FinTech financings and M&A continued this week. PayPal acquired Swift Capital, a provider of working capital to small business owners. PayPal cited Swift’s talent and capabilities as rationale for the transaction, as well as a desire to strengthen PayPal’s overall merchant value proposition. We note that PayPal invested in LendUp just a few weeks ago. The payment processor appears keen on bulking up its lending footprint to compete with rivals Square, Affirm, and Amazon Lending.
On Thursday, it was announced that KKR agreed to buy Australian non-bank lender Pepper Group for $518 Mn. Vyze, which offers a tech solution for point-of-sale financing, announced a $13 Mn investment led by Austin Ventures. Lastly, Coinbase, the cryptocurrency brokerage and exchange, has raised $100 Mn at a $1.5 Bn valuation.
This week, both Lending Club and OnDeck reported and exceeded analysts’ earnings estimates for Q2 2017. Both companies are approaching the key milestone of positive GAAP earnings. We take a closer look at their financial results below.
Lending Club Beats Estimates
After a rough 2016, Lending Club has regained investor confidence with net revenue and originations at their highest levels since Q1 2016. As of Friday’s close, Lending Club’s share price was at $5.90, up 20% from its recent low of $4.92. A key success in Lending Club exceeding expectations was the CLUB securitization which netted $3.7 Mn–a key driver of Lending Club’s $4.5 Mn in Adjusted EBITDA this past quarter.
Buoyed by the success of their first securitization (CLUB 2017-NP1), Lending Club intends to continue their ABS program, and intends to achieve GAAP profitability at the end of 2017. Lending Club’s Q2 quarterly net revenues currently stand at $140 Mn. The net revenue number is running neck-and-neck with SoFi, who reported $134 Mn revenues for the quarter (although it is unclear if SoFi is reporting net revenue).
Highlights from Lending Club’s earnings:
- New revenue stream: Lending Club plans to continue with one securitization per quarter, with expectations of a prime deal in Q3. They plan to contribute approximately $100 Mn in prime loans off the balance sheet for Q3’s deal.
- The CLUB securitization netted $3.7 Mn and was highly oversubscribed: Through sponsoring the security, Lending Club earned ~$600k, via a combination of selling servicing rights, pricing above book value, and netting out costs. The other $3.1 Mn came from $4.6 Mn in interest income earned while accumulating near-prime loans, less $1.4 Mn in write downs as principal was paid off.
- Increased investor appetite and positive brand awareness: The CLUB securitization has brought new investors to the asset class and the Lending Club platform. In Q2 Lending Club experienced record investor participation with 20 new investors and over 100 managed accounts/institutional investors.
- Increased bank participation: Lending Club saw 44% participation from banks in Q2 which decreases its “effective funding cost” and shows confidence in their loans. Lending Club is carving out a differentiated funding cost advantage in financing whole loans through an increasing mix of banks.
- High capital efficiency: As per Dodd Frank Risk Retention Rules, Lending Club retained a 5% vertical slice in the security through a Manager Owned Affiliate of which they own a 56% majority stake. This effectively brings LC’s exposure to 2.8%, allowing greater capital efficiency than on balance sheet financing. We discuss Dodd Frank and MOAs in a previous blog post. The vertical slice approach also enables Lending Club to maintain a favorable off-balance sheet treatment for accounting purposes.
Lending Club has also tightened underwriting standards. The latest data from PeerIQ’s risk analytics platform indicates Lending Club’s recent vintages have the lowest debt-to-income ratios of recent vintages. Reach out to PeerIQ to learn more about other trends in the public Lending Club data.
OnDeck moved to a positive adjusted Net Income ($1.5 Mn) and generated gross revenue of $86.7 Mn (up 25% year-over-year). OnDeck has focused on tightening credit underwriting and cost rationalization; consequently, originations were down for the quarter to $464 Mn (from $590 Mn last year). OnDeck has successfully executed its $45 Mn cost rationalization plan and expects operating expenses of ~$40 Mn for each of the next two quarters.
