DBRS Confirms Ratings of Home Trust Company at BBB (high) and R-2 (high)

DBRS Limited (DBRS) has today confirmed all ratings for Home Trust Company (HTC or the Trust Company), including the Issuer Rating at BBB (high), the Deposits and Senior Debt rating at BBB (high) and the Short-Term Instruments rating at R-2 (high). HTC is the primary operating subsidiary of Home Capital Group Inc. (HCG or the Group); the Group’s ratings for its Senior Debt (BBB) (formerly described as Deposits and Senior Debt in DBRS publications) and Short-Term Instruments (R-2 (middle)) are structurally subordinate to the Trust Company and have also been confirmed. All trends are Stable.

Primarily a residential mortgage lender, HCG operates in a business which continues to garner a lot of attention. Market observers express concern over Canadian housing affordability and the risk house prices may fall, pressuring mortgagors and ultimately creating losses for lenders. The Canadian government and regulators have made various changes designed to ensure borrowers meet minimum affordability levels and to reduce overall consumer debt levels. In spite of the continuing potential for a modest house price correction, DBRS views HCG as a good investment-grade credit on the strength of its asset quality, risk-based capital levels, earnings ability relative to likely loan loss provisions and general underwriting practices. HCG uses a more asset-based, hands-on approach than the larger banks in order to compensate for the lower quality of the information available for the Group’s typical borrowers. HCG naturally has significant exposure to the Canadian residential mortgage market. Any slowdown in this market may slow earnings generation, while a downturn in the residential mortgage market could hurt asset quality indicators and ultimately have an impact on provisioning levels.

The quality of the loan portfolio is strong. To assess the true quality of the uninsured portion of HCG’s mortgage portfolio, the DBRS rating assessment includes analyzing the portfolio using DBRS’s Canadian Residential Mortgage-Backed Securities (RMBS) model. Despite incorporating a number of conservative assumptions, the model concludes that HTC is very capable of weathering a greater than 30% overall decline in Canadian housing market prices. Comparing the model results year over year, DBRS also observed that the quality of the uninsured portfolio has improved, with better loan-to-value ratios and average borrower credit scores.

Absent a branch network, HCG continues to be heavily reliant on securitization funding and broker deposits. DBRS notes that HCG’s efforts in the past couple of years to diversify funding is a positive factor for the rating. In early 2013, HCG began offering wholesale deposit notes, opening access to a new investor base, and in 2014 HCG launched a direct deposit sales channel, Oaken Financial, providing access to what may ultimately be reasonably stable retail deposits.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations, Criteria: Support Assessment for Banks and Banking Organisations, and Rating Holding Companies and Their Subsidiaries, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.