Tthe bank of the digital market LendingClub (New York Stock Exchange: LC) will report fourth-quarter and full-year earnings on January 26, the same time it kicks off fintech earnings season. The company and the sector have had a rough few months, with LendingClub’s share price falling around 45% since the beginning of November.

The Fed’s fast-turnaround outlook and political stances seem to be the main culprits, but investors should still expect LendingClub to report solid earnings and forecast a strong year in 2022 from an operational standpoint as it continues to show its new top business model put in place last year. Here’s what you can expect from Wednesday’s earnings results.

Image source: Getty Images.

The interest margin will continue to rise

LendingClub has been in recovery mode for several years, but the fruits of management’s labor really began to pay off when the company completed its acquisition from Radius Bank in early 2021. LendingClub is primarily in the business of originating installment loans for credit card debt consolidation, auto loan refinancing, major purchases, home improvement projects, and elective surgeries. The company uses technology, machine learning, and automation to streamline the application, approval, and underwriting process.

The Radius acquisition created better unit economics in the model by providing stable deposits to fund a portion of originations, eliminating the external origination fees LendingClub paid to members. banksand regulatory clarity. It also gives the bank a better framework for keeping loans on its own balance sheet and generating net recurring interest income (NII), which is the profit banks make on loans and securities after covering their funding cost.

LendingClub management has told us that loans held on the balance sheet are three times more profitable over their life than those sold to investors.

Having only operated its new model for a few quarters, LendingClub has been building up its balance sheet. Unlike other tech lenders, now that LendingClub is a bank, you must follow bank accounting rules. So instead of charging origination fees up front, you now have to pay them off over the life of the loan. Additionally, you should set aside money to prepare for possible defaults on the loans you have on your balance sheet.

Because LendingClub is still building its loan book, these bank accounting policies have a larger effect at this time. But as the loan book grows, the NII also begins to grow and makes these accounting policies seem less important. LendingClub generated $18.5 million of NII in the first quarter, nearly $46 million in the second, and $65.3 million in the third. Expect NII to go higher again in the fourth quarter.

Most of LendingClub’s NII comes from its main credit product, the installment loan. The company has been retaining around 20% of total originations each quarter on its balance sheet. Because loan origination guidance for the fourth quarter is $2.8 billion to $3 billion, you’d expect installment loan balances on LendingClub’s balance sheet to grow to between $560 million and $600 million. Final growth may be less because there are likely to be past borrowers who make interest payments or pay off loan balances early.

The average return on these loans is around 16%, a figure that has also been growing and could grow in the fourth quarter, which would also boost the NII. Combine this with LendingClub’s other major source of income, fee income from the sale of loans to investors and banks, a number that stays consistent with origination volume, and I think there’s a good chance we’ll see a noticeable increase. in income.

What will be the trend of origination volumes?

If you didn’t already know, the LendingClub model is heavily driven by origination volume. The more loans you originate, the more you can sell to investors and the more you can put on your own balance sheet and collect recurring NII. Management provided guidance of $2.8 billion to $3 billion for the fourth quarter. They provided that guidance on October 27, which is almost a third of the way into Q4, so at that point they already had a good idea.

During October, data from the Fed showed that revolving credit, which is mostly credit card debt, grew by about $6.6 billion since September. LendingClub doesn’t offer credit cards, but one of its main use cases is credit card debt consolidation, so when credit card debt grows, it can be a precursor to type of origination volume. that LendingClub could see in the future. Non-revolving debt in October, which includes fixed-rate installment loans offered by LendingClub, grew by just under $10 billion.

But in November, growth spiked in both revolving and non-revolving debt as consumer balance sheets began to decline. Revolving debt grew by just under $20 billion, while non-revolving debt grew by more than $20 billion. According to Bloomberg, non-renewable debt growth was the highest in six months.

We still don’t have data for December, and the appearance of the omicron variant of the coronavirus may have had some adverse effect, but we do know that Christmas sales performed well in December and unemployment continued to fall. That suggests omicron probably didn’t affect originations at LendingClub too much.

LendingClub could also see continued tailwinds from auto refinancing, which the company has been ramping up. LendingClub CEO Scott Sanborn said on the company’s third-quarter earnings call that about two-thirds of the company’s 3.8 million members have an outstanding car loan. Sanborn also noted that auto refinance originations at the company were up 85% in the third quarter. LendingClub also announced that its auto refinance loans are now available in 40 states, covering 90% of the US population.

Will it top LendingClub?

On average, analysts are projecting earnings per share (EPS) for the fourth quarter of $0.22 on total revenue of just $246 million. This seems a bit low to me, considering the company generated $0.26 EPS in the third quarter on total revenue of $246.2 million.

As mentioned above, the NII is expected to increase because LendingClub’s unsecured loan balances should be much higher. I also feel good about origination volume in the fourth quarter, given what we saw in the Fed data in November, and with auto refinancing continuing to gain traction. Overall, I am optimistic about a surge in earnings on Wednesday.

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Bram Berkowitz you own LendingClub and have the following options: $31 February 2022 long calls on LendingClub, $45 January 2023 long calls on LendingClub, and $48.42 January 2023 long calls on LendingClub. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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