LexinFintech - Q1 2024

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to LexinFintech 1st Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star one one on your telephone. You'll then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I'd now like to hand the call over to Mandy Dong, IR Director of LexinFintech. Please go ahead.

Mandy Dong (Director of Investor Relations)

Thank you, Desmond. Good morning, and good evening, everyone. Welcome to LexinFintech's 1st Quarter 2024 Earnings Conference Call. Our results were issued earlier today and can be found on our IR website. Joining me today are our CEO, Jay Xiao, CRO, Arvin Qiao, and CFO, James Zheng. Before we get started, I'd like to remind you of our safe harbor statement in our earnings press release, which also applies to this call. During the call, we may refer to business outlook and forward-looking statements, which are based on our current plans, estimates, and projections. The actual results may differ materially, and we undertake no obligation to update any forward-looking statements. Last, unless otherwise stated, all figures mentioned are in RMB. Jay will first provide an update on our overall performance. Arvin will discuss risk management updates. Lastly, James will cover the financial results in more details.

I will now turn the call over to Jay. His remarks will be in Chinese, and English translation will follow.

Jay Xiao (CEO)

[Foreign language] Hello, everyone. It's my pleasure to give an update regarding our performance for the 1st quarter of 2024. Considering current macroeconomic environment and the industry dynamics, we adopted a cautious and a prudent business strategy in the 1st quarter. We maintained a dual-driven approach of risk and data, aiming to strike a fine balance between growth and the quality, and achieved a set of healthy results. Here are the key highlights. In the 1st quarter, total loan origination for the 1st quarter reached RMB 58 billion. Loan balance stood at RMB 121.5 billion, a year-over-year increase of 13.5%. Total revenue amounted to RMB 3.2 billion, with a year-over-year growth of 8.7%.

Net profit reached RMB 202 million. [Foreign language] In terms of asset quality, in the face of the moderate recovery of macroeconomic environment, the intensified competition among loan facilitation industry and the relatively high risk level of some part of our existing loan portfolios, we strengthened efforts to collect tail-end assets and disposal of these delinquent assets in the 1st quarter. For newly issued loans, we undertook the high credit standard, ensuring the good quality of new assets. To be more specific on these two fronts of asset quality measures. [Foreign language] For existing assets, we strengthened efforts to collect tail-end assets in the 1st quarter. This included improving the intelligent cost routing strategy for multi-line management to minimize the negative impact of line control.

We also continued to advance the construction of a localized integrated system for collection, mediation, and litigation services, ensuring an efficient user experience and effectiveness in post-loan collection. Simultaneously, we accelerated the disposal of tail-end assets by introducing strategy robots, replacing manual decision-making with machine learning algorithms... significantly enhancing the efficiency and effectiveness of asset disposal.

[Foreign language] Regarding new assets, firstly, we undertook measures to reduce the increase of high-risk assets. In the 1st quarter, the Low and Grow new customer risk management system was fully implemented across all business lines by initially granting a low credit limit to new users and gradually increasing the limit as we know the customer better as time passes by. We reduced the likelihood of credit loss for new credit approvals and maintained the increase of approval rate of new customers. We also enhanced our offer competitiveness for high-quality customers through dynamic credit limit growth to facilitate conversion. The approval rate for new customer credit increased by over 33.0%, and the proportion of super prime and prime segment customers rose from 24% in January to 44.0% in March. The early risk performance indicator for new customer assets, FPD30, shows a continuous downward trend.

[Foreign language] The second measure, targeting at newly issued loans, is that we continued to increase the proportion of high-quality new assets. Through pricing experiments and the causal inference models, we improved the matching of differentiated priced products among various customer segments, enhancing the competitiveness of offers for super prime and prime customers. Leveraging the advantage of Lexin large user base of over 200 million accumulated registered users, we targeted potential customers who have churned or not yet converted, and conducted re-offering program, which contributed to the increasing proportion of good quality assets.

