Home Capital Group - 2012 Third Quarter Update

As ever, Home Capital Group posted stellar results in the third quarter.  Earnings were up 18.3% (EPS increased slightly faster, at 18.7%), and return on equity was 25.6%.  Sharply increased earnings allowed the company to add to their dividend, which now stands at $0.26 per quarter, for a 2% yield.  Dividends, the CEO pledged, will amount to about 15% of earnings over time, meaning that they'll increase at roughly the same rate as earnings.

At Home Capital Group, strong earnings never come at the cost of higher risk or a weaker balance sheet.  Credit quality remains rock-solid: net non-performing loans were just 0.28% of overall loans, and provisions for credit losses stood at 0.10%.  On the balance sheet, the tier 1 capital ratio was nearly 17%, while total capital ratio was nearly 21%.

The company addressed the much discussed topic of Toronto's condo market.  HCG's exposure to the condo market in general is about 7% of their residential mortgage portfolio.  However, half of those are insured (no credit exposure), and about 60% of the other half are townhouses, which are very popular.  Townhouses have a position in the market that is much closer to single family dwellings, rather than high rise condos, which represent 1-1.5% of their residential mortgage portfolio.  In short, whatever the problems that may come from Toronto's overheated condo market, HCG is unlikely to be affected much.  In general, management reiterated its long-held position that the Canadian real estate market is not likely to implode, though they conceded that prices could correct by 5-10%.

The company sees opportunities for significant growth far into the future, in part because the big banks are pulling back in certain areas, which will increase the pool of potential lenders that HCG caters to.  At current prices, the stock trades at perhaps 8 times 2012 earnings, with those earnings primed to growth rapidly in the years to come, offering long-term investors a tremendous opportunity. 

My original analysis of Home Capital Group is here.

 

Disclosure: At the time this article was posted, the author had a long position in HCG.

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