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spk02: Ladies and gentlemen, thank you for saying bye and welcome to the LUFIX Holding Limited's fourth quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, we'll 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.
spk05: Thank you very much. Hello, everyone, and welcome to our fourth quarter 2022 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 and CEO, Mr. Y.S. Cho, who will provide an update of our business performance, the macroeconomic impact, and our business strategies. Our co-CEO, Mr. Fred Gibb, We'll then go through our fourth quarter results and provide more details on our business priorities. Afterwards, our CFO, Mr. David Choi, 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 Safe Harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. Please also note that we may discuss non-IFRS 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 the findings with the SEC. With that, I'm now pleased to turn over the call to Mr. YS Cho, Chairman and CEO of Lufax. Please.
spk08: Thank you for joining. I would like to start by providing some perspective on where we are. and on our business performance in Q4. While the fourth quarter was undoubtedly challenging, we are confident in our strategy to achieve a U-shaped recovery. At present, we must be patient, prudent, and prepared. We need to be patient for the macroeconomic tailwinds to flow through the SMB segment be prudent in implementing new risk strategies and embedding lessons learned from the pandemic period, and be prepared to gear up new business when the improved environment arrives. Recently, we have made the hard decisions on right-sizing risk and resources, with many related execution work streams to be completed in the first quarter. In the first half of 2023, Our focus will continue to be on asset quality overgrowth and depth over breadth in terms of upgrading our direct sales capabilities in prioritized geographies and within SBO customer segments. Our focus will also include optimizing credit enhancement approaches to provide further support to our operating margins and business sustainability in the mid-term. We believe These strategies will lead to a U-shaped recovery. And we remain patient in terms of preparing ourselves for this recovery and delivering sound operating and financial results. Now, I would like to share some updates for the fourth quarter. On the macro environment, we saw that the operating environment for SMBs remained challenging during Q4. Although, there have been signs of recovery in the mid-term since the change of zero-COVID policy on December 7, 2022. The composite PMI was 49 in October, decreased to 47.1 in November, and further decreased to 42.6 in December. Nominal GDP in the fourth quarter grew at only 2.9% year over year, Our SEO segment was shipped particularly hard as a result. With the adjustment of geopolitical policy, we believe China's economy will recover over the next several quarters. We have already seen signs of robust tourism activity and witnessed consumption boom during the Spring Festival. Non-manufacturing PMI returned returned to expansion after six consecutive months of contraction in January. And manufacturing sector PMI hit 52.6 in February, the highest since April 2012. The IMAC has also raised its forecast for China's economic growth in 2023. Meanwhile, the government has called for more efforts to implement Paris package for shoring up the economy. The Chinese government has stressed enhancing the role of finance in stabilizing the macroeconomy and improving financial services for the real economy. As SMBs are highly dependent on the macro environment and operating continuity, it is expected that SMBs operations will gradually turn to normal post reopening. While it is too early to say when a notable recovery in performance will arrive. The indicators that we are monitoring closely include our C to M3 net flow ratio and the asset quality of neuron vintages compared with older ones. For new business volumes, due to challenging macroeconomic environment in 2022, we have prioritized asset quality over growth by tightening our customer selection standards and focusing new customer acquisition in more economically resilient regions. As we have seen a better credit performance from customers in these regions, and we have turned away potential customers who do not meet our credit standards. For example, for our general secured loans, we rank the quality of our borrowers using our R1 to R6 risk rating system. which is based on the customer's credit risk score and their available assets. R1 represents customers with the highest quality and R6 with the lowest quality. Currently, we only enable loans for borrowers that are ranked R4 or better. We have also optimized our risk rating system by factoring in the differences in economic resilience and underwriting underlying credit performance by region and industry. Meanwhile, we have been optimizing our direct sales force to be more nimble, productive, and effective in customer targeting as we focus on higher quality borrowers. We reduced the size of our direct sales force from over 58,000 as of the end of Q3 to approximately 46,000 as of the end of Q4. We have managed to retain the most productive members of our sales force to target more economically resilient