This fintech is building AI-powered banks at a cheap price - and trading at a price below book value

After all the economic and interest rate turmoil since the pandemic, some promising young AI Fintech startups went bankrupt. But, an older and established fintech, Loan (NYSE:LC)has been cheaply exploring the intellectual property rights of several bankrupt startups.

In addition to its own investment, LendingClub also uses this IP to build a potentially strong financial ecosystem with great growth potential in the coming years. Investors should pay attention.

In recent months, LendingClub has mined the intellectual property rights of two deactivated AI startups: Cushion and Tally.

Tally’s technology enables customers to view all their debt and credit card payments, as well as related interest rates and other data in a single interface. Its intelligence tools provide customers with helpful insights, such as how long it takes someone to pay off their credit card loan if they only need to pay it off.

In my recent conversation with CEO Scott Sanborn, he noted that many credit card balance holders don’t actually know their credit card rates, or how long it will actually take to repay. By helping consumers calculate and automate debt, LendingClub can help them become better financial managers. Since the main purpose of LendingClub’s personal loan product is to consolidate credit card debt, it is also a good marketing tool.

LendingClub followed the Talley acquisition with Cushion last quarter. Cushion’s AI tools ingest bank transactions and payment information to help customers get a 360-degree view of all spending. Like Tally, it then adopts intelligence to help consumers better manage their obligations.

In addition to IP, Cushion founder Paul Kesserwani also joined LendingClub as Senior Director of Digital Participation Products.

The two acquisitions will be inserted into LendingClub's growing debt instrument. During a recent conference call, Sanborn noted that customers using LendingClub’s new debt intelligence feature had a 60% increase in login rates and a 30% increase in loan issuance.

The more LendingClub attracts not only borrowers, but also customers across the bank, the better its financial situation is. Obviously, if the borrower signs into a depositor, it increases the deposit and LendingClub’s ability to hold more loans on the balance sheet. The balance sheet has been a huge asset over the past few years, when both asset managers and banks stopped buying LendingClub loans and as interest rates rose.

In addition, depositors can also help with the cost of capital of LendingClub. For example, last quarter, LendingClub was able to replace a very large “legacy” and high-cost deposit account, while new customers use LendingClub’s new checks and Levelup Savings accounts.

Results: Overall cost of capital fell by 83 basis points, from 4.74% to 3.91%, resulting in a net interest margin rising to 5.97%, above 5.75%.

People with dollar sign on smartphone.
Image source: Getty Images.

With a better ecosystem, LendingClub costs have fallen. Lower costs (such as rising prices) lead to higher profit margins, thus providing more growth opportunities for more growth opportunities. For example, LendingClub can now recover to some of the marketing channels the company has abandoned in the past three years as loan sales prices have increased for five consecutive quarters. This enables the company to grow.

After two years of austerity, the company began to see those green shots. In the first quarter, management exceeded its $1.8 billion to $1.9 billion origin target, instead generating $2 billion, resulting in a 20% increase in revenue.

Although net income has technically decreased, it hurts stocks, but this is due to two projects. As LendingClub leads in the first quarter’s launch plan, management decided to hold more loans on its balance sheet. According to Sanborn, the company predicts to hold $550 million to $600 million in loans, but hold $675 million.

This is good in the long run, but when LendingClub increases loans more aggressively, it must adopt a CECL rule (currently expected credit loss) that even if LendingClub receives interest income over time, it will take into account all losses throughout the entire loan’s lifetime. As a result, the higher number of loans held has led to a larger recent CECL rule that now hurts profits but later increases profits.

Secondly, after the levy of the Liberation Day on April 2, LendingClub then believed that it was prudent to adopt an additional qualitative provision of $8.1 million on its loan book. This is purely due to economic uncertainty, even though LendingClub’s underwriting is very good. Last quarter, the first quarter rate dropped to 4.7% from 8.1% a year ago. Now it seems that tariffs will be alleviated.

If it weren't for that rule, net income would be $19.8 million, which would increase by 61% compared to last year, rather than a slight decline reported.

As long as banks and asset managers continue to buy more loans, LendingClub's growth opportunities are great. With $1.32 trillion in U.S. revolving credit, LendingClub and its competitors can refinance at a lower price. Meanwhile, as of the previous quarter, LendingClub's total service portfolio was only US$12.2 billion.

With its growing technology ecosystem aimed at attracting low-cost deposits, surpassing the industry’s underwriting industry and loan stocks returned by loan buyers, LendingClub stock still seems to be a bargain deal, accounting for only 94% of book value.

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Billy Duberstein and/or his clients have positions in LendingClub. Motley fool has no position in any stock mentioned. Motley Fool has a disclosure policy.

The fintech company is building AI-powered banks at a cheap price, with less transactions than book value, originally published by Motley Fool