This profitable Fintech stock is trading at a discount

This rising interest rate environment the US finds itself in has made it very difficult for fintech specialists in consumer finance to make money. Examples of this can be found at companies such as Upstart, SoFi technologiesand MoneyLionamong others.

But the difficult economic environment did not keep the digital marketplace bank LendingClub (NYSE: LC) from turning a profit every quarter since Q2 2021. Although the environment remains challenging, I expect the company to maintain a small level of profitability until market conditions become more favorable to the business model. With the stock now trading at a discount, I see this as a good time to get in. Here’s why.

Understand LendingClub’s business model

LendingClub’s main business is helping largely prime borrowers and above consolidate their credit card debt. This generates a high-yield, short-term loan for LendingClub, while saving borrowers a lot of money in interest payments on their remaining credit card balances.

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LendingClub became a bank after completing the acquisition of Radius Bank in 2021, and as a result it has access to deposits to fund loans and is well positioned to place loans on its balance sheet and collect periodic interest income. Over the term of a loan, loans on the balance sheet are three times more profitable than those sold to investors on LendingClub’s marketplace.

But the marketplace plays a critical role in the model because it allows LendingClub to originate more loans. When the marketplace operates at full capacity, the fees from the sale of loans can largely cover LendingClub’s expenses. When conditions are like this, the profit from loans kept on the balance sheet after setting aside capital to cover potential loan losses pretty much falls right on the bottom line.

Flexibility in a challenging environment

Unfortunately, the high interest rate environment increased the cost of capital for some parties who purchase LendingClub loans (such as asset managers). With a potential recession looming, investors are also nervous about credit quality. This has caused marketplace investors to demand higher returns on loans. LendingClub can reprice the interest rates on its loans like credit card loans, but that takes time, and since the Fed hasn’t slowed its aggressive rate hike campaign for over a year now, the company hasn’t been able to reprice loans quickly enough to keep up with the increased funding costs for investors.

But this is where having the bank’s flexibility has been huge. With capital markets frozen for most consumer fintech companies, struggling to find investors to buy their loans, LendingClub can simply raise more deposits and then keep more loans on the balance sheet. In fact, LendingClub increased deposits by 13% in the first quarter.

The company has to pay for these deposits in this type of environment, but with its main product – unsecured personal loans – still yielding more than 13%, it can handle the higher funding costs. LendingClub retained $1 billion…

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