goeasy Ltd. (EHMEF) CEO Jason Mullins on Q2 2020 Results – Earnings Call Transcript
goeasy Ltd. (OTCPK:EHMEF) Q2 2020 Earnings Conference Call August 13, 2020 11:00 AM ET
Hal Khouri – Executive Vice President & Chief Financial Officer
Jason Mullins – President & Chief Executive Officer
Jason Appel – Chief Risk Officer
Conference Call Participants
Gary Ho – Desjardins Capital
Jeff Fenwick – Cormark Securities
Etienne Ricard – BMO Capital Markets
Jaeme Gloyn – National Bank Financial
Ladies and gentlemen, thank you for standing by and welcome to the Goeasy Second Quarter 2020 Financial Results Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]
I would now like to hand the conversation over to your speaker today, Hal Khouri, Chief Financial Officer. Thank you. Please go ahead sir.
Thank you, Operator, and good morning, everyone. My name is Hal Khouri, the company’s Chief Financial Officer, and thank you for joining us to discuss goeasy Limited’s results for the second quarter ended June 30, 2020. The news release which was issued yesterday after the close of market, is available on GlobeNewswire and on the goeasy website.
Today, Jason Mullins, goeasy’s President and Chief Executive Officer will update you on the company’s response to COVID-19, review the results for the second quarter, and provide an outlook for the business before we open the lines for questions from investors. Jason Appel, the company’s Chief Risk Officer is also on the call.
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. All shareholders, analysts and portfolio managers are welcome to ask questions over the phone after management has finished.
The operator will poll for questions and will provide instructions at the appropriate time. Business media are welcome to listen to this call and to use management’s comments and responses to questions in any coverage. However, we would ask that they do not quote callers, unless that individual has granted their consent.
Today’s discussion may contain forward-looking statements. I’m not going to read the full statement but I will direct you to the caution regarding forward-looking statements included in the MD&A.
Now, I’ll turn the call over to Jason Mullins.
Thanks Hal and welcome to today’s call everyone. During the second quarter we continue to navigate through the effects of the COVID-19 pandemic. We prioritized the health and safety of our teams, our customers and our communities while remaining fully operational and ready to serve the millions of Canadian families that have come to rely on non-prime lending as a source of credit. Our response plan which included quickly pivoting our resources towards managing our existing portfolio supporting our customers, adjusting our credit and underwriting tolerance and carefully managing our expenses has helped us produce strong operating results and increased cash flows highlighting the unique strength and resilience of our business model.
We have also benefited from our Omni-channel lending platform. While our stores and branches have been open to the public since mid-May we have taken advantage of our digital lending capabilities to ensure that we can serve customers throughout the entire crisis and when visiting us is not possible. By working directly with branch personnel through calls, email, SMS and digital contracts we’ve been able to preserve the strength of our local customer relationships while catering to the health and safety of our team and our customers.
Furthermore, we have been fortunate to see steady improvements in the performance of our point of sale channel particularly with the rise in online e-commerce. Year-to-date we have acquired almost 6,000 new customers from this channel and they will now enjoy the opportunity to access the full suite of easy financial loan products.
Turning to the results for the quarter. As we highlighted during the update in our first quarter release and the AGM the effects of the COVID-19 pandemic which included stay-at-home orders, increased government subsidies and reduced living expenses for consumers serve to temporarily reduce overall demand. When combined with our stricter credit and underwriting criteria and the shift in focus towards managing our existing loan portfolio specifically during the month of April and early May we saw a lower level of origination volume. During the quarter we generated $171 million in total loan originations down 38% from the $276 million in the second quarter of 2019.
The lower level of originations led to the previously guided reduction in the loan portfolio of $31.6 million which finished at $1.13 billion at the end of the quarter up 18% from $960 million as of June 30, 2019. As the economy has progressively reopened, however, we have seen a corresponding and gradual increase in demand. In April during the peak period of the economic shutdown loan originations were $38 million down 56% year-over-year. In May loan origination volume improved to $51 million down 50% followed by $83 million in June down only 8%. In July demand is elevated further as loan originations climbed to approximately $97 million down only 7% compared to the same period in the prior year and the highest month year to date in 2020.
Revenue for the second quarter was a total of $151 million up 2% over the same period in 2019. Given the support provided to borrowers during the quarter along with the lower level of ancillary product sales and the higher level of loan protection insurance claims which lower the net commission earned by the company the total yield generated on the loan portfolio reduced temporarily to 42.6% in the second quarter. While a lower level of commission from this program results in a reduction in revenue it is more than offset by the long-term protection it provides for the customer and the company’s future credit losses.
