This Fintech Did All The Right Things During the Downturn. Now It's Reaping the Benefits, and Shares Are Still a Bargain.

Globe and Mail

2 days ago

Key Points
In the second quarter, LendingClub trounced analyst estimates and its own guidance.
The stock rallied more than 20% in response.
Despite the recent rally, shares look very cheap based on the potential profit trajectory.
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Fintech stocks have been battered by the economic slowdown of 2019, the COVID-19 pandemic, the subsequent post-pandemic inflation, the regional bank crisis of 2023, and then the recent tariff-related uncertainty of "Liberation Day." But battered fintechs and lenders that survived these successive lending crises are now on the brink of better things -- potentially much better.
Case in point: Last week, fintech LendingClub (NYSE: LC) stock rocketed 21.5% on the back of much stronger-than-expected earnings. Yet while strong growth appears to be emerging just now, the seeds of such strong results were planted during the downturn by its thoughtful and long-term-focused management.
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On that note, the long trough for LendingClub and other fintechs may be giving way to an upcycle that may just be getting started.
LendingClub followed Buffett's advice: Don't be dumb
Warren Buffett once said that banking is a great business, "unless you do dumb things."
LendingClub is primarily a personal loan lender, so its business is sensitive to economic health and interest rates. While the company bought Radius Bank in 2021, providing it with a balance sheet and deposits against which it could hold loans, a majority of LendingClub's target business model still comes from selling loans or portions of loans sales to outside parties.
But in the multiyear downturn spurred by recent economic turmoil, those third parties essentially stopped buying loans.
LendingClub could have responded by trying to grow through the crisis, but that would have entailed raising more capital against which to hold loans by selling stock, which was depressed at the time. Instead of diluting shareholders and taking outsize risks to lend through the uncertainty, LendingCLub responded by focusing on two things it could control: credit, and costs.
The company exited high-cost marketing channels, focusing its business on existing or repeat customers, which had already demonstrated good behavior and better credit performance. The company smartly realized that demonstrating better-than-average credit through a rocky economic period would yield long-term benefits, even if it came at the expense of near-term growth. So LendingClub pulled back and focused on those things, even though it resulted in declining originations, revenue, and earnings per share.
But now that the inflationary are rate headwinds are ebbing, LendingCLub is reaping myriad benefits.
LendingClub's results awaken after a long slumber
LendingCLub's revenue went into a decline in mid-2022, and had only begun a tepid recovery since mid-2024. But in the second quarter of 2025, things appear to be accelerating quickly.
Metric
Q2 2025
Growth Q/Q
Growth Y/Y
Originations
$2,391 million
20.2%
31.9%
Revenue
$248.4 million
14.1%
32.7%
Pre-provision net revenue
$93.7 million
26.9%
70.4%
Diluted earnings per share
$0.33
230%
153.8%
Return on Tangible Common Equity
11.8%
218.9%
131.4%
Data source: LendingClub Q2 2025 results press release. Y/Y= year-over-year. Q/Q=quarter-over-quarter.
These results beat expectations by a huge amount. Especially impressive was the return on tangible equity number, which grew from 3.7% to 11.8% in the span of just a single quarter. Management had previously forecast exiting the year above an 8% ROTCE. LendingClub beat that target handily, and two quarters early.
The outperformance was due to both strong demand from borrowers and loan buyers, which returned to purchase more loans, along with improved credit metrics. The credit outperformance was due to strong recoveries of previously charged-off loans on older vintages, while newer vintages have seen very low chargeoffs to date.
Meanwhile, LendingClub's typically conservative management forecast more quarterly growth for between $2.5 billion and $2.6 billion in originations next quarter. And while the fourth quarter is usually a "down" quarter from Q3 because of seasonality, I spoke with LendingClub CFO Drew LaBenne after earnings, who said the company is targeting growth from Q3 to Q4 at this point.
Credit, credit, credit
The focus on maintaining good credits in the downturn, even at the expense of growth, is helping on both the revenue side, in drawing loan buyers back, and the cost side, in terms of lower provisions. LendingClub can originate more if there is more demand for its loans, and we saw outside loan buyers returning en masse to the platform.
Of note, LendingClub recently landed two major names in asset management as long-term loan buyers: Blue Owl Capital Management, a large alternative asset manager with $273 billion in assets under management (AUM), and BlackRock, the largest asset manager in the world, with more than $10 trillion in AUM. In June, LendingClub agreed to sell $3.4 billion in structured loan certificates (LCSLCs) over the next two years to Blue Owl. And on the second quarter earnings release, LendingClub noted it had closed its first LCSLC transaction with BlackRock.
With blue-chip names in asset management agreeing to long-term loan and certificate buys from LendingClub, it's a clear vindication of LendingClub's prudent behavior through the downturn.
The growth opportunity remains massive
While the past quarter's growth was really strong, investors should expect a lot more in the future. LendingClub is just now reentering higher-cost market channels it had abandoned for years, such as direct mail. The second quarter was the first in which the company returned to these channels, but since they haven't been optimized yet, those channels aren't fully efficient and LendingClub hasn't been that aggressive.
Despite marketing expenses rising 15% quarter over quarter, LendingClub's efficiency ratio (non-interest expenses as a percentage of net revenue) declined almost four whole percentage points, from 66.1% to 62.3%. That speaks to LendingClub's spending discipline in other areas. So it appears that even though the company is investing in growth once again, it's doing so in a highly efficient manner.
Meanwhile, CEO Scott Sanborn noted "the TAM [total addressable market] is the largest it's ever been." LendingClub's core personal loan product is most often used to consolidate higher-rate credit card debt, and there is currently $1.3 trillion of revolving consumer debt in the U.S., against LendingClub's servicing portfolio that stands at just over $12.5 billion -- or less than 1% of the potential market.
The stock is still cheap
Despite the 21.5% gain last week, LendingClub's stock remains a good 65% below its 2021 highs, and it trades at just 1.27 times book value.
That may be an appropriate valuation for a bank that earns 12% on equity and isn't growing, but LendingCLub's ROTCE is expanding, with management noting each loan earns an incremental 25% to 30% on equity. So ROTCE should continue to creep up to those levels as the company grows. And clearly, given the size of the market, LendingClub also has a path to higher-than-average growth.
In that light, the stock still looks like a bargain in any "normal" or close-to-normal economic scenario.
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