What it means
Lenders and investors group assets by the date they were originated. A bank might refer to its loans from the first quarter as one vintage and those from the third quarter as another.
Each group is then tracked separately over time. Vintage analysis answers a simple question: do loans made at different times behave differently?
By lining up each vintage by its age (months since origination), you can compare them fairly. A vintage that shows more defaults at month 12 than earlier groups did at the same age is a warning sign.
The approach helps to separate causes. If one vintage performs badly, the cause may be looser underwriting (the process of checking a borrower's ability to repay), a change in the economy or a shift in the types of customers.
Because all loans in a vintage share the same start date, the comparison shows whether the problem was in how they were made. Vintage is also used in other parts of finance.
A private equity or venture capital fund has a vintage year, usually the year it first invested, and investors compare funds from the same year because they faced similar market conditions. Securitised loan pools are also described by vintage, so buyers can judge the likely behaviour of the underlying loans.
There are limits to the method. Young vintages have not had time to show their full losses, and comparing a three-month-old batch with a three-year-old one is meaningless without adjusting for age.
Analysts should also watch for changes in the mix of borrowers, products or sales channels. For a non-finance reader, the value of the concept is the discipline of asking when something was made, not just how it is performing overall.
A healthy average can hide a weak recent vintage, so ask for the numbers split by period before relying on a single headline figure.
In practice
Real-world examples.
Example
A credit card issuer tracks monthly vintages of new accounts. When accounts opened after a marketing campaign show twice the early losses of earlier groups, the risk team tightens approval rules for that channel. The change is made within weeks, long before the full losses appear in the accounts.
Example
A pension fund compares private equity funds with the same vintage year. It judges a fund's return against its peers from that year, not against funds that invested in very different market conditions.
Example
A buyer of a car loan portfolio asks the seller for performance data by vintage. The data shows that loans made during a period of aggressive growth have much higher default rates, and the buyer reduces the price it is willing to pay.
Formula
Calculation
Cumulative default rate for a vintage = loans defaulted to date / loans originated in the vintage
A lender made 2,000 loans in its first-quarter vintage, and by month 24, 90 had defaulted. Cumulative default rate = 90 / 2,000 = 4.5%. Its third-quarter vintage also had 2,000 loans, and by month 24, 150 had defaulted, a rate of 150 / 2,000 = 7.5%. The later vintage has 3 percentage points more defaults at the same age, which suggests a problem with how those loans were approved.Case study
Seen in the real world.
Bluefin Auto Finance is an illustrative, fictional lender that doubled its lending in one year by relaxing credit checks. The overall default rate looked healthy because most of its portfolio consisted of older, well-performing loans.
The risk director produced a vintage report. It showed that loans from the fast-growth year had defaulted at 6% by month 12, compared with 2.5% for earlier vintages at the same age.
In this illustrative case, management restored its credit checks and set aside extra provisions for the weak vintage. The report showed that the portfolio average had been hiding the problem, and that by watching vintages, the company caught it a year before losses would have appeared in its headline figures.
Watch out
Common mistakes.
- Comparing vintages at different ages, when a younger batch has not yet had time to show its losses.
- Relying on the overall portfolio average, which can hide a weak recent vintage behind older, stronger loans.
- Blaming the economy for poor results without checking whether lending standards changed in that vintage.
Questions
People also ask.
What is a vintage year in private equity?
It is the year a fund made its first investment or first called money from investors, and it is used to compare funds that faced similar market conditions.
Why do lenders use vintage curves?
A curve shows how losses build up as loans age, which lets the lender forecast the likely lifetime losses of newer loans.
Does a good vintage guarantee future performance?
No, it only shows how that group behaved so far, and conditions can change.
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