Outperformer Our Conclusion
The Federal Budget was released this evening. Despite announcing new
measures to “crack down on predatory lending”, the changes were relatively
benign and (most importantly) did not include a further reduction to the
maximum rate of interest allowable under the criminal code. The prospect of
more heavy-handed government action in the Spring Budget was the crux of
our downgrade in January. In that context, we interpreted the outcome to be
an important de-risking event and are upgrading the stock to Outperformer
with a $200 price target (from $175).
Key Points
No news is good news. In late January, we downgraded GSY from
Outperformer to Neutral after discovering that the Federal Government had
completed another consultation contemplating a further reduction to the
interest rate cap. The timing of the consultation had surprised us, and we
were left to wonder if it was deliberately scheduled to conclude in advance of
the Spring Budget. We published a ‘probability-weighted’ style of downgrade,
acknowledging that there was little evidence public market investors were
bracing for an adverse outcome. The Spring Budget was released this
evening, which did not entail any further action to reduce the interest rate
cap. This, in our mind, is an important de-risking event for shares of GSY.
Probability of further action on the rate cap has diminished. The
absence of any further announcement regarding the interest rate cap may
not necessarily guarantee that the Federal Government will not to seek to
address this policy issue in the future. It does, however, make the probability
of successfully implementing any changes before the next Federal election
seem a lot less likely. Current polling indicates that the Conservative Party of
Canada has clearly broken away in popularity from the incumbent Liberals. If
the Conservatives win the next Federal election, it seems likely that some of
these policy issues prioritized by the Liberals simply fall away. We believe
that the likelihood of any further action to lower the rate cap (i.e., below 35%)
is much lower now.
Capping the costs of optional insurance products. One item that stood
out to us in the Budget was the intent to “cap the costs of optional insurance
products for high-cost loans”. After speaking with the company, our
understanding is that the consumer protection framework that would govern
this type of activity falls to the jurisdiction of the provinces. In order to enact
any changes, the Federal Government would need to get cooperation and
alignment from each of the provinces and territories individually. This, in our
view, sounds like it could be a prolonged and drawn out process and is much
less likely to achieve successful implementation (whatever that looks like) in
advance of the next Federal election cycle. As a result, we feel much less
concerned about this risk than we would have been if the government was
signaling a further reduction to the rate cap.