Qfin Holdings - Q2 2023

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to the Qifu Technology Second Quarter 2023 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 all note today's event is being recorded. At this time, I would like to turn the conference call over to Miss Karen Ji, Senior Director of Capital Markets. Please go ahead, Karen.

Karen Ji (Senior Director of Capital Markets)

Thank you, operator. Hello, everyone, and welcome to Qifu Technology's Second Quarter 2023 Earnings Conference Call. Our earnings release was distributed earlier today and is available on our IR website. Joining me today are Mr. Wu Haisheng, our CEO, Mr. Alex Xu, our CFO, and Mr. Zheng Yan, our CRO. Before we start, I would like to refer you to our safe harbor statement in the earnings press release, which applies to this call, as we will make certain forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of the non-GAAP measures to GAAP measures. Also, please note that unless otherwise stated, all figures mentioned in this call are in RMB terms. Now, I will turn the call over to our CEO, Mr. Wu Haisheng. Please go ahead.

Haisheng Wu (CEO)

Thanks, Karen. Hello, everyone. Thanks for joining our second quarter earnings conference call.

Speaker 9

Hello, everyone, thanks for joining our second quarter earnings conference call.

Haisheng Wu (CEO)

Since the second quarter of this year, we have felt that the momentum of economic recovery in the macro economy has slowed down. In the consumer credit industry, we see that user demand is also more cautious. We are still continuing to follow a stable business strategy. We are maintaining risk and performing stably while pursuing reasonable growth. In the second quarter, our total loan origination volume reached RMB 124 billion, an annual increase of 26.4% and a quarterly increase of 13.5%. Compared to the first quarter, it should be said that it has accelerated further. As of the end of the second quarter of this year, our platform has served 153 financial institutions and has cumulatively provided lending services to over 47 million users.

Speaker 9

During the quarter, given the softening macroeconomic recovery and a more cautious sentiment among consumer credit users, we remain committed to our prudent operating strategy and pursued meaningful growth while maintaining stable risk performance. In Q2, total loan facilitation and origination volume on our platform reached RMB 124.2 billion, up 26.4% year-over-year, and 13.5% quarter-over-quarter, reflecting an accelerated growth trajectory compared to Q1. By the end of Q2, our platform had empowered a total of 153 financial institutions and accumulatively served more than 47 million users with approved credit lines.

Throughout the year, we have been steadily advancing our strategic upgrade. While pursuing our high-quality growth, we have further improved our profitability and increased our safety margin, making our business model more resilient in the complex macro environment. In terms of business growth, we have continued to expand and diversify our customer acquisition channels. By partnering with multiple leading traffic platforms under the embedded finance model, we have effectively expanded our coverage to the targeted users. We have also developed products tailored to different consumer and SME profiles, addressing varied users' needs and providing additional growth engines for our business. In terms of profitability, we have taken further steps to boost operational efficiency, reduce funding costs, and improve risk assessment capabilities.

... to optimize asset allocation and improve the overall profitability of our loan portfolio.

Haisheng Wu (CEO)

[Foreign Language] 现 在 我 来 具 体 分 享 一 下 我 们 Q2 的 一 些 重 要 的 进 展.

Speaker 9

Let me share some of our highlights in the second quarter.

Haisheng Wu (CEO)

[Foreign Language] 嗯 ， 第 一 个 方 面 呢 ， 我 们 继 续 去 拓 展 多 元 化 的 这 个 获 客 的 渠 道 和 创 新 的 获 客 的 方 式 ， 提 升 获 客 效 率 。 七 月 份 ， 我 们 ， 呃 ， 陆 续 上 线 了 一 些 头 部 的 这 个 短 视 频 啊 ， 是 支 付 啊 等 流 量 平 台 的 一 些 合 作 。 嗯 ， 依 托 ， 呃 ， 产 品 方 更 庞 大 的 这 种 活 跃 用 户 的 基 础 ， 我 们 通 过 这 个 双 方 一 起 联 合 建 模 ， 嗯 ， 通 过 一 些 这 个 创 新 和 定 制 化 的 这 种 客 群 的 识 别 策 略 ， 我 们 的 效 率 进 一 步 提 升 ， 嗯 ， 增 加 了 我 们 对 于 优 势 客 群 的 一 个 覆 盖 。 呃 ， 在 投 放 规 模 与 一 季 度 基 本 持 平 的 情 况 下 呢 ， 我 们 二 季 度 的 新 客 呃 ， 动 支 人 数 比 一 季 度 提 升 了 百 分 之 十 六 ， 因 此 获 客 效 率 嗯 ， 有 一 个 进 一 步 的 提 升 。 嗯 ， 同 时 我 们 ， 嗯 ， 也 通 过 这 个 ， 嗯 ， 一 个 这 个 百 分 之 四 点 八 利 率 的 一 个 极 限 的 这 个 嗯 ， 定 价 的 这 个 测 试 ， 嗯 ， 更 高 效 地 去 触 达 一 批 嗯 ， 有 稳 定 信 贷 需 求 的 这 种 优 质 客 群 。 嗯 ， 我 们 发 现 他 们 的 动 意 愿 和 这 个 额 度 的 需 求 都 相 对 的 更 好 。 嗯 ， 这 也 是 对 我 们 现 有 客 群 的 一 个 有 效 的 补 充 。 那 接 下 去 我 们 还 会 继 续 去 探 索 各 类 型 客 群 的 这 个 获 客 和 这 个 接 触 方 式 ， 通 过 这 个 产 品 的 创 新 去 满 足 这 种 更 多 样 化 的 这 个 用 户 需 求 。

Speaker 9

First, we continue to expand and diversify our customer acquisition channels while leveraging innovative approaches to improve marketing efficiency. In July, we entered into partnerships with top-tier traffic platforms, including short-form video platforms and payment providers, to tap into their massive active user base. Through joint modeling, process innovation, and tailored user identification strategies, we boosted user conversion and enhanced our ability to reach targeted users. With marketing spending largely flat from Q1, the number of new users making drawdowns increased 16% sequentially. Furthermore, we offered some experimental compelling rates to boost engagement in a more innovative and effective way with high-quality users with stable credit needs, stronger intention to borrow, and appetite for larger credit lines, which also serves as an effective supplement to our existing user base.

