BANK RUN: Home Capital Group Could Fully Collapse

Depositors continue pulling their money from the beleaguered mortgage lender

Our financial system functions on confidence. If that confidence is lost, the system falls apart quickly. The same holds true for individual institutions. Once people lose faith that they can get their deposits, they scramble to pull their money out of the bank. Since no bank actually has all of our money, the loss of confidence leads to a swift collapse.

That’s what’s happening to Home Capital Group – a Canadian mortgage lender now fighting for survival.

Home Capital’s Quarter 1 Reportreleased today – shows serious concerns about their ability to survive. Here are some key excerpts:

“The interim consolidated financial statements for the first quarter ended March 31, 2017 were prepared on a going concern basis; however, management believes that material uncertainty exists regarding the Company’s future funding capabilities as a result of reputational concerns that may cast significant doubt upon the Company’s ability to continue as a going concern.”

“The Company has continued to face heightened scrutiny related to its compliance with disclosure requirements as it relates to the broker suspensions announced in 2015.  Most recently, and as previously announced, the Ontario Securities Commission (OSC) has provided notification of its intent to pursue an administrative proceeding against the Company and three current and former officers and directors of the Company (please refer to the Company’s press release dated April 19, 2017 for further information). In addition, a Statement of Claim and Notice of Action have been filed with the Ontario Superior Court of Justice against the Company and three of its officers or former officers regarding a proposed class action lawsuit. While the Company will vigorously defend these allegations, the public attention to this matter has caused damage to the Company’s reputation.  In addition, the current vacancies for a permanent CEO and CFO have caused concerns over the stability and capacity of the Company’s management.”

The reputational concerns have had a direct and material impact on the liquidity position and future funding capabilities of the Company and the ability to fund the full level of mortgages in the Company’s pipeline as well as existing mortgages as they become eligible for renewal. Until this can be reversed, this will very likely translate to reduced mortgage originations.  The reputational concerns may also impact the Company’s relationships with mortgage brokers which may put downward pressure on loan originations.”

Home Capital’s statements may be carefully worded and calm in tone, but they are the words of a desperate organization. “Reputational concerns” is a nice way of saying people are losing confidence in them, and as I said at the outset the loss of confidence can lead to collapse. While the company is putting a brave face on things – as they must – they are in serious trouble.

They have already received a bailout of sorts from other banks – who are concerned about contagion – and their deposits are protected by the Canadian Deposit Insurance Corporation – which theoretically should prevent an ongoing bank run. However, the fact that Home Capital has pending administrative proceedings with the Ontario Securities Commission, and an issue before the Ontario Superior Court, will only add to the sense of doubt and uncertainty surrounding the lender. That will erode confidence even further.

Contagion already spreading

In our heavily connected financial system, what happens to one lender will inevitably impact others. We’re already seeing that happening, as all of Canada’s big banks had their credit ratings downgraded by Moody’s Investors Service, and the Canadian dollar and bank bonds have fallen. The combination of rising household debt, housing market uncertainty, and the potential collapse of a mortgage lender, is eroding overall confidence in the system.

Home Capital Group is now fighting to survive as a going concern, and what happens to them could end up impacting much of our economy.

You can read the full Q1 Home Capital Report

Spencer Fernando

 

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