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 Holdings Third 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, ma'am.

Thank you very much. Hello, everyone, and welcome to our third 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-Ting Zhu, will then provide more details on our financial performance and 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 CEO of Lufax. Please.

Thank you for joining us today for our third quarter 2024 earning call. During the third quarter, while poor loan demand remained weak as small business owners continue to face a complex macro environment, we saw ongoing growth in our consumer finance business. We are hopeful that policy stimulus measures introduced by the Chinese government in late September will help improve the macro environment. and have a positive impact on our business performance in the long run. Meanwhile, we plan to stay vigilant and prudent in the execution of our business strategies in light of the increased risk exposure on the 100 Guaranteed Business Model. Before we discuss the business details, let me share some updates on the macro environment. In the third quarter, the macro environment remained challenging for small business owners. The SME Development Index declined by 0.3 points quarter over quarter to 88.7 in September. The Business Conditions Index published by the Chung Kong Graduate School of Business also declined from 49.3 in June to 46 in September, suggesting persistent challenges faced by small business sector. On the other hand, we are encouraged by sign of mild recovery in the consumption sector during the third quarter. As the CPI showed improvement from 0.2% in June to 0.4% in September. In late September, we are glad to see that Chinese government announced a number of new stimulus policies, including measures to help the recovery of the real estate sector and increased liquidity, such as a cut to reserve requirements ratio and the lowering of existing mortgage rates. Local governments also launched a series of stimulus initiatives relating to real estate and consumption to boost consumer confidence and strengthen the economy. We believe all of these efforts have a positive impact on SDOs in China. We recognize it will take time for SBOs to benefit from these measures and improve performance, so we remain prudent as we execute our business strategies in the short term. Furthermore, we will also put more emphasis on our non-SBO customers and continue to grow our consumer finance business. This will help us take full advantage of the gradual effects of consumption recovery and will build solid position for our future growth. Now let's turn to our operating results. First, let's take a look at our loan volume. Total new loan sales in the third quarter were 50.5 billion, year over year, and improving by 11.7% from last quarter. The quarter-on-quarter growth despite the macro challenges, was mainly attributable to the continued growth of our consumer finance business, which offset the ongoing weakness in pre-loan demand from high-quality SBOs. New consumer finance loans increased by 27.8% year-over-year and accounted for 52% of our total new-owned sales in the third quarter. as a result of our continued efforts to roll out smaller tickets and revolving product structures. Balance-wise, our total loan balance stood at $213.1 billion as of the end of third quarter, of which consumer finance loans took up 22%. Turning to asset quality, our tightened risk control policies and enhanced risk assessment systems have helped maintain stable asset quality. The C2MC flow rate of Puhui loans remained at 0.9% during the third quarter, despite a decrease of total balance as compared to the second quarter. The asset quality of our consumer finance loans also stayed strong. With the NPL ratio further decreasing to 1.2%, from 1.4% in the second quarter. As loans enabled under the 100% Guarantee Model kept increasing as a percentage of total loans, our balance take rate rose by 1.9% points year over year to 9.7% during the third quarter of 2024. Cost of funds continued to decrease, driven by both monetary policy stimulus and our diversified license strategy. As mentioned during our last earning call, we acquired a nationwide small lending license in July. We started to provide new loans under this newly acquired nationwide small lending license in August. As of the end of third quarter, we have provided more than $1 billion in new loans under this new license. We believe our small lending license has the potential to further reduce our funding cost, diversify our product portfolio, and improve our capital management efficiency. Finally, I want to provide an update on Ping An Group's mandatory general offer. On September 27th, Ping An Group dispatched offer documents and commenced the offer period. If there are no additional requirements from regulators, The offer period will end on October 28. As stated in the offer document, Ping An Group is making the offer solely to comply with applicable rules and has no intention to privatize LUFEX. The intention is that LUFEX will continue to remain an independent entity listed on the New York Stock Exchange and Hong Kong Exchange. Looking ahead, we seek to continue to deepen our synergies with Ping An Group, leveraging its brand, reputation, technological resources, and extensive network to strengthen our market position. I will now turn the call 