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03.08.2017 12:00
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Street Capital Announces 2017 Second Quarter Results
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Canada NewsWire
TORONTO, Aug. 3, 2017
TORONTO, Aug. 3, 2017 /CNW/ - Street Capital Group Inc. ("Street Capital" or the "Company") (TSX: SCB), today announced its financial results for the three and six months ended June 30, 2017.
Q2-2017 Financial Highlights
All comparisons below are to Q2-2016, unless otherwise noted
- Total revenue (net of acquisition costs) was $16.1 million in Q2-2017 compared to $19.9 million.
- Net gains on sale of mortgages were $15.7 million, compared to $19.8 million.
- Adjusted shareholders' diluted earnings per share (i) were $0.02, compared to $0.05.
- Mortgages under administration were $27.81 billion, compared to $25.67 billion.
- Total prime originations and renewals were $1.96 billion, compared to $2.54 billion.
- Total Street Solutions originations were $10.2 million.
- The total portfolio serious arrears rate (iii) was 0.11% at the end of Q2-2017, unchanged from Q2-2016.
"Q2 was a pivotal period for Street Capital Bank (the "Bank", our wholly-owned subsidiary) as we launched our Street Solutions Program, a suite of mortgage products tailored to address the needs of customers in the growing uninsured segment," said Ed Gettings, Chief Executive Officer of Street Capital Group Inc. "As expected, Q2 new prime originations remained under pressure industry-wide due to the mortgage insurance rules announced in October 2016. Street Capital Bank is not immune to these challenges; however we are solidly positioned to grow as we build our uninsured book and begin to prudently expand our product suite to better serve our valued customers and mortgage broker partners. With a Schedule I bank licence as a foundation, a stable and conservative funding approach, and a relentless focus on generating industry-leading credit quality, we are positioned to generate substantial value for our shareholders over time."
"As Ed prepares to retire as the CEO of Street Capital, I would like to take this opportunity to extend my sincere thanks to him for his dedication and fundamental contribution to the growth of Street Capital Bank over the past 10 years," said Allan Silber, Chairman of Street Capital's Board of Directors. "Along with my fellow Board members, I appreciate that Ed will remain as a Director and we look forward to continuing to work with him. His leadership and the team he has built have brought the Bank to its current position of strength. Ed's experience and track record of success leading consumer lending businesses will continue to be an important resource for the Board and the management team in the coming years, as the Bank grows and diversifies."
Business Outlook
Note to readers: This section includes forward-looking information and is qualified in its entirety by the discussion about Forward-Looking Information, below.
Regulatory and Policy Changes
Many housing markets in Canada are experiencing prolonged periods of house price appreciation that have led to concerns from observers and market participants, resulting in an increased focus on the stability of the domestic housing market. Partly in response, the federal government has implemented regulatory changes that tightened the qualification criteria for insured loans, with the most recent being in October and November of 2016. OSFI's introduction of higher regulatory capital requirements for mortgage insurers has increased the cost of insurance for some borrowers, as well as the cost of portfolio insurance. The federal government has also proposed lender risk sharing arrangements that could further affect the insured mortgage market, and provincial governments in British Columbia and Ontario have recently introduced, and may further introduce, measures intended to slow house price appreciation in those provinces. Additionally, in July 2017, OSFI released draft amendments to Guideline B-20–Residential Mortgage Underwriting Practices and Procedures ("Guideline B-20") for public consultation. The basic framework of Guideline B-20 has not changed: the five fundamental principles for sound residential mortgage underwriting remain. However, OSFI is proposing to tighten and clarify its expectations, and introduce new expectations, including:
- Requiring a GDS/TDS stress test for all uninsured mortgages of at least 2.00% above the contractual interest rate;
- Requiring that Loan-to-Value (LTV) measurements remain dynamic and adjust for local market conditions where they are used as a risk control, such as for qualifying borrowers;
- Expressly prohibiting co-lending arrangements that are designed, or appear to be designed, to circumvent regulatory requirements; and
- Additional requirements with respect to income verification.
