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Lufax Holding Ltd American Depositary Shares, each representing two (2) Ordinary Shares
Q3 2021 Earnings Conference Call
11/10/2021
spk04: Ladies and gentlemen, thank you for standing by and welcome to LUFAX Holdings Limited third 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.
spk06: Thank you, operator. Hello, everyone, and welcome to our third 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 some general updates on our achievements for the quarter and share our thoughts on recent regulatory developments and industry dynamics. Our co-CEO, Mr. Greg Gibb, will then provide a review of our progress and details of our development strategies. Afterwards, our CFO, Mr. James Chung, will offer a closer look into our financials before we open up the call for questions. In addition, Mr. Wyatt Cho, our co-CEO, and Mr. David Choi, CFO of our credit facilitation business, will also be available during the question and answer sessions. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call, as we'll be making forward-looking statements. Please also note that we'll discuss non-effort 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 through the SEC. With that, I'm now pleased to turn over the call to Mr. Ji, Chairman of LUFAX.
spk07: Hello, everyone, and thank you for joining our 2021 third quarter earnings call. For today's call, I will start with an update of our key achievements in the quarter.
spk06: then address top concerns that investors and analysts raised in our recent communications, and finally share our views on the latest market development.
spk07: 第一方面是三季度的主要工作成果。 第三季度,路空业绩持续稳健增长。 与此同时,公司的合规治理能力进一步提升。 发布上市后的首份ESG报告, 积极落实打造海外上市公司合规治理典范的发展目标。
spk06: First key achievements in 2021-23. Overall, we achieved steady and healthy growth during the third quarter. At the same time, we improved our regulatory compliance and corporate governance. We published our initial post-IPO ESG report as part of our proactive effort in establishing ourselves as a role model for regulatory compliance and corporate governance among overseas listed Chinese companies.
spk07: In terms of business performance, the third quarter's revenue increase increased by 22%. In the third quarter, our total income increased by 22% year-over-year. Excluding the impact of non-recurring expenses in the third quarter of 2020, our net profit in the third quarter increased by 18% year-over-year, while our net profit in the nine months ended September 30, 2021, increased by 28% year-over-year. and the management team's confidence in the future market and performance, decided that from 2022, they will take out 20% to 40% of the net profit from the previous year. At present, the board has approved the fund-raising plan. Further details will be revealed in the fourth quarter performance report of 2021, early next year.
spk06: Due to the steady and healthy growth of our operational results and our confidence towards market outlook and business prospects, the Board of Directors decided to pay out 20% to 40% of our net profit in the previous years as dividends starting from 2022. We will release the details of our dividend payout plan in the fourth quarter earnings report in early 2022. 同时,继二季度完成三亿美元的回购后,
spk07: The company announced in August that it would add $700 million to its stock repurchase plan. By September 30, the total repurchase amount will be about $60 million. The total repurchase amount is about $600 million, and the rest is about $400 million.
spk06: Following the completion of our U.S. $300 million shares repurchase program in the second quarter, we announced additional $700 million in August. As of September 30, 2021, we had bought back about 60 million ADSs worth approximately U.S. $600 million, with roughly U.S. $400 million remaining. Despite market fluctuations, we maintain a high level of confidence about our own future. Built on our steady profit generation, excellent operating cash flow, abundant capital reserve, and effective regulatory response, We plan to continue to return value to our shareholders through share repurchases and dividend payouts.
spk07: 二,合规治理方面,路控集体响应监管导向, 在三季度完成了P2P产品的全部清零, 实现网贷业务良性平稳的退出, 业务合规性进步加强,为行业做出了表率。
spk06: On the compliance front, we proactively followed regulatory guidance and fully completed the run of our legacy peer-to-peer products in the third quarter. That's accomplishing a smooth and victorious withdrawal from the online lending business, setting a role model for the industry.
spk07: At the end of October, the Chairman of the Banking Association, Guo Zhuqing, publicly stated that in the improvement of the 14 Internet platforms, the financial management department has proposed thousands of problems in the future, In mid-October, Mr. Guo Shuqing, chairman of CBIRC, stated publicly that
spk06: In the process of rectifying and reforming the 14 Internet-based lending platforms, the financial regulators raised close to 1,000 issues, the majority of which have been addressed and about half of which have been resolved. As such, we anticipate more material and substantive progress by the end of this year. Recently, we noted the speech by certain regulators on the boundaries of financial licenses.
spk07: Here I want to explain that in the 429 contract business, we have a professional financial DNA and a deep understanding of supervision. We maintain a good communication with the supervision department, and the work of the supervision department is going smoothly. The requirements of the supervision department are basically the same as our previous understanding. We will normalize and actively inspect each business to ensure compliance. I want to reiterate, among those companies undergoing regulatory review, Lufact has maintained constructive dialogues with the regulatory authorities and progressed smoothly through all aspects of the rectification.
spk06: By leveraging our domain expertise, financial DNA, and thorough understanding of regulations, Our early understanding is reasonably consistent with recent requirements, and we periodically review all of our business lines to ensure compliance, upholding our principle of pre-emptive diagnosis and strict operational adjustment for timely, optimal results. And we will proactively adjust our business directions to more closely align with regulatory trends, as always.
spk07: In terms of EICT work, we are committed to achieving a harmonious, self-sufficient, In September of this year, the first ESG report was published, showing the actual results of the company's governance, green finance, consumer protection, and service. Two ESG indexes under Fuselow will also be included in the loophole, reflecting the market's recognition of the loophole ESG work, highlighting the corporate responsibility and social value of the company.
