FinVolution Group

Hello, ladies and gentlemen. Thank you for participating in the third 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 will now turn the call over to your host, Jimmy Tan, head of investor relations for the company. Jimmy, please go ahead.

Hello, everyone, and welcome to our third 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.finbygroup.com. Mr. Feng Zhang, our Chief Executive Officer, Mr. Simon Ho, our Chief Financial Officer, and Mr. Jia Yuan Xu, our Senior Vice President for Finance, 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 in accordance with US GAAP. For information about these non-GAAP measures and reconciliation 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 safe harbor provisions of the U.S. Private Security 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 these and other risks and uncertainties are included in the company's followings with the U.S. Securities and Exchange Commission. The company does not assume any obligation 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. Thank you, Jimmy.

Hello, everyone, and thank you for joining our third quarter 2020 earnings conference call today. We are pleased to report continued progress in our operations with a shift to higher quality customers. Our operational and financial results were better than expected in the third quarter 2020. A further testament to the agility and the robustness of our core capabilities, for a three-month period between August to October, our average RR declined to 28% as China gradually emerges from the aftermath of COVID-19. our loan business recovery has been gathering momentum. Our loan origination volume in mainland China for the quarter reached 17 billion RMB, representing a 30% increase quarter over quarter and exceeding the top end of our guidance range. More encouragingly, our operating income increased by 21% quarter over quarter to 689 billion RMB. Our focus on prudent credit risk management coupled with our proprietary risk assessment technology continue to support improvement across multiple operating metrics in the third quarter in the following ways. First, the vintage delinquency rate for loans originated in the second and third quarter of this year is expected to come in below 4%, and going forward, we expect the vintage delinquency rate to further lower to around 3.5% by the end of the year. The vertical delinquency disclose continue to show sequential improvement in all time buckets. Notably, the early stage of delinquency rates that are 15 to 89 days past due have fallen to 1.9%. It's a historically low level for the company. Finally, all of these continued improvements, despite the COVID-19 induced economic challenges, demonstrate that our diligent efforts in targeting and serving better quality borrowers paid off as boosted by our enhanced technology capabilities to build greater synergies with our partners. As expected, we continue to experience strong demand from our partners for quality assets. With our strategic shift towards better quality borrowers, we were able to steadily lower the cost of funding on the platform over the past one year. We are glad to report average cost of funds on the platform from institutional funding partners declined to 8.2% in the third quarter. The cost of new funds on the platform is even lower at below 8%. Given market dynamics in the aftermath of COVID-19 and the evolving regulatory environment, our business operations remained healthy and profitable in the third quarter. This performance was powered by our technological capabilities and a strong execution of our corporate strategies. With a faster and a better than expected transition to adjust towards higher quality borrowers, we now expect our loan volume in the domestic market for the fourth quarter to be between 18 billion to 20 billion RMB, representing an increase of between 6% to 18% over the third quarter. Now, I'd like to update you on our other strategic initiatives as we continue to leverage our technological capabilities to drive our growth in the long run. We are making impressive strides in our international business expansion, in particular in Indonesia, which today forms the bulk of our international business. In Indonesia, we operate under a lending license issued by the OGK, and we are now one of the leading fintech platforms in that market with over 3 million registered users. Our business operations in Indonesia is gaining strong traction. Loan origination experienced a significant rebound of five times from the depressed levels in the second quarter of 2020, during which many nationwide lockdown measures in response to COVID-19 were implemented. Loan volumes in Indonesia are now well above pre-COVID levels and at the highest levels since we began operating there. The strong momentum is continuing and we expect loan origination volume in Indonesia to increase another 40% or so quarter over quarter. We also have operations elsewhere in Southeast Asia, for example, in the Philippines, where the fintech ecosystem is emerging in a highly promising and dynamic manner. We will continue to capitalize on our experience, industry know-hows, and technological capabilities to explore growth potential in the technology-driven financial services in these countries. Lin Yang Fortune, our wealth management consultant, tech initiative remains on track in expanding its product and service offerings, with continued growth in cumulative investments facilitated of around 1.6 billion RMB, representing an increase of 33% quarter over quarter. In addition, speaking of the development of our technology as a service, we have been making steady progress in empowering banks and other financial institutions to implement digital transformation in their consumer finance operations. Institutions currently have a healthy pipeline of institutions in discussion and will continue to spearhead our strategy of exporting our technologies to more financial institutions. In summary, our proven track record in technology innovation, responsible risk management and effective measures taken to navigate across credit and economic cycles, have allowed us to successfully manage through the various regulatory changes in recent years. We have repositioned our core business. All fundings on platform have transitioned from P2P to financial institutions, and the customer base has significantly shifted towards the higher quality segment, resulting in lower lending rates for our borrowers and much stronger credit risk profiles. We continue to invest in new strategic initiatives, leveraging our technology and know-how, and some of these initiatives, such as Indonesia, are gaining momentum and starting to pay off. We are financially solid and well-positioned to generate sustainable growth and unlock the vast potential in the consumer finance in China and abroad. Lastly, I would like to take this opportunity to thank Simon for his remarkable contributions to the company during his tenure. Simon will join our board, and we look forward to his continued contributions as a director of the board. At the same time, I would like to extend a warm welcome to Ms. Jia Yuanxu as our new CFO. We look forward to his contributions in his new role. With that, I will now turn the call over to Simon, who will discuss our financial results for the quarter.

