This week, we examine continued evidence of the U.S. consumer’s steady recovery, with household income up 0.9% and a record quarterly GDP increase; we share a few thoughts on the latest set of 3Q earnings, with “stabilization” as the key theme at OneMain and others; and, we look at major moves in the industry, with Bread selling itself to Alliance Data and Visa potentially facing an antitrust suit over its Plaid purchase.
Let’s get to it.
Economy Continues Steady Recovery…
The U.S. consumer continues to slowly heal, as a range of economic data showed this week. Initial jobless claims fell to ~750k, the lowest level since the beginning of the pandemic. That improving environment helped boost household spending in September by 1.4% from August – the fastest pace since pre-COVID – while personal income increased 0.9% MoM.
Strikingly, not only have overall spending levels (excluding travel) recovered substantially since April, saving continues to be elevated as well – boding well for consumers’ ability to cover debt service in the near term.
Source: WSJ, PeerIQ
Source: WSJ, PeerIQ
Overall, GDP popped by a record 7.4% in 3Qr – a sharp recovery from the 2Q’s 9% drop, but leaving the economy still nearly 3.5% smaller than where it ended in 2019.
…as Election Day Looms
We’re just a few days away from Election Day and already more than 80MM people have casted ballots in this year’s election. In fact, the combination of in-person and mail-in votes through the end of the week is nearly 60% of the total number of votes in 2016’s election, potentially heralding a massive increase in turnout this year.
What Would a Biden Victory Mean for Lenders?
As the adage goes, “people are policy,” and the key positions we’ll be watching are Treasury Secretary and Head of the Consumer Financial Protection Bureau.
Treasury Secretary – Fed governor Lael Brainard, a veteran of the Obama and Clinton administrations, is mooted to be in the lead. A middle of the road pick, Brainard is seen as someone who could bridge the liberal and centrist camps within the party. Another possibility – Rhode Island Governor Gina Raimondo – a former VC with ties to Wall Street. However, that hasn’t stopped speculation about Senator Elizabeth Warren stepping into the role – an unlikely move at this point, but still a possibility.
CFPB – Whether or not we see a Secretary Warren as Treasury, it’s almost certain that Biden will replace the CFPB director with someone more in her mold. Under the Trump administration, the CFPB (effectively a Warren creation) has dialed back significantly from the enforcement policies of the Obama years; we can safely assume the hands-off approach would end under Biden.
Q3 Earnings, Continued: OMF, V, MA
Earnings season continued this week, with lenders Citigroup, One Main, and CURO joined by Visa and MasterCard in reporting results.
The theme for the quarter is “stabilization,” across lenders and payments businesses. Our quick takeaways:
1) Credit trends continue to stabilize among the lenders, with all three (OMF, C, CURO) showing improvements to the credit quality of their borrowing base.
- Credit metrics stayed stable QoQ, with loan loss reserves holding flat at $2.3Bn (13% of net receivables) and provision of $232MM down significantly from 2Q’s $422MM figure
- Borrower assistance has normalized, with end-September 2.4% share approaching pre-pandemic ratios of 2% (a significant drop from April peak of 8%)
- Long-term delinquencies (90+) and NCOs continue to decline, to 1.49% and 5.20%, respectively (versus 1.89% and 6.33% in 2Q)
In our view, this is impressive performance in light of the broader COVID landscape; we wouldn’t be surprised if OMF takes advantage of their “fortress liquidity” (to paraphrase a Dimon phrase) and purchases attractive assets or dislocated businesses in the coming months.
Source: OneMain Financial, PeerIQ
Source: OneMain Financial, PeerIQ
- Overall, consumer credit held stable: CECL release of ($0.1Bn) in the quarter, versus $2.0Bn build in 2Q, resulting in a $19.1Bn balance at quarter-end (7% of loans), primarily driven by cards business ($ 16.7Bn / 11.42% ratio)
- Within the North America consumer banking segment, credit costs fell significantly: net cost of $1.2Bn (down 61% QoQ / down 23% YoY) helped in part by lower card volumes
- Revenue down 39% YoY driven by decline in overall loan balances (down 26.5% YoY); signs of recovery, however, as 3Q loans grew 9.5% versus 2Q
- Although loan volumes are down, overall credit health has improved: weekly delinquencies are less than 15% of loans (peaked above 20% in mid-April), Past Due balances have fallen nearly 30% YoY, and the NCO rate is 41% lower than 3Q 2019
2) Domestic spend continues to shift towards Debit over Credit, with volumes stabilizing (and moving online), while cross-border transactions have collapsed
- Overall revenues fell 17% YoY, with international ($1.3Bn, down 38%) the biggest laggard
- Transaction volume up ~4% YoY, an improvement from the prior quarter’s 10% fall; discrepancy between Credit (down 10%) and Debit (up 20%) continued from the prior quarter (down 20% / up 3%, respectively)
Source: Visa, PeerIQ
- Revenues down 14% YoY, with cross-border fees ($0.8Bn, down nearly 50%) the primary driver of the decline
- Transaction volume up 1% overall, with U.S. volume (+4%) offset by international volume (flat); noted shift into Debit (+10%) versus Credit (down 10%)
Source: Mastercard, PeerIQ
Bread Sells, SoFi Gets Licensed
In industry news this week, Bread announced a sale to Alliance Data Systems (ADS), a provider of loyalty and rewards systems. The transaction is valued at $450MM, including $100MM of ADS stock, and gives ADS expanded “payments options and capabilities, giving our brand partners … another way to capitalize on the rapidly growing e-commerce channel.” Congrats to the team on the sale!
