Q3 2023 Review | Consumer Lending

Personal Loan Credit Tightening Quells DQ Spike, but Auto and Bankcard DQs Jump

Before diving into our third quarter coverage, we wanted to cover new industry data released from TransUnion, showing that second quarter personal loan originations grew 18.6% QoQ (seasonality) but were (14.5)% lower YoY (originations reported through Q2 due to reporting lag). Originations rose sequentially to 5.1Mn in 2Q23 from 4.3Mn in 1Q23, largely due to seasonality, and remained well below 2Q22 volumes of 6.0Mn originations. Much of the YoY origination decline can be attributed to below prime.

Fintech originations fell (38.8)% and finance company originations fell (12.8)% from the year prior, while banks +19.7% and credit unions +2.5% experienced origination growth from the year prior. Notably, fintechs significantly tightened credit underwriting standards in the second half of 2022, so YoY metrics did not fully reflect that adjustment. Finance companies maintained their lead in origination volume, accounting for 35% of total volume, while fintechs accounted for 25%, credit unions for 23%, and banks for 17%.

In the third quarter, below prime unsecured balances accounted for 32.2% of total unsecured balances, down slightly from 33.8% a year prior, roughly flat from 32.1% a quarter prior, and up slightly from a pre-pandemic (3Q19) 31.6%.

Due to significant credit tightening that occurred in the back half of 2022, we saw delinquencies improve on a YoY basis, with 30+ DPDs (37) bps lower, 60+ DPDs (22) bps lower, and 90+ DPDs (9) bps lower.

Delinquencies came in slightly above pre-pandemic (3Q19) levels for both 30+ DPDs +33 bps and 60+ DPDs +15 bps, but remained below pre-pandemic levels for serious delinquencies (90+ DPDs were (7) bps lower).

On a sequential basis, 30+ DPDs rose +18 bps and 60+ DPDs rose +7 bps, while 90+ DPDs fell (2) bps. Some of the increase may be attributed to seasonality, as the third quarters of 2018 and 2019 averaged a sequential increase in 30+ DPDs of +32 bps, in 60+ DPDs of +21 bps, and 90+ DPDs of +7 bps.

Fintech delinquencies rose +191 bps from 3Q21 to 3Q23, to 3.50%, largely due to the rapid expansion of credit during the pandemic era.

With delinquencies declining from the year prior, and largely in-line with pre-pandemic trends, it appears that credit tightening efforts made by unsecured consumer lenders have proven successful in preventing a spike in delinquencies. However, this has come at the cost of origination growth, with a number of lenders reporting origination volumes below year ago and pre-pandemic levels.

Per Fed data, 30+ DPDs for credit card and auto loans continued their upward trend, and are now above pre-pandemic levels. While less serious 30+ DPDs have risen, we have not yet seen this trend translate to more serious 90+ DPDs. Auto 90+ DPDs have remained relatively flat the past couple years. Credit card 90+ DPDs have risen, but still remain below levels seen in early 2021.

While more serious (90+ DPD) auto delinquencies have not seen much credit deterioration, subprime auto delinquencies have risen substantially. Subprime auto 60+ DPDs have risen to 6.1%, the highest on record (Fitch data since 1994). Both higher car prices and higher borrowing costs have fueled the rise in subprime auto delinquencies.

Despite the rise in consumer delinquency rates, consumer spending remains strong, with spend volumes up 7.7% at JPMorgan, 6.5% at Amex, 6.1% at Capital One (credit cards), 3.3% at Bank of America, and 0.7% at Discover from a year prior. Online shoppers spent $9.8Bn during Black Friday, per Adobe Analytics data, a 7.5% increase from the year prior. Salesforce data showed a 9% increase in online Black Friday sales from the year prior. While U.S. retail sales did fall (0.1)% MoM in October, the first decline since March, this comes after six straight months of MoM increases (including September's +0.9% MoM increase).

With “excess pandemic savings” tapped out, consumers turned to credit to finance their spending habits. TransUnion data showed that bankcard balances rose 15.0% YoY and 3.3% QoQ to $995.2Bn, and are increasingly held by below prime consumers. 26.5% of balances were held by below prime consumers, compared to 23.9% a year prior and 24.5% pre-pandemic (3Q19). The average debt per borrower of $6,088 represented a 11.2% increase YoY and 2.4% increase QoQ.

Increased credit card debt has driven delinquency rates, with Fed data showing that 90+ DPDs for credit card debt rose to 5.78%, from 3.69% a year prior, 5.08% a quarter prior, and a pre-pandemic 5.16% (3Q19).

