goeasy Limited (GSY.TO), a leading provider of loans and financial services, has announced robust financial results for the second quarter of 2024, with record loan originations and significant growth in its loan book, driving strong earnings. The company's gross consumer loan balances exceeded CAD 4 billion, and they secured an additional CAD 450 million in debt funding capacity.
Loan originations reached CAD 827 million, marking an organic loan growth of CAD 286 million. The quarterly dividend has been set at $1.17 per share, and the company is preparing for a CEO transition by the year's end. goeasy also revised its three-year commercial forecast, projecting substantial growth in its loan portfolio and anticipating stable credit performance with an increase in operating margins.
Key Takeaways
- Record loan originations of CAD 827 million and loan book growth to over CAD 4 billion.
- Unsecured lending comprised over 58% of loan originations.
- Revenue for the quarter reached CAD 378 million, a 25% year-over-year increase.
- Adjusted net income was CAD 71.3 million, with earnings per share of CAD 4.10.
- Anticipated loan portfolio growth to between CAD 4.55 billion and CAD 4.65 billion by the end of 2024.
- The company plans to introduce a new credit card product in 2025.
Company Outlook
- Loan portfolio expected to reach CAD 4.55 billion to CAD 4.65 billion by the end of 2024.
- Projected growth to between CAD 6 billion and CAD 6.4 billion by 2026.
- Anticipated stable credit performance and increase in operating margins.
Bearish Highlights
- Delinquency rates have increased due to macroeconomic pressures and changes in collection practices.
- Loss rate guidance expected to increase by 25 basis points over the next three years, partly due to a mild to moderate recession forecast.
Bullish Highlights
- Automotive financing originations up by 79% year-over-year.
- Home equity lending volume increased by 55%.
- Efficiency ratio improved to a record 26.9%.
- The company is actively investing in infrastructure to enhance automation and productivity.
Misses
- The company is taking a conservative approach to credit management, which may tighten credit tolerance levels.
Q&A Highlights
- The CEO is confident in managing delinquencies and maintaining a low charge-off rate.
- The transition to a 35% APR level after the rate cap is implemented is expected to be smooth, with no rush in loan volume.
- The company's mobile app has not been heavily marketed, but it shows promise with 150,000 users and several thousand loans funded.
In summary, goeasy Limited has demonstrated strong financial performance in the second quarter of 2024, with a positive outlook for continued growth and innovation in the coming years. The company is navigating regulatory changes and macroeconomic challenges with strategic initiatives, including the upcoming launch of a new credit card product and investments in technology to improve customer experience. With a focus on strategic priorities and a conservative approach to credit management, goeasy is poised to maintain its momentum in the financial services sector. Further updates will be provided in the next quarterly call scheduled for November.
Full transcript - None (EHMEF) Q2 2024:
Operator: Good morning. My name is Constantine, and I will be your conference operator today. At this time, I would like to welcome everyone to the goeasy Limited Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Farhan Ali Khan, you may begin your conference.
Farhan Ali Khan: Thank you Constantine, and good morning everyone. My name is Farhan Ali Khan, the company's Chief Corporate Development Officer, and thank you for joining us to discuss goeasy's results for the second quarter ended June 30, 2024. The news release which was issued yesterday after the close of market is available on Cision and on the goeasy website. Today, Jason Mullins, goeasy's President and Chief Executive Officer will review the results for the second quarter and provide an outlook for the business. Hal Khouri the company's Chief Financial Officer will provide an overview of our capital and liquidity position. Jason Appel, the company's Chief Risk Officer is also on the call. After the prepared remarks we will then open the lines for questions. Before we begin, I remind you that this conference call is open to all investors and is being webcast through the company's Investor website and supplemented by a quarterly earnings presentation. For those dialing in directly by phone, the presentation can also be found directly on our Investor site. Analysts are welcome to ask questions over the phone after management has finished their prepared remarks. 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 and any coverage. However, we would ask that they do not quote callers unless that individual has granted their consent. Today's discussion may contain forward-looking statements. I'm not going to read the full statement, but will direct you to the caution regarding forward-looking statements included in the MD&A. I will now turn the call over to Jason Mullins.