It will take some time to fully understand the complete effect that the combination of these changes would have on housing activity and prices, and ultimately on mortgage activity and mortgage rates. However, the Company believes directionally that prime insured mortgage activity and housing price appreciation will begin to slow during the remainder of 2017, as we have seen in some markets in Q2 2017.
Changes proposed in Guideline B-20 have the potential to reduce the size of mortgage a borrower may qualify for and require more documentation for self-employed borrowers, and therefore perhaps reduce the level of lending activity in uninsured mortgages originated by OSFI-regulated financial institutions. While the Company is in the preliminary stages of reviewing the potential implications of proposed changes to Guideline B-20 and developing its comments to OSFI on the proposals, management is maintaining its previously outlined origination targets for Street Solutions, given that they are relatively modest compared to the size of the market.
There remains a great deal of uncertainty in the markets, making it challenging to predict outcomes, and as a result the Company's views can change over time in response to observed factors and market trends.
Other Business Developments
On June 29, 2017 the Company's CEO and acting President, Mr. W. Edward Gettings, announced his intention to retire from Street Capital Group Inc. and Street Capital Bank effective September 1, 2017. Mr. Gettings will continue to serve as a member of the Company's Board of Directors.
Concurrently, the Company also announced that Duncan Hannay, a seasoned financial services and technology executive leader, has been appointed President and CEO of both the Company and Street Capital Bank. Mr. Hannay will assume these responsibilities subsequent to the retirement of Mr. Gettings, on September 1, 2017.
During Q2 2017, the Company initiated a business restructuring that involved the reduction of approximately 10% of its workforce. An action plan was developed during the quarter and selected reductions were implemented beginning July 5, 2017. Associated reorganization expenses of $2.5 million, pre-tax, were recorded as a component of operating expense in Q2 2017. Together with the $3.6 million retiring allowance recorded in Q1 2017 for Mr. DaRocha, the former President, total pre-tax reorganization expenses in 2017 are $6.1 million. The anticipated ongoing expense savings from the staff reduction is between $1.5 to $2.0 million per year. Over time, and as the Bank more formally develops its mid- and long-term strategy, the Company expects to add additional staff with the relevant skills and experience to execute that strategy. The Bank is still targeting positive operating leverage beginning in 2018.
Prime Mortgage Lending
Recent regulatory changes, discussed above, have reduced the volume of prime mortgages that qualify for insurance, leading to a decline in lending activity in the prime insured mortgage segment in 2017.
While it remains difficult to estimate, with any level of certainty, the potential reduction in prime mortgage activity in the market and for the Bank, the Company has been able to maintain strong origination volumes for prime insurable mortgages. These mortgages are not affected by the recent mortgage insurance rule changes. The Company has more than adequate funding and strong market demand, and the Bank remains competitive in this mortgage segment.
For mortgages that previously qualified for mortgage insurance, i.e.: prime uninsured mortgages, the Bank is offering these mortgages on a very limited basis. The Company remains active in pursuing additional funding for this specific product and has made good progress on this front during Q2 2017. However, given the uncertainty of the timing of funding availability, and the uncertainty of the potential profitability of these mortgages, management is taking a more conservative view of new prime origination volumes and gain on sale rates in 2017. The Company still expects that new prime originations volumes could be 20 – 30% below 2016, and it cannot currently provide a reasonable estimate of gain on sale rates. When market conditions stabilize, the Company hopes to resume providing guidance of this type moving forward.
Softness in new originations of prime mortgages will be partly offset by the Bank's expected highly profitable renewal activity in 2017, 2018 and 2019. Based on the maturity profile of the MUA, the Bank will experience material increases in renewal activity in these years and as we have seen in this quarter. To optimize this revenue stream, the Bank will continue to focus on its service and retention activities. The Bank's almost $28 billion of MUA provides both a sustainable portfolio of quality revenue generating assets and a customer base to drive significant value over the coming years as it expands into additional product areas.
