On Tuesday, Zopa had a simple message for investors: brace yourselves. But what do the numbers tell us?
Zopa has long prided itself on a prudent approach to risk management. With the broader outlook for consumer credit trending downwards, the world’s original peer-to-peer lending platform is now taking proactive steps to shore up its loanbook. Broadly, this involves a scaling back of its riskier lending, with a focus on cutting down on its highest yielding D-E risk lending markets.
But some of the damage is already done. Zopa’s non-Safeguarded loans, originated up to August 2017, are expected to undershoot original return expectations. The Plus account has been hardest hit, now expected to deliver a 5.6% return, rather than the targeted 6.3%. The Core account is now likely to return 3.5%, instead of the headline rate of 3.7%.
But why? AltFi Data’s analytics engine allows us to examine.
In his note to Zopa’s investors on Tuesday, Zopa’s chief product officer Andrew Lawson said that the UK had seen historically low levels of bad debt since 2010. During that timeframe, the average interest rate charged by Zopa has twice hit a high of 8.35%: in 2010 and in the second quarter of 2017. Between these tentpoles, it fell to a low-point of around 4 per cent, during the second quarter of 2014, before steadily rising again to its present level. The average interest rate hit its high point of 8.35% in April of this year.
Zopa’s average interest rate across all risk bands in July was 7.27%, and seems to be trending downwards, possibly due to its attempts to reduce its higher risk lending.
Drilling into Zopa's origination data would suggest that the platform is already some way advanced with its risk reduction strategy.
The platform originated roughly £75m in April of this year. Of that total, £16m were A* loans. The platform's originations have grown steadily over the past few months, to an all-time high of £88m in July, including £21m of A* loans.
Meanwhile, Zopa has been originating steadily less E loans throughout the course of 2017, down from £5m of monthly origination in January to just £2m in July. Its D loans are yet to tail off, but Lawson's update would suggest that we should expect to see less of them over the next few months.
Zopa’s principal in arrears has been steadily increasing from roughly 0.1% in early 2014 up to a high of 1.16% earlier this year. For July, the figure stood at approximately 1.0%. But the platform’s D and E risk bands, which first emerged in mid-2015 and 2016 respectively, are soaring above the average. 3.43% of the lender’s D loans and 4.67% of its E loans are currently in arrears. The latter of these figures represents an all-time high.
An often-touted strength of the Zopa platform is that it has – uniquely among UK peer-to-peer lenders – weathered a recession, having launched in 2005. The cumulative loss rate for its 2008 loan cohort plateaued at 4.8%, which, given the cataclysmic circumstances, is not to be sniffed at.
What might provoke sniffs is the fact that Zopa’s 2015 cohort, while yet to fully mature, appears to be charting a similar trajectory to its 2008 cohort. By contrast, the platform’s lending from 2009-2014 has never come close to the kind of cumulative loss rate that was endured during the 2008 downturn. 19 months out from origination, roughly 3% of the 2015 cohort is in default.
Initial signs suggest that the 2016 cohort, originated just 7 months ago, could produce the highest cumulative loss rates of any yearly cohort ever originated by Zopa, although it is arguably too early to draw conclusions.
Returning to the 2015 cohort: homing in on the troublesome D and E risk bands paints a predictable picture. 19 months removed from origination, the D loans have produced a cumulative loss rate of 10.53%, while the cumulative loss rate for the E loans is 13.86%.
This portrayal of Zopa would be incomplete without making mention of the net returns delivered to investors. The peer-to-peer lender’s returns have steadily declined from 6.74% in 2011 to 4.53% as of July this year. We’ve seen minor fluctuations along the way, but broadly speaking the decline in return has been gradual.
In opting to reduce its riskier lending, Zopa has perhaps correctly identified that in recent years it has been exposing investors to greater levels of risk, while delivering ever-decreasing returns. This trend could not be allowed to continue in the midst of deteriorating consumer credit conditions. Warning flags of this deterioration have been raised several times this year by the Bank of England, and the trend has this week been encapsulated by the collapsing share price of doorstep lender Provident Financial.
Zopa has delivered consistently strong returns to investors over the course of its 12 year history. While the lower return expectations for its outstanding loans will worry some investors, the platform’s decision to scale back on its riskier lending looks to be a prudent step.