Hi all, Cole here,
We come to you today with our quarterly consumer lending review. Catch up on the latest trends emerging in the consumer lending space:
- personal loan trends,
- auto/bankcard loan trends,
- takeaways from fintech earnings,
- takeaways from bank earnings,
- and an increase in MPL new issue volume.
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Missed last quarter’s report? Recap key trends with my Q4 Consumer Lending Review.
Personal Loan Credit Tightening, Auto and Bankcard DQs Continue to Rise
Personal Loan Trends
Before diving into our first quarter coverage, we wanted to cover new industry data released from TransUnion, showing that fourth-quarter unsecured personal loan (“UPL”) originations fell (4.8)% YoY (originations reported through Q4 due to reporting lag). Originations fell to 5.0Mn in 4Q23 from 5.2Mn a year prior, and 5.0Mn a quarter prior. The decline in originations was driven by most risk tiers, with prime plus (6.7)%, prime (10.4)%, near prime (6.9)%, and subprime (2.9)% from a year earlier. Super prime originations, the only risk tier to report YoY origination growth, were up 12.6% YoY.
Banks continued to grow their share of total UPL origination volumes, to 15.8% in 4Q23, up from 13.5% a year prior and 10.0% in 4Q21. Credit unions have also grown their share of origination volumes, to 24.8% in 4Q23, up from 24.0% a year prior and 19.6% in 4Q21. At the same time, fintechs are losing their share of volumes, down to 21.2% in 4Q23, from 26.2% a year prior and 34.2% in 4Q21.
Specifically, fintechs have cut back on below prime originations, with their share of below prime UPL originations declining to 15.6%, from 19.7% a year prior and 31.1% in 4Q21.
Despite a decline in originations, UPL balances have continued to grow, up 9.1% YoY to $245.2Bn. Growth has been driven by super prime originations.
Source: TransUnion
In the first quarter, below prime unsecured personal loan balances accounted for 31.5% of total unsecured balances, down slightly from 32.8% a year prior and 32.5% a quarter prior.
With consumer lenders maintaining tight credit boxes, we saw delinquencies improve on a YoY basis, with 30+ DPDs (40) bps lower, 60+ DPDs (26) bps lower, and 90+ DPDs (27) bps lower.
Delinquencies improved to slightly below pre-pandemic (1Q19) levels with 30+ DPDs (7) bps lower, 60+ DPDs (11) bps lower, and 90+ DPDs (25) bps lower.
On a sequential basis, 30+ DPDs improved by (42) bps and 60+ DPDs improved by (15) bps, while 90+ DPDs rose +3 bps.
Source: TransUnion
Auto and Bankcard Loan Trends
Moving on to other consumer credit products, NY Fed data showed that 30+ day delinquencies continued to rise for credit card and auto loans, above pre-pandemic levels. The trend continues when looking at more serious delinquencies, with 90+ day credit and auto loan delinquencies continuing to rise above pre-pandemic levels.
Source: Q1 NY Fed Report
Specifically, subprime auto delinquency rates remain elevated, with Fitch data showing that subprime 60+ day delinquency rates were at 5.23% as of April 2024. While this marks a decline from the peak 6.39% rate we saw in February 2024, much of the decline may be explained by seasonality. However, April 2024 60+ day delinquency rates were +56 bps higher than April 2023 and +88 bps higher than pre-pandemic (April 2019) levels.
Source: Fitch Ratings Subprime U.S. Auto Loan 60+ Delinquency Index
Despite the rise in consumer delinquency rates, consumer spending remained strong, with spend volumes +8.6% at JPMorgan, +8.6% at Mastercard, +7.1% at Visa, +6.0% at Capital One (credit cards), +5.1% at Amex, +4.5% at Bank of America, but (1.6)% at Discover from the year prior. However, April retail sales data cooled, coming in flat on a MoM basis, below 0.4% expectations. Additionally, the Commerce Department downwardly revised February and March retail sales data figures. The latest data suggests a potential softening in consumer demand, despite continued low unemployment numbers.
With “excess pandemic savings” tapped out, consumers have turned to credit to finance their spending. TransUnion data showed that bankcard balances rose to $1,020.4Bn, up +11.3% YoY, but down (2.6)% QoQ (partly due to seasonality). The average balance per consumer of $6,218 represented an 8.5% increase YoY, but a (2.2)% decline QoQ. Additionally, NY Fed data showed that credit card balances rose +13.1% YoY, to $1.12T.
Increased credit card debt has driven delinquency rates, with Fed data showing that 90+ DPDs for credit card debt rose to 6.86%, from 4.57% a year prior, 6.36% a quarter prior, and a pre-pandemic 5.04% (1Q19).
