The Fed raised interest rates by 25 bps, as expected, and indicated that they were on track to raise rates twice more in 2018. Chairman Powell said that the improving economy might necessitate a steeper path of rates hikes in 2019 and 2020. We have seen the 10-year treasury yield settle in around 2.85% but 3-month LIBOR has increased by almost 60 bps in 2018 putting pressure on short-term funding costs across banks and other lenders. Lenders like Prosper are planning to pass on some of the increase in funding costs to their borrowers by raising interest rates on Personal Loans.
US household income increased by 0.9% MoM in January reflecting the impact of the tax reform act. Lenders expressed optimism in their 4th quarter earnings reports about the potential benefits of tax reform on higher borrower incomes leading to lower delinquency rates in the medium term. We explore this aspect in greater detail in our Q4 Lending Earnings Insights, coming out next week.
In fintech financing news, CommonBond raised $50 Mn in a Series D round led by Fifth Third, continuing the trend of banks partnering with and investing in fintech companies. CommonBond will use the funds to invest in technology and broaden their lending offerings.
Amazon vs Costco
Continuing our theme of technology lenders like Amazon branching into providing financial services, the obvious question is who might be next. Main street retailers like Walmart, Target and Costco could be likely candidates. Some of these retailers like Walmart and Costco already have a range of financial products that they offer. These retailers are seen as a trusted brand and could provide financial literacy and offer complementary products to their customers. Costco’s range of financial products offerings is shown below:
Given the lack of a regulatory swim-lane for non-bank organizations, these companies are partnering with banks and insurance companies to offer financial products. Costco and others could potentially offer white-label robo-advisors to expand their product offerings. Costco previously used to offer discounted trading through ShareBuilder and WalMart abandoned its plans for a bank after finding the regulatory landscape too onerous.
PeerIQ’s Lending Earnings Insights
We will be releasing our Q1 2018 Lending Earnings Insights report next week. Stay tuned!
On a quarterly basis, following earnings announcements, we analyze lender performance with a focus on credit performance trends and forward-looking commentary. We analyze data across three main lender segments: (1) FinTechs & Non-Banks, (2) Large banks, and (3) Card Issuers.
Below is a sneak peek at some of the main themes that we explore in this tracker:
Where are we in the credit cycle? Earnings calls indicate CEOs/CFOs are constructive on the health of the US consumer and see a tax reform as improving consumers’ disposable income. However, an increasing supply for credit and demand for credit, as well as re-normalization trends and increased competition are leading to higher charge-offs.
Credit re-normalization continues across all major lending groups. Credit performance this quarter is mixed. We observe improvements, and record low delinquencies from ONDK, OMF, and FinTechs in particular. LendingClub expects 31 bps lower charge-offs going forward due to tighter credit standards. At Discover – a bellwether for personal loan performance – the net charge off rate jumped 92 bps YOY to 3.62% – the largest increase in several years.
Card issuers are increasing loan loss reserves at a higher rate than loan growth, indicating expectations of higher losses going forward. American Express increased loan loss provisions 33% although loan growth was only 14%.
GS & Morgan Stanley remain comparable in market cap, revenues, and margins – are focused on lending to improve ROE. MS is doubling the size of its warehouse lending footprint. GS continues to invest in Marcus and aggressively pursue M&A. If GS executes on its strategic plan of generating, in 5 years we should observe a growth in ROE from their consumer lending activities.
Bank FinTech partnerships, and M&A continues. Banks are either partnering with FinTechs or investing in beefing up their technology capabilities in payments, lending, digital banking and wealth management. Banks like JP are partnering with Amazon by rolling out co-branded checking accounts and credit cards. A specter is haunting financial services – the specter of Amazon.
Lenders are taking actions to pass rising rates on to borrowers to protect margins and investor returns. Lenders are also trying to reduce all-in funding costs by reducing the credit spreads on their securitizations.
As the chart below from Discover shows, net charge off rate jumped 92 bps YOY to 3.62% – the largest increase in several years. Discover has said that an over-supply of credit could lead to excessive borrower leverage and the company is keeping an eye on Personal Loan performance.
Source: Discover Investor Relations
CEO Ram Ahluwalia will be speaking at LendIt 2018 on the 9th of April on “What is Happening with Personal Loan Losses”
- Fed Lifts Rates, Steepens Path Through 2020 for More Hikes (Bloomberg, 3/21/18) The Fed raised rates and predicted 2 more rates hikes in 2018 based on strong economic growth.
- S. After-Tax Incomes Rise Due to Tax-Code Changes, Spending Slows (WSJ, 3/1/18) US household income increased by 0.9% in January potentially improving credit performance on personal loans in the medium-term.
- Here’s what the latest Senate bill means for US fintech (BI, 3/16/18) Lower regulation around compliance on medium-sized banks will spur financial innovation and put them in direct competition with fintech lenders.
- Amazon in wealth management? What about Costco or Target? (Financial Planning, 3/21/18) Main street retailers like Costco and WalMart can leverage the trust their customers place in them to offer a wide variety of financial products.
- CommonBond Secures $50M Series D Equity Round, Led by Fifth Third Bancorp (PR Newswire, 3/21/18) CommonBond raised $50 Mn in a Series D round led by Fifth Third, continuing the trend of banks partnering with and investing in fintech companies.
- Q3 2017 Default Risk Index – Update (VantageScore, March 2018) VantageScore’s Default Risk Index shows a decline in default risk QoQ and YoY on all asset classes except Mortgages, demonstrating the strong economic environment we are in.
- Franklin Templeton Acquires Data Science Investment Firm Random Forest Capital (Globe Newswire, 3/20/18) Franklin Templeton acquired Random Forest Capital which uses data science to invest in MPL loans.
- Maintaining Balance in a Rising Rate Environment (Prosper Marketplace, 3/19/18) Prosper is planning to raise interest rates in response to Fed rate hikes, raising borrowing costs on personal loans.
- Affirm embeds with Apple Pay for instore financing (Finextra, 3/21/18) Affirm is offering up to 24 months of point-of-sale credit using Apple Pay. Consumers are looking for a seamless financing experience which should lead to higher sales for the merchants.
- Even Financial Announces Expanded Partnership With Credit.com; Will Power Personal Loan Marketplace (Benzinga, 3/22/18) Even Financial will be the sole provider of personal loans on the loan comparison website Credit.com.
- Ex-SoFi CEO Mike Cagney’s new startup, Figure, is out of stealth (FastCompany, 3/20/18) Figure is using technology to offer Home Equity Lines of Credit, an asset class that has languished post-crisis.
- These boots were made for generating power (MIT Tech Review, 3/14/18) 19th century technology is being used to generate power from human footsteps in new high-tech shoes.