Direct lender-turned-loan facilitator reported better results for 2021 than two of its peers that also released earnings last week, sparking a 30% jump in its shares

Key Takeaways:

•      FinVolution, which has transformed into a loan facilitator from a direct lender, reported a 32% rise in fourth quarter revenue despite regulatory headwinds for fintech lenders

•      Lexin, which is also switching to a facilitator model but still continues to lend directly, posted a 27% decline in quarterly revenue, as it sacrificed growth for better risk management

•      Fourth-quarter revenue at Qudian, which remains a direct lender, plunged nearly 90%   

By Warren Yang

Online lending can be a lucrative business with abundant opportunities in China. It’s the world’s second-largest economy after all, with no shortage of consumers and businesses looking to borrow. The million-dollar question is how best to capitalize on the vast demand for credit in the country: By lending out of your own pocket, or by being a middleman for other lenders?

While direct lending offers companies the chance to collect interest and cut out middleman fees, it comes with heavier regulation and also higher risks from potential defaults. The facilitator role carries lower regulatory and default risks, but relies on less lucrative fees as its main income source.

At least for now, the answer to which model is better seems loan facilitation, as the latest financial results from FinVolution Group (FINV.US), LexinFintech Holdings Ltd. (LX.US) and Qudian Inc. (QD.US) show. All three were direct lenders until few years ago. But then a harsh regulatory crackdown prompted them and their peers to rethink their futures.

FinVolution is now entirely an online middleman between borrowers and banks. Qudian has stayed with direct lending. Lexin is somewhere in between, switching to a loan facilitator model while also continuing with some of its own direct lending. 

A look at the trio’s latest results released last week shows their fortunes are diverging, based on their business models.

At FinVolution, net revenue increased 32% to 2.5 billion yuan ($384 million) year-on-year in last year’s fourth quarter as total transaction volume grew more than 80%, according to its latest results released last Monday. Net revenue for all 2021 increased 25% to 9.5 billion yuan, as fees from loan facilitation nearly doubled. That growth came at a cost, with sales and marketing expenses surging. But at the end of the day annual net profit for the year also rose a decent 27% to 2.5 billion yuan.

The company disclosed the volume of loans on its balance sheet until 2020, but stopped doing so for its 2021 results. That suggests it no longer originates its own loans.

Unlike the other two, FinVolution will continue to pay dividends. It will pay a cash dividend for the year of US$0.205 per American depositary share (ADS), which translates into a payout ratio of about 15%, steady with the average for 2018-2021.

Lexin’s latest results, disclosed the day after FinVolution’s, were bittersweet. Its total operating revenue decreased about 27% to 2.2 billion yuan in the fourth quarter from a year earlier, while net profit attributable to shareholders nearly halved.

For the whole year, though, Lexin’s profit almost quadrupled even as revenue slipped. This was possible because provisions for loan losses dropped substantially. That suggests the decline in revenue was due to a greater focus on stronger borrowers, which inevitably resulted in a slowdown in lending business. Such prudence is something shareholders likely welcome, although sagging revenue could scare off some growth-oriented investors.

No cheer for Qudian

Qudian’s earnings report released last Friday offered little for investors to cheer. Total revenue evaporated by almost 90% year-on-year in the fourth quarter to 378.9 million yuan, pushing the company into the red for the three months. Total revenue for all 2021 fell more than 50%, driving down annual net profit by about 39%.

The results weren’t completely without positive components, though. Like Lexin, Qudian cut bad loan provisions substantially last year as overdue loans decreased, probably the result of efforts to avoid risky borrowers. The company has also been downsizing its WLM KIDS, an after-school tutoring business. That looks sensible because tutoring is another sector Chinese regulators have come down hard on lately, and is also well outside Qudian’s core competency.

Being a fintech direct lender is tough these days. Beijing is serious about reining in aggressive lending by such inexperienced internet platforms to prevent waves of defaults that can ensue. Chinese regulators famously cracked down on peer-to-peer (P2P) lenders in a campaign that peaked in 2018, driving many out of business and forcing companies like FinVolution, Lexin and Qudian to quit that business. China’s Supreme People’s Court threw more cold water on the industry by slashing the maximum interest rate for private loans protected by law in 2020.

As the government’s attitude toward private lenders shifts, risk management has become paramount for fintech financiers. Weeding out potentially bad borrowers is critical not only for direct lenders, but also for loan facilitators like FinVolution and Lexin.

Even though a true middlemen wouldn’t have to worry about defaults by borrowers it introduced to actual lenders, FinVolution and Lexin have arrangements that expose them to some liability when loans they arrange for their lending partners default. So they set aside provisions for such events, although they sometimes release the money if actual loan losses are smaller than their projections.

The quality of loans facilitated by FinVolution has improved quite a bit. Loans overdue 90 days or longer decreased to 1.26% of its total at the end of 2021 from 1.56% a year earlier – already low by industry standards. Lexin’s ratio stood at 1.92% at the end of last year, similar to the level 12 months earlier. Qudian didn’t provide a comparable figure in its latest report, although it said the ratio of loans overdue on a particular day was about 5% at the end of February.

That indicates that FinVolution has a better screening system for borrowers, allowing it to continue growing its business while limiting default risks. Investors seemed to pick up on that, with FinVolution shares rallying more than 30% through last Friday after its latest report’s release. The stock now trades at a price-to-earnings (P/E) ratio of 3, compared to 1.68 for Lexin and 1.41 for Qudian.

While results from Lexin and Qudian were more underwhelming than FinVolution’s, investors may have still focused on signs of improved risk control. Both companies’ shares rose in the days after their announcements, though by less than FinVolution’s.

For all three companies, days of unchecked runaway growth are long gone. In the newer more regulated environment, the fintech lending game is all about having fewer problems to worry about. With a lighter business model that frees it from the headaches of being a lender, FinVolution appears to be in good place to thrive. 

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