Q1 2018 Financial Results Presentation May 9, 2018 Forward-Looking - - PowerPoint PPT Presentation

Q1 2018 Financial Results Presentation

May 9, 2018

From time to time Home Capital Group Inc. (the Company) makes written and verbal forward-looking statements. These are included in the Annual Report, periodic reports to shareholders, regulatory filings, press releases, Company presentations and other Company

• communications. Forward-looking statements are made in connection with business objectives and targets, Company strategies,
• perations, anticipated financial results and the outlook for the Company, its industry, and the Canadian economy. These statements

regarding expected future performance are “financial outlooks” within the meaning of National Instrument 51-102. Please see the risk factors, which are set forth in detail in the Risk Management section of the 2018 Q1 Report, as well as the Company’s other publicly filed information, which is available on the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com, for the material factors that could cause the Company’s actual results to differ materially from these statements. These risk factors are material risk factors a reader should consider, and include credit risk, liquidity and funding risk, structural interest rate risk, operational risk, investment risk, strategic risk, reputational risk, compliance risk and capital adequacy risk along with additional risk factors that may affect future results. Forward-looking statements can be found in the Report to the Shareholders and Outlook section in the 2018 First Quarter Report. Forward-looking statements are typically identified by words such as “will,” “believe,” “expect,” “anticipate,” “intend,” “should,” “estimate,” “plan,” “forecast,” “may,” and “could” or other similar expressions. By their very nature, these statements require the Company to make assumptions and are subject to inherent risks and uncertainty, general and specific, which may cause actual results to differ materially from the expectations expressed in the forward-looking

• statements. These risks and uncertainties include, but are not limited to, global capital market activity, changes in government

monetary and economic policies, changes in interest rates, inflation levels and general economic conditions, legislative and regulatory developments, competition and technological change. The preceding list is not exhaustive of possible factors. These and other factors should be considered carefully and readers are cautioned not to place undue reliance on these forward-looking

• statements. The Company presents forward-looking statements to assist shareholders in understanding the Company’s assumptions and

expectations about the future that are relevant in management’s setting of performance goals, strategic priorities and outlook. The Company presents its outlook to assist shareholders in understanding management’s expectations on how the future will impact the financial performance of the Company. These forward-looking statements may not be appropriate for other purposes. The Company does not undertake to update any forward-looking statements, whether written or verbal, that may be made from time to time by it or

• n its behalf, except as required by securities laws.

2

Forward-Looking Statements

• Good start to 2018 - Home is back

– Q1 2018 results mark another positive step forward towards being the leader in Alt-A lending – Growing originations and increasing core residential loan balances sequentially

• Robust balance sheet

– Strong capital and liquidity position

• Strategic Priorities

– Good progress made on near term priorities – Focused on Alt A market – Investing in technology

3

CEO Q1 2018 Highlights

Good growth and momentum in business

• Increasing originations - total originations of $1.16 billion increased 32.9% quarter over quarter
• Quality of new applications improved and turn down rate continues to improve
• Focused on growing residential and commercial business through broker education initiatives

that provide greater clarity on residential lending products and risk appetite, improving service for a better broker and customer experience

• Increasing renewal levels in Q1 2018
• Commercial segment continues to focus on building a healthy pipeline and adding underwriting

resources

• Improving operational execution by investing in people, process and technology

Strong Capital Position

• CET 1 Capital 23.64% - Capital position provides flexibility
• Reviewing opportunities to build and deploy our capital in a manner that emphasizes creating

long-term value and avoiding excessive risk

4

Q1 2018 CEO Highlights

Strategic Priorities

– Build a sustainable risk culture – Be the leader in Alt-A in service, technology and solutions – Develop robust and diverse liquidity sources and maintain a strong balance sheet – Profitably grow residential and commercial business, increase market share, relative to market conditions – Increase renewal and retention rates – Deepen broker relationships and increase outreach to advance higher-quality applications – Assess opportunities for the business as it relates to operating in the context of an evolving regulatory environment

5

Q1 2018 CEO Highlights

First Quarter 2018 Financial Results

6

Improving Profitability , Increasing Originations and Growing Single-Family Loan Balances

