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Once-Troubled Mortgage Lender Saved by Buffett Bounces Back

Doug Alexander
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Once-Troubled Mortgage Lender Saved by Buffett Bounces Back

(Bloomberg) -- It took two years, but Home Capital Group Inc. shares have regained all their lost ground since the Canadian alternative mortgage lender almost collapsed in 2017.

Home Capital has more than doubled this year to become the fourth-best performing stock on Canada’s benchmark S&P/TSX Composite Index. The stock surged as much as 14% on Wednesday, the most in a year, after the Toronto-based lender reported third-quarter profit on Wednesday that beat the highest analyst estimate and said it plans to buy back C$150 million ($113 million) worth of shares.

The run up has taken the stock to levels last seen in July 2016, seven months before plunging after Ontario’s securities regulator accused the company of misleading shareholders over falsified mortgage applications.

Alternative lenders including Home Capital and Equitable Group Inc. have seen their stocks surge this year as the pace of mortgage growth picked up during the spring home-buying season, and home sales recovered in major cities including Toronto and Vancouver.

The “significant” share price appreciation of the alternative lenders is reflective of improving housing conditions -- particularly in Greater Toronto -- as well as a benign credit environment and robust mortgage growth outlook, CIBC analyst Marco Giurleo said in a Nov. 1 note to clients. He upgraded Home Capital to “outperformer” based on the company’s “path to double-digit profitability”, a strong mortgage growth outlook and attractive valuation.

Home Capital’s stock went into a free-fall in the weeks after the regulator’s allegations, fueled by short-selling and a run on deposits. Shares sunk to as low as C$5.85 in May that year, before Warren Buffett stepped in to buy a 38% stake in Home Capital and backstopped the lender with a C$2 billion ($1.5 billion) credit line through Berkshire Hathaway Inc.

Berkshire has since cashed in as the stock has recovered. The shares jumped 12% to C$32.62 at 9:46 a.m. in Toronto, for a market value of C$1.9 billion.

Home Capital posted third-quarter profit of C$39 million, or 67 cents a share, up 20% from a year ago. Adjusted earnings were 72 cents a share, topping the 58-cents-a-share average estimate of analysts’ surveyed by Bloomberg.

While Home Capital’s shares have recovered, the lender’s assets haven’t quite reached their pre-crisis levels. The company had C$18.9 billion of assets in the third quarter, down from a peak of C$21 billion at the beginning of 2017.

(Updates with share price in second paragraph.)

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