LexinFintech Holdings Ltd.

Good day and thank you for standing by. Welcome to Le Sing second quarter 2026 earnings conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star followed by 11 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Head of Capital Markets, Mr. Will Tan. Thank you. Please go ahead.

Thank you, operator. Hello, everyone. Welcome to our second quarter 2026 earnings conference call. Our results were released earlier today and are currently available on our IR website. Today, you will hear from our chairman and CEO, Mr. Zhanwen Qiao, who will provide an update on overall performance and the strategies of our business. Our CRO, Mr. Zhanwen Qiao, will then provide more details on our risk management initiatives and updates. Lastly, our CFO, Mr. James Zeng, will discuss our financial performance. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which will also apply to this call, as we will be making forward-looking statements. Last, please note that all figures are presented in Renminbi terms, and all comparisons are made on a quarter-over-quarter basis, unless otherwise stated. Please kindly note Jay and Alvin will give their hope remarks in Chinese first, then the English version will be delivered by Jay's and Alvin's AI-based voices. With that, I'm now pleased to turn over the call to Mr. Jay Wenjie Xiao, Chairman and CEO of Lexin. Please.

Hello, everyone. First of all, I would like to share with you the financial situation of our second quarter of 2026. Since the second quarter, the financial environment of the industry has continued to be suppressed. In particular, at the end of June, there was a risk event on individual platforms in the industry, which triggered a large-scale suspension and tightening of the supply of funds in the industry, which had a major impact on the industry's ecology and market confidence. The company's online consumer finance, stock exchange finance, and other residential businesses have been greatly affected. In order to effectively reduce the impact on the company, we have recently decisively promoted the following response measures. First, reduce the cost-effectiveness, improve the ability to go through the cycle, The company's rapid adjustment of the organizational structure has significantly optimized some of the resources, accelerated the application of AI technology, effectively reduced the operating cost of the company, and improved the long-term continuous operation and response to the ability to change the cycle. Second, tighten the risk management and maintain the stability of asset quality. The company is active in lowering the asset size, saving and controlling new assets, ensuring that the risk of new assets is stable and controllable, and improving the long-term safety of business development. The third is to strengthen financial control and improve operating efficiency. We focus on promoting the recovery work of receivables and guarantees. Achieve guarantee and balance balance balance to ensure the company's financial security and operating stability. Fourth, firmly promote a diversified strategy to accelerate the structural transformation of business. In non-banking businesses, the company has accumulated ecological business advantages for many years. We continue to accelerate from guaranteeing The company has always insisted on regular operations and has maintained its operability under the crisis of the current industry, and has continued to build up its ability to run long-term and be safe and reliable. Let me introduce the specific situation of the company in the second quarter. In the second quarter, the company achieved a transaction amount of 554.3 billion yuan, revenue of 319 billion yuan, profit of 1.01 billion yuan, In terms of asset risk indicators, due to the impact of the industry, the loss rate has risen, but the loss rate has also improved accordingly. In the face of changes in the industry, our long-term development of the company still persists. Mainly from the following aspects. First, the company has always been deeply rooted in the scene, and the technology retail business has a unique advantage. Under the policy direction and demand growth, we expect that the future technology retail business will have a good growth space. The company will continue to improve our supply chain system, surround users with long-term consumer needs, and improve the efficiency of the platform. Second, 2B digital technology business maintains rapid growth, and continues to meet the needs of private institutions and high-quality assets. The company has been deeply rooted in the field of digital technology for many years, and the industry advantage is significant. In the second quarter, the growth of 2B digital technology business has achieved a large-scale profit. This business is in line with the direction of future supervision and has long-term commercial value. We will continue to expand our investment. Third, AI landed in the negative energy business, the loss of capital is obvious. AI has landed in the whole chain of business, the effect is relatively obvious. With more than 100 AI intelligent positions on the line, it fully covers the strategy of intelligent production, compliance, education, delivery management, intelligent customer service and other business scenarios, to assist the company to complete the goal of reducing capital. In the second quarter, the operating cost of the company decreased by 17.6%, With the continued decline of AI technology, we expect that the cost of three-season companies will further decline. Looking forward to the future, the impact of the three events will continue. The industry still has a greater uncertainty. We will continue to save money. First, we will continue to strengthen business management, optimize financial status, promote e-commerce multi-faceted non-contained business development, and firmly respond to the confidence of the industry crisis. Second, we will adjust the dividend policy to one year at a time. Hi, everyone.

