DBRS Downgrades Home Capital Group Inc. to CCC, Home Trust Company to B; Maintains All Ratings Under Review - Negative

DBRS Limited (DBRS) has today downgraded Home Capital Group Inc.’s (HCG or the Group) Senior Debt rating to CCC from BB and its Short-Term Instruments rating to R-5 from R-4. Additionally, DBRS has downgraded the ratings of Home Trust Company (HTC or the Trust Company), HCG’s primary operating subsidiary, including the Issuer Rating as well as the Deposit and Senior Debt rating to B from BB (high). DBRS has also downgraded the Trust Company’s Short-Term Instruments rating to R-5 from R-4. All ratings remain Under Review with Negative Implications. DBRS has also lowered HTC’s Intrinsic Assessment to B from BB (high).The Support Assessment for HTC remains SA3, which implies no expected systemic support for the Trust Company.

These rating actions reflect DBRS’s concern over recent events, including HCG’s announcement yesterday that it has postponed the release of its Q1 2017 earnings from May 2, 2017 to after market close on May 11, 2017. DBRS considers this delay in announcing results as a negative, especially given that the initial Ontario Securities Commission’s (OSC) hearing regarding the Statement of Allegations made against three former members of HCG’s senior management is scheduled for May 4, 2017. These events are likely to continue to draw unfavourable attention to the Group.

Furthermore, in DBRS’s opinion HTC has not demonstrated an ability to stabilize its funding and liquidity, as accelerated withdrawals of on-demand High Interest Savings Account (HISA) deposits continue. The Group announced that HISA balances had fallen to $391 million as of May 1, 2017, down from $1.4 billion as recently as April 24, 2017. Showing more stability, Guaranteed Investment Certificate (GIC) deposits stood at $12.86 billion as of April 28, 2017, down from $13.0 billion as of April 24, 2017. DBRS views GICs as more stable since the majority of these deposits are reportedly fixed and non-redeemable ahead of their maturity date.

DBRS notes that there currently is no traded debt at the holding company, since HCG’s $150 million debentures matured in May 2016. In addition, DBRS considers the recent decline in share price would make it very difficult for HCG to raise additional capital or issue debt.

The review will focus on the ongoing viability of HCG. One consideration is HTC’s ability to stabilize liquidity and funding at a reasonable cost. Another consideration is its ability to hire key senior management. The review will also consider the adverse impact of recent developments on the Group’s franchise strength, including its ability to maintain broker relationships for both mortgage originations and funding.

RATING DRIVERS

Ratings could be lowered, if HCG is unable to stem deposit outflows and obtain funding at a reasonable cost. In addition, any significant negative consequences of the OSC hearing could also impact the ratings.

Conversely, the ratings could revert to Stable, if HCG is able to stabilize its funding and liquidity profiles, while demonstrating a clear path to sustainable profitability.

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 principal methodologies are Global Methodology for Rating Banks and Banking Organisations (July 2016); Rating Canadian Residential Mortgages, Home Equity Lines of Credit and Reverse Mortgages (November 2016); and DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2017), which can be found on dbrs.com under Methodologies.

Lead Analyst: Maria-Gabriella Khoury, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of North America FIG

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.