regions. During Q4, we made many difficult decisions, including adjustments to customer selection strategy and the operational optimization of the sales force. The above factors, coupled with seasonality, caused our neurons enabled in Q4 to drop by 37%, quarter over quarter, to $77.8 billion. We believe that seasonality accounts for approximately 10% of the decrease between Q3 and Q4, based on the data of the past two years. As a result of the aforementioned factors in Q4, our revenue declined by 6.6%, quarter over quarter. However, the new loans that we enabled should generate better results as compared to loan vintages as a whole from a loan lifecycle point of view. At the same time, while our core SDR customers were impacted by the deteriorating macro environment, we observed that our consumer finance sector was less affected, allowing us to continuously develop and grow our consumer finance business. The outstanding balance of consumer finance loans has grown substantially from $3.6 billion as of December 31, 2020, to $29.7 billion as of December 31, 2022, representing 188% compound annual growth over the two years. Similarly, our borrowers with outstanding consumer finance loans increased from 168,000 as of December 31, 2020, to 1.3 million as of December 31, 2022, representing 179% compound annual growth. We are in the process of optimizing our risk-bearing model. CGI premiums charged by our insurance partners remained elevated in fourth quarter, as they typically price the risk based on historical loan vintages that were impacted by the challenging macroeconomic environment. While we continue to work closely with our credit enhancement partners, we cannot ensure that the outcome of the CGI premium pricing negotiations will align with our expectation. In circumstances and to the extent where we no longer find these partnerships to be commercially attractive, we are looking to increase our risk-bearing portion on the loans that we enable through our licensed financing guarantees subsidiary and reduce the size of cooperation with the external credit enhancement partners. We are now in discussions with our funding partners regarding potential adjustments to our model where we reduce usage of external credit enhancement partners. We target to complete these adjustments with the majority of our funding partners over the next few quarters to increase our operating flexibility. As of the end of Q4, we had net assets of RMB 94.8 billion on a consolidated basis. And our financing subsidiary has net assets of RMB 48 billion. The strong capital position provides a solid foundation for us to increase the percentage of risk we bear and support the optimization of our risk-bearing model. On regulation, we have largely completed our rectifications and the industry will enter into a stage of normalized supervision. In January 2023, the regulators confirmed that rectifications on the financial business of the 14 platform companies have largely been completed, with only a few pending issues currently in progress to be resolved. The regulatory authorities will maintain normalized supervision in general going forward. according to the guidance provided by the regulatory authorities. Finally, I am pleased to share that we are pursuing a Hong Kong listing. We submitted the A1 filing for a dual-primal listing by introduction on the main board of the Hong Kong Exchange on February 1, 2023, and we will continue to communicate with the Hong Kong Stock Exchange regarding the listing plan. I will now turn the call over to Greg for more details on our operating resource and business priorities.
spk09: Thank you, Y.S. I will now provide more details on our Q4 and full year 2022 results and our operational focus for this year. Please note, all figures are M.E.B. unless otherwise stated. The challenging macro environment has adversely affected our top-line and bottom-line financial performance for the fourth quarter and full year 2022. Our revenue in Q4 declined slightly to $12.3 billion, down 6.6% compared with Q3. In aggregate, 2022 full-year revenue was $58.1 billion, a 6% decline compared with 2021. Due to a further spike in our credit impairment loss in the fourth quarter, which reflected the impact of a challenging macroeconomic environment for both our customers and operations, we made a net loss of $0.8 billion in Q4. while the full-year net income declined 47.5% year-over-year to 8.8 billion renminbi. Similarly, asset quality metrics in Q4 worsened across the board, with DBT 30-plus and DBT 90-plus reaching 4.6% and 2.6% respectively, increasing from 3.6% and 2.1% compared with Q3. Our credit impairment loss increased from 4 billion in Q3 to $6.3 billion in Q4, reaching an aggregate of $16.6 billion for the full year of 2022. We have also seen continued deterioration in our CDM3 ratio, which worsened by 21 basis points compared to Q3 and reached 1.0% in Q4 as compared to 0.5% in Q4 2021. In spite of the challenges we faced in Q4, there are some bright spots in our performance. For instance, our funding costs in Q4 declined by 33 basis points compared with a year ago as we were able to tap public trust funding. As Wyeth mentioned, our consumer finance business saw steady growth in 2022, and credit performance for consumer finance was healthy and in line with the industry. As part of our business