Home Capital Group Inc.

Home Capital Group Inc. (TSX: HCG) is a specialty finance company which offers residential and commercial mortgage lending, securitization of insured mortgage products, consumer lending, and credit card services. 

Q2FY20 Financial highlight: HCG impresses with its quarterly results, wherein Net interest income grew significantly to CAD 115.815 million as compared to CAD 97.534 million in the previous corresponding period (pcp). The increase was driven by decent growth within the residential and commercial loan originations. The Company reported a 31 bps improvement in the net interest margin to 2.40% due to higher average yields on non-securitized products coupled with lower rates on deposit liabilities, partially offset by the increased balance of low yielding liquid assets. Efficiency Ratio stood at 50.5% as compared to 55.4% in pcp. Total loan portfolio remained flat at CAD 17.21 billion, up 0.5% on y-o-y basis. Mortgage originations, during the quarter, stood  higher at CAD 1.50 billion in Q2FY20 as compared to CAD 1.28 billion in Q2FY19 aided by healthy and resilient real estate market amidst a tepid macro outlook. Net income soared to CAD 34.132 million against CAD 31.907 million in the previous corresponding period. The Company reported total deposits at CAD 14.01 billion as compared with CAD 13.51 billion in Q2FY19.

Q2FY20 Financial Snapshots (Source: Company Reports)

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.

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 ~29% so far this year due to weak investor sentiment on account of COVID 19 pandemic. Amidst a challenging macro scenario, the Company managed to report a better than expected operating performance and posted a 38.1% decline in the total provision for credit losses. The Company has launched new projects in digital banking and loan origination and is expected to improve its operational efficiency in the coming quarters. We expect that the performance of the business would improve in the coming days driven by the gradual recovery in the economy. The stock soared ~20% and ~30% in the last one month and three months, respectively, as the business reported resilient performance in the recent past. We have valued the stock using the P/BV based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered industry (Financials) median on NTM basis. Hence, considering the aforesaid facts, current price movement and stable business outlook, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 23.64 on August 10, 2020.

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

Genworth MI Canada Inc.

Genworth MI Canada Inc. (TSX: MIC) is one of the leading private-sector residential mortgage insurers in Canada and offers mortgage default insurance across the region. The Company has built a broad underwriting and distribution platform across the country that provides customer-focused products and supports services to the residential mortgage lenders and originators.

The Board of Directors announced a quarterly dividend of CAD 0.54 per common share, payable on September 02, 2020.

Q2FY20 Financial Highlights: MIC declared its quarterly results, wherein the Company reported improvement in premium earned to CAD 172 million, reflecting an increase of 2% on y-o-y basis. The Company's net operating income was reported at CAD 101 million, down 16% over the previous corresponding quarter due to higher losses on claims and lower investment income, partially offset by higher premiums earned and lower expenses. Net income, during the quarter, stood at CAD 98 million, down 11% on y-o-y basis, primarily attributable to a lower net operating income partially offset by a lower level of realized and unrealized losses from investments, derivatives and foreign exchange. The regulatory capital ratio, at the end of the quarter, stood at ~169%, 12 percentage points higher than the Company's internal MICAT ratio target of 157%. The Company reported Transactional Premiums Written at CAD 167 million, down 11% on y-o-y basis; however, transactional premium written increased 51% on a sequential basis.

Q2FY20 Financial Snapshot (Source: Company Reports)

Risks: Due to the current challenging environment, the Company’s insurance premium collection could be adversely impacted, which might result in a lower ‘premium earned’ in the coming quarters.

Valuation Methodology: Price to Book Based (Illustrative)

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

Stock Recommendations: The stock of MIC corrected ~32% so far this year, due to a weak investor’s sentiment and volatility in the equity market on account of COVID 19. The company has a strong business model and focuses on disciplined risk management and proven loss mitigation strategies, which ensures a stable business performance. The company reported an improvement in total premium earned, which is noteworthy looking at the current economic scenario. Amidst a current economic jolt, the company has delivered stable numbers, aided by disciplined risk management and proven loss mitigation strategies to combat the current downturn. The company reported return on equity at ~11% for Q2FY20, which is in line with the previous corresponding quarter, which is impressive. The company has a strong balance sheet with the regulatory capital ratio at 169%, which is significantly above the regulatory requirement of 150%. Further, the stock is offering a dividend yield of ~6.083%, which is lucrative, considering the current interest rate environment. We have valued the stock using Price to Book value-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered industry (Insurance) median on NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 37.0 on August 10, 2020.

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

Disclaimer

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