Building on the Fed’s data, TransUnion data showed that serious bankcard delinquencies (90+ DPD) have reached their highest level since the Great Recession. Across the board, bankcard delinquencies have risen, driven higher by 2021-2022 vintages. 90+ DPDs of 2.34% are up +40 bps YoY, +28 bps QoQ, and +52 bps from pre-pandemic levels (3Q19). 60+ DPDs of 3.23% are up +48 bps YoY, +34 bps QoQ and +68 bps from pre-pandemic levels (3Q19). And 30+ DPDs of 4.62% are up +60 bps YoY, +41 bps QoQ, and +84 bps from pre-pandemic levels (3Q19).

Bankcard charge-off balances have risen to $11.5Bn, from $11.0Bn a quarter prior. However, the number of accounts entering charge-off declined slightly, to 4.12Mn for the quarter, from 4.46Mn in the prior quarter.

On top of rising levels of credit card debt, millions of consumers now face the return of student loan payments. With payments resuming in October, these figures do not yet reflect the impact of student loan payments on household budgets. Additionally, with the one-year “on-ramp” period (through September 30, 2024), the government will automatically put loans into forbearance for payments missed. While interest will continue to accrue, under the “on-ramp” period, borrowers’ accounts “will no longer be considered delinquent and will be made current, recent missed payments will not lead to negative credit reporting, [and] loans will not default and therefore will not be sent to collection agencies.” As a result, we may not see the full impact of student loan payments in consumer delinquency figures until at least late 2024. And with 60.2% of Americans (LendingClub study) already living paycheck-to-paycheck (including 73.2% of Millennials), it is likely that we see an impact to both consumer spending and delinquency rates.

Fintech and Bank Lender Earnings Reveal Range of Results

In the third quarter, we saw a majority of fintechs grow originations sequentially, but a significant contingent of personal loan lenders continue to report declining originations due to their continued credit tightening efforts.

Navient (+93.9% QoQ) and SoFi (+17.8% QoQ) originations were helped by the student loan resumption, with SoFi CEO Anthony Noto stating, “Student loans, as expected, saw some increasing demand ahead of the resumption of student loan payments marking our highest origination quarter since Q1 of 2022.” Student loans were not the only source of growth for SoFi, as the fintech reported another quarter of record personal loan originations. SoFi has increasingly leaned on its deposit base to fund loans, with over 65% of loans funded by deposits by quarter end. Management reported that it realizes cost savings of 219 bps (up from 216 bps a quarter prior) by funding loans through deposits vs. funding loans through its warehouse facilities.

At the same time, we saw several consumer lenders report significant YoY declines in origination volumes (Oportun (23.9)%, Upstart (34.1)%, LendingClub (58.0)%) due to credit tightening measures.

Oportun has increased the standards for who they extend loans to, with CFO Jonathan Coblentz noting, “The percentage of underwritten loans with Vantage scores of 660 or greater was 33% for 2Q '22 prior to our significant credit tightening, and increased to 49% during 3Q23.”

Upstart CFO Sanjay Datta described, “Our underwriting of primer higher-income borrowers has become more conservative over this past quarter as their loss rates accelerate and converge with the broader default trends across the borrower spectrum”. Stricter underwriting standards have reduced the number of consumers that qualify for a loan, and have increased the APRs/cost that loans are offered at. As a result, Upstart’s acceptance rates (wherein a borrower accepts an offer from Upstart) have fallen to the ~30% level, down substantially from the ~60% level a couple years ago.

LendingClub has attributed lower origination volumes to reduced demand and purchases by bank loan investors. CEO Scott Sanborn explained that, “Banks are currently focused on right-sizing their balance sheets and their capacity to invest is likely to remain restricted in the near-term.”

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 have turned to credit cards, cash advance products, and higher-APR (higher than 36% APR capped loans) credit products.

One such lender, Enova, which offers unsecured installment and lines of credit with APRs 34-200+% (depending on state, product type), was able to capitalize on consumer demand and grew originations +19.2% QoQ by increasing its marketing investment. CEO David Fisher explained, “Given the stronger than anticipated consumer demand we were seeing during Q3, we made the decision to increase our marketing spend to capture this demand at attractive unit economics.”

Additionally, those that offer shorter-term cash advance products have continued to see robust demand. Dave (+23.1% YoY) and MoneyLion (+26.5% YoY) reported double-digit increases in originations from the prior year. As a reminder, Dave’s originations stem from its ExtraCash product and MoneyLion’s CEO Dee Choubey explained that, “Most of these originations came from our liquidity product, Instacash.”

