Tuesday, March 28, 2017 0 comments ++[ CLICK TO COMMENT ]++

Canadian Real Estate Lender, Home Capital Group, Terminates CEO

Not sure if this an isolated event or a symptom of a possible Canadian housing bubble, but Home Capital Group (TSX: HCG), just terminated its CEO. I don't follow Canadian financials so not sure but I think HCG may be the largest alternative real estate lender in Canada. CBC News reports (Mar 28 2017):

Home Capital announced Monday after stock markets had closed that that Martin Reid, its president and CEO, was out, effective immediately.

Investors responded by sending shares of Home Capital down $2.66 to finish at $25.06 on the TSX.

Reid has been replaced by Bonita Then, a member of Home Capital's board of directors, until a new permanent CEO can be hired.

"Home Capital requires leadership that can bring to bear a renewed operational discipline, emphasis on risk management and controls, and focus on improving performance," said Kevin P.D. Smith, the chair of company's board, in a statement.

In February, Home Capital said it had received an enforcement notice from the Ontario Securities Commission related to its disclosure in 2014 and 2015 about the impact of the company's findings that income information submitted on some loan applications had been falsified, and its subsequent move to suspend some brokers and brokerages.

The company said in February that the OSC issued a preliminary conclusion that Home Capital. failed to meet its continuous disclosure obligations during that period in 2014 and 2015. Home Capital has said it believes its disclosure met requirements.

Home Capital also announced on March 14 that several company officers and directors had also received enforcement notices from the OSC.
HCG has been under attack by short-sellers for a few years now but as someone living in Canada, it's not entirely clear what is going on with real estate.

Canadian residential real estate--not sure about commercial real estate but might be worth looking into that if you are thinking of shorting (likely easier and less costly short for small investors)--looks like a blatant bubble if you look at traditional metrics like price vs rent, price vs household income, average mortgage duration (to pay off mortgage), etc. The numbers make little sense if you look at income or any sort of serviceability metric.

But a lot of the prevalent causes of the American real estate bubble a decade ago (or some of the other ones in Europe) don't appear to be present in Canada. Part of the reason is that everyone (particularly lenders and investors) has learned from the financial crisis and watch for those signs. In other cases, due to the structure in Canada, the same thing doesn't apply. For instance, secrutization was never big in Canada. You also don't have a multitude of lenders/mortgage insurers/etc that was common in USA (partly because Canadian banking is an oligopoly and difficult for smaller/new lenders to survive).

Market is likely pricing in a lot of the negativity surrounding HCG. It is trading close to book value (versus big banks at multiples of book) and P/E is something like 7 if I remember. But then again a lot of the crisis-stricken firms during the financial crisis trading at low valuations as well (the most notable in my eyes was the homebuilders who were trading at really low valuations). One big red flag I see is that the CEO has apparently been in the role for less than an year (although he was president for many years) and the board references "risk management" which is a big concern given how leveraged financials are.

Remains to be seen if the issues faced by HCG are something isolated to the company or a harbinger of something bigger...

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