Q4 2024 goeasy Ltd Earnings Call
Good morning, My name is Joana and that will be a coffee shop or later today at this time I would like to welcome everyone should go easy limited fourth quarter 2024 earnings call.
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Speaker Change: Thank you I'll now turn the call over to Mr. Farhan Ali Khan. Please go ahead.
Speaker Change: Thank you operator, and good morning, everyone.
Speaker Change: My name is Farhan Ali Kahn, Chief strategy, and corporate development Officer, and thank you for joining us to discuss go easy Limited's results for the fourth quarter ended December 31 2024.
Speaker Change: The news release, which was issued yesterday after the close of market. It is available on obsession and on the go easy website.
Speaker Change: Today, David Ingram, Chief Executive Chairman and interim Chief Executive Officer will review the results in fourth quarter and provide an outlook for the business Hello, Corey the puppies Chief Financial Officer will provide an overview of our capital and liquidity position.
Jason Appel: Jason Appel, the company's Chief risk Officer, Patrick <unk>, our president of easy financial an easy home are also on the call.
Speaker Change: 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 our quarterly earnings presentation.
Speaker Change: For those dialing in directly by phone presentation can also be found directly on our investors site.
Analysts are welcome to ask questions over the phone after management has finished their prepared remarks the.
Speaker Change: Operator, who will poll for questions and provide the instructions at the appropriate time.
Speaker Change: This media are welcome to listen to this call and to use management's comments and responses to questions and any coverage.
Speaker Change: Never we asked that they do not quote callers that individual has granted their consent.
Speaker Change: This discussion contains forward looking statements I'm not going to read the full statement I will direct you to the caution regarding forward looking statements included in the MD&A.
Speaker Change: I'll now turn the call over to David Ingram.
David Ingram: Thanks, Paul and 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: 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 315000 loans to help everyday Canadians tackle that household financial needs.
David Ingram: But the originations exceeding $3 2 billion in the year. We have now proudly served approximately 1.5 million Canadians.
Furthermore, we remain 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 progressive lead lower rates of interest.
David Ingram: Over time, we are proud to have reduced our weighted average interest rate, we charge a borrowers so approximately 29% passing on the benefits the best scale directly to the customer.
David Ingram: Lastly, we have now helped over 380000 customers graduates of prime credit so far.
David Ingram: Of our active customers acquired the loss P. B S. The number of borrowers that we plan to help improve that finances is that really took her out.
David Ingram: 2024 was also another milestone yet in building a high performance culture. They all buy dedicated an ambitious people that care deeply about the financial wellbeing of our customers.
David Ingram: During the year, we were recognized as one of Canada's most admired corporate cultures ranked 30 eights on the 2020 for best Workplaces in Canada list named on the 2024 best Workplaces in Ontario list and names on the 'twenty 'twenty four best workplaces in financial reinsurance sepsis list.
David Ingram: 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 loan book growth stable credits and record earnings and a very healthy return on equity.
David Ingram: Continued increase in market share at the favorable competitive dynamics, that's a record volume of applications for credit at 677000 up 28% from quarter four last year generating 46800, new customers an increase of 16%.
David Ingram: Loan originations during the quarter were 814 billion 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 7 billion up 22%.
David Ingram: We continue to make progress in scaling our automotive financing products with record fourth quarter originations of $139 million up 31% year over year.
David Ingram: This quarter, we grew our dealer network to over 3900 dealers and continue to experience an increase in find funding volume for both the lung 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 a load.
David Ingram: Our second mortgage product secured by residential real estate is primarily used for debt consolidation of 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 33% at the end of the fourth quarter last year combined with ancillary revenue sources. The total portfolio yield finished within our forecasted range of 33, 6%.
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. The dollar weighted average credit score about fourth quarter loan originations was 624, the highest in company history for the third consecutive quarter, highlighting the benefits of our credit adjustments and improving.
David Ingram: Thanks.
