The collapse in demand continues to ripple across markets. U.S. weekly jobless claims hit 4.4MM, bringing job losses to 26MM.
Oil spot prices went negative. Electricity prices went negative in France. Mortgages went negative in Denmark. (And it’s not too hard to take delivery of a house.)
Former Fed Governor, Kocherlakota, suggested the FOMC take U.S. rates negative at the upcoming FOMC meeting.
We have a data-rich newsletter this week. We dig into:
- 1099 vs. salaried W-2 credit risk
- Loan forbearance statistics
- FinTech M&A and Financings (SoFi, Stripe)
Let’s dig in.
PPP – Last Call?
But first, we’ve seen a number of entrepreneurs scrambling to get a PPP loan. The first tranche ran out of funds in 14 days. The second tranche could run out even faster due to pre-applications.
Cross River, a leading FinTech bank, has rolled out a fully digital process to make applications as seamless as possible and you don’t need an existing bank relationship to apply. Borrowers can securely link their own bank account and apply for loans (up to $2MM).
Click here for more information on how to apply.
Some Consumers May Be Better off With UE Benefits
In our April 5th newsletter, we indicated that lower-wage consumer segments may have higher net incomes as a result of mortgage forbearance, stimulus, and direct payouts.
The anecdotal data is coming now. The title of this CNBC article says it all: She Got a Forgivable Loan. Her Employees Hate Her For It.
Each state has a “wage coverage breakeven point,” which defines up to what hourly rate employees have full replacement of income.
Here’s a chart that shows the data for a few states:
Source: EconoFact, CNBC, PeerIQ
The takeaway is that consumers that earn up to $20 to $30/hour, in certain states, have full wage replacement (or higher income).
Why it matters? The extraordinary benefits in the CARES Act may challenge the conventional wisdom on how to control risk in a recession.
Most “mainstream” FinTech lenders have stopped lending to 1099 workers, regardless of credit score/willingness to pay – and have focused solely on W-2 salaried workers.
However, dislocated higher income earners will not benefit from full wage replacement. This segment will have to make hard choices on what debt payments to prioritize.
Smaller balance, higher-rate loans, and shorter duration loans to “thick file” high credit score 1099 segments may be an attractive contrarian opportunity with much less competition.
Loan Forbearance Programs Ramping Up
A crack team at Piper Sandler has gone through bank earnings transcripts. We have combed through them to shed light on, i) provision builds and macro forecasts, ii) loan deferment/forbearance stats, and iii) loan forbearance policies.
|Reserving / CECL / Provisions
“Even as we have closed out this quarter, the variables that we look at continue to shift meaningfully. … with that as a backdrop, and again, subject to a lot of things, including how customers respond to the relief programs … we would see additional [reserve] builds in the second quarter.”
Citizens Financial Group:
“[For reserving purposes,] we’ve assumed a deep recession in Q2, followed by a V-shaped recovery in our forecast, which [if] true, would take us back to more normal provision levels over the balance of 2020. If the recovery is more U-shaped, provisions will be higher.”
“[For our CECL reserving assumptions,] we were looking at an economic outlook that had GDP down 25% in the second quarter and unemployment above 10%. … And we also thought about the impact, [of the] extraordinary government programs as well as our own payment relief programs. Since [we closed the books on 1Q] our economists have updated their outlook and now have GDP down 40% in the second quarter and unemployment at 20%. That’s obviously materially different. Both scenarios, though, do include a recovery in the back half of the year. … given the deteriorated macroeconomic outlook, we would expect to build reserves in the second quarter. [We’re] going to learn a lot through these next few months that will inform our judgments for second quarter reserves.” “When we do the 10-Q [we will disclose] lots of these various assumptions about CECL. … We’re going to spend all day on CECL … and it’s kind of a drop in the bucket, but it’s a lot of data. It’s like all the data we did after the last crisis we give you on Level 3 and all these assumptions [and] no one ever looks at [them] anymore. … And every company does it differently.”
“Our outlook included a second quarter GDP decline of nearly 20%, with unemployment peaking just under 10% and a recovery beginning in the second half of 2020.”
|Loan Forbearance Activity
Bank of America:
“[We offered] assistance to 66 million Consumer and Small Business clients in response to …COVID-19… No negative credit bureau reporting for previously up-to-date clients; paused foreclosure sales, evictions, repossessions and bankruptcy collections activities. … Nearly 1 million payment deferrals through April 8th; ~80% of requests are credit card.”
“To date, we have … commercial participants with a total loan balance of approximately $500 million, taking advantage of these deferral programs. For our consumer clients, we offer a 6-month full payment holiday, consistent with various guidance statements by the Fed and Fannie Mae. To date, we have consumer clients with a total loan balance of $25 million, utilizing these short-term payment holidays.”
“We are working with more than 8,600 small businesses, primarily in our Business Capital division to provide deferrals … for up to 3 months for qualifying customers impacted by economic events brought upon by COVID-19. We expect these loan modifications to meet the requirements to suspend the TDR classification in any related impairment for accounting purposes.”
