The Zacks Consumer Loans industry continues to bear the brunt of relatively lower interest rates. Though the economic growth remains solid, weak consumer sentiments mainly attributable to inflationary concerns and near-term geopolitical matters are likely to hamper demand for consumer loans.
Nonetheless, easing lending standards, which have increased the number of clients eligible for consumer loans, and improving asset quality are likely to continue providing much-needed support to these companies. Also, digitization of operations will boost operating efficiency. Thus, industry players like SLM Corporation SLM and Enova International, Inc. ENVA will benefit from such developments.
About the Industry
The Zacks Consumer Loans industry comprises firms that provide mortgages, refinancing, home equity lines of credit, credit card loans, automobile loans, education/student loans and personal loans, among others. These help the industry players generate net interest income (NII), which forms a major part of total revenues. Prospects of the companies in this industry are highly sensitive to the nation’s overall economic condition and consumer sentiments. In addition to offering the above-mentioned products and services, many consumer loan providers are involved in other businesses like commercial lending, insurance, loan servicing and asset recovery. These support the companies in generating fee revenues. Furthermore, this helps the firms diversify revenue sources and be less dependent on the vagaries of the economy.
4 Key Themes of Consumer Loan Industry to Keep an Eye on
Inflation and Weak Consumer Sentiment: Geopolitical conflicts between Russia and Ukraine, supply-chain challenges and red-hot inflation numbers have been weighing heavily on the consumer sentiments. Due to these factors, the Conference Board Consumer Confidence Index fell for the second consecutive month in February. Lynn Franco, senior director of economic indicators at The Conference Board, noted “Meanwhile, the proportion of consumers planning to purchase homes, automobiles, major appliances, and vacations over the next six months all fell.” Thus, consumer spending is expected to be hit by rising prices and thereby likely result in a lower pace of consumer loan demand. Thus, growth in net interest margin (NIM) and NII for consumer loan companies is likely to be hampered.
Relatively Low Rates: The Federal Reserve had cut interest rates to near-zero in March 2020 to support the U.S. economy from the coronavirus-induced slowdown. Since then, the rates have remained unchanged. Though the central bank has indicated rising rates at its March FOMC meeting, the market participants aren’t expecting any aggressive moves. Thus, relatively lower rates are likely to continue putting pressure on NIM and NII in the near term.
Asset Quality Shows Signs of Improvement: Since March 2020, the U.S. administration has provided substantial financial assistance to individuals through various packages. Backed by these, along with extensive vaccination drive, economic growth is expected to continue at a robust pace. Going by the Fed’s December 2021 Summary of Economic Projections, the U.S. economy will grow 4% in 2022 and 2.3% in 2023. So, the favorable developments have led consumer loan providers to release reserves (that they had built in the early part of 2020 to tide over unexpected defaults and payment delays owing to the economic slowdown resulting from the coronavirus mayhem) back into the income statement.
Easing Lending Standards: With the nation’s big credit reporting agencies removing all tax liens from consumer credit reports since 2018, the credit scores of several consumers have moved higher. This has increased the number of consumers for the industry participants. Also, easing credit lending standards are helping consumer loan providers to meet increased demand for loans.
Zacks Industry Rank Reflects Bleak Prospects
The Zacks Consumer Loans industry is an 18-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #187, which places it at the bottom 26% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may want to add to your portfolio despite industry concerns, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry vs. Broader Market
The Zacks Consumer Loans industry has outperformed both the Zacks S&P 500 composite and its own sector over the past year.
The stocks in this industry have collectively gained 18.1% over this period while the Zacks S&P 500 composite and Zacks Finance sector have rallied 10.8% and 10.7%, respectively.
One-Year Price Performance
Industry's Current Valuation
On the basis of price-to-tangible book (P/TBV), which is commonly used for valuing consumer loan providers because of large variations in their results from one quarter to the next, the industry currently trades at 1.25X. The highest level of 1.54X and a median of 1.23X are recorded over the past five years.
This compares with the S&P 500’s trailing 12-month P/TBV of 19.26X, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
As finance stocks typically have a lower P/TBV, comparing consumer loan providers with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TBV ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV of 4.39X for the same period is way above the Zacks Consumer Loan industry’s ratio, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
2 Consumer Loan Providers to Watch Right Now
SLM Corporation: The company (also known as Sallie Mae) is the dominant player in every phase of the student loan life cycle. This Newark, DE-based company is focused on catering to private education loans, and providing saving and insurance products for higher education to students and families.
The expectation of modest growth in enrolment will lead to higher demand for education loans. This, along with increasing tuition costs, is likely to enhance the company’s prospects. SLM expects to sell loans worth $3 billion this year, $1 billion in the first quarter and $2 billion in the third quarter of 2022.
Rising private education loan originations bode well for Sallie Mae. Management projects 8-10% increase in private education loan originations for 2022. Further, the company is focused on expanding its operations on the back of investments in varied product offerings and inorganic activities. In January, Sallie Mae inked a deal with Epic Research LLC to acquire a digital marketing and education solutions company, Nitro College. The deal will bolster its digital marketing competencies, lower the cost to acquire customer accounts and aid in becoming a holistic education solutions provider for students.
Shares of this Zacks Rank #1 (Strong Buy) company have rallied 21.1% over the past year. While its earnings are projected to decline 19.9% for 2022, the trend will likely reverse after that. In 2023, earnings are expected to grow 7.3%.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: SLM
Enova International: Based in Chicago, IL, Enova is a leading financial technology company focused on providing online financial services. The company currently provides its services in the United States, the United Kingdom, Canada, Australia and Brazil. ENVA caters to small businesses and capitalizes on its proprietary technology, analytics and customer service capabilities to underwrite and fund loans.
Being an early entrant into online lending, the company has completed more than 55 million customer transactions and collected nearly 49 terabytes of consumer behavior data since its launch in 2004. This has enabled Enova to better analyze its specific customer base.
Moreover, the company has been diversifying its operations. Some of ENVA’s financing products and services are installment loans, line of credit accounts and receivables purchase agreements. Also, the company has undertaken acquisitions to further improve market share.
This Zacks Rank #2 (Buy) company’s proprietary underwriting systems leverage advanced risk analytics, including machine learning and artificial intelligence. ENVA has provided more than 7 million customers with more than $40 billion in loans to enhance their financial health.
Shares of ENVA have surged 31.1% over the past 12 months. While the company’s earnings are projected to decline 23.3% for this year, the trend will likely reverse after that. In 2023, earnings are expected to grow 14.3%.
Price and Consensus: ENVA
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