Morningstar DBRS Confirms Home Trust Company’s Credit Ratings at BBB, Trends Remain Stable

DBRS Limited (Morningstar DBRS) confirmed the credit ratings of Home Trust Company (HTC or the Company), including the Company’s Long-Term Issuer Rating, of BBB. The trends on all credit ratings remain Stable. The credit ratings action follows HTC’s announced agreement to merge with Fairstone Bank of Canada (Fairstone or the Bank).

KEY CREDIT RATING CONSIDERATIONS
The credit ratings confirmation and Stable trends reflect Morningstar DBRS’ expectation that the impact of the merger transaction on the Company’s credit fundamentals will be limited. Post-transaction, Morningstar DBRS expects that HTC will remain as a separate and distinct entity and will continue its current growth strategy. The merger with Fairstone could provide opportunities to realise operational synergies and efficiency in management, risk, and compliance functions, as well as technology infrastructure and corporate operations. Nevertheless, there remain integration risks, both from an executional and operational standpoint.

As a result of the merger, HTC is expected to operate as a fully owned subsidiary of Fairstone. Smith Financial Corporation, HTC’s ultimate parent, will own a majority interest in Fairstone, while the Bank’s other current shareholders, Centerbridge Partners, L.P., Ontario Teachers’ Pension Plan Board, and management, will continue as minority shareholders. Completion of the transaction is subject to obtaining the required regulatory approvals, including that of the Office of the Superintendent of Financial Institutions, which are expected by year-end 2024.

The Company’s Intrinsic Assessment (IA) is positioned below the IA range, reflecting HTC’s highly concentrated business model in Alt-A real estate lending and a high reliance on broker deposits with significantly less funding diversity than its peers. In our view, these are nuances specific to the Company that make it susceptible to material adverse changes in the Canadian real estate market.

CREDIT RATING DRIVERS
Morningstar DBRS would upgrade the credit ratings if HTC significantly diversifies its funding sources, including a sustained increase in the share of directly sourced deposits. Increased diversification in HTC’s loan book and revenue mix, while maintaining a similar risk profile, would also result in a credit ratings upgrade.

Conversely, the credit ratings would be downgraded if there were significant operational issues post-integration or a significant, unanticipated change to HTC’s structure or operating framework that weakens its credit fundamentals. Additionally, significant losses in HTC’s loan portfolio as a result of unforeseen weakness in underwriting and/or risk management, disproportionate growth in commercial originations that weaken the risk profile, or substantive funding pressure caused by deposit outflows would also result in a credit ratings downgrade.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Good/Moderate

Earnings Combined Building Block (BB) Assessment: Good/Moderate

Risk Combined Building Block (BB) Assessment: Good

Funding and Liquidity Combined Building Block (BB) Assessment: Moderate

Capitalisation Combined Building Block (BB) Assessment: Good

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/431093

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024); https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (22 June 2023); https://dbrs.morningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024); https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at dbrs.morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

This credit rating was disclosed to Home Trust Company and amended following that disclosure before being assigned.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’s outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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