HCG.to - Home Capital Group

[rb]

I posit that the Canadian lending is not as conservative or good as most here believe. Bank staff and brokers have undermined the system. Connect the dots with what the bank staff have been saying with this and I would not touch any Canadian FI this early in the game.

 

Just go speak to your local banker or broker who helps commit fraud and you will learn a lot about how bad things are.

Wisdom, I fully agree with you that underwriting isn't all that tight in Canada. But the question is where does the risk actually lie? That's where I get lost, and I don't think that anyone knows that. My feeling is that it's mostly bottled up in the mortgage insurers.

 

Wisdom, I certainly dont disagree with you in a general sense.  We know certain lenders and probably some parts of the big banks have become sloppy.  FN reported a slight decline in originations due to the new, tighter mortgage rules, and projected further slowing of originations with the new rules in Ontario.  I have a medium size holding in RY, that I bought during the downturn in the oil patch.  I have been selling it off on dribs and drabs along the way.  I will likely keep what I hold. 

 

These big banks are diversified far beyond just housing.  Will they show lower profits in a housing crash.  Absolutely.  But most of the mortgages they have issued are sound, and on the books at much lower prices than the present market value of homes. 

 

The housing runup in Canada, is in no way the same as what happened in the US. 

 

The differences:

1) There has not been a huge overbuild.  There has really been very little construction outside condos which are lower value anyway.

2) Governments here are intervening.  The words I recall hearing from Ben Bernanke and others in early 2008 was that everything was contained.  They did nothing to cool the markets anywhere preferring to stick their heads in the sand. 

3) Securitization is simply not the same in Canada.  It is restricted to CMHC, or Genworth insured mortgages.  We dont have the proliferation of security acronyms. 

4) I am not seeing evidence of people using their homes as ATMs or the banks allowing it.  As I said, 2 years ago I was getting a Heloc with TD, and we had to just about sell out first bron and they would only loan up to 80% of a conservative valuation of the house (an assessor came out) after accounting for the mortgage with FN.  If you see such evidence of a huge credit expansion built on housing please post it.  I am not seeing or hearing of it.

5) Mortgage insurance.  This is unlikely to get overwhelmed in Canada.  Unlike the US it has an implicit government backstop at the federal level.  We just dont have the likes of MGIC et al. here. 

 

Similarities:

1) There has been a proliferation of bad lending by smaller entities.  "Car paid in full or part... we will loan you the value of your car" type of things.  Similar with low brow mortgage lenders. 

2) As it appears with HCG there has been some channel stuffing with crappy lending. 

 

I think housing prices could come down close to 40% without causing the big banks more than a quarter of two of pain.  That would bring the highest prices back to where they were 3 years ago.  It could actually lead to relief rallies once it happens.

I'll add a little bit to this. From what I can tell if there's a housing collapse we'll probably see at worst about 100 Bn of mortgage losses. Out of this I figure about $50B falls on the mortgage insurers. In that case MIC is probably toast but as far as I know CMHC has reserves to absorb the losses + gov't backstop. That leaves $50 Bn to the private lenders. The big 5 probably get about $40 Bn and the rest eat $10 Bn. While very unpleasant I don't see any reason why the big 5 can't deal with $40 Bn in loan losses.

 

The real question for the banks is how will their other loan portfolios perform in case of a housing collapse. Basically by the time you default on your house you've already defaulted on everything else. So they could see huge losses in credit card, HELOC, personal lines, etc. Business loans will probably present some problems too from the recession that will ensue. Another fact to keep in mind is that NPLs at the big banks have been really low. Much lower than the run rate from the 90s. So it could be that rising housing prices are keeping NPLs depressed because people can refinance, etc. If housing prices collapse or stop growing you could very well see a meaningful increase in NPLs and thus lower bank profits.

 

I say this as someone who isn't a hater of Canadian banks.

[RichardGibbons]

4) I am not seeing evidence of people using their homes as ATMs or the banks allowing it.  As I said, 2 years ago I was getting a Heloc with TD, and we had to just about sell out first bron and they would only loan up to 80% of a conservative valuation of the house (an assessor came out) after accounting for the mortgage with FN.  If you see such evidence of a huge credit expansion built on housing please post it.  I am not seeing or hearing of it.

