This article first appeared in The Edge Malaysia Weekly on March 5, 2018 - March 11, 2018

AEON Credit Service (M) Bhd, which has traditionally focused on credit services for customers in the low to middle-income segment, is widening its portfolio to include customers in the middle to high-income group.

This move comes on the back of an increasingly challenging landscape for financial service providers as technology disruption clears the way for unconventional players to enter the fray, and margins become thinner each year.

“In our financial year 2018, we have looked at expanding the middle to high-income group of customers. We have to march with the times... we don’t believe we can sustain [our performance] if we remain with our existing business model,” executive director Ajith Jayaram says in a recent interview. “At the present time, we need to balance our portfolio in terms of income distribution. We are heavy middle-to-low and these people will generally shift to the mid-40s group.” The company’s financial year end is Feb 28.

Currently, most of AEON Credit’s customers are below 30 years of age and have a monthly income of less than RM3,000.

Close to 60% of the company’s financing receivables come from its automotive financing and motorcycle easy payment segments, followed by personal financing (26.5%), credit card (8.1%), general easy payment (5.8%) and small and medium enterprises (0.9%).

One of AEON Credit’s advantages is that it can leverage the six million customers of AEON Group, including those of retailer AEON Co (M) Bhd and hypermarket AEON BiG as well as its own, to grow the market segment it is eyeing. Of the six million customers, 75% are active.

AEON Group’s customer base currently contributes less than 20% to AEON Credit’s financing business, with the remaining 80% coming from its merchant network and through its own recruitment.

This means the credit service provider has room to grow the business from synergy within the group and work on more collaboration in financing, says chief financial officer Lee Kit Seong.

“To enhance and grow our portfolio to the middle to high-income level, we are going to those who are not really bank customers ... but there will be also some who qualify as bank customers. Our ticket size is lower, around RM10,000, whereas banks offer RM50,000 to RM100,000 per loan. It is a different segment,” he explains.

Part of AEON Credit’s strategy to capture the middle to high-income customer segment is to embark on a digital transformation that will see it launch its own e-wallet by the first half of this year and roll out a platform, currently available on its website, that allows customers to apply for credit cards and some easy payment products at their convenience.

These are the kinds of services that complement the middle to high-income group of customers, especially those of AEON Group.

“For the e-wallet, our primary focus will be looking into providing this service to AEON Group customers to consolidate and integrate all of them on a single platform and provide payment solutions and loyalty programmes, among others,” says Ajith.

Lee admits, however, that the road ahead for the service provider is paved with challenges. For one, he believes return on equity (ROE) will no longer be above 30% like in previous years but instead moderate to between 22% and 25%.

“It is normal that the ROE declines when we want to grow our portfolio and target the higher-income market segment. The rates will be more expensive for us but the asset quality will generally be better with the higher-income group,” says Lee.

“People have more bargaining power with financial literacy improving these days, so we also have to be aware that high yields will be history in the next 5 to 10 years. This is the same in Hong Kong and Thailand.

“This is why we have to transform our business to sustain and also why we are looking at the middle to high-income group, second-hand business and payment systems. We are also shifting to fee-based ... that is why we have to improve the insurance business that is considered fee-based.”

The company’s insurance business, which is underwritten by several insurance providers, is small at less than 1% of the financing receivables.

Despite the challenges ahead, Lee believes AEON Credit will continue to see consistent growth of about 19% in its financing receivables with the credit card, personal financing and motorcycle financing segments driving growth.

For the cumulative nine months ended Nov 30, 2017, AEON Credit recorded revenue of RM925.95 million, up 14.2% from a year ago. Net profit improved 17.7% to RM217.75 million from the previous year.

Non-performing loans amounted to 2.5% for the nine-month period while its return on assets was 3.7%.

On dividends, Lee says he is hopeful the company will be able to continue paying 30% to 35% of profits as it has done in the past. But this, he says, would depend on the company’s asset growth.

Last December, AEON Credit was slapped with a notice of additional assessment with penalties, amounting to RM97 million, by the Inland Revenue Board. According to an announcement to Bursa Malaysia, the company is challenging the validity of the notices and the penalties imposed and is the midst of obtaining a stay order.

At its close of RM13.30 last Wednesday, AEON Credit’s share price had gained 33% over a one-year period. There are currently two “buy” and four “hold” calls, with target prices ranging from RM12.60 to RM15.30.

“We note that AEON Credit’s share price may potentially re-rate due to the ongoing digital transformation, marketing initiatives and 2% income tax reduction for the lower income group under Budget 2018 which, in our view, are game changers for the company in FY19,” AffinHwang Capital notes in a report. The research house has a “buy” call on the counter and a target price of RM13.80.

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