Furthermore, TransUnion data showed that serious bankcard delinquencies (90+ DPD) have continued to rise, to their highest level since the Great Recession era (1Q10). On a YoY basis, bankcard delinquencies have risen, driven higher by 2022-2023 vintages. 90+ DPDs of 2.55% are up +29 bps YoY, +35 bps QoQ, and +66 bps from pre-pandemic (1Q19) levels. 60+ DPDs of 3.38% are up +38 bps YoY, down (19) bps QoQ, and up +86 bps from pre-pandemic (1Q19) levels. And 30+ DPDs of 4.63% are up +46 bps YoY, down (82) QoQ, and up +106 bps from pre-pandemic (1Q19) levels.
Bankcard charge-off balances have risen to $15.5Bn, up from $13.1Bn a quarter prior. The number of accounts entering charge-off grew to 5.2Mn for the quarter, up from 4.6Mn in the prior quarter.
Credit card issuers are taking note of the rising balances and delinquency rates, with the super prime risk tier the only tier to report a YoY increase in originations for Q4 of +2.5% (Q4 originations reported due to reporting lag). All other risk tiers reported YoY declines, with prime plus (5.5)%, prime (11.0)%, near prime (14.0)%, and subprime (3.4)%.
Source: TransUnion
On top of elevated levels of credit card debt, millions of consumers now face the return of student loan payments. Despite payments resuming in October, these figures do not yet reflect the impact of student loan payments on household budgets.
With the one-year “on-ramp” period for student loan payments (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 on consumer delinquency figures until at least late 2024.
In addition, certain federal student loan borrowers may be eligible for relief if President Biden’s second student loan cancellation attempt passes. The second attempt would offer debt cancellation to a narrower set of borrowers. Those classified as facing hardship, who have seen their loans grow larger due to compounding interest, who hold older loans, or who attended low-value programs may be eligible.
Interest Rate Update
April CPI data showed a +3.4% YoY and +0.3% MoM increase in inflation, largely in-line with economists’ expectations. Core CPI (ex-food and energy) rose +3.6% YoY, which marked the lowest increase since April 2021. Additionally, April PPI data came in above expectations, rising +0.5% MoM. On the other hand, April retail sales came in below expectations, flat on a MoM basis. Based on recent data, Fed Chair Jerome Powell has urged patience, noting that it will take time for the Fed’s restrictive policy to do its work. Powell added, “It looks like it will take longer for us to become confident that inflation is coming down to 2% over time.” Stubbornly elevated inflation and a strong job market have pushed out the timeline markets expect for the Fed to cut rates. Looking ahead to the Fed’s June meeting, markets have priced in over a 95% chance of a pause. While in March, markets priced in three rate cuts for 2024, (per CME Group data), today markets are pricing in two cuts by year-end, the first at the September meeting and the second at the December meeting.
Source: Bloomberg
Fintech and Bank Lenders Report Increased Consumer Loans, NCOs
Fintech Earnings Takeaways
In the first quarter, we saw many fintechs grow originations YoY, while a significant contingent of personal loan lenders reported declining originations due to continued credit tightening efforts.
SoFi continued to grow originations, reporting a 22.4% increase on a YoY basis. Specifically, SoFi’s personal loan originations grew 11% YoY, student loan originations grew 43% YoY and home loan originations grew 274% YoY.
Pagaya reported a +30.8% YoY increase in network volumes driven by its personal loan and single-family rental businesses. Pagaya has maintained low conversion rates, with the average conversion rate of applications at 0.9% for loans issued during the quarter, from 0.8% a quarter prior.
Upstart reported +13.4% YoY growth in transaction volume (originations from bank partners). While Upstart has continued to maintain disciplined credit standards, it reported a 14% conversion rate for the quarter, above the 8% from the prior year quarter. Additionally, the consumer lender launched auto secured personal loan pilot programs in seven states, which enable borrowers to provide autos as collateral to their personal loan applications. By doing so, Upstart says it can offer rates 20% (%, not percentage points) lower than unsecured personal loans. Importantly, this expands Upstart’s potential borrower base, as borrowers who may have been “priced out” by the 36% APR cap may be eligible for this loan product.
Similarly, Oportun’s recently launched secured personal loan product has seen early traction. CEO Raul Vazquez highlighted the expanded product reach, stating, “Our SPL [secured personal loan] product has allowed us to invite 3 of 10 applicants who we weren’t able to approve to unsecured personal loans to apply for an SPL loan.” Notably, Oportun reported that its secured personal loans produced greater revenue per unit than unsecured, “Since, on average, SPL loans are over $3,000 larger.”
Consumer lenders LendingClub (28.1)%, Oportun (17.1)%, and OneMain Financial (10.4)% all reported YoY declines in originations, driven by continued credit tightening actions. Additionally, the lenders remain below pre-pandemic (1Q19) origination levels with LendingClub (39.7)% lower, Oportun (18.7)% lower, and OneMain (2.3)% lower.
