Home Capital Group Inc.

Home Capital Renews $500 Million Committed Standby Secured Funding Facility: 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. As on 10 July 2020, the market capitalization of the company stood at CAD 1.03 billion. The company has announced the renewal of its ~CAD 500 million committed standby secured funding facility with Bank of Montreal and Royal Bank of Canada for a span of one year.

Quarterly Performance (For the Period Ended 31 March 2020): During the first quarter, the company reported an increase of 24.7% in net interest income to CAD 114,452 but a decline in adjusted net income to CAD 29.9 million. In the same time span, HCG reported a total loan portfolio of CAD 17.12 billion and net interest margin of 2.38%.

Quarterly Financial Highlights (Source: Company Reports)

Key Risks: The company is exposed to a variety of risks including credit risk, liquidity, and funding risk. It may also be impacted by structural interest rate risk, operational risk, investment risk, strategic risk, and reputational risk. The compliance risk and capital adequacy risk along with additional risk factors may affect future results.

Outlook: The Board remains confident about the available resources and talent to meet the unprecedented conditions posed due to the COVID-19 crisis. However, it believes that the impact of COVID-19 will depend on the duration of lockdown, the effectiveness of relief programs to mitigate the economic effects and the resultant impact on the markets for real estate and consumer credit.

Valuation Methodology: Price to Book Value Multiple Based Relative Valuation (Illustrative)

Price to Book Value Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: Despite the rapid change in the global financial markets due to the outbreak of COVID-19, the operations of the company were operational and supported borrower and depositor needs. As per the company’s reports, it did not face any changes to the access to broker mortgage and deposit markets and continued to originate and fund new mortgages. The stock of HCG is inclined towards its 52-week low of CAD 13.67, proffering a decent opportunity for the investors to enter the market. The stock of HCG gave a return of 15.13% in the past three months. The company will release its results for the second quarter on 6 August 2020. We have valued the stock using the price to book value multiple based illustrative relative valuation method and have arrived at a target price offering a target upside of lower double-digit (in percentage terms). Considering the current trading levels, decent returns in the past one month, decent financial performance amidst the global pandemic and positive long-term outlook, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 19.63, up by 1.6572% on 10 July 2020.

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

Equitable Group Inc.

Launch of Joint Savings Plus Account: Equitable Group Inc. (TSX: EQB) is a Canadian company that operates business through Equitable Bank and owns several business lines, including single-family lending services, commercial lending services etc. As on 10 July 2020, the market capitalization of the company stood at CAD 1.51 billion. The company has recently launched a new joint savings plus account which offers users a quick and fully online sign-up process, along with a high interest rate of 2%.

Accelerated Customer Growth: The company has recently announced that it has surpassed CAD 3 billion in deposits, driven by the recent acceleration in customer growth. During the first quarter ended 31 March 2020, Bank's Common Equity Tier 1 Capital Ratio stood at 13.5% as compared to 12.9% in the pcp and liquid assets stood at CAD 2.3 billion. In the same time span, deposits of the banks went up by 6% to CAD 15.5 billion and adjusted Return on Equity was 8.4% relative to 15.0% in Q1 2019.

Quarterly Financial Highlights (Source: Company Reports)

Outlook: From a financial perspective, EQB entered 2020 in a solid position with decent CET1 ratio. While the earnings were understandably lower, margins were in line with management's expectations. EQB seems well positioned to thrive in this digital world with modern cloud-based architecture and open approach to working with other financial services businesses.

Key Risks: The bank is exposed to a variety of risks including risks related to capital markets and additional funding requirements, fluctuating interest rates and general economic conditions. The business model of the company is highly exposed to the nature of the customers and rates of default, and competition.

Valuation Methodology: Price to Book Value Multiple Based Relative Valuation (Illustrative)

Price to Book Value Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: Equitable opened 2020 with a positive outlook and responded quickly by enhancing liquidity, stress testing ensuring to manage through a range of possible and extreme downside scenarios. The company remained profitable and seems well-positioned for future growth. As per TSX, the stock of EQB is trading below the average of its 52-week trading range, proffering a decent opportunity for accumulation. The stock of EQB gave a return of 7.31% in the past three months and retains potential for further growth. We have valued the stock using the price to book value multiple based illustrative relative valuation method and have arrived at a target price offering a target upside of lower double-digit (in percentage terms). Considering the current trading levels, decent returns in the past three months and healthy financial position, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 68.54, up by 2.9902% on 10 July 2020.

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

Disclaimer

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