Happy Sunday,

Headline inflation cooled somewhat, but housing prices are keeping core CPI high. Consumer spending fell. Markets expect the Fed will hike rates by 25 bps next week – but predict they’ll drop by year’s end. Regulators, politicians scramble, have diverging views on SVB, Signature collapses. Apexx raises $25Mn Series B. Circle selects new partners for USDC. Credit Suisse adds to headaches. MoneyLion and Oportun report earnings.

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Fed Rate Hike Plan Thrown Curveball with Bank Failures

Overall inflation cooled somewhat in February. CPI rose by 6% year over year, vs. 6.4% in January. That makes it the smallest increase since January 2021. But despite headline inflation declining, core CPI topped estimates, with the measure showing a 0.5% increase in February vs. the month prior. That makes the largest month-over-month core CPI gain in five months. The main driver? Housing costs. They jumped 0.8% MoM in Feb, making for the largest cost increase since the 1980s.

Image: Bloomberg

Meanwhile, consumer spending fell. Retail sales dropped by a seasonally-adjusted (0.4%) in February after a strong start to the year.

Despite banking regulators dealing with the fallout of the collapse of SVB, markets are still anticipating a 25 bps rate hike at next week’s FOMC meeting. Further, markets now expect a 75-100 bps cut in rates by the end of the year.

Diverging Views on Path Forward After SVB, Signature Collapse

The events of the last week or so can really only be described as the most momentous since the 2007-2008 Global Financial Crisis. After selling some of its securities portfolio at a $1.8Bn loss and failing to raise fresh capital, Silicon Valley Bank faced an unprecedented bank run. SVB, highly dependent on uninsured deposits of tech startups and investors, saw some $42Bn in deposits leave the bank in about a day. Facing this situation, regulators stepped in and closed the bank midday Friday (our initial coverage of the situation).

Unable to find a willing buyer that met the government’s criteria, federal regulators stepped in late Sunday to backstop all depositors at SVB before global markets opened Monday morning. Also on Sunday, Signature Bank was shut down by New York banking regulators and taken over by the FDIC amidst a reported criminal probe, with the government backstopping all of its depositors.

The Biden administration and banking regulators have taken great pains to try to head off any description of the action as a “bailout” by emphasizing “no taxpayer money” is at risk and that SVB and Signature’s equity and bondholders face a total wipeout.

President Biden’s address on Monday called for tougher rules after the two abrupt bank failures. Discussion in Congress has focused on reversing the rollback of a Trump-era loosening of oversight of banks with $50-$250Bn in assets. Many Democrats advocate revisiting these changes, while their Republican colleagues point to “woke” bank leadership and excessive spending by Democrats to explain SVB’s failure.

Meanwhile, multiple agencies are launching investigations into various aspects of the collapse. The Fed has promised a review and analysis of its oversight of SVB to be published by May 1st. The DOJ and SEC have also opened probes into SVB’s collapse, potentially including share sales by SVB execs the week before the bank collapsed. No one at the bank has been accused of wrongdoing.

For its part, Signature Bank is facing questions around whether it had adequate controls in place to detect and mitigate money laundering by its clients.

This story continues to develop and may change by the time this newsletter reaches your inbox on Sunday. As we write this, First Republic Bank has announced a rescue plan with a consortium of major banks. The plan, coordinated by regulators, involves eleven large U.S. banks stepping in to deposit an aggregate $30Bn in the bank. First Republic’s stock had plummeted as investors worried about its large amount of uninsured deposits. Additionally, S&P and Fitch had downgraded its credit rating to junk.

Apexx Raises $25Mn Series B

Apexx Global, a payments orchestration platform, announced it has raised a $25Mn Series B. Apexx’s platform integrates acquiring, gateway, shopping cart, and alternative payment capabilities into a single API. The company boasts over 120 clients, including household names like ASOS, RyanAir, and XE.com. While primarily focused on the European market to date, the company plans to use the new funding to expand to North America.

