Key points to remember:
- FinVolution’s revenue growth slowed to around 12% in the second quarter, from 16% and 32% in the previous two quarters, while its latest quarterly net profit fell around 6%.
- 360 DigiTech and Lexin saw little to no revenue growth for the quarter, with profits dropping 37% and 80%, respectively, over the period.
By Warren Yang
It’s hard for a lender to grow its business in a slowing economy, and Chinese fintechs that once lured investors with their rapid growth by doling out funds to hungry consumers and small businesses are no exception.
The latest quarterly results from three of China’s leading lending facilitators – FinVolution Group FINV, 360 Digitech QFIN and Lexin Fintech Holdings Ltd. LX – show how the group bears the weight of a slowing Chinese economy in the same way as direct lenders.
An economic downturn can hit lenders in two ways. When things are going well, many people and businesses rush to borrow on the assumption that their future income will be enough to pay off their debt. But when things go wrong, many of these same entities fold and suspend their borrowings. Those who continue to borrow also become more likely to default on their debt. In such situations, lenders can be hit hard by a slowdown in lending activity and an increase in bad debts.
Last Monday, FinVolution – a former direct lender that turned itself into an intermediary between banks and borrowers to survive a severe regulatory crackdown on the fintech sector – reported a roughly 6% year-on-year drop in profit. net in the second quarter to 585 million yuan ($87.4 million). Its net revenue growth slowed to around 12% from 16% and 32% respectively in the previous two quarters.
China’s economic slump has put the company, along with other loan facilitators and direct lenders, in crisis. As general credit demand weakens, lenders could perhaps achieve more impressive revenue growth by aggressively pursuing consumers or small businesses in desperate need of funds as their business collapses.
But at times like these, these borrowers are exactly the type that any lender should avoid due to the higher likelihood of default on their loans. Even though companies like FinVolution act as loan brokers for the banks, they have provisions to return some or all of the funds to the original lenders in the event of default, exposing them to the same credit risks to which direct lenders face.
This means online loan providers would have to sacrifice revenue growth for the time being, which they appear to be doing. The higher quality borrowers they manage to find ultimately generate less revenue and lower fees because they pay lower interest rates due to their better creditworthiness.
What’s worse for fintech lending companies is that they typically lend to consumers or smaller private sector clients who are inherently riskier than large, stable companies that borrow from traditional public banks. This can be seen in FinVolution’s ratio of loans over 90 days past due, which climbed to 1.6% at the end of June from around 1% a year earlier despite its efforts to be more careful in selecting customers.
The provisions the company is setting aside to repay its lending partners in the event of default more than doubled year-on-year in the second quarter, far outpacing a 44% increase in its total outstanding loans. This hit FinVolution’s results hard.
360 DigiTech, which also became a loan facilitator with a direct lender, saw even slower revenue growth and a much larger decline in net income than FinVolution for the quarter. 360 DigiTech’s total net revenue for the three months rose only 4.5% to 4.2 billion yuan from a year earlier, while its net profit fell by around 37% to around 980 million yuan, according to its latest quarterly results published a few days before those of FinVolution.
Similar to FinVolution, 360 DigiTech recorded significantly larger provisions against possible defaults in the quarter, increasing the amount by almost 160% to around 1.2 billion yuan. In addition to earning fees in its role as an intermediary for banks, 360 DigiTech also derives income from loans distributed through trusts and asset management plans and records them as loans on its balance sheet. It describes these loans as “capital heavy”, but does not specify in its results or annual reports who is actually providing the funds for them. Nevertheless, the company has increased provisions for these assets by approximately 70%.
While FinVolution and 360 DigiTech have at least seen revenue growth, Lexin, which uses a hybrid model that mixes lending facilitation and direct lending, saw revenue decline 26% year-over-year in the second quarter. Lexin was also the only one of the three to see a decline in lending facilitation revenue, which eclipsed increases in its revenue from other businesses, such as interest from direct lending and software services for customers. tradespeople. As a result, Lexin’s net profit fell the most among the three fintechs, by almost 80%.
FinVolution likely held up better than the other two due to its focus on building capacity to target relatively high-quality borrowers before the onset of the current economic downturn, positioning itself better for the current climate. By comparison, 360 DigiTech and Lexin likely prioritized growth over risk management and are now paying the price as they strive to focus on less risky borrowers. These two still have much higher delinquency rates than FinVolution even after the latter’s metric deteriorated in Q2.
Investors apparently recognize all of this. FinVolution trades at a price-to-earnings (P/E) ratio of around 4, compared to 3.5 for 360 DigiTech and 2.6 for Lexin. FinVolution stock also had the best performance of the trio this year, roughly unchanged from its 2022 debut. In comparison, 360 DigiTech and Lexin are down 29% and 46%, respectively.
Still, that’s not to say the rest of the year looks too rosy for FinVolution, or any other lender for that matter. The worst for the Chinese economy may have passed after a difficult first half, when the arrival of the Omicron variant led to prolonged shutdowns in cities like Shanghai. But Beijing’s tough Covid-19 policies could lead to further disruption at any time, and there’s also a real estate slump and recent power shortages that have collectively prompted global investment banks to reduce their already weak projections for China’s economic growth for this year.
All of this means that the days of skyrocketing growth are unlikely to return anytime soon for these fintech companies, certainly not this year.