CANADA ECONOMICS

Global Affairs Canada. May 8, 2017. Minister Champagne visits Washington, D.C., to promote Canada’s trade and investment relationship with the Americas

Ottawa, Ontario - Deepening trade and investment between Canada and our partners throughout the Americas is part of Canada’s progressive trade agenda. Further growing these ties will lead to greater opportunities for Canadian businesses and result in more, well-paying jobs for Canadians and Canada’s middle class.

The Honourable François-Philippe Champagne, Minister of International Trade, will be in Washington, D.C., on May 9, to participate in the 47th Annual Washington Conference on the Americas, hosted by the Council of Americas. He will deliver a speech at the Conference, promoting Canada’s progressive approach to trade and highlighting the possibilities that exist to build closer trade, investment and people-to-people ties between our partners in the Americas. 

While in Washington, Minister Champagne will also meet with key business and political leaders to underscore the importance of the Canada-United States economic relationship and highlight the integrated nature of the North American economy.

Quote

“History has shown that trade is the best way to create jobs, growth and long-term prosperity. Maintaining strong economic ties is vital to our mutual success. Canada strongly supports open, principled and progressive trade throughout the Americas to create greater prosperity that leads to good-paying middle-class jobs for all of our citizens.”

- François-Philippe Champagne, Minister of International Trade

Quick Facts

• The 47th Annual Washington Conference on the Americas brings together political and business leaders from across the region to focus on the major policy issues affecting the hemisphere.
• Two-way merchandise trade between Canada and the Latin America and Caribbean region totalled $63.6 billion in 2016 – an increase of 62 percent over the past 10 years.
• Canada has seven free trade agreements in force with eight Latin American countries.
• Canada-United States bilateral trade in goods and services exceeded $886 billion in 2016.
• Canada and the United States benefit from robust trade and investment ties and integrated economies that support millions of Canadian and U.S. jobs. Nine million American jobs depend on trade and investment with Canada.
• Nearly 400,000 people and over $2 billion worth of goods and services cross the Canada-United States border every day.

BANK OF CANADA. 4 May 2017. Canada and Mexico both set to capitalize on current opportunities, Bank of Canada Governor Poloz says

Canada and Mexico share economic traits that leave both well placed to face global challenges and capitalize on opportunities, Bank of Canada Governor Stephen S. Poloz said today.

In a speech to CanCham México and the Club de Industriales, Governor Poloz showed how the similarities between Canada and Mexico—including their shared approach to monetary policy and the importance of industries such as oil and automobiles—have meant that global disruptions have hit the two economies in a similar way.

The plunge in oil prices that began in the second half of 2014 led to a major loss of income for both countries, the Governor noted. However, sound economic policies helped both adapt. “There is no doubt that the predictability and certainty that come from inflation targeting helped Canada’s economy respond as quickly as it has,” Governor Poloz said. “Mexico’s inflation-targeting framework helped make its economy relatively resilient to the shock as well.”

Canada and Mexico now face the common challenge of dealing with uncertainty in future US trade policy, particularly given the importance of that market to both economies. “This uncertainty has real consequences for companies,” Governor Poloz said. “When you consider that the painful memories of the global financial crisis are still fresh, it is not surprising that companies would continue to hesitate to expand.”

The Governor called on business and labour leaders to help policy-makers combat uncertainty by showing how open trade and economic integration have supported job creation across North America. “We know that with protectionism, everybody loses eventually, including the country that puts the policies in place,” Governor Poloz said. “And the uncertainty around this threat of increased protectionism is holding back growth.”

Governor Poloz also pointed to a number of ways that both countries can support growth and employment. These include pursuing free trade agreements outside North America—an area where Mexico has a significant head start over Canada—and domestic structural improvements. “Beyond pushing for open markets, governments can pursue structural policies that allow our economies to be as flexible as possible,” he said.

“We have faced obstacles before, and have overcome them,” Governor Poloz concluded. “Canada and Mexico’s shared commitment to open trade means both of our countries are well placed to thrive, whatever the international environment.”

BANK OF CANADA. SPEECH. 4 May 2017. Stephen S. Poloz - Governor. Canada and Mexico: Common Issues in Uncommon Times. Remarks on CanCham México and Club de Industriales
Mexico City, Mexico

Introduction

I am thankful for the opportunity to speak with you today, as it is a good time for our two countries to be talking. It is true that nobody will ever confuse Mazatlán with Manitoba, particularly in February. But it is also true that Canada and Mexico have more in common than is usually appreciated, especially on the economic front.

A good deal of our commonality stems from the fact that we are both relatively small open economies that trade heavily with the economic powerhouse next door, the United States. But we share much more than a common neighbour. Resources, particularly oil, are an important part of both of our economies. The automotive industry plays a vital role in our manufacturing sector, along with high-tech manufacturing such as communications and pharmaceuticals. And while we may be at different stages of our economic history, we are following a similar trajectory. In both countries, the service sector now makes up the majority of output—more than 60 per cent in Mexico and 70 per cent in Canada—and the shares are rising. Finally, we are both committed to rules-based free trade, and we both maintain a floating exchange rate within an inflation-targeting framework for monetary policy.

