Credit Demand Returning; Acting Comptroller Hsu Testifies; Figure Merger
Unemployment claims continue to drop, slowly, as Fed officials debate when to taper support for the economy. Demand for credit is returning. Acting Comptroller Michael Hsu testifies on OCC’s priorities. Student loan payment break extended. LendingPoint completes $542MM securitization. Square buys BNPL player Afterpay. Figure merges with a mortgage originator.
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Unemployment Dropping, Slowly but Surely
Initial unemployment claims came in at 385,000 last week, meeting expectations. Continuing claims dropped to just below 3 million, the lowest since the beginning of the pandemic.
ADP’s July payroll report showed just 330,000 new jobs created, falling far short of the consensus estimate of 690,000, though Friday’s Labor Department report had the economy adding 943,000 jobs in July, bringing unemployment down to 5.4%, beating expectations.
With job seekers holding the upper hand, some appear to be taking their time to shop around for roles with more growth opportunities or better pay and benefits.
To Taper or Not to Taper
When it comes to when to begin withdrawing Fed support for the economy, two camps are emerging. St. Louis Fed President James Bullard and Fed Governor Christopher Waller have urged the central bank to prepare to begin tapering bond buying this fall, in light of elevated inflation. Last week, Waller said an announcement could come as early as September, depending on the progress shown in the next two jobs reports.
While the timing of a Fed move is uncertain, expect any change in policy to be gradual and carefully telegraphed ahead of time, to avoid a repeat of 2013’s “taper tantrum.”
Demand for Credit Returning?
After seeing loan balances generally decline since the onset of the pandemic, there are signs this trend may be reversing. While major banks reported flat or slightly decreased loan books in Q2, non-bank lenders have seen a sharp increase in demand.
Now, a Fed survey out last week reports that banks are easing lending standards as the economy improves and demand for credit begins to return. Federal Reserve data shows that total consumer card balances increased slightly in Q2 to $787Bn, though they remain far below Q4 2019’s high of $927Bn.
With consumer and lender confidence improving and opportunities to spend returning, Delta variant notwithstanding, expect borrowers to cautiously take on more leverage through the end of the year.
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Acting Comptroller Testifies on OCC Priorities
“(1) guarding against complacency by banks,
(2) reducing inequality in banking,
(3) adapting to digitalization, and
(4) acting on the risks that climate change presents to the financial system.”
He also touched on the Community Reinvestment Act, emphasizing the need to “strengthen and modernize” it; true lender, where the OCC is working to gather and analyze data on fintech-bank partnerships; and alternative data, which the OCC believes can be a valuable tool to promote financial inclusion.
Clarified and modernized regulations from the OCC, in partnership with other regulators, will help banks and fintechs alike to responsibly serve their customers and communities.
Meanwhile, the White House is reportedly vetting a new candidate for Comptroller, Cornell law professor Saule Omarova. Her academic work gives some clues about potential views she could bring if she’s nominated and confirmed to head the OCC. Omarova has highlighted the growing risks of banks’ involvement with cryptocurrencies, particularly to the extent it may allow them to conduct trading activity outside of the oversight of regulators. Omarova could also bring heightened scrutiny of fintechs, which have largely remained outside of the OCC’s direct purview as non-banks.
Break for Student Loan Borrowers Extended
The Biden Administration announced on Friday that it will extend until the beginning of 2022 the pause on federal student loans originally scheduled to come to an end next month. The Education Department said this extension, the fourth one to date, will be the final one. The resumption of payments, which would have averaged $400 per month for the typical borrower, would have added to the financial stress many are facing. Even before the pandemic, some 25% of federal student loan borrowers were delinquent or in default, and over two-thirds of borrowers recently said they weren’t ready to resume payments, according to a Pew survey.
Square and Green Dot Shares Jump on Earnings
Square stock jumped 10% on strong earnings (gross profit +18.3% QoQ, 91% YoY), payment volumes (+29.3% QoQ and 87.7% YoY), and the announcement of its acquisition of Afterpay (more on this below). Square Cash monetization continues to improve reaching $55 quarterly gross profit per active customer, up 2.5X from two years ago.
Green Dot saw a resettling of consumer gross dollar volumes during Q2, down 19.4% QoQ and 5.7% YoY due to difficult comps created by the timing of stimulus programs in Q1. “Excluding stimulus funds in 2020, gross dollar volume in our Consumer Services segment increased 9% year-over-year.” While Green Dot posted lower gross numbers, its reporting segments all outperformed their internal forecast and consensus estimates, sending the stock up on the day. GO2bank, Green Dot’s digital bank, launched in Walmart, Dollar General, 7-Eleven and Family Dollar, and consumers will now have access to it in over 40,000 locations, with plans to aggressively add to that number in the second half of the year. The bank also announced new partnerships with Experian and Finicity to help the 100 million Americans living paycheck to paycheck improve their credit and overall financial situations.
Q2 Holdings posted a strong quarter reporting 6% QoQ revenue growth. The company added over 500k registered users on its digital banking platform in Q2, bringing the total to over 18.8Mn, representing a 16% jump YoY. Management increased full year guidance on revenue and adjusted EBITDA.
