The banking crisis last month had brutal repercussions on broader markets. While the regional banks seem more susceptible to the infection, the big U.S. banks seem well placed. On similar lines, Canadian Big Six banks are much stronger on the balance sheet front and look resilient compared to smaller financial institutions.
The Canadian banking sector at large is on a solid footing with its solid credit profile. Its average common equity tier-one ratio comes to around 14% — way higher than regulatory requirements and even higher than that of U.S. banks.
A top TSX financial bet amid the banking turmoil
Investors that want exposure to a financial sector but want to avoid traditional financial institutions can consider goeasy (TSX:GSY). It is a small-cap consumer lender primarily catering to non-prime borrowers.
GSY has demonstrated industry-leading growth for the last several years with its solid underwriting process and diversified product base. It offers unsecured consumer loans, auto loans, point-of-sale financing, and home equity loans. Its net income has increased by an astounding 33% compounded annually in the last decade.
GSY has consistently delivered over 20% return on equity — a truly admirable feat in a risky industry like consumer lending. This has well reflected in its market performance as well. In the last decade, the stock has returned 1,200%, including dividends, outperforming broader markets.
It has a strong balance sheet with manageable debt and a sound liquidity position. As it involves funding to non-prime borrowers, the credit risk is high. However, half of its unsecured loan portfolio is third-party insured.
Will the lowering of rates mar goeasy?
The Federal government last week announced its plan to lower the maximum allowable annual rate of interest on loans to 35% from 47% — a potential blow to goeasy. However, the GSY management clarified that the company will still keep growing at a steady rate as only one-third of its total loan portfolio is priced higher than the proposed rate. It is said to have a sound financial shape to adjust to the new rates compared to the industry.
The company expects its loan portfolio to grow by 20%, compounded annually for the next three years. It aims to achieve +20% return on equity annually for the foreseeable future. goeasy’s scale and operating leverage will likely keep its earnings growth intact.
Should you buy GSY stock?
GSY stock lost 14% last week on the proposed lowering rate news. It has lost 35% since August 2022. While the stock has corrected massively, it brings an attractive opportunity for long-term investors. It is currently trading at a price-to-book value ratio of 1.8 — lower than its historical average. With superior earnings growth and appealing valuation, GSY stock will likely create meaningful shareholder value.
