By Daniel Lanyon on Tuesday 19 March 2019
Last year saw P2P/marketplace lending volumes hit a new record but losses are also rising and net returns falling.
Marketplace lending hit a record £6.1bn in 2018 according to the Link Asset Services inaugural Marketplace Lending Index, a growth rate of nearly 20 per cent compared to the previous year.
Total gross lending climbed by £1bn to hit £6.1bn in 2018, the highest figure on record. Growth slowed following several rapid years of rising volumes from 39 per cent in 2017 demonstrating a healthy but maturation of the direction of the market.
The latest numbers also show a quarterly record of £1.6bn in Q4 of 2018, up 13.9 per cent year on year.
In contrast to 2011, when new gross lending amounted to just £92m, marketplace platforms are now orginanting this amount in just six days.
Rising invoice finance demand and business lending were key drivers of growth in 2018. The former leaping 104.8 per cent compared to 2017, reaching £1.1bn in 2018 while the latter which includes companies borrowing to invest, buy new premises, make acquisitions or refinance, broke the £2bn lending barrier for the first time, with gross lending climbing by 20.9 per cent. Consumer lending meanwhile saw slower growth of 4 per while property lending grew by just 2.1 per cent.
Whilst the numbers demonstrate growing confidence from both investors and borrowers in the sector, the data also show increasing loss rates in higher risk consumer and business loans dragging down net returns. Net returns after losses and costs stand at 4.1 per cent, down from recent high of 6.4 per cent in 2016.
Losses have risen on loans across the market, largely among riskier borrowers with higher interest rates.
This may have been prompted by a weaker economic backdrop prompting a growing minority of businesses ability to meet the terms of their loans alongside a deterioration among older consumer loans, reflecting the pressure consumer finances. Personal insolvencies reached a seven year high in 2018.
Rupert Taylor, chief executive officer (CEO) of Brismo says the lending performance index reveals an “impressive” risk premium has been ongoing for nearly 15 years of since the launch of the first platform (Zopa) in 2005.
“The success of this emerging capital market relies on loan originators ability to reliably attract capital to fund borrowers. UK platforms have been the first non-bank loan originators globally to recognise that attracting a diverse funding base relies on demonstrating accountability for performance to investors whilst ensuring that capital can be deployed based on sound analysis and an efficient process.”
“Standardised measurement of loan performance helps to achieve this. As disclosure evolves further and gains progressively wider adoption, investors will benefit from reduced complexity and improved insight, which will further increase the appeal of these assets to a wider universe of capital providers.”
Another year of double-digit growth?
Link/Brismo forecast gross lending will reach £7.3bn in 2019, but warn that the alternative lending market faces both greater regulation and ongoing economic uncertainty.
Mark Davies, Managing Director Link Mortgages Services, says that last year was a milestone year for marketplace lending as it moved further into the mainstream as platforms increasingly fill a funding vacuum created by the retreat of many traditional lenders.”
“Rapid growth is also bringing tighter regulation, marking the next stage of the sector’s evolution. This will go some way towards calming investors’ nerves around rising loss rates, and but it will also encourage lenders to improve the transparency of performance reporting across the sector, allowing investors to assess risk against returns across platforms.
“However, there is no room for complacency. Increasing losses are already dragging on returns, and should we see choppier economic waters following a disorderly Brexit, this would place businesses and borrowers’ finances under greater pressure. The subsequent rise in defaults would place a new level of strain on marketplace lenders’ risk management strategies, testing their loan servicing and recovery approaches in a downturn.”