Credit, Anyone? China's Online Loan Platforms Get Stuck as Quality Borrowers Dwindle


Key Takeaways:

  • FinVolution’s revenue growth slowed to about 12% in the second quarter from 16% and 32% in the previous two quarters, while its latest quarterly net profit fell about 6%
  • 360 DigiTech and Lexin posted little or no revenue growth for the quarter, as their profits plunged 37% and 80%, respectively, during the period

By Warren Yang

It’s difficult for any lender to grow its business in a cooling economy, and Chinese fintechs that once wowed 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 loan facilitators – FinVolution Group FINV360 DigiTech QFIN and LexinFintech Holdings Ltd. LX – show how the group is bearing the brunt of a slowing Chinese economy in the same way direct lenders are.

An economic downturn can hit lenders two ways. When all’s well, many people and businesses race to borrow on the assumption that their future income will be sufficient to repay their debt. But when things go south, many of those same entities hunker down and pause their borrowing. Ones that continue to borrow also become more likely to default on their debt. In such situations, lenders can take a double-hit from a slowdown in lending activity and an increase in bad loans.

Last Monday, FinVolution — a former direct lender that transformed to a middleman between banks and borrowers to survive a harsh regulatory crackdown on the fintech sector — reported a year-on-year decline of about 6% in its second-quarter net profit to 585 million yuan ($87.4 million). Its net revenue growth slowed to about 12%, down from 16% and 32% in the previous two quarters, respectively.

China’s economic slump has put the company, as well as other loan facilitators and direct lenders alike, in a bit of Catch-22 situation. While credit demand in general is weakening, loan companies could perhaps achieve more impressive top-line revenue growth by aggressively pursuing consumers or small businesses that are desperate for funds as their business sputters.

But in such times, such borrowers are exactly the type that any lenders should avoid due to the higher likelihood of defaulting on their loans. Even though companies like FinVolution act as loan brokers for banks, they do have arrangements to pay back some or all of the funds to the original lenders when there are defaults, exposing them to the same credit risks that direct lenders face.

This means that online loan providers at the moment should sacrifice revenue growth, which they appear to be doing. The higher quality borrowers they do manage to find ultimately bring in less revenue and lower fees because they pay lower interest rates due to their better creditworthiness.

The worst part for fintech loan companies is that they typically lend to consumers or smaller private sector customers that are inherently riskier than large, stable businesses that borrow from traditional state-owned banks. That shows up in FinVolution’s ratio of loans delinquent for more than 90 days, which shot up to 1.6% at the end of June from about 1% a year earlier despite its efforts to be more prudent in selecting customers.

Provisions that the company sets aside to repay its partner lenders in case of defaults more than doubled year-on-year in the second quarter, far outpacing a 44% increase in its total outstanding loans. That hit FinVolution’s bottom line hard.

Provisions swell

360 DigiTech, which has also evolved into a loan facilitator from a direct lender, posted even slower revenue growth and a much larger drop in its net profit than FinVolution for the quarter. 360 DigiTech’s total net revenue for the three months increased just 4.5% to 4.2 billion yuan from a year earlier, while its net profit slipped about 37% to about 980 million yuan, according to its latest quarterly results released few days before FinVolution’s.


Similar to FinVolution, 360 DigiTech booked substantially larger provisions against potential defaults in the quarter, boosting the amount by nearly 160% to about 1.2 billion yuan. In addition to earning fees in its role as a middleman for banks, 360 DigiTech also earns income from loans distributed through trusts and asset management plans and records them as loans on its balance sheet. It describes such loans as “capital heavy,” but does not specify in its results or its annual reports who actually provides the funds for them. Nonetheless, the company increased allowances for such assets by about 70%.

While FinVolution and 360 DigiTech at least saw their revenue grow, Lexin, which uses a hybrid model that mixes loan facilitation and direct lending, saw its revenue actually decline 26% year-on-year in the second quarter. Lexin was also alone among the three in seeing a decline in revenue from loan facilitation, which overshadowed increases in its revenue from other businesses, such as interest from direct lending and software services for merchants. As a result, Lexin’s net profit dropped the most among the three fintechs, by almost 80%.

FinVolution probably fared better than the other two due to its focus on building capabilities to target relatively high-quality borrowers before the current economic downturn started, better positioning itself for the present climate. By comparison, 360 DigiTech and Lexin likely prioritized growth over risk management and are now paying the price as they scramble to switch their focus to less risky borrowers. Those two still have far higher delinquency ratios than FinVolution even after the latter’s metric deteriorated in the second quarter.

Investors are apparently recognizing all this. FinVolution trades at a price-to-earnings (P/E) ratio of about 4, compared to 3.5 for 360 DigiTech and 2.6 for Lexin. FinVolution’s stock has also performed the best of the trio this year, roughly unchanged from where it began 2022. By comparison, 360 DigiTech and Lexin are down 29% and 46%, respectively.

Yet that’s not to say the rest of the year is looking too rosy for FinVolution, or any lender for that matter. The worst for the Chinese economy may be past after a tough first half, when the arrival of the Omicron variant led to prolonged lockdowns in cities including Shanghai. But Beijing’s strict Covid-19 policies could result in new disruptions at any time, and there’s also a real estate slump and recent power shortages that have collectively prompted global investment banks to cut their already-low projections for China’s economic growth for this year.

All this means that the days of breakneck growth won’t likely return for these fintech companies anytime soon, almost certainly not this year.

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