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Q3 2017 Financial Results November 14, 2017
From time to time Home Capital Group Inc. makes written and verbal forward-looking statements. These are included in the Annual Report, periodic reports to shareholders, regulatory filings, press releases, Company presentations and other Company communications. Forward-looking statements are made in connection with business objectives and targets, Company strategies, operations, anticipated financial results and the outlook for the Company, its industry, and the Canadian economy. These statements regarding expected future performance are “financial outlooks” within the meaning of National Instrument 51-102. Please see the risk factors, which are set forth in detail in the Risk Management section of the 2017 Third Quarter Report, as well as the Company’s other publicly filed information, which is available on the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com, for the material factors that could cause the Company’s actual results to differ materially from these statements. These risk factors are material risk factors a reader should consider, and include credit risk, liquidity and funding risk, structural interest rate risk, operational risk, investment risk, strategic risk, reputational risk, compliance risk and capital adequacy risk along with additional risk factors that may affect future results. Forward-looking statements can be found in the Report to the Shareholders and Outlook section in the 2017 Third Quarter Report. Forward-looking statements are typically identified by words such as “will,” “believe,” “expect,” “anticipate,” “intend,” “should,” “estimate,” “plan,” “forecast,” “may,” and “could” or other similar expressions. By their very nature, these statements require the Company to make assumptions and are subject to inherent risks and uncertainty, general and specific, which may cause actual results to differ materially from the expectations expressed in the forward-looking statements. These risks and uncertainties include, but are not limited to, global capital market activity, changes in government monetary and economic policies, changes in interest rates, inflation levels and general economic conditions, legislative and regulatory developments, competition and technological change. The preceding list is not exhaustive of possible factors. These and other factors should be considered carefully and readers are cautioned not to place undue reliance on these forward-looking statements. The Company presents forward-looking statements to assist shareholders in understanding the Company’s assumptions and expectations about the future that are relevant in management’s setting of performance goals, strategic priorities and outlook. The Company presents its outlook to assist shareholders in understanding management’s expectations on how the future will impact the financial performance of the Company. These forward-looking statements may not be appropriate for other purposes. The Company does not undertake to update any forward-looking statements, whether written or verbal, that may be made from time to time by it or on its behalf, except as required by securities laws.
2
Forward-Looking Statements
Deposit funding stabilized and ample liquidity available Aggregate available liquidity and credit capacity totaled approximately $4.66 billion including
the undrawn amount of $2 billion under the Berkshire credit facility as at Q3/17 Lowered deposit broker and Oaken rates to match net deposit flows to loan origination
volumes – ability to flex in line with loan volumes Mortgage portfolio continues to perform well with low losses Weighted average current loan-to-value (LTV)(1) of the uninsured residential mortgage
portfolio was 53.7% 98.5% of the mortgage portfolio is current, with 0.31% over 90 days past due High credit quality with low provisions for credit losses Returned Home Capital to profitability in Q3 2017 Net income of $30 million compared to a net loss of $111.1 million in Q2/17 Q3/17 results continued to reflect a number of factors stemming from the liquidity event,
including lower residential and commercial loan balances and originations, higher deposit interest expense and elevated non-interest expense
Total loans under administration were $23.2 billion as at Q3/17 vs. $26.4 billion as at Q3/16 3
Q3 2017 Business and Financial Performance Highlights
1. Weighted average current LTV is defined in the Q2 2017 Management Discussion and Analysis.
Renewed Management Team New team members combined with existing team creating a strong bench, deeply experienced across key
functions including risk management and compliance, underwriting, finance and treasury and sales
Yousry Bissada named President and CEO – joined August 2017
– more than three decades of experience focused on financial services and the mortgage industry.
– track record of managing change, driving transformation and creating value.
Brad Kotush name Executive Vice President and Chief Financial Officer (CPA, CA) – joined September 2017
– more than 11 years of experience as a public company CFO focused on financial services.
