Is the P2P sector prepared for a downturn?
RISING inflation, a squeeze on consumer spending power and Brexit uncertainty have raised questions about the peer-to-peer lending market’s ability to weather an economic downturn.
Recent figures show UK households have suffered the longest decline in real income for almost six years.
UK inflation is well above wage growth at just under three per cent and unsecured borrowing hit its highest level since 2008 in July.
Critics of the P2P lending sector warn that the combination of these factors could result in borrowers being unable to pay back loans and if the economy worsens the sector could suffer significantly.
It is difficult to predict what would happen in a downturn because the P2P market was very much in its infancy when the 2008 financial crisis hit. The only lender operating throughout the recession was Zopa.
Iain Niblock, co-founder and chief executive of Orca Money, a P2P research and analysis company, said defaults at Zopa rose significantly during the recession but not to a level that meant creditors lost capital.
“That is quite phenomenal if you compare it with other assets like equities and bonds which were in freefall,” he stated.
Niblock said another downturn would “definitely” result in defaults rising, but investors would still generate returns because P2P lending is not correlated to the stock market. P2P consumer lender Zopa, for example, delivered investors a four per cent annual return in 2008.
Last year, Zopa’s debut securitisation received the highest rating of any P2P lending transaction in the world by Fitch Ratings, despite forecasts of rising default rates.
Fitch gave the loans a rating of AA- which it said factored in Zopa’s increased appetite for risk and lower-quality loans.
A spokesman for Proplend said a downturn would create tougher conditions for the P2P market because investors would tighten their belts, making loans harder to fill.
“With more loan arrears and defaults also expected in these circumstances, we’re likely to see more investor losses across the market but clearly some platforms and asset classes are better placed to minimise risk. Unsecured loan investments are most susceptible,” he added.
But Paul Riddell, head of marketing and communications at P2P property platform Lendy, pointed out that although the P2P market has yet to go through a financial downturn, there are robust processes in place to protect investors.
For example, no loans exceed 70 per cent of the open market value, which means the market would need to drop by 30 per cent before Lendy would be unable to recoup all funds from the sale of the property.
Meanwhile, P2P buy-to-let specialist Landbay had an independent “stress test” carried out on its business in 2015, which calculated that in a “bad weather scenario” – where GDP drops 3.5 per cent, unemployment rises to nine per cent and house prices fall 20 per cent – the average expected loss rate would be 0.48 per cent.
Landbay’s reserve fund is maintained at 0.6 per cent of its loan book, which means it would absorb these losses.
Stuart Law, chief executive of Assetz Capital, believes P2P lending is a “Brexit-proof” option for investors and borrowers.
He said its own stress-testing showed the lender could weather the worst-case Bank of England recession forecasts, while at the same time avoiding the drastic lowering of investor interest rates that have already hit bank savers.
“This will be very comforting to lenders and the comparatively low overhead model of P2P lending is the key factor here,” he said.
Law added that borrowers can take comfort in the fact that just as banks may be hit by worsening losses in any negative Brexit scenario and need to close to new lending, P2P should remain open provided the borrowers are happy to pay higher rates.
“This is because these higher rates may be very attractive, net of any losses, to investors who may be hit by further bank savings rate cuts in such a scenario,” he said. “We believe P2P offers counter-cyclical protection characteristics to the economy on both the lender and borrower sides.”
Read more: FCA chief outlines consumer credit concerns