Thank you, Feng, and hello, everyone. In the third quarter, amid a recovering COVID-19 environment in mainland China, we delivered non-GAAP operating profits of 698 million RMB, representing a sequential increase of 21%, further demonstrating the sustained profitability of our core business model. Our balance sheet and liquidity remain strong, with 3.4 billion RMB in unrestricted cash and short-term liquidity. Leveraging on our strong technology, we look to capture new opportunities and expand our relationships with business partners. Now, turning to the financial results for the third quarter. In the interest of time, I will not walk through each item line by line on this call. Please refer to our earnings release for more details. Net revenue for the third quarter of 2020 increased by 13% to approximately 1.8 billion RMB from 1.6 billion RMB in the same period of 2019. primarily due to the adoption of ASC 326 at the beginning of the year. Loan facilitation service fees decreased by 46% to 486 million RMB for the third quarter of 2020 from 894 million RMB in the same period of 2019, primarily due to the decline in loan origination volume and a decrease in the average rate of transaction fees. Post-facilitation service fees decreased by 46% to 161 million RMB for the third quarter of 2020 from 301 million RMB in the same period of 2019, primarily due to a decline in outstanding loans serviced by the company and the rolling impact of deferred transaction fees. Guarantee income was 747 million RMB for the third quarter of 2020 due to the adoption of ASC 326 Net interest income decreased by 24% to 261 million RMB for the third quarter of 2020 from 345 million RMB in the same period of 2019, mainly due to the decrease in interest income from the reduction in outstanding loan balances of consolidated trusts. Other revenue increased by 159% to 138 million RMB for the third quarter of 2020, from 53 million RMB in the same period of 2019, mainly due to increased customer referral fees to third-party service providers. As we have shifted towards higher quality borrowers on our platform, we have increased the referral of borrowers that do not meet our requirements to third-party platforms. Non-GAAP adjusted operating profit, which excludes share-based compensation expenses before tax, was 698 million RMB for the third quarter of 2020, representing an increase of 6% from 658 million RMB in the same period of 2019. Other income decreased by 49% to 26 million RMB for the third quarter of 2020, compared with 52 million RMB in the same period of 2019, which other income primarily consists of gains from investment. Net profit was 597 million RMB for the third quarter of 2020 compared to 599 million RMB in the same period of 2019. Now, before I close, I want to address the regulator's recent consultation paper on microlending. In short, this does not materially affect us. We do not rely on our microlending company, nor do we have co-lending arrangements with our funding partners. We do have a microlending company, but loans dispersed through our microlending company is small and accounts for less than 1% of outstanding loans on the platform. Our core business model is based on a loan facilitation model whereby institutional funding partners on the platform provide 100% of the funds needed by borrowers. And our role is to provide value-added services to funding partners as well as providing access to credit to borrowers. We have a well-capitalized balance sheet, and our leverage is conservative. If you divide the total outstanding loans in our platform of 22 billion RMB by our shareholders' equity, the leverage ratio across the business was only 2.8 times. And our liquidity position remains strong with approximately 3.4 billion RMB of unrestricted cash and short-term investments as at the end of September 2020. A strong balance sheet means we are well positioned in the current environment and gives us significant flexibility. On buybacks, we have continued to buy back our shares. Since our last earnings call, we have deployed 11 million US dollars to buy back our shares. Since we began repurchasing our shares in 2018, we have cumulatively deployed 122 million US dollars on buybacks. Finally, I wanted to thank you all and to Feng and our team for all the support and partnership over the past several years. I will continue to serve as the company in my new role on the board, and I am excited to hand over to Alexis Xu Jiayuan, who is well prepared to lead Finvolution, which has strong technology and management capabilities and is very well positioned to adapt to the evolving environment and deliver long-term value to shareholders. With that, I will conclude my prepared remarks We will now open the call to questions. Operator, please continue. Thank you.

