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spk00: Good day and thank you for standing by and welcome to the GoEC's first quarter 2022 financial results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone or touchtone key. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Farhan Ali Khan. Thank you. Please go ahead.
spk06: Thank you, operator, and good morning, everyone. My name is Farhan Ali Khan, the company's Senior Vice President and Chief Corporate Development Officer, and thank you for joining us to discuss GoEasy Limited's results for the first quarter ended March 31, 2022. The news release, which was issued yesterday after the close of market, is available on Globe Newswire and on the GoEasy website. Today, Jason Mullins, GoEasy's President and Chief Executive Officer, will review the results for the first quarter and provide an outlook for the business. Hal Khoury, the company's Chief Financial Officer, will also provide an overview of our capital and liquidity position. Jason Appel, the company's Chief Risk Officer, is also on the call. After the prepared remarks, we will then open the lines for questions from investors. Before we begin, I remind you that this conference call is open to all investors and is being webcast through the company's investor website and supplemented by a quarterly earnings presentation. For those dialing in directly by phone, the presentation can also be found directly on our investor site. All shareholders, analysts, and portfolio managers are welcome to ask questions over the phone after management has finished their prepared remarks. The operator will pull up your questions and will provide instructions at the appropriate time. Business media are welcome to listen to this call and to use management's comments and responses to questions in any coverage. However, we would ask that they do not quote callers unless that individual has granted their consent. Today's discussion may contain forward-looking statements. I'm not going to read the full statement, but will direct you to the caution regarding forward-looking statements included in the NDNA. I will now turn the call over to Jason Mullins.
spk05: Thanks, Farhan, and welcome to the call, everyone. Today I will recap the highlights from the quarter and the progress we have made on our strategic initiatives and then pass it over to Hal to provide an update on our capital position and funding capacity. I will then spend some time talking about why we are confident our business is well positioned to perform through the current and projected economic conditions before wrapping up with an update on our outlook. The first quarter continued to highlight the growth potential of our business model. as all products and channels experienced a lift in origination volume, leading to a material increase in loan growth during a typically seasonally slower period. During the quarter, we continued to experience healthy consumer demand, as Canadians have largely adjusted to life with COVID-19 and borrowing and payment behavior has returned to more normal levels. Combined across all channels, we received a record number of applications for credit at over 330,000, a 62% increase year over year. The increase in application volume led to loan originations in the quarter of $476 million, an increase of 75% over the first quarter of 2021. With elevated lending activity, the consumer loan portfolio grew $124 million during the quarter, a record level of first quarter loan growth, and a 300% increase over the $30.5 million of net growth in the first quarter of last year, a strong signal that our business strategy is proving effective. The growth in the quarter resulted in an ending consumer loan portfolio of $2.15 billion, up 65% from the prior year. Of note, we experienced performance that exceeded our expectations in several key areas. Auto lending activity in the quarter continued to scale up as we increased our automotive business development team to 17 reps, who have done a remarkable job increasing our active dealer network from 1,400 to over 1,700 today. In total, 7% of all the customers we acquired in the quarter were issued an auto loan. We also experienced strong performance in our home equity loan product, producing $50 million in loan originations, nearly double the volume from the prior year. This product has an excellent credit profile, with the customers typically living in suburban and rural communities and an average home value of under $500,000. Inclusive of our home equity loan, the average loan-to-value ratios on this portfolio are approximately 65%. This product has always carried the lowest level of credit risk in our portfolio. Lastly, we continue to see strong cross-selling activity across our customer base, a key synergy identified in the acquisition of LendCare. While our cross-selling activity remains only a fraction of the future potential, our data continues to show that when we make offers to active customers, between 10% and 30% of them will convert into a subsequent loan product after 12 months, depending on the initial loan product they took. This performance is proving that our strategy to become the one-stop provider of all forms of credit for the non-prime consumer is beginning to prove out. By graduating our borrowers to lower priced products, we continue to bring down the weighted average interest rate for our customers. During the quarter, the weighted average interest rate on the portfolio declined to 33.3%, down from 37.8% last year. Combined with ancillary revenue sources, the total portfolio yield finished within our forecasted range at 38.7%. Total revenue in the quarter was a record $234 million, up 35% over the same period in 2020. We also continued to experience stable credit performance, with the annualized net charge-off rate finishing at 8.8% in the quarter within our target range of 8.5% to 10.5% in 2022. With credit performance performing well, our loan loss provision rate was broadly flat at 7.78%, down nine basis points from 7.87% in the fourth quarter of 2021. We believe this level of provisioning reflects the new structural credit risk of the portfolio and sufficiently contemplates potential deterioration in the overall economic environment based on probability-weighted economic scenarios. Operating income for the first quarter of 2022 was $80 million, up 25% from $63.9 million in the first quarter of 2021. Operating margin for the first quarter was 34.4%, down from 37.6% in the prior year. After adjustments, including items related to the acquisition of LendCare, an unrealized fair value loss on investments and corporate development costs recorded in the quarter, we reported adjusted operating income of $86.1 million, up $21.5 million, or an increase of 33%, compared to $64.6 million in the first quarter of 2021. Adjusted operating margin for the first quarter was 37.1%, down slightly from 38% in the prior year. Net income in the first quarter was $26.1 million, which resulted in diluted earnings per share of $155 compared to $714 in the first quarter of 2021. However, in the first quarter of the prior year, we recorded an unrealized gain on investments of approximately $75 million, while in the current period we recorded an unrealized loss on investments of approximately $15 million related to the mark-to-market of our remaining unhedged shares in Affirm. Notwithstanding the mark-to-market adjustments, this has been an excellent investment, including the cash received on the initial sale of Paybrite to Affirm. The total realized and unrealized gains amount to nearly $120 million relative to the initial investment of $34 million made in 2019, or approximately three and a half times our initial investment. After adjusting for these non-recurring and unusual items on an after-tax basis, adjusted net income was $45.8 million, up 25% from $36.7 million in 2021. Adjusted dilute earnings per share was $2.72, up 16% from $2.34 in the first quarter of 2021. As previously noted, we experienced accelerated growth in the quarter of $124 million, or $34 million above the midpoint of our original expectations. As a result, we incurred the additional loan loss provision expense that is required to be taken on the growth in our receivables. This additional expense ultimately reduced our earnings by an estimate of approximately 12 cents in earnings per share during the quarter. However, as we have said in the past, allocating capital to organic growth generates the strongest long-term return for shareholders. Carrying an additional $34 million in additional receivables produces approximately 21 cents in earnings per share in future years. Before passing it back to Hal, I also want to thank and acknowledge all our incredible women across Go Easy. This past quarter, we were proud to have been recognized on the Globe and Mail's Women Lead Here list, an editorial benchmark to identify best-in-class executive gender diversity in corporate Canada, which includes some of Canada's largest and best-performing organizations. We have worked hard to create a culture of diversity and inclusion that sets the tone from the top, with a highly diverse board and executive team. Ranking on the list is a testament to the steps we have taken to level the playing field, such as achieving gender pay equity in 2019 and increasing the female representation in our C-suite to nearly 30%. Although we are proud of the progress, we remain committed to challenging biases and creating a culture that advances gender equality at all levels of the organization. With that, I'll now pass it over to Hal to discuss our balance sheet and capital position before providing some comments on our outlook.