[Foreign language] Through the above mentioned measures, the risk performance of new customers has gradually improved, and the risk of newly issued assets has been under management. Although the disposal of existing delinquent loans and the resolution of risks associated with existing assets still require time, as the proportion of new assets in the asset structure gradually increases, it's expected that the overall risk performance will gradually improve in the 2nd half of the year.

[Foreign language] In terms of refined operations for different customer segments, we continue to prioritize customer orientation and leverage our product matrix to drive customer activities and improve asset quality. In the 1st quarter, we increased efforts in promoting Lexin Card, in Chinese, Lexin Card, to serve our top-tier customers better. Lexin Card is a consumer loan product with interest rates below 18%, targeting at high-quality working class consumers. After more than six months of testing, users of Lexin Card demonstrated higher user activity levels. In the 1st quarter, the number of transactions, average transaction amount, and average loan balance per user increased by 14%, 13%, and 19% respectively on a QoQ basis, with early risk performance indicator less than half of our overall portfolios.

We also focused on operating high-quality micro and small business customers by introducing a low interest and a large ticket size product called Le Ye Zhuan in Chinese. This product primarily serves high-quality micro and small business owners. Based on current tracking data, the early risk performance indicator for customers using Le Ye Zhuan are significantly lower than the overall inclusive loan portfolios, and we plan to continue expanding its scale while maintaining good asset quality. Lexin Card and Le Ye Zhuan are two key products targeting our top-tier customers, aiming to boost the activity of high-quality borrowers on our platform and to promote the return of more high-quality lost customers. In the 1st quarter, overseas business that we previously explored achieved a breakthrough in the Mexico market. Total loan origination volume grew by double digits on a quarter-over-quarter basis, and it remained profitable.

[Foreign language] In terms of funding costs, we continue bringing in more financial institutions with strong comprehensive capabilities. In the 1st quarter, we established a partnership with several nationwide large-scale institutions, further increasing the proportion of funds from national-level financial institutions. Our funding costs reached a new historical low level, with a 34 basis point decrease compared to the previous quarter. In May, we issued the company's first internationally rated ABS with triple A rating. Moreover, in the future, we will further progress the regular issuance of ABS. [Foreign language] In the 1st quarter, we invested RMB 130 million in research and development, further integrating large language models with our business to improve work efficiency and customer experience. We introduced real-time intent recognition technology based on large language models, leveraging years of accumulated data from customer service and sales scenarios.

This technology improved the accuracy of customer intent recognition, enabling personalized solutions tailored to customer needs in customer service and telemarketing scenarios, greatly enhancing customer satisfaction. In terms of user profiling, through continuous training, the large language model's ability to automatically analyze and identify information, such as the profession and repayment willingness, has improved, with an accuracy rate exceeding 77.0%, effectively supporting refined operation for different customer segments. [Foreign language] In terms of corporate social responsibility, in the 1st quarter, we launched the consumer protection and the Warmth Season campaign, providing consumer protection service through institutional building, product feature, user experience, and financial knowledge cultivation. We assisted the police force in several cities in cracking two cases of illegal agency, continuously combating financial fraud. In April, Lexin became the official partner of Chinese National Fencing Team.

We launched the Believe in the Edge Empowerment and Strive program to support local industries for micro and small enterprise with over RMB 20 billion funds, offering RMB 1 billion interest-free dream funds to support young graduates in pursuing their dreams, and collaborating with merchants to develop multiple product categories with monthly sales exceeding tens of millions. [Foreign language] Looking ahead to the second quarter, we will continue to adhere to a prudent operating principle, prioritize risk management, and continuously enhance profitability in the face of a complex and low visibility external environment. As our profitability grows in the future, we will continue to distribute cash dividends and provide more returns to shareholders. [Foreign language] Next, I will hand over to our CRO, Arvin, for risk management update. Thank you.