Moving forward, we will continue to explore effective ways to acquire and manage users from various segments and address their diverse needs through product innovation.

Haisheng Wu (CEO)

[Foreign Language] 第 二 个 方 面 呢 ， 我 们 加 强 了 用 户 的 精 细 化 的 运 营 ， 实 现 了 用 户 活 跃 度 的 一 个 显 著 提 升 。 我 们 从 用 户 的 需 求 出 发 呢 ， 优 化 了 我 们 用 户 全 生 命 周 期 的 产 品 、 风 险 和 运 营 策 略 ， 充 分 地 利 用 我 们 这 个 人 行 的 征 信 和 范 小 微 的 这 种 数 据 的 补 充 ， 精 准 地 识 别 用 户 。 嗯 ， 实 现 了 我 们 在 这 个 风 险 稳 定 的 基 础 上 呢 ， 提 供 了 更 加 有 竞 争 力 的 这 个 定 价 额 度 和 更 加 灵 活 的 这 种 还 款 方 式 ， 嗯 ， 以 满 足 用 户 更 加 多 用 ， 多 样 化 的 需 求 ， 也 大 幅 地 提 升 了 我 们 新 用 户 和 ， 和 老 用 户 的 这 个 动 意 愿 。 嗯 ， 加 上 我 们 更 多 的 这 种 对 用 户 的 触 达 方 式 和 运 营 手 段 ， 我 们 在 二 季 度 新 客 的 M0 的 这 个 人 头 动 率 比 一 季 度 提 升 了 百 分 之 十 三 ， 嗯 ， 老 客 的 复 借 率 比 一 季 度 提 升 百 分 之 八 。 嗯 ， 在 这 个 基 础 上 呢 ， 我 们 还 引 入 了 这 个 用 户 的 忠 诚 度 计 划 ， 通 过 为 用 户 提 供 更 加 丰 富 的 产 品 和 权 利 ， 来 提 升 我 们 平 台 用 户 的 粘 性 。

Speaker 9

Second, we improved our user engagement capabilities and achieved a significant boost in user activity. Starting from user needs, we optimize our product risk and operational strategies throughout the user lifecycle. We also enhanced our ability to identify users by leveraging PBOC credit data, as well as data related to the broadly defined SME segments. This enabled us to offer more competitive rates and credit lines and a more flexible repayment methods, catering to varied users needs, while ensuring the stability of our risk performance. As a result, we saw a notable improvement in drawdown intention among new and existing users.

In addition, through our diverse user outreach and engagement approaches, the first month drawdown rate, drawdown ratio of new borrowers increased by approximately 13% from Q1, and the re-borrowing rate of existing borrowers, meaning the average percentage of existing borrowers with an outstanding loan balance that drawdown again the following month increased by approximately 8% from Q1. On top of this, we also introduced user loyalty programs and offered a broader range of products and benefits to boost users engagement.

Haisheng Wu (CEO)

[Foreign Language] Three 个 方 面 是 我 们 继 续 维 持 稳 定 的 定 价 和 良 好 的 风 险 水 平. 我 们 充 分 地 利 用 我 们 的 资 金 端 的 优 势, 进 一 步 地 优 化 我 们 的 盈 利 模 型. 2Q, 我 们 与 金 融 机 构 进 一 步 地 加 深 合 作, 推 动 了 整 体 平 台 资 金 成 本 进 一 步 的 下 降, 而 且 降 幅 应 该 说 是 超 过 市 场 区 域 的 这 个 平 均 的 下 降 水 平. 我 们 通 过 创 新 的 产 品 设 计 呢, 引 入 了 多 家 这 个 state-owned banks 和 joint-stock commercial banks 的 ABS 的 投 资. 2Q 的 ABS 发 行 规 模 达 到 RMB 5.34 billion, 环 比 增 长 了 132%. 这 个 呢, 也 应 该 说 是 进 一 步 摊 薄 了 我 们 整 体 的 资 金 成 本. 随 着 我 们 的 风 险 识 别 能 力 的 不 断 的 提 升, 我 们 对 接 了 更 多 元 化 的 金 融 机 构 合 作 伙 伴, 来 提 升 我 们 各 类 型 资 产 分 层 的 这 种 承 接 能 力, 不 断 地 优 化 我 们 资 产 分 发 的 策 略, 从 而 提 升 我 们 的 整 体 的 盈 利 能 力.

Speaker 9

Third, we kept our pricing and risk performance at stable levels, leveraging funding strength to further optimize our economic model. During the quarter, our deepened cooperation with financial institutions contributed to a further reduction in our funding costs that far outpaced market rate cut. In addition, through innovative product design, we secured ABS investments from multiple state-owned banks and major joint-stock banks. We issued roughly RMB 5.3 billion of ABS in the quarter, up 132% quarter-over-quarter, and leading to a further reduction in our overall funding costs. As our credit assessment capabilities steadily improve, we are collaborating with a broader spectrum of financial institutions, which will enhance our ability to optimize asset allocation and boost profitability.