David Ingram: The fourth quarter was also the 12th consecutive quarters, 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 a weakening economic environment at a modest elevation in delinquency relative to last year, our credit losses remain stable as a result of proactive credit tightening and a higher proportion of that 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: <unk> tightened credit criteria and focus on growing higher credit quality loan products has served us well during periods of economic stress.
David Ingram: Annualized net charge off rate during the fourth quarter was nine 1% in line with our forecasted range of between $8 75, $9, 75% for the quarter and a slight quarter over quarter improvement from nine 2%.
David Ingram: Our loan loss provision rate rose to 761% from 738% in the prior quarter due to unfavorable changes in forward looking macroeconomic indicators obtained from Moody's analytics.
David Ingram: The company incorporates into its loan loss provision pool cost model.
David Ingram: We are continuing to experience the benefits of scale through operational leverage and productivity improvements 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%.
David Ingram: The fourth quarter of the prior year.
David Ingram: After adjusting for unusual items of 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: Adjusted operating margin for the fourth quarter was 41, 6% consistent with the same period in 2023. Adjusted net income was a record $77 4 million up 12% from $69 million in the fourth quarter up 2023, while adjusted diluted earnings per share was a record.
David Ingram: It's $4 45 said up 11% from $4 two one set in the fourth quarter of 2023.
David Ingram: And adjusted return on equity was above our target level of a return of 25, 9% in the quarter.
Speaker Change: With that I'll now pass stripes of how to discuss our balance sheet and capital position before providing some comments on their 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.
David Ingram: During the quarter, we increased our automotive securitization facility by 200 million to support growth of our automotive financing product.
David Ingram: <unk> of the facility was also extended by a year to December 15th 2026.
David Ingram: They can syndicate for that facility continues to consist of bank of Montreal, and Wells Fargo Bank and continues to bear interest on advances payable at the rate of adjusted core up plus 185 basis points.
David Ingram: Based on the current adjusted core rate the interest rate on the facility would be 5.43%.
David Ingram: We also continue to utilize an interest rate swap agreement to generate fixed rate payments all amounts drawn.
David Ingram: Based on the cash on hand at the end of the quarter and the borrowing capacity under our existing revolving credit facilities. We have approximately one 9 billion and total funding capacity.
David Ingram: At quarter end, our weighted average cost of borrowing was six 8% and fully drawn weighted average cost of borrowing was six 5%.
David Ingram: Also continue to remain confident that the capacity available under our existing funding facilities and our ability to raise debt financing is sufficient to fund our organic growth forecast.
David Ingram: The business also continues to produce a growing level of free cash flow.
David Ingram: Free cash flow from operations before the net growth in the consumer loan portfolio was $185 million in the quarter, while the trailing 12 months of free cash flow exceeded $412 million.
David Ingram: 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.
David Ingram: 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.
David Ingram: 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.
David Ingram: Subsequent to the quarter, we also continue to be opportunistic and repurchased an additional 42 million shares.
David Ingram: 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.
David Ingram: 95% or a payout ratio of approximately 35% of the prior year's adjusted earnings.
David Ingram: Furthermore, this marks the 11th consecutive year of an increase in the dividend to shareholders.
David Ingram: 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.
David Ingram: 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 about 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 consumer sneak credit.
David Ingram: The third pillar of our strategy is to expand geographically optimizing that retail merchant network across Canada, then considering other buckets, where our business model can be successful.
David Ingram: And the fourth pillar of our strategy 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: From 'twenty to 'twenty five we'll 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 segment, 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 invested 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 Madhu.
David Ingram: The majority of Canadians older 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 ultra maintain and streamlining business processes as well as leveraging of Boston in AI and technology to enhance existing workforce capabilities. We can continue to scale the business and drive cost savings.
Speaker Change: Tony brings me to the upcoming quarter, we expect the loan portfolio to grow between 160 <unk> at $185 million.
Speaker Change: While the total youll generate so 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.
Speaker Change: We also continue to expect stable credit performance with the annualized net charge off rates remain within the same range as previously guided at $8 75, and 975% in the quarter.
Speaker Change: 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 the preferred candidates will provide further updates as they become available.
