Home Capital a lender with primo stock value

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Canadian banks received many slaps on the back recently, thanks to their 100-per-cent survival rate during the financial crisis and steady dividends. But have you taken a look at Canada's top independent mortgage company lately?

Despite suffering a world-is-ending selloff late last year, Home Capital Group Inc. has emerged in remarkably good shape. The mortgage lender, which specializes in subprime mortgages for consumers with poor credit ratings - the sort of home-buying customer the big banks tend to avoid - has maintained steady revenues. Its quarterly earnings have continued to hit record highs.

The shares are up 34 per cent over the past 12 months. They are now just 13 per cent below their highs in 2007, the start of the financial tidal wave that would make subprime lending a dirty word and eventually swamp dozens of U.S. firms, including Bear Stearns and Lehman Brothers.

Meanwhile, Home Capital stands out from Canada's stingy big banks because it has increased its dividend this year - twice in the past 18 months.

Home Capital's success isn't actually that mysterious. Part of it comes from picking the right clients - the sort that actually make their payments. The company's impaired loans rate has been creeping up over the past year (recessions will do that), but represented just 1.3 per cent of outstanding loans. That's only slightly higher than the impaired loans rate among the big banks on regular mortgages.

Perhaps more important, the company has been benefiting from the weak financial climate that has sent competitors scrambling. This summer, Wells Fargo & Co. packed up shop in Canada, no longer offering residential mortgages here. General Electric Co. made the same move earlier.

"We've seen a pattern of a number of namely U.S.-based lenders that have exited the field as things have become difficult in the market," Jim Murphy, head of the Canadian Association of Accredited Mortgage Professionals, said in an interview with Bloomberg News. "It'll mean less choice, less options for Canadians."

But it means good news for Home Capital, which enjoys a return-on-equity ratio of about 28 per cent - a strong measure of profitability that the big banks can only dream about.

The question hanging over the stock is what happens if Canada's housing market does take a turn for the worse, due to falling home prices, rising interest rates or a stubbornly high unemployment rate.

The short answer: Even if Home Capital holds up under the pressure and remains profitable, fears among investors will certainly send the stock careening downward, if only in a pale imitation of its 60 per cent tumble in 2008. That's the best time to grab it.