HOME CAPITAL GROUP INC. (Toronto symbol HCG; www.homecapital.com) gets around 90% of its revenue by making residential mortgage loans to borrowers who don’t meet the stricter standards of larger, traditional lenders, like banks. Its clients include recent immigrants with limited credit histories, and self-employed people.
The remaining 10% of Home Capital’s revenue mainly comes from credit cards and other loans to consumers and businesses.
Low interest rates continue to fuel loan demand. As a result, Home Capital’s revenue rose 7.0% in 2013, to $949.5 million from $887.7 million in 2012. Earnings gained 14.8%, to $257.7 million, or $3.68 a share, from $224.6 million, or $3.23. (All per-share amounts adjusted for a 2-for-1 stock split in March 2014.)
Home Capital cuts its credit losses by identifying problem loans early. It then uses this information to restructure a borrower’s repayment terms and adjust its lending policies. The company also sells its mortgage loans to third parties.
Canadian stocks: Company launches Oaken Financial as Internet savings and banking outlet
In 2013, Home Capital set aside $15.9 million to cover future loan losses, up 7.8% from $14.7 million in 2012. That extra $1.2-million loss reserve is mainly due to problems with a $6.4-million commercial real estate loan. Even so, Home Capital does not expect it will have to write off this loan.
At the end of 2013, bad loans were just 0.35% of its total loans, up slightly from 0.33% a year earlier.
The company’s efficiency ratio (non-interest expenses divided by revenue—the lower, the better) weakened to 28.9% from 28.1%. That’s partly because it recently launched Oaken Financial, which offers savings accounts and other banking products, mainly over the Internet.
The stock is up 51% in the past year for our subscribers. The company just raised its dividend by 14.3%. The new annual rate of $0.64 a share yields 1.5%.
In the latest edition of The Successful Investor, we look at Home Capital’s prospects for growth in 2014 and whether the share price can continue to rise. We conclude with our clear buy-sell-hold advice on the stock.
(Note: If you are a current subscriber to The Successful Investor, please click here to view Pat’s recommendation in the latest issue. Be sure to log in first.)
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Home Capital is prospering thanks to a previously neglected clientele that didn’t match the standards of traditional lenders like the big banks. Do you see this formerly frustrated clientele as a potentially huge source of untapped growth? Or do you see risk in depending on those who may be more vulnerable to economic downturns?
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