ashtondav
Member of DD Central
Posts: 1,805
Likes: 1,087
|
Post by ashtondav on Aug 25, 2018 8:39:14 GMT
Nothing! The business model should be designed such that if (for example) 5 year rates are at either 4% (as they have been), or 6%(as they are now) the provision fund should provide, er, provision.
Thats what a PF is!
|
|
|
Post by nutfield on Aug 26, 2018 15:56:01 GMT
Nothing! The business model should be designed such that if (for example) 5 year rates are at either 4% (as they have been), or 6%(as they are now) the provision fund should provide, er, provision. Thats what a PF is! Yes, but I think the point is: do we want a Rolls Royce PF or a Dell-Boy Reliant Robin PF?
|
|
johni
Member of DD Central
Posts: 365
Likes: 327
|
Post by johni on Aug 27, 2018 8:12:48 GMT
Nothing! The business model should be designed such that if (for example) 5 year rates are at either 4% (as they have been), or 6%(as they are now) the provision fund should provide, er, provision. Thats what a PF is! Yes, but I think the point is: do we want a Rolls Royce PF or a Dell-Boy Reliant Robin PF? Unfortunately you are stuck with the Dell-Boy Reliant Robin which is going in reverse at great speed. It appears the have taken their eye off the ball and been lending to anyone regardless of ability to repay.
|
|
agent69
Member of DD Central
Posts: 5,587
Likes: 4,182
|
Post by agent69 on Aug 27, 2018 8:33:20 GMT
Nothing! The business model should be designed such that if (for example) 5 year rates are at either 4% (as they have been), or 6%(as they are now) the provision fund should provide, er, provision. Thats what a PF is! Yes, but I think the point is: do we want a Rolls Royce PF or a Dell-Boy Reliant Robin PF? I suspect that most people don't mind what sort of PF they have, provided it is clearly labelled and the interest rates reflect the quality of the fund.
|
|
|
Post by nutfield on Aug 27, 2018 10:42:14 GMT
The mere presence of a Provision Fund is not only reassurance that there is at least a first line of financial backup, but it also means that RS have some "skin in the game" and if they lend carelessly they bear some of the pain. My impression is that the returns from Zopa have taken a dive since they moved away from a PF system. My returns from Zopa have been so erratic and poor that I have been running my account down because of it.
|
|
ashtondav
Member of DD Central
Posts: 1,805
Likes: 1,087
|
Post by ashtondav on Aug 27, 2018 10:56:39 GMT
Still don’t understand the model that enables RS to deliver 6% on 5 year with a PF and Zopa to deliver under 5% with no PF. Surely it should be vice versa.
Different quality of borrower?
|
|
Stonk
Stonking
Posts: 735
Likes: 658
|
Post by Stonk on Aug 27, 2018 17:47:02 GMT
Still don’t understand the model that enables RS to deliver 6% on 5 year with a PF and Zopa to deliver under 5% with no PF. Surely it should be vice versa. Different quality of borrower? All other things being equal, the rates delivered should be the same. A neutral Provision Fund just smooths out the variations, both from month to month and from user to user.
I feel that Zopa may be cautious in their prediction of returns (underpromise, ovredeliver). Of course, there are plenty of vocal folk who will tell you otherwise! Personally, I have achieved approximately 5.4% annualised from Zopa Plus over the last 18 months.
|
|
josephg
New Member
Posts: 5
Likes: 3
|
Post by josephg on Sept 21, 2018 12:45:01 GMT
Still don’t understand the model that enables RS to deliver 6% on 5 year with a PF and Zopa to deliver under 5% with no PF. Surely it should be vice versa. Different quality of borrower? Different business model! Zopa take 1% of your amount invested, whereas RS take 10% of your interest received. Overall, RS business model fills me with more confidence, as they are tied to what their lenders make. Zopa don't care what their lenders make. PS: This was how it was, when I started lending. I haven't looked at any recent changes in the past few years.
|
|
Greenwood2
Member of DD Central
Posts: 4,241
Likes: 2,686
|
Post by Greenwood2 on Sept 21, 2018 13:39:48 GMT
Still don’t understand the model that enables RS to deliver 6% on 5 year with a PF and Zopa to deliver under 5% with no PF. Surely it should be vice versa. Different quality of borrower? Different business model! Zopa take 1% of your amount invested, whereas RS take 10% of your interest received. Overall, RS business model fills me with more confidence, as they are tied to what their lenders make. Zopa don't care what their lenders make. PS: This was how it was, when I started lending. I haven't looked at any recent changes in the past few years. Neither RS or Zopa charge a lender fee as such anymore. It's all tied up in the variable borrower fees.