Elevate reported an increase of 13% QoQ in combined loans receivable, in line with the overall trend of Q2’s increase in non-bank originations. However, the stock suffered a double digit drop following revenue decline and estimates’ miss. Elevate’s revenues typically lag originations and management reiterated that it will take some time for the revenue to catch up to the loan portfolio growth, expecting a stronger second half with full year revenue guidance of $380–400Mn (1H revenue was $174.2Mn).
Square Buys Now, Pays with Shares
Square made headlines again by announcing its intention to acquire Australian BNPL player Afterpay for about $29Bn in an all-stock deal. Square is looking to capitalize on a shift away from traditional forms of credit, particularly credit cards, among younger consumers.
A buy now, pay later offering is a logical addition bridging two key groups: Square’s merchant users and its Cash App consumer audience. Afterpay also helps bolster Square’s presence in ecommerce vs. Square’s traditionally strong bricks and mortar footprint. On the consumer side, Afterpay’s users skew more affluent than Cash App, another plus, as Square works to grow its reach and attract more merchants into its ecosystem.
The $29Bn price tag represents a 31% premium to Afterpay’s closing price prior to the deal’s announcement, though it is still below the company’s February high. Compared to other BNPL players like Openpay, Sezzle, and Zip, the price tag is a heady 5.6x Q2 GMV vs. a median valuation of 2.4x.
Looking at the deal in terms of merchant and customer relationships Square will acquire puts the price tag at almost $300,000 for each currently active Afterpay merchant or $1,812 per active user acquired.
LendingPoint Completes Largest-Ever Securitization
LendingPoint, which offers direct-to-consumer and point-of-sale originated unsecured loans, announced it has completed its largest-ever securitization. The approximately $542MM issuance was rated by KBRA and provided for a 95% advance rate, according to the release. Credit Suisse and Guggenheim served as joint book runners on the offering. Like other non-bank lenders, LendingPoint has seen a strong rebound in its originations from COVID lows, with volumes up 60% in H1 2021 vs. H2 2020.
LendingPoint CEO Tom Burnside highlighted the importance of securitizations as part of its capital markets strategy, saying: “The public and private capital markets, and transactions such as this, will continue to be an essential part of our platform strategy, allowing us to serve more customers and move into new products while maintaining our strong growth in revenue, EBITDA and net income.”
The MPL securitization market remains competitive across the entire capital stack, from investment grade seniors down to residual certificates. Even with MPL originations growing up to 60% QoQ across originators, there continues to be more demand than offer, deals are oversubscribed, and yields are at historic lows.
Figure Merger Will Leverage Blockchain for Mortgage Origination, Securitization
Last week, Mike Cagney-led Figure announced its intention to merge with mortgage originator Homebridge Financial Services. Homebridge wrote $26.4Bn of mortgages in 2020, making it the 28th largest originator. Homebridge also boasts 180 retail branches and two wholesale divisions. According to Cagney, Figure’s blockchain technology, Provenance, will allow it to originate and securitize mortgages while saving as much as 90 basis points of cost. The merger will put that thesis to the test.
Technology-focused financial firms like Figure continue to push the boundaries of innovation, with consumers being hopefully the ultimate beneficiaries.
In The News:
Heavyweight Companies Enjoy Outsize Rewards as Economy Rebounds (Wall Street Journal 08/01/2021) Big companies that got ahead during the pandemic may face antitrust battles as industries have concentrated.
Businesses Are Loading Up on Credit. Spending Could Follow. (The Wall Street Journal, 08/04/2021) JPMorgan and Bank of America reported nearly $1T in undrawn credit commitments, 20% higher than a year ago, which could help propel the economy if businesses draw down on their credit and increase spending.
Senators Unveil Full Text of Bipartisan Infrastructure Bill (CBS News, 08/02/2021) Senators unveiled text of the $1T bipartisan infrastructure bill, ahead of an anticipated vote at the end of the week.
New SEC Boss Wants More Crypto Oversight to Protect Investors (Bloomberg, 08/03/2021) In his first interview as SEC Chair focused on crypto, Gary Gensler expressed a strong focus on regulating it to ensure investor protection.
NEW DATA: Why 75 Pct Of Consumers Skip Using Digital Cards (PYMNTS, 08/02/2021) Report from PYMNTS and IDEMIA highlights consumer uncertainty regarding digital cards.
Exclusive: Another Major Financial Institution Ditches Overdraft Fees (CNN, 08/02/2021) Alliant, a digital-only lender with $14Bn in assets, scraps overdraft and non-sufficient fund fees.
Rapyd Raises $300M on $8.75B Valuation as Fintech-as-a-Service Continues to Boom (TechCrunch, 08/03/2021) The provider of financial services by API projects its total payment volume to pass $20Bn this year, 4x 2020’s volume.
Robinhood Surges 50% in Second Day of Wild Trading, Up 100% This Week (CNBC, 08/04/2021) Robinhood was up 81% at one point during the trading day, potentially driven by ARK Invest Cathie Wood’s $4.2Mn investment on Tuesday.
Inside MoneyLion’s Quest to Become a Financial ‘Super App’ (Banking Dive, 08/02/2021) The 8-year-old neobank is diversifying its revenue sources, with its BNPL product in beta and plans to roll out crypto this year.
What Does the Edge of the Solar System Look Like? (Live Science, 08/02/2021) New 3D map of the solar system’s edge reveals more secrets about this mysterious boundary.