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May 9, 2017

Home Capital isn’t the canary in the housing coal mine: CIBC

A sign shows the logos of Home Capital Group's subsidiaries Home Trust and Oaken Financial.

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CIBC bank analysts are sick and tired of Home Capital Group’s (HCG.TO) struggles being projected onto the broader financial sector.

In a research note, analysts Robert Sedran, Marco Giurleo and Christopher Bailey wrote that the embattled mortgage lender’s struggles are its own, and do not reflect the broader landscape for the Canadian banking sector.

“There may be a test for the housing market coming when the economy next enters recession, but the troubles faced by Home Capital Group this year are about Home Capital, not the housing market (we have grown tired of the canary-in-the-coal-mine analogy,)” the analysts wrote. “Liquidity crises are serious things and the market was right to worry initially, but asset quality remains strong.”

Home Capital has suffered a crisis of confidence since the Ontario Securities Commission alleged the company and top executives misled investors regarding disclosure of the impact of mortgage broker fraud at the company. Nervous depositors have pulled money from the company’s high interest savings accounts forcing the it to secure a costly $2-billion lifeline. Shares of Home Capital have plummeted dragging other banking stocks lower.

The CIBC analysts wrote that even if Home Capital goes belly up, they don’t anticipate it will cause massive shockwaves through the domestic housing market due to the company’s relatively modest loan book.

“We are not of the view that the resolution of the Home Capital situation will lead to a massive supply issue, causing Canadian home prices to correct,” the analysts wrote. “For perspective, we note that HCG’s $13 billion mortgage book accounts for less than 1% of the roughly $1.4 trillion Canadian mortgage market. Even if 100% of HCG’s mortgage clients were unable to refinance their mortgages, the impact would be manageable.”

CIBC does note that the disappearance of a major player in the alternative lending space will impact some borrowers who would otherwise be unable to qualify for a loan from the Big Six Canadian banks.

“One should assume that the higher cost of funds for the remaining players as well as the potential removal of one of the largest alternative lenders will have an impact at the margin, which implies at the very least that activity in the housing market will slow,” they wrote.

While CIBC is forecasting a slowdown in the torrid pace of housing growth, Sedran and company think valuations of the big banks will be supported by other measures.

“While slower mortgage growth for the banks may serve as a revenue headwind (mortgages account for 45% of total bank loans), we have been expecting this market to slow, with mortgage growth outpacing our assumptions for some time,” they wrote. “Instead, our growth estimates are supported by efficiency initiatives, more pronounced buyback activity, strong momentum in international segments (helped by higher interest rates), and ongoing progress in the Wealth and Capital Markets segments.”