Since we have so much in common, it is not surprising that shocks in the global economy have hit us in similar ways. Now we are facing similar economic challenges. More important, we have similar opportunities that we can capitalize on by using our strengths. So today, I want to discuss recent developments in, and prospects for, the Canadian economy, in a way that will hopefully resonate for the audience here in Mexico.   

Oil Price Shock

Let us start by looking back at the second half of 2014 and the collapse in oil prices. Various benchmarks saw declines of more than 50 per cent. Given the importance of oil to both Canada and Mexico, the shock represented a serious blow to our economies. It had a substantial impact on the terms of trade—the ratio of the prices a country receives for its exports relative to the prices it pays for its imports. Canada’s terms of trade fell by roughly 11 per cent from the middle of 2014 though the first quarter of 2016. This meant a significant hit to our national income, about $70 billion in that period, or roughly 3.5 per cent of Canada’s annual gross domestic product (GDP). Meanwhile, Mexico’s national income declined by about 500 billion pesos, or about 2.5 per cent of annual GDP.

In response to the shock, our currencies depreciated—the peso dropped by 28 per cent against the US dollar during the same period, while the Canadian dollar declined about 20 per cent. Of course, some amount of depreciation was not surprising. It was a natural consequence of the shock, and it helped economic adjustments happen by sending signals that prompted shifts in investment and employment.

Although both currencies rebounded early in 2016, the peso then began to fall again, while the Canadian dollar more or less stabilized. Global capital flows were likely one important factor. Historically, flows in and out of Mexican capital markets have been closely tied to investor sentiment about emerging markets. Capital flows into Mexico fell sharply in 2015 and remained low in 2016, as the US Federal Reserve prepared to raise interest rates and eventually began tightening monetary policy. This put additional downward pressure on the peso, on top of the pressure coming from lower oil prices that both Canada and Mexico faced.

In terms of output, though, the oil price shock hit Canada harder than Mexico. The Canadian economy contracted outright early in 2015, while growth in Mexico remained fairly stable. This reflected, in part, the fact that Canada is a bigger oil producer than Mexico is—at the end of last year, Canadian output was about twice as large as Mexico’s.

For Canada, the oil price shock meant a significant shifting of capital and workers out of the oil and gas industry. It established a two-track economy: while the non-resource sector continued to expand, it was not enough to offset the sharp decline in the resource sector. From the start of 2015, the negative impact of the resource track dominated.

While the adjustment process in Canada has been complex, and very difficult on a personal level for many, we are seeing encouraging signs that the worst may be over. Activity and investment in the oil and gas industry have stopped declining and are coming back to a level that is commensurate with current prices. And because that large negative force is now essentially past, it is no longer masking the sources of strength in other sectors. There is still a way to go, but the two tracks of the economy are gradually converging to become a single track for sustainable growth.

Policy Responses

Now let me say a few words about monetary and other policies in the aftermath of the oil price shock. Both the Bank of Canada and Banco de México dealt with the impact through our shared framework—inflation targeting with a flexible exchange rate.

To set the scene, it is worth noting that Canada was a very early adopter of both aspects of the framework. After experimenting with a floating currency in the 1950s, we allowed the dollar’s value to be set in financial markets as early as 1970, and we have not looked back. In contrast, Mexico moved to a truly free-floating system only in 1994. In terms of targeting inflation, Canada adopted the practice in 1991, 10 years before Mexico officially did. I mention this only because the experience of central banks worldwide is that inflation targeting builds credibility and improves an economy’s resilience to economic shocks. And the longer this policy framework is in place, the greater this impact becomes.

There is no doubt that the predictability and certainty that come from inflation targeting helped Canada’s economy respond as quickly as it has to the oil price shock. The response demonstrated our economic resilience and flexibility, certainly when compared with shocks of past decades. I do not mean to dismiss how difficult it has been for many individuals. But at the aggregate level, the economy has shown its ability to adapt quickly. Other structural factors, such as Canada’s relatively flexible labour market, have also contributed.

Mexico’s inflation-targeting framework helped make its economy relatively resilient to the shock as well. Indeed, it is worth noting that since Mexico adopted inflation targeting, the country has not seen the type of domestic financial crisis that it regularly experienced in previous decades. Mexico’s tax collection has improved, and it has also made notable progress with other structural reforms. While some of these have been politically difficult, such as the measures to open the oil sector to private and foreign participation, they have been important for increasing Mexico’s resilience and competitiveness.

In both countries, the inflation-targeting regime framed the monetary policy response. Recall that the oil price shock led to a contraction in Canada’s economy, while in Mexico growth continued at a slower pace. The drop in income caused by the shock raised the clear risk that Canadian inflation would fall below the Bank of Canada’s target. So, we lowered our key policy interest rate twice in 2015 to help offset the fall in income and facilitate the adjustment from resource industries to the non-resource sector.  

By the end of 2015, the US Federal Reserve began normalizing its monetary policy, and it has raised its key policy rate three times amid strengthening US inflation and a labour market that is near full employment. But in Canada, given that core measures of inflation have drifted downward in recent quarters and slack in the economy and labour market remains, we have kept our policy interest rate unchanged. Importantly, longer-term expectations of Canadian inflation have remained anchored at 2 per cent.

