This was an opportunistic purchase. Shares got down to $4-5 in the pandemic lows of 2020, then as high as $45 in late 2021 only to drift back down to the $20 share price range. After Q4 results, shares sold off to $15-16 per share where I started buying.
LendingClub is a fintech (formerly nonbank) lender offering consumer loans to affluent customers. In February 2021, LC acquired Radius Bancorp to retain loans on their balance sheet, create low cost deposits, and keep some revenue streams for themselves.
LendingClub has the makings of a 5-10% top-line and 10-20% earnings grower with multiple expansion potential. Here’s the snynopsis:
- LC saw origination volumes fall off a cliff in 2020 from COVID but have since rebounded to new highs.
- They acquired their way into a bank charter to lower funding costs and retain loans on their balance sheet — this move alone led to their first year of GAAP profitability in 2021.
- 2022 guidance calls for 25% loan origination growth, 40% revenue growth, and GAAP net income of $130-150m.
- The market is valuing LC like a traditional bank (First Internet $INBK trades at ~10x earnings) despite the overcapitalized balance sheet and growth — peers like $SOFI and $UPST trade at considerably higher valuations.
LC plays in the $1tn market for consumer revolving debt
- They target customers with higher income ($100k+) and better credit (FICO 700+) but with higher debt levels
- Typical loan duration is 1.5 years and typical coupon is ~15% (cheaper than credit card rates)
- Prior to the Radius bank acquisition — LC would originate a loan, earn a transaction fee, and the loan was sold to an investorm — today, LC is able to retain loans and earn 3x what they did under the old model
- Management is targeting 15-25% loan retention on their balance sheet and the rest get sold to third-party institutions (i.e. “renting” someone else’s balance sheet)
- Charge offs in the loan book should settle in around 6-6.5% (similar to private label credit card issuers like Alliance Data)
- Technology investments have totaled $325 since 2014 (and $115m over past 3 years) — as a reference, competitor $SOFI has invested ~$114m in capex over the past 3 years
As mentioned above, management is targeting 15-25% of loans originated for retention on their balance sheet. Going forward, they’ll earn transaction fees for originating loans via their marketplace (fintech model) and a net interest margin on the loans they retain (traditional bank model).
When LC announced they were acquiring Radius Bank, they had ~$1.4bn in total assets at the time. As of 4Q21, LC had ~$2.5bn loans on the balance sheet (excluding PPP loans). That’s 33% annual growth from 2020-2021. If originations in 2022 are $13bn and LC retains 20% that would add another $2.6bn to the loan portfolio.
Here’s a closer look at the loan statistics from 4Q21 (net interest margins are 8%+ and likely to settle there or a tad bit higher).
LC has a large NOL balance which is mostly reserved on the balance sheet so taxes aren’t a big part of the equation at the moment — though this will be a deterrent to earnings growth at some point in the near future.
This slide highlights the difference between the “marketplace” model vs. the “bank” model:
There are a few different groups in the lending world that LC competes in...
The private label credit card issuers like Alliance Data and Synchrony as well as sub-prime consumer lenders like Enova — all trade at 5-7x earnings — this looks like a good downside scenario for LC.
Other fintech competitors like Upstart, SoFi, and Affirm trade based on multiples of revenue — in the 6-7x range...
These companies (LC included) are all growing very rapidly. SoFi also just acquired a bank charter for the same reasons LC did so.
Some quick comments on the industry:
- High yield consumer credit isn’t some amazing new industry and these business models aren’t all that unique to each other (each of their 10-Ks reference how many terabytes of data or cells of data they’ve analyzed).
- They’re also incredibly sensitive to macro trends — as we saw in 2020 where originations fell off a cliff.
- It’s a big $1tn market (and growing) with plenty of room for several players — branding may matter more in a digital age which would benefit these companies over traditional lenders.
- The bank charters add a degree of risk — the adage “beware the fast growing financial” is more true when loans are held on the balance sheet (which is where LC is headed)... under the old model, it was truly more of a tech company acting as a marketplace facilitator; now, credit risk becomes a factor and we need to rely on the loan loss provisioning from management (currently at 6-6.5% of loans).
Why I like this one...
I’m not going to make the argument that LC should trade at a huge revenue multiple; that’s not my cup of tea. But there are a handful of things I like here...
- The stock is beaten up — It’s been long forgotten from the IPO heyday back in 2014 and more recently has come back to reality from a valuation / expectations standpoint
- Valuation is reasonable — 12x GAAP earnings is a great price for a business with a good balance sheet and growth prospects
- Growth — 2022 guidance is looking for 25% origination growth and 40% revenue growth... I wouldn’t expect those trends to continue in 2023+ but it’s likely LC will continue as a 5-10% top-line and 10-15% bottom-line grower for the foreseeable future
- Good balance sheet — If we’re looking at LC like a traditional bank, then you could argue it’s an overcapitalized bank with $850m in equity supporting ~$4.9bn in assets (17% equity/assets ratio) — closer to 10% is more common.
- Management — I like that LC has a seasoned banking executive as CFO in Tom Casey. In addition, the Radius Banking management team came over in the acquisition... This should help with the transition to the balance sheet intensive business model.
- Game-changing acquisition — The Radius deal has already tipped the balance to profitability in a major way. So long as management is careful with risk management, this should provide an excellent setup for years of earnings growth.
Analyst price targets range from $22-60 per share vs. today’s price at $16. At the 2022 guidance midpoint, earnings would be $1.30 per share so that $22 low-end would be right around 17x earnings.
Over the last 3 years (which included the COVID trough levels) — LC has traded at ~2.5x sales — this was perhaps influenced by the huge run-up in 2021 but it was pretty consistent at 2-2.5x sales during 2018-2019 as well.