We will now begin the question and answer session. To ask a question, you may press star then 1 on a touch-tone phone. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, We ask that you please kindly repeat your question in English. We will now pause momentarily to assemble our roster. And ladies and gentlemen, today's first question comes from Daphne Poon with Citi. Please go ahead.

Hi, good evening, management team. Thanks for taking my question. So I have three questions here. So first is just regarding your – on the financial side. So we noticed that there seems to be a meaningful decline in the credit cost in per quarter on new loans. So if I take your credit clause for quality assurance – by the authorship loan volume is only like 2.3%. So just wondering like what's the reason behind whether there's any right back in the quarter. And second is regarding your uneconomic outlook. So after you adjust your loan pricing now to all below 27% IRL. What is the long-term sustainable economic outlook? And if possible, can you break it back into the average APL and the cost and credit cost, et cetera? And lastly, just want to check, I guess, on the regulatory side, I guess, apart from this new online microlending rule, we do see some quite a number of statements, like from government officials, seems the tone is more towards the tightening side on this overall FinTech sector or the online consumer lending sector. So this management can share your thoughts on the future regulation direction or maybe like what you have been hearing from your funding partners or from the regulators on that front. Thank you.

All right, Daphne, thank you very much for your questions. I'll take them one by one. The first question is about the credit cost and, you know, provisioning levels and why they were so low. Yes, there were right backs in the third quarter because of the better than expected credit risk experience, as we have been highlighting throughout the commentary earlier. So there were write-back during the quarter, particularly for the guarantee credit loss. The figure of 327 million included in that was a write-back of roughly 690 million RMB, okay? And this write-back is for loans outstanding prior to the second quarter, okay? With regards to your second question about the profitability and sort of the unit economics, As we have said, our transition to lower lending rates has been ahead of expectations. Delinquency rates are improving faster than expected. Funding cost continues to decline, and we are growing our loan volume. Because of these favorable trends, we expect our take rate in the fourth quarter to decline only slightly compared to the third quarter. Our take rate was 3.9% in the third quarter. And Q4, we think, will mostly, the take rate will mostly come in in the range of perhaps between 3.5% to 3.9%. Now, going forward, we expect the take rate to stabilize or even improve from this level as we continue to optimize our credit quality and drive down credit cost. Okay. Now, as a side note, As we have shifted to better quality borrowers, there has also been an increase in fees from customer referrals. These borrowers don't meet our new standards to our new standards, and these have been referred to other platforms. Such referral fees in the third quarter amounted to about 19 million RMB, and these are completely free of credit risks. So we will continue to continuously work to improve profitability, and there is room for efficiency gains as loan volume expands and we work to optimize costs, and we are confident of delivering healthy and sustainable profitability. So I hope that helps address your question on, you know, the profitability outlook. And your final question on sort of government, you know, the regulatory outlook, I think, look, I think we can make a few comments. I think, you know, clearly I think government regulations, regulators recognizes the value that fintech companies bring to the table, such as in online customer acquisition and servicing data technology and in risk management. And I think this has been consistent in all the comments that have come out. And, you know, the fintech industry complements and benefits the traditional banks. expands access to credit, increases efficiency. I think this is all very positive. I think, you know, personally, I think the recent rules of micro-lending, co-lending seems to be primarily aimed at some of the larger companies. And this does not impact us as we do not rely on this co-lending model. And as you know, the loan facilitation model that we primarily rely on has been recognized or, you know, in the CBIRC's online lending rules for commercial banks, which was officially released only recently in July. And I think, you know, more stringent requirements and moves to prevent monopolization, you know, should be positive for proven companies with a strong track record like us. On the one hand, it raises the entry barriers for smaller players. And on the other hand, it should limit competition from the major, you know, the larger major Internet companies. So in the long run, I think this will encourage healthy in sustainable development for the industry. And I hope this helps to answer your questions, Daphne.

