CIBC Funds Trim Home Capital Equity Stake as Stock Recovers

2017-06-08 16:03:25

By Luke Kawa, Bloomberg News

Home Capital Group Inc.’s second-biggest shareholder trimmed its holdings of the Canadian alternative mortgage provider as the stock rebounded in May.

Canadian Imperial Bank of Commerce’s asset management division, which oversees about C$124 billion ($92 billion), reduced its stake by almost 200,000 shares last month to 9.5 million, according to a company filing. CIBC Asset Management held 14.8 percent of Home Capital across its funds as of May 31, down from 15.1 percent on April 30.

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CIBC Asset Management amassed the majority of its stake in Home Capital in April when the stock was in free-fall after regulators accused the company of misleading investors over fraudulent loan applications. That led to a run on deposits and forced the firm to take on an expensive rescue credit line from a Canadian pension fund.

CIBC declined to comment on the reduction in the Home Capital stake.

On May 10, CIBC’s portfolio manager Colum McKinley said he was “disappointed” in how this position in Home Capital had fared to date, but expressed confidence that the company’s underlying value would eventually be reflected in its share price.  CIBC Asset remains the No. 2 holder after Turtle Creek Asset Management Inc., which had a 19 percent stake at the end of April, according to data compiled by Bloomberg.

The stock has rallied nearly 20 percent since the end of April as deposit flight slowed and the company beefed up its board with new directors including Alan Hibben, a former investment banker with Royal Bank of Canada, and Claude Lamoureux, former head of the Ontario Teachers’ Pension Plan.

Home Capital rose 8.1 percent to C$10.42 in Toronto Thursday, the biggest gain in three weeks.

The stock still lingers about 80 percent below its 2014 record high. The new management team so far has been unable to make good on its top priorities: hiring a new chief executive officer and replacing the C$2 billion credit line from a group led by the Healthcare of Ontario Pension Plan.

On May 15, Macquarie analyst Jason Bilodeau recommended that investors take profits in Home Capital after the stock had nearly doubled from levels seen earlier that month.

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Ratings company Fitch warned of escalating housing risks for Canadian banks in a report on Wednesday, but added that Home Capital’s liquidity problems were idiosyncratic and that asset quality doesn’t appear to be an issue.

CIBC gauged how the mortgage lender would hold up in a housing downturn before accumulating its position.

“When we started buying Home Capital we did so having stress tested a number of different scenarios related to the housing environment, and even with that we came to the conclusion that Home Capital was undervalued,” said McKinley in May.

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