Q4 2024 goeasy Ltd Earnings Call
Good morning, my name is Joanna and I will be your conference operator today. At this time, I would like to welcome everyone to GO EASY Limited 4th Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise.
Speaker Change: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, please press star, then the number 2.
Speaker Change: Thank you. I will now turn the call over to Mr. Farhan Ali Khan. Please go ahead.
Thank you, operator. Good morning, everyone.
Speaker Change: My name is Farhan Ali Khan, the company's Chief Strategy and Corporate Development Officer, and thank you for joining us to discuss GoEasy Limited's results for the fourth quarter ended December 31st, 2024. The news release, which was issued yesterday after the close of market, is available on Precision and on the GoEasy website.
Speaker Change: Today, David Ingram, GOESU's Executive Chairman and Interim Chief Executive Officer, will review the results for the fourth quarter and provide an outlook for the business. Hala Khoury, the company's Chief Financial Officer, will provide an overview of our capital and liquidity position.
Speaker Change: Jason Appel, the company's Chief Risk Officer, and Patrick Enns, President of Easy Financial and Easy Home are also on the call. After our prepared remarks, we will then open the lines for questions.
Speaker Change: 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.
Speaker Change: For those dialing in directly by phone, the presentation can also be found directly on our investor site. Analysts are welcome to ask questions over the phone after management has finished their prepared remarks. The operator will pull for questions and provide instructions at the appropriate time.
Speaker Change: Business media are welcome to listen to this call and to use management's comments and responses to questions and any coverage. However, we ask that they do not quote callers unless that individual has granted their consent.
Speaker Change: Today's discussion contains forward-looking statements. I'm not going to read the full statement, but we'll direct you to the caution regarding forward-looking statements, including the MD&A.
I will now turn the call over to David Ingram.
David Ingram: Thanks Farhan. Good morning everyone and thank you for joining the call today.
David Ingram: The fourth quarter wrapped up another milestone year for the company. We were proud to have met or exceeded all of the metrics provided in our commercial forecast while producing record growth, consistently stable credit performance, and improved operating leverage.
David Ingram: further solidifying our position as a leader in the Canadian non-prime consumer credit market.
David Ingram: With over 9.6 million non-prime Canadians, we play an extremely important role in the financial system.
David Ingram: In 2024 alone, we issued over 315,000 loans to help everyday Canadians tackle their household financial needs.
David Ingram: With originations exceeding $3.2 billion in the year, we have now proudly served approximately 1.5 million Canadians.
David Ingram: Furthermore, we remained focused on providing our customers with a path to reduce their cost of borrowing when they have demonstrated consistent payment behavior by offering access to products with progressively lower rates of interest.
David Ingram: Over time, we are proud to have reduced the weighted average interest rate we charge at borrowers to approximately 29%, passing on the benefits of our scale directly to the customer.
David Ingram: And lastly, we have now helped over 380,000 customers graduate to prime credit so far, and with many of our active customers acquired in the last few years, the number of borrowers that we plan to help improve their finances is only to grow.
David Ingram: 2024 was also another milestone year in building a high-performance culture, fueled by dedicated and ambitious people that care deeply about the financial well-being of their customers.
David Ingram: During the year, we were recognized as one of Canada's most admired corporate cultures, ranked 38th on the 2024 Best Workplaces in Canada list,
David Ingram: named on the 2024 Best Workplaces in Ontario list and named on the 2024 Best Workplaces in Financial and Insurance Services list. A true testament to our team and our inspiring passion and leadership.
David Ingram: Turning to the results for the fourth quarter, which was the strongest in our history, characterized by strong origination volume and low book growth, stable credit and record earnings, and a very healthy return on equity.
A continued increase in market share and favourable competitive dynamics.
David Ingram: That's a record volume of applications for credit at 677,000, up 28% from quarter four last year, generating 46,800 new customers, an increase of 16%.
David Ingram: Loan originations during the quarter were $814 million, up 15% compared to $705 million produced in the fourth quarter of 2023.
David Ingram: Organic loan growth for the fourth quarter was a healthy $203 million, while our loan portfolio finished the year at $4.6 billion, up 26%.
David Ingram: Unsecured lending continues to be the largest product category at 63% of loan originations, and within our direct-to-consumer channel, the average loan portfolio across our branch network rose to a new high of $7 million, up 22%.
David Ingram: We continue to make progress in scaling our automotive financing product with record fourth quarter originations of 139 million up 31% year-over-year.
David Ingram: This quarter we grew our dealer network to over 3,900 dealers and continue to experience an increase in funding volume for multi-location dealer groups.
David Ingram: During the quarter, home equity lending volumes were also up 31% year-over-year, with consistent and conservative LTV ratios at approximately 64% inclusive of our loans.
David Ingram: The second mortgage product secured by residential real estate is primarily used for debt consolidation and major home repairs and is one of our best performing products with the lowest credit risk.
David Ingram: The overall weighted average interest rate charged to our customers during the quarter was 29%, down from 30.3% at the end of the fourth quarter last year.
David Ingram: Combined with ancillary revenue sources, the total portfolio yield finished within our forecasted range at 33.6%.
David Ingram: Total revenue in the quarter was a record $405 million, up 20% over the same period in 2023.
