On or about Dec. 10, shares of LendingClub will start trading publicly on the New York Stock Exchange under the ticker symbol LC. I discussed the importance of the peer-to-peer lending systems offered by LendingClub and other similar companies this past March and followed that up with another column specifically about LendingClub in September.
Just three months ago, the expected size of the IPO was about $500 million. It is now closer to about $750 million as interest by investors is very strong. Predictably, this interest is not being matched by concerns expressed by investors in the traditional banking and finance companies.
The market most closely associated with the current LendingClub target is the credit-card space. The rates charged to borrowers accessing loans through LendingClub's peer-to-peer system are similar to those of credit cards, in the 7%-24% range with combined delinquency and charge off rates of about 7%. Those delinquency and charge-off rates are about twice the average being experienced by banks.
The total dollar value of loans made through the LendingClub system to date is about $6 billion, which is less than 1% of the carried principal balances for credit cards at U.S. banks, which is about $683 billion. This appears to be causing many investors to dismiss the implications of the growth of the peer-to-peer lending systems for the traditional finance companies.
It is precisely the high NIMs available in the consumer and small business loan space though that has afforded the peer-to-peer lenders to get their start. This is somewhat akin to the current situation with respect to the traditional vs. alternative oil producers. The high profit margins enjoyed by the traditional producers made alternative shale production economically viable. One of the reasons this situation has arisen is because the traditional oil producing countries structured their sovereign finances such that the high profits generated from oil are required for them to meet their financial obligations.
As growth in peer-to-peer lending increases, this same situation is almost certainly going to play out in the banking and finance company spaces.
I don't know if the growth in the peer-to-peer lending space will be as immediately aggressive as that experienced by Uber in personal transportation but it's possible. Investors in traditional banks and credit-card companies would be wise to watch LendingClub very closely.
More important is that the size of the market for LendingClub's product and those of the other peer-to-peer lenders is substantially larger than that being targeted by Uber. As a percentage of all loans held by banks in the U.S., credit card balances are the fourth largest loan category, exceeded only by first trust residential mortgages, commercial and industrial loans, and commercial real estate loans; and makes up almost 10% of all loans.
Bank loans made to individuals account for another 4% of all loans in the U.S. banking system at about $300 billion in carried balances currently. The four largest money centers in the U.S. are not at risk of having their business models challenged by LendingClub, but the credit card companies I referenced in earlier columns do.
Additionally, banks that have high concentrations of loans to individuals are at risk as the peer-to-peer space grows. The largest of these are UBS AG (UBS), Citizens Community Bancorp (CZWI), Community West Bancshares (CWBC), and Stifel Financial (SF).
UBS is the fifth largest U.S. bank and carries a whopping 56% of its loan book in loans to individuals. Citizens Community is the 88th largest bank and about 40% of its loans are to individuals. Community West is the 94th largest with about 34% of its carried loans being made to in
There are also many other sectors of the financial industry that will be affected by growth in the peer-to-peer space that I will discuss in future columns. For right now, the best thing for all investors to do is to put LendingClub on their watch list and follow the growth in the peer-to-peer space.