Arvin Qiao (Chief Risk Officer)

[Foreign language] Thank you, Jay. I will give an update regarding risk management in the 1st quarter. In the 1st quarter, we observed uncertainty persisted in the external environment without a notable improvement from last quarter. This can be shown by a continued weak recovery pace of macroeconomic conditions and extended lukewarm consumer credit demand and the seasonal factor of the Chinese Spring Festival. Based on these observations, we firmly continued to implement our risk management, upgrading, and profit enhancement strategies in the 1st quarter. We focused on a series of initiatives, such as enhancing credit profile identification capabilities, optimizing asset structure, increasing the disposal of high-risk customers, and upgrading differentiated pricing capabilities, which achieved noticeable results.

Through the above-mentioned measures, although the risk performance of new customers has gradually improved with the risk level of new assets has been under management, the disposal of existing delinquent loans and resolution of risk associated with existing assets still require time. Looking ahead, as the proportion of new assets in the asset structure gradually climbs, it's expected that overall risk performance will gradually improve in the 2nd half of this year. Next, let me elaborate on the specific risk management measures we implemented in Q1. [Foreign language] First, in terms of continuous enhancement of risk identification capabilities, in the 1st quarter, we further increased the exploration of external scenario-based data and introduced a cutting-edge algorithm to significantly improve risk identification capabilities.... Regarding the continuous optimization of risk scoring for new and existing customers, we established partnership with several platforms that possess their proprietary ecosystem data.

Through joint modeling and utilizing additional data dimensions for key feature extraction, we enriched the types of model features. This resulted in an approximate 10% improvement in the KS value for the main risk models, further enhancing the risk identifying capability between good and bad customers. Additionally, in terms of customer credit profiling, occupation model, education model, and the income prediction model were all developed and implemented in Q1. This significantly enriched our understanding and insights into customer credit needs, greatly improving the matching effectiveness between loan products and the user needs. [Foreign language] Next, in terms of optimizing asset structure, in the 1st quarter, we launched a risk management strategy system for new customer based on the Low and Grow methodology. On the customer acquisition side, through strengthened front-end risk identification RTA model and optimized the user application completion models, the efficiency of acquiring high-quality customers significantly increased.

The proportion of high-quality loan applications increased by over 20%, while achieving a more than 33.0% uplift in the credit approval rate for customers. The FPD7 for new customer loans decreased by around 20% compared to Q4, resulting in a monthly improvement in new customer risk level. [Foreign language] In terms of risk management for existing customers, we have restructured the entire system of credit line limit, pricing, and a transaction monitoring strategy, significantly enhancing differentiation in credit line limits and pricing. This has resulted in a more rational alignment of credit line limits and pricing within various risk levels. The competitiveness of loan products offered to high-quality customers has been significantly strengthened, leading to a monthly rise in the proportion of high-quality customers. At the same time, it effectively reduced the credit limits and potential credit loss for customers with medium to high risk level.

[Foreign language] Third, regarding the disposal of high-risk customers, in the 1st quarter, we strengthened efforts to close accounts, intercept transactions, and reduce credit limits for high-risk customers. We developed and deployed an intelligent disposal tool, which has been applied and implemented in scenarios such as customer accounts closing, anti-fraud detection, and transaction interception. This tool has significantly improved efficiency and precision in high-risk asset disposal. It can generate strategy recommendations on a daily basis, enabling efficient high-risk transaction interception and account closing for high-risk customers. It has significantly improved the response speed of high-risk asset disposal and reduced the generation of delinquent loans. Additionally, in terms of our cooperation with traffic channels, recently, we have conducted a comprehensive risk versus profitability analysis of the existing traffic channels. Channels with small scale and high risk were closed, thereby contributing to a tangible positive result in reducing the risk level of new assets.

[Foreign language] Fourthly, in terms of risk-based differentiated pricing and customer churn prevention, in the 1st quarter, we also spent great efforts on strengthening the management system of risk-based differentiated pricing strategy. This led to a substantial improvement in the alignment and the rationality of risk level and pricing, enhancing the matching of risk and the profitability for various classes of assets and driving the growth of profitability. While maintaining average price of the whole portfolio almost stable, we increased the intensity of time-limited price promotion for high quality, low risk customers to boost transaction conversion and drive growth in high quality loan volume. We also lifted the price for tail portion customer segments to ensure risk and price alignment.

