LendingClub LC , perhaps the top-rated digital marketplace bank for unsecured personal loans in the U.S., has been the center of investor scrutiny due to the more than 50% drop in its stock price amid tumultuous market conditions. But when you take a close look at LC’s financials, business model and competitive position — as well as the evolving consumer debt landscape — a more optimistic picture emerges. The company’s strategic focus on the prime credit market, coupled with its unique dual revenue model, prepares it for sustainable growth as consumer debt continues to rise.
LendingClub’s business model is divided into two strategic segments: its peer-to-peer marketplace and its fully digital bank, LC Bank. The marketplace constitutes a significant portion of its revenue, predominantly derived from origination fees, which average around 5% of the loan value, and servicing fees charged to investors who purchase LC’s loans. This high-margin business bears the costs of marketing, customer support and R&D.
LC Bank, on the other hand, serves as the backup for loans unsold in the marketplace. These loans are funded by retail deposits, which have grown impressively from $2.7B to $7.2B in just two years. LC Bank’s fully online model minimizes operational costs, with expenditures going towards standard G&A, marketing for deposits, and R&D for platform development and maintenance.
Competitive Advantage
LendingClub generally operates within the prime credit range for personal loans, strategically positioning itself ahead of many traditional banks and fintech competitors like SoFi SOFI , which largely target the super prime credit range. On the other end of the spectrum, numerous fintech companies focus on the subprime credit range. LendingClub’s prime market focus gives it an edge in marketing efficiency, averaging only 1%-1.5% of loan volume ($) in marketing expenditure.
In addition to its marketplace, LC’s competitive advantage is amplified by its digital bank. Unlike marketplace-only lenders such as Upstart UPST , LC Bank enables the company to fund and benefit from its own loans, while simultaneously promoting the growth of its loan marketplace. This model significantly contrasts with fintech bank competitors like SoFi, which regularly employ warehouse credit facilities at higher capital costs, resulting in lower net interest margins (NIM).
LendingClub’s financial health is evident in LC Bank’s NIM of 7.5% as of Q1 2023, coupled with robust liquidity, with more than 20% of its deposits held in cash. The company’s prudent approach to credit loss provisioning using the CECL methodology allows them to recognize a significant portion of their losses upfront, thus creating a higher fair value than the carrying value for its loans.
The escalating levels of consumer debt, particularly credit card debt at a record-high $1.1 trillion and unsecured personal loan debt at $225 billion, provide an ideal backdrop for LC’s growth. These conditions not only stimulate a surge in refinancing activities but, with an anticipated slowdown in rate hikes, they also allow loan yields to rise and match deposit rate growth, leading to an increase in NIM.
Catalysts and Valuation
Although LendingClub’s near-term earnings are suppressed due to the upfront credit loss recognition under the CECL methodology, the company’s deposit growth of 10% in the last quarter points towards potential upside. As LC reduces its marketing spend and broker term deposits flow out gradually, the normalized cost of capital is expected to decrease naturally over the coming year.
As the economy stabilizes, LC plans to invest its excess liquidity into more loans, and its new structured loan program is projected to launch in Q3 2023, which will further strengthen its revenue stream. Under a conservative valuation model, using an earnings multiple of 8x and 1.5x tangible book value (TBV), LC’s valuation stands at $14.72 per share, indicating an upside of more than 70% from the current stock price of $8.80.
Given the volatile stock market conditions, LendingClub’s strategic positioning, robust financial health, and prospective growth drivers make it a compelling investment opportunity within the burgeoning prime credit market.
