A key question facing Home Capital Group Inc. is whether the mortgage lender can maintain its large deposit base of guaranteed investment certificates (GICs), which provide the money for the loans it gives to homeowners.
Home Capital has already suffered a run on the bank after depositors withdrew at least $1.6-billion from its high-interest savings accounts in short order.
But GICs – sold under the Home Trust and Oaken Financial brands – accounted for more than 84 per cent of the company's deposit base at the end of 2016. To stay in business in the long run, Home Capital will have to find a way to continue to sell these investments.
After a run of negative news about the company, some deposit brokers are leery.
"Given what's going on, we are steering away from the Home Trust GICs. It's not worth it for an additional five or 10 basis point [spread over other GICs]," said Jeff Kaminker, president of Frontwater Capital, a private wealth-management firm.
A spokesperson for Desjardins Group said: "As you may have guessed, there isn't much appetite for these GICs."
Home Capital has long offered some of the highest rates available on deposits, because it needs a constant inflow of cash to fund new mortgages and does not have a brand name that is as well-known as the major banks. Right now, Oaken is offering to pay 2 per cent on a one-year GIC, compared with 1.55 per cent from alternative lender Equitable Bank, 1.4 per cent from President's Choice Financial and 0.9 per cent from the Royal Bank of Canada.
Despite the higher rates, the company was concerned enough about its ability to attract new money that it arranged a $2-billion emergency loan from a pension fund, resolving immediate funding issues and drawing praise from Finance Minister Bill Morneau. "I was pleased to see Home Capital's funding issues resolved by market participants," Mr. Morneau said in a statement earlier this week.
Despite some reluctance to buy GICs, there are no visible signs of a collapse in the market for these products.
In its most recent update, Home Capital said that total GIC deposits stood at $12.86-billion at the end of April, down modestly from nearly $13.4-billion at the end of the year.
Bill Ritchie, chief executive officer of Victoria-based GICdirect.com Financial Services Ltd., said that Home Capital GICs are still being issued and maturing products in some cases are being reinvested – mostly in registered accounts, where the GICs are more attractive relative to other offerings.
"If the news gets worse with Home Capital, we might start to see a different attitude with our depositors," Mr. Ritchie said. "We're monitoring it closely. We're supporting Home Trust at this point, unless things were to get substantially worse."
Canada Deposit Insurance Corporation (CDIC) backstops deposits of $100,000 or less. However, it is unclear whether the insurance is enough to attract new investors or encourage existing investors to stick with the GICs as they mature, or get paid out.
Typically, GIC enthusiasts are older and risk averse. Financial advisers don't want to be in a position where they have to tell these clients that an investment has failed, even if it is insured and the depositor is going to get every dollar back.
"It's an uncomfortable conversation to have with someone. It makes clients nervous," Mr. Kaminker said.
GICs that were sold by third-party brokers account for 70 per cent of Home Capital's total deposits, or more than $11-billion at the end of 2016. Most of the money is used to fund non-prime or alternative mortgages for homebuyers who have been rejected for loans from the major banks.
According to Home Capital's financial report for the fourth quarter of 2016, 44 per cent of its deposits are locked in for one year, 30 per cent are locked in for one-to-three years and over 10 per cent are locked in for three-to-five years. Nonetheless, GICs are constantly maturing.
In a statement, Benjy Katchen, Home Capital's executive vice president, deposits & consumer lending, said: "The company is very busy due to increased volumes, but all valid redemption requests are being processed."
If Home Capital cannot attract investors to its GICs – advertised yields range between 1.85 per cent and 2.5 per cent, which is significantly more than what major banks are offering – it is unclear how the company will underwrite mortgages.
"I haven't had many GICs come up for renewal at this point, but when they do, I'll certainly have a conversation with the client to make sure they thoroughly understand it," said Mary Rygiel of ConservativeInvestors' Services, a Toronto firm that provides financial advice and sells investments, including GICs.
Brian Evans, chair of the Registered Deposit Brokers Association and head of Brian J. Evans Financial Services, said that he is not recommending clients cash out of their GICs. But he is not recommending them for most portfolios either.
"If we had a client come in for a new deposit today, we would probably not sell a Home Trust GIC until we see what happens," Mr. Evans said.
He added: "We try not to be fear mongers."
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