During Q2, OnDeck hit a significant milestone with JP Morgan Chase. After a successful deployment and scale out period, Chase and OnDeck have entered into a new four-year contract. In the contract, OnDeck will provide the technology powering Chase’s online lending to small business customers. OnDeck alluded to future partnerships with other banks during analyst Q&A. We note this business model presents a new scalable revenue stream that does not carry the same capital and credit risk management burdens.
Net Interest Margin and Net Interest Margin after Losses have fallen to their lowest points in recent times. If you look at the chart below, you can see NIM fell 70bps and NIMAL fell 8.2% when compared to Q2 2016. A large contributing factor to this is Net Charge-Offs by quarter which has hit a recent high of 18.5%. We would expect charge-offs to decline in future quarters and NIM to expand due to management actions to tighten credit underwriting and cost rationalization.
Source: PeerIQ, Bloomberg
Lastly, OnDeck’s cost of funding is up 30bps from last quarter. The chart below shows the historical cost of funding since Q4 2015.
Source: PeerIQ, Bloomberg
Over the last twelve-months, OnDeck has increasingly tapped warehouse finance. OnDeck extended the maturity date of its $100 Mn credit facility with SunTrust Bank to November 2018 and decreasing the facility’s funding cost by 50 basis points. OnDeck also extended the maturity date of another facility to May 2019, increased the facility’s borrowing capacity to $100 Mn, and decreased its funding costs by 200 basis points.
Over the past year, OnDeck has moved almost entirely away from funding via their marketplace model which now stands at only 2.3% of total originations. (Please see this blog post where we compare the funding mix for OnDeck vs. other non-bank lenders.)
Taking a step back, both Lending Club and OnDeck have made significant shifts in their funding mix. Lending Club has moved from a pure marketplace model to adding securitization as a funding component. We see both moves as continued evidence of our founding hypothesis that consumer credit is transitioning to the capital markets.
- Ram will speak on a panel at the Online Lending Policy Summit on September 25th in Washington, DC.
- Ram will speak on the “Trends in Online Consumer Lending: Less Tech, More Fin?” panel on Monday, September 18 at ABS East in Miami, FL.
PeerIQ in the News:
- Surge in FinTech Financings; PeerIQ Closes Series A(PeerIQ), Rated: AAA (LendingTimes, 8/17/17)
- Lending Club Earnings:
- LendingClub Reports Second Quarter and Full Year 2017 Results
- Lending Club Earnings Call Transcript (Seeking Alpha, 8/8/17)
- OnDeck Earnings:
- Online Lenders Upbeat About Turnaround Progress, But Worries Linger (Reuters, 8/7/17) Lending Club and OnDeck Capital reported strong growth forecasts that sent the online lenders’ stocks soaring, but analysts remain cautious.
- U.S. Credit-Card Debt Surpasses Record Set at Brink of Crisis (Bloomberg, 8/7/17) U.S. consumer credit-card debt has surpassed pre-crisis levels on an aggregate (not individual) basis.
- Lending Startup Earnest Is Working with Barclays to Find Buyer (Bloomberg, 8/7/17) Earnest is reportedly working with Barclays for strategic financing.
- NSR Invest and LendingRobot Merge to Become Largest Robo-Advisor in Marketplace Lending (Lend Academy, 8/10/17) Two tech platforms which help investors access the alternative lending space are merging, planning to streamline the investment fund offerings with the LendingRobot Series fund being the focus going forward.
- Uber Plans to Wind Down U.S. Car-Leasing Business (WSJ, 8/10/17) Uber plans to wind down its U.S. subprime car-leasing division to stem unsustainably high losses, a major retreat just two years after starting the business.
- Mercatus on Policy: Modernizing Financial Technology Regulations to Facilitate a National Market (Mercatus Center, 8/17) Report examines challenges non-banks face from the existing regulatory structure.
- Northern Trust: A Path To Transparency In Alternatives Investing (FinAlternatives, 8/1/17) Recent global survey of asset managers and institutional investors reveals continued demand for data standardization, technology, and best practices in the alternatives space.
- Inside Wells Fargo’s Plan to ‘Disrupt the Disruptors’ (Tearsheet, 8/9/17) Wells Fargo’s Lisa Stevens, president of western region regional banking, on how Wells Fargo approaches small businesses and what competition from alternative lenders mean for the bank.