Alliance DBS: Aeon Credit’s provisioning seems too prudent

PETALING JAYA: Aeon Credit Service (M) Bhd’s current financial year ending February, 2020 is expected to be a transition year, acording to Alliance DBS Research.

The research house said Aeon Credit continued to chart strong growth in its receivables base over the past year at double digits, as it expanded into higher income segments within its core product lines (i.e. personal financing, motorcycle and automotive financing).

“However, with further refinement of its provisioning methodology under MFRS 9 (Malaysian Financial Reporting Standards) beginning 2QFY20, the group’s general provisioning has increased substantially in line with the larger receivables base, ” it said in a report yesterday.

Alliance DBS Research pointed out that Aeon Credit’s annualised net credit cost during the quarter jumped to 4%, though exacerbated by movement between its delinquency buckets arising from seasonal factors.

“However, the group’s provisioning seems excessively prudent – its loan loss coverage ratio is around 330% despite fairly stable non-performing loan (NPL) ratios and robust collection rates, ” it said.

Alliance DBS Research said with the higher provisions eroding earnings, the company plans to optimise the pricing structure of its products further while improving cost efficiency to buoy margins.

Avenues to achieve this include utilising its existing customer database to increase product cross-selling.

“However, a return to its previous profitability levels will likely take time to materialise, especially with a moderating economic environment and potential pushback from changing its pricing strategy.

“The group’s current mix between higher income customers is around 32% in the Middle 40% (M40) bracket, and yields could be capped as the company grows this segment organically. That said, given the lower earnings base, growth should return in FY21F albeit at reduced profitability, ” it said.

Alliance DBS Research said it had not observed any alarming changes in Aeon Credit’s asset quality – the company’s NPL ratio has fallen steadily to around 2.0% from a high of 3.1% in 3QFY15.