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Financial Institutions: Banks and Trusts January 20, 2017
Rating Report
Home Capital Group Inc.
Ratings
Rating Considerations
Franchise Strength: Home Capital Group’s (HCG or the Group) market leading position in the niche non-prime uninsured single-
family mortgage lending throughout Canada is a key consideration in the ratings.
Earnings Power: HCG’s
leading market position
provides for solid revenue
generation; however,
recent initiatives have
resulted in operating costs
outpacing revenue growth,
pressuring earnings.
Risk Profile: DBRS considers
HCG’s risk profile as above
that of bank peers, given the
nature of HCG’s uninsured
non-prime portfolio. Moreover,
DBRS is cautious that any real
estate market correction could
adversely affect HCG.
Funding and Liquidity: The
majority of the Group’s funding is
broker-sourced, which is considered to
be of lesser quality than branch-based
deposits. Positively, HCG is placing
more emphasis on its direct-to-
customer Oaken Financial and Home
Bank deposits.
Capitalization: HCG
through its operating
subsidiary Home Trust
Company (HTC or the Trust
Company) enjoys a high
common equity tier 1
(CET1) ratio relative to
banking peers.
Rating Drivers
Factors with Positive Rating Implications Factors with Negative Rating Implications Meaningful increase of funding through direct
deposits, thereby reducing dependence on brokered
source deposits.
Noticeable diversification of income and
introduction of more fee-based and non-interest
income.
Inability to restore positive operating leverage due to the
failure to successfully execute upcoming initiatives aimed at
stemming leakage from existing portfolio, while not
improving broker customer service on the front end.
Significant losses in the loan portfolio due to unforeseen
weakness in the underwriting and/or risk management
process.
Material loss of market share or substantially lower
originations due to new Department of Finance mortgage
rules. NB: Operating leverage as calculated by DBRS.
Financial Information
IFRS
(IFRS data in CAD $m) 9M 2016 9M 2015Q1 2014 2015 2014 2013 2012 2011
Loans under Administration (LUA) 26,013 23,427 25,058 22,564 19,942 18,042 16,090
Total Mortgage Originations (on-balance sheet) 6,798 5,905 8,059 8,851 6,917 6,005 5,117
Net Interest Income 365 354 481 460 422 381 334
Net Non-Interest Income 73 80 104 133 75 56 35
Efficiency Ratio (%) 38.4% 31.3% 32.6% 27.4% 28.9% 28.1% 28.5%
Return on Average Common Equity (%) 16.4% 19.2% 18.7% 23.8% 23.9% 25.5% 27.1%
Gross Impaired Loans (GILs) / Gross Non-Securitized Loans (%) 0.4% 0.4% 0.3% 0.4% 0.5% 0.6% 0.5%
Liquid Assets* / Non-Securitized Assets 8.9% 5.9% 9.0% 5.8% 7.8% 5.9% 9.8%
Common Equity Tier 1 Ratio (Basel III) (%) ** 16.5% 18.1% 18.3% 18.3% 16.8% N/A N/A
** Ratios prior to 2013 are Basel II
Source: Company reports, DBRS
For the Year Ended Dec 31As of Sep 30
* Liquid assets includes unencumbered cash and cash equivalents, and available for sale securities
Issuer Debt Rating Rating Action Trend Home Trust Company Issuer Rating BBB (high) Confirmed Negative
Home Trust Company Deposits & Senior Debt BBB (high) Confirmed Negative
Home Trust Company Short-Term Instruments
R-2 (high) Confirmed Negative
Home Capital Group Inc. Senior Debt BBB Confirmed Negative
Home Capital Group Inc. Short-Term Instruments R-2 (middle) Confirmed Negative
David Laterza, CPA +1 212 806 3270
Maria-Gabriella Khoury, CFA +1 416 597 7561
Financial Institutions: Banks and Trusts
January 20, 2017
Rating Report | Home Capital Group Inc.
DBRS.COM 2
Issuer Description
HCG, through its primary operating subsidiary HTC, is engaged in residential mortgage lending, mainly to non-prime borrowers,
commercial mortgage lending, credit card lending and a modest amount of other consumer lending. HCG balance sheet assets at the end
of Q3 2016 were almost $20.3 billion, with total assets under administration (AUA) of $28.3 billion.