Let me start by sharing our business performance for the second quarter of 2026. Since the second quarter, the industry operating environment has faced ongoing headwinds. Most notably, in late June, risk events involving certain peers triggered a widespread tightening and even suspension of funding supply across the industry, severely impacting the industry landscape and shaking market confidence. As a result, Our loan facilitation operations across both online consumer finance and offline inclusive finance were materially affected. We swiftly took the following decisive measures to mitigate the impacts on us. First, driving cost efficiency to enhance resilience through market cycles. We rapidly streamlined our organizational structure, optimized headcount, and accelerated AI adoption. These measures effectively reduced operating expenses. and enhanced our long-term sustainability through industry cycles. Second, tightening risk controls to maintain stable asset quality. We proactively scaled back overall loan volume and adopted a prudent approach to new loan origination. This ensures the risk profile of new loans remains well controlled, safeguarding the long-term stability and resilience of our business. strengthening financial discipline to enhance operational efficiency. We prioritized the recovery of receivables and security deposits and drove a measured and steady scale down of facilitated loan balance, safeguarding our funding security and operational stability. Fourth, advancing our diversification strategy and accelerating business transformation. In our non-loan facilitation operations, We leveraged years of ecosystem advantages to accelerate our transition from a guarantee-backed model to a tech-empowered model, laying a solid foundation for business recovery. We have always placed compliance at the forefront of our operations. Despite current industry headwinds, we continue to demonstrate strong operational resilience, maintain organic cash generation capability, and ensure long-term operational safety and reliability. Let me walk you through our second quarter business performance. In the second quarter, we achieved a loan volume of 55.43 billion RMB, generated revenue of 3.19 billion and net profit of 101 million RMB. On the risk front, while day one delinquency ratio picked up due to broader industry headwinds, our 30-day collection rate showed an improvement. Despite current industry volatility, we remain confident in our long-term prospects. Let me explain why. First, our deep integration with consumption scenarios gives our e-commerce business unique advantages. Supported by favorable policies and growing consumer demand, we expect our e-commerce business to enjoy healthy growth going forward. We will continue to refine our supply chain system around essential consumer needs and enhance overall operational efficiency. Second, our fintech empowerment business Serving corporate clients maintains rapid growth, continuously satisfying licensed institutions' demands for high-quality assets. Backed by years of expertise in digital technology, we have established a clear market-leading position. In the second quarter, our FinTech empowerment business delivered solid growth and achieved profitability. As this business well aligns with future regulatory directions and has long-term commercial value, We will continue to increase our investments in this area. Third, AI adoption across our operations has delivered tangible cost savings. AI has been effectively deployed across the entire business processes. Over 100 AI agent roles are currently deployed across key operational scenarios, such as intelligent strategy generation, compliance check, post-loan management, and smart customer services, all contributing to our cost reduction targets. In the second quarter, our operating expenses decreased by 17.6% quarter over quarter. As AI adoption continues to gain traction, we expect further cost reductions in the third quarter. Looking ahead, the impact of the standalone event may persist and industry uncertainties remain significant. We will continue to adopt a prudent operational approach by adopting the following initiatives. First, We will continue to strengthen our operational management, improve our financial position, and advance the development of non-loan facilitation business like e-commerce to navigate this industry headwind with confidence. Second, we are adjusting our dividend policy to an annual distribution to provide sufficient capital reserves and a financial buffer for our business transformation. Third, we will accelerate AI investment, particularly in the tech-empowered service space and work with our partners to expedite the recovery of funding supply. When industry certainty gradually emerges, we will actively explore various shareholder return initiatives in light of our own circumstances, enabling our investors to better share in the value created by the company. With that, I will now turn the call over to our CRO Arvind. Thank you.