strategy, we continue to focus on regions, demonstrating more economic resilience given divergence in performance between different regions while further enhancing our operating efficiency and optimizing our channels. As we mentioned in last quarter's earnings release, we have seen variations in performance across different regions, and this remained the case in Q4. Last quarter, we saw a clear divergence between the top average and less desirable performing regions that we had categorized in Q3. We have therefore adopted and applied differentiated strategies in different regions as we strive to grow in regions that demonstrate more resilience and credit performance. Although we witnessed credit deterioration across the board in Q4, our asset quality metrics for top and average performing regions suffered less deterioration than those of less desirable performing regions. For example, the C to M3 ratio of general unsecured loans for top and average performing regions worsened by 14 basis points and 19 basis points respectively in the fourth quarter compared to the third quarter, while the C to M3 ratio for less desirable performing regions deteriorated by more than 28 basis points during the same period. On new loan sales, we achieved stronger contribution in new loan volumes from top performing regions due to our differentiated strategy targeting such regions. Compared with Q3, contribution of new loans enabled from top performing regions increased from 43% in Q3 to 46% in Q4. Average performing regions remained stable at 30%, while less desirable performing regions declined from 27 to 24%. In Q4, we continued our efforts to enhance efficiency and optimize our channels for new loans enabled in the full year of 2022, including consumer finance. Contribution from direct sales increased by 4.7% from 49.5% in 2021 to 54.2% in 2022. And contributions from online and telemarketing channels also increased from 12.8% in 2021 to 19.6% in 2022. Meanwhile, contributions from other channels declined from 37.7% in 2021 to 26.6% for the full year of 2022. We optimized our direct sales force during the fourth quarter to make our operations zimbler and more efficient. The overall size of our direct sales force downsized from about 58,000 employees at the end of Q3 to about 46,000 as of the end of Q4. We have retained the more productive direct sales workforce in the top performing region whose average productivity is more than twice those of the less productive sales members who departed in Q4. In addition to our differentiated strategies mentioned above, we have enacted prudent cost control measures to enhance operating efficiency. As a result, our cost-to-income ratio decreased from 48.8% in 2021 to 46.3% in the full year 2022. As the end of Q4, we bore 23.5% of credit risk on the outstanding loan balance and an increase from 22.5% as of the end of Q3. As Wyeth just mentioned, we are making progress in implementing an optimized risk-bearing model with our funding partners, underpinned by our strong capital position to address the challenges brought about by elevated insurance premium charge by credit enhancement providers. We have already engaged most of our funding partners to discuss the model under which our guarantee subsidiary provides full provision of credit enhancement. We aim to complete these discussions with the majority of our funding partners in the next few quarters. Among our 81 funding partners, 15 funding partners have already agreed to the model where our guarantee company provides full provision of credit enhancement gradually alleviating future margin pressure from the elevated fees currently sought by insurance partners. As mentioned before, our strong capital position provides us with a solid foundation to transform to an optimized risk-bearing model. As of December 31, 2022, our net assets stood at $94.8 billion, with $43.9 billion of cash at bank. Our financing guarantees considerate had net assets of $47.9 billion and a leverage ratio of two times as of the same date. At the same time, we continue to make progress on our new SBO ecosystem. We launched our new small business owner value-added services driven platform in November 22. This value-added services platform branded Mugen Tong is an open platform design populated with digital operating tools and industry content to support businesses' development for the small businesses themselves. 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 referrals. Our goal is to create an ecosystem that fosters both customer-to-customer and customer-to-sales team interactions and supports business owners whose end customers are both other small businesses and consumers. As of December 31, 2022, we had approximately 250,000 registered customers with complete business or personal information, of which 130,000 are C-end customers and 120,000 are B-end customers. Growth of the new ecosystem has continued to accelerate quickly into 2023, with the total number of registered customers expanding roughly five-fold in the first two months of 2023. Although we are not able to provide detailed guidance for 2023 at the moment due to the uncertainty as to the speed of the U-shaped recovery, which largely depends on the speed of recovery of the Chinese economy and the outcome of negotiation with credit enhancement providers, I'd like to