U.S. markets experienced their largest up days and down days since the depths of the 2008 crisis and 1987 stock market crash. Credit spread deals issued in Q4 have widened 40 to 50% – ultimately increasing the costs of borrowing for consumers and small businesses.
Some economists are predicting a 2% negative GDP print for Q2 and are now expecting a 0.1% to 2% annual growth rate. Economists expect growth to bounce back in the third quarter as fiscal stimulus works its way through the economy and factories reopen to stabilize supply chains.
These estimates, based on data a few days old, already seem outdated. It seems inevitable that economic activity would shutter further as governors and mayors enact policies to close restaurants, bars, sporting events, and limit public spaces (see Hoboken for instance) to bend the curve and avoid an Italian scenario. Public health officials are considering a 14-day or 30-day self-quarantined lock-down to blunt community spread.
Larry Summers indicates that the likelihood of a recession stands at 80 or 90%. Summers’ view is that neither monetary nor fiscal policy can address a fundamental issue – that tens of millions of Americans wake-up concerned about their or loved ones’ health. Rates are already low and the Fed is out of ammunition. (That said, the Fed’s $1 Tn intervention into the overnight repo market was a welcome move to stabilize bank-to-bank funding and payments).
How Does the “First Wave” Impact Consumer Credit Portfolios?
As we noted in last week’s newsletter, the primary credit risk factors center on retail-oriented small businesses. “Gig economy” and hourly wage workers that work for retail establishments will be the first to feel hits to income.
This sector of consumer credit tends to be under-banked and has less access to consumer credit. As a share of overall balances outstanding, they are not a meaningful size of the market and are under-represented in the prime portfolios of consumer lenders such as SoFi, LendingClub, Prosper, Marlette, and others. That said, there are FinTechs that specialize in lending to these sub-segments that could feel more losses if there are delays in policy or stimulus response.
Stimulus Policy Response
The House passed a Coronavirus Response Bill that the Senate is expected to approve this week. This bill would provide relief by:
- Offering free testing to individuals (that meet certain criteria)
- 14 days of paid sick leave
- 3 months of paid emergency leave
- Employers will be reimbursed through tax credits
- Exemption for small businesses < 50 employees that can demonstrate hardship
The bill is seen as the first installment of stimulus packages. The deal was executed quickly between House Speaker Pelosi and Treasury Secretary Mnuchin in a good sign of bipartisan focus.
Looking Ahead (Some Good News Please!?)
It is morbid and unpleasant to discuss the tragic loss of life with cold numbers. Economically, it is worth saying that the long-term productive capacity of the U.S. is not diminished. Even under the most severe mortality estimates (~1.5 MM deaths), those numbers are smaller than the net immigration to the U.S. (~3 MM new workers) or new college graduates per year (~3.9 MM). Moreover, the U.S. banks are extremely well-capitalized, unlike the 2008 crisis. The borrowing rates for the federal government are extremely low and provide plenty of room for stimulus or softening the blow to impacted communities.
There will be adjustments to daily life that will be felt for several quarters at a minimum. These adjustments include ramping up health care capacity, social distancing, small business lending support, consumer stimulus measures, and changes in how business is conducted.
The main question is whether those adjustments will take place in a speedy, orderly, and coordinated way or in a reactive, hap-hazard, and lagged manner.
Coronavirus Stressing Funding Markets
Here are a few highlights from Bloomberg on how the outbreak and work-from-home may hit Funding Markets.
- In an extreme scenario, dealer-banks could be flooded with an extra $200 billion worth of U.S. government debt as market participants rush to secure extra financing.
- New York and London are seeing “split” operations as big banks and dealers divide their workforces and instruct traders to work from home.
- “We are already seeing market-making severely disrupted, and to the extent that logistical frictions prevent ‘human’ traders from providing a backstop, liquidity-transaction costs can stay very high compared to even recent history,” said the JPMorgan team.
