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Peer to Peer Lending” Google Trend “Lending Club” Google Trend “Prosper Loans” Google Trend P2P Lending: Opportunity & how to invest 11 March 2014 Cormac Leech Research +44 (0) 20 3100 2264 [email protected] Karen Lucey Research +44 (0) 20 3100 2183 [email protected] Minh Tran Research +44 (0) 20 3100 2184 [email protected] Ropemaker Place, 25 Ropemaker Street, London EC2Y 9LY / T: +44 (0)20 3100 2000 www.liberum.com Liberum Capital Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 5912554 P2P Lending: Opportunity & how to invest Reaching critical mass Structural advantage / sustainable model Endgame Investment opportunities Conclusions Appendix 2 P2P Lending: Opportunity & how to invest £5bn of volume on top 5 platforms in 2014; P2P volumes have grown at 136% CAGR since 2009 • 2005: Zopa launched in the UK; P2P Gross Annual Volume £bn 6.0 • Lending Club - originated £1.3bn+ CAGR: in 2013 136% 5.0 • Strong UK govt backing for P2P: committed to lend £75m via P2P 4.0 3.0 UK Govt lending via P2P £m 70 2.0 60 50 40 1.0 30 20 10 0.0 0 2009 2010 2011 2012 2013 2014e MarketInvoice Zopa Funding Cirlce Prosper Lending Club Funding Circle Ratesetter Zopa Source: Lending Club, Prosper, Funding Circle, Zopa, RateSetter, Liberum Source: Lending Club, Prosper, Funding Circle, Zopa, RateSetter, Liberum 3 P2P Lending: Opportunity & how to invest P2P lending is a global phenomenon: largest markets US, China and UK $ = 2013 annual gross volume $1.4bn $2.4bn $1.9bn* * Estimate based on historic and Celent forecast 4 P2P Lending: Opportunity & how to invest P2P awareness rising everywhere; up by 70% since start of 2012 “Peer to Peer Lending” Google Trend “Lending Club” Google Trend “Prosper Loans” Google Trend 100 100 100 0 0 0 2012 2013 2014 2012 2013 2014 2012 2013 2014 Source: Google Trends Source: Google Trends Source: Google Trends “Zopa” Google Trends “RateSetter” Google Trends “FundingCircle ” Google Trends 100 100 100 0 0 0 2012 2013 2014 2012 2013 2014 Jan-12 Jan-13 Jan-14 Source: Google Trends Source: Google Trends Source: Google Trends 5 P2P Lending: Opportunity & how to invest Reaching critical mass Structural advantage / sustainable model Endgame Investment opportunities Conclusions Appendix 6 P2P Lending: Opportunity & how to invest No efficiency gains in banking since 1900 Net US revenues of financial intermediaries as % intermediated assets (i.e. unit cost of intermediation) • Unit cost of financial intermediation relatively constant for the last 30 years at just under 2% • No economies of scale suggests an oligopoly Source: Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation; Philippon Thomas, http://bit.ly/1gRuAEB Net US revenues of financial intermediaries as % US GDP • Finance share of GDP is at a historical – high- surprising vs. similar intermediation sectors Source: Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation; Philippon Thomas, http://bit.ly/1gRuAEB 7 P2P Lending: Opportunity & how to invest Productivity gains in Wholesale & Retail trade but not Finance; inefficient banks cost UK est. £30bn annually • Wholesale and Retail trade have become much more efficient due to IT investment. Opposite is true for the finance industry • Internet enabled supply chain innovation has revolutionised retail and wholesale trade but not finance – so far… • Financial sector currently at 9% of GDP, about 2% higher than it ‘should’ be (vs. other sectors and IT investment) =>lost annual income of $325bn in the US (UK £32bn)- £10 per person / week US Wholesale Trade as % of GDP US Retail Trade as % of GDP US Financial Intermediation as % GDP Source: Finance vs. Wal-mart: Why are Financial Services so expensive, Thomas Source: Finance vs. Wal-mart: Why are Financial Services so expensive, Thomas Source: Finance vs. Wal-mart: Why are Financial Services so expensive, Thomas Philippon, 2012 Philippon, 2012 Philippon, 2012 8 P2P Lending: Opportunity & how to invest P2P is the ‘Walmart’ / ‘Ryanair’ of financial intermediation; with costs 60% lower than banks. • Lending Club expects to be 60% Cost base comparison 2015e: Banks vs. Lending Club (costs as % loans outstanding) more efficient than the equivalent 700 Banks 700 Peer 2 Peer Cost inefficiencies 100 Government endorsed banking business, on costs as % 600 High margins 35 600 30 Attractive Rates Restrictive lending 30 of loan balances, by 2015e 500 500 Convenient & flexible 100 425bps Lower 400 400 Operating Expenses 695 170 300 300 • P2P has no expensive branches/ 10 legacy systems/ expensive 200 200 135 220 29 270 regulatory capital to service 100 100 28 19 20 0 0 39 IT IT G&A FDIC G&A Other FDIC OPEX (bps) Balance Outstanding OPEX Total / Other OPEX (bps) Outstanding OPEX / Balance Total Branch Branch Marketing Marketing