While LendingClub (LC) still faces challenges, CEO Scott Sanborn is finally seeing light at the end of the tunnel.
He's winning back bank investors, expanding into the lucrative auto-refinance market and rebuilding the company's leadership team, which are positive signals for a company that lost 17% of its market value since CEO Renaud Laplanche resigned in May.
The loan-sale irregularities reported along with Laplanche's resignation were a blow to the San Francisco-based fintech lender. It lacks the deposits that banks typically use to fund loans and relies instead on capital from sources such as asset managers, hedge funds and banks as well as individual investors.
Because banks are highly regulated, they pulled back sharply and were slower to return. Sanborn has been working diligently to win them over since their cheap capital makes them vital partners for providing lower-rate loans to high-quality borrowers.
"We dedicated a lot of resources this quarter to supporting banks, as they worked through their complex diligence and regulatory requirements," he said on an earnings call with investors this week. Those efforts paid off, he added, resulting in "nearly all of our key bank partners being back on the platform." Lending Club capped that achievement by winning a $1.3 billion infusion from the National Bank of Canada.
The company's shares have climbed 16% this week to $5.96. They are still lower than at the end of last year, though, while key financial indexes have risen in the same period.
And banks, while they have returned to Lending Club's platform, now constitute just 13% of its investor pool, down from 26% a year earlier, and overall loan volume is down.
"The problem with credit quality and financial institutions is it takes years of developing a reputation for good compliance and risk controls," Morningstar analyst Colin Plunkett said in a phone interview. "And while this past quarter was a positive for LendingClub, it remains to be seen whether they are able to do that."Over the past six months, the lender has taken hits from all sides. In addition to Laplanche's departure and the pullback by investors, investigations ensued and regulators scrutinized.
New loans fell 12% from a year earlier during the third quarter, to $1.97 billion. Of those 55% were funded by managed accounts, 14% by individuals and 18% by other institutional investors.
Still, despite a net loss of $36.5 million in the quarter compared with profit of $1 million a year earlier, the lender performed better than Wall Street analysts had expected.
Most of the loss was attributed to the $11 million paid as incentives to investors and "unusual" expenses of $20 million associated with review of its loan irregularities, retention, legal, and audit fees, the company said. The incentive program to draw investors back to LendingClub ended in August.
The company is still "implementing internal controls that will eventually restore loan buyers' confidence and re-accelerate" its revenue and profits growth," Oppenheimer analyst Jed Kelly wrote in a note to clients. "However, equity investors' confidence in the platform's ability to sustain long-term earnings growth will take multiple quarters to recover, thus capping any significant near-term upside."
In the meantime, auto refinancing, part of a market of $283 billion in used-car loans last year, has significant potential, with many consumers unaware that refinancing their auto loan can save them thousands of dollars annually.
"Our focus on refinance where consumers have already demonstrated the willingness and ability to pay, represents an especially well-performing segment," Sanborn said. "For investors, the secured auto loan market is one of the most stable asset classes, and it performed exceptionally well in the last recession."
Susquehanna Financial Group analysts, who maintain a neutral rating on the stock with a price target of $6, said that they see upside with LendingClub's "product expansion" and "more diverse funding," but don't project positive earnings in the "near term."
Auto refinancing "may provide a diverse revenue stream in the future, but roll-out is limited for the time being," James Friedman, a Susquehanna Financial Group analyst, wrote in a note to clients.
As for Lending Club's management team, Sanborn has hired Russ Elmer as general counsel, Patrick Dunn as chief capital officer, Valerie Kay as senior vice president of institutional investors and Raman Suri as senior vice president of retail investors.