Mexico’s experience has been somewhat different. The oil price shock was less of a downside threat to the inflation target. Indeed, the greater depreciation of the peso led to concerns about upward inflationary pressure. So, the central bank has tightened policy, by a total of 350 basis points, to counter inflationary pressures on consumer prices from the depreciation of the peso and other factors, as well as to ensure the impact of the exchange rate did not de-anchor inflation expectations.

Trade Uncertainty

As I said earlier, the worst of the restructuring in Canada’s oil sector appears to be over. After the shock hit, we expected a natural sequence to take hold; that is, stronger global demand—particularly from the United States—would lead to stronger exports. The depreciation in our currency would support gains in non-energy exports. All of this would spark increased business confidence and investment, which would increase growth and ultimately help bring the economy back to full output with inflation sustainably at target.

However, this sequence has yet to play out fully. A major part of the problem has been a continuing shortfall in Canadian exports relative to what one would expect historically. We have looked at this closely and found both a permanent loss of export capacity that started more than a decade ago and ongoing competitiveness challenges for some of our exporters. And now, we have another challenge to deal with—uncertainty about the future of US trade policy.

Clearly, this uncertainty is a significant issue for both Canada and Mexico. Both of our countries’ trade is dominated by the United States. Last year, fully 75 per cent of Canada’s goods exports went to the US market. For Mexico, the number was even higher, at 81 per cent. Similarly, the biggest share of both of our imports comes from the United States. These numbers reflect the traditionally open trading relationship among the three neighbours.  

This uncertainty has real consequences for companies. It increases the risks companies face, which can raise their cost of capital and restrain investment. The Bank’s most recent survey of Canadian companies showed that many see negative risks from potential US policies. These risks include increased protectionism, reduced competitiveness of Canadian firms if US corporate tax rates are lowered and possible delays in implementing pro-growth US policies.

To be clear, the outlook for investment in machinery and equipment in the Bank’s Business Outlook Survey has continued to improve, and many companies are saying they are maintaining or modestly increasing their level of investment. However, some are also saying this spending will be limited to maintenance work, rather than the type of expansion that supports economic growth. When you consider that the painful memories of the global financial crisis are still fresh, it is not surprising that companies would continue to hesitate to expand in the face of this uncertainty.

The situation is similar in Mexico. Both producer confidence and investment intentions fell after the US election, reaching their lowest levels since the global financial crisis. In concrete terms, we have seen several announcements by companies in the auto industry to cancel or delay plans for major investments in Mexico. The picture is certainly not uniformly poor, and we have seen auto companies based outside the United States announce plans to invest in Mexico. Still, the ongoing uncertainty represents a clear challenge for both of our countries.

Dealing with Uncertainty

This naturally leads to the question of what can be done. Any economist will tell you that open trade supports economic growth and employment. We know the predictable effects of protectionism. We have seen throughout history how efforts to shield industries and workers from foreign competition have been counterproductive. Increases in tariffs lead to higher inflation and a stronger real exchange rate, as well as potentially higher interest rates. Work done at the Bank of Canada shows that a broad-based increase in US tariffs would ultimately lead to lower US output after about five or so years, whether or not other countries retaliate. Basic economic theory also suggests that protectionism leads to slower productivity growth and slower rates of innovation and technology adoption.

But while it is one thing to make theoretical economic arguments about the benefits of open trade, it can be more helpful to have concrete examples. Consider the auto industry. We can talk about how it is responsible for 18 per cent of Canada’s goods exports and about 30 per cent of Mexico’s. We can talk about how many times a single auto part might cross a national border during the assembly process. And we can talk about the intricate supply chains that have been developed over more than 50 years.

Or, we can show how building a single, integrated North American auto industry has led to jobs in all three countries. The Automotive Parts Manufacturers’ Association has done a good job putting the numbers together. In Canada, 81,000 people are employed in the automotive supply sector, by both Canadian and foreign-owned firms. Those Canadian companies operate 150 plants in the United States, employing almost 43,000 American workers, and 120 plants in Mexico, providing jobs for roughly the same number of workers there. It is hard to imagine how interfering with open trade or implementing other protectionist policies would benefit these people and their families.

It would be helpful to hear many more examples from other industries. Policy-makers, business leaders and labour leaders all have a role to play in showing how open trade has meant jobs for workers across North America and around the world. Nobody can explain the importance of trade to an employee better than their employer.

Regardless of what evolves, though, there is no shortage of potential sources of growth for both of our economies. The first order of business should be to keep working on opening trade elsewhere in the world. In this respect, Canada has been playing catch-up to Mexico, which has successfully negotiated access to many more markets than Canada.

The numbers tell a clear story. As of today, Canada has free trade agreements in force with 15 countries that represent about 22 per cent of global GDP. Mexico has agreements in force with 47 countries that represent 44 per cent of global GDP. But if you take the United States out of the picture, Canada is left with free access to just 6 per cent of the world economy, compared with 28 per cent for Mexico.

The good news for Canada is that this gap will close significantly once the agreement between Canada and the European Union comes into effect. It is unfortunate that the Trans-Pacific Partnership, with its ground-breaking coverage of intellectual property and services, has been shelved for now. Still, the work that was put into those areas could prove useful for both Canada and Mexico in future trade agreements. The bottom line is there is still scope for both countries to improve access to markets outside of North America.

