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Lufax Holding Ltd American Depositary Shares, each representing two (2) Ordinary Shares
Q4 2020 Earnings Conference Call
2/3/2021
spk00: Ladies and gentlemen, thank you for standing by and welcome to the Leflex Holding Limited fourth quarter's 2020 earnings call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, we will have a Q&A session. Please note that this event is being recorded. Now I'd like to hand the conference over to your speaker host today, Mr. Yu Chen, the company's head of Board Office and Capital Markets. Please go ahead, Sharon.
spk08: Thank you, Alfredo. Hello, everyone, and welcome to our fourth quarter 2020 earnings conference call. Our fourth quarter 2020 financial and operating results were released by our News Bar services earlier today and are currently available online. Today, you will hear from our chairman, Mr. Ji Guangheng, who will start the call with updates on recent changes to corporate governance structure as well as regulatory development. Our co-CEO, Mr. Greg Gibb, will then provide a review of our business in the quarter and future strategies. Afterwards, our CFO, Mr. James Chung, will offer a closer look into our financials before we open up the call for questions. In addition, Mr. Weiss, our co-CEO, and Mr. David Choi, CFO of our retail credit participation business, will also be available during the question and answer sessions. Before we continue, I would like to refer you to our safe harbor statement in our earnings price release, which also applies to this call, as we'll be making forward-looking statements. Please also note that we'll discuss non-effortless measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the International Financial Reporting Standards in our earnings release and filings with the SEC. With that, I'm now pleased to turn over the call to Mr. Ji Guangheng of Lufax.
spk07: Okay. I would like to thank everyone for attending the 4th quarter of the R&D conference. Before the conference, I would like to share three things with you. The first is the adjustment of the management of the company after its listing. The second is the recent management trends and our understanding. The third is the judgment of the future management trends and our main recommendations.
spk08: Hello and thank you everyone for joining our fourth quarter 2020 earnings call. Before discussing our quarterly results, I would like to provide updates on three different aspects of our business. First, changes to our corporate governance structure since becoming a U.S. listed company. Second, our interpretation of recent regulatory development. And third, our view of future regulatory trends as well as the steps we are taking to stay in front of these changes.
spk07: The first aspect is that we quickly responded to the rules of the U.S. stock market and reshuffled the members of the board and the relevant committee. Regarding the management of the company, due to the age of Chairman Li Renjie, the board proposed a retirement application. In order to strictly abide by the rules of the U.S. stock market, the company held the board meeting on January 29th. Through the board meeting and the reshuffling of the members of the relevant committee, to accept the retirement application of Chairman Li Renjie and the resignation of the other four shareholders and one independent chairman, and to add Tang Yunwei and Li Qiangming, two scholars, as independent chairmen, and Li Rui, one shareholder representative chairman. As the former chairman of the Board of Directors and Chairman of the Board of Directors, I personally will continue to hope that the chairman will be reunited with the board after the resumption. There are nine board members, including three board members, one shareholder board member, and five independent board members. In accordance with the requirements of the Board of Directors of New Jiao, the number of independent board members must exceed half. At the same time, the audit committee, the nomination and recruitment committee are all formed by independent board members. As a shareholder board member of Meigu, the new board will continue to strive to improve the company's governance and improve the protection of shareholders.
spk08: Starting with corporate governance, Mr. Ren Jie Li, chairman of the board, has submitted his retirement application as he reaches the golden age of 65. In strict adherence to U.S. listing regulations, our board held a meeting on January 29 and approved Chairman Li's retirement, along with the resignation of four other shareholder directors and one independent director. As previous co-chairman of the board, I will now assume the sole role of chairman of the board, in addition to my role as chairman of LUFAC's executive committee. We have also appointed Mr. Yunwei Kang and Mr. David Xianglin Li as our independent directors, and Mr. Rui Li as our shareholder director. Following these changes, our board now consists of nine directors, among whom three are executive directors, five are independent directors, and one is a shareholder director. Additionally, our nomination and remuneration committee as well as our other committee now solely consists of independent directors. Such changes have brought us into full compliance with the NYSE listing requirements for a majority independent board and for both of the aforementioned committees to solely consist of independent directors. As representative of a U.S. listed company, our new board of directors will remain dedicated to improving the company's corporate governance, protecting minority shareholders' interests, and establishing prudent corporate strategies in an efficient manner.
spk07: At the same time, the Board of Directors has also successfully passed the management structure of the Land Control Coordination CEO. The Land Control Coordination CEO, led by Zhao Yongshi and Ji Peisheng, will separate the management of land control, retail, credit and financial management businesses. The new management structure will be more conducive to the integration and resource integration of the two major business units.
spk08: In addition, after careful reviews and thorough discussions, our board of directors has decided to adopt a co-CEO executive structure. As a result, Mr. Yung-Suk Cho and Mr. Gregory Dean Gibb will serve as the company's co-CEOs going forward, with Mr. Cho in charge of our retail credit facilitation business and Mr. Gibb in charge of our wealth management business. We strongly believe that this new management structure is in the best interest of all stakeholders, enabling us to cultivate more synergies across business segments and better integrate our overall business resources.
spk07: In addition, YS, in addition to his job as
spk08: running the Retail Credit Facilitation business, he will also assist me in managing the finance, planning, and treasury functions of the company.
