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spk06: Good day and welcome to the Go Easy fourth quarter 2022 conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand has been raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. It is now my pleasure to introduce Farhan Ali Khan.
spk01: Thank you, operator, and good morning, everyone.
spk04: 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 GoEP Limited's results of the fourth quarter ended December 31st, 2022. The news release, which was issued yesterday after the close of market, is available on Globe Newswire and on the GoEP website. Today, Jason Mullins, GoEasy's president and CEO, will review the results for the fourth quarter and provide an outlook for the business. Al Khoury, the company's chief financial officer, will also provide an overview of our capital and liquidity positions. And 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. Before we begin, a reminder that this conference call is open to all investors and is being broadcast to the company's investor website. and supplemented by 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 through 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 However, we would ask that they do not quote callers unless that individual has granted their consent.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 NDMA. I will now turn the call over to Jason Mullins. Thanks, Farhan. Good morning, everyone, and thank you for joining the call today. The fourth quarter wrapped up a year of record growth, strong credit performance, and improved operating leverage. further solidifying our position as a leader in the Canadian non-prime consumer credit market. We continue to experience a very strong growth environment, with another record quarter of applications for credit at over 400,000. General consumer demand remains healthy, while broader macroeconomic conditions have created a favorable competitive landscape for those with scale. Once again, the elevated level of applications led to originations in the quarter $632 million, up 25% over the fourth quarter of 2021. Organic loan growth in the quarter was $206 million, an increase of 54% over the same period last year and above our original expectations. By year end, our portfolio finished at $2.79 billion, up 38% from the prior year. Similar to the trend we experienced throughout the year, all our products and channels are performing well and are contributing to the current growth momentum. All equity lending, automotive financing, and healthcare financing all experienced a record quarter for originations, while unsecured lending, including the volume from cross-selling pre-approved loan offers to our existing customers, was the second largest quarter on record. While the rate of decline is moderated, the overall weighted average interest rate charged to our customers continued to gradually decline to 30.5%, down from 33.3% at the end of the fourth quarter last year. Combined with ancillary revenue sources, the total portfolio yield finished within our forecasted range at 36.2%. Total revenue in the quarter was a record $273 million, up 17% over the same period in 2021. We continue to be very confident in the quality of the originations being booked. In the recent quarter, we experienced the greatest proportion of originations in our highest credit years in our history, based on probabilities of future defaults. This is a signal that our credit model enhancements, combined with tightening credit criteria by prime lenders, are producing a greater proportion of lower-risk lending volume for GOEG. Furthermore, we continue to see that credit scores on new originations remain consistently above 600, while the loan-to-value ratios on our home equity lending program run below 65%, inclusive of our loans. and the portion of our portfolio now secured by hard assets reached almost 40% at quarter end, up from less than 33% one year ago. As we shared throughout last year, we began making proactive credit model enhancements in the fourth quarter of 2021 in anticipation of potential economic headwinds and to ensure we could deliver stable credit performance throughout. By gradually raising minimum credit, and adjusting our affordability calculations to moderate borrowing levels among higher-risk customer segments, we gradually improved the overall quality of our incremental lending activity, which served to de-risk the underlying loan portfolio. Between incremental loan growth and the natural portfolio turnover, nearly 75% of our loan book has been underwritten during or since Q4 2021 when we began making these changes. The combination of these proactive credit adjustments The higher loan quality in the originations, overall shift in the product mix towards secured loans, and improved operational execution has contributed to strong credit performance and helped to shelter our portfolio against weakness in the economic environment. The annualized net charge-off rate in the quarter reduced to 9%, down from 9.6% in the same quarter last year, and at the lower end of our target range of 8.5% to 10.5%. our loan loss provision rate remained broadly flat at 7.62%, which we believe reflects the appropriate level of credit risk going forward. As we suggested last quarter, we are also using this opportunity to further increase our scrutiny and discipline around managing expenses and capital expenditures. During the quarter, our efficiency ratio, specifically operating expenses as a percentage of revenue, reduced to 32.2%, down 200 basis points from 34.2% in the fourth quarter of the prior year. During the quarter, we also made the decision to terminate