FE Credit, zooming to a billion-dollar valuation

Vietnam Prosperity Joint-Stock Commercial Bank (VPBank), its parent company, announced last Wednesday it was selling a 49 percent stake in the non-bank lender to Japan’s Sumitomo Mitsui Finance Group (SMFG) for $1.4 billion.

It was Vietnam’s first M&A deal in the financial sector worth over $1 billion.

Based on the price, FE Credit is valued at around $2.8 billion, slightly higher than VIB’s valuation of $2.65 billion and much higher than mid-sized banks such as SHB, which is valued at $2.2 billion, HDBank ($2 billion), OCB ($1.15 billion), and LienVietPostBank ($1 billion).

Founded as the consumer finance division of VPBank in 2010, FE credit became an independent legal entity in 2015.

Within a short period it became a leading revenue driver for VPBank, growing at breakneck speed though not without controversy.

Before 2010, when it still went by its old name, Joint Stock Commercial Bank for Non-State Enterprises of Vietnam, VPBank was one of the smaller lenders in the country.

It changed its name to Vietnam Prosperity Bank in the second half of 2010 while also launching the consumer credit division to focus on segments the market had neglected such as small and medium enterprises and household businesses.

It sought to target high risk-high reward segments that traditional banks had been reluctant to enter.

CEO Nguyen Duc Vinh’s mantra has been that bad debts are inevitable in lending, and it is more important for banks to accept and manage this risk.

This was panned by analysts, especially since the banking industry had just experienced the 2008 financial crisis with bad debts being the biggest problem.

However, VPBank’s gamble seems to have paid off handsomely given the subsequent performance of FE Credit.

Lending was mostly to enable shopping. After three years of trying to figure out its direction, FE Credit settled on unsecured cash loans, a segment many banks ignored because of the risks involved.

But it was a good choice for FE Credit because there was a lot of pent-up demand. The borrowers are mostly people who do not meet the requirements for mortgage loans and are ignored by lenders because of the high risks, and so often have to turn to loan sharks for finance.

By meeting this niche demand, FE Credit quickly became a major revenue driver for VPBank, whose post-tax profits hit VND1 trillion ($43.44 million) for the first time in 2013 and rose six-fold by 2017, with FE Credit accounting for 40 percent.

However, the success of FE Credit has not been without controversies.

People have complained that they are indebted to FE Credit as a result of others forging their documents to obtain loans or that their phone number appeared on the list of persons related to a borrower without their consent or knowledge or they were harassed by third-party debt collectors.

In 2018 the Vietnam Competition and Consumer Protection Authority said over 100 consumers filed complaints that FE Credit had called them up for debt repayment though they had not borrowed.

It also said there were allegations that DeAura, a beauty products vendor and business partner of FE Credit, had scammed consumers into buying expensive products financed by the lender.

FE Credit, understandably for a consumer finance company, has always had a high bad debts ratio, making VPBank’s among the highest in the banking industry.

In 2018-19, despite its heightened focus on debt recovery, FE Credit's bad debts ratio was still nearly 6 percent.

Although FE Credit’s ‘quantity over quality’ philosophy is the reason VPBank's total operating income has always been the highest among commercial banks, it also means its operating costs and provisions for credit risks also top the industry.

FE Credit's growth has slowed in the past two years, but it was considered essential to standardize its operating model, restructure products and focus more on technology to build a stronger foundation.

But it remains the runaway leader in the consumer credit market with a market share of over 50 percent at the end of 2020.

The stake sale to SMFG also makes sense, according to analysts.

Vinh told shareholders at the annual general meeting earlier this year: "Selling 49 percent of FE Credit to SMFG does not mean that VPBank will give up its goose that lays the golden eggs. With more strategic partners, FE Credit can reap greater value."

Ngo Chi Dung, VPBank's chairman, said two options had been considered: a public listing of FE Credit and a private placement.

"To take FE Credit public, the only question would be the price, an option more profitable to VPBank in absolute terms since several Vietnamese and foreign consultants estimated the IPO to be worth $4 billion."

However, after meeting with investors, the bank decided to bring SMFG on board as a partner.

According to FiinGroup, a provider of financial data and analysis, FE will benefit in the long term from M&A transactions.

Firstly, it said it is cheaper to raise money from SMFG, and it is highly likely that FE Credit would take advantage of the opportunity to raise funds or restructure existing funding.

This would help bring down FE's cost of capital, net interest margin and profitability without having to pursue overly risky products or customer segments, it said in a report.

FE Credit would also benefit from SMFG’s experience in risk management and new product development in the consumer finance sector as it already operates consumer finance companies in Japan, China, Hong Kong, Taiwan, and Thailand, pieces which would become useful for FE Credit’s long-term strategy, it added.

Vinh said: "VPBank's share in FE Credit may be reduced in relative terms, but its absolute value will be much higher in future. FE Credit is still an important component in VPBank's profits."

FE Credit has 20,000 outlets and 13,000 employees. It reported pre-tax profits of VND3.87 trillion ($168 million) last year, down 16 percent from 2019.