Safe, sturdy GICs suddenly in focus amid Canadian subprime mortgage storm

Wed May 3, 2017 1:14pm EDT
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By Solarina Ho and John Tilak

TORONTO (Reuters) - The troubles engulfing Canada's non-bank mortgage lenders have cast a spotlight on a popular and dependable investment product that is a central part of financial life in the country, from grandmothers giving gifts to serving as the funding model for listed companies.

Canadian alternative lenders Home Capital Group (HCG.TO: Quote) and Equitable Group Inc (EQB.TO: Quote), which rely heavily on guaranteed investment certificates (GICs) to fund operations, saw withdrawals from another savings product last week as depositors got spooked by regulatory allegations against Home Capital.

The withdrawals from high interest savings accounts (HISA), including a 75-percent drop in Home Capital's HISA deposits and a far lesser decline at Equitable, spurred Canadian banks to provide a credit line to Equitable on Monday to prevent it spreading to other deposits, including GICs.

Equitable said on Wednesday that a sixth major Canadian bank had joined the syndicate for the facility.

According to Bank of Canada data, personal fixed-term deposits, of which GICs are a subset, totaled C$320.43 billion as of January 2017. This accounts for about 18.2 percent of all chartered bank deposits in Canada. The central bank and other financial authorities do not break out GICs' share of the total.

"Everything is to stop the panic. That's why banks stepped in to provide credit lines. Why risk it?" said a Canadian financial market participant who declined to be identified because he is not authorized to speak to media.

As depositors pull their money out of Home Capital Group, focus has turned to the long-term outlook for GICs as a funding source for alternative lenders.

The popularity of GICs, despite their low interest rates, is due to their safety. Unlike with stocks, a GIC owner can never lose money on their principal. Those bought from members of Canadian Deposit Insurance Corp (CDIC) issuers – such as banks, alternative lenders – are insured for up to C$100,000 ($73,201.08).   Continued...

FILE PHOTO: The entry to the Home Capital Group's headquarters is seen at an office tower in the financial district of Toronto, Ontario, Canada May 1, 2017. Picture taken using a wide angle lens. REUTERS/Chris Helgren/File Photo