Ed Karthaus named EVP of Sales, Amy Bruyea, SVP of HR – joined October/November 2017
Search for Chief Information Officer underway
Transactions Related to Liquidity Event Completed asset sales previously announced for total proceeds of $999.4 million in Q3-17, which primarily
comprised proceeds of $962.6 in commercial mortgages
During Q2 2017 sold mortgages for proceeds of $488.8 million
Repaid all outstanding amounts under the $2 billion credit facility with proceeds from asset sales completed in Q3/17, loan maturities and increased deposit flows
4
Q3 2017 Business and Financial Performance Highlights
In October, OSFI announced revisions to GuidelineB-20, effective January 1, 2018. The key changes included: A qualifying stress test requirement for uninsured borrowers Guidance regarding the use of co-lending arrangements The company is seeking clarification on some of the changes as part of an implementation plan. The stress testing requirement is expected to have the most material impact to the Company’s addressable market as some borrowers will qualify for smaller loan sizes than they would have without the stress test. The impact on the Company’s addressable market and originations volume moving forward in 2018 is difficult to quantify given various forces affecting the market including the following: Changes borrower behaviour, smaller loan sizes or increasing down payments Borrowers who may migrate from the prime market to the alternative space largely due to the stress test
requirement Strong growth expected to continue in the self-employed and new immigrant segments of the alternative
market which will contribute growth in potential customers While the net impact to new originations attributable to B-20 could be negative, renewal levels are expected to increase in the Company’s existing portfolio as borrowers will not have to re-qualify under the new rules. The company is also focused on providing competitive product offerings to meet customer demands as well as improved service levels to help capture a larger share of the addressable market post B-20. 5
Guideline B-20
6
Guideline B-20 Sensitivity Analysis
$ (in billions)
Actual 12 months ended September 30, 2017
Next 12 months with 10% reduction in Advances
Next 12 months with 20% reduction in Advances
Opening Balance 14.4 13.0 13.0
Advances 4.6 4.1 3.7
Discharges (5.2) (4.7) (4.7)
Other (0.8) 0.2 0.2
Ending Balance 13.0 12.6 12.2
Growth Rate (10)% (3)% (6)%
The below sensitivity analysis on the Company’s portfolio reflects the net result of the impact from these shifts in the market under different scenarios and no mitigating actions by the Company. The below table provides a comparison of the single-family residential mortgage continuity over the trailing 12 months (TTM) ended September 30, 2017 against two illustrative scenarios for the next 12 months. Both scenarios assume a consistent rate of discharge and repayments and exclude sales of mortgages. 1. Scenario 1 assumes a 10% reduction in single-family residential mortgage advances resulting from the impact
of the revisions to B20 2. Scenario 2 assumes a 20% reduction in advances.
7
Q3 2017 Financial Results
Q3 2017 Q2 2017 Q3 2016 YoY
Reported Net Income (Loss) $30.0M ($111.1M) $66.2M ($36.2M)
Reported Diluted EPS $0.37 $(1.73) $1.01 ($0.64)
Revenue $95.4M $(61.3M) $145.1M ($49.7M)
NIM (TEB) 1.85% (0.07%) 2.34% (49 bps)
Loans Under Administration $23.2B $25.9B $26.0B ($2.8B)
Provision as a % of Gross Uninsured Loans (0.14%) 0.07% 0.04% (18 bps)
NPL Ratio 0.28% 0.23% 0.31% (3 bps)
Total Capital Ratio 21.74% 17.54% 16.97% 477 bps
CET1 Ratio 21.25% 17.06% 16.54% 471 bps
# of Commons Shares O/S (000’s) 80,246 80,246 64,559
Net income for Q3 2017 includes impact of lower residential and commercial loan balances and originations, higher deposit interest costs and elevated non-interest expense. Net loss for Q2 2017 includes the impact of elevated expenses of approximately $233.7 million pretax ($173.5 million after tax). These expenses were in addition to normal operating costs and reduced diluted earnings per share by $2.70 resulting in the reported net loss in Q2 2017.