Haisheng Wu (CEO)

[Foreign Language] 第 四 个 方 面 ， 我 们 的 金 融 科 技 战 略 应 该 说 ， 嗯 ， 得 到 一 个 稳 步 推 进 ， 并 且 取 得 一 个 初 步 成 效 。 嗯 ， 我 们 进 一 步 地 完 善 了 我 们 的 产 品 矩 阵 和 解 决 方 案 ， 嗯 ， 支 持 了 银 行 更 多 元 化 的 这 种 需 求 。 嗯 ， 从 组 织 上 呢 ， 我 们 已 经 搭 建 了 一 支 ， 呃 ， 初 步 具 备 规 模 的 这 个 专 业 化 团 队 ， 嗯 ， 能 更 好 地 为 我 们 的 金 融 机 构 提 供 更 专 业 的 这 种 服 务 。 那 我 们 ， 呃 ， 中 小 银 行 对 于 ， 呃 ， 数 字 化 转 型 呢 ， 应 该 说 我 们 看 到 有 着 非 常 迫 切 和 很 大 的 这 个 需 求 ， 也 对 我 们 提 出 了 很 更 多 的 这 种 提 供 全 流 程 的 这 个 技 术 赋 能 的 这 个 解 决 方 案 的 需 求 。 那 我 们 目 前 呢 ， 嗯 ， 也 陆 续 开 始 有 项 目 逐 渐 进 入 到 这 个 交 付 的 阶 段 了 。

Speaker 9

Fourth, our technology solution business advanced steadily and has begun to take shape. We further optimized our product matrix and solutions to address the diverse needs of our banking partners. In terms of organizational development, we assembled a sizable team capable of providing professional service to financial institutions. Small and medium-sized banks are particularly keen to push forward the digital transformation with the support of our end-to-end tech solutions. A number of projects are currently in the implementation phase.

Haisheng Wu (CEO)

[Foreign Language] 回 顾 这 个, 回 顾 一 下 我 们 这 个 今 年 的 上 半 年 呢, 虽 然 宏 观 环 境 面 临 着 很 多 的 挑 战, 我 们 也 凭 借 我 们 非 常 稳 健 的 这 个 经 营 策 略, 我 们 平 衡 了 增 长 和 风 险, 应 该 说 还 是 取 得 了 非 常 不 错 的 这 个, 这 个 表 现. 下 半 年 呢, 我 们, 会 进 一 步 地 去 拓 宽 我 们 的 渠 道 和 产 品 线, 提 升 我 们 的 用 户 粘 性, 进 一 步 地 加 深 和 金 融 机 构 的 合 作, 优 化 我 们 的 这 个 资 产 的 这 个 分 层 和 分 发 的 策 略, 从 而 提 升 我 们 的 收 入 和 盈 利 能 力. 在 今 天 这 个 宏 观 形 势 下, 我 们 通 过 商 业 模 式 的 这 种 持 续 的 迭 代, 会 让 我 们 的 企 业 具 有 更 强 的 韧 性. 我 们 今 天 所 处 的 这 个 行 业 地 位 呢, 和 我 们 的 这 个 资 源 禀 赋, 也 让 我 们 非 常 有 信 心 继 续 在 这 个 行 业 保 持 一 个 领 先 的 一 个 位 置, 也 获 得 一 个 长 期 更 健 康 的 一 个 发 展.

Speaker 9

Looking back at the first half of 2023, despite the softening macroeconomic environment, we balanced the growth and risk through our prudent operational practice and delivered solid results. In the second half, we will further expand our channel presence and product offerings to enhance user stickiness, forge closer partnerships with financial institutions, and optimize our asset allocation to improve our top line and bottom line performance. Our ongoing efforts to refine and upgrade our business model will enhance the resilience of our company in today's macro landscape. We are confident that our industry position and unique resource and capabilities will enable us to sustain our leadership position in the credit tech market and deliver even more robust growth in the long term.

Haisheng Wu (CEO)

[Foreign Language] 嗯 ， 六 月 二 十 号 ， 我 们 宣 告 了 一 个 未 来 十 二 个 月 内 以 一 点 五 亿 美 元 为 上 限 的 股 份 回 购 计 划 。

[Foreign Language] ...from 公 告 to today, 呢 ,

Speaker 9

we have been actively executing the program. We have strong confidence in the company's long-term profitability and cash flow, performance, and remain committed to rewarding and creating value for our shareholders through those shareholder return initiatives.

Haisheng Wu (CEO)

[Foreign Language] 好 , 那 我 的 , 我 的 部 分 到 这 里 。 下 面 请 Alex 给 大 家 带 来 一 些 这 个 财 务 方 面 的 分 享 。

Speaker 9

With that, I will now turn the call over to our CFO, Alex Xu, who will walk you through our financial results for the quarter.

Alex Xu (CFO)

Okay. Thank you, Haisheng. Good morning and good evening, everyone. Welcome to our second quarter earnings call. Despite the slower than expected macro recovery, we continue to see modest improvement in many aspects of our operations throughout the first half of the year. Users' activity levels, measured by drawdown ratios, continue to improve in recent months, which led to the accelerated loan volume growth in Q2. The pace of macro recovery is still uncertain, we are proactively taking some actions to optimize our product and service offerings, strengthen relationship with key partners, and ultimately to drive long-term, sustainable quality growth. In Q2, the quality of our user base remained solid. Key leading risk indicators were relatively stable, near the best level of recent quarters. Day 1 delinquency was 4.2% in Q2 versus record-setting 4.1% in Q1.