 

For me, the evidence for people using their homes as ATMs in BC is the personal savings rate which has been negative since around 1996.  I couldn't find a new chart, but here's an old one, and as far as I have heard, this negative savings trend has continued.

 

To me, the most reasonable explanation for a negative savings rate over a long period of time is that people are using their homes as ATMs.  But I haven't seen anything that shows that conclusively.

[wisdom]

Anyone who thinks Canadians have not used their houses as ATM's is deluding themselves. I am going by memory here - mortgages are $1.2 trillion. What is the other $800B in debt that Canadians carry? I bet majority of that debt is HELOC's supporting consumption or the interest only payments allowing individuals to spend way beyond their finances allow.

 

BC has had 1 year of positive savings in the last 20 years.

[Green King]

There is no difference here. But the question is when. Also what SD is pointing out is that don't forget about 1982 MEXICO.

https://economics.rabobank.com/publications/2013/september/the-mexican-1982-debt-crisis/

 

Also, I've been looking into Micheal Burry's Big short in the past few weeks. He made those bets based on credit analysis and what he was betting on was the worst loans with no possibility of refinancing since there were no other low-quality standards. These large dragon trades seem to be widow makers it is better to stay away. This is only a liquidity problem things are not that bad yet. The rally is just shorts covering.

 

But the floors below our feet are shifting and the value of the coming days are a great magnitude more valuable than the days before.

 

I am not good at knowing the music, therefore, I am long popcorn.

[rb]

I am not good at knowing the music, therefore, I am long popcorn.

I'm gonna steal that line!

[wisdom]

I don't understand when people say that there is a shortage of supply when we are in a bubble. A bubble creates artificial demand that is not sustainable. When a bubble ends the demand drops way below the long term averages.

 

Canada has been building between 180,000 to 200,000 housing units for a few years. What is the long term demand in Canada?

 

Also, when I look at the US, they were building around 2 mil homes before 2008. Since then they have struggled to get up to 1 mil homes a year. I do agree that this is way below where it needs to be and there is pent up demand building up.

 

Since Canada is 10% of US, a back of the envelope calculation says that would imply our housing starts could drop to approximately 100,000 a year. Which is close to 50% of where we have been over the last decade or so.

[gurpaul88]

33% quite the rebound, nice call SD.

[vikx01]

Just as a data point, increase in housing stock has never been close to 100K per year since at least the 70s as per the following report.

http://www.pbo-dpb.gc.ca/web/default/files/Documents/Reports/2016/Household%20Formation/Household%20Formation%20EN.pdf

Household formation also has been higher than 100K since the same time.

 

Having said that, I am not sure I trust the report. Household formation seems to have lagged housing completion since about 2000 till about a few years ago (Figure 1.1 .) You'd assume the supply to be quite a bit larger than demand. But the opposite seems to be the case if you go by the signal from price increases. Demolitions and conversions are generally small numbers and mostly cancel out.

 

 

 

 

 

 

[SharperDingaan]

33% quite the rebound, nice call SD.

 

It's only day 1 .... we think it'll go quite a bit more yet  ;)

Most dead-cat bounces are around 1/3 of the decline on the day of the event.

 

SD

 

[Parsad]

Anyone who thinks Canadians have not used their houses as ATM's is deluding themselves. I am going by memory here - mortgages are $1.2 trillion. What is the other $800B in debt that Canadians carry? I bet majority of that debt is HELOC's supporting consumption or the interest only payments allowing individuals to spend way beyond their finances allow.

 

BC has had 1 year of positive savings in the last 20 years.

 

I just bought a BMW and my brother also bought one...both used...mine is 5 years old, his is 4 years old.  They are in mint condition with very low km's.  The lots are full of them!  Why?  Because people with increased equity in their homes, two steady incomes and low interest-rate loans/HELOC's are constantly buying and upgrading to new cars.

