LexinFintech Q2 Earnings: Mixed Prospects (NASDAQ:LX)

Elevator Pitch

I rate LexinFintech Holdings Ltd.’s (NASDAQ:LX) shares as a Hold.

In my earlier November 29, 2021 update for LexinFintech, I touched on specific regulatory changes that affect Chinese online consumer finance companies such as LX. With this latest article, I provide my updated view of LX after analyzing the company’s recently disclosed metrics.

I downgrade my rating for LX from a Buy to a Hold, considering its mixed prospects. I have a positive view of LexinFintech with respect to its loan growth guidance and revenue diversification efforts. But I am negative on the increase in LX’s 90 day+ delinquency ratio and the company’s slower-than-expected progress in complying with regulatory guidance on the interest rate cap.

Robust Loan Growth On A QoQ Basis

LexinFintech’s loan originations increased by +14% QoQ from RMB43.2 billion in the first quarter of this year to RMB49.1 billion in the most recent quarter, as highlighted in the company’s Q2 2022 earnings press release.

On a YoY basis, loan originations for LX still contracted by -19% YoY, which wasn’t a surprise considering the effects of the COVID-19 pandemic and associated lockdowns in Mainland China. Notably, LX emphasized at its Q2 2022 results briefing that “the impact of the pandemic (in China) was in fact greater in the second quarter than in the first quarter” of 2022. Therefore, LexinFintech has in fact done very well to have achieved loan originations growth in QoQ terms for Q2 2022.

Also, it is worth noting that the QoQ increase in loan originations for LX in the recent quarter was driven by both larger loans and a greater number of users utilizing its loan products. The number of borrowers grew by +7% QoQ from 5.7 million for Q1 2022 to 6.1 million in Q2 2022, while the average quantum of loans expanded by +6% from RMB7,579 to RMB8,049 over the same period.

Looking ahead, LX is confident that its loan growth momentum (on a QoQ basis) can be sustained in the third quarter of the current year. At its Q2 2022 investor call, LexinFintech disclosed that its “loan origination guidance in Q3 (2022) will be RMB53 billion or above.” This implies that the company is expecting a decent +8% QoQ growth in loan originations for Q3 2022.

Revenue Diversification Efforts

LX is actively diversifying beyond its core online consumer finance business. The company’s new growth driver is what it refers to as “consumption-driven location-based services”, which comprises of the Fenqile e-commerce platform and its BNPL (Buy Now Pay Later) product Maiya.

The company highlighted in its second-quarter earnings release that the GMV for Fenqile and Maiya combined grew by a strong +36% YoY from RMB816 million in Q2 2021 to RMB1.1 billion in Q2 2022. This helped to boost LexinFintech’s diversification efforts, as the consumption-driven location-based services’ revenue contribution as a proportion of LX’s top line increased from 13% in the second quarter of last year to 22% in the recent quarter.

Rising 90 Day+ Delinquency Ratio

It is encouraging to see a recovery in LexinFintech’s loan originations for Q2 2022, but there are concerns relating to specific credit quality metrics.

As indicated in its Q2 2022 results media release, LX’s 90 day+ delinquency ratio increased by +0.23 percentage points QoQ and +0.78 percentage points YoY to 2.63% as of the end of the second quarter of 2022. LexinFintech revealed at the company’s second-quarter investor briefing that its 30 day+ delinquency ratio also rose in Q2 2022.

But LX also stressed that “we expect the 30-plus (days) delinquency to have peaked” in Q2, and mentioned that it has been growing “loan volume contribution from lower risk borrowers.” In addition, LexinFintech noted that the company’s July 2022 day-one delinquency ratio was -11% lower as compared to Q1 2022.

Nevertheless, it is important to continue tracking the delinquency ratios as a means of checking if there are signs of credit quality deterioration for LX going forward.

Interest Rate Cap Guidance

I highlighted in my prior article for LX written in late-November 2021 that LexinFintech “guided at the company’s recent third-quarter (of 2021) earnings call that it expects to fully comply with the 24% interest rate cap requirement (as advised or guided by Chinese regulators) by June 2022.”

Unfortunately, LX has yet to achieve full compliance with the 24% interest rate regulatory guidance by the end of the second quarter of 2022 as it guided for previously. Specifically, the proportion of LexinFintech’s loans priced at below 24% APR (Annual Percentage Rate) increased by +330 basis points QoQ to 81.1% as of June 30, 2022.

At the company’s most recent quarterly earnings briefing, LexinFintech emphasized that it has “the capabilities to further adjust (the proportion of loans with APRs below 24%) to 100%”, but noted that it has “no targeted timeline.” This creates some degree of regulatory uncertainty and risks for LX, if and when the Chinese authorities choose to make this 24% interest rate cap for personal loans a legal requirement.

Concluding Thoughts

LexinFintech’s stock is rated as a Hold now. I am encouraged by LX’s strong loan originations growth and the good performance of its new consumption-driven location-based services business in Q2 2022. On the other hand, I do have concerns about LX in areas such as credit risks and regulatory compliance.