Fairstone Bank, Home Trust to merge

Smith Financial Corp. is merging a pair of its portfolio companies in a move it says will create the leading alternative lender in Canada.

The proposed combination of Fairstone Bank of Canada, which focuses on consumer loans, with mortgage-focused Home Trust Co. comes after Smith Financial closed its acquisition of the latter last year.

Combining the two firms would create an alternative lender with more than two million customers and 250 branches. 

The combination would create a stronger capital base and also create synergies in areas like risk management and marketing, said Smith Financial founder and CEO Stephen Smith.

“By bringing them together, we can capitalize further on that expertise, so that makes us more competitive.”

Fairstone Bank offers credit cards and rewards programs, point-of-sale financing, automobile financing and personal loans, while Home Trust is focused on residential and non-residential mortgages, credit cards and guaranteed investment certificates.

The alternative lenders tend to serve customers who find it difficult to secure loans from more conventional sources like banks, whether it’s because of a poor credit score, less predictable income, or they’re newcomers to Canada.

Under the deal, Smith Financial will own a majority stake in the new company, while Fairstone Bank’s other shareholders — Centerbridge Partners LP, Ontario Teachers’ Pension Plan Board and management — will continue as minority owners.

The new combined entity would likely keep either the Fairstone or Home Trust name, but it’s not yet decided, said Smith.

The deal is subject to customary closing conditions, including regulatory approvals. 

The deal comes as consumers are showing increased strain from high interest rates, but executives at both Fairstone and Home Trust characterize it as more of a normalization of credit with still solid repayments. 

“We see a very, very strong commitment to pay off debt by Canadians,” said Yousry Bissada, president and CEO of Home Trust.

He said that while some will likely be forced to sell, borrowers largely have enough equity in their home to provide a buffer.

“So even though they might be in arrears, there’s lots of opportunity for them to sell and get out of it without penalty to them or to us.”

The lenders said they’re also seeing higher demand as banks tighten up their credit standards, and are not expecting further deterioration in delinquency levels.

The proposed merger also comes as the federal government is moving to lower the maximum allowed interest rate to 35% on an annualized percentage rate basis, down from 47%. 

Fairstone is fully prepared to meet the government’s policy cap, with less than 15% of Fairstone’s loans above the 35% rate, said its chief executive Scott Wood. 

Smith said he doesn’t expect the federal government to lower the rate further, and that he believes it understands that the interest rates charged reflect the risk involved.

Overall, he said he’s excited to work to close the deal in the months ahead.

“What we’re focused on the next six to nine months is to put the businesses together…and offer more products to Canadians everywhere in the country.”