LendingClub Corp (NYSE:LC) retail investor volumes signal that either retail investor interest is still tepid or borrower conversion may not be rebounding as rapidly as Morgan Stanley anticipates. Path to growth is still intact, but the trajectory seems shallower. Hence, the firm lowers its estimates and PT to $7 (from $8) but remain OW.
LC's intraquarter retail investor volumes (~15% of total) have not shown much progress since Morgan Stanley begins tracking them last year, with 2Q appearing down 6% sequentially 1Q17 vs. its prior +13% QoQ estimate. The firm suspects the primary culprit is a slower than expected improvement in converting high credit quality applicants to actual originations. At the same time, other marketplace/online lending platforms have indicated an increase in originations volumes from the beginning of 2Q17, which Morgan Stanley finds encouraging, and still expect that LC will see loan volumes grow in 2H17 even though that growth might be below its original forecasts, and perhaps at slightly lower profitability.
Since 2Q16, LC's origination growth recovery has been driven primarily by burgeoning institutional investor interest, but disproportionate acceleration from institutional funding would compromise the company’s historical ~50/50 institutional/individual funding mix. While filing data makes the firm somewhat cautious on the pace of recovery in 2Q, it continues to see a path for LC to deliver meaningful improvement in originations growth in 2H, as it expects LC to increase advertising, investments should yield improvements in borrower conversion rates in 2H, and LC remains the scale player in marketplace lending, among other reasons.
Morgan Stanley lowers its retail funding estimates and total origination volume growth slightly for 2Q and F2017.For 2Q, the firm is lowering its origination growth forecast to 8.5% YoY vs. prior 9.7%. For 2017, Morgan Stanley lowers its total origination estimate to $9.15bn (+5.5% YoY) from $9.26bn (+6.9% YoY). The firm lowers its PT to $7, from $8, and remain OW.
LC's intraquarter retail investor volumes (~15% of total) have not shown much progress since Morgan Stanley begins tracking them last year. Average weekly volumes of $21.3mn were down 6% sequentially from $22.7mn in 1Q17, vs. Morgan Stanley's prior +13% QoQ estimate. The firm didn’t know whether the lack of improvement is due to a more gradual improvement in borrower conversion rates than anticipated, or a shift in funding mix, or lack of retail interest (or a combination of all three). Morgan Stanley suspects the primary culprit in the lack of retail purchase volumes is a slower than expected improvement in converting high credit quality applicants to actual loan originations, especially as LC has been operating close to its preferred ~50/50 retail/institutional mix and most investors still find yields on loans quite compelling, making reasons 2and 3above less likely.
Meanwhile, other marketplace/online lending platforms have indicated that they have generally seen an increase in originations volumes from the beginning of 2Q17, the result of stepped up marketing efforts that began in 1Q17 post the retrenchment that most went through in 2016. Morgan Stanley finds those trends encouraging, and still expect that LC will see loan volumes grow in 2H17 even though that growth might be below its original forecasts, and perhaps at slightly lower profitability.