our agreement with a third-party technology provider that was contracted in 2020 to develop a new loan management system for ET Financial. Given the evolving needs of our business, we had decided that the performance of the platform development to date was inadequate. and the additional investment necessary to complete the development was no longer economical relative to the anticipated business value and other available options. As a result of this decision, we elected to write off capitalized software costs in 2022 in the amount of $20.5 million related to the system that was being developed by the third party. It is important to note this is a non-cash item, and this decision does not affect our ability to achieve our long-term organic growth forecast. and this technology initiative began prior to our acquisition of the LendCare point-of-sale financing technology, some of the features we initially intended to develop we have since acquired. Our existing systems are therefore sufficient to execute our business plan. Furthermore, we now also expect to reduce our capital expenditures over the next 24 months by approximately $20 million, preserving that capital to use for organic loan growth. After adjusting for the non-recurring items, including the aforementioned non-recurring write-offs, we reported adjusted operating income of $99.7 million, an increase of 15.5% over the $86.4 million in the fourth quarter of 2021. Adjusted operating margin for the fourth quarter was 36.5%, down slightly from 36.8% in the prior year, due solely to the increase in loan loss provisions required to be recorded on our higher net receivables growth. After adjusting to these non-recurring and unusual items on an after-tax basis, adjusted net income for the quarter was $51 million, up 7.1%, from $47.6 million in the same period of 2021. Adjusted diluting earnings per share was $3.05, up 10.5%, from $2.76 in the fourth quarter of 2021. As highlighted earlier, we experienced another quarter of accelerated organic growth at $206 million, or $72 million above the same quarter last year. As such, we incurred an additional loan loss provision expense related to the growth in our receivables. At a provision rate of 7.62%, the additional $72 million in growth year-over-year resulted in approximately $0.24 of incremental provision expense on an after-tax per share basis. However, as we have clarified, the incremental growth is highly accretive to the long-term earnings of the business. 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. Thanks, Jason. The fourth quarter rounded out another year during which we made significant enhancements to our capital structure to support the organic growth of our business. As Jason noted earlier, healthy consumer demand coupled with highly favorable competitive dynamics are producing meaningful levels of organic growth potential. is that organic growth is our highest priority use of capital and generates the greatest long-term returns for shareholders who are allocating every available dollar in that manner. In an effort to increase our balance sheet capacity so we could continue executing our accelerated growth plan, in November we completed a bought deal equity financing transaction by issuing approximately 489,000 common shares at a price of $118.50 per common share, for gross aggregate proceeds of $57.9 million. In doing so, we reduced our leverage level and expanded the capacity to increase our debt moving forward. In December, we then further expanded our funding capacity when we established a new $200 million revolving securitization warehouse facility, structured and underwritten by Bank of Montreal. The new facility was designed to securitize our growing automotive financing programs. The facility has an initial term of two years and interest on advance is payable at the rate of one month's Canadian dollar offer rate, or CDOR, plus 185 basis points. As we traditionally do, we also established an interest rate swap agreement to generate fixed rate payments on the amounts drawn to assist in mitigating the impact of increases in interest rates. With these new balances, balance sheet enhancements for our fully drawn weighted average cost of borrowing at the year end was 5.5%. and we finished with a net debt to net capitalization ratio of 71% in line with our target range. In addition to growing the capital stack, the business continues to produce a growing level of free cash flow. Free cash flow from operations before the net growth in the loan portfolio during the quarter was $66 million, up 11% for $59.5 million in the fourth quarter of 2021. At today's loan rate, we can support funding nearly $250 million of growth consumer loan portfolio purely from our internal cash. As a result, we can now fund our latest accelerated growth forecast using a combination of free cash flow and debt while maintaining a comfortable level of leverage that gradually reduces in the outer periods. Based on the cash on hand at the end of the quarter and the borrowing capacity under our existing revolving credit facilities, we had approximately $973 million in total debt capacity at year end. We remain confident that the capacity available on our existing funding facilities, coupled with our ability to raise additional debt financing, is sufficient to fund our organic growth forecast. Based on the 2022 adjusted earnings, the increased level of cash flow produced by the business, and the confidence in our continued growth and access to capital going forward, the Board of Directors has approved an increase to the annual dividend from $3.54 per share of to $3.84 per share, an increase of 5.5% for