Fitch Affirms Home Capital Group's Ratings; Outlook Revised to Negative

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NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed the long- and short-term Issuer Default Ratings (IDRs) of Home Capital Group, Inc. (HCG) and its subsidiary, Home Trust Company (HTC) at 'BBB' and 'F2', respectively. The Rating Outlook is revised to Negative from Stable. A complete list of ratings follows this release.

Today's affirmation reflects HCG's consistently robust earnings supported by a strong niche franchise, solid asset quality and stringent cost controls. Providing additional ratings support is the company's sufficient liquidity and sound capital levels. Nonetheless, with over 80% of the company's total lending portfolio residing in the Ontario market, HCG's geographic concentration, narrow product mix, and limited franchise continue to present rating constraints. Furthermore, due to its modest branch network, HCG exhibits a significant reliance on relatively high cost brokered deposits and securitization for funding.

The revision of the Outlook to Negative is based on emerging concerns regarding home price valuations and household debt levels in Canada, which given HCG's focus on non-conventional borrowers could potentially translate into increased credit costs. These risks could potentially be magnified by HCG's concentrated business model.

Predominantly a Canadian residential mortgage lender, the company focuses on borrowers who do not qualify for prime mortgages offered by the major Canadian banks. HCG's typical clients consist of the self-employed, small business owners, individuals with poor or limited credit histories, as well as newly arrived immigrants to Canada. These seemingly higher risk borrowers have not so far translated into higher credit losses for the company however, as net write-offs totaled a mere 0.07% of gross loans for 2011, with net impaired loans to gross loans residing at 0.25% at Dec. 31, 2011. Actual net mortgage charge-offs have averaged less than 0.05% over the past 15 years.

A significant factor contributing to this strong asset quality is the company's underwriting procedures. HCG conducts a labor-intensive customized credit evaluation, with a conservative loan-to-value focus, which has been paramount in maintaining solid asset quality. Credit quality metrics have also benefitted from the relatively favorable economic environment in Canada where housing starts, home sales and property prices have remained favorable. Future performance of the Canadian housing market will remain a central rating consideration in Fitch's analysis of HCG.

HCG uses relatively high cost brokered deposits to satisfy its funding needs, reflecting its modest branch network. HCG also exhibits a significant reliance on Canada Mortgage and Housing Corporation (CMHC) mortgage securitizations for funding purposes. HCG has historically benefited from access to funds through securitization markets and insured deposits. Continued access to these funding sources will be an integral component of the company's liquidity strategy as well as an important consideration in Fitch's evaluation of the company.

Insured mortgages are securitized through CMHC-sponsored transactions. Securitized mortgages previously reported off-balance sheet under Canadian GAAP are now included on balance sheet under IFRS. This, combined with margin compression, has led management to de-emphasize the origination of insured mortgages. However, insured mortgages still represent a significant portion of the mortgage book at approximately 56% at YE11. Mitigating credit risk further and providing some cushion against credit deterioration are the company's sound levels of capitalization. Although, HCG's increased balance sheet, associated with the transition to IFRS, has pressured tangible capital. At YE11, Tier 1 and Total Capital ratios stood at 17.3% and 20.50%, respectively.

Looking ahead, factors that could pressure the ratings include deterioration in the overall housing market, adverse credit performance within HCG's market niche or decreased operating efficiency. Additional downward pressure could come from increased exposure to the condominium market particularly in the Vancouver area, or a significant shift away from the company's core expertise in residential mortgages towards higher yielding and potentially higher risk commercial and personal lending products. Positive rating momentum is constrained considering the company's limited product mix, geographic concentration and franchise.

Headquartered in Toronto with over $17.6 billion in assets at YE11, HCG offers deposits, mortgage lending, and retail credit through HTC, its federally regulated trust subsidiary, and payment card services through its PSiGate subsidiary. While HCG has a presence in Alberta, British Columbia, Quebec, Maritimes, Manitoba and Saskatchewan, the vast majority of the portfolio is located in Ontario.

Fitch has affirmed the following ratings:

Home Capital Group, Inc.

--Long-term IDR at 'BBB';

--Senior Unsecured Debt at 'BBB';

--Viability Rating at 'bbb';

--Short-term IDR at 'F2';

--Support at '5';

--Support Floor 'NF'.

Home Trust Company

--Long-term IDR at 'BBB';

--Viability Rating at 'bbb';

--Short-term IDR at 'F2';

--Support at '5';

--Support Floor 'NF'.

The Outlook is revised to Negative from Stable.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Aug. 16, 2011);

--'Bank Holding Companies' (Aug. 16, 2011).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=649171

Bank Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648612

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch Ratings
Primary Analyst
Fabrice Toka, +1-212-908-0369
Senior Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Joseph Scott, +1-212-908-0624
Senior Director
or
Committee Chairperson
Christopher Wolfe, +1-212-908-0771
Managing Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549
Email: brian.bertsch@fitchratings.com

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