Concerned about recession, US online lenders reduce risk

NEW YORK (Reuters) – US online lenders such as LendingClub Corp, Kabbage Inc and Avant LLC are scrutinizing loan quality, securing long-term financing and cutting costs as executives prepare for what could to be the first economic downturn in the sector.

A recession could lead to increased credit losses, tighter liquidity and higher financing costs, challenging business models in a relatively nascent sector.

Peer-to-peer digital lenders and other digital lenders have emerged largely after the Great Recession of 2008. Unlike banks, which tend to have cheaper and more stable deposits, online lenders are dependent on 39, market financing that may be more difficult to obtain in times of crisis. stress.

Their underwriting methods also often include non-traditional data analysis, such as the level of education of borrowers. Although platforms see it as a strength, it has not been tested in times of crisis.

"This is a major concern for us," said Scott Sanborn, chief executive of LendingClub, in an interview, citing the possibility of a recession. "It's not a question of" if "but" when "and it's not five years from now."

Sanborn and the leaders of nearly half a dozen other online lenders who spoke to Reuters said deteriorating economic indicators and forecasts had made them more cautious.

Their worries are the last sign that fears an economic slowdown in the United States. Economists polled by Reuters in March had a 25 to 25 percent chance of recession in the US over the next 12 months. More recently, according to some leaders, the Federal Reserve's decision to stop interest rate increases has reinforced these fears.

"We saw economists emit warning signals, we were following the signals of the Fed and they were becoming more and more dovish," said Bhanu Arora, head of consumer lending at the Chicago-based lender Avant. "We wanted to be ready and ready."

In order to better position itself in the face of the recession, Avant presented a plan at the end of last year, which includes a tightening of credit requirements for segments it has identified as presenting a higher risk, said Arora.

Certainly, the leaders said that they still did not see any glaring signs of problems in their credit books.

A slowdown is also far from certain. On Friday, JPMorgan Chase & Co, the country's largest bank in terms of assets, eased fears of recession after posting quarterly earnings above expectations, driven by what it termed solid US economic growth.

However, if a slowdown occurs, the most powerful online lenders would be separated from the weaker ones.

"All these platforms indicate that they can subscribe in a unique way," said Robert Wildhack, an analyst at Autonomous Research. "This will be the first opportunity to see who's right and who would have shortcuts."

CLAMPING CREDIT

In February, LendingClub, one of the pioneers of peer-to-peer credit, presented growth forecasts for 2019 below Wall Street expectations, which partly reflects increased caution. LendingClub does not offer loans directly to consumers, but generates fees by connecting borrowers and investors in its online marketplace.

Sanborn said the company had adopted stricter credit standards for borrowers on its platform and was attracting investors with a broader appetite for risk in case the more cautious participants pulled out.

He also outsources more of his back office operations and has moved some employees from San Francisco to Utah to cut expenses, he said.

SoFI, an online lender that refinances and then securitizes student loans, is striving to make its portfolio more profitable, even though it could mean lower origination volumes, Chief Executive Anthony Noto told reporters at the end of the year. February.

ADDITIONAL CUSHION Some companies have more room for maneuver in their balance sheets and are trying to secure their financing in the future.

Small business lender BlueVine Capital Inc., for example, is looking for long-term credit facilities. If the choice was to pay 10 basis points less or get a credit line for another year, BlueVine would choose the latter option, said Eyal Lifshitz, general manager of the company.

"We make sure we lock up capital for longer periods of time, and with suppliers we trust and we know we're there," said Lifshitz.

BlueVine offers invoice factoring, in which companies exchange future cash flows for current financing, as well as credit lines of up to one year. It delays the launch of long-term products due to economic concerns, said Lifshitz.

Atlanta-based Kabbage, which lends to small businesses, recently completed a $ 700 million asset-backed securitization. The company said it raised the funds needed to meet the growing demand of borrowers, but also to prepare for the worsening economic situation.

"We have been waiting for the next recession for five years," said Kathryn Petralia, co-founder and president. "More people feel confident that it's imminent."