goeasy Ltd. (OTCPK:EHMEF) Q3 2022 Earnings Conference Call November 11, 2022 11:00 AM ET
Company Participants
Farhan Ali Khan – Senior Vice President & Chief Corporate Development Officer
Jason Mullins – President & Chief Executive Officer
Hal Khouri – Chief Financial Officer
Jason Appel – Executive Vice President & Chief Risk Officer
Conference Call Participants
Etienne Ricard – BMO
Gary Ho – Desjardins
Marcel Mclean – TD Securities
Jaeme Gloyn – NBC
Stephen Boland – Raymond James Ltd.
Operator
Thank you for standing by. Welcome to the goeasy Third Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s conference call is being recorded.
I would now like to turn the conference to your host, Mr. Farhan Ali Khan. Sir, you may begin.
Farhan Ali Khan
Thank you, operator, and good morning, everyone. My name is Farhan Ali Khan, the company’s Senior Vice President and Chief Corporate Development Officer. And thank you for joining us to discuss goeasy Limited’s results for the third quarter ended September 30, 2022. The news release, which was issued yesterday after the close of market is available on load Newswire and on the goeasy website.
Today, Jason Mullins, goeasy’s President and CEO, will review the results for the third quarter and provide an outlook for the business. Hal Khouri, the company’s Chief Financial Officer, will also provide an overview of our capital and liquidity position. And Jason Appel, the company’s Chief Risk Officer is also on the call. After the prepared remarks, we will then open the lines for questions from investors.
Before we begin, I’ll 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 indirectly by phone, the presentation can also be found directly on our investor site.
All shareholders, analysts and portfolio managers are welcome to ask questions over the phone after management has finished their prepared remarks. The operator will poll for questions and will provide instructions at the appropriate time. Business media are welcome to listen on this call and to use management’s comments and responses to answer – to answer any questions and any coverage.
However, we will ask that they do not quote callers unless that individual has granted their consent.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 including 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. Before we get started on this Canadian Remembrance Day, I would like to take a moment to remember those who have served, sacrificed, fought and lost their lives for our freedom and all of those in active service today. We thank you, and we salute those who gave the ultimate sacrifice to serve our country. Last we forget. In honor of those who fight for our freedom, we will take a brief moment of silence before we start the call.
Thank you for observing that moment of silence. During the third quarter, our team produced record loan growth complemented by stable credit performance, which led to record financial results — business initiatives, combined with favorable competitive dynamics resulted in a record level of applications for credit at over 400,000, up 44% year-over-year, along with a record number of visitors to our easy financial brand site at nearly 700,000 in the quarter. Despite spending 7% less in marketing and advertising during the quarter, compared to the third quarter last year, new customer volume increased, effectively reducing our constant customer acquisition. Thus again, the elevated level of applications led to record loan originations and organic loan growth.
Originations in the quarter were $641 million, up 47% over the third quarter of 2021. Organic loan growth in the quarter was $219 million, an increase of 117% over the same period last year and above our original expectations for the quarter. At September 30, our portfolio finished at $2.59 billion, up 37% from the prior year.
We continue to experience strong performance from our omnichannel and multiproduct strategy. During the quarter, we produced healthy growth in unsecured lending, which was up 34% year-over-year. In particular, our strategy to acquire new customers and then use a combination of credit and payment data to make targeted preapproved loan offers continues to improve.
The enhanced data and benefit of an existing relationship dramatically enhances the quality of our lending decisions, reducing the risk of default compared to an equivalent loan given to a new customer by approximately 30%. That relationship would not be nearly as powerful if it were not for the passionate work of the nearly 1,000 staff in our retail branches where we still originate and service nearly two-thirds of all our lending volume.
Our business development and partner support teams also continue to execute on our plan to becoming a leader in provider of non-prime automotive financing in Canada with originations in this category up 144% year-over-year. In addition to standing up our strategic digital partnership with Canada Drives, which is currently performing well, we were pleased to have officially achieved a milestone that was originally set for year end, crossing over 2,200 active auto dealer partners in the quarter. In addition to the expansion of our distribution network, we also continue to invest in providing our dealers with a superior product, service and technology.
During the quarter, 75% of our automotive financing volume came from dealer partners that we acquired prior to 2022, which is strong evidence that we are continuing to win more market share and highlights the growth potential that still lies ahead.
As banks tightened lending criteria, we also remain the beneficiary of good quality borrowers that are unable to access traditional financial products. We believe our home equity lending program is an example of this, with 48% of loans in the quarter being issued to new borrowers, up from 37% in the prior year and originations up 125% year-over-year.
While the average property value has declined from peak levels, the loan-to-value ratios, including our loan remained below 60% on new originations, signaling the high quality of customers and business we are underwriting.
Lastly, we continue to make progress in growing our point-of-sale lending platform. With our powersports vertical performing well, which experienced a 37% increase in loan originations in the quarter, we were also pleased to gain positive traction in the development of our healthcare financing vertical.
While still only a small portion of our overall lending volume, healthcare grew to several million of loan originations during the quarter, and we were pleased to announce the partnership with Eye Recommend, a Canadian-based cooperative with a network of over 1,300 optometrists from coast-to-coast.
