Sizing Up the Online Lending Market: Key Trends & Themes

Transcription

1 Sizing Up the Online Lending Market: Key Trends & Themes John Hecht

2 AGENDA Landscape of Specialty Finance Marketplace / Technology Enabled Lending Market Size, Trends - sub segments of innovating lending segments Macro Factors Regulatory Update Capital Markets Overview Closing Thoughts

3 MARKET SIZE & TRENDS

4 1. The addressable market for Marketplace Lenders is LARGE Greater than $1 Trillion addressable market MARKET SIZE & TRENDS 2. Given the large opportunity the market is not a limiting factor Limiting factors include access to capital, business model constraints, resources, etc. 3. The focus should be on building a platform which can take the business to the next level Scalable platform, brand creation, control of niche, compliance as key tenets 4. Technology lenders market penetration is now at a point where the group can influence market factors Market share in non-prime is meaningful and influential Market share is small in prime (credit card-like and student lending) but growing and becoming influential 5. Credit quality has deteriorated and should be a focus Delinquency rates and loss rates have increased across most verticals

5 MARKET SIZE & TRENDS Small Dollar Consumer Lending Personal Loans & Small Installment Refinanceable Revolving Credit Student Loans Avg. Loan Size $500 $1,000 $5,000 $15,000 Term 2 Weeks - 1 Month 6 Months -1 Year 1-5 Years 5-15 Years Interest Rate/APR 300%+ 40%-100% 10%-36% L+200bps - L+1,400bps; Government loans UST10+ spread and capped at 10.5% FICO < > for private Losses/Annualized NCOs 15%-40% 8%-15% 2%-8% 1.5%-3.5% for private Total Addressable Market $3.6B $16B $762B $1,300B Sources: Jefferies, Federal Reserve Bank of New York Q Household Debt & Credit Report, PeerIQ Q Marketplace Lending Securitization Tracker, CFSA 2015 Presentation, S&P Global Market Intelligence Q Digital Lenders Loan Originations Report, ENVA, ELVT and other company data Note: Small Dollar TAM estimate based on 2015 CFSA data augmented with industry trends; other TAMs reflect estimates of balances based on CPR-adjusted originations data supplemented with reported issuer balances

6 Borrower Characteristics Use of Proceeds MARKET SIZE & TRENDS Small Dollar Severely tainted credit history, underbanked Unforeseen expenses including auto repair, medical expenses, etc. Consumer Lending Personal Loans & Small Installment Refinanceable Revolving Credit Light credit file, underbanked Unforeseen expenses, major purchases, auto repair, etc. Varies, some past credit issues/underbanked, others of higher credit quality Loan consolidation, home/auto repair, unforeseen expenses Student Loans College student Financial Aid Underwriting Process Minimal underwriting - pricing not credit-based. High credit risk Modest scrutiny, with loan size, term and pricing based on customer's income Credit scrutiny, with loan size, term and pricing based on customer's income Higher scrutiny for private student loans. Legacy Market Participants Cash America International, EZPW, FCFS, Check-n-Go, Check-into-Cash, Advance America, Ace Cash Express RM, WRLD Banks, DFS, LEAF, OneMain, RM, WRLD, AXP, BAC, C, COF, DFS, JPM, SYF C, DFS, First Marblehead, Nelnet, Sallie Mae, WFC New Market Entrants Enova, CURO, LendUp Avant, Elevate, Enova, Oportun, Lendup, Marlette, LendingClub, Prosper, Elevate, CURO Avant, Enova, Lending Club, Oportun, Prosper, CircleBack, Cross River Bank, Marlette, Upstart, Elevate, CURO CommonBond, Earnest, SoFi Sources: Jefferies, company data