David Ingram: We continue to be pleased with the quality of our loan originations and credit performance of the overall portfolio.
David Ingram: The dollar-weighted average credit score of our four loan originations was 624, the highest in company history for the third consecutive quarter, highlighting the benefits of our credit adjustments and improving product mix.
David Ingram: The fourth quarter was also the 12th consecutive quarter where the dollar-weighted average credit score of our originations was greater than 600. Secured loans now also represent a record 45.3% of the total portfolio.
David Ingram: Despite the weakening economic environment and a modest elevation in delinquency relative to last year, our credit losses have remained stable as a result of proactive credit tightening and the higher proportion of our portfolio secured by hard collateral.
David Ingram: We have long maintained that managing the credit performance of the business is our highest priority.
David Ingram: The decision to tighten credit criteria and focus on growing higher credit quality loan products has served us all well during periods of economic stress.
David Ingram: The annualized net charge-off rate during the fourth quarter was 9.1%, in line with our forecasted range of between 8.75% and 9.75% for the quarter, and a slight quarter-over-quarter improvement from 9.2%.
David Ingram: A loan loss provision rate rose to 7.61% from 7.38% in the prior quarter due to unfavorable changes in forward-looking macroeconomic indicators obtained from Moody's Analytics.
David Ingram: which the company incorporates into its loan loss provision forecast model.
David Ingram: We are continuing to experience the benefits of scale through operational leverage and productivity improvements.
David Ingram: During the fourth quarter our efficiency ratio, specifically operating expenses as a percentage of revenue, improved 24.2%, a reduction of 410 basis points from 28.3% in the fourth quarter of the prior year.
David Ingram: After adjusting for unusual items and non-recurring expenses, we reported record adjusted operating income of $168 million, an increase of 20% compared to $141 million in the fourth quarter of 2023.
David Ingram: Adjusting operating margin for the fourth quarter was 41.6%, consistent with the same period in 2023.
David Ingram: Adjusted net income was a record $77.4 million, up 12% from $69 million in the fourth quarter of 2023, while adjusted diluted earnings per share was a record $4.45.
up 11% from $4.01 in the fourth quarter of 2023.
David Ingram: An adjusted return on equity was above our target level of a return at 25.9% in the quarter.
David Ingram: 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, David. The fourth quarter highlighted the health of our balance sheet, the confidence of our bank partnerships, and the cash-generating capability of our business.
Hal: During the quarter, we increased our automotive securitization facility by 200 million to support growth of our automotive financing product. The maturity of the facility was also extended by a year to December 15th, 2026.
Hal: The lending syndicate for the facility continues to consist of Bank of Montreal and Wells Fargo Bank that continues to bear interest on advances payable at the rate of adjusted CORA plus 185 basis points.
Hal: Based on the current adjusted CORA rate, the interest rate on the facility would be 5.43%. We also continue to utilize an interest rate swap agreement to generate fixed rate payments on amounts drawn.
Hal: Based on the cash on hand at the end of the quarter and the borrowing capacity under our existing revolving credit facilities,
Hal: As a result, we estimate we could currently grow the consumer loan book by approximately $300 million per year solely from internal cash flows without utilizing external debt. While also maintaining a healthy level of annual investment in the business and maintaining the dividend.
Once our existing and available sources of debt are fully utilized we can also continue to grow the loan portfolio by approximately $500 million per year solely from internal cash flows.
Hal: During the quarter, we also leveraged our current liquidity position to take advantage of opportunistic share repurchases and purchased for cancellation approximately $27 billion worth of shares.
Hal: Subsequent to the quarter, we also continue to be opportunistic and repurchased an additional 42 million shares.
Based on the 2024 adjusted earnings the increased level of cash produced by the business and the confidence in our continued growth of access to capital going forward. The board of directors has approved an increase to the annual dividend from $4 68 per share to $5 84 per share an increase of 20.
Hal: 5%.
Payout ratio of approximately 35% of the prior year's adjusted earnings.
Hal: Furthermore, this marks the 11th consecutive year of an increase in the dividend to shareholders.
Hal: I'll now pass it back over to David to talk about our outlook at new forecast.
David Ingram: Thanks Hal.
David Ingram: And that release yesterday evening, we published a new three year commercial forecast as we have done annually for more than 10 years. These.
David Ingram: These commercial forecast are built bottom up isn't 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 a downside and upside case might look like before we ultimately decided on a range that we think captures the most probable set of outcomes.
David Ingram: Is this process that has served us well as we have either met or exceeded nearly every metric with consistency for over a decade.
David Ingram: We expect to organically grow the loan portfolio between 7.35 billion of $7 75 billion in 2027, 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 at one end and the benefit of our initiatives.
David Ingram: It's performing better than planned at the other.
David Ingram: We have also embedded the implementation of the 35% maximum allowable rates of interest alongside our own strategy to reduce the cost of borrowing for our customers by passing along rate reductions as we continue to scale.
David Ingram: As such our total yield inclusive of ancillary revenues will gradually decline to approximately 30% over the next three years.
David Ingram: Our disciplined approach to managing and prioritizing credit risk.
David Ingram: Bind with ongoing product mix and operational execution provide us confidence that the credit performance by portfolio will remain stable.
