Q2 2024 Review: Consumer Lending trends

We come to you today with our quarterly consumer lending review. Catch up on the latest trends emerging in the consumer lending space:

• takeaways from consumer lender earnings,
• takeaways from bank earnings,
• and an increase in MPL new issue volume.

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NCOs Rise, Origination Volumes Mixed at Consumer Lenders, Banks

Consumer Lender Earnings Takeaways

In the second quarter, we saw many consumer lenders grow originations YoY, while a significant contingent of personal loan lenders reported declining originations due to continued credit tightening efforts.

Despite an overall decline in unsecured consumer originations from the peak 21/22 era, it has not been due to a lack of consumer demand. Consumers are still seeking credit, and some have turned to credit cards, cash advance products, and higher-APR (higher than 36% APR-capped loans) credit products to fulfill those needs.

As such, we saw higher-APR lenders like Enova (which offers unsecured installment and lines of credit with APRs 34-200+% depending on state and product type) lean in on marketing, capitalizing on the demand. Enova reported a +26.5% YoY increase in originations and +22.2% YoY increase in consumer originations. Strong demand has allowed the lender to modestly raise 2024 origination growth guidance.

OppFi, another higher-APR lender (average yield of 135%), grew originations +2.4% YoY, as the fintech tightened credit, focusing on existing customers. CFO Pamela Johnson noted that,

“During the quarter, along with our bank partners, we continue to amplify loans to existing customers” and, “From a mix perspective, 55.6% of originations were to existing customers and 44.4% were to new customers.”

Lenders that offer shorter-term cash advance products capitalized on major demand from consumers. MoneyLion (+40.0% YoY) and Dave (+36.8% YoY) both reported double-digit increases in originations from the prior year. Facing high inflation, consumers have turned to these products to mitigate cash flow problems. Dave also increased its marketing spend +18% QoQ to capitalize on demand for its ExtraCash cash advance product. MoneyLion recently announced a new forward flow agreement to sell its Instacash advance receivables, which will allow it to be more cash efficient and move receivables off balance sheet.

With the CFPB proposing an interpretive rule explaining that many paycheck advance products are consumer loans subject to TILA, management has looked to prepare itself. Dave CEO Jason Wilk reiterated that the company’s ExtraCash product is structured as a federally regulated overdraft product, and as such, Dave does not believe it would be subject to the rule. MoneyLion filed an 8-K to amend its agreement with Pathward to offer overdraft protection. While CEO Dee Choubey said that the 8-K was merely to extend its relationship with Pathward and offer additional products, the move could allow MoneyLion to move its Instacash product toward a bank overdraft framework down the line.

Affirm reported a +31.3% YoY increase in GMV as consumer demand for installment loans remains high. Affirm users are transacting more frequently, and for lower-ticket, everyday purchases (transactions per active customer up to 4.9, from 3.9 a year prior and average order value down to $293 from $317 a year prior), in-line with Affirm’s strategy of capturing more of the payments market (including smaller, routine purchases). The Affirm Card has continued to gain momentum, nearing 1.2Mn active cardholders and card GMV increasing to $507Mn, from $129Mn a year prior and $374Mn a quarter prior.

Pagaya reported a +19.1% YoY increase in network volumes driven by its personal loan, single-family rental and POS businesses. Pagaya has maintained low conversion rates, with the average conversion rate of applications at 0.8% for loans issued during the quarter, from 0.9% a quarter prior.

SoFi continued to grow originations, reporting a 22.4% increase on a YoY basis. Specifically, SoFi’s personal loan originations grew +12% YoY, home loan originations grew +71% YoY and student loan originations grew +86% YoY.

Consumer lenders Oportun (10.4)%, LendingClub (9.8)%, Upstart (5.6)% and OneMain (4.3)% reported YoY declines in originations, driven by continued credit tightening actions. Compared to pre-pandemic (2Q19) levels, LendingClub was (42.1)% lower, Oportun (8.2)% lower and OneMain (7.7)% lower (no publicly available data on Upstart’s pre-pandemic origination volume).

Oportun’s originations were (10.4)% lower YoY, as the company continued to tighten credit and increase pricing. Due to credit tightening actions, average loan sizes declined (21)% (or $852) YoY. While its portfolio yield (of 33.9%) is nearing its 36% APR cap, Oportun’s expansion into secured personal loans may represent an avenue for growth.

