TORONTO, Feb. 8, 2017 /CNW/ - Home Capital Group ("Home Capital" or "the Company") (TSX: HCG) today reported results for the three and twelve months ended December 31, 2016. This press release should be read in conjunction with the Company's 2016 Annual and Fourth Quarter Consolidated Financial Report including Financial Statements and Management's Discussion and Analysis (MD&A), which are available on Home Capital's website at www.homecapital.com and on SEDAR at www.sedar.com.

Fourth Quarter and Full Year 2016 Highlights

Fourth Quarter 2016, compared with the Fourth Quarter 2015:

• Reported net income was $50.7 million and diluted earnings per share were $0.79, compared with $70.2 million and $1.00
• Adjusted net income was $63.5 million and adjusted diluted earnings per share were $0.98, compared with $71.8 million
• and $1.02
• Adjusted net income and adjusted diluted earnings per share exclude the impact of a goodwill impairment charge of $9.0 million net of tax (or $0.13 diluted earnings per share) for the Company's subsidiary Payment Services Interactive Gateway Inc. (PSiGate), and an intangible asset impairment of $3.8 million net of tax (or $0.06 diluted earnings per share)
• Repurchased approximately $5.7 million of common shares in the quarter. Normal Course Issuer Bid (NCIB) renewed through December 2017, providing ability to repurchase common shares up to 10% of the public float.

Year Ended December 31, 2016, compared with Year Ended December 31, 2015:

• Reported net income was $247.4 million and diluted earnings per share were $3.71, compared with $287.3 million and $4.09
• Adjusted net income was $263.4 million and adjusted diluted earnings per share were $3.95, compared with $288.9 million and $4.11
• Adjusted net income and adjusted diluted earnings per share exclude total impact of $16.0 million net of tax or $0.24 diluted earnings per share⁽¹⁾
• Provision for credit losses as a percentage of gross uninsured loans was 0.05%, compared to 0.06%
• CET 1 capital ratio of 16.55% and Total capital ratio of 16.97%, well in excess of regulatory minimums and internal targets
• Repurchased a total of $199.2 million of common shares inclusive of $150.0 million of common shares through the Substantial Issuer Bid (SIB) and $49.2 million common shares through the NCIB. The resulting outstanding common shares totalled 64,387,519 at the end of 2016

Management Comments

"In 2016 we took significant strides to improve our business and we look forward to building on these accomplishments in 2017," said Martin Reid, President and Chief Executive Officer, Home Capital. "Our core traditional mortgage originations continue to drive revenues alongside stronger performance from our commercial lending business. Our performance was muted by lower-than-anticipated retention and renewal levels and elevated expenses. In addition, as a result of the ongoing review of our goodwill and intangible assets, we recorded a goodwill impairment charge of $9.0 million net of tax reflecting lower expected future profitability of the PSiGate business and an intangible asset impairment of $5.1 million, or $3.8 million, net of tax, related to software development costs."

"In 2017, we remain committed to improving customer retention, increasing our loans under administration and growing revenue as well as lowering our expense base to help drive positive operating leverage and increase profitability. We have launched an expense savings initiative, Project EXPO, which targets, at minimum, an annualized $15.0 million of cost savings based on an annualized run rate of Q4 2016 expenses (excluding items of note), over the course of 2017. This will encompass most expense categories including employees, premises and other operating costs, and will result in restructuring provisions to be taken in 2017. Moving forward, we will continue to make the necessary investments that will enable the Company to meet its strategic goals, but in a manner that results in future costs rising in a more measured way."

"In 2016 we were pleased to return $199.2 million to shareholders through a SIB and through our NCIB. With two dividend increases in 2016, we returned an additional $65.2 million to shareholders. We maintained a strong CET 1 capital ratio of 16.55%, well in excess of regulatory minimums and internal targets. Our solid balance sheet will continue to provide the necessary foundation required to execute on our strategy, remain agile in an evolving economic and regulatory landscape, and support investments in the business to deliver excellent customer service."

"We believe our 2017 priorities put us on track to deliver our long-term goals of generating prudent and profitable growth, providing healthy returns to our shareholders and solidifying our position as the leading provider of financial services to underserved Canadians."

Performance Goals

Following completion of the Company's annual planning process and review of the prior mid-term targets, Home Capital Group is introducing new performance goals moving forward.  These goals are consistent with the Company's strategic plans and long-term objectives. The Company expects to achieve these goals over the long-term, and management will report on progress regularly.