Jason Mullins: Thanks, Farhan. Good morning everyone and thank you for joining the call today. The second quarter was the strongest in our history characterized by record originations, record loan book growth, stable credit and record earnings. We surpassed CAD 4 billion in gross consumer loan balances and added over CAD 450 million of debt funding capacity further solidifying our position as a leader in the Canadian non-prime consumer credit market. A continued increase in market share and favorable competitive dynamics led to a record volume of applications for credit at 665,000 up over 34% from Q2 last year, which generated a record 48,200 new customers, an increase of 15% in the quarter. Loan originations during the quarter were a record CAD 827 million, up 24% compared to CAD 667 million produced in the second quarter of 2023. Organic loan growth was a record CAD 286 million during the quarter with our loan portfolio finishing the quarter at CAD 4.14 billion, up 29%. Unsecured lending continues to be the largest product category at over 58% of loan originations. And within our direct-to-consumer channel the average loan portfolio across our branch network rose to a new high of CAD 6.2 billion, up 19%. We also continue to make progress in scaling our automotive financing product with volume exceeding CAD 140 million of originations for the third quarter in a row an increase of 79% year-over-year. This quarter we grew our dealer network to over 3,600 dealers and continue to experience an increase in funding volume from multi-location dealer groups another sign that we are increasing market share. With interest rates peaking and beginning to gradually ,decline we also began to refocus our efforts on one of our best-performing and lowest-risk products home equity loans. During the quarter, home equity lending volume was up 55% year-over-year. This second mortgage product secured by residential real estate is primarily used for debt consolidation and major home repairs, providing our best customers with access to a larger loan at a lower rate of interest. During the quarter, the overall weighted average interest rate charged to our customers reduced to 29.5% down from 30.1% at the end of the second quarter last year. Combined with ancillary revenue sources the total portfolio yield finished at the high end of our forecasted range at 34.9%. Total revenue in the quarter was a record CAD 378 million, up 25% over the same period in 2023. We also continue to be pleased with the quality of our loan originations and credit performance of the portfolio. Both the unit and dollar weighted average credit score of our second quarter loan originations rose to an all-time high highlighting the benefits of our credit adjustments and improving product mix. Secured loans now also represent a record 44.1% of our loan portfolio. Canada continues to experience a weakening economic environment with the unemployment rate increasing by 1.3% over the past 12 months to 6.4% today. While certain pockets of our customer base have experienced some pressure on their finances, our combination of proactive credit tightening and improving product mix have helped credit losses remain stable and within our forecasted range. The annualized net charge-off rate during the second quarter was 9.3% in line with our target range of between 8% and 10% for fiscal 2024. Our loan loss provision rate reduced slightly to 7.31% from 7.38% in the prior quarter. This was primarily due to the improved product and credit mix of the loan portfolio and forward-looking economic indicators, which indicate that future interest rate reductions should lead to improvements in the economy. We believe our current level of provisioning reflects the appropriate credit risk. However, we continue to tighten our collection policies as well as underwriting requirements, and plan to make additional credit and underwriting enhancements in the third quarter. We continue to feel confident in the credit portfolio and we'll continue -- and that we will continue to see stable losses in the quarters ahead. As has been the case for recent quarters, we are continuing to experience the benefits of scale through operating leverage and productivity improvements. During the second quarter our efficiency ratio specifically operating expenses as a percentage of revenue improved to a record of 26.9%, a reduction of 430 basis points from 31.2% in the second quarter of the prior year. As a function of receivables, operating expenses were 10.1% versus 11% during the prior year. After adjusting for unusual items and non-recurring expenses, we reported record adjusted operating income of CAD 153 million, an increase of 34% compared to CAD 114 million in the second quarter of 2023. Adjusted operating margin for the second quarter was 40.5%, up from 37.7% in the same period in 2023. And adjusted net income was a record of CAD 71.3 million, up 27% from CAD 56 million in the prior year, while adjusted diluted earnings per share was a record CAD 4.10, up 25% from CAD 3.28 in the second quarter of last year. Adjusted return on equity was above our target level of return at 25.4% in the quarter, an increase of 120 basis points from 24.2% in the same period last year. With that, I'll now pass it over to Hal to discuss our balance sheet and capital position before providing some comments on our new revised outlook.
Hal Khouri: Thanks, Jason. We continue to build on our long track record of obtaining capital support our growth. Subsequent to the quarter, we took advantage of the gradual improvements to the interest rate environment, implementing several enhancements to our balance sheet. Firstly, we increased our existing senior secured revolving credit facility by CAD 180 million to CAD 550 million and extended the maturity to July 2027. We added three new lenders with Desjardins, Bank of Nova Scotia and Raymond James. And our lending syndicate now includes all of the major banks in Canada, a testament to the strength of our business. In addition to the amendment to the credit facility, we issued USD 200 million of senior unsecured notes as an add-on to our notes due in 2029. In action with the offering, we can currently enter into a currency swap agreement which served to reduce the Canadian dollar equivalent cost of borrowing on the notes to 6.38% per annum, full 80 basis points better than the notes we issued in February. Based on the cash on hand at the end of the quarter and the borrowing capacity under our existing revolving credit facilities as well as the aforementioned balance sheet enhancements implemented following the quarter, we have approximately CAD 1.6 billion in total funding capacity. Quarter end, our weighted average cost of borrowing was 6.8% and the fully drawn weighted average cost of borrowing was 6.9%. We also continue to remain confident that the capacity available under our existing funding facilities and our ability to raise additional debt financing is sufficient to fund our organic growth forecast. The business also continues to produce a growing level of free cash flow. Free cash flow from operations before the net growth in the consumer loan portfolio was CAD 93 million in the quarter, while the trailing 12 months of free cash flow exceeding CAD 389 million. As a result, we estimate we could currently grow the consumer loan book by approximately CAD 250 million per year, solely from internal cash flows without using external debt, while also maintaining a healthy level of annual investment in the business and maintain the dividend. Once our existing and available sources of debt are fully utilized, we can also continue to grow the loan portfolio by approximately CAD 450 million per year, solely from internal cash flows. Based on the current earnings and cash flows and the confidence in our continued growth and access to capital going forward, the Board of Directors has approved a quarterly dividend of $1.17 per share payable on October 11, 2024 to the holders of common shares of record as at the close of business on September 27, 2024. I'll now pass it back over to Jason.