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 third quarter results. Please note, all numbers are RMB terms. and all comparisons on a year-on-year basis, unless otherwise stated. In the third quarter of 2024, our total income decreased by 31.1% to $5.5 billion from $8.1 billion, mainly due to a decrease of outstanding loan balance by 41.8%, partially offset by our increased take rate, as loans enabled under 100% guarantee model constitute a higher proportion of our total loan book. Meanwhile, our total expenses decreased by 19.2% to $6.3 billion from $7.7 billion, among which the total operating expenses declined by 35.9% to $3 billion from $4.7 billion. And credit impairment losses increased by 9% to 3.3 billion from 3 billion. Operating efficiency improved with our operating expenses to income ratio decreasing from 53.8% from 57.8% in the third quarter of 2023. The increase of credit impairment losses was mainly due to increased provision related to our loan book and certain investment assets. As a result, we recorded a net loss of $725 million for the quarter. Turning to the unique economies of our loan business, our APR by balance decreased 19.5% from 20.1%. Despite the decrease in APR, our take-home rate by balance increased to 9.7% from 7.8%. primarily due to the removal of negative impact from a high CGI premium of our transition to the 100% guarantee model, and also thanks to the decrease in our funding costs. We accept that the take rate will further increase as the percentage of the loans enabled under the 100% guarantee model continues to increase, and that funding cost will continue to decrease as we continue to optimize our funding structure by leveraging our consumer finance and a small lending license. On the expensive side of the unit economy, while sales and marketing expenses remain stable, credit costs and other operating expenses will drag on our net margin. Credit costs increase primarily due to the increased risk exposure and provision for our loan books. As discussed before, While we anticipate loans under the 100% guarantee model 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 performances as the loan portfolio matures. The increase of other operating expenses was primarily due to the contraction of our loan balance and the reduced economy of scale. Now, let me highlight a few key P&L items. During this quarter, our technology platform-based income was $1.6 billion, representing a decrease of 49.9%, mainly due to a decrease in retail credit services fees as a result of 41.8% decrease in outstanding loan balance. In addition, it was also negatively affected by cessation of the losing home business in April 2024. Our net interest income was 2.7 billion, a decrease of 18.8% from the same period last year. The relative lower decrease in net interest income was the result of our increase in consumer finance revenue. Meanwhile, our guaranteed income was $818 million, a decrease of 13.1%. In terms of revenue mix, technology platform-based income accounted for 29.5% of our total revenue, down from 40.5% in the same period of last year. Net insurance income and guaranteed income accounted for 48.5% and 14.7% of total revenue in the third quarter, respectively as compared to 41.1% and 11.7% in the same period last year. In terms of expenses, our credit impairment losses increased by 9% to 3.3 billion, mainly due to increased provision related to loans as we applied a more prudent approach in our ECL model to reflect the complex macro economy environment in the third quarter, as well as increased provision related to certain investment assets. Our total sales and marketing expenses, which include expenses for borrow, acquisition cost, as well as the general sales and marketing expenses, decreased by 49.9% 49.9% to 1.1 billion, mainly due to reduced loan-related expenses resulting from the decrease in new loan sales and outstanding loan balance, as well as the elimination of expenses associated with our losing companies. Operation and the service expenses decreased by 25.8% to 1.1 billion, as a result of our continued effort to control expenses and decrease loan balance, partially offset by increased commission associated with improved collection performance. Our finance costs increased by 48.9% to 59 million from 40 million, mainly due to the decrease of interest income from bank deposits, partially offset by the decrease of interest expenses after repayment of our C round curriculum processing note upon the maturity on September 30, 2023. In terms of capital, as of the end of September 2024, our main operating entities remain well capitalized. Our Guaranteed Subsidiary Leverage Ratio stood at 2.6x and our Consumer Finance Subsidiary Capital Equity Ratio stood at 14.9% as compared to the 10.5% regulatory requirement. As we deal with the complexity of the broader economy environment, we are now seeing encouraging signs in terms of asset quality and in the 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 operation and will uphold a commitment to bring value to our shareholders. That concludes our prepared remarks for today. I pray that we are now ready to take questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. In addition, I'd like to remind you to please mute yourself after stating your question. At this time, we will pause momentarily to assemble our roster. The first question today comes from Betty Lee with CLSA. Please go ahead.

