Home Capital Group Inc T.HCG

RE:RE:RE:RE:RE:NCIB is now 88% complete, SIB on the way?

[WBuffett1]

I think they will need to do both SIB and NCIB because their CET1 is climbing every quarter as they earn net profit

NCIB alone would take too long to reduce the excess capital. Took them 9 months to buyback 4.75 million shares, which would cost about $100 million but in those same 9 months, they will likely make over $90 million in net profits. That is why their CET1 has been climbing even though they are buying back everyday.

I think management will prefer a slower buyback (a smaller SIB + new NCIB) because 1) OSFI probably won't allow them to do another large SIB so soon. 2) Mgmt would prefer to slowly run down the CET1 instead a rapid distribution to show prudence. 3) Like you said, they probably want to keep the share price close to book value so they can continue to do buy backs. 

AIRB will boost their CET1 substantially, no doubt about it. Their current way is too conservative but with so much excess capital, don't think they are in a rush to establish AIRB just yet.

EventHorizon wrote: Dear WBuffett1,
Thank you for the added colour. The lower end estimate of 123M would be only about 8.5% of the outstanding shares at current prices.

Do you think the board might assume that a NCIB might be a better option than an SIB? NCIBs in many companies often include up to 10% of the outstanding shares.

At the same time, HCG should be able to cover an immediate 10% SIB as well as another 10% NCIB just deploying the excess future cash flow next year and yet still be overcapitalized compared to its peers.

If HCG can buy back shares below book value, cannibalizing the shares should be better for long term shareholder value than reinvestment in further growth. Doing a slow buy back might also allow them to buy back more shares than a rapid squeeze which migh force the shorts to bid up the price. I am curious what the board and management plan for the future and what is their long term vision for HCG.
-Mike


PS: I was reading a report quite a while back which was suggestign that AIRB transition migh decrease the percentage of risk weighted assets up to about half.... but this is heavily dependent on the institution and the country-specific regulations. Either way, since HCG is currently investing in going digital, it might be prudent if they would also start to prepare for AIRB and other future-proofing initiatives to remain competetive.