7 MARKET SEGMENT: SMALL DOLLAR Borrower Profile & Loan Characteristics Borrower Profile: Severely tainted credit history, underbanked Loan size: $500 FICO: <550 APR: 300%+ APR Loan Term: 2 weeks 1 month Annualized Losses: 15% - 40% Legacy Market Participants Cash America International, EZCORP, First Cash Financial Services, Check-n-Go, Check-into-Cash, Advance America, Ace Cash Express New Entrants Enova, CURO, LendUp Key Takeaways 1) New entrant penetration is significant and likely mature 2) Relatively low growth potential remaining 3) CFPB Rules threaten a portion of product Market Share & Total Addressable Market $2.0B ~10% decline $1.8B $3.6B Sources: Jefferies, CFSA 2015 Presentation, company data Note: Small Dollar TAM estimate based on 2015 CFSA data augmented with industry trends TAM

8 MARKET SEGMENT: SMALL INSTALLMENT Borrower Profile & Loan Characteristics Borrower Profile: Light credit file, underbanked Loan size: $1,000 FICO: APR: 40% - 100% Loan Term: 6 months 3 years Annualized Losses: 8% - 15% Legacy Market Participants Regional Management, World Acceptance Corporation New Entrants Avant, Elevate, Enova, Oportun, LendUp, Marlette, LendingClub, Prosper, Elevate, CURO Key Takeaways 1) New entrant penetration is meaningful 2) Low/Moderate regulatory uncertainty, but being clarified Market Share & Total Addressable Market ~40% growth $16.4B Sources: Jefferies, PeerIQ Q Marketplace Lending Securitization Tracker, S&P Global Market Intelligence Q Digital Lenders Loan Originations Report, ENVA, ELVT and other company data Note: TAMs reflect estimates of balances based on CPR-adjusted originations data supplemented with reported issuer balances $1.8B $2.6B TAM

9 PERSONAL LOANS & REFINANCEABLE REVOLVING CREDIT Borrower Profile & Loan Characteristics Borrower Profile: Varies - credit issues to higher quality Loan size: $5,000 FICO: >550 APR: 10% - 36% Loan Term: 1 5+ years Annualized Losses: 2% - 8% Legacy Market Participants Traditional banks, Discover, American Express, Capital One, Synchrony, Springleaf, OneMain, Regional Management, World Acceptance New Entrants Avant, Enova, LendingClub, Oportun, Prosper, CircleBack, Cross River Bank, Marlette, Upstart, Elevate, CURO Key Takeaways 1) New entrant penetration remains low, but growth is significant 2) High growth potential remaining 3) Low/Moderate regulatory uncertainty Market Share & Total Addressable Market $17.9B ~50% growth $26.8B ~$760B Sources: Jefferies, Federal Reserve Bank of New York Q Household Debt & Credit Report, PeerIQ Q Marketplace Lending Securitization Tracker, S&P Global Market Intelligence Q Digital Lenders Loan Originations Report, ENVA, ELVT and other company data Note: TAM reflects estimates of balances based on CPR-adjusted originations data supplemented with reported issuer balances TAM

10 MARKET SEGMENT: STUDENT Borrower Profile & Loan Characteristics Borrower Profile: Students Loan size: $15,000 FICO: 670+ for private APR: L+200bps L+400bps for private Loan Term: 5 15 years Annualized Losses: 1.5% - 3.5% for private Legacy Market Participants Citi, First Marblehead, Discover, Nelnet, SallieMae, Wells Fargo New Entrants CommonBond, Earnest (Navient), SoFi Key Takeaways 1) New entrant penetration very remains low, but growth is high and competition is increasing 2) Very large growth potential remaining 3) Moderate regulatory uncertainty Market Share & Total Addressable Market ~140% growth ~$1.3T Sources: Jefferies, Federal Reserve Bank of New York Q Household Debt & Credit Report, PeerIQ Q Marketplace Lending Securitization Tracker, S&P Global Market Intelligence Q Digital Lenders Loan Originations Report Note: TAM reflects estimates of balances based on CPR-adjusted originations data2.19 $14.9B $6.3B TAM

