RE:RE:RE:RE:"Going Concern" warnings are reg. requirements..Nothing new Just to point out a few facts from the 2017 Q1 interim report, which can be downloaded and viewed from Sedar.
1. We know in a few hours the stock price is going to shake, but irrespective of which direction it goes, the most important question is, as always, the going concern (see MD&A). Analysts will grill the CEO during conference call.
2. The adjusted EPS is $1.02 for the quarter, beating the estimate of 0.98 by a bit, which is nice but we all know this is history. The financial statement hereon will not look the same.
3. The $2B syndicated credit facility (364-day Line of Credit), has an upfront fee of $100M, 10% on outstanding balance, and 2.5% on unused portion. So this WILL be a definitive interest expenses between $150M to $300M, for the next 364 days. Low-end of the $150M interest expenses are based on 2.5% of 2B assuming they pay off the LOC immediately from sale of assets, and $300M are based on fully drawn LOC of 2B at 10%. Remember, they already drew $1.4B so the interests are already incurring.
4. HCG 2015 & 2016 Annual adjusted Net income was $289M and $263M respectively.
5. Dig deeper into the IS, the net interest margin was 2.44% as of Mar 2017, calculated as average rate of lending (mortgages/loc/retail loans...) of 4.23%, minus average rate of borrowing (HISAs & MBS) of 1.79%. The margin will be compressed, due to:
On the lending side, they have to offer better rates to acquire the B-rated borrowers and compensate them for the risk of insolvency. They just want to close a deal and buy that property. If I were a mortgagee I would call Laurentian or Equitable Bank... etc. before going to HCG.
On the borrowing side:
For HISAs, how much would you demand from HCG to keep your funds there? As far as I know they raised it twice and the deposits are still drying up. So let's be honest what is your price? 1% higher? 1.5%? I don't have an answer.
For MBS/Bonds/GICs, the ratings of HCG is now... junk? It is not going to average 1.79%. If Scotiabank is offering 30-month GIC at 1.7%, HCG is probably looking at 2.2%.
All in all, the Annual Net Interest Margin in 2017 will be compressed, possibly going to zero, if not negative.
To sum up, 2017 Annual net income will take a one-time hit ranging between $150M to 300M; HCG will have a smaller loan book because they sold 1.5B off, further dampening the Net Income performance down the road; the cost of capital (both equity and debt) will be higher due to loss of investor confidence, which always translates into higher risk premium for years. Goodwill impairment?
Take some time to reverse engineer the financial statements, don't just say CIBC bought more so it's a good sign, that's not investment 101. As far as I know CIBC stock was closing in red, and CIBC call options tanked.
Good luck. I don't have any position on HCG as of now.
M