What happened
Shares of fintech platform Upstart (UPST -3.23%) were falling today, down 6.1% as of 1:09 p.m. ET.
There wasn't any material company-specific news today. In fact, Upstart introduced a new software tool for auto loan origination today, which, if anything, would normally be a positive.
So why the fall? Well, Upstart tends to be a volatile stock, both to the upside and the downside, depending on the broader market and macroeconomic data, and the markets were down broadly today after a nice run to start the year. It appears as though investors are taking some early-year profits ahead of what could a volatile earnings season and potential recession.
Also adding to fears of the year ahead, one of Upstart's larger peers reported earnings last night, forecasting double the number of charge-offs in 2023 that it saw in 2022.
So what
Last night, credit card giant and personal loan provider Discover Financial Services reported earnings. While Discover's numbers actually beat on both revenue and earnings, the company forecast a rise in charge-offs in 2023. This is perhaps not surprising, as charge-offs have been historically low coming out of the height of the pandemic, and interest rates have risen at a historically fast pace over the past year. However, Discover now expects its 2023 charge-off rate to land between 3.5% and 3.9%, which would exceed 2019's charge-off rate of 3.2%.
However, Discover also forecast a net interest margin (NIM) for the coming year greater than 2022's 11.04%, which would actually be higher than 2019's 10.4% NIM, thanks to today's higher-rate environment. So, Discover's interest income per loans should actually be equal to or greater than 2019, even with increasing charge-offs.
Unfortunately, Upstart doesn't hold loans on its own balance sheet, as it's not a bank like Discover. Instead, Upstart has to constantly originate and sell its loans to its third-party bank customers. As rates rise and uncertainty looms, those loan buyers can pull back, therefore forcing Upstart to pull back on its originations. That's why growth and earnings went negative in the second half of last year.
Now what
Discover's projections only added to the uncertainties over the economy. The past year's rate hikes appear to be working, as inflation is coming down. However, softening economic numbers may no longer be welcomed as a positive thing.
Yesterday, December retail sales were reported, showing a 1.1% decline from November, which was below consensus. In addition, December's Producer Price Index fell 0.5%, also below consensus.
Those soft numbers could be signals of a slowdown at best or a coming recession at worst. In that light, it's perhaps no surprise Upstart and other cyclical financial stocks that make unsecured consumer loans are selling off after their hot start to the year.
