US equity markets had a bad week as the S&P500 closed 3.3% lower at 2,659. CDX IG spreads widened marginally by 0.6 bps to 55 bps and CDX HY spreads widened by 8.7 bps to 337 bps. We have seen significantly higher volatility this year, driven mainly by rising interest rates and inflation expectations. No new MPL deals have priced since the rise in volatility, although we expect the first $1 Bn MPL ABS transaction to announce soon.
Fed Chairman Powell offered a bullish view of the economy in his testimony to the Senate and indicated that the Fed would continue to raise rates gradually even though wage inflation is still not accelerating. US GDP growth for the fourth quarter was revised slightly lower from 2.6% to 2.5%, but still managed to cap off a strong 2017. New home sales dropped by 7.8% and pending home sales dropped by 4.7% in January, amid a supply squeeze in affordable homes. Core PCE, the Fed’s preferred inflation measure, rose 0.4% MoM in January, a strong reading.
In Fintech financing news, Pagaya, an asset manager that uses big data and machine learning to invest in consumer credit, received $75 Mn in debt funding from Citi to increase leverage on its Opportunity Fund which buys MPL loans from Prosper. Citi seems to be re-engaging in the consumer credit space after it stopped its CHAI ABS program in 2016.
In earnings news, Square reported 4Q earnings with net revenue up 36% YoY to $616 Mn and a net loss of $16 Mn. The stock was essentially unchanged at $46 post earnings.
SoFi’s new CEO, Anthony Noto, held his first management meeting this week. The CEO will focus on completing the build out of the management team, and defining the direction and scope of company – including potentially pursuing a banking charter.
PeerIQ at SFIG Vegas – “Heard on the Street”
The PeerIQ team was at SFIG Vegas this week. The conference had a euphoric atmosphere with almost 7,000 attendants and a buoyant mood among investors and issuers.
We share a few anecdotes from our informal conversations which we share in generic fashion to protect the innocent:
- A large issuer: “Our bonds are oversubscribed 2 to 3x. And when we share that with our investors they want more.”
- A large ABS investor: “We need help monitoring losses in the personal loan ABS space. Is this an indutry issue?”
- A large investment bank (Warehouse): “We ar doubling our exposure to warehouse lending. We have the mandate to grow the book.”
- A large investment bank (Syndicate Desk): “MPL has gone mainstream now.”
- A lender: “The 5% risk retention requirement is hurting our ability to issue loans to consumer and grow our business responsibly.”
- An issuer: “We are a small emerging originator and we have 7 term sheets – from large banks and small – in the last few weeks. Competition in warehouse lending is growing.”
PeerIQ announced our partnership with Cross River Bank and our role in providing risk analytics across capital markets, risk management, and regulatory compliance. PeerIQ also showcased our Credit Facility Management Suite and Consumer Credit Suite at our booth.
Kevin Walsh (CCO) and Ashish Dole (Head of Research), spoke on panels that were standing room only. Kevin Walsh spoke on “Predictive Modeling: The Role of Big Data and Machine Learning Across the ABS Market” and Ashish Dole spoke on “Marketplace Lending Snapshot: Performance, Review, ABS Issuance Outlook and Funding Trends, and Bank Partnerships”. Below is a brief overview of the products we previewed and do reach out to find out more.
The Credit Facility Management Suite streamlines credit facility management—for borrowers and lenders— though transparency, risk monitoring and visual reporting. Using this suite you can optimize allocation for breached covenants, optimize pledged collateral, solve for allocation across facilities and generate your borrowing base report. The tool enables covenant monitoring, simulating origination expectations and projecting collateral paydowns.
The Consumer Credit Suite offers in partnership with TransUnion, the most robust consumer credit reference data tool in the market—going back to 2000. Covering Unsecured Consumer, Auto, Student, Credit Card, Mortgage, and HELOC asset classes, the suite is essential for monitoring credit trends and performing vintage and benchmark analyses.
Bank-Fintech Partnerships and M&A
M&A between traditional banks and FinTech lenders continues to be a prominent theme. In our prior newsletter we stated: “Our argument is that banks without an unsecured lending capability risk losing long-term customer relevance. Banks that do not have an unsecured lending business do not have a seat at the table.”
Also heard at the conference was that Citibank is planning a Marcus-like online lender to enter the consumer unsecured loans space, although the timeline was unclear. Our view is that the GS Marcus – and specifically the ROE and NIM opportunity – is inspiring competitive response from other banks including Citi.