 

If you visit Vancouver, you will see more luxury high-end cars on a per-capita basis than anywhere in the world outside of perhaps Hong Kong, Dubai and Monaco.  10-15 years ago, Range Rovers were rare, today they are a dime a dozen in Vancouver.  That's partly because the company is producing more and better cars, and also simply Vancouverites feel rich with their homes compounding at 15%-20% a year for the last 10 years.  You also have drug dealers, immigrants with luxury tastes, and entrepreneurs, but alot of the middle-class success is completely attributable to greater equity in their homes.

 

I know how much alot of people make around me, and they aren't saving much.  The ones living the good life are the ones investing in or tapping into real estate assets.  There isn't much true liquidity and the everyday person is going big into real estate on the side.  Whether you are a doctor, lawyer, accountant, retail clerk, etc...they are all trying to get into real estate.  The number of people taking the real estate license course is off the charts.

 

What will it take to correct?  This is too big now.  It will take a substantial increase in interest rates, or a collapse in foreign buyers.  A tax on foreign buyers has limited effect unless enforced nationally.  For example in Vancouver, they instituted the 15% foreign buyers tax, which affected buyers in Vancouver and all outlying suburbs.  That just pushed the foreign money into other parts of the province, such as Abbotsford, Kelowna and Victoria.  Or it went into local commercial real estate and prices are escalating there now too.

 

But I suspect when this thing blows, it will be a much larger bubble than if they had pricked it a few years ago.  Now it could prove to be quite painful for institutions and especially the average consumer!  Cheers! 

[EliG]

Interesting take by a fund manager who used to own HCG:

 

http://www.greenskeeper.ca/wp-content/uploads/2017/04/The-Scorecard-Issue-18-Cruel-Cruel-Irony.pdf

 

The entire piece is worth reading, but this is the juiciest tidbit:

 

Canada’s banking regulator is the Office of the Superintendent of Financial Institutions or “OSFI” as it is more commonly known. Part of OSFI’s mandate is to control and manage risk and ensure that Canadian banks are sound. Unlike the US, Canada’s banking sector sailed through the Great Recession with flying colours.

 

With OSFI’s reputation intact, Home Capital is certainly front and center with Canada’s banking regulator at the moment . A little-known fact is that several years ago OSFI encouraged Home Capital to broaden its funding sources by growing demand deposits. Historically, almost all of Home Capital’s funding came from fixed-term deposits (GICs) which were locked in and closely matched to the term of the company’s assets (mortgage loans). Demand deposits represented $2.5 billion of Home Capital’s funding at the end of 2016 (vs. only $0.1 billion in 2012). In the past month, $591 million of those demand deposits have in fact been demanded by customers and are now gone. Even though they are fully guaranteed by the Canadian government (via the CDIC), depositors are fearful and withdrew their money creating a funding issue for Home Capital.

 

As a result, yesterday morning Home Capital announced a one-year funding deal with a major institutional investor. Under the facility, $2 billion will be available to the company but at an interest rate of 10%. In addition, the loan comes with a $100 million non-refundable commitment fee. For perspective, Home Capital earned $247 million in all of 2016. This secured loan has an effective interest rate of at least 15% and would represent only a fraction of the company’s $16 billion of deposits and GICs. Compare that rate with the 2% that Home Capital was paying on its deposits and the fact that the company earned an average of 4.24 % on its assets in 2016. In other words, they can’t earn a spread borrowing at 15% and lending at lower rates. You can now understand the equity market’s reaction. The irony here is that OSFI’s goal of reducing risk by having Home Capital diversify its funding sources may have perversely have contributed to the current run on the company’s funding. Term deposits may not be renewed, but generally aren’t payable on demand.

 

What is the benefit of funding diversification if it causes an asset-liability mismatch??

 

I think it's a classic case of... we are from the government and we are here to help. Yikes.

[mcliu]

I don't understand when people say that there is a shortage of supply when we are in a bubble. A bubble creates artificial demand that is not sustainable. When a bubble ends the demand drops way below the long term averages.