a payout ratio of approximately 33% of the prior year's adjusted earnings. Furthermore, this marks the ninth consecutive year of an increase in the dividend to shareholders. While the level of increase in the dividend is half the level of increase for adjusted earnings, this decision strikes the right balance between increasing their turn for shareholders and preserving capital for the strong organic growth profile of the business. I'll now pass it back over to Jason to talk about our outlook and new forecast. Thanks, Al. With a total non-prime consumer credit market of nearly $200 billion, we remain at the early stages of our growth journey in Canada. Despite the challenging macroeconomic conditions, we remain confident in our ability to thrive during this period. As we have proven during many cycles before, our business model and our customer is highly resilient, and we have a team capable of navigating through adversity. At the moment, the momentum of our business initiatives and the favorable competitive dynamics have in fact created the best growth environment in many years. This in turn provides us with greater choice and flexibility, the capacity to be more selective with our lending decisions, the capacity to determine the growth rate that we think reflects the ideal scale and capacity of the organization, and the capacity to choose which products and verticals we want to focus on. In our disclosures yesterday, we published a new, more accelerated three-year commercial forecast. These commercial forecasts are built bottom-up using a detailed set of scenario-based assumptions about product mix, pricing, economic conditions, funding sources, credit risk, and expense requirements. We then stress test those assumptions to understand what both the downside and upside case might look like before we ultimately decide on a range that we think captures the most probable set of outcomes. It is this process that has served us well for over 10 years now. Over that period, we have met or exceeded nearly every single metric with consistency. We expect to organically grow the loan portfolio by over 70% to nearly $5 billion in the end of 2025, driven by the growth and execution of our current suite of products and channels. Our outlook provides a range of guidance to account for unanticipated headwinds on one end and the benefit of our initiatives performing better than planned on the other. We also remain on a quest to reduce the cost of borrowing for our customers. By optimizing for an after-tax return on receivables of 7% to 8%, which produces over a 20% plus return on equity, we can deliver attractive long-term earnings growth and shareholder return while concurrently passing along rate reductions to our customers and expanding their relationship with us. Over the next few years, our strategy will bring down the weighted average interest rate we charge our customers to below 30%, while our total yield, inclusive of ancillary revenues, gradually declines between 33% and 35%. The combination of our credit risk management, product mid-shift, and operational execution provides us confidence that the credit performance of our portfolio remains stable and resistant. We expect the annualized net charge-off rate of our portfolio to oscillate between 8.5% and 10.5% throughout 2023, then gradually decline in the outer years. We also continue to benefit from scale and operating leverage. Despite declining risk-adjusted margins, we anticipate the operating margin of business to gradually expand by approximately 100 basis points per year. To achieve this forecast, we will continue to execute on the four-pillar strategy that has driven our business priorities since 2017. First, our strategy is to continue building and promoting a wide range of lending products that meet all our customers' credit needs. Newer categories such as automotive financing and healthcare financing are still very early stage, and we have yet to begin cross-promoting our entire range of products to our borrowers. Second, our strategy is to expand our channels of distribution. During the first quarter, we will open our 300th EZ Financial branch and launch our new GoDB Connect mobile app, and we now serve a growing merchant base of over 6,500 partners. Third, We continue to increase our retail, digital, and point-of-sale presence coast-to-coast with untapped expansion opportunities still in Quebec and other major urban markets. And fourth, we will remain focused on helping our customers improve their finances through understanding and improving their credit and gradually offering them a lower rate of interest, starting to be a stepping stone and a bridge back to prime credit. Turning specifically to the upcoming quarter, we expect the loan portfolio to grow between $185 and $210 million. We expect the total yield generated on the consumer loan portfolio to decline to between 34.75 and 35.75% in the quarter, partially reflecting the typical seasonal decline we experience in each first quarter period. We also continue to expect strong credit performance. Based on current delinquency trends, we expect the annualized net charge-off rate to finish between 8.5% and 9.5% in the quarter. In closing, I want to once again thank the entire BOEG team for their tremendous effort and performance. We have a passionate and driven team that works hard to put everyday Canadians on the path to a better tomorrow, to help our merchants grow their businesses, and to produce industry-leading performance for our shareholders. As I've said many times before, we are truly just getting started. With those comments complete, we will now open the call for questions.
