Shares in alternative lender Home Capital took a beating on Friday — despite the company posting record quarterly results the day before — because investors didn't seem to like what they heard from management in a conference call laying out how they plan to turn the company around.
On Thursday, Toronto-based Home Capital posted quarterly results that showed higher profit and a record number of new mortgage originations. But investors responded glumly when stock markets opened on Friday, pushing the company's battered shares down as much as 20 per cent at one point, before recovering somewhat late in the day.
After losing 75 per cent of their value in April following an OSC investigation into the company, Home Capital shares have been on a mini-rally from under $6 to around $11 as the company has shaken up its board and made deals to shore up its short term financial position.
But the stock sold off on Friday because despite strong financial performance for the period that ended in March, management did little to assuage fears about what they plan on doing about everything that followed. The stock finished at $9.14, down $1.67.
"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," Home Capital said in a release.
Unlike other banks that raise money in a variety of other ways, most of the money that Home Capital obtains to then lend out in mortgages comes from savings accounts and GICs from individuals
Those accounts have been steadily drained of late as savers have become fearful about the company's ability to stay in business. Last month, Home Capital borrowed money from a pension plan called HOOPP that came with an interest rate of 22 per cent on it.
On a conference call to discuss the numbers with analysts, Home Capital said it still hopes to find better funding sources, and is currently trying to sell off assets to pay down that loan. "Given the cost of the $2 billion credit line, repayment of the amounts drawn under this facility in a timely fashion is an essential part of management's plans," acting CFO Robert Morton said.
Alan Hibben, a former Royal Bank of Canada executive who was brought in a week ago to bolster Home Capital's board, fielded many questions from analysts on the call, who were eager to hear about the company's long term plans — not just how it plans to withstand the short term.
Hibben said Home Capital has "a number of people interested in us" for a possible sale, but the company prefers to continue to operate independently.
While the earnings release had a number of positive numbers in it — including higher profits and a record $2.3 billion in new mortgages — the period doesn't include the time since April when most of the company's problems began. "The view as of March 31 looked promising," Industrial Alliance analyst Dylan Steuart said, but "given the events subsequent to quarter-end, little of that is consequential to the prospects going forward."
- ANALYSIS: Victims of real estate uncertainty
The company's main problem is a lack of confidence, which is why savers have been pulling out their money. Savings accounts have dwindled by more than 90 per cent in a month, and even locked-in GICs are showing signed of weakness. Roughly $2.7 billion worth is scheduled to come up for renewal in the next three months, and another $4.3 billion in the next nine months, Laurentian analyst Marc Charbin said.
"[Home Capital] may be experiencing difficulty with any deposit inflows at all," he said in a note. Unless the company can find a reliable and affordable funds, it won't be able to give out mortgages to make money.
Home Capital Hibben said he "fundamentally believed in the funding model of Home Capital," and as such preferred to avoid selling off part or all of the company if possible. "You don't shrink your way to greatness," he said.
"We have some breathing room so that we can address medium and longer-term issues in a thoughtful way," he said. "I don't expect there to be any new, significant, transactions within the next days and weeks."