Investor warns of ‘viral spread’ of Home Capital’s fiscal troubles

Investor warns of ‘viral spread’ of Home Capital’s fiscal troubles

Investor warns of ‘viral spread’ of Home Capital’s fiscal troubles In response to reports of Home Capital Group Inc.’s mounting troubles, one of the lender’s largest former investors warned of the possibility of a “contagion” spreading through the rest of the Canadian financial system.

“The probability has gone from infinitesimal to possible -- unlikely, but possible,” according to Jim Hall, chief investment officer of Calgary-based Mawer Investment Management Ltd., which sold around 2.8 million shares, or a 4.3 per cent stake, in Home Capital  recently.

“If depositors or bondholders start to lose faith in their banks, well then that becomes systemic,” Hall stated.

However, Hall emphasized that the odds of this happening are low.

“It’s a pretty hot fire in one little corner of the forest, and it doesn’t look like it’s spreading,” Hall explained. “There are firefighters standing around it right now, so if it starts to move, they’ll put it out.”

The comments came in the wake of Home Capital’s attempt to secure a loan, intending to compensate for a drop in deposits. The lender has stated that it’s weighing a sale, hiring RBC Capital Markets and BMO Capital Markets to advise on financing and “strategic options.”

“The assets look, at this point, still reasonably good,” Hall noted, adding that the firm’s problem is a lack of confidence. “Confidence was lost in this company and the business model breaks apart. That’s the problem with banks.”

As of the end of 2016, Home Capital’s $15-billion home-loan book represented approximately 1 per cent of the nation’s $1.45 trillion mortgage market. The lender had $20.5 billion in assets at year-end.

Home Capital’s troubles were exacerbated in April 19 when Ontario’s securities regulator accused the company of misleading investors over how the firm handled a review of mortgage brokers who falsified documents about borrowers’ income. The lender’s shares dramatically declined by 65 per cent the day after.


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