LendingClub Q4 2022 Earnings Review: praying for the "soft landing"
Last year was transformative for LendingClub. The company grew its revenue to $1.2 billion (compared to $0.6 billion in 2021) and reported a Net Income of $289.7 million (compared to $18.6 million in 2021). The loan portfolio reached $5.6 billion and deposits reached $6.4 billion by the end of the year. However, LendingClub has not yet reached the scale, which allows it to profitably go through an economic cycle. Interest income is not sufficient to cover operating expenses and provisions, and the company still relies on loan origination fees to maintain profitability.
Thus, the company’s management guided for barely breaking even in Q1 2023, and I expect a return to losses if the U.S. economy falls into a recession and origination volumes decline further. In addition to navigating a tough economic environment, I believe the company needs to start thinking about diversifying its business and reigniting growth after the clouds clear. The Radius Bank bank gave the company new competencies (commercial banking, SME lending), so there is a lot to build on. In the meantime, let’s review the company’s Q4 2022 results.
If you are new to LendingClub, I suggest reading my previous reviews:
✔️ LendingClub Q3 2022 Earnings: getting a banking charter was a smart decision
✔️ LendingClub Q2 2022 Earnings: strong results, conservative guidance
✔️ LendingClub Q1 2022 Earnings: when a Fintech buys a bank, magic happens
LendingClub reported $2.53 billion in loan originations in Q4 2022, which represents a 17.7% decline compared to Q4 2021, and a 28.7% decline compared to Q3 2022. LendingClub retained 28% of the total loan originations or $0.70 billion on its balance; however, the company also acquired a $1.05 loan portfolio from MUFG Union Bank (loans were originated by LendingClub and it continued to service then). Including the acquired loan portfolio, LendingClub added $1.75 billion in loans to its balance sheet, compared to $0.76 billion in Q4 2021 and $1.15 billion in Q3 2022.
The company’s management guided for $1.9 to $2.2 billion in loan originations in Q1 2023, and it plans to retain 30-40% of originated loan volume on the company’s balance sheet ($0.7 - $0.8 billion). This guidance implies a 32-41% decline in loan originations compared to Q1 2022, and a 13-25% decline compared to Q4 2022, and would mark the lowest origination volume since LendingClub became a bank in Q1 2021.
There were two reasons for the declining origination volumes in Q3 and Q4 2022: a) weak investor demand for marketplace loans, as the company struggled to pass increasing rates to the borrowers to match return expectations, and b) tighter underwriting policy, as the company started incorporating deteriorating economic conditions in its credit decisions. Loan origination volume is the key driver of LendingClub’s revenue, as it directly impacts non-interest income (loan origination fees, gain sale of loans), and indirectly impacts net interest income (volume of loans retained on the balance sheet, size of the loan book).
The lending business is a reflection of the economy, and, as of this writing, economists see two paths for the U.S. economy. In the case of a soft landing, the economy avoids falling into a recession, and the Federal Reserve will soon stop raising rates, but will keep them elevated into 2024 until inflation reaches the policy target. In the case of a recession, the economy collapses in 2023, and the Federal Reserve will be forced to cut the rates. Consequently, in the case of a soft landing, LendingClub’s Q1 2023 guidance could be the lowest origination point, while in the case of a recession, it is fair to assume that the origination volumes will continue falling.
Loan Book and Deposits
At the end of Q4 2022, LendingClub had $5.63 billion in loans on its balance sheet (net of allowance for losses), which represents a 104.4% increase compared to Q4 2021 and a 24.6% increase compared to Q3 2022. Due to the short-term nature, LendingClub booked the portfolio it acquired from MUFG Union Bank as “Loans held for investment at fair value.” Including the acquired portfolio, consumer loans represented 87.0% of LendingClub's loan book (gross of allowance for losses), and commercial loans represented the remaining 13%.
The company decided not to originate “commercial real estate” and “equipment finance” loans going further (apparently, the scale did not justify the overhead cost, and the teams running these products became part of the reorganization), but will continue originating government-guaranteed loans to small businesses under the SBA programs. Scott Sanborn commented on the earnings call, that small business loans are close to personal loans in their dynamic, have variable interest rates, and can be sold to third-party investors in case such a need arises. Interestingly, SoFi’s CEO also mentioned SBA loans during the latest earnings call.
LendingClub finished Q4 2022 with $6.39 billion in deposits, which represents a 103.9% increase compared to Q4 2021, and a 24.8% increase compared to Q3 2022. The company’s guidance for loan originations, suggests that the volume of loans that it plans to retain on its balance sheet in Q1 2023 will barely offset loan portfolio amortization (repayments), and the size of the portfolio will remain flat. However, the company continues to attract new deposits and offers a competitive rate on its high-yield savings accounts. So how do they plan to use those deposits?
The most obvious use for new deposits would be to retain more than the indicated 30-40% of loan originations on the company’s balance sheet. In the case of a recession, LendingClub will most likely have to step in with its balance to support borrower demand. The second use for extra deposits would be further loan portfolio acquisitions similar to the MUFG Union Bank deal. Ideally, those loans would be originated by LendingClub, but I believe they could also pursue an acquisition of a portfolio originated by another lender. Finally, the company could be preparing for scaling its small business lending program, as a way to diversify the business.
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