Home Capital downgraded amid earnings uncertainty
Shares marked to neutral from outperform
• Home Capital Group Inc. has been downgraded by Macquarie Research despite a slowdown in the pace of withdrawals from deposit accounts at the alternative mortgage lender’s subsidiary.
Analysts Jason Bilodeau and Adarsh Iyer said Monday that while Home Capital has tangible asset value, there is much uncertainty surrounding its future earnings potential and the ability to realize this value “is in question and includes potentially realizing zero value.”
“We have been underwhelmed by delays/challenges in the company’s ability to secure permanent funding or to substantially monetize the company and this elevates our concerns,” the Macquarie analysts said in a note to clients in which they downgraded shares to neutral from outperform.
The Toronto- based mort- gage lender has been facing a liquidity crisis, with deposit holders withdrawing more than $ 1.8 billion — or more than 90 per cent of the funds — from high-interest savings accounts at its subsidiary, Home Trust, since the end of March. The run on deposits followed a series of executive departures and allegations of misleading disclosure by the Ontario Securities Commission.
Home Capital has said the allegations, in connection with the discovery of falsified information in its broker channel and the subsequent cutting of ties with 45 brokers, are “without merit.”
This rapid withdrawal of deposit balances forced Home Capital to obtain a $ 2- billion emergency credit line as a backstop last month, but at onerous terms that the company has said leaves it unable to meet previously announced financial targets.
Canada’s l argest nonbank lender said in its firstquarter earnings release on Thursday that the recent hit to its reputation has impacted its future funding abilities and cast “significant doubt on the Company’s ability to continue as a going concern.”
Macquarie said in its note that it has “no credible basis on which to make detailed forecasts or estimates. The audit requirement to include the ‘ going concern’ disclosure underscores just how limited the going forward visibility is within the company itself.”
Home Capital has said it is examining many options to stabilize the company, including the sale of non- core assets such as certain portfolios to shore up its liquidity. It has drawn $ 1.4 billion on the facility so far.
“Actual company results and operating performance are likely to bear little resemblance to any present estimates as mgmt will be looking to monetize assets, restructure the company, and permanently change the business model in ways that have not yet been fully contemplated or articulated by mgmt,” Macquarie said.
However, the stop- gap funding obtained by Home Capital “provides s ome breathing room,” the analysts added.
INCLUDES POTENTIALLY REALIZING ZERO VALUE.