Investors who think recession fears are overblown should buy this lending stock, JPMorgan says

Published Tue, Apr 11 20236:18 AM EDTUpdated Tue, Apr 11 20236:56 AM EDT

LendingClub may be oversold after investors grew too wary of financial institutions' balance sheets and the impacts of a potential recession, JPMorgan said. Analyst Reginald Smith initiated the stock at overweight. He set a price target of $11, which implies the stock could surge 60.3% from Monday's close. "We like LendingClub's marketplace-bank model, which combines the fee income of a marketplace with interest income of a bank, personal loan market opportunity, and competitive positioning," he said in a note to clients Tuesday. "Investor concern has shifted from the credit quality of their loan portfolio to the availability of bank partner funding and the near-term earnings impact (and optics) of holding more loans on balance sheet. Our sense is these third-party funding concerns are transitory and LC's marketplace model thrives in time." The stock advanced 4.8% in premarket trading Tuesday. But shares have fallen 22% year to date, building on 2022's 63.6% selloff. LC YTD mountain LendingClub Smith said the stock is oversold as the market is pricing in a lifetime loss rate in the mid-teens for the company's held-for-investment loan portfolio. Investors have been closely watching the balance sheets of financial institutions following the closure of Silicon Valley Bank last month. And he said the stock "is a compelling way to express the view that the recession for which investors have been bracing for well over a year, will be milder than feared." He said LendingClub is a leading player in what he called a fragmented and unpenetrated market for personal loans. At a roughly 8% market share, the company is the second largest loan originator in the U.S. Personal loans have become increasingly popular in recent years as consumers consolidated high-interest rate credit card debt and financed unexpected expenses, Smith said. And he said the size of the total addressable market is three or four times larger than its current size, meaning there's an opportunity for a market bigger than $100 billion in annualized interest income for LendingClub and its peers. Smith said LendingClub's digital marketplace-bank model provides unique financial benefits. It has a more stable revenue stream, he said, while also having relatively stable and low-cost funding. This system also has a more robust offering for products such as lending, savings and banking products, which increases the value to customers. He also noted that it's one of few consumer-facing financial technology companies that are profitable when looking at GAAP, with one of the lowest operating expense bases among peers. — CNBC's Michael Bloom contributed to this report. Correction: LendingClub was initiated as overweight by JPMorgan. A previous version misstated the rating change.