Billionaire financier Stephen Smith is merging recently acquired Home Trust Co. with Fairstone Bank of Canada in a deal he values at about $5-billion to $6-billion.
Last year, a subsidiary of Smith Financial Corp. closed its acquisition of Home Capital, which owns Home Trust. Once combined with Mr. Smith’s other subprime lender, Fairstone, the new entity will have $30-billion in assets, two million customers and 250 branches across Canada.
The two banks are similar businesses with the same target market, but offer different products. Home Trust provides single family residential mortgages, commercial mortgages and credit cards, while Fairstone offers consumer loans, a Walmart rewards credit card, consumer auto finance lending and a point-of-sale financing business.
The lenders provide subprime lending to customers who typically would not qualify for loans at a bigger bank, such as business entrepreneurs, self-employed workers, and new immigrants who have yet to build a credit score.
“They’re typically not served by the big banks,” Mr. Smith said in an interview. “They may have other credit challenges and large banks aren’t suited to them. That’s our market – that’s the Fairstone market and that’s the Home Trust market.”
The deal requires approval from Canada’s Competition Bureau, the Office of the Superintendent of Financial Institutions and the federal Finance Minister. As a majority owner of Fairstone, Smith Financial will have a 75-per-cent stake in the combined company. Fairstone’s other current shareholders, New York-based private investment firm Centerbridge Partners LP and Ontario Teachers’ Pension Plan Board, will split the remaining ownership as minority shareholders.
Mr. Smith is a stalwart in Canada’s mortgage industry as the executive chairman and co-founder of First National Financial Corp., one of the country’s largest non-bank lenders.
Initially, Mr. Smith had said that he intended on keeping Home Trust as a stand-alone company. Over the past year, the lender hit Mr. Smith’s financial targets – including profit and net interest margins, or the difference between the amount the lenders charge for loans and pay on deposits – faster than expected, prompting him and Fairstone’s shareholders to consider merging the two banks.
The combination would allow the lenders to streamline their operations to reduce expenses, and cross-sell a larger suite of products to their customers.
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The companies have not yet decided on a name for the new entity, nor the roles that Fairstone chief executive officer Scott Wood and Home Trust CEO Yousry Bissada will have at the bank if the deal closes, which Mr. Smith expects to happen in six to nine months.
“I’ve had the chance to work closely with Yousry during this transaction, and he and I really see eye-to-eye on many things,” Mr. Wood said. “We’ll be partnering over the next six to nine months to build the integration plan to be able to pull the organizations together.”
Fairstone has seen record demand for some of its products over the past year, including personal loans, retail point-of-sale financing and in its indirect auto lending business. Customers have grappled with high interest rates and the rising cost of borrowing, prompting the larger banks to tighten their lending requirements, especially in unsecured loans, Mr. Wood said.
Mr. Bissada said that demand for mortgages picked up quickly this year as the Bank of Canada signalled that it could start cutting rates later this year.
“We are actually a bit surprised at how quickly it started coming back as early as December,” Mr. Bissada said. “As soon as the Bank of Canada in December said we may have hit the peak, it seemed to light a fire under people who maybe were concerned on the sidelines.”