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Lufax Holding Ltd American Depositary Shares, each representing two (2) Ordinary Shares
Q2 2021 Earnings Conference Call
8/10/2021
spk03: Ladies and gentlemen, thank you for standing by and welcome to the Lufix Holdings LTV second 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 Q&A 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.
spk04: Thank you very much. Hello, everyone, and welcome to our second 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. Qi Guangheng, who will start the call with some general updates on our achievements, share our thoughts on recent regulatory developments and industry dynamics, and provide our plans for future business. Our co-CEO, Mr. Greg Kip, will then provide a review of our progress and details of our development in the quarter. Afterwards, our CFO, Mr. James Jones, will offer a closer look into our financials before we open the call for questions. In addition, Mr. Weiss, 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, and we'll be making forward-looking statements Please also note that we will 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 filing to the FTC. With that, I'm now pleased to turn over the call to Mr. Yi, Chairman of Lufax. Hello everyone and thank you for joining our 2021 second quarter earnings call. I will start with some general updates on our achievements in the first half, then share our thoughts on recent regulatory development and industry dynamics before providing our plans for future business. First, updating the first half. Generally speaking, all the Chinese ADR stock prices have seen increased volatility recently due to changes in macro policies and market conditions. At LuFact, we managed to deliver improvements in our operating performance, regulatory compliance, and corporate governance in the first half. First, we achieved high-quality growth in our core business. For the first half, our total income increased by 17% year-over-year, and net profit increased by 33% year-over-year. Later in the call, Greg and James will elaborate more. 其次,若控基金响应监管的要求,在二季度基本上完成了P2P的产品清零,实现网贷业务良性平稳的推出,业务合规性进步加强。 Second, we responded to regulatory calls by phasing out our peer-to-peer product in a smooth and compliant manner. In the second quarter, we substantially completed the runoff legacy peer-to-peer product, and further strengthened our regulatory compliance. Third, the control and management of the company is constantly improving. High-efficiency has completed the reorganization of the board, set up risk control, consumer protection, and ESG and other key areas of the system committee. Third, we continuously enhance our corporate governance by restructuring our board of directors and establishing committees in key focus areas, including risk management, consumer protection, and ESG. We will also be actively advancing the establishment of our ESG system. Fourth, the company announced a $300 million stock repurchase plan on May 24 this year. Until June 30, this repurchase has been basically completed. The entry-level management team also completed a $5 million refund with free funds. Fourth, on May 24, 2021, our company announced U.S. $300 million of share repurchase. As of June 30, 2021, we have substantially completed the repurchase. In addition, our senior management purchased U.S. $5 million worth of shares using their personal funds. Although the market is still uncertain, While there are still uncertainties in the market, our stable profitability strong operating cash flow, abundant cash reserves, and the actions we took to pivot our business based on our understanding of regulatory requirements all give us strong confidence about our future prospects. As such, I'm pleased to announce a new share repurchase program of US$700 million over the next 12 months. bringing our total price program to US $1 billion. In addition, we are actively evaluating other options to return shareholder value going forward. Second, the analysis of regulatory development and market dynamics. Since the release of the third quarter report, the country has continued to intensify its monitoring of the platform economy, including requiring the network platform's personal information to be directly linked to financial institutions, controlling the personal loan rate within 24%, and issuing a global opinion guide on how to monitor the security of the network, etc. Since our Q1 earnings announcement, the Chinese government has continuously tightened supervision of technology platform companies. These include the direct sharing of borrowing information by online loan facilitators and co-lenders with financial institutions, mitigating an all-in cost ceiling of 24% for consumer loans, and publishing the draft version of the amended cybersecurity real measures for public consultation. Lufac has always been close and constant dialogues with regulators to fully grasp the latest regulatory trends, intentions, and requirements. and make sure relevant authorities are fully aware of our business model and development in key areas. I'm pleased to report that so far we have maintained open communication lines with all levels of regulators with satisfactory frequency and results. Despite recent influx of new regulations and policy interpretations, our business has not been materially affected. Moreover, our business model offering results have remained resilient. Now I will address a number of questions that attracted recent attention. The first topic is the sharing of borrowed data by loan facilitators and co-lenders directly with financial institutions. The first topic is the sharing of borrowed data by loan facilitators and co-lenders directly with financial institutions. The recent media reports speculated that the CBIRC will prohibit online credit facilitation platforms from sending directly to their partner financial institutions forward data. including personal information voluntarily submitted by borrowers, data generated as part of the platform's process, and other borrowing information provided by third-party vendors. Our incorporation is that it aims to regulate the consumer credit scoring process, emphasizing that credit assessment data from internet platforms must be transmitted solely to licensed credit agencies. They can be used as a medium-sized insurance company, and they can be used for retail business. They can be used for retail business, and they can be used for retail business. They can be used for retail business, and they can be used for retail business. They can be used for retail business, and they can be used for retail business. LUFAC has been utilizing its licensed guaranteed company to conduct its retail credit facilitation business and perform credit assessment authorized by our partner banks. In full compliance with the banking sector financial institution and financial guaranteed company business cooperation guide, we refer potential clients to our banking partners, transmit the guaranteed company's approval results, and share timely updates on post-origination repayment status. As such, every aspect of our business cooperation is standing in accordance of the current guide and is thus different from an unlicensed