Yeah, sure. Thanks, Simon. Maybe just one quick follow-up regarding the loan pricing. What will be the average APR after you make all the adjustments?

And I think, you know, as Fung said, In the three-month period between August to October, our average IRR was running at about 28%. And I think in, you know, recent months or so, it's been around 27%. So, you know, we're around the levels that we want to be. This is where we want to be going forward, roughly speaking. Okay.

And this is, you know, this is dynamic. I think we will continue to observe, watch very closely what the regulators do and how our funding partners, you know, what their view is, what is their demand, as well as the market, right? You know, our competitors, how are they doing their pricing? So, I would just want to call out, currently, Our R is around 27, 28%, but, you know, it is pretty fungible, and we will be – we will watch closely all these factors and adjust, if necessary, accordingly.

Okay, understood. Thank you. And our next question today comes from Hunyung Wong with 86 Research. Please go ahead.

Thank you, management, for taking my questions. Congratulations on an impressive quarter. My first question is on the funding side. Given the recent regulatory environment, is there any change in attitude of your funding partners? And what is the proportion of the breakdown for your institutional funding partners? Can you name me a few of your top funding partners? And my second question is about the business model involvement. So what is the progress on your profit-sharing model for which you do not bear credit risk?

Thank you very much. I'll have the first question. We'll have Alexis Xu to answer.

Yeah. Hello. This is Alexis. I will take this question. And for the first question, I want to say our funding partners remain supportive, as you can tell from the gradual decline in funding cost to our platform. And in this quarter, banks and consumer finance companies facilitated around 85% of our loan volume, while trust companies facilitated around the remaining 15%. And for your second question, about our business model, we have already begun working capital light models, such as profit sharing models with some of our institutional funding partners. And we will continue to update the market when there is further progress. Hope it can help you.

Thank you. I have a follow-up question on the regulation environment. So basically I saw some local courts were trying to route some financial institutions from the four times LPR lending interest rate cap, but it seems that the regulatory authorities such as PBO, CDRC are still staying silent, so any new color on your side will be very helpful.

This is a phone. I'll share my thoughts. With regard to the Supreme Court rate cap decisions, the Supreme Court four times LTR cap only applies to private lending and not to licensed financial institutions. This was clearly stated in the Supreme Court decision. And I don't know if you noticed, it was also evidenced by a recent court ruling involving Tian Bank in Zhejiang Province. And all lenders on our platform are licensed financial institutions. Now, despite all these, in the spirit of reducing borrowing costs of our customers, providing better services to them, also in line with our strategy of targeting better quality customers, we have voluntarily significantly lowered the borrowing rates for new loan originations since August. As I mentioned, the average borrowing rate on our platform in the last three months, August to October, was about 28% on an IRR basis, compared to 33% in August prior to the Supreme Court decision. And our current average IRR is about 27%. And as I also mentioned, we will watch the market and watch the regulators move closely and, you know, it is all flexible. Now, we believe we are fully compliant with current regulation and are able to achieve significantly better credit quality and deliver healthy and sustainable profit under current pricing. And we continue to monitor the development in the country, in the industry, and when necessary, make appropriate adjustments that are in line with regulatory requirements and the industry norms.

Thank you. It's really helpful.

Thank you. Ladies and gentlemen, as a reminder, to ask a question, please press star then 1. Our next question comes from Alex Yee with UBS. Please go ahead.

Hi. Great. Good evening. Thank you for taking my question. I have a few follow-up. First one is on your quality loss for quality assurance commitment. Previously, it was mentioned that there was a right bet of 690 million, if I take it right. If we add that back into the 300 or so million of credit loss for the quarter, then essentially the company is making 1 billion of credit loss provision, then that would be equivalent around 7% of your off-balance-loan volume. So that compared to your expected vintage loss of only like 4% to 4.5%. So I'm wondering how we should reconcile these two numbers. Why are you still making such a lot of provisions currently for the current quarter? And my second question is on your temporary outlook. So it was mentioned in an earlier question the tech rate for the next quarter is going to be slightly lower or even closer to this quarter. But given your average IRR is lowering from 36% to 27%, I'm just wondering where were the savings in unit numbers coming from? Obviously, your lower credit cost is one of the important factors, but just wondering where are the other parts of the economic savings? And my last question is on your international business expansion. So we have seen a lot of more details in this quarter. So I'm just wondering if those international business continue to gain scale, how would that impact your P&L? So where are they booked at currently? Thanks.

