Digital market banks, like most companies that sell loans to investors lending club (LC -3.37%)Specializes in structuring unsecured personal loans.
LendingClub has done a lot of work in recent years to change its business model, including a transformational acquisition of bank sanctions for 2021. . Please let me explain.
crush the market
LendingClub specializes in credit card debt consolidation, primarily helping blue-chip consumers refinance their credit card debt and get much lower interest rates.
LendingClub then acquires high-yield loans. This can be sold to various investors through the market for a one-time fee, or you can keep a balance sheet and pay monthly interest on a regular basis each year. Investors who purchase LendingClub loans include banks, asset managers and other institutional investors.
The problem is that some of LendingClub’s institutional investors, such as asset managers, are funding these loan purchases with capital that has interest rates similar to the Federal Reserve’s benchmark rate, the Federal Funds Rate. is to be With the Fed raising interest rates significantly, these investors have a higher cost of capital and are now demanding higher returns.
LendingClub can certainly increase loan yields as the Fed raises rates, but it will take time. . The problem was that interest rates kept rising and no one had time to breathe. So while LendingClub may have re-priced, it has not been able to keep up with his Fed rate hikes that continue to drive up funding costs.
Investors are also concerned about credit as borrowers are starting to feel the pinch as stimulus ends, inflation is high, pandemic savings are depleted and borrowing costs are rising.
Although credit is still performing broadly in line with expectations, LendingClub’s management expects to increase future loan loss reserves to higher levels than originally anticipated. The company already has a lot of headroom, and future builds include qualitative overlays as well, so it’s no big deal. Still, investors are likely to be nervous about credit until there’s more clarity about what the economy and unemployment will look like this year.
With institutional investors buying LendingClub loans on the sidelines, banks’ market revenues fell 28% in the fourth quarter, and this trend looks set to continue this quarter.
LendingClub actually makes more money by keeping loans on its balance sheet. This is three times more profitable in a lifetime than selling a loan on the market. But the marketplace helps absorb volume, and when the marketplace is humming, the revenue can cover most of his LendingClub expenses. This allows most of the income from lending on the balance sheet to be turned into income in good times.
the company continues to fight
Kudos to LendingClub for how they handled the difficult times. The company cut headcount, scaled back marketing and stepped up underwriting to adapt to a challenging macro outlook. In the fourth quarter, LendingClub made a profit of his nearly $24 million.
Based on this quarter’s guidance, it looks like LendingClub could break even or make a small profit.
But management has limited control. LendingClub really needs the Fed to end its rate hike campaign in order to properly raise loan yields. Once the rate hike ends, we hope that credit and the economy will stabilize and investors will return to the market. In a more normalized environment, LendingClub can revitalize its business and build on the strong progress it has made.
Bram Berkowitz has a position on LendingClub and has the following options: Long call at $35 in January 2024 on LendingClub. The Motley Fool has no positions in any of the companies mentioned. The Motley Fool’s U.S. headquarters has a disclosure policy.