Q4 2019 Earnings Call

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Hello, ladies and gentlemen, thank you for participating in the fourth quarter and full-year 2019 earnings conference call for evolution group formerly known as ppdai Group Inc. Also known as Papa died.

At this time all participants are in listen-only mode after Management's prepared remarks. There will be a question-and-answer session.

Today's conference call is being recorded.

I wouldn't I'll turn the call over to your host Jimmy Tan head of investor relations for the company Mister Jimmy, please go ahead.

Hello everyone and Welcome to our fourth quarter and full-year 2019 earnings conference call. The company's results will issue be used while your services earlier today and our Post online. You can download wage earnings release and sign up for the company email alert by visiting the IR section of our website at with the phones on our chief executive officer and Mister Simon whole our Chief Financial Officer will start the call with your prepared remarks and conclude with a Q&A session during this call. We will be referring to certain non-gaap Financial managers to review and assess our operating performance package Financial managers are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. Get for information about this non-gaap Madras and reconsideration the Gap measures. Please refer to our earnings, press release before we continue please note that today discussion will contain forward-looking statements made under the Safe Harbor provisions of wage.

private Securities litigation reform

1995 forward-looking statements involve inherent risks and uncertainties

as such the company's results may be materially different from the front to the further information regarding these and other risks and uncertainties are included in the company filings with the Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Finally. We post a slide presentation on our web site providing details of our results for the quarter. I will now turn the call over to our CEO. Mr. Hello everyone and thank you for joining our first quarter and a few year 2019 earnings conference call by the rapidly evolving market dynamics and uncertainties during the year. We have made a numerous positive stride specifically, we have successfully reposition our business by transitioning the funding on our platform from being primarily facilitated by individual investors to being fully funded through our institutional Partners. This is a huge wage.

Richmond and while I would like to thank the hard work and dedication of our partners and employees for making happen in the first quarter hundred percent of our funding was from our Institute of funding Partners compared with just over 20% from the year ago. Founding on our platform is ample and we continue to work on driving down our funding costs which has been declined quarter-over-quarter and a year-over-year we expect this decreasing Trend to continue throughout this year. Our PDP loan balance has also been reduced progressively over the Year. This program is exemplified by the p-to-p loan balance of 5.2 billion MB as of December 2019 compared with 19.5 billion iron be as of June 2019 by the end of February 2020. The balance was further reduced to just 2.8 billion IMB and we will continue to shrink this parents as you are aware dead.

There will likely be noon Nationwide online micro-lending licenses available for qualified P2P platforms. We are in regular communication with the related Shanghai Regulators wage. We believe we are in a very good position to apply for such a license which will further solidify our business foundation and enhance our operations.

I mean, I was successful business transition. We have also delivered outstanding performance in 2019 on a year-over-year basis our loan origination volume increase by 34% off 82 ft 9 be contributing to a 31% growth in operating Revenue to 6. I'm be meanwhile operating income grew 43% to 2006. IND with non-gaap operating margin of about 45% this impressive results demonstrate the resilience and the flexibility of our business with practice management to execution as well as our strong brand Equity that enable us to rapidly expand our partnership with institutional investors. We will continue to deepen relationships with our Channel Partners. So in-depth technical technological Corporation and further sharpen our capabilities to navigate through market dynamics in 2019 our number

sort of cumulative registered users

Get one hundred six million and the Curative number of borrowers 18 million indicating a healthy double-digit user base growth year-over-year how extensive and growing borrow base reflects the tremendous demand and a growth potential of Consumer Finance in China as well as the trust borrowers place in US wage aside from all successful funding transition. We have been making significant progress in our strategic initiatives on the financial institution cooperation front. We completed a Strategic investment in fujian Bank through acquiring 4.99% of its stake and enter into strategic partnership with them in terms of enhanced risk involved online microcredit lending subsidiary has been approved to connect with the pboc credit reference Center contributing to a more transparent ecosystem.

Our International expansion has also achieved an important Milestone with our subsidiary in Indonesia receiving the peer-to-peer lending license from the Financial Services Authority of Bank Asia with business development in multiple fields on track. We are now rapidly evolving ourselves into a comprehensive fintech company in powered by Innovative Technologies that same borrowers and the financial institutions in the vast Consumer Finance space in order to better align with our current business model and strategy. We have also changed our group name and ticker symbol better reflect the implementation of Innovative Technologies throughout our business operations and our expanding business scope.

