Pending revenues provide LendingClub with an opportunity to validate its transformed business model
TThe digital marketplace bank Lending Club (NYSE:LC) will report fourth-quarter and full-year results on January 26, simultaneously kicking off fintech earnings season. The company and sector have had a rough couple of months, with LendingClub’s stock price down about 45% since early November.
The Federal Reserve’s rapidly changing outlook and policy stance appears to be the main culprit, but investors should still expect LendingClub to report solid earnings and forecast a strong 2022 from an operational perspective as it continues to demonstrate its superior new business model takes place in the past year. Here’s what else you can expect from Wednesday’s earnings results.
Net interest income should continue to rise
LendingClub has been in turnaround mode for several years now, but the fruits of management’s labor really began to pay off when the company was formed completed its acquisition Radius Bank in early 2021. LendingClub is principally engaged in the business of providing installment lending for credit card debt consolidation, auto loan refinance, major purchases, home improvement projects and election surgeries. The company uses technology, machine learning and automation to streamline the application, approval and underwriting process.
The Radius acquisition resulted in better unitary economics in the model by providing stable deposits to fund some lending and eliminating the outside lending fees that LendingClub paid to partners banks, and regulatory clarity. It also gives the bank a better framework to hold loans on its own balance sheet and generate recurring net interest income (NII), which is the profits banks make on loans and securities after they have covered their funding costs.
LendingClub management has told us that loans held on the balance sheet are three times more profitable over their lifetime than those sold to investors.
Having only been operating its new model for a few quarters, LendingClub has built up its balance sheet. Unlike other tech lenders, now that it’s a bank, LendingClub has to follow bank accounting rules. So instead of charging upfront fees for lending, she now has to amortize them over the life of the loan. In addition, it must set money aside to prepare for potential defaults on loans it holds on its balance sheet.
As LendingClub is still building its loan book, these bank accounting policies are having an outsized impact at this time. But as the loan book grows, so does the NII, and those accounting standards seem less important. LendingClub generated $18.5 million NII in the first quarter, nearly $46 million in the second, and $65.3 million in the third. Expect the NII to turn higher again in the fourth quarter.
The bulk of LendingClub’s NII comes from its main lending product, installment loans. The company kept about 20% of total lending on its balance sheet each quarter. Given that the fourth quarter lending guidance is $2.8 billion to $3 billion, I would expect the installment loan balances on LendingClub’s balance sheet to increase by about $560 million to $600 million. Ultimate growth may be less because there are likely previous borrowers making interest payments or prepaying loan balances.
The average yield on those loans is about 16%, a number that’s also up and could rise in the fourth quarter, which would also boost NII. Combine that with LendingClub’s other main revenue stream, fee income from selling loans to investors and banks, a number that’s constant with origination volume, and I think there’s a very good chance we’ll see a notable increase in revenue will.
How will the origination volume develop?
If you haven’t already figured it out, LendingClub’s model relies heavily on origination volume. The more loans it makes, the more it can sell to investors and the more it can put on its own balance sheet and collect recurring NII. Management provided guidance of $2.8 billion to $3 billion for the fourth quarter. They made that forecast on October 27th, which is almost a third of the way into Q4, so by that point they already had a good insight.
In October, Fed data showed that revolving credit, which is mostly credit card debt, grew about $6.6 billion since September. LendingClub doesn’t offer credit cards, but one of its primary use cases is credit card debt consolidation. So if credit card debt grows, it may be a harbinger of what kind of lending volume LendingClub could see in the future. Non-revolving debt, which includes the fixed-rate installment loans offered by LendingClub, grew a little less than $10 billion in October.
But in November growth in both revolving and non-revolving debt exploded as the consumer balance sheet began to shrink. Revolving debt grew by a little less than $20 billion, while non-revolving debt increased by more than $20 billion. According to Bloomberg, non-revolving debt growth was the largest in six months.
We don’t have data for December yet and the emergence of the Omicron variant coronavirus may have had some adverse effects, but we do know that December’s Christmas sales performed well and unemployment continued to fall. This suggests that omicron probably hasn’t impacted lending at LendingClub all that much.
LendingClub could also see continued tailwinds from the auto refinancing the company has ramped up. LendingClub CEO Scott Sanborn said in announcing the company’s third-quarter results that about two-thirds of the company’s 3.8 million members have an outstanding auto loan. Sanborn also noted that the company’s auto refinancing originations rose 85% in the third quarter. LendingClub also announced that its auto refinance loans are now available in 40 states, covering 90% of the US population.
Will LendingClub Beat?
On average, analysts are forecasting earnings per share (EPS) of $0.22 for the fourth quarter on total sales of just under $246 million. That seems a bit low to me considering the company generated $0.26 in Q3 EPS on total revenue of $246.2 million.
As mentioned above, the NII is expected to increase as LendingClub’s unsecured loan balances are likely to be much higher. I’m also feeling good about fourth quarter issuance given what we saw in the Fed data in November and given that auto refinancing continues to gain momentum. Overall, I’m optimistic about a result hit on Wednesday.
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Bram Berkowitz owns LendingClub and has the following options: long February 2022 $31 calls on LendingClub, long January 2023 $45 calls on LendingClub and long January 2023 $48.42 calls on LendingClub. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has one confidentiality policy.
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