This new early-stage financing vertical aims to help Canadians support everyday dental, cosmetic, healthcare and veterinary expenses that they do not have sufficient insurance coverage for. We look forward to providing updates going forward, as our business development and partner support teams continue cross building and supporting our network of merchants, which now exceeds 6,000 partners across all our financing verticals.
As we continue to travel into more challenging economic conditions, the mobility of our lending activity actually assist in strengthening the overall performance of our portfolio, helping to shelter against risks caused by deterioration of the macro environment.
During the quarter, we issued the highest proportion of low-risk category originations in our history. And for the second quarter in a row, the weighted average credit score of our loan originations exceeded 600, nearly 20 points above the existing portfolio.
In our automotive and home equity products, we have seen sequential growth in the proportion of originations in our highest credit tier. Lastly, the proportion of our portfolio now secured by hard assets such as real estate or automotive and power sports equipment is at an all-time high of 37.6%, up from 33.2% in the prior year.
We also continue to pass all the benefits of scale to gradually reducing the average rates for our borrowers – through our interest rate reduction programs and the gradual shift in the overall product mix of our portfolio, the weighted average interest rate charge to our customers declined to 31%, down from 33.6% at the end of the third quarter last year.
Combined with ancillary revenue sources, the total portfolio yield finished within our forecasted range at 37.4%. Total revenue in the quarter was a record $262 million, up 19% over the same period in 2021.
In addition to the benefits of the evolving product mix, which serves to improve the credit quality of our portfolio, we have continued to make proactive targeted and methodical credit model enhancements each quarter since the fourth quarter of 2021. These adjustments include modifying credit tolerance levels, adjusting our affordability calculations to account for a greater level of expenses brought up by higher inflation and limiting our lending amount to borrowers and higher risk credit res.
We are also implementing another generation of credit models featuring new statistical techniques and data sources, which are projected to be 200% stronger at predicting risk than a generic credit score in Q4. By increasing the accuracy of the credit model, we can preserve a similar level of lending volume while taking the model improvement in the form of lower credit risk.
Together, the disciplined approach to managing credit risk by focusing on the quality of our originations and underwriting standards has further strengthened the resilience of our portfolio. The annualized net charge-off rate in the quarter remained stable at 9.3%, comfortably within our target range of 8.5% to 10.5% and meaningfully lower than pre-pandemic levels of 13.2% in Q3 of 2019.
With credit performance trending well, our loan loss provision rate reduced slightly to 7.58% from 7.68%, primarily due to the improved product and credit mix of the loan portfolio. We believe this level of provisioning reflects the appropriate level of credit risk of the business moving forward given the growing proportion of secured funding.
The operating environment becomes more uncertain, we’re also employing a disciplined approach to managing expenses to ensure that our operating leverage can continue to outrun the compression in our risk-adjusted margin and elevated borrowing costs.
During the quarter, our efficiency ratio, specifically operating expenses as a percentage of revenue reduced to 32.6%, down nearly 400 basis points from 36.3% in the third quarter of last year.
Operating income for the third quarter of 2022 was $91.4 million, up 12% from $81.4 million in the third quarter of 2021. Operating margin for the first quarter was 34.8%, down from 37% in the prior year. After adjusting for non-recurring items, we reported adjusted operating income of $94.8 million, an increase of 11% over the $85.8 million in the third quarter of 2021.
Adjusted operating margin for the third quarter was 36.2%, down from 39.1% in the prior year due primarily to the increase in loan growth related to loan loss provisions that need to be recorded on our net receivables growth.
Net income in the third quarter was $47.2 million, which resulted in diluted earnings per share of $2.86 compared to $0.36 in the third quarter of 2021, a period which included unrealized gains related to investments. After adjusting for these non-recurring unusual items on an after-tax basis, adjusted net income was $48.6 million, up 4% from $46.7 million in 2021. Adjusted diluted earnings per share, was $2.95, up 9.3% from $2.70 in the third quarter of 2021.
As highlighted earlier, we experienced another quarter of accelerated organic growth at $219 million or $118 million up on the same quarter last year. As such, we incurred an additional loan loss provision expense related to the growth in our receivables at a provision rate of 7.58%, the additional $118 million in growth year-over-year resulted in an approximately $0.40 of incremental provision expense on an after-tax per share basis. However, the incremental growth is highly accretive to the long-term earnings of the business.
With that, I’ll now pass it over to Hal to discuss our balance sheet and capital position before providing some comments on our outlook.
Hal Khouri
Thanks, Jason. In connection with our earnings release yesterday, we also announced other meaningful enhancement to our balance sheet with a $200 million securitization facility on the growth of our automotive financing program. This new facility will be secured by automotive consumer loans for an additional term of two years and interest on advanced its payable price at the rate of one-month Canadian Dollar Offered Rate plus 185 basis points.
Based on the current one-month CDOR rate of 4.23% as of November 8, 2022, the interest rate on draws would be 6.08%. This new facility complements our existing $1.4 billion revolving securitization warehouse facility and $270 million revolving credit facility, bringing the total debt capital provided by our bank syndicate partners to $1.9 billion.
As with our existing securitization facility, we will also be establishing an interest-based swap agreement to generate fixed rate payments on the amounts drawn to assist in mitigating the impact of increases in interest rates.
