HCG.to - Home Capital Group

[KCLarkin]

This interview is a great overview of the situation at HCG:

http://www.bnn.ca/video/someone-forced-their-hand-here-veritas-ceo-suspects-regulator-pushed-home-capital~1109189

 

Marc Cohodes is entertaining but his interviews are usually just a series one-liners. This interview gets into the real substance of the crisis.

[rb]

Everything is getting smacked today. Equitable is down 20%, First National down 8%, Genworth down 7%. Equitable and Genworth are trading at less than book - in a rising home price environment. There doesn't have to be a lot of confidence in those mortgages out there.

[petec]

Excuse my ignorance but why aren't the big banks reacting at all?  Are they fully insulated if this becomes systemic?

[rb]

Excuse my ignorance but why aren't the big banks reacting at all?  Are they fully insulated if this becomes systemic?

I was wondering the same thing. I think it's the market's ignorance not yours. My thoughts are that the market continues to believe that old line that underwriting at banks has been tight, that the portfolios are solid and that they have plenty of insurance. The banks also don't have a deposit problem.

 

But still, big banks should have been dinged a couple of points today but they're basically flat. This is eerily quiet.

[KCLarkin]

Excuse my ignorance but why aren't the big banks reacting at all?  Are they fully insulated if this becomes systemic?

 

Obvious reasons why Big 5 aren't reacting:

- Don't rely on brokered deposits

- Savings accounts being pulled from HCG/EQB will likely go to Big 5, reducing funding costs immaterially

- Reduced competition should increase ROE

- Loan portfolios at HCG and EQB are still performing well

 

Not sure what you mean by systemic. So, I guess the question is whether the failure of HCG and EQB could cause a financial crisis or housing crisis. Given how tiny HCG and EQB are relative to the banks, it seems unlikely. But the failure of the alternative lenders would certainly take some demand out of the market. Combined with the new regulations in Toronto, it could be a tipping point. But given how slow the market was react to the obviously bad news at HCG, I doubt the market is going to react to systemic risks that are already well known.

 

[petec]

Noted, thanks.

 

Being new to this I am struggling to wrap my head around a deposit run at a sound underwriter.  Usually where there's smoke...  That was about the extent of my "analysis".

[rb]

I'm not so sure about the sound underwriter part. By the term of the line there can be 2 scenarios:

 

Either the collateral and by extension their underwriting is complete dogshit.

 

Or the run on deposits is massive and they need the money TODAY so didn't have time to arrange financing. Effectively they called a player with deep pockets - probably one of the pension funds - and offered a blank cheque.

[Guest Schwab711]

I'm not so sure about the sound underwriter part. By the term of the line there can be 2 scenarios:

 

Either the collateral and by extension their underwriting is complete dogshit.

 

Or the run on deposits is massive and they need the money TODAY so didn't have time to arrange financing. Effectively they called a player with deep pockets - probably one of the pension funds - and offered a blank cheque.

 

Agreed. I haven't see a term but the implied recovery rate on that collateral is frighteningly low. Lets hope it's #2, I guess.

 

http://www.cbc.ca/news/business/home-capital-financing-1.4086168

[Guest 50centdollars]

I'm not so sure about the sound underwriter part. By the term of the line there can be 2 scenarios:

 

Either the collateral and by extension their underwriting is complete dogshit.

 

Or the run on deposits is massive and they need the money TODAY so didn't have time to arrange financing. Effectively they called a player with deep pockets - probably one of the pension funds - and offered a blank cheque.

 

The underwriting is dogshit.

[rb]

Ok, Equitable is now down 35%.

[TBW]

I think big 5 could see issues but that is much further down the line. Not until housing is down a lot do they see large drops.

 

On eqb I guess mkt has been reading my posts...

[gokou3]

So the resemblance to the GFC will be complete when we see CIBC or BMO gobbles up one of the HCG/EQBs... (referencing BAC/Countrywide)

[dyow]

I don't think big banks stocks will be impacted until house prices finally begin to turn.  Big banks tend to follow housing cycles.  Also the big bank shareholder base is arrogant, they talk like these stocks are untouchable, they will probably hang on.

 

If this is the top of real estate.  Good.  Let the games begin.  Everyman for themselves.

 

 

 

[dyow]

I think big 5 could see issues but that is much further down the line. Not until housing is down a lot do they see large drops.

 

On eqb I guess mkt has been reading my posts...

 

Should have read before posting.  +1 on big banks

[K2SO]

This interview is a great overview of the situation at HCG:

http://www.bnn.ca/video/someone-forced-their-hand-here-veritas-ceo-suspects-regulator-pushed-home-capital~1109189

 

Marc Cohodes is entertaining but his interviews are usually just a series one-liners. This interview gets into the real substance of the crisis.

