FBR Capital Comments on Lending Club (LC) After Company Takes Steps to Address Credit and Demand

October 17, 2016 10:18 AM EDT
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FBR Capital maintained a Market Perform rating on Lending Club (NYSE: LC) after the company announced steps to boost investor returns and bolster investor demand for its loan products. The update was disclosed in an SEC filing after the market close on Friday.

Analyst Bob Ramsey commented on the development, stating, "The continued deterioration in credit is a concern, and the need to further raise rates may be a negative indicator for loan volume. Year to date, LC has tightened underwriting three times and increased rates by a weighted average of 161 bps. As we highlighted in a previous note, credit issues are concentrated in the lower-tier grades, although we are a bit troubled that softness appears to be creeping into the D and E grade loans, as well."

"LC raised rates by a weighted-average 26 bps (161 bps YTD), with the largest increase in the F and G grade loans, where pricing increased 301 bps and 161 bps since June. Curiously, pricing on A grade loans decreased by 9 basis points in the latest update, which may reflect investor 'flight to quality' and LendingClub using pricing as a tool to balance supply and demand," continued the analyst.

Discussing tighter underwriting, the analyst said, "LendingClub cited borrowers with "high indebtedness, an increased propensity to accumulate debt, and lower credit scores" as the primary culprits driving up delinquency rates in recent vintages. The updated pricing is expected to cut out 1% of borrowers who would have been able to obtain a loan under the previous underwriting criteria (earlier change this year cut out 9% of potential borrowers). Tracking changes in LC's expected losses and returns is a bit tricky since LC does not consistently report the same data (the June pricing changes 8-K did not include projected losses, and expected returns were provided by three-year and five-year products, but not overall as presented today). We would advocate more consistent reporting from the company."

For an analyst ratings summary and ratings history on Lending Club click here. For more ratings news on Lending Club click here.

Shares of Lending Club closed at $5.38 yesterday.

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