In a significant step forward, this week SoFi confirmed that it had received preliminary approval on its bank charter application. In parallel, the firm announced the launch of its first credit card – in partnership with MasterCard – giving customers enhanced cash back rewards when using other SoFi products. Combined, this positions SoFi to significantly broaden the product choices available to its customers, while lowering and stabilizing the company’s funding profile.
DoJ Readies Suit to Stop Visa / Plaid
In a legal filing this week, the U.S. DoJ indicated growing scrutiny of Visa’s planned purchase of FinTech platform, Plaid. The $5.3Bn deal, announced January, was seen as a way for Visa to tap into fast-growing payments systems that operate outside the traditional card network – and in a court filing this week, the DoJ noted it’s investigating whether the deal would “allow Visa—the dominant provider of debit services in the United States—to create or maintain a monopoly.”
Credit Karma Looks to Exit Tax Business
Finally – and potentially with an eye towards avoiding Visa’s fate – the WSJ reported this week on Credit Karma’s plans to sell its tax preparation business to Square. The move would augment Square’s emerging consumer business – adding to the Cash App offering – while helping defuse antitrust concerns as Intuit looks to close its $7.1Bn purchase of Credit Karma.
In the News:
- U.S. Jobless Claims Fall to Lowest Level Since Start of Coronavirus Pandemic (WSJ, 10/29/2020) Unemployment claims dropped to a 7-month low of 751,000.
- S. Economy Recovered Significant Ground in Record Third-Quarter GDP Rebound (WSJ, 10/29/2020) The GDP increased by 7.4% over the prior quarter in Q3 2020, which is a record pace.
- The Fed is Really Running Out of Firepower (Bloomberg, 10/28/2020) Fed officials were not exaggerating when they said that only government spending can rescue the U.S. economy.
- Recession’s Silver Lining: American Households Are Doing Better Than Expected (NY Times, 10/27/2020) Deferrals and relief aid are contributing factors to Americans saving more and paying off debts during Covid.
- Biden’s Path to 270 Widens, Trump’s Path Narrows, as Texas Moves to Toss Up (The Cook Political Report, 10/28/2020) With less than a week out from Election Day, President Trump has 20 states worth 125 electoral votes in his column, while former Vice President Joe Biden holds 24 states worth 290 electoral votes.
- Should banks be worried about skyrocketing fintech valuations? (American Banker, 10/26/2020) Analysis conducted by The Economist showed that conventional banks now make up 72% of market capitalization in the global banking and payments industry, which is down from 81% at the beginning of the year and 96% a decade ago.
- VC Funding for Fintechs Is Down, but Large Banks are “Quietly” Investing in Financial Tech Startups: Report (Crowdfund Insider, 10/26/2020) According to a report published by S&P Global Market Intelligence, VC funding for Fintechs is down, but large banks are “quietly” investing in FinTech startups.
- Venmo, Square Cash, And Paypal Give The QR Code A Second Life (Forbes, 10/27/2020) The QR code is gaining traction in the U.S. during Covid because of companies like PayPal and Apple.
- Ant Group to Raise More Than $34 Billion in Record IPO (WSJ, 10/26/2020) Ant group could bypass U.S. stock exchanges when in its market debut.
- PayPal’s New Service Is A $50 Billion Stimulus Check For Bitcoin (Forbes, 10/25/2020) PayPal users accounted for 74% of customers that purchased products and services using Bitcoin in the past year.
- SoFi gets Preliminary OK on bank charter, launches credit card (American Banker, 10/28/2020) San Francisco-based FinTech firm, SoFi, received preliminary conditional approval on its application to become a national bank.
- Visa’s Planned Purchase of Plaid Faces Antitrust Scrutiny at the Justice Department (WSJ, 10/27/2020) The Department of Justice is making preparations for potential litigation to decide whether it will sue to block Visa’s acquisition of Plaid.
- Alliance Data Signs Definitive Agreement to Acquire Bread® (PR Newswire, 10/29/2020) Alliance Data Systems Corporation announced it has signed a definitive agreement to acquire FinTech startup, Bread.
- There’s Water and Ice on the Moon, and in More Places Than NASA Thought (NY Times, 10/26/2020) NASA discovered water on the sunlit surface of the moon.