Now turning to credit we have experienced some deterioration in delinquency rates since the fourth quarter due to a complex effect of tightening loan collection practices pressure from the widespread exit of P2P players across the country and impact of losing the coronavirus pandemic We Believe many of these factors are transitory. We will see that our modem has already increased by a few percentage points in the fourth quarter, but this figure significantly overstates the degree of deterioration as this metric is measured as a percentage of the outstanding balance and due to the slowdown in law ordination volume in the fourth quarter outstanding loan balance declined by 16% quarter-over-quarter 229 building i m b at the end of December.

We have a long and proven track record in managing risk prudently and responsibly through credit and economic Cycles our strong culture and mentality of respecting risks coupled with its proprietary Technologies such as our magic mirror credit assessment system will enable us to manage risk effectively as the effects of the coronavirus subside. We believe our divorce rate will show structural improvements as the borrowers will engage with today. We engaged with today have stronger credit risk profiles than those on average we engage with them say six months all a year ago next. Let me elaborate more on how the coronavirus has impacted us with the people who are affected and we would like to extend our thoughts to those who are fighting against the outbreak together with our employees. We have made monetary donations and the donations of masks medical students and other supplies to various hospitals dead.

We now have detected the following key impacts.

They'd taken a more conservative stance and I have purposely slow download regulation volume during this period second we have provided a borrowers who have been affected with greater flexibility in a repayment schedules, sir. Getting it says have model trade increased as a result of the impact on the economy as well as disruptions to loan collection operations Thursday. We will continue to closely monitor the pandemic situation and together with our partners in pollution is adjusting his business strategies to minimize the impact on our operations.

We have also announced some management to Transitions crave is stepping down as chairman and CEO. This transition has been well planned for some time back in September 2018. I became close to your together with Chris and for the past 18 months. Chris responsibilities have been shifting towards my way. I would like to take this opportunity to thank Chris for his outstanding contribution to the company over the past decade. We look forward to his continued support in his new role as our advisor at the same time. I would like to extend a warm warm. Welcome to mist Google or Jack as long as we all call him in the company as the chairman of the board of directors. We look forward to Jack's contribution in his new role leading the company to Greater Heights.

In spite of dynamic and volatile operating environment our strong performance in 2019 reaffirms the enormous underserved demand for Consumer Finance services in China by juice out extensive proprietary Technologies and the market leadership. We are dedicated to strengthening our ability to provide a superior experience to both individual borrowers and financial institutions wage last but not least. I would like to take this time to thank our employees for the tremendous efforts. They put into their putting to to keep our company strong throughout a tough time during the outbreak culture is a stronger than ever and we will continue to be Innovative and aggressive about navigating and growing our business with that. I will now turn the call over to our CFO Simon home will discuss our financial results for the quartet.

Thank you for calling and hello everyone. We realized solid profitability at Mid fast evolving market conditions in 2019. Thursday are full transition into institutional funding. We delivered non-gaap operating income of 445 million RMB and maintained a healthy non-gaap operating off of 36% in the fourth quarter. Our operating margin did decline versus the third quarter, but this is mainly because loan origination volume decreased and not because of the take rate. In fact our take rate in the fourth quarter was stable compared to the third quarter and this is a quarter in which all one hundred percent of loan origination. We're funded by institutional Partners providing very clear evidence that our institutional funding model is robust profitable and sustainable our wage.

She has also remained soft.

With approximately 2.4 billion RMB of cash and short-term liquidity notably our quality assurance plan remains sufficient for the total balance of 5.1 billion RMB equivalent to 24% of the total outstanding loans off balance, total outstanding off-balance-sheet loans and interest with quality assurance our results demonstrate the off-chance about business models in our ability to adapt to the changing Regulatory and market dynamics.

first we have to

Now let me briefly go over the financial results for the fourth quarter in the interest of time. I will not walk through each item line-by-line on this call. Please refer to our earnings release for more details about operating revenues for the fourth quarter of 2019 decreased by 4.4% to approximately 1.23 billion R&B from 1.29 billion R and B in the same period of 2018 primarily due to the decrease in loan facilitation service fees facilitation service fees decreased by 36% to 536 million RMB for the fourth quarter of 2019 from 837 million RMB in the same period of 2018 primarily due to the decline in loan origination volume, and the decrease in the average rate of transaction fees post facilitation service fees increased by 10% to 276 million RMB for the fourth quarter of 2019.

From 250 million RMB in the same period of 2018 primarily due to the rolling impact of deferred transaction fees that interest income was 817 million RMB compared to seventy million R&B in the same period of 2018 mainly due to the increased interest income from the expansion in the outstanding loan is of Consolidated trusts non-gaap adjusted operating income which excludes share-based compensation expenses before tax was $445 Million R&B for the fourth quarter of 2019 representing a decrease of 6% from 472 million RMB in the same period of 2018.

