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Post by RateSetter on Apr 25, 2019 16:45:30 GMT
Good afternoon everyone, Today we have published the monthly update of portfolio statistics and also the quarterly review of the projections that underpin the Coverage Ratios. We've published a RateSetter Notice, which is copied below for reference. Following the quarterly review, the Interest Coverage Ratio has decreased to 112%. Many of you will know that the Coverage Ratio fluctuates over time and, when it has been around this level and lower in the past, we have managed it back up towards our target Coverage Ratio of 125%. The change in 2018 projections is not caused by a deteriorating trend or Brexit effect - we have simply reverted to our earlier projection having gained more data on performance (the relevant table on the statistics page shows that the 2018 loss rate at time of writing the loans was estimated at 4.8%, this dropped to 4.6% and is now back at 4.8%). The 2019 cohort of lending is shaping up for a significantly improved performance and this will come through in the Coverage Ratio as 2018 loans repay and the proportion of 2019 loans in the portfolio grows. As our portfolio grows in size it becomes more stable and every investor’s exposure is diversified across even more borrowers. The portfolio is currently one-fifth larger than this time last year. If an investor was exposed to the performance of just one or two loans, the investment may not turn out to be very stable, but at RateSetter you are investing against the whole loan portfolio of 250,000+ loans – scale which makes for stable returns. As the portfolio grows we also gather even more performance data. We now have 9 years of history covering several hundreds of thousands of loans and our ability to project the performance of the loan portfolio is enhanced. Copy of RateSetter Notice:The latest update of RateSetter’s portfolio statistics is now available on our statistics webpage. This month’s update includes our quarterly review of the loan portfolio and the projections that underpin the Interest and Capital Coverage Ratios. The projections include Provision Fund inflows and unrecovered outflows (usually referred to as Expected Loss) over the lifetime of all outstanding loans. This data is used by RateSetter to manage the size of the Provision Fund. Following the quarterly review: - The Interest Coverage Ratio decreased to 112%
- The Capital Coverage Ratio decreased to 226%
Key changes: - For Consumer loans, which make up approximately 70% of the loan portfolio, we have updated our methodology to an approach that scores each individual borrower, rather than scoring by group of similar borrowers. This provides a more accurate projection of performance and is a solid foundation for the future.
- In our previous quarterly review we projected that the loss rate on 2018 loans would be 4.6%, instead of 4.8% which was the projection at the point the loans were written. This figure now reverts back to 4.8%.
- There is also a substantive update on 2019 loans following initial performance data which is starting to offset the change in 2018 projections. The loss rate projection is reduced from 4.8% to 3.9%. This relates to loans originated to date and so may change as loans are written throughout the year.
To summarise, we are not seeing any deterioration of performance compared to our expectations at the point that loans were written. Performance is in line with original expectations, or better. Our target for the Interest Coverage Ratio is 125% and we aim to bring it back in line.
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benaj
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Post by benaj on Apr 25, 2019 17:03:35 GMT
RateSetter, could you please explain why the Provision Fund usage does not show projected surplus / deficit any more?
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r00lish67
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Post by r00lish67 on Apr 25, 2019 17:08:56 GMT
To summarise, we are not seeing any deterioration of performance compared to our expectations at the point that loans were written. Performance is in line with original expectations, or better. Our target for the Interest Coverage Ratio is 125% and we aim to bring it back in line. Hi RateSetter Re: my question on the stats earlier today, this notice touches on this and yet makes me even more confused. You've explicitly said that "we are not seeing any deterioration of performance compared to our expectations" and yet you've also significantly lowered the interest coverage ratio. You've also said you expect 2019 loans to incur less losses, which should boost the coverage ratio (as it covers future inflows), and yet it's still reducing even with this positive factor. So, if the loans are performing better than expected all around, why is the provision fund reducing? And if it's reducing when the loans are performing as or better than you expect, as now, then what is going to happen when they do underperform?
