As the Home Capital Group Inc. (TSX:HCG) debacle has continued to make headlines, investors have started getting concerned its problems are spreading through the market.
One of the casualties has been Canadian mortgage lender First National Financial Corp (TSX:FN), which has much in common with Home Capital. Both use mortgage brokers to fund loans without the overhead of physical branches. Both companies also heavily use the bond market to get the cash needed to make loans.
But it’s also easy to argue First National is nothing like Home Capital.
First, First National markets itself strictly to borrowers with the best credit scores. Home Capital deals with borrowers regular banks have already turned down. It’s obvious Home Capital’s portfolio is riskier than First National’s.
Then there are funding sources. First National doesn’t offer GICs or high-interest savings accounts. It deals with institutional investors. Home Capital’s issues all started when money started leaving its high-interest savings accounts.
Finally, First National is not being actively investigated by the Ontario Securities Commission. It is free of any scandals.
There’s little argument about First National’s valuation today. Shares trade hands at just 7.7 times trailing earnings. Considering the company’s revenue growth – up approximately 80% in the last five years – that’s an incredibly cheap valuation.
First National also offers a 7.4% dividend. Management is clearly confident in the payout; they just upped it to 15.14 cents per share each month.
The bottom line? If the current issues are contained to Home Capital, First National shares are a terrific bargain. If they spread, First National will likely be hurt as well.