As at the end of September, 95% of our drawn debt facilities were fully hedged, but we do continue to be exposed to rising rates on incremental draws in the future. Inclusive of these recent enhancements, we had approximately $1.12 billion in total debt capacity and our fully drawn weighted average cost of borrowing stand at 5.2%.
Free cash flow from operations before the net growth in gross consumer loans receivable in the quarter was $95.6 million, up 7% from $89.2 million in the third quarter of 2021. To highlight the cash-generating capability of the business, we estimate that we can currently grow the consumer loan portfolio by approximately $250 million per year solely from internal cash flows without utilizing external debt.
Of course, the current level of growth in the business, are exceed this level, thus we are a net cash user. We also estimate that once our existing sources of debt are fully utilized in the future, we can continue to grow the loan portfolio by approximately $400 million per year from internal cash flows.
In addition, if we were to run-off the consumer loan and leasing portfolios, the value of the total cash repayments over the remaining life of our contracts would be approximately $3.4 billion. If, during such a run-off scenario with reasonable cost reductions, all excess cash flows were applied directly to debt. We estimate we can extinguish all external debt in 15 months.
We finished the quarter with a net debt to net capitalization ratio of 73% as a result of the strong organic growth in the portfolio. Healthy cash-generating capabilities of the business will result in gradual deleveraging over time. Given we generate the greatest return on deploying capital toward organic growth, we continue to make our highest priority use of the company’s financial resources.
I’ll now pass it back over to Jason.
Jason Mullins
Thanks, Hal. While the current macroeconomic environment does present challenges, it is also a time where opportunities can be found. We continue to experience strong growth fueled by both our business initiatives and favorable competitive dynamics. The headwinds we face created a greater difficulty for many of our smaller scale competitors.
For example, in the last 12 months, the top five companies competed with the most popular loan search terms on Google have put their online marketing presence in half. Furthermore, several direct competitors have seemingly held origination values flat with onto reduced debt volumes as they struggle with rising costs, higher cost of capital and rising concerns about future credit risk.
While we are approaching this environment cautiously by making regular proactive credit adjustments and tightening our expense controls, we are also confident that the business is well positioned to grow responsibly and navigate through the current economic conditions.
Over the next few months, we are excited to be finishing up development and testing of our new consumer mobile app goeasy Connect. Through this new digital portal, customers and prospects will over time be able to complete account management functions, view and apply for our entire suite of lending products, receive personalized loan offers, access their credit score and connect directly to an agent for support.
We remain on track to launch Version 1.0 in the first quarter of 2023, and believe it will truly empower non-contingent, enabling them to effectively carry credit of their pocket, removing the barriers, stress at in convenience of the typical borrow experience.
In our disclosures yesterday, we have also reaffirmed our three-year commercial forecast. We now expect to finish at the high end of our range for loan book growth in 2022 and near the midpoint of the ranges for portfolio yield and credit losses. Moreover, we remain on track and committed to growing the consumer loan portfolio by approximately 54% to nearly $4 billion by the end of 2024.
Turning specifically to the upcoming quarter, we expect the loan portfolio to grow between $175 million and $200 million. As our portfolio continues to evolve and our consumers’ average APRs gradually reduce, we expect the total yield generated on the consumer loan book to decline to between 36% and 37% in the quarter. We also continue to expect stable credit performance with the annualized net charge-off rate remaining between 9% and 10%.
As we highlighted for the last few quarters, there are numerous reasons why non-contingent consumers generally fare well during periods of economic weakness. However, as noted in my earlier remarks, we are also leveraging both product mix and targeted credit underwriting enhancements to ensure we safely navigate our portfolio through periods of turbulence. As suggested earlier, the timing of credit criteria and favorable competitive dynamics only serve to assess that helping produce healthy and high-quality receivables growth.
In closing, I want to thank our entire team for their relentless pursuit of excellence. As a business with ambitious goals, we strive daily to deliver on our commitments and consistently achieve our targets, while providing our customers and merchants with respect to support and exceptional service.
More importantly, our team is dedicated to helping our customers to build their growing needs today, while improving their credit and reducing their future interest costs. So a matter of the headwinds we face, the goeasy team is dedicated to our journey to build Canada’s leading non-prime consumer lending platform.
With those comments complete, we will now open the call for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Etienne Ricard of BMO. Your line is open.
Etienne Ricard
Hello. Good morning. I presume it’s me. So first on credit performance, industry consumer insolvencies have been rising in recent months and normalizing towards pre-pandemic levels.
Now at the same time, your net charge-off ratio has been fairly stable in 2022. Now I understand the mix shift dynamic, but I’d like to get more visibility into how your unsecured portfolio is performing. And what explains the discrepancy with insolvency trends we’re seeing?
Jason Appel
Hey Etienne, it’s Jason Appel. I’ll provide some commentary and then, Jason Mullins can tackle on a two on insolvency. I think your comment around insolvency is a good one. The one point I think how you take into consideration as well insolvencies are certainly rising. They remain about 20% below pre-pandemic levels overall. So I think 1% has to contextualize the level of insolvency, it certainly is up, but it’s not nearly where it was two or three years ago.
