One of the strong points of Canadian investing in the past few years has been the reliability of our financial institutions compared to those in many other countries. That can even apply to companies that appear risky at first glance.
Home Capital Group Inc. (Toronto symbol HCG; www.homecapital.com) offers mortgages to borrowers who don’t meet the stricter criteria of larger, traditional lenders.
Even though Home Capital caters to riskier borrowers, it has avoided the huge credit losses that have crippled many U.S. banks. That’s because it continues to do a good job of identifying problem loans early. It then uses this information to restructure a borrower’s repayment terms and adjust its lending policies.
Home mortgages account for 90% of the company’s loan portfolio. The remaining 10% consists of other loans, such as non-residential mortgages and credit cards. Home Capital offers its loans through five retail branches in Toronto, Vancouver, Calgary, Montreal and Halifax.
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Canadian investing: low interest rates fuel gains for Home Capital
Home Capital’s revenue rose 89.0%, from $282.5 million in 2006 to $533.9 million in 2010. Earnings rose 166.7%, from $1.95 a share in 2006 to $5.20 a share in 2010.
These gains were mainly fuelled by low interest rates, which have pushed up demand for mortgages and other loans. As well, the company is shifting its focus to more-profitable mortgages that are not insured by the Canada Mortgage and Housing Corp.
Uninsured mortgages entail greater risk than insured mortgages. That’s why Home Capital set aside $1.2 million to cover future loan losses in the three months ended June 30, 2011. Even so, bad loans fell to 0.23% of its total loans from 0.34% a year earlier.
Even with the jump in loan-loss provisions, Home Capital’s earnings rose 34.5% in the quarter, to $48.2 million, or $1.38 a share. Revenue rose 16.5%, to $198.6 million from $170.4 million.
Canadian investing: demand grows for home equity credit cards
Besides mortgages, Home Capital is seeing strong demand for its Equityline Visa credit cards, which let cardholders borrow against the equity in their homes. On June 30, 2011, receivables on Equityline Visa cards totalled $372.1 million, up 23.3% from a year earlier.
Home Capital Group is in our Aggressive Growth Portfolio. In the latest edition of our flagship advisory on Canadian investing, The Successful Investor, we take a close look at the added risk of the company’s uninsured mortgages. We also look at whether Home Capital Group can keep its operating costs low. We conclude with our clear buy-sell-hold advice on the stock.
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