It's been a tough go for stocks in 2022. Inflation is stubbornly high, and the Federal Reserve has been aggressively raising interest rates in its efforts to bring it down. Since March, the Fed has hiked the benchmark federal funds rate from essentially zero to over 3%, -- the fastest it has boosted rates in decades.
The asset volatility that those rate increases have triggered has hit fintechs particularly hard. The ARK Fintech Innovation ETF is down by more than 70% since November 2022.
Helping consumers roll up credit card debts into personal loans
People who rack up big credit card balances at high interest rates can turn to LendingClub to consolidate those debts into a single, lower-interest loan. Founded in 2006, the company began as a peer-to-peer lending platform. But in 2016, it came under regulatory scrutiny for its lending practices. After an internal probe, its chief executive officer stepped down, the stock price tumbled, and it didn't rebound for years.
Since then, though, the company has revamped its business, focusing on serving high-quality credit card borrowers who want to consolidate their debts using personal loans. In 2021, it acquired Radius Bancorp, giving it a low-cost source of deposits to help fund its loans. The move also gave it a banking charter, which allows LendingClub to hold loans on its books -- and collect interest income from them -- rather than selling them. CEO Scott Sanborn said that the loans it holds will, over time, be three times as profitable for the company as the ones it sells.
LendingClub's growth is impressive
LendingClub has made personal loans for nearly 16 years now. During that time, it has built a database of lending information that it can leverage with technology and machine learning to extend loans to the highest-quality borrowers.
The company looks to hold onto 15% to 25% of the total loans it makes. In the second quarter, LendingClub's held-for-investment loan portfolio consisted of prime credit borrowers with an average FICO score of 730. Delinquencies were also below pre-pandemic levels -- a sign that the company's stellar credit quality remains intact.
Its revenue increased 61% in the second quarter to $330 million, while net interest income rose 153% to $116 million. Net income grew by an impressive 346% from the prior quarter to $182 million, and an eye-popping 1,837% from the same quarter last year.
Consumer lenders have this headwind to deal with in the short term
Many consumer lending fintechs rely on capital markets to buy the loans they make -- as LendingClub had to before it bought Radius. This creates problems for them when investors' appetites for risk diminishes. (Lending player Upstart Holdings is currently experiencing just those sorts of issues.)
Rising interest rates could present headwinds for companies that package and sell loans in the market -- and while LendingClub now holds some of its loans, it still packages and sells three-quarters of them. It could be forced to reduce the sale price of these loans to satisfy investors' yield expectations, which have risen due to higher interest rates. This, coupled with a slowing economy, could reduce LendingClub's revenue from loan originations.
That's why its ownership of a banking charter is so important. LendingClub could choose to hold more loans on its books if it doesn't find willing buyers in the marketplace. Also, its stream of revenue from interest could help smooth out its top line.
Rising credit card balances present an opportunity for the fintech
LendingClub expects third-quarter revenue of between $280 million and $300 million, and net income in the range of $30 million to $40 million. That would be a step down from its second-quarter results, and reflects the uncertainty in the marketplace for its loans. However, the company has achieved positive operating income for five consecutive quarters, and that pattern should continue when it announces its third-quarter earnings.
LendingClub faces short-term business headwinds due to economic uncertainty. However, its focus on customers who are consolidating credit card debt could make this a stellar stock to buy before the bear market ends. According to the Federal Reserve Bank of New York, Americans held $887 billion in credit card debt as of the end of the second quarter -- up $46 billion from three months prior. Rising credit card balances and higher interest rates on those balances will make LendingClub's refinancing services more appealing.
With a one-year-forward price-to-earnings ratio of 7 and a price-to-tangible-book-value of 1.2, LendingClub's stock has a margin for safety and could be an excellent value buy today.