Yiren Finds Big Returns In Small-Loan Focus, Even As Headwinds Swirl

Key Takeaways:

• Small revolving loans, which Yiren only started offering in 2020, were a big driver of its 13% revenue growth in the second quarter
• The focus on such products is part of the fintech’s efforts to balance risk management and profitability enhancement in China’s difficult economic environment

By Warren Yang

By going after small potatoes, Yiren Digital Ltd. YRD is doing something that looks quite shrewd in China’s current tricky economic climate.

The online loan facilitator’s total net revenue increased 13% year-over-year to 1.5 billion yuan ($206 million) in the second quarter, according to its latest earnings report released last Tuesday. While that growth is decent enough, even more remarkable was the 46% leap in revenue from the company’s main financial services business to 851 million yuan during the period, as the total amount of loans it facilitated swelled 57% from a year earlier.

While the revenue increase was commendable in the current difficult economic climate, it didn’t come without a cost. In this case, that cost was a huge jump in Yiren’s provision for potential future bad debt as it took more credit risks under a new loan facilitation model, which was a key factor causing its second-quarter profit to decline year-on-year.

A key driver behind Yiren’s latest big revenue increase was small revolving loans, which it started offering only in 2020 and have since grown to account for the bulk of loans made over its platform. As the company’s labeling of the category indicates, the amount of each of these loans, which function much like credit cards for companies and individuals, ranges from just 4,000 yuan to 6,000 yuan. They also have very short terms that don’t exceed a year.

For those who urgently need funds, Yiren’s revolving loans can be quite handy. A revolving credit line allows a borrower to draw down money up to the fixed limit at any time without having to go through the hassle of applying for a new loan every time.

The short terms of these loans mean that their interest rates are low, which probably explains why revenue growth from Yiren’s financial services business lagged the increase in the total volume of loans facilitated in the second quarter. But the focus on revolving loans offers a critical benefit since the small size of such loans spreads out default risk, meaning it would require quite a large number of individual defaults to cause a spike in its bad debt ratio.

Yiren’s delinquent loans as a percent of total loans didn’t change much by the end of June from three months earlier. While the proportion of the company’s loans that didn’t earn interest for 60-89 days has been creeping up over the years, reflecting China’s economic downturn, its loan quality seems to be holding up pretty well in general compared to its peers.

For example, at rival FinVolution FINV, the ratio of loans delinquent for 90 days or longer shot up to 2.65% at the end of June from 1.68% a year earlier, according to its latest results also issued last week. While FinVolution’s metrics for delinquent loans aren’t completely comparable to Yiren’s, things seem more stable for the latter.

Balancing Act

Managing risks and profitability at the same time is quite a balancing act. Yiren is trying to target consumers with high credit scores to keep default rates down. But that can also suppress its profit margins since it can only charge such high-quality borrowers relatively low interest rates. In an apparent effort to earn higher fees, the company is bearing more credit risks for its lending partners that provide actual loans to its borrowers. But that requires Yiren to preemptively book provisions against shaky loans for each period.

In the second quarter, such charges soared to nearly 280 million yuan, equal to 40% of the company’s revenue from loan facilitation services, from just 12 million yuan a year earlier. This, along with a sharp increase in marketing costs to lure high-quality borrowers, contributed to a decrease in Yiren’s net profit for the second quarter, despite the impressive revenue growth.

But the company can reclaim the doubtful loan provisions and add them to its revenue if no default occurs in the end. So, these proactive accounting measures aren’t necessarily a bad thing if most borrowers end up repaying their loans.

At the same time, funding costs for lenders in China are continuously falling as the country’s central bank sticks to monetary easing to support the sluggish economy. Last month, the People’s Bank of China, the nation’s central bank, made a surprise move by lowering medium-term interest rates by the most in more than four years.

“Given the current market funding conditions, we are strategically increasing our loan volume under the risk-taking model to better balance risk management and profitability,” Yiren CEO Tang Ning said on the company’s conference call to discuss the latest results.

In addition to Yiren’s strong revenue growth, another pleasant surprise for investors was its board’s approval of a plan to pay semi-annual dividends equal to at least 10% of its net profit. This new measure to curry favor with shareholders, which follows similar dividend policies by many of its rivals, will supplement a share repurchase program that was authorized in September 2022. Yiren can afford to be so generous as it’s sitting on a lot of idle cash. It generated 369 million yuan in net cash from operations in the second quarter, and it had 5.5 billion yuan in cash and cash equivalents at the end of June.

Yiren’s shares still fell after its earnings release, and currently trade at a very low price-to-earnings (P/E) ratio of less than 2. By comparison, the multiple for FinVolution is about 4.7, while Qifu Technology QFIN trades slightly higher at 6.

Perhaps Yiren’s profit decline didn’t go down so well with investors. Still, its ability to keep growing revenue is no small feat in China these days, especially when one considers the amount of new bank loans in China dropped 88% year-on-year to a 15-year low last month.

Yiren has been around for quite some time. It started out as an online consumer finance company back in 2012, so it has plenty of experience in the field. Then again, the current economic downturn in China is unprecedented and posing new challenges for companies across all sectors.

Considering that, Yiren appears to be coping pretty well so far. At the end of the day, a Chinese company whose revenue is growing and is sustainably profitable and generating cash is a rarity nowadays. Yiren is showing it’s capable of doing all three. For this reason alone, investors may want to give the company a second look.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.