This article first appeared in The Edge Malaysia Weekly on August 23, 2021 - August 29, 2021

AEON Credit Service (M) Bhd has made some interesting moves lately, in its bid to offer more comprehensive services to customers while seeking growth through digital initiatives.

Last Monday, the Main Market-listed consumer finance company took analysts by surprise when it announced that it would be acquiring an insurance and takaful broking firm — Insurepro Sdn Bhd — for RM1.7 million, having obtained the green light from Bank Negara Malaysia.

The acquisition, expected to be completed in October, will allow AEON Credit to distribute commercial and personal insurance products, including life insurance, by leveraging the AEON group retail network and ecosystem.

“It seems to be a departure from its usual business,” remarks a banking analyst. AEON Credit is in the business of providing personal, motorcycle and used-car financing. The non-bank lender also issues credit cards.

In a brief interview with The Edge, its chief financial officer Lee Siew Tee says AEON Credit had been looking to acquire an insurance broker for several years. There were failed discussions with other firms before it finally landed on Insurepro.

She explains that the acquisition will enable AEON Credit to ramp up its currently small insurance business, which will ultimately help the group grow its fee income.

“At present, we are just an agent representing three insurance companies. Going forward, as a licensed broker, we can tie up with more insurance companies; so, we are able to expand the insurance product range that we can cross-sell to customers when they take up financing from us. Currently, as an agent, we have limited products. We can [soon] add on other products and also tie up with the AEON ecosystem on new sales channels,” she says. AEON Credit plans to transform Insurepro into a “digital insurtech” company, with its main strategy being the direct-to-consumer approach.

Currently, AEON Credit’s insurance business accounts for only 2% to 3% of its total income; as such, there is huge potential for it to grow this further, especially given the country’s rising demand for insurance, Lee says.

Apart from insurance, the group also wants to venture into digital banking. On June 30, AEON Credit announced that it had teamed up with its parent, AEON Financial Service Co Ltd (AFS), to jointly apply for a digital bank licence from Bank Negara.

It will only know whether it is successful in the first quarter of next year, as that is when the central bank is expected to announce the successful recipients of up to five digital bank licences. AEON Credit will hold a 40% stake in the joint venture, while AFS will own the remaining 60%.

Digital banks in Malaysia are meant to focus on the underserved and unserved markets such as the Bottom 40% (B40) and micro, small and medium enterprises.

“We are working with our digital team on how to use technology to entice our customers in the B40 segment. For a start, it’s more of the M40 (Middle 40%) customers that we are focusing on for the tech strategy. And, of course, we are tapping the AEON ecosystem, which comprises not just B40 customers, but also other business partners,” Lee says.

AEON Credit also has a money-lending licence, which it expects to make use of in the early part of the next financial year ending Feb 28, 2023 (FY2023). “It is a little delayed, as we needed to enhance our core back-end systems first,” she says.

Lee stresses, however, that despite the new planned ventures, financing will continue to be AEON Credit’s bread-and-butter business.

In its latest annual report released in May, chairman Ng Eng Kiat highlighted that players in the financial industry are already moving into both banking and non-banking business activities, allowing them to leverage their vast consumer base.

“AEON Credit plans to strategically shift from being a financial service company to a comprehensive service company in a bid to serve our customers better,” Ng says.

Most research houses that track the stock, including Kenanga Research, MIDF Research and RHB Research, have a “positive” call on the stock, with target prices ranging from RM12.90 to RM14.80.

AEON Credit shares, which have gained 29.3% over a year, closed at RM11.82 last Friday, giving the company a market capitalisation of RM3.02 billion.

AEON Credit reported a net profit of RM163.1 million in 1QFY2022, up 520.6% year on year and 43.4% quarter on quarter, which was above analysts’ expectations.

The strong performance was boosted by the group making a net write-back of about RM20 million on the back of better collection and improved financing delinquency movement. Provisions were down 64% q-o-q, while its gross impaired loan ratio improved to 1.75% from 2.46% in the preceding quarter.

“We do not expect more write-backs in the subsequent quarters,” says RHB Research in a July 7 report. It raised its FY2022 earnings forecast by 7% following the better-than-expected first quarter.

“AEON Credit remains our pick for the recovery theme. The full lockdown impact has yet to manifest, but management expects a tougher situation in 3QFY2022 (September to November 2021), owing to the full lockdown. Relief measures (for example, moratorium) are being considered but will be targeted, hence mitigating profitability impact,” the research house says. It has a target price of RM14.80 on the stock.

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