Home Capital Group Inc HMCBF

TD Notes

[retiredcf]

Capital Distribution Increases can Resume

Event

OSFI lifts capital distribution restrictions.

Impact: POSITIVE

Yesterday, OSFI Superintendent Peter Routledge announced that restrictions to capital distributions are being lifted (as of Nov 4) that were in place since March 2020. OSFI regulated financial institutions (FIs) may now increase regular dividends, executive compensation, and may resume common share repurchases. We view this positively given the outlook for capital returns has increased (in-line with our general forecast for increases to regular dividends/share buybacks as of Q1/22). OSFI's rationale was threefold:

• The original arguments for capital distribution restrictions are no longer valid;

• Responsibility for capital distribution rests with the board or directors and management of FIs; and

• OSFI has confidence that the FIs will act responsibly with regard to capital deployment.

  For our mortgage coverage universe, we see Home Capital as best positioned to benefit from this update given their material excess capital. In contrast, while Equitable has a constructive earnings growth profile, they currently have limited excess capital, in our view.

• Home Capital's CET 1 ratio is 22.3% (Q2/21), materially above the company's target of 14-15%. This implies $577mm of excess capital, or $11.47/share. Home Capital reports Q3/21 results on November 12; we see potential for a substantial issuer bid (SIB) and quarterly dividend announcement.

• Equitable Group's CET 1 ratio is 13.7% (Q3/21), which is in-line with the company's target of 13%-14%. We are assuming a 62% increase to the quarterly dividend in Q1/22 ($0.30/share, up from $0.185/share currently), and Equitable will pay off its $75mm in preferred shares.

• First National Financial, Atrium MIC, and Timbercreek Financial, are not OSFI regulated so their capital decisions are not directly influenced by OSFI policies.

  OSFI also provided an assessment of the housing market. They argue that they have prudently added multiple measures since the global financial crisis (2008/2009) that have led to "healthy household credit" and ample downside buffers. However, these measures have focused on the demand side. OSFI believes the supply of housing is not keeping up and is adding to price pressure. Over the next 3-4 years, the opportunity is to bring supply in-line with household formation.