NIM declined in Q2 2017 due primarily to elevated expenses incurred during the quarter comprising primarily of the $100 million commitment fee incurred on the initial $2 billion emergency credit facility.
Provision for credit losses (PCL) decreased in Q3 2017 reflecting the impact of a $6.5 million release in the collective allowance related to the sale of $1.2 billion of commercial portfolio assets in Q2 and Q3 2017. The release in the collective allowance was offset by a corresponding increase to the loss on sale of the mortgages included in non-interest income. PCL as a percentage of gross uninsured loans was (0.14%), or 0.07% if the impact of the reduction in the collective allowance was excluded for ease of comparison in Q3 2017, compared to 0.04% at Q3 2016.
CET 1 ratio improved to 21.25% in Q3 2017 due primarily to lower loan balances. Common shares outstanding increased to 80,246 at end of Q3 2017 from 64,559 at Q3 2016 following the closing of the private placement for the
equity investment by a subsidiary of Berkshire Hathaway of approximately $153.2 million to acquire a 19.99% equity stake in the Company.
Asset Liability Management model based on matched or long funding principle
Near term non-securitized mortgage book run off exceeds repayment schedule of contractual GIC maturities
Securitization funding provides the Company with low cost long-term matched funding
Nominal amount of demand deposits remaining
8
Long Funded Balance Sheet
Maturity Profile as at September 30, 2017 ($ bn)
1. The total contractual fixed term deposit maturities exclude the Company’s outstanding HISA deposits of $176 million and Oaken Savings deposits of $179 million as of September 30, 2017.
2.7
6.5
2.6
0.4
12.3
1.8
4.3 5.1
1.8
13.4
0
2
4
6
8
10
12
14
0-3 months 3-12 months 1-3 years 3-5 years Total
Non-Securitized Contractual Mortgage Maturities
Contractual Fixed Term Deposit Maturities
9
Total GIC Balance
14.0
13.0
12.0
5.0
11.0
10.0
4.0
9.0
8.0
7.0
6.0
3.0
2.0
1.0
0.0
Broker
Oaken
Jul 31
12.5
10.7
1.8
Jun 30
12.3
10.6
1.7
May 31
12.2
10.6
1.6
Apr 30
12.9
11.2
1.7
Mar 31
13.1
11.4
1.7
Sep 30
12.7 12.4
10.8
1.9
10.5
2.0
Aug 31 9
In ($) Billions
10
Prudently Managed Mortgage Book
LTV Ratio (Q1 2014 – Present) LTV Ratios by Geography (Q3 2017)
Uninsured Residential Mortgages (1)
British Columbia 51.7%
Alberta 64.3%
Ontario 53.2%
Quebec 61.5%
Other 61.8%
Total 53.7%
Uninsured Residential Mortgages Originated Q3 2017
British Columbia 65.1%
Alberta 64.1%
Ontario 69.2%
Quebec 72.8%
Other 70.9%
Total 68.9%
1) Based on Teranet -National Bank House Price Index.
