Home Capital Group Inc HMCBF

Primary Symbol: T.HCG

Home Capital Group Inc. is a Canada-based holding company that operates through its principal subsidiary, Home Trust Company (Home Trust). Home Trust is a federally regulated trust company offering residential and non-residential mortgage lending, securitization of residential mortgage products, consumer lending and credit card services. In addition, Home Trust and its wholly owned subsidiary, Home Bank offer deposits through brokers and financial planners, and through a direct-to-consumer brand, Oaken Financial. Its mortgage lending includes classic single-family residential lending, insured residential lending, residential commercial lending, and non-residential commercial lending. Its consumer lending loan portfolio comprises credit cards, lines of credit and other consumer retail loans. In addition, the Company manages a treasury portfolio to support liquidity requirements and invest excess capital.

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Home Capital Group Inc

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Post by retiredcfon Oct 26, 2021 9:12am

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Post# 34048820

TD Notes

We are updating our target prices and estimates ahead of Q3/21 earnings results. We are also introducing our 2023 estimates. Home Capital remains our top pick (ACTION LIST BUY-rated), given its over-capitalized balance sheet that we expect to support material capital returns over the near term. Equitable Group and Atrium MIC remain BUY-rated, followed by First National and Timbercreek Financial (both HOLD-rated).

Given the forecast of rising rates and elevated housing activity YTD (despite moderating activity in Q3/21), we believe it is reasonable to expect lower housing activity in 2022 and 2023. In Exhibit 1, we show the historical inverse relationship between interest rates (which influence mortgage rates) and housing activity. With TD Economics forecasting that the five-year bond yield will increase by 47bps in 2022 and another 39bps in 2023 (annual averages), we believe it is reasonable to expect further affordability pressure to lead to moderating activity. For every 50bps increase in mortgage rates, affordability is reduced by ~4%. Potentially offsetting to some degree is high household savings, solid economic growth coming out of the pandemic, and the Federal government's proposed housing policies aimed at improving affordability, particularly for first-time buyers (see page 2 for details).
Housing activity pulled back in Q3/21. Sales activity was off 16% y/y. House prices remain elevated, up 22% y/y (September 2021). Listings inventory is low; however, with the national sales-to-new-listings ratio (SNLR) expanding to 75.1 in September 2021 from 70.5 in June 2021, suggesting that price strength could persist. The employment and mortgage arrears backdrop continues to improve. Fueled by strong house-price appreciation and YTD sales activity, mortgage credit growth is now trending above average rates (+9.7% y/y, vs. the historical average of 7.8%).
Year-to-date share-price performance has been strong for Equitable (+50%) and Home Capital (+33%). First National has lagged (+10%), while Timbercreek and Atrium are up a solid 14% and 15%, respectively. The mortgage companies continue to trade at valuations above L3Y/L5Y averages. We believe this is justified, given the outlook of decent earnings growth, solid credit trends, and healthy capital returns. We are forecasting that healthy dividend increases/buybacks from OSFI-regulated entities (HCG and EQB) will start in Q1/22.