Funding Circle loans reach record levels, though returns wane

Funding Circle's shares climbed on Thursday after it reported a record level of loans under management during the first quarter, though some analysts remain concerned about the company's business model.

The peer-to-peer lending marketplace said that its loans under management ended March at £3.4bn, an increase of 44% compared to the same quarter last year, as new business gained 23% to £644m.

Consequently, revenue increased by approximately 40% as policy changes in the US helped to drive a higher transaction yield, leaving the group trading in line for the full year.

While the update appears upbeat, analysts at Olivetree raised concerns that the company's bad debts are on the rise while investor returns are dropping, with loans originated in 2017 initially expected to return 5.5% to 6.5% but now looking at returned between 4.1% and 5.1%.

Meanwhile, while originations increased by 23% during the period to £644m the rate of increase has still slowed from 45% in the third quarter of 2018, bad news for a company for whom 80% of revenue stems from upfront fees.

"This is still a very unproven business model, which is showing signs of strain even before we hit a credit cycle…consensus doesn’t expect this company to turn a profit till 2021 and even that may be optimistic based on today’s information. We think the stock should trade down today," Olivetree said.

Even so, Funding Circle chief executive Samir Desai said the first quarter was a period where the company "reinforced its leadership position across each of its markets" to reach a record level of loans under management and continue to diversify funding sources.

This diversification saw a new commitment from the European Investment Bank to use the platform to lend €100m over the next two years to small businesses in Germany and the Netherlands, as well as launching two new institutional investor products.

Funding Circle's shares were up 3.30% at 320.75p at 0836 BST.