During the quarter we experienced very strong credit and payment performance. Use of the loan protection insurance program, increased government subsidies, assistance provided by banks and other lenders such as payment deferral programs and reduced overall living expenses combined with the credit model enhancements made over the course of 2019 conspired to result in an improvement to credit losses. The net charge operate for the second quarter was a record low 10% compared to 13.5% in the second quarter of 2019 and 13.2% in the first quarter of 2020.
Much like we have seen with consumer demand we’ve seen many encouraging trends in consumer payment activity including gradual declines in loan protection insurance claims, lower usage of our customer assistance programs and true payment performance that exceeds pre-COVID levels. As we’ve highlighted previously the majority of easy financial customers have loan protection insurance offered by Assurant Inc. a global provider of risk management solutions which covers a borrower’s full loan payment for a period of six consecutive months in the event of unemployment.
At the peak period in April approximately $7.8 million of claims payments were made to easy financial on behalf of its customers. In May the total claims paid reduced slightly to $7.7 million while in June they reduced further to $6.2 million. In the month of July claims paid have subsequently declined further to $4.4 million and more than half of all customers who previously submitted an insurance claim have now returned to making their regularly scheduled payments. The performance of this program through difficult times highlights the tremendous value add that it provides to our customers as the insurance has now paid out almost $30 million in claims on our customers behalf since the beginning of the pandemic in March.
As we always have we continue to provide our customers with a suite of loan amendment solutions that support them through a difficult financial period. These include temporarily deferring loan payments or extending the term of a loan to reduce the regular payment obligation. In April approximately 12% of our customers utilized a form of support as compared to approximately 7% to 8% in a typical month prior to the pandemic. In May the portion of borrowers utilizing a form of support reduced to below pre-COVID levels at approximately 6.3% followed by 6% in June. In July the proportion of customers that use support continue to remain below pre-COVID levels at approximately 6.8%.
Notwithstanding the critical support these programs provide to our customers we have also continued to observe a strong level of true overall payment performance. In the month of April we collected 93% of the customer payments that we would normally collect under normal conditions relative to the size of the consumer loan portfolio. In May this figure increased to 95% rising further to 100% in June. In July we collected 102% of the customer payment volume we would normally collect prior to the pandemic highlighting the condition of the consumer to meet their debt obligations.
While we have seen significant improvements in underlying credit performance along with some positive trends in the general macroeconomic environment there also remains uncertainty about the possibility of further spread of the virus and the exact timing and pace of an economic recovery.
As such we continue to employ the use of probability weighted economic scenarios to determine the appropriate loan loss provisional allowance that would fairly account for the future expected credit losses in the event we faced further economic disruption. As such our allowance for future credit losses was held broadly flat at 10.05% down only slightly from 10.1% in the first quarter. We also carefully managed operating expenses during the quarter. Most discretionary spend was curtailed. We reduced advertising spend and several projects were put on a brief hold to ensure maximum focus was on guiding the business through the crisis. Together the expense controls and record low credit losses led to operating income of $54 million up 32% from $40.9 million in the second quarter of 2019 while the operating margin for the business expanded to 35.8% up from 27.7% in the prior year.
During the quarter we also recorded a $4 million pre-tax increase to the carrying value of our minority equity investment in PayBright, our Canadian instant point of sale consumer financing and buy now pay later platform partner. Since arranging our investment last year PatBright has grown revenue by over 85% and onboarded dozens of marquee clients including The Source, Samsung, Taylormade and Sephora. With a significant presence in e-commerce and the launch of their pay-in-form product for smaller ticket items PayBright has been the beneficiary of the worldwide shift to online retailing caused by the pandemic. Although we quantified the return on our equity investment solely on the basis of the customer acquisition opportunities available through this channel we are pleased that their business is performing well and with the rise in their value we are now exceeding our investment thesis.
Altogether net income in the second quarter was a record $32.5 million up 66% from $19.6 million in 2019 which resulted in diluted earnings per share of $2.11 up 67% from the $1.26 in the second quarter of 2019. Return on equity was a record 37% up from 25.2% in the second quarter of 2019. If we adjust for the increase taken into the carrying value of our equity investment in PayBright net income was a record $29.1 million and diluted earnings per share was $1.89 an increase of 48.6% and 50% respectively while return on equity was a record 33.1%
I will now pass it over to Hal to discuss our balance sheet and liquidity position before providing some comments on our outlook.