The slight uptick in Day 1 delinquency somewhat reflect borrowers' sentiment toward the ongoing macro uncertainties. 30-day collection rate was 87.2% in Q2 versus 86.2% in Q1. This sharp rebound mainly reflect seasonal factors, as well as some improved collection efficiency. As economic recovery remain uncertain, we may continue to see some fluctuation of these metrics in the near future, although overall risk level should be relatively stable in our continued effort to proactively mitigate risks. Total net revenue for Q2 was $3.9 billion, versus $3.6 billion in Q1 and $4.2 billion a year ago. Revenue from credit driven service, Capital Heavy, was $2.8 billion in Q2, compared to $2.6 billion in Q1 and $2.9 billion a year ago.

The year-on-year decline was mainly due to overall decline in expected average tenure of new loans, as well as lowered average interest rates. The sequential increase reflect growth in loan volume under Capital Heavy and relatively stable effective tenures. Early repayment levels were relatively stable in Q2 versus Q1. On-balance-sheet loans continued to grow nicely and account for nearly 19% of the total loan volume. We issued a record $5.3 billion ABS, up 143% and 132% year-on-year and sequentially, respectively, which helped us further lower our overall funding cost and drive for better utilization of our macro lending licenses. Revenue from platform service, Capital Light, was $1.13 billion in Q2, compared to $969 million in Q1 and $1.24 billion a year ago.

The year-on-year decline was mainly due to overall decline in expected average tenure of the loans, and also the modest decline in average prices. For Q2, Capital Light loan facilitation, ICE and other technology solutions combined account for roughly 58% of the total loan volume, compared to roughly 56% in the prior quarter. We expect this ratio to be gradually trending down for the remainder of the year to a normalized level. We are evaluating different components of our operations and seeking a better mix between risk-bearing and non-risk-bearing solutions based on macro environment and operational conditions. During the quarter, average IRR of the loans we originated and/or facilitated remained stable Q-on-Q, well within the regulatory rate cap requirement. Looking forward, we expect pricing to be continued relatively stable for the coming quarters.

Sales and marketing expense increased slightly quarter-on-quarter, as we remained prudent and continued to diversify user acquisition channels. We added approximately 1.5 million new credit line users in Q2, roughly flat versus first quarter. Unit cost to acquire a new credit user also increased marginally quarter-on-quarter at approximately $296. Well, we will continue to drive for efficiency in our operations. We may adjust the pace of our new user acquisition based on market condition throughout 2023. Meanwhile, we'll continue to focus on re-energizing existing user base as repeat borrowers historically contribute vast majority of our growth. Although we will continue to take a prudent approach in booking provisions against potential credit losses, we should expect further write back of provisions from previous periods, as overall risk profile of our loan portfolios has been stabilizing to improving.

Total new provision for risk-bearing loans in Q2 were approximately RMB 1.9 billion. The write backs of previous provisions were approximately RMB 525 million. Provision Coverage Ratio, which is defined as total outstanding provision divided by total outstanding delinquent loan balance between 90 and 180 days, were 511% in Q2, compared to 432% in Q1. With solid operating results and stable contribution from platform model, our Leverage Ratio, which is defined as risk-bearing loan balance divided by shareholders' equity, was again at a historical low of 3.3 times in Q2, compared to 4 times a year ago. We expect to see Leverage Ratio fluctuated around this best level in the near future. We generate approximately RMB 1.8 billion cash from operations in Q2, roughly flat Q on Q.

Total cash and cash equivalent was $8.5 billion in Q2, compared to $9 billion in Q1. Non-restricted cash was approximately $5.3 billion in Q2, compared to $5.1 billion in Q1. The sequential decline in cash position was mainly due to increased cash usage in our balance sheet lending. As we discussed earlier, we'll continue to look for opportunities to deploy resources to launch new initiatives, develop new technology, and expand service offerings. Non-GAAP net profit was $1.147 billion in Q2, compared to $976 million in Q1. As we continue to generate healthy cash flow from operations, we believe our current cash position is sufficient to support our business development and to return to our shareholders.

In Q1's earnings call, we announced to increase our dividend payout ratio to 20%-30% and switch to a semiannual dividend distribution schedule. Today, we're glad to declare a semiannual dividend of $0.25 per ordinary share, or $0.50 per ADS, in U.S. dollar, both. Which represent approximately 30% of the payout ratio. In June 20, 2023, we announced a share buyback plan to repurchase up to $150 million over 12 months period. As of August 18, 2023, we have already bought approximately $28 million worth of our ADSs in open market, at an average price of $18.03. We will continue to execute the buyback program in accordance with the relative rules and regulations.

With the fully execution of the repurchase program and the dividend plan, we may return more than half our net profit to our shareholders. Going forward, we will continue to optimize our capital allocation plan and make timely adjustments to generate higher returns to our shareholders. Finally, regarding our outlook. Well, we see accelerated year-on-year growth in loan volume in Q2, which is in part driven by easy comp. We do notice continued uncertainty in macroeconomy. At this junction, we still see a slow recovery in consumer credit, with a growth rate somewhat depending on macro conditions for the rest of the year. As such, we would like to adjust our full year total loan volume target for 2023 to between RMB 470 billion and RMB 485 billion, representing a year-on-year growth of 14%-18%.

