This week, we discuss the Fed rate cut to the 2 to 2.5% target range, and provide market color on OnDeck earnings.

Fun fact #1: It has been 3,878 days (10.5+ years) since the FOMC last cut rates.

This is the second longest streak on record behind the 4,115 days that passed between cuts in the discount rate since 1954. Markets are speculating on additional rate cuts before year-end although Fed Chair Powell positioned the rate cut as an “adjustment” rather than a change in trend.

Fun Fact #2: A fed rate cut has temporarily ended inversion of the yield curve. (Nevertheless, 10-year yields continue to drop at stand at 1.86%)

The Chicago PMI moved below 50, putting the manufacturing sector, a smaller portion of the services-dominated economy into a technical recession.

Source: Chicago Fed PeerIQ

OnDeck (ONDK) Earnings

It has been a tough week for OnDeck Capital whose relationship with JPM Chase came to a rough ending after three long years of collaboration. The news and reports of higher DQs sent ONDK down in a knee-jerk ~20% drop, although shares bounced the next day ~13%.

Although the JPM relationship was never a major revenue generator, the partnership bolstered ONDK’s ability to sell lending-as-a-service software to other banks. In response to the setback, OnDeck is considering acquiring a bank charter perhaps via acquisition of small bank.

On top of their split from JPM, OnDeck also reported a near 25% (-$1.4M) drop in net income.

All in all, shares have fallen nearly 50% this year in comparison to the 20% gain in the S&P.

Equity investors remain in a “shoot first, ask questions later” mode for FinTech lenders. All publicly traded FinTech lenders are struggling to have their story understood by the market. What are the right comps for an “n=1” business model?

Sean Murray (Editor at deBanked) puts it this way (harshly):

“I can’t figure out what OnDeck wants to be. A bank underwriting tool? A bank? A subprime commercial lender? A tech company?”

The bull case for ONDK is that this is a waypoint on a longer journey to transforming small business lending. A bank charter for instance would drop funding costs and move tens of millions to the bottom line. ONDK would control its own destiny and could choose to sell loans to similarly regulated banks.

OnDeck’s market cap stands at ~$267 MM. The Price-to-Book ratio, a key valuation metric for banks, now stands at .85 – all-in-all a good deal for a bank looking to bolster their small business lending capabilities. How much value could ONDK unlock in the hands of a bank with strong origination and a reasonably sized balance sheet?

Competition in Unsecured Lending On the Rise

Amex and other banks are growing personal loan origination businesses. Like Marcus, AMEX personal loans charge no origination fee. Amex has the additional advantage of marketing to its existing customer base and pricing loans starting at 5%+.

Japanese e-commerce giant Rakuten (investor in Upstart) is also looking to get in on the competition, filing for a bank charter in Utah.  

Reports indicate Bank of America is testing its own platform with “on-us” customer relationships.

The greater competition is slowing loan growth at each originator. Discover personal loan growth is only 2% per year while the asset class continues to grow 15 to 20% annually.

Industry Update

Lighter Fare