Lend Academy Network Forum

Lending Club Discussion => Investors - LC => Topic started by: Fred93 on April 03, 2018, 05:02:45 AM

Title: LC loan performance not getting better
Post by: Fred93 on April 03, 2018, 05:02:45 AM
I want to begin with LendingClub's most recent statements about loan performance, then show you recent data, and let you decide whether LC's statements are reasonable or misleading.

From the 10K for the year ended 12/31/2017,
Quote
The loans originated between the second half of 2015 through the third quarter of 2016 continue to season and are charging off at higher rates than loans originated in prior vintages.

I agree.  Thank goodness they finally said that.  I've been saying it for awhile now.
   
Quote
The increases in charge-offs were partially offset by the following...

The effect of credit tightening implemented in late 2016 and early 2017.  As the fourth quarter of 2016 and first quarter of 2017 vintages are beginning to season we are seeing improved loss performance vintage-over-vintage compared to the second and third quarter 2016 cohorts as a result of the tighter credit criteria after normalizing for the impact of natural disasters.

Improved loan performance you say?  I'm listening.

This is technically correct.  4Q2016 and 1Q2017 chageoff rates have been coming in a bit lower than 3Q2016.  However, first I think the elephant in the room is that 3Q2016 is a really bad benchmark.  It was worse than each of the proceeding 28 quarters!  We're nowhere near where we were say a year earlier.  Things are still bad.  Ok, so some numbers ticked down, but the numbers are noisy, so I'm not sure there's anything to celebrate there.  While I'm at it, I don't think there's any evidence which can be used to substantiate the claim that this little tick down was due to the credit tightening LC implemented in 2016 and 2017.  That's speculation.

Although this document reports on events thru the end of 2017, it was filed on 2/22/2018.   Just a little more than 1 month later, on 4/1/2018, LC published the March 2018 chargeoff file.  I've charted some data from this file.

As you may recall, I'm plotting the fraction of loans which have been charged off at each month during a loan's life.  This data is usually charted in the form of "vintage curves" with one curve for each vintage of loans, and a horizontal axis which is the age of the loan.  Those charts make comparisons difficult, so I flip things around.  I plot one curve for every loan age, and the horizontal axis is the loan vintage.  On these curves, if every vintage behaved identically, all the lines would be horizontal.  If the curves go up at the right end, each new vintage behaving worse than the one before.  If the curves go down at the right end, each new vintage is behaving better than the one before.

(https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Ffred93.com%2Ffbi%2FLC-chargeoff-vs-vintage-2018-04-03.png&hash=337f05d7b7a0269489b93062434986a6)

The earliest month in a loan's life that is interesting is month 5.  That's because loans have to be 1 month old before the first payment is due, so can only become 4 months late (which makes them subject to chargeoff) at month 5.  I've shown the chargeoff fraction at months 5,6,7,8,9,10.   I don't show later months because they don't give us information about recent vintages.  (Only loans from old vintages have lived long enough to provide data for these later months.)

With all that in mind, lets look at the curves.  You can see that Q3 of 2016 was the worst quarter in recent memory, and the subsequent quarters 16Q4 and 17Q1 did indeed come in better, as the Lendingclub text above describes.  However, that  little downward trend was pretty much undone by the tick up that we now see in the 17Q2 data. 

Only 4 of these curves have data for 17Q2 because that's all the data that is available.  One more month's data will be available next month, etc.  However, the four months we can see are consistent with one another.  17Q2 is the second worst vintage in recent memory, second only to 16Q3.

Stand back and look at this chart.  Does it look to you like performance is getting better as we move to the right (into newer vintages)?  No it does not.

Although LC has thrown lots of words around in blogs and SEC filings, the data simply doesn't show that recent changes in underwriting (or anything else) has improved loan recent vintage performance.  The curves still look like they're gong up as they move to the right

This combined with the fact that LC stubbornly refuses to increase interest rates, makes the outlook grim.

Title: Re: LC loan performance not getting better
Post by: Rob L on April 03, 2018, 12:00:50 PM
Very nice work as always!

What I find most troubling in the chart is the strong uptick in charge off rates in 17Q2 for MOB's 6, 7 and 8. If this were a downtick of the same magnitude there would be cause for some optimism. Coupled with rate increases lenders might once again stand a chance of making acceptable returns (knowing beauty is in the eye of the beholder). But such is not the case.

Perhaps LC's "near death experience" in 16Q2 could explain the rationale for the dropping charge off rates in 16Q4 and 17Q1. The 17Q2 data are not available for MOB's 9 and 10 so we will have to wait a couple of months to see how they look at those ages. Meanwhile it appears LC has reversed course and lowered its grading standards, probably to garner more originations at the expense of its lending community.

When LC started out banks were simply not lending and LC had the field mostly to itself. The Fed's ZIRP forced hoards of savers to reach for yield anywhere it could be found, providing LC an almost limitless source of money to lend. When you have a virtual monolopy you're usually pretty successful. Fast forward to the current and borrowers have many options. LC faces competition today like it's never faced before.