Lufax Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 22, 2023

There are 6 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Lufax Holdings 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 and A session. Please note this event is being recorded. Now I would Now I'd like to hand the conference over to your speaker host today, Ms.

Operator

Liu Xin Yan, the company's Head of Board Office and Capital Markets.

Speaker 1

Thank you very much. Hello, everyone, and welcome to our Q1 2023 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.

Speaker 1

S. Cho, who will provide an update of our latest business strategy, The macroeconomic trends and the recent developments of our business. Our Co CEO, Mr. Greg Si, We'll then go through our Q1 results and provide more details on our business priorities and the key drivers. Afterwards, Our CFO, Mr.

Speaker 1

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 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 am now pleased to turn over the call to Mr. Wyatt Cho, Chairman and CEO of BlueVax.

Speaker 2

Thank you for joining. As you reflect on the Q1, 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 economy 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 upstream in our SEO segment.

Speaker 2

Let me provide some updates for the Q1. First, there are some signs of a gradual recovery in the macro environment. Though they remained unevenly distributed at an at a nascent stage, China's 4th quarter GDP growth Expanding by 4.5% year on year indicates that the country is on track for its 2023 gross 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.

Speaker 2

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 including sentiment. The ANT's Peking University survey results published in February show that approximately 80 Percent of SVUs 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 SCOs have had less than 2 months of normal operations in the Q1 After the spike in COVID cases and the Chinese New Year holiday, does it take time for SCOs to fully resume new business investments, which underpins lending demand. Now let me talk about the impact on our business.

Speaker 2

I would like to start by sharing our outlook on the U shaped recovery. During the Q1, we observed an improvement in credit rating mix and credit quality for new loans Initiated in the last two quarters, unsecured loans in the 4th quarter fell within our top 3 credit rating categories versus 41% a year ago. Euro growth in 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 Q4. We have also witnessed Early signs of increments in asset quality in certain economically resilient regions and industries.

Speaker 2

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 We likely peak in the Q2 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 the from past charge offs to upfront provisioning, Arriving 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 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%.

Speaker 2

This ratio stood at 24.5% at the end of the Q1. Our ability to focus More on new business is made by made possible by 3 factors. 1, the improving macro environment 2, ongoing progress in vetting funding partners for our deployment of the model, where we provide the entire guarantee and 3, the recent completion of our frontline 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 the 2024 event.

Speaker 2

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 headquarter and full time operating cost. Total expenses including excluding credit impairment losses, finance and other costs in the 4th quarter decreased by 21.5% versus a year ago. The total number of direct sales was 70% a year ago. Now that we have completed our organizational restructuring, We are focused on several priorities.

Speaker 2

Firstly, we continue to increase the proportion of risk bearing on new loans we enable, under which our guaranteed subsidiary provides 100% credit enhancement. These key initiatives are supported by our continued investment in technology. During the Q1, We deployed new technology to help us gain different 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 usual, we further enhanced our ability to access to assess owners' business status.

Speaker 2

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 augmenting our historical individual credit assessment, so called KYC, with a deeper insight with Owners Business and Industries, KYB. Next, let's move on to the capital markets. We successfully completed our Hong Kong listing by introduction on April 14, 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 20 22 dividend on aggregate amount of US114.6 million dollars in April 2023, demonstrating our commitment to maintain a stable dividend policy.

Speaker 2

Finally, as we shared in our last earnings call, we have substantially completed our regulatory verification efforts, And the industry is now entering a phase of normalized provision. We believe this normalized For supervisory framework, we provide greater stability and predictability for our industry, and we work closely with I will now I'll turn the call over to Greg for more details on our operating results. Thanks. Thank you, Wyatt.

Speaker 3

I will now provide more details on our Q1 results and our operational focus for this year. Please note all figures are in renminbi unless otherwise stated. In the Q1 of 2023, our top line and bottom line performance were adversely impacted by the challenging macro environment. Our total income was $10,100,000,000 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.

Speaker 3

Despite the challenges on our top line performance, We did turn the quarter and achieved profitability this quarter with a net profit of $732,000,000 primarily due to a decrease in credit 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 Q1 of 2023, our new loans enabled were $57,000,000,000 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 elevated credit impairment losses in the Q1, We continue to prioritize higher quality SVO customer segments concentrated economically more resilient geographies.

Speaker 3

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 Q1 from 41% in the same period of last year. Meanwhile, the contribution from In the top third and middle third regions continue to increase and reached any pace of 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 the upcoming quarters. Additionally, we observed that new loan vintages enabled after we tightened our credit standards demonstrate As we focus on higher quality SVOs, the average ticket size has naturally increased as a result. Average ticket size of unsecured loans for the Q1 of 2023 increased to revenue B2 $170,000 from $240,000 average for the year of 2022.

Speaker 3

Our consumer finance business saw healthy growth in the Q1 despite the challenges in our retail enablement model. The total outstanding balance for consumer finance loans in the Q1 of 2023 was $29,600,000,000 up 39% year over year and credit performance was in line with the industry credit performance. Contribution from our consumer finance business grew as a percentage of new loans enabled An increase from 11% in the Q1 of 2022 to 24% this quarter, further diversifying our products offerings. Another key driver of our top line performance is take rate. As mentioned earlier, our take rate remains compressed, which is mainly due to the elevated premiums charged by credit insurance partners.

