Fitch Ratings has upgraded the long-term and short-term ratings of Toronto-based mortgage company, Home Capital Group, Inc.

The rating agency says that the upgrade, and a shift to a stable outlook (from positive), “are indicative of HCG’s consistently strong financial performance amidst the challenging macroeconomic environment, which has been supported by robust earnings (ROA and ROE residing at levels above 2% and 27% respectively for the past eight consecutive quarters), minimal credit costs, and a healthy net interest margin.”

“The company’s robust capital levels, solid asset quality, sufficient reserves and comfortable liquidity provide additional ratings support,” it says, adding however, that “the company’s narrow product mix and limited geographic franchise continue to present rating constraints.”

Fitch notes that Home Capital’s business model focuses on lending to borrowers who do not qualify for prime mortgages from the big banks, a clientele that typically consists of the self-employed, small business owners, individuals with poor or limited credit histories, as well as newly arrived immigrants.

“These seemingly higher risk borrowers, however, have not translated into higher credit losses, as net write-offs represented merely 0.19% of total loans for 2009, with net impaired loans to gross loans remained essentially flat from 2008’s levels, residing at 0.85% at Dec. 31, 2009,” it says, noting that the company’s underwriting procedures, which include a labour-intensive customized credit evaluation, with a conservative loan-to-value focus, have contributed to its strong asset quality.

Credit risk is further mitigated by the company’s capital levels which experienced strong growth during 2009, it adds. And, Fitch views enhancements that the firm has made to its overall risk management practices over recent years as an additional positive factor.

IE