Canadian banks play down concerns of Home Capital contagion

Thu May 25, 2017 1:39pm EDT
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By Matt Scuffham

TORONTO (Reuters) - Three of Canada's biggest banks on Thursday played down concerns that Home Capital Group's (HCG.TO: Quote) problems could impact the broader financial system and reported quarterly results that topped market expectations.

The comments from executives came as investors, worried about a possible slowdown in Canada's red-hot housing market, are scrutinizing banks' mortgage exposures with the outlook clouded by issues at the country's biggest non-bank lender.

Home Capital has been struggling to finance its assets as its high-interest deposit account balances have fallen by more than 90 percent since March 27, when the company terminated the employment of former Chief Executive Martin Reid.

The withdrawals accelerated after April 19, when Canada's biggest securities regulator, the Ontario Securities Commission, accused Home Capital of making misleading statements to investors about its mortgage underwriting business. The company has said the accusations are without merit.

Royal Bank of Canada (RY.TO: Quote) Chief Executive Dave McKay said on Thursday those issues should not have systemic implications because Home Capital has only 1 percent of Canada's C$1.4 trillion mortgage market.

"It is not a systemic risk if that firm were to continue to experience trouble," he told analysts on a conference call to discuss earnings.

"I think it is an anomaly in the sense that there wasn't a credit reason to drive the liquidity challenges that Home Capital faced, but more a lack of confidence. I do not believe that is a systemic risk to the overall mortgage market."

Canada's biggest banks built a reputation for financial stability after emerging from the 2007-09 financial crisis unscathed. However, an index of Canadian bank shares hit a five-month low in May on worries about overheating housing markets, Home Capital and a Moody's downgrade that highlighted record household debt.   Continued...

A combination photo shows Canadian investment banks RBC, CIBC, BMO, TD and Scotiabank in Toronto, Ontario, Canada on March 16, 2017. REUTERS/Chris Helgren/File Photos