FINANCIAL SERVICES REPORTER
The challenge of raising money during the financial crisis has prompted Homeq Corp. and Canadian Tire Bank to change the way they do business, even though both companies expect conditions to improve soon.
Executives at the two financial institutions went back to the drawing board after the crisis sucked liquidity from the lending business and now plan to compete more heavily with the big banks for consumers savings by ramping up other products.
Canadian Tire Bank is abandoning its three-year trial in the mortgage business, as its financial service business retreats to focus on lucrative credit card loans.
And Homeq Corp., a public company that operates as Canadian Home Income Plan Corp., has received approval to become a federally regulated bank so that it can take in deposits. The new operation, called HomEquity Bank, hopes to be offering GICs as soon as Monday.
Both companies will be placing a big emphasis on raising deposits, which are prized by banks as a relatively cheap source of funding to make loans with, even though they believe that their traditional source of funding - the securitization market - will bounce back imminently.
To this point, Canadian Home Income Plan, which holds the country's largest portfolio of reverse mortgages, has been unable to cash in on the new demand that the financial crisis has created for its product. In fact, it has been forced to dramatically scale back business.
"Our originations are probably down 50 per cent year-over-year," chief executive officer Steven Ranson said. "We just couldn't find the money."
The company, which had been using on-balance sheet securitization to fund its mortgages, raised $165-million in the wholesale market in May, 2008. "We were basically trying to use that, and payments from existing customers, and we were kind of treading water in the business as opposed to trying to grow," Mr. Ranson said.
Before the crisis, its portfolio - which had about 7,000 reverse mortgages worth $2.3-billion at the end of June - had been growing by roughly 15 to 20 per cent per year. But as it turned down customers and offered others smaller amounts, the company lost $2-million in the first half of this year, compared to profits of $10.2-million in the same period last year, despite raising the interest rates it charges on new reverse mortgages.
It approached officials in the Department of Finance late last year to talk about the effect the crisis had had on its business, but its reverse mortgages are not eligible for the mortgage funding program Ottawa created for other lenders.
With its bank licence, it will now be able to take in consumer deposits, which it plans to do as soon as possible through a network of deposit brokers. The lower funding costs should allow it to reduce the rates it is charging consumers, Mr. Ranson said.
The bank licence comes as markets have improved to the point that Mr. Ranson believes the company could raise money in the wholesale market again if it wanted to.
His optimism about the state of the markets is shared by Canadian Tire chief financial officer Huw Thomas. The securitization market is opening up, Mr. Thomas said, and he hopes that Canadian Tire's securitization vehicle, Glacier, will be back in it soon.
With the market essentially closed over the last 18 months, Canadian Tire has been using consumer deposits such as GICs, high-interest savings accounts and tax-free savings accounts, to support its mortgage and credit card businesses.
"The fact that we've been able to build a book of $2-billion or so of broker deposits in a year clearly shows that if you are competitive and have a brand that consumers trust, you are able to build a good business."
Canadian Tire announced yesterday that it is selling the portfolio of about $167-million in mortgages it has built up in recent years through a pilot project in Kitchener-Waterloo, London and Calgary to National Bank of Canada at its face value. Instead, the company will contain its lending business to credit cards.
Its credit card receivables grew 4.5 per cent to $3.8-billion at the end of the most recent quarter, as the average customer's balance rose 7.5 per cent compared with a year ago.
HOMEQ CORP. (HEQ)
Close: $7.45, up 55¢
CANADIAN TIRE (CTC.A)
Close: $58.17, up 49¢
© The Globe and Mail
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