company's loan facilitation model. In the meantime, we will have constructive dialogues with the regulatory authorities to seek their feedback and guidance. We are also prudently exploring the viability of applying for a credit scoring license or cooperating with third-party credit scoring companies. Because the mandatory completion of credit scoring reform is set to the end of 2022, there should be sufficient time for both regulatory authorities and market participants to test new models and make adjustments. Based on currently available information, we believe whether to cooperate with third-party credit scoring companies will not materially impact our business model or profitability. The second topic relates to consumer borrowing cost. The second topic relates to consumer borrowing cost. From September last year, Rukong began to set up in advance, actively reducing the cost of new loans to 24% Next, the company will deliver the trend of supervision, actively exploring and applying technological methods to solve the problems of small and medium-sized enterprises, financing difficulties and financing costs, and increase the operating efficiency to ensure the company's profit and loss level. At the end of July, some media reported that regulatory authorities would require financial institutions, including consumer finance companies and banks, to implement an all-in cost ceiling of 24% for personal lending. From our perspective, we think that this new requirement has crystallized the direction of loan pricing and eliminated potential uncertainties. Since September 2020, we have been preemptively implementing an all-in-cost ceiling of 24% for all new loans we facilitate. Going forward, we'll continue to follow regulatory directions, leverage technology to broaden small and micro business owners' access to cost-effective financing, and maintain our own profitability by improving our operating efficiency. The third topic I would like to discuss is cybersecurity. Since July, regulatory authorities have been conducting special orders on several internet platforms in accordance with cybersecurity review measures, demonstrating the nation's heightened attention to cybersecurity and data safety. Wacom has organized a learning and development inspection in the first period of time to ensure that our business-level data processing activities are legal and legal. Wacom has passed the certification of the International Information Security Management System, ISO 27001, and obtained the national Ministry of Public Security's standard of information system security protection for three cases. To ensure full regulatory compliance about data processing business operations, we promptly conducted debriefing seminars and performed internal reviews. LUFAC achieved the internationally accredited ISO 27001 certification for information security management and the Level 3 registration certificate from the Ministry of Public Security of China. Going forward, we'll continue to strictly adhere to policy requirements and ensure regulatory compliance in all key aspects of operations, such as network equipment and service procurement, critical data reviews, and many others. The fourth topic is market development and competitive dynamics. In recent years, a number of Internet platforms and traditional financial institutions have jumped into the foray of serving small and micro business financial needs. Some platforms have started to copy the old-school business model that we pioneered. On the one hand, this validates the attractiveness of our business segment and the effectiveness of our auto model. On the other hand, intensifying competition challenges lose factors to perform even better. We believe that in the past 16 years, Rokon has already established an efficient offline team, developed a complete management mechanism, and developed a wind control model that meets all market challenges. These results are our strong business core. It is difficult to copy the industry in a short period of time. Over the past 16 years, we have built a highly effective offline sales and service team, a comprehensive management system, and a proven risk management model stress-tested over multiple market cycles. That combination serves as high barrier to entry and precludes peer replication within a short period of time. At the same time, increasing competition also motivates us to work harder, ensure regulatory compliance, innovate with prudence, advance our technology, and fortify our industry leadership. Third area, development plans for the future. based on our analysis of regulatory intentions and industry dynamics, we believe competitive focus will gradually shift from volume growth to quality growth. Consequently, we are determined to uphold the following three principles to keep our operations fully compliant, to create value to society, and to advance our technology. 第一,堅持 貫徹合規經營, 堅決執行監管的要求。 由於金融DNA可對合規的高度重視, First, we shall keep our operations in full regulatory compliance and strict policy adherence. As an organization with financial DNA, we have always prioritized regulatory requirements. and operated in a compliant manner. Based on our principles of preemptive diagnosis and swift operational adjustments for timely, optimal results, we plan to continue enhancing our communication with regulatory authorities so that we can keep a close tab on the course of regulatory development and timely execute our policy requirements. Second, we must create social values and serve the small and medium-sized organizations and central agencies. Second, we shall keep creating value to the society by providing quality financial services to small and micro-business owners as well as the middle class. As of June 30, 2021, Lufax had cumulatively provided credit facilitation services to more than 15.5 million borrowers, with an outstanding loan balance of more than 600 billion RMB. Over the past five years, we have effectively satisfied small micro-business owners' financing needs by facilitating nearly 2.3 trillion RMB worth of loans. At the same time, we have also launched specialized small and medium-sized assistance projects, mainly for the retail industry, the food and drink industry, the manufacturing industry, and other labor-intensive industries, to create a large number of jobs for society. In support of rural small and medium-sized businesses, we cooperated with the Chinese Women's Development Fund, and distributed agricultural funds to women entrepreneurs and cooperatives in rural areas, and supported rural revitalization. Recently, we launched special assistance plans for small and micro companies, mainly aimed at supporting companies in labor-intensive industries, such as retail, hospitality, restaurants, and manufacturing, creating a significant number of employment opportunities. For small and micro agriculture businesses, we are working with the China Women's Development Foundation to distribute our Farmer's Assistance Fund to rural female entrepreneurs and cooperative leaders. As a result of this work, we are making meaningful contributions to the economy of rural areas. 未来,路控将提供更多符合小微企业组需求的产品,通过科技更高效地触达小微企业组,简化申请流程,提高审核的效率,进行普惠金融,服务实体经济。 