|
|
wapping35
Member of DD Central
Posts: 385
Likes: 210
|
Post by wapping35 on Nov 16, 2018 8:12:01 GMT
|
|
|
Post by RateSetter on Nov 16, 2018 9:49:01 GMT
Thank you wapping35 . The full RateSetter Notice is below. Q3 2018 Coverage Ratio updateThe Coverage Ratios - our headline measures of the risk of investing with RateSetter - have been updated following our quarterly review of the RateSetter loan portfolio. We’ve added some commentary this quarter to help provide context around what these Ratios mean for investors and what the key drivers are. We hope that you find this information useful. Key points to note this quarter:
Coverage ratio movements
The coverage ratios measure how much worse losses would need to get before investors’ returns are reduced or any capital is lost. | * The Interest Coverage Ratio has reduced from 128% to 126%. It remains within our target range of 125%-150%. This means credit losses would need to be 1.26x worse than expected over the full lifetime of the loans before investor returns would be reduced.
* The movement is a result of a reduction in expected future Provision Fund inflows (in other words, there have been more early repayments from borrowers than previously estimated. This reduces future Provision Fund fees, causing a 6% reduction in the Interest Coverage Ratio). This is offset by an improvement in the Interest Coverage Ratio due to better than expected future losses (mainly driven by better performance on 2014-17 loans, causing a 4.2% improvement in the Interest Coverage Ratio). The increase in early repayments is a positive sign for credit risk, but it also reduces future fees destined for the Provision Fund.
* The Capital Coverage Ratio has reduced from 245% to 237% as a result of a 15% reduction in expected future Provision Fund inflows and expected future interest (higher early repayments) offset by a 7% improvement on expected losses. This means credit losses would need to be 2.37x worse than expected over the next five years before any capital is lost. For reference, losses on consumer loans (which are 90% of RateSetter’s expected credit losses) increased by 2x in the 2009 recession over a six month period before then stabilising.
| Expected future losses
Expected future losses on active loans covered by the Provision Fund. | * Expected future losses have improved from £30.9m to £29.9m following this quarter’s update. There has been an improvement in performance on older 2014-17 loans as the portfolio matures and our collections activity progresses, although this is partially offset by higher expected future losses on 2018 loans, which now stand at 4.8% compared to a 2014-17 average of 3.3%, as a result of a controlled change in portfolio mix.
* As such, we have increased APRs and Provision Fund contributions accordingly in 2018, ensuring that the loans are priced appropriately according to risk and that the Provision Fund is adequately covered.
| Capital buffer
The Provision Fund buffer, plus expected future investor interest. This provides an estimate of the buffer that protects investors’ capital against expected future losses. | * The capital buffer now stands at £71.0m, which comprises Provision Fund cash and low-risk investments, expected future Provision Fund inflows and expected future investor interest. This is how much is available as a buffer to cover expected future losses.
* There is currently £13.1m of cash and low-risk investments available in the Provision Fund to cover borrower missed payments and bad debt. This compares to £11.7m as at 30 June 2018 at the last quarterly update.
* We estimate the value of expected future Provision Fund inflows and expected future investor interest payments over the next five years on a quarterly basis by analysing early repayment trends on the active loan portfolio, which together with expected future losses can impact the expected amount received. The result of this quarter’s update is a 7% reduction in expected future Provision Fund inflows.
|
|
|
|
Post by Ace on Nov 16, 2018 13:02:37 GMT
RateSetter the information that you give on your statistics page, and above, is incorrect and therefore misleading. Your statement on the interest coverage ratio: " This means credit losses would need to be 1.26x worse than expected over the full lifetime of the loans before investor returns would be reduced." Should be; " This means credit losses would need to be 0.26x worse than expected over the full lifetime of the loans before investor returns would be reduced." There is a similar error in the capital coverage ratio. Your misleading statements grossly overstated the true position. I reported this to yourselves via customer support on 20 Sep 2018. You said that you would investigate. I realize that I am a bit of a pedant, but it really should not take this long for a finance company to understand and correct basic mathematics!
