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Apr 27, 2017

Scotiabank sees little long-term fallout for big banks from Home Capital plunge

Home Capital rallies on 'strategic options' statement

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Despite Wednesday’s plunge in shares of Home Capital Group Inc. (HCG.TO), there will likely be little long-term fallout for Canada’s major banks – and those banks are unlikely to step in and buy shares of the troubled mortgage lender,  says a new report from Scotiabank.

“We have a hard time viewing the challenges (Home Capital) is facing as a systemic event, particularly since there is no indication of credit deterioration in the mortgage portfolio of (the company),” the report said.

Shares of Home Capital rose sharply Thursday after the company announced it had secured a $2 billion line of credit lifeline to backstop a significant decline in deposits at its subsidiary. Investors have pulled about $600 million high interest savings accounts over the past three days, Home Capital said in a release earlier today.

The news comes a day after market value of the company dropped by more than 60 per cent on Wednesday.  At the same time, the TSX Bank Index dropped by about 1.7 per cent – its worst daily performance since June of last year after the so-called Brexit vote.

Even before the rout in the company’s stock this week, shares of the company had been under pressure. Days earlier, the company announced an executive and board shuffle in an effort to reassure investors after the Ontario Securities Commission accused the company of misleading investors.

Home Capital also said it has hired RBC Capital Markets and BMO Capital Markets to advise on further financing and strategic options. However, even with the value of Home Capital shares cut in half, rival banks are more likely to buy the company’s loan portfolio than its stock, Scotiabank noted.

“With the market cap of HCG having dropped to ~$400m we are skeptical that any of the banks will step up as a buyer of the company,” said the note to clients.  “At this stage of the HCG fallout a purchase of the underlying loan book would be a more straight-forward process than an acquisition of the common equity.”