LendingClub Earnings; PayPal Resilient to COVID-19; Square 4x Reserve Build

Greetings,

The jobs report confirmed that 20.5MM jobs were lost in April. The U.S. has never lost more than 2 million jobs in a single month.

Weekly jobless claims this past Thursday show an additional 3.1MM jobs were shed for total job losses of 33.5MM. Retailers and brick-and-mortar including J Crew, Nieman Marcus, and Hertz have filed or may file for bankruptcy.

The headline unemployment rate has now jumped to 14.7%. However, the speed of economic contraction means that these numbers are already out of date.

The true unemployment rate is in the 18 to 20% range when you account for i) last week’s jobless claims, ii) reduction in hours worked, and iii) reduction in job seeking activity (only people looking for work fall into the denominator).

Make no mistake, it’s an ugly report. And the numbers get worse the more you dig into it.

More stimulus and rate cuts are coming. Front-end forward rates declined into negative territory for the first time ever. Also, the lockdowns are in various phases of ending. The more relevant question for recovery though is not “when will lockdowns end?” but “will people show up?”.

The Contrarian View is Going Mainstream

We argued on April 6th that the recession and its effects would be different this time.

We also did some basic math taking the view that U.S. consumers would hold up better than 2008, despite the higher unemployment rate. We showed that consumer disposable incomes are higher under some reasonable assumptions and the consumer will be more resilient than people expect. (Not so much for small businesses.)

Since then, GS economists have done a lot more math.

They published a research report showing that personal income will be higher in 2020 (by about 9%), due to the massive fiscal response.

Here’s a chart that says it all - provided that you have super vision:

Source: Goldman Sachs Global Investment Research, PeerIQ

The GS economists’ key assumption is that there will be a phase 4 package of $550Bn.

That’s a safe bet. House Democrats are proposing $750Bn+ in much needed aid for state and local governments and Senator McConnell is constructive.

Charles Schwab - The 800lb Gorilla Re-Shaping Digital Consumer Finance

In industry news, Charles Schwab is taking aim at Robinhood with the introduction of fractional share “slices.”

Schwab has almost single-handedly re-shaped the terms of industry competition. If you could see us now, we would be gushing.

Schwab is co-opting FinTech’s best ideas and executing: i) zero-fee trades (launched a price war), ii) launched a consumer lending business, iii) then bought TD Ameritrade.

Do we see a Schwab digital wallet next?

LendingClub Earnings TearDown

LendingClub reported earnings this past week. LendingClub made some good, painful, and necessary moves over the last 6 weeks:

• Increased unrestricted cash - tapping revolver facilities
• Re-positioned to cash flow positive even with 90% down on originations.
  • The difference between 90% and 100% has a lot of substance to it:
    • No new origination means your portfolio is in run-off -- your balances are shrinking while losses continue to pile up
    • Keeping the machine active preserves the institutional know-how to grow when conditions improve
  • Increased servicing staff despite a substantial RIF
    • We’ve been concerned about costs to servicing staff. Digital servicing is highly overrated (easy to ‘mute’ annoying SMS from your lender, or tag as spam the bill collectors)

Can Other FinTechs Replicate LendingClub’s Playbook?

We are skeptical.

• LendingClub has a $12Bn+ servicing portfolio - bigger than most or all FinTechs (SoFi’s numbers are private)
• LendingClub sells 43% of its loans to banks
• LendingClub has multiple committed credit facilities and was able to increase cash balances

Business and P&L Dynamics

• $50MM in net loss; cash on hand is $294MM (up from $244MM)
• Portfolio hardships at 11%, but are starting to stabilize (PeerIQ reported 12 to 13% in our newsletter, although we used an industry composite)
• Loan originations of $2.5Bn, down 8% year-over-year
  • Originations expected to be down 90% - LendingClub could originate at 60 to 70%, but chose to preserve liquidity over revenue
  • Focused on repeat borrowers
• Cut quarterly expenses by $70MM
  • 460 employee headcount reduction (increased servicing staff)
  • Stopped 3rd party lead gen (e.g., LendingTree)
• Halt to ABS issuance [ ties up precious equity capital ]
• No liquidity issues even under severe stress scenarios.
  • Liquidity: $680MM drawn; $380MM undrawn

LendingClub also announced their continued intention to complete the Radius Bank acquisition.

