In our opinion, a series of recent events have increased the near-term downside to business risk for Home Capital Group Inc. (HCG), including the preliminary Ontario Securities Commission (OSC) enforcement notices concerning HCG and several of its officers and directors, disclosed by the company in February, as well as the recently filed Statement of Claim and Notice of Action regarding a proposed class action lawsuit. We believe elevated and continued staff turnover at the executive level may imply increased uncertainty regarding the company's strategic direction, as well as a distraction from addressing core business objectives that could result in underperformance. We view HCG's heavy concentration in nonprime residential mortgages as implying more vulnerability, compared with most Canadian banks, vis-à-vis the
