Buckle up, we have a long one this week, as many companies reported earnings, new consumer credit data dropped, and another bank may be entering receivership.
GDP growth slowed. TransUnion consumer credit data. CFPB data breach fallout. SBA may loosen loan underwriting approach. Super.com’s Series C. Regulators look to auction off First Republic. Survey data suggests deposit flows stabilizing. Binance terminates deal for Voyager assets. PacWest explores sale of lender finance unit. Investors mark down Revolut stakes. Frank founder moved funds from Chase after termination. Upstart delinquencies rose in March. Earnings coverage.
This past week we attended NYC Fintech Week events and the Empire Fintech Conference. Embedded lending and finance remained an area of fintech that VCs and speakers thought held a lot of potential for growth in the current market, as well as fintech infrastructure and alternative data. B2C valuations have come down significantly, and there has been less investment in the space (especially in the early stage B2C space) as investors focus on product differentiation. While there haven’t been many large public down rounds announced this year, these may be coming soon. B2C companies are acting more calculated with their marketing budgets, focusing on product market fit over growth at all costs.
Challenger bank Current revealed that it plans to announce a secured credit card soon. The primary use of the card will be to grow consumer credit and the card will not come with a fee. Panelists during fintech week stressed the importance of compliance and oversight when evaluating bank-fintech partnerships, noting that compliance is not a plug-and-play model. And with new rules from CFPB section 1033 likely coming, speakers referenced Chopra’s speech from Money 20/20, particularly how the regulation may help reduce the ability for incumbents to build moats and may increase competition in the banking ecosystem.
GDP Growth Slows
Despite a pickup in consumer spending in the first quarter, reduction in inventories and a pullback in business investment resulted in lackluster GDP growth of just 1.1% on an annualized basis. Inflation, as measured by the Fed’s preferred metric, increased to a one-year high.
TransUnion Releases Credit Industry Snapshot for March
TransUnion released its monthly credit snapshot, with lots of data on the state of consumer credit, including auto, bankcard, mortgage, and unsecured personal loans (“UPLs”). The Q2 2022 vintage of its UPLs’ delinquencies remained well above prior vintages. Notably, many UPL originators tightened credit mid-2022, so will be interesting to see if we see the Q3 2022 vintage perform better.
Across consumer credit products, we saw declines in delinquencies from February to March, though TransUnion cited seasonality as a major factor to the decline. UPL ((31)bps), Auto ((17)bps), Bankcard ((15)bps) and Mortgage ((3)bps) all saw declines in their 60+ DPDs on a sequential basis.
Turning to originations, we got information on UPL origination volume for the December 2022 – January 2023 period (lag due to reporting time), giving us some insight into the first portion of Q1. Perhaps unsurprisingly, this data showed that banks, credit unions, finance companies, and fintechs all cut back on their subprime, near prime and prime lending.
Banks even cut back slightly ((0.6)%) on prime plus UPL originations. In contrast, credit unions (+3.8%), finance companies (+3.9%) and fintechs (+5.3%) reported MoM increases in prime plus UPL originations for January. At the top of the credit spectrum Banks (+13.9%), credit unions (+14.4%) and fintechs (+13.8%) reported strong UPL origination growth for super prime consumers, while finance companies (+0.8)% reported more muted growth.
In March, fintechs retained their place as the leader in UPL total balances (30.7% of total), compared to finance companies (28.3% of total), banks (21.1% of total), and credit unions (20.0% of total). However, fintech dominance in the space has waned (down from 31% in February 2023 and 34.1% in March 2022).
Average UPL balances per consumer increased 0.8% on a MoM basis, with fintechs, credit unions and finance companies reporting slight increases and banks reporting slight declines in average balances per consumer.
CFPB Hasn’t Informed Consumers on Data Breach
The CFPB still hasn’t informed consumers whose information was sent to a former bureau employee’s personal email address in an embarrassing data breach for the consumer protection agency. It’s already been more than two months since the incident occurred. A now-former bank examiner at the bureau allegedly sent spreadsheets with data on 256,000 consumers and 45 institutions to a personal email address. There is no evidence the information was shared beyond that. The employee’s motivation for sending the data to a personal address remains unclear.