The first question on the earnings call was (paraphrasing): “Given the new environment, does it make sense for LendingClub to buy a bank, or for a bank to buy LendingClub?”

Management provided a lengthy artful reply to indicate “No, we aren’t for sale.” However, if you read the transcript a few times, like a Rorschach a few times, it seems like you can walk away interpreting whatever you want to interpret, which was probably the point.

LendingClub Deferment Program Highlights

Source: LendingClub, PeerIQ

Source: LendingClub, PeerIQ

PayPal Earnings Show that Payments is Resilient

PayPal is hitting records during COVID-19. The stock was up 14% after announcing and has an all-time high market cap of ~$150Bn.

PayPal has been a direct beneficiary of COVID-19 in so many ways:

• Massive number of new account openings
  • From merchant acceptance as brands look to e-commerce
  • From consumers looking to receive stimulus funds
• International remittances up
• Peer-to-peer payments up

PayPal is focused on a digital wallet (along with every other Big Tech).

Records Broke

• $1.2Bn in quarterly free cash flow. Transactions are up 20% year-over-year, with branded transactions up over 43% more than double pre-COVID-19 levels in January and February
• On May 1st, PYPL had its largest single day of transactions in history, larger than last year's transactions on Black Friday or Cyber Monday
• Net new actives hit record highs in April, surging over 140% from January and February levels, averaging approximately 250,000 net new active accounts per day
• For the month of April, added an all-time record of 7.4MM net new customers
• A record Q1 adding 10MM net new accounts, but that will pale in comparison to the 15MM to 20MM net new active accounts PYPL expects to add in Q2
• Our branded payment experiences are clearly benefiting from the increase in ecommerce spend as a result of these measures

Provision / Reserve

• PayPal boosted reserves by 54%. Coverage went from 11% of outstanding loan and interest receivables balance to 17% of their portfolio - very conservative vs. peer group

PPP

• PayPal has funded “tens of thousands of loans” and distributed well over $1Bn with an average loan size of $35,000
• PayPal and Venmo customers in the U.S. are eligible to receive their economic stimulus payment directly into their digital wallet

Quotable Quotes

• “People don't want to touch cash, they don't want to touch screens”

Square Ups Reserve 400% [!], Payment Volumes Are Steady

• Square reported revenues of $1.38Bn in Q1 2020, which topped what analysts estimated. The company’s loss for the quarter totaled $106MM. Analysts had expected losses of only about $34MM
• The total amount of all card payments processed by Square sellers was $25.7Bn in the first quarter, compared to analysts’ average estimate of $26Bn
• Transaction and loan losses, which account for bad loans as well as fraud, were $109MM, which is a 291% increase from the prior year. The company said that included additional reserves of $79MM for transaction losses and $22MM for outstanding loans in its Square Capital business -- a fourfold increase compared to the fourth quarter.

In financing news, digital bank Revolut is on the hunt for acquisitions. They intend to use its recent $500MM warchest to fund deals.

Peter Thiel-backed digital bank N26 raises another $100MM. The startup, led by CEO Valentin Stalf, raised another $100MM, which is an extension of its Series D funding that was announced last year.

The investment is backed by existing investors such as Chinese tech giant, Tencent and Peter Thiel’s Valar Ventures. It brings the total raised in that round to $570MM, while the company has now raised $770MM to date.

N26 already topped up its Series D round with another $170MMin July. The startup’s valuation remains unchanged at $3.5Bn, despite the injection of new capital.

Robinhood Raises $280M, Pushing its Valuation to $8.3B. Robinhood, led by CEO, Wes Moore, raised $280MM in Series F funding. The funding brings the company to an $8.3 billion valuation.

