Last week LendingClub held their very first Investor Day in New York. I was lucky enough to be invited along with about 150 others to the Morgan Stanley offices in Times Square. We heard from most of the LendingClub executive team as they laid out their vision for LendingClub and the opportunity they see in front of them.
The Three Most Interesting Announcements
While much was said over the more than three hours of presentations here is what I considered to be the three most interesting announcements from the day.
- A New “Exchange Traded Partnership” is Coming
This is a really big deal in my opinion and I was surprised it was not mentioned until the fourth presentation of the day when Patrick Dunne, their Chief Capital Officer, took the stage. LendingClub will be launching an Exchange Traded Partnership (ETP) that will be traded like a stock (similar to an ETF) on a public exchange but will be backed by LendingClub loans. It will be available to all investors and will be liquid. This could be a game changer as it will provide all investors with a simple and accessible way to get exposure to LendingClub loans. No timetable was given for its implementation and if it launches in 2018 it will likely be late in the year.
- LendingClub Has Been Testing Direct Payoff Loans
One of the criticisms investors have had over the years is that when someone takes out a debt consolidation loan it is not clear whether they really pay off their credit cards or use the money for other purposes. LendingClub has been running a test for some time that pays off a borrower’s credit card balance directly to give some certainty over loan proceeds. LendingClub claims that this will help them increase origination volume by 5% as they will be able to approve more borrowers knowing that their credit card debt will be paid off.
- A New “Snap and Save” Approach to their Auto Finance Product
LendingClub announced a very handy new feature for those borrowers taking out an auto loan. A prospective borrower can simply take a photo of their registration and LendingClub will pre-populate fields eliminating almost all of the data entry. While this feature is not that groundbreaking it was interesting to me because it demonstrated that LendingClub is focused on developing the auto loan segment.
The Opportunity on the Borrower and Investor Side
Throughout the day most speakers commented on the size of the opportunity in front of them. According to a TransUnion report LendingClub has grown from 1% of the total personal loan market in 2012 to 10% in 2017 while the category has expanded more than 2x in that time period. TransUnion put total US personal loan balances outstanding at $47 billion in 2012 expanding to $112 billion in 2017, of which LendingClub has a 10% share. Keep in mind this is not originations, this is total loans outstanding. The total addressable market (TAM) for credit card/debt consolidation is estimated at $300-350 billion and LendingClub has a 3-4% penetration of that market so far.
LendingClub President Steve Allocca shared how they view the increased competition with companies like Marcus entering the personal loan space. Overall, they view it as a positive because awareness of personal loans is still low and all the work others are doing helps expand awareness. Allocca also shared that LendingClub is focused on the lifecycle of their customers and are committed to expanding the product offerings including into non-lending products. There was no elaboration on that last point but it was the first time I have heard them talk about product expansion beyond lending.
On the investor side Patrick Dunne shared that the TAM there was a whopping $38 trillion. Most of that money is with asset managers with only $250 billion in the hands of self-directed retail investors. LendingClub feel that they have only penetrated a small part of this market and that there is a huge amount of potential investor dollars unaware of the benefits of this asset class. He also shared that LendingClub now has around 180,000 retail investors and 180 institutional investors on their platform today.
LendingClub’s Stock Down Sharply on Thursday
By the time the market opened on Thursday equity investors had already digested the news and were disappointed. LendingClub had provided slightly lower revenue guidance for 2018 as well as lower growth and lower EBITDA projections than analysts were expecting. And there was no big announcement that caught the attention of investors.
By the time the market opened LendingClub stock was down over 16% and while it recovered slightly throughout the day it was down again on Friday, closing at an all time low of $3.51.
Clearly, this was not the reaction that LendingClub management had hoped. I thought they provided a great overview of where their business is going and the ETP announcement was a big deal from my perspective. But clearly equity investors were not that impressed.
There was much more covered on the day that I have not mentioned here. LendingClub has made the slide deck available, all 123 pages of it, where you can see everything they discussed. You can also listen along to the entire presentation here.
Disclosure: Peter Renton, the founder and CEO of Lend Academy and author of this article, owns LC stock.
As a lender, I’d wish they’d address my big issue: not sharing the prepayment reinvestment risk. They need to share some of the upfront fees with lenders, especially when LC itself is refinancing the loans at lower rates (and pocketing a 2nd orig fee). I’m surprised the big bank investors are ok with this, or maybe they have a special deal that the individual investor customers don’t have.
The fundamental issue is that net returns continue to drift lower. There remain flaws in the borrower model and defaults continue to grow. The main change has been to reduce projected returns. This trend has been going on far too long.