Monday, July 09, 2012

Lending Club Q2 2012 Update - Credit Grade, Days to Issue, and Funded Amount

Following is the last of two updates on the second quarter data for Lending Club. The first one covered Loan Volume, Term and Interest Rate. This one covers Credit Grade, Days between Listing and Issued Dates, and Loan Amount.

Credit Grade

The chart below shows the number of loans issued quarterly by credit grade for past three years. The colored bars represent the loan volume with actual value listed just below the end of the bar and axis at the bottom. The colored stars represent the percentage of loans in the quarter of specific credit grade and axis at the top. I made the following observations:
  • The listing of grade A loans declined 14.3% in the second quarter compared to the first quarter of 2012. The listing of grade A loans grew 22.7% and 39.8% for the same quarter of 2011 and 2010 respectively. The listing of grade G loans declined 8.7% for the second quarter compared to the first quarter of 2012. The listings of grade G loans also declined 19.4% for the same quarter of 2011. The drop in number of grade A loans is surprising. It may be the result from a combination of lower demand for low interest rate loans and improved accessibility to low interest rate loans through traditional banks for borrowers with better credit rating. 
  • The listings of grade B, C, D, E, and F loans grew between 17.4% (grade B) and 42.1% (grade C) in the second quarter compared to the first quarter of 2012.
  • The grade mix of loans listed in the second quarter continues to be similar to those of previous quarters. Over the years, more than half of the loans listed on Lending Club have been of high quality (grade A and B).


Days between Listing and Issued Dates

The chart and table below show the percentage of total loans issued in a quarter with days between Listing and Issue of Loan. I made the following observations:
  • During the second quarter of 2012, about 70% of loans with 36 month term (Blue) and about 67% of loans with 60 month term (Orange) were issued within 10 days of listing date.
  • In the second quarter of 2012, 60 month loans are taking about the same time as 36 month loans to be funded and issued after being listed. In prior years, the 60 month loans always took longer to be funded and issued. The closing gap in issuance after listing between 36 month and 60 month loans is puzzling considering, with 60 month loans, the uncertainty of default risk due to limited history, larger loan amount, and longer repayment period when things could go wrong for borrowers of 60 month loans.


Loan Amount

The chart below shows the total loan amount funded by loan length during the past three years. I made the following observations:
  • The total loan amount funded for 36 month loans grew 7.9% in the second quarter compared to the first quarter of 2012. The second quarter growth over the first quarter was 16.7% in 2011. In 2010, there was decline of 9.2% in the second quarter primarily due to introduction of 60 month loans. The total loan amount funded for 60 month loans grew 20.1% in the second quarter compared to the first quarter of 2012. The second quarter growth over the first quarter was 35.1% in 2011. The total loan amount funded for all term loans grew 11.3% in the second quarter compared to the first quarter of 2012. The second quarter growth over the first quarter was 25.4% in 2011 and 22.7% in 2010.
  • Only 29.9% of loan amount funded during the second quarter of 2012 had 60 month term compared to 51.1% during the same quarter of 2011.
  • During the first six months of 2012, the loan amount funded has reached 88% of the loan amount funded for the full year 2011. Though impressive, Lending Club most probably will fall short of 226% growth in total loan amount funded in 2011 over 2010.


Key Takeaways

  • Lending Club continues to enjoy healthy growth in total loan amount funded, similar to growth in loan volume mentioned in previous post Lending Club Q2 2012 Update - Loan Volume, Term and Interest Rate, though growth is slowing.
  • Lending Club continues to manage credit grade mix of loans and focus on listing high quality loans on its platform.
  • The recent trend of 60 month loans taking about the same time to be issued after listing as 36 month loans seems very peculiar and reasons unexplained.
Recently, Lending Club CEO Renaud Leplanche interviewed with Zack Miller at Tradestreaming. Thomas DeLong wrote an excellent recap of interview in his post Lending Club's data about their borrowers could help them more efficiently price risk in future P2P lending markets. It seems Lending Club is aspiring to become financial social network. Check out the article and interview. One of my friend was disappointed to read that Lending Club is already working on incorporating social information into the risk pricing metrics as he has been working on offering similar service.