Speaker Change: 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 journey cares deeply about delivering high quality financial products to our customers and much and partners in a transparent and frictionless manner.
Speaker Change: We're on a mission, but everyday Canadians on the path to a better tomorrow.
Speaker Change: 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.
Speaker Change: 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.
John Aiken: Good morning wanted to take a look at the past due disclosures the 151 day plus in the quarter moved dramatically up and was hoping to get a little bit of color because it looks like basically from last quarter almost all of the loans that were past due 60 days plus almost moved into this category.
Speaker Change: 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 a comparable and 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 that.
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: Had been struggling to accommodate a much larger volume of units out for repossession.
Speaker Change: 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.
Speaker Change: Nor 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: 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 is as you're growing up I mean, obviously, you're very excited about the prospects of the book, but it 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 their comment I was going to make at the tail end of my previous remark is that if you look at the overall delinquency distributions that's published in the MD&A, you'll 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.
Speaker Change: Mix of higher quality loan originations that we are writing a that was a comment at all by David increment is preferred remarks by the fact that we've seen the highest level of our credit score origination dollar weighted volume in the last three quarters running straight.
Speaker Change: And it's also really a function of the credit tightening that we did midway through the third quarter of last year, which we previously disclosed so we we feel pretty good about how the auto portfolio is 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 industry, but we're pretty pleased about how the front end piece of the front end part of the business is.
Speaker Change: 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.
Nik Priebe: 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 teams.
Nik Priebe: This will be sort of mitigating the impact on portfolio yield.
Speaker Change: Yeah, I'll answer that Nick 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% and then where we think it makes sense have made some pricing adjustments on loans that we currently write less than 35, but as David mentioned, our overall, our overall objective is still to.
Speaker Change: Bring down the average credit or the average pricing for the average credit consumer principally.
Speaker Change: Principally through moving it through better credit quality products auto and the others, which typically carry lower rates of interest. So you would see in our our yields, albeit it's early days because we're only literally in the first quarter a.
Speaker Change: The reflection of our performance, but again in Q4, the yields that you see recorded there wouldn't reflect the changes in the maximum allowable rate cause that rate only came into effect on Jan one.
Speaker Change: Great that makes sense, Okay and then.
Speaker Change: You know when it comes to <unk> share price I think 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 know you charge off 9% of the book annually, it's clearly not because 9% of your borrowers are experiencing job loss every year.
Speaker Change: Just 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: Oh, that's a good question what I can tell you is that if you think about the role of how various macroeconomic variables play out of the portfolio unemployment are 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 unemployment or.
Speaker Change: Particularly sensitive if you think about where we've traveled in the last four quarters.
Speaker Change: Currently they are in December I believe sat at about six 6%.
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 has generally travel between a $9 one to nine 3% range.
Speaker Change: And the way in which we're able to manage that it's really through a couple of key capabilities three of which we've talked about before the first is obviously continuing with the shift of our product mix into secured loans backed by hard assets.
Speaker Change: 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 our various product protocols would 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 and we really haven't 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 modifying our 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: Just to keep it relatively stable over time.
Speaker Change: Hey, maybe just a bolt on is how here as you might recall there is a significant portion of our overall customer base that 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: Has credit insurance, which would cover them off.
Speaker Change: Thats 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 collection fees 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: So Nick 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.
Speaker Change: We say this in.
Speaker Change: Many of our shareholder meeting is just to try to help people understand what does this business do through a financial crisis or a change in employment status. If you go back to the dotcom bubble of 2001, the financial crisis 2008, the call crisis of Detroit in 2009 or even the.
Speaker Change: But oil crash of 2015, we've stress test to 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.
Speaker Change: It had very small movements, whereas you tend to see at the Super Prime level, you get the biggest exaggeration of change because of the debt burden.
Speaker Change: On those on those consumer 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 out of back test over the last 20 years, what happens where.
Speaker Change: Unemployment goes up.
Speaker Change: Yeah, that's great very comprehensive thanks, very much I'll turn it over.