Xigui Zheng, Zhanwen Qiao, Xigui Zheng, Zhanwen Qiao We expect that the risk of saving assets will continue to increase in the future, and the balance sheet will continue to shrink. We expect that the risk of saving assets will continue to increase in the future, and the balance sheet will continue to shrink. We expect that the risk of saving assets will continue to increase in the future, and the balance sheet will continue to shrink. We will continue to increase the risk of the industry and continue to tighten the new payment standards in the second quarter. In the second quarter, the new payment FPD30 is about 4.6% higher than Q1. In the third quarter, we will continue to strengthen the review. and Duotou Kuan Kong to collect the standard income and intercept high-risk assets to ensure that the risk of new assets is stable. In terms of the upgrade of the wind control capability, we continue to increase the AI wind control capability, explore and build, and have achieved good results. In the field of modern audit, we successfully promoted the new audit agent to store auxiliary artificial decision-making and move towards independent wind control decision-making. Their self-rejected risk detection capability has reached three times the artificial screening, which is in line with the recommendation to reach 1.2 times the artificial, and is still rapidly upgrading. In addition, we are developing an internal wind control agent expert platform to open the underlying big data, gather various wind control role professional skills and local large model calculations to make most of the wind control tasks professionalized and standardized. These measures will not only increase the efficiency of general risk models and conventional strategies by more than 5 times, but also allow us to carry out technology exports to the industry in the future, to control negative energy, and to make good energy reserves. Looking forward to the future, although the risk of being affected by the industry in the short term is fluctuating, we are confident that under the premise of monitoring risk, we will ensure that the volume of assets is gradually reduced to increase the quality of assets, stabilize operation, and lay a solid foundation for subsequent stable management.

In the second quarter, under the ongoing impact of the new regulations, funding supply across the industry remained tight, leading to a rebound in asset risk within our existing portfolio. Day 1 delinquency ratio across our total assets rose by roughly 9.5% quarter over quarter, while 90-day plus delinquency ratio rose from 3.5% to 3.6%. In the third quarter, as funding supply tightens further and new loan originations drop sharply, we expect risk indicators on our outstanding loan portfolio to continue trending upward on a sequential basis. Compounded by a shrinking loan balance, the 90-day plus delinquency ratio is expected to rise further. Regarding the risk management of our existing portfolio, we continue to strengthen early-stage collections and implement differentiated SMS repayment reminders, among other measures, to control the magnitude of risk elevation. Meanwhile, we are setting up provisioning and ensuring an orderly runoff of these existing assets. On the new loan front, we proactively raised our underwriting standards in response to the evolving risk landscape during the second quarter, limiting the quarter-over-quarter uptake in FPD30 to a minor level of around 4.6%. For the third quarter, we will maintain tight entry criteria, strengthen risk assessment for borrowers with cross-platform debt, and filter out high-risk applicants to maintain a stable risk profile for our new loans. On the technology front, our continued investments and explorations in AI-driven risk control are yielding meaningful results. In credit approval, our credit assessment agent has evolved from merely assisting human reviewers to making autonomous decisions. Notably, its risk detection capability is three times that of manual review for autonomous rejection and 1.2 times for review recommendations, and it continues to iterate rapidly. Beyond that, we are building an internal risk control agent expert platform by integrating underlying big data, domain expertise across risk management roles, and localized LLM capabilities into a seamless closed loop We are enabling AI-driven expertise and standardization across the majority of our risk management tasks. This initiative has not only boosted the output efficiency of general risk models and routing strategies by over five times, but also positioned us well for future tech empowerment and risk solution offerings to the industry. Looking ahead, while risk may experience short-term fluctuations due to industry headwinds, We are confident that, with stringent risk control in place, we can ensure an orderly runoff of existing assets and steady asset quality for new loans, laying a solid foundation for sustainable operations. Next, I will hand over to our CFO James to provide a review of the company's financial performance for the second quarter.