David Ingram: We expect that the annualized net charge off rate of our portfolio to gradually step down from 8% to 10% last year to seven five at nine 5% in 2027.
David Ingram: We also believe that there are further benefits from scale and additional operating leverage in the business.
David Ingram: Inclusive of the declining risk adjusted yield we still anticipate the operating margin to gradually expand by approximately 100 basis points each year.
David Ingram: Underpinning. This outlook is the same four pillar strategy that has driven that business priority since 2017.
David Ingram: The first pillar of our strategy is to continue building and promotes a wide range of lending products that position go easy to become the one stop solution for all the borrowing needs of our non prime Canadian.
David Ingram: The second pillar of our strategy is to expand our channels of distribution make it out products and services available easily accessible in a convenient manner when a whack consumers sneak credit.
David Ingram: The third pillar of our strategy is to expand geographically optimizing that retail are much of network across Canada <unk>.
David Ingram: Sidra in other markets, where our business model can be successful.
David Ingram: And the fourth pillar of our stretch state is to help our customers improve their financial wellbeing through credit education products and services, improving that credit gradually offering them, a lower rates of interest and serving as a bridge back to prime credits.
David Ingram: In 2025, well execute against these three key strategic initiatives that align to our strategy.
David Ingram: First we are continuing to build a new revolving credit card product that we intend to pilot later in the year the.
David Ingram: It remains a material void in the marketplace, but general purpose non prime credit cards for the customer segments, we serve.
David Ingram: Occupied by only a couple of major market participants don't prime borrowers that are unable to get a card product from traditional banks are often left with few options.
David Ingram: We believe we can build a superior solution one that will eventually have loyalty and rewards components.
David Ingram: The card product integrates well in our existing strategy of supporting Canadians on that credit building journey.
David Ingram: Secondly, we're investing in introducing both auto title and also refinance products.
David Ingram: What's the finance continues to represent the largest segment of the Canadian non prime credit bucket.
David Ingram: Majority of Canadians OTA vehicle with equity interest, which is secured as collateral would provide access to credit a favorable borrowing terms.
David Ingram: We will look to offer financial taxes to consumers, who either own the vehicle outright or have an existing whatsoever.
David Ingram: And lastly, we are continuing to prioritize investments in technology to enable greater efficiency.
David Ingram: Through auto maintain and streamlining business processes as well as leveraging advancement in AI and technology to enhance existing workforce capabilities. We can continue to scale the business and drive cost savings.
Tony brings me to the upcoming quarter, we expect the loan portfolio to grow between 160 and $185 million.
While the total yield generates on the consumer loan portfolio to be between 31 to $532 two 5% in the quarter, reflecting the typical seasonal decline we experienced in each first quarter period.
David Ingram: We also continue to expect stable credit performance with the annualized net charge off rate to remain within the same range as previously guided at $8 75, and $9, 75% in the quarter.
David Ingram: And lastly, with respect to an update on the CEO leadership transition continued to make progress without such a seasoned and experienced executives. We currently are in the advanced stages with a preferred candidates will provide further updates as they become available.
David Ingram: In closing I want to thank the entire go easy team for their drive and passion that helped produce another record year for our company attained truly cares deeply about delivering high quality financial products to our customers and merchant partners in a transparent and frictionless manner.
David Ingram: Together, we're on a mission, but everyday Canadians on the path to a better tomorrow.
David Ingram: So with those comments complete we will now open the call for questions.
Speaker Change: Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone. If you are using a speaker phone. Please lift the handset before pressing any case.
Speaker Change: The first question comes from John Aiken at Jefferies. Please go ahead.
Speaker Change: Yeah.
Speaker Change: Good morning, I wanted to take a look at the past due disclosures the 151 day plus in the quarter moved dramatically up.
Speaker Change: And was hoping to get a little bit of color.
Speaker Change: Looks like basically from last quarter, almost all of the loans that were past due 60 days plus almost moved into this category can you talk about.
Speaker Change: What's been going on in terms of collections scan why this actually does not negatively impact your outlook for losses on comparable as we can within this market.
Speaker Change: Sure John It's Jason I'll take that one.
Speaker Change: As you noticed in our disclosures or late stage delinquencies, which we define as being over 90 days past due obviously increased year over year.
Speaker Change: That increase was primarily driven by a delay in repossession turnaround times for some of our secured assets.
Speaker Change: Coming from third parties, we're reliant upon a repossession and collection efforts are the likes of bailiffs, telling companies auction houses and alike.
Speaker Change: It had been struggling to accommodate a much larger volume of units out for repossession.
Speaker Change: Not because of higher necessarily higher performance that we're seeing in our portfolio because the overall auto segment itself has experienced an upward tick in late stage delinquency across the country.
Speaker Change: Now the good news is that to date the lengthening of these repossession Timeframes has not had any material impact on our collection results.
Our ability to realize value from certain assets they are simply taking longer to realize.
Speaker Change: And as a result, that's impacting the volume of the assets or loans that are sitting in the longer term delinquency buckets.
Speaker Change: And as a result of the fact that we expect to realize value on these assets in keeping with historical performance that is the principal reason why we believe and are confident that the net charge off rate moving forward will travel within the same range. It has for the last several quarters.
