HOME CAPITAL GROUP INC. $17 (Toronto symbol HCG; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 34.5 million; Market cap; $586.5 million; SI Rating: Extra risk) is the parent company of Home Trust Company, a federally regulated trust company that specializes in residential first mortgages to small business owners, the self-employed and others who don’t meet the stricter criteria of larger, traditional lenders.
Home Capital recently began offering traditional mortgages. While that puts it in direct competition with the big banks, Home Capital feels this move will strengthen its position among mortgage brokers.
Demand for new residential and commercial mortgages rose 39.8% to $1.1 billion in the third quarter of 2008. Consequently, earnings grew 24.6%, to $0.81 a share (total $27.9 million) from $0.65 a share ($22.8 million) a year earlier. Revenue improved 24.0%, to $117.0 million from $94.3 million. Strong gains at the Visa credit card and personal loan businesses also help fuel earnings and revenue.
Despite the improved earnings, Home Capital is not immune to the current economic slowdown. In the latest quarter, loan loss provisions grew 62.6%, to $3.4 million from $2.1 million a year earlier. Most of the jump was due to problem mortgage loans in the Ottawa area. Bad loans now represent 0.72% of Home Capital’s total loans, up from 0.63% in the year-earlier quarter.
However, the company’s expertise helps keep loan losses down. For example, it routinely analyzes all non-performing loans for underlying patterns and causes. Home Capital then uses this information to adjust its own lending criteria.
Home Capital continues to do a good job controlling its costs. Its efficiency ratio (non-interest expenses divided by revenue — the lower, the better) weakened to 27.1% in the latest quarter from 25.9% a year earlier. However, that’s mainly due to extra employee salaries and other costs related to Home Capital’s expanding operations.
The stock has dropped from $40 in July, 2008. The company will probably earn $3.19 a share in 2008, and the stock trades at 5.3 times that figure. The $0.52 dividend now yields 3.1%.
Home Capital Group is a buy.
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