11 TOTAL ENTRANTS SHARE & MPL SECURITIZATIONS Tot. Entrants Share >$2.0T >50% growth $46.1B $28.0B TAM Sources: Jefferies, Federal Reserve Bank of New York Q Household Debt & Credit Report, PeerIQ Q Marketplace Lending Securitization Tracker, CFSA 2015 Presentation, S&P Global Market Intelligence Q Digital Lenders Loan Originations report, ENVA, ELVT and other company data Note: Total TAM reflects estimates of balances based on CPR-adjusted originations data supplemented with reported issuer balances Key Takeaways 1) MPL loan volume growth is outpacing industry growth rates / gaining industry share 2) This has occurred despite volatility / idiosyncratic company issues 3) In certain categories, the technology channels are becoming important and influential Key Takeaways 1) The securitization market for MPL is growing and developing rapidly Rating agency & global bank involvement, infrastructure build-out 2) Credit spreads are declining, despite rising DQs 3) MPL represents an important share of total consumer ABS issuance (~20% of market now) MPL & Tot. Consumer Securitizations ($Bs) $60 $50 $40 $30 $20 $10 >6x Larger ~5x Larger Source: PeerIQ Q Marketplace Lending Securitization Tracker, Finsight Note: Total Consumer securitizations reflect the summation of the credit card and consumer & specialty finance categories $ MPL Total Consumer

12 MACRO FACTORS

13 Consumer Macro Factors MACRO FACTORS 1. Macro factors surrounding consumer lending are supportive for both growth and benign credit Unemployment trends, asset values, (small) wage pressures, household leverage, etc. are all favorable to the consumer and to the consumer lender The consumer can afford their debts for the most part, and may be able to take on more debt 2. The consumer has recently exhibited a willingness to take on excess debt Household debt obligation levels (as illustrated by the FOR) are near multi-decade lows, but have recently come off lows Certain borrowing markets have accelerated recently, indicating the borrower is more comfortable with risk, and this is resulting in rising loss rates

14 MACRO FACTORS: CONSUMER Unemployment Rate (Weekly Jobless Claims) 700, , ,000 Charge-Offs (Credit Card NCOs) 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 400, , , , ,000 Revolving Credit Growth 10.0% Financial Obligations Ratio % Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec % % -5.0% -10.0% -15.0% Source: Jefferies, Federal Reserve

15 REGULATORY UPDATE

16 REGULATORY UPDATE: CONSUMER LENDING 1. CFBP final rule proposal Covers loans less than 45 days with single payments; loans > 45 days with balloon like payment structure Partially covers loans > 45 days and APRs > 36% Implements Ability to Repay underwriting framework Restricts automated withdrawal activities Requires use of Registered Information Systems Timing update: 21 month implementation period This could be impacted by legal actions Full implementation in 2H19 at the earliest 2. Potential impacts of the CFPB rules The rules would impact small dollar loans materially much of the business would likely go away Many lenders are modifying their products; migrating away from payday lending and towards installment loans (where this is possible from a local regulatory perspective)

17 REGULATORY UPDATE: BUSINESS LENDING (NON-BANK) 1. We believe regulators are in an enlightenment period Regulators are beginning to assess and understand the emerging / innovating lending segments Recent treasury study of the online marketplace lending industry is an example of this Review is focused on risk retention, servicing, disclosures, bank affiliation 2. Based on historical precedent, formal regulatory oversight of emerging lending segments takes time to formulate This will represent an overhang for investors, but is not unusual as large / growing lending segments are typically regulated 3. Madden v. Midland Funding This lawsuit is worth monitoring as it may impact product terms in various jurisdictions May be cleared up under Protecting Consumers Access to Credit Act valid when made doctrine 4. Prospect of OCC Fintech Charter is a key development for the industry, but limited for now

