Fitch Affirms Home Capital's IDR at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed Home Capital Group Inc.'s (HCG) and subsidiary, Home Trust Company's (HTC), long-term and short-term Issuer Default Ratings (IDR) at 'BBB-' and 'F3', respectively. The Rating Outlook remains Stable. A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS - IDRs, VR and Senior Debt

Today's rating affirmation reflects HCG's consistently robust earnings performance, solid asset quality, and sound capital base. Ratings continue to be constrained by the bank's geographic and earning asset concentrations and reliance on brokered deposits and mortgage securitizations for funding. Fitch views HCG as more vulnerable to a less benign Canadian housing market than peers due to its risk concentrations and sustained growth. While the Canadian housing market has remained healthy to date, there are indications the market is beginning to cool. High levels of consumer indebtedness and the risk of overvaluation in the Canadian housing market remain key macro concerns.

HCG is primarily a residential mortgage lender with a focus on borrowers who do not qualify for prime mortgages offered by larger Canadian banks. Typical clients consist of self-employed individuals, small business owners, individuals with poor or limited credit histories and newly arrived immigrants. While these loans typically carry a higher risk of default than Canadian Mortgage and Housing Corporation (CMHC) conforming mortgages, credit performance has remained strong with provisions and net-nonperforming loans totaling only 0.07% and 0.30% of gross loans, respectively, as of year-end 2014. Fitch views the continued strength in credit quality as reflective of the company's underwriting procedures and Canada's favorable economic environment; however, Fitch also notes that risks from contingent liabilities may be growing as a result of increases in securitized and originated for sale mortgages.

HCG's earnings continued to improve in 2014 with returns on average assets and shareholder's equity totalling 1.6% and 23.8%, respectively. Net interest margin expanded to 2.25% in 2014 from 2.17% in 2013, benefiting from HCG's growth in higher margin loans. While Fitch views HCG's profitability as a relative strength, influence of earnings performance on HCG's VR is tempered in the context of the bank's higher risk loans than Canadian banking peers.

HTC's capital levels also improved since last review and liquidity remains sufficient. Tier 1 and total capital ratios were 18.30% and 20.94%, respectively, for 2014, up from 16.80% and 19.69% in 2013. HCG also maintained sufficient levels of liquidity, ending the year with more than $1.1 billion in liquid assets at year-end 2014. While capital is well above the required levels, Fitch considers the cushion necessary given the bank's narrow business focus and funding structure and expects capital to continue to be managed conservatively.

Ratings continue to be constrained by HCG's reliance on high-cost, brokered time deposits. These consist primarily of guaranteed investment certificates (GICs) maturing from 30 days to five years. The company uses time deposits to match-fund maturities of mortgage assets, thereby keeping interest rate risk well controlled. Individual accounts are generally maintained below $100,000 (the maximum deposit insurance protection) and, thus, are viewed by Fitch as fairly stable as long as HCG's rates remain attractive. HTC's cost of funding is significantly higher than peers with interest expense totaling 2.37% of interest-bearing liabilities in 2014.

RATING SENSITIVITIES - IDRs, Senior Debt and VR

Positive rating momentum is unlikely due to geographic and product concentration, as well as HCG's limited franchise and funding mix. Deterioration in the overall housing market and/or adverse credit performance within HCG's portfolio could result in a downgrade, particularly in the event of a significant decline in operating performance and/or capital erosion.

A shift away from HCG's core expertise into higher yielding and potentially higher risk commercial and personal lending products could be viewed negatively. Moreover, excessive growth in HCG's uninsured residential mortgage portfolio resulting in a material shift in HCG's risk profile may adversely affect ratings. Rating pressure would also ensue if HCG's ability to source cost-effective funding is compromised.

KEY RATING DRIVERS - Support and Support Rating Floors

HCG has a Support Rating of '5' and Support Rating Floor of 'NF'. Fitch believes that HCG is not systemically important and therefore, the probability of support is unlikely.

RATING SENSITIVITIES - Support and Support Rating Floors

Fitch does not anticipate changes to HCG's Support Ratings or Support Rating Floors given Fitch's view that HCG will remain a non-systemically important institution.

Fitch has taken the following rating actions:

Home Capital Group, Inc.

--Long-term IDR affirmed at 'BBB-';

--Senior Debt affirmed at 'BBB-';

--Viability Rating affirmed at 'bbb-';

--Short-term IDR affirmed at 'F3';

--Support affirmed at '5';

--Support Floor affirmed at 'NF'.

Home Trust Company

--Long-term IDR affirmed at 'BBB-';

--Senior debt affirmed at 'BBB-'

--Viability Rating affirmed at 'bbb-';

--Short-term IDR affirmed at 'F3';

--Support affirmed at '5';

--Support Floor affirmed at 'NF'.

The Rating Outlook remains Stable.

Additional information is available at 'www.fitchratings.com'.

--'Global Financial Institutions Rating Criteria' (January 2014);

--'Assessing and Rating Bank Subordinated and Hybrid Securities' (January 2014);

--'Rating FI Subsidiaries and Holdings Companies' (August 2012);

--'The Evolving Dynamics of Support for Banks' (September 2013);

--'Bank Support: Likely Rating Paths' (September 2013); and

--'2015 Outlook: Canadian Banks' (December 2014)

Applicable Criteria and Related Research:

2015 Outlook: Canadian Banks (Stable Rating Outlook, Negative Sector Outlook Remains for 2015)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=810389

Bank Support: Likely Rating Paths

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715001

The Evolving Dynamics of Support for Banks

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715000

Rating FI Subsidiaries and Holding Companies - Effective from 10 August 2012 to 20 March 2015

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria - Effective from 31 January 2014 to 20 March 2015

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

Global Financial Institutions Rating Criteria - Effective from 31 January 2014 to 20 March 2015

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982170

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