Idle ramblings of a wandering mind...

This is the third article in a series of data analysis pieces I have written on Prosper.com. Links to my previous two articles are there at the end of this article, in case you want to dig deeper. Okay - so what am I saying here? As would be clear to anyone who has read my previous posts, I like data and I like visual representation of data. So here are three charts and what we can infer from these charts. All these charts are drawn on a monthly sampling basis for 10 months from Feb 2006 to Nov 2006. I am starting my analysis from Feb as the Prosper's size before Feb was quite minuscule and not really comparable. All data is from Prosper's Lending Performance page. It takes a while to retrieve all this data but its all publicly available.

Chart 1: Growth of Prosper

This is a chart of dollar value of loan's originated every month from Feb 2006 through Nov 2006.
Two things are obvious from the chart. First - Prosper's growth has been phenomenon. It has grown from half a million dollars of loans per month to more than three million dollars of loans per month in less than a year. Second - the growth has levelled out in last three months - in fact it the loan volume declined in Sep and Nov. Whats going on? My read of the situation is that in Aug Prosper received some good media coverage and it lead to an influx of borrowers and lenders leading to a huge spike in Aug. However, this spike also meant a decline in quality of loans - more loans of lower quality got funded. Prosper then clamped down on its verification process and started rejecting some loans (even when they got funded). Further, some lenders who got burnt after lending indiscriminately in June-July-Aug tightened their belts. Both these combined to reduce volume of loans in following months. However, the long term uptrend is very much intact and we should see continuing growth in Prosper's loan volume.

This loan volume also gives us a fair idea of how much money Prosper might be making. Lets assume an monthly loan volume of 4 million dollars per month and all repayments being reinvested. Prosper charges 1% of loan amount from borrowers - so that makes $0.48 million a year. Further, Prosper charges 0.5% of outstanding loan principal from lenders - so that makes $0.24 million. So a total of $0.72 million. Prosper will also make some money from interest (it does not pay any interest to lenders with free cash in their Prosper account), some from fees etc - so may be we are looking at $0.75 million per year. Lets say that in three years (I guess venture caps will stand by you for that long before pulling the plug) Prosper grows to be ~$40 million per month - not too outlandish considering past growth rates. Then Prosper will be making $7.5 million per year. Now - its not too big an amount but remember that running costs for Prosper is quite low - it does very little advertising, it employs few (maybe 20-25) people and it doesn't cost much to have servers and the site running. Combine this with potential for rapid scaling up and perhaps cross selling and other revenue sources and you are looking at a sustainable, profitable business here.

Chart 2: Distribution of Prosper Loans across Credit Grades

The chart below shows distribution of Prosper loans across credit grades for loans originated in every month from Feb through Nov 2006. The chart is a little busy - so look at the attached table to make sense of the graph.

You can see that the composition of Prosper loans has changed significantly since Feb. Initially AA and A credit category used to be quite big - more than 20% each of total loan amounts in Mar. However, over time, their proportion came down and by Nov - they were barely 20% of total loans combined. This declined has happened because of the increase of share of E and HR category loans. They combined for ~14% of loans in Feb but by Nov, E category alone claimed higher than 14% of total loan amount. B, C and D credit grades have mostly held their ground over the period. So what can we infer from this? Perhaps lenders have become more open to funding low credit loans after previous good experience with them. This is unlikely because except D, all other low credit category has performed miserably. Perhaps word has gotten out that Prosper is a good and affordable source of credit for low credit borrowers and many people with payday loans and such are not coming to Prosper in droves and hence the increase in E and HR category borrowers on Prosper - this is quite possible. There may be other explanations as well. Let me know if you have a different opinion.

Chart 3: Reduction in Credit Quality at Prosper

This is a followup of the previous chart. I thought - well - loan composition is changing - so lets see how the average loan profile is changing over these months. So I created a simple index of credit quality. Under this index - a loan with credit AA has an index of 0, A has an index of 1 and so on till HR has an index of 6. Then I take a weighted average of all loans for the month to calculate a credit quality index for the month. By definition, this index will be between 0 to 6 and higher number will mean lower average credit quality. So how has this average credit quality index changed in past months - here is the chart:

Its clear from the chart that the average quality of credit at Prosper is declining - rather sharply. In Feb and Mar, average credit quality was less than 2.5 - that is - a credit rating better than middle of B and C. It has now changed to higher than 3 - that is - a credit rating worse than C on average. It seems to have stabilized after July to a 3-3.25 level. It will be interesting to see how this develops in coming months.

I must post a disclaimer that this is still early days for Prosper and its numbers have not really stabilized - so reading too much into overall trends may not be accurate. So lets continue to watch Prosper and see what direction all these numbers are taking. I will be updating the above analysis every month or so and post updates on this blog.

In case you are interested in my previous two data analysis pieces on Prosper - here are the links:

• How to select a borrower on Prosper - Part II
• How to select a borrower on Prosper - Part I
  

Labels: Investing, Prosper