Home Capital earnings take hit, CEO points to mortgage headwinds

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Net income plummeted nearly 18% in the first quarter due to rising custody costs

A cyclist rides past a row of houses in Toronto. A cyclist rides past a row of houses in Toronto. Photo by Cole Burston/Bloomberg Files

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Home Capital Group Inc.’s bottom line was hurt in the first quarter due to rising costs for deposits, but it’s the prospect of a slowdown in rapid mortgage growth that was a bigger cause for concern following Wednesday’s earnings announcement.

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Home Capital’s net income for the three months ended March 31 fell nearly 18 percent year over year to $44.7 million, or $1.02 per share, the lender said.

Rising interest rates have yet to hit the company’s mortgage origination, which rose more than 72 percent to more than $2.76 billion in the quarter. That included a small gain in single-family home mortgage origination, which rose to $2.30 billion from $2.27 billion last quarter.

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“We are beginning to have good momentum in growing our mortgage book, including record originations in our traditional single-family mortgages,” said Yousry Bissada, Home Capital’s president and chief executive officer, in a press release. “Although our net interest margin declined this quarter as our funding costs increased and outpaced mortgage rates, we expect to benefit from margin increases over time as spreads normalize.”

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The company’s net interest margin fell to 2.18 percent from 2.46 percent last quarter.

Home Capital stock was under pressure ahead of the earnings report, falling nearly 14 percent the month before as markets weighed the risks for mortgage lenders in a slowing housing market.

During Wednesday morning’s conference call, Bissada pointed to potential mortgage headwinds, noting that lending growth came amid a more robust mortgage market.

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“We’ve delivered this growth in a market that’s beginning to show signs of slowing down after rapid price and volume growth over the past year,” Bissada said. “Reports from the Canadian Real Estate Association indicate that sales volume for the first three months of the year has weakened from record 2021 levels. We believe this is healthy for the long-term sustainability of the housing market.”

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“We are also seeing upward pressure on interest rates for the first time since the pandemic began,” Bissada added. “The bank has made it clear that it will take the necessary measures to keep inflation under control and maintain price stability.”

Bank of Canada Deputy Governor Carolyn Rogers reiterated the central bank’s mission to curb inflation as interest rates rise, acknowledging that while the tightening cycle can weigh on borrowers, inflation is weighing on everyone right now.

“Canada’s home price growth is unsustainably strong,” Rogers said in a May 3 speech at the Women in Capital Markets conference. “It wouldn’t be bad for the economy if house price growth slowed down a bit, and we expect that to happen as interest rates rise. It has to happen.”

Home Capital stock fell more than seven percent to $28.68 in the morning trading session.

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