Mortgage lender Home Capital Group Inc. reported a large jump in first-quarter profit as fears about losses on loans in the pandemic eased, but it kept tighter lending standards in place to guard against risks with housing markets roaring.
The company’s profit increased 139 per cent to $64.5-million in the first three months of this year, compared with the same period last year, and 19 per cent from the fourth quarter of 2020. The main reason was as economic forecasts improved, Home Capital reclaimed $12.1-million that had been set aside early in the pandemic to cover potential losses from defaulting loans, mostly for commercial mortgages.
The company’s efforts to guard against risks have limited its ability to grow at a moment of high demand for mortgages amid frenzied activity in housing markets. Home Capital, which specializes in alternative mortgages for borrowers who struggle to qualify with major banks, made $1.6-billion in new loans in the quarter, unchanged from a year ago. It issued 27 per cent more residential mortgages, but that increase was offset by a 52-per-cent drop in new commercial mortgages.
That was because Home Capital has consciously applied tougher lending standards since the start of the pandemic, reducing its appetite for risk and halting lending in some parts of the country, according to chief executive officer Yousry Bissada. But it has also raised questions about whether Home Capital’s self-imposed restraint is costing it valuable business as rival lenders pick up a larger share of the activity in busy markets.
“Management continues to be very cautious with growth in the pandemic. With house prices rising quickly, this has impacted their tolerance even further,” Raymond James analyst Stephen Boland said in a note to clients.
On a conference call on Thursday, Mr. Boland asked company executives: “Are you missing a window here, in terms of restarting your growth?”
Restrained lending parameters are still in place, but are “under review,” Mr. Bissada said. And although some mortgage brokers would like the company to relax its standards sooner, most have remained “very loyal to Home.”
The company is watching the distribution of vaccines and key economic indicators such as unemployment closely, and “we’re seeing all the signals that it’s getting better,” he said. But he added Home Capital won’t revert to its normal lending parameters overnight: “We’d ease into it.”
Home Capital also plans to shed a standby credit facility that has acted as a safety net since the company’s near-collapse in 2017. Home Capital first took an emergency $2-billion loan from Healthcare of Ontario Pension Plan, replaced it with an expensive line of credit from Warren Buffett’s Berkshire Hathaway, and then swapped that for a smaller, less expensive facility from a syndicate of Canadian banks. Mr. Bissada said Home Capital no longer needs the credit line and will terminate it early.
In the quarter that ended March 31, Home Capital earned $1.24 a share, compared with 52 cents a year ago. On an adjusted basis, the company said it earned $1.26 a share, whereas analysts expected $1.04 on average, according to Refinitiv.
Home Capital’s net interest margin – an important barometer of its profitability that measures the difference between interest earned on loans and paid on deposits – improved to 2.61 per cent, from 2.38 per cent a year ago. Low interest rates have brought down the cost of attracting deposits to fund mortgage loans, Mr. Bissada said.
Investors are now waiting for the company to start deploying some of the excess capital it accumulated during the crisis. The first priority is to reinvest funds into the company, including making upgrades to technology and launching new apps for customers, Mr. Bissada said. But once Canada’s banking regulator lifts a moratorium on dividend increases and share buybacks, the company will also consider options to return some money to shareholders.
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