FinVolution Group

Hello, ladies and gentlemen. Thank you for participating in the second quarter 2020 earnings conference call for Finvolution Group. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. I would now like to turn the conference over to your host, Jimmy Tan, head of investor relations for the company. Jimmy, please go ahead.

Hello everyone and welcome to our second quarter 2020 earnings conference call. The company results were issued via newswire services earlier today and are posted online. You can download the earnings release and sign up for the company email alerts by visiting the IRR section of our website at irr.finvgroup.com. Mr Feng Zhang, our co-executive officer and Mr Simon Ho, our chief financial officer will start the call with their prepared remarks and conclude with a Q&A session. During this call, we will be referring to several non-GAAP financial measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented according to U.S. GAAP. For information about these non-GAAP measures and reconsideration to GAAP measures, please refer to our earnings press release. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties are included in the company file links with the U.S. Securities and Exchange Commission. The company does not assume any obligations to update any forward-looking statements except as required under applicable law. Finally, we post a slide presentation on our IR website providing details of our results for the quarter. I will now turn the call over to our CEO, Mr. Feng Zhang. Please go ahead, sir.

Hello, everyone, and thank you for joining our second quarter 2020 earnings conference call today. We are pleased to report healthy and solid results for the second quarter. Thanks to the timely measures we took in response to the pandemic outbreak, the subsequent gradual economic recovery in China since the beginning of the second quarter, and our unwavering focus on comprehensive credit risk controls, given the lingering uncertainties due to COVID-19, we remain agile in our operations with a prudent risk management approach in the second quarter. Encouragingly, numerous operating metrics showed improving trends in the second quarter. In particular, credit risk across our platform has further improved thanks to our continued investment in risk management technology, our prudent approach to risk management, and our strategy to serve better quality borrowers. In terms of our most recent delinquency trends, our day one delinquency rate in recent weeks has further improved to about 7.5%. If you recall, on our previous earnings call, our day one delinquency rate was 9.7% for the May period and 12.4% in the fourth quarter of last year before COVID-19 appeared. Our 30-day loan collection recovery rate has further improved to about 88%, which is roughly four percentage points higher than the levels in May on our last earnings call and also in the fourth quarter of 2019. These improving trends can be clearly seen in the delinquency data provided in our earnings release. Delinquency performance for our first quarter 2020 vintage is about 30% to 40% below levels one year ago and at historically low levels. And lastly, our vertical delinquency rates disclosed showed improvement quarter on quarter in almost all times buckets. And the improvement is particularly significant in the early-stage delinquencies, that is, for loans that are 15 to 90 days past due. Such early-stage delinquency ratios have fallen back to levels at the end of last June, September. And this is achieved despite our total loan balance contracting by 30 to 40 percent compared to a year ago, which means that the underlying improvement in credit risk is actually larger than the figures suggest. These figures all show that our credit risk profile today is significantly better than what it was before the COVID-19 and versus our historical range. Thanks to our strategy to serve better quality borrowers, our continuous investment in risk assessment technology, like our Magic Mirror technology system, and our strong risk management capabilities. Another improving trend in the quarter can be found in funding on our platform. Funding from our institutional partners continues to be stable and ample. And with the shift to higher quality borrowers, we have seen keen interest by institutions to lend through our platform. One of our big focus this year has been on lowering funding costs. We are pleased to report that the current cost of funds from institutions have recently fallen to around 8.5%, compared to over 9% at the beginning of this year and over 10% last year. Despite all the challenges in the first half of the year, our business operations remain resilient and profitable, thanks to our technological capability and the relentless focus on executing our plan and strategy. Now let me address the implications of the Supreme Court's latest decision to lower the rate cap on private lending to four times that of the loan prime rate. It appears that the general understanding of the Supreme Court's decision is that firstly, it only applies to private lending and not to licensed financial institutions. And secondly, the cost rate cap seems to be defined on a nominal APR basis. Although this cap seems to apply only to private lending, and since the fourth quarter of 2019, all the fundings on our platform has been from institutions We decided to move proactively and swiftly after the Supreme Court's decision and adjust our cap on total borrowing for new loan originations to 15.4% on a nominal APR basis. This proactive approach supports the regulatory direction for lower lending rates. The cap is equivalent to around 27% RRR for our loan tenant profile and is lower than the average borrowing cost previously on our platform. which prior to the adjustments was running at around 33% RRR. To meet the cost rate cap, we will discontinue service to some borrowers. However, we believe the vast majority of our customers, roughly 90%, can continue to be serviced profitably, and our loan volume guidance for the third quarter of 15 billion to 16 billion RMB, representing an increase of 15% to 22% over the second quarter. shows that we can and will continue to service the vast majority of our borrowers under the new cap. Profitability will inevitably be lower than before, but as a result of the great progress we have made in improving risk performance and operating efficiency in the past year, we believe we will be able to continue to operate the business in a profitable and sustainable way. We have a number of levers to pull. With a high-quality borrower base, credit risk will be lower, and we expect vintage delinquency rates for this borrower profile to be below 4.5 percent. Secondly, we expect funding costs to further decline to below 8 percent. These targets are expected to be reached by the end of this year. And thirdly, we will continue to drive operating efficiency. We will also collaborate more closely with our institutional partners to explore capitalized lending models. The significantly improved credit profiles of our borrowers and our strong technological capabilities make this new model an attractive proposition to our institutional partners. Our timely and successful transition of funding on our platform from P2P to institutions demonstrates our agility and the core strength in our technology and management capability. Let me now update you on where we are on P2P. Our back book of P2P-funded loans have shrunk to 2 million RMB in July. So effectively, P2P is not a hindrance for us anymore. Finally, let me update you on other strategic initiatives, in particular, how we are leveraging our technology capabilities to enable businesses in financial services Our international business is one example with Indonesia as our earliest and most developed international market. Our operations there were severely affected by the pandemic, especially between February and May. But as the Indonesian economy reopened, we have seen some very encouraging signs of recovery, and we are pleased to report that delinquency rates and loan volumes in our Indonesian business are back to levels at the start of the year. We also continue to leverage our technology and operational experience to empower banks and financial institutions in their consumer finance operations. We expect an increasing number of institutional partners to deploy our technologies. Another example of how we are leveraging our technology is our new wealth management business. Some of you who were individual investors on our platform previously may have received text messages about our wealth management offering called Lin Yang Tai Fuo. or AY Fortune in English. Our new wealth management business focuses on servicing the huge mass affluence segment in China, drawing on our technology and extensive experience in acquiring customers online and in serving retail investors. We are confident in our ability to succeed in this new business initiative. Although the worst of the pandemic seems to be behind us, especially in China, we will remain vigilant towards the lingering risk from COVID-19. Given that the situation internationally is still fairly severe, with a long and proven track record in technology, innovation, and managing risk prudently and responsibly through credit and economic cycles, we believe our innovative and vigorous culture will enable us to navigate challenges and unlock the vast potential in China's enormous consumer finance and fintech markets. With that, I will now turn the call over to our CFO, Simon Ho, who will discuss our financial results for the quarter.