spk07: Thanks, Jason. During the quarter, we closed on the balance sheet enhancements previously discussed on our securitization warehouse, where we increased the total capacity from 600 million to 900 million, while syndicating the facility and adding several marquee banks. On the revolving credit facility, we extended the term reduce the limit slightly, improve the flexibility, and reduce the interest rate by 75 basis points when taking draws tied to Canadian bankers' acceptance rate, and 125 basis points when taking draws tied to the bank prime rate. Between the two facilities, we are fortunate to have participation from five of the six major Canadian banks and total capacity of nearly 1.2 billion, a testament to their confidence in our business. Given the conditions in the market, we elected to use $41 million of our available capital to opportunistically repurchase our shares at a level we feel is below their intrinsic value, buying approximately 280,000 shares during the quarter. Subsequent to quarter end, we have since purchased an additional approximate 168,500 shares for $20 million, bringing our year-to-date purchases to approximately 448,000 shares and $61 million of repurchase volume. While share repurchases serve to temporarily increase our leverage position, they are highly accretive to the future earnings per share of the company at these price levels. Despite the strong growth in share repurchase volumes, at quarter end, our net debt to net capitalization was 68%, below our targeted level of 70%. Based on the cash at hand at the end of the quarter and the borrowing capacity under our recently amended revolving credit facilities at quarter end, we had approximately $801 million in total funding capacity, which we estimate is sufficient to fund our organic growth through the second quarter of 2024. Inclusive of these amendments, our fully drawn weighted average cost of borrowing reduced to 4.3%, with incremental draws on our senior secured revolving credit facility bearing a rate of approximately 4%, and incremental draws on the amended securitization facility bearing a rate of approximately 3.3% prior to interest rate swaps. Most important, we have incredibly strong relationships with the banks, providing us funding, and we are in regular dialogue about additional capital to ensure we maintain sufficient liquidity to fund our ambitious plans. In an environment like the one we are in, it is important for investors to understand the cash-producing capability of the business. We estimate that once our existing and available sources of capital are fully utilized, we could continue to grow the loan portfolio by approximately $200 million per year solely from internal cash flows without the need for any additional capital. Furthermore, if we were to run off our consumer loan and consumer leasing portfolios, the gross value of the total cash repayments paid to the company over the remaining life of its contract would be approximately $3.1 billion. If during such a runoff scenario with reasonable cost reductions and all excess cash flows were applied directly to debt, we estimated we could extinguish all external debt within 15 months. Last quarter, I highlighted some key reasons why GoEasy was well positioned to manage through a rising rate environment and why we have a partial shelter from rising rates, which I would like to recap. First and most significant is the effect of mix shift. Much like our consumer loan portfolio is shifting towards lower-priced consumer loans, so too is our debt stack. We expect that nearly all the funding to support our three-year organic growth plan going forward will be from lower-cost secured funding facilities. As a result of the shift in mix, even if rates on those facilities were to rise, they are still projected to remain below our current weighted average drawn cost of debt of 4.75% in the quarter for a period of time. As noted earlier, incremental draws on the securitization warehouse today are approximately 3.3%. Secondly, all the draws we have made to date on the securitization warehouse and those we will make in the future have interest rate swap agreements put in place to hedge the interest rate risk and fix the rate going forward. As a result, the impact on rising rates only affects incremental securitization draws, resulting in a much slower and gradual impact on the overall cost of borrowing. Today, approximately 95% of our drawn debt is already at fixed rates. Combined, we expect our actual cost of debt on drawn balances to remain fairly stable for the next year despite the rising rates. Turning briefly to our investments, during the quarter we recognized a $17.5 million pre-tax net unrealized fair value loss on investments, which was mainly related to the unhedged contingent shares of our investment in a firm, The write-down was partially offset thanks to the pre-tax unrealized fair value gain in the related total return swaps. Since the initial shares of Affirm were obtained on January 1, 2021, we have recognized a realized gain on the non-contingent portion of the investment in Affirm and its related total return swaps of over $66 million, and a cumulative unrealized fair value gain on the contingent portion of the investment in Affirm and a total return swap of $31.4 million. Including the cash we received on the initial sale of pay break to a firm, the total realized and unrealized gains amounts, inclusive of this quarter's adjustment, amount to nearly $120 million. Relative to our initial investment of $34 million made in 2019, this is an approximately 3.5 times return on our investment. Furthermore, we reserve the right to hold our unhedged shares upon investing for a period of our choosing, providing the opportunity for additional gains in the future as markets adjust. All said, with $800 million of funding capacity, several tactics to soften the impact of rising rates on our cost of borrowing, and a disciplined capital allocation strategy that has us funding organic growth first, followed by opportunistic share repurchases, we are in an excellent position to continue our ambitious growth plans. I will now pass the call back to Jason for an update on our outlook.
