Millennial DQs on the rise; GreenSky earnings; OCC on a fix for Madden?

By Vy Phan

May 19, 2019

Greetings,

Continued evidence trickled in that the US economy remains in the late stage of this economic cycle. Gowth in US debt is slowing and delinquencies are picking up, albeit from low levels. US consumer debt rose by 0.9% QoQ in 1Q to $13.7 Tn.

Retail sales in April fell by 0.2% MoM suggesting lower projected GDP growth. Retail sales and consumer spending have been buoyed by consumer debt, which has been increasing at a slower pace.

One particular area of weakness are younger borrowers – the milennial cohort. Many FinTechs are focused on lending to millennials, many of whom have not lived through an economic downturn and are showing significantly higher delinquency rates than older borrowers.

Source: Bloomberg, PeerIQ

In this week’s newsletter we will look at FinTech lenders’ earnings in detail and PeerIQ’s ABS Investor Portal. The most notable surprise was GreenSky which lost Regions Bank as a funding partner. GreenSky is one of the few pureplay marketplace lenders. Other lenders including LendingClub and Prosper have added warehouse finance and securitization, alongside whole loan sales, as sources of liquidity. GreenSky is also one of the few FinTech’s that trades at a premium multiple – GreenSky’s Price/Sales multiple is at 4.75 vs. peers such as LC (P/S 1.98) and ONDK (P/S 1.61). The loss of a bank partner, some analysts say, exposes a vulnerability in the marketplace funding model. The news may have a knock-on effect on FinTechs that are positioning themselves as the next GreenSky for ‘[ insert niche vertical here ]’.

In regulatory news, during a House Financial Services Committee, Otting indicated the OCC is discussing a regulatory fix to the “valid-when-made” issue stemming from the Madden decision. OCC Chief Otting said that the ongoing lawsuit by NYDFS attempting to block the OCC from issuing FinTech charters is discouraging new applicants. Otting no longer expects a formal application from a FinTech firm later this year.

Mixed FinTech Earnings

FinTech issuers saw growth in revenues and loans. Pace of loan growth weakened slightly as originations fell at Enova and grew by less than 10% YoY at OnDeck and OneMain. Stock price performance post earnings was mixed. Enova saw its stock price increase by 18% post earnings while OnDeck’s stock price dropped by 16%.

Below we look at individual earnings in detail.

Source: Bloomberg, PeerIQ

(All changes below are YoY unless mentioned otherwise)

Revenues at Enova grew by 15% to $293 Mn to record levels.

Earnings were $35 Mn, up by 25% YoY.
Enova’s originations fell by 3% to $0.5 Bn, the only issuer to see a drop in origination volume. The loan book grew by 16% to $1 Bn.
Loss reserves increased by 23% to $0.1 Bn. Growth in reserves significantly outpaced loan growth.
Charge-offs have been growing from a low base. Net charge-offs increased by 37% to $162 Mn.
Enova is looking to ramp up Enova Decisions, its Analytics-as-a-Service platform, as a new revenue stream.

GreenSky’s revenues grew by 22% to $104 Mn but earnings fell by 63% to $7 Mn.

Origination volume grew by 20% to $1.2 Bn and the loans outstanding grew by 35% to $7.5 Bn.
Provision for losses grew faster than originations at 43% to $0.1 Bn.
GSKY now has nearly 16 k merchants active on its platform with over 3,500 in healthcare.
GreenSky had $11.8 Bn in commitments from funding partners at the end of 1Q. Regions Bank has decided not to renew its partnership at the end of 4Q citing inadequate returns.
The loss of a key bank partner exposes a vulnerability in GSKY's funding model, and the inadequate returns could cause other banking partners to revaluate their relationships.

Source: GreenSky, PeerIQ

LendingClub’s revenues grew by 15% to $174 Mn.

Net loss decreased by 36% to -$20 Mn.
Originations grew by 18% to $2.7 Bn. Loans outstanding grew by 18% to a record $14.1 Bn.
LC held $552 Mn in loans at the end of 2018 for future transactions.
LendingClub will no longer originate small business loans themselves but will partner with Funding Circle and Opportunity Fund to offer co-branded loans.
LC’s projected charge-off rates increased significantly this quarter leading to lower expected returns across grades. LC will stop originating E loans going forward due to lack of investor appetite.
Projected returns decreased by 14 bps on As and 34 bps on Cs QoQ.