As always, this forecast reflects the company's current and the preliminary view, which is subject to material changes. With that, I would like to conclude our prepared remarks. Operator, we're now open to take some questions.

Operator (participant)

Thank you. As a reminder, to ask question, you will need to press star 1 1 on your telephone. For those who can speak Chinese, please kindly ask your questions in Chinese first, followed by English translations. In addition, in order to have enough time to address everyone on the call, please keep it to one questions and one follow-up, and return to the queue if you have more questions. Please stand by while we compile the Q&A roster. First question comes from the line of Alex Ye from UBS. Please go ahead.

Alex Ye (Greater China Financials Research Analyst)

[Foreign Language] 管理层上午好，感谢接受我的提问。我的问题是，在过去 2 个季度，特别是 2 季度，我们看到这个贷款量的增速其实是超出预期的，也超出管理层之前的一个内部预期。但是我们看到这个营收方面的增速，其实似乎是较为缓慢一些，也包括，包括这个贷款的余额的增速其实也是慢于这个 volume 的。那想请问一下，这个背后的原因是不是还是跟之前提到的提前还款的一些结构性变化有关？还是说我们这个产品结构其实有一些新的改变，刚刚也提到有一些 product offering 的一些改动，那未来我们应该如何改善看待以后的一个收入 take away 的一个趋势。My question is, there appears to be some dislocation between the strong volume growth and the less strong revenue growth in the past 2 quarters.

Is it mainly due to the higher repayment issue, or there is some product mix change that lead to such changes? How should we expect the revenue take rate trend going forward? Thank you.

Alex Xu (CFO)

Sure. I think I will, I will take this one, Alex. And you're, you're probably right. Basically, the reason that the loan balance growth as well as the revenue growth, slower than the loan volume growth, is mainly because of the duration of the loans, at least so far this year, are shortening. Which in part because of the issue we encountered in the first quarter of the early repayment. If you recall, in the first quarter, there was no, there was a pretty significant impact on the revenue stream because of early repayment.

Even though the second quarter, you know, we saw that the early repayment sort of peaked around the April timeframe, and then start to gradually, although marginally trending, kind of to the right direction for us, but still, compared to sort of historical average, we're still seeing a shorter, kind of duration of the loan book. Now, that shorter duration will definitely result in a kind of a slower accumulation of the loan balance, and also the slower, or kind of a slower growth in the revenue, relative to the loan volume. We are from, from, I guess from product mix perspective, they didn't have a too much significant kind of directional impact, say, you know, we're taking a, in a bunch of new products that happen to be shorter duration.

No, I, I don't think that's a significant factor, and it's more so has to do with the issue I mentioned earlier. Going forward, we are ever since the second quarter, we are taking some kind of measures to gradually kind of move the duration or move the tenure of the loans to a longer period. As I mentioned, you know, since May, from May to July, we see a gradual kind of improvement, you know, so far.

For the second half, you know, we'll continue to take some actions to manage the duration and, hopefully the second half the, the revenue take rate, you will see a little bit improvement, or increase compared to what you saw in the first half.

Alex Ye (Greater China Financials Research Analyst)

Okay, thank you very much.

Alex Xu (CFO)

Thank you.

Operator (participant)

You for the questions. One moment for the next question. Next question comes from the line of Frank Zheng from Credit Suisse. Please go ahead.

Frank Zheng (Former Equity Research Analyst)

[Foreign Language] 感 谢 管 理 层 给 我 提 问 的 机 会 ， 我 是 Credit Suisse 的 Frank Zheng。 第 一 个 问 题 是 关 于 拨 备 和 冲 回 的 。 基 于 目 前 咱 们 看 到 最 近 的 一 些 macro 环 境 的 发 展 ， 以 及 基 于 公 司 目 前 这 个 刚 刚 说 到 Provision Coverage Ratio 已 经 有 进 一 步 的 提 升 ， 预 期 未 来 的 话 ， 我 们 在 拨 备 上 是 会 有 更 谨 慎 的 一 些 安 排 ， 还 是 说 有 这 个 更 多 的 冲 回 的 空 间 ？ 第 二 个 问 题 是 跟 刚 刚 第 一 个 问 题 的 一 个 follow-up， 关 于 这 个 信 贷 的 久 期 的 。 刚 刚 提 到 的 一 些 去 提 升 信 贷 久 期 的 措 施 ， 能 不 能 请 管 理 层 给 我 们 一 些 具 体 的 哪 些 措 施 ？ 另 外 就 是 想 请 教 一 下 ， 在 目 前 的 这 个 macro 环 境 下 ， 其 实 对 于 公 司 来 讲 ， 我 们 其 实 更 希 望 这 个 久 期 是 偏 长 一 点 还 是 这 个 更 短 一 些 ？ 我 自 己 来 翻 译 一 下 。 Thank you, management, for giving me the opportunity to ask questions.

This is Frank from Credit Suisse. The first question is, based on the latest macroenvironment and credit risk performance of the portfolio, do we foresee any extra provision we need to take, or is there any more room for extra write-back going forward? Especially considering the Provision Coverage Ratio recorded another step up to over 500% this quarter. The second question is a follow-up of the previous question. Could the management give us more specifics on measures taken to improve the duration of loans? I just wanna, just curious that in the current macroenvironment, are we preferring, you know, longer duration or shorter duration? Thank you.

