Getting LendingClub’s Comeback To Click

The best news out of LendingClub’s latest earnings report is, frankly, that the news could have been worse. The marketplace lender did manage to notch better-than-expected earnings results yesterday and beat the street.

Then again — analysts didn’t exactly set a terribly high bar for LendingClub’s performance. Clearing said bar, while better than not clearing it, didn’t do much to inspire investor confidence in the face of the firm’s third consecutive quarter of losses. Shares dropped 6 percent in after-hours trading to $6.20 — as a point of comparison, on this date two years ago, just out of their IPO, LendingClub’s shares traded at around $22 a pop.

And yet, despite numbers, CEO Scott Sanborn told investors he is pleased with the progress.

“2016 was a very significant year for LendingClub. We were tested and we showed great resilience. I’m proud of how this rose to the challenges and delivered against the targets we set for ourselves,” Sanborn noted.

“Simply put, I’m very pleased with our execution. Borrowers and investors continue to show great interest in our products, and we delivered the nearly $2 billion in originations in a seasonally difficult quarter while implementing tighter credit standards and interest rate increases. And we did it without incentives, resulting in $129 million in operating revenue, up 15% from Q3 and ahead of our expectations. We also achieved a 31 percent funding contribution from banks, exceeding our targeted mix. Finally, and through the tireless efforts of many of our employees, we completed all planned actions in order to remediate our historical material weakness.”

And while the steps may have been completed, it remains to be seen if the plan has worked — as the aftershocks of LendingClub’s historical weakness were still firmly felt in Q4.

By The Numbers

The numbers mostly tell the story of a company struggling to rebuild, with mixed results.

Between October and December, LendingClub extended $1.98 billion in loans. That is 23 percent fewer than the same time a year ago — but ahead of where they were during Q3. Banking-funded originations, however, did show a much greater degree of strength as 2016 ended — as Sanborn noted — funding 31 percent of these originations, up from 13 percent during Q3.

Revenue, however, was down 4 percent to $129.2 million — though that slide was a notably better result than the $121.9 million analysts were forecasting.

Still, the overall story in Q4 for LendingClub was about red ink, not black ink — as it was a year ago. LendingClub racked up $32.2 million in losses during the quarter, as opposed to the $4.6 million they took home in profit during Q4 2015.

Costs have also gone up notably as turnaround efforts and associated marketing costs spiked. In Q4 LendingClub saw those costs tick up 4 percent to $55 million.

“2016 was a year of investment in the company,” said CFO Tom Casey.

LendingClub expects to lose $84 million to $69 million on revenue in the range of $565 million to $595 million in 2017. That’s below the $597 million in revenue that analysts had been forecasting.

A Bright Outlook

Despite the falling numbers — with more losses forecast — LendingClub’s CEO remains confident that they will return to profitability this year. Sanborn noted that LendingClub’s major and most pressing problem — loan buyers fleeing the platform — has seemingly reversed as of the end of 2016.

“Our attention was focused on rebalancing our funding mix, a key step to bolstering our resilience and enabling a return to growth. We set a target to help our bank partners close out their rigorous diligence, so that they could return to scale. I’m pleased to say that our efforts have paid off, as not only are all of our key bank investors back buying on the platform, but we’ve also welcomed multiple new bank partners over the last few months.”

Sanborn also highlighted policy changes across the platform to bolster the strength of the borrower pool through increased prices for higher risk applicants and “the limiting of certain borrower populations based on observed performance.”

“While it is still early and the data is correspondingly thin, we are pleased to see increased gross yields and signs of stabilization in early delinquency rates through our latest data in January,” Sanborn noted — though he did not attach any specific figures to the claim.

He did note additional changes had ben implemented that had seen the platform cease to offer credit to around 6 percent of the platform’s total borrower base.

“The change is disproportionately focused on our higher-risk grades, similar to previous adjustments, and targets the unique combination of risk factors. While this change will give us some short term pressure in Q1, we’re building a business for the long-term in a truly massive market, and prudent credit management is our priority.”

As of 2017, Sanborn reminded investors, LendingClub will be 10 years old.

“In this time period, we’ve resoundingly demonstrated the power of the marketplace model. LendingClub has facilitated the origination of over 2 million loans, amounting to nearly $25 billion in total issuance. We’ve saved borrowers on average 30% versus their traditional alternatives, and we’ve generated more than $3 billion in interest for investors. And with close to 2 million customers served, we’re the world’s largest online marketplace connecting borrowers and investors. I’ve great confidence in the long term potential of our platform and in our ability to further penetrate the $1 trillion consumer revolving credit market, the $1 trillion auto market, which we’re just entering through refinance, and the larger consumer credit market beyond.”

It is a bold goal — especially for a firm that, six months ago, was being given credit for nearly single-handedly destroying the marketplace lending model.

And it still remains to be seen if LendingClub can — ten years and one scandal in — still be the firm to deliver on all the promised power of marketplace lending. The share price is less than encouraging.

But they’ve got ambition — and banks seem to be warming. It will certainly continue to be very worth watching in 2017.



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