Thanks Jason. The second quarter demonstrated the strong cash producing capabilities of our business and the preparedness of our balance sheet to weather an extended period of economic stress. Cash provided by operating activities before the net issuance of consumer loans receivable and purchase of lease assets was $83.4 million during the quarter, an increase of 24% from $67.3 million in the second quarter of 2019. After investing in the temporarily low level of organic loan originations generated during the quarter the business produced excess free cash flow which was used to simultaneously strengthen our balance sheet while also allowing for the repurchase of our shares at an attractive return level.
During the quarter we preserved a portion of our capital and increased our liquidity by 45 million through a combination of debt reduction and an increase in our cash position. Based on the cash on hand at the end of the quarter and the borrowing capacity under our revolving credit facility we had approximately $260 million in funding capacity which we now estimate would allow us to fund the organic growth of the business through to the fourth quarter of 2022.
We also estimate that once our existing available sources of capital are fully utilized we can continue to grow the loan portfolio by approximately $150 million per year solely from internal cash flows. We also use the portion of our free cash flow to invest in repurchasing our shares at an attractive level of return that we consider to be below the intrinsic value of our company.
During the quarter we completed $20 million in share repurchases buying back approximately 375,000 common shares at a weighted average price of $53 through our normal course issuer bid bringing our total repurchases year-to-date to 579,000 shares. Importantly both our dividend and share repurchase decisions are made on the basis that we can fund all organic loan volume that meets our credit criteria and that they can be sustained even in the event of severe recession. With respect to our funding sources our secured senior revolving credit facility and the unsecured notes table we issued last year continue to provide us with stable and long-term capital with maturities in 2022 and 2024 respectively.
At quarter end our fully drawn weighted average cost of borrowing also further reduced to 5.1% down from 6.8% in the prior year. In addition, incremental draws on a revolving credit facility currently bear a rate of approximately 3.6% due to the lower interest rate environment.
With the retention of cash flow we also reduced our leverage position with our net debt to net capitalization declining to 70% while increasing the equity on our balance sheet to [$353] million. On June 29, we also issued a notice to redeem all of our 5.75% convertible unsecured subordinated debentures that were due to mature on July 31, 2022. The convertible debentures were redeemable at a reduction price equal to their principal amount plus accrued and unpaid interest. As of the close of business on June 28, 2020 there was approximately $43.8 million principal amount of convertible debentures issued and outstanding of which the holders of approximately 41.4 million an aggregate principal amount elected to convert into approximately 954,000 common shares prior to the redemption date of July 31 this year.
We then redeemed the remaining 2.4 million and converted those on that date in cash. The early conversion produces the benefit of reducing our balance sheet financial leverage resulting in a pro forma net debt to net capitalization of approximately 67% while also reducing cash flows as the effective dividend yield is lower than that of the coupon rate on the debentures.
Lastly while our balance sheet and capital position remains strong and well equipped to fund the growth of our business for several years into the future we will continue to focus on diversifying our funding sources, lowering our cost of borrowing and increasing our liquidity so that we can take advantage of opportunistic investments. As such we continue to believe that there are opportunities for us to access the securitized funding facility in the near future and expect to make progress in this area over the coming quarters.
I will now pass the call back over to Jason for some comments on our outlook.
Thanks Hal. As there continues to be uncertainty around the ongoing and future effects of COVID-19 we plan to defer providing an updated long range forecast until the environment begins to stabilize and we can better assess the timing and pace of a recovery. In the meantime, our portfolio is performing well and we will continue to provide a regular near-term outlook.
As highlighted last quarter the first phase of our response was to prioritize the health and safety of our team and focus on taking care of our customers. We are now in the second phase of our response plan which is to continue carefully managing the existing business while shifting our focus toward growth and strategic initiatives. With sales volume gradually improving we expect to grow the consumer loan portfolio during the third quarter between 3% and 5% with sales improvements continuing into the fourth quarter. With the level of support being provided to borrowers declining the volume of loan protection insurance claims gradually reducing and the capital level of exposure that we have to higher claims levels. We expect the total yield generated on the loan portfolio to begin to improve climbing to approximately 44% to 45% in the third quarter.
And while we still face a temporarily lower level of commission from the insurance program, it is more than offset by the long-term protection it provides for our customers and the company’s credit losses.
And turning to credit. We continue to expect credit losses to eventually normalize however our consumer payment and default trends continue to perform remarkably well. During the month of July, our average delinquency rate was 4.1% which was down by over 20% from last year.
Based on the current collection repayment and delinquency trends, we would expect our net charge operate in the third quarter to finish at or below 10%. We also continue to carefully evaluate and differ discretionary expenses only where the impact on the business is minimal.
