pip
Posts: 542
Likes: 725
|
Post by pip on Feb 8, 2015 12:08:45 GMT
Yes the level of defaults have definitely tailed off a bit in the last few weeks, which is good to see. However the coverage ratio is still falling, although slower than before to 1.46. Let's hope this starts rising and then when back above 1.5 I will invest in the 5 year again.
Trust me I as much as anybody hopes that ratesetter is safe and it is good to see things get back to a good state. However I was I think rightfully, not alarmed, but a little cautious at the rise in defaults in the months up to the end of January.
While I know ratesetter never claims to be risk free, I would very much not like to lose any money and therefore am taking a low risk approach, i.e only invest in 5 years when coverage above 1.5.
|
|
spiral
Member of DD Central
Posts: 909
Likes: 456
|
Post by spiral on Feb 8, 2015 12:46:54 GMT
While I know ratesetter never claims to be risk free, I would very much not like to lose any money and therefore am taking a low risk approach, i.e only invest in 5 years when coverage above 1.5. If you assume all funds reinvested at 6% in 5yr at RS v a 3% fully FSA covered B/S bond for 5 yrs, you can afford to write off 13.3% of your RS investment at the outset and still end up with the same amount at the end. i.e. £866 in RS v £1000 in B/S
|
|
|
Post by davee39 on Feb 8, 2015 13:04:13 GMT
Yes the level of defaults have definitely tailed off a bit in the last few weeks, which is good to see. However the coverage ratio is still falling, although slower than before to 1.46. Let's hope this starts rising and then when back above 1.5 I will invest in the 5 year again. Trust me I as much as anybody hopes that ratesetter is safe and it is good to see things get back to a good state. However I was I think rightfully, not alarmed, but a little cautious at the rise in defaults in the months up to the end of January. While I know ratesetter never claims to be risk free, I would very much not like to lose any money and therefore am taking a low risk approach, i.e only invest in 5 years when coverage above 1.5. In reality only RS can know the level of risk on their books, the highest risk is likely to reside with with the high rate short term Giffgaff loans, which is why they are high rate (to the borrower). Even if the ratio is 1.5% this month your investment would be for 5 years. Who knows where the ratio would go next? RS has a number of plus points which make me consider them to be the safest 'not protected' savings option at the moment 1) There has been rapid growth and the platform, despite the horrible design, has functioned effectively and has scaled up well with the increased demand. This is a tribute to the relative simplicity of the RS offer. 2) The transparency of published information ensures that any negative trends are quickly spotted and commented on. This keeps the risk management team on its toes. 3) Even at 1.5 the ration is conservative, based on over covering a worst possible case scenario. 4) Pension freedoms from April, and ISA's probably from April 2016 will open up large new markets for savers. RS have shown they have the capacity to innovate into new borrower markets to ensure the savings cash is absorbed, but this could move the ratio in a currently unforeseen direction. 5) For several years there has been a substantial growth trend in new money deposited. This, I think, means that the fund overall is continuing to grow strongly. There might be more concern if the volume of investments entered a declining path. 6) RS looks to be well down the road to sustained profitability with an eye to an eventual IPO. This year they might be targeting more that £500m of new loans. In conclusion, at a time when the 12% rates offered elsewhere are hugely oversubscribed by savers apparently blind to the risks, I would find it hard to define an arbitrary provision fund ration which would determine RS risk level.