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wapping35
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Post by wapping35 on Apr 25, 2019 17:38:16 GMT
So the coverage ratio has fallen, due to the default rate for the 2018 written loans increasing back to the 4.8% level expected when those loans were written, as opposed to the better 4.6% rate at the last review.
And the 2019 loans are now expected to only have a 3.9% default rate, versus the 4.8% at the start of the year. Any bets that again that rate will next year go back to the original 4.8% rate in April 2020 (or may be earlier).
And so the cycle continues.
It would be interesting to know (I am sure we won't find out) what the coverage ratio (112%) would have been if the 2019 loans still had the original 4.8% default rate versus 3.9%. i.e. How close to 100% ?
Good though that we have had the update. I kind of expected to be a big cut in the coverage ratio and have not been disappointed.
W35
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r00lish67
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Post by r00lish67 on Apr 25, 2019 17:46:53 GMT
So the coverage ratio has fallen, due to the default rate for the 2018 written loans increasing back to the 4.8% level expected when those loans were written, as opposed to the better 4.6% rate at the last review. Well, that's the reason they gave. The other not insignificant point that they didn't mention is that the provision fund cash level has fallen from £14.1m on 1st March to £13.1m now. The £14.1m previous figure was to cover £843m of loans. The £13.1m current figure is meant to cover £854m of loans. Despite this, "nothing has changed" apparently. I'd hate to see what happens to the PF when things do look a little rough in their view. Although the associated drop of interest coverage ratio from 118% to 112% is pretty significant, it's only not an even larger decrease because projected future inflows have risen by £500k. As well as my previous question, I'd be keen to understand why RS believe 2019 is shaping up to being such an apparently sterling year. The political/economic climate is not exactly rosy, at least it seems somewhat throwing caution to the wind to significantly reduce the expected loss rate for 2019 at this stage (by a factor of, what, 20%?).They seem to be in a unique position as a financial provider in believing the short-term outlook is more positive than expected. Well, at least it certainly helps the nominal provision fund, doesn't it?
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benaj
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Post by benaj on Apr 25, 2019 17:55:17 GMT
It seems a small change with these numbers results 6% change in PF interest coverage ratio.
| 1st March | 25th Apr | PF cash | 14.1M | 13.1M | PF Buffer | 39.2M | 38.7M | Expected Future losses | 33.1M | 34.6M |
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wapping35
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Post by wapping35 on Apr 25, 2019 18:28:45 GMT
Deja vu...
This was a PF narrative I received back in November 2016 when I asked about the coverage ratio falling below 125%.
========
In terms of the coverage ratio, yes we are very much committed to the target of 125-150%. The current ratio is based on anticipated bad debts for a cohort of loans from 2014, when our risk appetite was different. Since then we have become more prudent in our lending and would expect to see an upswing in the coverage ratio in the future. However we are cautious in this respect and do not build in these potential improvements until we see them confirmed via actual performance data.
================
If you change the dates to 2019 it could have been cut and pasted... i.e. "Since(2019) then we have become more prudent in our lending and would expect to see an upswing in the coverage ratio in the future."
I really wish the PF was independently audited. I recall that RS indicated this was being consider (about 6 months ago), but I assume that is a long term aspiration.
W35
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Stonk
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Post by Stonk on Apr 25, 2019 18:44:50 GMT
112% is not as bad as I feared, but I think that's lower than I've ever seen it since I began on RS in April 2017, and definitely cements me in withdrawal territory.
One thing that I am finding troubling is why 2019 loans have been given a dramatically lower expected loss rate (3.9%) compared to 2018 loans (4.8%), especially when the loss rate on the latter has just been increased. If RS had left the loss rate at 4.8% for 2019 loans, I imagine the PF numbers would have been several points lower. Draw your own conclusions.
