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Lufax Holding Ltd American Depositary Shares, each representing two (2) Ordinary Shares
Q1 2023 Earnings Conference Call
5/23/2023
spk02: Ladies and gentlemen, thank you for standing by and welcome to LUFAX Holding Limited first quarter 2023 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, Ms. Liu Xinyan, the company's head of board office and capital markets.
spk03: Thank you very much. Hello, everyone, and welcome to our first quarter 2023 earnings conference call. Our quarterly financial and operations accounts were released by our Newswire services earlier today and are currently available online. Today, we will hear from our chairman and CEO, Mr. Y.S. Cho, who will provide an update of our latest business strategy, the macroeconomic trend, and the recent development of our business. Our co-CEO, Mr. Greg Tee, will then go through our first quarter results and provide more details on our business priorities and the key drivers. Afterwards, our CFO, Mr. David Troy, will offer a closer look into our financials before we open up the call for questions. Before we continue, I would like to refer you to our State Harbor Statement in our earnings precedent, which also applies to this call. as we will be making forward-looking statements. With that, I am now pleased to turn over the call to Mr. Y.S. Cho, Chairman and CEO of Revax. Please.
spk08: Thank you for joining. As you reflect on the first quarter, it is clear that macro and operating environments continue to pose challenges for many small business owners. However, we are encouraged by some indications of an economic rebound. giving us cautious optimism in our U-shaped recovery. We remain committed to navigating the challenges that lie ahead and maintain our unwavering focus on building a more resilient business. We'll continue to exercise patience, prudence, and preparedness for the anticipated macro upswing in our SEO segment. Let me provide some updates for the first quarter. There are some signs of a gradual recovery in the macro environment, though they remained unevenly distributed at the nascent stage. China's first quarter GDP growth, expanding by 4.5% year-on-year, indicates that the country is on track for its 2023 growth target of 5%. In addition, China's National Bureau of Statistics stated that first quarter was a promising start to the macro recovery. However, Chinese industry profits declined 21% year over year, and we continue to see a divergence in the pace of recovery across industries. While small business owners are becoming more confident, it may still take some time for macroeconomic tailwinds to flow through to our core SME segments. To give an example of this important sentiment, the Peking University survey results published in February show that approximately 80% of SBOs are optimistic about their business outlook in 2023. Over half of survey participants are expecting business volume increases of more than 50% this year. However, it is important to note that SBOs have had less than two months of normal operations in the first quarter after the spike in COVID cases and the Chinese New Year holiday. Thus, it will take time for SBOs to fully resume new business investments, which underpins lending demand. Now let me talk about the impact on our business. I would like to start by sharing our outlook on the U-shaped recovery. During the first quarter, we observed an improvement in credit rating mix and credit quality for new loans initiated in the last two quarters. 82% of new unsecured loans in the first quarter fell within our top three credit rating categories versus 41% a year ago. Neuron growth is increasingly concentrated in our preferred top third and middle third regions, which we believe will prove to be more resilient as the macro environment improves. Notably, the deterioration in asset quality has slowed down substantially in the first quarter. We have also witnessed early signs of improvements in asset quality in certain economically resilient regions and industries. We expect that flow rate will continue to improve gradually through the end of this year when operations of SMEs gradually recover. We also expect that credit charge-offs for the risk-bearing loans will likely peak in the second quarter and then gradually decline in the second half of this year. In the second half, we do expect total credit costs to remain elevated, but underlying driver will shift from past charge-offs to upfront provisioning. Arising from increasing the portion of loans we provide full guarantees for. This will be supportive for net margins in 2024 and beyond. As new growth and the portion guaranteed by us increases progressively over the next several quarters, we anticipate that the revenues will decline at a slower pace than they did this quarter. By year end, we expect the portion of loans that we bear risk as a percentage of entire portfolio to exceed 40%. This ratio stood at 24.5% at the end of the first quarter. Our ability to focus more on new business is made possible by three factors. One, the improving medical environment. Two, ongoing progress in rating funding partners for our deployment of the model, where we provide the entire guarantee. And three, the recent completion of our front-fine restructuring, which was difficult but necessary. As a result, the main drivers of our U-shaped recovery are taking shape. But as we have stated previously, we expect a notable recovery in profits underpinned by stabilized ANR to be a 2024 event. As part of our U-shaped recovery plan, we have implemented several strategic initiatives. We have completed the restructuring