lifetime expected loss at the point that new loans are written and
the latest projected expected bad debt rate.
The publication of cohort level expected loss information is required by all P2PFA member platforms as set out in the association’s operating principals. AltFi Data understands that the topic of RateSetter’s missing loss expectations has been discussed at length at recent P2PFA board meetings. We are delighted that the loss expectations have returned and, indeed, that we now have more information – the latest revision to the loss expectation.
RateSetter has accompanied the change with a blog post which explains in more detail the methodology that the platform uses to calculate the new metrics. It looks to be the case that RateSetter’s 2014 vintage was not one to savour in terms of underwriting. It should be noted that RateSetter use a a 12 month credit window on 18+ month old loans to calculate expected loss rates (see more in its blog post). Therfore the 2014 cohort is likely to be driving loss expectations for the entire platform portfolio right now, which means, if anything, these latest loss expectations might turn out to be on the high side (all else being equal). However, a bit of conservatism when it comes to serious things such as loss expectations is never a bad thing.
Figure 1: RateSetter’s portfolio performance statistics from this page.
So what new information do these updated metrics tell us?
RateSetter has revised its loss estimates for its 2013, 2014 and 2015 cohorts upwards from its initial estimates. The most extreme revision is for the 2014 cohort, where loss expectations increased by 145bps from 2.21% to 3.66%. This is tallies with the revised cohort level loss expectations that AltFi Data calculated back in June by extrapolating cohort performance.
Additionally, using the data on RateSetter’s performance statistics page we can extrapolate what RateSetter is telling us it expects final Provision Fund usage for each origination cohort to be, and we can also express this as a percentage of the contributions of that cohort. If this percentage is higher than 100%, it means that, based on RateSetter’s own figures, the Provision Fund does not have enough contributions from that cohort to settle all the expected losses and could therefore have to rely on subsidy by other cohorts. Our analysis is summarised in Figure 2 – row 6 in the table.
Figure 2: RateSetter Provision Fund analysis. Top 5 rows are RS provided figures, bottom 3 rows are AltFi Data calculated.
The analysis in the table indicates that losses on the 2014 cohort will just exceed the contributions from that cohort but the shortfall is easily covered by surpluses in earlier years. However, RateSetter tell us that ~£18m of the 2014 cohort was not covered by the Provision Fund (institutionally funded loans). These loans were riskier and suffered higher than average loss rates. Adjusting for this means that RateSetter project the Provision Fund to run a small surplus in the 2014 cohort. The magnitude of the shortfall/surplus is so small and there is always a margin of error in any prediction, so it looks like whichever side of the surplus/deficit line it falls, it will not be material, we’ll keep an eye on it. For other cohorts, RateSetter are projecting there to be a reasonable cushion in the Provision Fund at this stage.
With this type of analysis, as long as the latest projected loss numbers are updated on a timely and accurate basis, the information that RS provide in the new stats table gives investors the ability to easily monitor the performance of the Provision Fund. Checking that the projected loss numbers make sense is a slightly more involved task, but from what AltFi Data can tell, all other things being equal (ie the economy does not deteriorate), RateSetter’s cohort loss projections are now on the conservative side.