Going forward, LoopX will provide more products and services catering to the needs of small micro-business owners, leverage technology to reach customers more effectively, simplify loan application process, improve efficiency in reviewing and approving online loan applications, fulfill our commitment to financial inclusion, and support the nation's economic development agenda. In our wealth management business, Lufax operates as an information and empowerment platform to help the Chinese middle class manage their wealth. LoopX will continue to provide a variety of financial products, optimize product matrix composition, enhance customer experience, improve service quality and efficiency, and contribute to our clients' wealth preservation and growth goals. Thirdly, we shall empower our business development and quality improvement through technology. In adherence to our principles, auto integration, multi-service offering, and customized solution, we have continuously advanced our technology in big data, artificial intelligence, and others. In retail quarter facilitation, we have launched an AI-powered slot loan solution named Xingyun. In wealth management, we are promoting an intelligent customer service solution aimed at improving user experience. All these solutions demonstrate our ability to enhance our financial services efficiency by leveraging technology. In summary, although the future road is full of challenges, as long as we insist on implementing the rule of law, insist on creating social values, insist on improving the road of technology and the level of technology, we believe that the road will definitely lead to a successful road with its own characteristics. In conclusion, although our road ahead is not without challenges, we are confident that we will be able to lay our own unique path to long-term sustainable success by maintaining operational compliance, generating social value, and continuing technology advancement. With that, I will now turn the call over to Greg, who will share our business updates for the quarter. Thank you, Chairman Gee. Although the regulatory environment continues to transform and some uncertainties remain, our business performance is sound. Let me get straight into the key figures, noting that all numbers are in R&D and all comparisons are in a year-on-year basis unless otherwise stated. Our profits in the first half reached $9.7 billion, up 33.4% versus a year ago. Our second quarter profit was $4.7 billion, up 53.2% versus a year ago. Our second quarter revenues of $14.8 billion grew 17.3% versus last year. Our second quarter total operating expenses of $7.1 billion decreased by 1.7% for the same period. As a result, our net margin reached 31.9%, a 7.5 percentage point improvement over the second quarter last year, driven by ongoing improvements in operations and technology. We are confident that profit growth levels in the first half will be sustained throughout the balance of this year. On the back of this solid performance, it is important to note our strong balance sheet and cash position. As of June 30th of this year, our net assets reached $91.1 billion, of which approximately $42 billion are liquid assets maturing in 90 days or less. Our net cash flow has increased by $9.6 billion in the last 12 months. This strong position allows us to do several things. First, it provides us with a resilient ability to meet any new capital requirements that may come from regulatory changes. We believe that in lending facilitation, all platforms, regardless of business model or customer segment, will ultimately be required to bear 20% to 30% of related credit risks with a capital leverage of no more than 10 times the proportion of shared risk. In the second quarter, excluding the consumer finance subsidiary, we bore credit risk on 16% of all new loans facilitated, and we have more sufficient capital to increase levels if needed. Second, our strong profitability provides multiple avenues to generate value for shareholders. Today, we announced that we will extend our corporate buyback program, initiating a new plan to repurchase U.S. dollar 700 million of shares over the next 12 months. We continue to explore other avenues to return more value to shareholders over time. Third, our resources allow us to continue to invest in and enhance our unique business model. For the sake of general understanding, I'd like to highlight three aspects of our business model and the developments currently underway. First is our unique O2O direct Salesforce business model, which allows us to unlock the unmet borrowing needs for China's small and micro-business owners. In the second quarter, excluding the consumer finance subsidiary, 77.6% of new loans facilitated were to small business owner segments. We continue to find that our direct sales force of more than 58,600 professionals is the key to reaching the small business owners. And building required levels of trust serve their larger and long-term lending needs and being able to match an array of unsecured and secured products to their diverse business and industry purposes. In the second quarter, new loan sales reached $152.7 billion, growing 11.1% versus a year ago, in line with prior guidance. During the quarter, new loan sales from other channels slowed down a little. However, the increased new loan volume from our own direct sales teams has offset the weakness in other channels, thus demonstrating the resilience and flexibility of our direct sales team as well as the strengths of our O2O business model. Furthermore, with continued technology upgrades, we have greatly improved the productivity and efficiency of our direct sales teams. In the second quarter, 6.5% of new loans facilitated were in a new secured auto lending product, demonstrating the ability of our OTO direct sales to capitalize on changing market conditions and customer relationships. The productivity of our direct sales force increased 10% over the last 12 months. We continue to invest in new risk, data, industry insights, and technology tools to further enable our unique O2O sales force to tap this hard-to-reach segment, which we believe could not be efficiently served through a pure online model. A second unique aspect of our business model is how we deploy our licenses. This has become an increasingly important factor in the tightening environment to satisfy both regulatory and funding partner needs. All new loans that we facilitate today either flow through our guaranteed companies or our consumer finance license. Our guaranteed companies with operations all over the nation except Tibet, Minsha, and Yunnan provinces allow us to share credit and process data flows with our more than 65 national and local funding partners under well-established legal frameworks. The deployment of these licenses together with successful tapping of the ABS and interbank ABM market has helped the ongoing optimization of funding costs for the first half this year. We are now actively exploring new collaboration to meet expected credit rating license usage requirements that will come into effect by the end of next year. A third unique aspect of our business model is that we seek to serve our customers across a full range of financial services, not