spk07: Greg, in addition to managing the finance, planning, and treasury functions of the company, Greg, in addition to managing the finance, planning, and treasury functions of the company, Greg, in addition to managing the finance, planning, and treasury functions of the company, Greg, in addition to managing the finance, planning, and treasury functions of the company, Greg, in addition to managing the finance, planning, and treasury functions of the company, Greg, in addition to managing the finance, planning, and treasury functions of the company, Greg, in addition to managing the finance, planning, and treasury functions of the company, Greg, in addition to managing the finance, planning, and treasury functions of the company, Greg, in addition to managing the finance, planning, and treasury functions of the company, Greg, in addition to managing the finance, planning, and treasury functions of the company, Greg, in addition to managing the finance, planning, and treasury functions of but long-term, it is a good starting enterprise. In 2020, the management of the financial and technology industry has continued to deteriorate, especially at the end of 2020 and the beginning of this year. Management agencies have released the Internet小貸管理办法申求意見稿, platform economy anti-corruption guide, commercial banks, financial companies, financial products, sales management, exhibition method, and application opinion. There are a number of new rules on how to regulate business banks through the development of personal savings business through the Internet. The direction of supervision is focused on the promotion of innovation, anti-contradiction, consumer protection, financial stability and financial security. In the context of the industry facing strong supervision, the overall idea of entry control is to embrace supervision, actively communicate and interact with people. I think that more strict and more standardized supervision requirements
spk08: Now turning to regulatory development, fintech industry regulations continue to be tightened in China throughout 2020. At the end of 2020 and beginning of 2021, for example, regulators introduced a series of new regulations, including the interim measures for the administration of online microfinance business, the antitrust guidelines for the platform economy industry, the interim measures for the administration of sales of wealth management products from wealth management subsidiaries of commercial banks, and the notice on regulating commercial banks to conduct personal deposit business through the internet. At a fundamental level, these regulations represent the government's desire to promote prudent innovation, prohibit monopolistic practices, protect consumer interest, and maintain financial stability and security. Facing increasingly stringent regulatory oversight, we have adopted an overarching strategy of embracing regulatory change, engaging in proactive dialogue with regulators, and forging collaborative and productive relationships with local authorities. While we do recognize that stricter and more standardized regulatory requirements may result in some short-term pressure on the company, we also believe that such changes should foster more long-term benefits for fintech market leaders such as Lufax. Now allow me to elaborate on how these policies have impacted our own businesses.
spk07: First of all, in terms of retail new generation, it is also valuable to understand the connotation of supervision and communication. We have learned that the current discipline of supervision is that on the one hand, we do not want the cost of borrowing to be too high, and on the other hand, we do not encourage young people to invest in consumption. The cost of borrowing, according to the latest judicial interpretation of the Supreme Court, LPR interest rates are not suitable for financial institutions and local financial institutions. As of September 2020, we have reduced the total loan cost of all new loans to less than 24%, in line with the current judicial interpretation and supervision requirements. Unlike other consumer loan businesses on the Internet, credit loan businesses mainly serve small and medium-sized enterprises, First, for our retail credit facilitation business, we seek to thoroughly understand the spirit of regulations and proactively communicate the value of our services to the regulatory authorities.
spk08: Our understanding is that current policies intend to prevent excess consumer borrowing costs and overextension of consumption and credit limits by younger consumers. In respect to lending costs, the latest legal explanation from the Supreme People's Court of China stipulates that the four times LPI interest rate cap is neither applicable to the lending businesses of financial institutions nor local financial organizations. Since September 2020, we have restricted our all-in lending costs for facilitating all new loans to no more than 24%, which is in line with the latest requirements. What is noteworthy is that our loan facilitation services differ from other internet consumer lending services in bars of use of loan proceeds. We primarily serve micro and small business owners and meet their operating needs. In doing so, we help the physical economy to grow and prosper, which is in full alignment with policy directions. Although we face temperate pressure from the uniform enforcement of regulations across the board, we are engaging in active and persistent dialogues with the regulatory authorities so that our businesses' mission and societal values are fully understood and appreciated.
spk07: Secondly, in terms of financial management, we have lowered the deposit and reserve, and are currently focusing on financial management and technology payment. On January 15th, the Central Bank and the Bank of China issued a formal notice to the Bank of China that it will issue a personal deposit for the Internet. Before that, we have already issued a deposit for the Internet. Due to the low proportion of Internet-based products, the forecast for our performance is limited and controllable. In addition, the platform will continue to strengthen standardized products and structuralized products through the rapid sales, matching, user experience, and support for business growth. At the same time, we will continue to strengthen the full-scale technological empowerment of small and medium banks.
spk08: Secondly, for our wealth management business, we have stopped facilitating online deposits and shifted our focus to wealth management technology empowerment. In fact, before the PBOC and the CBRC jointly issued the notice on regulating commercial banks to conduct personal deposit businesses through the internet on January 15, 2021, we had already ceased offering online deposit products. Since these products only represent a small portion of our total income, we expect that the financial impact of these adjustments on our business will be both limited and manageable. Looking ahead, we will continue to promote standardized products and structured products on our platform. propelling the growth of our business through superior product recommendations and user experience. We will also continue to work towards empowering small and medium-sized commercial banks through advanced technologies.
spk07: Look Home, as an American listed company, will strictly abide by the legal supervision of China and the United States, and respond to the requirements of supervision, so as to make our business more legal and transparent. I believe that with our unique HubSpot model, we can achieve sustainable growth under strict division and supervision. This time, the strong supervision of financial technology companies may have a greater impact on a number of small and medium-sized platforms, but Rukong is one of the leading enterprises in the industry. Our technical ability, management ability, pricing ability, and risk-resistant ability will be stronger. In the long term, it will be more beneficial to us.
spk08: As a U.S. listed company, Lufax will remain in compliance with the regulatory rules of both China and the United States. Moreover, to improve the compliance and transparency of our business operations, we'll also remain vigilant of relevant regulatory development. We believe that our unique hub-and-spoke model will enable us to enjoy sustainable growth even under strict regulatory oversight. Although the increased scrutiny towards certain companies may severely affect small and media-sized platforms, we believe that stricter regulations will be more advantageous to LUFAX in the long run. As an English leader, LUFAX poses advanced technology capability, sophisticated management know-how, strong pricing power, and versatile risk mitigation expertise, all of which should enable us to thrive in any environment.