Within Canada, we had the positive news last month of the agreement to lower barriers to interprovincial trade. Perhaps the most encouraging part of the agreement is that instead of listing the few areas that are subject to open trade, the provinces are now listing the areas that are exempt. This makes open trade the default position, and it means the provinces will be under continuous pressure to justify any exceptions.

Beyond pushing for open markets, governments can pursue structural policies that allow our economies to be as flexible as possible. Canada is taking some welcome steps in this direction—for example, by investing in infrastructure that can increase our economic potential and by helping workers develop new skills to take advantage of a changing labour market. I hope policy-makers at all levels of government will continue to focus on measures to improve Canada’s flexibility.

I have already spoken about the moves by the Mexican government over the past five years to introduce some major structural reforms. Besides energy-market reforms, there has been good progress in such areas as tax policy, competition policy and regulatory reform. These and other measures are all investments in flexibility that will improve economic potential and give Mexico a better chance to succeed and grow in the future, no matter what is happening in the global economy.

In terms of central banking, the Bank of Canada has been working on the implications of heightened uncertainty for the economy and the conduct of monetary policy. More fundamentally, the Bank renewed its five-year inflation-targeting agreement with the Government last year. After a thorough look at all the evidence, we concluded that setting interest rates to aim inflation at a target of 2 per cent remains the best policy. Amid all the uncertainty, we can provide Canadian businesses and consumers with certainty about the future value of their money.

Conclusion

Allow me to conclude. For both Canada and Mexico, the oil price shock represented a significant economic setback. Sound economic policies in both countries are supporting a return to more balanced growth. But now, again, we face a common challenge. Even though trade liberalization and increased economic integration have generated prosperity across North America, we are now faced with the threat of new protectionist policies from our largest trading partner. We know that with protectionism, everybody loses eventually, including the country that puts the policies in place. And the uncertainty around this threat of increased protectionism is holding back growth.

However, in these times it is important not to lose sight of the bigger picture. There is much that Canada and Mexico can do to support growth and employment in our economies. We have faced obstacles before, and have overcome them. Back in the 1860s, the United States pulled out of a free trade agreement with the colonies of British North America. This provided the impetus for Canadian confederation 150 years ago, which turned out pretty well.

The antidote to uncertainty is certainty. The Bank of Canada will continue to provide certainty around the future value of our money through our commitment to inflation targeting. This is the best contribution we can make to Canada’s economic welfare. And more broadly, Canada and Mexico’s shared commitment to open trade means both of our countries are well placed to thrive, whatever the international environment.


I would like to thank Rose Cunningham and Tatjana Dahlhaus for their help in preparing this speech.

FULL DOCUMENT: http://www.bankofcanada.ca/wp-content/uploads/2017/05/remarks-040517.pdf

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REAL STATE - HOUSING BURBLE

The Globe and Mail. May 08, 2017. Home Capital adds new directors as deposits sink below $200-million
JANET MCFARLAND

Shares of Home Capital Group Inc. recovered ground Monday even as the company as the company announced it has drawn down $1.4-billion of its $2-billion credit line and has suspended its dividend, raising concerns the company is continuing to burn through its funding.

Investors were reassured by news the mortgage lender has appointed three new directors to its board as part of its governance “renewal process,” and has named director Brenda Eprile as its new board chair. Former chair Kevin Smith will remain on the board as an independent director.

Home Capital still has no rescue deal in place, saying Monday its advisers are continuing to work on a plan to seek lower-cost sustainable funding solutions and “evaluate strategic alternatives to solidify and strengthen its successful mortgage origination platform” as its available credit shrinks rapidly, with only $600-million remaining unused in a credit line that became effective just last Monday.

The company also announced it has suspended its quarterly dividend “to prudently manage liquidity.”

High-interest savings deposit balances at subsidiary Home Trust have shrunk to $192-million from $391-million last Monday. Home Trust’s savings account deposits stood at $2-billion at the end of March, but have faced huge withdrawals since a run on its deposits started two weeks ago.

The company also reported that its online retail subsidiary Oaken Financial has savings account deposits of $167-million, down from $222-million as of Friday, April 28.

GIC deposits totalled $12.64-billion on Friday, down from $12.86-billion on April 28. Most of the GICs held at Home Trust and Oaken cannot be redeemed early, so investors cannot easily move the money.

The company has added three new directors to its board of directors, announcing Monday that Claude Lamoureux, Paul Haggis and Sharon Sallows will join effective immediately.

Mr. Lamoureux is former chief executive officer of the Ontario Teachers’ Pension Plan and Mr. Haggis is former CEO of the Ontario Municipal Employees Retirement System (OMERS) who also previously headed Alberta Treasury Branches, a financial institution owned by the province of Alberta.

Ms. Sallows has a background in lending and investment “across a wide range of industry group including real estate,” the company said. She has previously held senior roles at the Bank of Montreal and MICC Properties and has served as a partner at private sector merchant banking firm Ryegate Capital and also previously served as a director on the Teachers’ board.

Ms. Eprile, who has been named chair of the board, joined Home Capital as an independent director last year. She is a former executive director and chief accountant at the Ontario Securities Commission and a former partner at accounting firm PriceWaterhouseCoopers.

