Home Capital Group Inc. is increasing the pace at which it issues new home loans as the alternative mortgage lender seeks to rebuild its diminished business.
Continuing a gradual recovery from a run on deposits that threatened its survival last spring, Home Capital originated $872-million in new mortgages in the fourth quarter of 2017 – up 126 per cent compared with the third quarter and well ahead of some estimates, although still a far cry from the $2.4-billion in new loans issued a year earlier.
The company is flush with capital to help fuel its recovery and, on Thursday, analysts pressed for details about how the lender might spend those funds. Company executives responded that excess capital could be used to bolster the core business, pursue acquisitions or invest in technology – but won't be returned to shareholders just yet. They won't consider buying back shares or restarting the company's suspended dividend until the second half of 2018.
Home Capital's profit grew only 2 per cent while its total portfolio of residential mortgages shrank by 3.5 per cent, settling at $10-billion. New stress tests being applied to many mortgages threaten to restrain activity in the housing market and fourth-quarter results still show steep declines when compared with results from a year ago, prior to disclosures from securities regulators that shook confidence in the lender. But with each passing quarter, Home Capital appears more stable.
"We will grow responsibly," Yousry Bissada, the company's chief executive, said on a conference call.
"Having excess capital is a privilege and a great position to be [in], and we don't apologize – because of headwinds, because of regulatory stress tests, because of all the things we want to do with it."
The company's common equity tier 1 capital ratio, a measure watched closely by regulators, was a plump 23.17 per cent as of Dec. 31, well above what is required.
"This provides us with an abundant level of security," Mr. Bissada said.
Home Capital turned a modest profit in the fourth quarter, with net income of nearly $31-million or 38 cents a share, down 40 per cent from nearly $51-million or 79 cents a year ago – prior to the company's liquidity crisis. But profit edged 2 per cent higher compared with the third quarter of 2017.
Fourth-quarter revenue was $109.5-million, down 24 per cent from the same quarter last year, but recovered somewhat from $95.4-million in the third quarter.
For the full year, Home Capital recorded only $7.5-million in profit, compared with $247.4-million a year earlier, mostly because the company had $224-million in added expenses from the liquidity crisis last spring.
Mr. Bissada said it's "too early to tell" what impact new mortgage regulations may have on Home Capital's ability to attract new business.
On Jan. 1, Canada's banking regulator introduced a new stress test on uninsured mortgages that will make it harder for some prospective borrowers to qualify for home loans.
Since then, some Home Capital clients have "qualified for smaller loans than they would have last year," Mr. Bissada said.
The overall credit quality of new clients has improved, however, which could signal that some borrowers who would have qualified at larger institutions may now be turning to Home Capital.
Another sign the lender's tarnished reputation is improving is that it has begun hiring again, including in its commercial-lending division, after slashing 10 per cent of its staff last fall to control costs.
"Six, seven or eight months ago, the company had trouble drawing talent into it, so we're very pleased with how that's shifted," Mr. Bissada said.