spk05: Thanks, Hal. It has clearly been a great start to the year with strong loan growth and stable credit performance thanks to the work of our remarkable team. We continue to make great progress on our strategic initiatives. During the quarter, we began the design of our new digital lending ecosystem, which will connect our product and channels through a mobile app and enable customers to obtain access to pre-approved loan offers. We are continuing to scale up our auto financing program as we track toward this year's goal of 2,200 active dealer partners and ramp up our direct-to-consumer offering. Lastly, we are well down the path of integrating a prime lender into our POS financing platform so we can begin offering a truly full-spectrum solution to our merchant partners. Notwithstanding the success and growth momentum, we appreciate there may be questions about how the business will navigate through economic weakness and what impact that has on our long-term guidance. For nearly 10 years, we have published three-year commercial forecasts for investors. These projections are built with the same consistent philosophy each year. Based on the products and initiatives in market, we develop a bottom-up projection of originations that our data and research suggest is reasonable and achievable. We then stress the model with more ambitious and more conservative cases, which in effect account for a variety of potential tailwinds and headwinds including the potential for a degree of economic turbulence. In our modeling, we anticipate a downside case, in which more challenging conditions influence lending activity and credit performance. As such, we only adjust the ranges provided in our forecast if we experience extreme economic conditions, or the product and credit mix evolve materially different than anticipated. This approach has served us well, and we have consistently achieved or exceeded our forecast. In examining the current economic backdrop, there are both a series of tailwinds and headwinds facing the consumer. On one hand, we are experiencing strong economic growth in tandem with a general labor shortage, resulting in extremely low unemployment. Unemployment is at an all-time low of 5.2%, and wage growth has been between 3% and 4%. This bodes well for our customers, as obtaining employment, pursuing a new career, or increasing their wages is perhaps easier now than in generations. Furthermore, consumers appear ready, willing, and able to return to their typical borrowing and spending behaviors as COVID restrictions have all but vanished and most people are anxious to live their lives again. On the other hand, excess money supply from government stimulus, strong consumer demand, and severe supply chain challenges have resulted in higher levels of inflation, which have exceeded the level of wage growth for several months running, which in the long term can put pressure on consumer cash flows. To carefully navigate economic conditions, we utilize a series of credit risk management tools. First, we employ several custom proprietary credit models that allow us to increase or decrease the level of credit risk we accept by lowering or increasing our credit tolerance. Our models, which have been developed and refined over 10 years using thousands of data variables, are statistically two times more predictive at projecting loss risk than a generic credit score. Secondly, our underwriting process includes an affordability component driven by either a debt-to-income or payment-to-income ratio varying by product. Through adjusting these ratios and the size of loan we are willing to issue a customer, we can effectively ensure that a borrower is left with additional discretionary income to absorb higher everyday living expenses. Given that our portfolio liquidates at a rate of approximately 45% per annum, we can affect the underlying composition quickly, with credit or underwriting-related modifications impacting nearly 50% of our portfolio within just 12 months of lending activity. By carefully monitoring the economic outlook, we can make proactive credit adjustments in advance of economic expansions or contractions. While growth remains strong, we have, in fact, already embedded a number of credit optimizations into our models and will make additional incremental improvements in the coming months. As we have communicated in the past, non-prime consumers and the companies lending to this category of borrowers are also incredibly resilient. There are critical points of consideration that explain why non-prime consumers experience a more moderate degree of change in default rates during an economic downturn than prime borrowers, and why non-prime consumer lending businesses are well equipped to navigate through these downturns. These include, number one, our customers have lower levels of total debt. In fact, Canadians with non-prime scores have 55% less debt than Canadians with prime credit scores. Prior to the pandemic, non-prime Canadians held balances of approximately $230 billion in credit, excluding primary residential mortgages, and the market was growing at a CAGR of approximately 4%. By the end of 2021, the total debt balances fell by 20% to $184 billion. Meanwhile, in the prime lending market, total balances actually continued to grow, topping $661 billion in 2021, growth of nearly 5%. The slower balance growth in non-prime is clear evidence that the average non-prime Canadian experienced an improvement in their finances throughout the pandemic, highlighting the significant growth opportunity available as the market cracks and the ability of these consumers to weather economic pressure. Number two, our customers have less exposure to rising interest rates due to lower home ownership, as only 20% of go-easy borrowers own their homes compared to over 65% of the overall population. Number three, non-prime consumers have a higher propensity to purchase credit insurance, Approximately 50% of our portfolio today carries incremental insurance for unemployment risk with a third-party provider of credit insurance. Number four, our secured loan levels have increased, with a portion of our portfolio secured by hard assets such as real estate or automotive and recreational vehicles increasing to over 33% of the portfolio. Number five, our customers work in a wide and diverse variety of industry sectors, including manufacturing, retail, financial services, healthcare technology, and public sector jobs with no significant industry-specific concentration risk. Number six, there is regular government support. Canada's standard unemployment insurance program covers approximately two-thirds of an average consumer's after-tax income. Number seven, our business model is inherently designed to accommodate a large level of stress. In fact, due to the risk-adjusted margins and variable nature of many operating expenses, Net charge-offs can more than double before compromising profitability, an increase that is well beyond what we or any of our peers in the non-prime space have experienced during economic shocks in the past. Number eight, the business can produce very strong free cash flow. If new lending activity was slowed and we were to hold the portfolio flat, the business generates nearly $300 million of free cash, while as Hal said in a runoff scenario with reasonable cost reductions, the business produces over $3.1 billion of growth cash and enough free net cash flow to extinguish all debt in approximately 15 months. Number nine, and lastly, the data