Interest Rate Change: +1% for Risky Grades

Today Lending Club disclosed an interest rate change. Compared to the previous rates, it’s a relatively large adjustment to the risky grades. This is to address the higher-than-average default rates we’ve seen in the D and E grade loans. It’s refreshing to see that Lending Club is adjusting the rates according to default rate changes so quickly to balance risks. Here’s how the new interest rates stack against the previous...

2015 – A Big Year for Eligible Investor States

Lending Club opened 14 new states to retail investors in 2015, which made the platform available to over 92 million Americans (+29% of the U.S. population). The biggest states were Texas and Michigan. This was in the works since the company went IPO in late 2014, which made it easier to open up new states for investors in its platform. When we rank all the newly eligible states by population, it’s clear that Lending Club pushed for making their platform available to the everyone. The remaining states that are not yet eligible are (in order of population rank): Pennsylvania, Ohio, North Carolina, Maryland, New Mexico, North Dakota, and Alaska. To sum it up, Lending Club now has 43 eligible investor states, covering over 276 million people (86% of the U.S. population), up from 201 million people a year...

Lending Club Raises Interest Rates by 0.25%

Lending Club increased interest rates just days after the Fed raised the Fed Funds rate by 0.25%, being one of the first in the industry to do so. However, an environment with interest rate hikes is foreign to P2P investors and many of us have questions on its implications. Here are our thoughts from a few angles: Loan Interest Rates We expect interest rates to rise inline with, and promptly after, future Fed rate hikes. Since Lending Club also adjust interest rates periodically based on market conditions and model changes, they will likely piggy back a Fed rate hike to make the net changes. However, do not expect the rate adjustment to benefit every grade level by the same amount. For example, our most recent Fed rate hike and Lending Club rate adjustment had a weighted interest rate change of 0.25% across all of its loan grades, but the changes were mostly in the mid- and high-risk grades. Lending Alpha’s strategies are expected to see a +0.23% to +0.46% interest rate increase for the latest adjustments, which a good thing: Default Rates Higher interest rates mean a higher cost of financing for new borrowers. We don’t expect interest rates to move up quickly, and any move will be gradual (+0.5% to +1% per year). The net impact to the borrower due to financing cost should be minimal due and would imply that it’s a small contributor to any increases in default rates.    Net Returns Investor returns should increase due to the higher interest rates, especially those employing strategies that optimizes for rate changes over time (like Lending Alpha’s strategies). We could see default rates stabilizing in...

Interest Rate Changes – Sub-grade Analysis

Lending Club changed their interest rates again effective 5/13/2015. Here’s how it compares against the last change from February 2015: Compared to the February 2015 interest rate changes, the May 2015 changes seem to focus on the extreme ends of the risk spectrum (A1-A4 and E2-G5). Here are some highlights: There were no changes to interest rates for A5-E1, as most of the adjustments last time (February 2015) were focused in that range. The A1 sub grade was adjusted down -0.61%, or 1/10th of the raw interest rate. There may be a goal to move the A1 sub-grade loans closer to the U.S. Prime rate + 1% after LendingClub’s investor fee (3.25% + 1.00% + 0.67% = 4.92%). A1 rates currently stands at 5.32%. For the high yield seekers who favored E and F grade loans, the rates were cut across the board by up to 1% However, at the extreme end of the grade scale, F5-G5 loans saw an increase in interest rates. Previously, F5 vs. G5 loans only had a 0.49% interest rate spread. Now, we see a 3.21% spread. Finally, how does this impact the typical investor return on an annual basis? Nothing significant…a loss of 0.01%/year. Reference: http://ir.lendingclub.com/Cache/c29553635.html http://kb.lendingclub.com/siteupdates/articles/Site_Updates/Updates-to-Interest-Rates-Effective-May-2015...

LendingClub Reports First Earnings Results Tomorrow

LendingClub (LC) reports earnings tomorrow after the market’s close as confirmed late last month, their first time ever since they IPOed on 12/15/2014. They will be hosting a webcast/conference call at 5:00pm EST (2:00pm PST) to discuss their financial performance for the period ending on December 31, 2014. Let’s look at three things: 1) Key Focus The key focus will be on originations performance, which origination fees could make up the majority of their revenues (>90%), and how it is sustaining originations growth through competitive pressure from existing and new players in their markets. Recent institutional investor interest (for loans) in the platform leaves little to doubt that they have continued to enjoy significant growth in this space. 2) Recent Financial Results from OnDeck Capital OnDeck (ONDK) reported earlier today and beat expectations (top and bottom line) and is up 5.3% during after-hours trading. OnDeck’s core business focuses on small business loans. LendingClub shares have been strong earlier today ahead of earnings, closing up +3.8% for the day at $23.78 and up +30% from the low two weeks ago of $18.30. 3) Recent Analyst Coverage Finally, let’s review what analysts have published so far on the company since their IPO. Analyst 12-month market prices have been all over the place, from as low as $17.75 to as high as $31.00 per share. This could be because of LC’s disruptive business model forces analysts to reply heavily on scale-changing assumptions, which many are not comfortable doing just yet until the future as the company continues to execute their grand plans: Here are select analyst comments from recent analyst coverage: The Company has automated traditional bank-based lending...

How the Partnership with BancAlliance Helps LendingClub

Withe the recent partnership with Alliance Partners, which controls over 200 community banks under BancAlliance, it gives LendingClub a business advantage. Here is my take on its implications: Lower and more stable borrower acquisition costs – The details of the partnership terms aren’t public, but I assume that LC is sharing some of the originations revenue with the Alliance. My guess would be up to half since that’s closer to the market average for borrower acquisition costs (50%* 5% fee * $15k avg. loan size = $375). This is a good deal since it’s increasingly competitive to acquire new borrowers given the new competitive environment. Prosper, up until very recently, were seeing losses because their borrower acquisition costs were higher than originations revenue. Also, the bread-and-butter borrower lead generation has been mostly using mailers (snail-mail solicitations), but with players aggressively coming into the game, this strategy will become ineffective in the long run (cost-benefit). Wider borrower network reach/more loan dollars/future opportunities – Partnerships generate 40% of Prosper’s new loans, so partnerships are a also big part of borrower lead generation. This is significantly more so for Small Business loans due to targeted solicitation costs. BancAlliance’s 200+ banks make up the 4th largest bank when measured by the number of branches/banking centers. This may be equivalent to $200-300 billion in customer assets. New community banks ($100M-$10B in assets) may also join the BancAlliance network and provide additional growth over time. Ultimately, this relationship allows LC to penetrate further in the consumer loan market share. It also sets them up for small business lending in the future through this ecosystem/existing partnership. More stable/institutional...
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