And I think the other thing to keep in mind is, a number of the credit adjustments that we’ve made over the course of the last several quarters, staying all the way back to Q4 2021, has specifically been designed to allow us to better target at-risk customers who are at-risk of going insolvent while being with us as customers. So while the insolvency risk is certainly rising. Our experience is necessarily taking a higher level of insolvency has not fundamentally moved over the last several quarters.
And it’s that combination of proactive credit adjustments where we’re trying to target those populations more effectively, before they decide to approach a trustee in bankruptcy, and instead choose to work with us on favorable terms that generally has helped keep our portfolio in good state in addition to all of the other product-related and credit-related changes, we’ve made on non-insolvent bankruptcy.
So that tends to decide what you might think of a threat marketplace. But it is something that we have collectively engineered over the last number of quarters since insolvencies started to rise back in the latter half of 2021.
Jason Mullins
I would just add a point that we touched on last quarter as well. I think the one part when we developed our commercial forecast and the target loss rate range. We do so contemplating a series of stress scenarios, which in our most recent set, contemplate going into a mild to moderate recession, insolvencies rising back to and potentially above pre-pandemic levels and unemployment rising to traditional mild to moderate recession levels.
So those things are already factored into and taken into consideration, when we make those productive credit adjustments. We have to make the right tolerance level of modifications to anticipate that type of macro environment. And so we think about those as being essentially embedded into our results and embedded into our decision-making or whatever with respect to credit.
Etienne Ricard
Thanks for sharing. On the New Mobile Application, what benefits to customer lifetime value and cross-selling rates are you expecting? I guess, first of all, with existing customers? And then, how do you think about this application as a new customer acquisition channel?
Jason Appel
Yes. So this will be obviously a multiyear journey for us to really see and unlock its potential. But I guess the way to think about it today is our multiproduct business model is built on the assumption and the data experience we’ve gathered to-date, which suggests that because of that wide range of products and the range of rates we offer, customers are likely to spend numerous years with us that active borrowers and take multiple products at multiple loans. And so creating a mechanism through which they can conveniently see all of what’s available and then request to pursue credit in an additional product or a convenient way to push them preapproved customized, personalized world offers is really important.
And while to-date, we’ve been able to do that through text and phone, e-mail, we’re now at a point where that idea of a mobile app and a digital portal becomes the most commonly expected tools to be able to do that.
As we’ve shared a few times before, we have still not yet begun to cross-sell all of our products to all of our customers. We are only cross-selling a subset of products to a subset of customers. And at the moment, we’re seeing a conversion rate of between 10% and 30% after one year when cross-selling customers from one product to another. We hope that the mobile app, being a more convenient tool, will only increase that capacity has been leading to expanding lifetime value.
To your other point, yes, it could definitely become valuable from a new customer acquisition perspective as well. Today, if you think about it, we were trying to capture a consumer — we’re really trying to capture a consumer right now only at the moment that they need credit. They’re actively searching for credit or they’re at one of our merchants there to buy something and need credit to finance it.
Eventually, the idea should be that we can promote the mobile app as being a single source of access to credit for a wide range of products. So, that path of individuals that are perhaps just perusing online or on social media become aware of this mobile app as being a great new tool for access to credit, download it, and then start to expose them to all of our products. I think it’s more likely to be something that focuses on existing customers first. But as you get into the future, absolutely, it could be a metal for new customer acquisitions as well.
Etienne Ricard
Thank you very much.
Operator
Thank you. Our next question comes from the line of Gary Ho of Desjardins. Your line is open. Gary Ho of Desjardins, your line is open.
Gary Ho
Great. Thanks. First question, just wondering if you can elaborate on the new credit model you plan to put through in this quarter. What gives you confidence the new version will give you greater predictive power and ability to reduce the default rate, maybe will walk us through, that would be helpful.
Jason Appel
Sure, Gary. It’s Jason Appel again. A couple of thoughts on that one. So, as far as the new models we’re deploying later this month, there are several of them. A couple of things sort of stand out in my mind that make them, let’s say, better than their predecessors in the past.
One would be, obviously, they’re built out much larger amounts of data as you can appreciate as we scale the business, our data that we can accumulate on our own experience proves very helpful when building those models. These new models also contain new attributes that we acquired from TransUnion, primary credit provider. They supply us that information, which we then test out and analyze to see their predictive power.
So, these new generations of models have new variables that our older generation does not. These models will also build using more advanced statistical modeling techniques. So they’re able to give us a much better level of predictive power when it comes to being able to confidently identify customers at risk of default over various periods.
And what that effectively allows us to do is either if we choose to, holds our current level of originations at or near where they are today and either accept a lower level of credit risk because these models better diversify our risk by more, we could conceivably choose to take up our level of originations and not take on any level of incremental risk.
So in essence, they give us more flexibility to toggle whether or not you need to solve for a specific loss rate target that we identify or whether or not we want to take advantage of a market situation where we want to actively be more aggressive in a known area of our business where the returns are quite high and quite profitable.
And I’d say the last comment that gives us that confidence is we put in place some pretty robust monitoring and reporting that effectively increased the speed of the feedback roots that allow us to see how effective the models are performing in pretty quick time periods. So as opposed to having it a way [indiscernible] to know whether or not our models are generating the expected level of performance these new levels of models, combined with the reporting got around them, give us a greater degree of understanding over a much shorter duration such that if we need to further adjust them or toggle them, we don’t have to wait as long as we would have in the past. So those are the major reasons. I would say the models give us a higher degree of confidence that they’re probably to be predicted going forward.
