Contagion: Home Capital Bank Run Spreads To Another Canadian Mortgage Lender

Tyler Durden's picture

As discussed first thing this morning, the fate of Canada's largest alternative mortgage lender, Home Capital Group, appears to have been decided over the weekend, when in the span of just one week, over 70% of the company's deposit base had been withdrawn, effectively mothballing the business, leaving just a sale or liquidation as the two possible outcomes even as a $2 billion emergency line of credit keeps the company afloat, at least until HCG's $12.8 billion in GICS mature some time over the next 30 to 60 days.

Predictably, the news of the ongoing bank run once again spooked shareholders, who sent its stock sliding by 10%, and wiping out two-thirds of the company's market cap in under 2 weeks.

A bigger red flag emerged when concerns about possible contagion appeared to have been justified Canada's Equitable Group, another alternative mortgage lender, said Monday it had started seeing “an elevated but manageable” decrease in deposit balances, traditionally a polite way by management to admit a bank jog is taking place. The company said that customers had withdrawn an average C$75 million each day between Wednesday and Friday, and while the withdrawals so far are modest, and represented 2.4% of the total deposit base, the recent HCG case study showed how quickly such a bank run could escalate. And while liquid assets remained at roughly C$1 billion after the outflows, the company also announced that it had taken out its own C$2 billion credit line with a group of Canadian banks, just in case the bank run was only getting started.

Having taken preemptive action, Equitable’s loans terms were more favorable than Home Capital’s, which as reported last week is paying an effective rate of 22.5% on the first half of the C$2 billion credit line that it tapped Monday from the Healthcare of Ontario Pension Plan.

According to Bloomberg, Equitable is paying a far more modest 1.25% interest rate on the drawn portion, and a 0.75% commitment fee and a 0.5% standby charge.

Trying to mitigate concerns, Andrew Moor, CEO of Equitable said that “the issues affecting the well-known trust company in Toronto are their issues alone, and it’s unfortunate the banking industry has been dragged into it." He spoke on a call to discuss earnings, which were published almost two weeks earlier than planned due to the Home Capital selloff.

To be sure, looking at historical credit losses, Equitable would be deemed quite safe, barely ever having seen any, which in retrospect may be troubling: another company which is in the same boat is none other than Home Capital Group.

Following news of the Equitable loan, a relief rally sent shares of the lender soaring by 26% to C$46 in Toronto, helping recoup some of the 41% drop from last week. Other Canadian bank stocks that had fallen last week also recovered Monday. First National Financial Corp., a mortgage lender, jumped 2 percent. Bloomberg notes.

So while Canada's nervous investors, not to mention its regulators, exhaled a breath of relief today hoping that things are back to normal even as they continue to keep a close watch on Equitable and other alt-lenders to see if the panic has subsided, attention turned to Home Capital's bonds. Bloomberg reports that Home Capital’s bonds maturing in December next year were trading little changed at 90.6 cents on the dollar on Monday, according to Bloomberg data, yielding about 10 percent, compared with less than 3 percent on April 19. Home Capital also has C$325 million in 2.35 percent bonds maturing on May 24.

“Things are perhaps all right from the bondholder’s perspective, but not certain and the bonds reflect that,” said Mark Carpani, a portfolio manager at Ridgewood Capital Asset Management, with C$1.1 billion in assets. He said he doesn’t hold any Home Capital bonds and declined to comment at what level he’d consider buying them.

While an optimistic outlook may be warranted, the biggest risk as explained this morning, remains with HCG's C$12.8 billion in GIC deposits which are essential to fund its mortgage business, and which represents 1 percent of the Canadian mortgage market. Withdrawals could accelerate as these short-term deposits mature.

What is the worst case scenario?  Declining deposits could lead to a windup of the company, which would be monitored by the federal bank regulator, the Office of the Superintendent of Financial Institutions, according to Bloomberg. The lender said Thursday it has hired BMO Capital Markets and RBC Capital Markets to conduct a review of strategic options, signaling that a sale may be on the table.

“OSFI maintains ongoing relationships with the financial institutions it supervises,” Annik Faucher, an OSFI spokeswoman, said by email. “While we are prevented by law from discussing the affairs of the individual financial institutions we regulate, or our ongoing supervisory work, I can confirm that OSFI is continuing to monitor the situation closely.”

