Home Capital earnings lower than expected, but company says it’s making progress reviewing suspect mortgages

Home Capital Group said hello is constantly on the make progress in reviewing its portfolio of mortgages generated by 45 brokers suspended for fraud this past year, using the value of suspect mortgages visiting roughly $200 million in the fourth quarter.

The Toronto-based mortgage company announced Wednesday that it has reviewed 40 per cent of the mortgages that were produced by the brokers, which were suspended from September 2014 to March 2015 after it had been discovered they had falsified income statements to assist clients be eligible for a mortgages.

Home Capital asserted 90 per cent from the mortgages reviewed to date continue to be entitled to renewal and that it is on pace to complete its investigation after this year. The need for the mortgages seemed to be revealed to have shrunk to $1.55 billion from $1.72 billion within the third quarter as customers reduce their loans.

“The company continues to actively monitor the topic mortgages and notes that there have been no unusual credit issues,” Home Capital said inside a statement.

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The company reported that net gain fell to $71.8 million for Q4 2015 from $71.9 million in the fourth quarter of 2014. Adjusted earnings per share arrived at $1.02, missing the $1.05 analysts surveyed by Bloomberg had expected.

Despite the miss, the mortgage company announced it had been buying back $150 million available and raising its dividend 9.1 percent, or 2 cents, to 24 cent per share.

The company signed $2.15 billion in new mortgages within the fourth quarter, down six percent from the $2.29 billion recorded in Q4 2014. The amount of new insured mortgages advanced 46.1 per cent, while new uninsured mortgages dropped 12.1 per cent.



“The underlying outcome was pretty strong as far as I can tell,” said Shubha Khan, research analyst of diversified financials at National Bank Financial. “Originations were stronger than we’d anticipated even though they were down year-over-year, there was net interest margin expansion, there was exceptional credit quality with loan losses being much lower than expected.”

Khan asserted unlike a few of the banks which have exposure to loans in resource provinces for example Alberta and Saskatchewan, Home Capital’s concentrate markets such as Ontario allow it to be less exposed to the slumping housing markets of oil-producing provinces.

He added, however, that the company will need to show investors the way they intend to reinvigorate their mortgage pipeline, as some of the brokers that were fired as part of its fraud investigations brought in a disproportionately large chunk of new mortgages.

Home Capital began its investigation into falsified income statements in 2014, but didn’t reveal detailed information or why the brokers were suspended until July of last year. Management expects that the investigation, that involves calling employers of mortgage applicants to ascertain if they actually result in the amount of cash for auction on their income statements, is going to be completed by the end of 2016.

‘The underlying results were pretty strong’

The company has additionally says some seven to eight per cent of these investigated were not co-operating using the investigation or couldn’t have their incomes verified. Management said that it intends to help those buyers get a new lender when their mortgages come up for renewal, potentially directing them to the non-public lending market.

Chief executive Gerald Soloway told analysts and reporters during a business call in November that despite the fraud, most of the borrowers signed by the brokers had healthy credit scores and weren’t missing mortgage repayments.

Despite the business’s troubles, no analysts surveyed by Bloomberg who cover the stock have issued sell ratings. The ratings include one strong buy, three buys, three outperforms, one overweight, one sector perform and one market perform.

“Although we all do possess some concerns towards Home Capital’s outlook, at current valuation levels, we believe the positive fundamentals within the company are not being properly reflected,” said TD Securities analyst Graham Ryding as he upgraded the stock to some buy on Jan. 22.

Shares of Home Capital closed down 1.93 percent, or 50 cents, to $25.35 in Toronto Wednesday.