Initial jobless claims fell to their lowest level since 1969 signaling a tight labor market. A decades-low unemployment rate and the lack of skilled workers has pushed wage growth up to 2.7%, potentially fueling inflation. Fed Chair, Jerome Powell, noted that if the yield curve inverted, that would change the Fed’s rate hike plans, but that they were on course for now. Fed Chair, Jerome Powell, noted that the economy was not yet at full employment.
Blackstone is launching a $10 Bn direct lending fund focused on middle-market corporate credit opportunities. The search for yield has pushed investors into higher-yielding middle-market lending, with direct lending funds raised $54 Bn in 2017. Consumer, small-business and middle-market lending have been a consistent theme among investors starved for yield by low global interest rates.
The Basel Committee on Banking Supervision released a report that said that only 3 of 30 global systematically important banks met its basic standards for compiling and reporting risk data. Banks generally remain behind-the-curve in summarizing their loan-level risk exposures. PeerIQ is a leader in the data management and analytics spaces; reach out to learn more about how we can help manage your data.
SoFi’s CEO Anthony Noto elaborated on the vision of SoFi Money in a CNBC interview. Some of the use-cases include helping consumers Borrows, Save, and Protect – putting SoFi head-to-head with Marcus. Noto also shared an intent to “go after the brokerage business” and the potential for SoFi branded ETFs. SoFi is not prioritizing an IPO; they remain focused on new products, differentiation, and strengthening ahead of any credit cycle downturn.
In this newsletter, we summarize a recent Deloitte survey on FinTech lenders. We also cull highlights from recent bank earnings with a focus on loan loss provision trends and digital technology.
Deloitte’s Survey on Fintech Lenders
Deloitte released a survey on fintech lenders which showed that lenders were most concerned about their cost of funding. Rising interest rates, especially at the front-end, have increased lenders’ funding costs and are squeezing margins on lenders that are unable to pass on interest rate increases to their borrowers.
The main take-aways from the study:
1. 7% of respondents listed cost of funding as one of the top 3 concerns, with liquidity and an inability to diversify rounding out the top 3.
PeerIQ view: Low-cost, and more importantly, stable and diverse funding continues to drive competitive advantage. We continue to see lenders partnering with providers of term capital, as well as deposit-taking institutions such as banks and credit unions to reduce the volatility in funding sources.
Source: Deloitte, PeerIQ
2. There is a significant difference in the cost of capital between large and small companies. Larger companies can access the securitization market to access cheap funding.
PeerIQ view: Securitization remains the cheapest source of large-scale financing. MPL bonds continue to go mainstream as credit spreads tighten vs comparable consumer credit issuers. Emerging issuers continue to take efforts to build a brand in the ABS markets via repeat issuance.
Source: Deloitte, PeerIQ
3. Investors remain interested in the online lending space with $11 Bn in equity capital expected to flow into the sector in 2018. The number of startups has decreased, suggesting a maturing market and some consolidation.
PeerIQ view: We see the most recent innovation focused on niche retail and online point-of-sale models – both for consumer and small businesses.
Source: Deloitte, PeerIQ
Strong Bank and Card Issuer Earnings
Overall, banks and card issuers delivered strong revenue and earnings performance. Nevertheless, stock price reactions are mixed as investors remain concerned about the impact of an inverting yield curve on bank margins.
Earnings’ season continues with GS, BAC, MS, AXP, and COF reporting this week. Goldman Sachs delivered net revenue of $9.4 Bn, up 19% YoY and net income of $2.6 Bn, up by 40% YoY. Some highlights:
- President David Solomon replacing current CEO Lloyd Blankfein announced his retirement in October.
- The transition underscores Goldman’s moves to diversify away from its trading business into newer areas like consumer lending.
- On the Q2 earnings call, GS highlighted that Marcus now serves 1.5 Mn customers and has originated over $4 Bn in personal loans.
- GS expects an annualized loss range of 4-5% on this portfolio and a low double-digit percentage of the portfolio was allocated to subprime borrowers.
Morgan Stanley delivered another quarter of strong earnings as revenue grew by 12% YoY to $10.6 Bn, and net income increased by 18% YoY to $3.1 Bn.
- CFO Pruzan commented that trade tensions and a fear of an inverted yield curve hadn’t yet affected investor and client sentiment, but could have an impact in the second half.
