HOME CAPITAL GROUP INC. $33 - Toronto symbol HCG

HOME CAPITAL GROUP INC. $33 (Toronto symbol HCG; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 70.2 million; Market cap; $2.3 billion; Price-to-sales ratio: 3.9; Dividend yield: 2.7%; TSINetwork Rating: Average; www. homecapital.com) is a mortgage lender that serves borrowers who don’t meet the stricter standards of larger, traditional lenders, like banks. The company offers most of its loans through 4,000 independent mortgage brokers. In July 2015, it cut ties with 45 of them after it uncovered inaccurate information on loan applications. Specifically, these brokers falsified borrowers’ annual incomes but not their credit scores and property values. So far, Home Capital has reviewed 25% of these loans. Based on the results, it doesn’t expect significant credit losses. It expects to complete these reviews by the end of 2016. These questionable mortgages, which now total $1.72 billion, add to Home Capital’s risk. Investors also fear that a sudden drop in home prices, particularly in Toronto, could force some borrowers to stop repaying their loans. However, the company keeps its credit losses down by identifying problem loans early and adjusting the repayment terms. In the three months ended September 30, 2015, Home Capital set aside $2.8 million to cover potential loan losses, down 18.9% from $3.5 million a year earlier. Even so, Home Capital’s earnings fell 1.8%, to $72.4 million, or $1.03 a share, from $73.6 million, or $1.05 a share, a year earlier. The decline is partly due to $1.4 million of extra costs related to its loan reviews. Revenue fell 3.1%, to $247.2 million from $255.0 million, as higher demand for commercial building mortgages offset weaker residential loans. The company recently paid $17.8 million for Canadian First Financial Bank, which offers a variety of services, such as deposits, mortgages and wealth management, through 37 branches across the country. Home Capital also injected $35 million of additional capital to help stabilize this business. Buying Canadian First Financial will give Home Capital access to more funding for its lending activities. The move will also help with its plan to become a Schedule 1 lender, which would let it accept deposits and have them insured by the Canada Deposit and Insurance Corporation. The company will probably earn $4.18 a share in 2015, and the stock trades at a low 7.9 times that estimate. The $0.88 dividend yields 2.7%. Home Capital Group is still a buy.