LendingClub Corp Fiasco – Analysts React

LendingClub Corp Fiasco – Analysts React
Chart via S&P Capital IQ

To say LendingClub Corp  (LC) had a bad day would be a massive understatement. The company tanked 34 percent and is now down about 80 percent since its IPO in late 2014. But there is more the CEO has left and there is more news which is making investors not too happy.

If the name John Mack rings a bell it is because he was the former CEO of Morgan Stanley and many blame him for the firm’s troubles during the financial crisis. The good news is that just like Glencore Mack might be able to blame short sellers for the demise of the company (okay not really, but he still could technically).

Analysts are scrambling to lower PT below are comments from the sell side.

LendingClub Corp – Analysts React

Dick Bove

When LendingClub Corp (LC/$5.29/NR) and OnDeck Capital (ONDK/$4.97/NR) went public, I began coverage with Buy recommendations. I also started an investigation into the industry contacting a series of private companies that expected to go public. The more I looked the more I found I did not think that the industry had developed a workable business model. So the ratings dropped to Sells and ultimately I dropped coverage of the companies.
Now, however, I find that the industry is becoming intriguing once again. It seems to have carved a niche out of the lending markets that was not being served but that can be served today. While I have no intention of picking up the two public companies again, I think that the evolution of the sector is significant that this is becoming a legitimate growth sector

In sum, these new company’s pioneered new techniques that are allowing banks to get at markets that they could not otherwise serve. This is of great value and it will continue to grow and become assimilated into normal lending channels. The pioneers did their jobs; now the middle stage managers will take over and the likelihood is that the industry will thrive.


LendingClub Corp’s Q1 results were mixed, with originations missing our estimate by ~6, revenue beating by ~2%, and EBITDA missing by ~4%. While this is clearly LC’s weakest quarter of the past several, the results themselves were not entirely negative. That said, the revelation of two internal control failures (which the company classified as “minor” financial impacts), the sudden departure of founder and CEO Renaud Laplanche,
and the withholding of guidance all raise uncertainties. While the valuation is more reasonable than ever, we are concerned regarding the spike in Q1 marketing costs, higher charge-offs, and greater reliance on retail investors. While we don’t like lowering our rating after such a sharp move down in the stock, we feel there is enough uncertainty to warrant a more cautious view in the short term.


The demand among borrowers for loans originated by LendingClub Corporation (LC, Buy, $21 PT) has significantly outpaced the demand for those loans from investors for quite some time, but the company has been able to attract more than enough investors to make its marketplace model work.

Goldman Sachs

LendingClub Corp reported 1Q revenue of $151.3mn, +87% yoy vs. +93% in 4Q, vs. consensus of $148.1mn, driven by loan origination growth of +68% yoy vs. +82% in 4Q. Adjusted EBITDA of $25.2mn compared to consensus of $25.8mn. The company announced the resignation of Chairman and CEO Renaud Laplanche following an internal review of the sale of $22mn in near-prime loans. The company did not provide 2Q guidance and withdrew its prior FY guidance. Despite broader credit market issues, LendingClub continues to show significant growth and improving profitability. That said, we expect the impact of these management
changes, concerns over the credit cycle, lender demand and competition are likely to limit the multiple expansion potential justified by that growth.


Renaud Laplanche Resigns after Internal Investigation: In 1Q:16 the board conducted an internal review of a non-conforming sale regarding $22mm of near-prime loans to an institutional investor. A few key personnel were aware of this indiscretion. The firm repurchased the loans at par in April and resold them at par to another investor because these loans did not meet the first investor’s
specific investment criteria. The investigation also discovered that Mr. Laplanche held personal interests in a third party fund while the firm was considering an investment in the same fund. The only financial impact to quarterly results was $150k of unrecognized revenue.

Following up from our downgrade this morning we are adjusting our estimates to reflect limited visibility in LendingClub Corp’s ability to navigate through a shifting macro and regulatory environment in light of the recent management changes. 1Q:16 results demonstrated the resilience of the platform with 68% y/y originations growth despite the negative industry data points we observed throughout the quarter. However we are concerned with the implications of the investigation as it may result in the potential for increased regulatory scrutiny and reduced investor confidence in the platform. Either issue on its own could limit the company’s growth and profitability profile and further accelerate the bear thesis on the entire Fintech industry. For now, we move to the sidelines and wait to grasp a better understanding of the company’s strategy and expectations once management provides updates for 2Q:16 and 2016 guidance later this quarter.

Morgan Stanley

CEO’s departure likely to undermine the confidence of banks and other institutional investors: CEO Renaud Laplanche and three unnamed executives resigned following an internal audit regarding improper allocation
of $22mn of loans to an investor. The direct impact is limited – the $22mn were bought back and resold at par – but the bigger potential impact is clearly the reputational damage, which could ultimately be detrimental to LC’s institutional funding. We’ve made the point in the past that LC’s reputation and track record are key distinguishing attributes that would have kept it relatively insulated from the ebbs and flows of institutional demand across the broader marketplace lending industry. This is clearly a setback to that assertion.

Sterne Agee CRT

In an early release of 1Q16 earnings, LC indicated that following issues with the sale of a relatively small portion of loans, $22 million and redating of an even smaller pool of loans, $3 million, LendingClub Corp Chairman/CEO Renaud Laplance was resigning, two other senior executive were leaving the company, and the company was pulling guidance.

? Worried about future growth of “market place” funding We have, been worried for sometime about the ability of the market place to absorb the $6-8 billion in new funding required to meet the company growth plans. While 1Q16 results were in line, the company did report a decline in fundings from some of its pockets of institutional offset by higher funding from it bank network and self-directed retail investors. Our hope had been that we would have heard more about the development of new funding sources such as securitization that could have filled this potential gap. The headline impact of today’s news only heightens our concerns.

RIP Fintech?


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