Home Capital Group Inc. (TSX: HCG) offers residential and non-residential mortgage lending, securitization of residential mortgage products, consumer lending and credit card services.

Q1FY20 Financial Highlights: Home Capital Group delivered a strong operating result on the backdrop of gloomy economic activities. Total net interest income came in at CAD 114.45 million, significantly improved from CAD 91.78 million in pcp. The growth was underpinned by a considerable rise in interest from loans. Interest on deposits remained stable during the quarter and stood at CAD 95.02 million, against CAD 94.56 million in pcp. The Company reported a significantly higher Provision for credit losses, primarily attributed to a soft macro outlook. Net interest margin increased to 2.38% from 2.01% in pcp. Total revenue, during the quarter, stood at CAD 127.15 million, as compared CAD 103.82 million in pcp. The Company reported net income at CAD 27.72 million, stood flat as compared to CAD 27.82 million in pcp, due to a stiff rise in the provision for credit losses and unrealized losses on securities and loans. Total loan portfolio stood at CAD 17.12 billion at the end of Q1FY20, reflecting a marginal decline of 0.2% from Q4FY19. HCG’s Total deposits stood at CAD 13.95 billion in Q1 FY20, as compared to CAD 13.72 billion at the end of Q4FY19. HCG reported its total Assets Under Administration at CAD 25,066.75 million, while the group’s Tier 1 Capital Ratio stood at 17.73%, improved from 17.58% in FY19.

Q1FY20 Financial Highlights (Source: Company Reports)

Risks: The lending sector is highly dependent on the consumer’s spending behavior. Due to a decline in consumer income and rise in the unemployment rate, the sector is likely to face severe challenges in the near-term, which might lead to higher default. Any such scenario is likely to hamper the group’s performance. Further, a lower interest rate environment is likely to build pressure on net interest margin. 

Valuation Methodology: Price to Book Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of HCG corrected ~36% so far this year due to a stiff correction in the broader equity market on account of COVID 19 pandemic. The company is targeting to increase its market share in the alternative lending industry. Further, the group is strategizing to tap the broker community and enhancing its technological advancement in order to cater to a higher audience, which augers well for loan growth. The company’s balances sheet remains strong as Tier 1 ratio improved to 17.7%. The group reported a decent quarterly result, amidst a weak macro scenario, which is notable. The group’s bottom-line was marred by higher provisioning of credit losses. However, it is likely to provide cushion from defaults if they occur in the near term. HCG reported an improved net non-performing loan as a percentage of the gross loan at 0.36%, as compared to 0.49%, which is commendable. We have valued the stock using price to book based relative valuation method and have arrived at a target upside offering double-digit (in percentage terms). For the said purposes, we have considered Equitable Group Inc (TSX: EQB), Genworth MI Canada Inc (TSX: MIC) and ECN Capital Corp (TSX: ECN) etc. as a peer group.  Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 21.11 on June 22, 2020.

HCG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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