This fintech is down 78% since its peak – Is it finally time to buy?

No matter how you cut it, it’s been a tough year for many investors. Inflationary pressures, interest rates rising to their fastest pace in decades and geopolitical uncertainty have all weighed on stocks this year.

One sector that has taken a hit is fintech stocksand loan club (CL -5.03%) sold hard. The consumer lender was flying high last year when its earnings started grow at an impressive ratebut market weakness sent the stock price down 77% from its peak.

Despite the challenges in the consumer loan market, LendingClub continues to grow revenue. Is it finally the right time to buy?

How LendingClub Transformed Their Business

Founded in 2006, LendingClub has undergone a huge transition in its young history. The company started as a peer-to-peer lending platform, where LendingClub matched lenders with borrowers.

During the Great Recession of 2007 to 2009, many people turned to peer-to-peer lenders when they had more difficulty getting loans from banks. At one point, LendingClub was the largest peer-to-peer lender in the United States, but a series of missteps led to regulatory scrutiny – ultimately leading to the resignation of its CEO in 2016.

The company has since pivoted, eliminating its peer-to-peer lending platform in 2020 and acquiring Radius Bancorp in 2021.

Now, LendingClub offers personal loans to borrowers, focusing specifically on people looking to consolidate their high-interest credit card debt and other loans into one low-interest loan. The company primarily makes money in two ways: by creating and selling consumer loans, which it calls market revenue, and through loan interest income that it holds on its books.

Bank Acquisition Helped LendingClub Increase Recurring Revenue

The acquisition of Radius Bancorp was a pivotal moment in LendingClub’s history. By owning a bank, LendingClub obtained a source of low-cost deposits to fund its loans. Additionally, the company could now hold loans on its books and collect net interest income, which ends up being three times more profitable long term, according to CEO Scott Sanborn.

LendingClub started holding more loans on its books last year after acquiring Radius. In the third quarter, the company collected nearly $124 million in net interest income, up 89% from a year earlier. Net interest income is becoming increasingly important to LendingClub’s business and represents 41% of the company’s total revenue in the quarter, compared to 27% last year.

Consumer lenders rose to this challenge in 2022

This has been a tough year for businesses, especially consumer lenders. At the beginning of this year, LendingClub saw strong demand for loans from investors, which led to more creations and increased market revenue. Since then, loan volumes have declined due to rapidly changing interest rates, which have crushed investor demand for these loans.

The drop in demand is because many of the investors buying these loans have a cost of capital based on forward interest rate expectations. As expectations rise, the cost of capital rises and the return needed to make an attractive investment rises.

Over time, LendingClub will provide a return by passing rates on to its customers, but it can’t do that right away. This is because the company focuses on credit card debt consolidation. Credit card companies tend to increase rates with a lag of one to two billing cycles. LendingClub does not want to increase its interest charged too quickly, otherwise it will no longer be an attractive option for consumers to refinance.

However, LendingClub has an advantage over another consumer lender, Assets received, as it may hold loans on its books. In the third quarter, LendingClub had 33% of its loan originations on its books. By comparison, Upstart has to sell its loans on the open market and is more sensitive to deteriorating market conditions. LendingClub also focuses on hold high quality loanswhich should help it be more resilient if the economy goes into recession.

Watch for this tailwind in 2023

LendingClub is currently stuck in limbo as interest rates continue to rise. However, growing credit card balances put it in a good position to capitalize next year and beyond.

According Equifax, credit card balances hit $916 billion in September, up 23% from their pandemic low in April 2021. Rising credit card balances are good for LendingClub as it primarily focuses on customers who want to refinance and consolidate their credit card debt. When credit card users are hit by higher interest rates, they may find it attractive to turn to the company to pay off all their debts at a more attractive interest rate.

LendingClub has done an amazing job of reinventing its business to be more bank-like, which should help it continue to grow in terms of revenue and bottom line. The company is trading at a very cheap valuation, with a price-to-earnings ratio of 3.8 and just above book value at 1.07. With the tailwinds of rising consumer credit card debt, now is a great time to pick up some shares of this fintech at a great discount.

Carol N. Valencia