Lufax Q2 2024 Earnings Call Transcript

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August 21, 2024

There are 6 speakers on the call.

Operator

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 and A session. Please note this event is being recorded. Now, I'd like to hand the conference over to your speaker host today, Ms.

Operator

Liu Xinyuan, the company's Head of Board Office and Capital Markets. Please go ahead, madam.

Speaker 1

Thank you very much. Hello, everyone, and welcome to our Q2 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.

Speaker 1

S. Cho, who will provide an update of the recent developments and the strategies of our business. Our CFO, Mr. Pei Qing 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.

Speaker 1

With that, I'm now pleased to turn over the call to Mr. Y. S. Cho, Chairman and CEO of Bluefax. Please.

Speaker 2

Thank you for joining us today for our Q2 2024 Earnings Call. In the Q2, the macroeconomic environment remained complex for small business owners. Despite this, we saw continued improvement in asset quality across both our Puhui and customer 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 macro situation before we discuss the business details.

Speaker 2

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 Business declined from 50.1 in March to 49.3 in June, falling below the 50% threshold and reaching its lowest level for the first half of twenty twenty four. 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.

Speaker 2

Our total new loan sales in the Q2 of 2024 were RMB45.2 billion, representing a 15.5% year over year decline. The decline was mainly caused by a 35% year over year decrease of Puhu relaunch, which comprised 51% of total new loan sales in the 2nd quarter, reflecting our continued emphasis on quality over quantity and sluggish demand for Puyi loans among high quality SVOs. Meanwhile, our customer finance business continued to grow and delivered a solid performance during the quarter. Customer finance loans saw a 23.6% year over year increase in neuron sales, representing 49% of our neuron sales as a result of our continuous efforts to roll out smaller kits 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.

Speaker 2

For Puyenoz, the C2M3 flow rate improved to 0.9% from 1.0% in the previous quarter, mainly driven by the improvement of C2MC ratio of unsecured loans. Our customer finance loans also saw asset quality improvements with NPL ratio decreasing to 1.4% from 1.6% in the Q1. Next, let's take a look at our loan loans under the 100% guarantee model. As discussed previously, since the Q4 of 2023, all new Puyi 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 2nd quarter.

Speaker 2

As a negative impact from our 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 decrease in 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 Lufex following the acquisition, PAO Bank delivered solid growth in the first half of twenty twenty four.

Speaker 2

Its total loan balance stood at CNY2.4 billion by the end of 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 products of our special dividend.

Speaker 2

I am pleased to announce that we completed the distribution of special dividend at the end of July as scheduled. After receiving the scrip 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 seek to enhance synergies with Ping An Group, primarily in the following 3 key areas. First is branding.

Speaker 2

Ping An 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 Lufax, deepening trust among our customers and funding partners. This enhanced brand association will improve our domestic and international standing and can potentially have lower funding costs. 2nd is technology. We will leverage Ping An Group's extensive technological resources, including its advanced AI systems to further strengthen our risk management and fraud prevention measures.

Speaker 2

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 Ping An 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 Ping An Group will help us better serve our SBL customers, easing their difficulty and expense of financing.

Speaker 2

With our strengthened capabilities, we strive to be a benchmark company with a unique role in supporting the growth of China's vital, small and microenterprise economy. While the macro environment remains complex, we are encouraged by the improvements in asset quality and the products 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 call over to Pei Qing, who will provide more details on our financial performance and business operations.

Speaker 3

Thank you, Weiwei. I will now provide a close look into our Q2 results. Please note that all numbers are RMB terms, and all comparisons are on a year on year basis unless otherwise stated. In Q2 2024, our total income decreased by 35.5 percent to RMB6 1,000,000 from RMB9.3 billion in Q2 2023, mainly due to a decrease of outstanding loan balance by RMB44.8 from RMB26.4 billion as of June 30, 2023 to RMB235,200,000,000 as of June 30, 2024, partially offset by our interest increased take rate as loans enabled and a 100% guarantee model can steal a higher proportion of our total loan book. Meanwhile, our total expenses decreased by RMB20.3 billion from RMB8 1,000,000,000 to RMB6 point 3 billion, among which the total operating expenses declined by 29.7 percent from RMB5 1,000,000,000 to RMB3.5 billion and credit impairment losses decreased by 14.6 percent from RMB3 1,000,000,000 to RMB2.6 billion.

Speaker 3

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 the upfront provision from loans and the 100% guarantee model. As a result, we recorded a net loss of RMB730 1,000,000 for the Q2. Turning to our unique economy for the Pufu business. 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.

Speaker 3

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 a percentage of loans enabled and 100% guarantee model continues to increase. In addition, our funding cost also decreased slightly, thanks to the favorable monetary policy and the support of our funding partners. On the other hand, while sales and marketing expenses remained stable, credit costs and other operating expenses dragged on our net margin. This was primarily due to the construction of our loan balance.