BNPL lender Affirm has also reported GMV growth YoY (+28.0%). While Affirm has grown GMV, a larger % of its loans have been of the interest-bearing variety as rates have risen. 74% of loans were interest-bearing in Q3, up from 64% a year prior. As interest rates and cost of funds have risen, Affirm’s merchant discount rates have remained relatively flat, suggesting that the move to offer a greater percentage of interest-bearing loans may be at least in part to combat shrinking margins between cost of funds and merchant discount rates. As we heard in Affirm’s Q2 earnings call, the company is also aiming to capture a greater share of consumer spending, with CEO Max Levchin saying, “You're trying to be a payment network, you have to be there for doughnuts and coffee and for bicycles and couches. And we've more or less conquered the bicycle and couch space, and we're trying to take our unfair share of doughnuts and coffee.”

Most lenders remain below pre-pandemic (3Q19) origination volumes (Navient (73.1)%, LendingClub (47.6)%, Enova - Consumer (22.2)%, OppFi (11.3)%, Oportun (11.2)%, OneMain (4.0)%) while SoFi grew +65.4% and Affirm’s GMV grew 552.4%.

Despite an industry-wide rise in delinquencies, fintech lenders remain committed to growth in the auto lending space. Last month, OneMain acquired Foursight Capital from Jefferies for $115Mn. Foursight is “an automobile finance company that purchases and services automobile retail installment contracts primarily made to near-prime borrowers across 38 states.” OneMain isn’t the only lender expanding in the auto space. Upstart expanded the number of dealerships offering Upstart-powered loans to 69 (from 61 a quarter prior), adding locations in Arkansas, Maryland, and Virginia. CEO Dave Girouard also stated, “Our auto retail platform saw a huge boost recently as we partnered with a major OEM to implement our software in support of the launch of a new vehicle.”

Turning to credit, despite significant credit tightening efforts, we have seen varied results in net charge-off ratios.

While we saw a (92) bps sequential improvement in OneMain’s NCO ratios, delinquencies also rose (30+ DPDs +46 bps QoQ, 30-89 DPDs +22 bps QOQ, and 90+ DPDs +24 bps QoQ). For context, OneMain reported a 22.2% personal loan yield for the quarter.

And while Oportun reported a (70) bps sequential improvement in NCO ratios, 30+ DPDs edged up QoQ, in part due to 3Q22 vintages underperforming 3Q19 vintages (3Q22 vintage 30+ DPDs were 60 bps higher than 3Q19 vintage 30+ DPDs). However, the 3Q22 vintages did come before Oportun’s second significant credit tightening effort (first in July 2022 and then in December 2022). Since the second round of credit tightening, vintages have seen better performance, with 4Q22 and 1Q23 vintages performing near or better than 2019 comparables. Oportun reported a risk adjusted yield of 19.8% and gross yield of 32.0% for the quarter.

LendingClub (+70 bps QoQ) has seen NCO ratios increase, but remains focused on prime originations. CFO Drew LaBenne gave some color on the loans, stating, “So in the prime space where we're originating, I mean, the coupons range anywhere from 10% to 18%, 19%. But on average, we're skewing towards the higher end of that population. So they're going to be in the low-teens in terms of the coupons that we're putting on the books for ourselves.”

OppFi (+800 bps QoQ) and Enova - Consumer (+280 bps QoQ), who serve a more subprime category of consumer, reported larger increases in NCO ratios. To put into context, OppFi’s average yield was 129% and Enova’s loans offered through subsidiary NetCredit have APRs 34-155% and lines of credit through subsidiary CashNetUSA have APRs over 200%, depending on state.

Compared to pre-pandemic (3Q19) levels, Oportun +370 bps, OneMain +148 bps, Enova - Consumer +90 bps, and Ally +48 bps all reported higher NCO ratios.

Looking at bank’s consumer divisions, NCOs have edged up, but to a lesser extent as banks have generally served a more prime consumer segment. Although NCO ratios have risen, most bank NCO ratios remain below pre-pandemic (3Q19) levels (Synchrony (75) bps below, PNC (24) bps below, JPMorgan (17) bps below, Citizens (7) bps below, Bank of America (2) bps below, Capital One +17 bps above).

While NCO ratios are largely below pre-pandemic levels, net charge-offs (in $ values) paint a slightly different picture. JPMorgan, Citizens, and Bank of America’s consumer divisions all reported NCO ratios below 3Q19 levels, but their net charge-offs (in $ values) were all higher (+10.9%, 2.5%, and 0.7%, respectively). Perhaps unsurprisingly, all banks’ consumer divisions reported double-digit YoY increases in net charge-offs. Much of this can be attributed to the normalization of consumer credit, following a period of historically strong consumer balance sheets.

Similarly, we saw net charge-offs for credit unions’ credit card divisions rise on a YoY basis, as credit continued to normalize.

Despite rising NCO ratios, bank consumer loan books have largely continued to grow from the year prior, with JPMorgan +28% (largely driven by an increase in Home Lending from FRB acquisition), Citi - Branded Cards +12%, Citi - Retail Services +9%, Bank of America +5%, PNC +3% and Wells Fargo flat YoY.

