This Fintech Stock Is Booming As Interest Rates Rise

Consumer lending fintechs that rely too heavily on capital markets have been hammered this year amid rapidly rising interest rates. Investors like asset managers who typically buy consumer loans have seen a higher cost of capital to fund these loan purchases and have also become more concerned about credit quality, with many fearing the US economy will is headed for a deep recession.

But digital market banking loan club (CL -1.26%), which combines a leading online personal lender with a charter bank, appears to be navigating the environment well. We’ll take a look.

A record quarter

Founded in 2006 and making its public market debut in 2014, LendingClub has been through many different economic cycles and has had no shortage of ups and downs.

This experience is likely what led the company, which is very good at using technology and machine learning to create unsecured personal loans, to buy Radius Bank in 2021. The banking charter allows LendingClub to create loans and to use cheap deposits to fund part of it. . It also puts in place a better framework for recording a portion of loans on the company’s balance sheet. The loans that LendingClub puts on its balance sheet and collects recurring monthly interest income are worth three times more over their lifetime than selling them to investors for a one-time fee.

Image source: Getty Images.

As interest rates rose rapidly in the second quarter and disrupted capital markets, some consumer fintech companies like Reached (UPST 6.59%) had to cut their second-quarter estimates and now expect to report lower revenue and a larger loss for the period. This is because they did not have enough investors to fund and buy their loans.

But LendingClub hasn’t had to worry so much because it has deposits to fund a good portion of its creations and put about a quarter of those creations on its balance sheet. LendingClub also serves a high-quality borrower who earns over $100,000 per year and has an average FICO score ranging from 720 to 730, making them more resilient in a recession.

As a result, LendingClub didn’t have to slow down at all in the second quarter. The company reported its strongest origination quarter since buying Radius, with more than $3.8 billion during the period. This led to record revenue and adjusted earnings of $330 million and $46.8 million, respectively.

Look forward

Although LendingClub’s banking charter allows it to navigate the rising rate environment much better than other fintechs, the company is not entirely immune.

Although LendingClub does not use the securitization market and sells far fewer of its loans to asset managers, after two consecutive rate hikes of 0.75 percentage points, some investors in the company will still need time. to adjust to the new rates and will demand higher yields on loans, which could temporarily suspend some funding for this group in the coming months.

The good news is that LendingClub will eventually be able to pass these costs on to the consumer, as its primary use case for personal loans is credit card debt consolidation. So, as credit card lenders increase the interest rate they charge on card balances, LendingClub can increase interest rates on its personal loans, while offering an attractive value proposition.

However, this will take some time and will put pressure on the volume of loans LendingClub can offload to investors in the current quarter. That’s why the company’s guidance for the third quarter is lower than investors were likely expecting given such a strong second quarter. The company expects third-quarter revenue of $280 million to $300 million and earnings of about $30 million to $40 million, both down from the second quarter.

Nonetheless, given the intensity of the rate hikes, this is a fairly gradual slowdown and LendingClub has still maintained its full year projection of $1.2 billion at the midpoint. dollars in revenue and $155 million in profit.

I think it’s a good result considering the environment. It is also for this exact reason that LendingClub bought the bank, according to Chief Financial Officer Tom Casey during the second quarter earnings call: “In the current environment, we are leaning more towards the banking model, being careful about credit and using our low-cost solutions deposit funds to hold more loans for investment and generate recurring income As the economy improves, we will be ready to support on our fintech advantage, opening up the market to drive scale and capture market share.

Continue priming the pump

In a very difficult context, LendingClub has just achieved its best quarter ever and slightly lowered its forecast for the third quarter. The banking charter allows it to be more defensive in tough markets (like today’s) and then press the gas in times of growth.

Lending demand is also quite healthy, and there is currently over $1 trillion in revolving debt in the United States, creating plenty of opportunity for LendingClub’s primary use case. If balance sheet growth continues as it has, the company could end the year with over $4 billion in unsecured personal loan balances, generating plenty of recurring monthly interest income through 2023.

The market still seems concerned about a recession and the holding of credit quality, which has weighed on equities, which are down 43% since the start of the year. But given the high-quality borrower that LendingClub serves and the fact that the company is cautiously reserving for loan losses, I’m optimistic about its ability to weather tough economic conditions successfully. I continue to believe the stock is a good long-term buy.

Bram Berkowitz has positions in LendingClub and has the following options: long calls of $35 in January 2024 on LendingClub. The Motley Fool holds positions and endorses Upstart Holdings, Inc. The Motley Fool has a Disclosure Policy.

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