|
|
|
Post by moneyball on Feb 8, 2015 18:49:43 GMT
Yes the level of defaults have definitely tailed off a bit in the last few weeks, which is good to see. However the coverage ratio is still falling, although slower than before to 1.46. Let's hope this starts rising and then when back above 1.5 I will invest in the 5 year again. Trust me I as much as anybody hopes that ratesetter is safe and it is good to see things get back to a good state. However I was I think rightfully, not alarmed, but a little cautious at the rise in defaults in the months up to the end of January. While I know ratesetter never claims to be risk free, I would very much not like to lose any money and therefore am taking a low risk approach, i.e only invest in 5 years when coverage above 1.5. In reality only RS can know the level of risk on their books, the highest risk is likely to reside with with the high rate short term Giffgaff loans, which is why they are high rate (to the borrower). Even if the ratio is 1.5% this month your investment would be for 5 years. Who knows where the ratio would go next? RS has a number of plus points which make me consider them to be the safest 'not protected' savings option at the moment 1) There has been rapid growth and the platform, despite the horrible design, has functioned effectively and has scaled up well with the increased demand. This is a tribute to the relative simplicity of the RS offer. 2) The transparency of published information ensures that any negative trends are quickly spotted and commented on. This keeps the risk management team on its toes. 3) Even at 1.5 the ration is conservative, based on over covering a worst possible case scenario. 4) Pension freedoms from April, and ISA's probably from April 2016 will open up large new markets for savers. RS have shown they have the capacity to innovate into new borrower markets to ensure the savings cash is absorbed, but this could move the ratio in a currently unforeseen direction. 5) For several years there has been a substantial growth trend in new money deposited. This, I think, means that the fund overall is continuing to grow strongly. There might be more concern if the volume of investments entered a declining path. 6) RS looks to be well down the road to sustained profitability with an eye to an eventual IPO. This year they might be targeting more that £500m of new loans. In conclusion, at a time when the 12% rates offered elsewhere are hugely oversubscribed by savers apparently blind to the risks, I would find it hard to define an arbitrary provision fund ration which would determine RS risk level. Good post Dave. I too have recently dabbled into the circa 12% opportunities out there but with a negligible amount. The apparent appetite from lenders in these non RS arenas does make me a little nervous big picture wise. The desperate chase for yield leading to a "minsky moment" etc. When I created this thread, the downward movement in the coverage ratio had yet begun. My personal comfort level with RS is unchanged but the questions and thought process I stated still remain. As with your very last sentence, I too, dont know what provision fund ratio "should" be achieved. I still cant get away from the 3.0 ratio in the long term but have very little evidence or reason to show anyone on why it should be the case. I do see two potential threats to RS (one of them being completely out of their control): 1) Massive inflation tumbling down the road in future years. 2) The very possible IPO you mention in point 6. The first is obviously a macro environment which (if true) will apply to all financial assets, not just RS. However, the IPO aspect does worry me a bit. In 2001 I started trading the betting exchange Betfair. This was a groundbreaking, new innovative product (winning multiple awards), that allowed participants to operate on "both sides", that was cutting out the middle man (or severley reducing its influence.) Taking on an "establishment" in its sector that was long in the tooth, that had taken its customers for granted for decades. The customer service was insanely brilliant, they knew they had to convince an ignorant and skeptical client base. It embraced technology, required "a new way" legislation, could operate over borders, provided a real time near perfect market and for its early adopters, not only enabled them to get ahead of the game but organically created a community of like minded individuals that amongst other things, made them feel as if they were "sticking it" to the establishment and the past. As long as the liquidity was there, the possibilities and opportunities were almost unlimited. Sound familiar? For anyone who wasnt involved in it at the time, its very difficult to convey just how much justified excitement there was. However, years later things were a little different. It would have been unfathomable back then that theyd have their own traditional sportsbook, that the exchange would be practically buried if not hidden, that the charging structure would mutate, that the aforementioned incredible customer service would nearly evaporate. These changes didnt occur when the equivalent of institutional money appeared (ie bookies using it to lay off their own liabilities) but when they had their IPO. Looking back, it really did pinpoint the change of direction. The shift to next quarters figures. The cost cutting etc. If applied to RS, the biggest fear Id have would be the pressure applied to decrease underwriting standards. Something that would greatly bring the coverage ratio into focus and attention. "The further you look into the past, the further you see into the future."
|
|
bigfoot12
Member of DD Central
Posts: 1,817
Likes: 816
|
Post by bigfoot12 on Feb 8, 2015 20:33:09 GMT