 

Management expects that 2017 will be a transition period in which cost reductions and revenue generation initiatives continue to unfold. Successful delivery of these items is expected to translate into improved results consistent with the above goals later in 2017 and beyond.

2017 Strategic Priorities

The Company has updated its vision, mission, values, and strategic priorities, which inform and are reflected in new performance goals. Home Capital's foundation and culture support achievement of the Company's strategic priorities and vision of being a leader in providing financial services to underserved Canadians. The Company's foundation is comprised of the key strengths of Talent, Service, Technology, Agility, and Risk Management.

Beginning in 2017 and moving forward, Home Capital is focused on the following strategic priorities to position the Company for long-term success:

• Prudent Growth in the Core Residential Mortgage Business
• Provide Innovative Products and Solutions
• Positive Operating Leverage
• Efficient Balance Sheet and Capital Utilization

Fourth Quarter Ended December 31, 2016 Summary

Home Capital reported fourth quarter 2016 net income of $50.7 million, compared with net income of $70.2 million in Q4 2015. Diluted earnings per share (EPS) for Q4 2016 were $0.79, a 21% decrease from Q4 2015. Adjusted net income was $63.5 million in Q4 2016, compared to $71.8 million a year ago. Adjusted EPS was $0.98, compared to $1.02.

Q4 2016 adjusted net income and EPS exclude the impact of a goodwill impairment charge of $9.0 million net of tax (or $0.13 diluted EPS) for PSiGate, and an intangible asset impairment of $3.8 million net of tax (or $0.06 diluted EPS).

Q4 2016 results reflect the Company's continued profitability as measured by its net interest margin (TEB) of 2.38%, a healthy loan portfolio as evidenced by continued low non-performing loans and credit losses, and a strong capital position.

At the end of Q4 2016, total loans under administration increased to $26.42 billion, driven by a solid core residential business and a growing commercial lending portfolio. 

Core Business

A continued focus on growing mortgage origination volumes resulted in a 12.7% increase in total mortgage originations in Q4 2016 to $2.43 billion, compared to Q4 2015.  Total originations decreased 4.4% from Q3 2016 mainly due to seasonality. Q4 2016 total mortgage origination growth was led by the traditional single-family line of business which increased 14.0% to $1.33 billion compared to Q4 2015, and by strong performance of the commercial lending line of business.

For the year ended December 31 2016, total mortgage originations were $9.23 billion, up 14.5% from 2015, reflecting good progress on initiatives to increase volumes through improved service levels. The core traditional single-family residential mortgage originations increased 3.5% in 2016 to $4.99 billion compared to 2015. Ace Plus originations grew to $407.8 million from $253.1 million in 2015, while Accelerator originations increased 16.5% to $1.62 billion compared to 2015.  Commercial mortgage originations continued to grow with strong performance in both multi-unit residential and non-residential mortgages.

Following the Government of Canada's announcement in early October 2016, which placed certain limitations on eligibility criteria for low-ratio government-backed insured mortgages (mortgage rules), the Company reported  that these limitations may significantly reduce the Company's ability to profitably originate and fund these mortgages (see the Company's press release dated October 20, 2016). Specifically, low-ratio lending for the purpose of refinancing and rental properties will be primarily impacted within the Company's Accelerator program.

The Company also reported that since the Accelerator program has traditionally been a low margin product offering it anticipates the negative impact on net income before tax to be relatively limited at approximately $6.5 million, and after-tax net income of approximately $4.8 million on an annualized basis. This estimate assumes that the Company sells its residual interest in fixed-rate mortgages which is an activity that the Company does from time to time.

While the Company did experience some weakness in the Accelerator insured product primarily in December, the mortgage rules had minimal impact on overall 2016 results. Management expects that the impact of these rules on the housing market, and on consumers and competitors, will become clearer as we move further into 2017, especially as the seasonally active spring market arrives. Further policy changes, particularly pertaining to risk sharing, are expected to become more defined in 2017.

Consumer Lending

Consumer lending, comprising credit cards, lines of credit and other consumer retail loans, continues to be an important source of loan assets with attractive returns. While representing 4.2% of the total on-balance sheet loan portfolio, these assets generated 7.7% of the interest income from loans for the quarter.

