New measures tighten regulations, making it difficult for Qifu Tech's performance to return to previous levels

Online lending service provider Qifu Technology announced weak third-quarter results and turned pessimistic about its full-year outlook, in stark contrast to a strong finish in 2024.

Key Points:

• The company's third-quarter revenue slightly fell by 0.2%, and net profit decreased by 17%, reflecting the challenges faced by the company in a weak macro environment.
• The company issued a pessimistic guidance for the full year, primarily due to new regulatory measures that will compress its profit margins in the online lending service business.

Liang Wuren

Over the past year, the online lending service platform Qifu Technology Co., Ltd. (QFIN.US; 3660.HK) has undergone significant changes. Firstly, the company changed its name, but more critically, under the tightening regulatory environment and the ongoing economic downturn in China, Qifu Technology, which had previously shown resilience in adverse conditions, has begun to experience a noticeable impact on its performance.

According to the latest quarterly report released by Qifu Technology last week, the company's third-quarter revenue fell slightly by 0.2% year-on-year to 5.2 billion yuan (731 million USD), marking the first revenue decline in over two years; net profit dropped by 17% year-on-year to 1.4 billion yuan. To make matters worse, the company provided a pessimistic outlook for the remaining year, expecting that net profit in the fourth quarter could decline by as much as 49%, and even in the best-case scenario, the full-year net profit for 2025 would only see about a 1% increase.

This outlook sharply contrasts with the optimistic sentiment Qifu Technology had at the beginning of the year when the company announced significant profit growth for 2024 and anticipated a strong start for 2025. Subsequently, the company changed its name from "Qifu" to "Qifu Technology," possibly to highlight its positioning as a fintech institution by incorporating "fin." Qifu Technology was originally named "360 Finance," reflecting its connection to the cybersecurity software company Qihoo 360 when it went public in New York in 2018.

More impactful than the name change are the new financial industry regulatory rules that officially took effect in China on October 1. One of the core aspects of the new regulations is the significant strengthening of risk management, meaning Qifu Technology must raise the threshold standards for borrowers, thereby sacrificing some loan growth, while also needing to increase provisions for potential defaults. These requirements may further suppress the company's profit growth.

Qifu Technology CEO Eric Wu stated during the third-quarter earnings call, "As an industry leader, we have always held ourselves to the highest compliance standards, and this time is no exception. Although the relevant measures may impact loan volume and profitability in the short term, we believe that prioritizing user value will ultimately enhance their trust in the company and support us in achieving more resilient and sustainable long-term growth."

This new regulation is just the latest wave in a series of adjustments to the regulatory framework for China's private financial industry, which has faced ongoing regulatory changes since the years before the pandemic. It also highlights the reality faced by Qifu Technology and its peers—the overall regulatory framework for China's financial industry is rapidly evolving, and the regulators aim to prevent systemic risks arising from excessive lending in the market.

Additionally, the current weak state of the Chinese economy has put pressure on both private and state-owned lending institutions. As businesses and consumers tighten their spending and borrowing, it has become increasingly difficult for lenders to expand their operations Even though Beijing has introduced revitalization measures providing interest subsidies for certain consumer-related industries, the national bank loan balance significantly contracted in October compared to the previous month.

The weakening financial condition of borrowers has also increased default risks, further elevating the importance of risk management, regardless of whether regulatory measures are tightened.

Qifu Tech's performance in the third quarter clearly reflects these pressures, with its total credit facilitation and loan issuance increasing only 1% year-on-year in the third quarter and declining 1.4% quarter-on-quarter. Meanwhile, the proportion of loans overdue by more than 90 days rose slightly from 1.97% in the second quarter to 2.09% at the end of September.

Provision Surge

As the operating environment deteriorates, Qifu Tech's bad debt reserves have surged significantly. Theoretically, as a facilitator connecting borrowers and banks, the company does not need to directly bear the risk of loan defaults, but the reality is different. If the "heavy capital" loans facilitated by Qifu default, the company must repay the original lender the full amount of all unpaid principal and interest. Additionally, Qifu also lends part of the loans through trusts and its subsidiaries' own funds, with the credit risk of this portion borne by the company itself. The simultaneous increase in the scale of these two types of loans has forced Qifu to significantly increase its provisions.

In a conference call, Qifu's management stated that the company would adjust the ratio of "heavy capital" loans to loans without full compensation obligations based on macroeconomic conditions. Management also mentioned that in the fourth quarter, the proportion of the latter (i.e., loans that do not require full compensation guarantees) would be increased to reduce the company's overall credit risk exposure.

Of course, Qifu Tech is not the only one facing these headwinds. Its competitor Xinye Technology (FINV.US) also announced a year-on-year decline in transaction volume for the third quarter last week, while its provisions also increased. However, unlike Qifu, Xinye Technology still successfully recorded revenue and net profit growth, mainly benefiting from its active expansion into overseas markets, which is an area that Qifu has yet to enter.

Qifu Tech remains a highly profitable company with good profit margins. Its advanced technology effectively reduces operating costs, and its service capabilities, relying on artificial intelligence and data analysis, are particularly attractive to banking institutions, giving the company a certain bargaining power when negotiating pricing with financial institutions.

For example, Qifu is integrating an AI credit approval agent into its Focus Pro platform. This technology can utilize vast amounts of data and large language model capabilities to complete borrower risk assessments in seconds, significantly simplifying the cumbersome loan approval process. Wu Haisheng stated that the trial operation of the relevant functions has received "very positive" feedback from clients.

Despite this, the market's reaction to the company's latest performance has not been ideal, with Qifu Tech's Hong Kong stock plummeting about 18% over four trading days. Since the beginning of the year, the stock has fallen over 50%, far behind the Hang Seng Index's approximately 32% increase. Currently, the company's price-to-earnings ratio is only 2.7 times, even lower than the similarly sluggish Xinye Technology's 3.3 times, indicating that investor confidence in the entire sector remains quite weak, despite most companies maintaining profitability in a challenging environment