just lending. While our wealth management platform is a smaller contributor to total company revenues today, the China wealth management market is witnessing substantial new growth as customers and providers are adjusting to full implementation of the new asset management regulations and a new framework for cross-border investing between China's Greater Bay and Hong Kong. Our domestic wealth of insurance serving primarily the affluent The emerging affluent continues to grow with client assets of $421.1 billion as of June 30, 2021, expanding 12.4% versus a year ago and expanding by 28.8% if excluding legacy P2P assets, which have now been substantially run off. Our platform in Hong Kong is currently entering new partnerships in preparation for the rollout of greater-made policies. In the third quarter of this year, we will merge our online client interface for all followers and investors to deepen services to all customers across small business owner lending, consumer finance, wealth management, and protection and pension insurance. Company analysis suggests many of our small business owners are middle class and emerging affluent customers, and a notable proportion of our wealth customers are small business owners. With the rapidly changing operating environment, we believe our capital strength and unique business model, combined with our deep financial credit experience and commitment to compliance, will allow us to remain resilient. Before turning over to James to go through the detailed operating and financial performance and second-half guidance, I would like to highlight one final figure. We have continued to make progress in bringing down APR to our borrowers with the second quarter APR for the overall portfolio reaching 24% versus 26.7% a year ago. This reduction has been executed without negatively impacting our net margins. In the medium term, we will seek to lower our APRs but keep our net margin steady by driving down relevant operating, credit insurance, and funding expenses. I will now turn over the call to James John, RCFO. Thank you, Greg. I will now provide a closer look into our second quarter operational and financial results. Before I begin, please let me remind everyone that all numbers are in R&D terms and all comparisons are on a year-over-year basis. And that's why the right is stated. Our second quarter 2021 results are characterized by strong business growth, continued operations improvement, and extended profit margins. Our total income increased by 17.3% to 14.8 billion, while our core business income, excluding investment income, grew by 19.1%. Our net profit increased by 63.2% to 4.7 billion, exceeding our earlier guidance of 3.7 to 3.9 billion. Our net margin reached 31.9% in the second quarter, a 7.5 percentage point improvement from the second quarter of 2020. Work-wise, our continued growth and profitability are four key factors. First, we further optimize the unit economics in our retail credit facilitation business, even as we reduce our all-in costs. Our loan balance APR declines, by 2.7 percentage points to 34% in the second quarter of 2021, from 26.7% in the second quarter of 2020. While our take rate based on those values improved to 9.7% from 9.5%, and our net margin also extended over the same period. This achievement is a result of four initiatives. we continue to increase our number of banking partners and diversify our funding sources, which has allowed us to obtain cheaper funding from partners with better asset quality. Second, the credit insurance premium on our loan portfolio has also been reduced as our insurance partners took the better credit and the cut in quality into consideration to lower their pricing and then adopt a greater portion of the credit risk. Third, the early payoff effect decreased the user conveyance because we have changed the way we charge our customers. Fourth, we achieved significant efficiency gains in our self-marketing as well as our operations. As a result, we are confident that even if we reduce our ATR service into the future, we should be able to maintain the stability in our take rate and net margin in retail credit facilitation. Second, we maintained a strong pace of low volume growth coupled with business mix improvement. On the retail credit side, we grew our new low sales by 11.1% to $152.7 billion during the second quarter of 2021, in line with our previous guidance of $145 to $155 billion. At the same time, we continue to focus on serving small business owners and improving the risk profiles of our borrowers. In the second quarter, excluding our consumer finance subsidiary, 77.6% of new loans facilitated were dispersed to small business owners, up from 72.6% for the same period of 2020. High-quality borrowers, defined as G1 to G3 borrowers by our own internal classification system contributed 63.7% of the new general unsecured loans facilitated in the second quarter compared to 59.4% for the same period of 2020. On the revenue side, our total client assets increased by 12.4% to $431.1 billion as of June 30th, 2021, exceeding our previous guidance target of 12.1% growth for $420 million. Side assets contributions from mass affluent customers who invest more than $300,000 further increased to 18.2% as of June 30, 2021, up from 76.3% as of March 31, 2021. Third, we continue to make progress in executing our plan for a more sustainable risk-hearing belief model. Loans where we did risk accounted for 16% of new loans facilitated in the second quarter, up from 4.4% in the same period of 2020. New loans facilitated with guarantees from T&C accounted for 76.3% of new loans facilitated in the second quarter, down from 89.1% a year ago. While our funding partners bore the risk for 4.8% of new loans facilitated in the second quarter. As of June 30th, 2021, our outstanding balance of loans facilitated with guarantees from third-party credit enhancement partners had decreased to 84.3% from 94.3% a year ago. All of the affirmation operating metrics exclude those of our consumer finance flexibility. At the same time, we continue to sharpen our focus on improving our asset quality. In the second quarter, our C2M3 flow rate for all loans facilitated was 24% versus 25% a year ago. The 30-day past year deficiency rate for all loans facilitated was further improved to 1.9% as of June 30th, 2021, from 2% as of March 31st, 2020. The 90-day past due increasing rate for the total loan facilitated stabilized at a 1.1% as of June 30th, 2021, on par with 1.1% as of March 31st, 2021. All of the affirmation operating metrics exclude those of our consumer finance history and the measuring product, which would represent roughly 1% of the total loan status. Four. we substantially completed the runoff of legacy P2P products in our work management business. During the quarter, current assets from legacy P2P products were reduced to $44 million from $4 billion in the previous quarter, effectively completing our business transformation. Meanwhile, our fixed rate for the segment was 31.8 BPS, increasing by 3.6 EPS from the previous quarter. These improvements were primarily driven by our continued development in standard wealth insurance products, offset by a decrease in deposit products.
