-- We believe that the Canadian banking sector is
encountering incremental pressure from headwinds facing the
Canadian economy, which is heightening economic risk in the
-- We also believe industry risk for the Canadian banking
sector is increasing. We expect that intensifying competition
for loans and deposits will lead to pressure on profitability
growth, especially in banks' retail businesses.
-- We are lowering our long-term issuer credit rating on
Home Capital Group to 'BBB-' from 'BBB' and on its subsidiary
Home Trust Co. to 'BBB' from 'BBB+', and assigning a stable
outlook, following our revision of the stand-alone credit
profile on the company to 'bbb' from 'bbb+'. In conjunction with
these actions, we are also lowering our issue rating on Home
Capital's senior unsecured debt to 'BBB-' from 'BBB'.
-- The stable outlook reflects our expectation that Home
Capital will maintain its current credit profile across a range
of future scenarios.
On Dec. 13, 2012, Standard & Poor's Ratings Services lowered
its long-term issuer credit rating on Home Capital Group (HCG)
to 'BBB-' from 'BBB' and on its subsidiary Home Trust Co. to
'BBB' from 'BBB+'. The outlook is stable. Standard & Poor's also
lowered its issue rating on Home Capital's senior unsecured debt
to 'BBB-' from 'BBB'. In addition, Standard & Poor's revised its
stand-alone credit profile (SACP) on HCG to 'bbb' from 'bbb+'.
The rating action follows our review of banking sector
industry and economic risks in Canada, taking into account the
headwinds facing the Canadian economy, Canadian consumers' high
debt levels, expectations of decelerating loan demand and
continued pressure on margins, particularly in the Canadian
retail sector, and areas of continuing weakness in the global
economy and financial system.
We believe banks and credit unions operating in Canada are
subject to an expanding set of potential stresses arising from
competitive pressure on growth and margins, while asset quality
is potentially vulnerable--in light of high consumer
indebtedness--to developments that may trigger general economic
deterioration in Canada.
Consequently, we lowered our anchor SACP, which is the
starting point for our ratings on financial institutions
operating primarily in Canada, to 'a-' from 'a'. This is
reflected in our revision of Banking Industry Country Risk
Assessment (BICRA) for Canada to group '2' from '1' and revised
our industry risk score, a component of the BICRA, to '2' from
'1' (see "Various Rating Actions Taken On Canadian Financial
Institutions Due To Rising Industry and Economic Risks,"
published Dec. 13, 2012, on RatingsDirect on the Global Credit
We believe that the banks and credit unions are under
incremental pressure from the headwinds facing the Canadian
economy. The acceleration of household debt to record levels has
increased Canadian households' vulnerability to sudden shocks in
incomes, employment, or a spike in interest rates. Exposure to
the consumer sector accounts for nearly three-fifths of total
bank loans, and losses on banks' uninsured loan
portfolios--although recent performance levels have generally
been strong--may be driven higher in the event of a substantial
shock to household creditworthiness, though we expect effective
regulatory supervision to remain a positive influence on
Canadian bank credit quality.
Although we expect ongoing intensification of competitive
dynamics in the Canadian banking sector, we note that overall
Canada still remains positioned favorably vis-a-vis most of its
global peers. However, a slowing economy risks exacerbating the
already-intense competition between banks for loan and deposit
share and puts further pressure on the margin and profitability
of the Canadian financial institutions' retail and commercial
lending businesses, the cornerstone of Canadian banking and
largest contributor to revenues.
We also believe that Canadian financial institutions' risk
tolerances may increase to compensate for lower profitability by
reaching for yield through investments, more aggressive lending
in higher yielding loans such as personal loans and credit
cards, or potentially a pick-up in mergers and acquisitions
Furthermore, we expect that continuing industry conditions
will test banks' operational capabilities. Relative performance
in areas such as service standards, cost control, operational
effectiveness, underwriting discipline, and ability to integrate
acquisitions will likely contribute to changes in market
position and financial performance, and will have an impact on
the relative credit standing among industry participants.
The ratings on Home Capital reflect its revised anchor of
'a-' along with company-specific rating factors. We view Home
Capital's business position as "weak", given its effectively
monoline business focus, and concentrated exposure to conditions
in the Canadian housing sector, while recognizing the company
has an incumbent position providing mortgage funding to the
nonprime portion of the Canadian mortgage market.
We view Home Capital's capital and earnings as "strong" due
to capital ratios above the regulatory threshold and ratios of
most peer institutions, a projected risk-adjusted capital ratio
above 11%, along with high quality of capital and a consistent
and sizable earnings buffer.
We assess Home Capital's risk position as "moderate" due to
the high growth orientation of the company and its concentrated
exposure to the Canadian mortgage sector, including a focus that
has shifted in favor of uninsured mortgages over the past year.
We view the funding of Home Capital as "average" and its
liquidity as "adequate", but anticipate ongoing evolution of
funding arrangements given changing dynamics in Canada's retail
deposit market, as well as structural changes relating to
options for funding secured by residential mortgages.
The stable outlook reflects Standard & Poor's view that Home
Capital's niche market position provides a degree of insulation
from competition for mortgage origination, and that the company
will effectively manage risks associated with elevated consumer
debt levels and housing prices. We also expect that Home Capital
has sufficient flexibility to adapt to funding market pressures.
An upgrade would depend primarily on the company achieving
substantial further diversification of its asset portfolio while
maintaining consistent performance in top-line growth and
We could lower the rating on HCG if there is sustained
evidence of difficulties managing its growing loan portfolio
while maintaining consistent credit standards, or if a severe
and sustained downturn in the Canadian mortgage market
undermines HCG's strong capital and earnings performance. A
projected RAC ratio falling below 10% would trigger a
reassessment of the rating.