spk06: On the ESG front, we devoted substantial resources to establishing ourselves as a role model for overseas listed Chinese companies in terms of compliance and governance. Our initial post-IPO ESG report, published in September of this year, showcased our achievements in implementing strong governance, green finance, and consumer services and protection. Also, our inclusion in the FTSE Russells to major ESG indices demonstrated market endorsement of our accomplishments in ESG, corporate responsibility, and social value.
spk07: I then want to share some of the key investment concerns.
spk06: Since releasing our Q2 results, our management team have maintained frequent communications with investors by hosting more than 60 events, including post-earnings calls, non-deal roadshows, and other meetings.
spk07: According to our statistics, out of the total 320 questions raised by investors, 253 questions accounted for 79% of the macroeconomic and regulatory trends. 51 questions accounted for 16% of the business trends. We received 320 questions from investors, among which 253 questions, or 79% of the total, were about macroeconomics and regulatory trends.
spk06: 51% or 16% of the total questions were about our business operations, and the reminder were about our capital market initiatives such as dividend payout and share buyback. I will share our thoughts on macroeconomics and regulatory directions. Then Greg and James will discuss our operational and financial details.
spk07: In terms of the macroeconomics, some investors are worried that the growth of the real estate industry and the overall economic growth will have an impact on the future of the market.
spk06: Regarding microeconomics, some investors are concerned about the impact of our future business from the tightening of China's property market and the slowdown of overall economic growth.
spk07: On the one hand, the direct or indirect impact on the global industry is relatively small. On the other hand, despite the short-term pressure of the macroeconomic economy, as an important part of China's economy, the small and medium-sized enterprises play the role of the blood vessels, and have a strong resilience. In line with the above two factors, the various business and risk indicators that are currently out of control are very stable. We will continue to pay close attention.
spk06: Our direct and indirect client exposure to the real estate industry is rather small. Also bear in mind that even though the macroeconomy may be under pressure in the near term, medium, small, and macro-sized businesses are extremely resilient and serve as crucial black whistles of the Chinese economy. Consequently, we have seen healthy and stable numbers in business and risk matrices. At the same time, we'll remain vigilant and closely monitor all aspects.
spk07: Second, regarding regulatory policies, some investors question whether China will retain its capital market openness and what regulations would have next. We believe that China is at the critical point of transitioning from high-speed to high-quality growth.
spk06: the nation's reformative and open stance remains unchanged. Its capital market stays connected to the world economy. It needs investment from around the globe to develop a healthy domestic capital market. And its regulatory authorities aim to maintain long-term market stability.
spk07: On the opening ceremony of the Fourth International Import and Export Conference, President Xi Jinping emphasized that China will continue to open up to foreign high-level markets. The vice prime minister also pointed out in his speech that he wants to promote high-level foreign opening, create a fair market environment, and maintain the legal rights of foreign institutions in China, and pay more attention to financial technology and enhance the efficiency of financial services. We believe that the country will continue to improve the policy of supervision and create a long-term stable capital market environment.
spk06: In a speech given at the opening ceremony of the fourth China International Import Expo, President Xi reaffirmed China's willingness to open to the rest of the world. At the 2021 annual Financial Street Forum held in late October, Vice Premier Liu He declared that the objectives of China's financial system should include promoting a high level of openness Establishing a fair market environment, protecting the legal rights of foreign enterprises in China, prioritizing the development of financial technology and improving the quality and efficiency of financial services. We believe that the government will keep refining regulatory policies to foster a stable and sustainable environment for capital market development.
spk07: The company's business model and financial performance are still stable. When it comes to implementing industry-specific regulations such as licensing requirements for credit scoring, preventing loan facilitators and co-lenders from sharing borrowed data directly with financial institutions,
spk06: and reducing borrowing costs, the direct impact on our business is rather muted. Our business model and operational performance remain steady and healthy thanks to our preemptive regulatory assessment, proactive operational adjustment, and anticipatory business realignment. Going forward, we'll continue to maintain open and frequent dialogues with regulators at all levels and through all available channels in order to maintain a tight and accurate grasp of policy intentions and achieve a more thorough implementation of regulatory requirements.
spk07: Thirdly, Lufax's unique business model. I would like to reiterate the compliant and unique nature of our retail quarter facilitation business as well as the core competitive advantages of our business model. to serve small and medium-sized enterprises. In the third quarter of 2021, about 81% of the new loans for retail and new generation businesses will be served by small and medium-sized enterprises. By the end of September, we have already served 16.2 million households.
spk06: First, we focused on serving small and macro businesses. In the third quarter of 2021, 81% of our new loans were distributed to small and macro business owners. As of the end of September, we had provided credit facilitation services to 16.21 million cumulative borrowers. 第二方面是,我们是通过融资担保牌照进行载业。
spk07: Second, we conduct our business activities through licensed financial guarantee subsidiaries.
spk06: What differentiates us from those unlicensed and pure play loan facilitators is that we have a business license to provide financial guarantees backed with registered capital, that we participate in the lending business in a material manner, and that we ensure strict regulatory compliance in every aspect of our business process. 第三是我们实质性的承担贷款风险。
spk07: According to the direction of supervision, we will establish a sustainable risk-saving model and continue to increase the risk-saving ratio of ourselves. In the third quarter of 2020, the risk-saving ratio of non-consumption consumer goods to new loans will rise to about 20%. In the future, the risk-saving ratio will continue to match the direction of supervision and continue to improve the preparation of risk-saving ratio.