of our direct sales force and further optimized our headquarters and front-line operating costs. Total expenses including excluding credit impairment losses finance and other costs in the first quarter decreased by 21.5% versus a year ago. The total number of direct sales force decreased from 47,000 as of the end of 2022 to around 36,000 as of the end of the first quarter. We managed to retain the most productive members of our direct sales team. whose average productivity is more than double that of those who departed. In line with our plan, 80% of new business in the first quarter came from top third and middle third regions versus 70% a year ago. Now that we have completed our organizational restructuring, we are focused on several priorities. Firstly, we continue to increase the proportion of risk-bearing or neurons we enable, under which our guarantee subsidiary provides 100% credit enhancement. We are encouraged to see our funding partners support for the model where we provide the entire guarantee. Furthermore, as we deepen our position as an SEB advisor, we focus on product diversification and co-selling between our retail credit enablement model and our consumer finance business to meet customer needs. This will diversify our lending duration mix, gradually adding shorter duration products to our longer-term duration base. Finally, we'll continue to enhance productivity in our post-loan recovery efforts to claw back a portion of past credit losses. These key initiatives are supported by our continued investment in technology. During the first quarter, we deployed new technology to help us gain deeper insights into our small business owners' daily operations. For customer onboarding, we strengthened our capabilities by further embedding facial, voice, and location verification features. As a result, we further enhanced our ability to assess owners' business status. For the underwriting process, we introduced real-time assessment of customers' online marketing activities, allowing us to further evaluate their business momentum and repayment capabilities. These changes in credit process are augmenting our historical individual credit assessment, so-called KYT, with a deeper insight with owners' business and industries. Next, let's move on to the capital markets. We successfully completed our Hong Kong listing by introduction on April 14th, marking an important milestone in our corporate development. The listing will increase our exposure to the Hong Kong market and broaden our investor base to continue to create value for our shareholders. Additionally, we are pleased to announce that we paid out the second half of the 2022 dividend on an aggregate amount of US$114.6 million in April 2023, demonstrating our commitment to maintain a stable dividend policy. Finally, as we shared in our last earning call, we have substantially completed our regulatory rectification efforts And the industry is now entering a phase of normalized supervision. We believe this normalized supervisory framework will provide greater stability and predictability for our industry. And we will work closely with regulatory authorities to ensure our compliance with all relevant regulations. I will now turn the call over to Greg for more details on our operating resource. Thanks.
spk05: Thank you, Waiya. I will now provide more details on our first quarter results and our operational focus for this year. Please note all figures are in renminbi unless otherwise stated. In the first quarter of 2023, our top line and bottom line performance were adversely impacted by the challenging macro environment. Our total income was 10.1 billion, representing a decrease of 18.2% compared with the last quarter of 2022. This was mainly driven by the decrease in new loans and the pricing pressure from our credit insurance partners. Despite the challenges on our top line performance, we did turn the corner and achieve profitability this quarter with a net profit of $732 million, primarily due to a decrease in credit impairment losses. Now let's dive into the details of our key drivers of the top line performance. One of the key drivers is our loan volume. In the first quarter of 2023, our new loans enabled were $57 billion, representing a year-over-year decrease of 65%. This was mainly driven by our tightened credit standards on new loans enabled. Executing on our strategic initiative in response to the other credit impairment losses in the first quarter, we continued to prioritize higher quality SBO customer segments, concentrated economically more resilient geographies. The proportion of new unsecured loans enabled in the R1 to R3 customers, which are our top three rankings in our R1 to R6 scale, increased to 82% in the first quarter from 41% in the same period of last year. Meanwhile, the contribution from customers in the top third and middle third regions continued to increase and reached 80% in the first quarter of 2023 compared to 70% a year ago. New loans were virtually impacted in the short run by the optimization of our direct sales team. which was difficult but necessary for the long-term development of the company. The optimization was completed in the first quarter, and we managed to retain the more experienced and productive members of our direct sales force. The average productivity of our retained direct sales employees is more than double that of those who departed. We believe that we are on the right path, and we expect to see the results reflected in upcoming quarters. Additionally, we observed that new loan vintages enabled after we tightened our credit standards demonstrate improved asset quality compared with