Home Capital Group Inc.

Home Capital reported Q3 net income of $31 million, or $0.70 per share fully diluted, versus adjusted net income of $38 million, or $0.95 per share. Return on equity was 8.0% and adjusted ROE was 9.8%; book value per share rose 11% year over year to $40.32. Net interest margin was 1.92%, down 5 basis points from Q2, and net interest income was in line with Q2. Non-interest expenses were $72.1 million, including a $9.4 million impairment charge tied to Ignite; excluding that charge, expenses would have been $62.6 million. The company booked $4.4 million of credit provisions, with $1.4 million of net write-offs, and ended with $44.1 million in total allowance for future loan losses and $37.6 million of gross non-performing loans. Customer deposits were $4.8 billion, and CET1 capital ratio was 15.41% after the substantial issuer bid. On originations, single-family volumes were down 28% year over year, while commercial originations were over $400 million; year-to-date originations were over $6 billion in single-family and $1.6 billion in commercial. Management said Q4 margins should not decline from Q3 and should improve over the balance of the year and into 2023, while credit quality is expected to remain resilient though they are preparing for arrears to potentially rise.

Yousry Bissada framed the quarter around a tougher rate environment and a softer housing market, but emphasized that Home Capital is adapting rather than pulling back. He highlighted continued support for broker partners, growth in deposits through broker deposits and Oaken, and the completion of more than 90% of the company’s systems upgrades under Ignite, including the new SAP banking platform. He was constructive on housing demand over the longer term, citing deferred demand, immigration, millennials reaching home-buying age, and strong employment, while stressing that the company has liquidity and capital to withstand a prolonged downturn.

Brad Kotush said the quarter included a $9.4 million pre-tax impairment charge on one Ignite software component, which reduced after-tax earnings by about $7 million or $0.18 per share. He noted that without the charge, expenses would have been $62.6 million, lower than last year despite 15% growth in assets under administration, and that year-over-year assets and loans under administration both grew at double-digit rates. He walked through margin pressure from faster rate increases, with Q3 NIM at 1.92%, but said the decline is slowing and margins should improve as loan repricing works through the book. He also pointed to $4.4 million of provisions, 16 basis points of non-performing loans, 15.41% CET1, over $44 million of share repurchases in the quarter, and $171.3 million returned year-to-date through buybacks and dividends.

Analysts focused heavily on net interest margin, credit performance on the 2021 vintage, and capital allocation. Management said margins are likely at the bottom now and that Q4 NIM should not decline versus Q3, while credit on renewals has remained strong with no sign of unusual deterioration; they said borrowers were stress-tested and many are renewing at higher rates but still performing. On capital, management said it is comfortable sitting above the 14% to 15% CET1 target near term and will revisit the mix of dividends and buybacks after more clarity on economic conditions and potential tax changes on repurchases.