May 8, 2015
Lending Club’s mission is to transform the banking system to make credit more affordable and investing more rewarding. The company’s technology platform enables it to deliver innovative solutions to borrowers and investors. Lending Club has been prominently recognized as a leader for its growth and innovation, including being named one of Forbes’ America’s Most Promising Companies, a CNBC Disruptor, a 2012 World Economic Forum Technology Pioneer, and one of The World’s 10 Most Innovative Companies in Finance by Fast Company.
But in its ongoing mission, Lending Club has not been able to turn all the goodness into balance sheet profitability. The company’s SEC filings showed the following financial picture:
As highlighted by the data above, Lending Club’s revenue has been on a steady rise since Q2 of 2012, growing at a CAGR (compounded annual growth rate) of 32%. But it should be noticed that for each quarter, the operating expenses have been higher than that of operating revenues. Except for Q2 and Q3 of 2013, all the quarters have shown no operational profitability. What could be the reason behind the lack of profitability? In order to investigate, we looked at a few things (and will keep looking).
Loan Defaults: The loan default for Lending Club is three times lower than that of OnDeck (previously On Deck Capital), it’s competitor; and OnDeck’s loan default rate is 11%, which is also the case with many lending companies. The loan default scenario might not be having a major impact on the company’s earnings.
Interest Rates and Transaction Fees: Lending Club’s average interest rate for 2014 was 13.4%, which is quite low as compared to the case of (say) credit card borrowers where it is around 16-17%. While that is the USP of Lending Club, which in turn attracts borrowers, this could be a reason behind the company not being able to generate enough collection from transaction fees which is the major component of its operating revenue (50% of operating revenue in the current quarter).
On further analyzing Lending Club’s SEC filings, the segregation of operating expenses shows that general and administrative costs have been the highest component, which is related to salaries and the like. Being a startup, it’s not surprising that Lending Club has to face such high general and administrative costs.
However, the company’s operating expenses have been growing at a CARG of 28%, which is less than that of operating revenue. On performing a simple linear regression, it can be deduced that between mid-2016 and late 2016, Lending Club would be able to achieve decent (still low) operational profit margins.
Lending Club went public by the end of last year. Although the company is not earning much on per-share basis (only 2¢) but this is expected to rise as the company grows. The company has shown massive growth in loan originations. In Q1 of 2015, the company originated $1.64 billion in loans, which is 107% year-over-year growth since in Q1 of 2014 when the company originated $791 million in loans.