Jason Mullins: Thanks Hal. Subsequent to the quarter in July, we announced that I will be transitioning out of the role as President and CEO at year-end. The Board of Directors has since commenced a formal search process. And similar to the previous CEO transition at goeasy in 2018, I will continue to serve as a Director on the Board, providing the company continuity of knowledge and expertise. Between myself and David Ingram, our Executive Chairman and former CEO, there is 38 years of combined goeasy specific management experience on the board. The company is in excellent position with a very strong executive team to continue its 23-year plus track record of delivering industry leading performance. Given recent trends, including the accelerated loan book growth experienced during the first half of the year, we have revised our three-year commercial forecast consistent with past practice at the midpoint of the year. The most notable revision is the increase we have made to the loan growth of the portfolio, which we now expect to finish this year between $4.55 billion and $4.65 billion in consumer loan receivables then scale to between $6 billion and $6.4 billion in 2026. In consideration of the deferral of the implementation for the previously announced reduction in maximum allowable rate, now to January 1, 2025 versus our prior forecast, which assumed mid-2024, we have also increased the yield and loss ratio for 2025 by 25 basis points, respectively to account for an additional half year of underwriting higher risk borrowers and higher APRs. The risk-adjusted margin of the loans we underwrite will remain unchanged. With the higher levels of loan growth, we also expect an increase in operating leverage resulting from scale, leading to an increase in operating margins for the company. When all combined, the net effect of these forecast updates is positive to the overall business outlook. Turning to the upcoming quarter. We continue to take a conservative and prudent approach to managing credit by layering an additional tightening to our credit tolerance levels. Yet, we also continue to experience healthy demand and limited competitive tension, allowing us to grow at an attractive rate while being selective about the loans we underwrite. In the third quarter, we expect to grow the loan portfolio between $235 million and $265 million. As we continue to optimize our pricing, we expect to maintain the current total annualized yield on the consumer loan portfolio, which has finished between 34% and 35%. We also continue to expect stable credit performance with the annualized net charge-off rate expected to be similar to current levels of between 8.75% and 9.75% in the quarter. Furthermore, we are well underway on our strategic priorities. During the quarter, we welcomed Patrick Ens to the team as our new President of the EV Financial Direct-to-Consumer Lending brand. Patrick who brings 17-plus years of consumer finance experience will lead several of our growth initiatives, including the development and launch of our new credit card product in 2025. We're also continuing to invest in our infrastructure, finding ways to improve automation and productivity. As evidenced by the continued reduction in our cost structure and margin expansion, we believe there are many opportunities to run this business more efficiently. In closing, I want to thank the entire goeasy team as we held these outstanding results and performance year-to-date entirely to them. Whether it's the staff in our branches, the team members in our call center, business development representatives working with our merchant partners, or our corporate office team who support the front line, the company today is a lending platform, powered by 2,500 talented team members that aim to provide everyday Canadians, the access to credit they need and deserve. In May, we were thrilled to hold our company national conference, providing us the opportunity to celebrate and recognize all of the incredible talent across our organization. I am just as convinced now as ever before that we have a winning team who are totally passionate about our vision. They play a central role in the financial system by serving the millions of hard-working Canadians that rely on us for the access to credit that fuels their lives. I am very proud of the entire team. So with our most ambitious growth forecast in front of us, it is certainly fitting to say that we are truly just getting started. With those comments complete, we'd like to now open the call for any questions.
Operator: Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Nik Priebe from CIBC Capital Markets. Please go ahead.
Nik Priebe: Okay. Thanks. Just wanted to start with a question on the credit front. So the loss rate was stable in the quarter. I noticed the delinquency rate ticked up and the value of loans in the Stage 3 risk bucket increased pretty significantly at the end of the quarter. But based on your guidance that you just outlined for Q3, it sounds like you're not expecting much of a near-term impact on the loss rate. So just wondering, if I could hear your perspective on that dynamic regarding the arrears rates in the quarter?
