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Financial Forums Mask Harsh Realities Faced By Loan Market

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Shares in the financial market soared after the recent decline in the 10-year treasury yield, but the upbeat atmosphere doesn’t hide the underlying challenges plaguing the industry, as pointed out in the Disruptive Finance Forum by Wedbush Securities, which included meetings with Upstart Holdings Inc, LendingClub Corp, and Pagaya Technologies Ltd.

Analysts David Chiaverini and Brian Violino shed light on the persisting challenges, noting slight improvements in funding markets like the ABS market compared to last year. However, loan buyer funding costs remain high, casting a shadow on overall returns. Even as lenders adjust credit criteria, the quality of older vintage loans remains subpar, casting uncertainty on credit performance under stricter underwriting standards.

Amid this grim outlook, Wedbush maintains an Underperform rating with a $10 price target for Upstart, citing ongoing pressure on the business model’s economics and credit quality.

  • Upstart remains optimistic about the potential benefits of a moderate economic downturn on its volume, aligning consumer spending more closely with income levels.
  • The fair value assessment of the held-for-sale portfolio remains slightly below par, depending on its vintage. Most investors assert that they can acquire an overcollateralized BBB bond yielding 8% to 9%, and any valuation approach below this range lacks rationale in Upstart’s current landscape.

For Pagaya, the analyst maintains a Neutral rating with a $2 price target, reflecting the company’s relative valuation as it outperforms other neobank peers focused on personal lending.

  • PGY aims for its 2023 network volume guidance to reach $8.0 – $8.2 billion and sets a medium-term goal of $25 billion. Its market strategy includes generating volume from personal loans, auto loans, and POS loans, aiming to capture a significant portion of the $4 trillion total addressable market it currently underrepresents.

The analyst maintains an Outperform rating for LendingClub, backed by a price target of $8, citing the company’s better positioning among neobank peers in terms of credit quality and business model durability, despite the challenging environment and discounted valuation.

Photo Via Pagaya Technologies

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