 

Canada has been building between 180,000 to 200,000 housing units for a few years. What is the long term demand in Canada?

 

Also, when I look at the US, they were building around 2 mil homes before 2008. Since then they have struggled to get up to 1 mil homes a year. I do agree that this is way below where it needs to be and there is pent up demand building up.

 

Since Canada is 10% of US, a back of the envelope calculation says that would imply our housing starts could drop to approximately 100,000 a year. Which is close to 50% of where we have been over the last decade or so.

 

That's how you justify bubbles. People probably said there was a tulip shortage 1636.

[SharperDingaan]

There's nothing wrong with forcing diversification of funding sources.

Match-funding is undeniably the desirable outcome, but you have to ensure that all your funding isn't coming from one place (GIC's). Adding demand deposits to fund HELOC's reduces total funding risk (via diversification), but obviously - you cant tolerate the same degree of leverage as you could with a fixed term GIC deposit.

 

HCG's problem appears to have been its risk management.

Lax underwriting, fraudulent insurance, and a decision to reach for growth via the HELOC channel. To maintain their risk profile (funding) their choices were to either increase GIC deposits (by raising rates), or tighten UW standards (reducing number of mortgages). They made the wrong decisions.

 

There is also nothing wrong with having big friends (HOOPP) on your board.

They are insurance policies, and they are there to raise business for their 'home' firm. The margin on that business is essentially the premium for stepping up with a rescue if/when the sh1te hits the fan. If/when the plan activates, the board member simply steps out of the room if/when anything related to the rescue is discussed. Everyday business.

 

Country & culture matters, everybody is different - especially in banking.

This isn't the US; OSFI/BoC will be calling the shots, and they will be complying with their mandate; it is a speculation as to how that will work out for HCG. Our own thoughts are that it is pretty hard to see how HCG doesn't pull out another rabbit or two before next weeks meeting.

 

SD

 

 

 

 

 

[rb]

Interesting take by a fund manager who used to own HCG:

 

.......

 

What is the benefit of funding diversification if it causes an asset-liability mismatch??

 

I think it's a classic case of... we are from the government and we are here to help. Yikes.

I'm not familiar with the particulars of HCG's GICs but generally a GIC despite having a term is always redeemable at face value. Basically even if I have a 3 year GIC I can always step up and ask for my money if I forgo the accrued interest. Because it's not legally demand deposit they can delay paying it out for a period but that's measured in days. In these times of low interest rates the interest penalty on early redemption in relatively small when you fear for your principle. Keep in mind that people that buy GICs do so because they are very fearful for their principle. So with the interest penalty not being such a barrier to withdrawal GICs are essentially demand deposits.

 

Also at the end of the day it doesn't really matter how you fund a bank. If a run starts the bank will most likely go down without intervention. Runs start because managements have made stupid/bad decisions.

[no_free_lunch]

Home Capital Group Inc. reported Friday that money continues to flow out of the company, with roughly $290 million pulled out of high-interest savings accounts on Thursday alone.

 

The drawdown comes after another $472 million was withdrawn from the company's savings accounts on the day before.

 

The alternative mortgage lender said it expects to have $521 million left in its savings accounts as of the start of the business day on Friday. That's down from about $1.4 billion as recently as Monday.

..

After news of the HOOPP lifeline emerged on Thursday, the CEO of the pension fund announced he would step down from his job on Home Capital's board of directors, citing the potential conflict of interest.

 

No position, but interesting to watch the death spiral.  I have mixed feelings on the whole thing as it seems it will just further strengthen the big canadian banks.

 

http://www.cbc.ca/news/business/home-capital-friday-1.4089781

[matts]

Interesting take by a fund manager who used to own HCG:

 

.......

 

What is the benefit of funding diversification if it causes an asset-liability mismatch??

 

I think it's a classic case of... we are from the government and we are here to help. Yikes.