[Foreign language] In Q1, we launched an offline and real-time customer churn prevention strategy system, targeting customer groups with high churn probability. As a result, the number of churned customers in the 1st quarter declined compared to the same period last year. This achievement increased the size of our operable customer base. Additionally, we provided reoffers for customers who historically obtained approved credit line but never conducted a drawdown, through which we successfully recalled those silent customers. Compared to the control group, the number of recalled customers increased by over 33.0%.

[Foreign language] In the 2nd quarter, we will continue to focus on enhancing credit profile identification, intensifying the disposal of high-risk customers, accelerating the acquisition of high-quality new customers, scaling up the loan volume of high-quality existing customers, and continue to push forward the risk-based differentiated pricing strategy. These key initiatives aim to promote risk management enhancement, improve profitability, and strengthen our capability. We believe that in the 2nd quarter, as our new risk management system and methodology gradually come into more effect, it will effectively drive a decline in the risk level of new loans while accelerating the disposal and the resolution of risk in existing loans. Based on current estimations, we expect the risk performance of overall assets will gradually improve in the 2nd half of this year. This ends the risk performance update for this quarter.

Now, I will hand over to our CFO, James, to share the recent financial updates.

James Zheng (CFO)

Thank you, Arvin. I will now delve into our financial results, noting that all figures are presented in RMB, unless stated otherwise. As Jay and Arvin highlighted, given the macroeconomic conditions and the continued cautious consumer behavior, as well as the New Year's seasonality, we strategically adjusted our Q1 operations. We tightened our credit standards and moderated loan originations to ensure the resilience of our financial performance. Approach not only helped manage volume, but also enhanced the quality of our operations, which I will elaborate across the following five key aspects. Number 1, resilient net profit margin . . . despite a decline in new loan volume to RMB 58 billion, down 5.3% from the previous quarter, and the total revenue falling to RMB 3.2 billion, down 7.6% quarter-over-quarter, profit reached RMB 202 million.

The net profit margin remained relatively stable at about 6.2% in comparison with the pro forma Q4 net income without investment losses, reflecting the robustness of our business model and the profitability. Number 2, record low funding costs. We achieved a significant reduction in funding costs by 34 basis points from the previous quarter, bringing it to under 6%. This improvement stems from the overall market rate, as well as enhancing our network of funding partners and increasing proportions of funds sourced from national banks to around 70%. Additionally, we resumed ABS issuance in May, raising RMB 350 million. We plan to continue optimizing our funding costs through further ABS issuances as market conditions allow. Number 3, revenue take rate uptick.

There is a slight increase in the revenue take rate of new loans to 2.54% in Q1, up by 7 basis points quarter-over-quarter and up by 5 basis points year-over-year. This is due to the lower funding costs, a continuously refined early repayment ratio, and slightly improved credit provisioning quarter-over-quarter. The total credit impairment costs lowered slightly quarter-over-quarter. The total credit impairment cost items, including the provision for financing receivables, provision for contract assets receivables, provision for contingent guarantee liabilities, and a change in fair value of financial guarantee derivatives and loans at a fair value, decreased by 7.5% on a quarter-over-quarter basis due to the decreased new loan amount and the improvement in risk trends of new customer loans. Number 4, improved risk profile of new customer loans.

As explained by Jay and Arvin earlier, our focused risk management efforts have gradually improved the loan quality among new customers from super prime and private segments. However, due to the size of the existing loan balance, the overall ninety-day plus delinquency rate still increased by 10 basis points to 3.0%. Now, our overall provision coverage ratio remains at over 300%, which is defined as total provision amount divided by the principal amount of ninety-day plus delinquent loans. This reflects our strong buffer against potential bad debts. An additional note, as followed by Arvin, the enhancement of overall credit indicators will likely accelerate in the 2nd half of the year, along with our risk mitigating initiatives, as well as the macro improvement. Number 5, operational expense control.