Speaker 3

Furthermore, while the actual losses decreased as a result of improvement in asset quality, we recorded more upfront provision for loans enabled under 100 percent guarantee model. As discussed before, while we anticipate that this part of the loans will be lifetime profitable, it's important to note that these loans may incur accounting losses in their 1st calendar year due to higher upfront provisions. This accounting treatment affects our short term probability, but this is expected to lead to improved long term financial performance as the loan portfolio matures. Now let me highlight a few of the P and L items during this quarter. Our technology platform base income was $2,000,000 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.

Speaker 3

In addition, it was also negatively affected by the close of the Lu Jingtong business in April 2024. Our net interest income was CNY2.7 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 guarantee income was $850,000,000 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.

Speaker 3

Net interest income and guarantee income accounted for 45.4 percent 14.2 percent, 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 RMB14.6 billion to RMB2.6 billion. Our total marketing expenses, which includes expenses for borrower acquisition costs as well as general sales and marketing expenses, decreased by 46% year on year basis to RMB1.4 billion in Q2. The decrease was mainly due to reduced loan related expenses resulting from decrease in new loan sales and outstanding loan balances as well as the elimination of expenses associated with our Lu Jingtong business. Operation and service expenses decreased by 15.8% year on year to RMB1.3 billion in Q2 as a result of a decrease of loan balance and our continued effort to control expenses, partially offset by increased commissions associated with improved collection performance.

Speaker 3

Our finance costs decreased by 90.2 percent to RMB30 1,000,000 in Q2 from RMB1 36,000,000 in the same period of 2023, mainly due to decrease of interest expenses after the repayment of CROWN 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 guarantee 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 economic environment and our strategy 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.

Speaker 3

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.

Operator

We will now begin the question and answer session. The first question comes from Emma Xu with Bank of America Securities. Please go

Speaker 4

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?

Speaker 4

So we see that in Q2, you granted RMB 45,200,000,000 new loans and the cumulated amount of the new loans issued in the first half reached RMB 93,300,000,000 accounting for around 42% to 49% of your full year guidance at the beginning of the year. So do you think you are still on track to meet your full year target? And when will we see the turning point of the loan growth recovery? And the second question is that, yes, congratulations on the continued improving asset quality. So your M3 flow rate has declined 2 quarters in a row and down to 0.9% in the second quarter.

Speaker 4

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?

Speaker 2

Thank you, Emma, for your question. The first question, loan demand. Yes, loan demand in overall is still weak. For loan growth recovery, it largely depends on macro environment improvement. So while we keep our prudence leverage on SVO lending, we see that from our CF business, the consumption loan demand is actually more and stable.

Speaker 2

So we focus more on consumer finance and relatively large case size consumption loan to cope with declining loan demand in near term, especially in the regions where our loan volume contraction is more significant. And for your second question, we all know that it is not easy to improve C2M3 flow rates 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 2024 Vintage takes bigger parts over 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 efforts in our risk model, underwriting model and also collection model upgrade and then a sales quality management process.

Speaker 2

So all in all, we are confident that the about sustainability of our asset quality going forward. Thank you.

Operator

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

Speaker 5

Hello, management. Thank you for taking my questions. I have 4 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?

Speaker 5

Looking at the cash at hand and future loan size, what could be the potential amount available to distribute to the investors? 3rd, 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 I will 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.

Speaker 5

Thank you so much.

Speaker 2

Okay. Let me answer your question 1 to 3. Thanks, Yara. The after let me see my notes. So after special dividend, Ping An Group's ownership increased much, much close to 57%, so 56.8%.

Speaker 2

That we've been working closely with Ping An Group from the very beginning in a few key areas like customer sourcing, right, using their online offline channels and technology development and then brand sharing. But with increased P and L growth now, we expect it will first help us to reduce funding cost, deriving on their good reputation, financial standing. So actually, your third question is about funding cost. We believe funding cost is technically decreasing or optimizing. We believe this trend will continue.

Speaker 2

And also with the acquisition of that nationwide small loan lending license, that lending license, that comes with better or lower funding costs going forward. So we are confident about the funding cost further improvements. And then the about your second question, the order the Board of Directors has determined that no semiannual dividend will be paid at this time because we made a net loss recorded for the first half of twenty twenty four, but management is dedicated to returning value to shareholders. We always seek out potential ways to increase shareholder returns as demonstrated in this special dividend this time. And our annual dividend policy, which is 20% to 40% of net profit and that we pay same annually, that policy does not change, remain unchanged.

Speaker 3

Okay. About the funding cost, I would like to share some of my view. For our Pukui loan, we expect that just because the LPR policy the central banks released the variable monetary policy to the market and just support that will definitely support our partners. And of course, they will pass it to our customers. So together with the synergy of the Ping An Group will enable which will enable us to enjoy a low funding cost.

Speaker 3

For consumer finance loans, I believe that we will continue to fetch a lower interest rate in interbank market. That actually you can see the trend also in the interbank market, right, the rate was led by the Central Bank to going down. And then 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 our OpEx to our income ratio increase in the Q2, although we remain committed to the cost optimization, our OpEx to income ratio trended upwards during this quarter.

Speaker 3

This was mainly due to our loan scale contraction that led to a decline in economy scale. In addition, some of the fixed expenses continued to contribute to a little bit 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.

Operator

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.

Speaker 1

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 Lupek's IR team. Thanks again.

Operator

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

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