Home Capital saw Q1 net income fall 18%, with more headwinds ahead
Home Capital saw its net income fall nearly 18% due to rising deposit costs, while the full impacts of rate increases are yet to effect its mortgage originations.
“Although our net interest margin fell this quarter due to increases in our cost of funds outpacing increases in mortgage rates, we expect to benefit over time from margin increases as spreads normalize,” said President and CEO Yousry Bissada.
And while growth in the company’s “A” business is starting to see a slowdown, Bissada noted that business among its “Alt-A” portfolio—mortgages that are slightly riskier than prime mortgages—remains “quite robust.”
Overall, Home saw record growth in mortgage originations, which were up 73% over last year, with growth in single-family originations up just 1.3%. However, loan balances for the single-family portfolio were up 15.5% year-over-year “on the strength of our origination volumes and retention efforts,” noted Chief Financial Officer Brad Kotush.
“We delivered this growth in the market that is starting to show signs of slowing after the rapid growth of prices and volumes last year,” Bissada said, adding they expect to soon see the effects of rising interest rates.
Home also touched on its recent credit rating upgrade from DBRS, which increased Home’s long-term rating to “BB” (high), while changing the trends on all ratings to stable from negative.
“We believe this upgrade will open up more opportunities for additional funding options in the future,” Bissada said.
And in the quarter, Home reported a $4-million increase in provision expenses to its single-family residential mortgage portfolio to “reflect the growth of the portfolio as well as changes to the inputs to our forward-looking economic models used to estimate future credit losses,” Kotush said.
Home’s total allowance for credit losses stands at $35.9 million, which is 38% lower compared to a year ago.
Highlights from the Q1 earnings report
Net income: $44.7 million (-17.7% YoY)
Total originations: $2.76 billion (+72.5%)
Loans under administration: $25.37 billion (+11.4% YoY)
Net interest margin: 2.18% (vs. 2.46% in Q4 and 2.61% in Q1 2021)
Net non-performing loans as a % of gross loans: 0.11% (vs. 0.13% in Q4 and 0.38% in Q1 2021)
Bissada made the following comments on a variety of subjects:
On whether Home has adjusted its underwriting practices given evidence of home price declines: “Yes, we’ve seen it slow down, but it’s still quite robust. There is still lot of activity. At this point, we’re pretty prudent in our risk appetite and our underwriting guidelines, we have not made changes. But we have very fast flexible underwriting if we should see a situation change by region or nationally, we can move rapidly to make changes…there are two markets for us, there’s the Alt-A and the A. What has slowed down somewhat is the A. Alt-A continues to be quite robust.”
On net interest margin: “Our net interest margin (NIM) fell this quarter due to increases in our cost of funds outpacing increases in mortgage rates, we expect to benefit over time from margin increases as spreads normalize. On the mortgage side, it takes some time for the spread between mortgage rates and deposit rates to revert to the NIM. In the broker distribution channel, the first lender to raise rates may risk losing volumes until those rates are matched by other lenders. Eventually rate can move up to bring margins back closer to historical mean levels. We have taken the lead in setting rates for alternative mortgage loans at levels that began the move back to historical NIM.”
On rate pricing: “We will always balance considerations of growth, sustainability and long-term value in our pricing strategy. However, as our rates on our assets increased more slowly than our cost of funds, the result is NIM compression. We expect spreads to normalize if as and when the pace of rate increases stabilizes.
On Home’s growth in its loan book: “We were able to grow our loan book and gather assets that will continue to produce income in the future…through refinance and renewal activity. We have found that retention improves in periods of rising rates, because borrowers are less likely to switch due to having to qualify at higher rates than other institutions.”
CFO Kotush said the market remains competitive for mortgages and funding, but that Home, “expect spreads to normalize over time, and that our net income will benefit…from the growth in loan balances that we are achieving.”
On Home’s forecast for double-digit growth in loans under administration (LUA), Kotush said, “we had seen that very strong growth in the first quarter and based on what we saw in our pipeline, we were able to make the statement of 20% [growth in] overall LUA…we still expect double-digit growth, but there is now more uncertainty in that prediction than we had at the end of what we reported Q4.” Bissada added to that, saying, “…even if originations slowed down, some renewals could go up, which is obviously part of the formula of growth.”
During the quarter, Home closed an RMBS offering of $425 million. “At the end of 2021, we initiated our participation in a $250-million committed securitization conduit in partnership with one of the major banks, backed by a pool of uninsured single-family residential mortgages,” Kotush said.
“We are continuing to see demand for both our residential and commercial loans. While rates are higher than they had been in the last few years, they are still low in historical context,” Bissada said. “With our years of experience operating in all types of rate conditions, we are comfortable in our ability to manage profitability through this environment as well.”
“Margins will be impacted by changes and rate expectations, but we expect they will revert to historical average levels in time,” Bissada added. “We will continue to diversify our funding sources and make progress towards our target capital range.”