Rating Rationale
On December 19, 2016, DBRS Limited (DBRS) confirmed Home Trust Company’s (HTC or the Company) Issuer Rating and Deposits
and Senior Debt rating at BBB (high) and Short-Term Instruments rating at R-2 (high). HTC is the primary operating subsidiary of Home
Capital Group Inc. (HCG or the Group). DBRS has also confirmed the Group’s Senior Debt rating at BBB and Short-Term Instruments
rating at R-2 (middle). Concurrently, the trend on all ratings has been revised to Negative from Stable. Under DBRS’s Global Methodology
for Rating Banks and Banking Organisations, HTC has an intrinsic assessment of BBB (high) and a support assessment of SA3. The SA3
rating, which reflects the expectation of no timely external support, results in the final rating being equivalent to the intrinsic assessment.
The rating action follows a detailed review of the Group’s operating results, financial fundamentals and future prospects.
The Negative trend reflects DBRS’s view that the Department of Finance Canada’s new mortgage rules, which took effect October 2016,
will likely have a negative impact on the Group’s origination volumes as well as loans under administration (LUA) and, as a result, be a
headwind to profitability. Moreover, these rules come at a time when the Group is already challenged by some loss of market share in its
core broker channels because of (1) customer service issues with its mortgage broker customers and (2) customer-retention issues on the
back end of its portfolio. These challenges, combined with actions taken to enhance its risk-management capabilities, have caused
operating efficiency to deteriorate, creating a headwind to earnings growth. DBRS expects HCG to announce in early 2017 details on
initiatives designed to restore the Company to positive operating leverage, but expects the execution of these initiatives to take time.
In confirming the ratings, DBRS acknowledges HCG’s leading position in the niche non-prime single-family mortgage market, which
enjoys higher margins and historically strong profitability. In addition, the Company’s strong regulatory capital ratios and consistent ability
to generate internal capital are considered in the ratings. These positive attributes are offset by geographic concentration in the loan
portfolio and past exposure to fraudulent mortgage applications, increased operating costs as a result of the enhancement of risk processes
and dependence on brokers for both mortgage and deposit generation.
HCG has $26.0 billion in LUA, $17.9 billion of which is on balance sheet, excluding loans held for sale. The Group has a significant focus
on the niche Canadian Alt-A market, where it is the largest market player. As at Q3 2016, the Group had $11.4 billion of non-prime
uninsured residential mortgages in its portfolio. HCG specializes in underwriting such mortgages, where the difficulty lies in income
verification (generally because of the borrower being self-employed or a new immigrant) rather than in the borrower’s creditworthiness
or the value of the underlying asset. At the same time, the Group also originates insured mortgages that are generally securitized after
origination through the Canada Mortgage and Housing Corporation’s (CMHC) National Housing Act Mortgage-Backed Securities (NHA-
MBS) and Canada Mortgage Bond (CMB) programs. As at Q3 2016, on-balance sheet-insured residential mortgages, including residential
commercial, stood at $3.9 billion. In addition, HCG has around $1.9 billion in commercial mortgages and $0.7 billion in credit card and
small consumer loans.
Revenue generation remains solid despite the challenges noted above, with net interest income increasing by 3% year over year (YOY) to
$365 million in 9M 2016 from $354 million in 9M 2015. However, recent risk-improvement initiatives have resulted in non-interest
expense outpacing revenue growth and negatively affecting HCG’s relatively good operating efficiency metrics. Indeed, non-interest
expense increased by 23% YOY to $168 million in 9M 2016 from $136 million in 9M 2015, mainly because of increased head count,
ongoing investment in information technology security platforms and initiatives to strengthen risk management and compliance. As a
result, net income fell by 9% during the same period to $197 million in 9M 2016. Although HCG is focusing on improving its operating
leverage through higher revenue growth and reducing costs, DBRS expects the latter will be difficult to achieve in the short term, as some
of the risk-management initiatives the Group has invested in are labour-intensive.
Despite the suspension of approximately 45 brokers who have been identified as being associated with falsified mortgage applications in
2014, HCG has been successfully managing its uninsured Alt-A portfolio, which makes up 44% of LUA, as evidenced by the Group’s
low loan impairments and losses. However, DBRS is being cautious, as HCG is more susceptible to a real estate market correction than
peers because of the nature of its portfolio. Furthermore, a 24% increase in its commercial mortgage loans during the year, which reached
$1.9 billion in Q3 2016, in DBRS’s view exposes HCG to wholesale risk at a time when the Group is concentrating on anchoring its
enhanced retail risk-management processes.
