PeerIQ released the new Lending Earnings Insights report this past week. On a quarterly basis, following earnings announcements, we analyze lender performance and pore over earnings transcripts to identify changes in credit performance data.Reach out to PeerIQ research & analytics team if you’d like to learn more.
This week featured several major developments across regulatory, M&A, and ABS markets.
The Cleveland Fed retracted its highly contested study on online peer-to-peer loans. The news is a victory for Nat Hoopes, Executive Director of the Marketplace Lending Association, who published an op-ed in the American Banker “Why Cleveland Fed Should Retract Its Online Lending Study”.
In M&A news, TransUnion acquired Factor Trust, a predictive analytics and risk scoring firm. The move provides TransUnion with access to the largest database of short-term and small-dollar loans. Overall, the transaction reinforces TransUnion’s position as a provider of alternative data and enables financial institutions to better segment risk across the credit spectrum.
PayPal sold its $6 Bn consumer lending portfolio to partner Synchrony Financial. The WSJ reports that the transaction enables PayPal to continue originating loans without taking on credit risk. The influx of capital will also enable PayPal to continue fund M&A. PayPal recently acquired Swift Financial to bolster its small business loan capability.
SoFi announced that it priced its largest consumer loan deal. SCLP 2017-6 was a $727 Mn issuance, making it the largest offering of securities backed by consumer loans. Investor acceptance continues to grow as measured by broadening participation, declining subordination levels, and upgrades on seasoned deals. Erica Dorfman, VP of Capital Markets at SoFi, reports that 5 new institutions joined the offering bringing total participation to 39.
Marlette completed its fourth securitization since August 2016. Marlette has now funded over $1 Bn in personal loans, and completed its fourth securitization of $312 Mn. Goldman Sachs led the deal while Citigroup and DB were joint book-runners. This was Marlette’s first deal to include a D-class, which was rated BB by KBRA. The deal contained loans originated by Marlette, Goldman Sachs, Cross River Bank and other affiliates. The deal was significantly oversubscribed allowing Marlette to price the deal at the tightest spreads ever (Class A priced at L+75 down from L+100 in MFT 2017-2 which priced in June).
This week, we perform a deep-dive on GS Marcus relying on excerpts from their recent presentation at the BAML Future of Financials Conference and earnings commentary.
GS Marcus: Goals & Motivation
Marcus, was launched in October 2016 amidst mixed perceptions from market participants. One-year later, however, Marcus has achieved its $2 Bn origination objective – making it the fastest growing lending platform that PeerIQ tracks.
Marcus is accessing a large consumer credit market, and with bank retrenchment still underway, there is plenty of slack to fill.
GS Marcus expects to originate $13 Bn over three years – the exact amount that Wells Fargo consumer balances have shrunk over the last twelve months as detailed in the PeerIQ Lending Earnings Insights report. GS expects to grow revenue from the Marcus platform to over $1Bn by capturing roughly 6% of the $250Bn unsecured consumer loan market:
We shared last year that the primary motivation for GS is ROE. Bank ROE’s remain mired in the low-teens due to tough post-crisis capital and liquidity rules. On the recent investor presentation, Marty Chavez noted that GS expects a mid-teens ROE from Marcus (and 30% ROE from other lending and investment initiatives) – substantially higher than GS’s current ROE of ~11%.
How does Marcus Compete?
Marcus intends to compete first-and-foremost on product and customer experience. Marcus offers borrowers no-fee loan products and flexibility (like the ability to miss one payment without penalty every 12 months).
Marcus is taking advantage of its deposit-funded status. GS can more readily extend term, modify loans, and compete on fees and rates in a way that financially-oriented ABS investors with strict servicing covenants, forward flow agreements, and prepayment sensitivities may find difficult.
How Does Marcus Comp to Other Lenders?
The following slide captures public data on Marcus performance expectations.
GS CFO Marty Chavez notes that Marcus has an aggressive ~3.5% ROA objective. By comparison, Discover’s ROA is currently ~2.4% and has only achieved a quarterly 3.5% ROA once in the last ten years.
How do GS Credit Loss Expectations Compare to its peers?
* GS estimate of 4%, Lending Club and Prosper based on 3-year ratings agencies cum. Loss estimate of 12%. Discover based on 3Q-10Q realized
Source: PeerIQ, GS Investor Presentation, Public Filings, Bloomberg.
Although the statistics look similar, each lender is measuring loss-rates somewhat differently:
- Lending Club and Prosper cumulative loss rates on 36-month prime term loans are ~12% – as estimated by ratings agencies during a base case (not thru cycle) scenario.
