|
|
Post by Matthew on Nov 27, 2019 21:08:57 GMT
Some thoughts... Firstly, Lending Works seems to have very good borrower feedback on Trustpilot which is comforting presuming the reviews are authentic. P2p borrower screening seems to be a big issue, brought more to light thanks to the Lendy & FS debacles. One very smart p2p CEO and I had a discussion about how p2p companies are under immense pressure to find new loan borrowers to keep revenue flowing and how this is a problem. Some p2p companies have very high overheads (staff, London digs etc.) so one has to wonder how much bending of underwriting guidelines occurs in order to write new loans to generate revenue. We as investors put trust into the p2p companies ability to underwrite loans to worthy borrowers but we aren't privy to what goes on behind the p2p companies doors. I've used Lending Works for some time and I am concerned that the borrower weighted APR% has doubled from 2014 (7.7%) to 2019 (14.8%). I also know that APR%'s do not always correlate to risk but they do play a part. Interestingly I downloaded the loan book which shows the Max Gross Rate as 6.5%. If LW lenders are being paid 6.5% max and borrowers are paying an avg. of 14% in 2019 (I presume some borrowers are paying much higher APR's and some lower), the spread indicates that the lender might be taking considerable risk for a 5% or 6.5% return. Some p2p companies, are working on very thin interest spread margins of about 2%. Thanks for the post. Just wanted to make a point regarding spread, as I've mentioned in another similar post elsewhere. The basic composition of a loan at an average APR of say 14% is something like this: Annualised lender return (net of losses) = 6.5% Annualised Shield contributions (default rate) = 4% (taken as a mix of upfront fee and interest spread) Acquisition fee (annualised equiv.) = 1% (payable to introducers where applicable etc) Lending Works margin (remainder) = 2.5% (taken as a mix of upfront fee and interest spread) Total = 14% I'd say this is a pretty fair spread given we need to cover all the costs involved in originating (data, marketing, underwriting, processing etc) and servicing (customer service, processing and distributing repayments, collections etc). So really we're comparing 2.5% with the gross interest rate payable to lenders of 10.5% (assuming there was no Shield) - I think any less than that could be fairly unsustainable. I do not agree that P2P companies working on very thin margins of about 2% (which presumably you are saying needs to cover losses, acquisition costs and all those costs mentioned above, in addition to the general overheads of running the platform) can be sustainable. I think you will see a move over the next few years towards platforms seeking profitability and sustainability in a way which hasn't always been evident in the past few years, which ultimately is a good thing. Thanks
|
|
macq
Member of DD Central
Posts: 1,934 
Likes: 1,199
|
Post by macq on Nov 27, 2019 22:18:07 GMT
Some thoughts... Firstly, Lending Works seems to have very good borrower feedback on Trustpilot which is comforting presuming the reviews are authentic. P2p borrower screening seems to be a big issue, brought more to light thanks to the Lendy & FS debacles. One very smart p2p CEO and I had a discussion about how p2p companies are under immense pressure to find new loan borrowers to keep revenue flowing and how this is a problem. Some p2p companies have very high overheads (staff, London digs etc.) so one has to wonder how much bending of underwriting guidelines occurs in order to write new loans to generate revenue. We as investors put trust into the p2p companies ability to underwrite loans to worthy borrowers but we aren't privy to what goes on behind the p2p companies doors. I've used Lending Works for some time and I am concerned that the borrower weighted APR% has doubled from 2014 (7.7%) to 2019 (14.8%). I also know that APR%'s do not always correlate to risk but they do play a part. Interestingly I downloaded the loan book which shows the Max Gross Rate as 6.5%. If LW lenders are being paid 6.5% max and borrowers are paying an avg. of 14% in 2019 (I presume some borrowers are paying much higher APR's and some lower), the spread indicates that the lender might be taking considerable risk for a 5% or 6.5% return. Some p2p companies, are working on very thin interest spread margins of about 2%. Thanks for the post. Just wanted to make a point regarding spread, as I've mentioned in another similar post elsewhere. The basic composition of a loan at an average APR of say 14% is something like this: Annualised lender return (net of losses) = 6.5% Annualised Shield contributions (default rate) = 4% (taken as a mix of upfront fee and interest spread) Acquisition fee (annualised equiv.) = 1% (payable to introducers where applicable etc) Lending Works margin (remainder) = 2.5% (taken as a mix of upfront fee and interest spread) Total = 14% I'd say this is a pretty fair spread given we need to cover all the costs involved in originating (data, marketing, underwriting, processing etc) and servicing (customer service, processing and distributing repayments, collections etc). So really we're comparing 2.5% with the gross interest rate payable to lenders of 10.5% (assuming there was no Shield) - I think any less than that could be fairly unsustainable. I do not agree that P2P companies working on very thin margins of about 2% (which presumably you are saying needs to cover losses, acquisition costs and all those costs mentioned above, in addition to the general overheads of running the platform) can be sustainable. I think you will see a move over the next few years towards platforms seeking profitability and sustainability in a way which hasn't always been evident in the past few years, which ultimately is a good thing. Thanks Just been watching Little Monsters on Sky (good fun by the way) so my brain is a bit frazzled.But are you not saying as your margin is about 2.5% and you do not agree that about 2% margin can be sustainable that you will be One of the platforms making changes and presumably to lenders?