spk06: Third, we bear credit risks on those new loans that we facilitate. In accordance with regulatory guidance and requirements, we have established a sustainable risk sharing business model and increased our risk exposure. In the third quarter of 2021, excluding our consumer finance subsidiary, our credit risk exposure to the new loans facilitated increased to 20%. Going forward, to stay in sync with regulatory guidance, we plan to make additional preparations for further expansion of our credit risk exposure.
spk07: 4. Continuous decrease in financing costs has led to an increase in the technology level and the efficiency of company management. Since the third quarter, the total loan cost has dropped to 23.1%. In the future, we will continue to optimize costs through technology methods to build on the original intention.
spk06: Third, we continue to reduce our borrowers' costs thanks to our technology advancement and managerial efficiency improvement. Since third quarter, we have reduced the all-in cost for new loans facilitators to 21.8%. Going forward, we'll continue to optimize our cost structure through technology and fulfill our commitment to financial inclusion.
spk07: We believe that the monitoring and development of the financial technology industry will achieve progress and progress. It will be useful to achieve stable and sustainable development of the industry. In conclusion, we believe that fintech industry's regulatory oversight and ratification should achieve more progress, which in turn should cultivate stable and sustainable industry growth.
spk06: Our retail credit facilitation and wealth management businesses are fully aligned with China's policy objectives of supporting small and micro-businesses to attain common prosperity. In a constantly evolving regulatory environment, our unique business model and strong corporate governance enable us to accomplish gradual business transformation and achieve steady growth.
spk07: In the future, we will continue to adopt the He Guijin concept.
spk06: We will continue to uphold our commitment to maintaining full operational compliance, providing compassionate and inclusive financial services, setting ourselves as a role model for corporate governance among overseas listed Chinese companies, and generating increasing value for our shareholders and our society. With that, I will turn the call over to Greg, who will share our business updates for the quarter.
spk10: Thank you, Chairman Gee. We delivered strong revenue and profit growth in the third quarter of 2021 despite the changing economic and regulatory environment. We grew our revenue by 21.8% and our net profit by 90.8% year-over-year, respectively. excluding the impact of the CRAN restructuring expenses in the third quarter of 2020, our adjusted net profit increased by 18.1% year over year. Before James takes you through our detailed operational and financial updates, I'd like to cover three broader areas related to our business. First, industry concern on the real estate sector. Second, an update on the regulatory rectification progress. And third, our financial position and capital-related plans. Concerns on the real estate sector. While we've observed the risk in the broader economic environment, including increased credit risk in the real estate sector, there has been no impact on our business performance to date. We do not provide lending services to property developers, although some of our small business customers produce construction materials and provide home decoration services. Our exposure to borrowers who are directly or indirectly linked to the property sector is quite limited. To date, we have not detected any sign of credit deterioration in our secured or unsecured loan facilitation portfolios, and we will remain vigilant and adjust credit policy quickly if needed. As of this third quarter, flow-through rates indicating future credit quality remain stable and in line with the previous several quarters. Our wealth management business and proprietary investment books have limited exposure to the real estate sector. Second, a little bit more on the regulatory rectification progress. As mentioned by Chairman Gee, regulators recognize that the current industry rectification efforts should see substantial progress by the end of the year, and some industry observers believe the current stage of regulatory changes is reaching finalization. Based on our understanding of the current regulatory requirements, we do not anticipate any major changes to our business model nor substantial impact on future business development. Over the last year, regulatory rectification of lending businesses has really included the following elements for platforms. separating lending services from other financial and payment services, rationalizing personal consumption risks, facilitating lower loan pricing to support the real economy, and having skin in the game to share credit risk with requisite licenses and capital requirements. Rectification has also required partnering banks to demonstrate independent risk management, set limits for cooperation with any one platform, and limit lending to their geographic footprints. Finally, rectification requires data sharing between platforms and financial institutions to be conducted via a credit rating license by the mid of 2023. NUFAX continues to make consistent progress on all rectification requirements. NUFAX conducts lending facilitation independent of any other financial service. About 81% of all new loans facilitated as of the third quarter were to small business owners in line with policy priorities. All-in pricing for loan balances dropped to 23.1% as of the third quarter this year, down from 26.6% a year ago. As of this third quarter, we now bear risk on 20% of all new loans. Our nationwide guarantee companies with shared credit risk on all new lending operate with a leverage ratio under three times as of September 31st this year. Given our strong capital position and likely future regulatory requirements, we expect to bear risk on 30% of all new loans in the future, probably by the end of next year. All of the aforementioned operating metrics exclude those of our consumer finance subsidiary. Lufax's 58.9 bank partners operate with their independent risk systems. Given our diversified partnerships, current cooperation is fully aligned with the regional footprint matching requirements, and each partnership operates within the single platform concentration limits. We are currently in discussions with a number of parties to establish a credit rating license within the stated requisition period if this indeed becomes a requirement. And here I'll just elaborate a bit. We will be prepared to connect to a third-party credit rating license by March of next year. And based on our latest understanding, the cost of that connection will not exceed more than $100,000 per month. So, indeed, it will not bring additional substantial costs to the way that we operate. Third, on our financial position and capital plans. Through this third quarter, we've been able to meet the rectification requirements and optimize customer pricing while sustaining both our revenue take rates and net profit