Several analysts praised the company’s moves to remake its board, saying the new directors add needed expertise and credibility. Shares of Home Capital traded at $607, up 22 cents on the Toronto Stock Exchange Monday morning.

Analysts also warned there are still many concerns about Home Capital’s funding and too little is known about the state of the company’s loan book.

Dylan Steuart at Industrial Alliance Securities said in a research note the restructuring of the board “is a necessity given the reputational issues facing the company,” but is “offset” by signs of a continuing outflow of funding.

He said the suspension of the dividend -- which costs the company $65-million on an annual basis -- comes as little surprise, but the key question remains how the company’s outstanding mortgage loans are faring amid weeks of bad news.

“While the update of the liquidity position of the company is useful, a clearer picture on the remaining loan book is needed to provide comfort,” Mr. Steuart said.

May and June are the most active period for home buying in Canada, which means they will also be critical for assessing Home Capital’s ability to write and renew mortgages.

Marc Charbin at Laurentian Bank Securities said he is concerned Home Capital may lose business to competitors who also provide credit to home buyers who do not qualify for traditional bank mortgages.

“Given the increased competition in near-prime lending in the last several years, it is reasonable to believe that a material portion of HCG’s mortgage assets could find another home,” he warned in a research note.

However, analysts at GMP Capital Inc. are more optimistic, maintaining a “buy” rating on the company’s shares and saying Monday they believe Home Capital has enough liquidity to absorb the recent runoff in its deposits and repay $325-million of debt that is coming due May 24.

“Rolling over the GIC deposits remains the key, in our view, and we continue to closely monitor the situation,” they said in a note Monday.

Also Monday, the bond trading desk at Canadian Imperial Bank of Commerce notified customers it has an offer to purchase up to $100-million of the $325-million of Home Capital debt coming due May 24.

The offer comes from an unnamed Canadian institutional investor, who is willing to pay 92.5 cents on the dollar for the deposit notes, which have a coupon rate of 2.35 per cent. The offer will be open until Tuesday at 5 p.m., CIBC said.


The notes have been trading hands actively in recent weeks as conservative investors have grown concerns about the risks of holding the company’s debt. A source said hedge funds have been active buyers.

The Globe and Mail. The Canadian Press. May 08, 2017. New federal infrastructure bank to call Toronto home

Canada’s largest city is getting itself a new resident this year: the headquarters of the federal government’s new infrastructure financing agency.

Putting the bank in Toronto will give its members easy access to investors in the city’s financial district whose dollars the Liberals need to make the agency a success.

Quebec Liberal MPs lobbied privately and publicly to have the bank’s offices located in Montreal, home to a light rail project being financed by the province’s pension fund which could be an early candidate for funding from the federal agency.

But the Liberals appeared set on Toronto weeks before Monday’s announcement after private consultations kept leading back to the investors along Bay Street.

“We believe that the right expertise that is needed for the bank is present in this city,” Infrastructure Minister Amarjeet Sohi said at a press conference at Toronto’s Union Station.

“The location of the bank is important, but the real value for the bank is the projects that it will fund, the projects that will be throughout the country. . . . That’s where the job growth will happen, that’s where the opportunities exist.”

The Liberals are also starting a search to find a chair for the agency’s board of directors, the directors themselves and the chief executive officer. Anyone is able to apply for one of the appointments, but there are few people internationally with the expertise and job experience for the positions.

Sohi said the government wants to select the right talent.

The government expects the agency to be up and running by the end of the year.

The proposed bank would take $35-billion in government funding to entice private investment in projects like public transit systems, highways and electrical grids that generate revenues through user fees or tolls. Approximately $15-billion of that will be cash, with the remaining $20-billion in the form of repayable loans or equity stakes that the Liberals say won’t affect the government’s bottom line.

The Liberals predict they can leverage three or four times the federal investment in private dollars for projects in three key areas: trade corridors, green infrastructure and public transit. Any project selected for the bank would have to generate revenue and be in the public interest.

The agency will focus on building new infrastructure, not selling off existing assets, Sohi said.

The plan to create the bank has come under increasing scrutiny from outside experts and the opposition parties, who question how much control private investors are being given over the creation of the bank and why the Liberals would let revenue generated by projects flow to private investors, some of whom may be overseas, instead of public coffers.

Sohi defended the government’s plan, saying federal money going to the bank is a fraction of the overall spending infrastructure plan. He also said that cities, provinces and territories will have the option of using the bank.

“We need to build even more infrastructure in this country and the bank is one way to do this,” he said. “The bank is one additional tool we are putting in our infrastructure tool kit.

“The vast majority of infrastructure will continue to be delivered by traditional funding tools.”


The Liberals plan to spend $81.2-billion on their infrastructure program over the next 11 years, including the money for the bank.

The Globe and Mail. May 07, 2017. Home Capital faces hard questions after earnings delay
JACQUELINE NELSON AND CLARE O’HARA

Home Capital Group Inc. will have a critical chance to calm investors, customers and the financial community this week amid an outflow of depositors’ money that has raised questions about its viability as an independent company.

The troubled mortgage lender is set to face questions about how much money it still has in deposits and the credit quality of its loan portfolio when it reports first-quarter earnings after the markets close on Thursday and speaks to investors on a conference call scheduled for Friday morning.