provide some directional guidance on our outlook for 2023. We project a return to profitability in Q1, albeit at a more subdued level given the challenging operating environment we described earlier. Challenging as the macro and operating environment for SBOs are, we do see signs of recovery in the medium term, resulting from zero COVID policy changes, and we are confident that we will achieve our U-shaped recovery and we must remain patient, prudent, and prepared for this recovery, as YS said earlier. As far as we can see, there are three stages in this U-shaped recovery process. Stage one, a broader credit policy adjustment we have made during the course of 2022, featured by tightening up of credit standards and focusing on regions and industries showing more economic resilience. Stage two, business adjustment and operating efficiency improvement, which we initiated in Q4 2022, expect to complete within the next several months, including optimization of direct sales, streamlining of management layers, and optimization of the risk-bearing model. And then stage three, back to sustaining growth and profitability as the economy is returning to normal. During the process, we need to be patient for the macroeconomic tailwinds to flow through to the SBO segment. be prudent in implementing new risk strategies and embedding lessons learned from the pandemic period, and be prepared to gear up new business when the improved environment arrives. Finally, we would like to thank our shareholders for their continued support. To deliver greater value to our shareholders, our board has approved the distribution of 40% of our 2022 net profit on a full-year basis as cash dividends. In October, we paid our first half of 2022 dividends of USD 17 cents per ADS, representing 32% of our net profit for the first half of 2022. We will distribute an additional cash dividend of US 5 cents per ADS for the second half of 2022, bringing the full year dividend to 22 cents per ADS. I will now turn it over to David for more details on our financial performance.
spk07: Thank you, Greg. I will now provide a close look into our fourth quarter results. Please note all numbers are in remedy terms and all comparisons are on a year-on-year basis unless otherwise stated. In the fourth quarter, our total income decreased to $12.3 billion and the total expenses grew to $12.9 billion. The increase in total expenses were primarily driven by the increase in credit and payment costs. while our operating related expenses actually decreased by 20.8% to $6.6 billion. For the full year of 2022, we recorded $58.1 billion in total income and $8.8 billion in net profit. Next, let's have a close look at our total income. First, as Wise and Grant mentioned before, our performance took a hit from the sluggish macro conditions in China, resulting in a 22.2% decrease in our top line performance in this quarter. As we are dedicated to building up a more sustainable business model, the total income mix of our credit enablement business continue to evolve. During this quarter, while platform service fee is decreased by 33.5% to 5.9 billion, our net interest income grew 3.2% to 4.4 billion, and our guaranteed income grew by 2.2% to 1.7 billion. As a result, our technology platform-based income service fees as a percentage of total income decreased to 47.7% from 55.8% a year ago. In addition, due to the increase in the consumer finance loans, our net interest income as a percentage of total income actually increased to 35.5% from 26.7% a year ago. Furthermore, as we continue to better utilize our guaranteed company's abundance capital to bear more credit risk by ourselves instead of by our P&C insurance partners, we generated more guaranteed income reaching 13.6% of our total income, compared with 10.3% a year ago. Our other income, which mainly includes account management fees, collections fees, and other variable service fees charged our credit enhancement partners as part of the credit, retail credit enablement process, was $131 million in the fourth quarter of 2022, compared to $769 million in the same period of 2021. The decrease was mainly due to the change of fee structure that we charged to our primary credit enhancement partners. Turning to our expenses, we continue to fluently manage our operating expenses. Our total expenses, excluding credit and asset impairment losses, finance courses, and other losses, decreased by 20.8% year-over-year to $6.6 billion this quarter. as we further improve our operating efficiency. In the fourth quarter, our expense grew to $12.9 billion from $11.5 billion a year ago. This increase was primarily driven by an increase in credit impairment losses of $3.7 billion year-over-year. Our total sales and marketing expenses, which mainly includes expenses for borrowers and investor acquisition causes, as well as general sales and marketing expenses, decreased by 23.4% to $3.7 billion in the fourth quarter. This decrease was driven by three factors. First, the decrease of new loan sales and reductions in commissions. Second, the decrease in faster acquisition and retention expenses and referral expenses from platform service driven by decreased transaction volume. And the last, the decrease general sales and market expenses driven by the decrease in new loan sales. Our general and administrative expenses decreased