Lending Works has lowered its expected annual returns and increased its predicted annual loss rates, as it warns that the full impact of Covid-19 on its portfolio is still unknown.
The peer-to-peer consumer lender, which recently announced that it had been acquired by investment manager Intriva Capital, published its second-quarter update that revealed “portfolio performance has continued to deteriorate in line with macroeconomic conditions”.
Average annual returns on past cohorts (2014-2019) have reduced from 4.9 per cent to 4.6 per cent for Lending Works’ Growth account and from four per cent to 3.8 per cent for its Flexible product.
Average returns on the 2020 cohort of loans have decreased from 4.8 per cent to 4.2 per cent per year for Growth and from 3.4 per cent to three per cent for Flexible.
The platform said that this was driven by the diversion of all interest payments on the portfolio to the Lending Works Shield – its provision fund – for 2014-2019 cohorts for the foreseeable future, combined with higher expected annual loss rates.
Meanwhile, overall expected annual losses on the active portfolio have been increased to 3.8 per cent, up from 3.5 per cent in the first quarter of the year.
Lending Works said it expects a further increase in loss rates in the short to medium term, as the full impact of Covid-19 is realised during the second half of 2020.
The Financial Conduct Authority introduced additional measures to protect struggling consumers on 1 July, mandating lenders to provide payment deferrals to customers until 31 October. As such, Lending Works said that it will not have a full view of its bad debts until the fourth quarter of 2020.
It said that it has provided 1,500 payment deferrals to date, of which 1,000 were still active at the end of June 2020 – accounting for around six per cent of its loanbook.
“We acknowledged that we see an economic disruption which will result in higher credit risk losses than in recent years,” Lending Works said in a blog post on its website.
“However, the full impact of Covid-19 on our portfolio is still unknown as loan customers are using payment deferrals to manage their financial circumstances, therefore it will not be until later in 2020 that we will have a more complete view of the quantum of the impact.
“We plan that our third-quarter 2020 portfolio performance update, which will be published in October 2020, will account for the full potential impacts from the Covid-19 outbreak in our active portfolio.”
Lending Works paused new lending at the end of March. It said that it will resume new lending when it is appropriate, but with tightened creditworthiness and affordability criteria.
“We we will also ensure that the contributions from new loans into the Lending Works Shield are appropriate for the current economic environment,” the firm added.
The update also revealed that the Shield future income, which is required to cover expected losses, increased to £8m, compared to £7.2m in the first quarter.
The Shield cash balance fell to £520,000 in the second quarter from £920,000 in the first quarter. Lending Works attributed this to the lack of upfront fees since new lending was paused and high use of the Shield for 2014-2019 loan cohorts.