Hal Khouri: Yes, for sure. Happy to. First point Stage 3 and delinquency are fairly correlated. They're predominantly one and the same. So, I'll comment on the topic as a general matter, but they're kind of otherwise deeply correlated. So a couple of things. One, as a smaller matter, but a relevant one, you probably have noticed over the last several years that as we've grown the secured product mix, the delinquency at any given quarter end has gradually increased. And that's simply a matter of that all of our secured loans have a longer charge-off cycle. So you have more loans to sit in the delinquency buckets, even though the roll rates from delinquency to charge-offs are lower and you've got the asset to offset those losses to reduce therefore the net charge-off rate. So that's a smaller component, but it is a component and it's sort of structural to what we've seen steadily for several years. So that's kind of one point. Two, as we've noted, we have seen some level of economic pressure. I think it would be inconceivable to imagine that given the unemployment rate has risen the degree that it has as I said in the prepared remarks, there are pockets of our customers that we've seen struggling a little bit more and some of that is in the delinquency number. And then lastly, we have also done some tightening as I said in the prepared remarks to collection practices. So one of the things as a lender you can choose to do is not only tighten and modify underwriting standards at the front end is you can also choose to tighten and modify collection practices at the back end. And we've tightened a number of our collection policies limit the customer's ability to have greater flexibility. As you get into a recessionary period, customers have to choose about where they're going to deploy their discretionary spend and which debtors they're going to or lenders they're going to pay. If you're a little bit too flexible with certain customers, you may actually then defer the amount of cash that they commit to repaying on their loans. So we've tightened a number of collection policies as well. Despite all of that to your point, based on what we're seeing in the performance of the collections activity and the roll rates or what percentage of that delinquency will roll with charge-off, we're still very confident that the actual net charge-off rate after factoring what rolls to charge-off and any recoveries we get from secured assets will still be stable and consistent with the levels we're at today. So, a little bit of a disconnect between that slight uptick in the delinquency and our charge-off outlook which we're still very confident in.
Nik Priebe: Got it. Okay, that's very helpful. And then, you've been adjusting prices a little bit higher to accommodate higher cost of financing over time. Now that policy rates are coming down, do you anticipate the pricing strategy to follow or are you kind of comfortable where you're at just given the forthcoming reduction to the interest rate cap?
Hal Khouri: Yes, generally more comfortable because of the rate cap pending. I think if it were not for that, we would probably take advantage of lower rates in the coming year or two ahead to pass some of that benefit on to borrowers. But we're in this sort of unique spot where we're operating in an environment that the rate cap itself will sort of force down pricing. And for us, every customer that we price down below the rate cap causes us to have to forgo another customer from getting approved that's sort of on the margin. So I think for right now, when you look at our yield forecast you can assume the pricing strategy we're using in the market is basically unchanged. The overall step down in the total yield is really nothing more than just the result of the rate cap that goes in Jan 1.
Nik Priebe: Got it. Makes sense. Okay. And then just last question. You alluded to plans to implement further credit enhancements in the third quarter. I was wondering, if you could just elaborate on to what extent you might be contemplating a tightening of the credit box like you're looking at adjusting LTVs on the secured lending product or raising the threshold for affordability calculations on unsecured? Can you just help us kind of understand that a little bit better?
Hal Khouri: Yeah. I'll let Jason kind of add to this, but we're basically doing kind of all of the above to varying degrees depending on the product and the credit risk tier of lending. In some cases, it's more effective to raise the credit floor, and actually increase the custom proprietary score that's required to get a loan. And in other cases, it makes more sense to simply reduce the amount of credit that you're willing to extend. So generally, we've done all of the above pretty consistently now every quarter or two for as you know going all the way back to pretty much 2022. But Jason, is there any specifics you want to share there?
Jason Mullins: Yeah. I mean, you hit on a couple of them Nik. So obviously, the most obvious ones we have made some modest modifications to the LTV ratios in our home equity product as that product continues to perform actually higher than our expectations which is great. The other thing we are doing is introducing some additional model adjustments. As we mentioned before we constantly tweak and modify the models that we use to originate credit. This latest set of round changes that we're contemplating will introduce some new generation bankruptcy and insolvency models that we've been working on over the past several months. So those just give us another angle to deal with the portion of our charge-offs which come in the form of unexpected insolvencies or what we call surprise bankruptcies. Those are ones we're obviously spending a lot of time trying to nail down because that is a very isolated group of individuals that's hard to identify. So those are some examples of the things we can anticipate putting in place over the course of the next one to two quarters.
Nik Priebe: Understood. Okay. That's great color. Thanks very much.
Operator: Your next question comes from the line of Etienne Ricard from BMO Capital Markets. Please go ahead.
Etienne Ricard: Thank you very much. Just circle back on non-current receivables, is there a way for you to quantify how much of the increase is driven by a weakening consumer relative to a mix shift to where it's the secured loans which as you pointed out tend to carry more imbalances?