Speaker 3

Although our tightened credit standards have improved asset 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 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, 5 out of 6 trust partners and 37 out of 78 bank partners have agreed to extend credit under the model where we provide the entire guarantee.

Speaker 3

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 The Q1 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 2 times As of the end of the Q1, 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 portion for new loan business. Next, let's go to the details of our bottom line drivers.

Speaker 3

The main driver of recovery in our bottom line was a decrease in credit impairment losses. In the Q1, credit impairment losses declined by more than 50% to $3,100,000,000 from $6,700,000,000 in the Q4 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 Q1, we partially released a portion of the previously made provisions, which had a positive impact on our P and L. The improvement in our credit impairment losses is also visible in our C to M3 ratios, The forward indicator on asset quality that we monitor closely.

Speaker 3

It stood at 1% in the Q1, remaining unchanged compared with the Q4 of 2022. This was primarily attributable to the increase in TDM3 for general unsecured loans from 1.1% in the Q4 of 2022 to 1.2% in the Q1, 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 Q1 and the delta of Sida M3 flow rate was 10 basis point increase versus a 20 basis point increase in the Q4 of 2022. We will continue to monitor closely of our U shaped recovery.

Speaker 4

Looking

Speaker 3

ahead for the remainder of 2023, we expect credit impairment losses in each quarter to be on par with those during the Q1. 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 Q1, we continued to make progress in our new SVO ecosystem. As a recap, our new value added services platform, branded Budiantong, It is an open platform populated with digital operating tools and industry content to support business development for our small business owners.

Speaker 3

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 31, 2023, we had approximately 1,900,000 registered customers on Lutgan Tou, We have submitted their complete business or personal information, an expansion of roughly sevenfold from the end of 2022, into this Q1. As Wyatt 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.

Speaker 3

I will now turn it over to David, our CFO, for more details on our financial performance. Thank you, Grak.

Speaker 4

I will now provide a close look Our first quarter results, please note that all numbers are in relative terms and all comparisons are on a year over year basis unless otherwise stated. As YF Grand mentioned before, our performance was impacted by the macro environment and our customer selection, Resulting a 41.8% decrease in our top line social income to RMB10.1 billion for the 1st quarter. RMB732 million. As a result, our net revenue was During this quarter, our technology based income, platform based income was RMB5 billion, representing a decrease of 46.1 percent of our revenue. Our net interest income was RMB 3,300,000,000, a decrease of 32.8 percent and our guaranteed income was RMB 1,400,000,000, representing a decrease of As a result, our technology platform based income services

Speaker 2

as a percentage of total income Declined

Speaker 4

to 49.7 percent from 53.7 percent 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 guarantee company's abundant capital to bear more credit risk by ourselves With that of throughout TSV Investment Partners, we generated more guaranteed income reaching 14.1 percent of the total income has compared with 11% a year ago. Our other income, This may increase account management fees, collections and other value added service fees charged to our credit and customer partners As part of the retail credit enablement process was RMB227 1,000,000 in Q1 of 2023 compared with RMB 7 The change was mainly due to change in the fees reflected as we charge to Our primary study and customer partner, turning to our expenses. We continue to prudently Manage our operational expenses.

Speaker 4

Operating expenses, excluding credit and asset impairment losses, credit losses Other losses decreased by 21.5 percent year over year to RMB5.7 billion in this quarter. As we're turning to the operating efficiency, in the Q1, our total expense decreased by 7.8% This decrease was primarily driven by sales and marketing expenses. Our total sales and marketing expenses, which mainly is expenses for borrowers and investor acquisition reports Asura's general sales and marketing expenses decreased by 32.4% to RMB 20,000,000 in the 1st quarter. The decrease was driven by 3 factors. 1st, decrease in new loan sales and reduction of commissions 2nd, the decrease in investor acquisition and tax expenses and store expenses from platform services driven by from platform services Our general and administrative expenses increased by 4.2% to 756 units in the 1st quarter, mainly due to the Chilean Thanks for the time last year, the increase in loan volume.

Speaker 4

Our operating and services expenses decreased by 2% to RMB1.6 billion in the 1st quarter, mainly due to expense control measures and decreases in non finance and mineral sales. Operating impairment losses was RMB3.1 billion in the 1st quarter compared with RMB2.8 billion a year ago, As a result, net profit for the Q1 was RMB732 million compared with net profit of RMB5.3 billion in the Q3 of

Operator

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.

Speaker 2

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? So and I guess there are 2 parts to this question. Thanks, Alex, for your question. So far, we haven't got any further instructions from regulators About further rolling API, if you look at the Q4 API, the blended API for all new loans in the Q4 is already less than 20%.

Speaker 2

And then that if you compare with other peers, We are absolutely and obviously lower than other peers average API. Yes. Quite lower. So I believe we are in a good shape in terms of over APR level. And I believe that really well meet regulatory requirements.

