By Roger Baird on 9th July 2019
The report takes a snapshot of patterns of growth across this emerging asset class, looks at how returns and loss rates are evolving and studies what level of return can investors reasonably expect while taking moderate levels of risk.
Fat margins get thinner for investors . . .
Investors in a diversified peer-to-peer 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 the second quarter of 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.
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 £20,000 per year of peer-to-peer investments to shielded from tax.
. . . but these returns are still tempting
Despite its steady decline, the net return from peer-to-peer loans still looks healthy compared with readily available alternatives. For a start, 4.1 per cent is significantly positive in real terms – taking into account consumer price inflation, which is currently 2 per cent.
Not surprisingly, in the aftermath of massive Quantitative Easing by the Bank of England, peer-to-peer returns are also well above the risk-free rate on three-year UK government bonds, which stands at about 0.7 per cent. peer-to-peer loans also provide a higher return than baskets of investment grade sterling corporate bonds and high yield bonds of similar tenor.
Britain dominates the European loan market, but growth is slowing
The peer-to-peer lending market is now funding more than £9bn of loans across Europe each year with two thirds (67 per cent) of this funding coming through UK platforms.
Rapid growth in the industry, however, is starting to shift its ability to sustain growth rates that have been huge when compared with the growth of other new asset classes.
Gross new lending topped £6bn in the UK for the first time in 2018, a 20 per cent rise on last year.
However, after two years of 40 per cent year-on-year expansion in volumes in the UK, 2018’s 20 per cent rise represents a sharp slowdown in growth.
Size matters . . . especially in Europe
Growth among Europe’s peer-to-peer lenders will almost halve this year as smaller rivals struggle to scale their operations.
Slowing economic growth across the continent and anaemic expansion among second-tier peer-to-peer players will lead the sector to grow by 47.5 per cent this year, compared to a 90.2 per cent jump in 2018.
This means European continental lenders, led by such players as Younited Credit in France and CreditShelf in Germany, are set to lend €4.9bn this year, compared to €3.3bn.
The report said: “Europe’s very largest platforms continue to grow apace, pushing into the billions lent territory, rather than millions. Yet many of the platforms at the smaller end of the spectrum appear to be struggling to scale their operations; it is striking how many of these firms have made a slow start (if they can be said to have started at all) in 2019.”
Its the economy, stupid
Peer-to-peer lenders are not immune to the wider economy, and its rapidly cooling demand for credit from consumers and small businesses.
According to the Bank of England’s Money and Credit bulletin in March, borrowing appetite among consumers weakened again in January.
It said: “The annual growth rate of consumer credit has continued to slow. It was at 6.5 per cent in January, well below its peak of 10.9 per cent in November 2016.” Within this, the growth rate of credit card lending fell to 6.7 per cent (against 7.1 per cent in December).”