Home Capital Group Inc. (TSX: HCG) released its most recent update on its liquidity situation on Friday. The company has provided investors with daily updates on the deposit situation following a run on its deposits since April.
Liquidity update concerning
The high interest savings account (HISA) balance as of May 25 sits at $110.6 million, continuing the daily declines and bringing the total weekly decline to $4.4 million. The continued decline in liquidity among HISAs is troubling; many analysts may have called the bottom on the deposit run too soon, suggesting in recent articles last week that the run on HISA deposits may have plateaued or may be starting to turn around. The total HISA withdrawals from levels seen just a few months ago total more than 90% of the previous balance.
Home Capital’s guaranteed investment certificate (GIC) balance has also declined to $12.28 billion from $12.3 billion just a day earlier with nearly $23 million being withdrawn from secured GICs. Cashable GIC balances also decreased by $3 million.
The concern among many current investors or potential investors in Home Capital is the company’s continued inability to attract in any meaningful high interest savings deposits and GIC deposits. Home Trust/Oaken Financial (subsidiaries of Home Capital) recently raised the interest rates payable to depositors in an attempt to stem the decline. The company raised rates last week across the board; the one-year GIC offered by Home Trust now provides investors with a yield of 2.2% compared with 1.6% earlier this month.
Other concerns stemming from Home Capital’s reduced liquidity and its ability over the medium term to meet prescribed liquidity requirements are also pressing. Home Capital’s total liquidity is now down to $1.07 billion, which includes the $350 million left on its emergency line of credit.
Business economics changing
The fundamental economics of Home Capital’s business model are changing due to the crisis of confidence the lender has experienced of late. Regardless of whether a bailout or bail-in process begins with a company willing to buy Home Capital’s book, or a portion of its loan book, the lender is now paying higher rates of interest for deposits in addition to an exorbitantly high interest rate on an emergency loan, which has still not been replaced with a syndicated loan.
Home Capital’s profitability moving forward with its new model of originating mortgages and selling them off, rather than holding them on their books, is anticipated to have very different margins and economics than the existing business model. Having to borrow at higher rates, including the $2 billion loan at double-digit rates, means any profitability the company is likely to have over the coming quarters will be significantly impaired.
Bottom line
I believe that additional downside still exists with respect to Home Capital due to the continued run on its deposits, despite the company raising its deposit rates to absurdly high levels. If the company is able to continue as a going concern (which is uncertain at this time, and the company has said as much), profitability will be significantly impacted, and the business will simply not be the same for a very long time, if ever.
Stay Foolish, my friends.
