Home Capital Reports Third Quarter 2017 Results

TORONTO, Nov. 14, 2017 /CNW/ - Home Capital Group ("Home Capital" or "the Company") (TSX: HCG) today reported financial results for the three and nine months ended September 30, 2017. This press release should be read in conjunction with the Company's 2017 Third Quarter Report including Financial Statements and Management's Discussion and Analysis (MD&A), which are available on Home Capital's website at www.homecapital.com and on SEDAR at www.sedar.com.

Yousry Bissada, President and Chief Executive Officer, Home Capital said, "We achieved a number of key milestones during the third quarter to set the Company on the right course for future growth.  We strengthened our liquidity position and maintained access to deposit funding which we can quickly flex up or dial back in line with seasonal demand. We made initial progress growing originations from a low base to more profitably utilize our deposits. We successfully completed Project EXPO reducing our ongoing expenses and we added experienced and capable members to our senior management team. Importantly, Home Capital returned to profitability."

"Looking ahead, our top priority is to grow our residential and commercial business lines to more normal and sustainable levels. We are enhancing our sales and underwriting processes to improve service levels and win business. With our strong capital and liquidity base, we are well positioned to take advantage of opportunities to build our business. We will do this in the context of an evolving regulatory landscape which we are assessing to quickly adapt. All the while we will continue to prudently manage credit risk and maintain an enhanced risk management and governance framework."

Third Quarter 2017 Financial Statement Highlights

Third Quarter 2017, compared with the Third Quarter 2016:

• Returned to profitability and reported net income of $30.0 million and $0.37 per share fully diluted, compared with net income of $66.2 million and $1.01 diluted earnings per share.
• Net income for third quarter 2017 includes the impact of reduced loan balances, increased interest expenses, elevated non-interest expenses and loss on sale of mortgage assets.
• Total loans under administration were $23.2 billion compared to $26.0 billion as a result of the sale of loans and lower originations.
• Total mortgage originations of $385 million, compared with $2.54 billion.
• Provisions for credit losses (PCL) decreased reflecting the impact of a $6.5 million release of the collective allowance due to the sale of $963 million of commercial portfolio assets. PCL as a percentage of gross uninsured loans was (0.14)%, or 0.07% if the impact of the reduction in the collective allowance was excluded for ease of comparison, compared to 0.04%.
• Robust capital position to enable future growth with CET 1 ratio at 21.25% compared to 16.54%.

First Nine Months ended September 30, 2017, compared with First Nine Months ended September 30, 2016:

• Reported net loss was $23.1 million, compared with net income of $196.7 million.
• Reported diluted loss per share was $0.33, compared with diluted earnings per share of $2.92.
• Total mortgage originations of $3.8 billion, compared with $6.8 billion.
• PCL as a percentage of gross uninsured loans was 0.05%, compared to 0.05%.

Recent Events

• Yousry Bissada named President and Chief Executive Officer, Brad Kotush named Executive Vice President and Chief Financial Officer and Edward Karthaus named Executive Vice President, Sales.
• Liquidity position of $4.66 billion including $2 billion undrawn balance of Berkshire Hathaway (BH) credit facility at end of Q3 2017.
• Announced agreement with a third party to sell the Company's payment processing and prepaid card business including its Payment Services Interactive Gateway (PSiGate) subsidiaries.
• Project EXPO successfully completed; expected to result in future annualized cost savings of $15 million when compared to the annualized run rate of Q4 2016 expenses (excluding items of note).
• Closed final tranche of a previously announced sale of certain commercial mortgage assets, for aggregate proceeds of approximately $1.0 billion.
• Received final approval of two agreements comprising a global settlement with the Ontario Securities Commission and a class action lawsuit from Ontario Superior Court of Justice.

Strategic Update

The Company's new Chief Executive Officer and Chief Financial Officer, along with the Board of Directors, are focused on setting a long-term strategy to grow the business and create shareholder value.

In the near term, the Company's priorities are to grow residential and commercial business lines and take back market share. To achieve this, management is focused on improving service levels, introducing competitive product offerings and increasing outreach in the broker community. 

