Zopa is being forced to react to rising levels of bad debt in the consumer credit space. The platform is expecting to see higher losses on some of its existing loans, and has lowered its return expectations for non-Safeguarded loans.
The platform’s chief product officer, Andrew Lawson (pictured), contacted investors this afternoon to inform them that a possible deterioration in consumer credit conditions – first detected by the platform in early 2016 – appears to be real.
The Bank of England recently warned, in its credit conditions survey, of significantly increased default rates on credit cards and other types of unsecured lending in the second quarter of this year. Meanwhile, Zopa points out that publicly available data suggests that consumer default and insolvency levels are now closer to historic norms prior to 2010, rather than to the historically low levels of bad debt seen over the past seven years.
Zopa is reacting to these trends by cutting back on its riskier lending. The platform is reducing its higher risk, higher return D-E risk lending markets, which are included in its highest return Plus account. In tandem to this, the company is taking steps to attract a greater number of lower risk customers, in an attempt to increase the proportion of A and B loans in its portfolio.
As a result of these changes, Zopa is expecting to offer lower targeted returns of 4.5 per cent for its Plus account, and 3.7 per cent for its Core product.
Lawson’s note explains that these lower returns are primarily a product of the changing mix. “It is important to note that the target average return levels for new investments in each risk market (A–E) have not changed materially,” he said. “The change in overall return is a result of changes in mix. For example, the proportion of D and E loans in the Plus product would go from 30% until now, to 10-15% in the future.”
He goes on to say that the platform is “expecting slightly higher losses” for existing loans. Zopa is also seeing an increase early repayments, which reduces interest income and so serves to lower returns. The platform does not expect Safeguarded loans to be affected by these trends.
However, non-Safeguarded loans, originated up to August 2017, are expected to deliver “lower than original expectations”. Zopa expects its Core account to deliver 3.5 per cent, rather than the targeted 3.9 per cent. Its Plus account is expected to take a bigger hit, delivering 5.6 per cent rather than the targeted 6.3 per cent.
In another sign of a worsening consumer credit market, the BBC this morning reported that doorstep lender Provident Financial has seen its share price plunge 66 per cent after it said that it expected increased losses of £80m to £120m. The lender’s debt collection rates have dropped to 57 per cent, compared to a rate of 90 per cent in 2016.