Right, Alex. Good questions and, you know, insightful. I'll take them one by one. I think your first question about the guaranteed credit loss, I think, yes, you are correct. New provisions were running at around $1 billion. Now, I think we'll put it this way. I think we continue to use a certain degree of prudence in our loan provision assumptions, given that there's always, obviously, some degree of uncertainty looking to the future. And, of course, if improving delicacy trends continue, our assumptions could be too conservative, and we may have obviously some provision releases in the future. So I think you should bear that in mind. Secondly, in terms of your question about the take rate, yeah, and I think that, you know, as we mentioned, delinquency rates have been steadily declining and has been better than expected, and this has contributed to a better take rate. Now, our take rate in the second and third quarter was, in hindsight, understated because credit risk was, at that point in time, overestimated. So, in other words, if we had perfect foresight on our credit performance, our take rate in the previous quarters would have been higher than what was shown in our income statement. So, due to these two reasons, the decline in take rates being reported, what we expect to be reported in the fourth quarter, will be relatively small I hope that makes sense to you and then you know your last question about Indonesia I think yeah you know I think the Indonesia right now is a small sort of low single-digit component of our loan volume at the moment. Obviously, it's growing much faster than the China business. And I think we want to highlight that, you know, the contribution to loan volume is likely to be relatively small on the small side, but it does have higher profitability. In general, Southeast Asia will have higher profitability compared to China. And so I think that it is not impacting the bottom line at this point, but we just wanted to flag the success, the traction, the momentum we've been getting there. And obviously, should the international Indonesian businesses do you have more of an impact on our numbers and bottom line going into next year? We will make appropriate additional disclosures and update you.

Hey, Alex, this is . Hey, this is Feng. I want to add a bit more color on the question about the P&L and the take rate and unit economics. So just to add on what Simon had already said, you know, just a very quick, like, kind of 80-20 math. Our RRR is about 27%, and our funding cost, FTP, is around 8%. And, you know, our vintage loss rate, and this is on a per-regional balance basis, we're expecting that to be 3.5%. So that, given our loan tenor is about eight months, so if we translate that 3.5 per-regional balance basis to an IRR basis, that will be roughly 8.8%, roughly annualized loss rate. So, if you, you know, take the 27%, minus 8%, minus 8.8%, you roughly come out around, like, 10%. So, that would be our take rate on an IRR basis. Now, usually we talk about take rates on a per original loan amount basis. So, you translate that back, given our loan tender is around eight months, so that gives you about 4%. And, you know, Now, this is a very simplified version, because the accounting law is quite different for trust-based origination versus our loan facilitation model, and roughly like 20%, a small percentage of our fee is recognized in a delayed fashion. But like all things given and take, I hope that gives you a cutoff, roughly like in a 4% take rate, given our current credit quality and our current pricing is very reasonable. Hope that helps.

Okay, thanks. So if I may just one follow up on the write back. So I'm wondering, so given we are now in the fourth quarter, middle of the fourth quarter, Just wondering, do we have any visibility on any potential more right back in the fourth quarter? Because we have been having a consistent right back in the past two quarters. I'm just wondering, do we further expect that in the near term? And yeah, any comment on that? Thanks.

Yeah, Alex, I think as Fung has been saying, you know, risk performance has been obviously, you know, fairly, you know, pretty good at the moment. And we are expecting the vintage delinquency rates to be in, you know, the new originations that we're doing in this quarter to be down in this sort of 3.5% range versus the sort of, you know, just below 4% range in the last two quarters. So I think, you know, The credit metrics are heading in, obviously, you know, in a positive direction, and we'll have to see at the end of the quarter where things end up at.

Yeah, I think, you know, if the credit quality of the environment has been benign, and I think if these trends continued, that would be like, you know, better than what we had assumed in the provisioning. I think it is possible that we may have some further release moving forward. But that's a yes.

And ladies and gentlemen, as a reminder, if you would like to ask a question, please press stars and one. Today's next question comes from Jackie Zuro with China Renaissance. Please go ahead.