The Company has successfully restored ample liquidity and stabilized its deposit funding; however, third quarter performance continued to reflect a number of negative factors stemming from the liquidity event including lower residential and commercial loan assets, higher deposit interest costs and elevated non-interest costs. New loan originations were well below historical levels and are not adequate to replace loan assets reduced through sales. Although the Company successfully stabilized its liquidity position and quickly restored deposit funding, the process of restoring loan growth has been slower than planned and is management's top priority.

In addition, the Company is operating in the context of an evolving regulatory landscape that will affect its primary residential mortgage market, though the extent of any impact is not yet clear.

Against this backdrop, Management and the Board of Directors are reassessing opportunities for the business and actively updating and executing its corporate strategy during the fourth quarter 2017 and first quarter of 2018.

Third Quarter Expenses

During the third quarter, the Company's expenses were in line with management expectations. Costs were elevated following the significant liquidity event that occurred during the second quarter 2017, which required the Company to liquidate securities and sell mortgage assets and establish a $2 billion credit facility (later replaced by the $2 billion credit facility on better terms from a wholly owned subsidiary of Berkshire Hathaway).

Some expenses associated with the liquidity event declined during the third quarter, such as the interest expense on the credit facilities which were repaid by the end of July. However, other operating expenses remained elevated, as expected, compared to historical levels due to increased professional fees, and legal fees and other expenses related to the liquidity event. In addition, the Company recognized a loss of $13.2 million on the completion of the previously announced asset sales required to repay the outstanding balance on the credit facility.  Project EXPO, the Company's expense savings initiative announced early in 2017, has been successfully completed and no additional severance or other expense related to Project EXPO was recognized during the third quarter.

Moving forward into Q4 2017 and the first half of 2018, the Company expects to experience some continued elevated costs associated with the liquidity event that should be partially offset by Project EXPO savings.

Fourth Quarter 2017 Outlook

During the third quarter, the Company focused on carefully increasing lending activity and growing mortgage originations in step with deposit funding growth. Origination growth was lower than anticipated and the process of growing the lending book is an ongoing priority.  Based on the current rate of funding new mortgages, the Company now estimates that the balance of non-securitized single-family residential mortgages will be approximately $10 billion at the end of 2017, compared to $10.4 billion at the end of the third quarter.

Improved depositor confidence, combined with premium interest rates offered on new fixed-term deposits, increased net deposit inflows and stabilized the Company's deposit funding. This positioned the Company with excess liquidity and increased funding capacity to significantly increase originations and achieve higher levels of new business going forward.

A focus on deploying excess liquidity and growing the loan book is expected to have a positive effect on net interest margins going forward. During the third quarter, the growth of deposits outpaced loan growth which resulted in a substantial increase in lower yielding liquid assets and contributed to lower net interest margins. The Company was required to offer premium rates on deposits, to increase inflows, which reduced the interest spread earned.  The interest spread earned was also reduced by the significant decline in lower cost demand deposits relative to higher cost fixed-term deposits.  By the end of the third quarter, the Company reduced deposit interest rates on new deposits to market levels, intentionally lowering deposit growth, as efforts turned to growing mortgage balances.

In addition, because of the overhang of the liquidity event, internal management and process changes, and timing of the shift in focus to growing mortgage balances, new loan originations are expected to be well below historical levels. Furthermore, the sale of commercial and residential mortgage assets and early payouts of consumer lending assets also contributed to reduced interest earning assets.

Net interest income is also expected to improve due to the full repayment of the outstanding debt under the BH credit facility; however, interest income is expected to remain at reduced levels until the Company can grow its loan portfolios to desired levels. 

Strong capital levels are expected to be maintained as management continues to review opportunities to deploy capital in the most efficient manner to maximize shareholder value.  The Company anticipates that return on shareholders' equity will continue to be dampened compared to prior periods by a combination of lower earnings and the increased share capital.

Management Comments on Revisions to Guideline B-20

In October 2017, OSFI announced revisions to Guideline B-20 Residential Mortgage Underwriting Practices and Procedures (B20), effective January 1, 2018. Management is interpreting the revisions to determine what potential operational adjustments will be required to be implemented prior to the effective date. The revisions include the following new standards:

1. a qualifying stress test for uninsured mortgages;
2. guidance on co-lending and bundling arrangements and;
3. additional guidance on income verification and expectations to account for property price inflation when determining appropriate loan to value.

