New Deposit Rules Could Hurt These 2 Stocks

Home Capital Group Inc. (TSX:HCG) and Equitable Group Inc. (TSX:EQB) could face a more difficult lending environment if the OSFI pushes through stricter deposit rules.

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The Office of the Superintendent of Financial Institutions (OSFI) recently put forward draft changes that could impose stricter rules governing deposits sourced online or from third-party brokers. This move is intended to strengthen banks in times of stress, but it is also expected to be a drag on alternative lenders.

In the summer of 2018, I’d discussed a new effort from the CMHC that would make it easier for self-employed Canadians to qualify for a mortgage. The OSFI introduced a mortgage stress test for uninsured buyers that took effect in January 2018. This cooled the market to start the year, as sales experienced a significant drop off. However, the federal government has recently expressed its intention to ease policy for prospective home buyers.

In early January I focused on Home Capital Group (TSX:HCG) and Equitable Group (TSX:EQB) as two stocks that would be shaped by the Canadian housing landscape in 2019. The new rules proposed by the OSFI could hit these lenders especially hard. New rules could force lenders to rely more on long-term deposits, while also raising the prospect of heavily penalizing digital banking. A leaked letter from the Canadian Bankers Association (CBA) said the proposal risked applying “an excessively blunt instrument when assessing the riskiness of these deposits.”

National Bank released analysis that projected that Equitable Group could see earnings per share reduced by 10% for 2020; it forecast a potential 4% decline at Home Capital. The analysis assumes that the proposal will go forward without revisions and that both lenders will fail to adjust funding models. Even so, both stocks have been punished in February.

Home Capital stock has dropped 7% month-over-month as of close on February 11. Shares are down 4.6% over the past week. The company is expected to release its fourth-quarter and full-year results for 2018 on February 22.

Equitable Group stock has performed well in 2019 and did not succumb to downward pressure following the release of this report. Shares have climbed 4.5% over the past week and are up 13% in 2019 so far. The company is set to release its fourth quarter and full-year results on February 28. Equitable Group has managed to overcome many of the challenges presented by the new OSFI rules. Alternative Single-Family lending is projected to post growth between 11% and 13% in 2018 compared to the original projection which ranged from 2% to 4%.

The CBA took aim at the OFSI proposal quickly, which likely means that we will see revisions before the new rules are made public. This should not lead investors to dismiss the negative impacts that stricter policy will have on alternative lenders. However, it’s possible that measures taken to ease housing regulations in other areas could offset these pressures.

Shareholders and those looking to dip into lenders in 2019 should monitor the new rules closely as we await their being made public.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned.

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