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Home Capital Group Inc. (HCG-T) investors will be watching to see how Canada’s hot housing market has benefited the alternative mortgage lender when it reports first-quarter earnings before markets open on Thursday.

Shares of Toronto-based Home Capital are up 15 per cent year-to-date, trading at their highest level since late 2019, and have nearly doubled over the past year. The stock hit a 52-week high of $35.23 on Wednesday.

Home Capital and other mortgage underwriting and lending stocks have rallied sharply over the past year alongside a surge in home buying spurred by rock-bottom interest rates. Many buyers are moving to small towns, taking advantage of the work-from-home trend that’s expected to continue after the pandemic.

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“We think HCG is one of the best ways to trade the de-urbanization paradigm shift in the fall out of the pandemic,” Stifel GMP analyst Cihan Tuncay said in an earnings preview note published late Tuesday, citing the company’s stock ticker. He has a “buy” rating on the stock and increased his target price to $43 from $42.

Mr. Tuncay said the stock “continues to trade at a wide discount to peers,” or 0.86 times 2022 estimated tangible book value per share (TBVPS) — which is the value of a company’s tangible assets divided by its current outstanding shares — compared to 1.48 times for domestic banking peers.

In the earnings preview, Mr. Tuncay increased his adjusted earnings per share (EPS) estimate for the first quarter ended March 31 by 8 per cent to $1.06 versus the consensus of $1.01. That’s nearly double the year-ago results of 52 cents. He says the increase is “on the back of lowering our provision expense estimate to zero from $5.7-million prior.” Provisions for credit losses are the funds lenders set aside to cover loans that may not be repaid.

“Lower provision expenses have been a theme for both U.S. banks and Canadian peers, and as such we expect HCG to follow suit,” Mr. Tuncay wrote.

He also said there’s potential for Home Capital to outperform his revised estimates “on 1) an additional reserve release which could turn provision expenses negative vs. our $nil estimate and 2) NIM [net interest margin] outperformance as housing activity levels in key end markets are more robust than ever while funding costs remain at historic lows.”

Mr. Tuncay estimates NIM — the difference between interest paid and interest received — of 2.56 per cent, up one basis point from the fourth quarter and compared to 2.38 per cent in the first quarter of last year. He’s also expecting net interest income of $125.5-million up 9.7 per cent year-over-year.

Mr. Tuncay also sees a potentially “significant capital release to shareholders” when restrictions from the Office of the Superintendent of Financial Institutions (OSFI) put in place during the pandemic are lifted, which he thinks could be later this year. OFSI temporarily banned federally regulated entities from buying back shares and increasing their dividends.

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Veritas Research analyst Nigel D’Souza said he expects the company to report results “relatively in line with consensus expectations.”

In an email to the Globe, he said the company’s mortgage book should continue to benefit from Ontario’s strong residential real estate market and expects “marginal credit provisions” for the quarter ended March 31, “with potential for a significant release of allowances for performing loans with insolvencies and delinquencies currently suppressed by government support programs and deferrals.”

He also expects net interest margins to remain “relatively stable as higher-cost term deposits roll over.”

In a report initiating coverage last month, Mr. D’Souza noted Home Capital’s business model is mainly tied to Ontario’s real estate market and revenue is predominantly reliant on net interest income.

“Despite a lack of diversification, we see several tailwinds for adjusted earnings in FY21 [full-year 2021], including deposits repricing at lower yields, reversals of credit allowances, and elevated real estate market activity,” he wrote. He has a “buy” on stock and an “intrinsic value” (what he thinks the shares should trade at today) of $35. (The stock was trading at $31.45 when the report was released April 8).

“Overall, we expect HCG to achieve high single-digit revenue growth in FY21,” he added.

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