Interested in learning to invest in stocks by reading and analyzing financial statements, check out Fundamental Analysis: A Back-to-the-Basics Investment Guide to Selecting Quality Stocks and other suggestions in Random Thoughts Reading List.

5 comments:

  1. Hi Anil,

    Two comments. But, first, I just want to say "keep up the good work". These charts are great. Insightful and very clearly formatted.

    1. In the Credit Grade chart at the top, having different scaling on the X-axis per Quarter makes it a bit confusing. 11Q4 and 12Q2 look almost the same at a glance, but closer observation of the X-axis shows almost 1000 more B grade loans in 12Q2.

    2. I think you answer your own observation about the closing gap in 36 and 60 months listing to issue date in 2012 with your Loan Amount chart. Lending Club probably noticed the lack of demand for 60 month loans and thus is reducing the amount of 60 month loans they let through the pipeline to get listed. With less demand they reduced the supply.

    Conor

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    Replies
    1. Conor,

      Thanks for the encouraging words. I am trying to figure out what other ways with my data analytics skills, I could help my readers. Your ideas are welcome.

      I didn't realize that different scales on X-axis will be confusing for readers. I updated the Credit Grade chart following your suggestion. Hopefully, it is better now.

      With your second point, you have interesting perspective that I didn't consider. I did a quick analysis. If you divide the total loan amount in the Loan Amount chart above by the total number of loans in Loan Volume chart from previous post, you get the average loan amount per loan. Actually, trend appears to be reverse. The average loan amount per loan is rising.

      Average Loan Amount per Loan
      Period 36 month 60 month
      ------ -------- --------
      Q2 12 $20,675 $11,331
      Q1 12 $20,705 $12,009
      Q4 11 $18,746 $10,202
      Q3 11 $17,287 $ 9,235
      Q2 11 $15,063 $ 8,592
      Q1 11 $14,192 $ 9,501

      There are two portions to days between loan listing date and loan issued date 1. The days it takes to fund a loan by lenders 2. The days it takes to issue loan by Lending Club. LC has incentive to issue loans as soon as possible so days between loan listing date and loan issued date most likely impacted by how quickly loan is funded. Based on the previous discussions on my Loan Length posts, I will hazard to guess that borrowers are tuning out differences between 36 month and 60 month loans and focusing on other factors for selection.

      Your thoughts are welcome. Thanks for taking the time to comment.

      Anil

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    2. Oops! Sorry, I reversed the numbers in my last reply. The first column of numbers is for 60 month loans and second column of numbers is for 36 month loans. The corrected table is listed below:

      Average Loan Amount per Loan
      Period 60 month 36 month
      ------ -------- --------
      Q2 12 $20,675 $11,331
      Q1 12 $20,705 $12,009
      Q4 11 $18,746 $10,202
      Q3 11 $17,287 $ 9,235
      Q2 11 $15,063 $ 8,592
      Q1 11 $14,192 $ 9,501

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  2. I think there are three things going on here. As you suggest many investors don't filter for loan term and so with fewer 60-month loans on the platform they are being gobbled up as quickly as the 36-month loans. Also, the extra yield available is still enticing for many investors. Finally, LC Advisors have been putting roughly 40% of their money into 60-month loans (my latest data about this is from March 2012) so unless this has changed they would be investing in a larger proportion of the 60-month loans than 36-month loans.

    ReplyDelete
    Replies
    1. Peter,

      Thanks for the clarification. Yes, LC Advisors could influence the faster issuance of 60 month loans. Their BB fund has lower limit of 28% of 60 month loans. Prospectus mentions $11.7M in escrow and 24.7% ownership in individual loans. $36M in 60 month loans last quarter * 25% = $9.2M < $11.7M. Yes, it is entirely possible that LCA was influencing faster funding and issue of 60 month loans.

      Thanks, you are wealth of info. :)

      Anil

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