18 CAPITAL MARKETS UPDATE

19 CAPITAL MARKETS OVERVIEW 1. Marketplace lending / technology enabled financial services is currently a high profile segment in the capital markets, but some controversy has emerged Interest and capital flows are strong, but off their peak given some issues at the operator level The investment themes market disruption, large addressable market, disintermediation, etc. are popular and have historical success patterns 2. Debt capital market patterns are positive Increasing capital flows, lower spreads 3. VC and public marketplace remain highly interested as they debate the risks and valuation framework Venture capital / private equity flows are case by case The public markets have a very high degree of interest; but are debating successful models and valuation Public stock performance has been poor

20 MARKET SENTIMENT & VALUATION: 2015-PRESENT: Specialty Consumer Finance 12.0x 1. Pre August 2015 Market was generally trading with regulatory sentiment in mind, credit was not a predominant driver 2. August 2015 February 2016 Market was generally trading with a recession in mind. Credit was at the fore of investor concern 3. February November 2016 Market was continuing to normalize from overly-bearish credit concerns while regulatory pressures started to reemerge 4. More recently Market fears over credit have largely abated as have a large portion of regulatory uncertainty 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x 10.0x 9.0x 8.0x 7.0x 6.0x 5.0x Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep x Underbanked Industry Forward P/E Multiple 5.1x 6.6x 8.9x 4.0x 3.0x 2.0x 1.0x 0.0x 1/15-8/15 8/15-2/16 2/16-11/16 11/16 - Today Source: Jefferies, FactSet Peer group includes ENVA, RM, WRLD

21 MACRO FACTORS: TECH LENDERS Price Market JEF CY P/E P/ MRQ Company Name Symbol Price Rating Target Cap ($MM) 2016A 2017E 2018E BV ROE Elevate Credit, Inc. ELVT $7.18 Buy $ x 17.5x 5.4x 2.9x -90% Enova International Inc ENVA $14.05 Buy $ x 10.6x 8.3x 1.7x 17% On Deck Capital, Inc. ONDK $4.70 Hold $ x x 19.3x 1.4x 4% OneMain Holdings, Inc. OMF $31.88 Buy $ , x 8.5x 7.3x 1.3x -23% * LendingClub Corp LC $6.39 NR NR 2, x 159.6x 29.0x 0.2x -13% Mean 0.7x -29.6x 10.1x 1.8x -23% Median 1.8x 9.6x 7.8x 1.5x -10% * LendingClub forecasted EPS and forward multiples reflect consensus Source: Jefferies, FactSet with pricing as of 10/06/2017 Technology enabled credit providers trade in a wide valuation range ~8x-30x CY18E EPS These represent discounts to the last expansion cycle Some questions regarding business models should be addressed Generic credit risk and the stage of the economic cycle likely account for the relative discount at this time

22 Closing Thoughts

23 FORWARD LOOKING THOUGHTS The addressable market for marketplace lenders is HUGE; the mitigating factors to approaching this opportunity are internal to new market entrants We expect further development of Marketplace Lenders New and incumbent operators will continue to seek control of a specific / niche market or brand Operators will build a specific / focused brand, fluid product sets and customer loyalty programs to attract and retain customers Market participants will win control of a market based on brand recognition, market share, and operational scale potential (like many Internet models)

24 FORWARD LOOKING THOUGHTS End market trends are supportive for alternative consumer lending Credit conditions are benign across most lending categories while macro trends are somewhat supportive Consumer loan demand is tepid, while commercial borrowers may be entering a capital expenditure cycle The regulatory framework is maturing which should encourage the following tendencies: Ongoing product innovation Focus on multi-payment products, risk-adjusted pricing, customer loyalty (or reward) programs Focus on compliance as a core competency (which results in incremental operating costs, which is easier for larger market participants to absorb) Capital markets are generally strong although the public markets are debating the risks and valuation parameters

25 IMPORTANT DISCLOSURES

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