LendingClub: Buybacks And Increased Profitability Could Be On The Cards

Core Viewpoint - LendingClub's business model has faced significant challenges due to rising interest rates and the regional banking crisis, but there are signs of potential recovery as regulatory capital requirements are expected to change in February 2024, allowing for greater growth capacity and possible share buybacks [1][2][14]. Regulatory Capital Position - LendingClub operates under a more restrictive regulatory capital regime compared to most banks, with commitments to maintain higher capital ratios until February 2024, including a CET1 risk-based capital ratio of 11.0% and a Tier 1 leverage ratio of 11.0% [3][4]. - Upon expiration of the current agreement in February 2024, LendingClub will revert to minimum capital requirements, significantly increasing its capacity to grow its balance sheet [5]. Structured Certificates - To adapt to challenging market conditions, LendingClub has introduced a Structured Certificates program, which involves private two-tier securitizations of packaged personal loans, allowing the company to take on less risk while providing attractive returns for asset managers [6][7]. - As of Q3, LendingClub has closed approximately $2 billion in Structured Certificates, with expectations for increased demand in Q4 due to declining yields on U.S. treasury bills [7][8]. Buybacks - LendingClub is currently trading at a significant discount to its tangible book value, making share buybacks an attractive option post-February 2024 when restrictions from the Radius acquisition agreement are expected to be lifted [11][13]. - The CFO indicated that share buybacks could become a compelling action for management and the board after the current restrictions are removed [13][14]. Final Thoughts - The shift from riskier personal loans to lower-risk Structured Certificates is likely to alleviate capital constraints, positively impacting LendingClub's business model and investment thesis [14]. - Key indicators to monitor in the upcoming Q4 earnings include signs of recovery in the marketplace and growth rates in the Structured Certificates program [14].