Down 35% this year, this fintech stock is a buy

The digital market bank loan club (CL -6.56%) started the year well, delivering results for the first quarter of 2022 that easily exceeded analysts’ estimates. LendingClub generated diluted earnings per share of $0.39 on revenue of nearly $290 million. The stock has been hit hard this year and even after a strong post-earnings run, it is still down around 35% this year as tech stocks have been hit hard and the market is increasingly concerned. more consumers and how they might operate given economic conditions. becomes more difficult. But after its first quarter results, I think LendingClub is a buy. Here’s why.

Proactively respond to credit issues

Investors fear consumers, who have been buoyed 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 rate. overnight lending benchmark – the federal funds rate – several times this year and eventually begins to reduce its balance sheet by $9 trillion. Markets have struggled since last November to adjust to the Fed’s new policy outlook. Consumer-facing fintech companies like LendingClub, which are largely focused on providing non-securitized personal loans, have been hit extremely hard because as debt mounts, consumers tend to stop to repay this debt sooner. Heavy loan losses would not be good for the stock. So far, however, credit quality is still in very good shape.

Image source: LendingClub.

Delinquencies over thirty days are still well below pre-pandemic levels, although they started to increase slightly in the first quarter, which is to some extent to be expected as the bank increases its portfolio. of loans. Net write-offs, debt unlikely to be collected and a good indicator of real 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 upcoming environment. LendingClub holds about 20% to 25% of its creations on its balance sheet and sells the rest to investors. In the first quarter, the average FICO score for loans on its balance sheet rose to 727, from 717 in the previous quarter. The average unsecured personal loan yield fell slightly in the quarter as the company focused on lending to higher quality borrowers. I completely agree with this given that the average return on the personal loan portfolio is always above 15%.

During the company’s earnings call, management also said it was tightening loan underwriting and pricing to pre-pandemic credit terms despite the fact that credit is much better right now than it was. before the pandemic. LendingClub also typically makes around 15% to 20% of its loans to quasi-prime borrowers, but said they would stay towards the lower end of that range until there is better visibility on the economic outlook.

Person looking at his computer screen.

Image source: Getty Images.

Still in strong growth

Even tightening credit, LendingClub still generated very strong origination volume in Q1 despite the lower seasonality they normally experience in Q1.

LendingClub quarterly loan creations.

Image source: LendingClub.

Not only did the bank issue more than $3.2 billion in loans, but it kept nearly 27% of those loans on its balance sheet ($856 million), more than ever before. Holding loans is more profitable for LendingClub because instead of just collecting a one-time fee to sell them to investors, they collect recurring monthly interest payments from borrowers. The risk is that if these loans go bad, LendingClub is responsible, although the bank will set aside reserve capital to prepare for losses.

But as Scott Sanborn, CEO of LendingClub, 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 kitchen.” Sanborn said the bank has more investors than ever before who want to buy loans on the LendingClub marketplace. LendingClub now expects to consistently retain between 20% and 25% of its creations each quarter, down from an earlier forecast of 15% to 25%. Additionally, LendingClub can go beyond like it did this quarter if it outperforms.

The company also increased its full-year guidance and now expects in the middle of its range to generate $13.25 billion in loans this year, generate $1.2 billion in revenue and $155 million in profit dollars.

An attractive valuation

It’s certainly fair that investors are skeptical right now, given the economic uncertainty. But LendingClub appears to be proactively managing credit and preparing for what’s to come, while posting solid growth and profitability. Even after the big earnings move, the company is trading at less than 11x 2022 earnings and around 1.4x 2022 revenue. I like that management is thinking conservatively about credit, and I think that ‘once the economic uncertainty dissipates, LendingClub stocks can really fly long term.

Ruth R. Culp