Home Capital pushed back the quarterly report by more than a week.

Among the biggest challenges ahead for the lender is stemming the run on client deposits that it needs to fund its mortgage business.

In a note to its financial advisers last week, Manulife Financial Corp.’s securities unit told staff that clients who hold more than $100,000 in a Home Trust GIC could move part of the balance to another subsidiary called Home Bank. That manoeuvre would add a second layer of deposit security from Canada Deposit Insurance Corp., which protects deposits up to $100,000.

Home Bank is a retail bank that offers deposit, mortgage and personal banking products and it was formerly known as CFF Bank before being acquired by Home Capital in 2015.

Last month, Home Capital offered depositors the right to split their investment between products offered by its trust company and its bank, in a bid to slow down the flight of money out of the firm.

A Manulife spokesperson said: “The option to transfer a portion of the Home Trust GIC to a Home Bank GIC was offered by the issuer, Home Trust. Manulife Securities felt it was the right thing to do to communicate that offer to our advisers with clients who have Home Trust deposits.”

In response to Manulife’s move, a spokesman for Home Capital said: “The company’s focus is on taking the steps required to rebuild confidence in Home. Home deposit products remain widely available across Canada.”

After the Ontario Securities Commission (OSC) made allegations in mid-April that Home Capital broke the rules in its disclosure of information about problems in its mortgage-underwriting business, the company suffered rapid withdrawals from its deposit products. More than $1.6-billion has been withdrawn from Home’s high-interest savings accounts since late March. The OSC allegations have not been proven, and Home Capital has said they are “without merit.”

But GICs make up a much larger portion of the company’s capital base, accounting for more than 84 per cent of deposits at the end of 2016. Home Capital said total GIC deposits, including those sold through Home Capital and independent brokers, amounted to nearly $13-billion as of April 26. The company is expected to provide an update in its earnings results this week.

To shore up its funding, Home Capital sought a $2-billion credit line syndicated by the Healthcare of Ontario Pension Plan (HOOPP). But the deal came with burdensome terms, including an interest rate of 10 per cent. HOOPP’s chief executive officer Jim Keohane also left the mortgage lender’s board as a result of the deal.

While Home Capital contends with a deepening run on its deposits, investment bankers at RBC Dominion Securities Inc. and BMO Nesbitt Burns Inc. – hired as financial advisers to consider strategic options for the company, including a potential sale of the business – are expected to speed up that process this week.

Sources familiar with the company’s plans say that while there are many would-be investors looking at Home Capital or its assets, including foreign private equity firms, the process of giving those potential bidders an opportunity to review the company’s financial information has been unusually slow. That is expected to change this week, those people said.

Home Capital made a bid to restore credibility Friday with the appointment of veteran banker and restructuring expert Alan Hibben as a board member. Several other new board members are expected to be appointed, and a search for a chief executive officer and a chief financial officer is also under way.


Board chair Kevin Smith said it was the start of a “major refresh in our corporate leadership as part of the process of rebuilding the company.”

REUTERS. May 8, 2017. Home Capital says account balance halves, suspends dividends

(Reuters) - Canada's Home Capital Group Inc HCG.TO estimated on Monday that the balance in its high-interest savings accounts (HISA) halved in the past week and said it had suspended its dividend and tapped its C$2 billion ($1.5 billion) credit line for the second time.

Canada's biggest non-bank lender also said it hired three new directors to its board and a named a new chairwoman as it continues its management overhaul in an effort to win back investor confidence.

Home Capital has become a rare Canadian financial institution to face a run on its deposits and its troubles come at a time when the Canada's biggest province Ontario has taken a series of measures to cool its red-hot housing market.

The fear of contagion has hit Canadian bank stocks and rival subprime lender Equitable Group EQB.TO has lined up C$2 billion credit facility.

Home Capital shares fell as much as 13.5 percent to C$5.06 in early Monday trade, their lowest level since August 2003. The stock is down more than 75 percent since early April.

Equitable shares were up 0.2 percent, while bank shares were broadly higher.

Home Capital has suffered a crisis of confidence since a securities regulator alleged earlier this year that its top executives hid mortgage broker fraud from investors.

"The company seems to be mortally wounded. It's questionable whether they will survive all this," David Cockfield, managing director at Northland Wealth Management, which manages about C$400 million, but does not own Home Capital.

As nervous depositors pull their money out and roughly three-quarters of Home Capital's funding needs coming from guaranteed investment certificates (GICs), investor focus is also on the lender's term deposits and other funding sources, many of which are maturing or up for renewal this year.

The high interest savings and guaranteed investment certificates (GICs) are the key funding source Home Capital has relied on heavily to grow its business. But as the crisis of confidence gripped the company, investors pulled out deposits, forcing Canada's biggest non-bank lender to seek an expensive emergency funding.

Home Capital said the balance in its HISAs is expected to slump to about C$192 million on Monday, down 50 percent from a week ago.

The company also said it has now withdrawn a total of C$1.4 billion, including a drawdown of C$1 billion a week ago.

The lender paid a quarterly dividend of 26 Canadian cents per share on March 1, according to Thomson Reuters data.

Home Capital said it hired Claude Lamoureux, Paul Haggis and Sharon Sallows as directors to its board, effective immediately. Brenda Eprile, who joined the board as an independent director in 2016, will replace Kevin Smith as chair.