The Group is highly dependent on brokers for both its mortgage and deposit origination. To improve funding, HCG is growing its direct
deposit channel through its Oaken Financial offering as well as through its subsidiary, Home Bank (formerly CFF Bank, which it acquired
in October 2015). With a limited buffer of unencumbered assets, DBRS views further growth in directly sourced deposits positively, as it
Financial Institutions: Banks and Trusts
January 20, 2017
Rating Report | Home Capital Group Inc.
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would further enhance liquidity and funding. In addition, the Group initiated an asset-backed commercial paper (ABCP) funding program
in April 2016 for its uninsured near-prime residential mortgages. While this program adds diversity, the short-term nature of such programs
does introduce refinancing risk; however, DBRS expects the program to remain a very modest component of the Group’s overall funding.
HTC is regulated by the Office of the Superintendent of Financial Institutions and thus is subject to Basel III capitalization requirements.
As at Q3 2016, HTC reported a CET1 ratio of 16.54%, one of the highest ratios among peers, giving HTC a buffer to contain potential
loan losses. In addition, DBRS ran its Canadian residential mortgage-backed securities model (including home equity line of credit) on
the uninsured residential mortgage portfolio using static loan-level data to gain an understanding of how the portfolio might act in the
event of material market declines. The analysis showed that the expected loss in the mortgage portfolio during a significant real estate
market correction is manageable. However, given the share buybacks that HCG undertook in 2016, DBRS also notes that the Group has
to be cognizant of maintaining capital ratios at their currently high levels relative to regulatory minimums to maintain a sufficient cushion
for the underwriting risk HCG undertakes relative to peers.
Franchise Strength
HCG is predominantly a specialized residential mortgage lender focused on non-prime customers. In addition, the Group is engaged in
commercial mortgage lending, credit card lending that is virtually all real estate secured, and a modest amount of other consumer lending.
Mortgage loans are primarily sourced from brokers and are mostly funded by brokered deposits.
The Group, which is a publicly listed company on the Toronto Stock Exchange, operates through its principal subsidiary HTC. HTC is
federally regulated by the Office of the Superintendent of Financial Institutions (OSFI) and represents virtually all of HCG’s business.
The other operating subsidiary, Payment Services Interactive Gateway Inc., offers electronic card-based services to merchants, but is very
small and makes only a small contribution to earnings.
In Q3 2016, LUA reached $26.0 billion, an increase of 4% over YE2015 and 11% from Q3 2015. On-balance sheet gross loans declined
by 1% from year-end 2015 to $17.9 billion in Q3 2016. This portfolio includes HCG’s securitized loans, which are predominantly insured
mortgages. The Group’s main insured single-family product is called Accelerator.
HCG is the leader in the non-prime uninsured single-family residential mortgage market. Its clients include self-employed persons, people
with previous credit problems, new immigrants with no Canadian credit history and newly employed individuals. This segment of the
market, referred to as Alt-A, is where verification and documentation is cumbersome rather than a reflection of the borrower’s
creditworthiness or value of the underlying asset. DBRS notes that all loan applications are still subject to OSFI’s B-20 guidelines.
Uninsured non-prime products include the traditional single-family Alt-A residential mortgages, which made up 72% of on-balance sheet,
unsecuritized loans and ACE Plus single-family mortgages, which are near-prime residential mortgages and comprise 3% of the portfolio.
On-balance sheet securitized mortgages totalled $2.5 billion in Q3 2016 and comprise primarily insured single-family and multi-unit
residential mortgages that are sold into CMHC’s NHA-MBS and Canada Mortgage Bond CMB programs.
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The majority of mortgages are broker-originated and are generally diversified across the country, although loans are concentrated within
Ontario, which comprises 84% of the portfolio, with an additional 6% in British Columbia and 4% in Alberta. HCG focuses its
underwriting on residences in urban and suburban areas.
There is some uncertainty as to how the new Department of Finance mortgage rules will affect HCG’s originations, since they only took
effect late in 2016. Management believes the rules will certainly have an effect on the Accelerator product (insured single-family mortgage
originations) which HCG generates only for the purposes of securitization. Specifically, the rules will potentially limit HCG’s ability to
profitably originate and fund these mortgages as they are traditionally a low-margin product. More clarity is expected as the Group
announces results for Q4 2016 and Q1 2017, but management expects up to a 60% decline in its Accelerator originations. As such, the
Group will review its mid-term (three- to five-year targets) in Q4 2016.
Commercial lending has increased over the last year, with non-residential commercial mortgages rising 27% YOY to $1.9 billion in Q3
2016. These mortgages are sourced through brokers or partners. The Group has stated that it will strategically continue to grow this
segment if market conditions remain favourable, since the portfolio provides HCG with high yields and asset diversification.