The stress test requirement is expected to have the most material impact on the mortgage market and would result in a material portion of the Company's existing portfolio qualifying for smaller loan size, if re-qualified under the new rules.  The net impact to future originations volume will be affected by borrower behaviour with respect to loan size requested and down-payments, and the potential for the Company to take on a part of the market that may no longer qualify at other federally regulated institutions. The Company also expects these revisions will increase the rate of renewals of mortgage loans with the existing lenders.

The Company has identified a number of strategies to mitigate the impact of stress testing and co-lending changes while maintaining overall credit quality. However, management will require a period of time to fully assess the market impact from the changes and what the net impact will be on the Company's addressable market and product suite offering. The Company will attend OSFI information sessions before the end of the year to receive further clarity on certain revisions such as income verification and
co-lending standards. 

It is unclear what impact the revisions to B-20 will have on the real estate and mortgage markets as a whole, particularly when combined with changes under the Ontario Fair Housing Plan announced by the Ontario Ministry of Finance in April 2017.

Management and Board of Directors will continue to reassess the corporate strategy and opportunities for the business during the fourth quarter 2017 and first quarter of 2018.

Governance and Risk Management

Over the past few years, the Company has worked to continuously strengthen its governance and risk management processes (Risk Framework) and has significantly invested in enhancing systems and controls throughout the organization to support responsible growth. Today the Company has a more robust Risk Framework and is well positioned to sustainably grow its business with a renewed Board of Directors. Earlier this year, five new independent Directors were appointed to the Board, adding deep governance, risk and regulatory, finance, banking and investment experience.  In addition, the Company has new Board and Board Committee Chairs, a new President and Chief Executive Officer and a new Chief Financial Officer. All are focused on driving governance, risk management and strategy to enhance long-term Company performance.

Brenda Eprile, Chair, Board of Directors of Home Capital commented, "Our renewed Board of Directors and strengthened corporate governance practices are the foundation to how we will grow and win future business and will also guide our strategies in the markets we serve.  I look forward to working with our management team and Board on a longer term strategy to increase our revenues, manage risk and expenses, expand our geographic footprint and build long-term shareholder value."

The Company's 2017 Third Quarter Financial Report, including Management's Discussion and Analysis, for the three and nine months ended September 30, 2017 is available at www.homecapital.com and on the Canadian Securities Administrators' website at www.sedar.com.

Third Quarter 2017 Results Conference Call and Webcast

The conference call will take place on Wednesday, November 15, 2017, at 8:00 a.m. ET. Participants are asked to call approximately 10 minutes in advance at 647-427-7450 in Toronto or toll-free 1-888-231-8191 throughout North America. The call will also be accessible in listen-only mode on Home Capital's website at www.homecapital.com in the Investor Relations section of the website.

Conference Call Archive

A telephone replay of the call will be available between 11:00 a.m. ET Wednesday, November 15, 2017 and 12:00 a.m. ET Wednesday, November 22, 2017 by calling 416-849-0833 or 1-855-859-2056 (enter passcode 96245439). The archived audio webcast will be available for 90 days on CNW Group's website at www.newswire.ca and Home Capital's website at www.homecapital.com.

Financial Highlights

Caution Regarding Forward-looking Statements

From time to time Home Capital Group Inc. makes written and verbal forward-looking statements. These are included in the Annual Report, periodic reports to shareholders, regulatory filings, press releases, Company presentations and other Company communications. Forward-looking statements are made in connection with business objectives and targets, Company strategies, operations, anticipated financial results and the outlook for the Company, its industry, and the Canadian economy. These statements regarding expected future performance are "financial outlooks" within the meaning of National Instrument 51-102. Please see the risk factors, which are set forth in detail in the Risk Management section of the 2017 Third Quarter Report, as well as the Company's other publicly filed information, which is available on the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com, for the material factors that could cause the Company's actual results to differ materially from these statements.  These risk factors are material risk factors a reader should consider, and include credit risk, liquidity and funding risk, structural interest rate risk, operational risk, investment risk, strategic risk, reputational risk, compliance risk and capital adequacy risk along with additional risk factors that may affect future results.  Forward-looking statements can be found in the Report to the Shareholders and the Performance Overview and Outlook section in the 2017 Third Quarter Report. Forward-looking statements are typically identified by words such as "will,"  "believe," "expect," "anticipate," "intend," "should," "estimate," "plan," "forecast," "may," and "could" or other similar expressions. 

