What's Behind SE's Soaring Credit Costs? A Deep Dive Into Digital Finance Headwinds

The Credit Risk Trade-off

Sea Limited’s aggressive push into digital lending is coming with a steeper price tag than investors bargained for. The company’s provision for credit losses accelerated 76.3% year-over-year in Q3 2025—a pace that far exceeds its 38.3% revenue expansion. This divergence signals a critical challenge: as the lender onboards hordes of first-time borrowers, the quality of its loan book faces mounting pressure.

The numbers tell the story. Consumer and SME lending balances nearly doubled year-over-year, climbing close to 70%. DFS revenues grew a robust 60.8%, but the margin expansion story is cracking. Cost of revenues in the segment jumped 37.5% annually, driven by intensified collection efforts, transaction fees, and infrastructure investments. The bottom line? Growth momentum doesn’t automatically translate to bottom-line profits when credit losses accelerate this dramatically.

Portfolio Quality Under Microscope

Management maintains that the Non-Performing Loan ratio at 90+ days delinquency (NPL90+) sits comfortably at 1.1%, suggesting the portfolio quality remains stable. But here’s where caution kicks in: the rising provision for credit losses suggests the company is bracing for deterioration despite current metrics looking decent. Rapid portfolio expansion typically masks credit stress that emerges later—a pattern that’s caused headaches across the fintech sector before.

The core issue is customer composition. DFS’s growth engine runs on customer acquisition speed, with a disproportionate share of newer, less-experienced borrowers entering the ecosystem. While this fuels revenue growth, it invariably increases credit risk, as first-time borrowers often lack repayment history or financial discipline.

The Competitive Pressure Intensifies

SE isn’t operating in a vacuum. Grab Holdings leverages its super-app advantage across ride-hailing, payments, lending, and digital banking, delivering 39% year-over-year growth in Financial Services revenue during Q3 2025. GrabFin and its affiliated digital banks are chipping away at SE’s market share with similar expansion playbooks.

Meanwhile, PayPal commands global scale that’s hard to replicate. With $8.4 billion in quarterly revenues (up ~7% YoY), a footprint spanning 200+ markets, and proven risk management technology, PYPL remains a formidable competitor. Its brand trust and cross-border infrastructure give it structural advantages in digital payments and lending that SE is still building.

Stock Performance & Valuation Questions

SE shares have lost 14.8% over the past six months, lagging the broader Computer and Technology sector’s 20.9% gain and slightly underperforming the Internet-Software industry’s 4.6% decline. From a valuation angle, SE trades at a forward P/E of 22.76x—a discount to the sector’s 27.87x multiple, but carrying a Value Score of F, suggesting limited appeal on fundamental metrics.

The earnings picture is mixed. Zacks Consensus estimates for 2025 and 2026 earnings stand at $3.54 and $5.64 per share respectively, with both estimates revised down 1.4% and 3.3% over the past month. Still, these figures imply explosive growth of 110.71% and 59.32% year-over-year. The tension between growth expectations and rising credit headwinds will likely dominate the narrative going forward.

SE currently carries a Zacks Rank of #5 (Strong Sell), reflecting concerns about near-term momentum and margin sustainability.

The Sustainability Question

Here’s the crux: Can SE maintain double-digit growth rates while keeping credit losses from eroding profitability? The provision for credit losses surge suggests management is taking a more conservative posture, anticipating potential portfolio stress. If NPL ratios climb from current 1.1% levels or provisions continue accelerating, the digital finance growth story shifts from an opportunity to a risk factor.

For investors, the key metrics to monitor are the provision-to-loan ratio trends, new customer cohort delinquency rates, and whether cost-of-revenue inflation stabilizes. Until SE demonstrates it can scale profitably without constantly raising provisions for credit losses, the valuation discount relative to peers may be warranted rather than attractive.