Greetings,
The US economy grew at a blistering 4.1% pace, the highest GDP growth reading since 2014, driven by consumer spending. Consumer spending grew by 4%, higher than economists’ estimates. Consumer spending has been driving US economic growth and outstanding consumer debt has reached all-time highs, although consumer debt per capita is still well below its pre-crisis peak.
Bank-Fintech partnerships continue as smaller banks and credit unions are also teaming up with fintech companies. In the latest example of such a partnership, community banks Blue Ridge Bank and Pioneer Bank are using Promontory Interfinancial Network to buy loans originated by SoFi. Such arrangements allow smaller banks to marry cheap sticky deposits with online lending. Please refer to our past webinar where we look at bank-fintech partnerships in greater detail.
Kroll has rated SoFi’s $546 Mn consumer loan deal SCLP 2018-3 AA+ on the senior tranches, A on the mezzanine tranche and BBB on the junior tranche. The $600 Mn pool has an average loan balance of $32k, a weighted average credit score of 749, and a weighted average remaining term of 60 months. The senior credit enhancement is 31.5%.
In regulatory news, the FHFA is suspending an initiative to update credit scoring models used by the GSEs as it views the efforts to be “duplicative” and “inconsistent”. The news is unfortunate as innovations to integrate alternative data (such as rent, utility payments, and alternate bureau scores) could expand access to credit to 7.6 Mn Americans who currently lack a credit score.
In this newsletter, we summarize earnings of the top 3 credit bureaus, and look at the 2nd quarter earnings of Discover, Synchrony and Enova. We conclude with a deep-dive into the changing regulation around valuation of whole-loans and the top 5 questions to ask to know if your valuation makes sense.
Credit Bureau Earnings
PeerIQ’s partner TransUnion released its 2Q earnings this week, along with Equifax. TransUnion’s earnings beat market expectations with revenue of $563 Mn, up by 19% YoY. TU’s revenue growth was driven by Online Data Services, where revenue grew by 23% YoY.
TU’s focus on the Fintech sector and technological innovation propelled organic growth. Reach out to learn more about TransUnion’s and PeerIQ’s enterprise analytics products, and upcoming products.
TransUnion also remains active in the M&A space and the company has completed 16 acquisitions since 2013:
Source: TransUnion, PeerIQ
Equifax’s revenue increased by 2% YoY to $877 Mn in 2Q, while net income decreased by 12% YoY to $145 Mn. Below we compare the latest earnings of the 3 credit bureaus – TransUnion, Equifax and Experian. Note that Experian’s earnings are for the 6 months ending 3/31/18.
Source: Bloomberg, PeerIQ
Equifax recently hired a CTO and appears to be re-platforming infrastructure on a cloud-first strategy.
Mixed Card Issuer and Fintech Earnings
Discover, Synchrony and Enova reported earnings this week. We summarize them below:
Revenue at Discover grew by 8% YoY to $2.6 Bn and net income grew by 23% YoY to $669 Mn.
- Loans grew by 9% to $85 Bn driven by credit card loan growth of 10%. DFS is pulling back on personal loans due to high competition from fintech companies and high customer acquisition costs.
- Provision for loan losses increased by 16% YoY to $742 Mn, outpacing loan growth as credit renormalization continues.
- Net charge-off rate increased from 2.7% to 3.1% YoY.
- DFS ROE grew from 19% to 25% YoY.
Synchrony’s revenues grew by 3.9% YoY to $3.1 Bn and net income grew by 40% YoY to $696 Mn.
- Loans grew by 5% YoY to $79 Bn. Walmart will not renew its store-card arrangement with Synchrony and will use Capital One instead. Synchrony is looking for other strategic options to replace this partnership.
- Provision for loan losses decreased by 3% YoY to $1.3 Bn.
- Net charge-off rate increased from 5.4% to 6.0% YoY.
- SYF ROE grew from 14% to 19% YoY.
Enova’s revenues grew by 33% YoY to $253 Mn and net income grew by 50% YoY to $18 Mn.
- Loans grew by 33% to $416 Mn driven by 39% YoY growth in the near-prime portfolio.
