How This Fintech Plans To Take Advantage Of Higher Interest Rates

It’s no secret that the market is off to a slow start this year. Investors are worried as inflationary pressures persist, interest rates are rising and geopolitical uncertainty is high. As a result, the entire stock market was beaten, with the S&P500 down 17% and the Nasdaq down 27% since the start of the year.

One action taken in all these sales is loan club (CL 7.75%). The personal lender has changed its business model over the past two years and rapidly increased its revenue.

Despite raising its earnings forecast on its recent earnings call, the stock was beaten alongside the rest of the market. Since peaking in early November 2021, LendingClub stock has lost 74%. However, the company should benefit from rising interest rates and appears to be excellent value for investors.

Image source: Getty Images.

A business coming out of a screening

LendingClub is a fintech founded in 2006 and specialized in personal loans. The company first started as a peer-to-peer lending platform. However, the company came under scrutiny in 2016 for its lending practices, leading its chief executive to resign. Since then, the company has undergone a facelift.

Last year, LendingClub completed its purchase of Radius Bank, allowing the company to take deposits and issue loans without going through a partner bank. Having a banking charter also allows LendingClub to hold the loans it makes on its books, which could be an important source of recurring revenue.

Current CEO Scott Sanborn has pointed out that holding loans on the books rather than selling them would sacrifice profits today, but triple the amount of company profit in the long run. LendingClub could also benefit from rising interest rates by holding more loans. Here’s how.

A commercial shift towards recurring revenue

LendingClub completed its acquisition of Radius Bank in February 2021. Since then, the company has significantly increased the number of loans held and the net interest income earned on those loans.

A chart shows LendingClub's loans held for investments over the past five quarters.

Data source: LendingClub.

In the first quarter, the lender collected nearly $100 million in net interest income (NII), a big jump from the first quarter of last year, when it collected $18.5 million in NII and in the fourth quarter when it made $83.1 million in NII.

It also saw its net interest margin (NIM) grow over the same period. NIM is a key metric that banks use to measure profitability. It takes the interest a bank earns on loans and securities, less interest paid on deposits and debt, divided by its earning assets, primarily loans and securities.

A graph shows LendingClub's net interest income and net interest margin over the past five quarters.

Data source: LendingClub. Table by author.

The NIM of most banks has been under pressure due to low interest rates in recent years. However, the Federal Reserve wants to raise interest rates several times this year, which could bode well for banks and their NIMs. Rising interest rates could be an additional tailwind to LendingClub’s business as it has more loans on its books.

LendingClub executives expect stellar growth to continue

LendingClub expects to originate $13.5 billion in loans in 2022, up from its previous estimate of $13 billion in the prior quarter. Of these loans, LendingClub seeks to retain approximately 20% to 25% of the highest quality loans it makes. Known as preferential loans, they are given to borrowers with a FICO score of 670 or higher. LendingClub’s loan portfolio currently has an average FICO score of 727.

LendingClub’s revenue increased 10% from the fourth quarter and doubled from the first quarter of last year. The company sees continued meteoric growth, with second-quarter revenue of $295 million to $305 million, up 44% to 49% from a year ago. It also forecast net profit of $40 million to $45 million, an increase of 327% to 380% over last year.

It looks like LendingClub pivoted at the right time. By holding more loans on its books, the business can increase its interest earned, thereby increasing its long-term profits. Although there is some uncertainty about the economic outlook, rising interest rates could also benefit it in the form of higher interest-bearing loans.

The stock currently trades at a price-to-earnings (P/E) ratio of 13.1 and a forward P/E of just 8.6. Given LendingClub’s strong growth and forward-thinking business strategy, this could be great value at these prices.

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