spk06: Thank you. Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And our first question comes from the line of Etienne Ricard with BMO Capital Markets.
spk03: Thank you and good morning. Thank you for sharing the percentage. Thank you for sharing the percentage of the portfolio originated post credit enhancements. Now, how, how does the credit performance of the 2022 vintage compared to prior years? In other words, What benefits are you seeing from underwriting changes made over the past year?
spk01: Hello? Can you hear us okay, Jeff? Yes, we can hear you. Okay.
spk04: Sorry, there must have been a glitch in the line. So just to answer the question, we don't publish the specific vintages by year, but we can say definitively the 2022 vintage, given both the credit enhancements and the product mix shift, are trending and performing better than prior vintages. You should assume that the current credit trends we've seen, which have trended downward, take Q4, which was 9%, down from 9.3 the quarter before, down from 9.6 the year before that, are proportionately influenced by credit adjustments and product mix. If one was to be more influential than the other, product mix would probably outweigh the impact of the credit adjustments. Perhaps maybe it's two-thirds affected by product mix and a third by credit adjustments, but they would both play a meaningful role in having trended the net charge operate down, and those entities are definitely better.
spk03: Understood. And thinking about growth prospects longer term for Easy Financial, in Canada, you have served in excess of 1 million customers out of approximately 9 million non-prime borrowers, given the portfolio grows 15% to 20% every year, at what point in time do you see your market share becoming more saturated in Canada? And how does that influence your decision to potentially expand in the U.S. or the U.K.?
spk04: Yeah, so although we've served over one and a quarter million Canadians That would include Canadians that we have done business with in the past that aren't necessarily current borrowers. Our active current borrower base is going to be approximately 350,000 customers. So we would still have a fairly small share of the total number of consumers in the market. The other thing is that because we have added new products that now serve the majority of those borrowers' needs, you would expect that over time we can continue to not only increase the customer base, but that as customers borrow from us and then leave, there will be often a propensity for them to have to come back at a later time, either because maybe their credit profile has warranted access to additional non-prime credit or simply because there's now another new product in our suites that is necessary for them to use for credit. Take, for example, unsecured cash lending. We know that from our historical experience, customers in that product over their life will borrow several times because they'll have repeated needs to be able to take care of regular household items. When people finance a vehicle, that vehicle is typically going to last between five and eight years and then they're going to need to purchase and finance another vehicle. So it's not as though as we accumulate the number of net customers within that marketplace that that necessarily materially slows down our ability for growth and expansion. With our current loan book relative to the $200 billion marketplace, we're still only a couple of percent market share. And the best references, again, that we know from the past If you go all the way back to 2008, 2009, the three U.S. banks that operated here in Canada, with lesser number of products than we currently have today, collectively had over $50 million of balances in non-prime credit. So from our perspective, there's still quite a long runway ahead of us. As it relates to your question around how does that influence M&A or international expansion, as we said before, Those things are entirely opportunistic. We are under no urgent desire or pressure to have to consider expanding into a new market. The organic growth profile right now is very strong, so we remain squarely focused on executing the organic growth forecast here in Canada. We're always going to keep our eyes and ears open because it's a good, responsible thing to do. If an opportunity were to emerge, we would consider it. But I would say that given the current market, both the demand for organic growth and just the general uncertainty, today we definitely are way more focused around that Canadian organic growth and would have deprioritized M&A and international expansion in the near term. So you would not expect to see us pursue acquisitions elsewhere in the near term. We are solely at the moment focused on this great organic growth opportunity here in Canada.
