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Home Capital reports net loss of C$111.1M for Q2

Home Capital Group Inc. on Aug. 2 reported a net loss of C$111.1 million, or C$1.73 per share, for the second quarter, compared to the year-ago period's net income of C$66.3 million, or 99 Canadian cents per share.

The S&P Capital IQ consensus mean EPS estimate for the latest quarter was a loss of C$1.10.

Net loss for the second quarter includes the impact of elevated expenses of about C$233.7 million pretax. These elevated expenses include incremental costs incurred in connection with the liquidity event totaling C$213.6 million; additional restructuring costs related to Project Expo, the company's expense savings initiative, of C$5.8 million; and costs related to the Ontario Securities Commission matter and related class action of C$7.0 million, net of expected insurance recoveries. In addition, the company determined it will exit its payment card and payment processing (PsiGate) business and its prepaid card business. As a result, the company recorded an asset impairment related to the remaining goodwill, intangible and other assets within these businesses of C$7.3 million.

The company's net interest margin on taxable equivalent basis for the quarter was negative 0.07%, down from 2.44% in the linked quarter and down from 2.38% a year ago. It recorded a provision for credit losses of C$2.4 million, down from C$5.9 million in the previous quarter and down from C$2.8 million a year earlier.

Home Capital repaid all outstanding amounts under the Berkshire Hathaway Inc. credit facility subsequent to the end of the second quarter, giving the Toronto-based company the ability to draw up to C$2.0 billion going forward if required. In addition, the company held total liquid assets of about C$1.94 billion as of Aug. 1, including proceeds received from the initial equity investment by Berkshire.

The company closed initial tranche of previously announced sale of commercial mortgage assets, receiving proceeds of approximately C$1.13 billion as of July 25, with a further tranche expected to close by the end of the third quarter. It also closed sales of residential mortgage assets for total proceeds of roughly C$300 million.

In its earnings release, Home Capital also disclosed that its search for a CFO "is nearing completion." Yousry Bissada was recently named its president and CEO.

The company said it "will cautiously increase lending activity with a view to growing the mortgage origination flow in step with the growth of deposit funding and adequate liquidity." It said deposit funding has grown in recent weeks, but has been paying a premium rate of interest on new deposits, which will reduce the interest spread earned on new business.

Home Capital said it will look to reduce deposit interest rates to more sustainable levels in the coming months, which may have a dampening effect on deposit growth and consequently constrain growth of mortgage originations.

It expects to see lower interest costs partly offset by lower interest income in the third quarter. The company said it can also expect elevated non-interest expenses as it will continue to be subject to scrutiny from a wide range of stakeholders.