Due to the potential impact of coronavirus (COVID-19) on the activities of NEO Finance, AB
NEO Finance, AB is engaged in two types of activities: it provides a payment initiation service for electronic businesses and is a P2P lending operator.
This week, the Board of Directors of the Company remotely participated in two extraordinary meetings to discuss the situation and decide on further action.
The Board believes that the current situation may have a positive impact on the financial results of the payment initiation service, as we are clearly witnessing the growing need for e-businesses to sign up for Neopay and accept payments from consumer payment accounts, thereby saving on billing costs. In order to meet the growing demand, the Company is increasing its human resources and allocating additional investments to these activities.
In the context of P2P lending activities, the Board, in response to the situation, adopted the below listed decisions to adapt to the changed situation in the Lithuanian economy.
- The interest rate on the bottom cap on all new-rated loans depending on the loan term was increased. The minimum interest rate was increased by 1% for A, 2% for B and 3% for C.
- In accordance with the Consumer Credit Act Amendment of 03/03/2020 (https://e-seimas.lrs.lt/portal/legalAct/lt/TAD/fa412bc268f611eaa38ed97835ec4df6?jfwid=kju1kjtqx ), we are immediately arranging for borrowers to take a “credit leave” by providing credit deferral part payment up to 3 months (in exceptional cases up to 6 months) as required by law.
- Temporarily, until further notice, we suspend loan applications for refinancing loans where the borrower's DTI is greater than 40 percent. With this decision we are trying to foreclose on the riskiest group of borrowers.
- We are changing the risk rating of C-rated loans and from now on we will not let through a portion of C-risk loans, leaving only the less risky portion of the loans at an approximate ratio of 80/20, i.e. rejecting about 20% of riskier C-rated loan applications.
- Reduction of the maximum loan amount according to the ratings: for A rating the maximum amount is EUR 13,000, B - EUR 10,000, C - EUR 7,000. The total amount of available loans per borrower may not exceed: EUR 17,500 for A, EUR 14,000 for B, EUR 10,000 for C.
- Significantly reduce advertising costs until the economic situation becomes clear.
- Review and reduce operational costs as far as possible and, in the event of a reduction in labor resource needs, seek mutually acceptable solutions to reduce the payroll line without reducing staff's fixed salary.
It is important to note that the economic situation in other countries does not affect the Company's activities (apart from the volume of investments by foreign investors) as the Company's investors and the Company itself lend directly only to citizens of the Republic of Lithuania working in Lithuania. However, as the demand for export goods and services diminishes, the economic downturn in other countries may have an indirect impact on the Company as a result of a decline in income or loss of income to its borrowers. The current economic situation in Lithuania has a greater impact on the income of borrowers as Lithuanian companies reduce their employment or terminate their employment. It is a very positive and important aspect that the Lithuanian Government have adopted an economic stimulus package in which subsidies or compensation for the salaries and employment of employees play the most important role. Employers, with the help of state aid, retaining employees and allowing them to take "credit leave," are likely to be able to gradually return to full-time employment and continue to meet their financial obligations in a few months' time as the threat of the virus and its negative impact on the economy diminishes. However, the decisions we make dictate that the number of non-performing loans may increase to a greater extent than before the quarantine due to the inability of subsequent borrowers to meet their financial obligations. We believe that the decisions made will fully or partially offset the possibly higher and currently more uncertain risk borne by investors when investing in new loans with higher interest rates and reduced risk. There is a strong likelihood that returns from past investment in consumer loans will not produce the returns that were expected in the past, and returns may decline significantly. However, in the most realistic scenario, provided that the number of non-performing loans does not increase by more than 2-2.5 times, investors who have invested in loans before the quarantine was announced will also earn positive returns from these earlier investments.
Company’s Cash flow
The Company's revenue collection business model is completely non-standard and in the current situation it can be called "anti-crisis" or "anti-cyclical". The Company receives all brokerage income related to the granted consumer credit from the borrower for the duration of the loan and does not withdraw any euro in advance, i.e. in the event of a full financing transaction on the NEO Finance platform, the brokerage income of the platform is not paid at the time of the transaction. Actual receipts are distributed throughout the duration of the loan and are collected at the monthly repayment of the borrower. Most of the costs incurred to earn this income (marketing, administration, etc.) are incurred in the month of the transaction. This method of revenue collection, even with a decrease in monthly installment revenue, allows the Company to obtain a significant revenue stream from previously concluded loan transactions, even with a significant reduction in new lending.
However, it is currently very difficult to say how much the monthly fee receipts from the borrowers and, consequently, the Company's brokerage fee, will decrease, as this will largely depend on the borrowers' need for a "credit leave". In any case, the Company has sufficient funds and future revenues to provide its services for a very long period after the reduction of operating expenses, therefore the current economic situation does not completely threaten the continuity of the Company's operations. As mentioned above, the Company will provide an updated stress-test simulation in the near future. It is also worth noting that the positive cash flow is likely to increase due to the growth of the Company's payment initiation services.
The Company is currently not in a position to calculate with sufficient certainty the impact of the coronavirus situation on the Company's financial results for 2020 due to too much uncertainty.