Shares Rally Amid Treasury Yield Decline, Yet Funding Challenges Persist in Loan Market, Analysts Warn

On Friday, Wedbush Securities hosted a Disruptive Finance Forum, which included management meetings with Upstart Holdings Inc UPST, LendingClub Corp LC, and Pagaya Technologies Ltd PGY.

Analysts David Chiaverini and Brian Violino observe that despite shares rising due to the recent drop in the 10-year treasury yield, challenges persist within the industry.

While funding markets, such as the ABS market, show slight improvement compared to last year, the expenses tied to funding for loan buyers continue to be high, impacting overall returns.

Additionally, while lenders have adjusted their credit criteria, the quality of older vintage loans remains subpar. Assessing the credit performance of newer loan originations under stricter underwriting standards remains uncertain at this stage.

Wedbush keeps the Underperform rating with a price target of $10 for Upstart, given that the economics of the business model and credit quality remain under pressure.

Upstart observed that a moderate economic downturn might benefit the company regarding volume, aligning consumption more closely with income levels.
The fair value assessment of the held-for-sale portfolio is slightly below par, contingent on its vintage. Presently, most investors in this market assert that they can acquire an overcollateralized BBB bond yielding 8% to 9%. In Upstart's current landscape, any discount rate utilized in a valuation approach lower than this range would lack rationale.

For Pagaya, the analyst maintains a Neutral rating with a price target of $2, saying the outlook is appropriately reflected in its relative valuation and that PGY's business is performing better than other neobank peers focused on personal lending.

PGY remains confident about its 2023 goal of network volume guidance of $8.0 - $8.2 billion and a medium-term network volume goal of $25 billion.
It expects to generate $7 billion of network volume from the personal loan market, where it expects to generate $7 billion of network volume, $7 billion - $10 billion from the auto loans market, and $5 billion - $6 billion from the POS loan market. The company believes that its total addressable market between these three buckets is around $4 trillion and is currently only capturing <1% of this.

The analyst keeps the Outperform rating for LendingClub with a price target of $8, based on the company's better relative positioning vs. other neobank peers from a credit quality and business model durability standpoint.