Czech finance firm banks on bumper borrowing in China

(In Oct. 18 story, adds missing letters to Sinopsis, para 21.)

A shop assistant offers an instalment sale to a customer inside of Kika furniture store chain in Prague, Czech Republic October 18, 2017. REUTERS/David W Cerny

PRAGUE (Reuters) - Czech consumer finance company Home Credit has achieved this year what many Western banks have struggled to do for decades: lend billions of dollars to Chinese consumers.

The privately-held firm has quietly become one of the biggest non-bank consumer lending companies in China. It lent 6.4 billion euros ($7.6 billion) in the six months to June - more than double the level in the same period a year earlier.

A large part of its business focuses on offering financing to smartphone buyers. It finances more than tenth of all iPhone sales in China, the U.S. tech giant’s second-biggest market.

The Czech company has 225,000 sales points in retailers across China, and said the number could rise to up to 500,000 in the coming years.

Home Credit’s strategy in China - which accounts for the bulk of its profits - and emerging markets could offer some guide for other companies and investors.

While many Western firms have pulled back from consumer lending in emerging markets since the financial crisis, Home Credit has taken a counter tack. It has also launched operations in the Philippines, Vietnam, Indonesia and India, which it believes may rival the Chinese market in years to come.

The company said it had sought to identify markets with a growing middle class eager to buy consumer goods where many might not be eligible for bank loans. It can then offer good customers additional products such as cash loans, often bigger and more profitable.

“Our strategy has been to target unpenetrated markets that had potential for us as new entrants,” said Jiri Smejc, a minority shareholder who controls Home Credit along with majority owner Petr Kellner, the Czech Republic’s richest man.

There are, however, inherent risks in a strategy focused on emerging markets. Economic cycles can shift abruptly, while government and regulatory polices can change just as suddenly.

Home Credit’s net loan portfolio stood at around 12.5 billion euros at the end of June, up from around 9.9 billion at the end of 2016.

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“The Czech Republic is a small market - we needed to go abroad in order to grow,” Smejc said in an interview. “Our home market because of its size, however, serves well for testing and piloting various innovations without the risk of a big loss if things are not accepted well.”


Home Credit, which was founded in 1997, entered China a decade ago, three years after Kellner’s investment firm PPF had arrived. It won one of four national licenses in 2014 to provide loans to a portion of China’s $4 trillion consumer finance market.

It is the only fully foreign-owned consumer finance firm licensed by the central bank in a country where authorities usually require overseas companies to team up with a local partner to operate.

“We were in the first batch awarded a consumer finance license because we had been in China since 2007. We practiced inclusive finance understanding and adapted to the local culture, things that are of critical importance,” Smejc said.

“Over our 20 years of operation in countries, including some where state policies have changed regularly, we’ve gained plenty of experience that helps us adapt.”

About half of Home Credit’s business in China comes from finance loans for consumer goods - mainly smartphones, with the rest being cash loans to existing customers.

The drive has been accompanied by a lobbying effort back home by Home Credit and PPF to push for closer ties between Prague and Beijing - something which analysts say has benefited Home Credit in China.

Speaking to a business forum in Prague in 2016 with the Czech and Chinese presidents in attendance, Smejc suggested Home Credit and PPF had helped foster better relations.

“PPF and Home Credit, and we are proud of this, have been at the foundation of an initiative that, I think, has led to the revival of Czech-Chinese relations,” Smejc told the conference.

In 2014, Czech President Milos Zeman - along with business leaders including Kellner and Smejc - traveled to China to sign a joint declaration of friendship. Zeman was also the only western leader to attend a military parade in Beijing in 2015 to mark the end of World War Two.

“Much of the lobbying was done by PPF and Home Credit,” said Martin Hala, an expert on China-Czech relations at Prague-based think-tank Sinopsis. “They are the big victors in this change.”


The prize is a potentially rich one.

Total outstanding consumer lending in China reached 26.76 trillion yuan ($4 trillion) in 2016, up 282.5 percent on 2011, according to Euromonitor International, which forecasts it could hit 35 trillion yuan by 2021.

Consumer finance firms make up a fraction of the sector, which also includes auto loans and home mortgages.

Most consumer credit is now issued by China's commercial banks and online consumer finance platforms, led by Ant Financial, the online payment arm of e-commerce giant Alibaba Group BABA.N, and JD Finance JD.O, which target existing customers with a proven credit history.

But many of the hundreds of millions of residents without a proven borrowing history are turning to consumer finance companies like Home Credit.

As a privately-held company, Home Credit had the freedom to build its business in China and other places despite early losses.

That has paid off. For the first six months of 2017 Home Credit more than doubled its net profit to 133 million euros.

Additional reporting by Robert Muller in Prague and Matt Miller in Beijing; Editing by Pravin Char