Hal Khouri: Yeah. So I think if you were to unbundle the increase in the delinquency rates say for this quarter versus last quarter, it's moved by about 1.4%, which based on the loan portfolio size today is about call it 55 million. You then have to sort of bifurcate between secured mix some level of macroeconomic pressure and some of the proactives kind of collection policy tightening that we've done. The secured mix would be very proportionate to the change in the secured mix. So I think quarter-on-quarter we went from 41.7% to 44% so it's up 2% or 3% on 41%. So think of that as it's probably 5% to 10% of the shift. The balance, you could probably think of it as about maybe a-quarter to a-third is just macroeconomic and then the majority the remaining call it two-third is specifically stuff we know we've done in our collection policies and collection practices. So because the majority is sort of very self-inflicted and we're aware of the changes in the tightening that we're making and we think those are actually good for the portfolio long-term and for our ability to collect cash that kind of is a big part of what underlies our confidence in the delinquency not flow through the charge-off rate at the same rate.
Etienne Ricard: Okay. I appreciate the details there. And Jason a candid question for you on succession planning. If we go back at the time of your appointment as CEO back in 2019 what did you find most challenging in terms of assuming this leadership role? In other words, what came as a surprise to you in the early days of assuming the CEO position? And the reason I'm asking you is, while you've been in this position in the past and you'll continue to be providing guidance as a Board member. So I presume this will help choose the right candidate. Thank you.
Jason Mullins: Yes, great question. So, I guess, I would say, when I took on this CEO role six years ago, I was new to being a CEO. And so I had a lot to learn frankly over the last six years by trial and error in many ways. Obviously had a lot of good business training had incredible mentorship from David our Exec Chair and former CEO and the balance of the Board. So, I was certainly surrounded by a lot of support, but it was still a brand-new leadership position for me. So you can imagine the number of lessons learned in terms of decision-making managing the team, the power of your words, and how it affects people's actions and work. So it's a pretty big list of probably learnings and reflections. I would say in this case, where we're seeking ideally based on the standard that's been set, a very seasoned experienced executive, particularly one that's been a CEO. The thinking would be that they likely come in with many of those lessons already having been learned. And so for me, where I had the deep institutional knowledge but I had to learn the CEO skill, what's more likely here is the person comes in with the CEO skill and then needs to learn more about our specific business and our specific culture. The reason we feel so good about that is if you look at the management team on the executive group that today reports to me and then, of course, a new individual the tenure of that group is very, very strong. It's pushing eight or nine or 10 years. The Board has a tremendous amount of tenure. They'll be advantaged again to take advantage of both David and myself as advisors whenever they reach out for support. So you can get someone that's kind of sandwiched between a very experienced talented tenured Board and a very experienced talented executive team. So it really does probably set them up for the best success possible. So yes, so lots of learnings for me, but I think a big part of that just being new to the role at that time and learning the lessons along the way. Inverse for someone else maybe from the outside that brings CEO experience, but we'll have to sort of integrate themselves and learn the go-easy way of operating.
Etienne Ricard: Thank you for sharing.
Operator: Next question is from the line of Jaeme Gloyn from National Bank Financial. Please go ahead.
Jaeme Gloyn: Yes. Thanks. Good morning. Wanted to dig in a little bit again on the delinquencies. Just are you able to provide a little more granularity in terms of a product line or borrowing segment? What you're seeing in terms of driving that delinquency rate higher?
Jason Mullins: There's really no specific concentration. Our collection policies and practices, we apply pretty uniformly across products. There's not really any uniqueness there to specific product lines. So if you were to look at the delinquency, the proportion across the products is pretty typical to what it historically has been. So, nothing product specific to call out to be honest.
Jaeme Gloyn: Okay. In terms of the action to tighten your collection policies, I would assume that was put in place some time ago, maybe early in the quarter. Do you have any color anecdotal, maybe some data around how those borrowers or how these borrowers are adjusting to, let's say, a more firm hand when it comes to collections and deferred payments?
Jason Mullins: So far so good. In non-prime lending, you're constantly balancing the need to give the customer some level of flexibility, because the segment we serve is just embedded in the model. The segment we serve is apt to find they're going to run into some trouble at times and hit some speed bumps. And if you're too rigid, you end up burning relationships with a lot of customers that are otherwise good customers that if you simply gave them a temporary helping hand would be very, very good valuable long-term customers. On the inverse, if you're too flexible and give them too much brace then they can take advantage of that then you won't collect as much cap as you should and it doesn't create the right discipline. So to be clear, what we're talking about here is nothing different than what we've always done, which is had to constantly optimize those collection policies and collections practices. I think that we felt there was a bunch of collection policies practices that we felt we could be tighter on. We could be more disciplined about. We can give less flexibility and freedom to the customer. And so we think that's actually not good for the business and for the performance of the loans. It does come with a little bit of a temporary pain, because a bunch of customers now roll the delinquency and now you've got to work your way in working with those customers and try and get them back on regular payments again. But that's the good blocking and tackling you have to be doing in the business model all the time. And so, so far so good. We will obviously constantly reassess that. But at this point we still feel very good that when we factor in the roll rates of that delinquency number, we factor in the recovery rates post charge-off, we factor in the assets that exist on these loans, all of that we feel good will conspire to still keep us in that low-9% loss rate range. So we feel good.
