Home Capital Group Inc. is hiking rates on its guaranteed investment certificates in a bid to attract depositors and replenish its cash base, weeks after the troubled lender was rattled by a surge of withdrawals.
The Toronto-based company says it had a total of $12.33-billion in GIC deposits as of Monday – an amount that has remained relatively stable in recent weeks. But that stability is threatened by a coming wave of maturities. Home Capital reported with is first-quarter results that $7.05-billion of fixed-term deposits, including GICs and institutional deposit notes, were set to mature in the 12 months following March 31. About $4.3-billion is set to mature from July to next March.
With renewal dates looming, the company is hitting the street with attractive interest rates that may be piquing the interest of new and current investors. Last Friday, Home Capital raised interest rates for all terms of its Home Trust GICs. A one-year Home Trust GIC now offers 2.2 per cent, up from 1.6 per cent earlier this month, according to a financial adviser.
Oaken Financial posted a rate increase Tuesday morning, offering 2.6 per cent for a one-year GIC, up from 2 per cent at the beginning of May.
"We have raised interest rates recently on GICs offered by both Oaken and Home Trust. We regularly update our rates to reflect the market for deposits and our place in it, and we understand that we need to pay a rate premium right now to attract deposit flows," said Benjy Katchen, Home Capital's executive vice-president, deposits and consumer lending.
"… In addition, consumers can benefit from up to $100,000 in CDIC-insured deposits per named account at each of Home Bank and Home Trust, which are both members of [Canada Deposit Insurance Corp.]" (Home Trust offers deposits through financial advisers while Oaken Financial sells directly to consumers.)
In comparison, rival alternative mortgage lender Equitable Bank's one-year rate is 1.75 per cent while the Bank of Montreal is offering 0.85 per cent for the same term.
For Home Capital, the question is whether it can attract enough new deposits to offset the maturing ones and maintain enough liquidity to run a healthy business.
Earlier this year, Home Capital was seen as an attractive mortgage lender that was able to offer better-than-average interest rates for both high-interest savings accounts (HISAs) and GICs. But after regulatory concerns surfaced within their mortgage business, brokers at other financial institutions grew wary and a flood of investment dollars was immediately pulled from the company's HISAs.
Over the past two months, balances in those accounts dropped to $115-million as of Monday from $1.9-billion.
Now, as GICs mature, wealth managers and their clients have been hesitant to reinvest funds back into Home Capital product. Several investment firms have capped the amount of Home Capital deposits a financial adviser can sell to $100,000 or less (the same amount insured under the CDIC program).
"Cash is first and foremost, and will always be, about liquidity," said James Price, director of investment and advice at Richardson GMP Ltd. "Any time you are stretching for a return with your cash, all of a sudden you are not making a cash decision. It doesn't mean the return that you could get with HISAs or GICs should be ignored completely, but it should always be a consideration that liquidity problems may arise in certain situations."
Still, the recent rate hikes for Home Trust and Oaken GICs could start to entice investors.
"When you are seeing rates that are almost double in return (compared to some banks) for a product that is guaranteed, that is really interesting and you can't ignore that when having a client conversation," said Darren Coleman, a portfolio manager with Raymond James. "I would certainly be looking at this for a client who has a really good GIC portfolio, perhaps wants to ladder some investments within a one-year term and stay within the limit of $100,000."
"While we were trying to distance ourselves from Home Capital and shied away from sending GIC business their way, it is very difficult to ignore their rates," added Kevin Rotenberg, principal with GIC Wealth Management Inc. "We've always been known for the highest rate so I wouldn't ever withhold offering Home to a client. They are quite a bit higher than the rest of the market."
As industry analysts from Raymond James noted last week, funding remains Home Capital's most critical constraint, and the one most closely intertwined with the market's degree of confidence in the company. But as it raises rates, Home Capital must also ensure it can operate its business with a healthy spread between its cost of capital and the amount it charges for mortgages. An emergency credit line it arranged in late April carries a hefty 10 per cent interest rate, and the company is believed to be seeking replacement financing.
Home Capital said Tuesday it drew another $250-million from its credit line to bring the total drawn to $1.65-billion.
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