Concern about the viability of HCG has extended to the Canadian government itself, with Finance Minister Bill Morneau saying in a statement that he has been monitoring the Home Capital situation “very closely." 

“I was pleased to see Home Capital’s funding issues resolved by market participants,’’ Morneau was quoted as saying. “What I’ve seen over the last few days is proof the system is working as it should, where institutions facing challenges find market-based solutions.”

Actually, the funding issues are anything but resolved, as the next 30-60 days may reveal.

However, it is perhaps the hint of a government backstop that prompted Home Capital’s biggest investor to announce he is sticking with the company, adding to its position. Toronto-based Turtle Creek Asset Management Inc., which owned 14% of Home Capital as of the end of February, praised the lender for its low loss rate and underwriting practices.

“To be clear, we have not sold shares; indeed, the opposite is the case," according to an investor letter, signed by Chief Executive Officer Andrew Brenton, managing partner Jeffrey Cole, and managing partner Jeffrey Hebel. “We are obviously not happy with recent developments at Home Capital, but we remain focused on long-term value creation for you, our fellow investors.

Well, as long as the "fellow investors" are fine with the short-term value destruction, all should be well. Ironically, for investors like Brenton, the "best" possible outcome would be the worst one, or runaway contagion and bank runs, which would force the government to step in and do what the US government did nearly a decade ago: bail out not only Canada's housing market, but also its insolvent mortgage lenders, as well as any other banks and financial institutions that would be slammed by the bursting of Canada's housing bubble.

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Dazman's picture

Don't worry. Yellen has a check in the mail now. PS. Me and you are paying.

We'll even bail out Mexico if we need to, right boys? Oh that's right what you want is irrelevant, our overlords have complete control.

Jim Sampson's picture

Imagine the money they'll print!  GOLD TO 30k!!!

jcaz's picture

....Aaaaand it's gone....

Deathrips's picture

Merely a flesh wound.



economessed's picture

There is never just one TWO cockroaches.

FatTony7915726's picture

The Major 6 Canadian Banks will remain unaffected by this:  Bank of Montreal, TD Bank, Bank of Nova Scotia, CIBC, Royal Bank & National Bank of Canada.


This situation will only affect alt-lenders, second chance credit lenders!  You guys in the States are having a wet dream.  Pull out the kleen-x and dry your weenies up!

Luc X. Ifer's picture

This is MSM, not what tptb calls 'fake news/media', and they sing the swan song. What u have to say?

[...Amid the current bubble, the panelists disagreed on who to blame. “I would lay this whole problem at the feet of the government,” said Avery. “The government is coach, referee, cheerleader and fan in the housing market.” Avery argued that Toronto has been doomed for a housing crisis ever since Ontario created the world’s largest greenbelt, a near two million-acre area where development is forever prohibited, shrinking the supply of homes. ...]







ebworthen's picture

Ben Bernanke circa 2005 - "There's no housing bubble to go bust."

" is a vibrant and strong company."

"It's different this time."

logicalman's picture

The Canadian banking system is a huge circle jerk.

The biggest owners of Canadian bank stock are the banks!


Ink Pusher's picture

Makes shorting them easier eh?


lurker since 2012's picture

Good point however Never one roach says the same.

Lore's picture

Alternative lenders cater to a small proportion of the market. The vast majority of Canadian mortgages are back-stopped by Canada Mortgage and Housing Corporation. What is the position of the CMHC? 

Canada’s housing market still flashing ‘red’ warning, but some improvement: CMHC (c/o Financial Post, 26-Apr)

I've explained before why the most dangerous Canadian real estate bubble is concentrated in those downtown glass-tower shoebox highrise apartments that are being pushed hard by local developers and the municipal "green" crowd, rife with corruption and speculation. You see thousands upon thousands of new units under construction, more than a Chinese factory town.  When crunch time hits, those things will be money pits.

Sick Monkey's picture

CMHC is a trillion in the hole and our new PM just emptied the piggy bank. We're gonna have to sell BC to create an American land route to Alaska. China might try and out bid Trump.

Giant Meteor's picture

It'll be fine just as long as nobody turns on the lights  ..

Bubble Man's picture

"Imagine the money they'll print!  GOLD TO 30k!!!"