Sequoia Capital led the round. Other investors included NEA, fintech-focused Ribbit, and smaller firms 9Yards Capital, and Unusual Ventures.

Robinhood recorded around $60MM in revenue this March, three times its February result.

Corrections

A few typos in our analysis of the OneMain vs OnDeck last week - in our haste to get out this product in a timely manner with the latest and greatest.

Mea Culpa!

• Last week we said, “OneMain is estimating a peak net charge-off rate of 11.25% in Q1 2021”. That estimate is from Compass Point not OneMain. It’s notable because that charge-off rate looks like a base case for a digital lender in good times. Channel matters.
• Similarly for OneMain, the key point is they do have thru-cycle loss experience - unlike many FinTechs, which has enabled them to tap ABS markets and maintain investor confidence.

PeerIQ New Hire

Jay Patel. Jay is currently a Data Analyst on PeerIQ’s Data Insights team. Prior to joining PeerIQ, Jay worked as an analyst in the datacenter space and has also worked as an engineer doing electrical design. He earned his B.S. in Electrical and Computer Engineering at Rutgers University. In his free time, Jay enjoys playing volleyball and gaming on his PC.

Industry News:

• Treasury Launches 20-year Bond to Help Fund the Record Borrowing Needed this Quarter (CNBC, 05/06/2020) The U.S. Treasury will launch a 20-year bond later this month in a $20Bn auction.
• ‘It’s devastating’ — Jobs number will be bad, but the reality is actually much worse, warns the Fed’s Neel Kashkari (MarketWatch, 05/07/2020) Federal Bank Reserve CEO, Neel Kashkari, said that the unemployment rate could be as high as 17%.
• Layoffs Start Turning From Temporary to Permanent Across America (Bloomberg, 05/06/2020) Many companies that reported temporary layoffs are now labeling them as “indefinite.”
• The Looming Paycheck Protection Program Forgiveness Nightmare (Forbes, 05/04/2020) Small businesses and banks are looking at a series of major obstacles as they head into two rounds of PPP loan forgiveness.
• Small Businesses Counting on Loan Forgiveness Could Be Stuck With Debt (NY Times, 05/06/2020) Business owners who took out loans under the Paycheck Protection Program thought converting them to grants would be easy, but it’s not.
• Banks are Facing Huge Credit Losses as their Customers Suffer Through the Coronavirus Pandemic, S&P Warns (MarketWatch, 05/06/2020) S&P Global Ratings said the COVID-19 pandemic will hit hardest to those lenders that are most exposed to industries such as commercial real estate and consumer lending.
• Wall Street’s Elite Bond Club Is Cracking at the Worst Possible Time (Bloomberg, 05/05/2020) Cracks are appearing in the exclusive Wall Street club responsible for ensuring the market runs smoothly.
• Warren Buffett Berkshire Hathaway Annual Meeting Transcript 2020 (Rev, 05/03/2020) Full transcript of Warren Buffett & Berkshire Hathaway’s 2020 annual shareholders meeting.
• Schwab’s Plan to Offer Fractional Shares Starting in June is a Shot Across the Bow at Robinhood, Stash (MarketWatch, 05/06/2020) Charles Schwab announced that it will offer trading in fractional shares of individual stocks as soon as June, providing competition for micro brokerages like Robinhood and Stash.
• PayPal Forecasts Stronger 2nd Quarter as Life Moves Online (Bloomberg, 05/06/2020) PayPal reported that revenue rose 12% to $4.62Bn in Q1 2020, but analysts estimated revenue to be $4.72Bn.
• Square Sees ‘Significant Slowdown,’ Quadruples Loss Reserves (Bloomberg, 05/06/2020) Square reported revenue of $1.38Bn in Q1 2020, which topped what analysts estimated.

Lighter Fare:

• Chess is the New King of the Pandemic (WSJ, 05/07/2020). We like E2-E4.