 

And just as a side note, I do find it hilarious that these BNN videos are preceded by an advertisement for a company offering 7%+ returns from lending to Canadian homeowners secured by real estate.  "I can understand that!"

 

Yes, we have seen this movie before. Yes, we know how it ends.

 

 

[LesPaul]

Interested to find out who handed over the $2b. Don't think it was a pension fund or government.

 

As an aside -- a smart and logical dude I've known for about 6 years is clinging onto the HCG long here. It's eye-opening to me to see an otherwise super objective and logical guy become emotionally attached here...we're all human at the end of the day.

 

Not to hijack the thread...also wondering whether something like FN is becoming an interesting buy... it's all A business, insured and well underwritten as far as I know. On the other hand, the new mortgage rules from late last year will hurt originations (my guess) and I don't know if the Stephen Smith EQB connection hurts FN here if at all.

[rb]

The key phrase here is as "far as you know". With these situations generally you don't really know where the risk lies until it's over. The story can extend way past as far as you know. FN is also trading at 2.7x book. That's a lofty valuation given everything that's going on.

[SharperDingaan]

Interested to find out who handed over the $2b. Don't think it was a pension fund or government.

 

As an aside -- a smart and logical dude I've known for about 6 years is clinging onto the HCG long here. It's eye-opening to me to see an otherwise super objective and logical guy become emotionally attached here...we're all human at the end of the day.

 

Not to hijack the thread...also wondering whether something like FN is becoming an interesting buy... it's all A business, insured and well underwritten as far as I know. On the other hand, the new mortgage rules from late last year will hurt originations (my guess) and I don't know if the Stephen Smith EQB connection hurts FN here if at all.

 

We bought in a trading position today at just over $6  ;)

Enough to make it worthwhile, but not enough to cripple us if it does not work out quite as we expect.

 

SD

 

[KCLarkin]

Not to hijack the thread...also wondering whether something like FN is becoming an interesting buy... it's all A business, insured and well underwritten as far as I know. On the other hand, the new mortgage rules from late last year will hurt originations (my guess) and I don't know if the Stephen Smith EQB connection hurts FN here if at all.

 

Maybe Uccmal can start a thread on FN? They claim a ROE of 47%. How is that possible if they are an A lender?

[LesPaul]

The key phrase here is as "far as you know". With these situations generally, you don't really know where the risk lies until it's over. The story can extend way past as far as you know. FN is also trading at 2.7x book. That's a lofty valuation given everything that's going on.

 

Don't disagree regarding the valuation; however, I am of the opinion that their book is clean. MKP is a similar name but less well run (in my opinion).

 

Back to HCG... that dividend has to go. I bet the May 11th AGM will be entertaining!

[TBW]

As for annual meeting, I bought 1 share in rrsp account so I can attend.  It's going to be an unreal experience.  I can't even imagine what they are going to say.  Will report back after the meeting.

[rb]

As for annual meeting, I bought 1 share in rrsp account so I can attend.  It's going to be an unreal experience.  I can't even imagine what they are going to say.  Will report back after the meeting.

It'll be unreal indeed. Pitchforks and all.... But you should have bought that share in a cash account.  :P

[TBW]

Haha Rb.  I know.  But the cash account is where the short was...  I wish puts were in TFSA, alas, they were not, other (not yet paid off) puts in there.

[Libs]

I have followed this thread with great relish for years. A little frustrated by the lack of betting opportunities ( I can't short Canadian stocks).

 

maybe puts on EWC would work-

 

Look how heavy EWC is in financials:

 

 

Company Symbol % Assets

Royal Bank of Canada RY.TO 8.57%

The Toronto-Dominion Bank TD.TO 7.36%

Bank of Nova Scotia BNS.TO 5.58%

Enbridge Inc ENB.TO 4.75%

Canadian National Railway Co CNI.TO 4.47%

Suncor Energy Inc SU.TO 4.04%

Bank of Montreal BMO.TO 3.81%

TransCanada Corp TRP.TO 3.14%

Canadian Natural Resources Ltd CNQ.TO 2.85%

Manulife Financial Corp MFC.TO 2.76%

 

Obviously not as bad as Nortel in 1999, but still seems way too high. Also, the top 3 are between 1.8 and 2.1X book - not cheap.

 

 

 

[rb]

Maybe this thread is more followed than we think. big 5 started sliding around 3PM eastern. CIBC went down the most 2.2%