Home Capital regains footing in weeks since Warren Buffett investment

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Deposits are steadily returning to Home Capital Group Inc. as the troubled mortgage lender recovers from a crisis of confidence.

Late Monday, the company provided its first liquidity update since the end of June. At that time, it was enjoying a renewed surge of faith from depositors after securing an investment worth up to $400-million from revered U.S. investor Warren Buffett, through his firm Berkshire Hathaway Inc.

In the two weeks since, to July 14, Home Capital attracted $125-million in net new deposits, the vast majority of them to guaranteed investment certificates, or GICs, with a fixed term.

The high water mark of the so-called Buffett bounce may have passed, as Home Capital said in a statement that it "has seen deposit inflows return to historical averages." Deposit totals have become a key barometer of Home Capital's health as well as broader confidence in the alternative lending space, after the firm endured a rare run on the bank earlier this year. But the latest figures show the lender is on firmer footing after months of woes, with overall levels of liquidity moving in the right direction.

Home Capital still faces a range of challenges as it tries to originate new mortgages and chart a path back to growth. Board chair Brenda Eprile reaffirmed last week that the balance of the year will "be tough from a profitability point of view." The company will report its second-quarter earnings on Aug. 2.

The company's board and executives have worked to clear away obstacles to winning back the market's confidence. In mid-June, the lender and three former executives agreed to pay a total of $12-million to settle allegations from the Ontario Securities Commission that Home Capital misled investors about incidents of apparent fraud perpetrated by some mortgage brokers in its network.

And last week, the company hired Yousry Bissada, a 30-year veteran of the mortgage business, to craft a turnaround plan and refresh the company's culture. He takes the helm as chief executive officer in early August, and Ms. Eprile said last week she expects Mr. Bissada will firm up a new strategy for the company "some time in the fall."

In late June, as optimism peaked in the wake of Mr. Buffett's investment, Home Capital absorbed $70-million in gross GIC deposits in a single day. But board member Alan Hibben has previously pegged $30-million in daily gross deposits as a more sustainable target.

In recent weeks, the lender has had success at attracting new deposits by offering far more generous interest rates than its competitors. As of Monday, a one-year GIC at Home Capital subsidiary Oaken Financial pays annual interest of 2.75 per cent, for example, compared with 1.47 per cent at competitor Equitable Bank, and 0.85 or 0.9 per cent at some large banks. Deposits in GICs were up $123-million over a two-week period, and totals in Oaken savings accounts climbed $12-million during the same stretch. Those gains were partially offset by a $10-million net decline on balances in high-interest savings accounts at Home Trust, another subsidiary.

Swelling deposits, combined with the proceeds from the sale of some commercial mortgage assets, have helped Home Capital reduce the outstanding balance on a $2-billion backstop loan provided by Berkshire Hathaway from $1.65-billion to $900-million. The company is still paying 9-per-cent interest on that balance, as well as a 1-per-cent standby fee on undrawn funds, but intends to pay down the remaining balance in the near future.