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Lending Club: A Quality FinTech/Bank Hybrid Trading At <6x FY23 P/E

Aug. 02, 2022 5:31 PM ETLendingClub Corporation (LC)AXP, COF, DFS, JPM, SYF, SOFI, UPST40 Comments
Siyu LI profile picture
Siyu LI


  • I explain Lending Club's hybrid business model that is often misunderstood as a FinTech firm (e.g. Upstart).
  • I reflected on what went wrong with my initial analysis that valued Lending Club at $70/share.
  • I revisited my model, and a conservative valuation offers 40%+ upside potential plus lucrative optionality.

LendingClub headquarters in Silicon Valley.

Michael Vi

Hybrid Business Model

Since Lending Club (NYSE:LC) acquired the banking charter with its Radius Bank acquisition in early 2020, it revamped its business model to leverage its banking and FinTech capabilities intended to:

  • Use its online banking

This article was written by

Siyu LI profile picture
I am a fundamental-driven analyst. I read sec filings/call script/ppt, study competitors, try out products, keep track of key personnel - leave no stone unturned to build rock-solid convictions. -------------------------------- I look for 3 types of companies. Misunderstood underdogs - power players mispriced for wrong reasons. Some past picks include H&R Block ($HRB)Turnaround stories - they failed before, hated, and still being ignored by investors, despite coming back like a champion. Recent picks include: Deutsche Bank ($DB), and United Natural Food ($UNFI)True innovators - they are category creators and pioneers, they grow where innovation thrives. Past picks include Roku ($ROKU). --------------------------------I am a generalist and am aware no matter how much I study a company, there are always investors out there in the SA community, who know a lot more than I do. They keep me stay humble and stay hungry. --------------------------------I am a practitioner of Ray Dalio's principles, an admirer of Peter Lynch's pragmatic style, and a follower of Howard Marks' wisdom.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of LC either through stock ownership, options, or other derivatives. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (40)

keremoner58 profile picture
@Siyu LI Isn't your valuation multiple rather conservative considering PEG? My PEG calculation is below 0.5. Do you have one?
Siyu LI profile picture
@keremoner58 its current growth is quite extraordinary, part of the reason as I mentioned in my analysis is it is in the 'ramping up the book' stage. thus I don't use PEG here.
IP Banking Research profile picture
@Siyu LI I agree, it is tough to model. I see the growth will be in spurts. First it’s ramping the unsecured lending book (probably a long runaway remaining), secondly is a multi-product approach…ala SOFI.
@IP Banking Research Once the loan book is fully ramped up, wouldn't think be a prime target for a buyout?
@Siyu LI Thanks so much for that really helpful and detailed presentation. I am not fluent in the business accounting, but a comparison to Amex even at a mature state is an interesting and helpful take It's a great analysis on your part and definitely worth reflecting on:

AMEX some years ago had revenue by charging merchants a fee for purchases, and over time has moved aggressively to gain money from interest rates and fees. (I can recall having an AMEX card for many years where they didn't charge interest if you were late).

Lending Club is generating interest income from originations and loans (we hope) successfully into other areas). I am not sure about the modeling, but I think if LC had an average P/E of 16 today that's a more fair evaluation. The whole point of Fintech is no bricks and mortar, agility, low cost, etc. The market is valuing LC closer to a bank today.

What is interesting is that the CEO in the earnings call talked about the ability to switch between growing originations and focussing on increasing the loan portfolio based on market conditions. It speaks to the flexibility of the model, which also seems to bake in quite a bit of earnings and stock price fluctuation. With my average price at $10, I do regret not selling when it was above $40, but I'm in for the long run, and I think we have good upside over time.
Siyu LI profile picture
@Wightnite thx for reading/comments
Just posting an FYI. Signed up for their HYS account last week. One of the deposits from my checking account to the savings account was done in triplicate... that is, 3x the amount withdrawn, and only the original intended amount reflected in the lending club savings account.

I have no idea the scale of the problem, but it's large enough that their log-in page has the following message: "We are experiencing a high volume of calls at this time. We appreciate your patience." banking.lendingclub.com/...

The triplicate transactions went through and all I've heard from Lending Club / Radius so far is "they're working on it". Meanwhile, I was lucky enough to have enough in my checking account to cover it. However, others are overdrawn.

Reddit is the only other place I've seen this mentioned:


Needless to say, I will not be keeping my money there.

