Lufax Holding - Q3 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding 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. Lu Xinyan, the company's Head of Board Office and Capital Markets. Please go ahead, ma'am.

Xinyan Liu (Head of Investor Relations)

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 the strategies of our business. Our CFO, Mr. Peiging Zhu, will then provide more details on our financial performance and the 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.

Yong Suk Cho (Director and CEO)

Thank you for joining us today for our third quarter 2024 earnings call. During the third quarter, while full loan demand remained weak as small business owners continued to face a complex macro environment, we saw ongoing growth in our customer 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% guarantee business, 100% guarantee 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 Cheung 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 increase 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 will have a positive impact on SBOs in China. Meanwhile, we recognize it, 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 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 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 CNY 50.5 billion, flattish 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 customer 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 loan sales in the third quarter, as a result of our continued efforts to roll out smaller tickets and evolving product structures. Balance-wise, our total loan balance stood at CNY 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 C-M1 flow rate of poor 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 percentage 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 earnings 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 CNY 1 billion in new loans under this new license. We believe our small lending license has the potential to further reduce our funding costs, 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 twenty-seventh, 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 twenty-eighth. 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 Lufax.

The intention is that Lufax 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 Peiqing Zhu, who will provide more details on our financial performance and business operations.

Peiqing Zhu (Director and CFO)

Thank you, Y.S. I will now provide a closer look into our third quarter results. Please note, all numbers are RMB terms, and all comparisons are on a year-on-year basis, unless otherwise stated. In the third quarter of 2024, our total income decreased by 31.1% to RMB 5.5 billion from RMB 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 and the 100% Guarantee Model constitute a higher proportion of our total loan book. Meanwhile, our total expenses decreased by 19.2% to RMB 6.3 billion from RMB 7.7 billion, among which the total operating expenses declined by 35.9% to RMB 3 billion from RMB 4.7 billion.

Credit impairment losses increased by 9% to CNY 3.3 billion from CNY 3 billion. Our operating efficiency improved, with our operating expenses to income ratio decreasing from 57.8% to 53.8% 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 CNY 725 million for the third quarter. Turning to the unit economics of our loan business. Our APR by balance decreased 19.5% from 20.1%.

Despite the decrease in APR, our take 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 cost. We accept that the take rate will further increase as a 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 expense side of the unit economy, while sales marketing expenses remained stable, credit costs and other operating expenses were a drag on our net margin. Credit costs increased primarily due to the increased risk exposure and provision for our loan book.

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 a higher upfront provisions. This accounting treatment affects our short-term profitability, but is expected to lead 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 RMB 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 LuJinTong business in April 2024. Our net interest income was CNY 2.7 billion, a decrease of 18.8% from the same period last year. The relatively lower decrease in net interest income was the result of our increase in consumer finance revenue. Meanwhile, our guarantee income was CNY 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 last year. Net interest income and guarantee 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 CNY 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 the certain investment assets. Our total sales and marketing expenses, which include expenses for borrower acquisition costs, as well as the general sales and marketing expenses, decreased by 49.9% to CNY 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 LuJinTong business.

Operating and servicing expenses decreased by 35.8% to CNY 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 CNY 59 million from CNY 40 million, mainly due to the decrease of interest income from bank deposits, partially offset by the decrease of interest expenses at the repayment of our C round convertible promissory notes 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 subsidiaries' leverage ratio stood at 2.6x, and our consumer finance subsidiaries capital equity ratio stood at 14.9%, as compared to the 10.5% regulatory requirement.

As we deal with the complexity of the broader economic 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 we'll uphold our commitment to bring value to our shareholders. That concludes our prepared remarks for today. Operator, we are now ready to take questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone 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 L with CLSA. Please go ahead.

Betty L (Equity Research Analyst)

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.

Yong Suk Cho (Director and CEO)

Thanks, Betty. Yeah, about stimulus, stimulus policy, it is surely a positive impact, I think, on overall economy, as in our SBO segment 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 SBO lending. At the same time, we take full advantage of the gradual recovery by putting more emphasis, focus on non-SBO segments and expedite small and medium-sized ticket loan growth using our CF license, customer finance license, and then newly acquired small lending license with their funding cost advantage and customer experience advantage over guarantee model, and then about your outlook question. Our volume guidance of RMB 190 billion-RMB 220 billion, and loan balance of RMB 200 billion-RMB 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 calendar year. But going forward, we know that, we believe the overall lifetime profitability will surely improve than before.

Operator (participant)

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 loan book for some time, which is bearing fruit 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 Q2? 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.

Yong Suk Cho (Director and CEO)

Okay, thanks, Judy. The asset quality indicator remained stable in the third quarter with C-M1 flow rate of our retail loans remaining at 0.9%, despite decline on balance. So while our customer finance NPL ratio continued 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, the mix will continue to optimize. So I believe we'll be able to demonstrate more obvious asset improvement measured by net flow not before long, so that we have confidence about shareholder return. We do not have any specific plan yet as to our special dividend this year.

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.

Operator (participant)

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

Yada Li (Equity And Debt Special Assets Analyst)

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 increased this quarter, while the risk indicators remained stable? And secondly, I was wondering, what is the trend of the funding costs going forward? That's all. Thank you.

Peiqing Zhu (Director and CFO)

Thank you, Yada. I'll try 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 up-front provision of loans under 100% guarantee model, as we discussed, right? The prudent approach, and also the prudent approach in our model to reflect our conservative forecast based on the macro environment in the third quarter. We're still seeing some uncertainties in the macroeconomy. The second question, I know you're interested about our funding cost trend, right? Our funding costs further decreased in the third quarter, thanks to the favorable monetary policy and our diversified funding strategy.

And also, we try to spend more time working with our partners and try to cut down some of the funding cost 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 our consumer finance and small lending licenses. Thank you.

Operator (participant)

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

Xinyan Liu (Head of Investor Relations)

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

Operator (participant)

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