Cabeza Howe

Long/short equity, growth, value, contrarian
Cabeza Howe
Long/short equity, growth, value, contrarian
Contributor since: 2006
CEO Renaud Laplanche: "The way we’re proposing to change the banking system is not in a competitive, or confrontational way with incumbents. We believe there’ll be more banks joining our marketplace."
This statement reflects Laplanche's brilliance. Shareholders are in good hands.
"In fact, combining Lending Club’s low cost of operation to the low cost of capital for banks would be a win-win situation for both parties, Laplanche believes."
That's the message he keeps on reiterating.
And big banks are taking notice too. In its annual shareholders letter last month, JPMorgan Chase CEO Jamie Dimon wrote, "There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking. The ones you read about most are in the lending business…And we also are completely comfortable with partnering where it makes sense."
On top of that, “We’re still getting started, and there’s a lot more to come than what has come so far”
They're building a far larger company, per SEC filings.
And allow me to reiterate for him, the longer-term EBITDA margin target is 40+%.
Longs don't need to freak out; others will figure out the potential of this company and join the party within the next year or so timeframe.
Lending Club Lifted to Overweight at Morgan Stanley (LC)
Mentioned on the 1Q15 conference call:
LC spent 200 bps of origination on marketing versus Prosper's 300 bps, per third party report.
It's true competition is heating up. But you can be sure that new entrants are spending even more than Prosper on marketing. They are incurring huge losses, so the LendingClubs and Prospers of the industry might squeeze them out of business over time.
So, as painful as competition might be, it might really serve to raise awareness among borrowers on the flip side.
E-commerce, search engines, and social networking have all appeared to have low barriers of entry at the beginning. But in the end they all appeared to turn out the "winners take all" result. Don't think LC, or Prosper, or Goldman is going to be the sole ultimate winner in marketplace lending. But the field might just end up to converge on just a few winners in the end.
Wow, what a courageous piece that goes against the market sentiment! This pairs up with Zacks' opinion here:
Why LendingClub Corporation (LC) Might Be a Diamond in the Rough
Lending Club Raised to “Buy” at Zacks (LC)
No, I was not comparing 1% NPA to a black swan event at all. If you read it again, I brought that up as a con of the CTL loans which was a separate risk issue I was discussing.
1% NPA is not rare at all, and INBK's %NPA post financial crisis far exceeded that. But as I have discussed above, INBK's historical %NPA should not be taken as a guide due to the dramatic difference in loan composition and macro environment now.
The question is really if INBK will suddenly reach 1% NPA in the near future, or is it more likely to reach that during a bust. I can't be sure; but some banks have been able to maintain 0.5% NPA or below like forever (maybe except during the financial crisis.) Their secret sauce is of course adhering to quality credits.
And recall what I said in the main article "the average LTV of these loans was underwritten at a conservative 55%. "
Conservative underwriting makes a whole lot of difference. And conservative underwriting on top of a conservative portfolio probably tells even more.
As a risk, for sure, sudden spike of loan loss certainly can be a threat. I said as much when discussing risks to my guesstimates on Q2/Q3 earnings.
So I'm not going to deny that. But in what form and shape, we should find out.
Of course, the other side of the coin is that CTLs are large credits. So in the event of a default, its impact would be felt more, in particular at this early stage of growth. In addition, a black swan event can strike too, with multiple CTLs defaulting at the same time. So you do have room to scare yourself. Just that a black swan event is merely that -- not likely, though not impossible.
As the company's loan portfolio grows even bigger from here, the ability to absorb a huge-credit default (or lumpy loan loss) will get better also. A $2 million loan loss on a $1.5B portfolio is certainly far less significant than a $2 million loan loss on a $200 million size. Plus, with existing and growing reserve, a $2 million loan loss does not necessarily translate into a $2 million loan-loss provision.
So be mindful of risks and monitor/adjust/diversify accordingly; but don't necessarily get terrified into the abyss.
To me the %NPA threshold/target/max numbers out there were designed just to make it easier for management to collect bonus. It shouldn't be taken as indicating actual average %.
Someone might then be inclined to use historical %NPA as a reference. The problem there though is that the historical %NPA and %NPL numbers are NOT a good guidance for INBK.
In 2008, INBK's consumer loans were 73% of loan portfolio. And now less than 13%! (Note "consumer loans" is defined as RV/Trailer/Credit Cards. It excludes residential mortgage or home equity loans/lines.)