They've known since Sunday and still haven't been able to resolve the problem, which suggests to me that it is very widespread... but that's just speculation.
Bram Berkowitz profile picture
@Siyu LI Thanks for taking another look. So based on your model you expect this quarter (Q3) to be the first time NII rises and CECL provision amount falls from Q2?
IP Banking Research profile picture
@Bram Berkowitz also I think the unsecured loans modelled is light for q3. EOP is already 3b. I would assume 3.3b. Additionally assuming no growth in secured doesn’t really make sense given auto loans.
Siyu LI profile picture
@Bram Berkowitz
I expect its CECL margin remains ~7%. so my projected CECL amount drop is largely due to projected loan origination back to 'normal' $3.4B vs $3.8B 2Q22.

fairly confident NII will continue to rise not just next quarter, but for a few quarters ahead of us, barring no major macro/disruptive events.
Good analysis!

LC is a solid fast growing business (highly profitable too) which is very hard to find. I have been collecting LC from $30'ish and keep buying the dip (so lucky bought more at $11.38 recently). In the next valuation expansion cycle (let's be honest and just call it the next "bubble"). When you hear again "this time its different", new nextgen technology "scams" , M&A spins.....LC will be trading at PE40 by then. Don't let go before that happens.....unless there is some fundamental changes to the business.
Siyu LI profile picture
@10 Eggs thx for reading and comments
Good article Li.

I understand that LC originates subprime loans with a corresponding higher interest rate than reg banks, yet due to its AI algo, suffers less charge off rates. Thats an amazing bus model. Have I got this right?
Siyu LI profile picture
@mac ron LC avg borrowers have fico score above 700, so not really sub-prime, especially the loans that LC kept on its own book.

most 'reg' banks(e.g. JPM, BAC, WFC, etc) don't really offer unsecured consumer loans (other than credit cards), so probably most comparable ones are credit card operators, as I discussed in the article.

Hope that helps.
Great article. Any idea why SOFI is trading so much higher (P/S)? Since both have acquired a bank they should be quite comparable.
Siyu LI profile picture
@takekura I don't know $sofi well enough to comment on it. in this thread some comments touched on this subject (sofi vs lc), check it out. twitter.com/...

thanks for reading.
John Windelborn profile picture
This was a good analysis and I really enjoyed you going back and looking at what you got wrong and what you got right.

Someday the market will take notice of LC.
Siyu LI profile picture
@John Windelborn that's very kind of you, I appreciate your reading and comments. thanks.
MikeFromNZ profile picture
LC pays a double accounting penalty when it retains loans since it also forgoes the immediate gain on sale?
Siyu LI profile picture
@MikeFromNZ in short term yes. in long term, it is just noise.
@MikeFromNZ If banks can pay the fee and still make money in the end, then LC should make the same money plus the fee. As Li says.
@mac ron they do make money

LC has said the loans are 3X as profitable when they keep them on the balance sheet vs selling them
wxflurry profile picture
@Siyu LI I'm no expert in this space, or any space for that matter ... but one thing still confuses me. I get comparing LendingClub's PE and other valuation multiples against its peers, but how can one argue that LC should have a similar multiple to its peers if it's growing so much more quickly than them?
Siyu LI profile picture
@wxflurry that's why i mentioned in the article today's P/E vs its peer is not apple-to-apple. My approach is to model its mature state income and use peer comparable P/E to get its intrinsic value. hope that helps.
IP Banking Research profile picture
I think the key question is the size of the unsecured lending.
And whether the binding constraint is capital or otherwise…?
I tend to think it is capital. Given that it generates organic capital plus the DTA utilisation, I expect the balance sheet to grow faster than ur model suggests.
Siyu LI profile picture
@IP Banking Research very possible, if so, how would you think LC would approach it (e.g. higher split ratio, expand another market, or else)?
IP Banking Research profile picture
@Siyu LI the key point being that earnings are highly sensitive to unsecured lending balance. The latter is constrained by leverage capital.
If u don’t get that right in the model, then the outcome is somewhat meaningless.
Given recent ER, it is very clear they are pressing the pedal on balance sheet growth and u can deduct size from capital position.
IMO 5b is way off.
Siyu LI profile picture
@IP Banking Research I certainly hope 5B is off and I would love to revisit that when it presents a compelling case. And true the last 2 quarters LC went aggressive to grow its loan book (and some macro tailwind help), but i don't feel that is sufficient to look beyond $5B yet. For one, $3.8B origination seems to be a high bar to keep/pass.

certainly will be fun to watch in the coming quarters.
Great article, clearly explained.

Should have waited for the decrease in price before jumping the gun and buying shares.
Siyu LI profile picture
@valuefirst281 thx for reading and sharing your thoughts.
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