older loan vintages. As we focus on higher quality SBOs, the average ticket size has naturally increased as a result. Average ticket size of unsecured loans for the first quarter of 2023 increased to revenue be 270,000 from 240,000 average for the year of 2022. Our consumer finance business saw healthy growth in the first quarter, despite the challenges in our retail enablement model. The total outstanding balance for consumer finance loans in the first quarter of 2023 was $29.6 billion, up 39% year-over-year, and credit performance was in line with the industry credit performance. Contribution from our consumer finance business grew as percentage of new loans enabled, and it increased from 11% in the first quarter of 2022 to 24% this quarter, further diversifying our product offerings. Another key driver of our top-line performance is take rates. As mentioned earlier, our take rate remains compressed, which is mainly due to the elevated premiums charged by credit insurance partners. Although our tightened credit standards have improved as a quality of new loans, credit insurance premiums have remained at an elevated level to date. We are proactively addressing the take rate pressure by continuing to modify our credit enhancement arrangements. Under these arrangements, our guaranteed company provides full credit enhancement without the involvement of external credit insurance partners. We are encouraged by the fact that our funding partners are supportive of the shift. As of mid-May, five out of six trust partners and 37 out of 78 bank partners have agreed to extend credit under the model where we provide the entire guarantee. In addition, 31 of our funding partners are already extending new loans under the model where we provide the entire guarantee. As a result, our credit risk-bearing by balance in the first quarter further increased to 24.5% and is expected to exceed 40% by the end of this year. We believe we have adequate capital to support the increase in risk-bearing loans as the leverage ratio of our guaranteed subsidiary was less than two times as of the end of the first quarter, well below the regulatory limit of 10 times. As such, we expect our take rate will gradually improve over the next several quarters as we increase the guarantee potion for new loan business. Next, let's go to the details of our bottom line drivers. The main driver of recovery in our bottom line was a decrease in credit impairment losses. In the first quarter, credit impairment losses declined by more than 50% to $3.1 billion from $6.7 billion in the fourth quarter of 2022. This was mainly driven by a notable decrease in provisions compared with the previous quarter as we've taken a more conservative view on the outlook for credit quality prior to post-pandemic reopening. As the macro environment gradually normalizes and activity is picking up in the first quarter, we partially released a portion of the previously made provisions, which had a positive impact on our P&L. The improvement in our credit impairment losses is also visible in our C2M3 ratios, the forward indicator on asset quality that we monitor closely. It stood at 1% in the first quarter, remaining unchanged with the fourth quarter of 2022. This was primarily attributable to the increase in C2M3 for general unsecured loans from 1.1% in the fourth quarter of 2022 to 1.2% in the first quarter. but this was partially offset by a decrease in flow rate for secured loans from 0.6% to 0.5%. While the asset quality of secured loans is clearly improving, it is worth noting that deterioration in asset quality of unsecured loans has slowed down substantially in the first quarter, and the delta of C to M3 flow rate was 10 basis point increase versus a 20 basis point increase in the fourth quarter of 2022. We will continue to monitor closely such indicators in the coming quarters as they are critical to determining the speed of our U-shaped recovery. Looking ahead for the remainder of 2023, we expect credit impairment losses in each quarter to be on par with those during the first quarter. This is mainly due to our planned expansion of the model, where we provide the entire guarantee during the coming quarters. The extension of such model will increase upfront provision levels, but should result in improved net margins over the medium term. During the first quarter, we continue to make progress in our new SVO ecosystem. As a recap, our new value-added services platform, branded Bu Dian Tong, is an open platform populated with digital operating tools and industry content to support business development for our small business owners. We intend to use this platform to engage potential customers at an earlier stage, deepen our interaction with existing customers, and create both new cross-sell opportunities and a new source of customer referral. As of March 31st, 2023, we had approximately 1.9 million registered customers on Lujan Tong, which submitted their complete business or personal information, an expansion of roughly sevenfold from the end of 2022 through this first quarter. As Wyeth mentioned, in the face of an uneven post-pandemic economic recovery, we are cautiously optimistic in realizing our U-shaped recovery. However, we will remain prudent on absolute levels of new growth until we see definitive improvement in overall lending demand and credit quality. While we expect to see gradual recovery in our core business metrics in the second half of this year, notable bottom line performance improvement is expected to be a 2024 event. I will now turn it over to David, our CFO, for more details on our financial performance. All right. Thank you, Greg.
