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Home Capital tries to calm investors in wake of OSC allegations

A ‘for sale’ sign is seen in this file photo. Home Capital’s chairman Kevin Smith said Friday that he is ‘confident about the company and its future’ the day after the firm lost more than a fifth of its stock market value.

©Eyewire

Shares in Home Capital Group Inc. pared some losses on Friday after the company sought to assuage investor concerns about a regulatory probe over alleged securities-laws violations.

Chairman Kevin Smith released an early-morning message to shareholders expressing confidence in the company's future, adding Canada's largest alternative mortgage lender planned to defend itself against regulatory action by the Ontario Securities Commission.

Home Capital lost more than one-fifth of its market value on Thursday after the OSC accused the company of making "materially misleading statements" to investors in a statement of allegations. By withholding information about fraud by mortgage brokers in its broker channel, the company allegedly violated securities laws, the OSC said.

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Related: Home Capital Group: A timeline

"I recognize that we have had our share of challenges recently and the confidence of our stakeholders has been understandably shaken," Mr. Smith said in his statement.

"The best way for us to move forward is to view these challenges as opportunities to improve the way we do business and to regain your confidence and our strong reputation," he added.

On Friday, the company's shares closed up 8.7 per cent on the Toronto Stock Exchange. Shares in the company fell by 20.6 per cent on Thursday as investors weighed the potential damage from regulatory action, the impact on the brand and potentially weaker funding capabilities.

Also on Friday, a spokesperson for Home Capital said that Bank of Nova Scotia stopped offering GICs and investment savings accounts (ISAs) from Home Trust, a subsidiary of Home Capital, across all of its platforms. A Scotiabank spokesperson confirmed the bank made the change on Friday as part of an "ongoing review of third-party products." Lenders such as Home Capital rely on deposits, such as GICs, to fund mortgage loans.

National Bank Financial Inc. analyst Jaeme Gloyn said it's too early to tell if the Scotia development in itself is material, but that "directionally it's negative," especially if other major banks follow Scotiabank's move.

The OSC's statement of allegations, which was released late Wednesday, also named its current chief financial officer and two former chief executive officers. The OSC's allegations have not yet been proven. The first hearing into the matter is scheduled for early May.

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The company also said it expects to report first-quarter earnings of 90 cents a share, a little better than analysts were predicting.

"While [earnings] above forecast is typically positive, this press release did not mention origination volumes," said Marc Charbin, analyst with Laurentian Bank Securities, in a note to clients on Friday. "This is perhaps an equally important metric as it will be indicative of the company's future earnings potential."

Fully audited financials will be released on May 3.

David Baskin, president of Baskin Wealth Management, which manages more than $1-billion for high net-worth clients, called the recent sell-off in Home Capital "panicked emotional nonsense selling."

Home Capital accounted for less than 1 per cent of holdings for Baskin Wealth. He hasn't sold any shares in Home Capital since the OSC's allegations were made public and says "a couple of brave clients" actually bought shares on Friday's open.

Mr. Baskin acknowledged that the company has "stumbled" and "gotten into bed with some people they shouldn't have," but he thinks the company is fundamentally sound. He calls Home Capital's valuation, which is around five times earnings, "unduly cheap" and points out the company is well capitalized.

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About the Author
Capital Markets Reporter

Niall McGee joined the Globe and Mail in 2014 as a capital markets reporter. Previously, he spent a decade at Business News Network (BNN) as a reporter and segment producer. In 2016, he won a National Newspaper Award (NNA) in business alongside veteran reporter Jacquie McNish for an investigative series into alleged insider trading at online gambling company Amaya Inc. More

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