Greetings,
The historic period of synchronized global growth story appears to be unravelling. Across Europe, growth has halved while inflation continues to accelerate. Germany’s economy shrank for the first time since early 2015. China is experiencing a contraction in manufacturing output due to trade wars.
Here in the US, the Fed is wrestling with the combination of slower growth and rising inflation. CPI rose by a brisk 2.5% in October. Inflation prints above 2% will keep the Fed on track to raise rates in December. However, in 2019, Fed Chair Jerome Powell laid out a scenario for pausing rate hikes.
The gap between current and projected financial conditions continues to widen suggesting greater volatility ahead:
Source: PeerIQ, The Daily Shot, St. Louis Federal Reserve
Non-Bank Lending under Regulatory Focus – Potential for more ILC Charters?
Here in the US, the dramatic growth of non-bank lending has shifted into focus. Non-banks now originate more mortgages, auto loans, student loans, and personal loans than US banks. (US Banks are holding on to credit cards).
FDIC head Jelena McWilliams warned that the rapid growth of non-banks may pose a risk to the financial system. Her full statement is here.
Post-2008, non-banks have filled in the gap left by bank retrenchment. Banks have focused on “lending to the lenders” with capital efficient warehouse lines and ABS programs. McWilliams notes that lending to non-banks has grown over 6 times since 2010 to $376 Bn. Digital originations have propelled the growth of FinTechs and other non-banks, but these are not necessarily adding to systemic risk. McWilliams shared her favor of granting Industrial Loan Charters to FinTechs – a major shift for the FDIC.
Citigroup CEO Michael Corbat echoed McWilliams’s comments by stating that credit risks were looming in the non-bank sector due to the growing percentage of non-bank lending.
In this week’s newsletter we will analyze Prosper’s and SoFi’s quarterly earnings and preview our 4Q2018 Lending Earnings Insight report.
Prosper and SoFi 3Q Earnings – Recalibrating for a Rising Rate Environment
We analyze Prosper’s and SoFi’s 3rd quarter earnings below.
Prosper’s 10Q revealed that the company lost $19.8 Mn in 3Q, a $7.2 Mn improvement YoY. Net revenues declined from $28.9 Mn to $20.7 Mn YoY. Originations declined from $822 Mn to $640 Mn YoY driven by tighter credit guidelines and rising interest rates.
Prosper announced that it was launching a digital HELOC product in early 2019 that would allow regional and community banks to originate HELOCs using Prosper’s digital interface. Prosper is following in the footsteps of OnDeck which launched ODX earlier this year to enable banks to originate small-business loans online.
SoFi’s EBITDA loss in Q3 was $12 Mn compared to an EBITDA gain of $56 Mn in Q3 2017. SoFi’s originations were $2.5 Bn, down by 30% YoY. Rising rates have slowed SoFi’s student loan refinancing business and have contributed to the drop in originations. SoFi now has 700 k checking account customers and the company is branching into offering a suite of wealth management services to these customers. SoFi recently closed a $560 Mn line of credit.
Below is a comparison of key financial metrics of Prosper, SoFi, and their publicly-traded counterpart LendingClub.
Source: PeerIQ, Earnings Releases. Note: SoFi’s earnings are EBITDA and not net income.
PeerIQ’s 4Q 2018 Lending Earnings Insights
We will be shortly releasing our 4Q2018 Lending Earnings Insights report where we analyze the earnings of bulge-bracket banks, credit card issuers and FinTech lenders. Some of the themes that we explore this quarter are:
- How late are we in the credit cycle?
- Delinquencies and charge-offs in FinTech asset classes
- Loan loss provisions across major banks and card issuers
- Bank ROE
- Where Banks are focusing technology spend and M&A
PeerIQ will be hosting a webinar on Lending Earnings Insights and other topics on Thursday, the 29th of November at 3 pm EST. We hope that you will join us!
Investors can analyze the real-time performance of FinTech lenders and credit trends on PeerIQ’s platform. Reach out to learn more!
Industry Update:
- Inflation Remained Muted in October Despite Solid Economy (Bloomberg, 11/14/18) CPI rose by 2.5%, and CPI Core (excluding Food and Energy) which is less volatile, rose by 2.1% in October.
- Retail Sales Rise Most in Five Months on Autos, Fuel (Bloomberg, 11/15/18) Retail sales rose by 0.8% in October, driven by sales of autos, fuel and building materials.
- Current Expected Credit Loss (CECL) Threatens Bank Total Risk-Based Capital (TRBC) Levels (StoneCastle, 12/18/17) As CECL reserves are expected to be higher than GAAP reserves, this paper estimates their impact on FDIC-insured institutions.
- Nonbanks’ rapid growth poses risks to industry: FDIC’s McWilliams (American Banker, 11/15/18) The FDIC head warned that the rapid growth of non-banks posed a risk to the financial system due to rising non-bank originations. Her full statement is here.
- ‘There is likely to be some pain’: Citi’s Corbat on nonbank lending (American Banker, 11/14/18) Michael Corbat warned about the potential credit risk in non-bank institutions due to a high percentage of loans originated by non-banks.
- Prosper 2018 Q3 Earnings (SEC 10Q, 11/14/18) Prosper lost $19.8 Mn in 3Q, a $7.2 Mn improvement YoY. Net revenues declined from $28.9 Mn to $20.7 Mn YoY.
- Prosper Announces Plans to Launch New Digital HELOC Product (BusinessWire, 11/14/18) Prosper announced that it was launching a digital HELOC product in early 2019 that would allow regional and community banks to originate HELOCs using Prosper’s digital interface.
- Losses Pile Up at Fintech Firm SoFi as Rates Rise (WSJ, 11/11/18) SoFi’s EBITDA loss in Q3 was $12 Mn compared to an EBITDA gain of $56 Mn in Q3 2017.
- JPMorgan Wants Card Customers to Pay with a Tap (WSJ, 11/14/18) JPM is launching contactless credit cards to speed out checkouts that have been slowed down by chip-cards.
- CommonBond Teams Up with Investor Fifth Third Bank on Student Loans (CrowdFund Insider, 11/15/18) Fifth-Third, an investor in student refinance platform CommonBond, will invest in loans originated on the platform.
- PayPal co-founder’s installments firm, Affirm, rebrands, gets into travel (PaymentSource, 11/13/18) Point-of-Sale lender Affirm is branching out into travel financing.
Lighter Fare:
- Chinese Company Pays Bondholders in Ham Instead of Cash as Domestic Defaults Soar (ZeroHedge, 11/9/18) Payment-in-Kind taken to the extreme, a pork producer in China paid the interest on its bonds in ham after a cashflow crisis.