Gary Ho
Okay. Thanks to answer that, maybe while I have you a related question also on the credit side. Everyone is talking about the lag effect of all the rate increases had on the consumer economy. I wouldn’t say we’re in a normal environment today. But how do you tackle this lag impact into your underwriting or modeling. I’m not sure you think historical data now will be a perfect predictor of what’s to come.
A – Jason Appel
No, I think that’s a fair comment. I won back over there — series of credit adjustments we’ve been making from Q4 2021. Most of those quarters have involved a resetting of the affordability levels we use to determine how customers qualify for borrowers. So I think as Jason mentioned in the remarks of the call, we typically don’t keep our customers’ affordability levels flat. We’ve actually been proactively reducing them over the last several quarters given the fact that if anyone would know who was out there, consumer expenses are rising, especially on basic staples like food, gasoline and heating.
So we’ve been progressively reducing those affordability levels and in some doing, taking into consideration those events, which just simply can’t be predicted, as you rightly pointed out by the history for the past. So it requires us to be pretty on track with respect to monitoring, the behaviors in the overall economy. And then looking at our current affordability levels, literally on a monthly basis to decide whether or not we want to make any tweaks or adjustments going forward.
And because the portfolio does turn relatively significantly even within a one-year period, making those changes on a repeated basis can have fairly significant impacts over relatively short time periods because you’re writing your originations every quarter on the quarter. And if those originations are being written more conservatively or taking into consideration lower affordability levels, they tend to produce high-quality originations in a pretty fast manner. So that’s the way in which we’ve been tackling it till the last several quarters.
A – Jason Mullins
Yes, I’ll just add one thing to that. We’ve mentioned before how the rising rate environment primarily impacts home owners of which that’s, of course, a smaller proportion of our business at around 20%. So for the 80% that carry fixed rate credit products and have on average lower debt than the prime borrower or half as much. Their impact from a rising rate environment is much less significant. But interestingly, on our homeowner portfolio, specifically the home equity product, we, at the time of origination, capture the information about the customer’s original primary mortgage and the renewal date of that mortgage.
And what that’s allowed us to do is bifurcate our home equity portfolio into two subsets. Those consumers who have had to review their first mortgage since June 1 of this year when rates start to rise meaningfully and those that have not, to be able to compare the delinquency levels of the individuals who have since increased the rate of the primary mortgage and presumably had to take on a higher payment size.
Although, we’re only across five months is post that cycle. At the moment, the delinquency rate of that subset of people sits at or below the subset of those who have not yet experienced a renewal of that primary mortgage.
So, again, early five months in, it’s only a small proportion of the customer so far. But we’re monitoring that literally every week, and we think it’s a great way to be able to gauge for those customers who are exposed to rising rates, which are the homeowner subset, how are they doing and absorbing that extra payment size. And so far, we’ve seen zero deterioration in that respect.
Gary Ho
Okay. Perfect. Thanks for sharing that. And then my last question, on slide 10, maybe this is a question for either Hal or Jason Mullins. You show the efficiency ratio down 370 basis points year-over-year. When you look out to 2023 and 2024, I imagine decline wouldn’t be as steep. Can you walk me through where you think you can take that efficiency ratio to if you hit your three-year commercial targets?
Jason Mullins
Yes. So, I think, while we haven’t provided efficiency ratio guidance, we have provided operating margin guidance. And that, of course, is going to be the net effect of a decline in the risk-adjusted margin increased borrowing costs and improved efficiency ratio all blended together to produce operating margin.
And as you’ll recall from our forecast, which we reaffirmed, we expect the operating margin to expand by 100 basis points approximately each year, next year and the year after. And again, that extension is net of the fact that our risk-adjusted margin is compressing, because we’re bringing down average APRs and our cost of borrowing has, of course, slowly incrementally increased with the rising rates.
So you can factor in with a certain compression on risk-adjusted margin and a certain assumption for the increased cost of borrowing being gradually baked in, how much our efficiency ratio, therefore, needs to improve if our total operating margin as a company is still going to gradually expand.
We’re very fortunate that because of the stage we’re on in our business cycle that, that leverage, that operating leverage and the benefits of scale, the OpEx are today absorbing and offsetting compression of the risk-adjusted margin and higher borrowing costs.
Power business is obviously, in today’s environment, cost of capital goes up. That pinches the bottom line and compresses net income margins. We expect our net income margin to remain and/or improve over the next couple of years barring any major unforeseen circumstances.
Gary Ho
Okay. Got it. That’s helpful. I’ll do that calculation. Thanks so much. That’s it for me.
Operator
Thank you. [Operator Instructions] One moment, please. Our next question comes from Marcel Mclean of TD Securities. Your line is open.