- The lending book grew by 2% YoY to $70 Bn, driven mainly by growth in Securities-Based Lending which grew by 8% Yoy.
Bank of America also beat earnings expectations with net income increasing by 33% YoY to $6.8 Bn. Highlights:
- Earnings growth was driven by the bank’s Consumer division which reported its highest quarterly profit in 8 years.
Loans grew by 2% YoY to $935 Bn while net consumer charge-offs increased from 67 bps to 74 bps YoY. BofA highlighted its digital usage trends. BAC continue to invest in technology capabilities as they look to fend off fintech rivals and emerging online banks such as Marcus.
Source: Bank of America, PeerIQ
Card issuers have also had a good Q2 with both Amex and Capital One delivering good results. Q2 revenues at Amex were up by 9% YoY to a record $10 Bn, and Amex also raised its revenue guidance for the year due to higher-than-expected cardmember spending. As Amex boosts its lending portfolio, the company reported $75.4 Bn in card-member loans, an increase of 14% YoY.
Notably, Amex’s loan-loss provisions increased by 38% YoY to $0.8 Bn, while the net charge-off rate increased from 1.5% to 1.8% YoY.
Capital One’s 2nd quarter revenue increased by 7% YoY to $7.2 Bn. Net income increased by 84% YoY to $1.9 Bn as card losses decreased. CEO Richard Fairbanks noted that credit card losses are now improving and that this was the first quarter when the charge-off rate on credit cards dropped. Charge-offs declined from 5.11% to 4.72% YoY and loss provisions also decreased by 18% YoY.
We will track all bank and fintech earnings in our Lending Earnings Insights Tracker. The previous tracker can be found here. Last week we released our MPL Loan Performance Monitor for May 2018, which is available here in case you missed it.
This week, stay tuned for our Q2 Securitization Tracker where we review issuance pricing, volume and credit enhancement trends.
- 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.
- Jobless Claims Hit Lowest Level Since 1969 (WSJ, 7/19/18) Initial jobless claims fell to their lowest level since 1969 signaling a tight labor market and fueling wage growth.
- Fed’s Powell Says U.S. May Still Be Shy of Full Employment (Bloomberg, 7/18/18) The Fed chair noted that the economy was not yet at full employment and that he was worried about low inflation.
- Blackstone Targets $10 Billion for Direct-Lending Comeback (Bloomberg, 7/18/18) Consumer, small-business and middle-market lending have been a consistent theme among investors starved for yield by low global interest rates.
- Banks’ approach to risk data is deeply inadequate (FT, 7/15/18) Only 3 of 30 global systematically important banks met basic standards for compiling and reporting risk data, and the others would struggle to paint an accurate picture of their risks.
- Deloitte’s Survey on Fintech Lending (Deloitte, July 2018) Rising cost of funding is the top concern for fintech lenders.
- Goldman Trading Rebound Falls Short While Blankfein Era Winds Down (Bloomberg, 7/17/18) Revenue growth was driven by the investment banking division with equity underwriting revenues growing by 88% YoY. Marcus now serves 1.5 Mn customers and has originated over $4 Bn in personal loans.
- BofA’s Consumer Profit Jumps as Customers Boost Borrowing (Bloomberg, 7/16/18) The Consumer division reported its highest quarterly profit in 8 years as loans grew by 2% YoY to $935 Bn.
- Most people have great credit scores (Vantage Score, July 2018) As derogatory events tied to the financial crisis fall of credit files, average credit scores have reached 675, the highest since 2012.
- LendingClub turns to outsider to oversee credit operations (American Banker, 7/17/18) Ronnie Momen has joined LC from GreenSky to oversee its credit strategy, credit data use, analytics, and innovative products.
- We are going after the brokerage business, says SoFi CEO (CNBC, 7/12/18) CEO Noto wants to expand SoFi Money, a full-service banking account, to expand into the brokerage business.
- LendingTree, Inc. Announces Agreement To Acquire Student Loan Hero (7/13/18) LendingTree will acquire Student Loan Hero, a personal finance website, to grow its student loan operations.
- Elevate Launches Prime Credit Card for Non-Prime Consumers (Business Wire, 7/19/18) Elevate has partnered with Capital Community Bank to offer a full-service credit card to non-prime borrowers, as the fintech expands its non-prime lending products.
- Researchers produce images of people’s faces from their genomes (Economist, 9/9/17) Decoding the human genome has now given scientists the ability to predict a person’s physical and facial features.