Alt Lending: Interest Rate, High Risk Lenders and Banking Parables

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Here is our pick of the 3 most important Alt Lending news stories during the week:

1. Interest Rates to Pinch Alt Lenders and Digital Banks 

Welcome to the unchartered territory for the lending landscape – at least for those who were born and came of age in the new Millennium, in the digital age…

…and post the Great Recession.

They say history doesn’t repeat itself, but it does indeed rhyme. For the neobanks that are now encountering precipitously falling interest rates, the question becomes: How do you keep the customers coming in the (virtual) door?

Why it matters: This piece is an attempt to point out to Millennium and post Great Recession folk the realities of our Hall of Mirrors interest rate world and the impact it is having on both mainstream lenders and Alt Finance and Digital Banks. Certainly there are problems in the sector particularly in the personal sector as the myriad of Governmental backed Covid relief schemes compete with commercial lenders for market share. The world of banking was however changing before 2008 and not necessarily for the better. The business of banking is in reality quite a simple one. A bank collects deposits and either pays a rate of interest on it or alternatively provides services for the money deposited. It then lends it out at a profit. In this the Alt Finance sector is not too dissimilar to banks. Its USP is efficiency its downside is that it is a one trick pony. Digital banks are the same but have add ons. The trouble is that none of it is very profitable in a limited leverage world and regulators that don’t seem to have a clue. We now have a situation where people are lending money to bankrupt governments at sub zero interest rates because they fear they might lose even more than seeking a risk weighted return. This is all madness and one day, perhaps quite soon we will reap the bitter harvest. Enhancing technology is undoubtedly a step forward but money is money and it changes its characteristics when interest rates go negative. The business models are currently disrupted not by innovation but by government meddling.

2. Amigo Loans sinks to £ 38million loss after flood of complaints

Shares in troubled Amigo Holdings have plunged to a record low as customer complaints flood in.

The controversial lender, dubbed a ‘legal loan shark’ by MPs, said it was back in talks with the City watchdog over how it would clear the enormous backlog of grievances.

Just last month, Amigo said it had agreed with the Financial Conduct Authority (FCA) to enter into a so-called voluntary requirement, to make a speedy decision on around 9,000 complaints which had piled up.

Why it matters: It seems a week doesn’t go by without some Alt lender or other showing signs of stress. This time it is Amigo loans a high risk lender that will make loans of up to £ 10k  to those with poor credit history so long as they can find a suitable guarantor. At its float only two years ago it had a market capitalisation of £ 1.3 billion. That has now shrunk to £ 33million. Given that it charges up to 50% interest on its loans the COVID problem has caused a huge collapse in demand. Not necessarily from the primary borrowers but more likely from the sudden absence of available guarantors who can easily see the enhanced risk. On top of this the company has had to provide £ 127 million for the costs of dealing with complaints from customers and unpredictable penalties from the FCA who, not surprisingly, are looking closely at the companies lending practices. As any old fashioned banker will tell you Guarantees are not the same as security and are quite frequently a major cause of conflict.  The FCA will have to answer some uncomfortable questions about why it approved the company’s business model in the first place.

3. BNP  Paribas (BNPP) plays long-game to be Europe’s banking winner from COVID crisis.

PARIS (Reuters) – When the COVID-19 crisis struck Europe, companies turned to one bank more than any other to arrange emergency loans: BNP Paribas (BNPP.PA).

The French lender took advantage of internal restructurings at European rivals, at a time when U.S. banks were preoccupied with rescues at home. It expanded its balance sheet by 23% to 2.7 trillion euros in the first quarter, extending multi-billion sums to the likes of energy giant BP and automaker Daimler.

Why it matters: Interesting piece from Reuters on France’s largest bank and how its ambitions have grown during the COVID pandemic. I have previously commented that at a time when almost everyone is short of money is not necessarily a panacea for growth. However BNPP has seen the crisis as a way of taking over the leadership of the European investment banking. In this I suppose it is trying to take over the role only recently vacated by Deutsche which like its fellow German behemoth Commerzbank is hampered by poor credit quality in its asset portfolio. BNPP has in fact grown its balance sheet during the crisis by an astonishing 23% to Euro 2.7 trillion. By comparison competitors such as Santander, Credit Suisse and Deutsche itself have limited their ambitions to around 5% despite increased demand at the quality end of the market. BNPP has provided billion dollar facilities to clients like BP, Daimler and Air France. However one must ask the question as to whether our old friend prudence might have been forgotten in the race to gain client acquisition? Although the names mentioned are high quality names only a handful of borrowers are coming out of COVID in better shape than when COVD started and that includes all the names above. Energy, Car Manufacturing and Airlines are all in the throw of seismic change as is the rest of the economy. BNPP risk weighted assets grew by 5.5% in the four years to 2019 but return on equity remained flat at approximately 10%.   Alt lenders please take note size isn’t everything and hubristic tendencies lurk everywhere.

Howard Tolman is a well-known banker, technologist and entrepreneur in London,

We have a self imposed constraint of 3 news stories per week because we serve busy senior Fintech leaders who just want succinct and important information.

For context on Alt Lending please read the Interview with Howard Tolman about the future of Alt Lending and read articles tagged Alt Lending in our archives. 

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