Actionable Alternatives: Consumer Lending

Title: Actionable Alternatives: Consumer Lending

Description: In this series, discover exciting private market opportunities and how PIMCO pursues them in an effort to benefit our investors. Learn why we believe data infrastructure is an attractive investment within our asset-based finance (ABF) portfolios.

PIMCO’s global team of over 40 dedicated asset-based finance specialists has been at the forefront of the sector since the Global Financial Crisis, becoming one of the largest investors, deploying over $170 billion across mortgage, consumer, and other asset-backed sectors (as of 6/30/24).

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Kraus: Consumer lending refers to the various forms of consumer debt, including personal loans, student loans,

Text on screen: Kristofer Kraus, Portfolio Manager, Asset-Based Finance

credit card receivables, auto loans, and many other forms of consumer credit. Today there's over $17 trillion of household debt in the

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United States as part of the overall consumer lending complex. And this is an integral part to the specialty finance opportunity set that we see today.

We'll be honing on two main sub-asset classes, personal loans and credit card receivables. We see opportunity here because of two key themes. First, the resilience of the US consumer and why that is. And second, the funding gaps left by the banks in the overall marketplace.

FULL PAGE GRAPHIC TITLE: Household vs Business Loans (Ratio to GDP). The chart shows two lines. The light blue line measures Business Loans from the first quarter of 2005 to the third quarter of 2024. The dark blue line measures Household Loans for the same period. The dark blue line shows household loans to GDP peaked at around 0.98 ratio to GDP around 2010 and then fell to approximately 0.75 ratio to GDP around 2020 before rising again to approximately 0.82 around early 2021. The business loans to GDP ratio reached approximately 0.75 around 2009, declined below 0.7 through 2013, before rising again starting in 2014 to its recent peak of approximately 0.92 in the second quarter of 2020. Beginning in the fourth quarter of 2017, business loans surpassed household loans, with the business loans to GDP ratio at approximately 0.73 in the third quarter of 2024.

Household balance sheets have significantly de-leveled since the global financial crisis. Household loans historically represented a greater share of GDP relative to corporate loans. However, this trend reversed in the fourth quarter of 2017. Household debt servicing costs have remained low by historical standards, in large part because of the existing stock of American mortgages, which today is a 95% fixed rate mortgage.

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Over the last several years, we have seen banks pull back from lending to the consumer. This has led to increased partnership opportunities for us to work with bank. Basel III Endgame continues to be a factor for banks, and therefore we expect the consumer complex to remain an attractive investment area for our clients going forward. 

Text on screen: Krishna Narasimhan, Asset-Based Finance

Narasimhan:  Over the last year, we have had many questions on the state of the U.S. consumer. And rightfully so. While household balance sheets are strong, with net worth at near-record highs due to rising home prices and stock market values, recent reports of higher delinquencies have raised concerns about U.S. consumers health, but not all consumers have the same credit profiles.

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PIMCO has extensive experience investing in the consumer loan market. We have built a large, granular US consumer credit database that stretches back to 2005 and has an estimated 35 to 40 billion data points.

This dataset allows us to do a few different things. First, it allows us to gain real time insights on the consumer health. Second, the data set allows us to build through-the-cycle asset specific credit models, which forms the foundation of our underwriting activity in the consumer lending space. To invest in these loans, we have built great relationships with consumer loans originators, including banks, credit unions and financial technology companies. While banks have scaled back their presence in the consumer lending market,

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PIMCO has provided, and expects to continue to consistently provide, liquidity to originators across market cycles.  That allows us to influence pricing and structure what we believe are favorable terms for our investors. 

I want to talk about 2 areas of the consumer lending market where we see great potential opportunities.

The first is the personal consumer loans market, which we have been investing in since 2017.

FULL PAGE GRAPHIC -  Title -$5+ billion deployed in personal loan market, Bullet: Bank retrenchment, Tighter origination standards, Moving higher in quality

We've deployed over $5 billion and we have developed a number of significant relationships. In the personal loan space, the combination of bank retrenchment coupled with tighter origination standards has created new opportunities to move higher in quality while achieving compelling spreads.

This dynamic has allowed us to invest in loans at attractive spreads relative to historical levels and incorporate more structural downside protections.

FULL PAGE GRAPHIC TITLE: Credit spectrum. Below the title is a horizontal line with arrows at each end, the left labeled low, the right labeled high, as well as text that reads: Co-brand partner offers cards to a broad spectrum through the bank. A second line below points to two icons. The first icon on the left shows a hand and a building and labeled “Bank sells to PIMCO.” The second icon on the right shows a building and is labeled “Bank wants to keep.”

The other area we see potentially compelling opportunities in is the credit card space. Often times, a bank will work with a co-brand partner that wants to issue credit cards to a broad credit spectrum of borrowers. However, the bank wants to retain what's in their credit sweet spot. PIMCO can invest in the receivables that the bank does not want to keep, giving investors exposure to an asset pool that we may not be able to access otherwise.

It allows PIMCO and the bank the potential to partner to accomplish their goals and isolate the segment of borrowers that they want exposure to. 

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Disclosure

This material (the “Material”) is being provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy interests in a fund or any other PIMCO trading strategy or investment product.

The investment strategies discussed herein are speculative and involve a high degree of risk, including a loss of some or all capital. Investments in any asset classes described herein may be volatile, and investors should have the financial ability and be willing to accept such risks.

Asset-backed securities are highly complex instruments that may be sensitive to changes in interest rates and subject to early repayment risk. Structured products such as collateralized debt obligations are also highly complex instruments, typically involving a high degree of risk including default, liquidity, management, volatility interest rate and credit risk; use of these instruments may involve derivative instruments that could lose more than the principal amount invested. Private credit involves an investment in non-publically traded securities which may be subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

Certain information contained herein concerning economic trends and/or data is based on or derived from information provided by independent third-party sources.  PIMCO believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.

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