Thanks, Arvind. I will now provide a detailed overview of our second quarter financial results. Please note that all figures are presented in rooming B terms and all comparisons are made on quarter-over-quarter basis unless otherwise stated. During the second quarter, we continue to advance our business transformation and the new regulatory framework that took effect in the fourth quarter last year, achieving progress that largely met our expectations. However, the landscape has shifted notably just before the second quarter ended. Before I dive into our second quarter financial details, I would like to briefly address recent developments that have created some uncertainty for the industry. Recently, risk events involving certain industry players have triggered heightened regulatory scrutiny. This raised caution among funding partners, leading to an ongoing sector-wide tightening of funding supply. This has impacted loan volumes across the industry, including Lexin. That being said, I would like to emphasize two key points to our investors. First, compliance has always been our operational bottom line. We have never engaged in any similar non-compliant practices, and our business operations stand up to strict scrutiny. Second, We currently have a cash position of $2.5 billion, which provides a financial buffer to help us navigate industry volatility and ensure the steady operations of our business. I will talk more about the impact of these recent developments and our countermeasures later in my remarks. With this context, let's now review our second quarter financial performance. During the second quarter, total loan origination volume was $55 billion, representing a 4.3% decrease sequentially due to the continuous decline in our consumer finance business and partially offset by the steady growth of our fintech empowerment business and e-commerce business. Total revenue came in at $3.2 billion, and net income stood at $101 million. Now let me dive into the details and walk you through the key numbers. First, the net revenue of the credit business, which is derived by adding up credit facilitation service income and tech empowerment service income, net of credit costs, which consists of provisions and fair value changes and funding costs, was $981 million, representing a 32.5%, or and many more. This was due to the decline of both credit facilitation service income and the tech empowerment service income. Specifically, credit facilitation service income representing our capital-heavy business decreased by 43.6% to $508 million primarily driven by lower loan volumes in our online consumer finance business, rising funding costs, and our prudent decision to maintain adequate provisioning. Meanwhile, our tech empowerment service income, representing our capital life business, decreased by 14.4% to $473 million. This was mainly attributable to the revenue decrease from value added services and a scale down of legacy ICP portfolios. Second, net revenue of the installment e-commerce business defined as the installment e-commerce revenue net of cost of inventory sold increased by $122 million to $329 million. So, the total net revenue summing the credit business and the installment e-commerce business added up to $1.3 billion, a 21.1% or $351 million decrease quarter-over-quarter. On the expense side, operating expenses, including sales and marketing, research and development, general and administrative expenses, and processing and servicing costs decreased by 17.6%, or $244 million to $1.2 billion. Tax and others decreased by 9.3%, or $6 million to $62 million. Consequently, total expenses added up to $1.2 billion, a decrease of 17.2%, or $251 million. By deducting the total expenses of $1.2 billion from the total net revenue of $1.3 billion, we arrive at a net income of $101 million, a decrease of 49.7%, or about $100 million quarter over quarter. To sum up, the decrease in this quarter's net income was largely attributable to three combined factors. A revenue decrease resulting from the ongoing scale-down of our loan facilitation business due to regulatory impact, an increase in provisioning driven by our prudent risk approach, and despite our cost optimization efforts, expense reduction lacked top-line contraction, temporarily squeezing our near-term profitability. Now I would like to walk you through the three key highlight from this quarter. First, the growing diversification of our business mix. While our overall loan origination volume experienced a minor decline of 4.3% in the second quarter, our fintech empowerment service successfully bucked the trend with continued growth of 8%. As a result, the loan volume contribution from our fintech empowerment and e-commerce business has now reached 45%. As we discussed last quarter, the steady expansion of our fintech empowerment business continues to lay the groundwork for highly visible long-term revenue pipeline and higher asset quality. Complementing this pivotal shift, our installment e-commerce business maintained a steady momentum continuing to serve as reliable stabilizer for a broader portfolio. Second, the solid growth and expanding profitability of our installment e-commerce business. Consistent with our strategy from the previous quarter, we maintained a disciplined approach, prioritizing asset quality and risk control over sheer volume