Circle Manages USDC’s SVB Exposure, Taps New Partners

The CEO of Circle, the issuer of the USDC stablecoin, called it “ironic” that the company, a key component of the crypto economy, needed to be protected from a failure in the traditional banking system. Fear gripped the ecosystem with funds flowing out of USDC and trading being suspended on some crypto exchanges as Circle held $3.3Bn in funds backing the stablecoin at SVB. USDC briefly broke its 1:1 peg with the dollar, trading as low as $0.87, before eventually returning to parity. As part of its plan to respond to the SVB fallout, Circle has tapped a number of new infrastructure partners, including Cross River.

Credit Suisse Drama Adds to Global Turmoil

Fresh on the heels of SVB and Signature’s abrupt failures, Europe’s Credit Suisse is facing its own set of issues. The Swiss bank, which has faced a long string of issues over the years, revealed “material weaknesses” in its financial reporting in its delayed annual report. The bank said its internal controls over its financial reporting for 2021-2022 were “not effective as it did not design and maintain an effective risk assessment process to identify and analyze the risk of material misstatements in its financial statements.”

The situation deteriorated when Credit Suisse’s largest shareholder, Saudi National Bank, ruled out providing any additional assistance to the bank in response to an interviewer question. Saudi National Bank pointed to additional regulatory requirements that would apply if its existing 9.9% stake grew to exceed a 10% limit. The response caused Credit Suisse’s shares to tank amid a crisis of confidence in the bank. The Swiss National Bank stepped in, promising to backstop Credit Suisse and extending about $54Bn in liquidity.

The drama across the pond added to already-busy U.S. banking regulators’ workload. The Treasury Department has reached out to major banks to gather data on their potential exposure to Credit Suisse, a standard practice in such cases.

MoneyLion, Oportun Report Earnings

Source: PeerIQ

MoneyLion reported strong origination growth, of 11% quarter-over-quarter, at a time when many consumer lending companies have been pulling back on lending. The company doesn’t report NCOs, but noted that provisions have remained near 4%, the bottom of their target range.

ARPU has declined, down to $62 for the fourth quarter, compared to $68 in the third quarter. MoneyLion said ARPU was slightly lower as it continued to grow its user base.

Total Customers grew 20% from the third quarter to 6.5Mn. CEO Dee Choubey commented on the change in calculation of total customers, with, “We exited the year with 6.5 million total customers and our definition of customers, as you know, points to monetized customers as opposed to those that just browse our platform.”

MoneyLion’s definition for total customers notes that, “Previously, Total Customers included all customers that submitted for or clicked on an offer through our marketplace but were not necessarily monetized, which we changed beginning in the third quarter of 2022 in order to more accurately reflect management’s view of our customers.” This represents a slightly stricter definition of Total Customer than before, only counting interactions that generate revenue.

However, the definition still seems like it could be fairly generous, as it does include, “Customers that have submitted for, received or clicked on at least one marketplace loan offer.” MoneyLion does earn revenue from customer clicks generated for its Product and Enterprise partners, but just because a consumer clicks the link does not necessarily mean that they end up using a financial product of MoneyLion or one of their partners.

Source: MoneyLion Earnings Presentation

Source: MoneyLion 10-K

Moving on, MoneyLion reported positive adjusted EBITDA and that its adjusted EBITDA (while negative) continued to improve throughout 2022. This is true, though it may be helpful to point out that net losses were significantly higher in the fourth quarter due to a $136.8Mn goodwill impairment (while this is a non-cash charge, it still represents a significant impairment). CFO Rick Correia explained that, “The impairment charge is attributable to the decline in the company’s stock price and related market capitalization, resulting from the adverse macroeconomic market conditions.”

Source: MoneyLion Earnings Presentation

Oportun officially reported earnings, having released preliminary figures and plans to lay off 10% of its workforce in early February. Despite originations and revenues coming in at the same levels as the reported preliminary figures, its stock slid nearly (35)% after missing earnings estimates.

As expected, originations declined (4)% from the third quarter, to $610Mn, on tightening of credit standards, and focused lending to returning members, partly offset by growth in average loan size. Management did not provide origination guidance, due to macro uncertainty, explaining that it would adjust its credit models based on how the macro environment fares.