Alex Xu (CFO)

Okay. I think I will take the first part, and then, I will let our CRO, Mr.

Zheng, answer the second part. In terms of provisions, as you know, we have been on a very consistent policy to book our provisions conservatively, and make sure that all the provisions are more than enough to cover the potential risks there. If you look at the historical kind of the financial report of us, basically other than the very special quarter, one or two quarters, for the majority of the period, we have the write backs from the previous provisions. As I mentioned in my prepared remarks, I think right now we see a relatively stable, although some fluctuation in the risk profile, you should continue to see write backs in the coming quarters, although the size of the write back we can determine at this point. You know, it's up to a multiple, you know, the third party evaluation and also all the other factors. Directionally, you will continue to see write backs in the coming quarters. You know, we will in terms of continue booking additional provision, we will take more prudent approach based on what our observation of the macro environment, and if we feel necessary, we, we will book more provisions, and you know, to counter the potential risk. The Provision Coverage Ratio you mentioned the 511% versus last quarter's 430 something. That's not a metrics we have a target on, it's more than a...

rather than it's a calculated number. We book provision, then, you know, when we do the calculation, it happen to be 511. So that's, that's not a something indication that we're targeting a higher coverage ratio or something. No, it's more, you know, we book provision basically based on the that quarter's loan volume, and the third party's evaluation. I will stop here. The second part of question will, I'll hand over to Mr. Zheng.

Zheng Yan (Chief Risk Officer)

[Foreign Language] 好 的 ， 那 我 ， 我 用 中 文 说 一 下 ， 然 后 。 哎 ， 能 听 到 吗 ？

Alex Xu (CFO)

[Foreign Language] 可 以.

Zheng Yan (Chief Risk Officer)

[Foreign Language] 我 ， 我 用 中 文 说 一 下 ， 然 后 请 Karen 帮 我 翻 译 一 下 。 好 ， 贷 款 期 限 这 一 块 的 话 ， 其 实 是 由 借 款 合 同 期 限 以 及 提 前 还 款 率 两 个 部 分 组 成 的 。 我 先 说 一 下 提 前 还 款 率 啊 ， 提 前 还 款 率 呢 ， 我 们 其 实 是 在 稳 步 下 降 的 。 最 核 心 的 因 素 是 宏 观 因 素 ， 其 次 是 运 营 动 作 的 因 素 。 Karen， 你 帮 我 说 一 下 。

Speaker 9

We believe loan duration is a combined result of contract tenure and early repayment. First, I will talk about the early repayment. Early repayment was steadily declining, mainly due to the macro environment changes. The second reason is our operational efforts.

Zheng Yan (Chief Risk Officer)

[Foreign Language] 嗯 ， 从 宏 观 因 素 来 讲 的 话 ， 呃 ， 现 在 我 们 的 信 贷 客 户 的 提 前 还 款 需 求 ， 呃 ， 现 在 是 看 到 是 在 降 温 的 。 那 呃 ， 我 们 观 察 到 从 四 月 份 到 七 月 份 吧 ， 这 几 个 月 ， 呃 ， 历 史 的 存 量 资 产 的 提 前 还 款 率 连 续 四 个 月 都 在 ， 都 在 呃 ， 稳 定 的 降 低 。 那 第 二 块 是 运 营 动 作 方 面 ， 呃 ， 近 期 我 们 也 在 优 化 一 些 运 营 的 策 略 ， 以 降 低 提 前 还 款 率 ， 那 主 要 包 括 ， 呃 ， 三 个 动 作 吧 。 一 是 ， 呃 ， 发 布 最 新 的 电 话 销 售 的 基 本 法 ， 呃 ， 将 提 前 还 款 率 作 为 一 个 考 核 指 标 ， 那 电 销 人 员 在 这 个 基 本 法 下 面 呢 ， 他 的 话 术 和 客 群 选 择 上 面 都 会 倾 向 于 让 客 户 提 前 还 款 率 下 降 。 那 第 二 个 是 提 前 还 款 页 面 ， 我 们 增 加 了 一 些 福 利 去 挽 回 一 些 客 户 。 呃 ， 第 三 块 是 优 化 了 我 们 的 发 放 发 券 的 一 个 策 略 ， 呃 ， 降 低 了 某 些 产 品 下 面 七 天 免 息 券 的 一 个 使 用 比 例 。 呃 ， 呃 ， 那 这 个 ， 呃 ， 这 个 优 化 策 略 下 面 ， 我 们 的 提 前 还 款 率 也 会 也 会 有 进 一 步 的 一 个 下 降 。

Speaker 9

From macro perspective, the early repayment sentiment was cooling off. We have observed that the early repayment ratio for our historical loan portfolio has been decreasing for 4 consecutive months from April to July. From operation perspective, we have refined our operation strategy to reduce the early repayment in 3 ways. The first is we applied a new telemarketing rules to incorporate the early repayment ratio into the KPI of the salesperson, so the salesperson tend to control this ratio. Second, we offer some benefits to retain the users when they have the intention for early repayment. Three, we reduce the 7 day interest free coupon to avoid those short term borrowers. Based on those optimization, we have seen improvements in our early repayment situation.

