FinVolution Tests Regulatory Tolerance With First Asset-Backed Securities Issue

Key Takeaways:

•      Online loan facilitator FinVolution has issued its first batch of 200 million yuan worth of asset-backed securities as a new form of fundraising tool

•      Move comes four months after the larger Ant Group canceled a much larger ABS sale totaling 18 billion yuan

By Warren Yang

Online loan facilitator FinVolution Group FINV is undergoing its own low-key revolution in China’s fintech realm, quietly adding asset securitization to its list of financial capabilities after surviving a brutal regulatory crackdown on the entire sector over the past few years.

The company, which connects consumers seeking short-term loans with institutional lenders, said Sept. 29 that it raised 200 million yuan ($31 million) through its first-ever issue of asset-backed securities (ABS). FinVolution’s shares were largely unchanged the day of the announcement, though they are up nearly 10% since then amid a broader rally for U.S.-listed Chinese stocks.

As their name implies, ABS are a package of assets, such as loans, which the creator can sell to multiple buyers as an investment product. These instruments are sometimes controversial if the assets inside them are highly variable or poorly understood since their buyers may unwittingly inherit that risk.

Given the modest amount of FinVolution’s maiden ABS issue, the move may be at least partly intended to gauge regulators’ tolerance for securitization of loans by online lenders in the future.

Just four months earlier, the larger Ant Group scrapped a much grander plan to sell 18 billion yuan of ABS backed by online loans, after regulators introduced rules to limit such actions by online lenders and a range of other measures to dent the fintech giant’s dominance. Ant’s mega IPO plan collapsed late last year, amid a broader campaign to stem the unchecked growth of online microlending platforms like the ones that form a core part of the company’s business.

FinVolution is among a small group of peer-to-peer (P2P) lending companies that have survived China’s prolonged regulatory crackdown that climaxed in early 2018. While many of its former competitors folded, FinVolution stopped collecting funds from individuals to finance its activity in late 2019, and now only acts as an intermediary between borrowers and institutional lenders.

Its revamped business model is less troublesome than direct lending, still practiced by some rivals like QudianQD, because regulatory requirements are lighter. But that doesn’t mean life is easy for FinVolution, with ever-evolving regulations creating a great deal of uncertainty and risk. For example, banks, which are some of FinVolution’s most important business partners, are themselves facing a slew of new restrictions for lending through such third-party platforms. If those banks decide the new restrictions are too burdensome, they could decide to stop working with FinVolution, hurting its business.

Despite all these headwinds, FinVolution appears to be sailing smoothly for now as its business booms. The number of new individual borrowers using the company rose sixfold in the second quarter from a year earlier, with transactions more than doubling to a record 33.4 billion yuan, according to its latest quarterly resultsreleased in late August.

At the same time, loan quality is improving. In announcing the new ABS issuance, FinVolution reiterated that its loans overdue 90 days or longer, which typically are considered nonperforming in the banking industry, hit a record low of 1.01% as of the end of June.

Low Risk

The obvious message is that such low default rates mean the newly issued ABSs are extremely low risk. The securities are backed by loans, most likely from FinVolution’s lending partners, and pay investors with cash generated from the interest those loans collect. So if a large share of the original loans default, holders of the ABS can earn lower returns or even sufferlosses.

A bad loan ratio of 1% is remarkably low, particularly considering that FinVolution charges its borrowers annual interest rates of more than 20%. By comparison, China’s largest bank, Industrial and Commercial Bank of China (ICBC), had a nonperforming loan rate of 1.54% at the end of June, both for overall loans and also for the personal consumption loans that FinVolution specializes in.

Among FinVolution’s competitors, 1.85% of loans at LexinFintech LX were overdue for more than 90 days at the end of June.

FinVolution also reported that the ratios of loans overdue for less than 90 days declined across the board, suggesting its overall loan quality improved. The company attributed the improvement to its increased focus on relatively strong borrowers.

The company’s expanding customer base has translated into revenue growth, while its improving loan performance has also helped to lower its provisions for repaying partner lenders in case of defaults. As a result, FinVolution’s net profit increased 37% year-on-year in the second quarter, outpacing a 31.7% gain in revenue gain for the period.

Despite the earlier regulatory crackdown, China needs a well-functioning consumer debt market because it wants private consumption to play a bigger role in driving economic growth. Traditional major lenders in China are predominantly state-run and focus on lending to large businesses.

That means private companies like FinVolution have an important role to play in China’s consumer lending economy, and could have plenty of opportunities for growth as long as they operate within regulatory parameters. The volume of outstanding consumer loans in China, excluding mortgages and auto loans, will nearly double to about 29 trillion yuan in 2025 compared with the end of 2020, according to a projection by McKinsey & Co.

ABS issuance is a great way for FinVolution and its lending partners to raise funds for business expansion – again, as long as it doesn’t use the method excessively to raise regulatory concerns. ABS relieve the companies that issue the original loans – in the case of FinVolution, most likely its lending partners – of responsibility for any losses from the underlying loans that may later occur. And raising funds through such instruments won’t increase debt for the issuer, unlike selling bonds. Because the loans underlying them carry high interest rates, ABSbacked by online consumer loans also are attractive to investors due to their high yields.

Stock buyers seem upbeat about FinVolution’s prospects. Its stock has more than doubled this year to trade at a trailing price-to-earnings (PE) ratio of 4.8. That’s ahead of LexinFintech and Qudian, which have PE ratios of 3.5 and 1.4, respectively.

FinVolution’s stock is still down by more than half from its 2017 IPO price, as the stockcontinues to reel from the regulatory clampdown. But it may continue to claw back lost ground if it can keep finding new growth channels like asset securitization while continuing to comply with increasingly tough regulations.