spk01: Thank you very much.
spk06: Thank you. And our next question comes from the line of Gary Ho with Desjardins.
spk00: Thanks, and good morning. Just going back to the three-year outlook, I understand the mixed shift to more secured over time, and that has a negative impact on revenue yields. When you think over the medium term, does that yield stabilize at some point? Is there an optimal revenue yield you'd like to hit? And what mix, I guess, between secured and unsecured does that assume?
spk04: Yeah, so in our three-year forecast, you would expect that our current proportion of secured lending that fits just below 40 today will continue to grow in proportion to And at the end of that three-year period, probably look more like 50% of our business. Could skew a little up or a little down from there, depending on exactly how the product mix unfolds and where we prioritize and focus, but it will continue to increase as a proportion of the business. The yield profile of the business is a combination of product mix where the Secured products are priced proportionate to the lower level of credit risk and the competitive dynamics. But it's also a function of our desire to want to continue to bring down the average APR for our customer. That works in the customer's best interest. And as we said before, it improves the lifetime value of our relationship with that customer. What you will see, though, is in our current outlook, the rate of decline in that total yield slows meaningfully to the extent that as you get in the outer years, it's a very, very small and modest amount of decline. That is really symbolic of the fact that at the end of this three-year forecast period, we will be pretty close to, I think, what the approximate right mix of pricing will look like on this business going forward. And so while there may be some level of decline, it should be quite moderate beyond that. So that Yield, total all-in yield within that kind of low to mid 30% range. I think that's as we envision how our product mix unfolds over the coming years about where the business is likely to settle for some time.
spk00: Okay, great. That's really helpful. And then my second question, can you give us an update on the new app that you hope to launch? I think it's the first half of this year. I think there's some cross-selling benefits over time. You talked about that, and I'm not sure if you can tell us kind of what you kind of baked into your three-year outlook with this new push.
spk04: Sure. Yeah, so the new app is developed and ready. We're very excited about it and really happy with what we've produced. We are launching it to a subset of customers As a pilot, we've done lots of small tests and kind of customer focus research, but we're now going to open it up to a pilot group of a fairly meaningful number of customers in the next few weeks. And then we're on track to sort of begin to announce it and launch it to all customers by the end of the first quarter. We will be focused initially on promoting it to our internal customer. So we'll limit the amount of external marketing that we do to announce and promote the app because our emphasis initially is that it's going to drive the most value for the existing customer. And we want to give ourselves, as we always have under our test and learn philosophy, time to learn from the customer experience and work out different learnings and insights and kinks. We do believe there is significant potential from a cross-sell perspective, but we have embedded very little expectation for that cross-sell performance into our current growth forecast. There is an assumption that the current trends we're experiencing in terms of the proportion of lending we do by going out and making pre-approved offers to customers continues to gradually expand, but we have not made, as is the case with any forecast we put, any big bets or assumptions that are not grounded in existing history and experience in that forecast. That would imply that there could be upsides from that experience. Whether we chose to take that upside in the form of more accelerated growth or we chose to take that upside in the form of being more selective around which loans we write, focusing on those that are credit risk or those that are more profitable or those that have greater lifetime value, The ability to produce more growth, what's great about it is it gives you choices as to where and how you focus. So no major assumptions implied in the forecast, but certainly excited about the potential.
