Home Capital Group Inc. declined another 11 per cent after the Canadian mortgage lender reported additional deposit withdrawals, prompting one of its biggest rivals to seek a new credit line from banks to stem any contagion across the country’s financial markets.

Home Capital fell to $7.14 in Toronto on Monday, extending this year’s drop to about 77 per cent, on concern that redemption of guaranteed investment certificates, or GICs, by nervous investors would worsen the lender’s deteriorating cash crunch. High-interest deposits have declined about $1.6 billion, or 80 per cent, over the past month to about $391 million, the company said Monday.

Here’s Home Capital’s intraday stock chart for the past five days:

“They could be at risk,” said Jaeme Gloyn, an analyst at National Bank Financial Inc. “If investors are pulling their high-interest savings accounts, it’s natural to think that other clients would also be looking to pull their GIC investments.”

The selloff in Home Capital’s stock and bonds are raising concern that its funding woes may spread to other mortgage lenders and derail a housing market that’s been a key driver of growth for Canada’s economy, accounting for as much as a fifth of output.

Equitable Group Inc., another alternative mortgage lender, said Monday it took out a $2 billion credit line with a group of Canadian banks after it started seeing “an elevated but manageable” decrease in deposit balances. Customers withdrew an average $75 million a day between Wednesday and Friday. The withdrawals represented 2.4 per cent of the total deposit base. Liquid assets remained at roughly $1 billion after the outflows.

Better Terms

Equitable’s loans terms were much more favorable than Home Capital’s, which is paying an effective rate of 22.5 per cent on the first half of the $2 billion credit line that it tapped Monday from the Healthcare of Ontario Pension Plan. Equitable is paying a 1.25 per cent interest rate on the drawn portion, and a 0.75 per cent commitment fee and a 0.5 per cent standby charge.

“The issues affecting the well-known trust company in Toronto are their issues alone, and it’s unfortunate the banking industry has been dragged into it,” Andrew Moor, chief executive officer of Equitable, said on a call Monday to discuss earnings, which were published almost two weeks earlier than planned due to the events with Home Capital.

Equitable shares soared 28 per cent to $46.74 in Toronto, helping recover some losses from last week.

The Ontario Securities Commission last month accused Home Capital — which provides mortgages to home buyers who have trouble getting loans from Canada’s big banks — and some executives of misleading investors and breaking securities laws. The allegations stem from a 2014 internal probe that discovered 45 brokers who generated $1 billion of mortgages for Home Capital falsified income information for borrowers on some of the mortgages. The OSC alleges that Home Capital failed to properly disclose the fraud to investors.

Bonds Hit

The company’s bonds have fallen along with the stock. Home Capital’s bonds maturing in December next year were trading little changed at 90.7 cents on the dollar on Monday, according to Bloomberg data, yielding about 10 per cent, compared with less than 3 per cent on April 19.

Home Capital external spokesman Boyd Erman was not available for comment.

The company has a busy week in store. It’s scheduled to announce quarterly earnings Wednesday. The next day, the Ontario Securities Commission is slated to hold a hearing on Home Capital’s alleged breaches of securities rules.

Home Capital’s $12.9 billion in GIC deposits are essential to fund its mortgage business, which represents one per cent of the Canadian mortgage market. Withdrawals could accelerate as these short-term deposits mature.

Declining deposits could lead to a windup of the company, which would be monitored by the federal bank regulator, the Office of the Superintendent of Financial Institutions. The lender said Thursday it has hired BMO Capital Markets and RBC Capital Markets to conduct a review of strategic options, signaling that a sale may be on the table.

“OSFI maintains ongoing relationships with the financial institutions it supervises,” Annik Faucher, an OSFI spokeswoman, said by email. “While we are prevented by law from discussing the affairs of the individual financial institutions we regulate, or our ongoing supervisory work, I can confirm that OSFI is continuing to monitor the situation closely.”

Canada’s banking regulator keeps an eye on financial institutions for solvency, liquidity, safety and soundness, and has a number of supervisory and regulatory tools that it can use to enforce OSFI requirements, she said.

Meanwhile, Home Capital’s biggest investor is sticking with the company, adding to its position.

Toronto-based Turtle Creek Asset Management Inc., which owned almost 14 per cent of Home Capital as of the end of February, praised the lender for its low loss rate and underwriting practices.

“To be clear, we have not sold shares; indeed, the opposite is the case,” according to an investor letter, signed by Chief Executive Officer Andrew Brenton, managing partner Jeffrey Cole, and managing partner Jeffrey Hebel. “We are obviously not happy with recent developments at Home Capital, but we remain focused on long-term value creation for you, our fellow investors.”

Bloomberg.com