Speaker Change: Okay understood and can you talk to the performance that you're seeing in the auto book as you're growing it I.
Speaker Change: I mean, obviously youre very excited about the prospects of the book is there.
Speaker Change: What are the trends been like and what our expectations. If we actually do start to face some headwinds in the Canadian economy.
Speaker Change: Well I'm glad you asked that because the other comment I was going to make at the tail end of my previous remark is that if you look at the overall delinquency distribution that that's published in the MD&A.
Notice a noticeable improvement in the sub 90 day delinquency period or what we call early stage that is primarily reflecting a couple of things one would be the increasing mix of higher quality loan originations that we are writing that was commented on by David increment is preferred remarks by the fact that we've seen the highest level of.
Speaker Change: Credit score origination dollar weighted volume in the last three quarters running straight and it's also a function of the credit tightening that we did midway through the third quarter of last year, which we previously disclosed so we feel pretty good about how the auto portfolio was trending obviously, we've got a bit of a delay on the backend due to some operational bottlenecks that were working through along with the rest of the <unk>.
Speaker Change: Industry, but we're pretty pleased about how the front end piece of the front end part of the business is performing as we're saying overall lower delinquency rates as a result of the tighter underwriting that we're doing so taken together we've got some some pretty good trends working in our direction and feel pretty good about them.
Speaker Change: Great. Thanks for the color I'll requeue.
Speaker Change: Thank you. The next question comes from Nik Priebe at CIBC capital markets. Please go ahead.
Speaker Change: Okay. Thanks, so the new recap came into effect January one I believe the plan was to implement some pricing changes on loans that were priced below the new cap is a deliberate action to mitigate the earnings impact where those changes also implemented on January one I suspect it's factored into your short and long term guidance, but I'm just wondering how quickly those changes.
Speaker Change: We'll be sort of mitigating the impact on portfolio yield.
Speaker Change: Yeah, I'll I'll answer that and then we've obviously done both sets of changes you've obviously reduced the interest rate on the loans in order to comply with the maximum allowable rate of 35%.
Speaker Change: Then where we think it makes sense have made some pricing adjustments on loans that we currently write less than 35.
Speaker Change: As David had mentioned overall, our overall objective is still to bring down the average credit or the average pricing for the average credit consumer principally through moving it through better credit quality products auto and the others, which typically carry lower rates of interest.
Speaker Change: So you would see in our yields, albeit it's early days because we're only literally in the first quarter.
Speaker Change: The reflection of our performance, but again in Q4.
Speaker Change: You see recorded there wouldn't reflect the changes in the maximum allowable rate because that rate only came into effect on Jan one.
Speaker Change: Right that makes sense okay.
Speaker Change: And then.
Speaker Change: You know when it comes to go use share price I think the the severity of the market reaction that we saw to the tariff threat materializing made it pretty clear there's a perception that credit performance is acutely sensitive to employment conditions, but you charge off 9% of the book annually, it's clearly not because 90% of your borrowers are experiencing job loss every year.
Speaker Change: Wondering can you roughly quantify what proportion of impaired loan formation would be explained by a job loss events, specifically as opposed to other sources of financial strain.
Speaker Change: Well that's a good question what I can tell you is that if you think about the role of how various macroeconomic variables play on the portfolio unemployment by far and away is the most sensitive metric there are others inflation GDP price of oil, which impact how we think about the loan loss provision but movements in.
Speaker Change: Unemployment are particularly sensitive if you think about where we've traveled in the last four quarters, though unemployment currently at the end of December I believe sat at about six 6%, but.
Speaker Change: But a year ago. It was traveling in the low fives and over that same timeframe as you've noted our credit loss rate is generally travel between the nine.
Speaker Change: Nine 1% to nine 3% range.
Speaker Change: And the way in which we're able to manage that is really through a couple of key capabilities three of which we've talked about before the first is obviously continuing to move the shift of our product mix into secured loans backed by hard assets.
Despite having a longer charge off window at 180 days those loans, obviously experienced a much lower charge off rate in totality, even under adverse economic conditions, where unemployment tends not to have the same degree of impact.
Speaker Change: The second change that we've also talked about throughout the year as the proactive credit tightening we've taken throughout 2020 for each of the last four quarters, we've made adjustments to various product protocols be the auto unsecured or home equity lending in advance of some of these rises in unemployment taking place, which obviously can impact a portion of our book.
Speaker Change: And then the third solution, we talk about it we really havent talked about this very much since COVID-19 is the suite of borrower assistance tools that we offer to deal with customers when they run into problems of repayment, whether it's through modify their interest rate lengthening their term or figuring out ways in which we can help them continue to make payments and thereby report positive payment.
Speaker Change: On the credit Bureau, we typically get a population proactively through some of the more recent credit and collection models that we've built so as a result, even though you might experience a significant uptake in the unemployment rate is among other things those three principal strategies that allow us to be quite proactive in influencing how that materializes into the charge off rate and effectively.
Speaker Change: First to keep it relatively stable over time.
Speaker Change: Hey, maybe just to bolt on as how here as you might recall there is a significant portion of our overall customer base, but actually has credit credit insurance.
Speaker Change: <unk> taken out on their loans, it's approximately half of the overall total portfolio composition has.