from research analysis done by TransUnion on several past recessionary periods, combined with our own experience in Alberta in 2015 when the unemployment rate doubled, proved that the degree of increase in credit losses is more moderate for the non-prime segment than it is for prime borrowers. Furthermore, as a company, we have a long track record of navigating through market corrections and economic cycles. Over the last 15 years, we have experienced four other instances of significant market correction due to various economic challenges. In each instance, the business performed well and over the following years experienced strong growth in the recovery. For all of these reasons, we remain confident in the outlook for our business and are well prepared to navigate through any economic turbulence that may lie ahead. Now turning to our outlook, during the second quarter, we are investing over $9 million in our nationally fully integrated media campaign, including digital, TV, and radio, to continue driving awareness for our brands, which combined with the momentum in our automotive financing program and POS channels, will help produce the largest quarter of loan growth in our history, between $160 and $180 million, approximately 25% higher than our previous record quarter in Q4. On the revenue side, we expect the total yield generated on the consumer loan portfolio to remain broadly flat between 38.5 and 39.5%, while the net charge-off rate continues to remain stable and is projected to be in the midpoint of our range, finishing between 9 and 10% in the quarter. For the full year, we now project to achieve the high end of our loan book growth range at $2.6 billion, which implies we will produce more than double the average loan book growth that we experienced over the last three years. With this, our minimum loan book expectation now lifts to our previous midpoint of $2.5 billion. In lockstep, we expect revenue to also finish at the high end of our range. While the incremental growth is accompanied by the extra expense necessary to provide for future loan losses and origination expenses, thereby moderating the in-year earnings benefit, it contributes to a lift in future earnings that produces long-term return for shareholders. Altogether, while we are operating in a rising rate environment, which inevitably impacts the cost of capital for all lending institutions, the benefit of our share repurchases and strong loan growth will serve to offset these impacts and still drive meaningful earnings growth in future years. In closing, I want to again thank our entire GoEasy team for their passion and commitment to our company and our customers. They make a meaningful difference in the lives of Canadians and deserve all the credit for our performance and progress. With those comments complete, we will now open the call for questions.
spk00: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Etienne Ricard from BMO Capital Markets. Your line is now open.
spk09: Thank you, and good morning. The new metric you raised in your comments is that 45% of the loan portfolio experience is turnover over a 12-month period. Now, as it relates to non-performing loans, what flexibility do you have to negotiate terms of the loan without charging it?
spk05: Yeah, so I'll maybe make a comment and then Jason if I can add. So we've had a basket of collection tools that we've used for many years and have always served us well in helping our customer through a difficult period. We offer the opportunity for a customer to temporarily defer a payment, but we limit and cap the number of times that that can be done over the loan to ensure that it's being used properly. And then we will also offer certain consumers the opportunity to extend the term of their loan, and if they're in a more hardship position, lower their interest rates. And then the combined effect of those two things can actually bring down the structural payment level for that customer. Keep in mind the proportion of loans when we use those types of support mechanisms is very low. It averages less than 10% even in extreme scenarios. So, you know, the majority of the time the consumer is still able to meet their payment obligations. But we do know we need to always have a tool set that can be available to help a customer if they do run into a difficult time. Last point would just be that, you know, when a consumer experiences difficulty, you know, one of the reasons that that is often the case is unemployment. And as I said earlier, because so many customers have that unemployment coverage, a lot of times the primary tool that's used is simply to make an insurance claim to cover the payment.
spk01: The only other comment I would add, Etienne, is in those tools that Jason identified, We dynamically rescore the portfolio every two weeks for the purposes of identifying accounts that may be at that risk of charge-off, and that would include accounts that aren't in a current state of delinquency, because in some cases you will find customers that suddenly will experience an event and then have no choice but to have trouble in making their payment. So we use a centralized algorithm to identify those customers up front, and that then dictates what type of enhanced collection tool we will offer them, which falls within the suite of what Jason elaborated on earlier. It's a combination of both a series of tools as well as a fairly complex algorithm to identify at-risk customers before, in many cases, they're at risk of charge-off.
spk09: Understood. You also flagged strong home equity loan originations for the past few quarters. How sensitive do you expect origination volumes for this product to be in a housing market slowdown? In other words, how sensitive are home equity loan originations to housing market transactional activity?
spk05: Yeah. So, I mean, I think the first point I would say is that the relative impact of any volatility in the sales performance of that product on our business is quite moderate. As I highlighted, while that was a product success in the quarter at 50 million of originations, that only represents just barely 10% of the originations for the company. So if that product fluctuates in terms of its performance in sales volume, it's not going to move the needle materially. Having said that, with respect to your specific question, the fluctuations in the real estate market we think are going to have a benign impact on the performance of that product. And that's largely because these consumers are living in predominantly rural markets Home values, as I mentioned, are less than $500,000, so they're not high-priced homes that are going to be far more sensitive to swings in real estate prices. And again, the total loan-to-value ratio with our product included is only 55%. So the consumers that are borrowing this type of product from us have plenty of room in equity, whether that's to qualify for another loan or whether that's if they've already got a loan and the real estate price was to decline. There's plenty of room there. I would add that the history of that product has been very consistent. Approximately two to three years after someone borrows that loan, they tend to refinance their original primary residential mortgage, and the vast majority of the time, they then are able to refinance that loan product into their primary residential mortgage, and our loan gets paid out early, and we've had the customer for several years, and it's been a great way to help bridge them during that period.
