Home Capital faces hard questions after earnings delay

Share

Home Capital Group Inc. will have a critical chance to calm investors, customers and the financial community this week amid an outflow of depositors' money that has raised questions about its viability as an independent company.

The troubled mortgage lender is set to face questions about how much money it still has in deposits and the credit quality of its loan portfolio when it reports first-quarter earnings after the markets close on Thursday and speaks to investors on a conference call scheduled for Friday morning.

Home Capital pushed back the quarterly report by more than a week.

The rise and fall of Home Capital

David Berman: How did Home Capital find itself in this downturn?

Rob Carrick: How to protect your finances against real estate contagion

Among the biggest challenges ahead for the lender is stemming the run on client deposits that it needs to fund its mortgage business.

In a note to its financial advisers last week, Manulife Financial Corp.'s securities unit told staff that clients who hold more than $100,000 in a Home Trust GIC could move part of the balance to another subsidiary called Home Bank. That manoeuvre would add a second layer of deposit security from Canada Deposit Insurance Corp., which protects deposits up to $100,000.

Home Bank is a retail bank that offers deposit, mortgage and personal banking products and it was formerly known as CFF Bank before being acquired by Home Capital in 2015.

Last month, Home Capital offered depositors the right to split their investment between products offered by its trust company and its bank, in a bid to slow down the flight of money out of the firm.

A Manulife spokesperson said: "The option to transfer a portion of the Home Trust GIC to a Home Bank GIC was offered by the issuer, Home Trust. Manulife Securities felt it was the right thing to do to communicate that offer to our advisers with clients who have Home Trust deposits."

In response to Manulife's move, a spokesman for Home Capital said: "The company's focus is on taking the steps required to rebuild confidence in Home. Home deposit products remain widely available across Canada."

After the Ontario Securities Commission (OSC) made allegations in mid-April that Home Capital broke the rules in its disclosure of information about problems in its mortgage-underwriting business, the company suffered rapid withdrawals from its deposit products. More than $1.6-billion has been withdrawn from Home's high-interest savings accounts since late March. The OSC allegations have not been proven, and Home Capital has said they are "without merit."

But GICs make up a much larger portion of the company's capital base, accounting for more than 84 per cent of deposits at the end of 2016. Home Capital said total GIC deposits, including those sold through Home Capital and independent brokers, amounted to nearly $13-billion as of April 26. The company is expected to provide an update in its earnings results this week.

To shore up its funding, Home Capital sought a $2-billion credit line syndicated by the Healthcare of Ontario Pension Plan (HOOPP). But the deal came with burdensome terms, including an interest rate of 10 per cent. HOOPP's chief executive officer Jim Keohane also left the mortgage lender's board as a result of the deal.

While Home Capital contends with a deepening run on its deposits, investment bankers at RBC Dominion Securities Inc. and BMO Nesbitt Burns Inc. – hired as financial advisers to consider strategic options for the company, including a potential sale of the business – are expected to speed up that process this week.

Sources familiar with the company's plans say that while there are many would-be investors looking at Home Capital or its assets, including foreign private equity firms, the process of giving those potential bidders an opportunity to review the company's financial information has been unusually slow. That is expected to change this week, those people said.

Home Capital made a bid to restore credibility Friday with the appointment of veteran banker and restructuring expert Alan Hibben as a board member. Several other new board members are expected to be appointed, and a search for a chief executive officer and a chief financial officer is also under way.

Board chair Kevin Smith said it was the start of a "major refresh in our corporate leadership as part of the process of rebuilding the company."

Want to interact with other informed Canadians and Globe journalists? Join our exclusive Globe and Mail subscribers Facebook group