Making a profit has proven to be quite challenging for fintech experts in the consumer finance sector due to the increasing interest rate environment the US is now experiencing. This may be seen, among others, at businesses like Upstart, SoFi Technologies, and MoneyLion.
The digital marketplace bank LendingClub (LC) has made a profit every quarter since Q2 of 2021 despite the challenging economic climate. Even though the climate is still difficult, I do anticipate that the firm will continue to operate at a modest profit until the market circumstances improve for the business model. I believe that now is an excellent time to invest since the company is now selling at a discount. This is why.
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Understanding the business structure of LendingClub
LendingClub's primary line of business is assisting prime and above clients with credit card debt consolidation. By doing this, LendingClub creates a quick-term loan with a high return while simultaneously saving the borrowers a ton of money on interest on their outstanding credit card balances.
LendingClub successfully acquired Radius Bank in 2021, and it then changed its name to a bank. As a result, it now has access to deposits to fund loans and is prepared to disclose loans on its balance sheet and collect interest payments on a consistent basis. Previously, buyers of LendingClub's note instruments would have provided funding for loans that the company generated. However, all borrowers now get their loans directly from a Federally-insured bank owned by LendingClub as a result of the purchase of Radius Bank, which was completed early in 2021 and received regulatory clearance; this gives investors more security and protection.
But since it enables LendingClub to originate additional loans, the market place is important to the concept. When the market is fully operational, the fees from selling loans may almost completely offset LendingClub's cost base. When circumstances are like this, gains on loans kept on the balance sheet almost always go directly to the bottom line after capital is put aside to cover prospective loan losses.
adaptability in the difficult environment
The current high interest rate environment has caused an increase in the cost of capital for asset managers and other parties who purchase LendingClub loans. This coupled with investor concerns over credit quality as a possible recession approaches, has led to lenders being asked for larger returns. While LendingClub can adjust the interest rates on its loans similarly to how credit card loan prices are adjusted, it takes time due to the Federal Reserve's aggressive rate-hiking campaign that hasn't slowed down in more than a year. This means that they haven't been able to keep up with increased funding costs and provide investors with adequate returns quickly enough.
But in this case, the bank's flexibility has been quite helpful. LendingClub can easily acquire additional deposits and then keep more loans on its balance sheet since the capital markets are frozen for the majority of consumer fintech firms, who are finding it difficult to find investors to purchase their loans. Deposits at LendingClub increased by 13% in the first quarter.
In the first quarter, LendingClub increased its balance sheet from $700 million to $1 billion in unsecured personal loans. Despite having to pay for deposits, the firm was still able to maintain a return of more than 13%, which allowed them to afford the additional financing costs. This demonstrates their commitment and ability to provide quality services while remaining financially viable.
The corporation is responsible for any loan losses when loans are shown on the balance sheet. However, LendingClub has been putting up reserves every quarter to cover potential losses, and as of this writing, it has enough reserves set aside to equal 6.4% of losses across its entire loan book. The expected yearly loan loss rate for the first quarter was 3.8%. Losses are probably going to increase, but LendingClub has some room for error.
Due to increasing financing costs and its inability to completely reprice its loans, LendingClub experienced margin compression and is now feeling the heat. Although first-quarter profits decreased by 66% year over year, the firm is still profitable despite the unheard-of rise in interest rates.
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The stock is valued favorably now
Investors' concerns about interest rate trends and credit quality are evident. However, the market will rebound after the Fed takes a break, enabling LendingClub to completely reprize its loans, and more information about the economy becomes available. That may occur extremely fast, according to Scott Sanborn, CEO of LendingClub.
With credit card interest rates already above 20% and revolving consumer debt at all-time highs of $1.2 trillion, the potential for LendingClub is bigger than ever.
LendingClub doesn't have any trouble generating borrower demand; it only has to find recipients for the loans since regulatory capital constraints can only allow it to increase its balance sheet so rapidly. Investors may purchase LendingClub shares at a favorable price before an eventual rebound since the company is now selling at only 77% of its tangible book value.