Speaker Change: Thank you. The next question comes from Tien required at BMO capital markets. Please go ahead.
Speaker Change: Thank you and good morning, our loan 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 the confidence that loan growth should accelerate in the second half.
Speaker Change: So it's a fair question, particularly on a guided comment on the range for Q1. So we do have some seasonality at play that we used this 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 a 30% plus and 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.
Speaker Change: The balance between how much that we are we put through versus how much we continue to be prudent on particularly with the outlook.
Speaker Change: For for unemployment and other changes so I think what you've seen is a conservative approach in Q1.
Speaker Change: As we get more dates are more information the credit team will have more confidence in seeing where there could be some loosening in Q2 onwards.
Speaker Change: But as we look forward to the rest of the year and the product generation that we have and the demand that we see from the Q1 demand we're confident that by the full year will be in a place that we've guided to.
Speaker Change: Okay.
Speaker Change: Okay I appreciate the details and with tariffs being topical.
Speaker Change: Have you started incorporating.
Speaker Change: Tighter underwriting policies for economic sectors that may be more at a materially affected.
Speaker Change: So I'll speak to first from a kind of a holistic view and I'll hand over to Jason to talk to what that May look like on the credit side. So just from a.
Speaker Change: Holistic position the business that has direct impact as a result of tariffs and where they may go 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.
Jason Appel: What we can see in our business, it's very small effect on Etfs and very small effect on easy home that just by directly through our furniture purchases, but that's some is is less than $5 billion. So there's no direct impact there.
<unk> carries a little bit more affected 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.
Jason Appel: At the Max are less than 10% of the whole portfolio will be impacted by direct cost. It should there be tariffs on the products that we directly led to.
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 terrorists I'm 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.
Jason Appel: The overall go easy.
Jason Appel: Customer 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 on the portfolio and by industry sectors. We mean quite a variety of them from goods producing sectors, which are in the minority of the exposures that.
Jason Appel: You would have in our business most of our consumers actually work and service sectors retail government and.
Jason Appel: In 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 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.
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.
Gary Ho: Thank you. The next question comes from Gary Ho at Deutsche Bank Capital markets. Please go ahead.
Gary Ho: Thanks, Ed Good morning, maybe Jason just follow on on that last comment on the ACL bump. So I'm looking at the F. L lie.
Gary Ho: The chart that you have in Gram DNA can you remind me.
Gary Ho: What are the.
Gary Ho: Ratings on each of those scenarios to get you to that 7.61% our ACL this quarter and then second.
Have you done a sensitivity analysis, if it's more in the bucket of moderately pessimistic where could the ACL go.
Gary Ho: 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.
Speaker Change: 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 macroeconomic indicators have been changing.
Speaker Change: What we saw moving from Q3 to Q4 and what accounted for the uptick in the ACL with 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 worse into under both a neutral and pessimistic scenarios that are incorporated into our forecast. So that was primarily or primarily the reason behind why we saw the lifting and performance.
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 see economic weakness. So we anticipate keeping that posturing moving forward and with only likely.
Speaker Change: He moved 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 we're simply at too early stage at this point to know exactly what the future will look like so expect our weightings to remain.
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: Maybe maybe just to bolt on there Gary this is Hal here. So we did a as you may have noted.
Speaker Change: Increase the overall ECL.
Speaker Change: About by by approximately 25 million in the quarter bumping that up to 350 million, just shy of 8% linked 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 just got a difference under the term.
Speaker Change: Yeah.
Speaker Change: Okay. That's that's helpful and then.
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.
Gary Ho: So Gary I got to give introduces a Patrick as you know a patchy 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: Thank you David.
This is a this is Patrick speaking.
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: From a product economics perspective.
Patrick: Certainly one of the reasons why we're starting with a pilot to that kind of test and grow.
Patrick: It's really just understand those components.
Patrick: I'd say from my experience.
Patrick: Similar revenue yields and loss rates to what we see at the overall portfolio level are reasonable guideposts for this product.
Patrick: And then in managing our 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: Solar products.