margins at or above historical levels. As of September 31st, our net asset is around $93 billion. Liquid assets maturing in 90 days or less total $47 billion, providing us with a position of strength to maximize shareholder value and make ongoing investments in the business. In terms of capital management, as just mentioned, we've completed about 60% of the $1 billion in shareholder buyback that we've announced in recent quarters. Despite our plans to increase skin in the game in the lending facilitation business, our strong ongoing cash flow allows us to announce today that starting early next year, we will begin to pay 20% to 40% of net profit of the previous year in cash dividend to shareholders. These plans should allow us to continue to improve shareholder return on equity. and leave us with more than sufficient resources to continue to invest in our core business while taking advantage of opportunities which may arise medium-term due to the changing industry and regulatory landscape. Within the core business, our priority areas for investment remain upgrading our lending services direct sales force with new technology enablement tools, deepening deployment of AI capabilities in risk management and collections infrastructure, adding new functionality to our product lines, and sharing technology capabilities with financial partners in both lending facilitation and wealth management. The main goals for our technology deployment are increasing market reach, enhancing our unique O2O business model productivity, deepening partner connectivity, and further automating services to improve both service quality and cost efficiency. Worthy of note is we did increase our O2O sales force, serving primary small business owners in Q3, to around 64,000, up from 59,000 at the end of Q2 to further expand market reach. The increase in direct sales was matched by an increase in Salesforce productivity. Excluding new recruited Salesforce in Q3, our productivity rose 8% quarter-on-quarter and 7% year-over-year. If we include the new recruited Salesforce, our productivity rose 4% quarter-on-quarter. This increased investment in O2O direct sales reaffirms our view that our offline-to-online service and approach is the most cost-effective way to increase coverage of this otherwise hard-to-reach small business owner segment. Also worthy of note is emerging affluent investors, those investing $300,000 more on the platform, made up 81% of customer assets on our wealth management platform, up from 78% a year ago. The revenue take rate for wealth management platform increased from 31.8 basis points to 44.1 basis points quarter on quarter due to the increased mix of qualified investor products, insurance services, and technology-enabled fees. Our overall performance for the third quarter is in line with our prior guidance, and today we reaffirm our prior guidance for the full year for revenue and profit growth. I'll now turn the call over to James Jung, our CFO, to go through the detailed operating and financial performance and our reaffirmed guidance for the year.
spk08: Thank you, Greg. I will now provide a closer look into our third quarter operational and the financial results. Before I begin, please be reminded that all numbers are in R&D terms and all comparisons are on a year-to-year basis unless otherwise stated. We delivered another very strong quarter, achieving double-digit growth in both revenue and net profit. Our total income increased by 21.8% to $15.9 billion, and our net profit increased by 90.8% to $4.1 billion year-over-year. If compared to adjusted net income in the same period last year, which excludes the impact of the C1 restructuring expenses, net profit increased by 18.1% year-over-year. Let me share some of the business milestones we achieved during the quarter despite the economic slowdown and the regulatory overhead. First, we maintained stable union economics despite APR decline. Our low balance APR was 23.1% in the third quarter of 2021, 0.9% point decline from 24% in the second quarter of 2021, and a 3.5% point decline from 26.6% in the third quarter of 2020. In comparison, our loan balance take rate remained stable at a 9.7% in the third quarter of 2021, same as the second quarter, and a 0.3% point increase from the third quarter of 2020. We were able to buck the trend because we continue to diversify our funding sources and increase the number of banking partners we work with. Additionally, we attained further reductions in the credit insurance premiums on our loan portfolio. Also, thanks to our new method of charging customers, we experienced diminishing impact from the early loan repayments. Above all, we drove relentless improvements in our sales and marketing efficiency. All these initiatives combined should enable us to maintain stability in our take rate and the net margin, even if the APR may reduce further in our retail credit facilitation business in the future. We sustained growth in our overall loan volume with an optimized business mix. On the retail credit side, we grew our new loan sales by 16.2% to $171.7 billion during the third quarter of 2021, in line with our expectations. At the same time, we continued focusing on serving small business owners and improving the risk profiles of our borrowers. In the third quarter, excluding our consumer finance subsidiary, 80.5% of new loans facilitated were disbursed to small business owners, up from 75.7% in the same period of 2020. On the wealth management side, our total client assets increased by 12.4% to $425.1 billion as of September 30, 2021. Prime asset contributions from mass affluent customers investing more than $300,000 increased to 80.8% as of September 30, 2021, up from 77.5% as of September 30, 2020. Third, we continue to evolve our risk-sharing business and stabilize asset quality. In line with prevailing regulatory requirements, we bore credit risks for 20% of the new loans we facilitated in the third quarter of 2021, up from 16% in the second quarter and 7% in the third quarter last year. As of September 30th, 2021, our outstanding balance of loans facilitated with guarantees from third-party credit enhancement partners had a decrease to 81.1% from 91.8% a year ago. All of the affirmation operating metrics exclude those of our consumer finance subsidiary. Driven by the evolving risk-sharing business development and ongoing technological and operational improvements, excluding our consumer finance subsidiary and the legacy products, DPD 30 plus and the DPD 90 plus delinquency rate remain stable at 1.9% and 1.1% for total loans we facilitated as of September 30th, 2021, compared to 1.9% and 1.1% as of June 30th, 2021. Fourth, we improved the take rate of our wealth management segment through product mix optimization. During the quarter, our take rate for the segment increased by 12.3 bits to 44.1 bits from 31.8 bits in the previous quarter, primarily driven by our continued product mix optimization as we sharpened our focus on products with higher take rate. Now let's take a closer look into the financials. As the revenue mix of our retail credit facilitation business continued to improve thanks to the evolutions of our business and risk-sharing