spk01: Now let's take a closer look into our second quarter financials. During the second quarter, our total income increased by 17.3%
spk04: and our core business income, excluding investment income, grew by 19.1%. On the back of this growth, our business and risk-sharing model continue to evolve, driving a change in the revenue mix of our retail credit facilitation business. For example, during the quarter, while the platform service fee decreased by 8.8% to $9.2 billion, our net interest income grew 98.7% to $3.2 billion, and our guaranteed income grew by more than 800% to $891 million. In addition, other income, which is directly linked to delivering services to our financial partners, increased by 205.1% to $1.1 billion. As a result, our retail credit presentation platform service fee as a percentage of total revenue decreased to 62% from 79.8%. In addition, as we continue to utilize consolidated trust plans, which provide lower funding costs, even more funding operations, our net interest income as a percentage of total revenue increased to 21.8% from 12.9% a year ago. Moreover, as we continue to bear more credit risk, we generated more guaranteed income, causing our guaranteed income as a percentage of total revenue to reach 6%, as compared with 0.7% a year ago. By expanding our 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 7.2%, from 2.8% a year ago. Our investment income decreased by 83.2% to $37 million in the second quarter from $220 million in the same period of 2020, mainly due to losses from the change in fair value of assets. On the wealth management front, our platform transaction and service fees increased by 39.9% to $407 million in the second quarter from $291 million in the same period of 2020. This increase was mainly driven by the increase in fees generated from our current products and services. Now, moving on to our expenses. In the second quarter, total expenses grew by 2.2% to $8.5 billion. Excluding credit impairment losses, financial costs, and other losses, total expenses actually decreased by 1.7% in the second quarter, underscoring the steady improvement of our operating efficiencies across most business areas. Our sales and marketing expenses, which include expenses for borrowers and investor acquisition, as well as general sales and marketing,
spk01: decreased by 6.3% to 4.3 billion in the second quarter.
spk04: As a result of our efforts to further optimize our sales productivity and sales conditions, as well as the higher base in the second quarter of 2020, due to non-recurring expenses, Our borrower acquisition expense, which are major components of our total sales and marketing expense, decreased by 19.5% year-over-year to $2.6 billion. In addition, our investor acquisition and retention expenses also decreased in the second quarter, mostly due to our optimization of investor acquisition channel costs. Our general sales and marketing expenses, which are mainly comprised of payroll and related expenses for marketing personnel, brand promotion costs, consulting fees, business revenue costs, as well as other marketing and advertising costs, increased by 33.8% to $1.5 billion in the second quarter from $1.1 billion a year ago. This year real increase was largely due to the lower base in the second quarter of 2020 resulting from the social security relief during the COVID-19 outbreak in the same period. Our general and service expenses increased by 21.1% to $798 million in the second quarter from $659 million a year ago. This increase was mainly due to the lower base in the second quarter of 2020 and headcount expansion in the second quarter of 2021 to support our new business development initiatives, including the development of our consumer finance business. Our operation and services expenses decreased by 3.3% to $1.48 billion in the second quarter from $1.53 billion a year ago. This decrease was primarily due to a decrease in post-origination management expenses driven by our improvement in management collection efficiency and partially offset by the increase in the trust plan management expenses resulting from increase in usage of consolidated trust plans.
spk01: As we maintain our commitment to investing in technology research and development, our technology and analytics expense increased by 18.6% to $517 million in the second quarter.
spk04: Additionally, our credit impairment losses increased by 133.5% to $1.4 billion in the second quarter from $597 million a year ago. This was due to the continuing evolution of our business model which led to increased loan-related risk exposure and higher upfront credit impairment losses. It is worth noting that the increase in impairment losses is purely a function of the increase in the proportion of the credit risks borne by us, while the overall credit profile of our borrowers has continued to improve, as mentioned earlier. Our finance costs decreased by 37.4% to $276 million in the second quarter from $441 million a year ago, mainly due to the decrease in our balance of convertible bonds, which led to lower borrowing costs and increase in interest expense resulting from the increase in deposits. As a result of foreign exchange rate gains, we booked $301 million in other gains for the second quarter of 2021, while our effective tax rate decreased to 26% from 29% a year ago. Consequently, our net profit increased by 53.2% to $4.7 billion in the second quarter from $3.1 billion a year ago.
spk01: Meanwhile, our basic and diluted earnings per ADS were 2 RMB and 1.9 RMB respectively in the second quarter of 2021.
spk04: As of June 30th, 2021, we had a cash balance of 29 billion compared to 24 billion as of December 31st, 2020. Net cash flow from operating activities was 2.1 billion in the second quarter of 2021. Now turning to our guidance for the second half and the full year of 2021. For the second half of 2021, we expect our new loan facilitated to be in the range of $324 billion to $340 billion, and the client assets to be in the range of $450 billion to $460 billion. Meanwhile, as we maintain our growth momentum and continue to improve our operating efficiency,
spk01: We expect our total income to be in the range of $31 billion to $31.3 billion, our net profit to be in the range of $6.6 billion to $6.8 billion in the second half of 2021. This translates into a year-over-year net profit growth of 32% to 36% for the second half of 2021 and a 33% to 34% for the full year 2021.
spk04: These forecasts reflect our current and preliminary views on the market and operational conditions, which are subject to change.