Gary Ho: And just to tie in there Gary.
Patrick: As per our previous discussion.
Speaker Change: We will be piloting.
Speaker Change: 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 with likely come at the tail end of 2000.
Speaker Change: 627.
Speaker Change: Okay.
Speaker Change: 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 I mean, you talked a bit 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 what's 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.
Speaker Change: Yeah, Hey, Josh.
Josh: Great question.
Josh: We've noted some significant growth overall.
Josh: In our in our auto vertical.
Josh: Frankly, we feel like we're just kind of hitting the tip of the iceberg there.
Josh: We continue to expand our relationships with.
Josh: Our dealer partners across Canada, we continue to invest in it.
Josh: This development representatives to increase increase the volume and the growth there. So it's certainly a substantial growth pillar for us.
Josh: You know and it's backed by a hard asset secured asset overall.
And you know given given the size and the scale of the market.
Josh: Being one of the largest markets available to us at 65 billion, albeit the likes of Scotiabank and T D. 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.
Josh: That's continued to grow over.
Josh: Over the next couple of years.
Josh: Yeah.
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 of the players.
Speaker Change: Perhaps being disrupted by the the rate cap and the higher cost of funding that had 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 I'm, 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 I.
Speaker Change: I think I think that might be the case in terms of the first on a personal 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.
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 competitors that are in the space.
Speaker Change: Do think that over the course of time that we will see a number of those players, particularly the smaller ones.
Speaker Change: Become dislocated.
Speaker Change: And that we're currently seeing in terms of the demand at 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.
Speaker Change: 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, the store footprint 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: Continuing to grow here and obviously, it's very important in terms of things like operating leverage for the business.
Speaker Change: Yeah, So hi.
Jeff Fenwick: Hi, Jeff.
Jeff Fenwick: A good question and the 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.
Jeff Fenwick: And I think we're into a about a 15th year of giving a consistent same store revenue growth with the product suite widening.
Jeff Fenwick: Our 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 as all of those pieces get added to the store and then we reflect back on the time.
Jeff Fenwick: 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. The the concentration of our loan book in each of those locations was around the $10 billion Mark that you just mentioned.
Jeff Fenwick: So there'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 in those locations combined with the attrition of existing competitors in the space.
Jeff Fenwick: I think there is a good line of sight to 10 billion, plus 10 billion plus rather.
Jeff Fenwick: Excellent that's all I had thank you.
Jeff Fenwick: 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 claim at National Bank Financial. Please go ahead.
Jamie Claim: Yeah. Thanks. So first question just wanted to understand a little bit better the credit tightening that took place in Q4.
Jamie Claim: What is it exactly team to optimize the mix of model strategies that would be first part and then the second part.
Jamie Claim: Round tightening the collection practices.
Jamie Claim: I would I would think that tightening those collection practices might lead to a increase.
Speaker Change: <unk> and 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: Yeah, Jamie it's Jason I'll take that.
Speaker Change: The sort of simple definition of the.
Speaker Change: <unk> 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 would 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 says I'd 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 proposed.
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 challenge here 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 into the dog. So that is a practice that we.
Speaker Change: Quite frankly have employed throughout the years and continue to do so and as we have scaled and as the portfolio has got larger we have the benefit of having more models in play so it's quite often in a given quarter or quarters, but 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: Offset that impact, which sometimes can be negative, especially if you are.
Speaker Change: Not giving those customers the same types of opportunities to remediate or 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: On 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 that that improvement.
Speaker Change: Okay, that's a great answer.
Second question, maybe more for Hal on this one repurchase shares in a 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 a is it still active in Q1 and and how are we thinking about that in terms of balancing.
Speaker Change: Capital allocation versus your your <unk>.
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.
Speaker Change: 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 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: Where we're still fueling record levels of growth, but also having capacity to take advantage of share repurchases. So we've been active.
Speaker Change: And Q4 and say over the last month and a half and we'll continue to monitor the market and where appropriate we will we will take action.
Speaker Change: Okay, 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 and 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.
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