Speaker Change: As credit insurance, which would cover them off.
Speaker Change: <unk> of job loss or other life events, and not with skew higher on unsecured products as well. So in addition to the items from a from a credit collections and working with the customer.
Speaker Change: That's another.
Speaker Change: Loss mitigation.
Speaker Change: Item.
Speaker Change: That would allow us to mitigate some of that exposure to the unemployment rate.
Speaker Change: Our next sorry, just one last piece because I can give you the a bit of a longer lens in terms of perspective over the last 20 years. So if we look back and I think we say this in.
Speaker Change: Many of our shareholder meetings just to try to help people understand.
Speaker Change: What does this business do through a financial crisis or a change in employment status. If you go back to the Dot com bubble of 2001, the financial crisis 2008, the call crisis of Detroit in 2009, or even the Alberta oil crash of 2015, we've stress tested.
Speaker Change: A look back at all of those periods and you can see in each of those cases, where unemployment almost doubled in those environments. The non prime basis of this consumer to change in their delinquency rates was fractional. So it had very small movements, whereas you tend to see at the Super Prime level.
Speaker Change: You get the biggest exaggeration of change because of the debt burden.
Speaker Change: On those on those consumers. So just as a reminder, the debt burden in the non prime consumer is around $68000 and the debt burden on our prime consumers around $145000. So we are less sensitive than most people would think and we have been at a back test over the last 20 years, what happens where.
Speaker Change: Unemployment goes up.
Speaker Change: That's great very comprehensive thanks, very much I'll turn it over.
Speaker Change: Thank you. Our next question comes from Kent Mccarthy at BMO Capital markets. Please go ahead.
Speaker Change: Thank you and good morning.
Speaker Change: <unk> growth for Q1 implies some deceleration relative to recent quarters.
Speaker Change: Yet a 2025 loan growth forecasts were increased modestly.
Speaker Change: So given the macro uncertainty that we've seen in recent months.
Speaker Change: What's giving you that confidence that loan growth should accelerate in the second half.
Speaker Change: So it's a fair question, particularly on that guided comments on the range for Q1. So we do have some seasonality at play that we we are confident in the demand side of the ledger. The demand from Q4 continued into Q1, so we still see application.
Speaker Change: But 30% plus in coming forward for our products. Some of the challenge for US is as we work through into a 35% rate cap and the tightening of the credit controls that Jason spoke to that we had put in place early in the year, we're still trying to optimize.
Balance between how much that we are we put through versus how much we continue to be prudent on particularly with the outlook.
For for unemployment and other changes so I think what you've seen is a conservative approach in Q1.
Speaker Change: And then as we get more data or more information the credit team will have more confidence in seeing where there could be some loosening in Q2 onwards, but as we look forward for the rest of the year and the product generation that we have and the demand that we see from the Q1 demand.
Speaker Change: Constant, but by the full year will be in a place that we've guided to.
Speaker Change: Okay I appreciate the details.
Speaker Change: And with tariffs being topical.
Speaker Change: Have you started incorporating.
Speaker Change: Tighter underwriting policies for economic sectors that may be more materially affected.
Speaker Change: So I'll speak to first from a kind of holistic view and I'll hand, it over to Jason to talk to what that May look like on the credit side. So just from a.
Speaker Change: Holistic position.
Speaker Change: Business that has direct impact as a result of tariffs and where they may go in there and of course, that's highly speculative at this point in terms of what will be what will be given tariffs for imports and exports.
Speaker Change: We can see in our business, it's very small effect on Etfs at very small effect on easy home that just by.
Speaker Change: Directly through our furniture purchases, but that sum is is less than $5 billion. So there's no direct impact there.
Speaker Change: <unk> carries a little bit more effective because we bring a lot of the power sports start into the country and again, we don't know at this stage, whether that will be impacted for tariffs coming in.
Speaker Change: At the Max are less than 10% of the whole portfolio will be impacted by direct cost.
Speaker Change: It should there be tariffs so the products that we directly led to.
Speaker Change: On the other side, which is how do we stress test and think about what it means in a rising unemployment as a result of tariffs I'll going to let Jason speak to that in more detail.
Jason Appel: One comment just to bolt on to David's first would be obviously, we've talked about this also ironically during the Covid period. When we were asked a similar question about exposure.
Speaker Change: The overall go easy.
Speaker Change: Customer of loan portfolio inclusive of both easy financial and Lincare business segments is quite diversified across industry sectors. There is no one industry sector that accounts for anything more than 8% of the total volume of customers out of the portfolio.
Speaker Change: Industry sectors, we mean quite a variety of them from goods producing sector, which are in the minority of the exposures that you would have in our business most of our consumers actually work and service sectors retail government.
Speaker Change: And other public related sectors, such that we're not at the point now where we're doing any significant tightening that's an industry specific.
Speaker Change: That said part of the reason why that's not required just because we've done quite a bit of tightening leading into the <unk>.
Speaker Change: Incoming Trump administration, joining the Fray in November most of those significant adjustments were made not only in response to the rate cap, which David spoke about earlier.
Speaker Change: As I said before as unemployment has been rising over 100 basis points since the start of the year, we have not been waiting for a potential tariff or to make surgical adjustments in the overall credit quality of the loan portfolio.