spk01: This concludes our prepared remarks for today. Operator, we are now ready to take questions.
spk03: Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. Your first question comes from Winnie Wu from Bank of America. Please go ahead.
spk02: Thank you very much for giving me this opportunity and congratulations for a solid second quarter result. I guess two things. First, in terms of the credit business, can you provide the latest number in terms of the effective APR in second quarter this year, both for the new business and also for the total outstanding loan balance? So the APR and then the breakdown of funding process CGI and EPO. Second question is related to what Chairman Hsu talked about on the information and the credit license, credit bureau or credit scoring license. Can you talk about any progress, any application, if you are applying for the credit scoring license, any expectation on that? And also, with the new regulation restrictions on the usage of credit information, is that going to impact how much credit data Lufax is able to access? or the scope of data that you're able to leverage on and that is going to impact your credit scoring. Thank you very much.
spk04: Thanks, Winnie. I think on your first question, what we have just disclosed for the second quarter on the overall portfolio is that the APR is 24%, and that's down from 26.7% a year ago. We don't disclose the rate for the new loans, but what you can very clearly calculate is in order for us to go from 26.7% down to 24%, that means that the new loans that we've been issuing, clearly ones have all been below 24%, and at least a couple hundred basis points below 24% in order to get that overall average of 24%. And so this is something that we've been doing for some time and will continue to execute on. Yeah, probably what I can add is, if you look at this part, even this number, if you look at our unsecured neurons, our APR decreased by almost 6% from vulnerable. But our case rate remained almost unchanged, so then I would say. And to answer your second question about the data sharing with banks, we are a credit license company. We met PBOC a few times. So we have two questions. The first is whether we need a credit license. The outcome process of data collection and sharing with partner banks is fully within, it's perfectly within J&T Business' approved scope. So we think we don't need this credit license. If we need, it means that all other energy companies or other insurance companies who see TGI business, they all need this credit license. But in fact, we need, we can apply for a new license while we can join others as a shareholder. But so far, we haven't been able to confirm whether we need to have this license or not. The second question we have here is, then what process do we need to change to follow this regulation? We might need to share our data with fund partners through the company who has credit license going forward. And this regulation becomes effective from the end of last year. Next year. Next year. Next year. And now we are working with one credit line company, and then working on a new process. So we're testing already within first half next year, and then just in case we need to change the process. But it's not confirmed yet. We are working on it. But in terms of scope of data, why is it that we can access or we need to use? Does it get impacted by this new structure? There's one small impact. How we collect data, there are three types of data. The first is personal information that we collect directly from borrowers, that is personal change. And the second data is the previous data. They can directly get this data from previous, personal change. But for the type, like other, the customer's financial data, insurance data, How do we collect those proportional asset data that we have to collect through the company's credit license going forward? That is our understanding. So, in a word, we don't have much impact on our business. Yes, you can report who you are first. The first question is from our new CEO, Vice. In fact, as he just said, we have been communicating with the people's bank credit department. And the communication is quite smooth. So far, we have not been affected by the whole business model, including the collection of information. In fact, I think the credit management department is more concerned about the fact that we have obtained a lot of information. After that, our information is only for our own use, or is there an external output, or even a problem of using information wirelessly? This is what I think the authenticity department is most concerned about. In fact, we don't have this. We do have a lot of information. Even if others find that we want to cooperate with them, we will not cooperate. But in fact, the authenticity management department is also asking us whether they are willing to share their information with the real estate professional companies in the future. We told them that if the People's Bank has a request, we are willing to share it, but it must be under the request of the People's Bank. So I think so far, the real estate management department of the People's Bank is concerned that we get this information voluntarily. Han said it would accumulate, store, and sell. This is one. In addition, he admitted that our current business model is different from other small companies. Our business model is very special. So at present, I personally think they have no final decision. We are still in constant discussion. If there is any progress in this aspect, we will immediately report to the market. So it was Vice Chair, our co-CEO, responsible for RECAL credit facilitation, Lenny, who just answered. On top of that, I just want to add that we are maintaining very active dialogue with the credit scoring bureau of the PBOC, all the relevant key decision makers within the bureau. So far, there's no material impact to our business model, and based on what they've indicated to us, there's no need for us to change now. I think their key focus is on, you know, the data or the information you collected, whether you just use it for yourself or do you actually pass it on to external parties or, in some cases, even monetize on that data. We believe that's their key focus. They are also asking out to our reviews whether we'd like to share our data with credit bureaus. And our response was, look, if there's a PBOC requirement and everybody's required to do that, we will comply. Again, their key focus is on whether we accumulate whether the data we accumulated or stored is just for self-use or will be passed on to third parties or even self-work. Of course, that's something we'll never do. They also recognize that we run quite a different business model by our guaranteed company. So, so far, that's the communication we've all had. We don't need to make any changes right now. We'll continue to have those conversations and let the market know if we see anything otherwise.
spk03: Thank you. Your next question comes from from media. Please go ahead.