While continuing to invest in our growth initiatives. With the gradual rise in sales activity, we want to ensure that we to leverage the current strength of our balance sheet and operating results to be the most prominent nonprime lender in our space.
As such, we will increase our investment in marketing and advertising to approximately $7.5 million in the third quarter so we can capture the rising consumer demand and continue building brand awareness going into the fourth quarter season.
We also look forward to the launch of some major merchants in our point-of-sale channel over the next few months which should result in a healthy step up in our new customers and we are making great progress on the development of our digital lending platform which will give us the capacity to scale the business for years into the future.
In the third quarter, we will launch our first generation of new proprietary scoring models that will leverage consumer banking data help us asses risk and underwrite loans to new segments and consumers such as new Canadians and students.
Lastly, we continue to make progress in the design and development of our direct to consumer auto loan offerings which will launch as a pilot in early 2021. Although the future impact of the pandemic is not clear, our business is performing well despite the condition and we are well prepared to navigate through future curfew like in the event we are faced with another outbreak.
Our customers who are everyday Canadians making approximately $46,000 per year have a total net income level that is much lower than the average Canadian, at a 115% versus a 175% at only 20% have the mortgage obligation.
They are hardworking and employed across a wide variety of industries including manufacturing, healthcare, public sector government jobs and retail staple, positioning them well to remain or become employed again.
Lastly, with the federal government announcing new revisions to the unemployment insurance program, both customers relying on the $2000 per month have been come from serve will transition to standard EI with the average Canadian being eligible for an early identical level of pre-tax benefit income.
In the meantime, we are focused on capturing the many new growth opportunities that lie ahead. We believe as prime lenders taking credit criteria, the role we play at building the gap left by the banks will become greater than ever.
We will also continue to consider strategic acquisition investments if and when they make sense, carefully evaluating opportunities that within our strategy to develop a full-suite omnichannel nonprime lending institution.
With our deep expertise in consumer lending, strong relationships with our customers, and a business model that’s been built to whether economic cycles were well equipped to navigate through the crisis and resume our ambitious growth plans.
In closing, I would like to extend my sincere thanks and gratitude to our 2000 goeasy team members that have resiliently stood by our customers. I’m inspired by the way they have arouse around our vision of providing everyday Canadians the path to a better tomorrow and I’m truly proud of what they have accomplished.
With those comments complete, we will now open the call for questions.
Thank you. [Operator Instructions] Our first question comes from Gary Ho with Desjardins Capital. Your line is open.
Thanks, good morning. Just first question, Jason. And you talked about your revenue guidance for Q3 44% to 45%. So, maybe if you can comment at a more normalized rate if you kind of lookout 12 to 18 months from now, where do you see that trending to or perhaps some of the drivers to look at any mixed shifts that we should be aware of looking out.
Sure. So, I think that the way it should think about the yield on our book is that we still have a strategy to continually offer more risk based pricing continue to diversify the product offering through the secured product and eventually the auto product.
And that that strategy which while it lowers the yield, also increases the average loan size, allows us to attract a wider segment of the nonprime consumer market and extend the lifetime value of our customer.
And therefore the long-term profitability of the business continues to be our strategy. And as such, despite the effects of COVID, that would be what we would expect to happen and that that yield will gradually decline over time anywhere.
If you recall back to our original forecast that we provided, before the effects of COVID, we estimated this year would be between 46.5% to 48.5%, that would step down next year to 43% to 45% and then step down only slightly to 42% to 44%.
Based on what we estimated to be how that portfolio mix would evolve. Clearly, there was an accelerated step down with the higher level of claims that we’ve discussed. Additionally or just over 42% this quarter that will rise back to 44% to 45% in the third quarter.
And then, I think you should think about it that at some point over the course of the fourth quarter and into next year, as the claims levels returned to normal, our yields will then just intersect with our original strategy which was that that gradual decline into that 43% to 45% range over the course of 2021.
So, we’ll obviously provide a new more specific range once we rebuild our forecasts in the next throughout year. But you should certainly think about it as it — it’ll eventually intersect with our original strategy.
So, maybe just to paraphrase if we should see a slight pickup in the yield over the next call it three or six, nine months at before declining back to your original trend that you guys disclosed in your previous guidance.
Yes, I think you should see it pick up a little further beyond the third quarter. We’ll obviously provide that level of specificity at the next results. But yes, you should see it pick back up a little further and then I would suggest as we go into next year, that intersects with our strategy.
