Greetings,
US payrolls rose by 213,000 in June. The unemployment rate rose slightly from 3.8% to 4% as the labor force participation rate increased to 62.9%. Meanwhile, in the Fed minutes released on Thursday, the Fed emphasized its interest rate hike path and saw a “strong economy”.
The US yield-curve flattens to its lowest level since 2007. Market participants are split on whether this yield curve flattening is different in kind from the past as the economy continues to be on a solid footing. An inverted yield curve has preceded past recessions, and we now see signs that a period of synchronized global growth could be ending leading to a synchronized global slowdown. (Readers interested in PeerIQ’s view of “Where We are In the Credit Cycle?” based on our June webinar can contact us.)
Personal loan growth continues unabated driven by fintech firms who have used technology to simplify applying for and getting a personal loan. All this growth has led some investors to be concerned about the deteriorating credit quality on personal loans, on newer vintage originations. KBRA released its latest consumer loan indices report that showed net losses ticking up on high quality Tier 1 loans, however losses are lower on Tiers 2 and 3 loans. (Note that these indices, by design, do not adjust for the vintage of origination and are not truly static pools, so interpret accordingly.)
On the M&A front, WSJ’s Peter Rudegeair reports SoFi seeks a $500 MM unsecured line of credit that could go towards acquisitions of other FinTech firms. Securing a line of credit indicates SoFi may be a small step closer to an IPO (unsecured LOCs are informally paired with winning an IPO mandate).
On the regulatory front, two recent studies published by the Federal Reserve provided a boost to fintech lenders and to the industry in general. A study by the New York Fed found that online lenders reduced mortgage processing time and experienced lower overall delinquencies. The study found that mortgages offered by fintech companies closed about 20% faster and showed that default rates were 38% lower for purchase loans and 29% lower for refinance loans.
The Philadelphia and the Chicago FRBs studied the impact of Lending Club loans on financial inclusion and concluded that these loans have penetrated areas that have lost bank branches and those in highly concentrated banking markets. The study also complemented Lending Club’s use of alternative underwriting data and noted that LC’s borrowers are, on average, more risky than traditional borrowers given the same FICO scores, and are able to access credit based on alternative underwriting data.
Square has recently withdrawn its ILC application with the FDIC and plans to submit a stronger application down the road. Its application with the Utah banking department remains active.
Fintech firms continues to diversify away from personal loans and offer a larger suite of banking products. An Industrial Loan Charter remains the best way for a fintech company to provide banking services in the absence of a traditional banking partner. The new FDIC chair is open to granting ILCs and providing a regulatory swim lane for technology companies to compete with banks.
GreenSky Company Profile
This week we profile the latest fintech entrant in the public markets – GreenSky. GreenSky, an online home-improvement lender went public in May. We will cover GreenSky’s earnings in our Lending Earnings Insights reports going forward.
GreenSky, headquartered in Atlanta, is led by CEO David Zalik. GreenSky has a $4 Bn market cap, 2017 revenues of $326 MM, and employs ~900 employees. Founded in 2006, GreenSky operates a lending platform that enables home improvement retailers (such as Home Depot), health-care providers and over 12,000 other merchants and contractors to offer credit to their customers.
GreenSky has funded over $12 Bn in loans for over 1.7 Mn customers. The company funded $1 Bn in loans in Q1 2018.
How the GreenSky Product Works
GreenSky provides loans of up to $55,000, which are funded by a network of banks, including Fifth Third, SunTrust Bank and Regions Financial. The home improvement loan can be drawn on at any authorized home improvement retailer for 6 months after the loan is made, after which monthly instalment payments begin for a total term of up to 60 months.
GreenSky Bank Partner Commitments (Publicly Announced)
GSKY has a smartphone app to help its customers manage their loans and loans are also disbursed at the point-of-sale when making home improvement purchases. According to Morgan Stanley Research, the vast unsecured consumer credit market and relatively low penetration of point-of-sale installment loans provide plenty of market opportunity for GSKY to grow into. GSKY’s current and adjacent verticals made up $898 Bn of total consumer expenditure in 2016.
GreenSky has shown impressive growth in its sales YoY. As seen in the charts below, GSKY had net income of $139 Mn in 2017, up from $124 Mn in 2016, while sales grew by 24% YoY to $326 Mn.
