KeyCorp’s recent acquisition of Laurel Road Bank’s digital lending platform raised questions on the bank’s recent earnings call.
Analysts questioned executives about whether this was the right time to take on so much consumer risk and whether Key could successfully compete in the space with so much competition.
“Is really now the time to layer in consumer risk on your balance sheet given that we’re late cycle?” Erika Najarian, managing director at Bank of America Merrill Lynch, asked KeyCorp executives on the call. “I’m wondering sort of what additional layers in terms of underwriting you plan … especially as you’re going to go to a retention model rather than originating sale.”
Cleveland-based KeyCorp last week announced its plan to purchase the digital lending platform of Laurel Road Bank for an undisclosed amount. The deal did not include the Laurel Road’s three branches, but the bank did say 140 of the 185 employees at Laurel Road would join KeyCorp.
The digital lending platform includes a student loan refinancing platform totaling more than $4 billion in loan originations to date, $1.2 billion of which were made last year alone.
As the economy is projected to begin to slow in the coming years, the question is how some of that credit will hold up once economic conditions start to deteriorate.
KeyCorp’s Chief Risk Office Mark Midkiff said the company looked at the purchase on a stress basis and feels very comfortable relative to the bank’s risk appetite.
“I would just offer that we do think that what we’ve seen at the underwriting is very sound and very complementary but obviously will be under our lens and our buy box,” he said on the call. “And I think that [we] will be very focused around relationships where we get just better overall credit performance than when you’re working at a transactional level. So, that will be an enhancement.”
Additionally, KeyCorp’s CEO Beth Mooney said that most of Laurel Road’s clients represented a strong demographic in terms of credit.
Approximately 70 percent of Laurel Road’s clients on the digital platform are doctors and dentists, with another 20 percent being lawyers and MBAs. The target client also has an average age of 33, average FICO score of 760 and annual income of approximately $185,000.
But despite the strong demographic characteristics, other analysts expressed some concern about whether KeyCorp would be able to compete in the space.
“There is quite a few banks who’ve got similar sorts of businesses, Citizens has got something, First Republic’s got something. SoFi isn’t a bank, but I think is active in that space. What is it that makes Laurel Road different from those other platforms out there that at high level it kind of feels like the customer bases is the same 33-year-old doctor or dentist with good FICO?” asked Geoffrey Elliot, a partner at Autonomous Research.
Clark Khayat, chief strategy officer at the KeyCorp, said there were two factors that made Laurel Road’s platform stand out: The platform is end-to-end and Laurel Road has already forged strong partnerships with trade associations, member entities and other groups.
The groups “talk directly to those end users in a way that we think is quite distinctive to the way a broad, mass market business might work,” said Khayat.
