Lending Works’ expected annual loss rates rose in the first quarter, while expected annual returns reduced.
The peer-to-peer consumer lender, which paused all new lending for 90 days earlier this month, said that expected annual losses on the active portfolio have increased from 3.2 per cent in the fourth quarter 2019 to 3.5 per cent in the first quarter of 2020.
Lending Works said in a blog post on its website that it expects that the Covid-19 outbreak could lead to a further increase in loss rates in the short to medium term.
Meanwhile, expected annual results have fallen due to the higher anticipated losses, combined with the diversion of all interest repayments to Lending Works’ provision fund.
Average annual returns on past cohorts (2014-2019) have reduced from 5.2 per cent to 4.9 per cent on its Growth product and from 4.2 per cent to four per cent for Flexible, Lending Works said.
Returns on the 2020 cohort have decreased from a target rate of 5.4 per cent to 4.8 per cent for Growth and from a target rate of four per cent to 3.4 per cent for Flexible.
In November 2019, Lending Works announced changes to the way its provision fund works – called the Lending Works Shield – to allow it to alter interest rates if the loans aren’t performing as expected.
“Given the current Covid-19 uncertainty, it is very difficult for us to assess the impact this crisis will have on Lending Works borrowers’ ability to repay their loans over the coming months,” the firm said. “Therefore, on 6 April, we started to divert all interest payments to the Lending Works Shield for all active cohorts.”
Lending Works said this was a temporary measure and if it is found to be overly prudent, it will increase the expected annual returns received by investors over the lifetime of the loans in their portfolio.
The Lending Works Shield future income, which is required to cover expected losses, has increased from £5.4m in the fourth quarter of 2019 to £7.2m.
The Shield’s cash balance increased to £920,000 in the first quarter, partly due to the proceeds of a £390,000 sale of bad debt that was added to the provision fund.
“The full impacts of Covid-19 on the economy and credit markets are still relatively unknown,” Lending Works said.
“It is therefore also complicated to predict the effect it will have on our loan portfolio at this stage.
“However, we are continually monitoring portfolio performance, and we are taking all the measures we feel are appropriate to support our loan customers while also protecting the interests of our investors.”
Lending Works also revealed that it has now processed around 600 payment deferrals for its borrowers, which equates to around three per cent of the active loanbook.
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