spk07: I would like to provide a close look at our first quarter results. It's no step on them, but I'm going to be charged, and all conversions are on a year-over-year basis on that underlying basis. As Wyatt and Grant mentioned before, our performance was impacted by the macro environment and our customer selection, resulting in a 41.8% decrease in our top-line social income to $10.1 billion for the first quarter, while our social expenses decreased by 0.8% to $9 billion. As a result, our net revenue was $732 million in the first quarter of the year. During this quarter, our technology-based income, platform-based income was $5 billion, representing a decrease of 46.1% of our revenue. Our net income system was $3.3 billion, a decrease of 32.8%, and our guaranteed income was $1.4 billion, representing a decrease of 25.5%. As a result, our technology platform-based income service fee as a percentage of total income declined to 49.7% from 53.7% a year ago. In addition, due to the increase of income from consumer finance loans, our net interest income as a percentage of total income actually increased to 33.2% from 28.8% a year ago. Furthermore, as we continue to better utilize our guaranteed company's abundance of capital, to bear more credit rates by ourselves instead of through our T&T insurance partners. We generated more guaranteed income, reaching 14.1% of the total income as compared with 11% a year ago. Our other income, which mainly includes accounts, management fees, collections, and other credit as a service fee, is charged to our credit and customer partners as part of the retail credit and employment process. was $227 million in the first quarter of 2023, compared with $704 million in the same period of 2022. The change was mainly due to change in the fee structure that we charge to our primary credit and housing partners. Turning to our expenses, we continue to critically manage our operational expenses. Our total expenses excluding credit and asset retirement losses and other losses decreased by 21.5% year-over-year to $5.7 billion this quarter, as referring to the operating efficiency. In the first quarter, our total expense decreased by 7.8% to $9 billion from $10.2 billion a year ago. This decrease was primarily driven by sales and mining expenses. Our total sales and market expenses, which mainly include expenses for borrowers and investor equity supports, as well as general sales and market expenses, decreased by 32.4% to $3 billion in the first quarter. This decrease was due to three factors. First, the decrease in minimum sales and reductions of commissions. Second, the decrease in investor equity and expense expenses and insurer expenses from platform servicing driven by from the platform services driven by decreased transition volume, and finding a decrease in general sales and market expenses, which was driven by a decrease in new loan sales. Our general and administrative expenses increased by 4.2% to $756 million in the first quarter, mainly due to the ceiling fixed costs, which are less than a 5% decrease in loan volume. Our operational and subsidy expenses decreased by 2% to $1.6 billion in the first quarter, mainly due to expense control measures and decreases in long-term and long-term sales. Our credit in capital losses was $3.1 billion in the first quarter, compared with $2.8 billion a year ago, an increase of 10.9%. This was primarily due to the increase in capital losses as a result of personal credit problems largely due to the part of the challenging economic environment. Partly offset by decreases in positions, driven by the decrease in loan products that require credit needs. Our finance costs increased by 10.5% to $189 million in the first quarter from $211 million in the third period of 2022. Mainly due to the increase of interest in offshore bank deposits. Partly offset by the increase of interest rates driven by increased basis rates. As a result, net profit for the first quarter was $732 million, compared with net profit of $5.3 billion in the second quarter of 2022. Meanwhile, our basic and diluted earnings per ADS during the first quarter both remedied to $2.3 billion, or U.S. dollar, $2.04 billion. On the balance sheet side, our balance sheet remains strong and solid as our cash flow bank balance increased. March 31, 2023, with a cash balance of $51.3 billion, as compared with $43.9 billion at the end of last year. In addition, liquid assets factoring in $98.4 billion at the end of March, 2023. As of the end of March 2023, our governing committee's last proposal is zoning 1.7 times, while the last three are limited to 3.10 times. All this provides strong support for the company to remain resilient in the face of an underway disaster and to continue our stable and sustainable policy. That concludes our prepared demands for today. Operators, we are now ready to take questions.
