Lufax Holding Ltd American Depositary Shares, each representing two (2) Ordinary Shares

Ladies and gentlemen, thank you for standing by and welcome to the Lufax Holding Second Quarter 2024 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. Please go ahead, Madam.

Thank you very much. Hello, everyone, and welcome to our second quarter 2024 earnings conference call. Our financial and operating results were released by our Newswire services earlier today and are currently available online. Today, you will hear from our Chairman and CEO, Mr. Y.S. Cho, who will provide an update of the recent developments and strategies of our business. Our CFO, Mr. Pei-Qing Zhu, will then provide more details on our financial performance in business operations. Before we continue, I would like to refer you to our Safe Harbor Statement in our earnings press release, which also applies to this call, as we will be making forward-looking statements. With that, I'm now pleased to turn over the call to Mr. Y.S. Cho, Chairman and the CEO of Lufax, please.

Thank you for joining us today for our second quarter 2024 earning call. In the second quarter, the macroeconomic environment remained complex for small business owners. Despite this, we saw continued improvements in asset quality across both our Hui and consumer finance businesses. as we continued to implement our prudent business strategies. We believe this will provide a solid foundation for our future growth. Let me provide some updates on the macro situation before we discuss the business details. The SME Development Index trended down by 0.3 points quarter over quarter to 89 in June. Meanwhile, the Business Conditions Index published by the Chung Kong Graduate School of Business, declined from 50.1 in March to a 49.3 in June, falling below the 50 threshold and reaching its lowest level for the first half of 2024. These indicators underscore the persistent challenges faced by the small business sector Now let me provide some updates on our operating results. First, let's take a look at our loan volume. Our total new loan sales in the second quarter of 2024 were $45.2 billion, representing a 15.5% year-over-year decline. The decline was mainly caused by a 35% year-over-year decrease of public loans. which comprised 51% of total new loan sales in the second quarter, reflecting our continued emphasis on quality over quantity and sluggish demand for pre-loans among high-quality SBOs. Meanwhile, our consumer finance business continued to grow and delivered a solid performance during the quarter. Consumer finance loans sold a 23.6% year-over-year increase in neuron sales, representing 49% of our neuron sales, as a result of our continued efforts to roll out smaller tickets and revolving product structures. Furthermore, we are pleased to observe a notable improvement in asset quality as we adopt more stringent credit standards with focus on higher quality customer segments and resilient geographies, bolstered by our enhanced risk assessment system. For point loans, the C2MC flow rate improved 2.9% from 1.0% in the previous quarter, mainly driven by the improvement of C2MC ratio of unsecured loans. Our consumer finance loans also saw asset quality improvements, with NPL ratio decreasing to 1.4% from 1.6% in the first quarter. Next, let's take a look at our loan loans under the 100% Guarantee Model. As discussed previously, since the fourth quarter of 2023, all new PUI loans have been enabled under the 100% Guarantee Model. As our pre-loan balance increasingly represents loans enabled under this model, our balance take rate has trended upwards, reaching 9.3% during the second quarter. As a negative impact from high CGI premiums has been eliminated. Thanks to this improved asset quality, our credit costs have remained stable despite increased risk exposure. However, It is worth noting that due to decreasing loan balances, our unit operating expenses have increased, which has become a key drag on our unit profitability. Let me now provide some business updates on our newly acquired PAO bank. By leveraging strategic synergies with LUPEX following the acquisition, PAO Bank delivered solid growth in the first half of 2024. Its total loan balance stood at $2.4 billion by the end of the second quarter, representing a 45% year-over-year increase. Going forward, PAO Bank is planning to roll out new initiatives, including insurance, wealth management products, to better serve SME and retail customers. To reinforce the strong license strategy we have discussed in the past, we recently acquired a nationwide small lending license. We believe this new license will help further reduce our funding costs, diversify our products, and improve our capital management efficiency. Now turning to the progress of our special dividend, I am pleased to announce that we completed the distribution of special dividend at the end of July as scheduled. After receiving the script dividend, Ping An Group's ownership increased to 56.8%, and Ping An Group now consolidates our financial results. LUFEX will remain an independent entity listed on New York Stock Exchange and Hong Kong. Meanwhile, we will seek to enhance synergies with Ping An Group primarily in the following three key areas. First is branding. Piyang Group is a Fortune 500 company and a leading global financial institution. Its strong global reputation and financial standing will serve as a powerful endorsement for LUFEX, deepening trust among our customers and funding partners. This enhanced brand association will improve our domestic and international standing. and can potentially help lower funding costs. Second is technology. We will leverage Ping An Group's extensive technological resources, including its advanced AI systems, to further strengthen our risk management and food prevention measures. Our goal is to provide small business owners and consumers with efficient, secure, and cost-effective financial services. Third is channel resources. While adhering strictly to applicable laws and regulations, we aim to expand our reach by tapping into PN Group's extensive nationwide network of online and offline channels. This expansion will complement our efforts to strengthen our direct sales force. In summary, our expanded relationship with PN Group will help us better serve our SBO customers. easing their difficulty and expense of financing. With our strengths and capabilities, we strive to be a benchmark company with a unique role in supporting the growth of China's vital, small, and micro enterprise economy. While the MECOM environment remains complex, we are encouraged by the improvements in asset quality and the progress of our strategic initiatives. We remain committed to our deliberate strategic approach as we continue to navigate the economy landscape and have set our sights on achieving sustainable quality growth. I will now turn the court over to Pei-Ching, who will provide more details on our financial performance and business operations.