Higher interest rates weighed on home lending, with originations falling at Wells Fargo (70)%, Bank of America (36)%, JPMorgan (9)%, and Citi (7)% from the year prior. Auto originations rose +36% at JPMorgan and +15% at Bank of America, but fell (24)% at Wells Fargo from the year prior.

After a tumultuous spring, which saw a “flight to safety” for deposits in the wake of the regional banking crisis, major banks have seen consumer deposits leave for higher-yielding alternatives. JPMorgan (3)%, Citi (3)%, Wells Fargo (3)%, Bank of America (2)%, and PNC (1)% all reported sequential declines in consumer deposits. Citizens reported flat deposits QoQ. In contrast, SoFi +23%, Synchrony +3%, LendingClub +2%, and Capital One +1% reported sequential increases in consumer deposits. Yield-seeking behavior appears to have driven the deposit moves, with SoFi’s average yield on interest-bearing deposits at 4.12%, Synchrony’s average yield at 4.18%, LendingClub’s average yield at 4.16%, and Capital One’s average yield at 3.30%.

Cost of deposits has continued to rise, despite the Fed pausing its rate hikes, with Capital One +39 bps, Citizens +34 bps, Synchrony +34 bps, LendingClub +32 bps, and Wells Fargo +23 bps on a QoQ basis.

Further evidence of yield-seeking behavior lies within Citizens’ deposit flows. Total deposits were up 0.3% QoQ (relatively flat), but term deposits were up 18.2% QoQ (continuing the trend of double-digit QoQ growth), while checking with interest deposits fell (0.5)% and demand deposits fell (4.2)% QoQ (continuing their downward trend).

Bank and Fintech Lender Earnings Summary

Larger Deals Drove Higher MPL New Issue Volume

October data showed a deceleration in inflation, but the 3.2% YoY increase in CPI remains above the Fed’s long-term target of 2%. With inflation decelerating and the job market showing some signs of softening, the Fed has taken a pause in its rate hike campaign, holding rates steady at the 5.25%-5.50% range at the past couple meetings. Despite some signs that inflation is slowing, consumers have opened up their wallets this holiday season, with Black Friday spending up 2.5% YoY.

Looking ahead, CME Group data suggests markets expect the Fed to hold rates at this range during the December (over 95% chance of pause) and January (over 90% chance of pause) meetings. Fed officials Bowman and Waller have softened on hawkish public statements, suggesting that further increases may not be necessary to bring inflation to desired levels. Markets are pricing in a continued pause at the March meeting (but just over 50% chance) and participants think the most likely outcomes for the May meeting are a 25 bps cut from current levels (~50% chance) or a 50 bps cut from current levels (~25% chance).

CME Group data shows markets are expecting 100-125 bps in rate cuts (both with ~30% chance) by the Fed’s December 2024 meeting. This differs from the Fed’s last dot plot, which only priced in a couple rate cuts for 2024 (see image below).

In the third quarter, we saw demand return to the consumer unsecured MPL market, with new issue volumes up 8.2% YoY and 56.8% QoQ. The YoY increase was led by larger securitizations, as 11 deals accounted for the $5,289Mn of new issue volume for the quarter, compared to 16 deals accounting for just $4,889Mn a year prior (average of $481Mn vs. $306Mn). The YoY increase marked the first quarter with a YoY increase in new issue volume since 2Q22.

Despite the increase, new issue volume remained (11.5)% below 3Q21 levels. As a reminder, many lenders (especially fintech lenders) significantly tightened credit underwriting standards and increased target returns to combat credit weakening and higher funding costs. These credit tightening efforts put a damper on origination volumes and, paired with higher funding costs, have led to lower securitization volumes.

OneMain - $1,400Mn, Pagaya - $1,292Mn, Affirm - $750Mn, Intervest Capital Partners - $363Mn, Marlette - $359Mn, Conns - $274Mn, Prosper - $251Mn, Reach Financial (fka Liberty Lending) - $225Mn, Achieve (fka Freedom Financial Network) - $214Mn, and CFG Partners - $161Mn were among the most active players in the space in the third quarter.

2023 cumulative new issue volume continued to trail 2022 volumes, with the $14,147Mn through November YTD (18.7)% below 2022 levels. However, we saw similar YoY issuance for the July-November period. For 2023, data showed $7,837Mn of cumulative new issue volume for the July-November period, compared to $7,758Mn in 2022. Through November, we have seen 36 consumer unsecured ABS issuances for 2023, compared to 56 in the same period a year prior.

Found value from the Q3 report? Subscribe here to receive our newsletter each Sunday. For even more updates, follow/connect with me on LinkedIn and join my Discord server for an archive of my individual company earnings notes.

*All quotes sourced from various earnings call transcripts during the Oct. – Nov. 2023 period