by 22.8% to $750 million in the fourth quarter from $971 million in the same period of 2021 because of decreased personnel expenses. Our operation and services expenses decreased by 12.7% to $1.7 billion in the fourth quarter from $1.9 billion a year ago, mainly due to our expense control measures and decrease of loan balance and new loan sales. Our credit impairment losses increased by 147.1% to $6.3 billion in the fourth quarter from $2.5 billion a year ago, mainly driven by an increase of proficient and indemnity losses as a result of the increased credit risk exposure and worsening credit performance due in large part to the accumulated impact of challenging macroeconomic environment. Our asset impairment losses decreased to 7 million in the fourth quarter from 689 million a year ago, mainly due to the higher basis of impairment losses in the fourth quarter of 2021 driven by impairment losses of intangible assets. Our finance costs increased by 87.6% to $501 million in the fourth quarter of 2022 from $267 million in the same period of 2021, mainly due to non-recurring interest courses due to early repayment of good convertible milks. Other gains were $419 million in the fourth quarter compared to $300 million a year ago, mainly due to the increase in government subsidies. As a result, next loss for the fourth quarter was $806 million compared to a net profit of 2.9 billion in the same quarter of 2021. Meanwhile, our basic and diluted losses per ABS during the fourth quarter were both going to be 0.36 yuan or US dollar 0.05 dollar. Our basic and diluted earnings per share during the year of 2022 were going to be 3.8 yuan or USD 0.55. On the balance sheet side, our balance sheet remains strong and solid as our cash advance balance increased. As of December 31, 2022, we had a cash balance of 43.9 billion in cash advance as compared with 34.7 billion as of December 31, In addition, liquid assets maturing in 90 days or less amounted to $49.9 billion as of the end of December 2022. As of the end of December 2022, our guaranteed company's leverage is only at 2 times, whilst regulatory requirements allow us to leverage up to 10 times. All of these provide strong support for the company to remain resilient in the face of economic downturn and continue with our dividend payout. That concludes our prepared remarks for today. Operator, we are ready to take questions.
spk02: Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star 4 by 1 on your telephone keypad now. If you change your mind, please press star 4 by 2. When preparing to ask your question, please ensure your phone is unmuted locally. In addition, I'd like to remind you to please mute yourself after stating your question. Thank you. Our first question comes from Yada Li of CICC. Please go ahead.
spk06: Hello, management. This is Yada from CICC, and thanks for taking my question. I have two questions for today. First, I was wondering when will the market see the U-shaped recovery And among the expansion of new loan sales and the improvement of credit impairment losses, which one shall the market expect first? And my second question is, in regards to the improvement in credit risks after the COVID pandemic, are there any positive signs of loan recovery collection and customer management? And is there any improvement in borrowers' willingness to repay after reopening? And what are the main causes if we still find some of the borrowers fail to repay? That's all. Thank you.
spk08: Thank you, Yada. So let me ask you a question. When to see U-shaped recovery? And then you ask him, among new loan sales or credit impairment loss income, which one we expect to see first? And then you also asked that whether we are seeing any signs of recovery in collection. And there was a reason for our borrowers failing in their repayments. So over-recovery, it depends on still our U-shaped curve. It depends on the recovery of over-economy, or in particular, our STO economy. And the outcome of negotiation with credit investment partners, as Greg said, because that largely affects our net margin. Although we see that in some industries, like travel, accommodation, restaurants, we see the signal of the initial improvement, but in overall, it's too early to say when a notable recovery will arrive with supporting numbers. Newer sales expansion and improvement of credit implement laws I think they will come at a similar time, but we don't say the expansion will precede. We are monitoring the early indicators of loan credit performance, like net flow rate and early MOB delequency rates. And for each segment, region, and industry, when we see the improvement signal, they will start expanding loan volume growth, while credit performance improvement will follow. as it carries a lag effect. And for your second question, yeah, we see some positive signs of consumption and travel boom, but knowing that SBO sector got the biggest hit during the last year, it'll take, I believe, it'll take more time to show obvious recovery. And then it's not because, I mean, the reason our customers failing in repayment is not because They are unwilling to repay, but their ability to repay the loan got damaged last year the most. So their ability to repay, we believe, will gradually turn to normal post-reopening. So it will take a few times, but I think we are sure about that.