Source: LC, PeerIQ

OnDeck’s revenue grew by 22% to $110 Mn. Earnings were $6 Mn, up from a loss a year ago.

NII grew by 28% to $95 Mn.
Origination growth slowed to 8% as the company tightened its credit box. Originations were $0.6 Bn and the loan book grew by 19% to $1.2 Bn.
Provision for credit losses increased by 19% to $43 Mn, while total loss reserves increased by 24% to $147 Mn, outpacing loan growth.
Net charge-offs jumped by 36% to $36 Mn. OnDeck noted that charge-offs were normalizing to within their target ranges.
ODX, its Lending-as-a-Service platform, saw good volume from Chase and originated its first loans for PNC.

OneMain’s revenues grew by 10% to $1.1 Bn and earnings grew by 23% to $152 Mn.

NII grew by 9% to $0.7 Bn.
Originations grew by 4% to $2.6 Bn and the loan book grew by 9% to $16.2 Bn.
Provision for credit losses increased by 13% to $0.3 Bn, while total loss reserves increased by 6% to $0.7 Bn.
Net charge-offs increased by 8% to $284 Mn.
OneMain increased its undrawn credit facilities to $6.2 Bn and achieved a 49% secured funding mix at the end of 2018.

PeerIQ’s ABS Investor Portal

PeerIQ’s ABS Investor Portal allows you to analyze and benchmark the loan-level collateral of major ABS issuers. Users can perform Stress Test scenarios, such as the 2008 global financial crisis, on each originator and project cash flows.

Do reach out to learn more about our Investor Portal!

Industry Update:

Weak U.S. retail sales, industrial output point to slowing economy (Reuters, 5/15/19) U.S. retail sales unexpectedly fell in April as households cut back on purchases of cars and other goods.
Americans Kept Borrowing in First Quarter as New Mortgages Eased (Bloomberg, 5/14/19) Total U.S. household debt rose by 0.9% from the prior quarter to $13.67 Tn.
Credit Card Borrowing Increases and Americans Are Slower to Pay Them Off (Bloomberg, 5/14/19) DQ rates have increased on credit cards for younger borrowers.
Millennials Are Helping to Sound the Credit Card Alarm (Bloomberg, 5/15/19) Young Americans have fallen seriously behind on their payments, adding to angst about the true health of U.S. consumers.
Fintech charter delayed following court ruling: Otting (American Banker, 5/15/19) OCC chief Otting said that the ongoing lawsuit by NYDFS attempting to block the OCC from issuing FinTech charters is discouraging new applicants.
Fitch Report: Declining Credit Enhancement in US MPL ABS is Unwarranted (Fitch, 5/14/19) Credit enhancement (CE) levels of ‘Asf’ category rated US MPL ABS have meaningfully declined since 2017, while asset quality remained relatively steady.
SCLP 2019-3 PreSale Report (KBRA, 5/16/19) Kroll has rated the senior tranche on SoFi’s latest consumer MPL deal AAA.
Enova International: 1Q Earnings Snapshot (Houston Chronicle, 4/25/19) ENVA reported 1Q profit of $35 Mn.
GreenSky: 1Q Earnings Snapshot (Omaha World Herald, 5/7/19) GSKY reported 1Q earnings of $2.9 Mn topping expectations.
LendingClub (LC) Reports Q1 Loss, Tops Revenue Estimates (yahoofinance.com, 5/7/19) LC’s loss was in line with expectations.
OnDeck lowers revenue target after charge-offs climb (American Banker, 5/2/19) OnDeck Capital reduced its revenue expectations Thursday after a quarter in which credit quality worsened and the firm tightened its lending criteria.
OneMain: 1Q Earnings Snapshot (Houston Chronicle, 4/29/19) OMF reported 1Q earnings of $152 Mn.

Lighter Fare:

This Hubble photo captures more than 265,000 galaxies in one image (MIT Tech Review, 5/13/19) A composite photo with 16 years of data shows 265 k galaxies and stretches 13.3 Bn years back.