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Post by propman on Apr 26, 2019 14:36:48 GMT
The 0.9% reduction in expected bad debts based on loans written in the first 3 months has increased the Coverage ratio by 5%. The 0.2% increase on 2018 has reduced it by 4%. There has also been a substantial increase in the estimated bad debt usage of 2016 & 2017 (3% of each year). The former despite only 10% remaining at the start of March. I hope this does not mean that the resale value of loans in default hasn't decreased as this has been the "get out of jail" card RS has employed to improve the statistics in the past (ie the main reason for the negative expected future bad debt on earlier cohorts).
Comparing to the previous values, the increase in expected future fund receipts (£454k) is less than half the decrease in current fund balance (£966k), suggesting that the reduced provision is despite receiving a higher proportion of PF receipts upfront.
We don't have provision fund contributions, but £64m was lent in the month. Based on the average for 2019, this will have contributed an estimated 5.8% to the fund (3.9%/67% expected usage), some £3.7m to the fund (both upfront and future expectations). So as the fund plus expected future income has declined £0.51m suggesting additional bad debts have been some £4.2m in March. Loans have increased £11m so there was £53m of repayments, so payments for defaults and late payments for the month were running at around 8% of repayments. I hope this is due to timing issues as it is way above the 5.8% average contribution.
- PM
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jlend
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Post by jlend on Apr 26, 2019 15:26:58 GMT
Deja vu... This was a PF narrative I received back in November 2016 when I asked about the coverage ratio falling below 125%. ======== In terms of the coverage ratio, yes we are very much committed to the target of 125-150%. The current ratio is based on anticipated bad debts for a cohort of loans from 2014, when our risk appetite was different. Since then we have become more prudent in our lending and would expect to see an upswing in the coverage ratio in the future. However we are cautious in this respect and do not build in these potential improvements until we see them confirmed via actual performance data. ================ If you change the dates to 2019 it could have been cut and pasted... i.e. "Since(2019) then we have become more prudent in our lending and would expect to see an upswing in the coverage ratio in the future." I really wish the PF was independently audited. I recall that RS indicated this was being consider (about 6 months ago), but I assume that is a long term aspiration. W35 From RS in Oct 2018 regarding the audit "The assets of the Provision Fund are audited each year as part of our statutory financial audit and the operations of the Provision Fund are audited as part our rolling internal audit programme. In the future, we also plan to have independent annual audits of the future contracted income and future expected losses." In the past RS also considered the possibility of having independent directors on the PF coming from their lender base. I was approached at the time. This was subsequently dropped following conversations with the regulator. There is also the independent 3rd party review of returns by brismo.com/market-data/ who review the RS loan book in detail.
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jlend
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Post by jlend on Apr 27, 2019 12:09:59 GMT
I agree with other posters.
I don't doubt the numbers RS have quoted are correct.
... I can't reconcile them with the wording overall though...
The wording doesn't feel balanced given the drop in the cash balance and the drop in the coverage ratio.
I am somewhat surprised the RS compliance team was happy for this to be released.
IMHO I can't see how it is possible for RS to finish the update with a positive statement when the coverage ratio and cash balance has fallen in a quarter and the coverage ratio is below the target.
I would have expected a coverage ratio between 125% and 150% given this summary statement. I appreciate the target has recently been changed to a single 125%.
"To summarise, we are not seeing any deterioration of performance compared to our expectations at the point that loans were written."
They could have added the following after this.
"There has been a deterioration in performance compared to the last quarter, the coverage ratio has reduced and remains below the target range"
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wapping35
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Post by wapping35 on Apr 28, 2019 16:50:58 GMT
I find this table on the "latest PF usage" most telling. Given the target is 125% . RS meeting the target latest PF usage requires that number to be 80% (i.e. 100/125). And yet looking at the 5 year period pre 2015 to 2018 the best RS has managed has been 90% for the pre 2015's and the 2018's. That is a coverage ratio of 100/90 = 111%. This really explains the continuing (trend) fall of the coverage ratio over the last 3 years. The good news is in 2019 all is well and the latest usage is only expected to be 71% . A 141% coverage ratio (100/71). We just all need to hope that is going to happen.Hmmmm, but I do hope so since I do have monies invested. At least the trend since 2015 has been an improving usage % from 115% to 90%.
