Former investor considers contagion odds as Home Capital Group swoons

Bloomberg

The escalation of Home Capital Group Inc.’s distress last week has led one of its largest former investors to rethink — if only slightly — the prospects
of troubles spreading through the rest of Canada.
After the alternative-mortgage lender set up a C$2 billion ($1.5 billion) credit line to offset a run on deposits, Mawer Investment Management Ltd.’s Jim Hall is recalculating the odds of a contagion widening across one of the world’s strongest financial systems.
“The probability has gone from infinitesimal to possible — unlikely, but possible,” said Hall, chief investment officer of the Calgary-based money manager, in an interview. “If depositors or bondholders start to lose faith in their banks, well then that becomes systemic.”
Mawer, which oversees more than C$40 billion in assets, sold about 2.8 million shares, or a 4.3 percent stake, in Home Capital in the past week, joining another Calgary-based money manager, QV Investors Inc., in exiting its investment amid the imbroglio consuming the Toronto-based lender.
Home Capital has been struggling since April 19, when Ontario’s securities regulator accused management of misleading investors over how the firm handled a review of mortgage brokers who falsified documents about borrowers’ income. Home Capital shares plunged 65 percent the following day, and the lender has since disclosed an accelerating pace of declines of its high-interest savings balances — deposits used to help fund its mortgage business.
The firm had C$20.5 billion in assets at year-end, and its C$15 billion home-loan book represents about 1 percent of Canada’s C$1.45 trillion mortgage market. Hall sees the odds of Home Capital’s woes spreading through Canada’s financial system as low, despite a growing chorus of voices speculating such fears in a nation gripped by an overheated housing market and runaway home prices in two of its three biggest real-estate markets: Vancouver and Toronto.