Amid concerns about housing prices and household debt levels, Fitch Ratings has revised its rating outlook on mortgage lender Home Capital Group Inc. (TSX:HCG) to negative from stable.
The rating agency affirmed its existing ratings on the firm, but, at the same time, it lowered its outlook on the firm, saying the move, “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,” it adds, noting that over 80% of the company’s total lending portfolio is in the Ontario market. “HCG’s geographic concentration, narrow product mix, and limited franchise continue to present rating constraints,” it says. As does the fact that the company places a significant reliance on relatively high cost brokered deposits and securitization for funding.
Nevertheless, in affirming the current ratings, Fitch says that the firm has “consistently robust earnings supported by a strong niche franchise, solid asset quality and stringent cost controls.” It also notes the company’s strong liquidity and capital levels.
The firm focuses on borrowers who do not qualify for prime mortgages offered by the major Canadian banks, including the self-employed, small business owners, individuals with weak credit histories, and new immigrants to Canada, Fitch notes. Yet these “seemingly higher risk borrowers have not so far translated into higher credit losses for the company”, it says, pointing to the company’s robust underwriting procedures as the key to maintaining solid asset quality.