LOAN FEARS HAUNT FINTECHS

Defaults may smash the sectors bottom line

 Joyce Moullakis, The Australian. 27th Match 2020

A day of reckoning is fast approaching for the local Fintech sector and buy-now-pay-later juggernauts Afterpay and Zip.

A period of steep economic decline due to the COVID-19 fallout and the associated rise in unemployment is expected to spur a marked increase in bad debts for the consumer credit industry.

Afterpay and EML Payments saw large rebounds in their share prices on Thursday – up 29.4 per cent and 32.9 per cent respectively - both stocks remain at less than half the value of their 24 month highs. It’s the future risk, though, posed by a spike in unemployment and heightened stress in sectors such as hospitality and retail, that are worrisome in 2020.

Analysis by McLean Roche Consulting’s Grant Halverson looks at local payment and arrears data from the 1990 recession and 2008-9 global financial crisis which paints a bleak picture this time around for fintechs and buy-now-pay-later companies.

The other worry is the speed of this downturn and its dramatic impact on spending and employment. “This is very quick whereas most recessions grind along” Halverson says.

He notes that during the 1990 recession, the Reserve Bank’s and banking regulator’s data showed non-performing loans jumped to 1.9 per cent of the total pool, up sharply from 0.75 per cent, reflecting a rise of 2.53 times.

The GFC performance was slightly less troublesome, with delinquencies for personal loans climbing to 1.5 per cent in 2009, from 0.8 per cent in 2007, for an increase of almost 1.9 times.

While the data from 1990-91 needs to be analysed with some caution, due to how the RBA collected it then, the risks and trends are clear. It’s also important to remember many of these newer companies are yet to navigate a sharp economic downturn and this will prove a key test to their models, resilience, funding and ability to collect debts. 

Halverson a former executive at Citibank (Asia) and Diners Club, reckons some of them won’t survive. “They are going to get totally whacked. Some of (them) are going to go off a cliff” he says.

Much depends on how much the next six months play out; how sharp the downturn is and whether there is a strong recovery on the other side. But Halverson’s numbers are startling if these companies see bad debts increase by 2.53 times, the same amount as the recession of the early 90’s.

The estimated full-year revenue of Zip would be completely wiped out by bad debts, while the bulk of Afterpay’s revenue would be offset by bad debts.

Flexigroup, Latitude and Tyro fare better in Halverson’s analysis because their business models are more diversified providing a bigger revenue buffer.

Analysis by S&P Global Ratings of how the mortgage market will navigate the economic slowdown also doesn’t bode well for the outlook for bad debts.

“We currently expect increases in arrears to be higher than during the 2008 global financial crisis, given the wide-ranging effects on the economy stemming from the sudden disruption to economic activity. Arrears will also rise much sooner than they did during the financial crisis” a report on Thursday finds.

Government stimulus packages will, of course blunt or delay some of the impact, but investors will be keeping a keen eye on signs of stress across bank and Fintech portfolios.

Afterpay last week rushed out a letter to shareholders in an attempt to ease nerves, saying it had not seen a “material impact” on repayments or loses. A lot has changed though since last week, including massive loss of jobs across a spate of industries.

Also this month Afterpay highlighted a $1.09bn warehouse funding facility and cash on its balance sheet of $402.5m.

Either way, it will be a turbulent six months ahead and share prices have already been hit hard. 

Halverson’s analysis of 18 listed fintechs, using Thursday’s closing prices, show as a group their market capitalisation amounts to $7.93bn, down notably from $13.42 on December 20 2019.