Upstart reported a (5.6)% YoY decline in transaction volume (originations from bank partners). While Upstart has continued to maintain disciplined credit standards, it reported a 15% conversion rate for the quarter, above the 9% from the prior year quarter. While overall transaction volume was lower on a YoY and QoQ basis, Upstart reported rapid traction in its small dollar loan product, with originations up +57% QoQ. As covered above, this type of product has been exceedingly popular with consumers looking to remedy cash flow issues, as we saw reflected in MoneyLion’s InstaCash and Dave’s ExtraCash origination volumes. To go along with this, CEO Dave Girouard reported that “In Q2, SDL [small dollar loan] became our second product to reach break-even economics. We also signed our first warehouse for SDL this past quarter.”

Despite a (9.8)% decline YoY, LendingClub originations came in slightly above guidance and rose QoQ driven by new consumer loan initiatives combined with marketplace investor demand for structured certificates and higher whole loan retention.

As a reminder, LendingClub has introduced structured certificates and extended seasoning HFI originations, which now make up most of its origination volume (49% from structured certificate sales and 18% from extended seasoning HFI for the quarter). LendingClub launched its structured certificates program in Q2 of 2023 under which "LendingClub retains the senior note and sells the residual certificate on a pool of loans to a marketplace buyer at a predetermined price."

OneMain management attributed its (4.3)% YoY decline in originations to “continued credit box tightening and pricing actions”. Management expects stronger originations in the second half of the year and aims to grow auto finance originations following its acquisition of Foursight Capital.

Turning to credit, despite significant tightening efforts, we have seen several lenders report YoY increases in net charge-off ratios.

Despite credit tightening efforts driving lower YoY origination volumes, LendingClub +180 bps and OneMain +69 bps reported YoY increases in NCO ratios. Although it rose YoY, LendingClub’s NCO ratio was (70) bps lower QoQ. Additionally, LendingClub CFO Drew LaBenne noted, “The last thing I'll note on credit is net charge-offs were down $14 million or 17% sequentially. Delinquencies on the consumer portfolio have also improved from the previous quarter and are down $9 million sequentially.” And OneMain CFO Jenny Osterhout stated, “First, let me take on peak losses. Really, our view hasn't changed since the first quarter. We're confident, and losses are going to go down for the rest of the year.” OneMain’s NCO ratio was +21 bps above its pre-pandemic (2Q19) NCO ratio.

Enova - Consumer reported a slight +10 bps YoY increase in its NCO ratio, even as it grew originations more than +25% YoY. Enova – Consumer’s NCO ratio was +27 bps above its pre-pandemic (2Q19) NCO ratio.

On the other hand, we saw YoY improvements in NCO ratios from Oportun (20) bps and OppFi (300) bps. Oportun expects further improvements to its NCO ratio, as a greater % of loans come from its “front book” (post-July 2022 tightening actions). CEO Raul Vazquez explained, “The losses on our front book are approximately 400 basis points lower, 12 plus months after disbursement than losses on our back book.” OppFi has been focusing on existing customer originations to improve credit, with CFO Pamela Johnson reporting, “During the quarter, along with our bank partners, we continue to amplify loans to existing customers. Those loans are generally less risky than to new customers. Credit performance during the second quarter supported the strategy, as refinance loans to existing customers have lower delinquencies and loans to new customers.”

Bank Earnings Takeaways

Looking at banks’ consumer divisions, we saw YoY net charge-off ratio increases across the board with Synchrony +167 bps, JPMorgan +49 bps, Bank of America +46 bps, Capital One +44 bps, Wells Fargo +38 bps, Ally +10 bps, Citizens Financial +10 bps, and PNC +8 bps. Additionally, many bank consumer divisions’ net charge-off ratios have risen above pre-pandemic (2Q19) levels, with Capital One +72 bps, Ally +70 bps, Synchrony +41 bps, Bank of America +29 bps, JPMorgan +28 bps and Citizens +2 bps. PNC was (13) bps lower than pre-pandemic (2Q19) levels but has grown home equity + residential real estate loans as a % of its consumer loan book from pre-pandemic levels. Looking at broader industry data, these types of loans have carried lower delinquency rates than credit card and auto loans and likely translate into lower net charge-offs.

Bank net-charge offs (in $ values) have also seen significant YoY increases, with the consumer divisions of JPMorgan +65.0%, Synchrony +47.9%, Bank of America +45.1%, Capital One +26.5%, PNC +22.1%, Citizens +15.8%, and Ally +9.0% from a year prior. Looking at pre-pandemic figures, net charge-offs at consumer divisions eclipsed 2Q19 figures across the board with Ally +139.0%, Capital One +105.2%, JPMorgan +56.4%, Bank of America +29.8%, Synchrony +21.8%, Citizens +20.5%, and PNC +5.5%.