We continue to optimize costs, particularly in operational expenses, excluding the processing and servicing costs, which is driven by the credit cycle and the collection operations. Net of operating expenses, including sales and marketing, R&D, and G&A, as a percentage of average loan balance, further dropped to 2.09%, 11 basis points down from last quarter and 49 basis points down from one year ago. This reflects our strategic focus on maintaining effectiveness in essential operations, like loan collections, to manage credit costs while reducing expenditures in other operational areas. Apart from the above operations-related highlights, I also want to provide some additional perspectives related to income statement line items.

Operating revenue increased by 8.7% year-over-year, and it decreased by 7.6% to RMB 3.2 billion quarter-over-quarter, slightly more than the decline in loan origination volume of 5.3% quarter-over-quarter, mainly due to a proactive tightening of credit in the e-commerce business segment. Our balance sheet funding costs increased by 19.1% quarter-over-quarter due to high volume in off-balance sheet loan facilitation. Year-over-year, the off-balance sheet funding cost amount decreased by 39.7% due to the decline of both the rate and the off-balance sheet loan amount. Processing and servicing costs rose by 14.3% quarter-over-quarter and 11.1% year-over-year. This is because we have intensified our efforts in loan collections to manage risks.

Sales and marketing expenses decreased by 2.8% quarter-over-quarter and at 5.1% year-over-year, aligning with our strategy to scale back customer acquisition amid seasonal and macroeconomic challenges. On the balance sheet side, our cash position remains strong, ending the quarter with approximately RMB 4 billion on hand and a solid equity position of RMB 9.9 billion. While looking for ways to continue increasing shareholder value when market conditions improve, currently, we will maintain our dividend payout policy, with the upcoming dividend payout payment scheduled for May 24th. Looking ahead, while the macro environment remains uncertain and the consumer credit demand is weaker than expected, we will stay focused on enhancing risk management, refining efficiencies, and optimizing costs. For the 2nd quarter, currently, I anticipate a total GMV of loan origination volume to be around RMB 54 billion-RMB 55 billion.

This estimate reflects the company's current expectation, which is subject to change. We're now ready to take your questions. Operator, please open the floor. Thank you.

Operator (participant)

Thank you. As a reminder, to ask question, you need to press star one one on your telephone and wait for a name to be announced. If you wish to ask your questions to management in Chinese, please repeat it in English for the benefit of all participants. Please stand by while we compile the Q&A roster. One moment for the first question. Our first question comes from Frank Zheng from UBS. Please go ahead.

Frank Zheng (Equity Research Analyst)

[Foreign language] Thank you, management, for letting me to ask the question. Since April and the 2nd quarter, how does the credit demand look like? What does the trend look like, and what are the management expectations for total loan volume in the 2nd quarter? Thank you very much.

Jay Xiao (CEO)

[Foreign language] Okay, Frank, I will translate for Jay. In 1st quarter, considering macroeconomic conditions and seasonal factors, the overall pace of loan origination remain within our expectation. You can see, our total loan origination only dropped about 5% in Q1, we are talking about a Q-on-Q basis. This is actually outperformed the industry average loan origination pace in Q1. Since we entered the 2nd quarter, you mean April and May, when we look at the operational metrics, considering both the external and internal factors, we see the external macroeconomic environment is still showing, we see relatively slow recovery trends. So therefore, internally, we will continue to adhere to the risk management upgrading strategy and then maintain a relatively high standard of credit approval for both new customers and newly issued loans.

Therefore, taking both the internal and external factor into consideration, as for the effective credit demand, we actually seeing a slowing down trend in April and May on a month-over-month basis that is actually below our expectation.

[Foreign language] Therefore, based on our current estimations, we expect that the total loan origination volume for the 2nd quarter will be around RMB 54- RMB 55 billion. At the same time, while we are adhering to the high standard of prudent risk management strategy, we also closely monitor the macroeconomic recovery. If in the future, the overall economic vitality improves significantly. We will also consider seizing the opportunity for business growth in a very timely manner.