And we see that product mix lead to that a slow gradual decline that we had previously expected, yes.
Okay, great. And then, if you kind of touch on that your three year outlook and I guess there’s still a lot of uncertainty in the market place. Maybe you can comment like what do you need to see to maybe reinstate your three year outlook here.
Is that kind of be kind of stabilization in terms of the market, like what are the factors?
Yes. I think the main factor probably is just that there is a possibility that as we hit the fall and winter season. It’s unclear on what that means for the pandemic.
If you know there is a chance that any level of outbreak is very small and regionalized and that there remains a nice gradual and steady recovery but there also knows you speculate there might be some larger scale player absent, that the rate of this in the recovery is been for long.
Yes, I think it’s that fall winter season that just leaves us wanting to be a little bit more cautious about firmly providing those numbers. So, I think as we get another quarter or two in that timeframe, it’s really helpful that the uncertainty will be mostly behind us and we’ll be able to provide that guidance.
And so, call it another quarter or two is our thinking and our plan. And at this point obviously we take pride in that when we put forecast out there. We fully firmly and the trajectory of the business to achieve them.
So, we also don’t want to put something else there that could support that history and of execution as well. So, that’s part of the delay.
Okay perfect, thanks for the color. And then, just my last question. Jason, a lot of discussion has been on your current portfolio and credit trends. Maybe a bigger picture question. When will you shift more to more kind of more of an offensive approach versus defensive?
Perhaps your team is doing that behind the scenes. And maybe talk about potential acquisition opportunities, international expansion, and etcetera. What are you seeing in the market place today?
Yes, sure. So, we’re definitely admit that transition now and moving gradually to more offense. We’re obviously being still very cautious and careful about managing credit collections given the uncertainty.
We still have a number of incremental credit and underwriting protocols in place, that’s we’ve retained since the very beginning of the pandemic. So, we’re trying to be not too quick to come out of defense.
Having said that, we are now in a position where all of our strategic initiatives are up and running again. So, as I mentioned, we’re full speed ahead on our core loan platform, our auto loan products, working on our point-of-sale partnership with PayBright.
So, everything that we had planned were gone, well was paused or temporarily delayed is now back in full swing. So, all of those growth initiatives are under way.
On the acquisition front, similar to our comments in the past, we continue to believe there are opportunities for growth via acquisition for us at some point in the future. But given we do have a health organic growth plan.
We’re looking at that very opportunistically or intending to yes be very disciplined about making sure it will only be something that’s our strategy and is priced really well. So, at this point we’re just keeping our eyes and ears open.
And with the disruption created by the pandemic, we’re starting to see opportunities up here and hopeful that that could create an opportunity for us that might not otherwise been there. So, we’ll obviously update on our progress.
But we’re certainly keeping our eyes and ears open for opportunities that did make sense for our business.
And that would include your international expansion ambitions as well. If there’s comments, any?
Yes, that’s right. Yes, I think we’re obviously always interested in opportunities for growth in Canada where we already built the scale in the infrastructure. But we also continue to believe there are good opportunities in other markets as well.
So, as opportunities are presented to us and through another markets, we’re just as open to considering them as the opportunities for Canada.
Got it, okay perfect. And that’s it from me.
Thank you. Our next question comes from Jeff Fenwick with Cormark Securities. Your line is open.
Hi, good morning. So Jason, I just I wanted to talk about the credit outlook here in terms of credit quality. And we know eventually you’ll begin to normalize back towards those prior level.
Maybe you could just help us conceptually understand the split between how impactful it will be when that initial large surge in the about the loan protection claims and payouts fall away versus the sustained government.
So, since it seems like it’s going to last where there’s a bit longer, will there be a point where that initial wave of loan protection falls away and there is a notable uptick, then from that point forward is that gets removed from the numbers.
Or is it a little more subtle than that as we go forward?
Yes. It’s a good question. I think my based on the trends, I think it’ll be a little more subtle. I think there will be a natural point in time when those remaining customers on loan protection insurance claims will reach their six months coverage mark.
And we’ll see a level of step up. However, I believe that level of step up will be minimal or it’ll be part of what contributes the business going from the 10% and that today back toward partially toward the pre-COVID levels of call it 13% or so.
But I don’t expect it to be significant. The reason for that being as I said we are seeing claims run off and gradually decline every week. That trend is continuing. So, hopefully by the time we get out to September, October, November and customers are reaching that six month mark.
The number of consumers left on the program is not too dramatically beyond normal levels. Secondly, as you know if the customer does get to the end of that six months cycle, they’re entitled to a one-time lump sum payment of $2000 from the insurer toward the balance of their loan.
