What a quarter for consumer lending! Consumers’ balance sheets are stronger than ever, spending is back, non-bank lenders’ volumes jumped close to pre-pandemic levels, and securitization deals are oversubscribed. 

In case you missed our earnings coverage in our weekly newsletter, this post summarizes the key trends for the quarter; we focused here on banks and non-bank lenders and organized the post around these two groups.

Non-Bank Lenders

Lending Originations Rebound

Consumer origination volumes are back for non-bank lenders, which posted record QoQ and YoY growth. Some lenders are already above their pre-pandemic levels (e.g., GreenSky, OneMain, SoFi), while others are still catching up (E.g., LendingClub, Enova, Elevate, Navient). 

Sources: Public Filings, PeerIQ

Consumer Balance Sheets Show Continued Strength

Consumer balance sheets continue to be historically strong. Despite the spike in unemployment, between stimulus payments and reduced spending, consumers had more disposable income, which they used to pay down debt. The stronger consumer profile, the trend toward deleveraging, and a tightening in underwriting at the onset of the pandemic led to a decline in net charge-offs across the board. This has primed the pump for a strong rebound in consumer spending and borrowing as the economy begins returning to normal.

(1) Elevate reports NCOs as a % of revenues
Source: Public Filings, PeerIQ

Chairman & CEO of OneMain Financial Doug Shulman commented “Our credit performance remains very strong and continues to benefit from the proactive credit tightening actions that we implemented at the start of the pandemic, the unprecedented levels of government support over the past 15 months and our robust underwriting capabilities.”

Record Investor Interest

The MPL securitization market remains competitive across the entire capital stack, from investment grade seniors down to residual certificates. Even with MPL originations growing up to 60% QoQ across originators, there continues to be more demand than offer, deals are oversubscribed, and yields are at historic lows. 

15 deals totaling $4.6B closed in the quarter, the highest number ever, and second in volumes only to the 2Q of 2019. One Main ($850Mn), Upstart ($647Mn), Oportun ($500Mn), Lendmark ($450Mn), Affirm ($320Mn), Freedom ($273Mn) and Marlette ($250Mn) were within the most active platforms, with Pagaya and Theorem continuing to play a lead role in the ecosystem. 

Optimism on the Horizon

Industry heads expect continued growth built on the momentum through the second quarter. We expect origination volume to continue to rise but would anticipate a lower growth rate as we move past the pandemic comps.

GreenSky CEO David Zalik – “We expect that this trend will translate into third and fourth quarter transaction volume contributions that would elevate transaction volumes above our historical seasonality trends.”

LendingClub CEO Scott Sanborn – “consumer demand appears to be ticking back up, though currently remaining below pre-COVID levels.”

Enova CEO David Fisher – “Even with the strong growth in demand and originations, credit quality remained historically good during Q2. We expect credit metrics to trend back to pre-pandemic levels over time.”

As the world returns to normal, we expect continued interest and investment in the BNPL vertical. This quarter, more heavyweights entered the space, with Apple and Goldman teaming up with plans to launch a BNPL product, Visa rolling out APIs that will allow card issuers to build their own installment plan offerings, and Square announcing its plan to acquire Australian BNPL Afterpay for a whopping $29Bn. With competition increasing, we’d expect to see pressure on margins. 

Performance Summary

Source: Public Filings, Yahoo Finance, PeerIQ

Summary Insights

OneMain fell (2.3)% on earnings, but ended the week trading directionally flat

  • Reported originations of $3.8Bn, up 67.9% QoQ. Within the quarter, originations improved each month, with June activity resulting in a record high for the company
  • Net charge-offs fell from 4.7% in Q1 to 4.4% for the quarter (and down from 6.3% YoY), with management expecting this trend to continue, updating FY net charge-off guidance to 4.2%
  • Announced plans to begin testing of new product offering, a credit card designed for the near prime customer, with the expectation from CEO Doug Shulman that the “card will be a multi-billion dollar receivables product over the coming years”

LendingClub crushed earnings estimates launching its share price up nearly 50% on net income of $9.4Mn versus an expected loss of $(30-40)Mn

  • Revenues nearly doubled QoQ, reaching $204Mn
  • Marketplace revenues increased 86% QoQ (on originations growth of 84%) to $151Mn (74% of total)
  • Net Interest Income is becoming a significant revenue contributor ($39Mn, 26% of total) as a result of the continued buildup of consumer portfolio held for investment (targeted retention of 15% to 25%)
  • CEO Scott Sanborn indicated that the next move for LendingClub is expanding the auto business within the bank

Elevate plummeted (13.1)% on a wider than expected net loss and a decline in revenue of (5.8)% QoQ and (28.4)% YoY

  • Originations grew over 100% from the first quarter, with management noting origination growth was heavily weighted to the last 45 days of Q2
  • Unveiled its new technology platform, Blueprint, which allows banks that license its tech to ability to integrate and collaborate across each of their three products (RISE, Elastic, today)

GreenSky stock popped 7.4% on an earnings beat, posting company record adj. EBITDA of $60.8Mn and net income of $46.7Mn respectively

  • Record earnings were driven by the rebound in transaction volume, up 19.1% QoQ and 13.7% YoY
  • Released new version of their mobile app, which migrates their POS platform to a new cloud environment
  • Finalized a 5-year exclusive deal with one of the nation’s largest HVAC sponsors, EGIA and an alliance with Angi Inc, a leading digital marketplace for home services