Zheng Yan (Chief Risk Officer)

[Foreign Language] 呃 ， 然 后 贷 款 期 限 方 面 啊 ， 这 个 并 不 能 简 单 地 归 结 为 越 短 越 好 ， 或 者 说 越 长 越 好 。 呃 ， 还 是 说 针 对 不 同 的 客 户 ， 我 们 会 有 不 同 的 一 个 最 优 期 限 的 方 案 。 呃 ， 举 个 例 子 ， 比 如 说 我 们 面 对 一 个 还 款 意 愿 比 较 好 ， 但 借 款 金 额 比 较 大 ， 且 收 入 比 较 稳 定 的 客 户 ， 那 我 们 会 倾 向 于 给 他 一 个 较 长 的 期 限 ， 呃 ， 以 降 低 客 户 的 一 个 还 款 压 力 。 啊 ， 但 是 如 果 我 们 面 对 一 个 长 期 还 款 能 力 较 弱 ， 但 短 期 还 款 能 力 还 可 以 的 客 户 呢 ， 我 们 就 会 倾 向 于 降 低 客 户 的 风 险 敞 口 ， 同 时 缩 短 客 户 的 借 款 期 限 ， 以 控 制 风 险 表 现 。

[Foreign Language] 啊 那 客 户 不 同 的 风 险 属 性 以 及 借 款 额 度 都 会 会 对 长 期 和 短 期 的 信 用 风 险 造 成 ， 呃 ， 不 同 的 影 响 。 呃 ， 那 我 们 会 进 一 步 去 迭 代 我 们 自 研 的 GBST 模 型 ， 呃 ， 就 是 之 前 我 们 提 到 的 梯 度 生 存 树 模 型 ， 去 提 升 这 个 客 户 的 期 限 的 一 个 匹 配 度 和 适 应 度 ， 啊 ， 这 样 去 平 衡 好 收 益 和 风 险 。 呃 ， 那 整 体 来 说 ， 呃 ， 我 们 觉 得 在 宏 观 因 素 的 影 响 以 及 我 们 积 极 的 一 个 管 理 下 面 ， 我 们 预 计 三 季 度 的 一 个 提 前 还 款 率 指 标 会 进 一 步 下 降 ， 呃 ， 且 实 际 九 期 会 有 所 增 加 。

Speaker 9

As for contract tenure, we won't say shorter the. As for contract tenure, we won't say shorter the better or vice versa. We offer the tenure based on the user's profile. For example, for those who have stable income and higher creditworthiness, we tend to offer a longer tenure to lower their repayment pressure. For those who have less long-term visibilities, we tend to reduce the risk, risk exposure and shorten the tenure to control the risk. Different user profile and ticket size will have different impact on the short term and the long term credit risk.

We will further upgrade our self-developed GBST model, the Gradient Survival Tree model, to improve the fitness of long tenure and balance their profitability and risks. In conclusion, under current macro conditions and our proactive management, we expect the early repayment ratio will further decline and our effective loan duration will increase in Q3.

Zheng Yan (Chief Risk Officer)

[Foreign Language] 我 不 知 道 这 能 不 能 回 答 你 的 问 题 。 好 的 ， 非 常 感 谢 。

Speaker 9

I hope this answer your question.

Operator (participant)

Thank you for the questions. We move on to the next questions from the line of Emma Xu from Bank of America Securities. Please go ahead.

Emma Xu (Greater China Banks and FinTech Research Analyst)

[Foreign Language] 嗯 ， 谢 谢 给 我 这 个 提 问 的 机 会 。 呃 ， 我 想 问 一 下 ， 就 是 关 于 ， 呃 ， 三 季 度 的 贷 款 需 求 和 贷 款 利 率 的 情 况 。 那 我 们 看 到 七 月 份 的 时 候 ， 居 民 短 贷 其 实 是 下 降 了 ， 呃 ， 四 百 二 十 亿 ， 然 后 整 体 目 前 来 看 ， 消 费 复 苏 还 是 比 较 疲 弱 的 。 那 我 们 ， 呃 ， 我 们 目 前 看 到 的 三 季 度 以 来 的 贷 款 需 求 情 况 是 怎 么 样 的 ， 那 这 个 又 会 怎 么 样 影 响 到 我 们 的 贷 款 利 率 ？ 同 时 ， 呃 ，LPR 在 六 月 份 以 来 也 下 调 了 ， 呃 ， 一 年 前 LPR 也 下 调 了 两 次 ， 那 这 个 对 我 们 的 贷 款 利 率 会 有 什 么 影 响 呢 ？So, um, I have two questions.

The first one is about the loan demand. In third quarter, we see the short-term consumption, household consumption loan declined $42 billion in July. And it seems the consumption recovery remained lacklustre. So, how, what's your loan, what do you see the loan demand at your side? And the second question is about loan pricing. So, will the lacklustre loan demand impact your loan pricing? And with the LPR being cut for twice since June, do you also need to adjust down your loan pricing? Thank you.

Haisheng Wu (CEO)

[Foreign Language] 谢 谢 艾 玛 ， 我 回 答 一 下 你 的 问 题 。 我 们 也 注 意 到 了 ， 七 月 份 这 个 居 民 短 贷 是 有 一 个 下 降 。 嗯 ， 那 从 我 们 自 己 的 角 度 来 看 呢 ， 我 们 在 七 八 月 份 的 余 额 其 实 还 是 上 升 的 ， 所 以 呢 ， 应 该 说 没 有 出 现 像 这 个 宏 观 这 个 整 体 经 济 短 贷 那 样 减 少 的 这 个 趋 势 ， 没 有 出 现 。

Speaker 9

Thanks, Emma. I will answer your question. We also noticed that the citizen's short-term loan has decreased in July. From our perspective, our loan balance continued to increase in July and August, unlike the declining trend of the citizen's short-term loan balance.

