Consumer finance arms reach out to attain positive growth

FE Credit has increased its market share after a strong 2019 performance. Photo: Le Toan

According to Vietnam’s Ministry of Finance, last year the scale of the consumer finance market came to around VND1 quadrillion ($43.5 billion) from just VND646 trillion ($28 billion) in 2016, accounting for 11.4 per cent of the country’s total outstanding balance. The government’s strong commitment to crack down on shadow banking and loan sharks is slated to propel the market’s further development.

However, economist Le Xuan Nghia stated the figure is just a drop in the bucket compared to that of other countries (around 50-70 per cent in United States or Europe), and “the development of the lending segment in Vietnam would need more time to grow strongly.”

As per global rating firm Moody’s, the consumer finance industry in Vietnam is vulnerable to disruptions since the economic fallout caused by COVID-19 could hurt asset quality, profitability, and liquidity. Particularly, many Vietnamese consumer finance companies are of high exposure to unsecured products and are targeting the low-income sector, which is the most vulnerable to the crisis.

“During the outbreak, out-of-work customers could miss loan payments, which might intensify the liquidity risks and amount of soured loans of these consumer financiers,” said economist Can Van Luc.

On the other hand, the State Bank of Vietnam’s Circular No.18/2019/TT-NHNN dated last November limiting unsecured consumer-finance personal loans will also exert more pressure on the business models of more-exposed companies in Vietnam over the next few years.

The rules highlight regulatory efforts to temper risks from rising consumer leverage following aggressive consumer credit growth over the years. However they may also push competition towards other segments as lenders seek to grow. As a result, larger and more established finance companies are better-placed to meet the new requirements.

For example, Home Credit Vietnam has significant exposure to cash loans. Such loans were roughly 58 per cent of Home Credit Vietnam’s total loans at the end of March 2019.

Meanwhile, HD Saison should be barely affected by the rules as cash loans only accounted for around 32 per cent of its total loans. Smaller companies which often specialise in cash loans might find it challenging to shift their business models.

However, firms still have to grapple with the challenge of diversifying their loan portfolios while maintaining growth and profitability. Apart from domestic pressures, risks from the lending sector could have been worse due to external factors.

The collapse of a number of Chinese peer-to-peer (P2P) lending services, even high-profile names, has sparked grievances not only in China but also in Vietnam.

Last week, local media reported more than 60,000 people across Vietnam had to suffer cutthroat interest rates of over 1,000 per cent annually from a payday loan ring headed by Chinese nationals.

The payday loan shark ran three companies (Vinfin, Beta, and Dai Phat) which provided cash loans via smartphone apps Vaytocdo, Moreloan, and VD Online.

A variety of online lending apps such as Panda, Lightning bolt, ATM Loans, Uvay, Bagang, and Vaydi are still catching the eyes of Vietnamese citizens.

“The government should issue a pilot legal framework or sandbox for new services like P2P lending in order to create equal opportunities for businesses. Moreover, it is necessary to publicise the list of those currently operating in the field,” said Tran Viet Vinh, CEO of online lender FIIN.

Positive outlook

With activism rising across the country, the number of consumer financiers is no longer limited to a few local players.

FE Credit – the largest player in the field – capped another stellar year. The firm’s net interest margin in 2019 improved to 31.3 from the 28.4 per cent reported in 2018. Pre-tax profits hit VND4.48 trillion ($194.78 million) for the year, noting a growth of 8.2 per cent compared to 2018.

Nguyen Duc Vinh, VPBank CEO, affirmed that FE Credit is still an “important and effective arm” of the bank. FE Credit increased its market share from 53 to 55 per cent.

On the flip side, to keep up with the ever-evolving technology, consumer finance companies have to be well-positioned to engage with the new wave of digitally empowered customers.

Ho Minh Tam, general director at VietCredit, revealed that new-age financial services have an opportunity to make credit accessible to individuals, boosting the harsh competition among consumer lending companies.

“VietCredit will concentrate on digitalisation because we believe the capability of utilising technology to enhance the way we serve our customers is utmost important. For example, optimising operating expenses, dealing with labour productivity, managing risks, or improving customer experience would be efficiently managed through our digital platform,” said Tam.

“The benefits of technological change are likely to be vast,” noted Basker Rangachari, director of FE Credit Marketing Center. “FE Credit is also in the process of developing customer-centric culture while we have made a fair amount of progress on embracing digitalisation. This is merely to provide our clients with greater access to financial resources and top-notch services.”

New foreign appetite

Experts believe Vietnam’s consumer finance sector is forecasted to witness double-digit growth in the next few years.

“The operating environment and business models of Vietnam’s consumer finance companies to continue to evolve rapidly,” Fitch commented. “Greater exposure to credit cards may bring finance companies into closer competition with banks, which generally enjoy greater benefits of scale and access to lower cost, more stable deposit funding.”

FE Credit, SHB Finance, HD Saison, and Shinhan Finance are backed by VPBank, SHB, HD Bank, and Shinhan Bank – four lenders with sound aid and financial security, which will amplify their strengths.

Fitch experts believed relationships with foreign shareholders that can transfer know-how or help lower costs will be an advantage, though any imported expertise will still need to be calibrated to local conditions.

South Korea’s Shinhan Card, Lotte Card, and Hyundai Card and Japan’s Shinsei Bank have each purchased or are in the process of acquiring stakes in local finance companies in recent years.

Last month, SHB signalled its ambition of selling part of its capital at SHB Finance to a foreign strategic partner. Albeit the deal value was not disclosed, the parent company is likely to still retain the bulk of the capital in the subsidiary.

In the same boat, FE Credit was allegedly mulling over co-operation with overseas partners, but its plan has yet to be announced. Earlier this year, the firm was approved to switch from a limited liability into a joint-stock company and got the green light to raise its charter capital. The shift into the new model would pave the way for FE Credit to go public as well as sell stakes to other deep-pocketed foreign investors.

Japan’s leading retailer AEON has also disclosed intentions to jump into Vietnam’s financial market. Masaki Suzuki, chairman of AEON Financial Services, said the group would expand operations here through acquiring either foreign-backed or state-owned financial firms in the country.

Previously, South Korean giant JB Financial – the parent firm of Jeonbuk Bank and Gwangju Bank among others – is ramping up investment in Vietnam and elsewhere. Hence, looking for potential tie-up deals is one of the most feasible ways to penetrate emerging markets.