HOME CAPITAL GROUP INC. $44 - Toronto symbol HCG

HOME CAPITAL GROUP INC. $44 (Toronto symbol HCG; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 69.5 million; Market cap; $3.1 billion; Price-to-sales ratio: 1.2; Dividend yield: 1.5%; TSINetwork Rating: Average; www. homecapital.com) gets around 90% of its revenue by making residential mortgage loans to borrowers who don’t meet the stricter standards of larger, traditional lenders, like banks. Its clients include recent immigrants with limited credit histories, and self-employed people.

The remaining 10% of Home Capital’s revenue mainly comes from credit cards and other loans to consumers and businesses.

Low interest rates continue to fuel loan demand. As a result, Home Capital’s revenue rose 7.0% in 2013, to $949.5 million from $887.7 million in 2012. Earnings gained 14.8%, to $257.7 million, or $3.68 a share, from $224.6 million, or $3.23. (All per-share amounts adjusted for a 2-for-1 stock split in March 2014.)

Home Capital cuts its credit losses by identifying problem loans early. It then uses this information to restructure a borrower’s repayment terms and adjust its lending policies. The company also sells its mortgage loans to third parties.

In 2013, Home Capital set aside $15.9 million to cover future loan losses, up 7.8% from $14.7 million in 2012. That extra $1.2-million loss reserve is mainly due to problems with a $6.4-million commercial real estate loan. Even so, Home Capital does not expect it will have to write off this loan.

At the end of 2013, bad loans were just 0.35% of its total loans, up slightly from 0.33% a year earlier.

The company’s efficiency ratio (non-interest expenses divided by revenue—the lower, the better) worsened to 28.9% from 28.1%. That’s partly because it recently launched Oaken Financial, which offers savings accounts and other banking products, mainly over the Internet.

The stock is up 51% in the past year. Even so, it trades at a low 10.4 times Home Capital’s likely 2014 earnings of $4.22 a share. In addition the company just raised its dividend by 14.3%. The new annual rate of $0.64 a share yields 1.5%.

Home Capital Group is a buy.

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