Jaeme Gloyn: Great. In terms of the loss rate guidance over your three-year forecast picking up 25 basis points, obviously not a huge jump. But just want to get a better understanding of maybe some of the assumptions that are going into that guidance and sort of the range of those assumptions that would keep us within the band over the next couple of years maybe around like macro forecasts or impact of some of these credit tightening that you've implemented over the last several quarters? Maybe just talk us through some of those assumptions.
Jason Mullins: Yes for sure. So to re-baseline the forecast methodology that we use is built on a down the fairway what we consider to be very reasonable, very realistic set of assumptions around how the business is going to perform, how the market and the customer is going to perform. It's based off our existing suite of products and channels. So we don't layer in an assumption for new contribution from things, we have not yet built like credit card for example, it's based on current products. We then overlay a set of macroeconomic forecasts and probability weight them to come up with a certain economic outlook that we then apply so that the loan performance we're expecting is adequately stressed to account for whatever economic conditions we're operating in. Our going model today is still mild to moderate recession in 2024 or early 2025. We're kind of beginning or on the cusp of experiencing that now with the current level of unemployment although it held at 6.4% today. That version of mild to moderate recession as we've talked about before assumes unemployment going up to 7%. And so if you think about our range for let's say 2024 of losses of 8% to 10% and the unemployment rate hasn't having risen from 5% to 6.4%, you can see why we're at the low-to-mid-9s. And we've got the capacity and the buffer for unemployment to continue to rise to as high as 7% and pretty confidently still stay within our range, although we might be in the upper end of our range. As the – if the economic conditions were to worsen beyond that and you had unemployment now rising up into the 7s or 8s, that's where we would obviously have to revisit our assumptions, either modify our forecast or get even more aggressive with tightened credit. The reason the loss rate range steps down next year and beyond is a combination of factors. One, as was always the case when the rate cap goes in, there's a bunch of borrowers that are at higher APRs we now reject. And so that improves the long-term credit quality of the business. All of the credit modifications that we've been making will continue to flow through gradually over time. And then lastly, there's an underlying assumption in the economic forecast that even though, it's actually going to get maybe a little worse before better the next little while is more likely to be in the sort of verge of recession or recession level territory. As you get a full year out from now, the effect of rate cuts should lead to an improving economic environment, particularly as you get to sort of mid-year and beyond. So all of that has been factored in and weighs into why we think that losses will gradually step down next year. But because that rate cap has been deferred by that full six months another half year of higher APR lending, they just simply kind of defers or protracts the rate at which we would expect that loss rate improvement.
Jaeme Gloyn: That’s great. I’ll turn it over.
Jason Mullins: Thanks, Jaeme.
Operator: Your next question comes from the line of Gary Ho from Desjardins Capital Markets. Please go ahead.
Gary Ho: Thanks. good morning. So first one, I just want to go back to the rate cap implementation. Now that we have the actual date, can you talk about the strategy up to and post – we take advantage of writing higher rate loans up to year-end, obviously with higher net charge-off profile. Do you anticipate a rush near year-end and maybe post, I think you've talked about in the past options that you have to mitigate some of the rate decreases including extended new credit at the 35% rate? Yes, maybe just talk to us a little bit about that.
Jason Mullins: Yes. So we don't foresee any like material change in the volume of the loans that we write at those APR levels or any sort of like consumer rush. Frankly, I think that majority of consumers in this segment are still probably not even fully understanding and aware of the regulatory changes that they're about to face. So we don't expect any real change in trajectory or behavior in that sense. We will continue to offer loans with those APRs to those customers all the way right up and until the time at which we can. Some of the customers that would be otherwise rejected as a result of the lower rate cap are already in fact many of them are already captured in the credit tightening we've been doing and continue to do because they represent the higher risk segment. So as you're trying to tighten credit it tends to kind of tackle those customers that are higher APRs, they have higher credit risk anyway. So the amount of additional tightening that has to be done to prepare for the rate cap is limited at this point. It's a little bit more but not a ton. Once that rate cap is in to your point the strategy will be that for the customers that we are able to continue to lend to we'll give them incremental credit at the new 35% level. So you're going to have some customers that get rejected some who will continue to get more credit in an incremental form at 35%. And then a whole proportion of borrowers two-thirds of our business and rising that are already at rates below that level. And for them it's business as usual and there's really no change. Other than that a little bit of pricing increasing we've been putting through to account for higher funding costs. The vast majority of our customers in our portfolio are well below that level and there's really no change to their day-to-day borrowing experience.
Gary Ho: Okay. Got it. Makes sense. And then my second question I just want to talk about your efficiency ratio that continues to improve. Can you elaborate on kind of what you're doing on the cost side to drive that ratio better? Is it a function of keeping OpEx in line while growing top-line? Just provide some color that would be helpful.