|
|
rogedavi
Member of DD Central
Posts: 100
Likes: 129
|
Post by rogedavi on Nov 28, 2019 0:22:33 GMT
you dont need 2% if you have scale, and thats the way I think it will go for P2P.
RS/Z will start gobbling up the smaller players
|
|
|
|
Post by propman on Nov 28, 2019 8:17:29 GMT
I do not agree that P2P companies working on very thin margins of about 2% (which presumably you are saying needs to cover losses, acquisition costs and all those costs mentioned above, in addition to the general overheads of running the platform) can be sustainable. I think you will see a move over the next few years towards platforms seeking profitability and sustainability in a way which hasn't always been evident in the past few years, which ultimately is a good thing. Thanks Just been watching Little Monsters on Sky (good fun by the way) so my brain is a bit frazzled.But are you not saying as your margin is about 2.5% and you do not agree that about 2% margin can be sustainable that you will be One of the platforms making changes and presumably to lenders? Matthew was saying that the 2% was thin if it needed to cover losses. LW takes 2.5% + 4% as a contribution for the Shield.
|
|
macq
Member of DD Central
Posts: 1,934
Likes: 1,199
|
Post by macq on Nov 28, 2019 10:08:12 GMT
Just been watching Little Monsters on Sky (good fun by the way) so my brain is a bit frazzled.But are you not saying as your margin is about 2.5% and you do not agree that about 2% margin can be sustainable that you will be One of the platforms making changes and presumably to lenders? Matthew was saying that the 2% was thin if it needed to cover losses. LW takes 2.5% + 4% as a contribution for the Shield. thanks - that makes more sense p.s with the news on other threads guess i got my answer
|
|
benaj
Member of DD Central
N/A
Posts: 5,591
Likes: 1,735
|
Post by benaj on Nov 28, 2019 10:12:20 GMT
So, what exactly is the platform risk? In the case of lending site collapses, there is a substantial risk that delay may occur of getting the money back and chances of not receiving all the money invested.
In the case of LW, the lifetime default rate is much smaller than those 12% rate platforms, i.e 8% max. If LW needs to wind-down, a good loan book of 95Mil would minimise the losses potentially occur from platform risk against current LW losses in a year and administrator fee, assuming investors have made 3 year profit of 6.5% return.
Yes, there's a risk, but I don't think it would be as bad we have seen so far.
|
|
r00lish67
Member of DD Central
Posts: 2,692
Likes: 4,048
|
Post by r00lish67 on Nov 28, 2019 10:32:36 GMT
So, what exactly is the platform risk? In the case of lending site collapses, there is a substantial risk that delay may occur of getting the money back and chances of not receiving all the money invested. In the case of LW, the lifetime default rate is much smaller than those 12% rate platforms, i.e 8% max. If LW needs to wind-down, a good loan book of 95Mil would minimise the losses potentially occur from platform risk against current LW losses in a year and administrator fee, assuming investors have made 3 year profit of 6.5% return. Yes, there's a risk, but I don't think it would be as bad we have seen so far. I mostly agree, but surely what the failure of other platforms has taught us is to expect some unknown unpleasantness to be revealed, and that things might not be as squeaky clean as had been imagined. Actually, strangely, RS are almost a good example of this. Imagine if they had not decided to cover the losses for the wholesale lending debacle. All would have seemed relatively well to us, pretty clean loanbook, then *BAM* £13m of sour loans that they hadn't mentioned to date. Maybe LW would be an exception to that, and hopefully it won't come to that of course, but I have so far seen nothing but heartbreak from entities failing. If I adjudge any investment to be struggling I ain't sticking around to find out. edit: revamped stats up btw, they seem....ummm...familiar?
|
|
|
|
Post by propman on Nov 28, 2019 14:43:46 GMT
That's what I have been saying on other threads, but remember that all bad debts seen are against low unemployment so expect a jump in a serious recession.
