LendingClub (LC, $18.76): “Banking on Strong Fundamentals”
By: Anwar
Ahmed, AIM Student at Marquette University
Summary
LendingClub
Corp. (NYSE:LC) Is a digital lender leveraging cutting edge machine
learning technology to offer a full suite of banking products including
personal loans, auto loans, checking accounts, and investment solutions.
- LC
posted a record net income of $29.1M and EPS of $0.27 in 4Q21 beating consensus
by 23.85%.
- Share
price fell sharply after earnings release due to management forecasting slower
growth rates in 2022.
- The
company closed out the year with record setting results of $818.6M in
revenue (up 157% YoY) and net income of $18.6M compared to a net loss in
2020.
- LendingClub
earned a perfect score from the Human Rights Campaign Foundation’s corporate
equality index and is recognized by Bloomberg’s gender quality index for their
commitment to diversity and inclusion in the workplace.
Key
points: 2021 was a crucial year for LendingClub as their focus was integrating
the Radius Bank acquisition completed back in February. The company underwent a
business model transformation. Their stellar FY21 results show the vertically
integrated bank/loan marketplace business model is a key driver of
profitability. Compared to preacquisition 4Q19, LC generated an additional
$73.7M of revenue and $28.9M of net income on the same loan origination volume
in 4Q21. These results confirmed managements perspective on the value
proposition of integrating a bank business model.
LC continues to focus on interest
income as a key top line driver. Net interest income grew 27% QoQ while non-interest
revenue stayed relatively flat. This was primarily driven by a 36% QoQ increase
in their customer loan portfolio. The recurring and predictable nature of interest
income archives stability in earnings and is crucial for the company to scale.
Their proprietary AI origination process has reduced loan losses 21% below pre-pandemic
levels and continues to be a key competitive advantage.
LendingClub’s new business model
also provides greater operating leverage that allows exponential profitability from
scalability and growth. Total non-interest expenses have fallen from 136% of
revenue in 4Q20 to 72% of revenue in 4Q21. Compensation expense has also steadily
fallen as a % of revenue from 70% to 30% over the same period. This indicates
that LC’s growth is creating exponential value for shareholders and is being
accomplished organically. Over the same period, net interest margin expanded
from 0.7% to 7.6%. This has greatly improved overall company fundamentals.
What
has the stock done lately?
Since the start of 2022, LC stock
has declined 24.99% despite announcing strong financial results. This is primarily
attributed to management forecasting slower growth in 2022 due to macroeconomic
factors and the rising interest rate environment. General market conditions
have contributed to the declining price as January saw the largest decline in
stock prices since 2020.
Past
Year Performance:
Over the past year, LC has risen
an impressive 66.90% from the complete business model overhaul. Over the same
period, the S&P 500 rose 19.65% and the Russell 2000 index declined 4.60%.
My
Takeaway
LendingClub’s FY21 results serve
as a proof of concept of their ability to successfully operate in the digital
banking space. Their strong earnings growth, growing customer base, and overall
financial strength make them an attractive investment opportunity. LC combines
the growth and technology of a fintech with the profitability of a bank. With the
banking business model, they have reduced business model risk with a strong growth
narrative. Despite LC’s recent underwhelming stock performance, it has a sound
long term strategy to deliver value to its customers and shareholders.