spk09: And lastly, through your adjusted results disclosure, it seems that you were contemplating an acquisition in Q1, which ultimately did not work out. So I guess first part to my question is, could you comment on how active your M&A pipeline is? And the second part, considering the valuation on your stock and leverage getting closer to target, how do you think about balancing five acts? and deploying capital for acquisitions?
spk05: Yeah, great question. So first of all, on the M&A point, so we're always keeping our eyes and ears open for opportunities. We've highlighted and flagged that that was part of our strategy for a long time, and so just generally speaking, we keep our eyes and ears open, and various opportunities come our way. Quite a number of months ago now, actually all the way back to late last year, an opportunity came our way that we got quite interested in and thought was an excellent strategic fit, so much so that we went very, very deep on looking at and exploring the opportunity, clearly to the point in which we incurred some costs due to due diligence and financial analysis. In the end, you can imagine that in this kind of market that has been under pressure now for quite some time, as we got closer to the end of the process, we essentially realized that the opportunity was just not going to financially work to produce the level of accretion that's needed to exceed the organic hurdle rates that any type of investment has to have. Because our organic growth is so strong and our outlook is so positive, that hurdle rate is very high. Anything we're investing in has to have a very strong outlook. And the value of our equity, if we need to issue equity to fund a purchase, obviously has to be in a good position to be able to make the transaction accretive. One of those situations where it was a very good strategic fit, but as you get close to the finish line, you look at the prospects and the financial projections, you look at your equity price, it just doesn't make sense. And down the road, we think there'll be opportunities that will reemerge, and we'll be there to consider them as always. Now, to your second point, clearly in the current market conditions, M&A is not a current priority. At the moment, we are following our capital allocation framework that Hal and I have mentioned in the past, which is first and foremost, fund organic loan growth. Organic loan growth generates the highest return on our capital, the most accretive to shareholders in the long run. So we want to make sure we have the capital capacity to fund the great organic growth that we're producing. And then when the share price is at these levels, we would then prioritize share buybacks over M&A because at this point at these levels, the accretion on buying back our own shares is going to be likely better than any type of investment we could find out there. And so at this point, that'll be the way we'll manage capital fund organic growth and then opportunistically buy shares when they make sense. We'll just want to make sure that we don't overbuy because we want to make sure we can preserve capital for organic growth. Thank you for your comments.
spk09: Thank you.
spk00: Your next question comes from the line of Gary Ho from DGR Day Capital Markets. Your line is now open.
spk04: Thanks. Good morning. Um, there's obviously a lot of focus on credit and net charge jobs, just given the macro uncertainty, inflation, et cetera. So you delivered pretty solid 8.8% in a, in one queue and unchanged range, I think in the eight, nine to 10% for Q2. A couple of things. I imagine your customers would have felt some of the inflation pain in Q1 and April. Any commentary you can provide in terms of their ability to service the loans, any cracks and delinquencies that you're seeing, payments, et cetera? Just wondering if you can share any real-time color.
spk05: Yeah, so again, I'll make some comments, and if Jason has anything to add. So at the moment, boots on the ground, we see no sign of deterioration and no sign of degradation in payment or credit performance. And that's sort of, even considering the most recent data you could possibly have available, which is if we look at customer payments that were due just this past Friday, most customers make their payments biweekly on a Friday. If we look at just this recent week's payments that were due and what proportion were made on time versus default, that ratio, again, very, very consistent and stable. I know there's probably a sense of disconnect between why the environment is what it is, and yet we're seeing this type of stable credit performance. I think you have to consider a couple things amongst the list that I've highlighted. Our business just gradually and inherently over time is gradually improving based on credit and product mix. You think about the areas that I highlighted earlier that had the strength in the quarter, auto lending, home equity lending. These are secured products. The loss rates on these programs have a weighted average loss profile below our portfolio average. So inherently, you know, that's going to mean that we can withstand some of the pressure that's in the economy right now. And then going to the actual consumer, you know, I think if you look at some of the research on wage growth, it appears that the wage growth is most robust in the lower paying jobs, the entry level jobs. So that means the average Canadian, the average consumer, is the one that is experiencing the strongest wage growth. So we can tell from just having our own frontline workforce and knowing who's coming and who's going and where they're working and stuff. And it's very evident to see that in some of those average Canadian frontline jobs that their wage growth can perhaps be far beyond the Canadian average of 3% to 4%. In many cases, it may actually be at or above inflation. So I think that with the fact that non-prime customer came into this with a lower level of debt, as I mentioned earlier, maybe a bit more well-prepared to navigate through these times. The fact that wage growth, although on the national average has been below inflation in the entry-level positions, has been quite robust, and that our portfolio has been improving credit mix, those conspire to suggest that at the moment we're seeing no deterioration and we're seeing excellent performance, and we expect it to be that way going forward.
spk01: Gary, I'd just add to that that, you know, and we've said this before, we ingest quite a substantial sum of data on our customers, and we do it regularly. Application data, credit bureau data, banking data. And if you look at that data long enough, you can begin to detect patterns. And when you encounter these periods of economic uncertainty, what you're most worried about are customers that live on what we call the margin, right? They're just on the precipice of being able to maintain their ability to keep themselves in good standing. and that period where they're not able to do so. And we look at that data on a regular basis, and because we're looking at it and updating it very frequently, we're constantly tweaking and updating our models and our underwriting protocols. We certainly did that throughout the pandemic, as we've mentioned in previous calls, and we continue to do that as we've come out of that pandemic because we don't tend to believe that economic certainty is certainty. And as a result, as Jason highlighted in the script that came out from today's call, We've already made a series of credit adjustments, and we have more actually planned for this quarter. They're not massive adjustments, but they're tweaking around the edges because we want to make sure that those customers who are most at risk at a time of economic weakness have some degree of protection for those that we're going to subsequently underwrite as well as those that we're currently dealing with on the book. So the ability to have that data regularly updated, to be able to build and refresh our algorithms on a regular basis, probably one of the key things that allow us to have that degree of confidence and thinking about the next couple of quarters looking out going forward.
