Pawnshop chain F88 raises outlook to ‘stable’ amid industry downturn

F88 Business Joint Stock Company (F88), operator of the F88 brand pawnshop chain in Vietnam, recently had its development outlook upgraded to “stable” by domestic credit rating agency FiinRatings.

Strong operating performance, diversified capital mobilization capacity and significant reduction in non-performing loan ratio are the “pillars” that have contributed to F88’s remarkable “turnaround” in Fiin Ratings’ independent credit rating report.

Despite the downward trend in the consumer finance industry due to reduced market demand caused by the slowing economic recovery, F88 has maintained the stability of its customer lending business and diversified its business activities, thereby ensuring its leading position in the alternative lending field.

In the fourth quarter of 2023, key profit indicators such as NIM and ROA maintained good performance compared to the consumer finance industry average, and the CIR operating cost ratio also improved, helping the company return to profitability.

In the first quarter of 2024, F88’s loan portfolio grew by 3.9 percent, while the overall market loan balance declined. Moreover, revenue from interest and loan fees increased by 18.4 percent, resulting in a quarterly profit of VND31.1 billion ($1.22 million).

F88’s capital structure and leverage remain strong. As of the end of the first quarter of 2024, the pawn shop chain’s financial leverage ratio was 1.8x, well below the consumer finance industry average of 3.7x in 2023. Overall, the ratio is trending downward from 3.9x in 2022 to 1.7x in December 2023.

Currently, F88 maintains its policy of setting aside 100% provisions for loans past due more than 90 days and writing them off from its on-balance loan portfolio. In comparison, other banks and financial institutions typically set aside provisions for loans past due more than 360 days.

Additionally, F88 has maintained a lower average loan-to-value ratio (LTV) than its 80% commitment to foreign lenders.Improvements to its customer credit scoring system to enhance assessment quality and implementation of appropriate lending policies have also contributed to the company’s superior risk management index.

The situation regarding bad debt disposal has been improving since mid-2023, with the debt recovery rate gradually increasing from the fourth quarter of 2023, and then soaring to 22.6% in the first quarter of 2024, compared with the 2023 average of 15.6%.

By 2023, the company had been quite successful in diversifying its funding sources, from equity to bond issuance channels, foreign funds, and lending through banks, minimizing refinancing risk and effectively reducing funding costs from 12% to 11% per year, contributing to the stability of liquidity.

Now, F88’s collaboration with CIMB Bank provides the company with a stable and ongoing source of capital.

In its latest announcement in mid-June 2024, FiinRatings continues to maintain F88’s rating at BBB- but has raised the outlook to “stable.”

The main reason for the upgrade is that “the company has seen some recovery in its asset quality, operating performance and capital mobilization capabilities amid the recent overall downturn in the consumer finance and alternative lending sectors.”

In its report, FiinRatings reiterated the trend of stagnation and slow recovery in the alternative lending market and the consumer lending market in general, noting that the overall market’s loan balance is expected to decrease by 21.4% in 2023 and continue to show negative growth in the first quarter of 2024.

However, FiinRatings has not concluded whether F88’s “turnaround” is a sign of an overall market recovery, but predicts that its rating could be upgraded if F88 continues to effectively respond to competition from other lenders, further diversify its capital mobilization and revenue sources, and improve profit margins.

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

Specifically, F88 demonstrated improving asset quality, profitability and funding capacity despite recent weakness in the consumer finance industry, particularly the alternative lending sector.

The upgrade reflects F88’s continued leadership position in the alternative lending space, based on the company’s stable and well-diversified business, strong capital structure and returning profitability, while maintaining good asset quality and liquidity.

Despite facing challenges from a slow economic recovery and the currently struggling consumer lending industry, FiinRatings expects F88 to maintain its business position in the sector and gradually improve its credit profile.

Despite the slowing economic recovery and the declining market demand, and the downward trend in the consumer finance industry, F88 has maintained the stability of its customer lending operations and diversified its business activities, thus ensuring its leading position in the alternative lending sector.

In the F88 core lending division, adjusted customer loan balances are expected to increase again from September 2023, with the decline in 2023 limited to 21.4% (compared to loan balances at the end of 2022). Furthermore, as of the first quarter of 2024, while the overall consumer finance industry is still experiencing negative growth rates, F88’s loan balances continued to grow, recording an increase of 3.9% compared to the end of 2023.

In addition, interest and fee income from lending activities maintained a relatively stable growth rate (2023: +18.4%; Q1 2024: slightly down -2.9%, based on annual figures). This increase is due to the effective management of F88’s Board of Directors and cross-departmental coordination to effectively manage lending expenditure and asset quality.

In addition, F88 continues to maintain its policy of promoting the efficiency of existing stores and digital transformation of business operations rather than continually opening new stores. As a result, the number of stores as of March 31, 2024 will be 813, the same number as at the time of the previous survey.

However, to meet future business growth targets, F88 also plans to expand its network by 2025. Regarding non-interest and fee income business activities, insurance income in 2023 is expected to decrease by 23.2% year-on-year, consistent with the downward trend in the overall insurance industry.

In particular, F88 has seen improvement in insurance revenue over the past two quarters due to enhanced customer service and strengthened sales efforts for loan insurance (bundled insurance). Revenues from other financial activities also increased significantly in 2023 compared to 2022. Overall, F88’s business size and growth rate were somewhat negatively affected by the sluggish consumer finance industry in 2023 and the slowdown in recovery in early 2024, but F88 has shown a recovery since the fourth quarter of 2023.

Thanks to its management experience, sound strategy and relatively robust business model, F88 has maintained a leading position in the alternative lending industry and is more stable than most companies in the consumer lending sector. Therefore, FiinRatings has continued to assess F88’s business position as “adequate” in this audit.