Speaker Change: As far as the impact of tariffs, though just because you've asked you've obviously seen that reflected in the higher allowance. The allowance is obviously now reflecting an adjustment.
Speaker Change: For the the potential onset of tariffs knowing that we don't know exactly how that's going to land, but as we commented in our disclosures. This quarter, we've obviously seen that uptick in the at the islands in part because there is a view that things could worsen and worsen materially.
Speaker Change: For a potential population of customers that would be adversely affected that is the primary reason why our loan loss provision rate went up in the quarter and if we hadn't seen her experience that worsening effect from the actual loan loss provision rate would have declined so.
Speaker Change: As far as the expectation for future performance, we think it's adequately reflected in the allowance, but as I said earlier, we're not waiting for the allowance to dictate how we manage the charge off experience in the loan book, that's predominantly handled through a number of proactive measures that we've been running quarter to quarter over the last several years.
Speaker Change: Thank you very much.
Speaker Change: Thank you. The next question comes from Gary Ho at Deutsche Bank Capital markets. Please go ahead.
Speaker Change: Thanks, and good morning, maybe Jason just follow on on that last comment on the ACL bump. So I'm looking at the F. L lie.
Speaker Change: Chart that you have in Gram DNA can you remind me.
Speaker Change: What are the the weightings on each of those scenarios to get you to that 761%.
Speaker Change: ACL this quarter and then second.
Speaker Change: Have you done a sensitivity analysis, if it's more in the bucket of moderately pessimistic where could the ACL go.
Speaker Change: Just wanted to kind of pick your brain on that.
Speaker Change: Yes, no problem, Gary maybe just to answer your question. Initially I don't believe we published the weightings across the various scenarios, but to help clarify what I can tell you is that over the past year management has placed a majority of its weightings and the neutral and pessimistic scenarios to reflect the direction in which the man.
Speaker Change: So economic indicators have been changing what we saw moving from Q3 to Q4 and what accounted for the uptick in the ACL.
Speaker Change: The contemplated changes in the forward looking indicators being unemployment GDP inflation and the price of oil, but most notably unemployment and GDP.
Speaker Change: Significantly worsened under both the neutral and pessimistic scenarios that are incorporated into our forecast.
Speaker Change: That was primarily or primarily the reason behind why we saw a lift in performance but.
Speaker Change: But our weightings are actually not materially changed over the course of the year. We are still quite conservatively postured and have been since the latter part of 2023 coming out of the Covid period, where we'd began to where we began the first C. Academic weakness. So we anticipate keeping that posturing moving forward and with only likely.
Speaker Change: Move with should we happened to see a material reversal of where we think these worst case scenarios that out and probably more importantly, depending on how things with things like tariffs ultimately land because were simply too early a stage at this point to know exactly what the future will look like so expect our weightings to remain concern.
Speaker Change: It'll be posture going over the course of the next couple of quarters at least until such time as we understand how things with the tariffs.
Speaker Change: Hey, maybe maybe just a bolt on there Gary this is Hal here. So we did as you may have noted.
Speaker Change: Increase the overall ECL dollar amount.
Speaker Change: <unk> by approximately $25 million in the quarter bumping that up to 350 million just shy of 8%.
Speaker Change: Quarter over quarter.
Speaker Change: And then even in the most pessimistic scenario as you may have noted in the MD&A.
Speaker Change: And under the worst conditions, we would be looking at a 14% decrease in the overall ECL.
Speaker Change: Just wanted to give you that additional color and contacts there.
Speaker Change: So sorry, just wanted to clarify that last point. So if you move the total weighting to the extremely pessimistic it would increase your allowance by 14%.
Speaker Change: Correct and that's that's in the MD&A disclosure as well got it under the term yes.
Speaker Change: Okay. That's that's helpful and then my.
Speaker Change: My second question, just going back to your 2025 strategic initiatives, especially around the new.
Speaker Change: The new product launches can you share the economics on these maybe just go to market strategy and expected credit profile.
Speaker Change: Our job et cetera.
Speaker Change: So.
Gary Ho: Gary I'm going to give a introduces a patrick as you know our Apache joined us from capital one and will be leading the project for credit cards and has the expertise in that area. So.
Gary Ho: I think he might be able to give you a generic response more than a detailed response, but I'm going to introduce him to to that conversation.
Patrick Enns: Thank you David Hi, Jerry This is a this is Patrick speaking.
Speaker Change: Maybe I just had a I love to start with why we're so excited about it right. It's a very large market with relatively limited competition and it should broaden our access to the number of Canadians we serve quite dramatically. So that we can provide them a whole host of potential products within our suite. So really the strategic rationale is top of mine there.
Patrick Enns: From a product economics perspective.
Patrick Enns: Certainly one of the reasons why we're starting with a pilot.
Patrick Enns: That kind of test and grow.
Patrick Enns: It's really just understand those components.
Patrick Enns: I'd say from my experience.
Patrick Enns: Similar revenue yields and loss rates to what we see at the overall portfolio level are reasonable guideposts for this product.
Patrick Enns: And then in managing ROA is a lot of the success comes from doing so efficiently and being able to market efficiently to these customers as they tend to be a little bit higher operating expenses.
Patrick Enns: That's all the products.