spk07: Finally, I would like to share with you the outlook on the future of the policy. As I pointed out in the three-part report, we predict the new management direction for retail modern business, mainly in a few aspects. One, interest rate rise. Two, additional demand for capital. Third, stock sales are the first range of industry. Five, capital, capital-oriented wind control system. Sixth, loan application. Seventh, consumer protection. For these seven aspects, the company has been actively preparing. In addition to reducing costs, by the end of December 2022, the company has planned to increase the risk tolerance ratio to 6.3%, and planned to increase the risk tolerance ratio to 20% by mid-2021. According to our prediction, our net assets are enough to cover the potential capital needs of the future. In terms of the development of the industry, we have set up branch companies in major cities across the country in recent years. There is no problem with the national industry. In terms of capital cooperation, we will cooperate with the funders to carry out the construction of the control and regulation of the funders. In terms of consumption protection, the company has already
spk08: Finally, I would like to share our views on the future development of regulatory policies. As mentioned on our previous quarterly earnings call, we expect that regulations for retail credit facilitation will focus on seven different areas, including interest rate cap, capital requirements, bundled sales, geographic coverage restrictions, funding institution risk management, use of perceived verification, and consumer protection. We are actively preparing our businesses to maintain compliance in those seven aforementioned areas. In addition to lowering our lending costs, we have also increased our overall risk-taking rate to 6.3% as of December 31, 2020. By mid-2021, we intend to have increased our overall risk-taking rate to 20% for all new loans facilitated. Based on our analysis and forecasts, we will have sufficient net access to cover potential capital needs going forward. In regards to geographic coverage restrictions, in recent years, we have established branch offices in key cities across the country to ensure that our nationwide operations remain smooth and compliant. Furthermore, on the consumer protection front, we have upgraded our apps and processes, implementing more timely response protocols for customer complaints, and providing our borrowers with more credit enhancement choices to better protect their interests.
spk07: To sum up, we believe that the company has made sufficient preparations for the uncertainty of future supervision. In conclusion, we believe that we are well prepared to navigate through the regulatory uncertainties as we engage in active communications with the regulatory authorities.
spk08: we are confident that we will complete our business transition smoothly while maintaining regulatory compliance. With our refined operational processes, technology-enabled cost optimization, and risk matching pricing mechanism, we should be able to sustain our healthy and proper growth for the long run.
spk07: I will now give the floor to Greg, who will share our business updates for the quarter.
spk08: Thank you, Chairman Gee.
spk07: Before I begin, Steve knows that all the numbers are in R&D terms, and all comparisons are on a year-over-year basis and less otherwise stated. In the face of regulatory uncertainties and overwhelming market noise, we upheld our commitment towards driving high-quality and profitable business growth. As such, we exceeded our previous guidance, delivering solid financial and operating results in the fourth quarter of 2020. As of December 31, 2020, our balance of loans facilitated have grown 17.9% to $545 billion, while our client assets and wealth management have also grown by 23% to $426 billion. Moreover, for the full year of 2020, our total income grew by 8.8% to $52 billion, while our non-IFRS adjusted net profit grew by 2.1% to $13.6 billion. Underpinning these positive outcomes were several driving factors. First, we continue to observe improvement in our credit quality. The C to M3 flow rate, the leading indicator of risk performance on our lending platform, continued to stabilize around its pre-COVID-19 levels. In Q4 2020, our flow rate was 0.4% as compared to 0.4% in Q4 2019. Additionally, our 30 days past due plus further improved to 2% in the fourth quarter from 2.2% in the third quarter of 2020, while our 90 days past due decreased to 1.2% in the fourth quarter from 1.3% in the third quarter. Second, we received more clarity surrounding the interpretation of the application of interest rate caps. We're pleased to see, as Chairman Gee just mentioned, the recent Supreme Court guidelines and local court cases providing additional clarity on the interest rate cap. These developments were largely in line with our expectations, and all of our loans from September 4th last year had been below 24%. We do not expect any further adjustments to our lending rates in the short term. Third, in line with our plans, we continue to make good progress in establishing a more sustainable risk-sharing business model. is encouraging to see that our funding and insurance partners have remained supportive and embraced this new model. As of December 31st, 2020, our expanding balance of loans facilitated with guarantees from third-party insurance partners decreased to 88.8% from 95.6% a year ago. Moreover, Ping An P&C accounted for 77.7% of new loans sold in the quarter, down from 93.2% a year ago, while our funding partners bore the risk for 6.7% of new loans in the fourth quarter. Fourth, we further penetrated into our core and target segments, customer segments. During the fourth quarter, 72.7% of new loans facilitated were dispersed to our core segment of small business owners, up from 63.1% in the same period of 2019. In the wealth management business, the contribution from customers with investments of more than 300,000 renminbi as a percentage of our total platform client assets increased to 75.5% as of the fourth quarter versus 73.1% a year ago. Moreover, our 12-month investor retention rate remained high at 96.8% as compared to 93.3% in the same period of 2019. Lastly, we observed strong growth in our current product client assets in the wealth management business. Current product client assets grew by 67.2% year over year, and thus accounted for 95.5% of our total client assets as of the quarter end. The remaining legacy client assets decreased to $19.4 billion, or 4.5% of total client assets as of the quarter end. Next, let me provide some more context regarding new loan sales, take rate, and pre-tax margin in the fourth quarter. In retail credit facilitation, our new loan sales for the quarter were $132.7 billion, slightly ahead of our prior guidance and representing a 3.2% year-on-year increase. We also observed stable credit demand from our small business owners in Q4, as well as a very strong start to the new year. In fact, for January 21, we just recorded our highest-ever single-month new loan sales, representing a year-on-year double-digit increase. As a result of our adjustments to borrowing costs back in September 4th last year, our revenue take rate did experience temporary pressure in the fourth quarter. declining to 9.1% in Q4 from 10.3% a year ago. As these reductions at the time occurred overnight, we believe this decline is temporary in nature. And nevertheless, we are now renegotiating with our partners to reduce our funding and credit costs as we continue to adjust our cost structure that will take some time. We believe our revenue take rate and net margin will improve in the future throughout the course of this year. I'm going to circle back on this in just a moment to explain to everyone how we're going to get there in 2021. For now, despite the regulatory uncertainty, we expect double-digit top line and bottom line growth going forward through this year. As I mentioned, we've already had a very strong start for the year, recording the highest ever single-month new loan sales, while maintaining the full and steady backing of our insurance and funding partners. We also decreased our sales commission rate starting this January, and we've continued to optimize our funding costs, and we've started to enjoy lower CGI costs as insurance partners adjusted their pricing on the back of better credit and customer quality. All of these factors are leading to a recovery in pre-tax net margin as compared to Q4 2020. As we expect this trend to continue throughout the remainder of 2021. Due to the complex accounting treatment of revenue recognition for loans that we facilitate versus trust-funded loans and the initial recognition of credit costs for our risk-bearing loans, there will likely be some quarterly volatility in our net margins, which James will elaborate more on next. But in spite of this, our strong performance in January has given us confidence in the health and momentum of new loan sales, as well as our underlying unit economics. In fact, after overlooking the accounting treatment complexities, we believe that both, and here we're talking about take rate and unit economics, have already bottomed out and will continue to improve throughout 2021. For our 2021 business priorities, we'll continue to monitor the new regulatory requirements and be prepared to adjust quickly when required, similar to how we have operated in the past. Now, as you look ahead in reach-out credit facilitation, The stabilization of borrower rates and continued optimization of external and internal costs are expected to improve our underlying unit economics. We will also continue to execute our plans for the new risk-sharing model, diversify our funding channels, secure more funding partner support, and enhance our deployment of technology. In wealth management, we will prioritize revenue optimization and product mix over client asset growth. The reason we had made this decision is in reflection of the tightening regulations in some areas that we've seen, such as the bank deposit distribution. But we expect revenue growth to be in line with our own expectations as we explore more qualified investor products and increase our focus on those insurance and equity-related products capable of generating better returns for our business. Our two businesses will also be working together to expand our technology-enabled services in lending and wealth management to small bank partners. We expect this strategy to deepen our ties with the partner banks and to generate additional revenue opportunities. I will now turn the call over to James Jung, our CFO, to go through the financial details. Thank you, Greg. I will now provide a closer look into our fourth quarter financial results. Please note that all numbers are in RMB terms and all comparisons on a year-over-year basis, unless otherwise stated. We continue to deliver solid financial results in the fourth quarter of 2020. Our total income was $13.3 billion, up 5.9% year-over-year. More importantly, our net profit increased by 17.4% to $2.8 billion in the fourth quarter. while our net profit margin further expanded to 21.4% from 19.3% in the same period of 2019. Before diving deeper into our Q4 numbers, I want to highlight two factors that create a mismatch between our revenue and earning growth and the actual business growth. These factors have impacted our 2020 Q4 results and will continue to impact our 2021 results. First, our increase in off-balance sheet loans slows the pacing of revenue recognition in comparison to that of off-balance sheet loans. Revenue and expenses are recognized over the life of the loan. For loans that will facilitate, retail credit facilitation service fees are recognized under IFRS 15. and a great portion of the revenue is thus recognized in month one, reflecting a larger portion of the service that is provided to the borrowers in month one. We utilize trust as a funding channel. Certain trust-funded loans for which we meet accounting consolidation requirements are recognized as on-balance sheet lending And revenue for these type of loans is recognized as net interest income and IFRS 9. Recognition of monthly revenue and IFRS 9 is more evenly spread out across the life cycle of the loan. Furthermore, an IFRS 9 or revenue associated with these loans, whether facilitation, interest, or guarantee in nature, is all recorded as net interest income. Whether a loan is funded by a bank, therefore recognized as IFRS 915, or funded by a consolidated trust, and therefore recognized as IFRS 9, makes little business difference as the overwhelming majority of loans are funded by third parties in any case. However, the accounting treatment differs greatly as all balance sheet revenue is recognized at a slower pace than off-balance sheet revenue in month one, therefore creating a temporary deviation between accounting results and the business performance. Second, self-risk bearing loans front load loan credit costs. As we start to bear more risks, we expect to earn more margin over the life of a loan. as the margin previously earned by our insurance partners will now come to us. However, accounting standards require us to record a provision determined by IFRS 9 for the month in which we take on a new loan, while the revenue associated with bearing that risk is recognized over the loan's entire life. This timing mismatch means that our net margin will also be under pressure during those periods in which we increase our own risk-bearing balance. Nonetheless, once this stabilizes, we expect our net margin to return to its previous levels. These factors affect the pace of our recognition for revenue and expenses, creating a timing mismatch between our financial and business results. and will likely result in more quarterly movement and volatility. With that, now let's take a closer look into our Q4 numbers. During the fourth quarter, our total income increased by 5.9%, while our revenue mix continued to change as a result of our business model's ongoing evolution. As discussed earlier, such revenue mix change has slowed the pace of revenue recognition. Following our decision to increase funding from those consolidated trust plans that offered lower funding costs and continued to increase the volume of loans for which we bear credit risks, our net interest income and guaranteed income grew significantly to $2.6 billion, or 19.5% of total income, in the fourth quarter from $1 billion or 8.2% of total income in the same period of 2019. As a result, our retail credit facilitation service fee increased by 9.9% to 9.3 billion or 69.9% of total income from 10.3 billion or 82.1% of total income in the same period of 2019. The annualized take rate for current products and services on a wealth management platform was 31.4 BPS in Q4 as compared to 21.5 BPS a year ago. We calculate the take rate by dividing total wealth management transactions and the service fees for current products by our average current product client assets. As we upgrade our business from product distribution to focus more on providing our partners with comprehensive technology enablement offerings, we are generating a greater portion of revenue from those service fees that are not directly linked to products. In light of this ongoing transition, we believe this take-weight measurement better reflects our business and thus plan to continue using it going forward. Now, moving on to our expenses. In the fourth quarter of 2020, our total expenses increased by 11.7% to $9.1 billion, given by accounting factors related to early customer repayment and the credit cost from self-risked bearing loans, as I mentioned previously. Our sales and marketing expenses increased by 20.5% to $4.9 billion during the fourth quarter from $4.1 billion a year ago. Our borrower acquisition expenses, which are a major component of our sales marketing expenses, increased by 22.3% to $2.8 billion from $2.3 billion a year ago, mainly due to the accelerated recognition of selling expenses that we recorded in a quarter as a result of customers' early repayment. Since we started to changed how we charge monthly fees in September 2020, the negative impact of early customer repayments on revenue has largely been minimized. However, early customer repayment also impacts our self-marketing expenses. When a loan is repaid early, we are required to recognize all of the remaining self-marketing costs that have not yet been amortized in the same month. Therefore, in a period of high early repayment, sales market costs are likely to be inflated when compared to actual activity in the period. Meanwhile, our investor acquisition and retention expenses decreased by 17.5% to $227 million in the fourth quarter from $275 million a year ago, mostly due to our improved investor acquisition efficiency as we leverage technology to achieve greater precision in investor profiling and targeting. At the same time, our general sales and marketing expenses, which are mainly comprised of payroll and related expenses for marketing personnel, brand promotion costs, consulting service fees, business development costs, as well as other marketing and advertising costs, increased by 24.9% to $1.8 billion in the fourth quarter from $1.5 billion a year ago. This increase was mainly due to our previous postponement of marketing campaigns and subsequent resumption in the quarter as businesses across the country restarted their operations in the post-pandemic period. Our general administrative expenses increased by 47.8% to $986 million during the fourth quarter from $667 million a year ago. The increase included employee social security payments for the first three quarters of 2020, which were previously delayed following the release of government policies made in response to the outbreak of COVID-19. In addition, We also recorded a higher share based compensation expense for the fourth quarter. Consistent with the growth of our outstanding balance of loans facilitated, our operations and services expenses increased by 10.6% to $1.7 billion during the fourth quarter from $1.5 billion a year ago. While our outstanding balance of those facilitated grew by 17.9% to $545.1 billion as of December 31st, 2020, from $462.2 billion as of December 31st, 2019. Meanwhile, an increase in our loan repayment volume led to an increase in our payment processing expenses and the consolidated trust plan fees to trustees during the fourth quarter. This increase was partially offset by our use of AI to improve the efficiency of our loan approval and the collection process, helping to reduce the related costs. Our technology and analytics case decreased by 17.4% to $461 million during the fourth quarter from $558 million a year ago as we continue to improve our efficiency. Our credit impairment losses increased by 1.4% to $985 million during the fourth quarter from $971 million during the same period of last year. This increase was primarily due to our higher loan-related risk exposure as our business model continued to evolve, causing us to start to bear more risks and record credit impairment losses upfront. The increase was also due to an increase in our loan-related receivables, which was mostly driven due to the residual effects of COVID-19. Conversely, the increase in credit impairment losses was partially offset by the year-over-year decrease in our asset management impairment losses during the fourth quarter. Our finance costs decreased by 17% to $326 million in the fourth quarter from $393 million a year ago, mainly due to the decrease in our borrowing cost during the period. Consequently, our net profit increased by 17.4% to $2.8 billion during the fourth quarter from $2.4 billion in the same period of 2019. Our basic and diluted earnings per ADS were both 1.25 RMB as compared to 1.12 RMB in the same period of 2019. As of December 31st, 2020, we had $24.2 billion in cash at the bank compared to $7.4 billion as of December 31st, 2019. Looking into 2021, because of the previously discussed accounting and the temporary business factors, we expect our margin in Q1 to be somewhat impacted, but profit growth to resume starting from Q2 and beyond. For Q1 2021, we expect the new low sales to be in the range of $175 billion to $180 billion, client assets to be in the range of $385 billion to $395 billion, total income to be in the range of $14.3 billion to $14.6 billion, and net profit to be in the range of $4 billion to $4.2 billion. For the first half of 2021, we expect new loan sales to be in the range of $340 billion to $350 billion, client assets to be in the range of $375 billion to $385 billion due to the stoppage of online bank deposits, total income to be in the range of $28.5 to $29.3 billion, and the net profit to be in the range of $7.8 billion to $8 billion. This forecast reflects the company's current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks for today. Operator, we are now ready to take questions.
spk00: Certainly. At this time, if you would like to ask a question, as a reminder, please press star and the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of LC Chang from Goldman Sachs. Your line is open.
spk03: Good morning, Ji-Jong, Greg, Yues, and James. Congratulations on the solid quarter again, and thank you for taking my questions. I have two questions here. First is on the RCF take rate. Understand that we're targeting to serve higher quality client cohort with low interest rates amid this environment. However, given the recent clarification on the applicability of four times LPR restriction, I'm just wondering, can we expect some upside in our sales takeaway for us now that we probably have more flexibility in interest rates as well as targeted client cohort? And my second question is really on the guidance. If my calculations are correct, our new loan sales in first half 2021 is guided to grow at a very solid pace of 21% young year at the midpoint. So can management share a little bit more color on the major drivers of the growth? And can we actually extrapolate this growth momentum into second half as well? Thank you. Thanks.
spk07: So let me first explain the first question. So think of our unit economy. Fourth quarter last year, our new loans, it came with lower pay grade and then margin because we reduced borrowing costs, but funding costs, fee-guide premium, and borrow sourcing costs, they didn't drop at the same pace immediately. And fourth quarter nuance, it took about 25% of 2020 year-end loan balance. So that's why we had lower take rate in fourth quarter last year. And also versus 2019, we had more trust fund and self-guarantee portions. Those are the reasons. But if you look at January 2021, our last month's number, as Greg said, in January this year, we delivered record high new sales, almost close to 100 billion new sales in one month. And then we are able to see that the funding cost, CSI premium and barrel sourcing cost, obviously drops. and take rate as a result, take rate and margin are very much in line with our previous expectations. So in overall, respect to 2020 overall take rate and net margin levels. And we believe this will continue. We are very confident for full year 2021, our take rate and net margin for ICF new business will be sustained without much change. And the thing of HR, The Supreme Court did clarify four times of HR does not apply. It does not apply to financial lending institutions, including generating companies and consumer finance and small companies. However, we believe the general guidance from CBIRT remains unchanged at 24%. So we don't have any plan to adjust up our price. And then depending on the products of funding cost, credit cost reduction, and the operating cost optimization, we further want to reduce our borrowing cost gradually, slowly, to be more price affordable and competitive in this retail credit market while we can maintain current take rate and net margin level. So we don't have any immediate plan at this moment, but going forward in the long term, we still plan to gradually decrease our borrowing cost. So that's the answer for the first question. And second question is, yeah, our sales volume growth, as I just mentioned, we only have two. January this year, we delivered almost close to 100 billion unit sales, which is very strong sales momentum. And going forward, We believe sales growth, the market demand is plenty. And then our sales growth productivity increase is very obvious. For example, last year, without any increase of sales growth headcount, we delivered 14.4% annual sales volume growth. So we focus on more and more productivity improvement at the same time with AI applications, such as AI Video On, that we try to attend and develop new inbound channels going forward. But in the meantime, because in this China-Italy credit market, our experience is, for now, we do not see any other online channels which can give us as good quality borrowers as offline channels, such as our direct sales, our live insurance agents, with highest case size, and then with borrowers' acquisition costs less than 3%. So, in the meantime, Our offline ribbon phase, this will continue with about 85% contribution ratio. But going forward, we are trying to develop further self-application channels.
spk03: Got it. That's very clear. Thank you.
spk00: Your next question comes from the line of Mei Yan from UBS. Your line is open.
spk01: Thank you, Morning. Thanks for giving me this. can you ask questions and congratulations on a very steady uh quarter again um okay my my question uh first one is related to uh to suit your regulation if i cannot ask uh um um The People's Bank of China has a policy on how to manage real estate business. Someone also discussed that this is a real estate agency. From now on, it will be in the realm of real estate. It needs to take a real estate license, and the business needs to meet a lot of restrictions or management. I don't know what you think about this. Is it possible that we will also fall into the realm of real estate business, which is to do real estate? So this question is related to PBOC's earlier draft consultation paper on credit rating business. And some people interpret this and they apply to loan facilitation business and loan facilitation companies will be required to have a credit rating licensing. if there's something relevant to LUFEX. Okay. And then second question, still on the take rate, as I understand that the take rate may be temporarily down, you know, for quarter net take rate, net pre-tax profit take rate 3.1% and revenue take rate 9.1%, that's below sort of previous expectation. So this year you said it's going to be gradually recover to the range of 3.4 to 3.5 to 4% on the net take rate. What would be the path for that? And what is the recent CGI cost that you mentioned with the 6.7% in fourth quarter and also on the funding partners cost? And our loan size, the new loans are all below 24% interest rate. Are they at the size of much larger than before? I remember in the third quarter, you mentioned about 200,000 per loan. Is it even higher than that as of now? And any guidance from the CBRC to increase the 20% credit risk exposure to be higher, maybe to 30% or so? Thank you.
spk07: Thank you. I think it may be in the current situation, I think it may be mainly aimed at individual leading companies, or we can say that it may be buried in the whole reform of some business and some relevant regulations. So these regulations, in the end, I think after a specific case, after implementation, it will definitely not be able to promote it. So at present, we think that our major business, I think this is probably not a clear statement yet. But what I want to say is that we have been having a very smooth communication with the supervision department. If we also include the supervision in the future, I believe we will be able to deal with the case. At present, because the whole situation is not very clear, I think it may take some time for the supervision department to make their request clearer.
spk08: So in terms of the credit scoring business, we think the guidelines at the moment are reasonably early and preliminary. Business requirements and the shareholder requirements of a credit scoring institution, the rules from PBOC are not that clear as of yet. We do think it's probably targeted that, you know, leading institutions specifically probably aren't as part of the ratification plan. This is why this came out. Of course, new rules applying to a special case could be later on widely applied to the industry. In terms of loan facilitation business, we don't think it's currently directly involved. We don't think our business will be classified as a critical institution at this stage. We are maintaining very smooth dialogues with the regulators. So in the future, if it does become the case, rest assured we'll get enough pre-warning so we can plan and position our business accordingly and early. In conclusion, we think it's early and preliminary stage. We need more clear requirements from the PBOC before we can react to it.
spk07: So it may take another quarter for the news to be cleared. Thank you. Actually, I think there are three more questions. The first question is again about fourth quarter take rate, 9.1%. And I explained that mainly because the fourth quarter neurons came with lower take rate and the margin actually reduced high volume cost to less than 24% from September last year. But if you see the January number, I believe the first number James and David made sure we use in their presentation. January, our take rate and net margin already recovered back to our expected level. In overall, it's not less than overall 2020 level already. So we are ready to sign out. And how we reach it to that point? There is an obvious driver funding cost. And then CGI premium. Our interest partners, they also changed charging method from the amount base, loan amount base, to balance base from mid-January. So that, as a result, we used CGI premium ratio. And we also decreased our borrow sourcing costs. In January, aside from January, we reduced our sales commission by 15%. So as a result, we saved lots of the borrower acquisition costs. So then that, our pay credit net margin recovered very nicely back to original level. And the next question, case size. Case size, we don't see much change in recent few months. Before September 4th, our average case size was if you remember, it was 160,000 RMB. And then since we reduced high borrowing costs and then switched to better quality segments from September 6th with low price, that increased KSI from 160,000 RMB to 200,000 RMB. So this is CSAC increased by about a little more than 20%. And this is the reason why we could reduce sales commission by 15%. And lastly, about our sales guarantee portion, 20%. As of December last year, for New York, our sales guarantee portion increased to 13.6%. And then we also make it up to 20% in June for New York. as part of discussion with our regulator. But further than 20%, we don't have any plan at this moment. A lot of things is, if a regulator requests more than 20%, for example, 30%, for that, we have enough organic capture to support that, the extra, more self-guarantee portion. So we don't have much concern.
spk00: Your next question comes from the line of Winnie Wu from Bank of America. Your line is open.
spk02: Thank you very much for giving me this opportunity. Two questions, I guess. First, regarding, again, the regulation and our licenses. Since November last year, CBRC published the consultation paper for those online microloan companies license. Have you started to communicate with the regulator regarding application for a national operating license and and is there any feedback from regulator on on the outlook of you know when we will get clarity certainty on getting this like national operation license And also, LUVAX obtained the consumer finance license earlier last year. So what's the progress in using the consumer finance license? How much of the business, whether it's the loan facilitated or the outstanding balance, is being done by this consumer finance license? And what's the plan there? So that's the first regarding those licenses. And second, James mentioned the accounting difference from booking loans online versus offline. I think by end of last year, roughly, sorry, unbalance sheet versus off balance sheet. As of end of last year, you have slightly over 20% of the total loans outstanding unbalance sheet. So what's the plan there? Do you see that further increase to 30, 40%? or is that going to stabilize at around 20% level? So meaning, you know, the related question is when we will see the normalization or stabilization of the account booking for those like revenue and expenses. When will this like base effect be normalized? Thank you.
spk07: Okay. Thanks for the question. The first question was about two licenses, online microloan licenses. We have three licenses in Chongqing, Henan, and Shenzhen. And out of three, two are nationwide online microloan licenses. But we haven't got clarity and confirmation from regulators about the next level of development of those businesses. Those licenses are not in use at this moment. And then CF license, we got it in April last year. We started business from May last year. And then as of December last year, we have, we booked 6.5 billion neurons with about a little more than 200,000 new customers. And the ending balance was about 3.5 billion a new day. So we made a very good start. And then this is very much different from our public business. This is very complimentary business to serve younger and consumption borrowers. So we believe this is an opportunity for us, and that this can be a new business line going forward. And the focus of our accounting method that James was a supplement, online on-balance sheet versus offline balance sheet. It depends on our funding mix. It's already stabilized, I think. But going forward, our funding mix will be stable with 70% from partner banks and then 30% from trust. And I believe that mix will continue without much change. So as a result, home balance sheet and off balance sheet, this mix, I think it's already stabilized.
spk02: Sorry, just to clarify, how about you taking more... So this 70-30 between banks and trusts is already stabilized. Is there any plan, like for example, growing of the consumer finance business might mean that you will have more loans funded by yourself. Is that going to change the picture?
spk07: That's correct. That's very correct. But if you think about our overall scale, Our public loan balance as of today is almost $600 billion. But consumer finance business is how much? It's only $3.5 billion. So no matter how quickly it grows, it doesn't take much portion out of our total loan balance scale. So it takes some time. I think we can say with the stabilization in funding between banks, and trust in terms of other on-balance sheets will basically be driven by where we take the credit risk here. And that is why I said our target would be to 20% by June. So it will be a little bit more over time, but it's roughly stable. I think it's going to be over 5%.
spk02: right and and so for the consumer finance license it will be more contained to do a pretty uh different differentiated the business line which is sort of the the unsecured consumer loan um what's the average ticket size there and what's the landing rate is this significantly different from our traditional business uh yes uh that is very much different from our personal visibility um the open license uh license uh the fizz call
spk07: The ticket size cannot be more than 200,000. But actually, it's controlled at less than 50,000. And our ticket size, given for those CF bowers, is less than 20,000 RMB per borrower. And then with average price, less than 17% APR.
spk02: Thank you. And how about the maturity? Are those like similar to the loans of Antwee Bank, which is only like a few months of maturity?
spk07: Maturity is quite open. This is line of credit products. It's like a virtual credit card. So a customer can choose whenever they spend and then select info month, repayment service. They can select three months, six months, and then 24 months.
spk02: I see. Thank you very much.
spk00: Your attention comes from the line of Thomas Chong from Jefferies. Your line is open.
spk06: Hi. Thanks, management, for taking my questions. I have a question about the wealth management first. Can you provide us some updates about how we are using our technology in our automated portfolio strategy in June 4? And on the other hand, I'm talking about the online deposit how much does it contribute to our client asset mix? And then my second question is about the second half outlook. Given that we have a Q1 and the first half, how should we think about on a full year basis in terms of the top line and the bottom line? Thank you.
spk07: Great. Thank you, Thomas. It's Greg here. On the wealth management side, In Q4, we basically did two things. So there was the existing portfolio management tools where we continue to use more and more market data to help provide a set diversified investment strategy for the clients. And that has continued to progress in the fourth quarter as it has in the recent year. What we've also done is opened up the platform to allow other financial advisory providers to come on and basically providing more product, more service to the customers. And so this is an area that continues to grow at a good pace. and we think it's going to become more important in the market as a whole. And we're continuing to drive more and more automation and more and more content sharing with customers in that line so they can get used to diversified investing. On the deposit question, if you go to the end of last year of the total client assets, the deposits made up about 16%. of the total, so about $660 billion revenue in B. And that represented the revenue generated by that business was less than 0.4% of the total company. So as we let those deposit products mature naturally, we will try and direct clients' money from those products into other areas on the platform as we've done in the past with the likes of P2P. So it will be an ongoing transition for that area. And then on the Q1, just a quick response. We do believe, or rather in the first half of the year, we do believe that we will see double-digit top-line and double-digit bottom-line growth. We're pretty confident of that, certainly for the first half. We'll continue to monitor the regulatory situation as it goes. But overall, we do think that the outcome for 2021 will be double-digit on both top and bottom lines.
spk00: Got it. Thank you. Your next question comes from the line of Hans Van from CLSA. Your line is open.
spk05: Thank you for offering this opportunity to ask a question. This is Hans from CSA. I got two questions. The first one is on the wealth management side. So Craig just mentioned that the, you know, the strong growth in AUM in fourth quarter last year. I'm looking to the guidance for first quarter and also first half this year. We look at the client assets. It's actually showing a slowing down in terms of growth rates. So just wondering why we are prudent in the wealth management client assets outlook. And also related to the wealth management side, we're wondering why the take rate for the carbon products were actually down quote-on-quarter. So what's the reason behind this? That's number one. And number two is that just wondering on the dividend side, We understand that management mentioned previously that there's no near-term plan to pay out any dividends. But just wondering, in terms of longer term, once we are good at the capital front, do we have any intention to offer any dividends to investors? Thank you.
spk07: Thanks, Hans. On the wealth management question, We anticipate two things happening in the first quarter with regards to client assets. Number one is as those deposits mature, that 16% of the client assets mature, they will actually mature reasonably quickly. The average duration of most of those products was about six to nine months. And so that will have some dampening effect on the CA growth. The other thing is that we continue to accelerate the final resolution of the PDP products in the first quarter. And so we really are going to probably push both the deposits and the PDP portion down, and then we will be shifting client money to other areas. But the outlook, therefore, that we've taken, at least in the first half, for the wealth management is we will focus more and continue to optimize the product mix. That will allow us to continue to meet our revenue expectations for this business, but we'll take a little bit off the accelerator on the client assets as we optimize the mix. So that is the focus for the near term, but we will update if that situation changes. On the take rate question, we actually did have very strong growth in the fourth quarter in CA before some of these changes like the deposits came into effect. The growth in the fourth quarter was a combination of bank asset management products and bank deposits. And so you had an accelerated growth of the denominator, which brought the take rate down a little bit so that you had a 5% decline quarter-on-quarter, but a year-on-year increase of 10%. So as we look forward into this year, 2021, we expect over the course of the next three or four quarters that we will continue to see improvements in take rate as we drive that mix in product on the platform. On the question of dividends, we have no immediate plans to issue dividends. You know, our intent is still very much to grow the business, to deepen our use of technology. And in the later days, you know, we could look at it, but it's not on the immediate radar. Thank you.
spk00: Thank you. Your final question comes from the line of Benny Wong from HSBC. Your line is open.
spk04: Hi, good morning. Thank you for taking my question here. So my question here, actually two questions. One is on the retail credit facilitation service fee. I think there's, of course, we see the decline in the past two quarters. And then I guess consensus is also looking at this to re-evaluate, especially into the second half this year. What are some of the challenges that you might foresee that might not be able to yet see the inflection point or might delay that inflection point? And then with that also, can you have some color in terms of the service fee take rate as well? And then also one follow-up question on the regulatory side is that, remember earlier on since IPO, we talked about the interpretation, right? By different on the four times one year loan rate and whether that also includes the credit guarantee fee. interpretation as to, you know, different local cause. You also said there's different rulings. So just want to see any updates on that. And I just have a very quick follow-up. Thank you.
spk07: Well, now about funds from backwards, legislation, full-time to the HR. So when we met a long time ago, once we said, we want to get outside price to the 24% HR. And then within that, if we exclude guarantee and honor, credit enactment fees, such as guarantee fees and insurance premium. All the way, we try to cap within 15.4%. And I believe now we have clarity. So we don't care about this mix. So the Supreme Court, they clarified. So full temporary insurance does not apply to financial lending institutions, like a mortgage company or small finance or small companies. And the CBI slide, 9.24%. So the mix-up, it doesn't really matter. So as long as overall price is less than 24%, we believe this is very much compliant. And then this is fine within current labor environment. And the first question is about the isolation screen. Although effective HR will remain unchanged throughout 2021, we don't have any trend increase or decrease overall borrowing cost. And then referring to January number, I said our take rate and net margin is already back to our 2020 level. In over, our possibility comes from take rate and net margin are very much in line with our previous expectations. And over 2022 HR will stay unchanged, or a little bit changed, not much changed, throughout 2021. I think one part of the question may have been the mix in the service fees versus other interest income as we also increase the risk sharing or change the risk sharing model. Yeah, in terms of our fee mix, as we increase our share payment portion to 20% for new ones by the end of June, so that will increase our fee mix, that will increase our payment portion And then service fee, there is a decrease. Why can't the fee increase? Maybe I can add a little bit. As I explained in my portion, basically the revenue exchange is driven by two things. One is between all balance sheet versus off balance sheet makes change because we have seen that the all balance sheet loan has increased from 10% by the end of 2019 up to 32% of 2020 as a result of we have consolidated more trust loans. So that's one change. The second change is we are taking more risks. the self-guaranteed risk has been risen from 2.2% by the end of 2019 up to 6.3%. So because of these two factors, it's changing the revenue mix so that you see the RCF kind of a platform fee is coming down a little bit, but the revenue from the interest income, from guaranteed income, has substantially increased. And that's why at the beginning, at the middle, we talked about because of these kind of business factor changes, it's reflective in our financial numbers.
spk00: That concludes Q&A for today. I now turn the call back to management for closing remarks.
spk07: I think so. I think we've had a chance to lay out the basic situation here on the call. But we certainly look forward to engaging with the analysts, you know, very deeply over the next day or two to answer all of the questions that are out there. And we thank you for your attention and support. Thanks very much. That concludes the call.
spk00: That concludes today's conference call. You may now disconnect. Thank you, everybody, for joining today.
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