spk04: Okay, great. And then maybe just as a follow-on, I guess despite those credit risk adjustments that you're putting on last quarter and going into Q2, you're still projecting a very, very healthy growth, loan book growth number for Q2. Just curious, like, what's the disconnect there and, you know, how sustainable is that growth for the remainder of 22?
spk05: Yeah, so right now, I think the way to think about it is when we publish our commercial forecast, you'll recall the philosophy we've shared in the past has been that the midpoint of our range is just sort of some things go well, some things don't go according to plan. The low end of the range is if we hit a few speed bumps and more things don't go quite according to plan. And the high end of the range is if all the kind of tactics that we have and all the strategy we've built are going according to plan, then we would be at the high end of that range. That's where we are right now. This is not a function of loosening credit to drive growth. In fact, as you noted, we're going the other way. We're tightening up around the edges. This is really just a case of good, solid, healthy consumer demand. Consumers are borrowing and using credit at very appropriate levels. And all of our initiatives are currently working in lockstep, whether that's automotive finance program, home equity lending, digital and online marketing and acquisition, point-of-sale finance. We're coming into a great seasonal period for certain categories like power sports as people start to go out and purchase summer recreational vehicles and water sports vehicles. So it's just a good time right now in the business. It's performing well, and all of our initiatives are working in our favor. So at this point, as long as the credit that we're writing we continue to see meets the credit profile we think it needs to in terms of the credit mix and the product mix, even considering the credit adjustments that we're making, then that means we're putting good healthy loans on the block that are actually over time going to help prepare the business to weather any economic turbulence. So for us, this is actually good growth. You take the growth in home equity lending, for example, that will decrease the credit risk of the portfolio and provide us even further weatherproofing against the future. So that's how the growth is looking right now. Okay.
spk04: And then my last question is, I noted last month you're a larger competitor, acquired Eden Park. Just wondering in the auto loan space, is that a threat? Do you compete with those guys in terms of your auto loan product? Just wanted an update on that front.
spk05: Yeah, so the way to think about the automotive market is you have four what I call large scaled-up non-prime lenders. Two of them are banks. Both TD and Scotiabank have non-prime lending portfolios, albeit they're clearly focused on more near-prime. And then you have IA Financial Group and Santander, the previous Carfinco business. Those would be the four that have large and have scale. You then have ourselves and Fairstone that are clearly large organizations pursuing that category. And then after that, you have a cadre of smaller independent firms that, for the most part, we've been able to demonstrate we can compete with and we can beat in the market. All of that being said, it's important to consider that in the $200 billion-ish marketplace we operate, automotive financing is the largest single product category. It represents $58 billion of that marketplace. So by itself, it's a very significant financing market. So for us, We believe that we can be the number one non-prime non-bank. So behind Scotia and TD, we can be the number one player in that space. It will take us time to get there. But given that market is so large, even with a number of competitors, even with Fairstone buying Eden Park and looking to compete in that market, there is still significant runway and opportunity for growth for us.
spk04: Okay, great. Thanks for the call. That's it for me.
spk00: Your next question comes from the line of Jamie Gloin from National Bank Financial. Your line is now open.
spk03: Yeah, thanks. Good morning. Good morning. My first question was just going to be on the cross-selling, which seems to have more success this quarter than in previous quarters. Can you give us a bit more sense as to the direction of that cross-selling? Is it point-of-sale clients coming into the unsecured product or unsecured products going into point-of-sale or otherwise? And then maybe just a bit more on that first.
spk05: Sure, yeah. So this obviously is an area for us that is core to our strategy long term. We're looking to build a full suite financial services institution where a non-prime Canadian can come to us for any form of borrowing needs that they might have. And then obviously over time, as those needs change and evolve, that we would be their go-to solution for other credit products as we capture a larger share of their wallet. To date, the cross-selling activity that we began late last year and is the focus point at the moment is when a customer is acquired on an initial loan of either home equity, power sports, retail point of sale, or automotive, offering them an incremental loan as an unsecured cash loan. That's been the primary focus thus far. So far that has performed very well. As I said in the prepared remarks, the propensity for them to add an additional product at some point appears to be tracking to between 10 and 30% of them after about a year. We are getting ready over the next coming quarters to start to then market other products in the reverse direction, which there's actually much greater opportunity for. Taking our power sports products, home improvement lending, healthcare financing, automotive finance, and pre-approving existing unsecured loan customers, of which that's the lion's share, for those products. That's the greatest opportunity. You've got a wider range of products you're actually cross-selling into a bigger customer base, and the products that they might convert into are some of our best performing. So again, it's quite early days in this regard, but early signs suggest the concept is resonating very well.
spk03: Okay, great. So it sounds one-directional at this point, or at least in Q1. And then in terms of the go-to-market strategy here, is it primarily inbound emails? Is it phone calls? What is the go-to-market strategy on that cross-off?