Notably, within the past year, LendingClub has introduced structured certificates and extended seasoning HFI originations, which now make up a majority of its origination volume (48% from structured certificate sales and 15% from extended seasoning HFI for the quarter). As a reminder, 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.”
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 increased its marketing spend slightly YoY (from 17% of revenue to 18%) and plans to lean into growth, expecting marketing expenses to be around 20% of revenue in the second quarter. The increase in marketing spend has yielded results, with originations up +29.8% YoY and consumer originations up +43.3% YoY.
OppFi, another higher-APR lender (average yield of 130%), grew originations +2.4% YoY, as the fintech tightened credit, focusing on existing customers. CFO Pamela Johnson noted that, “On an absolute basis, new customer originations for the quarter decreased by 1.7% year-over-year, while existing customer originations increased by 5.7%.”
Fintechs that offer shorter-term cash advance products capitalized on major demand from consumers. MoneyLion (+41.7% YoY) and Dave (+31.6% 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 CEO Jason Wilk explained some of the growth by stating, “But I also think that there is a tougher macro backdrop going on with things like credit cards and personal loans still tightening their belt on credit originations, which leads to more volume on ExtraCash. So I think that helped us beat some of the seasonality dynamics.” And these aren’t typically one-off products. Dave CFO Kyle Beilman explained that its ExtraCash users are mostly repeat customers, saying, “We have not called that out explicitly, but the number of existing customer repeat originations in a given month or quarter is in excess of 95%.”
Affirm reported a +36% 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 4.6, from 3.6 a year prior and average order value down to $293 from $323 a year prior), in line with Affirm’s strategy. As CEO Max Levchin said last year, “We’ve more or less conquered the bicycle and couch space, and we’re trying to take our unfair share of doughnuts and coffee.” The Affirm Card has continued to report momentum, with active cardholders crossing 1Mn and Card GMV increasing to $374Mn.
Student lender Navient grew originations +54.2% YoY and 16.1% QoQ, while volume remained (73.7)% below pre-pandemic (1Q19) levels. Navient recently announced strategic actions to simplify the company, including outsourcing its student loan servicing and creating a variable expense model, initiating exploration of strategic options for its business processing division, including a potential divestment, and intending to streamline its shared service infrastructure and corporate footprint.
Source: Company Earnings
Turning to credit, despite significant tightening efforts, we have seen many fintechs report YoY increases in net charge-off ratios.
Despite credit tightening efforts driving lower YoY origination volumes, LendingClub +310 bps and OneMain +86 bps reported YoY increases in NCO ratios. LendingClub CFO Drew LaBenne explained that management expects NCOs to decline, stating, “As we indicated last quarter, we believe delinquencies and net charge-offs on our held for investment portfolio have peaked and are beginning to decline as the portfolio ages past the point of peak dollar net charge-offs.” And OneMain CEO Doug Shulman noted, “We remain confident that the credit performance of the overall portfolio is moving in the right direction and continue to expect that losses will peak in the first half of 2024.”
On the other hand, we saw slight YoY improvements in NCO ratios from Enova’s Consumer division (30) bps and Oportun (10) 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 loss rates 12 or more months post–disbursement for our front book of loans continue to run approximately 400 basis points lower when compared to our back book of loans, with our Q1 2023 vintage now joining that group.”
Fintechs have largely eclipsed pre-pandemic (1Q19) NCO ratios, with Enova – Consumer +230 bps, OneMain +148 bps, Ally +82 bps and Navient +70 bps.
Source: Company Earnings
Bank Earnings Takeaways
Looking at banks’ consumer divisions, we saw YoY net charge-off ratio increases across the board with Synchrony +182 bps, Bank of America +50 bps, Capital One +47 bps, JPMorgan +37 bps, Wells Fargo +36 bps, Citizens +10 bps, and PNC +7 bps. Additionally, many bank consumer divisions’ net charge-off ratios have risen above pre-pandemic (1Q19) levels, with Capital One +54bps, Synchrony +25bps, Bank of America +19bps, JPMorgan +16bps and Citizens +10bps. PNC was (21) bps lower than pre-pandemic (1Q19) 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.
Source: Company Earnings
Bank net-charge offs (in $ values) have also seen significant YoY increases, with the consumer divisions of JPMorgan Chase & Co. +78.6%, Synchrony +57.6%, Bank of America +56.9%, Capital One +23.8%, Citizens +18.5%, and PNC +18.0% from a year prior. Looking at pre-pandemic figures, net charge-offs at consumer divisions have eclipsed 1Q19 figures at Citizens +47.7%, JPMorgan +43.0%, Bank of America +23.7% and Synchrony +17.9%. Capital One (19.3)% and PNC (4.8)%’s net charge-offs remained below 1Q19 levels.
