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Home Capital hopes to capture more turf from big banks

Home Capital Group Inc. has made a name as an alternative mortgage lender to Canada's big banks. Now, it wants another slice of their turf - the mutual fund business.

While most analysts have a "buy" on Home Capital - a stock market darling for much of the past five years - some observers have concerns about this new strategy.

The Toronto-based trust company uses brokers to offer mortgages to consumers who have been turned down by the banks, as well as deposit, loan and credit card services.

After 42 consecutive quarters of profit growth, the company stumbled last year. The shares have rebounded sharply from $25 last fall, and rose 20 cents yesterday to close at $40. On Tuesday, Home Capital said it was diversifying into the funds business and hired former Cormark Securities Inc. analyst Jason Donville to be chief investment officer.

Like virtual bank ING Direct, Home Capital doesn't have bricks and mortar branches but can hook up with consumers through its website or call centres. Home Capital could start this by next RRSP season, but that could depend on buying a small private asset manager - the preferred option to building from scratch, said Mr. Donville, who will eventually run a financial services fund.

"People are looking for that one-stop shopping," Mr. Donville said in an interview. Mr. Donville, who has been a long-time bull on Home Capital, rated both his new employer (target of $48) and rival Equitable Group Inc. as "top picks" before leaving Cormack.

While most of the analysts believe Home Capital won't be hit by the same problems that hit the subprime mortgage industry in the U.S., it may take a while for Home Capital to win over the Street with its new strategy to get into mutual funds.

Desjardins Securities analyst Michael Goldberg is one analyst who likes the new strategy, but other aren't so sure.

Mutual funds would fit into Home Capital's model, Mr. Goldberg said. He has a "buy" on the stock with a target of $43.50. "It's all about helping the brokers, and giving the brokers more reason to do business with Home Capital," he said "Alternative lenders are companies that basically feast on the crumbs that fall off the banks' table."

But Blackmont Capital analyst Adam Seanor is more cautious, saying he has a "hold" on Home Capital with target of $42.

"This was a company that was growing at 30 per cent year-over-year," Mr. Seanor said. "I am forecasting more along the lines of 15- to 20-per-cent growth." Home Capital is in a very profitable business, but it needs to "look for new avenues" to increase revenues, he said.

Selling mutual funds "makes a lot of sense" given the lender's access to distribution, but he is concerned there are already too many players in the business. "It's a very competitive market," he said.

Chris Fernyc, a portfolio manager with Calgary-based Bissett Investment Management, is not convinced Home Capital needs to diversify into mutual funds.

"It seems like a distraction to me," said Mr. Fernyc, who owns Home Capital stock in his Bissett Small Cap Fund. "It ultimately confuses the story ... with Home Capital going from a pure play to a financial services holding company," he said. There are no synergies between an asset manager and a mortgage lender, he added.

"The asset management business is a great business and is super profitable," Mr. Fernyc said. "Look at CI and AGF. Great fortunes have been made, including our own shop. But it's tough to get into the game now."

© 2007 The Globe and Mail. All rights reserved.

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