Deposits

At the end of Q4 2016, total deposits were $15.89 billion. Approximately 28.9% of deposits were from diversified sources. In addition to sourcing deposits through investment dealers and deposit brokers, diversification continues to be a focus that includes growing deposits through Oaken Financial, a direct-to-consumer business, and through Home Bank. In Q4 2016, the ending balance of Oaken deposits was $1.77 billion, up 62.6% from the end of 2015, demonstrating significant progress in the Company's efforts towards deposit diversification.

Operational Highlights

Home Capital continued to deliver strong credit performance, with net non-performing loans as a percentage of gross loans (NPL ratio) at 0.30% at the end of Q4 2016, consistent with 0.31% at the end of Q3 2016 and slightly higher than 0.28% in Q4 2015. These results reflect the high credit quality of the Company's loan portfolio resulting from regulatory changes to mortgage rules over the past few years, among other variables and are supported by the Company's continued investments in its risk management framework and control infrastructure.

During 2016, the Company invested in processes to improve service and retention levels. The Company has improved response times for commitments within its risk management framework while ensuring the documentation process is completed quickly and accurately. Efforts to improve retention during 2016 did not materialize as planned, resulting in lower-than-anticipated retention levels which also muted revenue growth, although some progress was seen later in Q4 2016. As a result, management is increasing efforts to change processes to significantly improve retention levels of existing customers, especially those seeking early discharge.

Non-interest expenses in Q4 2016 increased to $71.0 million from $54.7 million in Q4 2015. As a result of the ongoing review of goodwill and intangible assets, Q4 2016 expenses included a goodwill impairment charge of $9.0 million reflecting lower expected future profitability of the PSiGate business and an intangible asset impairment of $5.1 million. Full year 2016 expenses totaled $238.9 million, up 25.3% compared to $190.7 million in 2015 as a result of elevated costs and investments across the business. In addition, full year expenses include the costs related to goodwill impairment and intangible asset impairment, and $5.1 million in severance and other related costs recorded in Q1 2016.

The Company is working hard to become more efficient and reduce expenses to achieve positive operating leverage, a key priority. In Q3 2016, the Company announced it would take a hard look at expenses which have significantly outpaced revenue growth over the last year. As a result, the Company has started to implement an expense-savings initiative, Project EXPO, which targets, at minimum, an annualized $15.0 million of cost savings based on an annualized run rate of Q4 2016 expenses (excluding items of note), over the course of 2017. Project EXPO will encompass most expense categories including employees, premises and other operating costs, and will also result in restructuring provisions to be taken in 2017. Moving ahead, management will continue to make the necessary investments required to enable the Company to meet its strategic goals, but in a manner that results in future costs rising in a more measured way. While this is a key initiative for 2017, a focus on effectively managing expenses company-wide will remain an ongoing operational priority.

Strong and Conservative Financial Position

Home Capital continued to focus on maintaining a strong and conservative financial position while delivering value to shareholders in Q4 2016 and the full year 2016. Home Capital delivered ROE and adjusted ROE of 15.3% and 16.3%, respectively.

With two dividend increases, a SIB and share buybacks through the NCIB, the Company returned more than $264 million to shareholders in 2016. The Company's capital position remained strong with a CET 1 ratio of 16.55% at year end, well in excess of regulatory minimums and internal targets. The Company's strong balance sheet continues to provide a firm foundation that will enable management to execute on its longer term strategy and continue to support investments made in the business to deliver a consistent and optimal experience for all customers and stakeholders.

Subsequent to the end of the quarter, and in light of the Company's performance, profitability and strong financial position, the Board of Directors approved a quarterly dividend of $0.26 per common share payable on March 1, 2017 to shareholders of record at the close of business on February 17, 2017.

Outlook

Home Capital has built a solid foundation comprised of its strong balance sheet and its core traditional business. In 2016, the Company completed a review of its strategic agenda, business and operational initiatives to ensure its strategic priorities remain aligned with the Company's long-term goals of generating prudent and profitable growth, providing healthy returns to shareholders and solidifying Home Capital's position as the leading provider of financial services to underserved Canadians.

Looking ahead, the Company is committed to building on its foundation by more stringently managing costs as one of the ways to drive positive operating leverage, reviewing product offerings and related operations, and strengthening revenue growth.

The Board of Directors and management expect that Home Capital will deliver on its long-term business and financial performance goals, and continue to generate solid shareholder returns in 2017 and beyond.                                  

