The digital marketplace bank LendingClub (LC -6.56%) got off to a good start to the year, generating earnings results for the first quarter of 2022 that easily beat analyst estimates. LendingClub generated $0.39 diluted earnings per share on revenue of close to $290 million. The stock has been hit hard this year and even after a nice post-earnings run is still down about 35% this year, as tech stocks have been hit hard and as the market grows increasingly concerned about consumers and how they might perform as economic conditions get more difficult. But after its first-quarter earnings results, I think LendingClub is a buy. Here’s why.
Proactively addressing credit concerns
Investors are worried that consumers, who have been propped up by stimulus, excess savings during the pandemic, an ultra-low interest rate environment, and a strong stock market, will struggle as the Federal Reserve raises its benchmark overnight lending rate — the federal funds rate — several times this year and eventually begins to reduce its $9 trillion balance sheet. The markets have struggled since last November while adapting to the Fed’s new policy outlook. Consumer-facing fintech companies like LendingClub, which are largely in the business of originating unsecuritized personal loans, have been hit extremely hard because as debt piles up, consumers tend to stop repaying this debt sooner. Heavy loan losses would not be good for the stock. So far, though, credit quality is still in extremely good shape.
Thirty plus-day delinquencies are still far below pre-pandemic levels, although they did start to tick up slightly in the first quarter, which is to be expected to some extent as the bank grows its loan book. Net charge-offs, debt unlikely to be collected and a good indicator of actual loan losses, are still extremely low at 0.44% of average consumer loan balances at the end of the first quarter.
It also appears that management is preparing for the environment to come. LendingClub holds about 20% to 25% of its originations on its balance sheet and sells the rest to investors. In Q1, the average FICO score of loans on its balance sheet increased to 727, up from 717 in the prior quarter. The average yield on unsecured personal loans came down in the quarter a bit, as the company focused on lending to higher-quality borrowers. I’m perfectly OK with this considering the average yield on the personal loan book is still above 15%.
Management on the company’s earnings call also said they are tightening underwriting and loan pricing to pre-pandemic credit conditions despite the fact that credit is much better right now than pre-pandemic. LendingClub also typically originates about 15% to 20% of its loans to near-prime borrowers but has said they will stay toward the lower end of that range until there is better visibility into the economic outlook.
Still generating strong growth
Even while tightening credit, LendingClub still generated very strong origination volume in Q1 despite the weaker seasonality they normally experience in Q1.
Not only did the bank originate more than $3.2 billion of loans, but they retained nearly 27% of those loans on their balance sheet ($856M), more than they ever have before. Retaining loans is more profitable for LendingClub because instead of just collecting a one-time fee for selling them to investors, they collect recurring monthly interest payments from borrowers. The risk is that if these loans go bad, LendingClub is on the hook for them, although the bank sets aside reserve capital to prepare for losses.
But as LendingClub CEO Scott Sanborn has said in the past, putting loans on its own balance sheet has proven to be a good signal to the market that the bank is now “eating our own cooking.” Sanborn said the bank has more investors that want to purchase loans in LendingClub’s marketplace than ever before. LendingClub now expects to regularly retain between 20% to 25% of its originations each quarter, up from the prior guidance of 15% to 25%. Furthermore, LendingClub may go above that like it did this quarter if it outperforms.
The company also increased its full-year guidance for the full year and is now projecting at the midpoint of its range to originate $13.25 billion in loans this year, generate $1.2 billion of revenue, and $155 million in profit.
An attractive valuation
It’s certainly fair for investors to be skeptical right now, given the economic uncertainty. But LendingClub seems to be proactively managing credit and preparing for what’s to come, while also still showing strong growth and profitability. Even after the big move in earnings, the company trades at less than 11 times 2022 earnings and about 1.4 times 2022 revenue. I like that management is thinking conservatively about credit, and I think once some of the economic uncertainty clears, LendingClub’s stock can really fly long term.