LendingClub (NYSE:LC) reported solid quarterly results yesterday that solidly beat earnings estimates. Earnings per share (EPS) came in $0.26 when estimates were expecting less than half of that. Following the news, shares rallied significantly higher and in pre-market trading, LendingClub shares are currently trading up around 30% topping $40. A year ago, LendingClub was trading at under $5. While today’s gain is no guarantee of tomorrow’s share price, things are looking up for the Fintech that once struggled to survive and had to do a reverse share split to keep their equity trading on the NYSE.
Much of the improving investor sentiment revolves around the Fintech’s transition from a consumer online lender to a full-stack digital bank. At the beginning of this year, LendingClub completed its acquisition of Radius Bank thus positioning the company to be able to offer a broader portfolio of services to its users.
Of note is the fact that LendingClub is a nationally chartered bank – unlike many “neobanks” that provide bank-like services by partnering with other chartered banks. This means LendingClub has cut out the bank – middle man.
Combine that with the fact that LendingClub now has access to cheap capital via consumer deposits means it business can lend more for less giving it a competitive advantage against other lenders while benefitting from its “billions’ of data points culled from years of online lending. During its earnings call, LendingClub said that its data allowed it to reduce loan delinquencies at a lower cost. A fully 80% of originated loans are now fully automated. And this is minus costly bank branches and the people needed to staff these physical locations.
Another important advantage for LendingClub Bank is the fact there are only a handful of nationally chartered digital banks. Most digital competitors are neobanks that still must deal with the expensive middle man. The recent transition to the Biden Administration has led to a regulatory environment that is far less innovation-friendly. Some pundits believe there will be no more digital banks approved by the Office of the Comptroller of the Currency (OCC) for at least four more years.
LendingClub Bank is in a good position and is expected to continue to generate profits during the coming year. But what does the digital bank need to do to keep things rolling?
First, it must grow accounts and deposits faster. Wall Street will want to see the number of “members” go from 3.8 million to a good bit higher. During the past quarter, LendingClub added just 100,000 new members. Expect LendingClub advertisements across the internet and on cable television as it looks to juice this number.
Second, LendingClub must add new features and functionality. As an agile Fintech, LendingClub can do this faster than its brick-and-mortar competitors. During the earnings call, LendingClub executives were vague on forthcoming services focusing more on helping people manage their money and boosting auto-loans and other lending verticals. LendingClub has the option do much more in the coming months. Management just needs to decide to pursue modern digital banking features that consumers, especially younger ones, have come to expect from a forward-looking financial services firm.