Marcel Mclean
Okay. Good morning. Thanks for taking my question today. I’m going to go back to credit. I really don’t want to belabor a point too much, but there still seems to be a bit of a disconnect to me. You referenced that at these levels, your charge-off ratio is relatively normalized. But in the macro environment, we’re seeing insolvency still might rising, still well below pre-pandemic levels. The larger financial institutions that deal mainly with prime ores, they’re seeing that lag effect or creditor are very favorable for them. So your portfolio has changed a lot over the last few years. So it’s tougher to compare to pre-pandemic levels in that sense. But how can we get increased comfort that these are, in fact, normalized levels for you if we’re still well below pre-pandemic levels in terms of insolvencies and those types of macro inputs?
Jason Mullins
Yes. So, I mean I’ll cover it again, and I don’t think that’s not a hammer on the same point, but they are the critical points that need to be emphasized. So — if we were in a normal economic environment, not deteriorating, no high inflation, no expectation of rising unemployment, no increases in installment fees. We were just in a steady-as-she-goes environment. The combination of the credit model adjustments that we proactively made and the material shifted product mix towards secured loans would result in a gradual decline in our loss rate.
In fact, if you recall, prior to the last set of commercial numbers we provided, we had previously before we revised them under the current economic outlook, expected the charge-off range that we experienced to step down, but the upper and lower bound by 50 full basis points. We’ve, of course, since revised that earlier this year and now said we expect credit to remain stable.
For us, when you think about the fact that we’ve done credit model adjustments and we’ve got a shift in product mix, stable is the equivalent to acting as the offset the deterioration in the macro environment. So make no mistake about it, we’re not any less susceptible to the pressures of that macro environment than anyone else’s. It’s just those two factors. But when accounted for at our total portfolio level, are allowing us to run with a very stable credit performance.
We’re able to essentially absorb those increases in insolvencies, absorbed those higher inflationary expenses, absorbed an expectation unemployment is going to rise and still be able to operate within our target loss rate range. So the other way to maybe think about it is just emphasize the product mix, the categories where we’ve talked about experiencing more significant growth over indexing or higher proportion of growth, home equity, automotive and power sports. All three of those products have loss rates that sit well below our current portfolio average. So as they represent a larger and larger share of our book, we would otherwise in a normal environment, see those loss rates begin to gradually drift down. The stable loss rate is a reflection of having accounted for a series of stressed scenarios in the macro environment. So hopefully, that’s that kind of really has a bit more color.
Hal Khouri
Yes. The only other point I would add is, as we pointed out, with almost 38% of the portfolio now is sitting and being secured by hard assets, not only do those portfolios in to average loss rates, as Jason mentioned, they also have very, very low bankruptcy and solvency rates, because the individuals who generally pledge those assets on security or mode to give them up in periods of economic stress and they’ll offer to prioritize repayment of those assets over certain types of unsecured debt. So as a result of that portfolio mix continuing to rise, the proportion of the bankruptcy and insolvency that sits within that book actually declines overall. So that’s why you have to look at bankruptcy and solvency within the context of the ships that are taking place within the portfolio and not necessarily what’s going on just within the broader market.
Marcel Mclean
Okay. Thanks for that additional color. Yeah.
Jason Mullins
I’ll just add more quick comment on solvencies because we’ve touched on this topic in the past. The total number of insolvencies in Canada as a representation of the total population, it’s still less than 1%. So sometimes it’s kind of one of those things where the numbers can be a bit tricky insolvency is up 20% year-on-year in this most recent month. When you quantify that, it’s about 1,000 people increase year-on-year. So the 20%, I know can sometimes sound alarming, but when you look at the underlying data, that really only represents just over 1,000 Canadians more year-on-year. So given we — still a fairly small business in the context of the size of the Canadian population, it maybe doesn’t have the same effect it might sound like on the peer headline just at a bit more context as well.
Marcel Mclean
Okay. I think that’s a good point. And then secondly, in a similar vein on demand, I think at the start of the call, I heard you say applications were up 44% year-over-year, and we’re at another record level. But again, going back to the longer financial institutions, we’re starting to see borrower demand slow in that cohort, at least as these rising interest rates start to impact consumers. But it sounds like within the subprime segment, you’re not seeing that, but your comment as well was that some of your peers, their origination level remain flat or their loan book levels. So just wondering kind of how you think about things going forward from here. Do you see any slowdown in demand or do you expect to pick up? How do you think about kind of the competing market dynamics right now?
Jason Mullins
Yeah. So a couple of things on that. So one of the ways that our business is correctly different than some of the peers within our industry is we are mid a growth strategy that is benefiting from numerous business initiatives that are effectively expanding our amount of distribution. We, as I mentioned earlier, have added several hundred more automotive dealer partners this last quarter. We did our partnership with Canada Drive, Canada’s largest online car retailer. We’ve added a dozen branches year-to-date. We’ve continued our expansion into Quebec. I mentioned earlier, some of our point-of-sale traction power sports and healthcare.
So if you are a business that has a single product and a single channel, then your growth trajectory is going to be, in large part, influenced by just the share environment, what’s going on with consumer demand and what’s going on with competition. In our case, we have expansion from numerous products and channels that is also aiding and contributing to our rate of growth. So that would be — and that’s net of the credit changes that we’ve made. So that would be one point.
Secondly, I mentioned in our comments about the competitive dynamics. I don’t want to speak about any specific competitor, not necessary, but it does appear like if we look at the competitive landscape that some of the companies who perhaps have less scale, in particular, whether it’s because of rising operating costs, rising cost of capital, concerns about credit risk, funding capacity, all the things we know that business is struggle with the time like this, smaller scale competitors are only going to struggle to a greater level, and it does appear as a result, they’ve had to moderate their level of investment, their level of spend, pull back on origination growth, and that’s creating good competitive dynamic for us as well.