expansion amidst the current macro environment. As a result, our e-commerce loan volume maintained stable at $2.3 billion. More importantly, our ongoing focus on operational refinement yielded solid profitability improvements. Gross profit for this segment reached $329 million, representing a 58.7% increase, while gross profit margin expanded from 9.4% last quarter to 14.1%. By seamlessly integrating consumption scenario into our broader ecosystem, this segment continues to serve as a valuable revenue driver, adding another layer of resilience to our diversified revenue streams. Third, our prudent provisioning strategy. The industry dynamics unfolding in late June, including a tightened funding supply and an anticipated upward tick in sector-wide risk resulting from peer-level risk events, which Albert noted earlier, have introduced a new market complexity. Incorporating these cautious, forward-looking industry expectations into our risk assessment models, we adopted a more conservative provisioning approach for our second quarter portfolio. As a result of this strict and prudent stance, Our overall credit costs increased 9.6% sequentially to $1.4 billion during the quarter. To better understand of our provisioning, let's look at our gross provision metrics. By stripping out the net accounting impact of fair value changes, our gross provision ratio for new capital-heavy loans was at 7.8%. higher than the last quarter. Furthermore, our provision coverage ratio remained robust at 230%. Now let's move on to our operating expense items. On the cost and expense side, our total operating expenses decreased by 17.6%, or $244 million to $1.1 billion. mainly due to the decrease of the sales marketing expenses of $165 million and partially offset by a one-time decrease in G&A expenses driven by costs associated with our organizational optimization. For balance sheet items, as of June 30th, our cash position would include cash, cash equivalents, and the restricted cash was approximately $2.5 billion. Shareholders' equity remains solid at about $12 billion. Now, turning to our business outlook. As I mentioned earlier, the recent risk events involving certain players have created sector-wide impacts, and Lexin has not been immune to these tech wins. Specifically, we are facing two main challenges. First, a contraction in new loan volumes. and second, the liquidity squeeze resulting from funding supply has constrained some borrowers' cash flows and could potentially impair their repayment capacity, leading to increased risk volatility in the coming quarters. Against this backdrop, we are taking proactive and decisive measures to navigate this environment. First, we are maintaining dialogue with our funding partners to reinforce mutual trust. This ensures that we are well positioned to resume normal funding supply as soon as the market conditions permit. Second, amidst the industry-wide funding squeeze, we are prioritizing cash flow management while optimizing an operational efficiency including staff reduction to safeguard our core business fundamentals. Third, like Jay mentioned earlier, we are proactively exploring new business models centering on technology empowerment services for BN consumers. These initiatives will safeguard our long-term sustainable growth and lay a solid foundation for our future business trajectory. Looking ahead, given that regulators heightened their scrutiny to resolve the risks associated with certain industry players, along with the potential introduction of new industry regulations, We have limited visibility on when funding partners will resume normal operations, and the exact timeline for our loan volumes to normalize remains uncertain. Compounded by the industry-wide liquidity squeeze, we expect our revenue to further decrease and credit risks and costs to trend upward in the third quarter, for which we will make adequate provisions. Additionally, We have initiated a series of organizational optimization to navigate industry uncertainties with the resulting one-time expenses primarily recognized in the third quarter. Consequently, we expect the company to record a net loss in the third quarter. As for the reminder of the year, due to the limited visibility at this time, we will provide further guidance as the year progresses. In light of ongoing industry uncertainties, the Board has made a decision to adjust our dividend distribution policy from a semi-annual to annual payment. Therefore, any potential dividend declarations for 2026 will be assessed when we announce our fourth quarter results in early 2027. This proactive step allows us to optimize liquidity Fortify our core operations and maintain strategic flexibility needed to navigate near-term market volatility. I want to emphasize that delivering shareholder value remains our top priority, and we view this as a prudent adjustment that may be temporary as the market visibility improves. The Board will actively reassess our capital allocation strategy and explore renewed initiatives to drive shareholder returns. In conclusion, while navigating this industry-wide transition, we are taking decisive and proactive measures to safeguard our liquidity, protect the long-term shareholder value, and pivot ourselves for sustainable growth once the market normalizes. Operator, we are now ready to open the lines for questions.