It is also possible the world will have a debt jubilee and just wipe out all debt and gold could go to $30/ounce too.  Unlikely, but it is a possibility as well this point in the game.  The world has written off debt many many times in history.




hxc's picture

Not sure why someone downvoted ya. Here's an up. True hedgies look at all potential outcomes and that is one I've mulled over many a fortnight.

SeattleBruce's picture

Except: counterparties holding the bag on hundreds of trillions of notional derivatives.  What's a few hundred trillion between friends? Now we're talking real money...

Raffie's picture

Good, let it all fall.

The muzzies might be mad and go to where ever they came from.

Hitlery_4_Dictator's picture

I wish I had something cool, cleaver, insightful, smart or intriguing to say. I don't and nothing will come of this. 

Giant Meteor's picture

It's probably nothing ...

Sick Monkey's picture

The administrative or accounting side maybe but when you think of the root cause was completely avoidable. The analogy I like to use is a house built on sand. Infrastructure cost to sustain a speculative asset that historically has been a protected given right has never been proven to be sustainable nor has it's effects on an economy over all. Experiment started in the 80's as tax cuts and deregulation leading to a band aid solution to fix that mess called forward guidance. All they had to do is leave it alone plus become self sufficient on the energy side. The deregulation gave money lenders a green light to saturate the market with overvalued products then soak the consumer on the down side. The finishing touch was lowering rates to force investors into a house built on sand. To make a complex story short we gave into removing a couple of auto stops. I guess the 80's and 90's were good times. Folks tend to let their guard down when things look good. They used to call that trust or faith in the system. The house always wins in the end.

sixsigma cygnusatratus's picture

I was pleased to see Home Capital’s funding issues resolved by market participants,’’ Morneau was quoted as saying.

All contained, nothing to see here. Pension fund contributors are not part of the economy anyways.

SeattleBruce's picture

"Pension fund contributors" = our personal piggy bank...

HRClinton's picture

Nobody is "paying" until the Casino closes. Until then, it's creative Game On!

Place your bets. You don't get to leave, without permission or consequences. 

Jacksons Ghost's picture

Gives new meaning to HOME RUN!

The central planners's picture

Holly shit the mail got lost and yellen forgot to put a tracking number.

Squid Viscous's picture

I'm sure another kike lender will save them for a 25% vig

l8apex's picture

"kike" - I need to use that more often.  It seems to be out of style at the moment.

Giant Meteor's picture

Ah shucks you guy's .. go fly a kike for Christ sakes !

obvious sarc, but just in case ..


Giant Meteor's picture

I believe the proper vernacular on this is, Jump You Fuckers!

Back by popular demand, sing it !

ZH Snob's picture

I hope this is the first domino.

CheapBastard's picture

Bernanke just gave a spoeech and interviews today saying the economy was great. The guy should be hung along side Greenspan.

techpriest's picture

Isn't that what they were saying late 2007?

centerline's picture

tanks in the streets eh?

Jacksons Ghost's picture

This is Canada, plural "Tanks"?   You mean the Tank.  

CRM114's picture

Well, the TCH alone is nearly 5,000 miles long. Nobody's got that many tanks.

p.s. Canada has enough AFVs for one every 230 miles of road. Assuming they are all serviceable. A rough back-of-the-envelope calculation tells me the nearest AFV to my house would be 35 km away, and will affect my life not a whit.

If they distribute the tanks by population, then there won't even be one in my Province.

corporatewhore's picture

what could go wrong?  LOL

Offthebeach's picture

Mabe a strategic merger with Bombardier.   Start funding machine camps down by the frozen river.

LawsofPhysics's picture

"deposits"... LMFAO!!!

Modern bankers have no idea what the fuck that means, just like they have no fucking idea what collateral is...

Fuck 'em!

Get long sharecropping and guillotines...

Falconsixone's picture

Open Account! Take what you need to float you poor babys......

Zoomorph's picture

EQB is actually weathering this pretty well so far.

blueberry100's picture

Any one remeber $25.00 savings bonds one would buy for $18.50 and get $25.00 back in 4 years? Now it will take 40 or 400 years.

FIAT CON's picture

You didn't account for the loss of purchasing power due to inflation over those 40 to 400 years.