model, total income increased by 21.8% year-over-year. During the quarter, while the platform service fees decreased by 3.5% to $9.6 billion, our net interest income grew 57.2% to $3.8 billion and our guaranteed income grew by more than 600% to $1.3 billion. In addition, other income, which is directly linked to delivering services to our financial partners, increased by 144% to $1 billion. As a result, our retail credit facilitation platform service fee as a percentage of total revenue decreased to 57.1% from 72%. Because consolidated trust plans provide lower funding costs, we continue to utilize them in our funding operations, enabling our net interest income as a percentage of total revenue to increase to 23.9% from 18.5% a year ago. Moreover, as we continue to bear more credit risk, we generated more guaranteed income, reaching 8.1% as a percentage of total revenue compared to 1.3% a year ago. By expanding our services to credit enhancement partners in account management, collections, and other value-added services, our other income as a percentage of total revenue increased to 6.3% from 3.1% a year ago. Our investment income increased by 149% to $266 million in the quarter from $107 million in the same period of last year, mainly given due to the increase of investment assets and the return. In terms of wealth management, our platform transaction and service fees decreased by 4.7% to $467 million in the third quarter from $490 million in the same period of 2020. This decrease was mainly driven by the runoff of legacy products and partially offset by the increase in fees generated from the company's current products. Now, moving on to our expenses. In the third quarter, our total expenses grew by 5.1% to $9.9 billion, excluding the $1.3 billion CRO restructuring expenses in the third quarter of 2020. adjusted total expenses grew by 22.2% year-over-year, mainly driven by the increase in credit impairment costs. However, excluding credit and asset impairment losses, financial costs, and other losses, total expenses increased by 10.5% in the third quarter as we maintained our growth trajectory and further improved operating efficiency. Our sales and marketing expenses, which include expenses for borrowers and invest acquisitions, as well as general sales and marketing expense, increased by 7% to 4.6 billion in the third quarter. Our borrower acquisition expenses, which are a major component of our total sales and marketing expenses, decreased by 8.5% year-over-year to 2.6 billion. mainly driven by increased sales productivity and a decreased sales commission. Our investor acquisition and retention expenses increased by 10.1% to $2.2 billion in third quarter, mostly due to the increase in marketing efforts to attract and retain investors. Our general sales and marketing expenses, which are 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 39.2% to $1.8 billion in the third quarter from $1.3 billion a year ago. This year-over-year increase was largely due to the increase in sales costs and lower base in the third quarter of 2020, resulting from the Social Security relief during the COVID-19 outbreak in the same period. Our general administrative finances increased by 46% to $937 million in the third quarter from $642 million a year ago. This increase was mainly due to the increase of accrued bonus driven by better performance, lower base in third quarter of 2020 and headcount expansion in the third quarter of 2021 to support our new business development initiatives, including the development of our consumer finance business. Our operation and services expenses increased by 6.3% to $1.7 billion in the third quarter from $1.6 billion a year ago. This increase was primarily due to the increase in trust plan management expenses resulting from the increase in usage of consolidated trust plans. We remain committed to investing in technology research and development as our technology and analytics expense increased by 8.7% to $534 million in the third quarter. Our credit impairment losses increased by 74.8% to $1.7 billion in the third quarter from $952 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 of the proportion of credit risks borne by us, while the overall risk profile of our borrowers has continued to improve, as mentioned earlier. Our asset impairment losses increased to $410 million in the third quarter due to the impairment losses of intangible assets and goodwill. Our finance costs decreased by 89.8% to $168 million in the third quarter from $1.7 billion a year ago, mainly due to the higher base in the third quarter last year, which included $1.3 trillion of CDI $1.3 billion of C-1 restructuring expense. Additionally, our effective tax rate decreased to 31% during the third quarter of 2021 from 40% in the same period of 2020. Consequently, our net income increased by 90.8% to $4.1 billion during the third quarter from $2.2 billion in the same quarter of 2020. Excluding impact of the C-1 restructuring expenses in the comparable quarter, adjusted net income increased by 18.1% year-over-year. Net margin was 25.8% in the quarter compared to a net margin of 16.5% and adjusted net margin of 26.6% in the same period as last year. Meanwhile, our basic and diluted earnings per ADS were 1.76 RMB and 1.66 RMB respectively. As of September 30th, 2021, we had a cash balance of $30.5 billion compared to $24.1 billion as of December 31st, 2020. Net cash flow from operating activities was $1.7 billion in the third quarter of 2021. Now, turning now to the outlook. We iterate our guidance for the full year of 2021. We expect our new loans facilitated to be in the range of $649 billion to $665 billion. The client assets to be in the range of $430 billion to $450 billion. Meanwhile, as we continue our efforts to maintain growth momentum and continue improving our operating efficiency, We expect our total income to be in the range of $61.1 billion to $61.4 billion, and our net profit to be in the range of $16.3 billion to $16.5 billion. This circulates into year-over-year total income growth of 17% to 18%, and year-over-year net profit growth of 33% to 34% for the full year of 2021. These forecasts reflect our current and preliminary views on market and operational conditions, which are subject to change. This concludes our prepared remarks for today. Operator, we're now ready to take questions.
spk04: Thank you. We will now begin the question and answer session. To ask a question, you may press star 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star 2. At this time, we will now pause momentarily to assemble our roster. Thank you. Your first question comes from Richard Zhu from MS. Please go ahead.
spk05: Thank you very much. Congratulations for the strong third quarter. Just have a couple of questions on the funding partners at the moment. One is basically, are we seeing opportunity to further reduce the funding costs or basically the yield from the funding partners that we work with at the moment since we're expanding our cooperation population? And in addition to that, are we seeing these banks are taking more risks on their own? So what percentage of risks are taken directly by the banks at the moment? Thank you.