"They've named some pretty respectable board members. But they are not there yet. Until you see things stabilize, it's still an unknown," Cockfield added.

Before joining Home Capital, Eprile worked at PricewaterhouseCoopers LLP as a senior partner responsible for the company's Canadian risk consulting practice.

Lamoureux retired from the Ontario Teachers' Pension Plan in 2007, while Haggis was the CEO of the Ontario Municipal Employees Retirement System from 2003 to 2007.

Sallows is currently a trustee of Riocan Real Estate Investment Trust REI_u.TO and Chartwell Retirement Residences CSH_u.TO.

Home Capital has 13 directors, including those named on Monday, according to the company's website.

Total deposits in the lender's less-liquid GICs stood at C$12.64 billion as of May 5, down from C$12.68 billion on April 28.


(Reporting by John Benny and John Tilak; Editing by Martina D'Couto and Nick Zieminski)

REUTERS. May 8, 2017. Canada's housing starts fall in April after surge in March

OTTAWA (Reuters) - Canadian housing starts fell in April after an unexpected surge in March but remained near a five-year high, data from the Canada Mortgage and Housing Corporation showed on Monday.

The seasonally adjusted annual rate of housing starts fell to 214,098 units in April, slightly above analysts' expectations of 210,000. The figure for March was revised slightly lower to 252,305 units, the federal housing agency said.

"It's been a great start to the year for Canadian housing starts, even if April cooled from March's blistering pace," CIBC Capital Markets economist Nick Exarhos said in a research note.

The pace of new homebuilding is at its fastest in close to five years, Exarhos said, with a bit more momentum expected, given strength in recent housing permits.

Canada's long housing boom has shown signs of slowing in recent weeks after a series of government moves to cool lending and impose a foreign buyers tax in Toronto and Vancouver, but starts have defied an expected slowdown for years.

Multiple urban starts decreased 16.7 percent to 134,314 units in April from March, while single-detached urban starts fell 12.1 percent to 65,171, the CMHC said.

The report showed most of the strength in recent months has come from apartment construction in British Columbia and Quebec, partly offset by a decline in starts of multiple units, typically condos or apartments, in Ontario.

The agency had warned of housing problems nationally with overvaluation in areas around Toronto and Vancouver, the two largest markets.

The provincial government of Ontario imposed a 15 percent foreign buyers tax in April, matching British Columbia's move in August for Vancouver. Prices in the two cities have increased at double-digit percentage rates, sparking fears of a housing bubble.


(Reporting by Andrea Hopkins; Editing by Paul Simao and Lisa Von Ahn)

BLOOMBERG. 2017 M05 8. Home Capital Stalls a Nascent Canadian Mortgage Bond Market
by Allison McNeely

• At least two uninsured deals on hold as market weighs outcome
• Investors want to see how Home Capital situation resolves
• Signage for Home Trust Co., a subsidiary of Home Capital Group Inc., stands outside the company's headquarters in Toronto.

Trouble at lender Home Capital Group Inc. is stalling efforts to create what would be the closest thing Canada has to a subprime mortgage bond market.

At least two bond sales are on hold in Canada as investors wait to see how the Home Capital situation shakes out, according to people with knowledge of the matter. While discussions on both bond offerings were in early stages, one of the deals would be backed by loans from MCAP Corp., and the other, marketed by Royal Bank of Canada, with loans from Home Capital and Equitable Group Inc., said the people, who asked not to be identified because the talks are private.

All three of those firms focus on borrowers that the biggest banks shy away from, such as people who are self-employed and have irregular income. Their loans are often known as “alt-A” mortgages.

These alternative lenders are coming under increased scrutiny as Home Capital faces allegations from the securities regulator that it failed to properly disclose an internal probe into fraudulent mortgage applications. Home Capital this month took out an expensive C$2 billion ($1.5 billion) loan to fight off an exodus of customer deposits and an almost 80 percent plunge in its shares since the end of March.

‘Gun-Shy’

“At the moment, investors are a little bit gun-shy,” said Mark Carpani, a money manager at Ridgewood Capital Asset Management, which oversees C$1.1 billion in assets. He usually looks at residential mortgage bond sales, but is more hesitant about them now.

Representatives for Home Capital and Equitable declined to comment. A senior executive at MCAP did not return calls seeking comment.

It’s too soon to say whether the pause is anything more than a hiccup in the nascent market for mortgage bonds without government backing in Canada. The nation’s mortgage bond market, like the U.S.’s, is dominated by top-rated securities with a form of government-backed insurance. In Canada’s case, the insurance comes from the Canada Mortgage and Housing Corp., which was backing about C$440 billion of outstanding securities at the end of September.

Bankers and mortgage lenders have been testing investor demand for mortgage bonds with no federal support. So far, these bonds have been backed by prime home loans. MCAP sold such securities in 2014. In the last few weeks, Bank of Montreal sold a C$2 billion mortgage-backed securities deal bundling prime residential mortgages originated by the bank, spokesman Paul Gammal said by email. The big Canadian bank planned to purchase the top three tranches of the debt, equal to about 98 percent of the principal, according to a Moody’s Investors Service report.

