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Fitch Affirms Home Capital Group's Ratings; Outlook Revised to Negative

Monday, April 9, 2012 4:49 PM

Fitch Ratings has affirmed the long- and short-term Issuer Default Ratings (IDRs) of Home Capital Group, Inc. (HCG) and its subsidiary, Home Trust Company (HTC) at 'BBB' and 'F2', respectively. The Rating Outlook is revised to Negative from Stable. A complete list of ratings follows this release.

Today's affirmation reflects HCG's consistently robust earnings supported by a strong niche franchise, solid asset quality and stringent cost controls. Providing additional ratings support is the company's sufficient liquidity and sound capital levels. Nonetheless, with over 80% of the company's total lending portfolio residing in the Ontario market, HCG's geographic concentration, narrow product mix, and limited franchise continue to present rating constraints. Furthermore, due to its modest branch network, HCG exhibits a significant reliance on relatively high cost brokered deposits and securitization for funding.

The revision of the Outlook to Negative is based on emerging concerns regarding home price valuations and household debt levels in Canada, which given HCG's focus on non-conventional borrowers could potentially translate into increased credit costs. These risks could potentially be magnified by HCG's concentrated business model.

Predominantly a Canadian residential mortgage lender, the company focuses on borrowers who do not qualify for prime mortgages offered by the major Canadian banks. HCG's typical clients consist of the self-employed, small business owners, individuals with poor or limited credit histories, as well as newly arrived immigrants to Canada. These seemingly higher risk borrowers have not so far translated into higher credit losses for the company however, as net write-offs totaled a mere 0.07% of gross loans for 2011, with net impaired loans to gross loans residing at 0.25% at Dec. 31, 2011. Actual net mortgage charge-offs have averaged less than 0.05% over the past 15 years.

A significant factor contributing to this strong asset quality is the company's underwriting procedures. HCG conducts a labor-intensive customized credit evaluation, with a conservative loan-to-value focus, which has been paramount in maintaining solid asset quality. Credit quality metrics have also benefitted from the relatively favorable economic environment in Canada where housing starts, home sales and property prices have remained favorable.


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