Hi, management. Congrats on the solar results and congrats, Simon and Alex, for the new role. And thanks, Simon, for all the help in the past years. So just two questions from my side. Number one is the drivers behind the solar recovery of the loan volume in the third quarter. And I observed that the ticket size also increased. So How much of the loan volume increase would you attribute to the larger ticket size? And how much would you attribute to the new borrowers, especially the high quality borrowers? And any change to our customer acquisition strategy, any color will be helpful. And second question is on regulation again. So just, you know, looking into details of the new online macro lending license rules, since the capital requirement is quite high and it's a bit difficult for, you know, all the listed players to get the national license, so will that affect your business if, you know, at the end you can't get an online macro lending license? Thanks.

Yeah, Jackie, let me just quickly address some of those questions. I think in terms of the ticket size increase, I think it's expected and normal because as we shift to a better quality, higher quality borrower segment, as you can see from the credit metrics that we're showing at the moment, delinquency rates down in the sort of 3.5%, 4%. Our borrowers in these segments just don't – they tend to borrow a bit larger than what we used to give out. So actually, you know, for first-time borrowers, the ticket sizes are now roughly, you know, the average ticket size in third quarter for first-time borrowers is about 8,500. It is, you know, edging upwards. But, you know, typically speaking, 9,000, 10,000 sort of, you know, is not uncommon. So this is sort of the area we are operating in at this moment. And, you know, that's actually been an ongoing process. over the last several quarters, so it isn't just suddenly a big bump. That number is an average for the third quarter. And of course, you know, the better than expected loan volume in third quarter is related to sort of the better than expected transition we've had to a lower lending rate environment. So we've had the confidence to actually to grow, to expand the book, as we saw the sort of numbers and the performance come in. So I think that's – it's hard to separate, you know, ticket sizes, but it's an ongoing transition which we, as we consistently said, has been – you know, it's been better than expected. It's been faster and more successful than expected. Now, in terms of the customer acquisition channel strategy, it hasn't changed significantly yet. We mainly rely on a range of social media platforms, information feeds and advertising such as, you know, WeChat, Touqiao, Douyin. And the types of channels haven't changed much, but the methods, the optimizations, we are continuously improving. And we work very closely with our key channels to build models and deploy technology that can more accurately target the customers that we seek. And I think we will continue to optimize and expand these channels to effectively reach out to our customer segments. So it is quite detailed and quite technology-driven. But we are seeing that the adjustment overall has been smoother than expected. And your final question is this simple. You know, yep, the capital requirements and micro-lending licenses are much higher than the previous version of the consultation paper. But I think at this point in time, we will just have to, A, wait for the final rules, and B, you know, assess what we ought to be doing. At the moment, you know, we don't rely on the microlending license, as we said. So we use a loan facilitation model. But we'll have to see. We're still obviously waiting and thinking.

Yeah, very helpful. Thanks again, Simon.

And once more, ladies and gentlemen, if you'd like to ask a question, please press star then one. Our next question comes from Yiren Zong with Credit Suisse. Please go ahead.

Hi. Thank you for taking my questions and congratulations on the strong quarter. I just have one follow-up question on the customer side. It seems that, you know, you've been quite effective in your transformation to move up the quality curve for your customers. So can you please share your thoughts in terms of how you managed to achieve that so far? It seems that the number of new borrowers as a percent of unique borrowers in 3Q was at a low level versus historical levels. So can I read that as, you know, you're relying more on the better quality segment of your existing borrower pool, and what's the way forward from here? Thank you.

Sure.

Yeah, the number of unique borrowers that you see is lower, but that's also a reflection of loan origination volumes that are still at sort of low levels relative to where we want them to be. And so it's really a reflection of where the business is and, of course, the larger ticket sizes, which we just mentioned, I mean, yeah. So, you know, our transition to better quality borrowers, I think how we've done it, it's been a combination of several factors. One is, obviously, as you know, we have discontinued lending to borrowers with relatively high risk profiles. Number two, we've been adjusting the rates for existing borrowers as well and increasing the focus of customer acquisition of higher quality segments. And three, we've also been quite successful in reactivating previously inactive users that have been of good quality. And, of course, you know, we are offering them lower lending rates now, so probably they're open and coming back to us because, you know, the interest rates are now attractive to them. So, you know, I think, you know, we're pretty – we're pretty confident that, you know, that because of improving credit quality, the credit loss metrics of the past year, you know, we are able to maintain healthy and sustainable profitability despite this lower pricing. So, yeah, so I think that's where, you know, how we've made the transition. I don't know if there's anything sort of further, whether answers to questions, whether you want to have any follow-up on what I've just said.

