GreenSky loses key partner, raising concerns about its other bank relationships

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GreenSky is about to lose one of its key financial partners, and that’s raising concerns among investors about the durability of the fintech company’s bank-centric funding model.

Regions Financial confirmed Thursday that it will not renew its contract with GreenSky when it expires in November. Regions, of Birmingham, Ala., is one of five banks that combined have provided approximately 89% of GreenSky’s funding commitments.

Regions said that it is cutting ties with GreenSky because it wants to focus more on direct relationships with its customers. But GreenSky Chief Administrative Officer Gerry Benjamin indicated that Regions also believed the partnership was not generating a sufficient return on capital.

“The only thing that we can conclude is Regions believes that they can redeploy these assets and generate a higher return on a risk-adjusted basis,” Benjamin said Wednesday during remarks at a conference. “If they’re able to do so, they will have accomplished something none of our other banks have been able to heretofore.”

Shares in Atlanta-based GreenSky fell 9.4% Wednesday in heavy trading after the company stated in a securities filing that it did not expect Regions to renew its annual funding commitment. The stock price fell another 2.9% Thursday to close at $11.22.

After Regions’ decision, other bank partners will probably review the returns they are earning, even if they ultimately decide to continue their partnerships, analysts at Compass Point Research & Trading said in a research note. Analysts at Sandler O’Neill said that they suspect Regions’ move “will put more negotiating leverage on the side of bank partners.”

The four banks that along with Regions provide most of GreenSky’s funding commitments are SunTrust Banks, BMO Harris Bank, Fifth Third Bancorp and Synovus Financial. GreenSky also added Flagstar Bancorp of Troy, Mich., as a partner last year.

GreenSky, which held its initial public offering a year ago, offers point-of-sale loans to consumers through partnerships with Home Depot and thousands of other merchants.

The company initially focused largely on the home improvement industry, where many consumers want a faster and easier approval process than is typically available on home equity loans. More recently, GreenSky has been expanding its footprint in other parts of the retail economy, including the elective health care sector.

One reason banks have been attracted to GreenSky’s loans is that the company’s customers typically have strong credit profiles. Customers’ weighted average credit score was 769 in the first quarter of 2019.

GreenSky’s transaction volume last year totaled $5.03 billion, which was up 34% from the previous year. The company currently has $4 billion in open funding commitments, according to Benjamin.

“Banks will come into the ecosystem, at times they’ll depart the ecosystem,” Benjamin said Wednesday. “And the combination of increased commitments from our existing bank partners as well as new bank partners gives us every confidence that we won’t miss a beat.”

Benjamin also expressed a conviction that GreenSky will continue its partnership with SunTrust after the Atlanta bank’s pending merger with BB&T. “We can’t believe their appetite for high-quality assets is going to go down in combination,” he said.

A Regions spokesman explained the decision to cut ties with GreenSky by saying that the bank wants to create more opportunity for developing relationships with customers, including at the retail point of sale.

Because of how GreenSky assigns loans to its bank partners, the banks often end up funding loans to borrowers in places where they have no retail presence. Regions announced in February that it was exiting indirect auto lending, another business where banks have little opportunity to sell additional products to customers.

“We appreciate the partnership we have had with GreenSky,” the Regions spokesman said in a statement to American Banker. “They have been very responsive and collaborative as we have built the portfolio.”

The decision to cut ties with GreenSky marked a reversal for a bank whose executives publicly touted the partnership in recent years.

In early 2016, Regions’ then-CEO Grayson Hall said that point-of-sale lending had far exceeded the bank’s expectations. And last year, Tracy Jackson, Regions’ senior vice president of consumer lending, explained that the bank did not have the existing technology to provide infrastructure to thousands of retail locations.

“GreenSky has that technology, plus all these relationships with the home improvement contractors,” Jackson said in an interview early last year. “For a bank, that’s just too much overhead to support.”

Jon Prior contributed to this story.

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