RE:RE:MD&A Table 18bI've also studied both and I agree HCG is definitely being more cautious than EQB in provisioning
Also agree we don't need to worry too much about deferrals on residential mortgages. HCG said they granted deferral for pretty much everyone that asked for it. Many applied for deferral out of an abundance of caution. A lot of my friends applied for deferral while still being employed and paid their normal salaries. HCG also said there were more deferral applications in their insured mortgages than the uninsured. So the percent of deferrals in uninsured should be even lower.
Many inexperienced investors falsely assume default equates to loan losses for HCG. Like you said, HCG had 61% average LTV so there is a lot of buffer there.
I think you got the commercial loan part wrong though. HCG's commercial loans are all secured real estate mortgages (think shopping malls, office buildings, apartment buildings etc.). They are not business term loans. It is highly unlikely they will have significant loan impairment here. The company actually said they are seeing attractive opportunities in the commercial space because every other lender out there are cash strapped. HCG was the only lender that went into the crisis with significant excess capital. Also, only less than 10% of those commercial loan borrowers asked for deferrals by Apr 30.
The only loans that are now riskier are the "other consumer retail loans" portfolio. That is also why they provisioned a significant amount for this portfolio last quarter. It is a tiny part of their overall portfolio and they are no longer originating this type of loans.
EventHorizon wrote: I just read through MD&A reports for both HCG (https://s2.q4cdn.com/668293721/files/doc_financials/2020/q1/HCG-Q1-2020-Quarterly-Report.pdf) and EQB (https://eqbank.investorroom.com/download/EGI+MDA+and+FS+Q1+2020+SEDAR.pdf).
I am guessing that HCG is being extra cautious and perhaps is being too pesiministic with their Stage 1 and Stage 2 disclosure. EQB has emphasized their provisions (ie how much they anticipate they might lose) while HCG emphasized the total loan amounts (ie all outstanding balances even if most will be recovered). In the meantime, the numbers are comparable [I do not know what they exactly refer to as their loan book / deferred loans - whether mortgages on book or all loans under administration].
HCG: "Residential mortgage and other loan deferrals consist of 1,014 loans with a balance of $271.9 million as at theend of Q1 2020 and 9,903 loans with a balance of $3,933.6 million as at April 30, 2020." ==> This might be around 17.1% of their total loans under administration.
EQB: "As of April 30th, 2020, we had granted deferrals to 14,547 customers comprising 17.9% of our loan portfolio, and amounting to $81 million in deferred loan payments." ==> This might be up to 6.08 billion of loans.
I am hoping alt-a banks will be OK through this downturn. The residential mortgages should be fine with the fairly conservative LTV buffers. I am quite worried about the commercial loans though. For HCG, the commercials loans include hotels and restaurants (168M), retail stores (266M), as well as construction in-progress (193M) among other things like financing retail inventory etc. These might become permanently impaired and will have essentially no or negligible recoverable value. Just these few categories alone could wipe half of our equity.
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I continue holding both HCG and EQB. As od 13th of May, I am about 4% underwater on HCG and about 9% underwater on EQB... after both have essentially halved in their value from before COVID.
I did not have money to buy anything during the March downturn. Since then, I have been waiting and saving up as much money as I could. I have managed to save about two months worth of paycheques (by next week) which is not much since I don't have a good job... but if HCG and/or EQB will drop in price back to some interesting levels, I think I will buy more. There is no point in rushing in though...
Q2 results this summer will be horrible for alt-a banks as well as most other companies. There will be more deferrals and losses. Moreover, increased provisions for credit losses will likely wipe-out most earning and destroy book value for the foreseeable future (maybe even into 2022). EQB report which came out tonight has also noted this on page 9 of the MD&A report: "We believe it is prudent to build capital in times of stress, so will not introduce any buyback programs in 2020 even if our capital ratios increase above our target range. OSFI has also mandated that banks do not buy back shares until further notified." Since HCG does not pay dividend and there will be no buybacks, there are very few catalysts which could help normalize the price in the foreseeable future. Hopefully, the price will drop to 0.5 book value or less so that we can average down and make up for our current losses. At current prices though, I am afraid to average down given all of the uncertainty.