- Provision for loan losses increased from 12.7% to 13.8% YoY.
- Net charge-off rate increased from 12.2% to 12.9% YoY.
We will track all bank, credit card issuer and fintech earnings in our Lending Earnings Insights Tracker. The previous tracker can be found here. Stay tuned this week for our Q2 Securitization Tracker where we review issuance pricing, volume and credit enhancement trends.
Conferences:
- PeerIQ’s CEO, Ram Ahluwalia, will speak on the Tomorrowland is Here Today: What Will the Structured Finance Market Look Like in 2025 panel at 11 am on Monday September 24th 2018 at ABS East in Miami.
- PeerIQ’s CCO, Kevin Walsh, will speak on The Innovation Institute: Technological Solutions for Improving Market Transparency panel at 4 pm on Monday September 24th 2018 at ABS East in Miami.
Industry Update:
- GDP Growth Hits 4.1%, Fastest Since 2014 (Bloomberg, 7/27/18) The US economy grew by 4.1% in the 2nd quarter, the highest GDP growth reading since 2014, driven by consumer spending.
- Trump Administration Proposes Tightening Rules for Forgiving Student Loans (WSJ, 7/25/18) The Education Department is proposing to tighten the criteria for student loan forgiveness by requiring former students to show that their colleges had an “intent to deceive” or showed a “reckless regard for the truth”.
- FHFA Forced to Put Credit Score Decision on Hold (Mortgage News Daily, 7/24/18) The FHFA is suspending an initiative to update the credit scoring models used by the GSEs to integrate less traditional sources of data such as rent and utility payments in its models.
- An Inside Look at Bank/Fintech Partnerships: Promontory Interfinancial Network and SoFi (Lend Academy, 7/19/18) Bank-Fintech partnerships continue as smaller banks and credit unions are also teaming up with fintech companies to diversify their assets.
- Americans are splurging on personal loans thanks to fintech startups (Quartz, 7/24/18) Personal loans outstanding rose to $120 Bn driven by growth in fintech origination. Consumer debt and spending has been boosting US GDP growth, and the market is keeping an eye on whether this will continue.
- Prosper Performance Update: June 2018 (Prosper Blog, June 2018) Prosper continues to migrate to a higher rated credit book as 58.2% of June originations rated AA-B. Lending platforms have been continually tweaking their underwriting guidelines in their search for the right credit mix.
- eBay & Square Partner on Business Loans, Apple Pay Coming to eBay this Fall (CrowdFund Insider, 7/24/18) Square will provide small business credit of up to $100k for eBay merchants within one day.
- Discover Sets Pullback in Personal Loans, Touts Strong Q2 Results (PYMNTS.com, 7/27/18) DFS is pulling back on personal loans due to high competition from fintech companies and high customer acquisition costs.
- Walmart chooses Capital One Financial for credit card program (Reuters, 7/26/18) Walmart will not renew its store-card arrangement with Synchrony and will use Capital One instead. Synchrony is looking for other strategic options to replace this partnership.
- Stripe Starts Issuing Credit Cards (Bloomberg, 7/26/18) Stripe, the online payments processor, will issue its own credit cards to help businesses manage their payments to vendors.
- Credit Card Payoff App Tally Raises $25 Million (Cheddar, 7/24/18) Tally, an automated debt-managing app, has raised $25 million in Series B funding to expand operations.
- Could Amazon Manage Your Money? Bernstein Analysts Think So (Bloomberg, 7/24/18) Amazon’s broad customer base and online platform would give it an edge among big tech companies in asset management, most likely as an arms-length distributor of funds.
- A Conversation with Figure’s Mike Cagney (The Financial Revolutionist, 7/20/18) Figure will use Provenance, a blockchain, to hold second-lien loans made by Figure.
Lighter Fare:
- One Woman’s Math Could Help NASA Put People on Mars (Bloomberg BusinessWeek, 7/25/18) Research around Lagrange points which balance centrifugal and gravitational forces, could allow NASA to build a waystation 45,000 miles away from the moon for future journeys to Mars.