July 26, 2017 / 1:44 PM / in 2 months

Home Capital cedes gains as regulatory concerns weigh

FILE PHOTO: The building housing the headquarters of Home Capital Group is seen in downtown Toronto, Ontario, Canada June 19, 2017. REUTERS/Chris Helgren/File Photo

TORONTO (Reuters) - Shares in Home Capital Group Inc relinquished early gains on Wednesday as concerns about tougher mortgage regulations offset news it had paid back the balance of a C$2 billion ($1.60 billion) loan from Warren Buffett’s Berkshire Hathaway.

Repayment of the credit facility will significantly reduce the interest paid on borrowings going forward, Home Capital, Canada’s biggest non-bank lender, said after the market closed on Tuesday.

Home Capital shares initially rose by 4.4 percent on Wednesday, having gained 8 percent on Tuesday, but were trading down 0.7 percent at C$14.49 at 1115 EST.

Raymond James analyst Brenna Phelan said she viewed the repayment favorably but added the company’s outlook was clouded by the proposed introduction of tougher regulations by Canada’s financial regulator, and the dilutive impact on existing shareholders of a previously announced C$400 equity injection by Berkshire Hathaway, the second phase of which is subject to a shareholder vote in September.

The Office of the Superintendent of Financial Institutions (OSFI) last month proposed banning “bundled” residential mortgages to clamp down on risky lending, six months after a Reuters investigation revealed that regulated mortgage providers were teaming up with unregulated rivals to circumvent rules limiting how much they can lend against a property.

The OSFI also proposed stricter stress tests on uninsured mortgages.

The changes “would likely put downward pressure on origination volumes given stricter debt service ratio tests and upward pressure on regulatory and compliance costs,” Phelan said

Berkshire Hathaway has already taken a 20 percent stake in the company and will increase that to 38.4 percent, if shareholders approve the transaction in September. Some investors have objected on grounds that Berkshire Hathaway is receiving a significant discount on the shares.

Home Capital executives say Berkshire Hathaway’s investment in the company is key to restoring confidence among investors, savers and borrowers after depositors withdrew 95 percent from its high interest savings accounts since late March.

The withdrawals began after the company fired former Chief Executive Martin Reid on March 27. They accelerated after Canada’s biggest securities regulator, the Ontario Securities Commission, accused Home Capital of making misleading statements to investors about its mortgage underwriting business.

Home Capital settled with the commission last month and accepted responsibility for misleading investors.

Earlier this month, Home Capital appointed Yousry Bissada as its new chief executive, tasking the mortgage industry veteran with reviving the company’s fortunes.

Reporting by Matt Scuffham; Editing by Jeffrey Benkoe and Tom Brown

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