How a Bet on China Consumers Is Backfiring for Richest Czech

(Bloomberg) -- Petr Kellner's push into China was meant to turbo-charge one of eastern Europe's biggest fortunes. Instead, the Czech billionaire saw a listing of his consumer lender collapse, followed by a fight to contain the impact of the coronavirus pandemic.

That has cost him $2.5 billion since January, with mounting questions about what's next for his Asian expansion. In November, Kellner's Home Credit NV scrapped a plan for a $1.5 billion initial public offering in Hong Kong after investors demanded a lower valuation. Now China's slowing economy and shrinking consumer loans following strict lockdowns are adding to the woes for a company that has most of its loan book in that country.

Kellner's fortune, now at $10 billion, has dropped the most this year among the richest eastern Europeans outside of Russia, mostly because of a $1.5 billion plunge in the value of his stake in Home Credit. It's now worth an estimated $2.8 billion, based on the performance of publicly traded peers, according to the Bloomberg Billionaires Index.

“The coronavirus pandemic unfortunately won't remain without a negative effect on the Home Credit business,” company spokesman Milan Tomanek said in an email. “Quantifying the impact at this moment, when the pandemic hasn't ended yet, would be speculation.”

Born in Czechoslovakia in 1964, Kellner studied economics and worked as a salesman for an office-equipment distributor shortly after the Communist Party fell in the 1989 Velvet Revolution. Then the newly capitalist state began selling assets such as industrial firms and refineries using a unique approach: it handed out vouchers exchangeable for company shares. Kellner, like many others, took advantage. He set up a fund in 1991 and, with the help of outside investors, acquired stakes in 202 companies. It wound up handling the sixth-biggest batch of assets offered for sale at the time, according to the firm, which then became known as PPF Group NV.

Foreign Ownership

Today, PPF's operations span finance, telecom, biotech, real estate and engineering, and Kellner controls about 99% of the company. Its Home Credit unit, started in 1997, is one of the largest consumer lenders in central and eastern Europe.

The push into China came in 2007. Home Credit operates in countries with little consumer-finance penetration and where demand for consumer loans is growing with improving disposable incomes, according to a prospectus for its IPO. The company, registered in Amsterdam, is the only consumer-finance firm in China owned entirely by foreign investors and held 28% of the nation's consumer-loan balance at the end of 2018, the prospectus showed. It also expanded in Vietnam, India, Indonesia, the Philippines and Kazakhstan, according to its website.

Increasingly Apparent

With China's economy reopening, the impact of the lockdowns will become increasingly apparent. When it comes to consumer lending, the balance of short-term loans from financial institutions dropped more than 20% to 7.8 trillion yuan ($1.1 trillion) in April from the end of last year, according to data from the People's Bank of China.

“Fewer people are willing to take longer trips and fewer people will buy a luxury handbag or an automobile right now as they might not be considered necessities when you can choose to work from home,” said James Chang, a partner at PwC China. “These factors are continuing to affect negatively the volume of new consumer loans.”

Growth in China's market for consumer loans had already started to slow before Covid-19 hit as regulators sought to curtail unsustainable lending practices. For Home Credit, the introduction last year of an interest-rate cap that led to a review of its product offerings and a reduction in fees and commission income was a major hit, even though it managed to report a 9.5% increase in net loans to Chinese customers to almost 12 billion euros ($13 billion) for 2019.

For popular domestic lending platforms such as Alibaba Group Holding Ltd.'s Ant Financial Services Group, the pandemic has actually led to more business. Chinese lenders sought out the firm's digital technology after they were forced to shutter branches, and its MYbank, which cut interest rates, is on track to issue a record 2 trillion yuan of new loans to small- and mid-size companies this year, up almost 18% from 2019.

In its Hong Kong IPO, Home Credit sought a valuation of 10 billion euros, people familiar with the matter said at the time. When investors pushed back, the company decided to pull the deal. Tomanek, the spokesman, said there are no plans to revisit a listing.

Kellner's business in China has caused some controversy back home. Late last year, PPF and Home Credit sought to fend off allegations in local media that the lending arm had hired a public relations agency to help improve China's image in the country. Home Credit said its goal was only to “rationalize the public debate” and “weaken extreme positions in the public sphere” by presenting facts about doing business and life in the Asian nation.

PwC's Chang remains confident that Home Credit and its owner will recover. Domestic consumption will be a major driver for China's economy, and the industry holds promise for the medium to long term, he said. A September report by the National Institution for Finance & Development projected rapid growth in the next five years, with consumer loans comprising more than 25% of China's credit-loan market.

“They are from eastern Europe, they saw how an economy develops, so they know how to reach their customers and how to design products for different scenarios like buying a new smartphone,“ Chang said of Home Credit.