The incident has given more ammunition to Republicans in Congress, who are likely to raise questions about the CFPB’s data handling practices. It also is leading some to ask if there is a double standard. Banks are typically required to report outages or security breaches within 36 hours of the incident being detected to their primary regulator.
SBA Seeks to Loosen Underwriting
SBA lending is back in the news as some in Congress question the agency’s proposal to loosen underwriting requirements for loans under its 7(a) and 504 loan-guarantee programs. Currently, a lender must certify that an applicant doesn’t qualify for a traditional loan and can be held accountable if it is later determined the borrower had other financing options. Under the current proposal, applicants would be able to self-certify that they didn’t qualify for credit elsewhere. The prospect of self-certification is attracting heightened attention in the wake of PPP programs, which permitted self-certification and experienced elevated rates of fraud.
Super.com’s Series C
The Series C is dead; long live the Series C. Super.com, a savings and discount app, announced it has raised an $85Mn Series C to scale its product and engineering resources and continue adding features to its app. The company, previously known as SnapCommerce, last raised about two years ago, in March 2021. The current round of funding was led by Inovia Capital.
Regulators Solicit Bids for First Republic, which is Likely to Enter Receivership
Another one bites the dust? After a disappointing earnings report on Monday, First Republic looks like it may be the latest bank to enter FDIC receivership. First Republic reported deposits of $104.5Bn, well below the average analyst estimate of $137Bn. This came even after the bank received $30Bn in deposits last month from a group of 11 banks. Overall, deposits were down (40)% from March 9th. One “bright” spot in the earnings report was First Republic’s wealth management business, which reported a 7% increase in assets sequentially.
Notably, management did not take any questions on its earnings call, but sought to reassure investors by reporting that deposits from March 31- April 21 had only declined by (1.7)%. Investors were not reassured, with the stock falling over (75)% during the course of the week.
The FDIC reached out to some banks late Thursday seeking indications of interest for First Republic. As of Saturday, it was reported that the FDIC asked a group of banks including JPMorgan, PNC, US Bancorp, Citizens Financial, and Bank of America to submit their final bids for First Republic by Sunday. The FDIC has not yet placed First Republic under receivership, but an auction process may involve a seizure and sale. A sale to JPMorgan may require an exception to regulations, as the bank holds over 10% of nationwide deposits, making it ineligible to acquire another deposit-taking institution.
[To note, this story is still developing and our coverage is current as of Saturday afternoon]
Deposit Flows Normalizing, Survey Suggests
After the chaos in the wake of SVB and Signature’s abrupt failures, deposit flows appear to have normalized, according to a recent survey of executives at 567 banks from deposit network IntraFi. The majority of respondents worked at smaller banks with less than $10Bn in deposits. According to the survey, 77% of banks did not see significant inflows or outflows. About 9% said deposit rose by at least 2%, while 14% said deposits fell by at least 2%. Slightly more than two-thirds reported receiving inquiries from customers regarding recent events, while the rest said it was “business as usual.” Execs at smaller banks said it helped that they were able to personally reach out to customers in their communities to address any concerns they had.
The survey is a bright spot for a banking market still facing uncertainty, as demonstrated by ongoing questions about the fate of First Republic Bank.
Binance Terminates Deal for Voyager’s Assets
Binance.US has terminated its plan to acquire about $1Bn in assets from the bankrupt crypto lender. Binance cited the “hostile and uncertain” regulatory environment for its decision to terminate the deal. Lawyers for the U.S. government had attempted to block the now-defunct deal, though it was approved by the vast majority of Voyager creditors and the bankruptcy judge overseeing the case. With a deal off the table, Voyager is planning to distribute cash and crypto to users directly.
PacWest Explores Sale of Lender Finance Division
Regional bank PacWest Bancorp announced it is exploring the sale of its lender finance division. The news came on Friday evening, which is never a good sign. As of the end of 2022, the division had approximately $3Bn in loans. The move comes amid ongoing uncertainty for smaller and regional banks, including PacWest specifically. Customers pulled about 20% of their deposits from PacWest following the collapse of SVB and Signature. PacWest inked a deal for a $1.4Bn financing facility from Atlas SP Partners to fill the liquidity gap left by the deposit flight.
