Banks' earnings calls the past few weeks have been abuzz with talks of liquidity and capital management following the collapse of Silicon Valley Bank last month, but LendingClub is still prioritizing the main concern it's had for the last year: rising interest rates.
The San Francisco-based online lender said on its first quarter earnings call last night that it doesn't expect to see an increase in institutional investor demand to buy its loans in the marketplace anytime soon, as higher rates and inflation have created a mismatch between cost of capital and risk. While LendingClub's issues with its
LendingClub CFO Drew LaBenne said on the earnings call that the fintech is projecting marketplace appetite from banks, its
"The recent turmoil in the banking sector will not be constructive to demand, and we expect heightened cautiousness, especially from our bank partners, as the implications on the economy are yet to be fully understood," LaBenne said.
Despite disappointing loan sales, LendingClub was an outlier among most banks in that it logged strong quarterly loan originations and deposit growth this quarter. Additionally, since LendingClub is one of the few neobanks with a banking charter, it has the advantage of being able to tap into deposit-based funding, and hold the loans it can't sell on its balance sheet. Fintechs without banking charters, like Upstart, are facing similar marketplace pressure without the benefits of a banking charter.
David Chiaverini, an analyst at Wedbush, wrote in a note that he thought LendingClub had a strong quarter, despite a "challenging backdrop." He added that he expects the company will outperform compared to other neobanks, due to its banking charter.
LendingClub CEO Scott Sanford said the company has shifted its reliance to recurring revenue, which made up 70% of total revenue in the quarter, amid lighter marketplace demand. In the first quarter, the fintech brought in total net revenue of $245.7 million, down from $262.7 million in the previous quarter. Revenue from loan sales to institutional investors was $95.6 million, a drop from $123.4 million in the previous quarter. LendingClub's stock on Thursday was up less than 1% to $7.05.
To make up for the dwindling marketplace demand for its loans, LendingClub introduced structured certificates, a private securitization for institutional investors. The fintech retains senior notes and sells the residual certificate at a predetermined price and provides leverage to the buyer. LaBenne said the company just settled its first certificate with an asset manager last week, and expects that business to grow through the year.
Vincent Caintic, an analyst at Stephens, said in an interview that structured certificates don't make as much of an impact as full marketplace sales, but the strategy is unrolling at the right time.
"After this bank crisis in March, a lot of banks are now pulling back on providing any kind of warehouse lines or funding to commercial and consumer lenders, so LendingClub is providing that leverage," Caintic said. "I actually expect that [business] to get bigger. I would rather have a full marketplace sale, but this helps LendingClub's balance sheet on getting more of these loans sold in part."
Caintic added that he doesn't expect loan marketplace volume to return to where it was before interest rates began rising for at least the next 18 months to two years.
LendingClub is still playing the long game. Sanford said that once the interest rate environment and banking crisis stabilize, he expects marketplace demand to come back quickly. He added that high credit card balances and interest rates provide an opportunity for LendingClub's services down the line.
"As we witnessed during the pandemic, capital inflows accelerate very quickly when the market sentiment turns positive," Sanborn said. "We will be ready to capture the opportunity ahead."
