Lending Club - The Next AmEx

| About: LendingClub Corporation (LC)

Summary

Lending Club is in a chaos due to recent revelations about the CEO, which led him to resign.

But have borrowers deserted the platform?

Similarities to AmEx 1963 scandal!

Lending Club (NYSE:LC) is the United States' largest online credit marketplace connecting borrowers and investors. Both can benefit by reducing the spreads that would have normally gone to the banks.

Founded by Renaud Laplanche in 2006, Lending Club was the first peer-to-peer lending company to register its securities with the Securities and Exchange Commission. As per the latest Company Statistics, the company's loans funded to date are $18.732 Billion up to March 31st, 2016. When the company raised $1 Billion in 2014 through the world's largest Fintech IPO, nobody would have thought that the company would get caught up in such a deep crisis. The company started facing problems in 2016. It failed to attract investors, a scandal unearthed over some of the company's loans and revelations about CEO Renaud Laplanche led to his resignation. Lending Club had improperly sold $22 Million of loans to an Institutional Investor that did not meet the investor's standards. The New York Times later reported that the Company's CEO was guilty of not disclosing his interests in the investment fund that Lending Club was considering as an investment.

All these revelations brought the share price of the company to $3.99 as on May 19th, 2016. Lending Club has suffered a tumble of around 80% from its initial price at the time of its listing.

Even before the above crisis, Lending Club was not able to able to live up to its reputation of being the pioneer of fintech industry. It is being forced to compete with other unlisted Fintech lenders who do not face the investor scrutiny of a listed peer. The company had a negative return on assets for the year 2014 and 2015 of -1.13 and -0.10 respectively.

The Lending Club's fall can be traced to its changing business model. Lenders have turned out to be more of Hedge Funds and sophisticated parties who prefer to lend to only a specific category of borrowers. Second, and perhaps the most important reason is that despite having emerged as a real competitive force against the banks, LC's growth has been choppy. The investors have also raised concerns about the algorithm LC uses to assess its borrowers.

The worst is not yet over for the Lending Club as the company announced that a lawsuit against it appeared imminent. An internal review of the company found that LC was not confirming to its own rules regarding loans. In order to regain investor's confidence, LC in its recent statement said that it might have to offer higher interest rates to attract them and invest its own capital in loans which would again erode Company's margins. In the aftermath of the scandal, it will become difficult for LC to retain its key personnel. To retain them it might have to boost pay packages which would put an additional burden on the company.

Additional analysis

As per the 3 analyst ratings posted on Morningstar, 2 have a Hold rating and 1 has a Sell rating and nobody is recommending buying the stock. As per the upgrade and downgrade data posted on Yahoo finance by various research firms like Keefe Bruyette, Pacific Crest, Guggenheim, all seem to have downgraded the Lending Club's stock. The fall of Lending Club has instigated fears in the mind of investors regarding the long-term growth potential of marketplace lending. Decelerating growth rates and emerging regulatory issues have added fuel to the fire.

But one must not ignore the fact that market has also been ignoring Company's revenue and earnings, both of which either matched or beat Wall Street expectations.

LC had reported a Revenue of $211 Million and $430 Million with Net Loss of $33 Million and $2 Million for the year 2014 and 2015. But during the Trailing Twelve Months, the scenario has been different. It reported TTM revenue of $501 Million and a Net Profit of $6 Million respectively. Also, if we compare the performance of Lending Cub with its peers like On Deck Capital (NYSE:ONDK), Lending Club's Performance was not a disaster in financial terms as On Deck capital reported a TTM Revenue of $261 Million and a Net Loss of $9 Million. This makes one feel positive about LC.

The situation is similar to the American Express (NYSE:AXP) Scandal in 1963 and the emergence of Warren Buffett. AmEx got wrapped in a fraud totaling $175 Million and when the news of the scandal broke its share price halved. But Warren Buffett put most of his cash into the AmEx stocks . His view was based on an Independent research analysis on the 'Brand AmEx'. Within a year, the stock prices rose over 40%.

It is important to realize that this crisis does not hurt the franchise the company has built in the eyes of its borrowers.

As per latest PWC reports, the P2P Lending market is expected to reach $150 Billion by 2025. So one cannot write off LC, which has been the strongest player in this industry. At least the borrowers would continue to use the P2P platform to reap the benefits. Lending Club might be a promising Investment, if one is looking for a contrarian play.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.