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Lending Briefing: Digital lending profitability and underwriting discipline

  • Quite a few digital lenders beat market expectations in Q1 2022, posting very strong revenue growth as they continue to expand in new pockets of the market.
  • But looking at the stock market performance of digital lenders', stocks are still well in the red, indicating that investors are looking for underwriting profitability.

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Lending Briefing: Digital lending profitability and underwriting discipline

Small digital lenders grow, but it’s the underwriting that matters

Digital lenders delivered quite a few positive earnings surprises in the first quarter of 2022, as the strong post-pandemic consumer credit health continues to encourage lenders to push for growth. 

However, valuations remain under pressure. Stocks are still down year-to-date, indicating that stockholders are still looking for profitability and underwriting discipline. 

Here’s a quick Q1 earnings overview of some digital lenders that exceeded market forecasts and reported strong portfolio growth:

Lending Club beat expectations in the first quarter with $40.8 million in net income. New loan originations rose to $3.2 billion from the $2.8 billion reported in the prior quarter. Deposits almost reached $4 billion, a 27% growth on the previous quarter.

Oportun delivered a strong earnings surprise as well, with net revenues of $205 million up 86% year-on-year. First quarter originations grew by 140% year-on-year to $800 million, with new borrowers representing more than half of total loans, up from 40% a year ago. 

MoneyLion also beat consensus estimates of $56 million with revenues of nearly $70 million, and just about broke even with a $0.1 million net income for the quarter. On a year-on-year basis, total customers more than doubled to almost 4 million at the end of Q1 2022. Originations rose 116% to $408 million. 

However, with some muddy waters looming ahead in terms of macroeconomic uncertainty, investors are still taking a cautious approach – despite the quarterly profits and beats delivered by some digital lenders, stocks are still well in the red on a year-to-date basis. 

One big underlying issue across the fintech/digital lending sector is whether or not the underwriting models are really proven to work profitably, according to Oportun CEO Raul Vasquez. If things were to go down the path of a recession, everyone's underwriting prowess is going to be tested, he said. 

“Investors were a bit concerned about some of the trends in terms of delinquencies, losses, and securitizations. There are also concerns about fintech unit economics – whether or not those companies can actually be profitable,” Vasquez told Tearsheet. 

At Oportun, there is no leap of faith required as the company has six years of profitability behind it, the executive said. And continuing to turn profits after a stressful time like the pandemic gives management confidence that its underwriting can weather other external headwinds as well. 

MoneyLion is slowly marching towards profitability, remaining confident in a breakeven adjusted EBITDA for the year. It also reiterated its FY22 revenue forecast to be in the range of $325 to $335 million, meaning an adjusted revenue growth of 100%.

These positive signs coupled with the quarter’s strong earnings beat were well received by the public markets, which sent the company’s stock up 26% after the results release. 

At Lending Club, the stock is down 15% quarter-to-date, on top of the 35% drop recorded in Q1 2022. CEO Scott Sanborn was confident in the company’s fast growing portfolio, and said during the conference call that the lender’s customers are overall in great shape with strong balance sheets.

However, the prospect of rising interest rates at “unprecedented speed and magnitude” led the company to “proactively tighten underwriting on the margin to stay ahead of pressures that consumers may face,” the executive noted.

Overall, it looks like management at these digital lenders remains optimistic, growing their books, confident with their underwriting. 

But the fintech valuation drama doesn’t look to be going anywhere, and in the long run, a market downturn will tax the undisciplined.

Chart of the week

And speaking of profits, it looks like digital lending is the most profitable global fintech model, according to Tellimer research. Contribution per user and as a percentage of revenue is highest in the lending segment. 

“These fintechs usually offer lower interest rates than traditional retail banks but can still generate strong margins due to their low cost operating structures, making lending the most profitable product for fintechs,” Tellimer said.

This would also explain why payments giants like Alipay and Paytm tend to expand into lending once they have achieved sufficient scale in the payments arena – but once they step into lending, there’s also more regulatory oversight. 

What we’re reading 

Buy now. Pay (and pay, and pay, and pay) later (Intelligencer)

Banks can bring stability to the stablecoin market (American Banker)

JPMorgan expects credit losses to stay low through '23 (PYMNTS)

​​Senior business lending exec of Square mas moved to Coinbase (deBanked)

Fintech Recap: Key Factors Impacting Lending in 2022 (Fintech Business Weekly)

What we’re writing

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