Thank you. As a reminder, to ask a question, you need to press star 1 and 1 on your telephone. For the benefit of all participants, if you wish to ask your questions to management in Chinese, please translate them to English. One moment for the first question. Our first question comes from the line of Judy Zhang of Citi. Your line is open. Please go ahead.

Thank you for giving me a chance to ask a question. I have two questions. The first question is to ask the management team how they view some recent risks in the industry. Let me translate. I've got two questions. The first question is, what's your take on the recent risk event in the industry? How has it affected the industry and your business? And what steps are you taking in response? And second question is, how do you expect the risk trend to evolve in the third quarter? Thank you.

Okay, let me answer the first question. Recently, there has been an incident where individual platforms have exposed their risks, which has triggered a trust crisis in the entire industry. The capital supply of the industry has been greatly reduced, but this incident is still the case for the entire industry. It has been suspected of criminal offences. will promote more management policies. We also expect that the liquidity and supply of the industry will continue to tighten, and the collection period will be significantly extended. The company has always insisted on harmonious management, and there are no problems associated with the institution, but we have also been affected by the tightening of capital supply in line with the industry. In July, there was a major impact in the mortgage business, and the increase in new loans was obvious. The overall asset value will also fluctuate with the industry. The company has sufficient capital, reserves, and continuous learning capacity to meet all operations and needs. The company is still on the white list of major capital and joint partners, ensuring that loans can be restored as soon as possible. The risk of default is also very sufficient.

This is the translation for Jay's remarks. The recent recent events involving certain peers have triggered a crisis of confidence among funding providers, causing a growth-based tightening and even suspension of funding supply across the industry. That said, these are isolated cases. though they do involve potential criminal conduct and we wouldn't be surprised to see more regulatory measures follow. We expect funding supply in the loan facilitation sector to remain tight for a while and the adjusting period will likely last longer than initially expected. As for us, we've always operated strictly in compliance with regulations and we don't have any of the issues seen at this institution. but were not immune to the broader industry trend. With funding supply tightening, our loan facilitation business took a meaningful hit in July. As a result, new loan originations have contracted notably and asset quality is facing further volatility in line with the broader market. That said, we are in a solid position We have ample capital reserves and organic cash generation capabilities to meet the needs of ongoing operations. We remain on the wide list of major funding partners, which should allow us to resume long-term origination as soon as conditions allow. And we have sufficient provisions in place to manage and orderly wind down existing portfolios.

In the face of the new industry environment, the company's operating strategy is accelerating. We will focus on the following key points. First, we still have to stick to a multidimensional strategy to accelerate the transformation of technology. Economic growth continues to provide support for the current demand. Financial institutions will become the trend of the industry. The company is in line with this trend, vigorously developing a technology rich model, using platform traffic, wind supply, AI, technology and operation capabilities to help financial institutions develop their own business in all directions, achieve low-risk sustainable growth. In response to the new environment

We are well positioned to ride this trend with our tech empowerment model. IE, leveraging our capabilities in traffic, risk management, AI, and operations to help financial institutions grow their own lending business in a low-risk and sustainable way. We've been building our ecosystem for years, and we are advancing the transition from a guaranteed-back loan facilitation model to a tech-empowered model, and that position as well for long-term sustainable growth ahead. Meanwhile, it's worth Stressing that our e-commerce business will keep growing steadily and continue to contribute profit. These diverse businesses are our differentiated advantages compared with our peers.