• Net income of $34.6 million in Q1 2018, an increase of 13.0%, from $30.6 million in Q4 2017
• Increasing originations – total originations $1.16 billion in Q1 2018 vs. $ 872.1 million in Q4 2017
• Non-securitized single-family residential mortgages $10.26 billion, an increase of 2.3% or $227.3 million from $10.04 billion at

Q4 2017, down $2.36 billion or 18.7% from Q1 2017

• Non-interest expense of $51.4 million in Q1 2018 decreased 21.5% or $14.1 million from $65.5 million in Q4 2017 and

decreased $13.1 million from $64.5 million in Q1 2017, a decrease of 20.3%

– Non-interest expenses are expected to increase for the remainder of 2018 principally due to salaries and benefits expenses and other operating expenses from lingering impact of costs stemming from the liquidity event – Quarterly salaries and benefits expense will increase between $5-6 million over Q1 2018 levels in subsequent quarters

• A number of factors stemming from the liquidity event in Q2 2017 continue to impact financial results when compared to 2017

performance

Mortgage portfolio performing well with low losses

• Weighted average current loan-to-value (LTV)(1) of the uninsured residential mortgage portfolio was 58.5% vs. 55.3% at Q4

2017 and 60.4% at the end of Q1 2017

• High credit quality with low provisions for credit losses
• Provision for credit losses (PCL) as a percentage of gross uninsured loans of 0.20%, compared to 0.12% at Q4 2017
• 98.9% of the mortgage portfolio is current, with 0.29% over 90 days past due
• IFRS 9 accounting may increase volatility of PCL in future periods

Deposit funding stable and ample liquidity available

• Aggregate available liquidity and credit facility of approximately $3.45 billion including the undrawn amount of $2 billion under

the Berkshire Hathaway credit facility as at Q1 2018 – Reviewing opportunities to replace the credit facility

• Able to raise or lower broker and Oaken deposit rates to match net deposit flows to mortgage origination volumes

7

Q1 2018 Financial Performance Highlights

• 1. Weighted average current LTV is defined in the Q1 2018 Management’s Discussion and Analysis.

8

Q1 2018 Financial Results

($ millions) Q1 2018 Q4 2017 Q1 2017 QoQ QoQ % Chg YoY YoY % Chg Net Income $34.6 $30.6 $58.0 $4.0 13.0% ($23.5)

• 40.4%

Diluted EPS $0.43 $0.38 $0.90 $0.05 13.2% ($0.47)

• 52.2%

Revenue $103.8 $109.5 $147.7 ($5.7)

• 5.2%

($43.9)

• 29.7%

NIM (TEB) 2.02% 2.02% 2.44% Flat (42 bps) Non-Interest Expenses $51.4 $65.5 $64.5 ($14.1)

• 21.5%

($13.1)

• 20.3%

Loans Under Administration $22.5B $22.5B $27.2B Flat 0.0% ($4.7B)

• 17.3%

Provision as a % of Gross Uninsured Loans 0.20% 0.12% 0.16% 8 bps 4 bps Net Non-Performing Loans Ratio 0.29% 0.30% 0.24% (1 bps) 5 bps Total Capital Ratio 24.12% 23.68% 16.77% 44 bps 735 bps CET1 Ratio 23.64% 23.17% 16.34% 47bps 730 bps Commons Shares Outstanding (000s) 80,246 80,246 64,204 Flat 16,042 25.0%

• Net income and EPS increased over Q4 2017 primarily from a decrease in non-interest expenses.
• NIM remained flat for Q1 2018 over Q4 2017, while net interest income decreased. The decrease in net interest income is primarily due to a decrease in

interest income from the traditional single-family residential mortgage portfolio, as well as an increase in the average rate of interest expense on deposits and credit facilities. Offsetting this was a decrease in the relative proportion of average lower-yielding cash resources and securities.

• Non-interest expenses for Q1 2018 were lower than Q4 2017 mainly due to $11.4 million in expenses included in Q4 2017 comprising a $6.3 million

impairment loss on intangible assets and costs related to the exit of the PSiGate and prepaid businesses, as well as litigation expenses.