By their very nature, these statements require the Company to make assumptions and are subject to inherent risks and uncertainty, general and specific, which may cause actual results to differ materially from the expectations expressed in the forward-looking statements.  These risks and uncertainties include, but are not limited to, global capital market activity, changes in government monetary and economic policies, changes in interest rates, inflation levels and general economic conditions, legislative and regulatory developments, competition and technological change. The preceding list is not exhaustive of possible factors.

These and other factors should be considered carefully and readers are cautioned not to place undue reliance on these forward-looking statements. The Company presents forward-looking statements to assist shareholders in understanding the Company's assumptions and expectations about the future that are relevant in management's setting of performance goals, strategic priorities and outlook. The Company presents its outlook to assist shareholders in understanding management's expectations on how the future will impact the financial performance of the Company. These forward-looking statements may not be appropriate for other purposes. The Company does not undertake to update any forward-looking statements, whether written or verbal, that may be made from time to time by it or on its behalf, except as required by securities laws.

Assumptions about the performance of the Canadian economy in 2017 and its effect on Home Capital's business are material factors the Company considers when setting its performance goals, strategic priorities and outlook. In determining expectations for economic growth, both broadly and in the financial services sector, the Company primarily considers historical and forecasted economic data provided by the Canadian government and its agencies. In determining the outlook for the remainder of 2017, management's expectations continue to assume:

• The Canadian economy is expected to be relatively stable in 2017, supported by expanded Federal Government spending.
  
  
• Generally the Company expects stable employment conditions in its established regions. Also, the Company expects inflation will generally be within the Bank of Canada's target of 1% to 3%, leading to stable credit losses and demand for the Company's lending products in its established regions.
  
  
• The Canadian economy will continue to be influenced by the economic conditions in the United States and global markets and further adjustments in commodity prices; as such, the Company is prepared for the variability that may result.
  
  
• The Company is assuming that interest rates will generally remain at the current rates for 2017. This is expected to continue to support relatively low mortgage interest rates for the foreseeable future.
  
  
• The Company believes that the current and expected levels of housing activity indicate a relatively stable real estate market overall. Please see Market Conditions under the Performance Overview and Outlook section of the 2017 Third Quarter Report for more discussion on the Company's expectations for the housing market.
  
  
• The Company expects that consumer debt levels, while elevated, will remain serviceable by Canadian households.
  
  
• The Company will have access to the mortgage and deposit markets through broker networks.
  

Non-GAAP Measures

The Company has adopted IFRS as its accounting framework. IFRS are the generally accepted accounting principles (GAAP) for Canadian publicly accountable enterprises for years beginning on or after January 1, 2011. The Company uses a number of financial measures to assess its performance.  Some of these measures are not calculated in accordance with GAAP, are not defined by GAAP, and do not have standardized meanings that would ensure consistency and comparability between companies using these measures.  Definitions of non-GAAP measures can be found under Non-GAAP Measures in the Management's Discussion and Analysis included in the Company's 2017 Third Quarter Report.

Regulatory Filings

The Company's continuous disclosure materials, including interim filings, annual Management's Discussion and Analysis and audited consolidated financial statements, Annual Information Form, Notice of Annual Meeting of Shareholders, and Proxy Circular are available on the Company's website at www.homecapital.com and on the Canadian Securities Administrators' website at www.sedar.com.

About Home Capital

Home Capital Group Inc. is a public company, traded on the Toronto Stock Exchange (HCG), operating through its principal subsidiary, Home Trust Company. Home Trust is a federally regulated trust company offering deposits, residential and non-residential mortgage lending, securitization of insured residential first mortgage products, consumer lending and credit card services.  In addition, Home Trust offers deposits via brokers and financial planners, and through its direct to consumer brand, Oaken Financial.  Home Trust also conducts business through its wholly owned subsidiary, Home Bank. Licensed to conduct business across Canada, Home Trust has offices in Ontario, Alberta, British Columbia, Nova Scotia, Quebec and Manitoba.

SOURCE Home Capital Group Inc.

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