Community Bank System:
“… We’ve granted deferrals to 4% of the outstanding balance of our consumer mortgage portfolio.”
First Horizon National:
“Deferrals would be on about $3.3 billion worth of underlying loan balances. Of that, about $600 million would be what I consider small business. … had about $850 million [of deferrals] in CRE or about 20% of the CRE book.”
“As of April 10, client requests for such deferrals totaled less than 3% of the total loan portfolio … [First Republic is doing 6 month deferrals] and then we’re re-amortizing over the remaining life of the loan. We’re trying to be as consumer-friendly as possible in our deferrals. We do not want to be the problem. We want to be the solution.” “We really don’t [know how high forbearances will go]. The single-family home request for hardship modification as well as other loan types has decreased by about 50% … so maybe this will end up in the 4% to 5% range for the entire portfolio. I would characterize [the forbearances] as internal watch list, so they don’t meet the definition of a special mention loan yet because we’re responding to client inquiry for the COVID-19.”
“… We are providing relief such as a 90-day grace period for mortgage, auto and card payments as well waiving or refunding certain fees. … In mortgage, [forbearances are] a little over 4% of our service book at this time. In Card, we’re seeing payment rates down a bit but still strong, and we’ve seen a slight uptick in late payments in Auto.”
KeyCorp: “[We] received approximately 11,000 [deferral] requests from our retail customers, about 0.7% of accounts. We also received approximately 800 similar requests from our commercial customers. While this is still early, request levels have been less than we originally expected.”
“[Mortgage servicing group has] provided assistance to over 70,000 customers whose loan balances total some $13 billion. Just under 90% of those balances are serviced for others. In total, we’ve assisted an approximately 10% of the mortgage loans we service … for customers with other consumer loans, auto and recreation finance, credit card and home equity loans, we’ve provided nearly 17,000 customers with some form of payment relief. These customers hold balances of over $500 million and represent just under 4% of our consumer loan portfolio.
Simmons First National:
“… We have already modified 20% of our outstanding loan balances. …And just to give you a little more color on our modified loans, we had 2 options. One was 6 months interest only, the other was defer payments for 3 months, then interest-only for another 3 months. So both of them had a 6-month deferral plan.”
“On the consumer side, it’s about $9 billion. That’s for both owners and service[d] for others, so it’s about $8 billion for balance sheet, so roughly 3%. On the commercial side, it’s about roughly $2 billion or so, 5% or 6%.”
“On the consumer portfolio [USB granted] forbearance and extensions [to] about 181,000 customers, which is about 4.9% of on- and off-balance sheet exposure. [USB] helped 3,400 business customers or about $2 billion of total of exposure.”
|Loans (e.g., LOC draws, “at-risk” loan categories) / Deposits (e.g., recent deposit inflows)
” … We had roughly right around about $30 billion, $32 billion worth of draws in the first quarter. So somewhere 10%, 11%, 12% of our outstanding, but unfunded. … I wouldn’t call that an overly meaningful number. … I think that the extraordinary actions taken [by the government/Fed to establish various facilities] alleviates a lot of that pressure … coming into the second quarter, we’ve actually seen really de minimus draws on the facilities. And I think, in our dialogues, we don’t see or feel that pressure right now.”
“[…The retail and hospitality loan portfolio] is approximately 2.5% of the bank’s overall portfolio, and that has an average loan size of just under $3 million and a medium loan size of only $1.5 million, and the weighted average LTV is 50% and the debt coverage ratio is 2x. So it’s a very strong, safe portfolio that will recover when the economy gets growing again.”
“Deposit growth accelerated meaningfully in March, most notably driven by wholesale clients as they secured liquidity and held those higher cash balances with us. At the same time, we saw accelerating loan growth primarily driven by revolver draws.”
“Deposits were up … 15% linked quarter and 20% from a year ago, largely driven by the depositing of revolver draws into DDA. Normalizing for revolver usage, deposits were up approximately 5%.”
|View on U.S. Economic Outlook
“We’ve entered into a world we haven’t seen before. Much of the economy is essentially closed. Consumer spend is down over 25% year-over-year … New auto sales in the month of March were down 32% from February. Manufacturing has turned downward … as businesses cut back on orders. Commodity prices are down 24%, speaking to the weakness in global demand. Unemployment has grown beyond what we’ve traditionally modeled. And while there is hope that this is time-bound by shelter-in-place orders, we don’t know what the time frame is or how quickly the economy will recover when these orders are lifted. What we do know is the contraction is real, and we must do all we can to be safe and to ensure we do our part to help recover as quickly as possible.”
|Paycheck Protection Program
Bank of America:
“For small business clients, we built the first digital platform for the PPP program … The team is working hard to drive over 300,000 requests for funding through the process, so that we can get those loans funded.”