• PCL as a percentage of gross uninsured loans was 0.20% compared to 0.12% in Q4 2017. Provisions for credit losses were calculated under IFRS 9 for Q1

2018 and under IAS 39 for 2017. Provisions for credit losses for 2017 were not restated. Q1 2018 PCL primarily related to single-family residential mortgage portfolio reflecting portfolio growth including volume of renewals and the impact of forward-looking macroeconomic information

• CET 1 ratio improved to 23.64% primarily as a result of the increase in Tier 1 regulatory capital from net-income.
• Common shares outstanding remained consistent with Q4 2017 and increased year-over-year due to the equity investment by a subsidiary of Berkshire

Hathaway of approximately $153.2 million to acquire a 19.99% equity stake in HCG.

9

Sequentially Increased Mortgage Advances

200 400 600 800 1,000 1,200 1,400 1,600 Traditional Single-family Residential Mortgages ACE Plus Mortgages Accelerator Single-family Residential Mortgages Residential Commercial Mortgages Non-Residential Commercial Mortgages Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018

(in millions) Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 QoQ % Chg YoY % Chg Total Mortgage Advances $2,345.6 $1,118.1 $385.1 $872.1 $1,159.2 32.9%

• 50.6%

Traditional Single-family $1,458.8 $699.9 $201.1 $515.7 $749.4 45.3%

• 48.6%

ACE Plus Single-family $106.0 $56.1 $1.5 $21.7 $61.3 182.5%

• 42.2%

Accelerator Single-family $147.6 $84.2 $21.3 $28.6 $59.0 106.3%

• 60.0%

Residential Commercial $294.8 $89.8 $99.1 $194.8 $104.9

• 46.1%
• 64.4%

Non-Residential Commercial $338.4 $188.1 $62.0 $111.2 $184.7 66.0%

• 45.4%
• Q1 2018 total single-family mortgage advances of $869.7 million, compared $ 566.0 million in Q4 2017

• Effective January 1, 2018, the Company adopted IFRS 9 Financial Instruments (IFRS 9)
• IFRS 9 replaced IAS 39 Financial Instruments: Recognition and Measurement (IAS 39). Refer to Note 2 of

Q1 2018 unaudited interim consolidated financial statements for additional information.

• Credit losses and delinquencies are expected to remain low in 2018; however, the Company is prepared

for volatility in these measures that may result from in forecast changes in the macroeconomic environment.

• Implementing the changes to OSFI Guideline B-20 could have a negative impact on the housing market

and economic growth in the Company’s largest market of Ontario. This in turn could contribute to deterioration in credit performance in future quarters, if the extent of the impact is more severe than widely expected. IFRS 9 requires consideration of forward-looking information, and may also add higher volatility to reported credit losses going forward.

10

Credit Performance

Q1 2018 Credit Performance

• Strong credit performance with total provision for credit losses (PCL) of $6.0 million in Q1 2018 (vs. $3.4

million in Q4 2017 and $5.9 million Q1 2017)

– PCL calculated under IFRS 9 for Q1 2018 and under IAS 39 for 2017. As provisions for credit losses for 2017 were not restated, comparability is reduced to some extent. Q1 2018 PCL primarily related to single-family residential mortgage portfolio reflecting portfolio growth including volume of renewals and the impact of forward-looking macroeconomic information

• Provision as a percentage of gross uninsured loans remained low at 0.20% (vs. 0.12% in Q4 2017 and

0.16% in Q1 2017)

• Net write-offs were $1.1 million and represented 0.03% of gross loans (vs. 0.11% in Q4 2017 and

unchanged from Q1 2017)

• Net non-performing loans (represented by Stage 3 loans under IFRS 9) as a percentage of gross loans

remained low at 0.29% at end of Q1 2018 (vs. 0.30% at end of Q4 2017 and 0.24% at end of Q1 2017)

– Provision on the commercial mortgage portfolio decreased $0.3 million, comprising a reduction of the provision on performing loans of $3.4 million, offset by an increase of $3.0 million for a specific commercial loan. This increase was included in Stage 3 under IFRS 9. – The Company continues to observe strong credit profiles and stable loan-to-value ratios across its portfolio, which continues to support low delinquency and non-performing rates and ultimately low net write-offs. 11

Credit Performance

• Maintained strong credit quality, non-performing loans remained at low levels
• Close monitoring of non-performing loans and proactive measures to minimize losses