Patrick Enns: And just to tie in there Gary.
Patrick Enns: As per our previous discussion.
Patrick Enns: We will be piloting.
Patrick Enns: Both credit card and looking at auto title refi towards the latter part of this year, garnering learnings and with a moderate uptick in 2026 and more so you know the increased volume that we're looking to generate which is incorporated into our guidance and targets would likely come at the tail end of 'twenty.
Patrick Enns: 627.
Patrick Enns: Okay.
Patrick Enns: Thanks for the color that's it for me.
Speaker Change: Thank you. The next question comes from Jeff Fenwick at Cormack Securities. Please go ahead.
Jeff Fenwick: Hi, good morning.
Jeff Fenwick: I wanted to circle back to the to the auto product when he was talking about that earlier, obviously, it's gonna be contributor to growth or the trajectory on that product has been very strong I'm just trying to get a sense of.
Jeff Fenwick: How sustainable that sort of growth is what was the sort of opportunity is looking like now in that space and maybe you can also put it into context, I guess with some of the competitive dynamics that you're seeing in the market today.
Josh: Yeah, Hey, Josh.
Jeff Fenwick: Great question.
Jeff Fenwick: We've noted some significant growth overall.
Jeff Fenwick: In our in our auto vertical.
Jeff Fenwick: Frankly, we feel like we're just kind of hitting the tip of the iceberg there.
Jeff Fenwick: We continue to expand our relationships with.
Our dealer partners across Canada, we continue to invest in business development Representatives to increase increase the volume and the growth. There. So it's certainly a substantial growth pillar for us.
Jeff Fenwick: You know and it's backed by a hard asset secured asset overall.
Jeff Fenwick: And you know given given the size and the scale of the market.
Jeff Fenwick: Being one of the largest markets available to us at 65 billion, albeit the likes of Scotiabank and TD capturing on a decent market share that we are still you know just just a very small percentage of the overall penetration in that market.
Jeff Fenwick: That is to continue to grow over the next couple of years.
Jeff Fenwick: [laughter].
Speaker Change: Okay. Thanks for that that color and then maybe we could just talk more broadly about what youre seeing in the competitive environment and you've touched on it in the past with some other players.
Speaker Change: Perhaps being disrupted by the the rate cap and the higher cost of funding that had to experience, but what are your thoughts as we head through this change in the rate cap into this year. It does seem like you're seeing a lot of demand come your way and maybe at the other end of the market as we're always saying we saw fair some of them do it so its merger with home capital just wondering if that maybe.
Speaker Change: Changes some of their their focus that might open up more opportunity for good reason.
Speaker Change: Yeah look.
Speaker Change: I think I think that might be the case in terms of the first on <unk>.
Speaker Change: First one deal, but I think it's still early days currently in terms of the rate cap environment, certainly we feel that there will be dislocation primarily.
Speaker Change: Primarily in some of the model lines that are primarily high interest rates that would be above the rate cap primarily in terms of their loan offering and so with the compression in yield the lack of capital to actually back those particular.
Speaker Change: <unk> that are in the space, we do think that over the course of time that we will see a number of those players, particularly the smaller ones.
Speaker Change: Dislocated.
Speaker Change: That.
Speaker Change: We're currently seeing in terms of the demand.
Speaker Change: Our record levels in terms of application volume that will only add fuel to the fire in terms of the throughput coming through.
Speaker Change: Within the go easy umbrella.
Speaker Change: Okay. Thank you and then maybe one one last one here I mean, one thing that continues to stand out as just the the same store loan book growth of 22% to $7 million of store.
Speaker Change: That's a really impressive metric and continues to seem to grow ever higher what's the ultimate target here I mean, historically hasnt changed all that much I used to think of a mature store in an urban location might get to sort of $10 million or so but it is the opportunity on a per store basis.
Speaker Change: You're going to grow here and obviously, it's very important in terms of things like operating leverage for the business.
Speaker Change: Yeah.
Jeff Fenwick: Hi, Jeff.
Speaker Change: It's a good question and.
Speaker Change: If you think about it in terms of we probably are at a mature state in terms of store count distribution. We are within a good easy driving distance. So most of our critics achievements coast to coast. So the opportunities obviously to to get more same store sales growth, which we've historically done and I think we're into.
Speaker Change: About 50 peer of giving a consistent same store revenue growth with the product suite widening.
Speaker Change: <unk> access to more products being provided to the stores with the ability to use technology to make it easier for our store staff to be able to sell into other categories, which at this point they can't take the whole suite into the store.
Speaker Change: All of those pieces get added to the store and then we reflect back on the time in 2008, when we had the incumbents of Wells Fargo, and HSBC and Citi Financial I think when we go back to those numbers if those days before the financial crisis.
Speaker Change: The concentration of our loan book in each of those locations was around the $10 billion Mark that you just mentioned so that's there's clear visibility for us over the next few years to take that same store average book co location when aggregated to the new products that will be added to be made available.
Speaker Change: Those locations combined with the attrition of existing competitors in the space I think there is a good line of sight to 10 billion plus 10 million plus rather.
Speaker Change: Excellent that's all I.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Thank you, ladies and gentlemen, as a reminder, should you have any questions. Please press star one.