50.0%
55.0%
60.0%
65.0%
70.0%
75.0%
80.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2014 2015 2016 2017
Weighted-average LTV Ratios for Uninsured Residential Mortgages
Weighted-average LTV Ratios for Uninsured Residential MortgagesOriginated During the Period
Maintained strong credit quality, non-performing loans remained at low levels Close monitoring of non-performing loans and proactive measures to minimize losses 98.5% of the mortgage portfolio is current, with 0.31% over 90 days past due
11
Non-Performing vs. Net Write Offs as a % of Gross Loans
0.28%
0.03%
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
0.40%
Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017
Net Non-Performing Loans as a Percentage of Gross Loans
Net Writeoff's as a Percentage of Gross Loans
Q3 2017
12
Mortgage Originations
-
200.0
400.0
600.0
800.0
1,000.0
1,200.0
1,400.0
1,600.0
Traditional Single-familyResidential Mortgages
ACE Plus Mortgages Accelerator Single-familyResidential Mortgages
Residential CommercialMortgages
Non-Residential CommercialMortgages
Q3 2016
Q4 2016
Q1 2017
Q2 2017
Q3 2017
(in millions) Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017
Traditional Single-family Residential Mortgages $1,416.8 $1,325.9 $1,458.8 $699.9 $201.1
ACE Plus Mortgages(1) $116.7 $106.5 $106.0 $56.1 $1.5
Accelerator Single-family Residential Mortgages $446.7 $346.7 $147.6 $84.2 $21.3
Residential Commercial Mortgages $212.8 $371.5 $294.8 $89.8 $99.1
Non-Residential Commercial Mortgages $347.6 $277.3 $338.4 $188.1 $62.0
Total Mortgage Originations $2,540.7 $2,427.8 $2,345.6 $1,118.1 $385.1
1) ACE Plus product discontinued during Q2 2017
13
Net Interest Margin
NIM (TEB)(1)
NIM Non Securitized Assets (TEB) NIM Securitized Assets (TEB)
Spread of Non-Securitized Loans over Deposits (TEB)
1) NIM declined in Q2 2017 from Q1 2017 due primarily to elevated expenses incurred during the quarter comprising primarily of the $100 million commitment fee incurred on the initial $2 billion emergency credit facility.
2) In Q3 2017 NIM increased from the previous quarter due to the net loss in Q2 2017 which resulted from elevated costs of the liquidity event experienced in the second quarter noted above. While returning to positive levels in Q3 2017, NIM continues to be negatively impacted by interest expense on the BH facility. As well, elevated deposit balances and higher rates on new deposits maintained downward pressure on net interest margins.
2.35% 2.38%
2.44%
(0.07%)
1.85%
Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017
2.70% 2.73%
2.76%
(0.19%)
2.21%
Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017
2.89% 2.86%
2.93%
(0.41%)
2.62%
Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017
0.45% 0.53%
0.75% 0.50%
0.43%
1.85% 1.90%
1.58% 1.63%
1.17%
Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017
CMHC-Sponsored SecuritizationBank-Sponsored Securitization
As of September 30, 2017, aggregate available liquidity and credit capacity totaled approximately $4.66 billion including the undrawn amount of $2 billion under the Berkshire credit facility.
Q3 2017 Capital ratios:
― CET 1 Ratio 21.25% ― Tier 1 Ratio 21.25% ― Total Capital Ratio 21.74%
Capital ratios improved due to the decline in
the overall loan portfolio.
