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. 

Key highlights

• Strong FY 2021 numbers:Recently, the company reported its FY21 results, wherein the Net Income grew by 39.3% in FY21 to CAD 244.7 million as compared to the CAD 175.7 million in FY20. The rise was pushed by the increase in Net Interest Income on securitized and non-Securitized assets and loans to CAD 493.75 million in FY21 vs the CAD 474.83 million in pcp.  Further, the decline of provisions in Credit losses to CAD 36.5 million in FY21 from CAD 70.8 million in FY20 helped the Net Income to improved further. Below is the graphical representation of the EPS and return on equity garnered by the company in last four years.

Source: Company Filing

• Rising NII and NIM: Net interest income (NII) is the primary driver of the Bank’s profitability. In FY 2021 the group’s total net interest income of CAD 493.7 million increased by CAD 18.9 million from CAD 474.8 million in FY 2020, reflecting loan growth and higher net interest margin of 2.56% compared to 2.46% in the previous corresponding period. The group is continuously achieving a growth in its NII and NIM, even on sequential basis is reflecting the strength and resilience.

Source: Company Filing

• Healthy mortgage originations: The group witnessed strong mortgage originations in FY 2021, which stood at CAD 8.86 billion, compared to CAD 6.95 billion in FY 2020. The beneficial performance resulted primarily from single-family residential mortgage originations, which increased to CAD 7.45 billion from CAD 5.18 million in pcp. The Company's primary emphasis remained single-family residential mortgage originations, with Classic mortgage originations accounted for 84.1% of the total originations.

Source: Company Filing

Risks associated with investment

The company deals primarily in the mortgage lending business hence the key risk which hovers on its books is the credit risk, which could worsen the ability of the borrowers to pay the mortgages on time in case of any economic slowdown or rise in interest rates. Further, in the rising interest rates environment, the company faces the challenge of how efficiently it passes on the rates to its customers and failing to do so can dent its Net Interest Income margins. 

Financial overview of FY 2021

Source: Company Filing

• In FY 2021, the group reported total net interest income of CAD 493.7 million, increased CAD 18.9 million or 4%, compared to CAD 474.8 million in the previous corresponding period, resulting primarily from an increase in net interest income on the non-securitized loan portfolio and securitized loans.
• NIM improved to 2.56% in the reported period, against 2.46% in the previous corresponding period.
• The group’s net income stood at CAD 244.7 million in the reported period against CAD 175.6 million in the previous corresponding period. Decline in operating expenses helped the company to post healthy net income.

Valuation Methodology (Illustrative): Price to Book Value Based

Analysis by Kalkine Group 

Stock recommendation

FY 2021 was a year in which the company executed across all of its strategic objectives by growing originations, implementing new technology and diversifying its funding sources. It also returned over CAD 365 million to shareholders through share repurchases, making significant progress toward achieving the target capital ratio in a range of 14% and 15%. The group posted robust mortgage originations and is increasing its NII and NIM on the sequential basis, which is a key positive.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating on the stock at the last closing price of CAD 35.05 on April 18, 2021. Additionally, the 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 April 18, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary

Disclaimer

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