Non-bank lenders miss targets

EARNINGS of local banks in the recent third quarter came in largely above and within analysts’ expectations.

For 2024, one research house expects the sector’s performance to be similar to the growth rate of Singaporean peers and ahead of Indonesia and Thailand banks.

However, non-bank lenders missed targets as they found the operating environment more challenging.

Non-bank lenders provide finance, often serving the low to mid-income groups that may not meet the creditworthiness assessments of banks.

The players in this space are AEON Credit Service (M) Bhd, RCE Capital Bhd and ELK-Desa Resources Bhd. The profitability of the two bigger companies were weaker year-on-year (y-o-y) and quarter-on-quarter in the latest quarter, while ELK-Desa’s decline was marginal.

Inflation has been eating into the disposable income of consumers, especially the low and moderate income groups.

“The loans offered by non-banks are typically higher than those offered by banks.

“Asset quality is something to watch and lenders may have to take pre-emptive or pro-active measures to mitigate the potential risks,” the analyst says, noting that Malaysia’s household debt ratio is relatively high at 84%.

Take the case of AEON Credit, which primarily offers credit cards and other loans and financing options to consumers.

AEON Credit’s net profit for the second quarter ended Aug 31, 2024 (2Q24) fell by two-fifths due to sharper-than-expected credit costs.

Kenanga Research, for one, has slashed AEON Credit’s financial year 2025 (FY25) earnings by 16% after raising its gross credit cost assumptions to 5% (from 4.25%) to reflect higher asset quality concerns.

However, this is still lower than FY24’s 5.15%.

It also expects the group’s cost-to-income ratio to be on the high side in FY25 as AEON Credit incurs more marketing spend to support its new customer acquisition efforts for its digital banking associate company AEON Bank.

Over at RCE Capital, lower-than-expected financing growth dragged down net profit by about a quarter in the 2Q ended Sept 30.

RCE Capital provides personal financing with its customers mainly being civil servants, who repay their loans via direct salary deductions.

However, RCE does experience non-performing loans (NPL) if civil servants resign or retire early.

With a gross financing balance of RM2.1bil, its market share is about 2% in the personal financing industry.

Notably, the operating environment for civil servant financing has been challenging over the past year.

RCE has been seeing an influx of lower credit score applicants and had to pare down disbursements to maintain asset quality.

Positively, credit costs have moderated back to circa 1.2% per quarter, compared to the 1.5 to 2% range over the past three quarters, RHB Research said in a recent report.

Meanwhile, ELK-Desa reported a 5.4% decline in net profit to RM16.4mil in the first half of its 2025 fiscal year.

There was an increase in its impairment allowance, which ballooned to RM20.8mil versus RM12.9mil a year ago. Management attributed this to slower hirer repayment.

ELK-Desa operates in two segments – hire purchase and furniture sales.

In its 2Q25 forward looking statement, the company said it expects demand for used car financing will continue to outstrip supply.

But it expects increased pressure in collection and recovery due to the uncertainties arising from the government’s impending subsidies rationalisation in 2025, which may have short-term implications on the country’s inflation rate.

To mitigate this, it will continue to reduce problem loans by engaging with customers and ramping up recovery efforts. The government is slated to implement the targeted RON95 petrol subsidy rationalisation in mid-2025 to achieve its medium-term fiscal consolidation targets.

Analysts reckon the inflation impact should be manageable as the government’s priority is to keep cost of living pressures in check when deciding how much to adjust fuel prices.

Providing some buffer for consumers are the upcoming hike in minimum wage from RM1,500 to RM1,700 and the civil servant salary adjustments from this month.

These are expected to spread RM20.4bil across 6.05 million individuals, one research firm estimates.

With higher salaries, it is also reasonable to expect fewer civil servants leaving the workforce going forward – a boon for RCE Capital.

Private investor Ian Yoong says the three non-bank lenders have fared reasonably well in managing their loan books.

“Their reported NPL over gross customer loans for the months of February, March and April this year are 2.6%, 3.7% and 5%, respectively.

“The positive for the sector is that domestic interest rates should ease in 2025, thereby lowering borrowing cost as shareholders funds and borrowings are their main sources of funding,” he adds.

Of the three stocks, AEON Credit still garners some appeal.

Bloomberg data show there are four “buy” calls and one “hold” rating ascribed on the stock, which is 61.5% owned by Japan’s Aeon Financial Service Co Ltd.

Yoong says notwithstanding the weaker 2Q25 results, AEON Credit’s valuation at 1.3 times price-to-book (PB) is compelling and backed by a decent return on equity (ROE) and dividend yield of about 4.4%.

As the digital banking space grows, the stock’s attractiveness may also increase when cross-selling between the two entities is rolled out in the near-term. For context, the banking sector’s average PB stood at 1.2 times.

As for RCE, its valuations appear stretched with the stock trading at 2.8 times PB. The company’s share price had risen earlier in the year following news on the civil servants’ salaries revision.

“Maintain ‘sell’ with a new RM1.25 target price from RM1.35,” RHB writes in a recent report.

Where ELK-Desa goes, TA Research’s RM1.30 target price is based on 25% discount to the sector average and the stock’s PB ratio of 1.6 times.

The discount is due to the stock’s smaller market cap and less superior ROE as compared to the two other peers.