Lending Works, the peer-to-peer consumer lending platform, expects to see an increase in loss rates over the short to medium-term.
The platform anticipates that existing loan customers could fall into financial distress when their payment deferral period finishes and government-backed schemes come to an end.
As part of a quarterly update on its loanbook, Lending Works said expected annual losses on its active portfolio had improved slightly, at 4.3 per cent during the second quarter of 2021, up from 4.5 per cent in the first quarter. This reflects the most recent portfolio performance and the results of stress testing.
Average annual returns on past cohorts of loans (2014 to 2019) were 4.3 per cent per annum for growth investments and 3.7 per cent per annum for flexible. The 2020 cohort’s average returns stood at 2.8 per annum for growth and two per cent for flexible, while the 2021 cohort’s returns were 4.5 per cent for growth and 4 per cent for flexible.
Due to the current economic environment, Lending Works said negative interest rates are still required for two annual cohorts, 2017 and 2018. While this rate remains the same at minus seven per cent for the 2017 cohort, it has fallen from three per cent to one per cent for the 2018 cohort.
Commenting on the Lending Works Shield, a contingency fund which makes payments to lenders if borrowers are unable to meet their obligations, the platform said future income required to cover expected losses had fallen to £3.6m from £5m in the first quarter. During the three month period, the Shield cash balance fell from £0.98m to £0.74m. Lending works said utilisation of its contingency fund had been high during the second quarter due to loans defaulting.
“However, the 2020 cohort accounts for approximately £0.43m of £0.74m, has not been utilised yet,” the platform noted.
At the end of the first quarter, Lending Works’ had lent £222.8m across 35,662 loans. Its expected annual loss rate for 2021 stood at 1.8-2.8 per cent, which compares with 3.2-3.8 per cent in 2020.