spk00: Perfect. That makes absolute sense. And I just want my last question, wondering if there's any update on the regulatory front that you've been hearing from your counterparts.
spk04: No, no change, no update. We know that the consultation that they said they would do last year was done last fall. Since then, there's been no news, no announcements, no posting of the results of the consultation or the consultations themselves. So based on everything we know and all of the information we've gathered, uh we are still of the same view that we believe the probability of a change to the regulation is low and uh and and nothing we've seen or heard would change change that view i do know that the responses they got were significant it was a very very robust response that would imply that there's a greater likelihood that there's a better understanding of the magnitude of a change and the complexity and the unintended consequences. So I suspect that that message, uh, that has proven to be the case in the past when other consultations or bills were considered has also come through with this consultation. But again, there's been no change. There's been no announcements. There's been nothing we've heard about any plans or intentions. So at this point it's, um, it's, you know, move forward and, and, uh, And our view is the probability of change remains low.
spk00: Okay. Thanks. Thanks for the update. Those are my questions.
spk06: Thank you. And our next question comes from the line of Stephen Bolin with Raymond James.
spk02: Good morning. First question would be just the use of the credit insurance. Has there been any change in the overall size of claims Or if not, any change, you know, in terms of where you're seeing the claims coming in, whether it's geography, distribution source, any trends that you could point to?
spk04: No. Claims ratios have been very stable. The claims ratios we experience are the most highly correlated to unemployment. because that's the primary benefit of the product. There's obviously additional benefits like death and disability and critical illness, et cetera, but those are clearly the minority of claims. The majority relate to unemployment, and given unemployment has remained at all-time lows, you would expect claims to be consistent with that experience, and that's what we've seen. No other notable changes in terms of you know, provincial mix or the use by the certain customer or product segments, it's been very steady, consistent, lower levels of claims. So that insurance product continues to be one of the many reasons why we feel comfortable about the business from a credit performance perspective, because as we've seen in the past, it can be a very helpful tool for customers if they ever do run into an unemployment event in the future.
spk02: Is that still about 50% of the unsecured book or total book? Maybe just remind me what that number was.
spk04: Yeah, it's pretty close to that on the total book. It's higher on unsecured, lower on secured, but overall it's pretty close to half our business.
spk02: Okay, that's great. Just on your guidance, the one thing that was missing was the store opening guidance. Is that just some uncertainty or shifting in the business? Is that something that would be coming later? Just wondering about that.
spk04: No, it's really just a reflection of how late we are in the cycle of our retail expansion. As I mentioned earlier in our comments, we're getting ready to open our 300th location in the next few weeks, which is a really great new branch here in Toronto on Yonge Street. And as we've said before, we thought the range in the long run was somewhere between 300 and 350. So we do have some additional openings planned. But providing guidance that we're going to open five or seven branches is just not – it's too small of a number to be meaningful enough to include as part of our major commercial forecast set. So you should assume that we are going to open still – handful of branches every year and can really kind of target and pick where those small areas and pockets are that we need additional footprint, but we're pretty close to the mature state, so the branch count will only grow gradually from here.
spk02: Okay. I'll sneak one more in. Just on the cross-selling, you're saying 35% now of the loans are, you know, there's cross-selling. Could you just give us an idea of You know, is that unsecured loan coming in and then moving to some sort of secured loan or an auto loan? What are you seeing the biggest kind of tandem or is it across the board?
