In August 2017, we gave you our take on credit conditions at the time. In short, we talked about how we were expecting loss rates across the UK consumer credit market to start to increase, back towards more normal historical levels, after a prolonged period of lower than average losses. We also talked about how we had been taking a stricter approach to who we approve for loans since early 2016, and explained how we price loans to mitigate any impact that rising loss rates could have on your investment.
With over a year more of data we’ve re-calculated our expectations for loan loss rates and returns and overall, we are pleased that the actions we have taken so far have kept risk performance in line, as per our last expectations.
In this post, I’ll go over our updated view of the UK consumer credit landscape and what that means for Zopa loans and investments.
How are Zopa’s loans performing?
We have used the longer timeseries of data available to recalculate expected loss rates across all loans on our platform. It is good to see that based on this data, we don’t see any significant difference in loan performance compared to our revised expectations last year.
Overall, our loan performance has been broadly the same. Of course, there are some combinations of cohorts (loans that started around the same time), risk markets, and terms that have slightly higher loss expectations than we previously thought. But, equally, there are mixes where they are lower.
So, whilst our pro-active tightening of our credit policy since early 2016 has meant that we’ve grown loan volumes slower than we would otherwise have done, this has proven to be the right decision so far.
If, like us, you’re into numbers, we have recently updated our website with new figures around performance. Have a look but remember these reflect Zopa’s entire retail loan book, and your individual portfolio will have its own performance metrics and a different spread of risk.
What’s changed outside of Zopa?
Out in the wider world, there have been a couple of developments which have altered the shape of the UK’s consumer credit landscape. We have continued to see the return of overall loss rates in the market to historic norms. We have also had two base rate increases from the Bank of England (BoE) to control inflation, which, as we wrote recently, makes borrowing more expensive (i.e. less attractive) and saving more rewarding (i.e. more attractive).
These trends have influenced the amount of credit in the market and in the BoE’s latest Credit Conditions Survey, other lenders state that they are continuing to tighten their credit policies. This reaffirms our decision to be proactive with our own tightening since 2016.
We always keep a close eye on market conditions and given the continuing uncertainty from Brexit, we remain cautious in our approach.
So, what does this mean for investors?
Our risk appetite remains the same as before: we’re still only looking for low-risk U.K. borrowers. For Plus investors, we’ll stick to a similar proportion of D&E market loans allocated to the product, which is 10-20%. If that changes, we’ll let you know (as well as update target returns). But remember your portfolio is unique, and you may see a slightly different mix in your Plus loans.
Andrew Lawson is Chief Product Officer at Zopa