LendingClub builds on the benefits of charter banking amid rising interest rates

LendingClub is reaping the benefits of the banking charter acquired last year. The online lender is holding more loans on its balance sheet and planning its next consumer banking product.

San Francisco-based LendingClub, which primarily refinances credit card debt, is taking advantage of its bank acquisition in 2021 as it feeds on deposits, high-yield products and high-quality loans held for investment purposes. LendingClub is also working on building a more comprehensive checking account product and mobile banking app, CEO Scott Sanborn said in an interview Wednesday ahead of the company’s third-quarter earnings call.

“I would say the next big thing we want to do is a verification experience tailored specifically for the LendingClub member,” Sanborn said in the interview. “These are creditworthy people with high incomes and high debts. So a verification experience that helps them manage their spending and savings, while tracking their lending behavior or helping them save on their lending products .”

High-yield savings will be a growth driver for the company, Sanborn added during Wednesday night’s earnings call. In the third quarter, deposits were up 80% year over year to $5.1 billion. The deposits will help LendingClub fund the high yield consumer loans on its balance sheet.

LendingClub’s stock had fallen about 9%, trading at $10.60, Thursday afternoon.

As the Federal Reserve raises interest rates at a rapid pace, institutional investors who have previously purchased loans from LendingClub are facing a higher cost of capital. Credit card rate increases are lagging Fed rates, and LendingClub has raised rates about 200 basis points so far. The company’s loans have thus become less attractive to investors seeking high yields. The fintech has fought this shift by targeting more loan sales to banks, which often face a slightly lower cost of capital, and increasing the amount of loans it holds on its balance sheet.

The company held 33% of the loans issued during the quarter, vs. 27% in Q2 and well above its projected range of 20% to 25%. Chief Financial Officer Drew LeBenne said on the earnings call that LendingClub will use the same projected range each quarter and only invest more when the opportunity allows.
While rising interest rates create a tighter environment to sell loans into the market, Sanborn added on the call that when the economic environment stabilizes, higher rates will likely create an opportunity as more of consumers will seek to refinance their debt.

Holding more prime personal loans on its balance sheet helps LendingClub positively differentiate itself from other neobanks that don’t have bank charters, Wedbush equity analyst David Chiaverini said in a note following the call for results. The company has also remixed its loan book to hold more low-risk loans, LeBenne said on the earnings call.

Total net revenue decreased slightly from last quarter, from $330.1 million to $304.9 million. Net interest income increased to $123.7 million from $1 of $5.1 billion of $16.2 million last quarter. LendingClub also announced that it is tightening its annual revenue forecast to $1.18 billion to $1.19 billion from the previously announced $1.15 billion to $1.25 billion.

Sanborn told American Banker that the loans on the company’s balance sheet represented consumers with an average FICO score of 730 and income of about $115,000. LendingClub sees these consumers have higher liquidity than before the pandemic, higher levels of prepayments and strong credit performance. The fintech market tells a different consumer story.

“One of the reasons we have a marketplace, not just a bank, is so we can serve a wider range of consumers,” he said. “There are non-bank-grade loans that we’re offering. There we’re seeing pockets of stress. We’re seeing signals that indicate that this compound inflation that we’re seeing is putting a strain on people’s ability to meet their obligations. C This is where you would be expected to be – lower incomes, less creditworthy people.”

Comments are closed.