OnDeck Capital Inc. reported a strong quarter in originations
/The originations and margins surprise to the the upside
OnDeck Capital reported a strong quarter surprising the market on originations and cost of funding. The weak spots in December quarter financials were asset quality deterioration and rising cost of risk. The effective tax rate also came in worse than expected.
The December quarter gross revenue reads $109.5 million, 5% above the market consensus. The margin came in better than the estimates with EIY reading 36.6% and lower funding costs. As a matter of fact, funding cost of 5.5% reported for the quarter was significantly below what the analysts were looking for. We reckon lower cost of funding is likely to help OnDeck sustain margins in 2019. At $658 million, the originations grew 21% year on year and surprised the market to the upside. The momentum with originations remains strong and there is probably upside risk there in 2019 as well. The weak spot was the credit quality. The rise in 15+ day delinquency ratio, to 7.5% in December quarter from 6.4% in September and 6.7% in 4Q17, upset the asset quality metrics and provisioning. The net charge-off rate came in at 12% versus 11.1% in September quarter. Rising cost of risk and an uptick in tax provisioning are now the sources of downside risk to 2019 earnings.
ODX indeed appears to complement OnDeck's existing platform services business to meet growing demand from banks looking to grow their small business lending capabilities online. The new company is likely to target and engage with those banks with relatively limited resources allocated to online banking.
ODX roll-out
ODX, which was launched last year, has started offering its platform for originations to partner banks. ODX now offers a combination of software, analytic insights, and professional services to help participating banks grow their small business lending. The ODX solution, a modular and scalable SaaS platform, enables banks to either create a fully end-to-end digital experience for their customers or to select and purchase parts for specific product functions. The idea is that banks deploying the ODX will be able to focus on their business targets and outcomes reducing processing costs.
International business looks set to grow
OnDeck Capital remains committed to growing its international business. Currently a small portion of its business, both Australian and Canadian investments have good growth potential for the foreseeable future. The Canadian merger places OnDeck on a strong footing in the country. Evolocity Financial should make OnDeck the second largest online small enterprise lender in Canada. The management expects the international business will become profitable by 2020.
About OnDeck Capital
On Deck Capital Inc. is one of the leading on line financial intermediaries with specific focus on lending small enterprises. The company provides term loans (since 2007) and lines of credit (since 2013) to small businesses. OnDeck has over $7 billion in originations serving over 70,000 clients as at 2017 year-end. The model is scalable as the penetration in on-line small business lending remains low. The management believes there is $80-120 billion in unmet demand for small business lines of credit. Based on that size, On Deck serves less than 9% of the market. They currently operate in the U.S., Canada and Australia. OnDeck has developed proprietary analytics and credit scoring models, key to the sustainability of the business model. Approximately two-thirds of OnDeck liabilities are "notes and certificates," which are unsecured structured notes tied directly to specific underlying customer loans.