“With respect to PPP, we assisted approximately 10,000 clients to employ over 300,000 employees totaling nearly $3.5 billion.”
“[The PPP] fees are going to be accrued over the life of loan. So depending on how much of it gets forgiven and how much we have to carry for 24 months, … there’s a lot of uncertainty there as to when it will be contributed. And there are some additional costs because … we’ve got a lot of people working over time … and still have much more to go between now and the end of the funding and then the end of the forgiveness phase of this. So it’s a little too … too early to determine how much [revenue] contribution there is going to be.”
“… 27,711 clients approved for PPP loans totaling … $6.4 billion+ … Those companies collectively employ 600k+ workers”
Big Banks Get Bigger
Last week, we mentioned that the biggest banks of the land are issuing loans and soaking up liquidity – and are likely to outperform expectations.
The idea is that the big banks do not have as much exposure to commercial mortgage, non-conforming mortgage, CMBS, and commercial real estate, as compared to certain regional banks or community banks.
Here’s more on the theme: Coronavirus Made America’s Biggest Banks Even Bigger.
FinTech M&A Continues – SoFi and Stripe
SoFi announced its first expansion into the international market by introducing SoFi Invest in Hong Kong.
SoFi launched the program by acquiring “8 Securities”. (No, this is not a clever way to buy its own bonds below par value in the market.)
Turns out “8 Securities” is a Hong Kong based online brokerage. Post-acquisition, the firm will re-brand the offering “SoFi Invest”. The move enables SoFi to tap into an “expanding member base.”
American Banker has a data-rich article titled Funding for FinTech Startups: Down but Not Out.
- Larger, profitable FinTech companies with the right digital products can still tap funding.
- The demand for digital finance at a time of social distancing and other factors are expected to buoy the numbers in coming months.
- Globally, venture capital firms invested $6Bn in FinTech companies in the first quarter, down 45% from the fourth quarter and 25% less than in the first quarter of 2019, according to the data analysis firm CB Insights.
Stripe raised $600M at $36B valuation in Series G Extension. Stripe now has $2Bn on its balance sheet. The financing is an extension to the company’s Series G round priced in September 2019, with a $250MM raise. This sets the private valuation of Stripe at $36Bn post-money.
- US Weekly Jobless Claims Hit 4.4 Million, Bringing 5-Week Total to More Than 26 Million (CNBC, 04/23/2020) Weekly unemployment claims increased higher than expected for the week ending April 18th.
- The Fed is Buying $41 Billion of Assets Daily and It’s Not Alone (Yahoo Finance, 04/21/2020) The Fed’s balance sheets are expanding to record levels amid their latest buying spree, which raised questions about how big they can get and whether those assets can ever be sold back to markets.
- Nearly 3 Million Borrowers are Already in Forbearance (Housing Wire, 04/17/2020) According to Black Knight, more than 2.9MM mortgages are in forbearance as of April 16th.
- She Got a Forgivable Loan. Her Employees Hate Her For It. (CNBC, 04/22/2020) Some small business employees are finding that their unemployment checks are more than their regular wages.
- Coronavirus Made America’s Biggest Banks Even Bigger (WSJ, 04/23/2020) More than half of the $1Tn in deposits in Q1 2020 went to JPMorgan, Bank of America, Wells Fargo, and Citigroup.
- Giant U.S. Lenders Outpaced by Rivals in Small-Business Rescue (Bloomberg, 04/17/2020) Some of the nation’s top banks lagged behind small competitors in handling PPP applications.
- US Banks Brace for Surge in Loan Losses (Financial Times, 04/18/2020) Lenders are increasing reserves because they anticipate a wave of defaults during the COVID-19 pandemic.
- Pandemic Hands FinTech Lenders a Chance to Prove their Worth (Financial Times, 04/21/2020) FinTech lenders have the opportunity to prove themselves through the COVID-19 pandemic.
- Funding for FinTech Startups: Down but Not Out (American Banker, 04/21/2020) Larger, profitable FinTech companies with the right digital products might still be able obtain funding.
- Blackstone Sees Prospect of Buying Opportunities in Crisis (Bloomberg, 04/23/2020) Black Stone believes there will be plenty of investment opportunities once the current economic crisis abates.
- LendingClub Cutting 460 Staff in Response to Reduced Loan Volume (LendIt, 04/21/2020) LendingClub cuts jobs across every department, including C-suite executives.
- Leaked Pics Reveal Google Smart Debit Card to Rival Apple’s (TechCrunch, 04/17/2020) Leaked images show that Google is developing its own physical and virtual debit cards.
- Podcast 243: Jared Hecht of Fundera (LendIt, 04/17/2020) CEO and Co-Founder of Fundera spoke about the Paycheck Protection Program and its impact on small business lending.
- That Time I Tried to Buy an Actual Barrel of Crude Oil (Bloomberg, 11/03/2015) Tracy Alloway negotiated and took delivery of one of the most ridiculous oil trades in commodities history.