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Will Street Capital Make a Comeback?

The stock of Street Capital Bank of Canada looks like it’s sliding into the abyss. It made a 52-week low of 45 cents on Thursday.

Source: TSX

The company has the unwanted distinction of having the lowest stock price of any public bank in Canada. Not only are investors worried, but a lot of brokers are worried and we’re guessing OSFI is concerned too.

With a $45 million loss in Q4 (albeit, mostly due to “non-recurring” accounting items like writing down goodwill and restructuring), a 14% drop in 2018 originations, a $11 million drop in its liquidity position (cash + liquid securities) vs. January 2018, and a 32% drop in net gain on sale margins for new originations year-over-year, more than a few are questioning the company’s ongoing viability.

Its reported broker share (according to Filogix) has fallen from a peak of 9.6% in Q3 2016 (before the insured mortgage rule changes made life far tougher for small lenders) to 4.7% in Q4.

All in all, it’s not hard to see why the stock is in the dumper.

On the plus side:

  • Credit quality is solid: 90-day arrears are 11 bps (about half the industry average) with no losses in the Street Solutions (non-prime) portfolio
  • The company grew deposits 118% in 2018 to $638 million
  • It maintains decent capital levels, including a CET1 ratio of 19.84% and a 10.07% leverage ratio, with $95.8M in regulatory capital
  • Street is back in the refi game, having added a new domestic partner for funding prime uninsurable mortgages
    • That’s not only critical for business (brokers and customers don’t like dealing with lenders that have limited refinance capability) but it’s key for the regulator, which said today “OSFI will…maintain its focus on institutions with vulnerable funding models.”
  • Street also added a new international funding partner for non-prime mortgages in 2018. Its non-prime “Street Solutions” business line was the beneficiary, growing 107% to $421 million, with a healthy weighted average yield of 5.27% on those loans.
Street Capital CEO Duncan Hannay
Street Capital CEO Duncan Hannay

CEO Duncan Hannay tells CMT, “2018 was a very challenging year for us…Our financial performance was not what we expected or wanted. In response to these business challenges, late last year we announced a strategic realignment and have already made several difficult but necessary decisions aligned with our commitment to support responsible growth and sustained performance.”

But he adds, “It appears that some have chosen to interpret our 2018 performance as a sign of distress. This is categorically false. Our business is healthy and growing and we intend to be a thriving lender for many years to come.”

“The bank is well-capitalized and enjoys industry-leading credit quality.”

But it can’t do it alone, so the company is reportedly looking for a buyer or large investor. Says Hannay: “We’re exploring a spectrum of opportunities to strengthen the capital position of the bank to support future growth.”

Investor interest could come from:

  • existing shareholders (through a rights offering or private placement)
  • by issuing stock to the public market (unlikely we’re guessing, given the current stock trend)
  • a private placement from a new shareholder, or
  • a new majority shareholder by way of a private or public acquisition.

We probably won’t hear much on this until a deal is done. Public companies are at liberty to explore deals on the down-low and are usually not obligated to disclose potential deals until the terms firm up. That’s assuming there’s been no disruptive activity with the stock.

Street’s Core Broker Business

street capital logoStreet’s most important customers are brokers. Here’s what it’s doing for them:

  • Better rates: For a while there, Street’s low-ratio rates were atrocious (particularly its uninsured rates, which suffered from its lack of a good funding partner). Consistency of rates was a serious problem that, for now at least, appears to be solved.
  • Trailers: “Our top broker partners told us…they were looking for a trailer compensation model…Our Loyalty Plus program now gives them this choice,” Hannay said. (Street brought back trailers after canning them in 2015, saying they weren’t profitable, but it’s now improved the economics by spreading its broker incentives throughout the first term and subsequent renewal periods, reducing the likelihood of mid-term liquidations.)
  • Status: The bank now has “concierge service” for its top brokers and a new Prestige Program with rush approvals, express funding, priority document review, marketing rebates, pricing credits, etc.
  • Features: The bank’s product flexibility remains top-notch with among the most useful online customer portals in the business, blend and increase without penalty, a fair penalty for early discharges (compared to the Big 6 banks), non-collateral charges, portability across the country, 20% prepayments, no restrictive bona fide sales clauses, etc.
  • BAMs: Street is piloting a new hybrid sales and underwriting role, with three of its top underwriters acting as “Broker Account Managers” or BAMs. It’s similar to Scotia’s popular and hugely successful RSM model.

The question remains for brokers, what will change—if anything—if Street finds a new owner (majority owner or otherwise). If it gets a strong capital partner that’s dedicated to the broker channel it could easily turn the ship around.

Either way, we suspect it won’t be long before an announcement is made. A 45-cent stock is unsustainable for a bank that wants/needs to grow and thrive.