- GS projects thru-the-cycle annual credit losses of 4.0%. Therefore, GS is betting that it will outperform on losses thru-the-cycle.
- Discover’s 3.2% loss-rate is a realized statistic from the most recent 10-Q.
- Discover management notes that loss rates are re-normalizing to higher levels. Indeed, Discover’s loss rate was 2.1% two year ago in 3Q 2015 and management expects losses will continue to re-normalizing going forward.
- We believe a comparable thru the cycle loss-rate for Discover would meet or exceed 4%. By way of comparison, the Discover loan portfolio experienced a peak charge-off rate during the financial crisis of ~7%. (and continued to deliver a positive ROA).
What Other Moves May Be In Store?
Notably, in early November, GS Bank announced the US Bank will re-brand to “Marcus by Goldman”. The move indicates that GS intends to deliver a broader range of offerings under the Marcus banner. GS also announced to customers that it will introduce enhance the mobile experience and “improve your financial wellness”.
Away from Marcus, GS is utilizing other levers including M&A and partnering with FinTechs to achieve its lending objectives. GS recently acquired Genesis, and has in the past acquired other offerings complimentary to its business plan (see the acquisition of Honest Dollar). GS also led the recent Marlette securitization (contributed 36% of the collateral in the recent deal) and announced a $300 MM forward flow program with Solar Mosaic.
Overall, the landscape for online lending is dynamic and borrowers are benefitting from competitive access to credit. We believe the long-term winners will have, among other attributes, a competitive advantage in managing liquidity and credit risk. At PeerIQ, we’re excited to play a role in driving standards and transparency for this fascinating and rapidly growing sector.
- CEO, Ram Ahluwalia will speak on the “A-Z of Securitizations Done to Date” panel at 11:50 AM IMN’s 3rd Annual Investor’s Conference on Marketplace Lending on December 1 in NYC.
- Chief Commercial Officer, Kevin Walsh will also be speaking on a panel at 2:20 PM titled “Improving MPL Liquidity and the Role of Securitization.”
PeerIQ in the News:
- Fed flags online lending as subprime redux, but market hits back (Global Capital, 11/16/17)
- Fed Report Prompts Leverage Fears (AB Alert, 11/17/17)
- PeerIQ’s Q3 Public Lender Tracker (PeerIQ Email), Rated: A (Lending Times, 11/13/17)
- TransUnion Expands Credit Access to More Americans with Acquisition of FactorTrust (GlobeNewswire, 11/14/17) TransUnion announced the acquisition of FactorTrust, a provider of alternative credit data, analytics and risk scoring information.
- PayPal Makes Growth Play as Market Cap Nears $90 Billion (WSJ, 11/15/17) PayPal sold its $6 Bn consumer lending portfolio and expanded its relationshipwith Synchrony. PayPal recently acquired Swift and now has more capital for M&A.
- Richard Cordray Stepping Down As Head Of U.S. Consumer Protection Agency (NPR, 11/15/17) Richard Cordray, Director of the CFPB, announces he will leave end of November. The move enables Trump admin to continue to re-shape the embattled CFPB.
- VPC takes (Peer2Peer Finance News, 11/16/17) VPC has continued its expansion into balance sheet lending by upping its investment in online secured lender Borro.majority stake in online lender Borro
- SoFi Completes Largest Consumer Loan Securitization to Date(CrowdFundInsider, 11/11/17) SoFi announced it has completed a $727 Mn issuance of SCLP 2017-6 notes.
- Prosper Shares Q3 2017 Results with $821 Million in Originations (Lend Academy, 11/14/17) Prosper has published their Q3 numbers which show gains in positive cash flow and originations up 164% year over year. As seen on PeerIQ’s platform Prosper’s loans have a weighted average interest rate of 15.2% and a weighted average term of 3.9 years.
- Square is now letting people buy bitcoin on their phones (MarketWatch, 11/15/17) Square Cash users will be able to hold or sell their bitcoin on the platform.
- Fintech Company Elevate Launching a Credit Card for Sub-Prime Consumers(LendEDU, 11/10/17) Elevate announced it is entering the credit card business.
- Federal Reserve of Cleveland Makes Some Dubious Claims in a Report on P2P Lending (Lend Academy, 11/13/17) LendAcademy examines Federal Reserve of Cleveland’s claims in recent report on P2P Lending and expresses doubt over the findings.
- Rising challenges unlikely to deter U.S. securitization in 2018 (ASR, 11/15/17) Fitch’s outlook for U.S. structured finance ratings see no signs of a slowdown in issuance next year.
- Buyer of $450 MM Da Vinci Painting Sort of Assumed It Would Come With A Frame (The Onion, 11/16/2017)