spk02: Thank you. Our next question comes from Richard Hsu of Morgan Stanley. Please go ahead.
spk00: Thank you, YS. Thank you, Greg, for the detailed explanation. I got two questions. So I understand basically the company is trying to use more guarantees rather than insurance EGI, insurance guarantees. So any long-term target in terms of the split between guaranteed by your guaranteed company versus insurance. Any timeline, target on that as well? Second question is, recently there's some news on CBIRC, you know, crackdown on some of the loan brokers. I don't know if there's any impact on our business and how do we separate the typical loan brokers essentially targeted by the new regulatory scrutiny at the moment versus our agents on the ground. Yep, two questions. Thank you.
spk08: Let me address our first question, and then Greg can take the second. I think we are aware that our CGIT level remains high till now. That affects our new business net margin. We have been negotiating with our credit investment partners But we have not made clear progress in lowering CGI premium rates so far. And as they price the rates based on the historical loan vintage performance, right? And then that was affected by the macro environment last year. So if we do not make good progress, meaning that if we do not find the CGI price in the future is not commercially attractive for us, then we can increase our risk-bearing portion and reduce our cooperation scale with CGI partners. Now we are discussing with funding partners, and as Greg mentioned, already a large number of our funding partners have agreed to switch to no CGI models in which we provide a full project of credit enhancement. If you see how much net access we have under our guarantee company, we already have almost 50 billion net access under our guarantee company, which can provide 10 times leverage support. So in other words, about 500 billion, you would say. So I believe overall direction is clear. We want to have less dependence on CGI partners because of the price issue. We want to take more self-guarantee portion from 30% to about 50% or going forward even higher. That's possible. But we don't have any timeline that we provide today. But I think we are ready today.
spk09: Great. Richard, on your second question, I think you're reflecting an announcement that came out with the CBRC this past Friday with regards to loan brokers, I think two points to make. The first is our core business itself is operated under the guarantee license. And so our sales force is able to find clients, introduce those to the banks, and the banks then make their judgment on providing a loan. So as such, we are really not acting as a broker with our funding partners. I think that is really the most critical point. The second point is if you look at the apparent reasons for the CBRC to raise this is there have been examples where there have been third-party agents without a license who have basically been either packaging customer information to make a loan look like it's to be used for business purposes but then is used for other purposes and or external brokers working with banks to charge customers other intransparent fees, therefore increasing total cost. So that is an area that we really don't touch. We do operate through our guarantee company, and when we do our business, at the end of the day, the banks are able to collect and see all information they need to determine the use of funds for the loan, be that secured or unsecured. So this is something that we will, nonetheless, keep a close eye on. The banks, the funding partners themselves, will be going through a process which goes from March until September to review. And certainly, if there's any higher standards or anything in our process that we would need to uplift, we would do so. But we don't anticipate a major issue there, Richard.
spk02: Thank you. Our next question is from Alex Yee of UPS. Please go ahead.
spk04: Okay, thanks for taking my question. My question is on pricing and tech rate. So I will separate them into two parts. First is on the short-term outlook. So how should we expect the pricing trend going forward? And if we take into account the pricing and CGI cost, how does the tech rate outlook look like for the rest of 2023 and in terms of the trajectory of that tech rate recovery? And second, from a medium-term perspective of, say, in the next one to two years and after your U-shaped recovery did do materialize. So after that, what is a sustainable level of takeaway that we should target at? And in the past, I remember management used to give high-level guidance of targeting a pre-tax margin of 3.5% to 4.0%. I'm wondering, is that still a reasonable target? Thank you.
