Alt Lending Week ended 7th August


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

  1. Banks across Europe braced for further heavy loan-loss charges

Largest UK, Swiss and eurozone lenders expected to make at least €23bn in provisions as they tackle Covid pain

Why this matters: This is of course on going news. Nat West posted large bad debt provisions at the weekend and it comes on top of gloomy headlines from the UK and Eurozone economies.  The damage being caused by the Covid19 virus is unprecedented. The question is what can we learn from what is happening and who is going to come out of this best. A SWOT analysis might be a good starting point. The large existing players have both strengths and weaknesses in that they are in control of the macro data and have a better view on what their large and diverse client bases are doing in practice. They see the cash flowing in and out and are having difficult conversations with distressed borrowers struggling to explain how they are going to keep their businesses intact. They are also well established and, in some cases, too big to fail. However they also have the problems associated with a dominant position, legacy systems, largely redundant infrastructure etc. The newcomers have better technology, leaner and fitter, processes and are in a good position to pick up new business. They are also in a much better position to be able to pick who they would like to do business with and decide who is going to benefit or not in the post COVID environment. So far the signs are ambivalent. While there appears to be a good appetite for equity capital in the start up world others are not doing so well. It is difficult to judge how this will all pan out while some players can seemingly raise money on good valuation others who have taken a more risky approach are really struggling. In formulating strategy it is perhaps worth remembering 2008. As we all know the crash was largely caused by a systemic collapse in the US real estate market. In this case it is a pandemic but there are similarities. One thing seems certain: we are in very risky times and prudence should be a watchword.


2. Loans At Home owner pauses cash call after questions from watchdog

The Financial Conduct Authority raised a ‘number of concerns’ over Non-Standard Finance’s guarantor loans division.

Why this matters: From the Macro situation discussed above to the struggles at the low levels of credit services. The virus has hit everybody but surely the worse affected sector is the one in which poor credit borrowers have to find suitable guarantors to support the risk. A couple of weeks ago I reported on the problems facing Amigo loans the largest such lender in the UK. Now it appears that its smaller competitor NSF is also in trouble. Once again the FCA appears to have a hand in things. Now this sector is not something to be discussed in polite company. The borrowers are struggling to make ends meet anyway virus or no virus, the interest rates are huge and it is very difficult to effectively police so many distressed clients at the same time. Nevertheless this is a sector that needs to exist because there is a demand for it and the alternatives are not particularly appealing. I bring it up because this is the type of alt lending that technology cannot do much for and it is where KYC is probably the most important in terms of getting your money back. Nevertheless it is probably better to have a regulated sector than descending into loan sharking.

3. Metro Bank snaps up Ratesetter for £ 2.5 million

Metro Bank will acquire UK lending firm RateSetter for an initial consideration of £2.5 million to boost its unsecured lending ambitions.

Why this matters: The past year has not been great for Metrobank the newcomer bank founded in 2010 and which has tried to pitch itself as a “community bank” .  Metro’s fortunes were adversely affected last year when they suffered significant losses from rather risky property loans causing their share price to dip by over 90%. Yesterday following the announcement of their acquisition of Ratesetter their shares rose to  110p although they were trading at over 200p before the crisis hit in February. Ratesetter is a peer to peer lender which was also set up in 2010 and was valued by tarnished finance chief Neil Woodford in a 2018 at £ 200 million. Its principal competitor is  Funding Circle whose share price has also dropped by nearly 80% since it also floated in 2018. This demonstrates the volatility in technology start ups such as these two companies and displays the susceptibility of untested business models to systemic situations. The vulnerability is not limited to peer to peer lenders although this area might be thought more risky than most. Certainly it does demonstrate that underwriting and credit risk analysis in some companies is less than impressive and could do with improvement. In fact what lead people to invest in this type of risk in the first place is difficult to understand but the flight towards improved yield might be one of the key factors. In any case the whole sector is ripe for consolidation with the inevitable winners and losers being judged on vulnerability or the lack of it rather any potential benefits to consumers.

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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