Lastly, we mentioned in our comments, we do see what we think our size and signal on prime lenders and banks typing credit criteria. To your point, they have not yet seen an experience that in their actual loss performance but that; a, doesn’t mean that it might not be because of credit typing, and it doesn’t necessarily mean that they wouldn’t be proactively tightening credit.
And so that does push some customers down into our statement. We think the home equity product and the automotive product because those are the two most near prime products; the ones that sit most on the doorstep of prime for us are the best products to be able to monitor that effect.
And as I said earlier, those two, we’ve seen sequential increases in the proportion of those originations in that highest credit tiers. So no way to know for certain, but certainly a strong signal it’s push credit account from banks. So very happy with the current growth trajectory. I feel good about the current competitive and consumer demand levels. And we’re just making sure we take advantage of that to make those appropriate credit adjustments, so that we can grow constantly and responsibly.
Marcel Mclean
Okay. All right. Thank you. I appreciate the color.
Operator
Thank you. One moment please. Our next question comes from the line of Jaeme Gloyn of NBC. Your line is open.
Jason Mullins
HI, Jaeme.
Jaeme Gloyn
Yeah, I actually didn’t hear that it was my turn. Yeah, few more questions on the next-gen credit models. Hoping you can give us a little bit more color as to the history of its development, some of the test-and-learn outcomes over that timeline? And then is the expected rollout to apply to all future loan originations and existing loans, or is it a measured rollout?
Jason Mullins
Hi, Jaeme, it’s Jason. I’ll answer your second question first, and then I’ll just talk about the development. So as you would know, we very much embrace and have supported our strong test-and-learn philosophy when it comes to our credit model deployments. So the new models that are set to go in, in about a month’s time, they are very much being tested on only a portion of the portfolio, both new customers and existing customers, much in the way, as we’ve always operated, we usually have between three and four credit funnels operating, if you will, behind the scenes that are in some form of test-and-learn mode.
That allows us, as you know, to inform the champion model that give us the most confidence what we test challenges around the periphery. And we do that on a randomized basis, so that we don’t hedge this in — that we put in there.
As it relates to the development, from credit model building, if you will, is both at [indiscernible] that we’ve been engaging in now for well beyond a decade. And our mechanisms for building it have continued to get more sophisticated in two ways. One, the sheer software power, robust power of newer techniques that are out there and the analytical platforms that you can use to service them really cut down on the time frames within, which you need to build these models. And while they incorporate months again in some cases, years of data history, what’s really interesting about where the power of these models go is how quickly we’re able to distill the variables that have the biggest impact. It’s not that we find that out overnight, but we’re much more able to get to those conclusions much quicker over time.
And then we’re able to simulate exercises with various competing models in an effort to figure out which of those attributes that go into them, are likely to be more predictive before we put them into a natural simulation in our production environment, as I said before, will only give a small portion of the portfolio exposure to it.
And then, once we see how that performance goes, we can either ratchet up or ratchet down a level of exposure or in some instances, we can tweak. And what I mean by tweak is we can change the composition of how those models are built. A great example of where we’ve done that has been in our experience with Quebec.
We’ve been in the Quebec market now for almost six years. And over that time, we have deployed four different generations of credit model, including the one that’s going in, in December. And over that time, we’ve gained a tremendous amount of learning about the differences within the Quebec market, and that’s helping to form our development.
It’s also helped us from the kind of data we need to put in. And as along the way, we continue to test and challenge additional models along the way. So even though we may have only had four generations of credit models that we’ve used, we’ve actually built far more. We’ve just chosen not to deploy them, because when we simulate their activities, they just don’t make the grade.
So those are a couple of ways in which we’re able to build those models out in pretty robust time frames and with a pretty decent degree of confidence in how we’re going to roll them out. But as always, these are measured rollouts that we carefully plan well ahead of time, so as not to put the portfolio overall at risk.
Jaeme Gloyn
Okay. So if I understand correctly, then in December, all new loan originations will be on this next-gen model that has been, of course, tested and worked out in the last several quarters or even longer. Is that fair?
Jason Mullins
So I would say, yes, a portion of our new loan originations and a portion of existing loan originations will be on the new model because, as you know, we use different models to adjudicate existing borrowers versus new borrowers. So, it’s very much a very minor percentage of the total number of applications, but enough to give us a statistical read on how those models are likely to perform.
Jaeme Gloyn
Okay. Great. And then, one more follow-up on that. Has the experience of US peers that have gone down this path of using AI and next-gen credit models. Have you talked with them? Have you learned from those experiences? What have you maybe taken from their performance and applied to your modeling, especially as we see some of those models kind of missing the market a little bit in the US?
Jason Mullins
Yes. I think the one thing to think about when we look at our US peers, I mean, these folks have been in the credit modeling business as long as we have. So, I’m not here to comment whether or not the models are better or worse or sophisticated or not, because I think a number of them are quite frankly, quite good at what they do. I think a difference you have to keep in mind around why some of our US cost may not be enjoying the stability of the credit performance that we’ve had, is I think we’ve been very fortunate in two ways.
