Home Capital Group Inc. is planning to start a bank in an effort to appeal to retail customers, and to compete more aggressively with other financial institutions.
The alternative mortgage lender and trust company said Monday that it will apply to the Minister of Finance and banking regulators for a Schedule I bank charter, a designation assigned to deposit-taking banks headquartered in Canada.
The decision to launch Home Trust Bank, as the new subsidiary will be called, is the next step in Home Capital's multiyear strategy to diversify the source of its deposits and to target more of the country's retail banking market.
Right now, most of Home Capital's deposits are retail funds sourced primarily through investment dealers and deposit brokers. These professionals are paid brokerage commissions, similar to the way the company gets its mortgage business. But on the deposit side, the big five banks are especially dominant, and Home Capital began to worry about its growth prospects through those channels a couple of years ago.
"It's not that they are going to cut you off, but it may be limiting," said Martin Reid, president of Home Capital. "We saw that as a longer-term risk and we said, 'You know what? If we grow deposits outside that channel in a low cost way, then that would reduce our risk.'"
Enter Oaken Financial, Home Capital's direct-to-consumer brand, launched last year to reinforce deposits from financial advisers and brokers, with business coming in straight from retail consumers and small businesses. Oaken offers deposit-taking services as well as Guaranteed Investment Certificates (GICs) with competitive interest rates, Retirement Savings Plans (RSPs) and Tax-Free Savings Accounts (TFSAs).
Introducing a bank behind the Oaken brand – which is currently part of Home Trust, a subsidiary of Home Capital – is expected to help grow the business in two key ways. First, it doubles the money a single depositor can have insured through Home Capital, since the Canada Deposit Insurance Corp. (CDIC) would insure $100,000 deposited in the bank, and another $100,000 under the trust arm of the institution.
Mr. Reid notes that many other fringe players are trying to get a piece of the retail deposit business, including credit unions. Still, Home Capital has been making inroads. Total deposits at Home Capital came in above $14-billion when the company reported third quarter earnings on Nov. 5. That was up more than 17 per cent from the same time last year. The amount of deposits raised through "diversification initiatives" such as Oaken Financial and other institutional deposits have also increased, and made up more than $2-billion of the total.
Another reason to introduce a bank, Home Capital says, is that the word "bank" inspires confidence.
"I'm thinking more of the younger generation. They really know and understand what a bank is, but it's less clear to them what a trust company is," Mr. Reid said.
Canadian consumers' increasing interest in online banking made the Oaken Financial business affordable to start up, Mr. Reid said, although Home Capital is also planning to launch a few brick and mortar branches.
Beyond that big-picture strategy, Mr. Reid says there aren't a lot of differences between a trust and a bank. Home Capital is already federally regulated, under the Office of the Superintendent of Financial Institutions (OSFI) supervision and subject to the same capital requirements as its fellow banks. It's also already a member of Canada Deposit Insurance Corporation (CDIC), the agency protecting consumer deposits.
Home Trust's application will be reviewed by the Office of the Superintendent of Financial Institutions (OSFI), which will then make recommendations to the Finance Minister. Getting all necessary approvals may take time.
If approved, Home Trust Bank would join the 28 other federally-regulated domestic banks in Canada, according to OSFI.
1. The Big Six control 97 per cent of the assets of domestic chartered banks.
In a country where the six biggest banks are so dominant, it's easy to lose sight of other players. In addition to new bank entrant Home Capital, Canada has 20 domestic banks operating in the shadows of giants.
Canada bank assets
The Big Six: (Bank of Montreal, Bank of Nova Scotia (including Tangerine Bank), Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and Toronto Dominion Bank)
2. The biggest of the smalls is Laurentian Bank with $35-billion of assets, but it's getting some competition.
Manulife Bank, a division of the insurance heavyweight, reports $24-billion of assets, and Edmonton-based Canadian Western Bank has another $20-billion.
Canada bank assets (non-Big Six banks)
3. The biggest surprise is the country's smallest.
Continental Bank, bearing the same name as the Toronto bank that failed in 1996, opened its doors in Whitby in March and is backed by one of Bay Street's biggest names. Fund manager Eric Sprott and his firm Sprott Inc. owns 51 per cent of the 17-branch bank.