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Online lenders are ripping higher today — here's why

Chris Collins | Getty Images

Online lending stocks may have finally found the bottom, and now they're on the way back.

Shares of both Lending Club and OnDeck Capital shot up in trading Monday, respectively adding more than 7 percent and more than 3 percent. The moves come on a day when the broader banking sector is edging only slightly higher.

After a rough year for start-ups that channel cash to small businesses and consumers via the web, shares of lenders OnDeck Capital and Lending Club have risen recently, signaling shareholder optimism. A week after the financial technology, or fintech, stocks announced quarterly earnings, shares of both companies have risen more than 12 percent, and some say the worst has passed for the lenders.

A key metric is showing signs of improvement in each of the companies' quarterly earnings reports: originations.

Originations, or the new customers that the online lenders sign up, drive revenue higher and also help signify staying power for their business. After the Lending Club ousted its CEO over financial irregularities, resulting in a plunge in the company's stock, it still managed to increase originations in the second quarter, the company said last week. And origination fees are also a contributor to online lenders' revenue.

The same goes for OnDeck Capital — which saw its own originations rise a whopping 41 percent compared with the prior year. The lender has a partnership in pilot mode with JPMorgan Chase to market loans to its user base; once that program is fully online, it has the potential to pump up OnDeck's top line even more.

Lower-for-longer drives investors toward yield.
Jefferson Harralson
associate director of research, KBW
Chase's Sommers: Branch remains the center of customer relationship

Despite Monday's move higher, OnDeck is still down more than 40 percent so far in 2016, while Lending Club stock is down nearly 50 percent. Neither company was available for comment.

FBR Capital Markets analyst Bob Ramsey said in a note following the lenders' earnings that On Deck Capital "is actively working to expand general funding through its warehouse lines and is evaluating additional securitizations." Ramsey raised his 2016 earnings estimates for the company on that news. As long as investors desperate for yield are chasing lending products, these fintech companies will likely fare well.

Online lenders, their customers and investors in the companies know: It isn't demand that counts here, its supply. And the lower-for-longer monetary policies adopted in the U.S. by central bankers play into online lenders' hands.

"Lower-for-longer drives investors toward yield," said Jefferson Harralson, associate director of research at investment bank Keefe, Bruyette & Woods.

However, one investment banking source who asked to not be quoted told CNBC that there is still plenty more appetite for online lenders' products, since they often provide capital to borrowers at a rate lower than what they would get from standard credit cards. That, he said, will fuel sector growth for as long as they can line up investor cash to support the loans.

"They should be fine growing far into the future at a 25 percent rate," the source said. "But there are a lot more borrowers than lending capital."