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.