spk04: Yeah, so the metric you're referencing in our material is a slightly different KPI than the one we've been talking about recently over the last few quarters. And it's really just meant to provide another data point to support the cross-selling thesis. So the data point we had been providing last year was that for every new customer we acquire, regardless of the product, the propensity from the experience we had for them to then borrow a subsequent loan from us was between a 10% and 30% conversion rate after the first 12 months or within that first 12-month period. The data point that we put in the material last night was to show that of the unsecured cash lending that we are now doing, about one-third of that is related to going out actively to customers and making pre-approved loan offers, which is effectively that cross-selling behavior. That's something that we have always historically done, but it's really just to show that within that unsecured lending origination volume, a third of it is us hand-picking and hand-selecting customers using our proprietary scoring logic and going out and making proactive pre-approved offers, those loans tend to perform very, very well because it allows us to proactively pre-screen the customer and effectively influence the quality of the originations that we generate. All of our cross-selling to date has just been cross-selling unsecured cash loans. So whether the customer got a first cash loan to begin with, whether they got an auto loan, whether they got a power sports loan, whether they got a healthcare financing loan, All of the cross-selling we've done at this moment has really just been to then cross-sell the unsecured cash product. The big opportunity that's yet to be tapped into is to then pre-approve customers for the other products, pre-approve car loans, pre-approve power sports financing, pre-approve retail financing. We've started to work on that. We're quite a ways along the journey where we've got a lot of good information about who and how much they'll qualify for. we will start to begin testing those offers throughout the course of this year. Again, all of that would be potential upside, if you will, to our current plan.
spk02: Okay. That's helpful. Thanks, Jason.
spk06: Thank you. And our next question comes from the line of Marcel McLean with TD Securities.
spk05: Okay. Good morning. Thanks for taking my question. First question, a two-parter on loan growth. We saw a $206 million increase net growth over last quarter. That obviously exceeded your guidance that you had provided last quarter, and it's a very good number. But it's slightly lower than the increase that we saw in the prior two quarters. I think we had $219 million, $216 million. In that range, you know, am I reading too much into it? It's very close to those numbers, but I guess first question is, is there seasonality in Q4 that maybe caused it to come down slightly? And second part of that question is with regards to the 2023 guidance, you know, if I take even the high end of your guidance, That would imply, if I spread it out evenly, growth of about $200 million per quarter, which, again, is just slightly lower than those numbers. So just wondering with this step down, is this maybe a level of conservatism in the outlook, or is there a recession that could slow demand in your base case? Or for your non-prime customers, would you actually anticipate an increase in demand if we do go into a worse situation? I'll let you take that one where you want.
spk04: Yeah. Good question. So a couple points I would reflect on. So first, as the portfolio grows, the amount of originations that are needed to generate the same level of absolute growth continue to have to elevate. When you look at a forecast for a business, if you see a stable level of net loan growth, that implies that the business is growing and producing more incremental originations. That's one key point. As it relates to the trend in net loan growth of the last few quarters and our guidance for this year, Keep in mind that two things. One, that net loan growth, which has been quite robust, is net of the fact that we've made five consecutive quarters of credit model enhancements. All of those enhancements, whether it's raising the minimum credit criteria or adjusting the affordability logic, all of those things lead to producing less lending volume on purpose with the intent of improving the credit mix of the business. being able to sustain this growth rate, even inclusive of credit adjustments, is a great example of how when the growth dynamic is favorable, we can be more selective. We intend to continue to be more selective going forward because that just prepares us even better for the risk of any uncertain potential economic headwinds. So I would say that would be the second thing. Third thing would be when we put out our commercial forecasts, we have always taken the approach of applying what we think is a reasonable, fair, call it down the fairway set of assumptions with ranges wrapped around them. And again, because they do not contemplate new business initiatives like this cross-selling effect on the mobile app, they don't contemplate us building or doing anything that we already have experience with, that gives us confidence that they are confidently attainable as opposed to that they are the stretch upside scenarios. So certainly there's a case where given the current market dynamic, growth could be more accelerated than that. However, my fourth point would be, you know, we are conscious of controlling that rate of growth. at a certain level. There are implications when you grow that include an impact on leverage, an impact on short-term profitability, an impact on the organization's ability to handle the pace at which it scales up. And so there's always a certain level of growth that you believe is responsible and appropriate. And those numbers we put out, which are clearly more ambitious than our last set of projections, and more accelerated, we feel comfortable with. Comfortable that the business can maintain and gradually decline its level of leverage. Comfortable that Hal and the team can raise the appropriate financing for that plan. Comfortable the operations can scale to support that growth. Comfortable that it balances the right mix of short and long-term profitability. So it has all of those things factored in. If you were to ask me just purely outright, is there the capacity in the market and the business capability to grow even larger than that forecast, the answer would be yes. But that doesn't necessarily mean it's the right thing to do or the responsible thing to do. So we feel these numbers really strike the right balance of all the potential variables and competing priorities.
