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This lender's stock is beating the banks by luring borrowers they turn away

Canadian bank headquarters stand on Bay Street in Toronto.

Brent Lewin/Bloomberg

Goeasy Ltd. shares have surged 21 per cent this year, beating almost every bank and alternative lender in Canada. That's not good enough for the head of the company that offers loans with rates as high as 47 per cent and rents out sofas and TVs.

"I am disappointed, I truly am," Chief Executive Officer David Ingram, 50, said in an interview in Bloomberg's Toronto office last week. "I would argue that we're actually undervalued against what we've demonstrated for 16 years and the commitment that we've given to targets that we've executed and performed to."

Under Mr. Ingram's 15-year tenure, the stock has returned more than twice as much as Canada's five biggest banks including dividends, yet the shares are almost half as cheap. The lender to consumers with spotty credit plans to boost its loan book by 45 percent over the next two years and is considering adding credit cards, auto loans or secured credit while still providing rent-to-own household goods at its 26-year-old legacy business.

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Goeasy shares rose 1.4 per cent to $23 in Toronto Monday for a market value of $306-million. The stock has gained 21 per cent this year, topping the 17-per-cent return of the eight-company S&P/TSX Commercial Banks index and outperforming every lender except Bank of Nova Scotia this year.

"They have one of the best growth profiles out there today," said Jeff Fenwick, an analyst with Cormark Securities in Toronto who rates the stock his top pick. "They've shown strength in the way they've managed the business and it's translating now into significant earnings growth."

Mr. Fenwick estimates Canada's non-mortgage subprime lending market at more than $100-billion, giving Mississauga-based goeasy, with a current loan book of about $344-million, plenty of room to take market share. The company's biggest competitor is CitiFinancial Canada, which has about 200 branches across the country, and it competes with online lenders such as closely held Borrowell Inc. and Mogo Finance Technology Inc.

The shares trade at less than seven times Mr. Fenwick's per-share earnings estimate for next year with a return on equity approaching 20 percent. Canadian banks, in comparison, trade at 10 to 12 times adjusted per-share earnings for the next 12 months, according to data compiled by Bloomberg.

Ingram is betting on the firm's easyfinancial lending operation to carry future growth for good reason: within a decade of being established, the unit has originated about $1.4-billion of consumer loans and eclipsed its easyhome leasing business on revenue, earnings and profit margins. That's helped the company extend a streak of record earnings to the third third quarter, though it cut its revenue forecast for 2016.

"I'm very comfortable we'll have another record year next year," Mr. Ingram said.

Goeasy plans to increase its easyfinancial kiosks and branches, which supplement its online lender, to as many as 240 by 2018 from 210 at the end of September and to increase its consumer loan book to $500-million. Ingram plans to bring his ideas on which new businesses to pursue to the board in February; the company plans to have something in place by 2018.

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Goeasy shares dropped about 12 percent after it cut its 2016 revenue estimate and disclosed Nov. 3 it backed out of an acquisition. Mr. Ingram declined to comment on the abandoned deal, which analysts speculated may have been CitiFinancial.

Ingram casts easyfinancial as a business that helps "everyday Canadians" avoid payday lenders and offer a chance to repair their credit scores so they can eventually borrow from banks. The company offers personal loans from $500 to $15,000 at an annual rate of 29.99 per cent to 46.99 per cent -- above credit card rates but below payday loans that can have annual carrying costs above 500 percent.

"I don't know that we can convince everyone and anyone who's never been in one of life's problems that this is a good thing for consumers, but for our customers in our communities who have been through different crises, they totally get it," he said.

Canada is in the middle of a consumer lending binge and Finance Minister Bill Morneau has cited it as a key risk to the economy. Credit-market debt, much of it mortgages, rose to a record 167.6 per cent of disposable income in the second quarter.

About 15 per cent of easyfinancial's consumer loans go bad, according to Ingram, whereas soured loans at large Canadian banks are typically less than 0.4 per cent of overall domestic retail loans. Mr. Ingram said he's not worried so much about a meltdown in Canada's hot housing market as most of his customers don't carry a mortgage; it's the unemployment rate that is the main arbiter of his business.

Bruce Campbell, a fund manager with Stone Castle Investment Management in Kelowna, British Columbia, which manages about $100-million, said that's a key worry for the company.

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"The one thing that scares us with this is that when things do turn down in the economy, their loan loss is going to go through the roof," he said. "If you look at the company for the first time, when you see their loan loss numbers, your eyeballs pop out of your head."

Still Mr. Campbell said the company has managed the downturn in Alberta through the oil slump "very well" and he bought shares earlier this month.

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