The black sheep among big banks this earnings season was definitely Goldman Sachs (GS 0.38%). The Wall Street bank saw its earnings plunge last quarter, as its core investment-banking business ground to a halt amid historically weak numbers of initial public offerings and mergers. Also, trading gains declined along with falling debt and equity markets.
In order to diversify away from the volatile investment banking and trading arms, Goldman has tried to cultivate its own consumer banking division under its Marcus brand. Begun six years ago, Marcus offers high-yield deposit accounts, credit cards, and personal loans.
But the consumer banking division hasn't been successful, having lost more than $3 billion since December 2020. In the fourth quarter, Goldman's consumer bank logged another $778 million in operating losses. For all of 2022, the red ink totaled nearly $2 billion.
In response to the escalating losses in consumer banking, management recently announced it would not originate any more Marcus personal loans, and would likely let the existing loans roll off its books. As of the third quarter of 2022, Goldman held $5.2 billion in personal loans on its balance sheet.
Yet could Goldman's losses be someone else's gains? As it exits this market, the following four fintechs could benefit.
NASDAQ: SOFI
Key Data Points
Personal-loan fintechs poised to pounce
Although some of the largest big banks do offer personal unsecured loans, these are not their primary business and are usually restricted to existing clients they know well.
However, the rise of newer fintech platforms over the past decade has accelerated growth in the personal-loan category in recent years. Leading companies including LendingClub (LC 2.64%), SoFi Technologies (SOFI 3.91%), and Upstart (UPST 5.53%) have come onto the scene with cutting-edge technology and little or no overhead for physical branch offices. That allows them to price loans at lower rates than credit cards issued by banks.
Since 2016, the personal-loan market in the U.S. has more than doubled, growing from $91 billion in the first quarter of 2016 to $210 billion by the third quarter of 2022, which itself was up 34% year over year (YOY).
It's no surprise as to why. Inflation ate into consumer budgets in 2022, and interest rates have spiked. Since credit cards offer high and variable rates, consumers are likely turning to lower-rate, fixed-payment personal loans, which are simpler to manage than juggling various credit cards.
In addition to these fintechs, branchless credit card giant Discover Financial Services (DFS +0.00%) also has a sizable personal-loan business.
Here's how these four personal-loan leaders look with respect to originations, loans held, and total servicing assets (combined loans held by the companies and/or third-party buyers) as of the third quarter 2022:
|
Company |
Q3 2022 Originations |
Q3 2022 Originations Growth YOY |
Q3 2022 Loans Held on Balance Sheet |
Q3 2022 Servicing Portfolio |
|---|---|---|---|---|
|
LendingClub |
$3.54 billion |
14% |
$4.41 billion |
$15.93 billion |
|
SoFi |
$2.81 billion |
71% |
$6.8 billion |
$10.85 billion |
|
Upstart |
$1.79 billion |
(42%) |
$249 million |
N/A |
|
Discover Financial Services |
$784 million |
11% |
$7.67 billion |
$7.67 billion |
Data source: company earnings releases and presentations. Personal loans only. Discover originations are net of maturities and redemptions. Upstart doesn't disclose the size of its servicing portfolio.
As you can see, there seems to have been a big market share shift between SoFi, which greatly accelerated its personal loan originations, and Upstart, which has pulled back in a big way.
What was the difference between Upstart and its peers? All the other lenders shown above have their own banking licenses, which means they can collect deposits, enabling them to hold more loans on their balance sheets. On the other hand, Upstart doesn't have a banking license or deposits, with a business model dependent on third-party loan buyers.
Since interest rates have risen at a very fast pace, third-party loan buyers have pulled back from buying securities over the past year. That has left Upstart having to decrease originations, because it didn't have enough third parties to sell to -- a potential ongoing risk for the company.
Meanwhile, it's interesting to see SoFi accelerate its personal lending by so much, especially as financial conditions are tightening and fears of a recession loom. It also doesn't appear that SoFi is merely underwriting the loans that Upstart is leaving behind. Rather, SoFi targets prime borrowers who have gone to graduate school, with an average FICO score on its personal loans of 746 and average income of $160,000.
That's opposed to Upstart, which tends to underwrite "overlooked" borrowers with FICO (FICO +1.01%) scores slightly lower on the credit scale, usually between the low 600s to low 700s.
So there appears to be some interesting company-specific dynamics among the top players. And don't forget the big banks and smaller, privately-held fintechs participating in various segments of the personal-loan market as well.
Image source: Getty Images.
How will Goldman's exit affect things?
Given Goldman's premium brand, it's likely its would-be borrowers might be in the prime category. That would stand to benefit both SoFi as well as LendingClub, which has also targeted prime borrowers in recent years.
That being said, heading into a potential economic downturn, investors should be wary of too high a growth rate in originations, which could mean caution for SoFi. For instance, LendingClub has tightened credit and intentionally slowed its originations this year.
While SoFi has noted that delinquencies and charge-offs remain very low to date, these new loans are recently originated. Therefore, investors might want to monitor SoFi's loan portfolio over the next year or two. If its 2022 loan vintage doesn't show excess charge-offs, that would be a big positive for its competitive position. A bank that can grow that fast without the risks of careless underwriting could reveal a competitive advantage, either in terms of underwriting or marketing.
LC year-to-date total returns (daily); data by YCharts.
Bounce-back candidates for 2023
As you can see, each of these stocks has had a hot start to the year, although each remains far below levels from one year ago. Fintech was one of the worst-hit sectors in the current bear market, as these stocks underperformed both the tech and financial sectors.
However, should these lenders make it through a recession relatively intact, or if this feared recession doesn't happen, their stocks could have a lot of potential upside in a bounce-back recovery. That could be especially true for these category leaders, if they can capitalize on Goldman's exit and gobble up market share.