The other important consideration is that we are now in a quite different economic environment than the Great Recession/Financial Crisis a few years back.
These two factors are important because (1) seasoning has worst impact during a crisis/bust, (2) delinquency of different types of loans is quite different (day and night) in a financial crisis, vs. normal recession, vs. periods of economic growth.
In boom times, increasing delinquency/defaults due to seasoning get offset, to a large extent, by debtor's improving capability to pay and (for a fast-growing lender) the new loans added which have not yet seasoned. So, seasoning does not necessarily have to mean vastly increased loan loss. Loan loss might creep up, but not necessarily huge increase.
Seasoning is more a concern during busts. But here we have to distinguish between a regular or shallow recession and a financial crisis like the housing-triggered 2008 crisis.
In both growth periods and a regular or shallow recession, consumer loans perform worse than both residential mortgages and CRE loans. And CRE loans have the lowest chance of delinquency among the three loan types.
This means, in a growth period like now or in a shallow or regular recession down the road, INBK's loan portfolio likely will outperform because it now has a very small consumer loan portfolio (which induces highest loan loss). Besides, INBK's fastest-growing credit is the the safest type of CRE loans, the CTL. And to repeat, CRE loans as a category already performs far better than consumer loans.
(Seasoning on CRE loans, in particular CTLs, and residential mortgage loans should be far less painful than that on consumer loans, especially during growth periods like now.)
It's only in a financial crisis like the one in 2008, is INBK likely to run into major problems. During the 2008 crisis, residential mortgages performed the worst, followed by CRE loans and then consumer loans.
In all likelihood, the next major financial crisis is still many years away. But whenever you see that on the horizon, do get out of INBK and any financial stocks. And by extension, get out of equity investment in general too before a major crisis strikes.
It's also a great idea to reduce equity exposure (or get out totally) when treasury yield curve inverts, which often forebodes a recession and bear market.
Correction on my previous post:
"(And overall decline rate almost tripled in the same period.)" -> Wrong. Should be corrected as ("):
"In December 2014, LendingClub’s approval rate was 5.8%, down from 14.4% in December 2013. "
So, overall approval rate almost dropped to 1/3 of "initial rate" in 12 months.
"Larry Summers, a member of multiple presidential administrations and a current LendingClub board member, predicted that online lenders could soon achieve a 30-40% market share in consumer lending, and even 70% in small business lending. "
Vast room for growth, increasing leverage as tech/platform/operation scales, and promising long-term margin profile are what makes LC a long-term buy.
Nocturnian, I have already acknowledged the LC/TREE difference in business models in my previous post, including in TREE's business description (i.e. comparison shopping). As I have pointed out or implied, the difference only justifies LC's richer P/S vs. TREE (while they possess similar P/B). I agree with you that P/B is far more useful for identifying undervalued stocks vs. high-growth techs. So, solely looking at P/B is not appropriate. However, I still believe in its usefulness as just one extra metric because it allows you to account for balance-sheet strength or weakness. A fortress balance sheet like LC's allows a company to pursue additional growth opportunities as well as accelerate existing ones.
There's been discussion that LC's decline rate on lower-FICO-score (660 or below) applicants has climbed significantly in the past year or so. (And overall decline rate almost tripled in the same period.) Observers are suggesting that this spells extra opportunity for LC on those declined applications. For example, LC can offer non-loan financial services to those declined applicants. Or, it can refer those same applicants to partners (-> one more step closer to TREE's sending leads to partners).
And there's opportunities overseas as well. LC is building its brand from ground up and will expand over time.
As LC scales up, the leverage and profitability will follow. You don't really have to confine yourself to P/S or P/B. You can model future P/E, EV/EBITDA, P/EBITDA, P/CF, etc. as well. And when you are complete with the exercises, you might have a quite different assessment on LC's valuation.
(I want to repeat/emphasize LC's longer-term adj. EBITDA margin target of 40+%.)
"The bank has an average estimate for NPA’s of 1%."
Please be more specific about how you came up with this number. Seasoning is universal and inevitable. But credit quality, economic condition, and actual loan types/composition all make a difference on NPL/NPA metrics.
