Wall Street Journal Article
Doesn't really say anything that anyone following these companies doesn't already know.
China’s internet-lending companies face rising credit costs and a tougher environment for new loans due to the country’s slowing economy.
Shares of U.S.-listed Lufax Holding Ltd., LU -3.32%▼ 360 DigiTech Inc. QFIN 1.23%▲ and LexinFintech Holdings Ltd. LX 1.69%▲ have fallen dramatically this year. Though the three are profitable, they have reported a rise in bad loans that some analysts think will only get worse.
Their performance shows how China’s wider economic problems—which have hurt the largest banks and included defaults at giant property developers—are affecting even companies catering to small borrowers. Although the three have slightly different business models, they all help funnel loans from banks to consumers or the owners of small and midsize enterprises.
Second-quarter net profit at Lufax—by far the biggest of the three, with a market value of around $7.5 billion—was down 38% from a year earlier, while credit-impairment losses more than doubled to $496 million. About 1.7% of its total loans were over 90 days past due, compared with 1.1% a year earlier.
LexinFintech and 360 DigiTech and said their profits fell 79% and 37%, respectively, in the second quarter due to rising bad debts. Lufax and LexinFintech said their new loans fell.
FinVolution Group, FINV 0.45%▲ a U.S.-listed Chinese internet lender that targets higher-quality borrowers, had a better quarter, with a 5.7% drop in net profit. But loans 90 days past due rose to 1.6% from 1%.
The rise in delinquency rates has only just begun and will continue in the coming quarters, said Johannes Au, a financial-services analyst at ABCI Securities. The situation is worse for internet lenders than banks, he added, as their borrowers tend to be less creditworthy.
Lufax declined to comment. LexinFintech, 360 DigiTech and FinVolution didn’t respond to requests for comment.
While banks generally rely on credit scores and income in determining whether to approve a loan, internet lenders use a range of information that can include demographics, location, spending habits and even data on browsing history, obtained from third parties.
A typical consumer loan is usually the equivalent of around $1,400, with a repayment period of around one year. For small-business owners, a loan can be up to $43,000 and two or three years. Most are unsecured, and online lenders tend to charge an interest rate north of 20% to compensate for the risk.
Internet lenders generally don’t make these loans themselves, instead acting as intermediaries between lenders and borrowers. They typically use third-party loan guarantors to reassure lenders, but as the economic slowdown worsens they are facing more pressure to guarantee larger portions of these loans themselves. Lufax, for instance, bore risk on 21.7% of its outstanding balance in the second quarter, up from 16% a year earlier.
Risk-sharing was initially a selling point for internet lenders, which had positioned themselves as capital-light businesses. But some of these companies are under regulatory pressure to increase guarantees, said Alex Ye, a China financials analyst at UBS. “Regulators want certain biggest internet lenders to have more skin in the game so that they will be more careful in underwriting the loans,” he said.
Banks and other financial institutions may also ask for more guarantees during difficult times, said Mr. Au of ABCI Securities. But this represents an opportunity as well as a risk—by providing guarantees internet lenders can also generate higher fee income.
To brace for the economic downturn, internet lenders are putting themselves in defensive mode, focusing on risk management instead of loan growth. Yong-Suk Cho, co-chief executive officer and chairman of Lufax, said in a recent earnings conference call that the company will give priority to asset quality over volume growth this year. New loans on its platform decreased by more than 15% in the last quarter.
“We believe that this is the right approach given the risk profile of the borrowers likely has deteriorated,” Goldman Sachs analyst Thomas Wang wrote in a research report. Mr. Wang expects Lufax’s credit impairment to remain high in the second half of this year and 2023.
On top of the economic slowdown, Chinese internet lenders face regulatory challenges that further hurt their share prices. In a push to support small businesses, Chinese authorities have been outlawing high-interest loans. In 2020, China’s Supreme Court lowered the ceiling for private lenders from 24% to four times the one-year loan prime rate—a calculation that now gives a maximum interest rate of 14.6%.
Many internet lenders are spared from the new rule thanks to partnerships with banks, whose cap is still 24%. But that may not be a long-term solution.
“Even though their pricing is already below the cap, small-business loans lenders may be under some regulatory pressure to further lower the loan pricing to support the real economy,” said Mr. Ye of UBS. He believes online lenders eventually will have to become licensed lenders to maintain profits.
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Live in Wisconsin. CPA. Have been investing/speculating for 35 years now. Have made very good money and lost much too.
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paladinsir : WSJ can be biased at times.https://tradingeconomics.com/china/loans-to-private-sector
See for yourself. If no lockdowns, the loan sum to private sector is average. In fact, if western nations going to charge 4% interest, it may be worth it to loan from China and transfer overseas to fund operations
Jeff BoydOP paladinsir: Believe an RMB loan from a PRC firm/person to a US person would violate capital controls but with the proper approvals there would be a good arguments to do so. Big exchange risks but one could probably hedge it away; would be interesting to see the cost of doing so.
paladinsir Jeff BoydOP: No need to US, HKD is pegged to USD, to HKD will do. HK is part of a China, no capital control to HK
paladinsir : HK interest rate same as US interest rate because the HKD is pegged to USD, so can borrow from Chinese Banks through Lufax and deposit in HK bank
Jeff BoydOP paladinsir: HK doesn't have much of anything to do with these companies. They are doing business in RMB. The decline in RMB relative to the USD translates directly into lower value for shareholders but the big risks are (1) PRC (excluding HK) has a bunch of loan defaults, (2) PRC changes policies applicable to loan facilitators, (3) businesses/individuals stop borrowing or (4) the banks stop buying the loans. There are other risks too such as a potential US or HK shareholder can now put their money in a bank and get 3-4% where a year ago they got practically nothing so they are less likely to buy shares in anything.
Jeff BoydOP paladinsir: I'm not saying don't buy the shares because of these risks; I own the shares. I'm just saying they are risks that any money lender/facilitator has and right now the share price is reflecting a lot of problems that may or may not come to pass.
paladinsir Jeff BoydOP: Totally agree, but it’ more of poor investor sentiments from these risks. I think the state is asking banks to lend more, so (4) may be limited. (1) may be limited if banks bear the risk of loan defaults rather than facilitator, but likely the size of each loan has reduced significantly so the commission fee will drop.
Jeff BoydOP paladinsir: Would love to disagree with you but I think you are right on the mark. Is it time to panic and sell everything or are you going to hold on?
paladinsir : Not going to sell when price less than book value unless I can be convinced it will be going to bankrupt, which doesnt look the case. Technically, if banks bear more default risks than online lender, state banks will go bankrupt first, which China will not allow. Basically, all depends on the zero covid policy and whether that will change after National Congress.