Landbay has subjected itself to another round of severe stress testing.
The P2P buy-to-let mortgage lender Landbay has today published the results of a series of stress tests that have been independently applied to the platform by the mortgage industry data, analytics and risk consultancy group MIAC Acadametrics. These stress tests followed Bank of England criteria in order to project how Landbay’s loan portfolio would perform in both base and stressed economic conditions.
Owing largely to the company’s attempts to position itself as the “lowest risk” P2P lender, Landbay’s management believed it necessary to bring the platform under the same level of stress testing scrutiny as is endured by the high street banks. The results of the stress tests were overwhelmingly positive.
In the “base case” scenario – in which the economic conditions that the Bank of England expects to occur are applied – Landbay would sustain an average loss rate of 0.03% before interest payments.
In the stressed scenario – which entails a 3.5% drop in GDP, a rise in unemployment to 9% and a 20% decline in UK house prices – MIAC projects that Landbay’s average loss rate would be 0.48% before interest payments.
In both instances, falls in rents (which are of course highly relevant to the Landbay proposition) have also been factored in, falling in tandem with GDP and other key factors. MIAC holds over 15 years worth of mortgage data – a useful resource for forecasting the performance of Landbay’s existing portfolio under severe economic conditions.
The Landbay platform boasts a provision fund which is currently maintained at 0.60% of the loan book, which equates to £53,145.77, according to the Liberum AltFi Volume Index UK. In other words, Landbay’s contingency fund – if maintained at its present level of coverage – would absorb the entirety of the platform’s losses, in both of the above Bank of England scenarios. Indeed, even if the stressed scenario was to be exacerbated, with the fall in house prices steepened to 25%, Landbay’s contingency fund would still be fit to the task of covering its lenders losses, which would increase to 0.52%.
For those that weren’t aware that Landbay even had a provision fund, be not alarmed. The platform chooses not to make a great deal of noise about the protective mechanism for two reasons. The first is that the tool is used more as a means of covering missed interest repayments than for covering losses. The second is that management are wary of the potential of individual lenders mistaking contingency fund structures for some manner of insurance coverage.
Keen AltFi readers will be aware that Landbay has been working quite closely with MIAC of late. Yesterday we covered the platform's new “Rental Index”, which is designed to provide into greater insight into the buy-to-let space by monitoring rental prices and market trends, and which is powered by MIAC.
Since launching in April 2014, Landbay has been hot on sector transparency. The platform made its full loan book (complete with interest rate paid by the borrower) available to the public in March 2015 – in a move that has seldom, if ever, been replicated by so young a platform. Landbay first ran a stress test in December last year, commissioning the Wriglesworth Consultancy to assess both the buy-to-let space in general, and the platform’s loan book.
Funding Circle released a comparable stress test of its loan book in January 2014, modeling results based economic conditions that were decided upon by the Prudential Regulation Authority for the 2014 banking stress test. Independent consultancy firm Hymans Robertson was tasked with carrying out the project. Without dwelling too much on the detail, Funding Circle’s loan portfolio also exhibited a high degree of resilience, with average annualised returns for the platform’s investors remaining upward of 5.5%, even in the most severe of economic conditions.
The encouraging results posted by the likes of Landbay and Funding Circle have surprised some industry observers. But Gareth Rumsey, Product Director at Experian, to some extent vindicated the findings of the Funding Circle stress test in a data-rich presentation at the AltFi Europe Summit 2015. John Goodall, Co-Founder and CEO of Landbay, offered his thoughts about the resilience of Landbay’s loan book:
“The great strength of BTL lending is that your return is secured primarily by the rent received by BTL landlords, rather than the underlying property value. So you are really investing in the health of the private rental market rather than the UK property market. Currently for Landbay’s mortgages average rents are 68% higher than the average interest payments required to service the mortgage. This is a key element of Landbay’s lending policy of focussing on the serviceability of the mortgages (and thus risk of default). The results of this stress test vindicates this approach, over and above those that purely focus on the asset value.”
“With UK property prices well out of the reach of so many people, and little likely to change that in even the medium term, investing in the private rental sector is both remarkably secure and of social value as so many people are reliant on being able to rent.”
For further analysis of the stress test, check out Mike Baliman's latest London Fintech Podcast: "A Deep Dive Into Stress Testing P2P Portfolios With John Goodall Landbay CEO".