HCG’s other ancillary businesses include a $374 million Visa portfolio as at September 30, 2016. This portfolio is predominantly a product
called Equityline Visa, which is a home equity line of credit (HELOC) that is secured with residential mortgages as collateral. In addition,
the Group has approximately $361 million in other personal loans, largely secured by home-related assets. HCG is also expanding into
other lending products, such as unsecured credit cards, where it has limited experience. Given its limited scale and management’s
announced plans for slow expansion, DBRS does not anticipate that this growth in consumer lending would add significantly to the Group’s
risk profile. Together, these products currently contribute around 4% to HCG’s loan portfolio.
HTC offers deposits via brokers and financial planners, and through its direct-to-consumer deposit brand, Oaken Financial. HTC also
conducts business through its wholly owned subsidiary, Home Bank (formerly CFF Bank), which HTC acquired in October 2015. HTC
has six “trust branch” offices in Ontario, Alberta, British Columbia, Nova Scotia, Québec and Manitoba, and two Oaken Financial stores,
one in Toronto and the other in Calgary.
HCG’s executive team has been growing over the last couple of years, with the new leadership settling into their roles. This mitigates to
some degree DBRS’s concerns about the depth of the management succession pool.
Earnings Power
As the market leader in the non-prime mortgage lending space, HCG enjoys better margins and access to securitization pools versus its
peers, which lends to higher profitability. Nevertheless, operating efficiency has suffered as the Group increased spending on risk
management and mortgage retention programmes.
Net interest income (NII), increased by 3% YOY to $365 million in 9M 2016, despite a 1% retraction in the gross loan portfolio from 9M
2015. In response to the low interest rate environment, which has compressed margins, HCG has altered some of its product mix,
introducing new securitization pools and increasing its commercial lending. Net interest margin (NIM) was up modestly to 2.44% in 9M
2016 from 2.39% in the comparable period a year ago.
Non-interest income declined by 8% YOY to $73 million for 9M 2016, due to a 14% decrease in fees and other income, which came about
due to changes in the portfolio mix and fee structure. Meanwhile, securitization income increased by 21% as HCG sold the residual interest
in both single-family and multi-unit mortgage securitizations. DBRS notes that non-interest income makes up around 10% of total revenues
and would view favourably a greater contribution to revenues of non-interest income.
In the aftermath of the suspension of the 45 brokers in 2014 and 2015, HCG has upgraded processes, changed business relationships,
increased regulatory compliance activities and introduced additional risk management procedures. These changes resulted in increased
costs and has strained the ability to grow assets and net revenue. As such, HCG has invested in improving broker service and borrower
retention levels through two initiatives: Spire, a broker partnership and incentive program rolled out in 2016, and Loft, a broker portal
technology that was created to enhance the broker experience, as well as improve service levels by increasing transparency, which will be
rolled out in 2017. As a result, the efficiency ratio deteriorated to 38.4% in 9M 2016 from 31.3% in 9M 2015.
Financial Institutions: Banks and Trusts
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The Group’s main focus now is on improving operating leverage by driving revenue growth and reducing expenses. On the revenue side,
the strategic focus is to improve the retention of customers at renewal and compelling business lines to increase revenues, while on the
expense side HCG is will look to optimize its cost structure. DBRS believes the latter will be difficult to achieve in the short term as the
Group has had to invest in risk management initiatives some of which are labour-intensive.
According to management, the probable decrease in insured mortgage originations due to new mortgage rules are expected to have an
impact on net income before tax of approximately $6.5 million, as the Accelerator programme has traditionally been a low-margin product.
However, in DBRS’s opinion, the Department of Finance Canada’s new mortgage rules, which took effect October 2016, will likely have
a negative impact on the Group’s origination volumes as well as LUA and, as a result, could prove to be a greater headwind to profitability.
Furthermore, Home Bank will continue to incur operating losses until it is fully integrated.
Provisions for credit losses decreased by 27% YOY to $5.5 million in 9M 2016, while the current collective allowance exceeds the
cumulative net write-offs experienced over the last 36 months. Consequently, provisions to income before provisions and taxes (IBPT)
decreased from 2.5% in 9M15 to 2.0% in 9M 2016. In DBRS’s view, however, given the nature of the uninsured residential portfolio and
with an increase in commercial lending HCG’s write-offs may increase, especially if there is a real estate market correction, and thus
provisioning levels may rise.
Return on average common equity decreased to 16.4% in 9M 2016, from 19.2% in 9M 2016, as net income fell by 9% YOY to $197
million in 9M 2016 due to negative operating leverage.
