LendingClub, Cap One Earnings Point To Credit Rebound

Credit Spending

To get a sense of the consumer, where they’ve been and how they’ve been weathering the pandemic, the big banks and the payment networks (Visa and Mastercard among them) have pointed to continued debit spending, and at least some green shoots in credit.

As for LendingClub, the headline numbers show that revenues of $105.8 million, down a bit more than 19 percent year over year, topped the Street by $17 million. But digging into results, it is the loan book that stands out, and the sequential growth in a few key metrics that show pent-up demand materializing. The firm said that loan originations were up 63 percent quarter on quarter, while revenues surged 40 percent to $106 million. Loan originations were $1.5 billion in the period.

As CEO Scott Sanborn said on the call with analysts, though lending activity still remains below pre-pandemic levels, “personal loans will be our near-term economic driver and will pave the road to our broader future as a full-service digital bank.” The majority of loans, management said on the call, were made to existing members in LendingClub’s installed base.

Looking ahead, said Sanborn, “as the economy recovers and we normalize our underwriting, we expect more than two-thirds of our loans to be automatically approved, while maintaining fraud rates in the low single-digit basis points.”

To get a sense of the consumer snapback, consider that revenues grew 40 percent sequentially, which outpaced management expectations, as laid out by CFO Tom Casey, so that the top line would grow 15 percent to 25 percent. Supplemental materials that accompanied earnings showed that the 63 percent originations growth far outpaced the 32 percent to 43 percent growth that had been the internal targets.

Forward-looking guidance sees current-quarter revenue up 23 percent to 32 percent, and total originations in the period to be $1.7 billion to $1.9 billion, up 15 percent to 28 percent. In response to questions about the Radius Bank acquisition, management noted that total loans in that bank at the end of the most recent period stood at $2.1 billion, which includes $324 million in LendingClub consumer loans.

“Credit is performing exceptionally well,” Sanborn said later in the call.

Capital One Shows 

As has been seen with other financial services companies in recent quarters, Capital One (Cap One) released reserves that had been taken to cover anticipated loan losses that had not materialized — $1.6 billion in the most recent period. In terms of its own high-level metrics, total net revenues were $7.1 billion, better than the Street by $120 million.

“The release was driven by strong credit performance across all of our businesses and a more favorable economic outlook that includes the $1.9 trillion stimulus package passed in March,” said CFO Andrew Young. Coverage has declined across all segments from prior periods, management noted on the call (domestic card coverage is 10.5 percent, down from 10.8 percent).  The improving metrics for those borrowers are notable, since Capital One tends to have insight into (and presence among) sub-prime borrowers.

At a high level, said CEO Richard Fairbank, purchase volume rebounded overall compared to the first quarter of 2020, while the biggest driver of results was the provision for credit card losses, which has been improving. The domestic charge-off rate was 2.54 percent, better than a 200-basis-point improvement year over year.

“For the third consecutive quarter, the story of our domestic card business continues to be two sides of the same coin. Historically, high payment rates amplified by the effects of government stimulus continue to put pressure on loan balances. And on the flip side, the same factors are driving exceptional credit performance,” noted Fairbank. Domestic card purchases were up more than 8.4 percent in the quarter, and up 17 percent over 2019’s levels. At the same time, consumers have been paying against loan balances, which are down $18.5 billion, or 17 percent year on year.

But beyond cards, the health of the consumer is also in evidence at Cap One, where consumer banking loans grew 9 percent over last year and auto originations surged 16 percent.

With some granular detail on the card business, all spend categories are rebounding, said Fairbank, even T&E. In that segment, “spending at the beginning of the pandemic was down more than 80 percent. And by December, it was down about 50 percent, and in March it was down about 25 percent. So from a growth point of view, both the growth and purchase and loan growth, there’s some strength that we see on the spending side,” he told analysts.

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