02 Jun 2020
The Edge : Testing times for non-bank lenders as well
Testing times for non-bank lenders as well

Esther Lee  /  The Edge Malaysia Weekly

NON-bank lenders could see trying times on expectations of a recession and rising unemployment.

There are three companies listed on Bursa Malaysia that function mainly as non-bank lenders — Aeon Credit Service (M) Bhd, ELK-Desa Resources Bhd and RCE Capital Bhd. Unlike their bigger cousins in the banking industry, non-bank lenders are not obligated to offer automatic moratoriums for their loan products, as they do not fall under the purview of the central bank.

Some believe, however, that non-bank lenders that usually serve the low to mid-income groups would need to prepare for higher defaults as the Covid-19 pandemic drags on while financing growth slows.

In a report by Maybank Investment Bank Research on RCE Capital dated May 13, the research house points out that many of the non-bank lender’s customers had problems repaying their debts because of the Movement Control Order (MCO), which started on March 18, resulting in liquidity issues and slowing financing growth.

Of the three listed companies, RCE Capital is likely to be the least affected, as its loan payments are collected through monthly salary deductions, notes Rakuten Trade head of research Kenny Yee.

This implies that the chances of default rates are fairly low because civil servants are seen to be relatively unaffected, income-wise, by the Covid-19 pandemic and the MCO.

Furthermore, Maybank IB Research’s report on RCE Capital notes that the company offered its customers a moratorium but allowed less than 1% of its gross financing and receivables to undergo the six-month moratorium period.

“We also understand that its main collection agent, ANGKASA, is operating as usual throughout the MCO. Thus, RCE is not suffering the liquidity issues that many of its peers are experiencing,” adds the report.

Maybank IB research has a “buy” call on the stock, with a target price of RM1.92. It forecasts the core net profit of the company to cross RM100 million this financial year. It adds that there is upside potential to earnings from lower cost of funds (COF), owing to the lower interest rates.

“We estimate that every 25bps (basis point) reduction in average COF will accrete 3% to earnings,” it says.

As at Dec 31, 2019, the gross financing and receivables of the company totalled RM1.81 billion. The company’s financial year ends on March 31.

While RCE Capital’s gross financing and receivables have been increasing every year, the rate has slowed considerably over the last five years. For FY2019, the gross financing and receivables totalled RM1.73 billion, up 5.4% y-o-y from RM1.64 billion. Between FY2017 and FY2018, the gross financing and receivables expanded 7.8%.

In terms of its gross non-performing loans (NPLs), the rate as at 3QFY2020 was 4.3% — a slight uptick from 4.1% in the previous year. However, it was an improvement from 4.4% in 2QFY2020.

While RCE Capital caters for the needs of civil servants and shields itself against high default rates through automatic monthly salary deduction of its customers, credit company ELK-Desa Resources Bhd’s business model is different.

Observers say ELK-Desa, known for its hire purchase financing for used motor vehicles, will not be badly affected even if there is a spike in non-payments because the loans are relatively small.

Hire purchase financing makes up 98% of the group’s revenue; the remaining 2% is derived from its furniture division.

In its 2019 annual report, the company notes that its average outstanding net hire purchase receivables per hirer is about RM13,000, indicating that the credit exposure per hirer is relatively low.

ELK-Desa chief financial officer and executive director Henry Teoh tells The Edge that it is still too early at this point to comment on the outlook for the company and that it would need more time to understand customers’ behaviour at such a time.

ELK-Desa’s NPL ratio stands at 0.8% and has been trending down over the last five financial years, from 1.7% in FY2015 to 0.8% in FY2019.

Meanwhile, its gross hire purchase receivables have been growing from RM372.72 million in FY2015 to RM669.74 million in FY2019. In its recent third quarter ended Dec 31, 2019, gross hire purchase receivables totalled RM601.69 million for the cumulative three quarters.

In a report dated Feb 18, Affin Hwang Investment Research says there will be weaker growth and higher risk of NPLs for ELK-Desa, given its expectation of a moderation in the economy, following the Covid-19 outbreak. It is still positive on the company’s prospects, however, “as it remains a prudent mass-market [hire purchase] financing player in the Klang Valley”. The research house maintains its “buy” call on the counter, with a target price of RM1.82.

Among the three, Rakuten’s Yee believes that Aeon Credit could be the worst affected, as its credit covers a larger range of products and is mainly for the low to mid-income group.

“The potential default rate could jump in the event of increasing job losses,” he suggests.

Aeon Credit has been trying to diversify its portfolio to capture the middle-income groups. Kenanga Research notes, however, that at least half of its customer portfolio still constitutes those in the “higher Bottom 40” income mix.

Most of its profit comes from its easy payment schemes, followed by its personal financing schemes. Notably, more than half of its financing receivables are derived from its automobile and motorcycle easy payments.

As at Feb 29, the company’s financial year-end, its gross financing receivables totalled RM10.39 billion.

Kenanga Research notes that a saving grace is perhaps its current NPL ratio, which is low — 1.92% as at Feb 29 — and should be able to sustain the group until the situation eases.

Kenanga Research upgraded Aeon Credit to “market perform” from “underperform” previously. The target price of the company was revised downwards to RM8.80, from RM12.50, in anticipation of weaker earnings as a result of the weak market environment.