And with an average unsecured loan of 5000, 6000, you assume it was partially into its term. And then the six months has expired, that does a fairly meaningful job at reducing the actually right-off exposure of it individual accounts if it does get there.
And then lastly, it’s not necessarily safe to assume then a customer view goes through that process and then receives that lump sum, will inevitably charge on. Many of those consumers then just continue to repay.
They find the way to manage expenses overall from friend to family with the EI program that’s been improved a bit. That gives another source to lean on. So, I think it will result in part of the correction of the normalization of the losses if you will. But it shouldn’t be a material shift.
And I guess, with the continuation of CERB and these are the government programs. I mean, that would just I assume naturally also keep that charge-off rates somewhat lower below trend.
Yes, I think so. I think our view would be that certainly those programs if they continue to work the way they have, it would appear our trending to act as quite a soft-landing if you will coming out of the crisis.
So, we have our reference points, we go the 10% that we’re trending at today which is obviously record low levels. On the complete other end of the spectrum, we have the outer scenario which is our operating experience which now looks progressively more unlikely as being lower than reference point.
But that certainly gives an outer barrier. And then we’ve got our pre-COVID levels we came into this in the middle at around 13%. I think that as we think about the LPP program, the insurance product running off, we think about the EI stepping in to replace CERB.
We think about the good payment performance we’re seeing. We certainly feel pretty confident and optimistic that there will be a gradual return to normal levels and it’ll be a bit softer. If there is another outbreak, if there is another shutdown, then we know what that outer barrier market looks like with the upper experience.
But that scenario at least starts to look less and less probably given how well things are going at the moment.
The other thing, Jeff, its Jason here. That we also have working in our favor is the underlying quality of the originations that we’ve seeing since the crisis began. That’s actually better than what we saw prior to COVID.
Prior to that as a function, obviously the temporary changes we introduced as soon as the crisis became significant. And then the other piece, I’d have you think about is we’ve been making tweaks and adjustments all the way along in the latter part of 2019.
And before that into 2018 in an effort to bring the underlying loss rate down over time. So, I think in addition which Jason has offered, that has given us some additional padding if you will to cushion ourselves in the event that we see these regional or if it’s unlikely national flare ups that could otherwise put us in harm’s way.
So, those would be two other things that have you think about as well.
Great, that’s helpful. I wanted to direct my next question. Just on the recovery of activity that you referenced and how originations is sort of progressively been improving down only 7% through July.
Can you maybe just give us some color around how much of that is just sort of market activity in general normalizing versus goeasy beginning to push a bit more on advertising.
Is it just a matter of storefronts being open, people out in and about some of that activity resuming or and was this all just happening before you began to push on the marketing spend and what’s — how does that look?
Yes. It’s definitely a little bit of both. We are seeing a natural or be it slow to gradual but a natural rise in consumer demands for the reasons you cited. As things reopen, people’s expenses begin to resume.
And as peoples expenses begin to resume, the need and use of credit begins to rebuild. So, that has been happening as restaurants reopen and as various extracurricular activities for kids start to become available again.
That’s all contributing to that slow and gradual rebuild of underlying consumer demand. And we do see that just in terms of things like the volume of consumers that search online for keywords that indicate they’re in the market for credit.
So, that’s a part of it. And then the other part, you’re absolutely right, is us trying to take advantage of the fact that we’re in such a strong position.
Our investment in marketing and advertising is to make sure that while there might be a lesser volume of consumers out there actively looking for credit, we want to make sure that we don’t miss the opportunity given the strength of the business right now to make sure we are the most prominent option and source for credit for them.
So, we’re going to continue to make sure we take advantage of that and make sure we’re front center of those consumers that are looking for credit.
Okay great, thanks for that color. I’ll be in queue.
Thank you. Our next question comes from Etienne Ricard with BMO Capital Markets. Your line is open.
Alright, thank you and good morning.
So, the first question I have is on credit quality. The allowance rate remains stable sequentially. I believe you’ve added as a consideration to modeling assumptions the level of repayment assistance provided by banks and other lenders.
Could you give us a sense of how much were positive impact it have in the allowance rate in Q2. And just also could you remind us of how your borrowers prioritize paying back your easy financial loan versus other debts they might have.
Sure. I can provide a couple of additional comments and then Jason will talk and can add. So, first of all with respect to the allowance. We continue to imply the same approach that we did last quarter which is rather than looking at the actual conditions in the book and the performance of the book.
