With Berkshire Hathaway agreeing to indirectly acquire $400-million of Home Capital’s common shares, confidence is being restored for many financial advisers – and their clientsCHRIS HELGREN/Reuters
As Warren Buffett swoops in to save the day for Home Capital Inc., a surge of renewed confidence has been restored throughout the investment community.
Earlier this year, Home Capital was seen as an attractive mortgage lender that was able to offer better-than-average interest rates for both high-interest savings accounts (HISAs) and guaranteed investment certificates (GICs). But after regulatory concerns surfaced within their mortgage business, brokers at other financial institutions grew wary and a flood of investment dollars was immediately pulled from the company's HISAs.
Over the past several months, balances in those accounts dropped to approximately $112-million from $1.9-billion.
Total GIC deposits, including Oaken and broker GICS, stood at approximately $12.03-billion and Oaken savings accounts stood at approximately $142-million, as of Wednesday.
In hopes of drawing in new investment dollars, Home Capital has remained aggressive in both the HISA and GIC markets offering attractive interest rates that at times were more than double what Canadian banks were offering.
Currently, Oaken Financial GICs are offering 2.75 per cent for a one-year GIC, while Home Trust is slightly less at 2.5 per cent (Home Trust GICs are sold through the adviser channel while Oaken GICs are sold directly to investors).
Despite aggressive rates and the security of Canadian Deposit Insurance Corp. (which insures the majority of deposits under the $100,000 threshold) many advisers were hesitant to take on the risk of their clients money being tied up in the case Home Capital had to shut its doors. Several financial institutions – including Scotia Wealth Management – placed a capped limit of $100,000 of Home Capital product an adviser could sell to a client. (That capped limit still remains for Scotia wealth advisers.)
Now, with Berkshire Hathaway agreeing to indirectly acquire $400-million of Home Capital's common shares, confidence is being restored and many financial advisers – and their clients – may be more willing to turn to the mortgage lender for attractive cash options.
Here is what investment advisers are saying about the potential backing of Berkshire Hathaway in Home Capital:
Brian Evans, chair of the Registered Deposit Brokers Association and head of Brian J. Evans Financial Services
"We never stopped recommending Home Capital products because we were pretty confident that there would not be a failure in the company but there were some clients who chose to stay clear of potential risks with their deposit products. Now I wouldn't be surprised if some of these same clients would be looking at Home Capital in a different light than they did a few weeks ago. For both the retail investor, and the deposit brokers, seeing an investment partner, like Berkshire, come on-board adds strength and confidence to the firm. We know this is the start of the anticipated resolution to the matter."
Darren Coleman, portfolio manager with Raymond James
"This news about Warren Buffett buying in brings a huge vote of confidence for deposit holders. Not only is there an injection of capital into the company, but now there is also a steady hand at the wheel for deposit holders to see. Warren Buffett is one of the most highly respected investors in the industry and has obviously done the due diligence to make an investment in the company. This would make me very comfortable as an investor now. But what will really be interesting is whether the company will drop the interest rates back down. The company ramped up interest rates to draw in funds … if the perception of risk goes down then it would make sense that the rates would follow suit."
Brad Brain, portfolio manager at Aligned Capital Partners Inc.
"Unquestionably, this is good news. I am a long-term Buffettophile and am very familiar with his philosophy and his previous transactions. This is exactly in his circle of competence and he doesn't work with management teams that he doesn't have full faith and confidence in."
Darren Farwell, director of wealth management with The Farewell Group at Scotia Wealth Management
"There is no question that as of today, with a strong corporate sponsor like Berkshire Hathway, there is a higher level of comfort for any Home Capital depositors and stakeholders. But, for these kinds of investment products, I am reluctant to expose my clients to that unnecessary kind of risk in a product that has so little differentiation in a rate of return."