Yeah, that's helpful. Thank you.

And the next question today comes from Terry Sun at CMBI. Please go ahead.

Hi, management. Thank you for taking my call. So just more about the funding cost trend. You were saying the funding cost due coming down in 3Q. I just want to understand the logic behind it because we've seen some marginal tightening of liquidity and the in-the-bank costs actually have been rising a bit. So why are the funding costs still coming down?

Sure. I think that's a very fascinating question. Great question. I think there's probably a couple of angles to this. I think one is We're not a very large player. So in terms of the overall liquidity in the market, we're pretty small, particularly relative to the banking system. Secondly, is that our lending volumes have come off quite a bit over the past six to nine months because of COVID, credit risk concerns, and all sorts of obviously changes in the environment. And actually, for a period, we have more demand for our assets than we do have for the assets themselves. And bear in mind also from the bank's perspective, I think this is still a very attractive segment they want to be in. If you look at the returns that they are getting, whether it's low 8% or below 7% to 8%, it's still a very, very good return business for them. So I wouldn't be surprised that they would continue to work with us continue to source quality borrowers and assets, you know. And, yeah, so, you know, I think you're all very familiar with the banks, the banking system. This is a very attractive business for the banks at the end of the day, I believe. But, yeah, and we're pretty confident that, you know, our funding costs can continue to improve from these current levels.

Okay. Thank you. And once again, ladies and gentlemen, to ask the question, please press star then 1. Our next question comes from Stephen Henn with HITOM. Please go ahead.

Good evening, management, and congrats for your new role for Simon. I hope that is a half retirement life. Anyway, A few quick questions, a quick follow-up. First of all, if I use the sales and marketing expenses to estimate the so-called per customer acquisition cost, it seems that there was a rise in average customer acquisition cost in 3Q compared with first half. So I just wanted to know whether it is correct or not and what has caused the rise in customer action, is it one-off, and how is it looking forward? That's the first one. And the second question, just to clarify, you just mentioned there are about 85% of funding partners are consumer finance companies and 15% from trust companies, so none of that is from banks. And my question is that recently there are some court cases in different areas saying that, you know, the consumer finance companies may have to apply for the, you know, high court lending ceiling. So if most of your funding partners are consumer finance companies, are you worrying about that, you know, you have to apply to the lending rate cap? So that's the second one. And finally, I think just to follow up what Alex question about your assumptions in the expected credit laws. So you have made one billion and some right back. Do you think that you will relax your assumption a little bit in Q4 and maybe going forward in Q1 next year? because of the improving vintage.

Yeah, Stephen, thanks for your questions. I think your second question is very simple. I think you probably misheard our response. The 85% figure is for banks and consumer finance companies combined. In fact, banks is a large, large majority. It's about probably 65 or two-thirds of the book. consumer finance is probably about roughly 15% to 20%, maybe around 20%, or just below that. So we don't think that's a huge problem for us. I think the bulk of the funding and the liquidity in the market, as you know, come from banks, and there are many, many more banks in the system than consumer finance companies at the end of the day. In terms of the increase in your customer acquisition costs, I think, yes, you're right. I think your calculations are fairly you know, the trends are accurate and correct. There has been a general increase in customer acquisition costs as we have been flagging on each of the calls we've had in the past few quarters. And this is mainly because of the shift to better quality borrowers that have significant and stronger credit risk profiles and they borrow larger ticket sizes. And you should also bear in mind that in the second quarter and the first half of the year, they were not normal environments for customer acquisition because of COVID-19. and everyone was holding back customer acquisition. So Q3 not only saw a bounce back in market activity, but we ourselves also increased customer acquisition as we look to resume growth. So I think these are the main reasons behind obviously the pickup in customer acquisition costs in the third quarter. It's the shift in our customer segment, the bounce back in activity, and also our sort of more active push to acquire new customers. But I do want to highlight a few points that you should bear in mind is, you know, firstly, we do estimate, we internally estimate a typical borrower will break even within the first 12 to 18 months. So our newly acquired customers deliver healthy, you know, NPV net present value despite the higher cost of acquisition. And secondly, our new borrowers, they only account for about 10% of the loan volume today. and 90% still come from repeat borrowers where we do not pay any acquisition cost at all. So I hope that clarifies and explains sort of the trend that we're seeing. And your final question about, obviously, you know, our assumptions in the fourth quarter and write-backs, and I think we've addressed this quite thoroughly. I think we've commented on this quite thoroughly. I don't think we can – I don't think I can, say, preempt myself into assumptions going forward, I think that would be obviously dangerous. But obviously, should we see actual credit loss levels being better than expected, then that should really result in some right backs and releases. And yeah, so it'll depend on the situation at that point in time.