Lenders and bond underwriters have this year also been looking at selling bonds backed by loans that aren’t prime. For the deal backed by Home Capital and Equitable loans, Royal Bank of Canada held investor meetings to gauge interest on what was tentatively discussed as a C$250 million transaction, according to people with knowledge of the matter. Those bonds are to be issued by Steel Curtain Capital Group LLC and Ashley Park Financial Services.

For the deal backed by MCAP mortgages, National Bank of Canada has held meetings with investors, with an initial tranche of less than C$100 million. That offering would be issued by New Latitude Capital Corp. RBC, National Bank, Steel Curtain and New Latitude declined to comment. No one at Ashley Park was immediately available to comment. 

Government regulations that came into effect last year tighten access to government insurance, which could create an opening for more issuance of mortgage-backed securities backed by uninsured mortgages. The rule changes were part of ongoing efforts to cool the housing market, particularly Toronto’s, which saw average home prices increase 25 percent in April.

The Ontario Securities Commission accused Home Capital of failing to properly disclose an internal probe into fraudulent mortgage applications. The lender has hired bankers to pursue strategic options, including a possible sale of assets. The company suspended its dividend and added two former pension fund executives to its board, according to a statement Monday.

A resolution of Home Capital’s troubles might be needed to make investors more comfortable again with securitizing nonprime mortgages made by alternative mortgage lenders, said Richard Hunt, an analyst at Moody’s Investors Service in Toronto.


“It’s not sort of the mainstream part of the Canadian market,” Hunt said. “The perceptions might be a little harder on them.”

BLOOMBERG. 2017 M05 8. Home Capital Halts Dividend, Adds Former Pension Executives
by David Scanlan  and Maciej Onoszko

• Embattled mortgage lender cuts dividend as deposits decline
• CIBC client buying C$100 million of Home Capital’s 2017 bonds

Home Capital Group Inc. suspended its dividend and added two former pension fund executives to its board as the mortgage lender tries to win back shareholder trust following accusations that it misled investors over fraudulent loan applications.

The Toronto-based bank, facing a run on bank deposits, said it will suspend its quarterly dividend to “manage liquidity,” according to a statement Monday. The company’s high-interest savings accounts, used to fund its mortgages, have slipped to C$192 million ($140 million), from almost C$2 billion five weeks ago. The guaranteed investment certificates, or GICS, fell to C$12.6 billion, from C$12.9 billion last month.

The run on deposits and the regulatory accusations have forced the company to consider a sale amid concerns the fallout may spark a selloff in the real estate market, which has been a key driver of growth for the Canadian economy.

Home Capital was forced to take out a C$2 billion credit line with an Ontario pension fund last month, at an effective rate of 22.5 percent for the first half of it. The Canadian mortgage lender said Monday it has drawn C$1.4 billion from the credit line, and has C$1.16 billion in liquid assets as of May 5.

The company has found support for its bonds that mature May 24. Canadian Imperial Bank of Commerce said it has a Canadian institutional buyer for as much as C$100 million of the 2.35 percent debt. The offer is for 92.5 cents on the dollar, according to an emailed statement from the Toronto-based bank, which declined to identify the buyer. The bonds, which have C$325 million outstanding, were quoted at about 94 cents as of 8:38 a.m. in Toronto on Monday, according to a trader who declined to be identified.

Home Capital continued to shake up its board, adding Claude Lamoureux, Paul Haggis and Sharon Sallows. Lamoureux is the former head of the Ontario Teachers’ Pension Plan, Sallows is a former director at Ontario Teachers and sits on the board of RioCan Real Estate Investment Trust, a Canadian mall developer, while Haggis is the former head of the Ontario Municipal Employees Retirement System. Director Brenda Eprile becomes chair, replacing Kevin Smith, who remains on the board. Lamoureux is also the founder of the Canadian Coalition for Good Governance.

RBC Banker

Alan Hibben, a former RBC Capital Markets managing director who specialized in mergers and acquisitions, last week replaced Home Capital founder Gerald Soloway, whom the Ontario Securities Commission named as one of the executives who allegedly misled investors.

Shares of Home Capital fell as much as 14 percent on Monday, extending their decline to about 80 percent since April 19, when the OSC made the allegations public.

Read the inside story on Canada’s attempts to contain the fallout from Home Capital

Home Capital’s meltdown has shaken confidence in Canadian markets, weakening bank stocks and helping send the loonie to a 14-month low against the U.S. dollar. The Canadian dollar was down 0.5 percent at 1.3715 per greenback, extending its loss since April 19 to 1.7 percent, the second worst performance among major currencies after the yen.

Contagion Risk

The risk from Home Capital doesn’t stem from the company’s size or linkages -- it holds only about 1 percent of Canadian mortgages and these are on its own books, which limits spillovers. However a disorderly fallout from Home Capital would damage a sector which is driving Canadian growth. Real estate, residential construction and finance sectors were responsible for around two-fifths of output in Canada’s fastest growing provinces.


Home Capital is raising questions from investors who are comparing Canada’s housing market to troubles in the U.S. that tipped the world into a crisis in 2008. The jury’s still out on whether the comparison is correct, but policy makers have acknowledged that Canada’s housing market is red-hot and the magnitude of gains in house prices is divorced from reality.

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LGCJ.: