An update on credit performance and provision fund coverage ratio calculations for May.
Our Covid-19 and The Provision Fund blog in April outlined how we expected Covid-19 to impact the Australian economy, updated our estimate of credit losses on the RateSetter Lending Platform loan book and updated the Provision Fund coverage ratio.
With the benefit of a further four weeks of internal and external data, we are pleased to provide a further update of our credit and Provision Fund performance for May.
Impacts on loan book to date
Pleasingly, borrower arrears rates remain
consistent with this time last year, and show no discernible signs of impact from
Covid-19. Additionally, the most recent borrower direct debit honour rates
remain consistent with pre Covid-19 levels.
As anticipated, the number of
borrowers making enquiries about financial hardship has remained elevated.
Currently, around 3% of RateSetter Lending Platform borrowers have entered into
financial hardship arrangements. This remains below the ~4% we expect, and below
our understanding of industry averages based on our discussions with (and data
disclosed by) other lenders. Our priority is now to support these borrowers by
working with them to develop affordable payment plans, and in time to reinstate
each borrower’s contractual payments as their circumstances improve.
Borrower early payments have increased
above historical levels, as should be anticipated during times of increased
We continue to employ tightened
credit criteria for new lending and we continue to require new borrowers to pay
increased amounts into the Provision Fund.
Changes to expected credit losses
The peak level of unemployment and the duration of elevated unemployment are key inputs into our expected credit loss models. Over the last month we have seen expectations of peak unemployment reported by analysts at the Big Four banks rise from around 9.0% to a median of 9.75%. Expectations of a reasonably rapid recovery continue to hold, supported by the most recent economic data, improving Covid-19 statistics and high levels of government stimulus.
In light of this increase to expected unemployment we have revised our credit models, and we now expect $14.2 million of net losses on RateSetter Lending Platform loans outstanding.
Provision Fund coverage ratio
As at 14 May 2020, the Provision Fund buffer is $17.6 million. Accordingly, the Provision Fund coverage ratio is now ~124% of expected credit losses. We are pleased that despite the significant economic shock to the economy caused by Covid-19, the Provision Fund continues to compensate investors for all borrower late payments and defaults and the Provision Fund coverage ratio remains above 100%.
We continue to take steps to help increase
the Provision Fund coverage ratio increases over time. Most notably, we have
materially increased the amount new borrowers must pay into the Provision Fund
relative to the amount of their loan.
We note that the Provision Fund is not an insurance product nor a guarantee and you should read the PDS for more information about the Provision Fund.
We continue to believe that the RateSetter Lending Platform is well-positioned to absorb the economic impacts of Covid-19, and that our investors will continue to benefit from attractive returns, whilst other asset classes suffer significant changes in both prices and returns.
Written bySimon Cordell
Simon joined Plenti in April 2016, having headed up Consumer Risk and Small Business Risk at American Express. His team considers all aspects of the credit lifecycle.