<abbr data-timestamp="1423421383000" class="time" title="Feb 8, 2015 18:49:43 GMT">Feb 8, 2015 18:49:43 GMT</abbr> moneyball said: In 2001 I started trading the betting exchange Betfair. This was a groundbreaking, new innovative product (winning multiple awards), that allowed participants to operate on "both sides", that was cutting out the middle man (or severley reducing its influence.) Taking on an "establishment" in its sector that was long in the tooth, that had taken its customers for granted for decades. The customer service was insanely brilliant, they knew they had to convince an ignorant and skeptical client base. It embraced technology, required "a new way" legislation, could operate over borders, provided a real time near perfect market and for its early adopters, not only enabled them to get ahead of the game but organically created a community of like minded individuals that amongst other things, made them feel as if they were "sticking it" to the establishment and the past. As long as the liquidity was there, the possibilities and opportunities were almost unlimited. Sound familiar? For anyone who wasnt involved in it at the time, its very difficult to convey just how much justified excitement there was. However, years later things were a little different. It would have been unfathomable back then that theyd have their own traditional sportsbook, that the exchange would be practically buried if not hidden, that the charging structure would mutate, that the aforementioned incredible customer service would nearly evaporate. These changes didnt occur when the equivalent of institutional money appeared (ie bookies using it to lay off their own liabilities) but when they had their IPO. Looking back, it really did pinpoint the change of direction. The shift to next quarters figures. The cost cutting etc. If applied to RS, the biggest fear Id have would be the pressure applied to decrease underwriting standards. Something that would greatly bring the coverage ratio into focus and attention. "The further you look into the past, the further you see into the future." I couldn't agree more. Strangely I was at the Betfair launch party. They held a mock funeral for bookmakers. Now they are a bookmaker. I can't understand it. (To be fair they have been a bookmaker on multiples for a long time.) One of their mottoes for many years was "Winners Welcome" and now they charge winners a tax (premium charge) of up to 60%. (It turns out recruiting new losers is much more expensive than recruiting winners even if the former dwarf the latter.) It is interesting looking at the number of senior staff members who quit after the IPO. I haven't asked them but I suspect some quit because they had made money in the IPO and had other ideas, but I suspect others left because after the IPO cutting costs became the dominant philosophy and the exciting innovation was less important. Reverting to coverage ratio, as the fund and loan book grow the fund needed to maintain a given risk (all other things being equal) falls as a fraction. So a coverage ration of 1.3 is about the same risk as a coverage ratio of 1.1 if the fund is ten times bigger. (Assuming independent loans - which is probably too strong an assumption to leave unchallenged.)
|
|
|
Post by moneyball on Feb 8, 2015 22:02:01 GMT
A mock funeral for the competition? Where have I seen that before?! Dont get me started on the whole "winners welcome"/premium charge debacle!!! Back to RS though, I repeat, the biggest threat I see to RS and their like is the IPO horizon. It will be the thing that will change their ethos, focus, values, culture... the whole works. I wouldnt even expect anyone at RS (or their competitors) to believe or agree with me on this. Ive seen and lived this movie before. When it finishes, Ill leave the stage. Until then, make hay while the sun shines. Regardless of the coverage ratio.
|
|
pip
Posts: 542
Likes: 725
|
Post by pip on Feb 9, 2015 14:10:24 GMT
The coverage ratio is now 1.44.
There is the lowest money I have ever seen in the queue for the 5 year?
Could we be in a situation by the end of the day where there are no funds to borrow?
|
|
c88dnf
Member of DD Central
Posts: 364
Likes: 266
|
Post by c88dnf on Feb 9, 2015 16:05:56 GMT
The coverage ratio is now 1.44. There is the lowest money I have ever seen in the queue for the 5 year? Could we be in a situation by the end of the day where there are no funds to borrow? Possible, but unlikely - there is always a lot of "invisible" money sat in people's holding accounts, plus quite a few investors waiting to pounce on peak rates by using their debit cards. By the way, the coverage ratio is irrelevant. What you need to keep an eye on is the percentage of loans outstanding covered by the protection fund. As I write that's 3.75%, up the merest smidgen (0.01%) from last week.
|
|
pip
Posts: 542
Likes: 725
|
Post by pip on Feb 9, 2015 17:31:01 GMT
The coverage ratio is now 1.44. There is the lowest money I have ever seen in the queue for the 5 year? Could we be in a situation by the end of the day where there are no funds to borrow? Possible, but unlikely - there is always a lot of "invisible" money sat in people's holding accounts, plus quite a few investors waiting to pounce on peak rates by using their debit cards. By the way, the coverage ratio is irrelevant. What you need to keep an eye on is the percentage of loans outstanding covered by the protection fund. As I write that's 3.75%, up the merest smidgen (0.01%) from last week. The coverage ratio is totally not irrelevant. Your figure shows the maximum default percentage that the provision fund can withstand. The coverage ratio should in theory (if worked out correctly) show the ratio of your number against the expected defaults. Even if your rate rises, it is only good if the expected default rate doesn't rise more quickly. One other thing, people will probably say, well look at the historic default rates they have been way below 3.75%, so there is little risk. Yes this is some comfort, but with the loan book growing, if the default rate was to rise in the future to above 3.75% then due to the much larger number of loans with the increased default rate, the previous lower default rate and provision fund balance would not go far.
|
|
|
Post by p2plender on Feb 9, 2015 17:52:34 GMT
And of course this is why it is in our interest to lend our hard earned pennies at rates that reflect there is a risk some of your money may never come back.