spk02: Thank you very much. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two to withdraw your question. When preparing to ask your question, please ensure your phone is unmuted locally. In addition, I would like to remind you to please mute yourself after stating your question. Thank you. We now have our first question from Alex from UBS. Please go ahead.
spk06: Hi, thanks very much for taking my question. So my question is running out in the pricing outlook. So could you give us some color in terms of what's the average loan pricing for our portfolio and about the pricing for the new unsecured loans? And I guess there are two parts to this question. First, on the regulatory front, so we have been lowering the loan price in the past two to three years due to some regulatory pressure. So I'm wondering, is there any follow-up our comments from the regulators in terms of where we are do you think we have reached a level where the regulators is now more comfortable with and second if we just put aside the regulator pressure for now and just focus on the supply and demand dynamics for the sbo segment um should we expect some further downward pressure on loan pricing ahead given now that we are further upgrading our customer profile to better quality followers and given the current pace of economic recovery appear to be quite modest. I'm keen to hear your view. Thank you.
spk08: Thanks, Alex, for your question. So far, we haven't got any further instructions from regulators about further lowering APR. If you look at the first quarter APR, the blended APR for all neurons in the first quarter is already less than 20%. And then that, if you compare with other peers, we are absolutely and obviously lower than other peers' average APR. We are quite lower. So I believe we are in a good shape in terms of over APR level. And I believe that really well meets regulatory requirements. And now we also have more flexibility in others to adjust APR upwards or downwards whenever necessary. Our overall price is more determined by market demand and supply. And also we consider our operating costs, which includes funding cost, and then credit cost, and then our operating cost, which includes our sales expense. So we don't believe, we don't think that the targeting time segments will necessarily further reduce our API. We are already less than, again, less than 20% for all neurons, so I expect I do not expect noticeable change in terms of APR in the near future.
spk02: Thank you very much. We now have our next question from Emma Shute of Bank of America. Please go ahead.
spk00: Thank you for taking my questions. I have two. The first one is about asset quality. On one hand, we see some encouraging signs of your portfolio. As the management mentioned earlier, there is already some green shoes in the business and you expect flow rate to gradually improve. in the coming quarters. However, on the other hand, we see the flow rate of your unsecure loan continue to increase in first quarter, while your total flow rate just remains flat quarter over quarter. So could you give us more discussion about the asset quality of your legacy loan portfolio? And a related question is, how is the collection of your charge of loans? As the management also mentioned in the report that you are try to increase the effort to recover past credit losses, which may contribute to the net profit in the future. So could you give us more details on this front? The second question is about the loan demand. So how is the loan demand so far? And is the high CGI cost the major reason that limits your loan growth in first quarter? What's your progress of moving to the 100% guarantee model? And will we expect to see the loan growth more, to see more strong loan growth in the second half when you move to this entire guaranteed model? Thank you.
spk08: Thank you, Emma. The situation in Esther Quartz has slowed down substantially in the first quarter. If you look at C2M3 flow rate for the total loans was 1.0% in the first quarter this year, which remained unchanged from fourth quarter last year. But if we consider that our balance, loan balance has been declining in this month, month after month. So if we analyze in this way, for example, if we only compare the accounts, whose month-on-book is less than six months or 12 months. So to remove the impact from declining balance on our net flow rate. Then now we already see a certain increment trend. Now I believe we can show, we can demonstrate more obvious improvements from the next quarter onwards. So there we have confidence. And as the company continuously carry on new shape recovery plan, now we observe on implement in credit rating mix and credit quota for nuance initiated in the last two quarters. Yes, we know that we had large amount of last year. So that is one of our focus this year. We are now sensing our post-recovery accidents to grow back more from the past credit losses. And then I see your question about loan demand. Our loan demand is decided by how our SEO customers see their future economy, right? And in this regard, we haven't seen any obvious change in the world. But no matter what, if you understand our monthly new sales volume and then our market share, actually, loan demand itself should not be of our concern because we are compared to the market size. our market share is very small. So we don't really worry about loan demand at this moment. And the decrease of new loan growth, recent decrease, was mainly given by our tightened underwriting credit policy and also partly due to our DSP reform. That was the reason. And speaking of 100% guaranteed model, we are making a great progress. We are very happy. we are encouraged to see that our funding partners did provide good support for the model where we provide the entire guarantee. By now, five out of six trust partners, they agreed, and 37 out of 78 bank partners, they also agreed to extend credit under the model where we provide full guarantee. In addition, 31 of our funding partners are already providing disbursing loans under this model. So we are making a good progress, and then I think the whole transition can be relatively quick.