Risk Profile
With the majority of its portfolio in non-prime single family mortgages, DBRS considers HCG’s risk profile as above that of its bank
peers. While DBRS acknowledges the Group’s traditionally solid underwriting and servicing of the uninsured Alt-A portfolio, as evidenced
by the low level of impairments and loan losses, in DBRS’s view HCG is more susceptible to real estate market corrections than other
lenders.
When underwriting uninsured mortgage loans, which is an important component of HCG’s business, the Group focuses more on property
appraisals and ensuring lower LTV ratios than is typical for prime mortgages in order to reduce credit risk. The current weighted average
LTV of uninsured residential mortgages was 63.6% as of Q3 2016 compared 66.0% for YE2015.
With the exception of a small portion of consumer loans, almost all of HCG’s lending is secured by real estate, with 20% of on-balance
sheet lending insured, while the uninsured portion comprises primarily Alt-A single-family mortgages. Credit performance on the single-
family mortgage portfolio has historically experienced low levels of impairment. Indeed, for 9M 2016 gross impaired loans on single-
family mortgages averaged 0.35% of gross loans, while write-offs of unsecuritized loans were negligible at 0.03% in 9M 2016. Despite
HCG’s ability to successfully manage or sell its impaired loans, DBRS considers such low levels of loan losses as not likely to be
sustainable should real estate prices begin to depreciate.
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Meanwhile, given their secured nature, the Group’s ancillary credit card loans businesses’ impaired loans have been low, totalling 0.56%
in Q3 2016, while other consumer retail loans were 0.08%.
Events in 2014–2015 led HCG to suspend relationships with a group of approximately 45 brokers identified as being associated with
falsified mortgage applications. HCG has completed the review of the $1.14 billion portfolio of loans outstanding as of Q3 2016 generated
by these suspended brokers. There have been no unusual credit issues on these mortgages.
Non-residential commercial mortgages, which includes store and apartments, office buildings, residential and non-residential construction,
hotels and industrial properties increased by 24% from year-end 2015 to $1.9 billion at the end of September 2016. While commercial
lending adds a degree of diversification, DBRS is cautious that HCG is growing this portfolio and increasing its exposure to commercial
real estate, especially given concerns that commercial property markets may tend to have higher loss content, especially at times of a
potentially slowing economy.
The Group is heavily reliant on external brokers for the origination of both mortgages and deposits, which causes some concentration risk,
especially when dealing with some of the major brokerage firms. In addition, HCG faces geographic risk as 84% of single-family
residential mortgages are Ontario-based, with another 6% in British Columbia, 4% in Alberta and the rest distributed among other
provinces.
HCG has been improving its risk management processes and procedures since the suspension of the brokers in 2014–2015. As the new
systems have now been institutionalized into the Group’s practices, HCG is now concentrating on making these procedures more efficient
and creating a more transparent application process for brokers and, in turn, borrowers.
The Group is subject to investment and interest rate risk that is used to hedge its exposure. In DBRS’s view, the integration of Home Bank,
combined with the implementation of Spire and Loft, could increase operational risks.
Funding and Liquidity
DBRS considers HCG’s reliance on confidence-sensitive broker deposits as a weakness. As such, DBRS views the strategy to transition
the deposit base to more direct-to-consumer-sourced deposits favourably, but recognizes that this will take time and has execution risks.
As of September 30, 2016, approximately 83% of HCG’s $15.7 billion deposits were sourced through brokers. Although this is an
improvement from 86% at YE2015, the Group continues to introduce products to directly acquire deposits through its Oaken Financial
and Home Bank offerings and, to a smaller extent, through wholesale deposit notes. HCG’s uninsured mortgages have a weighted-average
life (WAL) of around two years, compared to the usual five-year WAL for prime mortgages (amortization periods are the same, typically
25 years), which facilitates HCG’s ability to match-fund its term assets with liabilities of a similar tenor, especially given its reliance on
broker deposits and wholesale funding.
The Group funds insured residential and multi-residential mortgages through CMHC’s sponsored programs, CMB and NHA MBS, providing
some diversity to funding and a consistently accessible channel of liquidity. In addition, HCG established an ABCP funding program for its
ACE Plus (near prime) residential mortgages in April 2016. Securitizations, including ABCP, formed 15% of total funding as of Q3 2016.
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In May 2016, HTC retired three Subordinated Debt notes with HCG totalling $156 million. This corresponded to the majority of HCG’s
$150 million Senior Debt.