On the bright side, PacWest reported that deposits have stabilized and are rebounding from their March 20 update. Period-end deposits (March 31) totaled $28.2Bn. While deposits were still down $5.75Bn from the end of Q4, they were over $1Bn higher than March 20 deposits of $27.1Bn. Additionally, the bank has seen deposits grow by an additional $700Mn from the quarter end (as of April 24).
Investor Marks Down Revolut Stake by 46%
Neobank Revolut, once valued at as much as $33Bn, just got a reality check. An investment trust managed by Schroders, which owns a stake in the company, revealed a $5.8Mn writedown in its investment in a filing earlier this month. That’s a 46% drop in the value Schroders assigned to its stake in the company. The news comes on the heels of another investor, TriplePoint Venture Growth, writing down its stake by a more modest 15%. For its part, Revolut said that it does not “engage in speculation” on its valuation and touted its first full year of profitability (though that report came with a disclaimer from its auditors).
Frank Founder Moved Millions from Chase to Signature
Frank founder Charlie Javice, who allegedly faked user data to sell her startup to JPMorgan Chase, moved millions of dollars out of her account at the bank to Signature after JPMC accused her of fraud. The information was disclosed in response to demands from JPMC for records tied to three Nevada-incorporate shell companies that held accounts at Signature before its collapse. Javice said she managed to withdraw her funds from Signature and move them to other “major domestic institutions.” JPMC alleges Javice is attempting to use the shell companies to hide her ill-gotten gains from seizure by federal prosecutors.
Odds & Ends
Wise, formerly known as TransferWise, announced the option for U.S. customers to earn interest on balances held as USD. U.S.-based users holding dollars can earn up to 3.92% APY in an FDIC-insured account. The move seems designed to give customers a reason and the confidence to hold funds on the platform as rates rise and amidst ongoing banking turmoil.
Klarna announced an AI-powered shopping feed. Looking to move beyond the “BNPL” label, the company is launching a shopping feed to give users an endless scroll of product recommendations. The company also announced a free personal shopper service dubbed “Ask Klarna,” which provides users with on-demand access to shopping experts.
Octaura, a platform for trading leveraged loans, launched last Tuesday. The company was formed by a group of seven banks in 2022 as a secondary market for trading loans. In addition to buying and selling loans, the platform offers a suite of analytics tools.
Upstart Delinquencies Increased in March
Upstart reports May 9th, and we should get greater clarity into delinquency performance, and what management is seeing in their earnings coverage. Last quarter, Upstart reported that its past six vintages (up to 3Q22) were underperforming cash flow targets, but that the level of underperformance was narrowing the past three. Looking ahead, we will see if Upstart has been able to further narrow the underperformance in cash flows (or report an overperformance).
30+ day delinquencies jumped 25 bps in March (from February), after trending slightly lower to start 2023. Breaking this down, 30-59 day delinquencies rose 41 bps (from February), and, in contrast, 60-89 day delinquencies fell (15) bps (from February) and 90+ day delinquencies fell (2) bps (from February). With the increase in early-stage delinquencies, we will want to closely monitor management’s commentary and guidance on delinquencies and NCOs in their earnings call.
Earnings Season Continues: Banks, Fintech Lenders, Card Networks
Catch up on last week’s earnings coverage here, covering many banking names.
Following March’s bank failures and, currently, regulators stepping in to run an auction for First Republic, deposits remain the centerpiece of evaluating bank health. This week Finwise +17%, LendingClub +13%, and Capital One +5% reported sequential increases in their period-end deposits. LendingClub continues to grow its deposit base, just two years after gaining a bank charter (through the acquisition of Radius Bank). Finwise attributed its deposit growth to an increase in brokered CDs, which were primarily utilized for short term funding needs of the bank.
Both LendingClub and Capital One reported increases in the percentage of FDIC-insured deposits, with LendingClub reporting 86% of deposits insured, up from 78% a quarter prior, and Capital One reporting 78% of deposits insured, up from 76% a quarter prior. As with other deposit-taking institutions, the cost of funding has risen, with Capital One reporting an average rate of 2.4% on its interest-bearing deposits, up from 1.82% a quarter prior and just 0.32% a year prior and with Finwise reporting a cost of deposits of 3.18%, up from 1.98% a quarter prior and 0.79% a year prior.
