First National Financial Corp is Canada’s largest non-bank mortgage lender. In the last thirty years of its business, the company has built a leading reputation in real estate financing with more than $117 billion in Mortgages Under Administration and is the largest commercial mortgage lender in the country today.
Residential (single-family residential mortgages) and commercial (multi-unit residential and commercial mortgages) are its two operating business segments. Prime mortgages account for about 94% of its MUA.
Nearly 78% of First National’s MUA is insured mortgages, followed by uninsured single-family residential (16%) and uninsured multi-unit residential and commercial mortgages (6%). It maintains diverse and flexible funding sources and is known for its prudent and conservative underwriting practices.
Size, large national presence and focus on mortgage financing are key differentiators for the company. First National serves more than three million borrowers across Canada. Its status is that of an income trust.
- Opportunity Score: 49
- Ticker: TSE:FN
- Sector: Financial Services
- Industry: Mortgage Finance
- Market Cap: 2.91B
- P/E: 15.52
- Dividend Yield: 4.33%
- Payout Ratio (Earnings): 67.31%
- Canadian Dividend Aristocrat: NO
- Chowder Score: Members Only
- Revenue Growth: Members Only
- Dividend Growth: Members Only
- Dividend Growth Fit: 4/10
- Dividend Income Fit: 7/10
Revenue Growth & Market Exposure
First National is Canada’s largest non-bank originator and underwriter of mortgages and is among the top three in market share in the mortgage broker distribution channel. The majority of First National’s MUA is insured and is funded through sources that result in no residual credit risk.
First National’s funding model is known for delivering cost-effective mortgage financing over a range of market conditions. The company’s proprietary technologies such as MERLIN and My Mortgage are effective tools for mortgage brokers and borrowers respectively.
First National’s MUA has grown at a rate of 5% CAGR in the last five years. Revenues are driven directly by the value of Mortgages under Administration. The company’s core business comprises of funding its origination activities through a variety of sources, complemented with a third-party underwriting and servicing business.
First National’s broad range of mortgage solutions and innovative customer service has made it a preferred choice for hundreds of thousands of borrowers and independent mortgage brokers from coast to coast. Its partners include independent mortgage brokers, large insurance companies, banks, and wealth management firms.
First National originated and renewed mortgages worth more than $28 billion in 2019 and grew them at the rate of 30% YoY, in the latest quarter. Its earnings benefited from strong origination and wider mortgage spreads. The company is expecting higher seasonal residential origination and commercial originations at larger spreads at the start of FY 2021. A resilient housing market across Canada acts as a strong tailwind for the company.
First National is effectively placed to provide financing across Canada. The company is in a good position to leverage from a growing Canadian mortgage market which is valued at over $1.1 trillion. First National’s business continues to benefit from population growth, aging demographics, and the demand for rental multi-unit apartments in urban markets. Its revenues have grown at ~8% CAGR in the last five years.
First National has grown its dividends every year in the last thirteen years since its IPO and has also paid special dividends in each of the past four years including the one declared in December 2020.
Its annual dividend yield is very attractive at more than 5% currently and it sports a payout ratio of 75%. The company last raised its dividend by 9% annually and has grown them at a 5% CAGR every year in the last five years. It pays a dividend on a monthly basis.
First National has paid close to $1.4 billion to shareholders in dividends since its IPO in 2006. The company has a large MUA that generates continuing income and cash flow to support future dividends. First National also earns stable and recurring income from servicing the mortgages.
The company has a $34 billion portfolio of mortgages pledged under securitization and $81 billion service mortgages which act as a good source of cash flows. It earns a large portion of its revenue by the gross interest earned on the mortgages pledged under securitization.
First National continues to have considerable liquidity as a result of its funding model, and access to various channels to fund its mortgages and generates excess capital to fund its near-term growth opportunities from operations. The company currently commands a small share of Canada’s single-family mortgage market which grants it sufficient room for future expansion.
First National’s principal competitors are the chartered banks and other entities originating mortgages from mortgage brokers. It competes with the likes of Equitable Group Inc. which is a leading Canadian financial services company offering a wide range of residential and commercial lending and savings solutions to its clients.
Strong relationships with mortgage brokers and diverse funding sources set First National apart from its competition. Uncertain securitization margins and tighter mortgage spreads are the company’s concerns.
With low interest rates and falling house prices, it is a good time for Canadians to buy their own house. First National’s strong relationships with mortgage brokers and diverse funding sources should support its future growth. Despite the challenging environment, FNFC continued to increase its regular monthly dividend and also paid a special dividend during the year.
The company expects future growth on the back of a full range of mortgage solutions for Canadian single-family and commercial customers, growing assets under administration, and a conservative risk profile.