NCOs rose to 12.8%, compared to 9.8% in Q3, due to underperformance in its loans originated before its July tightening. Management expects this to reflect “the peak of this cycle”, forecasting an eventual return to its 7-9% target range. Looking at first payment defaults, one can see that last summer’s credit tightening had a significant impact on lowering these.

Source: PeerIQ

Lastly, Oportun announced that its partnership with BNPL company Sezzle went active in February, marking its first Lending-as-a-Service relationship. With the partnership, Oportun will provide financing to customers who need larger loans than Sezzle offers.

In the News:

Fed’s Magical Accounting Might Save Banks but Doom Rate Increases (Wall Street Journal, 3/13/2023) The Fed may now have to pull back on rate hikes, after stepping in to allow banks to borrow against certain investments at face value.

Individual Investors Pile into Cash, Chasing Higher Returns (Wall Street Journal, 3/13/2023) Retail assets in money-market funds are hovering near records, and demand for short-term CDs has risen to its highest level since the 2008 financial crisis.

The Fed Has a Lot of Options for Adjusting Midtier Bank Regulation (American Banker, 3/14/2023) Title 12 of the U.S. Code gives the Fed broad authority to impose new requirements on banks with over $100Bn of assets to protect financial stability.

ICBA: Silicon Valley Bank and the Nation’s Largest Banks Are Not Community Banks (ICBA, 3/13/2023) The ICBA will “vehemently oppose community banks bearing any financial responsibility for potential losses to the deposit insurance fund.”

Blue Ridge Bank and Fintech Deposits (Bank Reg Blog, 3/11/2023) Blue Ridge Bank’s deposits sourced through fintech partnerships represented 27.6% of deposits by the end of 2022, up from 8.2% a year prior.

Banks Trade Relief Now for Regulation Later (Wall Street Journal, 3/13/2023) Measures by the government to step in to make depositors whole could lead to new legislation in the future.

Signature Bank Was Seized After Leaders Caused ‘Crisis of Confidence’ (Bloomberg, 3/14/2023) The bank was seized after regulators lost faith in management and depositors fled.

Fintechs Winning Silicon Valley Bank’s Abandoned Customers (Forbes, 3/12/2023) Companies are turning to fintechs to manage their deposits that diversify to offer higher amounts of FDIC insurance.

Too-Big-to-Fail Lenders Rake In Deposits After Three Banks Fail (Bloomberg, 3/14/2023) JPMorgan, Bank of America, Citi and Wells Fargo have seen higher-than-usual deposit volumes.

Banks Tap Federal Home Loan Bank System for $90 Billion in Liquidity (American Banker, 3/13/2023) The FHLB recorded the system’s largest debt issuance in a single day.

Moody’s Cuts Outlook on U.S. Banking System to Negative, Citing ‘Rapidly Deteriorating Operating Environment’ (CNBC, 3/15/2023) The move was made in light of key bank failures and followed action late Monday when Moody’s warned it either was downgrading or placing on review for downgrade seven individual institutions.

Facebook Parent Meta Plans 10,000 Job Cuts in New Round of Layoffs (Wall Street Journal, 3/14/2023) CEO Zuckerberg warns the company will conduct multiple rounds of cuts, reduce hiring and cancel some projects.

Silicon Valley Bank Collapse Produces An Early Winner: Digital Banks (Forbes, 3/15/2023) Mercury, Brex and other fintechs have seen deposit and customer inflows, but the test will be, can they retain them?

Neobanks Report a Windfall of New Clients in Wake of SVB Shutdown (American Banker, 3/14/2023) Fintechs are adding clients by promoting their abilities to protect funds above FDIC limits.

Lighter Fare:

Why I Risk My Life Climbing Skyscrapers (Vice, 3/15/2023) French free solo climber Alexis Landot prepares to climb The Mercury Tower in Paris.

Subscribe here to get our newsletter each Sunday. For even more updates, follow us on Linkedin (PeerIQ, a Cross River Company) and Twitter (@PeerIQAnalytics).