spk02: Okay, thank you for taking my question. 我先用中文問一下 還是問一下紀總 關於監管方面的 剛才因為Vini已經問了 我想再clarify一下 再繼續追問一下 一個是剛才說到新聞報導的 就是說斷直聯 這個意思是說 金融機構 就是持牌的金融機構 以後也 um um We just talked about the general judgment. The issue of authenticity may not have much impact on our business. Of course, it is not in the short term yet, because it is also until the end of next year. In the long term, if there is not much impact, it is based on what kind of judgment. It may not have much impact. We just talked about authenticity and license plate. How do you cooperate with the third party? This is also one of the problems of supervision. Secondly, we also talked about the 24% ratio just mentioned, because it is now 24%. The current supervision guidance says that all of them, including small and medium-sized companies, are down to 24%. Is there any further pressure to continue to go down in the future? Taiwan Taiwan Taiwan exposure 持有風險的超過百分之二十吧 咱們以後監管不知道是不是還有指引 是不是把這個數要提高到百分之三十 或者是已經更高呢 這就是我幾個關於 regulation 的監管的問題 我要翻譯一下嗎 還是不曉得
spk04: Thank you for your question. We are still in the process of questioning. Actually, I would like to talk about a big concept, which is the communication of the whole supervision. I just summed up a few points. That was my own summary. I think that the communication between us and the whole supervision is still relatively smooth. I think it includes density and level. I think it includes their recognition of us. In fact, it includes rebuilding the trust. This is very important. Including the 429 platform, I think the whole communication, the communication of the 13 platforms, I think we are all, I think including our self-reporting report, I think it is more recognized above. Then you talk about a few specific ones, such as the issue of short-term contact. We say that so far, we have been working with the People's Bank of China, In this process, we use insurance to open up the industry. In the past, there was a clear business guide. You can see that I just told you that there is a bank, financial institution and financing insurance company business cooperation guide. This is very clear. In this process, there is a recommendation of each other, and mutual understanding of each other's requirements for customer integration. So in this process, I think the whole supervision department We need to have a clear judgment that I must have a true guidance. This matter is actually our own judgment. We feel that it may not be necessary at present. But the report of me and my team and the supervision department is that the final decision is based on the定性 of the supervision department. That is to say, to a certain extent, if we say that the supervision department thinks that we must We can't give our information directly to banks or new financial institutions. We have to go through a real-estate institution. In fact, we have our own plans. As you just said, one of them is to go through the third party. The second is that we have to take the railways by ourselves. So these two, we currently have a plan. Specifically, you just asked a very detailed question, is it through Ping'an to take it, or we can take it by ourselves, or we can do it together with others. I think I may not be able to talk about this in detail because I don't have a full-length recording. But I want to tell you that we have a very good communication with the government. Thank you. No matter what way, I think it's enough to be able to meet the entire demand of the market. I personally think there is no problem with this. I think it's... And in fact, after the concept of cut-off-time chain was proposed, in fact, the market needs a small number of people. You can see that after the main leader talked about the concept of cut-off-time chain, there is no further interpretation at the moment. So I think the whole management, the management department, in particular, China China China China China China There is a problem with financing. In our country, from the government to the supervision, and our entrepreneurs, and our borrowers, I think it's a common wish. I think in the future, we should gradually lean towards low cost. So this low cost needs to be achieved very quickly and very intensively. Personally, I think this needs to be eliminated by the market. Because all the markets have a main body. I think we all need to have the ability to handle it. In fact, when I go to Beijing, I often talk to the government departments and other government colleagues. In our country, the problem of financing difficult and expensive needs to be solved gradually. If the market is too fast, there may be some groups involved, or some groups will be eliminated. Then I personally think that we have been here for more than a year. Our management is very important. That is, we took a step and understood the things of supervision. Including last year, you probably remember, when I was listed, we said that we must rely on supervision, not supervision. So we actually took a step 24% earlier. Then we can tell you today. We also have our own steps. For example, how many, 20% or less. We have our own timetable. But at present, does the supervision department have a more clear requirement that at what time point you will decrease to 22%, 20%, 18%, or 16%? I can tell you that currently there is no such requirement. But we know the way of supervision. We hope that we can reduce it faster and more. I think the whole market China China China China China You can see that our capital cost must be low in the market. We actually have a lot to add this year in Singapore. Then I said that we can hear the market claims. We can also understand the requirements of supervision. Then we ourselves are prepared. But what you told me is that there is no specific time table requirement. For example, how much will it be this year and how much will it be next year. We have not received any of this at present. This includes the export guidance is not received. But we understand. The third question is about the risk of use. I believe that we will increase this proportion. I hope that YS can add to this. Let me comment on the question number two first, and then I will answer question number three. The question number two is about loan rate should be within 24% by June 2022, right? This requirement was given to three companies. And it's very precise. What they said is total borrowing cost should be less than 24% for new loans by June 2022. And the average AHI should be less than 20% within three years' time, meaning that by June 2024. That's what they said. And then we believe this will become like a standard regulation for all. And this is good for us because it brings no impact for us. If you look at our CF company as of today, highest AHI is less than 24%, and average AHI is less than 19%. So we're already there. And then probably highest APR less than 24%. And as of July, our APR for neurons is already less than 21%. So basically, we see no impact from this new regulation. So we are in a very safe position. And the third question, self-diagnosis portion. In August, this month, our self-diagnosis portion for neurons will reach, finally reach 20%. So we are done. And the next step, whether we want to further move up to a 30%. This, we haven't decided yet. We are in discussion with the regulator. But once they demand we have to go up to 30%, then we can do that very easily with time. Because our joint company, we have already more than $22 billion net assets, which is more than enough to support 30% self-guarantee portion for neurons.
spk02: Thank you.
spk03: Your next question comes from Thomas Cheung from Jefferies. Please go ahead.
