China’s Internet Lenders Feel Pain of Economic Slowdown

China’s Internet lending companies are facing rising borrowing costs and a tougher environment for new loans due to the country’s slowing economy.

Her performance shows how China’s broader economic woes – which have hurt the biggest banks and included defaults by giant property developers – are affecting even companies that supply small borrowers. Although the three have slightly different business models, they all help channel loans from banks to consumers or small and medium-sized business owners.

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Lufax’s net income — by far the largest of the three with a market value of about $7.5 billion — fell 38% year over year in the second quarter, while losses from loan impairments more than increased to $496 million doubled. About 1.7% of total loans were more than 90 days past due, compared to 1.1% a year earlier.

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LexinFintech and 360 DigiTech said their second-quarter earnings fell 79% and 37%, respectively, on rising bad debt. Lufax and LexinFintech said their new loans fell.

FinVolution Group,

FINV 0.45%

A US-listed Chinese internet lender targeting higher-quality borrowers had a better quarter, with net income falling 5.7%. But loans that are 90 days past due rose to 1.6% from 1%.

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The increase in default rates has only just begun and will continue in the coming quarters, said Johannes Au, 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.

Covid-19 lockdowns, anti-corruption and more have put China’s economy on a potential crash course. WSJ’s Dion Rabouin explains how China’s economic slowdown could hurt the US and the rest of the world. Illustration: David Fang

Lufax declined to comment. LexinFintech, 360 DigiTech and FinVolution did not respond to requests for comment.

While banks generally rely on creditworthiness and income to decide whether to approve a loan, internet lenders use a range of information including demographics, location, spending habits and even browsing history data they receive from third parties.

A typical consumer loan is usually around $1,400 with a repayment period of around one year. For small business owners, a loan can be as much as $43,000 and two or three years. Most are unsecured, and online lenders typically charge an interest rate in excess of 20% to offset the risk.

Internet lenders usually do not grant these loans themselves, but act as an intermediary between the lender and the borrower. They typically use third-party loan guarantors to reassure lenders, but as the economic slowdown deepens, they face greater pressure to guarantee larger chunks of those loans themselves. Lufax, for example, was at risk for 21.7% of its outstanding balance in the second quarter, up from 16% a year earlier.

Risk-sharing was originally a selling point for internet lenders who had positioned themselves as capital-poor companies. However, some of these companies are under regulatory pressure to increase guarantees, said Alex Ye, financial analyst for China at UBS.

“Regulators want certain of the biggest internet lenders to have more leverage in the game so they’re more cautious about lending,” he said.

Banks and other financial institutions may also ask for more guarantees during tough times, ABCI Securities’ Mr Au said. However, this represents both an opportunity and a risk – by providing guarantees, Internet lenders can also achieve higher fee income.

To prepare for the economic downturn, internet lenders are going into defensive mode, focusing on risk management rather than loan growth. Yong-Suk Cho, co-CEO and chairman of Lufax, said in a recent earnings call that the company will prioritize asset quality over volume growth this year. New loans on its platform fell more than 15% last quarter.

“We believe this is the right approach as the risk profile of borrowers has likely deteriorated,” Goldman Sachs analyst Thomas Wang wrote in a research note. Mr. Wang expects Lufax’s credit rating to remain strong in the second half of this year and into 2023.

In addition to the economic slowdown, Chinese internet lenders are facing regulatory challenges that are further hurting their share prices. To support small businesses, Chinese authorities have banned high-yield loans. In 2020, China’s Supreme Court lowered the cap on private lenders from 24% to four times the one-year lending rate — a calculation that now yields a maximum interest rate of 14.6%.

Many internet lenders will be spared the new rule thanks to partnerships with banks, which still cap at 24%. But that may not be a long-term solution.

“Although their rates are already below the cap, small business lenders may face some regulatory pressure to further lower loan prices to support the real economy,” UBS’s Mr Ye said. He believes online lenders will eventually need to become licensed lenders to maintain their profits.

write to Michelle Chan at [email protected]

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