Industry News – LendingClub, Square, and Apple
Scott Sanborn, CEO of LendingClub, provided a much anticipated interview with Peter Renton and provided more perspective on the pending Radius Bank acquisition and a glimpse of the new “marketplace bank.”
Square Cofounder, Jim McKelvey, describes how Square was able to take on Amazon when the tech giant introduced its own POS reader – and won.
Forbes has data on how well the new Apple Card is doing. Highlights:
- Roughly 2.2% of all U.S. adults with a credit card already have the Apple Card.
- Roughly 3.1 million Americans — 2.2% of all U.S. adults with a credit card — have the Apple Card already.
- Most are younger consumers — 70% are Millennials (nearly evenly split between younger Millennials in their 20s and older millennials in their 30s). Just 3% are Baby Boomers, by the way.
- Still unclear what the profitability of the deal will mean for GS, which competed aggressively to win the business.
Intuit is on the hunt for more acquisitions.
- Intuit could potentially buy Credit Sesame, Finicity, and NerdWallet. Finicity is potentially an acquisition target because it is a data aggregator. Finicity is similar to recent Visa acquisition Plaid, which was bought for $5.3 billion in January. Plaid’s APIs help customers connect bank accounts with finance apps. Credit Sesame was expected to go public later this year or possibly next, and it’s essentially a smaller version of Credit Karma.
- The volatility of the market, especially since being affected by the coronavirus, could cause a drop in some mergers and acquisitions (M&A) valuations and provide buying opportunities for interested companies.
In financing news, Alipay owner Ant Financial takes minority stake in Klarna (Tech Crunch, 03/04/2020) Ant Financial Group announced that it is taking a minority stake in the Swedish payments platform, Klarna.
- Ant Financial Group, the owner of China’s Alipay payment platform, has announced it’s taking a minority stake in Swedish payments platform Klarna. Klarna has a strong European presence and a flagship product that lets shoppers buy now and pay later in interest-free installments (typically 14 or 30 days after the purchase).
- The pair have not disclosed terms of the deal, but Reuters reported the stake amounts to less than 1% and was made up of existing and new shares. It also cites its source saying the stake was done at a “slight uptick” to Klarna’s $460 million funding round last August, which valued the company at $5.5BN.
Figure executed a $150M securitization of HELOC loans “on chain”. Figure Technologies, led by CEO, Mike Cagney, executed the first such transaction in which all aspects of the process were managed on a blockchain. Everything from the origination of the loans to the issuance of the bonds to the collection of borrowers’ monthly payments is run on Provenance, Figure’s blockchain and powered by IBM’s HyperLedger. US brokerage Jefferies Group and Japanese financial giant, Nomura, managed the bond sale for Figure.
Chart of the Week – U.S. Yields Fall Below 1% Across the Curve
Source: Bloomberg, PeerIQ
PeerIQ New Hire:
Matthew Aquiles. Matthew has recently joined PeerIQ as a Software Engineer with his main focus on the backend. Previously, Matthew worked as a software engineer at JPMorgan Chase, where he developed a content management platform for investment banking applications. He also has experience working in fields such as the internet of things, radio frequency engineering, and portfolio management. Matthew graduated from Stevens Institute of Technology, where he obtained a Bachelor of Engineering Degree in Computer Engineering with a concentration in Software Engineering. Aside from programming and computers in general, some of Matthew’s hobbies include video games, music, soccer, and playing with his dog, Frank.
PeerIQ will be at LendIt Fintech USA 2020 – with a lot of hand sanitizer.
PeerIQ CEO, Ram Ahluwalia, will be speaking on May 13th at 3:15 p.m. Reach out if you’d like to connect!
- The Fed Can’t Let Bond Yields Fall to Zero (Forbes, 03/10/2020) If Treasury yields fall too low, it can be a threat to the global financial system.