Jason Mullins: Yes. It's really three buckets that we've kind of talked about before. Bucket one is just natural scale. There's aspects to any business that are more fixed like costs. And thus as you grow revenues you get more leverage on those fixed costs and more of that revenue flows to the bottom-line. So every business has an element of the benefit of scale and we're no different. So that's bucket one. Bucket two, we're doing I would say proactive cost management activity that could be just being more conservative with cost. And when you're operating in a higher credit risk higher funding cost environment every business is being probably more prudent about expense management. It's also in the format of investments in productivity and automation. As we talked about before there's lots of our business where we've developed maybe a manual process or a human process that's been perfectly fine but now it just creates the opportunity to do some automation and take some costs out of the system. So that's kind of the second bucket kind of cost management. And then the third bucket is also just a function of mix. We've talked about before how direct-to-consumer lending has a higher cost structure than the indirect lending. So as we shift gradually and slowly the mix of business that's coming through indirect channels lead generation partners, automotive financing dealers, point-of-sale merchants those channels and products tend to have slightly lower cost structure so simply the mix shift alone is going to mean that the OpEx ratios of the business are also going to gradually improve. So all three of those things are chipping in and conspiring to drive the improvements in the efficiency ratio that we're seeing.
Gary Ho: Okay great. Thanks for the color. And then my last one, Jason I think you mentioned potential credit card launch in 2025. Maybe just give us a glimpse on, kind of, what you're working on behind the scenes? Any early read into potential uptake or cross-selling opportunities there?
Jason Mullins: No real meaningful progress to share. We're at the beginning. I think we've done a decent amount of leg work on the product design. We've narrowed in on a couple of potential platform partners. But with Patrick's addition here recently and his background experience we kind of have just maybe taken it fairly slow get him and up to speed because he will be a key part of leading that. And again our goal is to get a pilot up and running at some point next year. Clearly given our robust organic growth we're not in a urgent rush to have to get that product to fuel growth. So we're much more apt to take our time be very careful, methodical, test, learn. It's early days though and not much insight yet to share. But I'd say as we get into next year we'll start to have some learnings and some thoughts around we can share about more specifically how we've designed the product.
Gary Ho: Okay, perfect. Those were my questions. Thank you.
Operator: [Operator Instructions] Your next question comes from the line of Stephen Boland from Raymond James. Please go ahead.
Stephen Boland: Good morning. Just one question. Every quarter we see your auto lending record originations continue to add dealers, I'm just -- I mean it's such a competitive space. I'm just curious what you're doing maybe differently than your competitors in terms of winning business and adding dealers? Because it has been a saturated market for many years so I wonder if you could just -- why are you winning so much in that space?
Jason Mullins: Yes, great question. So, if you look at the competitive landscape by product category, it's probably been the one that has had the most competitive disruption. There are a handful and we won't sort of name names, but there are a handful of particularly smaller scale auto lenders that had been in that market for some time represented that kind of call it more competitive robust competitive environment you noted that over the last several years have retrenched pulled out scaled back, at least two of the handful I'm referring to are public companies. So, you can kind of reference those and there's a few other private ones as well. So, if anything, we've actually seen less competitive tension there than we would have in the past. You really have again the major banks TD and Scotia that are doing non-prime. You then have the two large scale businesses Santander (BME:SAN) and IA the insurance business. And then outside of those four the next year is really ourselves at Fairstone through their Eden Park brand. And so you kind of think of it as the banks have the sort of highest echelon of credit the very, very near prime population. And then IA Santander Fairstone and ourselves are kind of capturing the balance. And when you consider the fact that it's the single largest product category at $60 billion of the $200 billion even to generate $100 million of originations a quarter $400 million to $500 million per year like that's it's a good and really solid amount of market share. But relative to the size of the market and maybe only having four or five main companies you're competing with, it's pretty reasonable and logical.
Stephen Boland: Okay, that’s all I have. Thanks very much guys.
Operator: Your next question comes from the line of Geoff Kwan from RBC Capital. Please go ahead.
Geoff Kwan: Hi, sorry I was late joining the call. So -- and then maybe somewhat similar to Steve's question, but looking at as far on the point-of-sale and the pipeline there. Just wanted to get a sense on kind of where you see the pipeline and that pipeline of adding more to the point-of-sale merchant?
Jason Mullins: Yes, still a fairly early stage for us. I would say if you go by kind of product category powersports and recreational vehicle financing is a more mature vertical. So, there's still room for expansion of new partners, but it's more limited. Auto we're at 3,600 dealers. We think the target number over time that we would pursue is 8,000 to 9,000. So, we won't of course necessarily capture or sign-up all of them, but I would assume that the dealer network can probably double over the next five years as we pursue growth in auto. And then, once you get to the non-auto, non-powersports world, retail, healthcare—there we still have a ton of runway. Yes, we have thousands of partners today, but you're talking about a marketplace across all retail and all healthcare that has tens and tens of thousands of potential point-of-sale distributors to partner with. So that opportunity still remains a key part of our growth outlook and our growth strategy. Q - Okay. Thank you.
