Home Capital Group Inc. (TSX: HCG) is a specialty finance company that offers residential and commercial mortgage lending, securitization of insured mortgage products, consumer lending, and credit card services. The company also offers deposits via brokers and financial planners, and through its direct-to-consumer deposit brand, Oaken Financial. 

Key Updates:

• High-Quality Loan book: The company reported strong operational efficiency and has consistently lowered its gross non-performing loans, which suggest highly-quality and well secured loan book. We expect the continuation of the above trend is likely to benefit the company’s operations in the coming years. A decline in non-performing loans despite sluggish economic scenario is encouraging.

Source: Company Presentation

• Growth in Loan Under Administration: In Q1FY22, total Loans under administration stood at CAD 25.3 billion at the end of Q1FY22, up 11.4% from Q1FY21 and 5% over Q4FY21. The growth was supported by an increase in both the on-balance sheet and off-balance sheet portfolios. The group reported growth from the company’s Classic single-family residential mortgage portfolio, which reflects the company’s excellent origination and retention strategy.

• Growth in Total Deposits: At the end of Q1FY22, the company reported a stable deposit growth supported by growth from its new acquisition of Oaken in FY21. Notably, Oaken currently accounts for 31.5% of total deposits up from 29.5% a year ago. We expect the above momentum to continue due to company’s constant focus to enhance direct-to-consumer segment.

    Source: Company Presentation

Risks associated with the Investment:

The company’s performances might be hindered due to the extension of the ongoing pandemic, as it would impact the overall consumer credit and might lead to higher non-performing loans. Despite strong performance from Oaken Financial, Total deposits fell from y-o-y and q-o-q basis, and continuation of the above trend might dampen the company’s overall performance.

  Q1FY22 Financial Highlights:

Q1FY22 Income Statement Highlights (Source: Company Report)

• HCG announced Q1FY22 result, wherein the company posted total revenue of CAD 125.6 million, stood higher from CAD 139.5 million in pcp. The slide was primarily due to by a decline in total net interest income.
• The period was marked by higher salaries and benefit expenses, increase in premises expenses, partially offset by a slightly lower other operating expense. Net Income stood a CAD 44.7 million, as compared to CAD 64.5 million in pcp, partially supported by a lower income tax expense.
• Non-performing loans stood at 0.11% of gross loans in Q1FY22, improved from 0.13% from Q4FY21 and 0.38% in Q1FY21, respectively. Net interest margin stood at 2.18%, slide from 2.61% in pcp.

 Valuation Methodology (Illustrative): Price to Book Value Based

Analysis By Kalkine Group

Stock Recommendation:

Despite several macro headwinds like poor consumer sentiment, increase in non-performing assets, the company ended Q1FY22 on a positive note. This suggested disciplined cost structure along with secured loan book. Also, the company’s reported a stable growth in the total deposits and was highest in the last five quarters, which is a key positive from the operational point. 

We have valued the stock using the price to book value-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Equitable Group Inc, AGF Management Ltd and Provident Financial Services Inc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of HCG at the last closing price of CAD 27.86 on May 06, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 06, 2022). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV 

  Technical Analysis Summary

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