P/B is relevant because it takes into account how much shareholders already have on a company's balance sheet. This is much like if you have a $5 million net worth but are only making $20K a year now, you should still be valued much higher than a person who has zero net worth but is making $100K a year now. And it would be all the more relevant if you are going to make $500K a year starting 3 years down the road. LC is in a similar position, as it has a solid balance sheet but is not making much profit for now. But then its high growth, scale, and leverage should bring in much more profit in the future.
TREE is a relevant comparison because it is in this business:
LendingTree, Inc. operates an online marketplace for consumer loan and other credit offerings. It helps consumers comparison-shop for mortgage loans, home equity loans and lines of credit, reverse mortgages, personal loans, auto loans, student loans, credit cards, small business loans, etc. It connects consumers with actual lenders on its marketplace.
TREE is already a competitor of P2P platforms and lenders. It will be more so in the future. As for the difference in business model (from LC's), one can certainly argue that P2P platforms (or marketplace lending platforms, to be more precise) deserve a much RICHER valuation.
As for MBLY, it is less an appropriate comparison. But it just goes to illustrate that if you can grow fast, maintain a market-leading position and deliver decent return, investors will not necessarily turn their back on you. Because investors will ultimately look into what the future holds for them.
"If you look at your chart above, its 1Q15 sales and mkting % increased from 1.8% last quarter to 2.04% this quarter."
> Except that you have not factored seasonality into consideration. S&M (as % of origination) of 2.04% in 1Q15 was actually lower than that in both 1Q14 and 1Q13, which both came in at 2.16%.
More complete view on margin: contribution margin and adjusted EBITDA margin.
Contribution margin: 44% (1Q15), compared to 38% (1Q14)
Adjusted EBITDA margin: 13.1% (1Q15) compared to 4.8% (1Q14)
So margins are heading in the right direction. You are seeing operating leverage as LC scales up.
Current price action is more about sentiment (caused by pending lockup expiration) than valuation, competition, or margin trend.
Once lockup expiration uncertainty is behind us, the stock should look up. Strong balance sheet, fair valuation (P/B=6.15 vs. TREE's 6.27 but growing much faster). Long-term adjusted EBITDA margin target of 40+%. Huge market opportunity, lots of room to scale up and improve margin/profitability.
When you talk valuation, don't forget balance sheet and growth potential. Look at multiple metrics. Instead of fixating on just one parameter.
If you really freak out about high P/S, don't be. Try MBLY (I admit that's a bit of orange-to-apple comparison; but both are high-growth industry leaders, well, in different industries - sorry.)
P/B = 24.9
P/S (FY14) = 68.4
P/S (FY15 Est.) = 45.0
P/S (FY16 Est.) = 28.5
P/B = 6.15
P/S (FY14) = 28.3
P/S (FY15 Est.) = 15.6
P/S (FY16 Est.) = 9.9
MBLY also went through a period of price decline until lock up expiration. And once there, investors were no longer concerned. Stock rallied following a secondary offering for insiders to unload shares.
Believe LC is following the same pattern. People are now primarily freaking out about lockup expiration.
Pain from loan seasoning is inevitable; no institutions can get around that. But it tends to happen over time. Volatility aside, it's a gradual process. Besides, their major growth is in CTL loans which generally are of higher quality than other CRE loans. So, the pain might turn out to be quite tolerable. As NII grows huge, the ability to absorb higher loan-loss provisioning would improve also. Risk is certainly there; but it is a risk you can't avoid when investing in a high-growth lender.
PIN also quite liquid. Hope they continue to correct a bit more, to offer a better entry point.
Thanks for the note, JSL.
Wow, sole holding! That was brave and timely and proves your value-investing acumen. I do think this stock still has room to run in the next twelve months, in particular if INBK's mortgage banking mojo can withstand rate volatility and turns out to have sticking power.
And it would certainly be a long-term winner if Mr. Becker succeeds in his multi-billion-dollar blueprint on admirable ROE, on his way up.
But as the price goes up, the valuation gap narrows and it appears to me gradual diversification is not a bad idea. Best of your (and our) luck!
Thanks, JSL. SA locked me out (until now) on my archived articles since I'm not a Pro subscriber. So I was not able to respond to your comment earlier. But I have published one yesterday. Hope you will check it out if you have not already done so.
Thanks, Eckman. I'm really glad our patience (which we discussed over and over) has paid off. Congratulations on your over-weight position in INBK (if I have not remembered wrong)!
