In the second in our series of articles exploring the State of the P2P Lending Market, we focus on what returns investors have seen.
Investors in a diversified P2P lending portfolio made up of the largest UK platforms have seen returns after fees and losses fall consistently for three years.
The overall headline change, from about 6.4 per cent in Q2 2016 to 4.1 per cent at the end of 2018, as measured by the Link Asset Services Marketplace Lending index, is due to increasing loss rates at a time when the industry has been moving through a significant period of growth into an increasingly mainstream asset class for retail and institutional investors.
This is one of the findings from AltFi’s State of the Market Report into P2P lending which examined data from Brismo as well as original research conducted across the UK and Continental European peer-to-peer lending platforms.
Over this period volumes have continued to grow at high double-digit levels while institutional investors have upped funding commitments and, in the UK, retail investors have been supported by a government-backed tax wrapper allowing £20k per year of investments in P2P to shielded from tax.
P2P’s gross yield stable over this near three year period, hovering at just over 7 per cent and climbing slightly to 7.2 per cent currently as platforms nudge up credit risk, the loss rate has increased much more rapidly.
At the end of 2016, net losses after recoveries cut investor returns by just 90 basis points (bps). In the latest figures, they wipe out 290bps of returns or 2.9 percentage points.
Stephan Findlay, CEO of BondMason, who recently announced his company would wind down its marketplace lending activities due to concerns about declining returns says net returns have several reasons
He said: “Net returns have declined by about 100bps a year over the past couple of years for a mix of reasons including competitive pressure on headline rates for some types of lending, platforms’ margin requirements and rising loan losses.”
Findlay argues that a maturing of loan books across the sector is a major part of the reason for the increase in loss rates rise and decline in net returns.
Given that the loan books now reaching maturity were originated in 2016 and 2017 – a period of very strong P2P volume growth accompanied by somewhat higher credit risk appetite – it is not altogether surprising that a couple of years down the line, loss rates start to edge up.
“Platforms are generally going through a full term-cycle of their loan book,” said Findlay.
“Funding Circle’s average loan is about 3.5 years so we’re now getting to a position where we’re coming through those loan book cycles – which is not the same as an economic cycle – and we’re getting a feel for what impairments look like across the life of a loan book. There’s no hiding place at that point because if the loan’s gone bad and the borrower’s gone bust, you have to recognise it.”