Thank you. Very clear.

Thanks, Stephen. Thank you.

Thank you. And once again, to ask a question, please press star then one. Our next question comes from Leang Henry with Golden Dragon. Please go ahead.

Hey, management. Congrats on the good quality results. I just have two quick questions to follow up. One, like, can you guys share your secret doors on sort of managing down the delinquency ratio or the MPL while most of the players in the industry is no less still struggling or see that the increasing rate like still much higher than the pre-COVID period while we are just getting it like down to sort of record low again and again. Can you share like how you guys managed to do that? And the second question is that like you speak of the new customer acquisitions. and it seems like the loan volume is gaining more momentum in the fourth quarter onwards. Can you share your plan of, like, the marketing input and expense onwards and how you would think of acquiring new customers, like what channels and what kind of plans onwards? Thank you.

Hey, I'll take the first question about credit risk. This is Phuong. Yeah, I think, you know, it's a combination of the environment and our measures, the active measures and the risk management philosophy and culture we have and the capability, of course. In terms of the environment, we have observed coming out of COVID-19 and the cleanup of P2P and FinTech platforms, you know, with tighter regulations and generally We have, in general, an improvement in the credit information, like PBOC availability, PBOC credit bureaus. All things have leads to a, you know, in our view, a more benign credit environment, you know, than, let's say, like, you know, of course, the pandemic period, but I also think slightly better than the pandemic period last year. And now, more importantly, I think we have taken a lot of proactive measures. Now, besides the continuous shift to better quality borrowers, as Simon has mentioned, not only we have a step of effort in acquiring better quality new customers, we have also done a lot of work to kind of reactivate some dormant you know, users who, you know, with, like, better offers, better price, better lines, and, you know, that generates some positive selection, you know, getting the better quality of, you know, dominant customer, inactive customers. And, you know, also, we continue to optimize the use of technology in customer acquisition, i.e., more accurately targeting low-risk customers continue to optimize our risk models, credit policies, as well as our loan collection practices. So all these factors, when we combine that together, that results in the loss rate, the credit quality improvements that you have seen. It's demonstrated very clearly in the vertical loss rate tables we have in the annuities, as well as in the vintage loss rate, loss rate curves, Just quarter by quarter, continuous drive lower. Hope that helps.

Yeah, Henry, Henry, thanks for your question. I'll address your second question about the, obviously, the customer acquisition front and marketing, how we're thinking. I think, no doubt, I think as we, as our loan, obviously, you know, volume grows and I think we will have to spend more on marketing and acquiring and targeting new customers. I think that's sort of inevitable. We do internally focus very hard on trying to assess the profitability of each new user that comes into the platform. So as I mentioned, we do use an NPV model to model out and try to estimate profitability, how much we should be paying. So I think You know, the customer acquisition cost should be – the appropriate cost should be different for every platform depending on the type of, obviously, borrowers, the ticket sizes, and also their ability to manage risk and generate a return from that customer. So I think, you know, in some ways it's very – it's actually hard to be completely comparable. And my final comment is, as we mentioned before – It's probably not my expertise at all, but we are happy to obviously follow up with you about details in terms of the operational details, but there is a lot of obviously optimization that goes on with our key channel partners, how we build models to specifically target and effective models to target the type of borrowers that we seek from each of these key channels. So I think there's been a huge amount of work that's gone into these type of activities, which I think is very underappreciated and we don't see it as much in the numbers up front, but it's a lot of what we do. And I think Fung and team spent a lot of effort on this. And I think we could clearly, we could sit down and explain all this in much more details you know, as a follow-up aside from obviously the call today.

Yes, thank you for my assignment. I really appreciate all the optimization, the effort, and it's been very helpful. Congrats again on the short order.

Thank you, Henry.

As there are no further questions, now I'd like to turn the call back over to the company for closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact Simplution Investor Relations team. Good night.

This concludes this conference call. You may now disconnect your lines. Thank you.