Funding Circle & RateSetter: Regional Default Trends
We noticed a while back a variance in default rates across different UK regions. Geographic locations draw deep emotions amongst people and we have personally found it very interesting to analyse variances between regional default rates. For investors who actively select loans within the peer to peer lending (P2P) market, there is an opportunity to infer lending strategies from analysing the regional performance of loans.
To gain some form of statistical significance we have ran analysis on two of the larger loan books: Funding Circle and RateSetter. The aim of this analysis is to determine whether there are any default trends between different UK regions; it is not to estimate potential investor losses or returns.
Funding Circle Regional Default Rates
Analysis was conducted on all loans (loans still in circulation and closed loans) held within the Funding Circle loan book; 50,100 loans, totalling £3.35 billion. Any capital recovered post default was not considered.
Table 1: Funding Circle Defaults by Region, Source: Orca Analytics
Unfortunately, my home country of Scotland has come out as the region with the highest default rate, followed by Wales and Northern Ireland.
Loans originated in East Anglia, London, the South East and South West of England experienced lower defaults. The difference between the highest defaulting region and the lowest is relatively large at 2.15%.
RateSetter Regional Default Rate
We removed the wholesale lending loans from the RateSetter loan book, prior to conducting the analysis, as a large default last year may have influenced results unfairly. Wholesale lending was discontinued at RateSetter in December 2016.
The analysis covered 495,000 loans, totalling £2.1 billion of lending across consumer, business and property lending markets. As a reminder, recoveries were not considered in this analysis.
Table 2: RateSetter Default Rates by Region, Source: Orca Analytics
Again, we find the regions of London, the South East of England and East Anglia to have the lowest defaults, while the North East of England, Northern Ireland and Scotland have the highest default rates.
The difference in default rates in the highest defaulting region, the North East of England (5.79%), is significantly higher than the lowest, London (2.25%).
Based on data held in the RateSetter and Funding Circle loan books it would appear that Scotland, Northern Ireland and the North of England have historically experienced higher defaults than the South of England, including London.
Focusing on Funding Circle
Although it feels that a trend has emerged, different loan characteristics such as loan size, interest rate and the loan term, may be associated with different regions which may be the reason for the differences in default rates. We’ve ran further analysis on the Funding Circle loan book to verify if a variance in loan size, interest rate and loan term correlates to different default rates across the regions.
Scotland, with the highest default rate, has the lowest average loan size of £56,000, while East Anglia, with the lowest default rate, has an average loan size of £63,000. With such a small variance in the loan size between these two regions it is difficult to attribute the differing default rates to this reason.
Funding Circle: Defaults & Average Loan Amount by Region
Chart 1: Funding Circle Defaults and Average Loan Amount by Region, Source: Orca Analytics
Below is a similar chart displaying the weighted average loan term versus the default rate across the regions.
Funding Circle: Defaults & Weighted Average Loan Terms by Region
Chart 2: Funding Circle Defaults & Weighted Loan Term by Region, Source: Orca Analytics
The weighted average loan term remains fairly consistent between the regions, with the lowest, London, being 41 months and the highest, Northern Ireland, being 54 months. Although this might suggest that a shorter loan term might be less likely to default, the difference is too narrow to state with any real confidence.
When plotting the weighted average interest rate vs. the default rate, we can see that borrowers in Northern Ireland pay the highest interest rate, 10.8%, while borrowers in East Anglia pay on average 9.4%. This 1.4% variance between the regions is actually close to the variance in the default rates; 1.27% between these regions. Scotland, however, has a weighted average interest rate of 9.8%, which is pretty close to London’s, 9.6%. The variance in the defaults between these regions is 1.95%. Again, it cannot be said that differences in interest rates throughout the regions correlate to default rates.
Funding Circle: Defaults & Weighted Average Loan Rates by Region
Chart 3: Funding Circle Defaults and Weighted Borrower Rates by Region, Source: Orca Analytics
A trend has emerged from analysing the Funding Circle and RateSetter loan books which demonstrates a regional default variance exists. Historically, regions in the South of England, including London, have experienced lower default rates than the North of England, Scotland and Northern Ireland. When focusing on the Funding Circle loan book, although there were small variances in loan terms, loan amounts and interest rates between the regions, a correlation with default rates was not found. A different factor must be in play which has resulted in default rate differences, potentially social and economic factors.
Both RateSetter and Funding Circle are passive platforms so unfortunately investors are not able to weight their holding to different regions with lower default rates. On P2P platforms where loans can be selected, similar trends may exist, however further analysis would have to be conducted to form conclusive lending strategies.