spk05: Okay, thanks for that. That was a personal answer. And then if I could ask a second question on the, it again relates to your forecast, and I'm going to apologize in advance. I do feel like I'm nitpicking a little bit here into your forecast, but I do appreciate them. But the yield on consumer loans for the Q1 number you're guiding to, that's essentially just the narrower band of your 2023 guidance, kind of near the midpoint, but actually biased towards the lower end of your annual guidance. In the past few quarters or years even, we've seen the yield come down. If we're already in the bottom half of your annual guidance in Q1, To a question earlier, you had suggested that over your three-year horizon, we might start to see that yield stabilize at some level. Might that stabilization happen earlier rather than later over your three-year horizon? Could it even happen by midway through 2023? We might see those sequential decreases in the yield come down or maybe even bounce around a little bit. I'll let you hear your answer there.
spk04: Yeah, so as you've noted, the yield guidance for specifically Q1 is in the lower end of the range we've provided for the full year. That is not uncommon and inconsistent with past years. The first quarter tends to seasonally have a slightly lower yield. Two reasons for that. One, some of the revenue in our business related to ancillary products is recorded on a cash-as-cash collective basis versus accrual method. And the first of the year and the holidays in the first few days then, as a result, get collected from consumers typically at the end of the prior quarter. And secondly, the first quarter always has the month of February in it, so the sheer number of days less than the first quarter, and when, for the interest income, we drew that on an accrual basis, a number of days for interest to accrue is simply smaller. So you will have historically seen Q1 always dips down a little bit, and then Q2 recovers, and you either see the yield increase or you see very little to almost no decline from that moment forward as you transition into the next quarter of the year. Nothing about the Q1 yield guidance would imply we are not comfortable with the range we provided for the full year. That's a little bit of a seasonal factor. As it relates to your question around could the yield decline moderate, I think that's really a function of what we do from a pricing perspective. There's obviously a tension between the fact that as the environment has more inflationary expenses, higher cost of capital, you have the tension on that side of the ledger to want to increase pricing. And most lenders, if they have one steady product mix, will take pricing up as a way to recover the risk-adjusted margin associated to a higher cost of capital. However, in our case, we know and have proven consistently time and time again that gradually lowering that pricing has many favorable effects to the business, including the true long-term lifetime value and profit of the portfolio. So the question of around does that yield decline moderate more slowly than what's in our current forecast, I think it really comes down to what decisions we make around pricing. We have made some pricing increases in certain pockets and in certain credit segments where it makes business sense that it's the right thing to do based on the cost structure. So that is certainly a possibility. But we're just being careful and cautious with pricing increases to not swing the pendulum too far the other way when we know it's net beneficial for the customer and for the business as well. So that would be everything about it. The yield for the full year, we still feel comfortable with. I think a Q1 is a little bit of a seasonal trend that you would have seen past years.
spk05: Okay, perfect. Thank you. I appreciate the response. That's it for me.
spk06: Thank you. Now I'm showing no further questions. So with that, I'll hand the call back over to management for any closing remarks.
spk04: Great. Well, thank you, everyone, for taking the time to join today's call. We appreciate it. We look forward to updating you again in a few months to report our first quarter results. Have a fantastic day and the rest of your week. Thank you.
spk06: Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.
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