Thank you, Wise. I will now provide a closer look into our future results. Please note that all numbers are RMB terms and all comparisons are on year-on-year basis unless otherwise stated. In the Q2 2024, our total income decreased by 35.5% to $6 billion from $9.3 billion in the Q2 2023, mainly due to a decrease of outstanding loan balance by 44.8% from $426.4 billion as of June 30, 2023 to $235.2 billion as of June 30, 2024, partially offset by our increased tax rate as loans enabled under 100% guarantee model constitute a higher proportion of our total loan book. Meanwhile, our total expenses decreased by 20.3% from $8 billion to $6.3 billion, among which the total operating expenses declined by 29.7%, from $5 billion to $3.5 billion. And the credit impairment losses decreased by 14.6%, from $3 billion to $2.6 billion. The gap between the decrease of revenues and operating expenses was mainly caused by the decreased economy of scale, which resulted in increased fixed expenses to income ratio. The decrease of credit impairment losses was mainly due to the decrease in actual losses of loans as a result of improvement of credit performance, partially offset by upfront provision from loans and the 100% guarantee model. As a result, we recorded a net loss of $730 million for the second quarter. Turning to our unit economy for the pool of revenues, our APR by balance decreased from 20.3% in the Q2 2023 to 19.6% in Q2 of 2024, primarily due to the change of customer mix as we continue to prioritize high quality customers. Despite the decrease in APR, our take rate by balance increased to 9.3% from 7% in Q2 2023 due to our successful transition to the 100% guarantee model. We expect the take rate will further increase as the percentage of loans enabled under 100% guarantee model continues to increase. In addition, our funding cost also decreased slightly thanks to the available monetary policy and the support of our funding partners. On the other hand, while sales and marketing expenses remain stable, credit cost and other operating expenses drag on our net margin. This was primarily due to the construction of our loan balance. Furthermore, while the actual losses decrease as a result of improvement in asset quality, we recorded more upfront provision for loans enabled under 100% guarantee model. As discussed before, while we anticipate this part of the loans will be lifetime profitable, it's important to note that these loans may incur accounting losses in their first calendar year due to higher upfront provisions. This accounting treatment affects our short-term profitability, but is expected to lead to improved long-term financial performance as the loan portfolio matures. Now, let me highlight a few of P&L items during this quarter. Our technology platform-based income was two billion, representing a decrease of 51%, mainly due to the decrease in retail credit services fees, as a result of 44.8% decrease in outstanding loan balance. In addition, it was also negatively affected by the close of the Lu Jintong business in April 2024. Our net interest income was 2.7 billion, a decrease of 19.3% from the same period last year. The relatively lower decrease in net interest income was the result of an increase in consumer finance revenue. Meanwhile, our guaranteed income was $850 million, a decrease of 26%. In terms of revenue mix, technology platform-based income accounted for 33.4% of our total revenue, down from 44% in the same period last year. Net interest income and guaranteed income accounted for 45.4% and 14.2% respectively of total revenue in Q2, as compared to 36.3% and 12.4% in the same period last year. In terms of expenses, our credit impairment losses decreased by 14.6 to 2.6 billion. Our total marketing expenses, which includes expenses for borrow, acquisition cost, as well as general sales and marketing expenses, decreased by 46% year on year basis to 1.4 billion in the Q2. The decrease was mainly due to reduced loan related expenses resulting from decrease in the new loan sales and outstanding loan balances as well as the elimination of expenses associated with our Lu Jintong business. Our operation and service expenses decreased by 15.8% year on year to 1.3 billion in Q2. as a result of decreased loan balance and our continued effort to control expenses, partially offset by increased commissions associated with improved collection performance. Our finance costs decreased by 90.2% to $13 million in Q2 from $136 million in the same period of 2023, mainly due to decrease of interest expenses after the repayment of C round convertible promissory notes and other debts, partially offset by the decrease of interest income from bank deposits. In terms of capital, at the end of June 2024, our main operating entities remained well capitalized. Our guaranteed subsidiaries leverage ratio stood at 2.4x, and our consumer finance subsidiaries capital adequacy ratio stood at 14.7%, well above the 10.5% minimum regulatory requirement. As we deal with the complexity of the broader economy environment and our strategic shift to the 100% guarantee model, we are seeing encouraging signs in terms of the asset quality and in growth of our consumer finance business. We will remain committed to our prudent strategy as we seek to build a solid foundation for long-term, sustainable future success. I will uphold our commitment to bringing value to our investors. That concludes our prepared remarks for today. Operator, we are ready to take questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. In addition, I'd like to remind you to please mute yourself after stating your question. Thank you. The first question comes from Emma Zhu with Bank of America Securities. Please go ahead.

