PayPal sees pressure on margin with loan provisions climbing
PAYPAL Holdings shares slumped after the payments giant said a key measure of profits shrank in the second quarter as the company had to set aside more money to cover souring loans it has made to merchants.
PayPal’s adjusted operating margin narrowed to 21.4 per cent in the second quarter from 22.7 per cent in the first three months of the year, the San Jose, California-based company said in a statement on Wednesday (Aug 2). That came as the company tightened underwriting standards for loans it has made to merchants in recent months.
“We saw some increased losses in our PayPal business-loan portfolio,” chief executive officer Dan Schulman said in a telephone interview. “We tightened on originations and we’re seeing the effects of that in the quarter. We put a provision in for our losses and I expect that to be a temporary blip across results.”
In recent years, PayPal has expanded its loan offerings for the millions of merchants that process payments across the firm’s many platforms, and these days the company offers business and working-capital loans. The business loans can be as small as US$5,000 and as big as US$150,000 for repeat borrowers.
The increased provisions come as investors have grown increasingly concerned about pressure on PayPal’s margins. That’s because the company continues to invest in its unbranded-payments technology and shareholders fear that business is less lucrative than the branded PayPal checkout experience.
PayPal shares dropped 9.2 per cent to US$6.93 at 5.05 pm in late New York trading.
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The results echo those of American Express, which last month said it’s begun to see softness in its portfolio of cards dedicated to US small business. The Federal Reserve said this week that a “significant” share of banks reported having tightened standards on loans to small businesses in the second quarter.
Spending soars
Spending growth on PayPal’s platforms accelerated in the second quarter, meanwhile, as consumer confidence continues to soar amid moderating inflation.
Total payments volume rose 11 per cent to US$376.5 billion, higher than the US$372 billion average of analyst estimates compiled by Bloomberg and faster than the 10 per cent growth the company posted in the first three months of the year.
PayPal has benefited from the ongoing strength of US consumers and their increased willingness to travel and spend more on experiences in the aftermath of the pandemic. Consumer confidence advanced to a two-year high in July, aided by a strong job market and easing inflation.
“E-commerce seems to be bouncing back as inflation cools,” Schulman said. “You’re seeing a return in discretionary spend.”
PayPal has been searching for a replacement for Schulman as the longtime CEO prepares to leave the company in the coming months. Ahead of his departure, Schulman has sought to refocus the company on the core checkout experience it’s long been known for, while also working to improve operating leverage, or the ability to grow revenue faster than expenses.
To do that, he’s sought to rein in costs. PayPal in January said it would cut 2,000 staffers, or 7 per cent of the company’s total workforce at the time.
Revenue for the quarter climbed 8 per cent to US$7.3 billion, in line with the US$7.28 billion average of analyst estimates compiled by Bloomberg. The company now expects third-quarter revenue to jump 8 per cent to US$7.4 billion, while adjusted profits will climb as much as 14 per cent to a range of US$1.22 to US$1.24 a share. BLOOMBERG
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