|
|
|
|
Post by Financial Thing on Nov 28, 2019 14:55:48 GMT
If LW lenders are being paid 6.5% max and borrowers are paying an avg. of 14% in 2019 (I presume some borrowers are paying much higher APR's and some lower), the spread indicates that the lender might be taking considerable risk for a 5% or 6.5% return. Some p2p companies, are working on very thin interest spread margins of about 2%. Thanks for the post. Just wanted to make a point regarding spread, as I've mentioned in another similar post elsewhere. The basic composition of a loan at an average APR of say 14% is something like this: Annualised lender return (net of losses) = 6.5% Annualised Shield contributions (default rate) = 4% (taken as a mix of upfront fee and interest spread) Acquisition fee (annualised equiv.) = 1% (payable to introducers where applicable etc) Lending Works margin (remainder) = 2.5% (taken as a mix of upfront fee and interest spread) Total = 14% With regards to the new stats page, it states "As we’ve grown, we’ve prudently expanded our risk appetite and average APR to meet demand from a wider pool of borrowers". I presume this means LW is lending to higher risk profile borrowers paying higher weighted APR %'s. LW used to advertise that borrowers were lower risk. The stats page shows a rise in the avg APR, lifetime default rate and reduction of the Shield cash balance. Why was the actual bad debt rate table removed in favor of an Expected annual loss rate? I think those actual bad debt numbers are important. Now the lender rate has dropped to 5.4% max, risk to reward seems to be widening.
|
|
picnicman
Member of DD Central
Posts: 238
Likes: 216
|
Post by picnicman on Nov 28, 2019 15:31:10 GMT
Thanks for the post. Just wanted to make a point regarding spread, as I've mentioned in another similar post elsewhere. The basic composition of a loan at an average APR of say 14% is something like this: Annualised lender return (net of losses) = 6.5% Annualised Shield contributions (default rate) = 4% (taken as a mix of upfront fee and interest spread) Acquisition fee (annualised equiv.) = 1% (payable to introducers where applicable etc) Lending Works margin (remainder) = 2.5% (taken as a mix of upfront fee and interest spread) Total = 14% With regards to the new stats page, it states "As we’ve grown, we’ve prudently expanded our risk appetite and average APR to meet demand from a wider pool of borrowers". I presume this means LW is lending to higher risk profile borrowers paying higher weighted APR %'s. LW used to advertise that borrowers were lower risk. The stats page shows a rise in the avg APR, lifetime default rate and reduction of the Shield cash balance. Why was the actual bad debt rate table removed in favor of an Expected annual loss rate? I think those actual bad debt numbers are important. Now the lender rate has dropped to 5.4% max, risk to reward seems to be widening. - yes growth has fallen to 5.4% (0.6%) BUT flexible has fallen to 3.8% (- a whopping 1.2%!!). I expect we will get chapter and verse on the whys and wherefores in tomorrow's update - but seems to be following on from the reductions by Ratesetter as recently announced - I really hope that AC do not follow!!, but everything seems to be on a downward trend in terms of squeeze on lenders. Will be interesting to see (if this is possible) on overall changes in investment levels!! Cheers P
|
|
|
|
Post by Matthew on Nov 28, 2019 22:15:00 GMT
Thanks for the post. Just wanted to make a point regarding spread, as I've mentioned in another similar post elsewhere. The basic composition of a loan at an average APR of say 14% is something like this: Annualised lender return (net of losses) = 6.5% Annualised Shield contributions (default rate) = 4% (taken as a mix of upfront fee and interest spread) Acquisition fee (annualised equiv.) = 1% (payable to introducers where applicable etc) Lending Works margin (remainder) = 2.5% (taken as a mix of upfront fee and interest spread) Total = 14% With regards to the new stats page, it states "As we’ve grown, we’ve prudently expanded our risk appetite and average APR to meet demand from a wider pool of borrowers". I presume this means LW is lending to higher risk profile borrowers paying higher weighted APR %'s. LW used to advertise that borrowers were lower risk. The stats page shows a rise in the avg APR, lifetime default rate and reduction of the Shield cash balance. Why was the actual bad debt rate table removed in favor of an Expected annual loss rate? I think those actual bad debt numbers are important. Now the lender rate has dropped to 5.4% max, risk to reward seems to be widening. Hi Financial ThingThe expected annual loss rate is the actual bad debt to date plus the latest expectation of future losses, as per the definitions and using the terminology used by the FCA. The gross bad debt to date on a lifetime, cumulative basis is shown separately in the lifetime default rate curves. Thanks
|
|