Speaker 2

And now we also have more flexibility than others who are just API of voice or downloads whenever necessary. Our overall price is more determined by market demand and supply. And also we consider Our operating cost, which include funding cost and then credit cost and then our The operating costs, which include our sales expense, right. So we don't believe We don't think that the entire seat time segments will necessarily further reduce our API. We already less than Again, less than 20% for all new ones.

Speaker 2

So I expect I do not expect

Operator

Thank you very much. We now have our next question from Emma Xu of Bank of America, please go ahead.

Speaker 5

Thank you for taking my questions. I have 2. The first one is about asset quality. So we see on one hand, we see some encouraging side of your portfolio. As the management mentioned earlier, you said there is already some green shoots in the business and you expect flow rate to gradually improve in the coming quarters.

Speaker 5

However, on the other hand, we see the flow rate of your unsecured loan continue to increase in 1st quarter, while your total flow rate just remained flat quarter over quarter. So could you give us more Discussion about your the asset quality of your legacy loan portfolio and related question is, How is the collection of your charge off 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.

Speaker 5

So how is the loan demand so far? And is the high CGI cost the major reason that limits your loan growth in Q1? What's your progress of Moving to the 100% guarantee model and where we expect to see the loan growth more Now to see more strong loan growth in the second half when you move to this entire guaranteed model? Thank you.

Speaker 2

Thanks, Emma. The situation in asset court has slowed down substantially in the Q4. If you look at C2M3 flow rate for the quarter launch was 1.0% in the 4th quarter This year, which remained unchanged from Q4 last year. But if we consider that Our balance, loan balance has been declining in less months, like, every month after month. So If we analyze in this, say, for example, if you only compare the accounts Hu's monsoon book is less than 6 months or 12 months, so to remove the impact from declining balance on our net flow rate, then Now we already see certain improvements planned.

Speaker 2

I believe we can show, we can demonstrate more obvious improvements from the next quarter onwards, so that we have confidence. And as the company continues to carry on new sales and credit plan, now we observe On improvement in credit rating mix and credit quality for Nuance initiated in the last two quarters. Yes. You know that we had large amount of charge off last year. So that is one of our focus this year.

Speaker 2

We are now sensing our post recovery actions to claw back more from the past credit losses. And then answering 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 a war. But no matter what, if you understand our monthly new sales volume And then our market share, actually loan demand is not a very concern because we are Compared to the market size, our market share is very small.

Speaker 2

So we don't really worry about loan demand at this moment. And the decrease of neuron growth, recent decrease was mainly driven by our Heightened underwriting credit policy and also partly due to our DST reform. There was a reason. And speaking of 100% guarantee model, we are making a great progress. We are very happy.

Speaker 2

We are encouraged to see that our funding partners, they provide good support for the model where we provide the entire guarantee. By now, 5 out of 6 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 a fixed version loans under this model. So we are making good progress. And then I think the full question can be

Speaker 4

relatively quick.

Operator

Thanks. Thank you very much. We now have our next Question from Richard Hsu of Morgan Stanley. Please go ahead.

Speaker 4

Sure. Thank you. I have a question on the funding cost. Just wondering what's the funding cost at the moment basically as The change from the insurance model to the guarantee model. And what's the overall impact on the safe grade?

Speaker 4

And What will be the level expected to stabilize once shipped to the guarantee model is largely complete? Thank you.

Speaker 3

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 Q1 on a year on year basis. As we shift to the 100 percent guarantee model, we're not seeing much change in that funding cost. In fact, probably you're seeing the market more broadly coming down.

Speaker 3

So any shift 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, as you kind of go and look at historically, our take rate has been in the sort of 8% to 10% range. More recently, due to the higher credit guarantee insurance costs, that take rate is now closer to About 7%, 8% range. As we then move to the 100% guarantee model, right, so if you look out over a year 1.5 years from now when more of the portfolio will be 100% guarantee 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%.

Speaker 3

So if you take a base today of 7% to 8%, which is obviously compressed because of the higher CICs 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, Rich, where things will end up probably in about a year and a half from now when we've made more of the complete shift.

Speaker 4

Got it. Thank you.

Operator

Thank you very much. We now have our next question from Yada Lee of CICC. Please go ahead.

Speaker 4

Hello, management. This is Yada from CICC, and thanks for taking my question. My question today is regarding the risk of bearing percentage. And I was wondering what is the trend of this percentage going forward? And how to view this change and potential impacts on our top line credit impairment losses and the bottom line?

Speaker 4

And that's all. Thank you.

Speaker 3

Thank you. In terms of the risk bearing percentage, as of the end of this Q1, 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 We'll 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.

Speaker 3

So that will provide a basis for 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 $3,100,000,000 We expect this number over the next couple of quarters to remain stable, But what's driving it, the mix is changing.

Speaker 3

So 3.1% in the Q1 is mostly from the credit impairment costs from the Legacy portfolio, if you will, the existing past book. As we move into the second half of this year, You'll still be at about $3,000,000,000 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%, right, 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.

Operator

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.

Speaker 1

Thank you. This concludes today's call. Thank you for joining the conference call.

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