Home Capital saw first-quarter net profit fall 18%, with more headwinds to come

Home Capital has seen its net income fall nearly 18% due to higher deposit costs, while the full impact of rate hikes has yet to affect its mortgage borrowing.

“While our net interest margin fell this quarter due to our cost of funds rising in excess of mortgage rates, we expect to benefit from margin increases over time as spreads normalize. “said President and CEO Yousry Bissada.

And while growth in the company’s ‘A’ businesses begins to slow, Bissada noted that its ‘Alt-A’ portfolio businesses — mortgages that are slightly riskier than prime mortgages — remain “pretty robust.” “.

Overall, Home saw record growth in mortgage originations, which were up 73% from a year ago, with single-family origination growth up just 1.3%. However, loan balances for the single-family portfolio grew 15.5% year-over-year “due to our origination volumes and retention efforts,” noted CFO Brad Kotush.

“We have achieved this growth in the market which is starting to show signs of slowing after the rapid growth in prices and volumes last year,” Bissada said, adding that they expect to see the effects of the crisis soon. rise in interest rates.

Home also discussed its recent credit rating improvement from DBRS, which raised Home’s long-term rating to “BB” (high), while changing the trends of all ratings from stable to negative.

“We believe this upgrade will open up more opportunities for additional funding options in the future,” Bissada said.

And during the quarter, Home reported a $4 million increase in provisioning expense for its single-family residential mortgage portfolio to “reflect portfolio growth as well as changes to inputs to our forward-looking economic models used to estimate future credit losses. “, said Kotush.

Home’s total provision for credit losses is $35.9 million, down 38% from a year ago.

First Quarter Earnings Report Highlights

  • Net revenue: 44.7 million dollars (-17.7% year-on-year)
  • Total number of origins: $2.76 billion (+72.5%)
  • Loans under administration: $25.37 billion (+11.4% YoY)
  • Net interest margin: 2.18% (vs. 2.46% in Q4 and 2.61% in Q1 2021)
  • Net non-performing receivables as % of gross receivables: 0.11% (vs. 0.13% in Q4 and 0.38% in Q1 2021)

Source: First Quarter 2022 Earnings Report

Notables of his appeal:

Bissada made the following comments on a variety of topics:

  • On whether Home has adjusted its underwriting practices given the evidence of declining home prices: “Yeah, we’ve seen it slow down, but it’s still pretty tough. There is still a lot of activity. At this point we are quite conservative in our risk appetite and underwriting guidelines, we have not made any changes. But we have very fast flexible underwriting if we were to see a situation change regionally or nationally we can move quickly to make changes…there are two markets for us, there’s Alt-A and the. What has slowed down somewhat is the A. Alt-A continues to be quite robust.
  • On the net interest margin: “Our Net Interest Margin (NIM) fell this quarter due to our cost of funds increasing outpacing mortgage rate increases, we expect to benefit over time from margin increases as spreads narrow. On the mortgage side, it takes some time for the spread between mortgage rates and deposit rates to return to the NIM In the broker distribution channel, the first lender to raise rates may risk losing volumes until these rates are matched by other lenders Eventually the rate may increase to bring margins closer to historical average levels We have taken the initiative to set alternative mortgage rates at levels that initiated the return to the historic NIM.
  • Pricing on tariff: “We will always balance growth, sustainability and long-term value considerations in our pricing strategy. However, as our rates on our assets have increased more slowly than our cost of funds, the result is NIM compression. We expect spreads to normalize if the pace of rate increases stabilizes over time.
  • On Home’s growth in its loan book: “We have been able to grow our loan portfolio and gather assets that will continue to generate income in the future…through refinancing and renewal activity. We have found that retention improves in times of rising rates because borrowers are less likely to switch as they have to qualify at higher rates than other institutions.
  • Chief Financial Officer Kotush said the market remains competitive for mortgages and financing, but Home “expects spreads to normalize over time and our net income will benefit…from growing balances.” of loans that we make”.
  • Regarding Home’s forecast for double-digit Loans Under Administration (LUA) growth, Kotush said, “We saw this very strong growth in the first quarter and based on what we’ve seen in our pipeline, we have could make the declaration of 20% [growth in] overall LUA…we still expect double-digit growth, but there is now more uncertainty in that prediction than we had at the end of what we reported in the fourth quarter. Bissada added to that, saying, “…even if creations slow down, some renewals might increase, which is obviously part of the growth formula.”
  • During the quarter, Home closed a $425 million RMBS offering. “In late 2021, we initiated our stake in a $250 million committed securitization conduit in partnership with one of the major banks, backed by a pool of uninsured single-family residential mortgages,” Kotush said.


  • “We continue to see demand for our residential and commercial loans. Although the rates are higher than they have been in recent years, they are still low in the historical context,” Bissada said. “With our years of experience in all types of pricing conditions, we are also comfortable in our ability to manage profitability in this environment.”
  • “Margins will be affected by rate changes and expectations, but we expect them to return to historical average levels over time,” Bissada added. “We will continue to diversify our funding sources and move towards our target capital range.”

Source: Q1 conference call

To note: Transcripts are provided as is by the companies and/or third-party sources, and their accuracy cannot be guaranteed to be 100%.

Featured Image: Carlos Osorio/Toronto Star via Getty Images

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