Uninsured Mortgage Lending
The Bank launched its uninsured mortgage product, Street Solutions, in Q2 2017. Discussions and observations in the market have been very positive, with many existing mortgage broker partners welcoming another provider in this segment. Management deliberately limited the launch of Street Solutions to a handful of brokers and geographic regions in order to manage demand and monitor our underwriting processes. After a successful test run we have expanded our broker reach and geographic regions, and are expecting to make the origination targets as set out in the guidance. The Bank has relatively modest plans for uninsured lending origination in 2017, and will remain conservative in both credit quality and funding, and prudent with growth, to ensure it builds a sustainable and quality portfolio of assets and customers that drives profitability today and in the coming years.
Deposits
The Bank began taking its first CDIC-insured GIC deposits in February 2017. The Company offers deposits, in the form of GICs, for fixed terms of 90 days cashable, and 1 year to 5 years, with fixed interest rates. Deposits are sourced through investment dealers and the distribution network has been growing each month. As banking operations continue to expand, deposits will be cash flow duration matched to underlying mortgages and other assets, with maturity gaps managed within the Bank's conservative risk appetite. The Company is confident that it will achieve sufficient deposit flows to support $150-$200 million in uninsured mortgage funding in 2017.
Near-term Strategic Priorities
The Bank continues to focus on infrastructure and the development of a compelling credit card offering to be launched in 2018. The product will initially be offered directly to both qualifying borrowers in our current base of more than 130,000 customers, and new mortgage clients. Credit cards are expected to add modestly to revenue in 2018.
Financial Expectations – 2017 to 2019
Note: The Bank may not realize the financial expectations indicated below if business or competitive conditions, the regulatory environment, the housing market, or general economic conditions change, or if any of the other management assumptions do not materialize in the amount or within the timeframes expected. Please refer to the Forward-Looking Information, below.
Management's financial expectations, below, are unchanged since they were originally presented on May 10, 2017.
| | 2016 – | 2017 | 2018 | 2019 |
| Prime New | $7.94 billion | 20%-30% lower | Maintain market | Maintain market |
| | | | | |
| Prime Renewal | $1.43 billion | $1.80 - $1.90 | $2.40 - $2.60 | $2.60 - $2.70 |
| | | | | |
| Uninsured | nil | $150 - $200 | $600 - $700 | $850 - $950 |
| | | | | |
| Uninsured Net credit losses) | N/A | 2.0% -2.5% | 2.0% -2.5% | 2.0% -2.5% |
| | | | | |
| Expense Ratio | 0.50% | N/A | Positive operating | Positive operating |
| 1 Forecasting future prime insured originations remains challenging, given the recent regulatory changes, and competitors' and consumers' potential reactions thereto. The projections reflect management's current views only and are subject to change over time. |
| |
| 2 As revenues from balance sheet lending begin to grow, the Bank will begin to measure itself on operating leverage. |
| |
| 3 Positive operating leverage is defined as: percentage growth in revenue, minus percentage growth in expenses, is greater than zero. |
Financial Highlights
The following tables set out the financial highlights for the three and six months ended June 30, 2017:
| | | | | ||||||||||
| (in thousands of $, except where defined) | For the three months ended or as at | | For the six months ended or as at | ||||||||||
| | June 30, | March 31, | June 30, | | June 30, | June 30, | |||||||
| | 2017 | 2017 | 2016 | | 2017 | 2016 | |||||||
| Financial performance | | | | | | | |||||||
| Shareholders' net income (loss) | $ | (104) | $ | (2,574) | $ | 5,310 | | $ | (2,678) | $ | 8,313 | ||
| Shareholders' diluted earnings (loss) per share | $ | 0.00 | $ | (0.02) | $ | 0.04 | | $ | (0.02) Werbung Mehr Nachrichten zur Street Capital Group Aktie kostenlos abonnieren
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