spk05: Yeah, so great question. So our strategy to date has been a little bit rudimentary. We've primarily been reaching out to customers to let them know they're pre-qualified by email and calls and some direct mail, but primarily digital email and calls. The primary strategic initiative for this year that I highlighted earlier, the Lending Ecosystem Project, is the one that will ultimately provide the most efficient way for us to offer all our customers our full suite of products. So we are down the path to beginning to build a digital mobile app. So it'll be an ecosystem where when a customer gets a loan under any brand and any product, they'll get access to a set of credentials. Those credentials will allow them to log into the Go Easy portal. And in there, they can not only do basic things like see their balance and their next payment date, but it'll show them all the products available. Some of those products, they'll just be invited to apply. And some of those products, they'll be pre-approved for if we have enough data and they're eligible. That, I think, becomes the most efficient way. It allows a customer to basically wake up every morning, open their mobile phone, open their GoEasy app, and instantly see all the products and which things that they're eligible for, and then for us to be able to use that digital portal to be able to do push notifications and alerts and things of that nature when they become eligible. So this is a very long-term, multi-year strategy for us that we're very keen on, and we think will really monetize this platform that we've built of multi-product, multi-channel.
spk03: Okay, great. In terms of applications, I noticed that online applications were down to 39% from 49%. Is that reflective of reopening or is it more reflective of maybe some changes in the underwriting that you implemented during the quarter to sort of diminish the exposure to online applications?
spk05: So, no, well, so three things. One, the last point you just mentioned is true. Hopefully that's very minor. When we make credit model adjustments to tighten up either credit tolerance or affordability, typically the consumers that are applying digitally online are the group of consumers who that will most impact because they tend to have a lower credit quality than walking in a branch or point of sale. But that would be very, very minor. The primary reason you will see that is just simply mixed shifts. As our other channels and products, which are newer and younger, are growing, like automotive financing, like point of sale, their percentage of our total application pool is going to rise. And even if online traffic and volume were to stay flat absolute, the percentage would decline. Now, we did also see a slight decline in the absolute amount of business originated through online traffic. But in that direct-to-consumer channel, there is typically a seasonally slower period, Q1 versus Q4, hence why total originations in Q1 were still down a little bit from Q4 as they seasonally always are. So think about it as a little bit of seasonality, primarily a mixed shift effect because the other verticals and products are growing more quickly in their earlier stage, and then a touch of the effects of credit adjustments that are going to over-index their impact in online.
spk03: Got it. Two more. First, just on the capital allocation, obviously the NCIB has been very active. I'm curious to get your thoughts on a substantial issuer bid, something a little bit more larger scale than just tapping the NCIB. Have you considered that or any other comments on that strategy?
spk05: So, look, we talk about share repurchases regularly, and we've obviously been very active, bought back over 800,000 shares since November, since the market correction began, 130, 140 million or so total repurchases. That entire time, we've been able to leverage the NCIB. Our current NCIB, which doesn't expire until this December, allowed us to repurchase during the period of that NCIB about 1.1, 1.2 million shares, and we're only about 400 and some thousand through that NCIB, in which case we've got plenty of room to still use that as the primary tool. But more importantly right now, with the strong organic growth, that is our primary capital allocation place to invest. So that means that our buybacks are going to be managed and constrained to a certain level that allows us to fund all that organic growth, keep the leverage at a level that we're comfortable with and we think our stakeholders are comfortable with. And so, therefore, it's really just that excess capacity of capital that then gets allocated to buybacks. So we'll continue to be active, but we'll just have to feather and manage the volume of buybacks so we make sure we don't take away from this great organic growth, which generates the highest return.
spk03: Okay, great. And my last question is just on the – The experience of the Alberta portfolio and its applicability or reasonability for today's portfolio. So if we're looking at delinquency rates and loss rates in Alberta back in 15, they were running at 14% loss rates, peaking up to 16.5% loss rates. So you're right, not a huge increase, but it's a higher starting point than where we are today. So my question is really, can we look at Alberta and that type of borrower and gain comfort with the overall portfolio as it sits today where loss rates are starting at 9%, let's say?
spk05: Yeah, I think you absolutely can. And for a couple reasons. One, the segment of borrowers in our portfolio today is still a non-prime consumer. And if you break non-prime into near prime and subprime, the lion's share is still subprime. And so when you think about 14 to 9, you know that's not a function of a dramatic shift in the customer segment that we worked with we do have more near prime customers and the average credit scores have improved a little bit but much more of the change in the losses has been over that period of time we've developed far more sophisticated credit decisioning and science and models you know in the last seven years since then it's been it's been significant uh the mix of the product you know at that time we had just the unsecured loan now that same borrower that's borrowing an auto loan a home equity loan, a power sports loan, the same customer with the same propensity to change their probability of default exists. It's just the products that we now have are by nature starting from a lower overall base in terms of credit risk, particularly because so much of that volume is secured. Last thing I would say is unlike Alberta, in this case more in our favor, We've just come off of two years of declining total debt levels for the non-prime customer. That was not the case going into the 2015 Alberta oil crash scenario. Debt levels were still rising for those borrowers at the time. So, yes, we still believe that that period of experience for us is highly relevant, and our data would suggest that the portfolio by and large is a very similar customer set that should react similarly under stress.
spk03: Thank you very much.
spk05: No problem. Thanks, James.
spk00: Your last question comes from the line of Marcel McLean from PT Securities. Your line is now open.
spk08: Okay, thanks for taking my questions. First one on the interest rates. Last quarter you guys had commented – sorry, I dropped off the call earlier, so if this is something that's been discussed, just let me know and I'll go back and see the transcripts. But you said that you're basically hedged for up to 200 basis points of interest rate increases. The market is starting to predict that that could happen or see interest rates in excess of that. Can you just maybe describe what would happen in that scenario if we do get all these interest rate increases that they're forecasting?