Origination Origination Total OPEX Total Total OPEX Total CS/Collection… Billing/Fraud CS/Collection Source: McKinsey / Lending Club 2013e costs as bps of outstanding loans for P2P platforms and credit card providers* • In 2013e, P2P platform costs were 420bps of loan balances vs. 695bps 800 for comparable banking business; 700 40% more efficient 600 • Over time, economies of scale will 500 further increase P2P’s relative 400 efficiency 300 200 100 0 Bank avg P2P ex prosper *P2P Platforms: Lending Club, Zopa, RateSetter, Funding Circle Source: Liberum 9 P2P Lending: Opportunity & how to invest Basic recap: revenue fee structure for P2P Platforms • Platform revenue from borrower: At Start of Loan Upfront 2-5% of principal. Lender Borrower Principal Principal Platforms Upfront fee 2-5% During the Loan • Platform revenue from lenders: Annual fee of typically 1% of loan Lender Borrower balances (details vary slightly by Principal Principal platform) + + Interest Interest Annual Platforms Fee of 1% 10 P2P Lending: Opportunity & how to invest P2P just as competitive in high or low interest rate environment ; 50%+ lower fee structure remains BASE RATE= 0.5%: P2P rates vs. bank rates BASE RATE= 4.0%: P2P rates vs. bank rates 12% 12% 10% P2P benefit to 10% borrowers 8% 8% P2P benefit to P2P benefit to 6% 6% borrowers lenders 4% 4% P2P benefit to 2% lenders 2% 0% 0% Banks P2P Platfoms Banks P2P Platfoms Total Cust. Cost Central Bank Rate Term Deposit Rate Borrowers Rate Total Cust. Cost Central Bank Rate Term Deposit Rate Borrowers Rate Source: Liberum Source: Liberum • Current low interest rate environment viewed by • With higher rates P2P price advantage remains some as temporarily enabling P2P to thrive. However… • When BoE rates normalise to 4.0% banks: • Charge borrowers 10.5% • With BoE base rates at 0.5% banks : • Pay term depositors 6.3% • Charge borrowers 7.0% • Banks earn rate gap of 4.2% • Pay term depositors 2.8% • Banks earn rate gap of 4.2% • P2P platform fees: only 2.0% • P2P platform fees: only 2.0% P2P price advantage is independent of BoE rates 11 P2P Lending: Opportunity & how to invest Current P2P rates are meaningfully better for savers & borrowers • For US savers: Prosper and Lending US: Bank deposit rates vs. P2P net yields UK: Deposit rates vs. P2P net yields Club offer savers a c. 6-9% yield 12.0% 6.0% pickup compared to US deposit 10.0% 5.0% accounts. 8.0% 4.0% • For UK savers: UK P2P platforms 6.0% 3.0% offer savers a 3% pick up vs. cash 4.0% 2.0% ISA rates. 2.0% 1.0% 0.0% 0.0% 2 year CD 5 year CD S&P Prosper Lending Corporate Club Bond BBB 5 yr Note: 3y expected net yields. Source: Prosper, Lending Club, Liberum Note: 3y expected net yields. Source: Zopa, Funding Circle, RateSetter • For US Consumer Finance US: Bank loan rates vs. P2P loan rates UK: Bank loan rates vs. P2P loan rates borrowers: P2P offers rates 1-25% 40.0% lower 10.0% • Particularly for more credit worthy 30.0% 8.0% customers 6.0% 20.0% For UK borrowers: Consumer • 4.0% Finance borrowers, P2P platforms 10.0% offer loan rates 1.1% lower than 2.0% typical bank rates. 0.0% 0.0% Prosper Lending Peoples National BM Citizens Avant Club United Bank Harris Bank Credit Bank Arizona Bank Corp Note: 3y loan rates. Source: Prosper, Lending Club loan rates, bankrate.com Note 3y loan rates. Source:Zopa, & RateSetter, moneysupermarket.com, 12 P2P Lending: Opportunity & how to invest Credit risk is manageable, driving relatively stable returns despite some margin erosion Lending Club gross & net yields by cohort Prosper gross & net yields by cohort • Prosper and Lending Club provide 20.0% 25.0% the highest net yields due to their 20.0% higher risk appetite: 9.3% and 6.9% 15.0% respectively 15.0% 10.0% 10.0% 5.0% 5.0% 0.0% 0.0% 2H09 1H10 2H10 1H11 2H11 1H12 2H12 2H09 1H10 2H10 1H11 2H11 1H12 2H12 Net Yield Fee Loan Losses Net Yield Fee Loan Losses Note: Maturity weighted. Source: Liberum, Lending Club Note: Maturity weighted. Source: Liberum, Prosper RateSetter gross & net yields by cohort Trustbuddy net yields by cohort 12.0% • We expect RateSetter will gradually 25.0% increase their risk appetite somewhat 10.0% to potentially broaden available net 20.0% 8.0% yields 15.0% 6.0% 10.0% 4.0% • Since 2010 Trustbuddy has delivered 5.0% an average annualised net yield of 2.0% 13.8% 0.0% 0.0% 2H10 1H11 2H11 1H12 2H12 2010 2011 2012 2013 Net Yield Fee Loan Losses Net Yield Note: Maturity weighted. Source: Liberum, RateSetter Source: Liberum, Trustbuddy 13 P2P Lending: Opportunity & how to invest Post financial crisis credit card delinquencies declining • Post the financial crisis we see there Capital One 30 day Credit Card delinquency Federal Reserve US Delinquency Rates for All Banks has been a marked improvement
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