LendingClub reported $4,319Mn in unsecured personal loans HFI for the quarter, a 12% increase sequentially. In contrast, Capital One’s average loans HFI dipped (2)% QoQ, OneMain’s managed receivables fell (0.5)% QoQ and Enova’s average consumer loan and finance receivables fell (2.2)% QoQ.
Fintech lenders reported major drops in originations, due to a mix of tightening credit, rising rates, and some elements of seasonality. OneMain ((19)%), Enova – Consumer ((13)%), and LendingClub ((9)%) all reported sequential declines. Finwise Bank saw loan originations fall even further, down (25)% QoQ.
LendingClub has begun to offer structured certificates, described as, “Essentially a two-tier private securitization in which LendingClub retains the senior note and sells the residual certificate on a pool of loans at a predetermined price to a predetermined marketplace buyer, effectively providing built-in finance.” LendingClub successfully settled its first certificate last week.
The decision to tighten underwriting standards appears to have yielded positive results. Enova – Consumer saw NCOs improve by 90 bps QoQ, to 15.2% and 30+ DPDs improved by the same amount, to 7.3%. Capital One’s Consumer Banking NCOs improved 17 bps QoQ, to 1.6%, and its 30+ DPD improved 72 bps QOQ. Although OneMain’s NCO’s rose 84 bps QoQ, its 30+ DPD declined 51 bps, indicating that NCOs may be likely to come down over time.
Consumers continued to pull out their cards to spend, with Mastercard (+10%) and Visa (+6%) reporting YoY increases in purchase volumes. Mastercard announced its exclusive partnership with Wells Fargo and Choice Hotels, to launch their new credit card program in the U.S. Additionally, Mastercard announced it had renewed its deal with N26, to be the exclusive provider for issuing and processing services. As we reported the other week, Visa announced Visa+, a new network that allows users to send and receive payments among different P2P apps through a personalized payment address.
Student lender Navient just priced $718Mn of Term Refi Education Loan ABS transactions for settlement on April 27. Despite a major decline in originations over the past year, management expects that the rebound in enrollment levels will result in a doubling in loan originations for 2023.
In the News
Moody’s Downgrades 11 Regional Banks, Including Zions, U.S. Bank, Western Alliance (Yahoo, 4/24/2023) Moody’s downgraded 11 regional banks, which have come under increased scrutiny in the wake of the SVB and Signature Bank failures.
Hedging in the Spotlight After Banks Failed to Mitigate Interest Rate Risk (Bank Director, 4/24/2023) Only about 6% of aggregate assets at U.S. banks are hedged by swaps.
Corporate Insiders Step Up Stock Buying After Banking Turmoil (Wall Street Journal, 4/24/2023) Over 1,000 officers and directors at over 600 companies bought their own stock in March, the most since last May.
FedNow Real-Time Payments Are Here. What Should Banks Do Now? (Forbes, 4/24/2023) The majority of financial institutions that intend to launch RTP this year plan to use FedNow.
Why Apple’s Partnership With Goldman Is The Future Of Banking (Forbes, 4/24/2023) Apple’s strong level of brand trust should help the business recruit users.
Shopify Adds Direct Bill Payments in Bid to be a Single-Stop Fintech for Merchants (Tech Crunch, 4/24/2023) Shopify teams up with Israeli B2B payments startup Melio to launch a new bill pay tool designed to allow U.S.-based merchant customers to manage their expenses and vendors via its platform.
Hedge Funds Place Biggest Ever Short on Benchmark Treasuries (Bloomberg, 4/24/2023) Hedge funds bet on “higher for longer”, boosting net shorts on 10-yr Treasury futures to a record 1.29Mn contracts as of April 18.
Deposit Migration to Large Banks Would Harm Small Businesses (American Banker, 4/24/2023) Many small businesses bank with regional and community banks, who can tailor to their needs.
The Four Horsemen of the Digital Payments Revolution: Real-time Payments (Medium, 4/24/2023) With FedNow slated to launch this summer, get up to speed on RTPs.
Elephant Seals Amaze Scientists with their Ability to Sleep 1,200 feet Deep Under the Ocean to Avoid Predators (Insider, 4/22/2023) Talk about a power nap.
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