spk09: Okay, the first is about funding cost, right? How much risk they bear. As of today, we have 59 part-time banks and 6 trust companies. And then income from mix. Bank funding takes about 60%, and then 40% are from trust at different funding costs. The bank funding cost is at 6.4% and trust at 5.6%. So going forward, we believe later we can discuss about take rates this year and next year. We believe we have more room in funding costs to further reduce and safeguard our take rates under decreasing HR environments. As of today, if you look at our third quarter number, our self-guarantee portion, it takes up to 20% for neurons. And then our dependence on insurance companies, especially Penang P&T, it went down to 70%. So the rest, about 20%, the rest, about 10%, are taken by in terms of risk-sharing. 10% are taken by partner banks and also insurance companies together.
spk04: Thank you. Your next question comes from Winnie Wu from BOFA. Please go ahead.
spk00: Hello?
spk10: Woody, go ahead.
spk00: Okay, sorry. Yeah, so I want to ask a high-level question regarding how does management think about, you know, the difference between the credit assistant lending model versus the co-lending model. I mean, apparently, you know, regulators have made pretty strict rules regarding the co-lending model, right, the risk sharing, the percentage funding sharing. which is more capital-intensive. But essentially, the way LUFEX has been complying with the regulation, you are taking more risks. You are putting our loans on balance sheet, and you do have the capital to be fully compliant. Whereas on the other side, the so-called assistant lending model has it's facing more regulatory uncertainty regarding, you know, the license requirement, regarding, you know, the disconnection from the banks. So, strategically, how do you compare the pros and cons of those two business models, and where do you see LUFAC's business model evolving over time? Thank you.
spk10: Thanks, Winnie. It's Greg. I'll take a first shot at your question, and then to see why I said anything to add. I think that The way the regulators increasingly look at this is really in two buckets, right? There's loans done by banks, and then everything else is really regarded as a form of facilitation and cooperation. And I think that under the bucket of facilitation and cooperation, and there's been some recent announcements in the last couple of days about ANTS requirements in terms of how they partner with banks. The core of this is really that you have the skin in the game. And, you know, we have done it at 20% up to now, but we'll probably be moving to 30% over the next 12 to 18 months. And so, you know, that skin in the game is robust and very much in line with the overall spirit of regulation. The second is that when you take the skin in the game, you need to have a license that is regulated and where capital is leverage is controlled within 10 times. And so we do that through our guarantee company. Our leverage today on those guarantee companies is under 3x. And so we're very well positioned to handle all of that. I think the other thing I would just highlight is that if you look at the requirements that have been announced around Ant over the last couple of days, They now have to split the lending they do through their consumer finance company, and they're partnering with banks, and it has to be separately branded. We are already compliant with that requirement in that our consumer finance business is separately branded. And when customers process a loan through our facilitation, the banks themselves are disclosed. And then each bank carries out its own risk process to prove the lender. So we think that we're unique in having that guarantee company, in really taking shared risk on every loan, in bringing that to 30 percent, and then in having the capital behind it, and then in disclosing our bank partners in the process. It will be – honestly, I think it will be difficult for some players in the market to really meet those capital requirements going forward. So I don't think there's that much of a distinction between co-lending and facilitation. The real issue is having that capital to back up your risk sharing.
spk09: I do agree. Technically speaking, we are not co-lending for sure. We don't have lending license. All funds come from bank or from trust companies. And then we are not the official company either because we are financing guaranteed licensing company. And so the way we do it is perfectly with our financing guaranteed licensing score. But my view is Obviously, we don't think regulators, they clearly separate co-lending and then assistance lending. We believe going forward, one policy, one regulation will apply to all different model loan services, including to that assistance lending and also co-lending and other pure assistance lending. Only that the bank loan, which they pay all functional loans by themselves, from, say, underwriting collection. And our case, our future model, I think we already have a clear mind in this question with our regulator. So going forward, we take all loan funds. We need to come from banks and trust companies. We don't provide any funds. But we are only taking 30% credit risk. And then the rest of the percent will be taken, eventually will be taken by fund providers. But it takes some time to reach that point. So as a bridge, we use our more interest partners. So eventually, after three years, if you ask me what is our future model after three years, then all funds come from banks first, but we're sharing 30% by us, and all the last 70% are taken by fund partners.
spk04: Thank you. Your next question comes from from UBS. Please go ahead.
spk03: Thank you. Can you hear me?
spk10: Yes, go ahead, Dei.
spk03: Okay, thank you. Thank you, Craig. Okay, maybe I'll follow up on Winnie's earlier question still about regulation. So the CBRC, the bank regulator, have said that they, or PBOC as well, they will separate, make clear boundary between financial services, the lending, technology services, and credit scoring. So it looks like it's maybe targeting to have first um you know each operator should have certain type of licenses that will allow you to do this to be engaged in such uh such activities uh and then secondly to sort of split or or separate uh the whole the operation current long facilitation model which uh covers the whole um sorry the business chain um so and Does that mean that in the end, so the service part, the technology service part, will be sort of segregated out of the lending and also maybe guarantee as well? So is that maybe technically happening in how you can come back to your lending or the whole loan precipitation business? I don't know if I'm clear or not on that question. And then also earlier mentioned that by March, you will be connected to some kind of credit scoring services and paying a small fee of about less than 100,000 RMB per month. I just want to confirm that. So you already, is there guidance that the illness could see patients companies or LVACs need to do so and to which credit scoring sort of agencies. And also, sorry, on the operating front, you know, we saw the peanut insurance groups, the sales force has quite a lot of turnover and has sales force has declined a lot since because that impacted through your customer acquisition, selling by their sales force, et cetera. By the way, it's very good, very strong quarter result, and also great to hear about the dividend payout. Congratulations. Thank you.
