KBW Latest To Downgrade LendingClub Amid Clouds Of Doubt

LendingClub Corp LC reported healthy 1Q16 earnings. Keefe, Bruyette & Woods’ Julianna Balicka downgraded the rating for the company from Market Perform to Underperform, while reducing the price target from $15 to $2.

“A pretty decent 1Q16 result in a challenging quarter for marketplace lenders was overshadowed by material weaknesses in internal control over financial reporting at LendingClub,” analyst Julianna Balicka wrote.

Breach Of Investor Trust

Balicka said that the company missing to match the loan sale with investor express parameters and the inclusion of falsified loan application dates was a “serious failing.” The enforcement unit of the SEC is also reportedly reviewing LendingClub.

“The loan amount, $22mm, was merely 80bps of 1Q16 originations and the direct revenue loss was only $0.15mm or 10bps of 1Q operating revenue. In early April, LC bought back the loans at panor and resold them to another investor, also at par,” the analyst mentioned.

While the direct financial effect of the problematic loans has been contained, the credibility loss is material and the domino effect of damaged investor confidence could have a significant impact on the company’s earnings model, Balicka pointed out.

“Weakened investor demand would decrease originations volume and transaction fees, which make up over 80% of LC's revenue,” the analyst commented. He added that LendingClub would need to take remedial measures, which are not cheap, to boost investor demand.