Speaker Change: The next question comes from Jamie Glen at National Bank Financial. Please go ahead.
Jamie Glen: Yeah. Thanks. So first question just wanted to understand a little bit better the credit tightening that took place in Q4.
Jamie Glen: What does it exactly mean to optimize the mix of model strategies that would be first part and then the second part.
Jamie Glen: Around tightening the collection practices.
Jamie Glen: I would I would think that tightening those collection practices might lead to a an increase in delinquencies in that 1% to 90 day bucket, but it seems to be the opposite so maybe just sort of talk through that as well.
Jason Appel: Hey, Jamie it's Jason I'll take that.
Speaker Change: The sort of simple definition of the optimization of credit strategies, it's really a risk speak for how we go to market on many of our products, where we will employ.
Speaker Change: Credit adjudication models to determine the eligibility for customers tomorrow.
Speaker Change: No I mean, we've mentioned this through the years, we even play out a champion challenger approach, where often we will have a customer would be scored by as many as four or five credit models at the same time it'd be pass through one of them in terms of outcome, but we are constantly doing that across a number of our product offerings in part to fine tune. The predictive power that these models can have to.
Speaker Change: If I default risk and as we've quite frankly build better credit models are built better mousetrap as I like to say Oh, we can open up the ability to let increasing amounts of customers in the door without necessarily taking on incremental credit risk. So sometimes one of the strategies that will do just to ward off risk in the portfolio is to switch the.
Speaker Change: Are customers moving through let's say model a versus model B, where we have increasing evidence that model be which would let's say be our challenger is outperforming model, a and delivering either a lower loss rate for the same number of customers or a comparable loss rate for a larger number of customers. Let answer the door. So that is a practice that we have.
Speaker Change: Quite frankly have employed throughout the years and continue to do so and as we have scaled and as the portfolio has gotten larger we have the benefit of having more models in play so it's quite often in a given quarter or quarters, where we'll do some of that tinkering from time to time simply because the opportunity presents itself presents itself.
Speaker Change: Your comment around the tightening of collections is actually is correct is that tightening collection practices in theory should result in a higher uptick in your delinquencies.
Speaker Change: But if you do that in such a way where you're seeing an overall improvement in the underwriting quality of your portfolio you have the benefit of having a nice balance whereby you can still be more considerate of how you want to go to market and dealing with delinquent customers.
Speaker Change: And offset that impact, which sometimes can be negative, especially if you are not giving those customers. The same types of opportunities to remediate their loans, but making sure that other customers that you are letting in are of a higher credit quality.
Speaker Change: Over the course of the last couple of quarters, where we've made this disclosure we have continued to be more particular on how we go to market with our collections activities.
Speaker Change: And balance some of the impacts of that activities with better quality customers that were writing a new loans. The net effect of which is that we're able to keep the overall credit performance stable. It can and in some cases, maybe the oscillations in the delinquency in the total levels, but in early stage delinquency based on the way we've gone to market with it we've actually seen a net improvement.
Speaker Change: Okay, that's a great answer.
Speaker Change: Second question maybe.
Speaker Change: Maybe more for Hal on this one repurchased shares in the in the fourth quarter.
Speaker Change: We haven't seen too often throughout.
Speaker Change: Throughout the history, how are we thinking about the buyback in <unk> is it still active in Q1.
Speaker Change: And and how are we thinking about that in terms of bounce in <unk>.
Speaker Change: Capital allocation versus your your capacity.
Speaker Change: Capacity and leverage constraints.
Speaker Change: Yeah, Jamie So first and foremost is always where we believe there to be value.
Speaker Change: We continue to feel that there is a strong value in our <unk>.
In our company and where we feel the stock may be trading.
Speaker Change: No.
Speaker Change: Our view of <unk>.
Speaker Change: Market pricing, we will certainly take advantage of those situations.
Speaker Change: As we look at the outlook here.
Speaker Change: And a pretty strong position as it relates to liquidity overall, we talked about almost 2 billion of funding capacity within the overall business, we feel that we are.
Speaker Change: We're very well positioned to fuel and fund the organic growth of the of the book first and foremost so that would be our primary.
Speaker Change: And but we also feel that given our overall leverage position at this point.
Speaker Change: Continuing to improve with strong cash flows and earnings our debt to adjusted tangible net worth coming in the quarter at just north of $3 <unk> below and overall threshold of Forex as outlined by our rating agencies on our banks.
Speaker Change: That number our view continues to improve for the balance of this year and certainly in the coming years allows us some additional space.
Speaker Change: We're still fueling record levels of gross but also.
Speaker Change: Having capacity to take advantage of share repurchases. So we've been active.
Speaker Change: In Q4, and say over the last month and a half.
Speaker Change: And we'll continue to monitor the market and where appropriate we will we will take action.
Speaker Change: Alright, great. Thank you.
Speaker Change: Thank you there are no further questions I'll turn the call back over to management for closing comments.
Speaker Change: Thank you all for you since there are no more questions, we'd like to thank everyone for your continued support.
Speaker Change: Participation in this call and we look forward to updating you at the next quarterly call in May have a great rest of your day and family weekend. Thank you.
Speaker Change: Ladies and gentlemen. This concludes your conference for today, we thank you for participating and we ask that you. Please disconnect your lines.