HCG maintains a pool of unencumbered liquid assets, which are defined as cash, short-term bank deposits, treasury bills, banker’s
acceptances, government bonds, insured mortgage-backed securities and Canadian bank bonds. At the end of Q3 2016, HCG reported its
unencumbered liquidity pool was $1.9 billion, or 9.2% of total assets, versus $1.5 billion or 7.3% of total assets in Q3 2015. These liquid
assets mostly comprise cash and cash equivalents, which stood at $1.1 billion at the end of Q3 2016, in addition to about $0.8 billion of
securities. HTC is not required to disclose its Basel III Liquidity Coverage Ratio (LCR); however, the Trust Company does calculate the
LCR, which it shares with OSFI as part of the supervisory review process. HTC has disclosed that it is adhering fully with OSFI’s liquidity
guidelines.
Capitalization
From DBRS’s perspective, the Trust Company benefits from capitalization levels that are the highest among its peers. This leaves HTC
with a sufficient cushion to withstand any major stresses. Internal capital generation is strong as the dividend payout has historically been
low; in addition, the Group is participating in share buyback programmes.
While the operating subsidiary HTC is regulated by OSFI, HCG is not directly regulated. HTC maintains very strong regulatory ratios,
with a Basel III CET1 capital ratio of 16.5% as of the end of Q3 2016, well above the regulatory minimum of 7%. DBRS estimates this
leaves the Group with a capital cushion of approximately $803 million (based on total risk-weighted assets) to absorb potential loan losses.
HTC follows the standardized Basel III approach on an all-in basis, and at the current moment there are no projects underway to implement
the advanced ratings-based approach.
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While still above bank peers, HTC’s CET1 has fallen from 18.3% at YE2015 due to higher risk-weighted assets as a result of growth in
non-residential commercial loans and a decrease in retained earnings due to share repurchases, as well as a higher dividend payout. HCG
completed a Substantial Issuer Bid (SIB) for 3.9 million common shares in April 2016, for proceeds of approximately $150 million, in
addition to participating in Normal Course Issuer Bids (NCIB) totalling $44 million for 9M 2016. HCG renewed the NCIB through to
September 2017, providing HCG with the option to repurchase up to 5% of outstanding shares. The purchase cost of shares acquired
through the repurchase of shares is allocated between capital stock and retained earnings. The Company expects to continue to participate
in these share buyback programmes going forward.
HCG’s ability to internally generate capital on a consistent basis has been strong, driven by high ROE and a historically low dividend
payout, which reached a high of 24.6% in 9M 2016, thus providing HCG with a considerable amount of capital flexibility. Management
has indicated that it will be revising its dividend payout targets in Q4 2016.
DBRS ran its Canadian residential mortgage-backed securities model (including HELOC) on the uninsured residential mortgage portfolio
using static loan-level data to gain an understanding of how the portfolio might act in the event of material market declines. The analysis
suggests HTC would remain above regulatory minimums and weather such an unfavourable scenario. Nevertheless, DBRS notes, given
the share buybacks HCG undertook in 2016, the Group should make an effort to maintain capital ratios at their current high levels above
regulatory minimums in order to keep such a buffer, due to the underwriting risk HCG undertakes relative to peers.