We recommend looking at Peter Rudegair’s synopsis of GS Marcus ambitions this week. As Peter points out in the WSJ, Goldman is making a big push into consumer banking to generate double digit ROE on this business and $1 Bn in revenues by 2020. GS is reportedly in discussions to acquire a credit card startup, and also a personal finance company. GS has already acquired or aquihired a fix-and-flip lender and announced a home improvement loan product. (See our GS strategy teardown or our GS M&A timeline.)
PeerIQ in the News:
- As online lending grows up, banks work to strengthen partnerships (Tearsheet, 2/26/18)
- MPL ABS set to grow in 2018, but credit cracks begin to show (Global Capital, 2/27/18)
- Marketplace lenders develop new wrinkles to attract more funding (SFIG panel) (American Banker, 3/1/18)
- S. Fourth-Quarter Growth Revised Down to 2.5% Annual Pace (Bloomberg, 2/28/18) 2.5% growth, although revised down slightly, caps an impressive run in 2017.
- US consumer inflation picks up in January as spending slows (CNBC, 3/1/18) Core PCE, the Fed’s preferred measure of inflation, rose by 0.4% in January breaking out of the 0.2% pace seen lately.
- US pending home sales fall to lowest level in 3 years (FT, 2/28/18) A lack of affordable housing inventory and rising rates is weighing on pending home sales.
- Powell Bullish on Economy, but Sees No Signs of Overheating (WSJ, 3/1/18) Fed Chairman Powell offered a bullish view of the economy and indicated that the Fed would continue to raise rates gradually even though wage inflation was still not accelerating.
- Real Disposable Incomes in U.S. Increase Most Since 2015 (Bloomberg, 3/1/18) A $30 Bn increase in one-time bonuses and a $115.5 Bn annualized drop in personal taxes is boosting real disposable income and spending.
- Goldman Sachs, Adviser to the Elite, Wants to Be Your Local Bank (WSJ, 2/27/18) GS Marcus is building an online consumer banking business to boost its ROE.
- Retail Banks Are Missing Opportunities to Give Digital Financial Advice (Wealth Management, 2/26/18) Customers are looking for digital financial advice and only some banks are enabled to provide that today.
- Coming to your banking app soon: Predictive analytics (Bankrate, 2/28/18) BofA and Wells Fargo are using AI to deliver predictive analytics to anticipate customers’ needs and expenses and provide targeted financial advice.
- How Capital One is rethinking its approach to products (Tearsheet, 2/23/18) CapitalOne is re-engineering its traditional products, and not just providing a bolt-on digital experience.
- S. Bank Offers New Online Tool to Help Consumers Get Fast, Convenient Car Loan Approvals (BusinessWire, 2/22/18) US Bank is partnering with AutoGravity to provide an online and simplified auto loan experience to its customers.
- Fintech Startups Need Industry Partners to Thrive, Report Says (Bloomberg, 2/27/18) FinTech lenders are open to partnering with banks instead of competing with them directly, which will be mutually beneficial.
- Fintech Pagaya Receives $75 Million in Debt Financing from Citi (CrowdFund Insider, 2/27/18) Pagaya received $75 Mn in debt funding from Citi to increase leverage on its Opportunity Fund which buys MPL loans.
- Meritize Raises $6.8M in Seed Funding (FinSMEs, 2/21/18) Meritize, a student loan platform, raised seed funding from Colchis Capital and others to expand operations.
- Square declares fourth quarter earnings (SQ, 2/27/18) Square reported 4Q earnings with net revenue up 36% YoY to $616 Mn and a net loss of $16 Mn, and processed $17.9 Bn in payments, up 33% YoY.
- Anthony Noto’s Mission as SoFi CEO: Get the Startup Ready to Go Public (Bloomberg, 2/26/18) New CEO Noto would like to take SoFi public but will first deal with its internal crises.
- SoFi’s new CEO says bank charter remains an option (American Banker, 2/26/18) SoFi might continue to pursue a banking charter as it seeks to broaden its product offerings.
- PeerIQ and Macquarie are nominated for the Most Promising FinTech Partnership award at LendIt.
AI can beat us at games—but sometimes, that’s by cheating (MIT Tech Review, 2/28/18) Evolutionary AI is getting better at playing games, but is learning some under-handed tricks along the way.