spk09: Thank you, Alex. I think the view on pricing, which today for new unsecured loans is just below 20%. I think it's about 19.7%. This pricing will largely remain stable in 2023. If you look at that headline pricing over the last couple of quarters, it's come down a little bit. But the reason for it coming down is really because of the way we've prioritized our business focus. So we are prioritizing, as Wyatt said, serving customers who rate R1 to R4 in the better performing regions. And those rated customers have traditionally had slightly better pricing. So what you see in our pricing on the APR side as it comes down a bit, it continues to represent the improvement in our overall customer mix so we will not even though CGI pricing remains elevated that really is reflecting the history of the macro economy over the last 12 months but because of that we're not going to change our customer focus to then try and drive up higher pricing because we really want to stay focused on those higher quality customers so the key for us to return to the historical level of net margin of pre-tax 3% to 4% is really doing two things. One is making sure that the new customers that we're acquiring and building out in the R1 to R4 rated group achieve what we believe to be the reasonable and targeted performance. And that is something that we've seen over the last couple of quarters to be largely intact. It's now a matter of continuing to build up that business in line with the speed of the economic recovery. That's point one. Point two, to achieve that historical level of three to four percent is indeed, as YS just laid out, optimizing the mix of our credit guarantee versus credit insurance, right? Because if the credit insurance partners continue to charge a high amount, that reduces the net margin in the business model. So the transition to a higher percentage of our self-guarantee is the key to us achieving that historical level, which we do intend to achieve over the medium term. I think if you were to press on the number you asked, medium term, the answer to that question is yes. Is that a 2023 or 2024 event? We would see that more as likely as a 2024 event for the portfolio as a whole, because we need to need that new business build up and replace the legacy business as it matures.
spk02: Thank you. Our next question comes from MSU of Bank of America. Please go ahead.
spk01: Thank you for taking my questions. I have three. The first one is about your loan growth. What's your loan growth plan in the coming quarters, and what are the assumptions underpinning the current growth plan? The second one is about your cost. Are there room for you to continue optimizing cost? including founding costs, sales and marketing costs, and other operating costs. And the third one is about your dividend policy. We note that you changed your dividend policy, so could management comment on the change and its impact to the shareholders? Thanks.
spk09: Sure. So on the first two, and I'll ask David to also elaborate on the third, On loan growth, what we're really looking at is the overall improvement of the key lead indicator, C to M3. What we've seen is that being elevated through Q4. Not increasing as fast as what we've seen in some of the other previous quarters, but nonetheless remaining at a higher level. While we continue to prioritize new loan growth at the moment to the best customer segments in the best regions, Broader loan growth will depend upon us seeing a more across-the-board improvement in some of those lead indicators. So we hope that that improvement will be something that we see in the next one to two quarters. As we see that improvement, we will then uptick in our overall loan growth. But as Wyatt said, our bias at the moment is to go for quality over volume. And so that's something that we will probably have that stance, I think, through Q1 and into Q2. But indeed, if we see that improvement, then in the second half, there will be more opportunities to enhance that relative loan growth. On the cost side, we have been optimizing starting in Q4. It goes through into Q1 in terms of optimizing lower productivity sales force, reducing some management layering, and indeed optimizing mid and back office costs. All of the execution of this is happening really mostly in Q1, a little bit into Q2. There's a little bit of room to optimize. I think it's something that really is in line with our overall business growth. But in terms of funding costs, we're probably not going to see a huge optimization in the near term on that front, even though we have seen improvement there over the last couple of quarters. On dividend, just a high-level comment, which is that for the last two years, we basically have announced a dividend policy of 20% to 40%. This time, we basically kept within that range. The cash dividend for the full year of 2022 is 40%, so the overall range hasn't changed. What we did modify slightly is that for 2021, our dividend was paid out in two halves. And so what we have done is saying for the full year of 2022, we will take it to a total of 40%. The dividend that was paid out in the first half of 2022 was really based at 32%. And so we had basically brought it at par across the entire year at 40%. I don't know, David, do you want to add any other comments on the dividend policy?
spk07: Yeah, Brad has put in a pretty comprehensive comment on the different – yeah, this is – Nothing changes that the frequency of our given payment is not changed. The range, the dividend payout ratio that approved by the board doesn't change, 20 to 40%. The subtle change is really on how to calculate on a semi-annual basis or on a full year basis. That is the subtle change. This subtle change, we believe, relieves management more flexibility And we are able to deliver greater value to our shareholders. So I think it is positive to all shareholders.
spk02: Thank you. There is no further questions. That concludes our Q&A session for today. I'll now hand the call back over to our management team for closing remarks. Thank you.
spk05: So this concludes today's call. Thank you all for joining the conference call. If you have more questions, please do not hesitate to contact the company's IR team. Thanks again.
spk02: Thank you. That concludes today's call. Thank you, everyone, for attending. You may now disconnect.
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