Source: Company Earnings
Despite a rise in net charge-offs, banks have largely continued to grow their consumer loan books, driven by credit card loans. As noted above, NY Fed data showed that credit card balances rose +13.1% YoY, to $1.12T. On a YoY basis, average consumer loan books grew +27.0% at JPMorgan, (ex-First Republic Bank “FRB” +6.0%), +11.1% at Citi – Branded Cards, +5.9% at Citi – Retail Services, +3.1% at Bank of America, +0.4% at PNC +0.4%, and were (2.5)% lower at Wells Fargo.
While average consumer loans declined on a YoY basis at Wells Fargo, this was driven by declines in home lending (4)% and auto (11)% loans. These declines more than offset the +15% YoY growth in credit card loans and +3% YoY growth in personal loans.
Wells Fargo’s home lending originations were (38)% 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 (13)% YoY and home equity originations (27)% as high rates quelled demand. Despite high rates, JPMorgan reported a 16% (ex-FRB 11%) YoY increase in mortgage originations.
Tighter credit and high car prices led to auto origination declines for Wells Fargo (18)% YoY, Bank of America (6)% YoY, and JPMorgan (3)% YoY. As discussed in the prior section, auto loan delinquency rates have continued to rise above pre-pandemic levels.
It’s been over one year since the regional banking crisis, which prompted a temporary “flight to safety” in deposits. Since then, major banks have seen consumer deposits leave for higher-yielding alternatives. Citi (4.8)%, JPMorgan (1.2)% (ex-FRB down (6.7)%), Wells Fargo (0.8)%, and Bank of America (0.7)% all reported sequential declines in average consumer deposits. Citizens +1.3% and PNC +0.3% reported sequential increases. The decline in deposits has slowed/plateaued as rate hikes have paused. Citizens’ CFO John Woods stated, “With the Fed holding steady, we saw the migration of deposits to higher cost categories continue to moderate.”
While the migration of deposits to higher-yielding alternatives has moderated, we saw SoFi +16.1%, LendingClub +2.6%, Synchrony +3.0%, and Capital One +1.0% report 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 4.29%, LendingClub’s average yield at 4.74%, Synchrony’s average yield at 4.65%, and Capital One – Consumer’s average yield at 3.15%.
By successfully growing deposits, SoFi has recognized significant cost savings, with CFO Christopher Lapointe noting, “The 226 basis points of cost savings between our deposits and our warehouse facilities continues to support our net interest margin and translates to nearly $500 million of annualized interest expense savings at our current deposit base.”
The cost of deposits has continued to rise, despite the Fed pausing its rate hikes, with LendingClub +29 bps, Synchrony +23 bps, Wells Fargo +16 bps, Capital One – Consumer +9 bps, and Citizens 9 bps on a QoQ basis.
Bank and Fintech Lender Earnings Summary
Sources: Company Earnings, Yahoo Finance
Sources: Company Earnings, Yahoo Finance
Increased Number of Deals Drove Growth in MPL New Issue Volume
In the first quarter, we saw a resurgence in demand in the consumer unsecured MPL market, with new issue volume +52.4% higher on a YoY basis and 48.1% higher on a QoQ basis. The YoY growth was driven by an increase in securitizations as 15 deals (up from 8 a year prior and 11 a quarter prior) accounted for the $4,475Mn of new issue volume for the quarter (an average of $298Mn vs. $367Mn a year prior and $275Mn a quarter prior). While many lenders (especially fintech lenders) continue to maintain tight credit underwriting standards, lenders have seen increased demand in the MPL market. Upstart CEO Dave Girouard stated, “I’m happy to report that the funding situation on our platform is beginning to improve for banks and credit unions, as well as for credit investors.” Further, Pagaya CFO Evangelos Perros explained, “Overall, funding markets are on a stronger footing than in 2023. We are seeing spreads in our 2024 deals reduced by 150 basis points to 200 basis points compared to the peak in 2023.”
Source: Finsight
Pagaya – $1,539Mn, Affirm – $500Mn, Lendmark – $400Mn, Intervest Capital Partners – $296Mn, Bankers Healthcare Group – $273Mn, Conns – $259Mn, Reach Financial – $237Mn, Achieve – $201Mn, Oportun – $200Mn, Purchasing Power LLC – $200Mn, Prosper Funding – $136Mn, PowerPay LLC – $119Mn, and Time Investment Co – $115Mn were among the most active players in the space in the first quarter.
Source: Finsight
2024 cumulative new issue volumes are off to a strong start. Through April 2024 cumulative new issue volume of $6,210Mn has outpaced 2023 levels by 22.4% and 2022 volumes by 2.7%. Through April, we have seen 17 consumer unsecured ABS issuances, already more than the 16 issuances in 1Q23 and 2Q23 combined.
Found value in our Q1 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.