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Nov 13, 2019

'Give them credit': Home Capital profit surges amid turnaround

Home Capital CEO ready for next phase of growth as it shakes off turbulence

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Home Capital Group Inc.’s third-quarter earnings beat has caught the attention Canadian money managers.

The alternative mortgage lender reported its profit for the quarter ended Sept. 30 rose compared with a year ago as its mortgage originations also climbed higher.

The company says it earned $39 million or 67 cents per diluted share in its third-quarter, up from a profit of $32.6 million or 41 cents per diluted share in the same period last year.

On an adjusted basis, Home Capital says it earned 72 cents per diluted share for its most recent quarter, up from an adjusted profit of 41 cents per diluted share a year ago.

Analysts on average had expected a profit of 58 cents per share, according to analysts polled by Bloomberg.

Mortgage originations totalled nearly $1.55 billion, up from $1.44 billion in the same quarter last year.

Total provisions for credit losses amounted to $3.7 million in the most recent quarter compared with $6.1 million in its second quarter and $4.0 million in the third quarter last year.

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    The better-than-expected earnings suggest a turnaround at the company, according to one portfolio manager.

    “I think even the most critical of us [have] to give them credit for where they are today compared to where they were not too long ago,” Kash Pashootan, CEO and chief investment officer at Toronto-based First Avenue Investment Counsel, told BNN Bloomberg in an interview Wednesday.

    The once-embattled Home Capital was bailed out with a $2 billion credit line by Warren Buffett’s Berkshire Hathaway Inc. in June 2017 after the company ran afoul of the Ontario Securities Commission for improperly-documented mortgage applications. Berkshire has since substantially reduced its stake in the company as the stock has recovered.  

    Pashootan said that First Avenue exited its position during the company’s troubles with the OSC, but that it’s taking “a real look” at the stock again, adding he sees an opportunity for Home Capital to attract customers that don’t meet the more-rigid thresholds of traditional lenders.

    “There is real opportunity out there for good-quality borrowers to connect with the Home Capitals of the world and do some business that we don’t view as high-risk,” Pashootan said.

    “It’s great to see Home Capital back and well-capitalized. And really, the confidence has been restored and the share price of course is seeing that as well. So [it’s] back on our radar.”

    Home Capital’s path to redemption was hard fought, according to another portfolio manager and shareholder who remains bullish on the stock.

    David Taylor, president and chief investment officer at Taylor Asset Management, said the company has had to reassure several parties including regulators, depositors, customers and shareholders.

    “They’ve done all that and they’ve done an exceptional job,” Taylor told BNN Bloomberg in an interview Wednesday.

    Taylor said he expects the company’s margins will continue to rise amid a favourable housing and interest-rate environment.

    “They’ve had a great tailwind in that the economy is strong, housing prices have been strong, unemployment’s low, you’ve got an influx of immigrants, which of course is their key market, and then you’ve got rates [that] have dropped.”

    Taylor added he expects Home Capital to bring back its dividend in the fourth quarter which may entice investors in search of income.

    “Now that the stock’s trading at book value, it makes sense now to have a regular dividend,” he said.

    --With files from Canadian Press.