Key points:
Q4/17 reported EPS was $0.38, ahead of our $0.34 forecast and a penny ahead of $0.37 consensus (range of $0.30 to $0.43). However, there was $11.4MM of non-recurring expenses (intangible asset impairment, PSiGate and prepaid card business exit costs as well as litigation-related costs), which suggest normalized EPS may be closer to $0.49, but at the very least significantly ahead of our forecast and consensus.
Q4/17 originations of $872MM were ahead of our $825MM forecast.
Higher-than-forecast non-prime residential, multi-unit residential and commercial mortgage originations were partly offset by lower-than- forecast prime residential originations. Mortgage loan growth was -15% Y/Y, right in line with our -15% forecast. This compares to -11% Y/Y growth generated last quarter in Q3/17 and +6% Y/Y growth last year in Q4/16.
Credit losses were $3.4MM, in line with our $3.5MM forecast.
Other takeaways: (1) actual residential mortgage growth was -13% in
2017. Reflecting OSFI B-20 changes, HCG estimates a 10% decline in residential originations would see residential loan growth of -7% in 2018 (-10% loan growth if originations drop -20%); (2) HCG expects to complete its long-term corporate strategy review during H1/18; and (3) the share buyback was not renewed as HCG continues formulating its long-term strategy with share buybacks/dividends as part of the process.
Increasing 12-month target to $20/share (was $19), but maintaining our Sector Perform rating. Our increased price target reflects higher financial estimates following better-than-forecast Q4/17 results. Our neutral near- term outlook for the stock reflects mortgage market concerns given recent regulatory changes and potential new changes (see our Q1/18 Canadian Mortgage Monitor for details) and lower earnings visibility vs. mortgage peers. In the near term, we see greater risk-reward opportunities elsewhere within the group, but for investors with an above-average risk tolerance and a willingness to a take a longer-term view, we think there is potentially significant valuation upside driven by higher EPS growth potential vs. peers and a positive re-rating of the valuation multiple.