One, obviously, we’ve been able to consciously shift our product mix over the last three years, which has offered us additional offset protection in a worsening credit environment as you well in general. And the second thing would be is I think we’ve done a fairly effective job of being able to read the performance of our models. And we’ve proven over the past and continue to do so that we’re not afraid to make those changes prospectively.
At the danger that a lot of lenders can sometimes run into is when they realize that the ship has already left the yard, they’ve got to make fairly substantive changes in the credit, which has the dual impact of cutting their originations and actually worsening their performance in the short-term, because our overall portfolio slowed down the rate of growth. And over a 10-year history, we’ve learned over many years of how to navigate those waters very carefully, so that we’re not making all of our credit changes at all on so. We’re doing a bit-by-bit, quarter-by-quarter. And in doing so, we’re not necessarily relying on just one set of changes. And that in and of itself allows us to diversify our risk more effectively because we can always come back and tweak and make adjustments that we would have made before.
The differences we’re making them sooner rather than later, and we’re prepared to sacrifice the effect that might have on originations, but not in such a way as we have to absolutely slow down our rate of growth. We’re able to continue to drive our rate of growth, as well as also making tweaks along the way and continuing to build up earnings as we get more informed about the impact of those tweaks.
So I would say, our credit modeling capabilities are as good as our peers. I think where we might have a bit of a lag up in addition to the fact of how we store the business from a product composition point of view, is being able to make those changes more frequently without necessarily putting the overall business at risk.
Hal Khouri
Just to add to that, the idea of creating and developing new models to challenge the existing incumbent models is something we’ve been doing every year for a decade. So this is not new or different in that way. Nothing here has changed in terms of the typical cadence with which we develop models that are attempting to use more data or new modeling techniques to be more predictive. That’s just what we do.
The reason we highlighted it here is just that when a new model is being implemented, if it is more predictive, you have the option to hold the loss rate that receive additional volume by way of its more accurate nature or to hold the volume flat and benefit from an improved expectation of loss savings, given the environment which is being the latter.
But as Jason said, we implemented on only a small subset of business. We monitor it closely. It has not performed at that level, we can quickly switch back to the other existing incumbents. But to date, in 90% of all the instances we’ve put in enhanced models that’s proven to deliver us the lifted performance we expected. So this is, from our perspective, just a continuation of our strategy, and we’re very happy with the history that we’ve had and navigated credit risk.
Jaeme Gloyn
Great. Thanks for the color.
Operator
Thank you. One moment, please. Our next question comes from the line of Stephen Boland. Your line is open.
Stephen Boland
Sorry, was that Steve Boland?
Operator
Yes, sir. Your line is open.
Stephen Boland
Okay/ All right. Thank you. Sorry. First question, just looking at your consolidated leverage ratio, it is ticking up quarter-by-quarter. Is that your kind of, I guess, your maximum 4.5 times. Can you maybe just talk about where do you see that going, or does it stabilize here?
Jason Mullins
Yes, Steve, I can touch on that and then Hal can get chime in as well. Leverage is essentially one major variable in our business model. And our job is to manage the capital and the growth rate in a manner in which we manage leverage to a level we’re comfortable with and that keeps us on with all of our cabinet interest rates. That’s what we’ve always done. And that’s what we’ll continue to do.
So clearly, the strong organic growth in the leverage six out or just beneath the level that you noted in our [indiscernible] package. But rest assured, we are very aware and carefully match that level of leverage. And we always have numerous tools, primarily managing the rate of organic growth to be able to manage leverage. So we’re very comfortable with the tool set to be able to do that.
Stephen Boland
Okay. So just basically, your guidance that you’ve provided takes that into account in terms of your leverage. I guess, is there a way to look at it?
Jason Mullins
Yeah. The range we provided the market, yes, the ranges we provide the market contemplates managing the business to within our leverage objective, yeah.
Stephen Boland
Okay. My second question, just the new securitization facility, I haven’t calculated this apologies, but I think the effective rate is around 6%. Is that comparable to your other facilities? And will this be taking all the auto loans, or will it just be a certain segment that will be going into that facility?
Hal Khouri
Yeah. So it’s Hal here. So yes, the rate would be comparable to our current securitization warehouse has the one month zero rate plus 185 basis points. In terms of the assets actually to securitize would be based on eligibility and the investment price you’re in. So we’ll filter through those qualifying assets.
Stephen Boland
Okay. So I’ll take that as maybe better quality, better borrowers, et cetera, et cetera, because it just to go into that facility? Is it a fair way to look at it?
Hal Khouri
Yes. Similar to what we do on our securitization facility. Obviously, accounts that don’t have high credit risk or a security rate would qualify for inclusion in that facility. So yes, we’re trying to moving towards high assets.
Stephen Boland
Thanks, guys.
Operator
Thank you. I’m showing no further questions at this time. I’d like to turn the call back over to Jason Mullins for any closing remarks.
Jason Mullins
Great. Thank you, everyone, for taking the time to join today’s call. We appreciate your attendance, and we look forward to updating you on our next quarterly earnings. Have a fantastic day. Thank you.
Operator
Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you all for participating. You may now disconnect. Have a great day.
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