P2P business models facing first economic cycle test from coronavirus
The coronavirus outbreak will pose the first economic test for most peer-to-peer lenders, an analyst claims.
Research by Moody’s has assessed how coronavirus-induced job losses and reduced household incomes will negatively affect P2P lenders as well as securitisations involving some of these platforms.
Most P2P lenders were launched after the previous financial crisis. Only Zopa has gone through a full economic cycle, although commentators note that its loanbook was comparatively small at the time of the Great Recession.
Moody’s highlights that there is less wholesale funding available for all types of non-bank lenders, especially if they relied on the capital markets for financing, but warned P2P lenders in particular are facing a big test as the prospect of a recession looms and it will be harder to fund loans.
“A whole economic cycle has not yet tested their performance, since it only reflects a post-financial crisis period,” Rodrigo Conde, an analyst for Moody’s said.
“Their origination criteria have also evolved over time, incorporating the most recent portfolio behaviour during a relatively benign economic environment, which may not be an adequate predictor of defaults in an economic downturn.”
He has warned that platforms could be facing a big threat to their profits from a lack of lending.
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“The current crisis will place a strain on these platforms’ finances because most of their profit comes from origination fees,” he added.
“Origination volumes will decline substantially amid lower availability of funding from retail and institutional investors.
“Marketplace lenders’ incentive to maintain volumes in a period of heightened credit risk will test their ability to manage the trade-off between maintaining loan volumes and credit quality.”
The research also warns the pandemic will have an impact on the performance of European consumer securitisations, a route used by platforms such as Zopa.
It warned that consumer asset-backed securities (ABS) will be the first to experience performance deterioration.
“Credit card receivables and unsecured consumer loans will be among the most affected,” Conde said.
“Coronavirus disruptions will also adversely affect auto manufacturers and are credit negative for auto ABS.”
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