The Company's 2016 Annual and Fourth Quarter Consolidated Financial Report, including Management's Discussion and Analysis, for each of the three- and twelve-month periods ended December 31, 2016 is available at www.homecapital.com and on the Canadian Securities Administrators' website at www.sedar.com.

Fourth Quarter and Year-End 2016 Results Conference Call and Webcast

The conference call will take place on Thursday, February 9, 2017, at 8:00 a.m. ET. Participants are asked to call approximately 10 minutes in advance at 647-427-7450 in Toronto or toll-free 1-888-231-8191 throughout North America. The call will also be accessible in listen-only mode on Home Capital's website at www.homecapital.com in the Investor Relations section of the website.

Conference Call Archive

A telephone replay of the call will be available between 11:00 a.m. ET Thursday, February 9, 2017 and 12:00 a.m. ET Thursday, February 16, 2017 by calling 416-849-0833 or 1-855-859-2056 (enter passcode 44438639). The archived audio webcast will be available for 90 days on CNW Group's website at www.newswire.ca and Home Capital's website at www.homecapital.com.

Annual Meeting Notice

The Annual Meeting of Shareholders of Home Capital Group Inc. will be held at One King West, Grand Banking Hall, Toronto, Ontario, M5H 1A1, on Thursday, May 11, 2017 at 11:00 a.m. ET. Shareholders and guests are invited to join Directors and Management for refreshments following the Annual Meeting. All shareholders are encouraged to attend.

 

 

Items of Note

Items of note are removed from reported results in determining adjusted results. Adjusted results are designed to provide a better understanding of how management assesses underlying business performance and to facilitate a more informed analysis of trends. Adjusted results are determined after removing items of note from reported results.

The Company's results were affected by the following items of note that aggregated to a negative impact of $16.0 million, net of tax, or $0.24 diluted earnings per share in 2016:

• $9.0 million of goodwill impairment loss related to the Company's PSiGate business ($9.0 million net of tax and $0.13 diluted earnings per share).
• $5.1 million of intangible asset impairment loss related to internally developed software costs ($3.8 million net of tax and $0.06 diluted earnings per share).
• Expenses including severance and other related costs in the amount of $5.1 million ($3.7 million, net of tax and $0.06 diluted earnings per share), that were recognized in the first quarter of 2016.
• Positive adjustment to gain recognized on the acquisition of CFF Bank in the amount of $651 thousand ($478 thousand, net of tax and $0.01 diluted earnings per share).

The Company's results were also affected by the following items of note in 2015:

• $0.7 million in acquisition costs and $3.5 million in integration costs, less $2.1 million in relation to a bargain purchase gain for a net negative impact of $2.1 million related to the acquisition of CFF Bank in 2015 ($1.6 million after tax and $0.02 diluted earnings per share).

 

 

 

 

 

 

Management's Responsibility for Financial Information

The Company's Audit Committee reviewed this document along with the Company's 2016 Annual and Fourth Quarter Consolidated Financial Report.  The Company's Board of Directors approved both documents prior to their release.   A full description of management's responsibility for financial information is included in the Company's 2016 Annual and Fourth Quarter Consolidated Financial Report.

Caution Regarding Forward-looking Statements

From time to time Home Capital Group Inc. makes written and verbal forward-looking statements. These are included in the Annual Report, periodic reports to shareholders, regulatory filings, press releases, Company presentations and other Company communications. Forward-looking statements are made in connection with business objectives and targets, Company strategies, operations, anticipated financial results and the outlook for the Company, its industry, and the Canadian economy. These statements regarding expected future performance are "financial outlooks" within the meaning of National Instrument 51-102.  Please see the risk factors, which are set forth in detail in the Risk Management section of the Company's 2016 Annual and Fourth Quarter Consolidated Financial Report as well as the Company's other publicly filed information, which is available on the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com, for the material factors that could cause the Company's actual results to differ materially from these statements.  These risk factors are material risk factors a reader should consider, and include credit risk, liquidity and funding risk, structural interest rate risk, operational risk, investment risk, strategic risk, reputational risk, compliance risk and capital adequacy risk along with additional risk factors that may affect future results. Forward-looking statements can be found in the Report to the Shareholders and the Outlook section in the Annual Report. Forward-looking statements are typically identified by words such as "will,"  "believe," "expect," "anticipate," "intend," "should," "estimate," "plan," "forecast," "may," and "could" or other similar expressions. 