继续推动降本增效,提升公司穿越周期的能力。 公司已经推进一系列的组织精简与效率提升。 管理成本未来预计将降低30%到40%,调整后组织响应。 The speed will be faster, and the efficiency will be significantly improved. Long-term continuous operation and the ability to respond to weekly changes will be further strengthened, and provide good security for company transformation and development. The upgrade of AI drive operation, the company will immerse artificial intelligence technology more deeply into the core operation, risk, customer service, and other areas. Through AI, artificialization, hardware upgrade, upgrade hardware process, increase efficiency, further reduce business cost. and many more. In the short term, the company will continue to manage its assets to ensure that the risk is reduced. In the long term, the company will continue to manage its assets to ensure that the risk is reduced. In the long term, the company will continue to manage its assets to ensure that the risk is reduced. In the long term, the company will continue to manage its assets to ensure that the risk is reduced. In the long term, the company will continue to manage its assets to ensure that the risk is reduced. In the long term, the company will continue to manage its assets to ensure that the risk is reduced. In the long term, the company will continue to manage its assets to ensure that the risk is reduced. In the long term, the company will continue to manage its assets to ensure that the risk is reduced. In the long term, the company will continue to manage its assets to ensure that the risk is reduced. In the long term, the company will continue to manage its assets to ensure that the risk is reduced. In the long term, the company will continue to

We are driving cost efficiency to strengthen our ability to navigate industry cycles. We've rolled out a series of organizational streamlining and efficiency measures, and we expect management costs to come down by 30% to 40%. As a result, we are seeing faster decision-making, significantly higher productivity per employee, and a stronger foundation for long-term operational sustainability and resilience to market cycles, all of which create a runway we need to execute our transformation. Third, we are deepening our AI integration across the board in key operations, risk management and customer services. By embedding AI more deeply into our processes, we are simplifying workflows, improving efficiency and further reducing operating costs. so that we stay lean and agile even in a volatile environment. Looking ahead, we don't expect the regulatory and funding environment to ease anytime soon. Recovery will take time. In the near term, we will stay disciplined, continue to adopt prudent operational approach, and ensure an orderly wind-up of risk assets. Over the medium to long term, we will accelerate the transition to a tech-empowered model by empowering financial institutions with our technology solutions and driving our operational efficiency through AI so that we are well adapted to the new regulatory landscape and position for long-term sustainable growth. Thanks.

I would like to answer about the risk situation of Q3. At the end of June, the impact and impact of the industry's risk event, the entire liquidity of the industry, has been affected. This has caused some risk indicators to rise in recent times. Looking forward to the third quarter, we estimate that the supply of mortgage funds will be further tightened,

will take the initiative to manage and control the risk.

It is expected that there will be a significant decline in the amount of new loans. Due to this, we expect that the risk of saving assets will be higher than Q2. At the same time, with a continuous contraction of the balance sheet, we expect that there will be a certain increase in the balance sheet. At the same time, in terms of revenue, due to the narrowing of the industry and the influence of recent policies, it is expected that the return rate will also be affected by a certain decline. For the industry risk, we continue to strengthen this cautious risk management strategy, and then carry out a sufficient amount of risk allocation. We will This is the translation for Alvin's remarks. Following the industry risk event in late June, we did see some volatilities in a few risk indicators recently, driven by sector-wide liquidity shocks.

Looking ahead to Q3, with funding supply tightening further and active risk management measures in place, new loan originations will decline materially. As a result, we expect existing portfolio rates to remain upward pressure sequentially. Compounded by a further contracting loan balance, the 90 days plus daily income ratio is expected to rise further On the collection side, due to the industry-wide regulatory campaign and higher compliance requirements for long collection practices, our collection rate will also see a decline. That said, with our prudent risk approach and adequate provisioning, we have the capability to manage an orderly wind-down of existing risk assets. Our goal is to keep any risk fluctuations within our risk appetite.

