In spite of a trading software error in early August that cost Knight Capital Group upwards of $400 million and led the company to near-insolvency, the company is likely to hold on to its reverse mortgage business, says Morningstar analyst Michael Wong.
“The reverse mortgage company could be a differential advantage,” Wong told RMD, with respect to other Wall Street Institutions. “From Knight’s perspective, [Urban Financial] is diversifying their revenue streams.”
Knight, which is known on Wall Street for its market-making and trading businesses, received a bailout following the trading software glitch from several companies including its competitors. Holding on to Urban Financial could provide some stability in light of the loss, Wong says.
“From a balance sheet perspective, this would be a business some companies would not want to get into,” he says, referencing the recent exits of large banks from the reverse mortgage space. “But it’s not as restrictive for Knight, not being a bank holding company.”
The company’s origination platform and ongoing production of reverse mortgages may provide another indication that Urban is an asset of value to its parent company.
“If you look at the retail origination business like Urban, Urban also has a large institutional sales trading business. Having the origination platform works well for the company even if it is not one of Knight’s founding businesses. They do have a good sales force, so there is some synergy in reverse mortgages and in sales trading.”
Morningstar downgraded its fair value estimates of Knight Capital Group from $19 per share to $16 per share on July 31. After the loss became known, the estimate fell further to $13 per share. On August 7, after the terms of the financing deal were disclosed, Morningstar lowered its fair value estimate to $4.20 from $13.
The company has stated publicly it remains committed to Urban and that the trading error did not present a capital loss to the reverse mortgage lender.
Written by Elizabeth Ecker