|
|
|
Post by propman on Nov 16, 2018 13:59:02 GMT
Thanks for the update. However the commentary merely says in words what has happenned to the numbers. It would be much more informative to understand what has caused the number movements. In particular, the key judgements in these statistics are the losses on future loans. It is not clear why the 2014-7 portfolio has become less risky while the 2018 has become more so. I understood that previously the estimates were made based on the performance of the loans issued 18-30 months previously. This would appear to show that it is the loans where you have increased your exposure in the last year that has sufferred increased defaults. As 2018 now constitutes 60% of the outstanding loans with net expected losses of over 75% of the whole, with the least information, I for one would welcome a more detailed breakdown of these estimates. At the risk of sounding like a stuck record, you are now expecting that the losses up to the end of 2017 will exceed the credit fees and so the credit fees from 2018 are required to provide the full buffer and cover the expected shortfall as well as meet the bad debts from 2018. As such, the expected surplus from this year is critical.
Finally, please would you confirm that as assumed in your description of the capital buffer, but not I think explicitly confirmed, that you will not withhold any capital if shortfalls on the PF are less than the interest received? If this is not the case and you believe that you might retain capital receipts to cover short term insufficiency of interest to cover PF payout requirements above PF liquidity, then I believe you need to amend your statement that all that matters is total payouts over the term of the loans.
|
|
|
Post by RateSetter on Nov 16, 2018 17:19:06 GMT
RateSetter the information that you give on your statistics page, and above, is incorrect and therefore misleading. Your statement on the interest coverage ratio: " This means credit losses would need to be 1.26x worse than expected over the full lifetime of the loans before investor returns would be reduced." Should be; " This means credit losses would need to be 0.26x worse than expected over the full lifetime of the loans before investor returns would be reduced." There is a similar error in the capital coverage ratio. Your misleading statements grossly overstated the true position. I reported this to yourselves via customer support on 20 Sep 2018. You said that you would investigate. I realize that I am a bit of a pedant, but it really should not take this long for a finance company to understand and correct basic mathematics! Ace , thank you for your comment. We are looking at how we can make the presentation of this information as clear as possible.
|
|
|
Post by RateSetter on Nov 16, 2018 17:39:28 GMT
Thanks for the update. However the commentary merely says in words what has happenned to the numbers. It would be much more informative to understand what has caused the number movements. In particular, the key judgements in these statistics are the losses on future loans. It is not clear why the 2014-7 portfolio has become less risky while the 2018 has become more so. I understood that previously the estimates were made based on the performance of the loans issued 18-30 months previously. This would appear to show that it is the loans where you have increased your exposure in the last year that has sufferred increased defaults. As 2018 now constitutes 60% of the outstanding loans with net expected losses of over 75% of the whole, with the least information, I for one would welcome a more detailed breakdown of these estimates. At the risk of sounding like a stuck record, you are now expecting that the losses up to the end of 2017 will exceed the credit fees and so the credit fees from 2018 are required to provide the full buffer and cover the expected shortfall as well as meet the bad debts from 2018. As such, the expected surplus from this year is critical.
Finally, please would you confirm that as assumed in your description of the capital buffer, but not I think explicitly confirmed, that you will not withhold any capital if shortfalls on the PF are less than the interest received? If this is not the case and you believe that you might retain capital receipts to cover short term insufficiency of interest to cover PF payout requirements above PF liquidity, then I believe you need to amend your statement that all that matters is total payouts over the term of the loans. propman, you are correct that in the past expected loss estimates had been informed by the performance of loans issued 18-30 months previously. We revised our approach to assessing expected losses in April 2017. More information can be found in our RateSetter Notice and blog at the time here (note, the formatting of the headings in the table at the foot of the blog has gone awry; the headings relate to the second and third columns). Regarding the projected Provision Fund surplus/ deficit in each year set out on the data hub webpage, 2015 and 2016 are projected to be in deficit but 2017 and 2018 are projected to be in surplus, with the surplus for 2018 projected to be substantial. These projections evolve and become more accurate as the loans mature. Regarding your final point, our Investor Terms (para 9.5) state that a capital reduction would apply if RateSetter reasonably believes the Capital Coverage Ratio is or will imminently be below 100% (this would mean that the Capital Buffer - i.e. the Provision Fund Buffer plus Expected Future Investor Interest - would have to be deemed inadequate to cover all expected future losses). At the time of writing, the Capital Coverage Ratio is 236%.
|
|