Publication Date: May 2024
How are Default and Delinquency rates defined?
Delinquency rates are those loans that are overdue at least one repayment, expressed as a percentage of the amount lent in the year. Default rates are the percentage of the amount lent in the year which is considered unrecoverable following our Collections efforts. For the ‘Actual’ results published, all loans have passed their final payment date at the date of publication and our Collection activities continue to collect further repayments on loans, for example customers on payment plans, and as a result our Default and Delinquency Rates improve over time, and so does the Lender IRR
What is the expected cash flow return profile of The Money Platform’s loans?
Our target is for a monthly loan cohort as a whole to have broken even by 6 months after the start date (e.g. loans issued in May 2024 are targeted to reach IRR break even (0% return) by November 2024), and to reach Forecast IRR 6 months after that (i.e. 12 months after the loan start date). The First published Actual annualised return for the year ended 31 January 2024 (our company year end) above includes months that are several months passed their maturity date (e.g. February 2023) and months that have only recently matured (e.g. January 2024)
Returns by Annual Cohort
2023-24 Actual Returns (as at May 2024)
Returns in 2023-24 were ahead of expectations with a Gross Return (after losses and fees) now at 24.0% (May 2024). This is ahead of the last two years at the same point and we should, as collections activity takes place, see returns significantly exceed the forecast for 2023-24.
One important continued reason for outperformance is improved credit decisioning tools we have developed and utilised, resulting in only the very best borrowers within this credit market being selected for a loan.
The macro-economy has performed broadly in line with expectations from May 2023. In recent months, strong wage growth and a falling rate of inflation has boosted real incomes offering a slight macro tailwind for repayments.
2022-2023 Updated Returns ( as at May 2024)
Returns in 2021-22 are substantially ahead of expectations with a Gross IRR of 33.2%. This reflects a strong collections performance for loans on payment plans after the first 12 months
Our response to the Cost of Living was immediate and thorough, the macroeconomic landscape for the year was not as poor as originally expected, so our constrained lending resulted in above forecast returns.
2021-2022 Updated Returns ( as at May 2024)
Returns in 2021-22 are ahead of expectations. Returns for 2021-22 did underperform initially, with the cohort only just reaching lender breakeven in at the first reporting date in May 2022 (Net IRR of 0.3%-0.4%). The year was one of two halves with performance markedly weaker in the first half as the U.K. exited Covid-19 restrictions in the Spring and Summer of 2021, with the well-documented effects of the ‘pingdemic’ and end of furlough, producing weak credit performance. By contrast the performance over the Autumn of 2021 was stronger as the economy returned to a more ‘normal’ state.
We said in our initial assessment in May 2022 that we expected strong collections from the 2021-22 year and this has now been borne out. With a Gross Return (after losses and fees) now at 26.4%, this follows the Default Rate falling from 7.8% to 6.2% and the Delinquency Rate dropped from 11.7% to 10.3%.
2020-2021 Updated Returns (As at May 2024)
Returns in 2020-21 have continued to outperform expectations, with both the Default and Delinquency rates now below the forecast level. Collections are now minimal on this cohort as most loans have either completed or defaulted and so further improvements in performance are likely to be muted.
It should be noted that the figures above refer to the past and that past performance is not a reliable indicator of future results
2024-2025 Forecast Returns
For our financial year 2024-25 (loans issued between 1st February 2024 – 31st January 2025) we are forecasting a Gross Return (after losses and fees) of 15.2% p.a..
Background
The key assumptions for the 2024-2025 Forecast Returns (when compared to actual returns for 2023-24) are:
A higher default rate of 7.0%.
A higher delinquency rate of 13.2%.
These Forecast Returns reflect an expected deterioration on the actual returns realised in 2023-24 (as at May 2024). Over the course of the last year we have operated a tighter than desired lending policy in response to the cost of living crisis, the war in Ukraine, and the expectation of a deterioration of our customer’s finances. We are now relaxing those lending constraints in order to allow more customers to access credit however overall this is likely to lead to a small increase in delinquencies and defaults versus 2023-24 actual returns.
We expect the macroeconomic situation faced by our borrowers will be less challenging over the year compared to the previous year as the rate of inflation recedes, leaving employees with real pay rises. Falling interest rates later in the year might lead to less financial pressure on some over-indebted households.
Unemployment may rise slightly over the course of the year, providing a slight headwind to the working population we serve, the OBR’s March 2024 report forecast unemployment to peak at 4.5% in 2024. Like in previous years we expect to continue to see economic stagnation and limited growth. The OBR forecast growth of 0.8% in 2024, with inflation remaining around target at 2.2% for 2024. Uncertainty around the strength of UK consumers, possible renewed inflationary pressure and the low level of economic growth is a cause for our caution and expectation that returns in in 2024-25 will be weaker than seen in previous years.
AAny deviation from our macro-economic assumptions, including for example entering a deep recession, higher than expected interest rate rises, higher than expected inflation, further changes to the regulatory environment or political instability, could undermine the situation and result in higher levels of default and delinquency.
Methodology for 2024-25
The Forecast Annualised lifetime return is the total return calculated on an Internal Rate of Return (IRR) basis that an investor can expect to receive on loans issued in the year from February 2024 to January 2025 (our company’s financial year) over the life of the loans. We will continue to update the actual returns (including recoveries) for our cohorts.
The Forecast return is an IRR calculated on the basis of historic performance of our loan book adjusted for forward-looking expectations. We are constantly improving our credit decisioning as we accumulate data but given the macroeconomic uncertainties, we have included a buffer on our historical loss rate.
The Forecast Return assumes an investor invests in a diversified portfolio of our loans each month throughout the Forecast Return period, and in proportion to the volume of loans issued each month by the Company.
For the purposes of this Outcomes Statement the Forecast Annualised lifetime return is based on expected cashflows from three different loan outcome-cohorts:
Performing Loans, being those that are fully repaid within the reporting period.
Defaulted loans, being those with no received payments.
Delinquent loans, being those that at the end of the reporting period have only made partial payments or have entered into an alternative payment plan.
Reasons why the actual return may differ from the Forecast Return:
The default and/or delinquency rate being different to expected.
The UK macroeconomic situation in the period being different to expected.
The Company’s loan volumes each month being different from forecast.
Changes to the regulatory environment in which the Company operates.
An investor’s portfolio mix being different to the Company’s volume mix.
The number of lenders on the platform impacting the uninvested weighting.
Delays in payments being distributed to lenders due to technical or personnel issues.
Our net return assumes a 25-35% cash drag and a 40% (higher band) tax rate – this may not match the experience or circumstances of all lenders.
Changes to The Money Platform’s economic model, for example a change to the income allocations between lenders and the platform (which would be communicated in advance to loan participation).
Reduction in interest payable due to changes in customer behaviour resulting in more early repayments.
What is an “Internal Rate of Return”?
The internal rate of return on an investment is the annualised effective compounded return rate or rate of return that sets the net present value of all cash flows (both positive and negative) from the investment equal to zero.
IRR is designed to account for the time value of money. A given return on investment received at a given time is worth more than the same return received at a later time, so the latter would yield a lower IRR than the former, if all other factors are equal.