By their very nature, these statements require the Company to make assumptions and are subject to inherent risks and uncertainties, general and specific, which may cause actual results to differ materially from the expectations expressed in the forward-looking statements.  These risks and uncertainties include, but are not limited to, global capital market activity, changes in government monetary and economic policies, changes in interest rates, inflation levels and general economic conditions, legislative and regulatory developments, competition and technological change. The preceding list is not exhaustive of possible factors.

These and other factors should be considered carefully and readers are cautioned not to place undue reliance on these forward-looking statements. The Company presents forward-looking statements to assist shareholders in understanding the Company's assumptions and expectations about the future that are relevant in management's setting of performance goals, strategic priorities and outlook. The Company presents its outlook to assist shareholders in understanding management's expectations on how the future will impact the financial performance of the Company. These forward-looking statements may not be appropriate for other purposes. The Company does not undertake to update any forward-looking statements, whether written or verbal, that may be made from time to time by it or on its behalf, except as required by securities laws.

Assumptions about the performance of the Canadian economy in 2017 and its effect on Home Capital's business are material factors the Company considers when setting its performance goals, strategic priorities and outlook.  In determining expectations for economic growth, both broadly and in the financial services sector, the Company primarily considers historical and forecasted economic data provided by the Canadian government and its agencies.  In setting and reviewing its performance goals, strategic priorities and outlook for 2017, management's expectations continue to assume:  

• The Canadian economy is expected to be relatively stable in 2017, supported by expanded Federal Government spending; however, it will continue to be impacted by adverse effects related to fluctuations in oil prices and other commodities. The Company has limited exposure in energy-producing regions.
• Generally the Company expects stable employment conditions in its established regions; however, unemployment rates in energy producing regions are expected to remain elevated in 2017. Also the Company expects inflation will generally be within the Bank of Canada's target of 1% to 3%, leading to stable credit losses and consistent demand for the Company's lending products in its established regions. Credit losses and delinquencies in the energy-producing regions may increase, but given the Company's limited exposure, this is not expected to be significant.
• The Canadian economy will continue to be influenced by the economic conditions in the United States and global markets and further adjustments in commodity prices; as such, the Company is prepared for the variability to plan that may result.
• The Company is assuming that interest rates will remain at the current very low rate for 2017. This is expected to continue to support relatively low mortgage interest rates for the foreseeable future.
• The Company believes that the current and expected levels of housing activity indicate a stable real estate market overall. Please see Market Conditions under the 2017 Overall Outlook section of the 2016 Annual and Fourth Quarter Consolidated Financial Report for more discussion on the Company's expectations for the housing market and the impact of the recent changes unveiled by the government to the mortgage market.
• The Company expects that consumer debt levels, while elevated, will remain serviceable by Canadian households.
• The Company will have access to the mortgage and deposit markets through broker networks.

Non-GAAP Measures

The Company has adopted IFRS as its accounting framework. IFRS are the generally accepted accounting principles (GAAP) for Canadian publicly accountable enterprises for years beginning on or after January 1, 2011. The Company uses a number of financial measures to assess its performance.  Some of these measures are not calculated in accordance with GAAP, are not defined by GAAP, and do not have standardized meanings that would ensure consistency and comparability between companies using these measures.  Definitions of non-GAAP measures can be found under Non-GAAP Measures in the Management's Discussion and Analysis included in the Company's 2016 Annual and Fourth Quarter Consolidated Financial Report.

 Regulatory Filings

The Company's continuous disclosure materials, including interim filings, annual Management's Discussion and Analysis and audited consolidated financial statements, Annual Information Form, Notice of Annual Meeting of Shareholders, and Proxy Circular are available on the Company's website at www.homecapital.com and on the Canadian Securities Administrators' website at www.sedar.com.

Home Capital Group Inc. is a public company, traded on the Toronto Stock Exchange (HCG), operating through its principal subsidiary, Home Trust Company. Home Trust is a federally regulated trust company offering deposits, residential and non-residential mortgage lending, securitization of insured residential first mortgage products, consumer lending and credit card services.  In addition, Home Trust offers deposits via brokers and financial planners, and through its direct to consumer brand, Oaken Financial.  Home Trust also conducts business through its wholly owned subsidiary, Home Bank. Licensed to conduct business across Canada, Home Trust has offices in Ontario, Alberta, British Columbia, Nova Scotia, Quebec and Manitoba.

SOURCE Home Capital Group Inc.

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