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alanh
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Post by alanh on Apr 28, 2019 17:49:57 GMT
I have tried to work out the implications of an interest cut, should that ever occur.
On the statistics page they have £854m under management. Lets say they implement a cut of 1 percentage point in investor interest across the board, then this means there is an annual inflow into the provision fund of £8.54m, or £711k per month.
This £711k per month inflow in turn increases the coverage ratio by 2.05 percentage points per month, all else being equal. So in rough terms a 1% cut in investor interest would lead to the coverage ratio going from 112% to 124.3% after 6 months or 136.6% after one year. this to me does not sound like a total calamity.
Admittedly these improvements would probably be being implemented against a background of generally deteriorating fundamentals so the coverage ratio improvements are unlikely to be as impressive as calculated above but I think it does go to show that ratesetter do have quite a lot of ammo available to correct this situation should the need arise without having too much of a detrimental effect on investors.
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r00lish67
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Post by r00lish67 on Apr 28, 2019 20:34:08 GMT
I have tried to work out the implications of an interest cut, should that ever occur.
On the statistics page they have £854m under management. Lets say they implement a cut of 1 percentage point in investor interest across the board, then this means there is an annual inflow into the provision fund of £8.54m, or £711k per month.
This £711k per month inflow in turn increases the coverage ratio by 2.05 percentage points per month, all else being equal. So in rough terms a 1% cut in investor interest would lead to the coverage ratio going from 112% to 124.3% after 6 months or 136.6% after one year. this to me does not sound like a total calamity.
Admittedly these improvements would probably be being implemented against a background of generally deteriorating fundamentals so the coverage ratio improvements are unlikely to be as impressive as calculated above but I think it does go to show that ratesetter do have quite a lot of ammo available to correct this situation should the need arise without having too much of a detrimental effect on investors. Interesting, but the increased inflow underpinned by that hypothetical 1% haircut would either be very rapidly deflated by people withdrawing from the rolling market in order to avoid it or, far more likely, necessitate RS having to lock the rolling market to enforce its support. I suspect an awful lot of people would be upset by that (the "I thought this was easy access" brigade) and it would have the consequence of encouraging people to use the 1+5 year markets instead because they've realised you can be locked in on the lower rate product, which in turn would depress RS's margins as they make the most from rolling. Worse, it would also encourage people to leave RS entirely, and potential new investors to avoid it. Investing at 2.5-3% in P2P seems like madness to me anyway, but if you threw in a very visible 'it just happened' risk of a big haircut? I think nearly everyone would cross RS off their list. In such an event, perhaps it would be better to apply the haircut only to 1yr/5yr investors, who are already relatively resigned to longer loan terms and who should also be receiving higher rates in any case. They wouldn't need to express it like that, they could perhaps say " any investor receiving more than 4.5%p.a. will see a 1% cut applied". Meanwhile, the pain for rolling investors could be 'just' having their loan terms locked in and no penalty applied. The problem whatever way you cut it would be that the whole situation indicates RS wouldn't have a provision fund anymore. So to have any chance of attracting new investors, either someone would need to cough up the dough to seed a new one, or they have to switch to a Zopa/FC style of operation of target returns, passing the risk of underperformance to the investor instead. As a result, I wouldn't be surprised at all to see them revamp their investing approach for new contracts along those lines, even without us reaching a full-on crunch. I certainly wouldn't prefer it as an investor, but that might at least stabilise the risk that RS are currently running of running out of PF money and make for a smoother transition (providing they continue to pay to mitigate the risk of existing contracts, which I think they'd have to do in the absence of a resolution event).
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alanh
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Post by alanh on Apr 28, 2019 21:27:51 GMT
I hear you. I think whilst I personally wouldn't be too bothered by a, say, 6 month interest haircut the manner in which it is implemented is all important. If it was done in an ill thought out manner then I agree that there could be a number of undesirable knock on effects. Hopefully we will not need to find out.
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