Thank you, management, for the opportunity to ask the first question. So I have two questions. The first one, could you kindly express what will be the impact of the new policy stimulus on your business? The second is, could you share more about the business outlook for this year and beyond? Thank you.

Thanks, Betty. About stimulus policy, it is surely a part of the impact, I think, on over-economy and our SCBO segments as well. But knowing small business owners in general are in difficulty now, it will take more time for them to benefit from these measures and improve performance. So in near term, we remain prudent and put asset quality over quantity for SCBO lending But at the same time, we take full advantage of the gradual recovery by putting more emphasis, focus on non-STBO segments and expedite small and medium-sized TCHAT loan growth using our CF license, Consumer Finance license, and then newly acquired small lending license with their funding cost advantage and customer experience advantage over guaranteed model. And then about our look, our look question. So our volume guidance of Runminbi, 190 billion to 220 billion. And loan balance of Runminbi, 200 billion to 230 billion. That remains unchanged. On a single account basis, We know that due to the upfront provision of the 100% guarantee model. So profitability is under pressure in the first, very first change of year, but going forward, we know that, we believe the overall lifetime profitability will surely improve than before.

The next question comes from Judy Zhang with Citi. Please go ahead.

Thank you, management. I have two questions. The first question regarding on asset quality. I understand that Lufax has been de-risking Lumbok for some time, which is the bearing food in the recent quarters. Could management share a bit more color on our latest asset quality performance and how has our flow rate, delinquency rate, been trending since 3-2? And second question is, Does management have any plan to announce another round of special dividend this year, or any other measures that you are considering to boost the shareholders' return? Thank you.

Okay, thanks, Judy. The asset quality indicator remained stable in the third quarter, with C2M's flow rate of our pre-loans remaining at 0.9%, despite decline on balance. So why our consumer finance NPL ratio continue to improve from 1.4% to 1.2%? Knowing that our loan balance reduction will come to an end in a few months, a few months later, and the portfolio account mix in terms of account vintage, that mix will continue to optimize. So I believe we'll be able to demonstrate more obvious asset quality improvement measured by NetFlow not before long, so that we have confidence. About shareholder return, we do not have any specific plan yet after our special dividend this year, but the management team is committed to provide long-term shareholder returns as always, and we'll consider all positive ways to return value to shareholders going forward.

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

Hello, management. Thanks for taking my questions. My first question is regarding the credit impairment loss. Could you please share a little bit more about why the credit impairment losses increase this quarter while the risk indicators remain stable? And secondly, I was wondering what is the trend of the funding costs going forward? That's all. Thank you.

I tried to answer the first question. The increase is mainly due to the provision associated with our loans and certain investment assets. The increase of loan provision was driven mainly by the upfront provision of loans under 100% guarantee model, as we discussed. And the prudent approach, and also the prudent approach in our model to our conservative forecast based on the micro environment in the sub-quarter. We're still seeing some uncertainties in the micro-economy. The second question, I know you're interested about our funding cost trend. Our funding cost further decreased in the sub-quarter thanks to the variable monetary policy and our diversified license strategy. Also, we try to spend more time to work with our partners and try to cut down some of the funding costs in terms of the different products. And also, we expect funding costs will further decrease as we continue to optimize our funding structure by leveraging consumer finance and small lending licenses. Thank you.

Thank you. That concludes our question and answer session for today. I will now turn the call back over to management for closing remarks.

Thank you. This conference is now concluded. Thank you for joining today's call. If you have any more questions, please do not hesitate to contact our IR team. Thanks again.

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