LendingClub's earnings on Wednesday offered a worrying sign for fintech lenders — even as LendingClub itself holds what could be a key advantage during hard times.
The San Francisco company’s third-quarter earnings Wednesday of $0.41 per share topped analyst expectations. But the firm's share price was still trading down by nearly 10% in after-market trading, some of which may be in response to gloomy fourth-quarter projections.
The firm sounded a warning about the market for the loans it originates and then sells to investors, an arrangement often called marketplace lending.
"As we anticipated, marketplace volumes were impacted by higher funding costs for certain loan investors, driven by rapidly increasing interest rates," CEO Scott Sanborn said in the earnings release.
The company reported an 8% quarterly decline in the total value of its loan originations, driven by a decrease in marketplace loans.
Investors in consumer debt are seeking higher yields and getting pickier as interest rates rise. That has put a squeeze on marketplace lenders.
"Certain loan investors' cost of capital is based on forward interest rate expectations," Sanborn explained on the company's earnings call. "As expectations go up, their cost of capital goes up and so does their yield requirements."
LendingClub can reprice its loans to meet those higher funding costs over time, but Sanborn said the company needs to remain competitive against credit card rates, as the majority of its personal loans are people refinancing credit card debt.
LendingClub is not alone in relying on the marketplace model. Upstart, which reports earnings on Nov. 8, has already described constraints on its funding.
The good news for LendingClub is that it is no longer solely reliant on the marketplace. LendingClub last year completed a $185 million acquisition of Radius Bank, giving it the banking charter required to hold deposits and directly fund its loans.
While the $2.4 billion in originations that LendingClub sold to investors in the quarter is down about 15% from the three months prior, the $1.2 billion in loan originations that LendingClub is holding onto was a 13% increase.
LendingClub is now holding onto 33% of its loans, compared to 20% one year ago. The spread between the interest LendingClub is paying depositors and collecting from borrowers, or net interest income, climbed 89% year over year to $123.7 million last quarter.
"The benefits of our bank capabilities could not be more clear," Sanborn said.
Still, the company is projecting $255 million to $265 million in revenues for next quarter, which would mark a decrease up to 16% from the $304.9 million it reported in the third quarter. That could be driving the negative initial reaction on Wall Street. LendingClub's share price is down 54% from the start of the year but had shown signs of recovery, climbing 4% over the past month.
Sanborn last quarter compared LendingClub to a car reducing its speed while approaching a curve, with plans to accelerate coming out of it.
"We are in the curve right now," he said. "But as we look further down the track I would note that some of the negative dynamics in today's market will point to future opportunity. Most notably, record high credit card balances at record high interest rates should be a boon to our core refinance business. Our marketplace revenue has a proven ability to quickly rebound."
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