Online loan facilitators enter ‘risk management mode’ as times get tough



“Risk management trumps everything” seems to be the mantra for Chinese online lending companies these days, as China’s economy slows sharply after years of skyrocketing growth fueled largely by easy credit. . And investors seem to like the new direction.

That’s the message from the latest results from a trio of online credit facilitators, with Lexin Fintech Holdings Ltd. (LX), 360 Digitech (QFIN), and FinVolution Group (FINV) all announced a year-over-year decline in their third-quarter net profit last week. The details of their results vary, but the common theme is growing caution as they try to limit risks from China’s economic slowdown, which can affect borrowers’ finances and increase their risk of default.

That means the trio sacrificed revenue growth to focus on higher-quality or lower-risk customers. Lexin’s third-quarter revenue fell 9.4% year-on-year, according to its latest earnings report released last Wednesday. A few days earlier, 360 DigiTech job a similar drop of 10%. EndVolution’s the results show it managed to increase its third-quarter revenue by around 18%. But even this growth has been slower than in previous years.

“At present, management believes that quality rather than quantity is the right approach to maintain the good health of our business,” Lexin chief financial officer Sunny Sun said on the earnings conference call. of society, summing up the broader sentiment at the moment.

The pressure to find financially sound borrowers and minimize defaults is greatest for Lexin among the three as it has the highest delinquency rate. Loans past due for 90 days or more, which are generally considered non-performing, accounted for 2.66% of the company’s total at the end of September, down from 1.85% a year earlier and 2.63% at the end of June. The latest figure is more than double the average of traditional banks in China rated by Fitch Ratings.

Although Lexin is focusing more on high-quality borrowers with lower credit risks, which should reduce the need to set aside provisions against possible defaults, it still significantly increased these provisions in the third quarter. compared to the previous year. Although Lexin is largely a loan broker between borrowers and banks, the company, like 360 ​​DigiTech and FinVolution, faces credit risks as it helps cover losses to its lending partners when borrowers do not repay the loans it facilitates.

The surge in provisions in the third quarter eroded Lexin’s net profit, but it also shows that the company wants to be prepared for an increase in defaults. Such proactive provisioning seems prudent in economically uncertain times like today. If actual loan losses are lower than Lexin’s projections, it can still release some of its provisions and add them to its revenue in future quarters.

Quality Growth

360 DigiTech’s delinquency rate has also increased over the past year and was at a similar level to Lexin’s at the end of June. But unlike its rival, the company’s figure fell slightly in the third quarter. This suggests some success in screening subprime borrowers as 360 DigiTech, like Lexin, steps up its efforts to generate “quality growth”, as CEO Wu Haisheng reiterated on the earnings call. of the society.

Such efforts require constant investment to develop and refine risk assessment software, which is not easy when your profit is down. For 360 DigiTech, funds for a new second listing in Hong Kong can be useful for such an investment. The company is offering 5.54 million shares to raise up to HK$492 million ($63 million), with pricing expected on Wednesday. He said he would use the proceeds to develop technology and credit reporting capabilities, among other purposes.

FinVolution illustrates how a focus on high quality borrowers can pay off in the long run. The company started targeting less risky consumers long before Lexin and 360 DigiTech. As a result, its 90-day delinquency rate is much lower than the other two, at 1.44% at the end of September, although it is up about 0.4 percentage points from the previous year. .

Because FinVolution already has a better credit risk assessment system and accumulated experience, it can probably target qualified borrowers and increase its loan facilitation volume more easily than Lexin and 360 DigiTech. That’s probably why, unlike the other two, it was able to grow its third-quarter earnings despite the economic headwinds.

But the fact that FinVolution’s revenue growth has also been weaker than in previous years means that it has likely become more cautious in seeking out new borrowers, likely both out of caution and because the pool of customers responding to his risk criteria decreased. And like Lexin and 360 DigiTech, FinVolution has also strengthened provisions against potential future defaults.

Although the latest reports from the three companies were hardly stellar, all of their stocks rallied after their release. FinVolution shares now trade at a price-to-earnings (P/E) ratio of around 4, while Lexin and 360 DigiTech’s multiple exceeds 3. Admittedly, those valuations are hardly high. But they seem to indicate that investors are acknowledging companies’ efforts to stay in the game for the long term, despite ever-changing regulations toward their industry.

All three have earned the title of “survivor”, resisting a harsh regulatory crackdown on online lenders by changing their business models to loan facilitation instead of direct lending. This achievement seems commendable, given that many of their former peers have disappeared or are fighting for survival. This last group includes Qudian Inc. (QD), which is barely surviving after failed attempts to reinvent itself as a tutoring center operator and convenience food vendor. His third-quarter net loss swelled almost sevenfold, with no clear path forward as he searches for a business model.

In contrast, Lexin, 360 DigiTech, and FinVolution all deserve credit for not only sticking around, but also for taking what seem like the right steps to stay in business for the longer term.

Disclosure: None

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.


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