Other income was 35 million RMB for the fourth quarter of 2019 compared with 94 million RMB in the same period of 2018 primarily due to a lower gain from the Assurance Fund in the quarter that profit increased by 47% to 413 million RMB for the fourth quarter of 2019 from a $175 million R&B in the same period of two thousand 2018.

Next let me give a few further updates on guidance now due to the moderate increase in delinquencies. We saw towards the end of last year and 1/2 impact of the coronavirus. We have taken a more conservative stance on one origination volume in the first quarter as a result. We expect loan origination volume in the first quarter Cup 2022 be in the range of $12 billion R&B to $13 billion R&B. Although the first quarter has not been easy. We expect these Trends to be transitory and we'll be in a position for growth when the conditions normalize. We have seen some early signs of improvement in recent weeks as people across the country are returning to the office and workflow economic activity is picking up we have seen delinquency and Loan collection rates improve steadily and returning in recent days close to the levels. We saw yep.

for the outbreak of the Coronavirus

These are very encouraging trend for our business and the economy and during this. We are keeping a tight discipline on our expenses. For example, we are spending less than a customer acquisition as we have shifted loan originations further towards repeat borrowers. We are also proactively managing down funding costs with our institutional Partners wage turning to Capital return and share BuyBacks. We we purchased approximately 4.2 million vs between December 2019 and January 2026 of January 31st, 2020. We have cumulatively deployed approximately $79 million dollars to repurchase the companies under our share repurchase. We purchase program with a total authorized amount of hundred twenty million dollars.

We are very comfortable with our balance sheet and liquidity position in particular out cash position remains strong with approximately 2.4 billion RMB of cash and short-term liquidity page at the end of December 2019 during these times of uncertainty. Our strong capital and liquidity position is an important source of confidence for all our stakeholders, including our employees institutional Partners. Finally. We are very pleased to announce a dividend of $0.12 per a DS for the fiscal year 2019, despite the volatility and challenges in the operating environment this validates our commitment to enhancing shareholder value and our continued confidence in the business our capabilities and the long-term Market potential with them. I will conclude my prepared remarks. We will now open the call to questions operator, please continue. Thank you. We will now begin the question-and-answer session.

Ask a question. You may press * then 1 on your touchtone phone. If you were using a speaker phone, please pick up your handset before pressing the keys to wage all your question, please press star and then too.

For the benefit of all participants on today's call. If you wish to ask your question to management in Chinese. We ask that you please kindly repeat your question in English.

Our first question today will come from John KY with Morgan Stanley, please go ahead.

Hi, thank you management for taking my questions. So I have two questions. The first one is on the risk given the outbreak of virus in a folder. Just wonder is there any more counters or or quantitative measures that we can provide on on the increase of the delinquents? And and also how would that impact our provision then in in the in the first quarter and because I can suck appears, uh, expecting a material loss in the first quarter. Just wonder is there any more uh AutoZone on our profit abilities in in the first quarter given the the situations? My second question is is about to take race or just wonder what is the tech right now and um dead

If we are talking about the borough's APR and and what what is the the current?

Level and uh, the API and the take rate is that the level that we should expand in the coming years. Thank you very much.

Thanks. Thanks John for the questions. I'll start off with the answer your question about delinquencies and you know phone can chime in and and found on this if there's more to information to discuss so as we mentioned earlier, we have experienced simply link deterioration of delinquency rates since the fourth quarter, um, you know, cuz of tightening of loan collection practices, there's pressure from the widespread exit of P2P players. And of course, there's the impact of the coronavirus whilst we have said in the past that are delinquency wage actually improve due to our gradual shift towards a better quality borrow a segment the events in the past few months have delayed this Improvement. I believe the coronavirus impact recently has added around 5% to 1% to Our Vintage delinquency rates.

As a result, we expect our recent vintages to show cumulative delinquency rates remaining in the 68% range. We will continue to closely monitor the situation but believe that as the impact of the coronavirus recedes conditions normalize, we expect vintage Our Vintage delinquency rates to improve and decline below the 6% level and as mentioned earlier we have in recent weeks seen some encouraging signs of improvement in delinquency and Loan collection rates, which are back close to level seen wage or the Corona virus outbreak.