spk02: Thank you. Thank you very much. We now have our next question from Richard Hsu of Morgan Stanley. Please go ahead.
spk04: Thank you. I have a question on the funding cost. Just wondering what's the funding cost at the moment, basically as we change from the insurance model to the guarantee model, and what's the overall impact? What will be the level expected to stabilize when shift to the guarantee model is largely complete? Thank you.
spk05: Thank you, Richard. It's Greg here. If we look at the funding costs, which are about 6% overall, they have come down about 30 basis points if you look at the first quarter on a year-on-year basis. As we shift to the 100% guarantee model, we're not seeing much change in that funding cost. In fact, probably you're seeing the market more broadly coming down. So any shifts to the guarantee model is really not having a net impact in terms of funding cost increase. We think it will be quite stable as we look forward through the remainder of the year. On the take rate, if you kind of go and look at historically, our take rate has been in the sort of 8 to 10 percent range. More recently, due to the higher credit guarantee insurance costs, that take rate is now closer to about 7%, 8% rate. As we then move to the 100% guarantee model, right, so if you look out over a year or a year and a half from now when more of the portfolio will be 100% guaranteed, that credit premium or credit insurance premium that was previously paid to our CGI partners will be earned by us. And that number was historically about 5% to 6%. So if you take a base today of 7% to 8%, which is obviously compressed because of the higher CGI fees, and we move to the guarantee model where that take rate moves over to us, then you should be looking at, on a stabilized basis over the longer term, a take rate of about 14%. So we think that's where things will end up probably in about a year and a half from now when we've made more of the complete shift.
spk04: Got it. Thank you.
spk02: Thank you very much. We now have our next question from Yada Lee of CICC. Please go ahead.
spk01: Hello, management. This is Yada from CICC, and thanks for taking my question. My question today is regarding the risk-bearing percentage, and I was wondering what is the trend of this percentage going forward and how to view this change and potential impact on our top line credit impairment losses and the bottom line. And that's all. Thank you.
spk05: Thank you. In terms of the risk-bearing percentage, as of the end of this first quarter, it was at about 24%. we expect by the end of the year on a portfolio basis to be over 40%. And that means as you move through the second half of the year for new loans, a much higher percentage will be under this 100% self-guarantee model. Now, as we go through that process, similar to the question that Richard just asked, that will increase our top-line revenue because you're basically moving what was paid previously to credit guarantee insurance partners onto the balance sheet and therefore the revenue will come with it. So that will provide a basis for a revenue increase. As we take on more credit risk, we initially have to provision for the new loans. So that is front loaded in the model. So what you'll see in our overall credit impairment costs, right, we had credit impairment costs in Q1 of $3.1 billion. We expect this number over the next couple quarters to remain stable, but what's driving it, the mix is changing. So $3.1 in the first quarter is mostly from the credit impairment costs from the legacy portfolio, if you will, the existing past books. As we move into the second half of this year, you'll still be at about $3 billion or so credit impairment costs, But more and more of it will be coming from the fact that the new business is done, a higher percentage of new business is done through self-guarantee. So while that carries a higher upfront cost, if we look forward into 2024, it should also improve our net margin, right? Because you're shifting from a very high credit insurance cost today of over 10%. to a model where we think that the new business that we're doing should perform more in line with historical levels. And that should be, therefore, constructive for our 2024 profitability.
spk02: Thank you very much. There are no more questions on the line. That concludes our question and answer session for today. I will now turn the call back over to our management for closing remarks. Thank you.
spk03: Thank you. This concludes today's call. Thank you for joining the conference call. If you have more questions, please do not hesitate to contact the conference IRP. Thanks again.
spk02: This concludes today's call. Thank you for joining. You may now disconnect your line.
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