spk10: Thank you, Mary.
spk09: Let me start from the back. The number of live agents has been declined from more than a million. Now it's about 70,000. It's going to affect our business growth. That's true. If you look at our sales channel mix, Live channels used to contribute about almost 40% of total new loans, about three years back. But if you look at third quarter vision number, they now contribute only 28% of total loans. So now we have a lot less dependence on live channels. While our direct trades, our own outsourced course, their sales contribution increased up to more than 50% by now. And what about next year? we agree that the lifetime contribution or the absolute sales contribution amount will decrease uh further we think so but we are ready because even they decreased a little bit from that 28 contribution uh our 50 contribution from direct that part uh our annual growth is almost 20 percent so that is enough more than enough to cover the shortfall from life agent channel now for example uh i don't know this discussion some of people uh we have direct full capacity ratio uh this full capacity ratio monthly was less than 90 percent in the second quarter. But when you finish the first quarter, it's already only percent. started us, started to put more investment on this developing and abstracting and cultivating our higher-performance data. And now we see an initial effect, and then we have full capacity ratio. So I think that means that we are very much confident. Despite live channel decline further next year, we are still very confident in overall we can deliver, we can achieve two-digit, at least two-digit sales goals. And the second question was about credit scoring, credit scoring, right? We are in close discussion with PBOC directly. And then they reviewed our process in detail. If I make a lot of numbers, normally we share with banks about 300 data for one customer. And the PBOC said out of 300, about 80 data, they believe it must go through the company who has credit license. So that process, now we are working with Bihang. And as Greg said, this new process will be in place by March next year. Why? The requirement from PBOC is June 23. So we will be already a lot ahead of And so maybe to go to the top end of your question,
spk10: The way that Lufax Holdings is set up is that each business line is very clearly segregated, very clearly segregated in terms of operation, technology staff, people, corporate governance, et cetera. So we are already very clearly split by business lines. The lending business is also very clearly split in its enablement to partner banks and trust companies, and that is really where we process the flow of borrowers. That is done That is done through our technology platform, and it passes all of the data, as Wyeth just mentioned, to our banks and trust partners for their separate decision-making. All of our process there does not touch upon a payments license, which I think was one of the more major focus areas for Ant, which is really to separate payments and lending. Our lending is entirely separate in that regard. But the other thing I want to highlight is that no matter what your business model is, this requirement by regulators to have skin in the game, that part of it must be licensed. And so we do that through our guarantee company in terms of being able to provide that skin in the game. So I think as you look down the path of regulation, Your processes in terms of where you're partnering with institutions on the technology side have to be clear and separate from other services. But where you have to bear skin in the game, you have to have requisite licenses to do that. And then in the corporate governance, you have to have separation in that setup which we have today. May I just double check that we've answered your questions?
spk03: Can I follow up? Thank you. Thank you for answering my question. Follow up on that. If the, I guess, the edge for Lufax's model is having the guarantee side of the business, which is licensed, then the intention of the central bank and CBRC is to have all the information flow into the credit scoring agencies, and that can be used and shared with other financial institutions, etc., Then with other loan facilitation companies or internet technology companies, they can also have the guarantee, try to get a guarantee license, and then they can sort of kind of avoid the credit scoring, sending data to the scoring agencies too. So I understand it may take some time for them to get the parent key license, but that could also be a way to avoid the regulation, right?
spk10: Our view, May, for what it's worth, and this comes from a lot of interaction with regulators, is that the core principle of data eventually being shared through the rating license is why it's just said. In our case, 80 of the 300 variables that we share with banks need to go through that license. I think that's going to be true no matter what your business model is. The second thing that we believe is that no matter what your business model is, co-lending, facilitation, or other definition, you will have to have skin in the game. And then behind that skin in the game, you'll have to have an entity that can bear that capital. I think what I would highlight is other people can get guaranteed licenses. It does take time. But I think the more important thing is if you look through the regulation, what they're looking to prevent is instances where platforms are providing a lot of guarantees beyond what's just indicated in the license. What they're going to do is really look through the total loans that you help facilitate, that you are really bearing risk on 30% of that, and that you then have capital to back up that 30%, right? There can't be under the table or side agreements or or anything else which doesn't fully disclose that capital requirement. So I think that's the core direction, and I think that where we are unique is having those licenses in place, having the national coverage, and having more than enough capital to meet those requirements today.
spk04: Thank you. Your final question comes from Hans Van from CLSA. Please go ahead.
spk01: sure thanks management for giving me this opportunity and congratulations again for the decent results i have two questions um i think first one is also regarding the regulatory trends as you probably recall back in july uh mr uh mr uh xiao uh from the consumer protection bureau of cbrc uh once mentioned that the platform companies uh charged too much profits from from the loan facilitations. So what's your view on that? That means that potentially CBRC really care about the net margin of Blue Pax. Do we see any sort of pressure on the regulatory side in the coming years in terms of squeezing our net margin? I think that's the first question. Second one is more on the operating side regarding RCS because the loan growth in solar quarter was quite strong. And also we mentioned that the sales productivity was getting better. So here I just want to check what's your view regarding the loan demands, despite the economic slowing down, what's your see the loan demand for our SME customers? And what do we have done in terms of to promote the productivity of the direct sales team? And how can we reduce the sales commission rates, as we mentioned in the announcement? Yeah, so that's pretty much about the question. Thank you.