Source: GreenSky IPO prospectus
The GreenSky IPO
The GreenSky IPO is notable for two reasons. First, it’s the first FinTech IPO in three years. The performance of GreenSky will signal the receptivity of capital markets for public FinTech financing. Second, GreenSky is one of the only pure marketplace-driven lending platforms. Many platforms – including Lending Club, Prosper, and Avant – have shifted from a pure originate-to-distribute to a diversified funding model that includes the use of the company’s balance sheet.
Will public equity markets reward GreenSky with a higher enterprise value due to its capital light funding model?
So far, the near-term IPO performance has been mixed. GreenSky’s IPO priced at $23 on May 24th and the stock has since fallen somewhat below its IPO price to ~$21. Most fintech lenders have shown mixed performance in roughly one month since their IPOs. While LC had the best performance as its stock soared by 40% from its IPO price, ENVA saw its stock price drop by 21%, leaving GKSY’s performance squarely in the middle of the pack.
Source: Bloomberg
Does GreenSky Get Credit for Marketplace Lending?
We focus on the price-to-sales metric to comp these FinTech lenders, although arguably other metrics and revenue reporting or origination windows might serve as a better basis for comparison.
Source: Bloomberg
Thus far, we find that public equity markets, at least at this point in its relatively short post-IPO window, are rewarding GreenSky for its capital-light model.
Investors and capital markets team interested in benchmarking their performance vs. overall industry benchmarks using the TransUnion dataset can reach out to learn more.
Industry Update:
- S. Payrolls Rise 213,000; Wage Gains Slow, Unemployment Up (Bloomberg, 7/6//18) Unemployment rose slightly to 4% but average hourly earnings only rose by 0.2% MoM, potentially derailing the Fed staying at its inflation target of 2%.
- Fed Plans to Keep Hiking Gradually as Risks From Trade War Mount (Bloomberg, 7/5/18) FOMC meeting minutes showed that the Fed thinks that the economy is “very strong” and would continue on its rate hike path, while warning about economic turmoil from trade wars.
- Behind the Flattening Yield Curve: Fed Rate Increases and Tariff Fights (WSJ, 7/5/18) The yield curve continues its relentless flattening squeezing the margins lenders make.
- ‘Very Serious’ Global Synchronized Growth Downturn Seen, ECRI says (Bloomberg, 7/5/18) A period of synchronized global growth could be ending and leading to a synchronized global slowdown driven by trade wars and tariffs.
- The Role of Technology in Mortgage Lending (NY Fed, Feb 2018) In a shot in the arm for the fintech industry, the Fed study found that online lenders reduced mortgage processing time and had lower overall delinquencies.
- Fintech Lending: Financial Inclusion, Risk Pricing, and Alternative Information (Philadelphia and Chicago Fed) In a study using LC data, the Fed found that the use of alternative underwriting data allowed overlooked borrowers to receive credit, but these borrowers were riskier than traditional borrowers with similar FICO scores.
- Square quietly withdraws bank application (American Banker, 7/5/18) Square has withdrawn its application for a ILC with the FDIC and plans to refile later. Its application with Utah’s banking department is still active.
- Personal Loans Surge to a Record High (Bloomberg, 7/3/18) Technology has propelled the growth in personal loans and investors are getting concerned about increased credit losses.
- KBRA Monthly Consumer Loan Indices (KBRA, 7/6/18) KBRA released its latest consumer loan indices report that showed net losses ticking up on Tier 1 loans but lower on Tiers 2 and 3.
- Under Noto, SoFi Trying to Raise Money for Deals (WSJ, 7/2/18) SoFi is looking for a $500 Mn credit line to acquire other fintech firms that will help expand its products into banking and wealth management.
- Digital Mortgage Platform SimpleNexus Raises $20M In Growth Capital (FINSMES, 6/27/18) SimpleNexus, a digital mortgage processor, has raised $20 Mn to expand operations.
- LendingPoint Upsizes its Mezzanine Financing, Bringing it to More Than $50 Million (BusinessWire, 6/28/18) LendingPoint, a near-prime consumer lender, has upsized its mezzanine funding to $52.5 Mn to grow its lending footprint.
Lighter Fare:
- Algorithm matches human cardiologists in detecting heart attacks (MIT Technology Review, 7/2/18) Smarter healthcare, in which AI and robots would work alongside doctors, looks set to improve patient outcomes.