Haisheng Wu (CEO)

[Foreign Language] 嗯 ， 从 需 求 这 个 角 度 呢 ， 我 们 也 发 现 了 一 些 ， 这 个 ， 这 个 从 今 年 以 来 啊 ， 这 个 发 现 了 一 些 这 种 结 构 性 的 这 种 变 化 的 趋 势 。 嗯 ， 这 种 结 构 化 体 现 在 几 个 方 面 。 第 一 个 就 是 我 们 从 用 户 的 资 质 这 个 角 度 来 看 ， 呃 ， 我 们 发 现 呢 ， 一 些 最 优 质 的 一 些 客 户 啊 ， 倾 向 于 这 个 提 前 还 款 ， 那 次 优 一 些 的 客 户 呢 ， 需 求 相 对 就 比 较 稳 定 。 嗯 ， 另 外 一 个 角 度 就 是 从 这 个 用 途 这 个 角 度 ， 呃 ， 用 户 角 度 呢 ， 消 费 的 这 个 消 费 客 群 的 发 起 需 求 有 一 个 降 低 ， 那 小 微 的 这 个 客 群 呢 ， 需 求 ， 呃 ， 反 而 是 稳 定 的 一 个 上 升 趋 势 。 嗯 ， 从 行 业 来 看 呢 ， 会 体 现 在 这 种 建 筑 行 业 、 交 通 运 输 行 业 、 旅 游 行 业 ， 呃 ， 住 宿 、 餐 饮 这 些 需 求 呢 ， 上 升 还 是 比 较 明 显 的 。 那 加 上 今 年 我 们 也 侧 重 会 在 小 微 上 呢 ， 做 了 很 多 这 种 专 项 的 开 发 工 作 和 运 营 工 作 ， 那 整 体 上 这 个 客 群 的 这 个 效 率 ， 嗯 ， 我 们 看 到 有 一 些 这 个 还 是 比 较 有 一 个 大 幅 的 一 个 提 升 的 。

Speaker 9

From demand perspective, since the beginning of this year, we have seen some structural changes in terms of users demand. From user quality perspective, the highest quality users tend to repay the loan earlier, while the low-lower quality users have relatively stable demand. From the usage perspective, the broader, broadly defined SME users are more active than the consumer credit users, especially for those in the construction, transportation, tourism, hotel, and the catering industries. Plus our operational efforts, we have gained efficiency improvement in managing the broadly defined SME segment. Given the softer consumer credit demand, we expect to increase our spending on the broadly defined SME users. Further, we will increase our penetration in the broadly defined customer segment in new user acquisition. For the existing users, we'll improve our service qualities to improve the users stickiness.

In terms of the pricing, we expect the pricing will be stable in the future. From our past experience, the LPR rise or cuts had very little impact on our pricing. Our pricing is mainly determined by the supply and the demand in this market.

Haisheng Wu (CEO)

Uh, uh,

Emma Xu (Greater China Banks and FinTech Research Analyst)

[Foreign Language] 谢 谢 ， 非 常 有 帮 助 。

Operator (participant)

Thank you for the questions. One moment for the next question. Next question is from the line of Yada Li from CICC. Please go ahead.

Yada Li (Special Assets and Special Situations)

[Foreign Language] 管 理 层 好 ， 感 谢 给 我 这 个 提 问 的 机 会 ， 我 是 CICC 的 Yada Li 。 今 天 想 向 管 理 层 请 教 一 下 ， 近 期 我 们 的 回 购 计 划 ， 想 请 教 一 下 ， 这 次 这 个 $150 million 的 回 购 计 划 主 要 是 出 于 什 么 考 虑 ？ 那 我 们 是 否 可 以 将 本 次 的 回 购 呢 ， 视 为 对 股 东 回 报 的 这 样 一 个 常 规 方 式 ？ 谢 谢 。 I'll do my translation. Hello, management. Thanks for taking my question. This is Yada Li with CICC, and today I just have one quick question.

I was wondering, could you please elaborate more about the consideration behind the $150 million share repurchase program this time? Should we consider it as a regular way to return value to the shareholders? Thank you.

Haisheng Wu (CEO)

[Foreign Language] 这 个 请 那 个 Alex 说 一 下 吧.

Alex Xu (CFO)

Okay. Yada, thanks for your question. You know, basically every quarter, we are reviewing our cash position, as well as our capital allocation, kind of a strategy. When we determine that there are actual, we consider the, you know, free cash, sitting there idle, without making a too much of a return, we would like to deploy that cash, either in the form of the dividends or in the form of the of the buyback. Okay? That's a, it's, I would say, ongoing process, you know, in the, in the future quarters as well.

We consider a optimal balance between the buyback and a a dividend is the best way to return to the shareholders. Like I said, the first thing first, we need to complete this $150 million U.S. buyback program. Along the way, we will do our periodical review to determine, to determine, to determine what to do afterwards there. Long, longer term, I would say some kind of a combination between the between the buyback and the and the dividends.

Yada Li (Special Assets and Special Situations)

Thank you.

Operator (participant)

Thank you for the questions. In the interest of time, I'll now conclude the Q&A session. I would like to hand the call back to management for closing remarks.

Alex Xu (CFO)

Okay, thanks for everyone joining the conference. You know, since we have our peers right behind us in their earnings call. To the courtesy, we just conclude our call here. If you have additional question, please, you know, contact us offline. Thank you.

Operator (participant)

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