|
|
c88dnf
Member of DD Central
Posts: 364
Likes: 266
|
Post by c88dnf on Feb 9, 2015 17:53:06 GMT
The coverage ratio is totally not irrelevant. Your figure shows the maximum default percentage that the provision fund can withstand. The coverage ratio should in theory (if worked out correctly) show the ratio of your number against the expected defaults. Even if your rate rises, it is only good if the expected default rate doesn't rise more quickly. One other thing, people will probably say, well look at the historic default rates they have been way below 3.75%, so there is little risk. Yes this is some comfort, but with the loan book growing, if the default rate was to rise in the future to above 3.75% then due to the much larger number of loans with the increased default rate, the previous lower default rate and provision fund balance would not go far. pip - the problem with the coverage ratio is that it is mixing apples and oranges. Let me explain my thinking. Last week, Ratesetter's stated anticipated default rate for 2014 and 2015 was 2.569%. As of this morning it is 2.602%. Someone (or more likely some computer program) has changed things, presumably based on an algorithm that is commercially confidential (and whose precision makes me smile...). In a blink, the coverage ratio has been eroded. Is this a source of concern right now? Not to me as the default rate will occur over an extended period into the future and Ratesetter will presumably gently tweak some other part of their algorithm to compensate. However, the results of that tweak are not likely to be visible for a while. Hence I focus on the actual coverage percentage, not the coverage ratio. I hope I've better explained why.
|
|
pip
Posts: 542
Likes: 725
|
Post by pip on Feb 9, 2015 18:08:46 GMT
The coverage ratio is totally not irrelevant. Your figure shows the maximum default percentage that the provision fund can withstand. The coverage ratio should in theory (if worked out correctly) show the ratio of your number against the expected defaults. Even if your rate rises, it is only good if the expected default rate doesn't rise more quickly. One other thing, people will probably say, well look at the historic default rates they have been way below 3.75%, so there is little risk. Yes this is some comfort, but with the loan book growing, if the default rate was to rise in the future to above 3.75% then due to the much larger number of loans with the increased default rate, the previous lower default rate and provision fund balance would not go far. pip - the problem with the coverage ratio is that it is mixing apples and oranges. Let me explain my thinking. Last week, Ratesetter's stated anticipated default rate for 2014 and 2015 was 2.569%. As of this morning it is 2.602%. Someone (or more likely some computer program) has changed things, presumably based on an algorithm that is commercially confidential (and whose precision makes me smile...). In a blink, the coverage ratio has been eroded. Is this a source of concern right now? Not to me as the default rate will occur over an extended period into the future and Ratesetter will presumably gently tweak some other part of their algorithm to compensate. However, the results of that tweak are not likely to be visible for a while. Hence I focus on the actual coverage percentage, not the coverage ratio. I hope I've better explained why. Your sum is not a coverage percentage, it is a maximum tolerable default. Of course the anticipated default amount is an estimate. The actual default could be more or less. However it is the best we have at anticipating future defaults. The reason why I want a coverage ratio of over 1.5 is to give me some comfort that even if the expected default rate is too low, that I will still be covered. I would like to see that 'tweak' here or there starting now, even if this means volume declines.
|
|
c88dnf
Member of DD Central
Posts: 364
Likes: 266
|
Post by c88dnf on Feb 10, 2015 14:50:48 GMT
Should those contributing to this thread be interested, RS's default expectations moved again last night and this morning. 2014 & 2015 last night 2.603% (up .001%), but now showing 2.648%. An active computer algorithm at work at least twice per day. Coverage ratio will have dropped again, but on the other hand the percentage of on loan monies covered by the PF is edging up steadily and now stands at 3.78%.
Purely as a comparison, Zopa's coverage ratio stands at 1.25 with a stated intent to reduce it to 1.1. Their expected default rates for 2014/15 are 2.30% and 2.48% respectively, up significantly from 2013, as are Ratesetter's.
|
|
c88dnf
Member of DD Central
Posts: 364
Likes: 266
|
Post by c88dnf on Feb 20, 2015 14:35:53 GMT
Ten days on and the quantity of loans covered by the Protection Fund is up another 0.02% to 3.8%.
This afternoon's anticipated 2014/15 default percentage is 2.556%, giving a coverage ratio of 1.487 for those who prefer that number.
|
|
jlend
Member of DD Central
Posts: 1,817
Likes: 1,444
|
Post by jlend on Feb 22, 2015 17:42:19 GMT
Ten days on and the quantity of loans covered by the Protection Fund is up another 0.02% to 3.8%. This afternoon's anticipated 2014/15 default percentage is 2.556%, giving a coverage ratio of 1.487 for those who prefer that number. No surprises - that's good
Thanks for keeping an eye on it and posting us updates.
|
|