14
Capital & Liquidity Update
16.54% 16.55% 16.34% 17.06% 21.25%
Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017
16.97% 16.97% 16.77% 17.54% 21.74%
Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017
Basel III Common Equity Tier 1
Basel III Total Capital
Leverage Ratio
7.08% 7.20% 7.29% 7.19%
7.89%
Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017
Total on-balance sheet mortgage portfolio balance of $14.7B, of which 93.0% is residential mortgages 21.2% of the residential mortgage portfolio is insured Weighted average current loan-to-value (LTV) of the uninsured residential mortgage portfolio
was 53.7% 98.5% of the mortgage portfolio is current, with 0.31% over 90 days past due Condominiums represent 8.1% of the residential mortgage portfolio, with 25.1% insured
15
Mortgage Lending Q3 2017 Highlights
Single-Family Residential Loans by Province Insured Uninsured Equity Line Visa Total %
British Columbia $267.4M $531.2M $2.5M $801.1M 6.0%
Alberta $365.4M $271.9M $9.2M $646.5M 4.9%
Ontario $1,852.8M $8,967.9M $304.5M $11,125.3M 83.8%
Quebec $112.7M $238.5M $1.2M $352.5M 2.7%
Other $217.9M $136.7M $1.8M $356.4M 2.7%
Total $2,816.4M $10,146.2M $319.2M $13,281.8M 100.0%
16
Strengthened Governance and Risk Management We have strengthened our Governance and invested significantly in enhancing our systems and controls
Renewed Board of Directors – Stewards focused on driving governance, risk management and strategy with oversight of company management and performance. Governance Renewal • Added five new independent experienced Directors to the Board with deep finance, banking and investment
experience; Named new Chair • Appointed new Chairs for all Board committees • Appointed new Chief Executive Officer & President, new Chief Financial Officer and EVP, Sales Strengthened Governance – Key Highlights • Risk Appetite Statement • Risk and compliance performance objectives that apply to all employees • Senior leadership mandates include specific risk and compliance accountabilities • Share ownership guidelines for senior executives to avoid excessive risk-taking behavior Strengthened and Invested in systems and controls – Key Highlights • Developed new business performance metrics, key risk indicators and other analytics to enhance proactive risk
management • Strengthened business-line controls within Residential Lending • Invested in IT systems to increase visibility and to enhance internal controls within Residential lending;
Introduced a new broker facing origination platform (LOFT) • Implemented an industry-leading fraud detection system across the entire residential lending portfolio to help
mitigate mortgage fraud at origination
Maintain adequate capital and liquidity at all times. Only take risks that are transparent and manageable, and that fit our business strategy. Do not have exposure to any significant single loss event on any individual transaction or
acquisition. Do not take risks that are expected to result in significant volatility in earnings or shareholder
returns. Conduct business with honesty, integrity, respect and high ethical standards. Strive to protect the Company’s reputation at all times, with all key stakeholders. Adopt a risk-based approach for identifying, assessing, managing, mitigating and monitoring risk
that meets regulatory requirements and expectations. Do not tolerate business activities that are not supported by appropriate processes and internal
controls that are designed to detect, deter and prevent activity associated with financial crime, or maintain relationships with persons or entities believed to be engaged in illegal or illicit activities.
Incorporate risk and compliance measures into performance and reward measurement programs.
17
Risk Appetite Framework
Growing our business includes taking risks in a responsible manner to serve our customers. We do so responsibly and within our Risk Appetite Framework:
FIRST LINE OF DEFENSE
Business units, Corporate functions
As risk owners, management is accountable for identifying,
assessing, measuring, managing, monitoring, and
reporting on the risks generated within their respective areas of
responsibility. Business risk management teams are
embedded within the first line of defense to assist
management in carrying out their risk and compliance
responsibilities. 18
Risk Management Framework
Integrated Risk Monitoring, Measuring and Reporting: Business Unit – To – Senior Management – To – Board of Directors
Risk governance is based on a 3 Lines of Defense model:
SECOND LINE OF DEFENSE
Enterprise Risk Management, Corporate
Compliance & Finance
Responsible for risk and compliance management
frameworks and the independent oversight of its implementation. Together with Finance, they are also
responsible for the independent assessment,
monitoring and reporting of risk-taking activities.
THIRD LINE OF DEFENSE
Internal Audit
Provides independent, objective assurance to the
Board of Directors and Executive Management by
assessing the effectiveness of governance, risk
management and control processes.
19
Investor Relations/ Media Contacts
Investor Relations Media Relations
Home Capital Group Inc. Attention: Investor Relations 145 King St. West, Suite 2300 Toronto, ON, M5H 1J8 Canada Phone: (416) 933-5652 Toll Free Phone: (800) 990-7881 Inquiries: [email protected]
Laura Lepore, AVP Investor Relations To arrange a meeting: Laura Lepore Phone: (416) 933-5652 Email: [email protected]
Laura Lepore, AVP, Investor Relations Phone: (416) 933-5652 Email: [email protected]