- Economists Start Forecasting Negative U.S. GDP Numbers on Coronavirus (Bloomberg, 03/11/2020) Economists are lowering their estimates for Q2 GDP in the U.S.
- Virus is at Bear Stearns Moment and May Get Worse, Summers Says (Bloomberg, 03/11/2020) Former U.S. Treasury Secretary said the Coronavirus might be the most serious crisis of the century so far.
- The U.S. May Already Be in a Recession (Bloomberg, 03/06/2020) The Coronavirus may have ended the longest economic expansion in U.S. history.
- JPMorgan Analysts Say Work-From-Home May Hit Funding Markets (Bloomberg, 03/10/2020) Coronavirus outbreak is worsening trading conditions for U.S. Treasuries.
- Mortgage Applications Skyrocket to Highest Level Since 2009 as Rates Tumble (HousingWire, 03/11/2020) Refinancing applications surged 79%, which is the highest level since April of 2009.
- Inside China’s All-Out War on the Coronavirus (WSJ, 03/04/2020) Leader of the World Health Organization, Dr. Bruce Aylward, saw how fast China suppressed the spread of the Coronavirus.
- Payments on Mortgages to be Suspended Across Italy after Coronavirus Outbreak (Reuters, 03/10/2020) Lenders in Italy to offer debt moratoriums to small firms and households dealing with the economic fallout from Italy’s coronavirus outbreak.
- ‘Coronavirus’ Has Been Heard At Least 11,000 Times in Earnings Updates (MarketWatch, 03/10/2020) More than 1,400 corporate calls pertaining to earnings updates have mentioned the outbreak of the Coronavirus.
- Digital Banking will Claim Over 3.6 Billion Users By 2024: Research (Crowdfund Insider, 03/05/2020) According to Juniper Research, the number of digital banking customers will increase by 54%.
- Banks and Credit Unions View Fintech Partnerships a Key Growth Strategy for 2020 (Gonzo Banker, 02/19/2020) According to Cornerstone Advisors, 65% of banks and 76% of credit unions say that FinTech partnerships will be an important part of their business strategies in 2020.
- Super Size: Digital Bank Market to Top $578 Billion by 2027 (Crowdfund Insider, 03/07/2020) According to a report from Facts and Factors Market Research, the digital bank market is projected to reach a valuation of approximately $578 billion by 2027.
- Podcast 237: Scott Sanborn of LendingClub (Lend Academy, 03/06/2020) LendingClub CEO, Scott Sanborn, discusses the pending Radius Bank acquisition and gives a glimpse of the new “marketplace bank.”
- Why Citizens Bank Got Into Point of Sale Lending (American Banker, 03/09/2020) How Citizens Bank established partnerships with Apple and Microsoft for point of sale lending.
- Intuit Eyes Buying Credit Sesame, NerdWallet and Finicity (PYMTS, 03/09/2020) Intuit could acquire Credit Sesame, NerdWallet, and Finicity.
- If Tim Cook Won’t Tell The World How The Apple Card Is Doing, I Will (Forbes, 03/09/2020) Roughly 2.2% of all U.S. adults with a credit card, already have the Apple Card.
- How Square took on a challenge from Amazon — and won (CNN, 03/10/2020) Square Cofounder, Jim McKelvey, said Square was able to take on Amazon with “Innovation Stack.”
- Alipay Owner Ant Financial Takes Minority Stake in Klarna (Tech Crunch, 03/04/2020) Ant Financial Group announced that it’s taking a minority stake in Swedish payments platform, Klarna.
- Figure Technologies Securitizes $150M of Home Equity Loans on Blockchain (Coindesk, 03/11/2020) San Francisco-based startup, Figure, completed a $150 million securitization of a bundle of HELOCs, which was managed on a blockchain.
- He’s on Fire! What ‘NBA Jam’’s Hot Hand Reveals About the Power of Streaks. (WSJ, 03/06/2020) Is the ‘hot hand’ a statistical mirage or an enduring state of peak performance?