spk01: Hi, good morning. Thanks, management, for taking my question. I have a question regarding our wealth management strategies. I think we have talked a lot about the RCF side, but how about the WM side? I think we are about to talk about some of the upgrades in terms of the product features, including integration with RCF in terms of the interface. Can you talk about how we should think about our long-term goal for WM, in particular the progress that are made with our automated AI portfolio as well as any competitive landscape or regulations that we need to bear in mind. That's my first question. And then a follow-up question is about the recent outbreak of COVID. Are we seeing any changes in terms of the fundamentals recently? Thank you.
spk04: Right. Thanks, Thomas and Frank. On the wealth management business, As we summarized, through the first half of this year, or as of June 30th, the growth of the P2P portion was about 28%. And so this is a business we continue to want to develop as fast as we can. And we continue to see very good progress on our affluent customers, on our qualified investors, across a range of higher-end products, including ongoing development for portfolio services and automated matching, which we're doing here in China, but we're also looking into Hong Kong as that market starts to evolve as well. So this is an area that we will continue to invest, we'll continue to automate, we'll continue to apply more and more data to it to make sure that our middle class customers are generating good returns, particularly as the market shifts away from fixed income to more variable return products. and this is an area that we continue to invest in. In terms of the COVID impact, I would say up to now we've not seen any impact. It's really too early and very, very narrow. I know that there's more headlines about it, but it really hasn't been anything that we've seen in terms of frontline impact. Got it. Thank you.
spk03: Thank you. Your next question comes from go ahead and Thank you.
spk02: I think my peers have asked a lot about regulatory risk. And then I'm going to have a follow-up question on the regulatory risk as well. I think just now management saying that like the way to maintain a stable profit margin is to control costs, right? So first, can you help to elaborate like what room does Bluva have to continue to cut costs so that the overall tick rate will be more stable? The second question that I have is on investors' return. There's already like $1 billion of buyback being announced and executed. Some of them have been executed so far. So what is the asset on the balance sheet that you believe is deplorable for like buyback or maybe in the future dividends in general? Thank you.
spk04: Well, I actually want to... speak first about the cost optimization area? Okay, I think the team will share more data in the presentation, right? But if I give you a rough picture, for neurons, for unsecured neurons in the second quarter this year, our average APR was less than 23%. But land margin stayed almost unchanged at around 4%. And then let's look at our components. expanding cost, CGI premium, and EQ impact, you see that those three numbers are obviously including, meaning decreasing. And then going forward, we believe we can further optimize by about 3%. So going forward, even if the overall HR goes down to close 20%, we are confident our net margin will be protected at around 4%. Of course, I'm not saying that. No matter how low HR goes, we can deliver 4% net margin. I'm not saying that. But as long as average price is around 20%, we are very confident net margin will not change. And in terms of investor returns, As we noted on our balance sheet and cash position, $91 billion overall net assets, $42 billion of relative and liquid assets within 90 days. So the share we purchased, the additional $700 billion taking us to $1 billion, still represents a very small portion of our total capabilities. We will continue to explore other ways to generate returns for investors through all means. And we're exploring those structures and we'll certainly undertake them as soon as it makes sense to do so. But we certainly have a lot of room in which to play. Yes, because the cash on our account is still very plentiful. And since we have such a company, not only do we have plentiful cash, but we also have good profitability. I think this is relatively rare in our domestic companies. Of course, you just said that in addition to ByteDance, there are other works that are similar. Because this is a large-scale meeting. As I told you in the report, we are considering all kinds of ways. Once there is information about progress in the future, I will report it to you as soon as possible. In general, I think the reaction of $1 billion to the buyback has a very small impact on the cash flow. You can see the concept of 7 billion RMB and 9 billion RMB. We should be very... As Greg mentioned, not only that we have a strong balance, in addition, we have very strong profitability and cash-sharing capability. In terms of the question you asked, whether it's buyback or dividend, I can say that we are considering, again, all means to return value to shareholder. Once there's a decision made, we will be making the right announcements. You know, the $10 billion U.S., which is roughly $7 billion R&B or buyback, is small compared to, you know, the gunpowder we have on our balance sheet. And let's not forget, you know, by the end of the year, we would have generated another $10 billion-plus of R&B profit, and that will also go into our cash reserves and balance sheet.
spk03: Okay, thanks. Thanks. Thank you. That does conclude our time for questions. I'll now hand back to management for closing remarks.
spk04: uh uh So we believe that China's entire market and regulators are also hearing this kind of market voice. In this process, we have no choice but to take the responsibility. We must deal with it in this process and improve our relationship with regulators. In this process, I think after going through this difficult period, I think we will have a faster and more stable development. Thank you for attending our calls today. And as mentioned earlier, the results are available online. And we will be having a number of one-on-one sessions with the CELSAT analysts, which we will elaborate more on our messages. Please do have full confidence that we have a very hard-working management team. I mean, the current environment where global capital markets view on China regulations, which caused a lot of volatility recently, rest assured not only that the companies have heard that, I believe the relevant regulators in China have also heard the market views. Some friends have been telling me that today the biggest factors impacting Chinese ADR stock prices, number one is regulation, number two is industry, company-specific fundamentals come later. Rest assured, you know, the regulators have heard that. And in the current environment, it is very prudent and has always been our principle to strengthen regulatory relationships, maintain open communications, and make sure we are in the right side of the future direction. Thank you again for joining the call.
spk03: Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.
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