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Home Capital Group Inc.Balance Sheet IFRS IFRS IFRS IFRS IFRS IFRS IFRS
($ millions) 9M 2016 9M 2015 2015 2014 2013 2012 2011
Assets:
Cash and Cash Equivalents 1,059 612 1,150 361 733 302 534
Restricted Cash and Investments 231 494 196 421 648 725 473
Investments 523 413 453 583 424 414 392
Mortgages - Non-Securitized 15,342 15,238 15,423 14,283 12,640 10,402 7,817
Mortgages - Securitization 2,549 2,901 2,674 3,946 5,210 6,706 8,243
Loans Held for Sale 74 162 135 102 138 22 0
Other Assets 538 494 496 387 282 228 237
Total Assets 20,317 20,314 20,527 20,083 20,076 18,800 17,696
Liabilities & Equity:
Deposits 15,694 14,950 15,666 13,940 12,766 10,137 7,922
Securitization Liabilities 2,680 3,318 2,781 4,303 5,773 7,336 8,649
Debt 0 154 151 152 153 151 153
Other Liabilities 363 323 308 239 206 209 197
Total Liabilities 18,738 18,745 18,906 18,634 18,898 17,832 16,922
Common Equity 1,579 1,569 1,621 1,449 1,178 968 775
Total Equity 1,579 1,569 1,621 1,449 1,178 968 775
Total Liabilities and Equity 20,317 20,314 20,527 20,083 20,076 18,800 17,696
Source: Company reports, DBRS
Home Capital Group Inc.Income Statement IFRS IFRS IFRS IFRS IFRS IFRS IFRS
($ millions) 9M 2016 9M 2015 2015 2014 2013 2012 2011
Interest Income - Core Lending 578 573 770 718 629 526 401
Interest Income - Securitization 62 81 104 166 226 288 330
Interest Income - Other 16 14 19 25 19 18 24
Total Interest Income 655 668 892 910 874 832 755
Interest Expense - Deposits 237 241 319 311 268 230 192
Interest Expense - Securitization Liabilities 52 68 86 132 178 213 225
Interest Expense - Other 2 5 6 6 7 7 4
Total Interest Expense 291 313 411 450 453 450 421
Net Interest Income 365 354 481 460 422 381 334
Fees and Other Income 54 63 83 71 61 44 38
Securitization Income 25 20 26 27 13 8 0
Net (Loss) Gain on Investments (6) (4) (7) 3 1 4 (3)
Other 0 0 0 33 0 0 0
Operating Revenue 437 434 583 593 497 437 369
Salaries & Benefits 78 63 89 81 71 59 53
Other 90 73 102 81 73 64 52
Operating Expenses 168 136 191 162 144 123 105
Non-Operating Income/Expense 1 0 2 0 0 0 0
Income Before Provisions and Taxes (IBPT) 269 298 394 431 353 315 264
Provisions for Loan Losses 5 8 9 13 16 15 8
Income Before Taxes 264 290 385 418 337 300 256
Taxes 67 73 98 104 81 78 66
Net Income to Shareholders 197 217 287 313 257 222 190
Source: Company reports, DBRS
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0
Profitability Ratios IFRS IFRSIFRS IFRS IFRS IFRS IFRS IFRS
9M 2016 9M 2015Q1 2014 2015 2014 2013 2012 2011
Return on Average Common Equity (%) 16.39% 19.18% 18.72% 23.85% 23.91% 25.47% 27.09%
Return on Average Assets(%) 1.28% 1.43% 1.41% 1.56% 1.32% 1.22% 1.14%
Net Interest Margin (%) 2.44% 2.39% 2.42% 2.33% 2.20% 2.12% 2.04%
Non-Interest Income / Total Revenue (%) 10.00% 10.64% 10.42% 12.79% 7.90% 6.30% 4.41%
Efficiency Ratio (%) (Op exp / Op rev) 38.39% 31.34% 32.60% 27.37% 28.92% 28.06% 28.47%
IBPT Margin (%) 37.00% 39.87% 39.59% 41.29% 37.21% 35.44% 33.38%
IBPT / Risk-Weighted Assets (%) 4.38% 5.30% 5.20% 6.29% 5.89% 6.27% 6.34%
Provisions / IBPT (%) 2.04% 2.5% 2.3% 3.0% 4.5% 4.7% 2.8%
Effective Tax Rate (%) 25.49% 25.28% 25.43% 24.99% 23.97% 25.99% 25.84%
Risk Profile Ratios IFRS IFRSIFRS IFRS IFRS IFRS IFRS IFRS
9M 2016 9M 2015Q1 2014 2015 2014 2013 2012 2011
Loan Loss Provision / Average Net Loans (%) 0.04% 0.06% 0.05% 0.07% 0.09% 0.09% 0.05%
Net Write-offs / Average Net Loans (%) 0.04% 0.03% 0.04% 0.06% 0.09% 0.07% 0.07%
Gross Impaired Loans (GILs) / Gross Loans (%) 0.32% 0.31% 0.30% 0.31% 0.36% 0.34% 0.26%
GILs / Common Equity + Reserves (%) 3.59% 3.55% 3.22% 3.85% 5.35% 5.89% 5.19%
GILs/IBPT (%) 16.18% 14.36% 13.58% 13.29% 18.36% 18.76% 15.85%
