Consumer finance major F88 outlook upgraded to 'stable' amid industry downward trend

F88 Business Joint Stock Company (F88), a leading consumer finance company in Vietnam, has had its development outlook upgraded to "stable" by domestic credit ratings agency FiinRatings.

Positive business results, diverse capital mobilization capabilities, and a significant reduction in bad debt ratio are the "pillars" that have resulted in F88's impressive "turnaround" in Fiin Ratings' independent credit rating report.

Despite facing a downward trend in the consumer finance industry due to declining demand from the market amidst a slow economic recovery, F88 has maintained stability in its customer lending operations and diversified its business activities to ensure the company's leading position in the alternative lending segment.

In Q4/2023, the firm returned to profitability while key profit indicators such as NIM and ROA were better maintained compared to the industry average in consumer finance, and the CIR operating cost ratio improved.

In Q1/2024, F88's loan portfolio grew by 3.9% while the overall market loan balance declined. Additionally, its revenue from interest and loan fees grew by 18.4%, with a quarterly profit of VND31.1 billion ($1.22 million).

F88's capital structure and leverage continue to be a strength. At the end of Q1/2024, the financial leverage ratio of this pawn lending chain was 1.8 times, much lower than the consumer finance industry average of 3.7 times in 2023. Overall, this ratio has been on a downward trend, from 3.9 times in 2022 to 1.7 times in December 2023.

Currently, F88 maintains a policy of 100% provisioning for overdue loans over 90 days and writes them off from the on-balance sheet loan portfolio. Comparatively, other banks and financial institutions typically provision overdue loans over 360 days.

Moreover, F88 maintains an average loan-to-value (LTV) ratio, lower than the 80% commitment to foreign lenders. The improvement of the customer credit scoring system to enhance assessment quality and the implementation of appropriate lending policies have also contributed to the company's impressive risk management index.

The situation of bad debt handling has positively changed since mid-2023, with the debt recovery rate gradually increasing from Q4/2023 and sharply rising in Q1/2024 to 22.6%, compared to the 2023 average of 15.6%.

Before 2023, the company was quite successful in diversifying its capital mobilization sources, from equity to loans through bond issuance channels, foreign funds, and banks, minimizing refinancing risks and practically reducing capital mobilization costs from 12% per year to 11% per year, contributing to liquidity stability.

Currently, the cooperation between F88 and CIMB Bank continues to provide a stable source of capital for this company.

According to the latest announcement in mid-June 2024, FiinRatings continues to maintain F88's rating at BBB- but has upgraded the outlook to "stable."

The main basis for the upgrade is "the company has seen certain recovery in asset quality and business results as well as capital mobilization capabilities amid the overall downward trend in the consumer finance industry and the alternative lending segment in recent times."

In its report, FiinRatings repeatedly emphasized the stagnation and slow recovery trend of the alternative lending market and the consumer lending market in general, noting that overall market loan balances decreased by 21.4% in 2023 and continued to show negative growth in Q1/2024.

However, FiinRatings does not conclude whether F88's "turnaround" is a sign of overall market recovery. Nonetheless, they have forecasted a potential rating upgrade if F88 continues to effectively respond to competition from other lending companies, further diversify its capital mobilization and revenue sources, and improve profit margins.

In May, FiinRatings affirmed F88's credit rating at 'BBB-' with the outlook revised from 'negative' to 'stable' in its latest surveillance. This reflects F88's recent credit profile improvement and its expectation that this trend will continue over the next 12 months.

Specifically, F88 demonstrated improvements in asset quality, profitability, and funding capacity, despite the recent downturn in the consumer finance industry and the alternative lending segment in particular.

The upgrade also reflects F88's continued leading position in the alternative lending segment based on F88’s stable and appropriately diversified business, strong capital structure and recovering profitability, while maintaining good asset quality and liquidity position.

FiinRatings expects F88 to maintain its business position in the segment and gradually enhance its credit profile, despite facing slow economic recovery as well as challenges from the currently struggling consumer finance industry.

Despite facing a downward trend in the consumer finance industry due to declining demand from the market amidst a slow economic recovery, F88 has maintained stability in its customer lending operations and diversified its business activities to ensure its leading position in the alternative lending segment.

In F88’s core lending segment, adjusted customer loan balances have resumed growth since September 2023, halting 2023 decline to 21.4% (compared to loan book at the end of 2022). Furthermore, as of Q1/2024, while the overall consumer finance industry still maintained a negative growth rate, F88's loan balance continued to grow and recorded an increase of 3.9% compared to the end of 2023.

In addition, income from interest and fees for lending activities maintained a relatively stable growth rate (2023: increased by 18.4%, Q1/2024: decreased slightly by 2.9%, based on annual figures). This enhancement is attributed to the effective management of F88's board of management and the collaboration between departments to effectively control lending disbursements as well as asset quality.

Besides, F88 continues to implement a policy to improve the efficiency of existing stores and promote digital transformation in its business operations instead of continuously opening new stores; as a result, the number of stores as of March 31, 2024 is 813, similar to our previous surveillance.

However, F88 also plans to expand its network by 2025 to achieve its business growth targets in the coming period. Regarding non-interest and fee earning business activities, insurance revenue in 2023 decreased by 23.2% compared to the previous year, in line with the downward trend of the entire insurance industry.

Notably, F88 has seen an improvement in insurance revenue in the last two quarters due to enhanced customer service and increased sales efforts for loan insurance (bundled insurance). Revenue from other financial activities also grew strongly in 2023 compared to 2022. Overall, while F88's business scale and growth rate have been somewhat negatively impacted by the consumer financial industry's downturn in 2023 and its slow recovery in early 2024, F88 has shown a recovery since Q4/2023.

Thanks to F88’s management experience and sound strategy, accompanied by a relatively robust business model, F88 has maintained its leading position in the alternative lending industry and is more stable than most companies in the consumer finance sector. Therefore, FiinRatings maintained its assessment at "adequate" for F88’s business position in this surveillance.