Thank you for the question. Please hold for our next question. The next questions will come from the line of Alex Yeh of UBS. Your line is open. Please go ahead.

Hello, Mr. Gordon. I would like to ask a question. Under the influence of the risk event in the industry, how do you look at the financial performance in the second half of this year?

So my question is, given the impact of recent industry risk events, how should we think about the financial performance for the second half of the year?

Thank you. This is James. I'm going to take this question. Looking ahead to the second half, the overall market visibility still remains limited given the ongoing uncertainties around the funding supply recovery and the regulatory trends. So as a result, we are not providing any specific financial guidance at this point. However, against the backdrop of sector-wide liquidity tightening, we expect our third quarter performance to be under pressure, mainly due to the following factors. On the revenue side, obviously the sector-wide funding tightening had a material impact on our new loan originations in supply in July and August, the last two months. If this situation continues, our Q3 loan origination volume will come down a lot, which will directly weigh on our top line. On the cost and expense side, there are two structural factors at play. One is the credit cost. Liquidity tightening across the sector has led to an uptick in default risks within our existing portfolio. In line with our prudent risk management approach, we will set aside sufficient provisions for the associated potential risks, which obviously will drive up the credit cost for the quarter. Second, the operating expenses. In Q3, we proactively streamlined our organizational structure, optimized headcount, and enhanced efficiency. This generated one of severance-related costs, which will temporarily drive up our G&A expenses for the quarter. Over the long run, however, the benefits of these cost savings and efficiency initiatives will gradually flow through to our financials. So if I factor in all of this, we expect the company to record net loss in the third quarter, For Q4, we will update our business and financial guidance as we get more clarity on the regulatory front. While the short-term performance is under pressure, we are steadily resolving existing portfolio risks, advancing our technology-empowered transformation, and driving organizational efficiency. This will for sure solidify our capitalized operations foundations and position ourselves well for steady resilient growth and the new regulatory cycle.

Thank you for the questions. Our next questions will come from the line of Yu Jiejing of CICC. Please go ahead.

Thank you for giving me this opportunity. I'm Jin Yujie from Zhongjin. I'd like to ask you about the shareholding issue. The company adjusted the shareholding policy in the first half of the year. What is the long-term plan of the company for shareholding? Let me quickly translate my question. Following the change to your dividend policy, how should we view your long-term plans to return value to shareholders? Thanks.

Okay. In recent years, due to industry risks, there has been a wave in the industry. The Board of Directors, after a thorough assessment, has decided to adjust the company's dividend cycle from half a year to a year. The Board of Directors believes that maintaining abundant liquidity and financial flexibility will provide sufficient capital reserves and security boundaries for business transformation, which will help the company to operate stably in the adjustment period of the industry. This will also better protect the long-term interests of shareholders. Again, I would like to make it clear to everyone In response to the recent industry volatility triggered by recent banks at certain tiers,

The Board, after careful deliberation, has decided to change our dividend distribution from a semi-annual to an annual schedule. The Board believes that maintaining ample liquidity and financial flexibility and preserving sufficient capital reserves in a financial buffer for our business transformation will help us navigate industry adjustment more smoothly and that, in turn, will better protect long-term shareholding interests. I would like to stress that our commitment to creating and returning value to shareholders has not wavered. As the industry gradually recovers and the business performance improves over time, the board will actively evaluate a range of shareholder return options, including share buybacks, based on our specific circumstances at that time. Thank you.

Thank you for the questions. At this time there are no further questions from the line. I would like to hand the call back to management for closing.

Thank you. This conference is now concluded. Thank you for joining today's call. If you have any more questions, please do not hesitate to contact us. Thanks again.

That concludes today's conference call. Thank you for your participation. You may now disconnect.