GILs / Gross Non-Securitized Loans (%) 0.38% 0.37% 0.35% 0.40% 0.51% 0.57% 0.53%
GILs (residential)/Gross Residential Mortgages 0.34% 0.32% 0.31% 0.32% 0.34% 0.35% 0.25%
Net Impaired Loans / Total Net Loans * (%) 0.31% 0.30% 0.28% 0.30% 0.35% 0.33% 0.25%
Loan Loss Allowance / Total Gross Loans (%) 0.22% 0.22% 0.22% 0.20% 0.19% 0.20% 0.19%
Loan Loss Allowances / GILs (%) 69.27% 69.41% 74.05% 64.35% 52.37% 56.99% 74.86%
Loan Loss Allowances / Risk-Weighted Assets (%) 0.48% 0.51% 0.50% 0.51% 0.52% 0.61% 0.69%
* Includes insured impaired loans
Funding & Liquidity Ratios IFRS IFRSIFRS IFRS IFRS IFRS IFRS IFRS
9M 2016 9M 2015Q1 2014 2015 2014 2013 2012 2011
Core Lending / Total deposits 98.0% 102.2% 98.7% 102.7% 99.3% 102.9% 99.0%
Debt/Common Equity 0.0% 9.4% 9.0% 10.4% 12.8% 15.5% 19.6%
EBIT/Debt Interest Expense 119 65 61 66 52 45 60
Liquid Assets* / Non-Securitized Assets 8.9% 5.9% 9.0% 5.8% 7.8% 5.9% 9.8%
Liquid Assets* / Total Assets 7.8% 5.0% 7.8% 4.7% 5.8% 3.8% 5.2%
* Liquid assets includes unencumbered cash, cash equivalents and available for sale securities
Capitalisation Ratios IFRS IFRSIFRS IFRS IFRS IFRS IFRS IFRS
9M 2016 9M 2015Q1 2014 2015 2014 2013 2012 2011
Common Equity Tier 1 Ratio (Basel III) (%) * 16.5% 18.1% 18.3% 18.3% 16.8% N/A N/A
Tier 1 Ratio (Basel III) (%) * 16.5% 18.1% 18.3% 18.3% 16.8% 17.0% 17.3%
Total Common Equity / Total Assets (%) 8.1% 8.1% 8.2% 7.3% 6.0% 5.2% 4.4%
Total Risk Weighted Assets / Total Assets (%) 41.4% 38.4% 38.9% 35.8% 32.4% 29.2% 25.7%
Payout Ratio 24.6% 22.0% 22.0% 17.0% 14.9% 15.0% 14.2%
* Ratios prior to 2013 are Basel II
Source: Company reports, DBRS
Financial Institutions: Banks and Trusts
January 20, 2017
Rating Report | Home Capital Group Inc.
DBRS.COM
1
1 Rating Methodology and Approach
The applicable methodologies are Global Methodology for Rating Banks and Banking Organizations (July 2016), Rating Canadian
Residential Mortgages, Home Equity Lines of Credit and Reverse Mortgages (November 2016) and DBRS Criteria: Support
Assessments for Banks and Banking Organisations (March 2016), which can be found on the DBRS website under Methodologies.
Ratings
Rating History
Previous Action(s)
DBRS Confirms Home Trust Company’s Long Term Rating of BBB (high) and Short-Term Rating R-2 (high), Stable Trends,
December 21, 2015.
DBRS Confirms Ratings of Home Trust Company at BBB (high) and R-2 (high), December 17, 2014.
Related Research
DBRS: Home Capital Group Stable Q3 2016 Profitability; New Mortgage Rules May Impact Few Segments, November 8, 2016.
DBRS: Home Capital Reports Strong Earnings; Still Few Signs of Credit Troubles in The Mortgage Portfolio, February 16, 2016.
Previous Report
Home Capital Group Inc., Rating Report, January 11, 2016.
Issuer Debt Rating Rating Action Trend Home Trust Company Issuer Rating BBB (high) Confirmed Negative
Home Trust Company Deposits & Senior Debt BBB (high) Confirmed Negative
Home Trust Company Short-Term Instruments
R-2 (high) Confirmed Negative
Home Capital Group Inc. Senior Debt BBB Confirmed Negative
Home Capital Group Inc. Short-Term Instruments R-2 (middle) Confirmed Negative
Issuer Debt Current 2016 2015 2014
Home Trust Company Issuer Rating BBB (high) BBB (high) BBB (high) BBB (high)
Home Trust Company Deposits & Senior Debt BBB (high) BBB (high) BBB (high) BBB (high)
Home Trust Company Short-Term Instruments
R-2 (high) R-2 (high) R-2 (high) R-2 (high)
Home Capital Group Inc. Senior Debt BBB BBB BBB BBB
Home Capital Group Inc. Short-Term Instruments R-2 (middle) R-2 (middle) R-2 (middle) R-2 (middle)
Financial Institutions: Banks and Trusts
January 20, 2017
Rating Report | Home Capital Group Inc.
DBRS.COM
1
2
Notes:
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