Mandy Dong (Director of Investor Relations)

Okay, Frank, hope Jay addressed your question. Operator, I think we can take another question.

Operator (participant)

Certainly. One moment for the next question. Our next question comes from the line of Yada Li from CICC. Please go ahead.

Yada Li (Equity and Debt Special Assets Analyst)

[Foreign language] I'll do the translation. Mr. Xiao mentioned that the overseas business achieved double-digit growth in the 1st quarter. Could you provide more detail about the business planning for overseas development, core business lines, and the future profit expectations? That's all. Thank you.

Jay Xiao (CEO)

[Foreign language] So Yada, I will translate for Mr. Xiao. Considering that China's macroeconomic development has shifted from the high-speed growth to high-quality growth, and you see the loan facilitation industry has entered a stable growing phase, we have made some attempts overseas, and so far it achieved good results. And a couple of years ago, we made some strategic investment in Southeast Asia regions such as Indonesia. The affiliate company in Indonesia conducts loan facilitation business in the local market. Besides that, we also have built up our own operation team and could expand our business into South America region, for example, Mexico market. Well, in the past quarter, in Q1, the monthly loan origination volume in Mexico market has exceeded RMB 100 million, achieving profitability for the quarter.

The loan origination volume for overseas business increased by double-digit growth on a Q-on-Q basis, which far exceeded our overall business line growth. However, you see, the scale of the overseas business is still relatively small compared to our domestic business. Therefore, in the future, we will continue to increase our investments overseas to expand and strengthen the business development. Regarding the products, we will push forward the transition from the current single model, cash loan model, to more diverse the products models. Moreover, by optimizing targeted marketing, continuous iterating products, and enhancing risk management, we hope to increase the proportion of our overseas business and contribute more to our profitability. Yada, I hope Jay gives you more color regarding our overseas business line. Well, operator, we can take next one.

Operator (participant)

Thank you. One moment for the next question. The next question comes from the line of Zoe Zhou from CLSA. Please go ahead.

Zoe Zhao (Internet Research Analyst)

[Foreign language] Let me do the translation. As CRO, Mr. Zhao mentioned that the risk performance of loan issued to new customer is showing a trend of gradual improvement, while risks of existing loan book will still need time to be resolved. Looking ahead, could you discuss in detail the risk performance outlook of both existing and new assets, and expected future performance of the overall asset? Thank you.

Arvin Qiao (Chief Risk Officer)

[Foreign language] Well, Zoe, let me translate what Arvin mentioned for you. So certainly, I think the overall risk performance of our total assets really draws market attention, and I will just add that. In terms of the asset quality of loan issued to new customers, you see, in Q1, we enhanced risk identification capability, improved the efficiency and accuracy of the front-end RTA model for acquiring new customers, and we also fully implemented the Low and Grow lifecycle risk management approach. As a result, we've seen a noticeable increase in the proportion of new good quality customers and the leading indicator for the asset quality for new customers. For example, first payment default rate seven has decreased by more than 20% compared to the level in Q4, showing a month-over-month improving trend.

Although you see the risk performance for loan issued to new customer has gradually improved, and the risk of new assets has under management through the measures we talk about, it still require time for the resolution of risk of existing assets. Therefore, we expect in the future, as the proportion of new assets in the overall asset structure gradually increased and the existing loan book risk are gradually resolved, we foresee that the overall risk performance will gradually improve in the 2nd half of this year. Hope this answers your question regarding our risk performance of the overall assets, Zoe. Well, operator, if can you look at the line? If there is no more queuing on the line, I think we are good to close the call for today.

Operator (participant)

Thank you. That's the end of the Q&A session. I'll now hand the call back to you for closing.

Mandy Dong (Director of Investor Relations)

Well, thank you everyone again for joining us today. If you have further questions, please contact us via the contact information on our IR website and offline. Thank you all. Have a good day and good night. Bye bye.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.