Equitable, Home Capital Cash in on Tighter Canada Mortgage Rules

(Bloomberg) -- Equitable Group Inc. and Home Capital Group Inc. are reaping a windfall from Canada's tighter mortgage regulations.

Shares of the alternative lenders are surging as homebuyers seek financing outside the big banks in the wake of new mortgage rules imposed last year and as home prices in big cities such as Toronto remain lofty.

Equitable was up 16% to a record C$93.69 at 1:08 p.m. in Toronto after reporting earnings Tuesday that blew past analysts expectations. Home Capital, which was bailed out by Warren Buffett's Berkshire Hathaway Inc. in 2017, climbed 7.5% to its highest in more than two years.

The rules are making it difficult for some homebuyers to qualify at the big banks but they're still good credits, said Equitable Chief Executive Officer Andrew Moor. The company controls about 35% of the alternative mortgage market in Canada and should see more business amid forecasts for lower interest rates and high levels of immigration, he said.

“We certainly have seen our client portfolio quality improve over the last couple of years,” Moor said in an interview. “The general risk of a house-price correction gets reduced as these rules now get embedded in the system. It's a structural permanent shift and we will continue to see higher credit quality than we've ever had.”

Earnings Surprise

Equitable reported record earnings and a surge in principal retail loans outstanding of C$16.9 billion ($12.8 billion), up 23% from a year ago. Commercial loans outstanding rose 19% to C$7.9 billion. The company said it will increase its dividend at a rate of 20% to 25% per year over the next five years, up from a previous target of 10% per year.

Home Capital is due to report on Aug. 7, with profit seen up about 7%, according to analysts surveyed by Bloomberg.

Equitable also operates Equitable Bank, which offers high-interest savings accounts and guaranteed investment certificates at higher rates than the big banks.

“People understand that Equitable challenges banks and we have really embraced the digital future as a bank online platform,” Moor said.

While all the analysts covering the company have increased their price targets, the stock trades at only 7.6 times estimated forward earnings per share, versus 10 times for comparable companies, according to data compiled by Bloomberg.

“We certainly see people interested in buying” the company, Moor said. “Our thinking is that we can keep growing, we are the ninth-largest bank in Canada, we're growing faster than any of the other ones.”

To contact the reporter on this story: Paula Sambo in Toronto at psambo@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Jacqueline Thorpe, David Scanlan

©2019 Bloomberg L.P.