Canaccord's Graham Likes Lending Club, OnDeck As Ways To Play 'Classic' Internet Disruption

In a report published Friday, Canaccord Genuity analyst Michael Graham noted that the banking sector was in the "early stages of disruption." Graham mentioned that the online lending platform companies appeared poised for robust growth for a fairly long period before facing regulatory headwinds or intense competitive response from the banks. "There is ~$3.4 trillion of consumer credit ex housing and ~$300 billion of small business credit outstanding in the U.S," the analyst pointed out. Although banks had a substantial cost of funds advantage over online lending platforms, they lagged on several other critical areas like "efficient origination, regulatory freedom, rapid decision making, technology and cost structure." Canaccord Genuity initiated coverage of two online lending platform companies LendingClub Corp LC and On Deck Capital Inc ONDK with Buy ratings and price targets of $24 and $22, respectively. Graham pointed out that LendingClub focused on consumer loans, especially consolidation of credit card debt. The company's marketplace model allows it to grow without accumulating capital on its balance sheet. OnDeck offered a revolutionary service by leveraging the internet and big data with a proprietary credit scoring model that "gives SMBs credit decision within minutes and a platform that supports same-day funding," Graham wrote, while adding that the company was diversifying its funding base by selling more loans and catering to repeat borrowers. "LC and ONDK are both trading at approximately half of their December 2014 peaks. We believe both should (conservatively) grow revenue in the 70-80% range this year and in the 50-60% range in 2016," the report stated. Key risks to the two companies included potential for increased regulation, marketing war with other online platforms and a worsening of credit market conditions.