Operator: Your next question comes from the line of Jaeme Gloyn from National Bank Financial. Your line is now open.
Jaeme Gloyn: Yeah, thanks. Just wanted to follow up and go back to the credit underwriting enhancements and maybe what you're seeing from an application flow perspective. Maybe not for the more recent changes in Q3, but going back the last few quarters, can you sort of refresh what you have seen from an approval rate standpoint? Is that something that's trending much lower? Have you -- is this more prospective, or have you been seeing applications that have just been coming in that are far too distant from what you'd like to underwrite? Like what else can you add to that for these enhancements? And how has it affected the [indiscernible] to the growth profile?
Jason Mullins: Yeah. So, I mean, the advantage that we have right now is that when you have robust, healthy consumer demand and slightly less competition, as we've talked about a few times, we're basically just being a lot more selective. I think in our earnings deck we quote that we only funded about 12% of all the new applications for credit. So I think that's a pretty stark sense of how much filter is being applied. Now, of course, you have in there customers that don't fulfill their application or you can't get a hold of, or drop off for all those different typical sales funnel elements. But a very, very big part of that is the customers that are getting knocked out due to either credit or affordability, and we're just being more selective about that. So you may recall in the past that the percentage of funded new customers historically, if you go kind of before the last two years of concerns around the economic environment, was 15% to 20%. So it's down pretty meaningfully. And so even though we're seeing this great top-of-funnel in terms of applicant volume, and it's more than enough to generate still very meaningful growth, we're being highly critical, I guess, of the applicants and the loans that we're writing at this point. And every time we tighten credit that just continues to reduce the approval rate, like we're fortunate that the market is big enough. We can be that selective and still generate pretty attractive growth. And a lot of those leads, too -- like, we're spending the marketing dollars or the merchant relationships to get those leads -- those can and will become customers in the future. We maintain an active database of every applicant. Those customers that we reject provide consent to pull their credit reports for up to one additional year past their application. So we can go back and re-authorize and re-approve them with pre-approved loan offers in the future. So if six months from now the economic conditions are better, there might be thousands of customers that we've rejected recently that we could go back out and make offers to if we feel better about the conditions and want to change course on credit tolerance. So that's kind of what we're seeing and experiencing today.
Jaeme Gloyn: Okay, great. And a separate topic on the growth side. The app -- the mobile app has been in customers' hands now for a few months. What can you tell us in terms of loan production and credit quality from that channel?
Jason Mullins: It's going well. I mean I think we're at 150,000 or so users of the app. So at roughly almost 400,000 active customers. We're kind of about one-third or just thereabouts of the total customer base are active users. We still have not done a lot of marketing and promotion around the app. We've gotten the benefit of again very robust organic growth. So given, of course, there are always some limitations on leverage and capital and all of these factors operational capacity, we've always talked about how we're very happy with the rate of growth and there's certainly a limit as to how much faster you would want to grow. So we're not necessarily doing all of the things that are available to us to try to push and drive growth even further. We're sort of very comfortable at today's growth levels. But if I do look at the app, we had over 30,000 customers start applications for credit through the mobile app. That's pretty meaningful. We funded several thousand loans that have been from customers that apply through the mobile app. So very, very happy with the performance, very happy with the data, but we just know that that is an opportunity that's still very untapped. We have still not done haven't advertised and marketed and promoted to the public that mobile app and that solution. It's been purely available to a customer after they've kind of onboarded with one of our goeasy products. And we have still not generated all of the potential cross-sell offers that are available to our existing customers. We have a very big queue of offers that we've assessed for credit on existing customers to cross-sell existing products that we have not made yet. Those are -- those continue to be building in the queue for the future growth. When you have a quarter with 48,000 brand new customers, you don't need to go out and push the envelope on extending credit to existing customers with as much ambition. So there's a pretty big queue of opportunity building around the use of the mobile app in the future. I would also add that once you have a product like a credit card that sort of speaks to some of the strategic benefits of a product like a card, a card much like a bank account is like a never-ending ongoing revolving account. It gives you a very sticky reason to get customers to come back and use your mobile app. And so that's another milestone I think that will be a kind of key event I suppose in terms of the benefits of the mobile app to our customers because we'll have even more reasons to be using it and checking it on a regular basis.
Jaeme Gloyn: Great. Thanks for the color.
Operator: There are no further questions at this time. So I'd like to turn the call over to goeasy for closing remarks. Please go ahead.
Jason Mullins: Great. Thank you everyone for joining today. Since there's no more questions, we appreciate your participation and look forward to updating everyone at the next quarterly call in November. Have a fantastic rest your day and a great weekend. Thanks everyone.
Operator: Ladies and gentlemen, this concludes today's conference. Thank you very much for your participation. You may now disconnect.
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