I'm not familiar with the particulars of HCG's GICs but generally a GIC despite having a term is always redeemable at face value. Basically even if I have a 3 year GIC I can always step up and ask for my money if I forgo the accrued interest. Because it's not legally demand deposit they can delay paying it out for a period but that's measured in days. In these times of low interest rates the interest penalty on early redemption in relatively small when you fear for your principle. Keep in mind that people that buy GICs do so because they are very fearful for their principle. So with the interest penalty not being such a barrier to withdrawal GICs are essentially demand deposits.

 

Also at the end of the day it doesn't really matter how you fund a bank. If a run starts the bank will most likely go down without intervention. Runs start because managements have made stupid/bad decisions.

 

Are you sure? My understanding is that the typical Canadian GIC from someone like Scotiabank really is non-redeemable. Banks can choose to release the GIC but that only happens in event of death or demonstrated financial hardship.

[TBW]

http://brontecapital.blogspot.ca/2017/04/home-capital-group-it-is-time-for.html?m=1

[Spekulatius]

They were done without this life preserver, so cheap money from that pov.

 

Feels, to me, that this was probably coordinated by regulators.  Otherwise why not disclose who the lender is.

 

I still think this company fails, although this does extend their life a bit.

 

When secured short term borrowing is costing you between 15% and 22.5% a year and your business is about confidence and making a spread between what you borrow and what you lend, you're done.

 

Agreed. Generally speaking, no financial institution survives this.

[SharperDingaan]

Both HCG and HOOPP are regulated by OSFI. Systemic risk did not change, it just bar-belled; reflecting the additional stress on the financial system.

 

GIC’s are also no longer running off anywhere near as rapidly as claimed; we have now also entered the weekend – interrupting the feed forward panic cycle. GIC balances < $1OOK are CDIC insured across the land for a reason; you get all your money back (without risk) irrespective of what happens to the FI. 

 

Technically an early GIC redemption is at the FI’s discretion, and subject to penalty (usually loss of interest to date & opportunity cost; as it is unwound as though it have never occurred). They are structured that way, so that if there is a deposit run - it can be stopped dead. There is zero risk to the average depositor as the GIC is CDIC insured (assuming < 100K.)

 

HOOPP is also not really expecting HCG to draw on the DIP financing either; it’s why the financing has such a high cost. The 1st bitch is that they scooped everyone else, nullifying much of the gain that could have been made from this bear raid. The 2nd bitch is that there must be an undisclosed rabbit somewhere if HCG turns out not to need this DIP financing - further screwing up the gain.

 

To make HCG go to zero, they had to have been knee-capped by end of day Friday; they weren’t. No doubt next week will be a rough week for them; but it is highly likely that they are NOT standing still this weekend. Most would expect some announcements ahead of next week’s meeting.

 

We live in interesting times.

 

SD

 

[Mark Jr.]

Looks like they've already drawn over half of that 2B lifeline (took 1B out to shore up deposits and 100M in non-refundable fee, leaves 900M to draw on)

 

http://www.cbc.ca/news/business/home-capital-monday-1.4093202

 

GIC's down 150M since last monday.

 

Zerohedge posted this helpful infographic:

 

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/04/19/HCG%20bank%20run%20may%201_0.jpg

 

via: http://www.zerohedge.com/news/2017-05-01/what-bank-run-looks-home-capital-loses-70-deposits-one-week

 

Wonder what will shake out in Wednesday's earnings....

 

 

[Liberty]

Looks like they're delaying their earnings release until may 11. Oops.

 

http://www.homecapital.com/press_releases/2017/NRQ1AGM_HCG_Final.pdf

 

Originally planned for may 3rd.

[rb]

Looks like they're delaying their earnings release until may 11. Oops.

 

http://www.homecapital.com/press_releases/2017/NRQ1AGM_HCG_Final.pdf

 

Originally planned for may 3rd.

They need to update the whole section on risks lol

[Mark Jr.]

I imagine that dividend is gone.

[Liberty]

I imagine that dividend is gone.

 

I doubt they really have a choice when borrowing short-term money at 15-22%...

[gfp]

Saw this on the wires this morning - my apologies if it has already been posted here:

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http://www.reuters.com/article/us-home-cap-grp-m-a-idUSKBN17Y21G