Despite record high stocks, record high consumer confidence, and 'full' employment, LendingClub is struggling to originate high-enough quality loans – crashing almost 20% after slashing its Q4 outlook.
CEO Scott Sanborn on LendingClub’s conference call pointed to a new credit model that represents "a tightening with an overall shift to higher-quality grades and higher quality approvals within grades," and said Equifax’s significant data breach "has put consumers on edge."
The stock is now back near record lows…
Analysts are watching what the company will say at its Dec. 7 investor day; some cut their price targets…
MORGAN STANLEY (James Faucette)
- 3Q shows "credit box setback," with origination growth hurt as LC tightens credit, re-calibrates marketing with launch of 5th gen credit model
- Targets expected at investor meeting will "weigh heavily"
- Cites positives, including high borrower demand, high institutional funding, securitization demand; cites negatives including near-term costs of new credit model, lower-than-est. retail investors and managed funds for net-net-worth individuals; sees EFX, hurricane impact as transient
- Overweight, PT $6.50 from $7
NEEDHAM (Kerry Rice)
- Below-est. outlook is squarely in focus, with 4Q view trailing amid origination headwinds as LC re-targets its marketing, tightened credit related to F&G grades
- 3Q was mixed, with strengthening marketplace fundamentals despite near-term headwinds; notes strong originations, but light rev., Ebitda due to higher-than-est. securitization program costs, EFX breach impact, natural disasters (both transitory)
- Flags strong demand from both borrowers and investors, consistent execution of securitization transactions, continued improvement in loan performance
- Buy, PT $7
BTIG (Mark Palmer)
- Solid 3Q obscured by weak 4Q outlook due to implementation of new credit model
- Notes mgmt "made it clear" during conf. call that anticipated slowdown in 4Q originations wasn’t due to macroeconomic or competitive environments, but rather to deliberate decision to accelerate implementation of 5th-gen credit model in September
- New model uses recent data, reflecting current environment in which consumers in higher-risk portions of prime-credit population have more personal leverage, different mix of credit exposures; mgmt believes revised model (which looks at credit behavior over time rather than as a snapshot) will give them confidence needed to scale platform, drive rev., earnings, CF growth in 2018
- Buy, PT $9
WEDBUSH (Henry Coffey)
- Reported noticeable rev. miss and indicated it’s been tightening credit, a move which may cut LC’s total addressable market (TAM) by 3%-6% and cap future growth
- New, more comprehensive credit scoring model, tighter underwriting, significantly restricting purchase/resale of loans classified as F&G to have direct impact on 4Q
- Problem likely to persist given challenges and costs associated with originating loans capable of meeting/exceeding loss-adjusted return hurdles
- Neutral, PT to $5 from $5.50
JANNEY (John Rowan)
- Guidance is light as mgmt tightens up credit
- Flags mgmt mentioning will go into mediation to potentially settle securities class-action lawsuit relating events of 2016; may impact 4Q
- Highlights mgmt remarks about temporarily not making loans available to investors while conducting product/price tests designed to reduce defaults, prepayments, and noting marginal-prime borrowers are seeing many new credit offers, which is driving prepayments; seemed to indicate some cohorts of consumers have over-levered
- Neutral, PT to $5 from $6
COMPASS POINT (Michael Tarkan)
- "Credit and competitive concerns re-emerge"; mgmt tightening underwriting appears consistent with recent actions taken by Discover, Prosper, but it still leaves Compass Point wondering what happens to investor demand when the credit cycle starts to turn
- Adds that LC, by cutting out lower-tier borrowers, is forced up the credit spectrum to compete for borrowers vs slew of spread-based traditional lenders who have recently entered category; this may weigh on customer acquisition costs, pressure transaction fee rates
- Believes origination volume needs to accelerate meaningfully — in an intensifying competitive landscape — for model to drive meaningful returns for shareholders
- Sell, PT to $4 from $5
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