Note: PeerIQ will make a significant corporate announcement this week. Stay tuned!

Earnings season continued with reporting from card issuers. As PeerIQ observed last quarter, we continue to see a “tale of two cities”–a divergence in charge-off rates of card issuers and large money center banks.

Discover reported a 55% increase in loan loss reserves citing re-normalization of credit performance, an increased supply of consumer credit, and an increase in consumer leverage. We also observe increases in loan loss reserves from Synchrony Financial (30%), American Express (26%), and Capital One (13%).

However, charge-off rates at large money center banks continue to decrease. Year-over-year charge-offs for Wells Fargo, JP Morgan, and Bank of America declined 31%, 18%, and 9%, respectively. The lower charge-off rates are consistent with bank’s sale of riskier credit portfolios to non-banks—see for instance the JPM sale of $6.9 Bn in student loans to student lender Navient, or Barclay’s $1.6 Bn sale to non-bank lender Credit Shop.

We can see the separation in credit risk between card issuers and large money-center banks in the following charts:

Source: PeerIQ, Bloomberg

Source: PeerIQ, Bloomberg

Outlook for Consumer Lending 

The backdrop for consumer lending businesses is strong. Although delinquencies have picked up, originators remain compensated for taking on credit risk. The ROE for Discover and American Express are both over 20% as compared to C, JPM, WFC, and BAC where ROE remains stubbornly low in the 6 to 11% range. Also, consumer loan demand continues to grow (total loan requests on Lending Tree increased 48% year-over-year to 5.4 Mn).

The biggest challenge to the above state-of-play is the latest scale entrant to the retail banking business–Goldman Sachs. GS’s new lending business, Marcus, is on pace to originate $2 Bn in loans this year–the fastest growth rate of any lender that PeerIQ tracks. Over the past several years, through M&A and organic product launches, GS continues to deliberately knit together an online product offering centered on building banking relationships with the mass affluent segment. (GS previously acquired Honest Dollar an online retirement solution, and a $17 Bn online retail deposit business from GE Capital.)

This week Goldman unveiled GS Select–a provider of loans from $75K to $25 Mn to investors using the borrower’s investment portfolio as collateral. As we foretold at LendIt Europe last year, we continue to believe that GS presents a significant competitive threat to traditional consumer banks.

Competition vs. Partnership

Incumbent consumer banking lenders are partnering with FinTechs to improve their competitiveness. Regional and community banks are buying origination from tech-enabled non-bank lenders or renting technology.

GS’s rivals–Morgan Stanley, Citi and JP Morgan–have struck partnerships with dozens of FinTech firms including an integration with PayPal this past week, and others including iCapitalNetwork (Alternatives), OnDeck (SME Lending), Roostify (Mortgage Tech), LevelUp (Payments), and TrueCar (Auto Finance), and Betterment (Robo Advisory) to name a few.

Exciting times ahead!

PeerIQ in the News:

Industry Update:

  • Amazon Banks On Its $3 Billion Loan Club (Forbes, 7/25/17) Over the past year, Amazon Lending has made more than $1 billion in small business loans to sellers on its marketplace and has the potential for further expansion into financial services.
  • Goldman Launches New Online Lending Strategy For Mass Affluent (Reuters, 7/27/17) Goldman Sachs launches is launching a new digital platform called GS Select where customers of other wealth management firms and brokerages can apply for loans of $75 K to $25 Mn and it will use borrowers’ investment portfolios as collateral.
  • Scandal-Hit Libor to Be Phased Out (WSJ, 7/27/17) Andrew Bailey, the chief executive of the U.K.’s Financial Conduct Authority, which regulates Libor, said that work would begin to plan for a transition to alternate benchmarks by the end of 2021.

Lighter Fare: