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Lufax Holding Ltd American Depositary Shares, each representing two (2) Ordinary Shares
Q1 2021 Earnings Conference Call
4/27/2021
spk04: Ladies and gentlemen, thank you for standing by and welcome to LUSAC's holding limited first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, we will have a question and answer session. Please note 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, sir.
spk08: Thank you very much. Hello, everyone, and welcome to our first quarter 2021 earnings conference call. Our quarterly financial and operating results were released by our newswire 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 the impact of regulatory developments, as well as our efforts in supporting the growth of small and macro businesses. Our co-CEO, Mr. Greg Gibb, will then provide a review of our progress and details of our development strategies in the quarter. Afterwards, our CFO, Mr. James Zhang, will offer a closer look into our financials before we open up the call for questions. In addition, Mr. Weiss Chard, our co-CEO, and Mr. David Choi, CFO of our Retail Credit Facilitation business, will also be available during the question and answer session. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call, as we will be making forward-looking statements. Please also note that we'll be discussing nine IFRS 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 finance with the SEC. With that, I'm now pleased to turn over the call to Mr. Ji Guanghong, Chairman of Blueflex.
spk12: Thank you for attending our first group of business conference in 2020. Before the press conference, I would like to introduce two aspects of the content. One is the current monitoring trend and the impact of the lockdown. The second aspect is the work of the lockdown to support the development of small businesses.
spk08: Hello everyone and thank you for joining our first quarter 2021 earnings call. Before we go through the detailed quarterly results, I would like to provide some general updates on two aspects of our business. First, the recent regulatory development and their impact on our business. And second, our achievements in supporting small and micro businesses.
spk12: The first aspect is the impact of the monitoring trend and the lockdown. Since the first quarter, the monitoring trend has been becoming clearer and clearer. We have been paying attention to the monitoring requirements for some of the leading technology platforms. So far, we believe that the monitoring trend has three aspects. The directionality trend, Let's start with the recent regulatory development and the impact on Lufa.
spk08: First, with increased clarity on regulations in the first quarter, we have witnessed how regulatory authorities impose various reform requirements on leading tech platforms. We believe that the intention of the new regulation has three points. First, all financial businesses must be rooted in finance and empowered by technology. Second, all financial activities should be placed under regulatory oversight. Third, the development of the sector must be built on the basis of compliance. These policy directions are largely in line with our previous expectations.
spk12: The regulatory compliance has always been a key focus for LUFAX. Although we were not directly affected by the recent announcement, we have always upheld our commitment
spk08: to provide socially responsible, trustworthy, and convenient financial services.
spk12: In terms of retail credit, we create rational loans, develop good financial values, and prevent credit services from being mixed with other services, or lead customers to loan. In terms of loan use, our loans are different from most other consumer loans of other Internet platforms. The main service is for small and medium-sized enterprises, to support the development of the physical economy. This is in line with the national policy. In terms of data security, we adhere to the principle of legal and minimum data usage. First, the data used for customer risk assessment does not come from payment data. Strictly comply with the relevant requirements of the Real Estate Management Act. Second, all information from Ping'an Group has been authorized by the customer and strictly transparent. Thirdly, all risk modeling and risk analysis are carried out under a legal framework. We will continue to comply with the requirements of Shenzhen's innovation and regulation, strengthen personal information protection, use of technological means, enhance financial service efficiency and reliability.
spk08: For our credit, retail credit facilitation business, we promote responsible lending practices and educate borrowers on rational borrowing. These efforts help us keep our credit services independent from other incompatible businesses and prevent the misleading customers with excess lending practices. For borrowers to use the proceeds for our loans, we're different from most online consumer credit business as we focus on serving the small and macro business owners. We support the development of China's real economy and our mission is fully aligned with national policies. On data security, we have strictly adhered to the principle of compliance, minimum and necessity. First, the data we collect that are used for the purpose risk assessment are to prove all payment information, which is strictly compliant with the requirements listed in the regulation on the administration of credit scoring industry. Second, all data related to Ping An Group has customer consent and has been scribbled thoroughly to remove sensitivity. Third, all risk modeling analysis processes are executed in full compliance with industry rules and regulations. Going forward, we'll continue to abide by regulatory guidelines, foster prudent innovation, ensure operational compliance, prioritize protection of personal data, and improve financial service efficiency and inclusiveness through technology.
spk12: In terms of wealth management, we are actively responding to the demand for P2P products. For our wealth management business, we continue to one stand our P2P products in response to regulatory requirements. Thanks to our strong operations and risk management capabilities,
spk08: P2P products now account for only 0.9% of our total client assets. We have achieved a smooth and compliant transition process as we gradually phase out our peer-to-peer products, making our business more aligned with regulatory guidelines.
spk12: In general, in terms of our business model, target customer groups, etc., there is a significant difference from other leading Internet technology platforms. On the issue of compliance, the management concept of early discovery, early modification, and early establishment has always been relatively consistent with the trend of supervision. Under the increasingly clean background of industry supervision, in the long term, we believe that the supervision environment
spk08: Overall, we are fundamentally different from other leading platforms in terms of business model and target customer base. On regulatory compliance, we have adhered to the principle of preemptive diagnosis and swift operational adjustments for timely, optimal results to keep our operation in line with regulatory trends. As policy trends become clearer, we believe it will benefit industry leaders such as Lufax in the long term.
spk12: Next, I would like to provide an update on our achievements in supporting small and macro businesses. First, we help small and macro businesses to overcome the hurdles of limited access to capital and high-cost financing.
spk08: Second, we leverage our unique offline-to-online model to provide better services to small micro-businesses.
spk12: Lufax has always been committed to promoting inclusive finance.
spk08: To expand small and micro businesses' access to finance, Bluefax has provided credit facilitation services to more than 15 million customers as of March 2021, facilitated over 580 billion RMB of outstanding balance of loans, and extended unsecured loans to nearly 4 million customers residing outside of Tier 1 and Tier 2 cities. To improve financing affordability, we have adhered to regulatory guidelines and implemented an all-in cost ceiling of 24% for all new loans since September 2020. We will remain committed to exploring additional ways to lower the financing cost for small and micro-businesses.
spk12: The unique online and offline financing model and technology capabilities also effectively support the financing needs of small and medium-sized enterprises. China China China China China their annual income is less than RMB10 million, and the number of employees is less than 20. Their average age is around 39 years old. They are older and often lack the knowledge to get loans from banks. They also don't have the time and the habit to directly borrow money through the Internet. As for their characteristics, by implementing the online and offline integration service, they have established more than 2.8 million sales and service teams in more than 280 cities. At the same time, we use a series of technology tools developed by Rukun, to provide professional, convenient, and flexible customer service for individuals and small and medium-sized enterprises. For example, the verification of customer status information is completed online by the robot, greatly reducing the amount of materials submitted, the artificial work loop in the water-based decision-making, and greatly increasing the efficiency of payment. In the future, we will continue to increase our investment in technological research, optimize our experience, and improve our performance.
spk08: Doofat's unique offline-to-online business model and technology capabilities have enabled us to support the financing needs of small and micro businesses very effectively. Recently, we noted investor interest in the development of our offline sales team. I would like to mention that our decision to establish an offline sales team was based on the key characteristics of our core customers. Most of our core small and micro business owners have an average age of 39. The business has average annual revenue of less than 10 million RMB and average pay of less than 20 employees. Their borrow profiles make it difficult for them to qualify for traditional bank loans. They also lack the time or the experience to apply loans online. With this in mind, we have a sales and service team of nearly 57,000 representatives in over 280 cities. By leveraging our proprietary technology applications, our service team is able to provide professional, convenient, and flexible credit services. For example, the verification of borrower background information is conducted automatically through artificial intelligence online, thus significantly reducing manual effort in information gathering and decision making. substantially improving the efficiency of our lending process. In the future, we plan to launch a series of new technology applications to further enhance our customer experience, empower our offline sales team, and improve our operational efficiency.
spk12: In the development of the industry in the future, Rufax will continue to respond to the national green finance and stock exchange financial strategy, insist on stock exchange intentions, and implement a warm-temperature financial concept, and provide timely, convenient, and high-quality financial services for individuals and small and medium-sized companies all over the country.
spk08: Moving forward, Rufax will continue to adhere to the nation's guidelines on green finance and inclusive finance by executing our mission of providing inclusive and compassionate financial services. We view it as our responsibility to provide individuals and small and micro business owners across China with easy access to timely, convenient, and high-quality financial services.
spk12: As the saying goes, although the recent policy of supervision has had a certain impact on the industry, due to the gap, we should try to understand the purpose of supervision in advance and make appropriate adjustments. Therefore, the impact of the business is limited. We have also achieved good business results in the first quarter. The management team of the company will continue to embrace, supervise, and actively communicate management ideas, and enhance the company's ability in technology, pricing, risk prevention, control, and other aspects. We are confident in maintaining the stable growth of the open industry and providing customers with warm financial technology services.
spk08: In conclusion, although recent regulatory developments have impacted the industry, our business was not materially affected thanks to our preemptive interpretation of regulatory intentions and proactive adjustments. These efforts have also enabled us to achieve solid operating results in the first quarter. Our management team will continue to embrace regulatory oversight while maintaining active dialogue with the authorities. We will also improve our capabilities in technology, pricing, and risk management to streamline our operations, optimize our cost structure, and enhance our operating efficiency. We are confident in our ability to maintain the stable growth of our business and continue to provide compassionate financial services to our customers.
spk12: I will now turn the call to Greg, who will share our business update for the call-in.
spk10: Thank you, Chairman Gee. Before I begin, please note that all numbers are in renminbi, and all comparisons are on a year-over-year basis unless otherwise stated. LUFAX had a strong first quarter. We exceeded our guidance and delivered strong top and bottom line growth. In the first quarter, total income increased by 16.9% to $15.3 billion, and net profit increased by 18.7% to $5 billion. This is exceeding our earlier guidance of $4.2 billion. Our net margin reached 32.6% in the first quarter and 11% to this point improvement over the fourth quarter of 2020. Four key trends underpinned our first quarter performance. First, we experienced a significant rebound in our retail credit visualization unit economics. While keeping all-in costs for new borrowers below 24%, the take rate based on loan balance was 10% in the first quarter of 2021, recovering from 9.1% in the fourth quarter of 2020. Funding cost optimization and credit insurance premium reduction were key drivers of this improvement, as insurance partners lowered their pricing on the basis of better credit and customer quality. We also reduced our sales commissions in January and improved our operating efficiency. As a result, our net margin and lending facilitation essentially returned to the levels we saw prior to price reductions in 2020. As mentioned, reduction in credit insurance premiums is closely linked to credit performance. In the first quarter, our C to M3 flow rate for all loans facilitated was 0.4% versus the COVID peak of 1% in February 2020. The 30 days plus past due delinquency rate for all loans facilitated stabilized at 2% as of March 31, 2021, on par with December 31, 2020. The 90 plus days past delinquency rate for total loans facilitated improved to 1.1% as of March 31, 2021, from 1.2% on December 31, 2020. All of the aforementioned operating metrics exclude our consumer finance subsidiary and legacy products, which represent less than 1% of our total loan business. Second, we observed steady volume growth while improving our business mix. On the retail credit side, our new loans facilitated grew by 17.3% to $172.4 billion in the first quarter, largely in line with our expectations. We continue to focus on serving small business owners and improving the risk profile of our borrowers. In the first quarter, excluding the consumer finance subsidiary, 75.7% of the new loans facilitated were dispersed to small business owners, up from 65.9% for the same period of 2020. High-quality borrowers defined as G1 to G3 borrowers by our own internal classification system contributed 65.9% of new general unsecured loans facilitated in the first quarter compared to 58.7% for the same period of 2020. The improved borrower quality led to a sustainable decline in credit insurance premiums and expected credit loss levels. On the wealth management side, our total client assets exceeded our guidance and reached $421.1 billion as of March 31, 2021. Our focus on NASA Fluent customers who invest more than $300,000 in revenue on the platform has paid off, as the contribution to our total client assets reached 76.3% as of March 31 of this year. Third, we continue to make progress on executing our plan for a more sustainable risk-sharing business model. It is encouraging to see that our funding and insurance partners have remained supportive and are embracing the new risk-sharing business model. As of March 31, 2021, our outstanding balance of loans facilitated with guarantees from third-party insurance partners decreased to 86.8% from 95.1% a year previously. Moreover, new loans facilitated with guarantees from Ping An PNC accounted for 78.3% of new loans facilitated in the first quarter, down from 92.5% a year ago, while our funding partners borne the risk for 5.5% of new loans facilitated in the first quarter. Loans where we bear the risk accounted for 12.5% of new loans facilitated in the first quarter, up from 1.3% in the same quarter of 2020. The balance of loans where we bear the risk was $45.7 billion as of March 31, 2021, representing around two times leverage of our licensed guarantee companies' net assets of $19.2 billion. Again, these figures do not include our consumer finance subsidiary. We expect the net assets of our guarantee companies to continue to increase as our retained earnings grow, providing organic support to future business growth. Under a 20% to 30% risk-bearing business model and a 10 times leverage cap for our guaranteed companies, we have ample room to grow our total loan guarantee balance without any additional capital injection this year. The existing capacity of our guaranteed companies supports a doubling of the current business scale. Fourth, our wealth management client assets and take rates remain stable despite accelerated P2P runoff and discontinuation of bank deposit products. As of March 31, 2021, our total client assets increased by 18.7% to $421 billion versus a year ago, despite accelerated P2P runoff and dissimulation of bank deposit products. First quarter revenues from wealth management business increased by 52.8% year over year. In the first quarter, we accelerated the runoff of $15.4 billion in P2P products. Of that, March 31st, 2021 legacy products accounted for just 0.9% of total client assets compared to 20.6% a year ago. We expect the runoff of our remaining legacy products to be completed in the second quarter. As a result of regulatory restrictions on bank deposit products, deposit-related client assets decreased 9.1 billion renminbi in the first quarter. Our take rate for the wealth business was 28 basis points in the first quarter with some fluctuation due to decreased deposit products offset by continued development in standard wealth and insurance products. Next, our upgraded guidance for the first half. We expect continued growth momentum in the second quarter with steady business development, further cost optimization, and strong credit performance. Therefore, we are increasing our first half of 2021 guidance for total income growth to be between 17% and 18%. up from our previous guidance of 11% to 14%. We are also increasing our first half of 2021 guidance for net profit growth to be between 19% and 22%, effectively doubling our earlier guidance of 7% to 10%. In the first half of this year, we expect growth in new loans facilitated to be between 12% and 15% growth, down from our prior guidance of 20%. This is really due to our greater focus on improving product mix and margins. We plan to prioritize the growth of unsecured loans over secured loans as unsecured loans provide higher operating margins but with smaller ticket sizes. We expect overall unit economics for new loans this year to be largely in line with the average for new loans in 2020. Our expectation is that wealth management client assets will grow 9% to 12% in the first half from the same period of last year, as we will continue to focus on higher margin asset management funds and insurance products. Finally, I do want to share our priorities for technology development. Our focus is on four fronts. First, we continue to expand our use of legally compliant big data and AI capabilities to augment our strength in the end-to-end risk management for small business owners. Second, we are developing industry content and real-time planning tools to better support the productivity of our unique O2O sales force. Third, we are integrating infrastructure and services across our lending and wealth management customers to capture greater business synergies. We've already begun to integrate lending and wealth client sourcing with the third-party channels, and we'll move to an integrated APP for all services during the course of this year. Fourth, we are exporting our technology and proven online operating models via cloud solutions to our banking partners in China, Hong Kong, and Southeast Asia to extend our market reach and deepen these important ecosystem relationships. We will measure our progress in technology deployment by our ability to increase customer sourcing and financial institution partnerships, to enhance our O2O sales productivity, and to promote deeper product cross-selling, and finally to achieve greater operating efficiencies. With ongoing changes in regulation, we believe that our ability to combine our DNA, including financial services with innovative technology, will enhance our competitive differentiation and sustain our growth trajectory for the long run. I will now turn the call over to James Young, our CFO, to go through the financial details.
spk11: Thank you, Greg. I will now provide a closer look into our first quarter financial results. Please note that all numbers are in R&D terms and all comparisons are on a year-over-year basis, unless otherwise stated. As Greg mentioned, we have experienced significant rebounds in retail credit facilitation unit economics, driven by lower funding costs, insurance premiums, and optimization of operating expenses. As a result, we have delivered strong financial results in the first quarter. Our total income was $15.3 billion, up 16.9% year-over-year. Our net profit increased by 18.7% to $5 billion in the first quarter. And our net margin further expanded to 32.6%. Now let's take a closer look into our Q1 numbers. During the first quarter, our total income increased by 16.9%, driven by strong business volumes and increased take rate. On the back of this growth, our retail credit presentation business is seeing a change in revenue mix as our business and risk-sharing model evolves. While platform service fees decreased by 9.4% to $9.7 billion, our net interest income grew 111.7% to $2.9 billion, and our guaranteed income grew 597.5% to $551 million. In addition, other income directly linked to delivering services to our financial partners increased 241.8% to $1 billion. As a result, our retail credit facilitation platform service fees as a percentage of total revenue decreased to 63.4% from 81.8%. As we continue to fund more with consolidated trust plans providing lower funding costs, our net interest income as a percentage of revenue increased to 19.1% from 81.8%. 10.5% in the previous year. And as we share more credit risk, generating more guaranteed income, our guaranteed income as a percentage of total revenue increased to 3.6% from 0.6%. Through expanded services to our credit enhancement partners in account management, collections, and other value-added services, our other income as a percentage of total revenue increased to 6.8% from 2.3%. In Work Management, our platform transaction and service fees increased by 52.8% to $625 million in the first quarter from $409 million in the same period of 2020. The increase was mainly driven by the increase in fees generated from our current products and the revenue recognition arising from accelerated P2P runoff. Now, moving on to our expenses. In the first quarter, total cost grew by 17.1% to $8.5 billion. Total expenses excluding Credit impairment losses, financial costs, and other losses, however, grew by only 10.1% as a result of improved operating efficiencies in most cases. Our sales and marketing expense, which includes borrower and investor acquisition expense and the general sales and marketing expense, increased by 5.5% to $4.2 billion during the first quarter. Our borrower acquisition expense which is a major component of overall sales marketing expenses increased by only 0.2% to $2.6 billion from a year ago, mainly driven by further optimization in sales productivity and sales commission. Our investor acquisition and retention expense decreased in the first quarter versus the year before. mostly driven by improved acquisition efficiency as we leverage data to achieve greater precision in investor profiling and targeting. Our general sales and marketing expense, which is mainly comprised of payroll and related expenses for marketing personnel, brand promotion costs, consulting fees, business development costs, as well as other marketing and advertising costs, increased by 24.8% to $1.5 billion in the first quarter from $1.2 billion a year ago. This increase was mainly due to lower base in first quarter of 2020, resulting from this postponement of certain marketing campaigns due to COVID-19 at that time. Our general administrative expenses increased by 24.1% to $854 million during the first quarter from $688 million a year ago. This increase was mainly due to lower rates in the first quarter of 2020 and a subsequent headcount expansion to support a new business development, including the consumer finance business. General administrative expenses as a percentage of revenue decreased to 5.6% from 7.4% during the fourth quarter of 2020. Consistent with the growth of our outstanding balance of loans facilitated, and in turn, the expanded loan repayment volume, our operation and service expenses increased by 17.7% to $1.5 billion during the first quarter, from $1.3 billion a year ago. Our technology and analytics expense increased by 8.2%, to $447 million during the first quarter as we continue to invest in technology research and development. Our credit impairment losses increased by 109.8% to $1.1 billion during the first quarter of 2021 from $502 million during the same period of last year. This increase was due to increased loan-related risk exposure as our business model continues to evolve, leading to higher credit impairment losses upfront. Excluding the consumer finance subsidiary, the proportion of loans for which we bear the risk accounted for 12.5% of new loans facilitated in the first quarter, up from 1.3% from the same period of 2020. It is worth noting that the increase in impairment loss risk is purely a function of the increase in the proportion of credit risks borne by us, while the overall credit profile of our borrowers continues to improve. High-quality borrowers, defined as G1 to G3 borrowers by our internal classification system, contributed to 65.9% of the new general unsecured loans facilitated in the first quarter of 2021 compared to 58.7% for the same period of last year. In addition, our loan quality indicators such as flow rate, EBD 30+, EBD 90+, have stabilized and in some cases improved substantially from a year ago. Our finance costs decreased by 36.3% to $284 million in the first quarter from $446 million a year ago, mainly due to the decrease in interest costs. Additionally, our effective tax rate decreased to 26% during the first quarter of 2021 from 37% in the same period of 2020. Consequently, Our net profit increased by 18.7% to $5 billion during the first quarter from $4.2 billion in the same quarter of 2020. Our basic undiluted earnings per ADS were 2.09 renminbi and 1.96 renminbi in the first quarter of this year. As of March 31st, 2021, we had a cash balance of $34.5 billion compared to $34.2 billion as of December 31st, 2020. Now let me provide you with some guidance for the first half of 2021. For the second quarter of 2021, as we prioritize improvement in our loan mix and yield economics, we expect our new loan facilitated to be in the range of $145 billion to $155 billion. The wealth clients' assets to be in the range of $410 billion to $420 billion. As we maintain our growth momentum and we continue to improve our operating efficiency, we expect our total income to be in the range of $14.9 billion to $15.1 billion, and a net profit in the range of 3.7 billion to 3.9 billion in the second quarter. As indicated before, our quarterly financial results are subject to seasonality and infractions as a result of accounting treatment. However, as Our underlying unit economics improve. Our second quarter guidance translates into an estimated year-over-year net profit growth of 19% to 22% in the first half of 2021, a level which we believe should be sustainable for the remainder of the year. These forecasts reflect our 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.
spk04: Certainly. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. The first question comes from Winnie Wu with Bank of America. Please go ahead.
spk02: Thank you very much for this opportunity. Congratulations to Lufax for a very good first quarter result. And I have two questions. First, regarding the guidance upgrade, compared to the guidance provided at the full year result, I think bottom line, uh number for first half is now 11 higher than previous version which is actually a quite significant upgrade um so just want to see if management could elaborate on some of the key drivers and also the outlook for food here i think james just mentioned expect that momentum to continue into second half so Hopefully, it means the strong growth momentum will be maintained for the rest of this year. So that's first. And key drivers for the earnings upgrade and potentially some outlook for the second half of this year as well. Second is also back to the regulatory front. And, you know, I think Chairman mentioned that there's more regulatory clarity. And I think investors are still concerned regarding stuff like, you know, will there be further window guidance to reduce APR? And what about some of the latest requirements like Ant was talking about? They need to have a credit bureau license to provide the loan facilitation business. So hopefully, second question is if management can give us also some expectation if there's further requirement from regulator regarding particularly on data and APR from. Thank you very much.
spk10: Thanks, Winnie. I'll take the first part and then turn the regulatory question over to Chairman Gee in a second. The guidance upgrade really results from a number of improvements that really exceeded even our own expectations, I think, at the end of Q4 last year. We've seen continued improvement in funding costs. As we continue to improve the mix of our borrowers, the credit insurance costs are coming down. So those are two significant drivers that allowed the take rate to go back up to 10% in Q1. And these advantages that we're gaining on both the credit insurance costs should continue to actually continue to improve as we move through the rest of the year. And then on our own operating costs, we continue to see efficiencies in our Salesforce, our commissions, our productivity. And so these are really the main drivers that allow us to really upgrade our profitability. And the net margin side of the business, of course, directly benefits from that. And we are seeing very good recovery, not only in the take rate line, but also in the net margin line. And these are things that we think will continue for the rest of the year. So as James indicated, We're projecting 19% to 22% profit growth for the first half, and this is something that we think as a level can be sustained for the balance of the year. Chairman Ji, on the regulatory question.
spk12: First, it's about the window guidance. On two aspects, one is about the demand for IPR to go down. As of now, we have been communicating with the supervision department to see if there are any specific requirements. As of now, the supervision department has not given us a specific requirement. We just hope that it will continue to decline. Our own judgment is that, in the current situation, in the 24-day period, I think it is safe. In terms of window guidance, the first one on any further requirements to reduce ATR further,
spk08: So far, based on our dialogues with the regulators, we've asked, is there a specific number of targets you'd like us to go through? And we have not received any answer from the regulators, apart from that, you know, as industry leader, you should continue to show or demonstrate your willingness to lower the financing costs. But there's no specific number mentioned. Based on our own judgment, we think below 24%, where we are today, is pretty safe at the moment.
spk12: We understand the direction of the monitoring department. We hope that the loan cost will be as low as possible. In fact, we have been maintaining a very frequent and smooth communication with the monitoring department. In fact, I will go to Beijing today and have a report with them tomorrow.
spk08: Of course, we understand the regulators will always want lower financing costs, and we will continue to maintain very active dialogues with them. In fact, I'm flying over to Beijing this afternoon to speak to a few of the authorities.
spk12: We hope that the regulators will understand that if the market can exist and grow healthily, then all the participants in this market will have a reasonable living space.
spk08: so we we are loving our we're hoping the regulator understand for a market to exist and to develop in a healthy way all participants in the market needs to have enough room to maintain and grow the operations
spk12: If the API ceiling continues to go down endlessly during that process, you will see the exit of many credit providers in the industry. I personally don't think that's what the regulator wants to see. As we enjoy lower funding costs and lower credit and CGI costs as a result of better risk management and lower operating costs as a result of improved inefficiency, improvement in efficiency.
spk08: We hope to pass on those cost savings to lower the overall owing cost for our borrowers. So we do have our own roadmap in terms of lowering future cost for our borrowers as we optimize the aforementioned cost.
spk12: The second question is related to the price tag. I would like to say once again that we are using a security price tag and the ant price tag, you can see the small bag price tag, these two price tags are completely different.
spk08: In terms of the credit bureau license or credit scoring license, I want to point out again that we have been using a guaranteed license as the main entity, while Ant has been using a micro license. Those two licenses are quite different.
spk12: We have been using the credit bureau license for a long time. In this process, in fact, we have a much smaller scope of customer information access than small companies.
spk08: The guarantee model has existed for many, many years. And in the process, using the guarantee company to collect information and collect customer data, in fact, the scope is much smaller than what a smaller company would collect.
spk12: So far, we have received no window guidance or any other communications from regulators on this front.
spk08: Of course, we will be adhering to very strict data protection, data privacy. If we do receive anything further, we'll be letting everybody know.
spk04: The next question comes from Piyush Mubai with Goldman Sachs. Please go ahead.
spk09: Thank you, Greg, David, James, for taking the question. Congratulations on a good set of numbers. Can I just take you through two particular questions? One is when you talk about the loan book, Greg, that you saw with SMEs being a greater percentage, Could you take us through color on how that is playing out, the sort of growth rates we can continue to expect into the second quarter? And I realize you mentioned the guidance of the second quarter, but you also mentioned that the levels are sustainable for the rest of the year. So could you just take a step back and take us through where you think this growth from the loan book is going to come from and what the size of the loans has been as possible? And the second question has to do with the far better cost controls that you demonstrated in the quarter. Where it's clear that, and you pointed out that it's lower sales commissions that you're paying out for the quarter, as well as better sales productivity. Can you just take us through these two aspects and to look through the rest of the quarters and whether this is a structural change that we're seeing in the business and we can model the new levels of sales and marketing spend? Thank you.
spk08: Chris, your line's a bit blurry.
spk10: Can I just repeat our questions to make sure we... I'll repeat them as I go, and then I think Wyeth will probably add in. I think on the first question you're asking is really about loan growth that we've seen in the first quarter and that it is sustainable for the balance of the year. Our view is that we're seeing quite good and strong demand from the market. I think we've seen a number of indicators that say that... you know, SME owners, SME businesses are increasingly using money to grow their businesses and not to repay debt. And so I think there's a healthy environment there for our customer base. And so if there's one thing to point to when we look at growth on the second half, we will be prioritizing more on the unsecured side. We see the greatest need there. We also see our greatest competitive advantage there. And so that's something that we will drive a bit more. So that has the benefit of really maintaining the revenue growth in particular into the second half as we meet that demand. On the cost control side, it really is multi-parts, right? So at the top line level, as I mentioned, we are seeing funding costs continue to come down. We are seeing our credit insurance costs coming down, and we expect those credit insurance costs to continue to be optimized because as the new loan book grows as a percentage of the total, then our overall customer mix will have improved. The second thing that goes with that, as you may recall from when we first did the IPO, is that as we move more and more to high-quality SME owners, which now makes up 75% of total new loans, the average ticket size of those loans increase. And so that's really the rate of, I believe, about 10% to 15% increase. which therefore allows us to reduce commissions at a proportionate level without reducing the absolute income of the direct sales. So if you take all that and then the ongoing efforts we're really making on the technology side to really empower our DS more, to bring more of an online engagement with those customers to deepen both on the lending side and other products, That's what allows us to reduce costs while keeping the top line strong. I don't know if you're getting the YS one.
spk11: If I add some more numbers, from January this year, we reduced our sales commission by 50%. But as Greg said, since we reduced price much, our sales size increased accordingly. So as a result, the overall income per direct case didn't change at all. So that monthly income is around 8,500 RMB per month, which is very stable. And then explain more about unique component change. If you compare first quarter this year with the same period last year, our progress in cost improvement is very obvious. Our effective API decreased from, I think, about 29% for New York, and now it's about 23%. But at the same time, funding costs decreased much. It's now close to about 6%, previously about 7%. And the seizure premium, as I said, it was about 9%. Now it's getting close to 6%, which very well indicates Our customer mix has been changing a lot since we reduced the highest APR. And then our EQ impact is basically gone since we changed our price-charging mechanism to towards based on balance charge. So as a result, pay credit is about 10%, which is almost exactly the same as one year ago. So that is why we have so much content about the second half The first half, all more are the particles.
spk09: Can I just ask a question, please? It's very quick, if you don't mind. One of the comments is about the company ball risk of 12.5% of new loans facilitated. How does this compare to the 20% to 30% range you talked about as a percentage of risk that you take on?
spk11: Yeah, so the question about our safe risk-bearing portion, it changed. The first quarter is about close to 50%. But if you look at our March single-month number, our safe risk-taking portion is around 70%. So we plan to complete, we plan to reach about 20% safe risk-bearing portion. for news by the end of June or no later than July. That is our commitment and discussion we had with the regulator. And at the same time, the risk-bearing portion, which is done by PNC CGI, has been gradually reducing. It's gone down to almost 70% by now. So the rates are taken by five other insurance partners, and then 17 partner banks. We have now 52 partner banks, and then out of 52 partner banks, already 17 banks, they joined our risk-sharing model. So going forward, you will see that our set risk-taking portion will go up to 20%, and then PNC will be further declining, and then you will see that a lot more risk will be directly taken by either by partner banks or other insurance partners.
spk04: The next question comes from Thomas Chong with Jefferies. Please go ahead. Thomas Chong, your line is live. Good morning.
spk05: Thanks for taking my questions. Can you comment about the trend in terms of the wealth management takeaways in the long term? How should we think about investors' adoption of higher NAV products, insurance products, and financial advisory services?
spk10: Thanks, Thomas. We would expect the take rate on the wealth management side to improve as we move through the year. And that improvement in the near term and the longer term are a combination of factors. So in the near term, it is really about... continue to increase our service to the higher-end customer, providing more qualified investor product on the fund side and the asset management side. So those are drivers in the near term which are pulling upward our overall take rate. And then if you go out slightly longer term, so if you move kind of more six to 12 months out from today, we would expect the insurance business, the insurance products that we have on the platform should continue to grow at a more rapid pace, and those carry attractive economics for the take rate. And we will then, over the longer term, obviously we're still in the process of looking at the financial advisory license. And once we have that, we expect that there would be a further lift from the mutual fund side. So those are in the near term and in the longer term. But generally, we think you should see continued improvement as we move through the quarters of this year.
spk04: The next question comes from Hans Van with CLSA. Please go ahead.
spk01: Hi, thank you very much for letting me ask questions. I got two questions here. One is about the regulation. Clearly that recently there's a lot of investigations from CBIC regarding the misuse of the consumption loans and business loans from banks for the purpose of property purchase. There's a lot of rounds of investigation going on in Shenzhen, Shanghai, and Beijing. So we're just wondering, does that really have any implication on loosebacks? And how do we usually control and monitor the use of funds? That's number one question. And number two question is really on the other income in the financial statements. Because in the first quarter, there's a noticeable increase in other income. And just want to maybe, can management just elaborate regarding what's the key drivers of the other income here? And can this be sustainable in the future? Thank you very much.
spk11: Okay, Ben. Let me take the first question. Thanks for your very tough question. You know, this model. Our partner banks, as a fund provider, they take the final responsibility for this loan purpose management. However, we do all we can do within our capacity from sales, application, underwriting, and collection. In every stage of operation, we pay high attention to loan purpose management. For example, during the application process, the customer needs to confirm their loan purpose and then they need to sign on the commitment letter that says that the loan process, I'm very aware, loan process cannot go into property market or stock market. And during underwriting process, during unit interview, we ask one more time and we check all other status, we check that interest rate payment account. So if their account is repeatedly used by multiple applicants, they will reject. And then lastly, during correction process, after loan, three months after loan, we check PDO's report, and then if we see a record of new mortgage, then we assume customer use our loan proceeds to buy a new house. Then, according to the contract, customer must repay as soon as possible. So this is what we are doing because we don't have accounts, but with our capacity, we do everything we can do. And to better support our partner banks, Banks are paying also very high attention to this loan proposal management because they are taking final responsibility. And our partner bank requests are a little bit different from bank by bank. Some banks, they want our borrowers to open their title accounts so that they can monitor loan proceeds. And some banks, they want our insurance partners to make early indemnity for the customers of loan purpose violation case. So those we support. However, knowing that our trade size is about 200,000 RMB, so this is quite small trade size which can be used for the property purchase. So we are paying more attention to our secured loan and then those actions we are taking to help and to have our partner banks.
spk10: Hans, on the question of other income, a couple points. One is it's actually directly tied to our core business. And what it involves is the services that we provide to our financial institution partners on account management and also to the extent that they outsource services back to us, such as collections. And so this is a number on other income which we will see continue to be strong at least to the balance of this year. It does also – the reason you see it popping up a little bit is as we changed our overall pricing structure in September last year in terms of how we gather revenue from various partners, you see this increase in other income. But for the purposes of understanding the overall impact on the economics, at least for the balance this year, you will see that level of performance in this line item.
spk01: Thank you very much. Thank you.
spk04: The next question comes from Catherine Lane with JP Morgan. Please go ahead.
spk03: Hi, good morning. Thanks for giving me the opportunity to ask this question. I mainly have two questions. The first one, I would like to ask about the tick rate, because just now management mentioned about that you will pass on some of the benefits of lowering something called an insurance cost to the borrowers, right? So now I think the tick rate has improved back to the first Q2020 level. So what is your target tick rate? How much benefits do you expect that you pass on to consumers? And do you expect tick rates within this year to stay at this level or continue to improve? And within, like, say, two, five years, where do you see the tick rate goes? So this is the first question. Second part of my question is mainly on clarifications of questions asked previously by my peers. So mainly on like the risk-taking portion, because for the disclosure, in disclosure that about 12.5% of new loans, the risk-bearing is a risk-bearing loan by LUVAX. So what is that on existing stock of loans? Maybe you have talked about that just now, but then I didn't get it because the line is a bit blurry. And also that for the portions of risk sparing by third parties, what is the portions on the stock of loans instead of the new loans? Can you just clarify a few numbers on that? Thank you.
spk11: Okay, about the take rate, which explains now our take rate for new business. it's back to about 10% level, which is almost same as last year. And then going forward, we try to deliver 10% take rate, and then we are confident. And then if we can further improve, further optimize our course lines, like funding course, or insurance premium, or our borrow equation course, then we can return a debt to our consumers, so we can be more price affordable and competitive. But my view is, so within this year, as long as we can keep 10% take rate, as long as we have room, we can further reduce our overall API by probably 1% or 2%. But it depends on our on how much we can further save our cost and the funding cost and then our insurance cost. And the second question about the 20% risk bearing. So we explained the four neurons, and then now you want to understand about our balance. So in terms of total balance, because our loans are three years' duration. So although we are taking more set risk-bearing portion, up to 20%, it gradually affects our overall portfolio. So in terms of total portfolio, our set risk-bearing portion is about 8.7% as of first quarter this year. And therefore, Ping An P&T, they take about 82%.
spk04: Thank you. The next question comes from Jackie Zuo with China Renaissance. Please go ahead.
spk06: Thanks for taking my questions. I have two questions to ask. Number one is a follow-up on your take rates. So could you help us go through your unique economics for the existing balance in Q1 and for new loans in Q1 and probably in April? That would be very helpful. And second question is also related to regulation. So regarding the exponential rectification plan, the plan to move their consumer credit to consumer finance company under that license. So I just want to check whether we have any change in terms of our consumer finance license. I just want to check, firstly, our progress, our business finance company subsidiary, and any change towards our business regarding this financial, sorry, this license. Thank you.
spk10: Okay.
spk11: And TechCred, do you want to go first, Wai? Sure. So about TechCred, for hold balance, first of this year, our take rate is 10%. And then, more importantly, if you look at, if you understand our take rate for new business, because that really affects our future profitability. Take rate for new business in the first quarter is also 10%, despite the effective APR is obviously lower than over portfolio. So that means Going forward, 10% take rate can be secured unless we take significant change in terms of to our effective API. So we are coming with 10% take rate throughout this year. And then for new business, second quarter, third quarter, so ASAP, we estimate about 10% take rate for new business without much change.
spk08: Maybe I'll comment on that and then Wyeth can add.
spk10: You know, I think where Ant has come from historically is that what they used mostly was micro lending license and co-lending with bank partners. And now that... the entire industry has to take on more risk bearing. They're obviously at the same time looking for something that is as capital efficient as possible from a leverage perspective. So microfinance companies typically carry a cap leverage of three to five times. There's some differences by geography, but it's roughly in that range. For Ants, to use their consumer finance company that gives them the opportunity to bear risk at a 10 times leverage for capital. So I think that's why you see Ant and their various announcements moving their model more towards a consumer finance license. Our risk-bearing, as Chairman Gee mentioned, is really done through a guarantee company that operates nationwide. And that guarantee company, where we're bearing the risk of up to 20% on all the loans going forward, operates at a 10 times leverage ratio. So for us, we've already achieved what we think in the market is kind of the best guarantee. efficiency in terms of bearing risk and then putting capital against it. So given our business model is different, Right. And the Ant business model has been around traditionally those smaller ticket, shorter duration loans that does fit well under a consumer finance license. Our business model, which has been focused on the small business owners, larger tickets, relatively speaking, for longer duration is best suited by the use of the guarantee company. So I think, you know, things that Ant are doing and versus what we do, they're driven by different factors. Right, right. Very quick.
spk11: So if we choose between small loan license and then consumer finance license. Obviously, consumer finance license is better in terms of leverage ratio, and then you can also do a nationwide loan disbursement, right? No regional limitation. But our case, just to understand, our borrowers, the average ticket size is way above $200,000. Many of them get $300,000 and up to $1 million for unsecured loans. But a constant finance license, it does not support a larger TK size lending. The maximum TK you can do with this constant finance license is $200,000. Actually, with regulatory window guidance, it has to exceed $50,000 on the TK size, which is not very applicable to our current business model.
spk10: So I think the result of that, I think that the back part of your question is today the consumer finance balances as a percentage of total is less than 1% of our facilitated amount. It's a new business. It's got about 300,000 borrowers. As we move in the second half of this year to integrate more our online services across wealth and lending, We believe the consumer finance license will be very helpful to serving a lot of our wealth customers on some of their consumption needs. So we would expect the business to continue to show healthy growth, but as a percentage of the total, even by the end of this year, it will still be probably less than 2%. Thanks, Ben.
spk04: The next question comes from Xiao Huang with Morgan Stanley. Please go ahead.
spk07: Hi, thanks management. Congratulations on the solid quarter. I have basically two questions. The first one is, related to the low economics of the loans that we are providing guaranteed as we move closer to the 20% risk-taking. So basically, I want to ask how much in terms of the loan balance that we are taking a risk, how much we can charge on the top line level, and then how much we can charge in the provision cost in terms of the loan balance that we are taking risk. And the second question is in terms of the overall industry. So if you view the SME loans and the asset class, I want to help the management think of the supply and demand side of this industry with all the regulatory changes and the changes of players. How do you see the supply of these assets and the demand for these assets evolve over time? And that's my question. Thank you.
spk11: Yeah, for guaranteed portion 20%, I don't emphasize. No matter you take 20% or 25% or 30%, it does not fundamentally change our flexibility. If you take more credit risk, it comes with risk premium. So actually, it can be a little bit more flexible by taking more risk. And then ice cream, for the whole portfolio now, we have about 8.7% risk taking. And then for new business, about 70%. about industry, supply and demand. Demand are huge, that we all know, about 60 trillion, more than 60 trillion of demand. But supply, we see that, yeah, for unsecured larger trade sites, these are pretty long. We don't see much competitors. We don't see any other companies who are providing similar services for small business owners. Either they do, like other banks, We see that more and more banks, they're getting to this market with secured products. So that's a pressure that we get when our secured are paralyzed. But our major business line, unsecured largest case size business operation alone, that we still do not see any surprise from banks or other internet finance companies. So I think this market is pretty much secured, very competitive. And then I don't think it's easy for others to get into this market. You also have to meet several preconditions, like offline channels, underwriting model, and the collection infrastructures, all of those things.
spk04: This concludes the question and answer session and today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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