Thanks, Remy. I can't be 100% sure on the interest rate sensitivity issue either, though I have expressed my belief in INBK being asset-sensitive (which would benefit when rate rises). The logic of my thinking was already stated throughout my writings. And that's in line with Mr. Becker's position too. Let's hope we will get clarity in the upcoming 10-Q. That disclosure could be a source of either delight or disappointment to the market.
From the May 2015 issue of Inc. magazine About LC and ONDK.
From the May 2015 issue of Inc. magazine
Yahoo! might NOT have disabled INBK message board on purpose. Software glitch could be a possibility too? Anyhow, if you just type in the following URL,
It appears you can still read and maybe post on the INBK MB. Problem is that fewer people will be reading and posting there.
Thanks for your note, Eckman. It's great that you remain interested in this tiny, growing bank. I'm inclined to include any update along with my thoughts on Q1 earnings if I do find time to write one. So, that would be after Q1 ER.
The recent run-up following the announcement of $1B asset mark indicates that communication matters and maybe Ken should indeed put some more effort into that, besides his (and Mr. Becker's) focus on delivering result.
Regards and good luck.
Few traders (if any at all) are dumb enough not to know that your questions were rhetorical. To yours sincerely, intelligence and humor are not even part of the investment equation. BTW, I was not even necessarily trying to answer your questions. Besides you, there are others (including myself) in this chatting room.
"With current cash Opex and Capex projection, the current liquidity can last into 2H16" => More precisely should be "the current liquidity could last through 1H16."
(1) If you can trust management's words, Q/Q sales decline was due to focus on higher-margin products and, presumably, culling of lower-margin I&I shipments.
(2) With current cash Opex and Capex projection, the current liquidity can last into 2H16. Again, if you can trust management ability to execute and deliver on their promises, revenue might pick up throughout 2015 and 2016 thus further mitigating the cash crunch.
Of course, if the past is any indication, there's no telling when management will again shift gears down the road. So take your own risk to take their words for granted.
And like some brought up in the call and given Moema's habitual setbacks, there's also the risk that SBJV won't receive enough commitment from Bunge in the future.
So depending on if you are a hardcore believer, fortune teller, observer, or doubter, you will arrive at different conclusions.
Hi Eckman,
Ken has a lot of connections in the analyst community. Over time he is going to introduce INBK to them. But he has his own road map. He knows intimately about the banking industry, how banking stocks are valued by Wall Street and investors, and the dynamics of analyst coverages. Right now he believes the top priority should be in boosting EPS, which makes sense. So, patience is indeed the keyword here. I have no information regarding near-term investor conference participation. Feel free to contact the company to find out. Good luck investing to all.
1Q14 revenue was $11.2 million. $5.7 mm in 1Q15 means a (49%) decline Y/Y. I have been bearish on this stock since it hit $5:
It's not fair when you jack up earnings without upgrading the stock. The guy you mentioned appears to have a hold rating on the stock, which has remained unchanged for the past 12 months. So, he's contributing to rising estimates that's making future positive surprises harder to come by while remaining quiet each time he pushes the numbers up. Depressed price plus brightening outlook does not seem matter to him at all.
What's your take on Tsipras' latest conciliatory gesture amid Germany's hard-line stance on further debt haircut? Does that seem a mere tactic or does it suggest Syriza has to face reality eventually?
Have to agree 2.5 years later. Just check the price now: $44.89. A double from the then historical high of $22 in 2.5 years is still quite good.
Two directors have acquired shares again, after earnings release.
PJS and Eckman,
Thank you for your comments and shared vision on INBK. I shared my opinion on shareholder communication with IR and CFO in the past couple of days (when this article was in its first day of embargo). I'm delighted that they have had almost everything I recommended in their plan already. It just takes time for their measures to materialize. I plan to detail this in a future writing. Long story short, my exchanges with Ken and IR in the past couple of months have convinced me that Mr. Becker and the board have picked an optimum candidate to be this company's CFO at this stage of its long-term growth. Ken has brought in a wealth of expertise that bodes well for the shareholders. We are in good hands.
That said, I do still encourage you to let them know that you agree with my proposals and their plan/strategy and commitment. Management will be glad to hear that shareholders agree with their planned communication strategy.
Good luck to all INBK shareholders. Cheers!