LexinFintech Holdings (LX 2.17%) would probably like to forget 2020. The COVID-19 pandemic unleashed havoc across the global economy, and there was simply no escape for players in the financial sector, including this fintech that caters to the financial needs of young professionals in China.

By the first quarter of 2020, LexinFintech's provisions for credit losses had surged. The company slipped into the red, and investors got nervous. As a result, LexinFintech stock plunged nearly 60% from 52-week highs. The stock has since made up a lot of lost ground, but it still trades 25% below pre-COVID levels. 

But there are fresh signs that the fintech is in full recovery mode. LexinFintech's latest earnings report, released late last week, offers up new evidence that things are better.

Women shopping on phone

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LexinFintech made the best of a brutal 2020

There's no doubt 2020 was brutal for LexinFintech, which generates income mainly by matching lenders and young borrowers -- those who do not have a credit record and cannot access banks' credit facilities -- in exchange for a fee. Full-year net profit plunged 74% due to global economic concerns that necessitated higher loan provisions as well as a change in accounting rules.

Yet LexinFintech's performance throughout 2020 shows a steady recovery. It reported a net loss of 678 million yuan (approximately $103.6 million at current conversion rates) in the first quarter of 2020, but it reported a net profit in the second and third quarters.

In the fourth quarter, credit-oriented service income -- the fees LexinFintech generates from lending activities -- grew 3% year over year to 1.8 billion yuan ($275 million). Net profit came in at 510 million yuan ($78 million), down from a year ago but just 2% lower. In other words, business is basically back to pre-coronavirus levels.

Credit quality has also stabilized. For example, the 30 days-plus delinquency ratio -- which tracks borrowers who are at least one month late in their repayments -- has dropped to pre-pandemic levels of 3.4%. That's a big improvement from 6% in the first quarter of 2020.

There were some positive developments for the year as well. For instance, LexinFintech managed to hit its 2020 loan origination targets. More importantly, the company accelerated its shift to a technology-driven, capital-light business model that emphasizes zero financial risks. Under this model, LexinFintech isn't responsible for any loan losses, improving the quality of its income. In the most recent quarter, LexinFintech issued more than 50% of its loans using this model.

Things are looking up for LexinFintech

LexinFintech managed to eke out growth in 2020, proving just how resilient its business model is. And as the economic recovery gathers steam, consumers will start spending more. This should boost its fintech business even further.

LexinFintech is also uniquely positioned to grab market share from China's tech titans, including Ant Group and Tencent, which dominate everything from social media to finance. These companies have grown too big for China's regulators, who are now considering efforts to rein them in. So it's not surprising that LexinFintech has raised its loan issuance guidance for 2021 by 20 billion yuan ($3 billion). It now expects total loan originations to be between 240 billion yuan and 250 billion yuan ($37 million to $38 million).

LexinFintech is also making a big push into digital retail, which could unlock a new growth engine. For example, it recently launched Maiya -- one of China's first "buy now, pay later" providers. With Maiya, LexinFintech is betting it can replicate the success of Affirm and Klarna in the U.S. and Europe. Maiya is on track to hit 50 million yuan ($8 million) of gross merchandise value in its first month of operations, signaling solid market demand. 

Of LexinFintech's 118 million registered customers as of December 2020, just 27.7 million have credit lines through its existing financial products. LexinFintech could leverage Maiya to convert inactive users into active ones, with minimal acquisition costs. Moreover, Maiya also gives LexinFintech a way to tap the growing spending power of China's young consumers. This is a much bigger opportunity than LexinFintech's existing fintech market -- and could supercharge its future growth.

What's next for LexinFintech

LexinFintech made the best of a brutal 2020. With profits back to pre-COVID levels and consistent improvements in credit quality over the last three quarters, investors can expect a stronger financial performance this year.

Moreover, LexinFintech is not sitting still. Its evolution from a pure-play fintech into a platform for young people to shop and spend their money using Maiya will likely unleash a new phase of growth.

Investors just have to sit tight and watch the money roll in.