And the projections or the specific macroeconomic indicators that we historically used of which if we were to do that, it would imply that the provision should be reducing substantially. We said that we know there are factors at play that are extraneous and untypical that are causing some of that underlying trends.
And therefore would not be prudent to do so. And as such, we continue to use a model where we took our experience in Alberta. We measured what change of default rates could be expected under a typical set of recession scenarios, a moderate and a more severe scenario.
We weighted those outcomes and that then we arrived in our initial provision. We apply that same approach this quarter. And as you saw that resulted in only a very tiny change effectively in being roughly flat.
And till such time as we believe the underlying credit performance is more normalized and those economic indicators are a little bit more stable, we’ll continue to use that bona fide approach and we think that’s that’d be a prudent thing to do.
So, that’s how we’re looking at it right now. With respect to your question around what level of contribution does other lenders flexibility if you will contribute to the performance of the customers today.
I don’t know we have a firm data point that we can share that would give you an exact response. It’s definitely a contributing factor along with all the other elements that we highlighted. We know that the area consumers got the most relief, was in their mortgage payment.
And only 20% of our customers are mortgage holders. The majority are renters, and I don’t think that the relief that’s been provided to consumers rental payments has been as generous given so many independent landlords as was provided for homeowners through the banks.
So, not to say that means that that factor had less benefit to our customers than the average Canadian, we don’t know that. But it’s just a data point that I think adds context. And then, in regards to your last question around how do our customers prioritize payments.
Obviously we don’t have a specific and firm statistic on this but we have some reference points. One is if you look at how consumers typically rank order, the debt that they repay. Installment loans generally rank next in line to consumers housing payments and their car payments.
And typically, according to data by the prior reporting agencies, a rank ahead of things like credit cards. So, we generally rank in the middle of the pack in terms of the average Canadians prioritization of their debt obligations.
I think the factor that then squeeze us a little further favorably in that pyramid or hierarchy if you will is that because the customer knows we were there to provide them credit when they were in a tougher times.
And that were the non-prime lender, one of the few sources they can go to continue to rely on for credit. And some of the other creditors like the loans they have with the banks, who have already rejected them from getting access to more credit.
They know they cannot lean on in the future. We’re definitely seeing many instances where we did prioritized higher in that pyramid because they know they can could be in the trust to lean on us for credit in the future.
So, again I can’t tell you therefore exactly where we rank but those are some data points as to how that customer generally would look at us relative to their other debt obligations. Does that make sense?
Uh-huh. Got it, perfect, that’s great. I like to go over to trend in loan protection insurance claims. $4.4 million in July down from $7.8 million in April. Can you talk about the drivers of this decline?
But is it more related to borrowers having found a new employment or is driven by people benefitting from government assistance?
So, in this case it’s almost entirely or exclusively gainful employments. The vast majority of all those claims were unemployment claims. The number of call it steady state claims that we would receive by death or disability or critical illness is quite small.
So, the majority of them are unemployment claims. The customer in the event they remain unemployed has very little to do to continue to review their claim other than just submit a form to demonstrate they remain unemployed.
And so at the moment that they are unable to demonstrate unemployment because they have now they gained employment, then they just simply don’t review their claim and their regular payment comes do again.
And we have seen that all of those customers that have come off of claims have all gone back on regularly scheduled payments and the payment performance of them has been quite healthy. The delinquency rate of customers that have come off claims is a bit higher than the portfolio.
Given that subset and but that’s already embedded into our overall delinquency rate highlighting that the payment performance of them is actually quite positive. So, it’s entirely a function of that as we’ve gone through the various stages of economic reopening and restaurants are reopened and retail shops have reopened.
Gyms have reopened. Each time a new tranche or industry of the economy reopens, that’s another incremental tranche of people that now suddenly can go back to work.
The other thing to think about retail energy, if you look back to our Alberta experience, where we have a fairly severely for loan recession where the unemployment rate more than doubled, not like what we’ve seen in the COVID experience.
When we looked at our LPP claims experience of customers back then, the average claim duration of those people on claim was just over four months. And that was similarly for the same reason as Jason outlined.
Is that the vast majority of these people do find work. And as a result, they don’t necessarily need to remain on claim for the full period of time. And it’s generally similar to what we’re seeing this time around with the COVID period.
That the people who were coming off claim were actually finding ample employment which is obviously allowing them to maintain their payments on their loan obligations going forward. So, it is consistent is what I have you think about with what we have seen in the more recent recession that we did experience in line in the COVID and upward.