spk07: Hey, it's Kyle here. So effectively kind of going back to our overall strategy around borrowing, So as it stands today, roughly 95% of our debt stack is fixed rate. So that would be our notes that we have in place, roughly the 1.1 billion Canadian, those are all fixed rates. Every securitization draw that we take, while the initial cost of borrowing is in fact going up as you indicated, we actually swap out and hedge hedge those incremental draws. So today, effectively, we're roughly around 4.75% our total cost of borrowing on a weighted average on our drawn debt. And so as we continue to draw on prominently our securitization warehouse to fund the organic growth of the portfolio, notwithstanding that those rates are going to go up. The overall weighted average cost of borrowing over time should stay relatively flat, at least say for the course of the next nine to 12 months.
spk05: And Marcel, that's as Hal pointed out earlier, because that securitization facility today, incremental draws are about 3.3%. And so as we factor in a rate curve where rates are rising, we can see that each incremental draw will still be progressively below the current weighted average cost of drawn balances for quite some time, at least until such time as those rates rise pretty material. And as Hal said, that's probably well beyond a year from now. And then as to what the rate environment looks like then, it's hard to say.
spk08: Okay. All right. Thank you. And secondly, I had a question on your revenue yields. Um, so, so this has come down at, but that's as expected as the loan makes shifts. But I take a look at something what I call risk-adjusted yield, which is basically taking your revenue yield and subtracting off the bad debt expense to find risk-adjusted yield. So now that risk-adjusted yield is something I thought you'd be able to sort of protect the margin on that basis as the loan book shifts. But it looks like that's actually come down over time as well. Can you maybe just speak to that? Or maybe that's not the right way to look at things. And just let me know what you think.
spk05: Yeah, sure. So, yeah, look, risk-adjusted margin is a relevant KPI, the KPI that we measure and track and all lenders do and should. However, our risk-adjusted margin, the delta between our gross yield and our loss rate, has been declining by design for more than five years and will continue to gradually decline, meaning that the decline in the gross yield will outrun the decline in the loss rate, such as the risk-adjusted yield will drop. However, each loan that we write, albeit as progressively at a lower risk-adjusted margin, is actually more profitable, and each customer that we're acquiring and serving is more profitable. And that's because as that risk-adjusted margin is coming down, you're ultimately writing larger and longer-term loans, and the consumer's propensity to stay with us and graduate through other products is increasing. And so think of it as that if you write a larger loan, your effective operating costs for that loan drop, and so your OpEx ratio drops. And that's why at the same time our risk-adjusted margin is dropping, we're still seeing over those period of years an expanding operating margin from the scale and leverage of serving more customers that are staying with us longer and have higher average loan sizes. We do watch risk-adjusted margin, very mindful of the compression in that ratio, but the strategy that we've built and have been executing for the last five years and going forward is that that risk-adjusted margin will slowly continue to compress, but we will acquire more customers, and ultimately they'll stay with us longer because of our product strategy.
spk08: Okay, got it. All right, that's it for me. Thank you.
spk00: Your next question comes from the line of Stephen Boland from Raymond James. Your line is now open.
spk10: Thanks. Jason, you made a comment on the insurance product that I believe you said it was around 50% of, I guess, your loans. I just want to make sure I'm using apples to apples here, but I think during COVID you said a majority of the loans had the insurance as a backed product. Is that correct? And maybe is there a change or a shift in terms of borrowers wanting that product?
spk05: Yeah, so you're right. At the time that COVID hit, we said it was the majority, so it was more than half versus today is approximately half. The difference is not a function of demand for the product or retention of the product. That's simply the effect of the merge of the portfolio with the LendCare acquisition. The LendCare portfolio, which is also today where we put automotive financing and all the point-of-sale financing, that category, point-of-sale financing, and particularly those secured loans, tend to have a lower average propensity to purchase that product, especially because they're secured by a hard asset. And so, therefore, our blended now new weighted average is around half the portfolio. But the good news is that the protection exists and over-indexes significantly in the product categories like unsecured loans. where it's much, much higher than that. And that's where you want the most protection. Whereas in the secured product, you have the asset, the consumer can always surrender and create value to cover any loss. So that's simply the mix shift effect of the acquisition. And the fact that that coverage is sitting in the hands of the right customers on the right products.
spk10: Okay, that makes sense. And maybe just a kind of a macro question. We've seen some reviews in the US about point of sale concerns about that it is ramping up people's debt. Has there been anything in Canada that gives you concern about reviews of point of sale, that it being predatory, et cetera, like that?
spk05: No. I think a couple comments there. One, I think the point of sale, buy now, pay later concerns that exist in the U.S. are largely related to the small dollar kind of pay in for, you know, buy a pair of jeans for $80 and make it in for, you know, $20 payments type products. Those are, you know, have been far more prolific in the U.S. market than they are here. Paybrite and Affirm do offer that kind of product here, but much less volume than has been in the U.S. Because of that high volume in the U.S. of those small ticket buy now, pay later financings that don't always report to the credit file, That's where the concern has been from in that market. We have not seen that type of proliferation of product here in Canada. Paid Right to Firm's focus has generally been a little bit more on more traditional retail products and retail financing. And certainly for us, that's not a category we're in. We're not doing very small dollar retail financing like that. We're doing much more traditional, larger ticket, installment lending, full credit evaluations, full affordability valuations, full credit assessment, et cetera, et cetera. So aware of the kind of reference point you're making, but not something we think is relevant in Canada or to us specifically.
spk10: Okay. All right. That's great. Thank you, guys. No problem. Thanks. No problem. Thanks.
spk00: There are no further questions at this time. I'll turn the call over to the speakers.
spk05: Great. Thank you, everyone. Thanks for joining today's call. We appreciate your participation. For those of you that are attending our formal AGM later this morning, we look forward to seeing you there. And for everyone else, we look forward to updating you again at our next quarterly results in a few months. Have a fantastic day.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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