Upstart’s share price jumped 26.2% on strong transaction volume growth (+62% QoQ) and a 25% upward revision in revenue guidance for the year

  • Increased FY revenue guidance to $750Mn, a major bump from prior guidance of $600Mn
  • Reported over 150 institutions who buy Upstart-powered loans or bonds
  • Expanded its auto refi business from 33 to 47 states, now covering more than 95% of the U.S. population

SoFi stumbled, even with solid top line growth (of 18% QoQ and 101% YoY), its share price dropped 14.15% on an earnings miss

  • Continued to exhibit strong member growth, up 12.2% QoQ and 112.6% YoY to 2.56Mn members
  • Overall originations grew 15.7% QoQ, driven by the personal loan origination segment, which increased 60.7% from Q1. Home loan originations also experienced solid QoQ growth (+7.7%), while student loan originations was down 14.5% due to seasonal differences and the impact of the payment freeze on federally-held loans
  • Rolled out a Rate Match Guarantee and “snooze” feature for student loans, allowing borrowers to lock-in current low rates on a new student loan without beginning payments until the suspension of payments on federally-held loans enacted by the CARES Act is lifted
  • Refined its credit policy and automation capabilities, with over 50% of personal loans processed during the quarter fully automated, up from less than 30% a year ago

Large Banks

Consumers Hoard Cash As Economy Reopens

Consumers have been hoarding away cash, with bank deposits increasing across the board. Continued government support through increased unemployment, SNAP benefits, and the child tax credit should provide support to consumers through the third quarter.

Bank of America CFO Paul Donofrio –“With respect to deposits, we continued to see significant growth across the client base not only because of the growth in the money supply, but also because we added new accounts and attracted increased liquidity from existing customers. Normally, we see deposits decline in the second quarter given tax payments. But this year, we saw strong growth even with these tax payments.”

(1) PNC reported Total Deposits, excl deposits from BBVA USA acquisition
Source: Public Filings, PeerIQ

Spending Coming Back Across the Board…

While consumers saved extra cash during the quarter, they did not hold back on spending. Card spending volumes surged during the quarter, up double digits from the first quarter as pent-up consumer demand was unleashed with the reopening.

Citi CEO Jane Fraser – “In consumer banking, while our loan book and revenues were impacted by the elevated payment rates in cards, spending is well above pre-COVID levels, now with a 38% increase in global purchase sales year over year.”

Source: Public Filings, PeerIQ

…But Not Yet Resulting in Loans Book Increase

Loan balances have not bounced back yet; prepayment continuing to be a major driver of loan balance decreases across the board.

(1) Excludes loans from BBVA USA acquisition
Source: Company Filings, PeerIQ

Average home lending declined from the first quarter across players, with Wells Fargo down 7.0%, JPMorgan down 2.6%, Bank of America down 3.5%. 

Wells Fargo CFO Mike Santomassimo – “The decline from the first quarter was almost entirely driven by lower residential real estate loans primarily due to continued high prepayments and the resecuritization of loans we purchased out of mortgage-backed securities last year.”

Personal lending balances were also under pressure, in stark contrast with the performance of non-bank lenders. 

Auto loan portfolios performed better, with stable or increased balances; the industry had a wild quarter, with high demand, supply constraints and record prices. Wells Fargo loans portfolio increased +3.0% and JPMorgan +0.3% and Bank of America substantially unchanged.  

Wells Fargo CFO Mike Santomassimo – “Consumer demand for auto loans continues to be very strong despite higher prices and limited inventory. Auto originations increased 19% from the first quarter and 48% from a year ago”.

Solid Credit Performance

The strengthening of consumer balance sheets paired with stricter underwriting standards has driven net charge-offs to record lows. 

Bank of America CFO Paul Donofrio – “This is the lowest loss rate in more than two decades…For at least the next couple of quarters, I would expect total net charge-offs to moderate around the current level with lower card losses partially offset by lower net recoveries and other products.”

(1) Total NCOs, no consumer breakdown provided
Source: Company Filings, PeerIQ

Looking Past COVID

C-suite execs see a strong consumer segment emerging from the pandemic, but uncertainty continues around when or if a rebound in rates may occur.

Wells Fargo CEO Charlie Scharf – “The restocking of inventories is expected to be substantial, and the excess personal savings should provide a cushion for consumer spending. However, risks remain, interest rates have been volatile and the recent rally in rates is putting pressure on net interest income.”

Bank of America CEO Brian Moynihan – “We have work to do to keep driving down the core expenses and getting out the net COVID expenses over time. And above all, due to responsible growth, we saw strong core credit metrics. So as the economy continues to recover, we are seeing our organic growth engine kick back in.”

JPMorgan CFO Jeremy Barnum – “Looking forward, the obvious question is the outlook for loan growth, especially in Card, and we are quite optimistic that the current spend trends will convert into resumption of loan growth through the end of this year and into next. And while we wait, the exceptionally low level of net charge-offs provides substantial offset to the NII headwind.”

Goldman Sachs CFO Stephen Scherr – “As the credit environment remains benign, we expect loan growth to accelerate in coming quarters consistent with our strategy to increase lending and financing across the firm.”

Capital One Chairman and CEO Rich Fairbank – “Competitor tech investments are increasing as technology is increasingly seen as an existential issue. The investment flowing into fintechs is nothing short of breathtaking. And the war for tech talent continues to escalate, including levels of compensation.”

Performance Summary 

Source: Public Filings, Yahoo Finance, PeerIQ