Perfect, great details. One last question from me. On the topic of the retail branches. How are you thinking about expanding that network over the coming year given social distancing and how meaningful do you believe the online chow could become in a post COVID-19 environment.
Yes. So, it’s a great question. So, despite that we had to adapt to the current environment and leaning more heavily on digital lending capabilities. We continue to believe that the retail branch network plays a very meaningful role.
And just to be more specific, what we mean is that even though we might shift to the use of more digital technology to allow for customers to apply for credit, do the underwriting actually borrow and to fill their loan contract with us.
The role of the retail branch still has a meaningful contribution. For example, one third of our customers say that they heard about us because that they saw a retail branch in a plaza that they regularly visit as part of their daily routine whether going to the pharmacy or they’re going shopping for groceries.
And so, we’ve actually worked out that if you took the face operating costs of our retail network, they call it rent and very basic minimum operating cost to just have that network go in.
And you reverse engineer that into a cost of acquisition relative to the portion of customers that you acquire because they actually saw your retail footprint. You actually get back to a very attractive source of customer acquisition on its standalone basis only.
I.e., your retail branches act as fantastic brand building and awareness contributors and they also add tremendous credibility to your online presence. Remember we’re only talking about a small 1,500 square foot footprint.
So these don’t come with significant retail operating costs. The other factor that we are seeing is that even if a customer deals with a company over the phone or through email or digitally, that when they’re dealing with someone who is at a local outlet in their local community and particularly again in a plaza that they might frequently travel.
There is a different perception of that relationship; a different expectation, a different loyalty factor, a different report, particularly if you might run into that same person in your local community, than there is if you’re dealing with a call center person in a big city far away.
So, our retail branch staff play a very meaningful role in dealing with customers even though they might be dealing with some of them on a remote basis. So, at this point given all of those factors even though I think digital will continue to play a more and more meaningful role particularly as consumer preferences shift and the effects of COVID as you’ve noted, our intent will continue to be build out our retail branch network.
The retail branch of the future might look different. How it looks, outlooks, what technology you find in the branch, the labor model of the staff within the branch will evolve those things but the concept of that footprint that we still feel is very meaningful.
Thank you, for your comments.
Thank you. [Operator Instructions] Our next question comes from Jaeme Gloyn with National Bank Financial. Your line is open.
Yes thanks, good morning. I just want to, I’m going to follow-up on that last line of questions just around the retail branches.
How are you thinking about store acquisitions and maybe in particular around the Southern Ontario region? Is that something that still would be viewed as attractive for you and how are you thinking about acquisitions on the retail branch side?
Acquisitions as in buying other retail outlets that might be available or store expansion just organically opening new, just to clarify?
Yes, acquiring stores that are already in existence.
Yes. So, that continues to be definitely an attractive opportunity for us. We’ve done numerous times before. The most prominent instance was when we picked up what was almost 50 locations from the Cash Store a number of years ago where we were able to take over the leases and have them equipped with staff.
Those locations today perform very well. They perform consistent with our average branches. So, very meaningful contribution. So, certainly as part of our retail expansion, if we identify a network of locations that fits within our targeted expansion plans, it’s a fantastic way for us to accelerate retail openings and get that footprint quickly.
So, if an opportunity were there, we would certainly pursue it.
Okay, great. Next question is around the impact of the loan protection plan. I was hoping you could separate if I’m thinking about the call it $16 million decline quarter-over-quarter from Q1 to Q2 and commissions earned, could you separate the impact between what was a claw back, what was a claim and maybe what was less demand for the product because of lower origination growth?
So, I will give you some qualitative guidance there. So, on the demand side, there was not really any change in the propensity to purchase the product. So, there would be a small portion attributed to the fact we just had lower volume and the lower level of originations.
But that would be small and would only be proportionate to the lower level of originations as opposed to anything more than that. I.e., we haven’t seen a change in the customer’s propensity to purchase the product.
The majority of the decline just comes from the basic premise that when claims are below a certain level of the premiums we collect, that portion comes back to us as a net incremental commission and with elevated claims that incremental commission would be into by the elevated claims.
That’s the vast majority of the extra cost that reduces the revenue quarter-on-quarter. So, I would have you think about that as being the primary driver by far relative to anything else.
Okay, that’s great. Thank you, very much.
Thank you. And I’m currently showing no further questions at this time. I will return the call back over to Jason Mullins for closing remarks.
Great, thank you. Well, thank you everyone for joining today’s call. We appreciate your participation and we look forward to updating you when we release our third quarter results in the next few months. Have a fantastic day.
Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.
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