The digital marketplace bank LendingClub (LC 1.36%) will report earnings for the fourth quarter and the full year on Jan. 26, while also kicking off fintech earnings season. The company and the sector have had a difficult few months, with LendingClub's stock price down about 45% since the start of November.
The Federal Reserve's fast-shifting outlook and policy stances seem to be the main culprit, but investors should still expect LendingClub to report solid earnings and forecast a strong year in 2022 from an operational standpoint, as it continues to show its superior new business model put into place last year. Here's what else you can expect from Wednesday's earnings results.
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Net interest income to keep rising
LendingClub has been in turnaround mode for several years now, but the fruits of management's labor really began to pay off when the company completed its acquisition of Radius Bank at the beginning of 2021. LendingClub is largely in the business of originating installment loans for credit card debt consolidation, auto loan refinancing, 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 outside origination fees LendingClub paid to partner banks, and regulatory clarity. It also gives the bank a better framework to hold loans on its own balance sheet and generate recurring net interest income (NII), which is the profit banks make on loans and securities after covering their cost of funding.
Management at LendingClub has told us that loans held on the balance sheet are three times more profitable over their life than those sold to investors.
Having only operated its new model for a few quarters now, LendingClub has been building up its balance sheet. Unlike other tech lenders, now that LendingClub is a bank, it must follow bank accounting rules. So, instead of collecting fees for originations upfront, it must now amortize those over the life of the loan. Additionally, it must set aside money to prepare for potential defaults on loans it holds on its balance sheet.
Because LendingClub is still building up its loan book, these bank accounting policies have more of an outsized effect right now. But as the loan book grows, NII starts to grow as well and make these accounting policies look less important. LendingClub generated $18.5 million of NII in the first quarter, nearly $46 million in the second, and $65.3 million in the third. Expect NII to come in higher again in the fourth quarter.
The bulk of LendingClub's NII comes from its main lending product, the installment loan. The company has been retaining about 20% of total originations each quarter on its balance sheet. Because loan origination guidance for Q4 is $2.8 billion to $3 billion, I would expect installment loan balances on LendingClub's balance sheet to grow by about $560 million to $600 million. The ultimate growth may be smaller because there will likely be previous borrowers that complete interest payments or pay off loan balances early.
The average yield on these loans is about 16%, a number that has been growing as well and could grow in Q4, which would also boost NII. Couple this with LendingClub's other major source of revenue, fee income from selling loans to investors and banks, a number that is steady with origination volume, and I think there is a very good chance we'll see a notable increase in revenue.
How will origination volumes trend?
If you couldn't tell already, LendingClub's model is heavily driven by origination volume. The more loans it originates, the more it can sell to investors, and the more it can put on its own balance sheet and collect recurring NII on. Management provided guidance of $2.8 billion to $3 billion for Q4. They provided that guidance on Oct. 27, which is nearly a third of the way into Q4, so at that point, they already had some good insight.
During October, Fed data showed that revolving credit, which is mostly credit card debt, grew about $6.6 billion from September. LendingClub doesn't offer credit cards, but one of its primary use cases is consolidating credit card debt, so when credit card debt grows, it can be a precursor of what kind of origination volume LendingClub might see in the future. Non-revolving debt in October, which includes the fixed-rate installment loans that LendingClub offers, grew a little less than $10 billion.
But in November, growth exploded in both revolving and non-revolving debt, as the consumer balance sheet began to wind down. Revolving debt grew a little less than $20 billion, while non-revolving debt grew 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 adverse effect, but we do know that holiday sales performed well in December and unemployment continued to fall. That suggests omicron likely didn't affect originations at LendingClub too much.
LendingClub could also see continued tailwinds from auto refinance, which the company has been ramping up. LendingClub CEO Scott Sanborn said on the company's Q3 earnings call that roughly two-thirds of the company's 3.8 million members have an outstanding auto loan. Sanborn also noted that auto refinance originations at the company jumped 85% in Q3. LendingClub also announced that its auto refinance loans are now available in 40 states, covering 90% of the U.S. population.
Will LendingClub beat?
On average, analysts are projecting fourth-quarter earnings per share (EPS) of $0.22 on total revenue of just shy of $246 million. This strikes me as somewhat low, considering that the company generated $0.26 EPS in Q3 on total revenue of $246.2 million.
As mentioned above, NII is expected to rise because LendingClub's unsecured loan balances should be much higher. I also feel good about origination volume in Q4, given what we saw from Fed data in November and with auto refinance continuing to gain traction. Overall, I'm optimistic about an earnings beat on Wednesday.
