To ensure balance in our marketplace, we make periodic adjustments based on investor feedback, marketplace demand, loan performance, and the general interest rate environment. As part of those efforts, effective August 6, 2019, we are increasing rates for Grade D by on average, 50 basis points. We are seeing ongoing benefits to loss trends in certain loan grades/segments following our past credit tightening actions. Please see below for this quarter’s commentary.
Powered by ongoing consumer strength, the U.S. economic expansion continues to appear sound. June jobs numbers were strong,1 after disappointing in April and May. Along with accelerating wage gains, the favorable jobs picture is helping underpin consumer health. However, global industrial production is showing signs of strain, with sequential declines recorded in key measures of manufacturing output.2
Consumer delinquency trends remain relatively stable.3 However, in keeping with last quarter, lenders continue to tighten credit.4
The Federal Open Markets Committee cut interest rates by 25 basis points at its July 31st meeting, in what it termed “a midcycle adjustment.” While a cut had been widely anticipated,5 Fed Chairman Powell seemed to throw cold water on the move as a prelude to another easing cycle.6
We continue to employ a “test and learn” approach which we use to both optimize investment offerings to reflect investor demand as well as adjust to and anticipate changes in borrower behavior. As part of this, and in line with our heightened focus on core customers, we expanded our balance transfer product. These loans enable borrowers looking to consolidate debt or refinance their credit cards the ability to seamlessly pay off higher-interest debt.
We are selectively trimming in higher-risk Grade A and B segments to better meet investor return expectations. Additionally, as noted earlier, effective today, interest rates on Grade D are increasing by on average, 50 basis points, as part of our ongoing efforts to balance marketplace demand.
As usual, and in tandem with the adjustments we have been making across all loan grades, we continue to monitor the broader interest rate environment to inform potential future changes.
We expect weighted average returns at a portfolio level to be 5.3% versus 5.4% for the last quarter for new vintages. This incorporates our reduced yield targets for Grade A and B, as well as the interest rate increases going into effect for Grade D. Overall, we are seeing stability in losses as a result of our selective tightening and rate adjustments. We believe marketplace loans are highly attractive from a relative value standpoint given their short duration, regular cash flows, and return profile, particularly as the Fed seems open to additional rate cuts.
Please see the updated return forecast below.
Platform summary and projections as of August 6, 20197, 8, 9
We will keep you informed as and when we make changes.
Safe Harbor Statement
Some of the statements above are “forward-looking statements.” The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “outlook,” “plan,” “predict,” “project,” “will,” “would” and similar expressions may identify forward-looking statements, although not all forward-looking statements contain these identifying words. Actual performance of the overall platform has differed from projected performance in the past and could differ in the future. Factors that could cause actual results to differ materially from those contemplated by these forward statements include: increases to unemployment rates, particularly if such increases are concentrated in populations with a greater propensity to take loans facilitated by our platform; changes to consumer credit behaviors; stagnation or reduction in the growth of the nation’s gross domestic product or uncertainties created by political changes associated with a change in presidential administrations, the Company’s ability to continue to attract and retain new and existing retail and institutional investors; competition; and demand for the types of loans facilitated by the Company and those factors set forth in the section titled “Risk Factors” in the Annual Report on Form 10-K, filed with the SEC. LendingClub may not actually achieve the plans, intentions or expectations disclosed in forward-looking statements, and you should not place undue reliance on forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in forward-looking statements. LendingClub does not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
1. Bureau of Labor Statistics: “Employment Situation Summary,” https://www.bls.gov/news.release/empsit.nr0.htm, July 5, 2019.
2. Source: Bloomberg, “Global Factory Output Contracts for the First Time in 80 Months,” https://www.bloomberg.com/news/articles/2019-07-01/global-factory-output-contracts-for-the-first-time-in-80-months, July 1, 2019.
3. Source: Moody’s Analytics, Board of Governors of the Federal Reserve System, “Delinquency Rate on Consumer Loans, All Commercial Banks,” https://alfred.stlouisfed.org/series?seid=DRCLACBS&utm_source=series_page&utm_medium=related_content&utm_term=related_resources&utm_campaign=alfred, May 23, 2019.
4. Source: Moody’s Analytics, Board of Governors of the Federal Reserve System, “Senior Loan Officer Opinion Survey on Bank Lending Practices.”
5. Source: Wall Street Journal, “Economic Forecasting Survey,” https://www.wsj.com/graphics/econsurvey/, July 2019.
6. Source: Bloomberg News, “Powell Says Fed Cut Not Start of Long Series, Drawing Trump’s Ire,” https://www.bloomberg.com/news/articles/2019-07-31/fed-cuts-rates-by-quarter-point-and-signals-potential-for-more, July 31, 2019.
7. “Average Interest Rate” is the hypothetical weighted average interest rates we obtained by using the subgrade and maturity mix for issued Prime Program loans in June 2019 and calculating the interest rate that would have applied had such loans been issued following the rate and/or credit policy changes going into effect on August 6, 2019.
8. “Projected Charge-Off Rate” is LendingClub’s projection of the aggregate dollar amount of loan principal charged-off, net of any amounts recovered and accounting for the impact of amounts prepaid, as an annualized percentage of the aggregate dollar amount of loan principal for Prime Program loans issued following the rate and/or credit policy changes going into effect on August 6, 2019. Projected Charge-Off Rate is not a promise of future results and may not accurately reflect actual charge-off or prepayment rates. Actual charge-off and prepayment rates experienced by any individual portfolio may be impacted by, among other things, the size and diversity of the portfolio, the exposure to any single loan, borrower or group of loans or borrowers, as well as macroeconomic conditions.
9. “Projected Return” is a measure of the estimated annualized return rate on invested principal using an internal rate of return (IRR) methodology. The IRR is computed using monthly cash flow projections. Monthly cash flow projections are calculated as follows: the scheduled principal and interest payments based on the Interest Rate, minus the amount of such principal and interest payments lost due to the Projected Charge-Off Rate, minus Projected Fees (as disclosed below). Monthly IRR figures are annualized by multiplying the monthly IRR figure by 12, then converted to percentages. Projected Returns are calculated based on grade and maturity mix described in the “Average Interest Rate” disclaimer above. Projected Return is not a promise of future results and may not accurately reflect actual returns. Actual returns experienced by any individual portfolio may be impacted by, among other things, the size and diversity of the portfolio, the exposure to any single Note or loan, borrower or group of Notes, loans or borrowers, as well as macroeconomic conditions. Individual results may vary, and projections are subject to change. The information presented is not intended to be investment advice, guidance, or a guarantee of the performance of any Note or loan. Notes are offered by prospectus filed with the SEC and investors should review the risks and uncertainties described in the prospectus prior to investing. Actual results may be materially worse.
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