Thank you for the opportunity for the first questions. Actually, I have two questions. So the first question is about the loan demand. So how is the overall loan demand currently? So we see that in second quarter, you granted RMB 45.2 billion new loans and the accumulated amount of the new loans issued in the first half reached RMB 93.3 billion. according for around 42% to 49% of your four-year guidance at the beginning of the year. So do you think you are still on track to meet your four-year target? And when will we see the turning point of the long-growth recovery? And the second question is that, yeah, congratulations on the continued improving asset quality. So your M3 flow rate has declined two quarters in a row and down to 0.9% in the second quarter. So do you think you can continue to see the improvement in the flow rate? And how will management try to sustain this good trend? Thank you.

Thank you, Emma, for your question. The first question, loan demand. Yes, loan demand in Ovor is still weak. For loan growth recovery, it largely depends on macro environment improvement. So while we keep our prudence values on SCBO lending, we see that from our CF business, the consumption loan demand is actually more unstable. So we focus more on consumer finance and relatively large ticket size consumption loan to cope with declining SCBO loan demand in near term, especially in the regions where our loan volume contraction is more significant. And for your second questions, We all know that it is not easy to improve C2M3 flow rate while loan balance keeps declining. But with continuous portfolio mix improvement, what I mean is now we see that more and more accounts from 2023 and 2024 vintage takes a bigger part of the whole portfolio, which is better quality accounts. So we believe our asset quality measured by C2MC flow rate will continue its improvements. And also, we put tremendous effort in our risk model, underwriting model, and also collection model upgrade, and then a safe quality management process. So all in all, we are confident about sustainability of our asset quality going forward. Thank you.

The next question comes from Yada Li with CICC. Please go ahead.

Hello, management. Thank you for taking my questions. I have four questions today. Firstly, I was wondering in what areas do we see more collaboration potential in the future with the Ping An Group? And secondly, I'd like to ask do we have any plans to further increase the shareholder returns Looking at the cash at hand and the future loan size, what could be the potential amount available to distribute to the investors? Third, I noticed that the funding cost decreased slightly in the second quarter, and I was wondering what's the outlook for the future funding cost? And last, I want to ask, why the OPEX to income ratio hike in the second quarter, do we see any room to further improve this ratio? That's all. Thank you so much.

Okay, let me answer your question one, two, three. Thanks, Yara. Let me see my notes. After special dividend, Ping An Group's ownership increased much, much close to 57%, so 56.8%. We've been working closely with Ping An Group from the very beginning in a few key areas, like customer sourcing, using their online, offline channels, and technology development, and then brand sharing. But with increased Ping An Group ownership now, we expect it will help us to reduce funding costs, the good reputation, financial standing. So, actually, your third question is about funding costs. We believe funding costs has been actually decreasing or optimizing. We believe this trend will continue. And also with the equation of that nationwide small loan lending license that comes with better or low funding costs going forward. So we are confident about the funding costs for the improvements. And then about the second question, although the Board of Directors has determined that no semi-annual dividend will be paid at this time, because we made a net loss recorded for the first half of 2024. But management is dedicated to returning value to shareholders. We always seek out potential ways to increase shoulder returns, as demonstrated in this special dividend this time. And our annual dividend policy, which is 20 to 40% of net profit, and we pay semi-annually, that policy does not change, remain unchanged.

About the funding cost, I would like to share some of my view. For our Pukui loan, we expect that just because of the LPR policy, the central bank released the variable monetary policy to the market. That will definitely support our partners. Of course, they were passed to our companies. So together with the synergy of the Ping An Group, which will enable us to enjoy a low funding cost. For consumer finance loans, I believe that we will continue to set a lower interest rate in the interbank market. Actually, you can see the trend also in the interbank market, right? The rate was led by the central bank to going down. And we expect that funding cost will remain at a relatively low level. And generally we will say that we are optimistic to our overall funding cost that will continue to decrease. And another question about up to our income ratio increase in second quarter. Although we remain committed to the cost optimization, our impact to income ratio trend upwards during this quarter. This was mainly due to our loan scale contraction that led to a decline in economy scale. In addition, some of the fixed expenses contributed to the increase. Looking forward, we will continue to improve our operational efficiency by leveraging the technology and the CNG and the digitalization and the work together with the Ping An Group and our internal efforts. Thank you.

Thank you. 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. This concludes today's call. Thank you all for joining the conference call. If you have more questions, please do not hesitate to contact LUFAC's IR team. Thanks again.

Thank you. This conference is now concluded. You may now disconnect.