Digging into Lending Works’ loan book

In mid October the P2PFA updated the Operating Principles for its members. One of the major changes was the requirement for P2PFA member platforms to publish their loan books.

Lending Works has always had one of the most informative statistics pages of any platform. It tells users large amounts about the types of borrowers and investors using the platform. Today Lending Works has published its loanbook and revamped its statistics page, allowing further insights into the workings of the platform. 

Nick Harding, CEO of Lending Works explained:

“We’ve been working very closely with the P2PFA over the past year to increase the levels of transparency across our sector. As part of this drive we’re pleased to release full details of all of our loans to the public. Peer-to-peer lending platforms are leading the way in financial services transparency and providing investors with current and comprehensive information to allow them to make very informed investment decisions.

“A frequently quoted criticism of peer-to-peer lenders is that we do not have any “skin in the game”. I would argue strongly against this, as we have more skin in the game than 99% of companies. Our success will be defined by the performance of our loan books, hence providing absolute transparency with our statistics means that we have more skin in the game than any traditional financial services company.”

AltFi Data has been fortunate enough to have a sneak preview of the new data and we’ve drawn out a few highlights:

Borrowers

61% of Lending Works’ borrowers are homeowners with an average annual income of £33,779. The average loan size is £5,530, 40.7% of borrowers are aged between 35 and 49 and Lending Works have made 3,199 loans.

The vast majority of loans are to consumers with a small number (0.4%) to sole traders, similar to Zopa. The loan book includes a borrower ID allowing investors to check whether loans are being repeatedly rolled over (or ‘evergreened’). We can observe that three borrowers have taken out three loans whilst 58 have taken out two loans.

Lenders

Lending Works’ 1,132 lenders have an average account value of £13,282 each and have an average age of 53 years. For the first time we can see how much is on loan – currently £13,263,274. Combining this figure with the number of lenders gives an average of £11,717 on loan per lender. When the loans outstanding figure is considered against a total amount lent of £17,689,545, it underlines how young the Lending Works platform is and how quickly it has grown.

Another revelation is that 29.6% of lending through the platform has been carried out by institutions (more about this below).

Risk and Return

Aside from the publication of the loan book, the biggest area of improvement in the statistics pages is the risk and return section. Lending Works tells us what the annualised returns have been since the first loan was made in January 2014 – a steady 4% to 5% for the 3yr product and 5.5% to 6.5% for the 5 year product. We are not, however, given the methodology behind this calculation.

There is also a graphical representation of actual defaults vs expected defaults by cohort, plotted against time. It is clear that defaults are currently meaningfully better than the platform originally forecast. On that basis, the bad debt coverage of the Shield (Lending Works’ contingency fund) looks ample at 3.05%. i.e. the Shield could absorb a bad debt rate of 3.05% versus expectations of just 1.5% defaults for the current cohort.  However it is worth remembering, that Lending Works is still very young. The weighted average term of loans is currently 43.89 months.  By contrast the platform itself has only been lending for 23 months. Of £17.58m originated loans, only £4.39m has been repaid and only £1.68m of those loans reached full maturity.

Loan book Analysis

From Lending Works’ loan book we can get a better picture of how the platform’s lending has evolved over time.

Figure 1:  Monthly origination split into retail and institutional investors.

Monthly volumes at Lending Works have grown steadily, as can be seen in figure 1, with institutional flows becoming an increasingly large part of that picture with 57.6% of November’s lending coming from institutions – an almost identical percentage to Funding Circle.

Figure 2: Gross lending rate – each point represents a loan, the lines give the weighted average.

Gross lending rate appears to be rising slightly as can be seen in figure 2. This gross rate is the rate that the lender receives and is after credit charges have been taken for Lending Works’ Shield contingency fund. However, given the change in average term that can be observed in figure 3, one might have expected to see a bigger uptick in gross rate. In a similar way to Zopa, institutional investors appear to be able to use the platform to access more risky loans and this results in a marginally higher weighted average for institutional lenders.

Figure 3: Loan Term by origination month

One of the biggest changes to the type of lending going through the Lending Works platform is the term of loans being made. Whilst in the platform’s first 12 months of operation loans over three years made up less than 20% of flows, over the past six months they have made up around 50% of origination. This evolution appears to be being driven by institutional capital with the majority of loans over 3 years having been funded in recent months by institutions.

In this short article we have barely scratched the surface of what can be done in terms of analysis. The level of transparency provided by Lending Works and the amount of thought that has gone into the user interface is impressive and will undoubtedly help increase investor trust in the platform and add further to the hugely impressive visibility being provided right across the sector.