spk09: Okay, let me ask. I think the first question later, if you can supplement. About the comment from Guo Wuping, Xiao Baozhi Juzhang, actually we don't have any concern because she's the person who provided window guidance for LOOP-X in the last three years. So our rectification priorities in terms of sales guarantee portion increase, or price decrease, or inviting more insurance partners, are all following SHI's window guidance. So we haven't got any further information from Kuo Joo Jang. The one she said that the total fee charged by Roofect, including guarantee fee, service fee, should be less than 5.5% of loan amount, not the last loan amount, which we already achieved last year. So since then, we haven't got any further instruction or demand from or the other department . So we don't have any concern. Then I think later, may add some more comment. And then some question about the ICF loan demand and direct tax productivity. This year, if you look at year-on-year number, if I'm not wrong, sales grew by 16% and balance grew by 20%. So I think loan demand is surely there. It's very strong. I think this is thanks to our unique positioning because providing unsecured loan service for small and micro business owners in we don't see really many other players. So we have huge demand, and then we can select the customer we want. So loan demand-wise, we don't have any concern. And part of what we hope to say, our main focus is greatest leading effort, how we can provide more technology tools to support direct sales. And also, if you understand our direct sales mix, 10% of high-performing direct states, they contribute almost 40% of total neurons. And then knowing that, we launched a new direct state management strategy. So we hire and then train. cultivate highly-performing dialectics more. And then who are they? They are normally the people who have three years of experience, and then they're college graduates. So targeting those, the high-potential state force, we provide it. We add more input. We provide higher fixed salary, but lower commission in the first 12 months so that they can come in second without time. And then all senior managers, we provide year-end bonus based on current loan balance. So this year, if you look at sales and marketing expense this year, actually total expense didn't increase at all. But starting on fourth quarter, we added a little bit more. And next year, I don't think we have a room to reduce sales commission or reduce sales and marketing expense overall because that's we have to guarantee that our sales force are very competitive and they are very well rewarded but uh we see more room uh in funding course and the physical premium in those two lines i believe the more to stay so uh in the fall in the first quarter this year our average loan price for total loan about 20 percent unsecured about 22 percent our plan for the next phase uh we don't need to dramatically and quickly reduce price further. We don't need. But we will gradually, very slowly reduce, together with funding costs and CDI premium optimization, so we can safeguard our take rate and net margin. So next year in overall, the price decrease will be very minimal, and then our take rate and net margin will be protected, I think. Thank you.
spk07: I would like to add something to what you said. I think the State Council talked about this last time. I don't know if it's this news. After this incident, we actually had a close communication with the Security Bureau. We are also learning whether there is a more important reference and guidance behind his speech. In fact, I think there are three meanings in it. Do you want to explain? I think the first level is to reduce the cost of social financing, especially for small and medium-sized enterprises. China It's difficult to solve it quickly. In the process of financing men and financing women, all the market participants must work together to solve the problem. Because everyone knows that funding providers are cost-effective. We, as capital operators, have our own costs. We have our own costs, our own risks, and our own capital costs. So if you cut this cost into pieces, you can see that there is a certain rationality in it. So in this process, I believe that this whole decline requires a process and time. As you can see, the window knowledge of Xiaojin Group, the window knowledge of one year and three years, its time point is actually three years. The other 20% is also a very important concept. As you can see, our credit card is now about 18 or 19, right? So in this case, I think it's an absolute number. This is down. Its trend needs time. It needs a multi-party cooperation, a fund provider. Our operating costs, our credit costs, the position of our negotiation in the market, and the credit situation of the entire society and the entire market. I think this is a comprehensive view. The third is that so far, we have repeatedly questioned that the supervision department has no specific a specific number to know. For example, when will you be able to ask for a discount? There is no specific number to tell us. But I think we hope to have as many as 20 discounts as possible to ensure that we can survive. If everyone thinks that if all the players in the market die in the end, then I don't think the problem of financing is solved. In fact, the problem of financing is difficult. There is no way to solve it. So in this question, we talked about three things. In terms of reducing costs, our goal is the same as the government's. We have to work hard. We have to improve our operating system, our risk control system, and our cross-border infrastructure. At the same time, we have to improve our operating capacity. Second, I think it takes time. It's a process. Third, to this day, the administration and the government have no specific digital guidance for us. But I think we have that direction. We have a foundation inside ourselves. We hope that in the future, you can see that we will gradually come down. I think we will come down to a basically market and we, the administration, can all accept this gap. That's about it.
spk06: One quick summary of the translation that Tim and Chi just gave. Basically, three points to summarize. Number one, we're fully aligned with the regulatory and the overall society's intention to lower funding costs for small business owners. We'll do our utmost by technology, efficiency improvement, risk management, better negotiation with funding partners to lower our cost components to achieve that. Second point, I believe the lowering of all our funding costs for the society is going to take some time to achieve. It's not something that can be solved overnight. It requires all participants to work together to achieve that, and obviously we are part of that. And thirdly, so far, there are no specific requirements on the exact number or timing from the regulators on us. But obviously, we do have an internal target. We fully understand the future direction, and we have an internal target to lower it to a appropriate level at the right time.
spk10: Is there any other questions?
spk04: There are no further questions at this time.
spk06: OK, thank you, operator. Thanks, everyone, for joining our call.
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