The 5th Annual LendIt USA conference featured 5,000+ attendees, where Pacific Crest had the opportunity to speak with roughly a dozen industry participants including LendingClub Corp (NYSE:LC). Relative to LendingClub investor dynamics, Pacific Crest picked up on sustained banking momentum, but with more mixed securitization trends and a narrower credit box preference by institutional investors. Marcus by Goldman Sachs is an emerging competitor to watch. Pacific Crest has yet to identify a broad-based funding recovery; thus, it remains neutral on LC. Feedback on Square's integrated lending offering was supportive of Pacific Crest’s positive bias on SQ shares.
LendingClub banking momentum was balanced by mixed institutional investor commentary. Positively, momentum with the bank funding channel continues to be robust. However, Pacific Crest heard comments that suggested securitization funding can be a fickle source, as Prosper experienced most notably, which might make it less attractive as a substantial, durable funding source. Several fund managers noted optimism about LendingClub credit underwriting changes, but also expressed a preference for higher-quality loans with A, B and C grades cited in particular. Other popular fixed income investor topics were liquidity and the impact from a normalization of the credit cycle.
The firm’s LC model analysis suggests a broader base of funding is required for substantial upside. Assuming D+ grade standard program originations fall by 10% in 2017 (D+ was down 13% y/y in 2016), this would imply 15% A/B/C growth in 2017. From a funding perspective, Pacific Crest expects banks to grow by 28% y/y in 2017 and expect more flattish trends in managed accounts and other institutional funding. In order to justify upside to the firm’s 2017E $9.2 billion origination estimate and its $6 to $7 LC fairvalue estimate, the firm believes funding from managed accounts and other institutional investors would need to improve substantially from current levels.
Marcus by Goldman Sachs is an emerging competitor to watch. Marcus is targeting the 680-plus FICO segment with no origination, late, or prepayment fees. While the millions of pieces of direct mail that Marcus has sent out pale in comparison to the tens of millions sent, in some cases monthly, by the likes of LendingClub and Prosper, the head of Marcus commented that early results indicated more robust demand than expected and also mentioned the direct mail response rate was above the industry average. A substantial balance sheet with low-cost deposit funding make Marcus a potentially disruptive competitor to monitor, in Pacific Crest’s view.
Feedback on Square Capital was generally positive, consistent with the firm’s view. Investor feedback on the Square product, data richness, ability to source loans, and shorter duration was generally positive.
The companies mentioned in this article are subjects of research reports issued recently by investment firms. Their opinions in no way represent those of VoiceObserver.com