Despite rising interest rates, alternative lender Home Capital saw its mortgage originations jump over 40% in Q2 compared to last year.
While total loans under administration rose 17% year-over-year to $26.7 billion, the company experienced a 31.7% decrease in net income over the same period.
“We have built our business to be resilient in the face of challenging conditions,” said President and CEO Yousry Bissada. “We are better prepared than ever to manage through any market environment and deliver value.”
He added that the company is resilient and “is built to be a fortress precisely in case of challenging times.”
Net interest margin was down 64 basis points from a year ago and 21 bps from Q1.
“As lower-cost funding matures and is replaced by higher-cost funding, net interest margins may contract further before stabilizing at the historical levels,” Bissada noted.
Home also added provisions of $4.7 million in the quarter, which Home said is a return to normal provisioning levels. That compares to a reversal of credit provisions of nearly $19 million in Q2 2021.
Highlights from the Q2 earnings report
- Net income: $41.3 million (-31.7% YoY)
- Total originations: $3.04 billion (+42%)
- Loans under administration: $26.7 billion (+17% YoY)
- Net interest margin: 1.97% (vs. 2.18% in Q1 and 2.61% in Q2 2021)
- Net non-performing loans as a % of gross loans: 0.14% (vs. 0.11% in Q1 and 0.24% in Q2 2021)
Source: Q2 2022 earnings report
Notables from its call:
CEO Yousry Bissada made the following comments on a variety of subjects:
- On changing lending conditions: “We have entered a new phase of higher borrowing [rates]. We’re also seeing increasing evidence of a correction in the economy and housing market…[Home] is well-positioned to perform and generate value as we navigate through the changing economic landscape…This industry and our company are historically very resilient.”
- On Home’s return to the deposit market: “We also announced our return to the deposit market for the first time since 2015. The level of investor interest in our $200-million issuance was quite healthy and gives us confidence in our ongoing ability to access this option as an element of our funding diversification strategy.”
- On delinquency rates: “Our delinquency metrics are very low and our loan loss allowances provide a significant cushion against future potential losses. This quarter we returned to normal provisioning levels. Increased provisions on residential and commercial are in line with growth in the portfolio and changes to our economic outlook. Actual write-offs were in line with our historic low levels.”
- On IT developments: “It was an eventful quarter for IT development and we hit multiple major milestones. We went live with our second core banking release for deposits similar to our release for our loans in early 2020. This approach is more flexible, less customized and will generate productivity improvements in workflow for high-volume transactions…We (also) went live with a new call centre technology. The improved workflow provides higher productivity and staffing efficiency as well as better service to our customers.”
- On client retention: “We expect retention to go up. Less housing activity needs fewer discharges…In addition, we expect renewals to go up, not just at our institution, but probably at most financial institutions, because rates have climbed so much in the last two or three months. Usually, if you are not in arrears and you’ve made your payments, you get an automatic renewal.”
- On whether they’ve seen any changes in credit quality: “We have not seen any change in credit quality. Most people who come in near prime, it is for the main reason that they don’t have evidence of two years of a FICO score…for new Canadians, this is very common. The other category is self-employed. So, it hasn’t changed. And I suspect one of the reasons it hasn’t changed yet is unemployment is so low. So, people’s financial situations haven’t changed. In fact, if anything, they may have gotten better [due to higher wage increases to keep up with inflation]. If unemployment starts tracking negatively, then we might see a bit of a shift.”
- On why Home will be able to weather any economic storm: “First, the characteristics of the mortgage market and the past behaviour of the clients we serve. Second, our expertise and historical experience in serving the near-prime market. Third, our investments during the last five years building an organization that is fortified for the future. And four, our expertise and experience in managing delinquencies should they become an issue.”
- When asked if Home is sacrificing NIM to grow market share: “There’s a view out there that we are buying market share. Let me tell you that is absolutely not true…Our brand, our reliable service, and our relationship with the brokers in this volatile time. Home is a very good place to bring a mortgage, because, if we say yes, there’s no walking back. We do all our work upfront…So that has brought us a significant amount of business.”
Brad Kotush, Chief Financial Officer, added that net interest income was the biggest driver of profitability, accounting for nearly 90% of total revenues.
“When rates dropped sharply as they did in 2020 through 2021, we were able to access lower-cost deposit and capital markets funding at a faster pace than that of reductions in most yields,” he said. “Rates on our assets adjust more slowly, in part because we make our funding commitments 45 to 60 days before the assets come on our balance sheet. The combination of those two factors produced high average margins in our last year.”
However, in 2022, the opposite has been true.
“With four increases by the Bank of Canada so far this year totalling 225 basis points from a base of 25 basis points, we have seen a corresponding increase in our cost of funds,” Kotush noted. “We have lower-cost funding from the last two years being replaced by higher-cost funds in a competitive deposit market.”
As a result, Home has been raising rates on its mortgage products to match its cost of funds.
“Since the beginning of the year, we have increased our classic mortgage rates 11x from the low 3% range to the mid-6%.,” Kotush said. “We expect to see the benefit of mortgage rate increases in our margins over time as lower-rate mortgages renew at higher rates and spreads on originations revert to historical averages.”
Source: Q2 conference call
Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.