Despite a rise in net charge-offs, banks have largely continued to grow their consumer loan books, driven by credit card loans. On a YoY basis, average consumer loan books grew +10.3% at JPMorgan, +9.5% at Citi - Branded Cards, +4.1% at Citi - Retail Services, +1.8% at Bank of America, and were (1.2)% lower at PNC and (3.1)% lower at Wells Fargo.

While average consumer loans declined on a YoY basis at Wells Fargo, this was driven by declines in personal loans (2)%, home loans (4)%, and auto loans (13)%. These declines more than offset the +14% YoY growth in credit card loans.

Wells Fargo’s home lending originations were (31)% lower on a YoY basis, due to its strategic decision to step back from the housing market. Bank of America reported similar declines in its residential mortgage originations (3)% YoY and home equity originations (24)% as high rates quelled demand. And JPMorgan reported a (4)% YoY decline in mortgage originations.

Tighter credit and high car prices led to auto origination declines for Wells Fargo (23)% YoY, Bank of America (12)% YoY, and JPMorgan (10)% YoY.

With the Fed holding rates at current levels, major banks have seen consumer deposits leave for higher-yielding alternatives. JPMorgan (7.2)%, Citi (7.0)%, Bank of America (5.7)%, and Wells Fargo (5.5)%, all reported sequential declines in average consumer deposits. Citizens +2.5% and PNC +0.0% reported sequential increases. The decline in deposits has slowed/plateaued as rate hikes have paused. Citizens’ CFO John Woods stated, “We continue to see a slowing rate of migration from demand and lower cost deposits to higher cost interest-bearing accounts with the Fed holding steady as well as the benefit of deposit market share gains with the Private Bank. As a result, noninterest-bearing deposits are stable at about 21% of total deposits.”

While the migration of deposits to higher-yielding alternatives has moderated, we saw LendingClub +7.6%, SoFi +6.4%, and Capital One - Consumer +2.2% report sequential increases in consumer deposits. Yield-seeking behavior appears to have driven the deposit moves, with LendingClub’s average yield on interest-bearing deposits at 4.81%, SoFi’s average yield at 4.24%, and Capital One - Consumer’s average yield at 3.22%.

By successfully growing deposits, SoFi has recognized significant cost savings, with SoFi able to reduce warehouse facilities utilized at a 213 bps lower rate which translates to roughly $500Mn in annualized interest expense savings.

The cost of deposits has continued to rise, despite the Fed pausing its rate hikes, with Wells Fargo +10 bps, LendingClub +7 bps, Capital One - Consumer +7 bps, Synchrony +5 bps, and Citizens +1bp on a QoQ basis. SoFi deposit costs declined (5) bps QoQ, likely due to a decline in its demand deposits and increase in higher yielding savings deposits.

Further, banks that partner with fintechs may face unfavorable changes to the way their fintech program’s deposits are classified. In the wake of last year's regional banking crisis and the still-unfolding Synapse bankruptcy, the FDIC board voted 3-2 to issue a proposed rule that would effectively reverse the changes made in 2020 to brokered deposit rules. Brokered deposits, sometimes referred to as "hot money," are funds placed with a bank by a third-party agent or broker. Because they are perceived to be higher-risk, brokered deposits carry a higher deposit insurance assessment, and there are restrictions on banks that are less than well capitalized on using such funding.

Increased Number of Deals Drove Growth in MPL New Issue Volume

In the second quarter, demand remained strong in the consumer unsecured MPL market, with new issue volume +29.5% higher on a YoY basis, but (2.4)% lower on a QoQ basis. The YoY increase in new issue volume was driven by an increase both in deals (10 vs. 8) and average deal size ($437Mn vs. $422Mn).

While many lenders (especially fintech lenders) continue to maintain tight credit underwriting standards, lenders have seen increased demand in the MPL market. Affirm reported that its two most recent securitizations were both “upsized and significantly oversubscribed.” Affirm management noted, “Since FQ3’23, each of our ABS transactions have priced well as evidenced by lower pricing spreads.” And Upstart CFO Sanjay Datta is optimistic on the ABS markets, stating, “But I do think that those markets are rapidly improving, and we have plans to be back in the ABS market certainly before the end of the year.”

2024 cumulative new issue volumes continued to outpace 2023 levels. Through August 2024 cumulative new issue volume of $12,425Mn has outpaced 2023 levels by 28.9% but was (5.7)% below 2022. Through August, we have seen 34 consumer unsecured ABS issuances, already more than the 27 issuances in 1Q23, 2Q23 and 3Q23 combined.

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