This Is What A Bank Run Looks Like: Home Capital Loses 70% Of Deposits In One Week

In the beginning it was a slow pace, then it became a casual jog. Then, starting early last week, the jog morphed into a full-blown run, and - as of the past 3 days - the withdrawal of deposits at Home Capital Group's high interest savings accounts has mutated into a full blown mad dash not to be the last person to have their money at what is now an effectively insolvent alternative lender.

According to HCG's latest press release this morning, the "less than prime" Canadian mortgage lender held HISA deposits of only $391 million as of Monday, May 1; this is down C$130 million from Friday, or a reduction in the total amount by 25%. It is also down 72% from the C$1.4 billion reported one week ago.

For those who need to think all the way back to the third Greek bailout of 2015 to recall what a bank run looks like, here is what the deposit situation at HCG has looked like over the past month.

There is some good news: a terminal bank run at the mortgage lender has already been largely factored in, and is largely covered courtesy of the recently announced $2 billion emergency loan from the Ontario Pension Plan - putting up to 321,000 retirees on the hook - which carries a pre-bankruptcy interest rate of as much as 20%.  To this end, HCG announced today that its subsidiary, Home Trust, expects to receive the initial draw today of $1 billion from its $2 billion credit line.

However, there is another problem: the company has another C$12.8 billion in  Guaranteed Investment Certificate deposits, or GICS. As these 30- and 60-day deposits come due in the coming weeks, depleting HCG's already tapped out liquidity, and forcing even more emergency loans. Without a deposit base, Home Capital can’t fund new mortgages.

As we reported over the weekend, while Home Capital hired investment bankers for a possible sale, there is little to no interest in the loan book as the company itself.

Meanwhile, as financial regulators say they are watching closely, overnight Jim Hall, the CIO of Mawer Investment Management, formerly one of the biggest investors at HCG, said he is "recalculating the odds of a contagion widening across the Canadian financial system."

“The probability has gone from infinitesimal to possible - unlikely, but possible. If depositors or bondholders start to lose faith in their banks, well then that becomes systemic.

So is contagion on the horizon? Here Bloomberg has some good observations, noting that unlike in the U.S. housing crash when loan defaults soared, there is little evidence of faulty loans, at least not yet: after all the housing market remains propped up by tens of billions in offshore money flooding into Canada's two main metroareas, Vancouver and Toronto. Furthermore, Home Capital’s delinquency rate, for example, was just 0.20% as of February, suggesting at least for the time being there are no rising delinquency concerns.

All that may change, however, if Chinese money launderers shift to other targets, such as the US west coast as one can now make the case based on several outlier transactions in the Pacific Northwest and, as of past week, Los Angeles.  It would also explain why the Ontario Pensioners demanded they have $2 in mortgage collateral for every $1 lent, hinting that the creditor may anticipate losses as much as 50% on the loan in the future.

Still, investors are starting to get cold feet, and shares of rivals First National Financial and Equitable Group have both tumbled, dragged lower by the Home Capital woes as investors fear contagion.