Upcoming results offer LendingClub a chance to validate its transformed business model
Jdigital market bank loan club (NYSE:LC) will release its fourth-quarter and full-year results on January 26, while kicking off the fintech earnings season. The company and the sector have had a tough few months, with LendingClub’s share price having fallen about 45% since early November.
The rapidly changing outlook and policy directions of the Federal Reserve seem to be the main culprit, but investors should still expect LendingClub to post strong earnings and forecast a strong year in 2022 from an operating perspective. , as it continues to show off its new superior business model. in place last year. Here’s what else you can expect from Wednesday’s results.
Net interest income will continue to increase
LendingClub has been in turnaround mode for several years now, but the fruits of management’s labors really started paying off when the company completed its acquisition of Radius Bank in early 2021. LendingClub is largely in the business of lending installment credit card debt consolidation, auto loan refinance, major purchases, home improvement projects and elective surgeries. The company uses technology, machine learning and automation to streamline the application, approval and underwriting process.
The acquisition of Radius created better unit economics in the model by providing stable deposits to fund a portion of originations, the elimination of external origination fees that LendingClub paid to partner banks, and regulatory clarity. It also gives the bank a better framework for holding loans on its own balance sheet and generating net recurring interest income (NII), which is the profit banks make on loans and securities after covering their cost of funding.
LendingClub management told us that loans held on the balance sheet are three times more profitable over their lifetime than those sold to investors.
Having operated its new model for only a few quarters, LendingClub is building its balance sheet. Unlike other tech lenders, now that LendingClub is a bank, it must follow bank accounting rules. Thus, instead of collecting fees for arrangements in advance, he must now amortize them over the term of the loan. In addition, it must put money aside to prepare for possible defaults on the loans it holds on its balance sheet.
Since LendingClub is still building its loan portfolio, these bank accounting policies are currently having a more outsized effect. But as the loan portfolio grows, the NII also begins to grow and makes these accounting policies less important. LendingClub generated $18.5 million from NII in the first quarter, nearly $46 million in the second, and $65.3 million in the third. Expect NII to rise again in Q4.
The bulk of LendingClub’s NII comes from its main loan product, the installment loan. The company retained about 20% of total emissions each quarter on its balance sheet. Given that the loan origination forecast for the fourth quarter is $2.8 billion to $3 billion, I expect the installment loan balances on LendingClub’s balance sheet to increase by approximately $560 million to $600 million. dollars. Ultimate growth may be lower because there will likely be previous borrowers making interest payments or repaying loan balances sooner.
The average yield on these loans is around 16%, a number that has also increased and could increase in the fourth quarter, which would also boost the NII. Add to that LendingClub’s other major source of revenue, commission revenue from selling loans to investors and banks, a number that’s stable with origination volume, and I think there’s very good chance that we will see a noticeable increase in revenue.
How will origination volumes evolve?
If you couldn’t already tell, LendingClub’s model is heavily influenced by origination volume. The more loans it makes, the more it can sell to investors, and the more it can post its own balance sheet and collect recurring NII. Management provided guidance of $2.8 billion to $3 billion for the fourth quarter. They provided those insights on October 27, which is almost a third of the way into the fourth quarter, so by then they already had good information.
In October, Fed data showed that revolving credit, which is mostly credit card debt, was up about $6.6 billion from September. LendingClub does not offer credit cards, but one of its primary use cases is credit card debt consolidation, so when credit card debt increases, it can be a precursor to the type of origination volume that LendingClub may see in the future. Non-revolving debt in October, which includes fixed-rate installment loans offered by LendingClub, rose by just under $10 billion.
But in November, growth exploded in both revolving and non-revolving debt, as consumer balance sheets began to shrink. Revolving debt increased by just under $20 billion, while non-revolving debt increased by more than $20 billion. According to Bloomberg, non-revolving debt growth was the largest in six months.
We don’t have data for December yet, and the emergence of the omicron coronavirus variant may have had some negative effects, but we do know that holiday sales performed well in December and unemployment continued to rise. to lower. This suggests that omicron probably didn’t affect the creatives at LendingClub too much.
LendingClub could also see continued tailwinds from auto refinancing, which the company has been stepping up. LendingClub CEO Scott Sanborn said on the company’s third-quarter earnings call that about two-thirds of the company’s 3.8 million members have an outstanding car loan. Sanborn also noted that the company’s auto refinance issuance jumped 85% in the third quarter. LendingClub also announced that its auto refinance loans are now available in 40 states, covering 90% of the US population.
Will LendingClub beat?
On average, analysts expect earnings per share (EPS) of $0.22 in the fourth quarter on total revenue of just under $246 million. That seems a little low to me, given that the company generated EPS of $0.26 in the third quarter on total revenue of $246.2 million.
As mentioned above, the NII is expected to increase as LendingClub’s unsecured loan balances are expected to be much higher. I’m also pleased with the origination volume in the fourth quarter given what we saw in the Fed data in November and the fact that auto refinancing continues to gain traction. Overall, I’m bullish on a beating in earnings on Wednesday.
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Bram Berkowitz owns LendingClub and has the following options: $31 Long Calls February 2022 on LendingClub, $45 Long Calls January 2023 on LendingClub, and $48.42 Long Calls January 2023 on LendingClub. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.
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