12

Non-Performing vs. Net Write Offs as a % of Gross Loans

0.29% 0.03%

0.00% 0.05% 0.10% 0.15% 0.20% 0.25% 0.30% 0.35% 0.40% Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Net Non-Performing Loans as a Percentage of Gross Loans Net Writeoff's as a Percentage of Gross Loans

Liquid Assets

• $1.45 billion at Q1 2018 (vs. $1.65 billion at

Q4 2017 and $2.10 billion at Q1 2017)

• Aggregate available liquidity and credit facility

totaled approximately $3.45 billion including $2.0 billion undrawn credit facility at Q1 2018 Deposits

• $12.08 billion at Q1 2018 (vs. $12.17 billion at

Q4 2017 and $16.25 billion at Q1 2017)

• Lowered deposit broker and Oaken rates in Q4

2017 to match net deposit flows to loan

• rigination volumes. Increased rates in Q1

2018 to drive deposit origination in line with mortgage originations

13

Liquidity and Deposits

11.2 11.5 12.0 12.5 11.3

Total Broker and Oaken Deposits Payable on a Fixed Date – Excludes Demand Deposits and Institutional Deposit Notes

In ($) Billions, end of the month

10.5 10.0 9.6 9.4 9.2 9.3 9.3 2.0 2.0 1.9 1.8 1.8 1.8 2.0

2 4 6 8 10 12 14 Sept Oct Nov Dec Jan Feb Mar Oaken Broker

11.0 11.1

• 1. Excludes institutional deposits notes of $300 million and

Deposits payable on demand of $476 million as at Q1 2018. Total demand deposits at Q1 2017 were $2.4 billion and deposit notes were $804 million.

• Current capital provides safety and

flexibility

• Q1 2018 Capital ratios:

― CET 1 Ratio 23.64% ― Tier 1 Ratio 23.64% ― Total Capital Ratio 24.12%

• Capital ratios increased sequentially

mainly due to net income

14

Capital and Leverage Ratios

16.34% 17.06% 21.25% 23.17% 23.64%

Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018

16.77% 17.54% 21.74% 23.68% 24.12%

Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018

Basel III Common Equity Tier 1 Basel III Total Capital Leverage Ratio

7.29% 7.19% 7.89% 8.70% 9.02%

Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018

Questions

15

Q1 2018 Financial Results Presentation

APPENDIX

17

• Asset Liability model based on

long funding principle

• Near term non-securitized

mortgage book run off exceeds repayment schedule of contractual GIC maturities

• Securitization funding provides

the Company with low cost long-term matched funding

• $476 million of demand

deposits at March 31, 2018

18

Long Funded Balance Sheet

Maturity Profile as at March 31, 2018 ($ billions)

1. Total contractual fixed term deposits include $300 million in institutional deposit notes and exclude deposits payable on demand of $476 million as at March 31, 2018. Total demand deposits at March 31, 2017 were $2.4 billion. 2.4 6.7 2.5 0.6 12.2 1.6 4.0 4.1 2.0 11.7 2 4 6 8 10 12 14 0-3 months 3-12 months 1-3 years 3-5 years Total Non-Securitized Contractual Mortgage Maturities Contractual Fixed Term Deposit Maturities

19

Net Interest Margin

NIM (TEB)(1) NIM Non Securitized Assets (TEB) NIM Securitized Assets Spread of Non-Securitized Loans over Deposits (TEB)

1) NIM declined in Q2 2017 from Q1 2017 due primarily to elevated interest expense incurred during the quarter comprising primarily of the $100 million commitment fee incurred on the initial $2 billion emergency credit facility. 2) While returning to positive levels in Q3 2017, NIM continues to be negatively impacted by interest expense on the Berkshire Hathaway credit facility. Additionally, elevated deposit balances and higher rates on new deposits maintained downward pressure on net interest margins while building volumes kept mortgage rates low. 3) In Q4 2017 NIM increased to 2.02% from 1.85% in the previous quarter. The improvement over last quarter resulted primarily from prepayment penalty interest income earned in Q4 2017 on the early payment of a consumer retail loan portfolio and higher interest earned on government bonds combined with lower interest and fees on line of credit facility reflecting a full quarter with no drawn balances on the Berkshire Hathaway credit facility. 4) In Q1 2018 NIM was flat at 2.02% over last quarter, while net interest income decreased. The decrease in net interest income is primarily due to a decrease in interest income from the traditional single-family residential mortgage portfolio, as well as an increase in the average rate of interest expense on deposits and credit facilities. Offsetting this was a decrease in the relative proportion of average lower-yielding cash resources and securities.

2.44%

• 0.07%

1.85% 2.02% 2.02% Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 2.76%

• 0.19%

2.21% 2.46% 2.45% Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 2.93%

• 0.41%

2.62% 2.84% 2.60% Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 0.75% 0.50% 0.43% 0.30% 0.32% 1.58% 1.63% 1.17% 0.99% 1.10% Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018

CMHC-Sponsored Securitization Bank-Sponsored Securitization

Total on-balance sheet mortgage portfolio balance of $14.4B, of which 91.9% is residential mortgages

• 23.9% of mortgage portfolio is insured
• Weighted average current loan-to-value (LTV) of the uninsured residential mortgage portfolio

was 58.5%

• Condominiums represent 7.9% of the residential mortgage portfolio, with 26.7% insured

20

Mortgage Lending Q1 2018 Highlights

Single-Family Residential Loans by Province Insured Uninsured Equity Line Visa Total % British Columbia $262.2M $539.0M $2.8M $804.0M 6.2% Alberta $424.4M $245.9M $8.8M $679.1M 5.2% Ontario $1,830.4M $8,544.4M $297.4M $10,672.2M 82.7% Quebec $120.2M $213.7M $1.0M $334.9M 2.6% Other $269.4M $150.0M $1.9M $421.3M 3.3% Total $2,906.6M $9,693.0M $311.9M $12,911.5M 100.0%

21

Prudently Managed Mortgage Book

LTV Ratio (Q1 2015 – Present) Weighted-Average LTV Ratios by Geography (Q1 2018)

Uninsured Residential Mortgages Q1 2018(2) British Columbia 51.4% Alberta 64.0% Ontario 58.7% Quebec 60.0% Other 62.2% Total 58.5% Uninsured Residential Mortgages Originated Q1 2018(1) British Columbia 63.6% Alberta 68.8% Ontario 70.0% Quebec 72.9% Other 70.6% Total 69.4%

50.0% 55.0% 60.0% 65.0% 70.0% 75.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2015 2016 2017 2018 Weighted-average LTV Ratios for Uninsured Residential Mortgages Weighted-average LTV Ratios for Uninsured Residential Mortgages Originated During the Period

1. Weighted-average LTV is calculated by dividing the sum of the products of LTVs and loan balances by the sum of the loan balances. LTVs are calculated using appraised property values at the time of origination. 2. Weighted-average LTV is calculated by dividing the sum of the products of LTVs and loan balances by the sum of the loan balances.

OSFI Guideline B-20 became effective January 1, 2018. The key changes included:

• A qualifying stress test requirement for uninsured borrowers
• Guidance regarding the use of co-lending arrangements

The stress testing requirement is expected to have the most material impact on the Company’s addressable market as some borrowers may now only qualify for smaller mortgages due to the stress test. The impact on the Company’s addressable market and originations volume moving forward in 2018 is difficult to quantify given various forces affecting the market including:

• Changes in borrower behaviour, such as smaller loan sizes or increasing down payments
• Borrowers who may migrate from the prime market to the alternative space largely due to the stress test

requirement

• Strong growth expected to continue in the self-employed and new immigrant segments of the alternative

market

• Overall residential market activity in our focus areas

While the net impact to mortgage originations attributable to B-20 could be negative, renewal levels are expected to increase in the Company’s portfolio as existing borrowers may choose to renew rather than try and re-qualify under the new rules. The company is focused on providing competitive offerings to meet customer demands as well as improving service levels to help capture a larger share of the addressable market post B-20.

22

OSFI Guideline B-20

23

Investor Relations/ Media Contact

Home Capital Group Inc. Attention: Investor Relations 145 King St. West, Suite 2300 Toronto, ON, M5H 1J8 Canada Phone: (416) 933-5652 Toll Free Phone: (800) 990-7881 Inquiries: inquiry.homecapitalgroup@hometrust.ca Laura Lepore, AVP Investor Relations To arrange a meeting: Laura Lepore Phone: (416) 933-5652 Email: laura.lepore@hometrust.ca