Home Capital anticipates mortgage renewal surge as it reports steep profit drop

TORONTO _ Home Capital Group Inc. is anticipating the highest mortgage renewal rate in the alternative lender’s history amid new regulations and company initiatives to stay competitive.

Chief executive Yousry Bissada said Wednesday the Toronto-based mortgage lender is expecting mortgage renewals to provide a boost, as its latest quarterly earnings show a 40 per cent drop in net income compared to one year ago.

Bissada said a combination of tighter mortgage underwriting rules that make it harder for homebuyers seeking uninsured mortgages to qualify and new company initiatives will spur on this surge.

“We will have better renewals than any time. Not just last year, but any time in the 30 year history of this company,” he told analysts on a call discussing the lender’s latest quarterly results.

His comments on an uptick of mortgage renewals come as Home Capital reported fiscal first quarter net income of $34.6 million. This beat the $32 million expected by analysts, according to Thomson Reuters Eikon data, but fell far short of the $58 million earned a year ago before the lender was hit with allegations of misleading investors and faced a run on its deposits. Last June, the company had agreed to pay $29.5 million to settle a class-action lawsuit and a matter before the Ontario Securities Commission concerning the allegations.

The lender also got a lifeline last June from Warren Buffett’s Berkshire Hathaway, which bought a $400 million stake in the company and provided a $2-billion line of credit.

Bissada said Wednesday that Home Capital has taken several positive steps forward in recent months and mortgage originations saw a “meaningful increase” from the previous quarter.

“Home is back in every aspect of our business,” he told analysts. “The momentum we achieved over the last six months are showing results. There is still work to do, however.”

Bissada said while it is too early to assess the impact of new mortgage underwriting rules which took effect on Jan 1, it is expected to make it more difficult for certain customers to qualify elsewhere and boost renewals.

Under the revised rules, known as B20, borrowers who stick with their current lenders can avoid a new stress test for uninsured mortgages.

Nearly half of all existing mortgages in Canada will need to be renewed this year, substantially more than in prior years, according to a recent CIBC Capital Markets report.

Bissada also said that while the housing market appears to be cooling, fundamentals are strong given solid employment numbers and immigration trends.

Home Capital is also offering more competitive mortgage rates as it faces competition from private lenders and other institutions which are not federally-regulated, and not required to apply the new stress test.

“We have to be. Because if we’re not, they’ll go find someone else. So we’re being as competitive as we can be,” he said.

Home Capital also plans to undergo a digital overhaul in the coming years, which will include more mobile and online interaction options for customers and brokers, he added.

“This transformation will not only improve their experiences with us, but also improve the scalability of our business model and provide us with better data to help us start using AI,” he told analysts. “To make better decisions including the management of risk across our business.”