I want to see if if someone wants to have anything else to add on the risk side. Okay now dead, you know your question about you know, where

Where the provisions and the first quarter could be, you know, I think q1 is the challenging quarter for everyone, you know delinquency rates are for us a call. It moderately higher volumes have declined versus the previous quarter clearly revenues and earnings are being impacted. Now, you know, our printing thinking is we we don't think if we put a loss but we'll have to wait of course till the first quarter ends the earnings come in and see where the numbers actually come in on. So I think you know, yeah, but take comfort we are obviously doing as much as we can on the cost front and the obviously recent signs on the delinquency side have been encouraging as as you know, as as we've highlighted just now.

now in terms of

Where we are in terms of the take rate and sort of lending rates levels. Let's let's let's talk. Let's talk about the landing weight levels as as as many of, you know, there there is no official formula still or method for calculating the 36% legal maximum for the total borrowing cost. However, most of our institutional funding Partners require the 36% to be defined in the strictest way on an irr basis. So as we've been saying all along all the loans that are funded by our license institutional partners are strictly capped at the 36% measured on an IRA basis and this will remain this way as long as we continue to work with our, you know, such institutional partners of ours.

In terms of the in terms of the take rate. So I'll take it was stable pretty stable in the fourth quarter of first, sorry in the fourth quarter versus the third quarter. The absolute level was just over a little over 4% and and you know, the the point is dead in though. We shifted completely to institutional funds. This does show the economics of our institutional funding model is healthy and profitable.

Now as you know the take rates as we account for it in the fourth quarter is also a function of credit risk levels and as we've guided the delinquency rates have increased this year. And so that's naturally put some pressure on the take rate. But as we've said before the the magnitude of our delinquency rate increase has been relatively moderate and managing but before John before I hand over back to you and and see if you have any further questions, I do want to take the opportunity to speak a bit more about how we do Age Management at at Finn dilution. We have all along been emphasizing our strong capability and cultural risk management the company we have a long proven track record in managing risk. We have proprietary Technologies and systems such as our magic mirror credit assessment system for detection Technologies. We also have a large dog.

Loan collection team with over a thousand collection agents. And so those of you who have followed us into our IPO, you'll recall that our CEO phone joined the company as our chief risk officer. So the culture of risk management runs deeply in the company. We're always Vigilant on credit risk and as you know over the past few years are average loan Tenors and tickets. I have not changed much and we have been shifting. Our borrowers based towards better credit risk profiles. And in fact, if you look closely at the Vintage delinquency rates, we disclosed today. I could see that our third quarter 2019 vintage is meaningfully better than the earlier vintages. Obviously the data you see do not yet reflect the impact of the coronavirus but the improved Trend in the data is evident of this shift in the borrower profile that we have been talking about.

and lastly

We've obviously been conservative in setting aside reserve for credit risks and you can see this in this quality assurance coverage ratio, which we disclosed that around 24% again. I just want to emphasize, you know, we have a prudent approach to managing risk, and it does put us in a better position than some of our peers went credit risk is rising.

Going to hand that over to you if you have any further questions.

Yeah, thank you for timing. It sounds encouraging given the situation so a little bit follow up on the QA F. I think it's 24% off but I don't care that makes a little bit. So you seems the restricted cash portion decline quarter-on-quarter probably due to the restaurant phone balance. But my question is I bought a receivable. So just wonder do we consider the potential delinquent um or provision that we need to make on the qf receivable and off and and also in in the first quarter given the the risk level we expect the 24% to come down a little bit. Thank you very much.

So I think there's a great questions the movement in the quality assurance related restricted cash and the same quality assurance receivables in the fourth quarter really all relates to the fact that during the fourth quarter. We began returning funds to certain investors a portion of our investors in our investment programs ahead of schedule and we early we paid these investors back their money. So the movements you see in our bank to cash which fell about 2.3 billion in the fourth quarter and also the movements in the quality assurance received Bose is actually a reflection of this it's not nothing to do with you know, increased credit risks, but if you want I could I'd be very happy to go through with you some of this accounting, um offline and and log

the details

Thank you Simon.

Our next question today will come from Daphne Pune City, please go ahead.

Actually taking my questions. So my first question is regarding dependent cost Trend to imagine in the repair in my bag recalls has been training backpack. So just want to check on the magnitude like what the funding costs looks like involve you and and also in q1 2020 and like given the reason I'm calling the right situation. Do you see any change in the attitude of your family like whether they're getting more cautious about the partnership we conceived and and the second question is regarding the license the microlending license. You also mentioned earlier that you're seeing some good progress wage. So just wondering any color on the timetable like when we should expect that license to be approved. Thank you sure wage.

Firstly on funding cost managing down. Our our funding cost is a high.

Priority for us this year. The banks is appetite to work with us remains strong and we have a healthy and robust funding pipeline the tightness investing in the fourth quarter was seasonal and in the first quarter liquidity in the banking system is back to normal and example currently the funding cost for our new contracts is running between a 9% to nine and a half percent. If you recall a year ago, we were running more closer to the 11% level and you know as we age as we approach the end of the year, it was closer to around the 10% level. So our funding cost has been declining over the past year and we expect this declining Trend to continue throughout this month.

With regards to the micro lending loan license as we said we are interested and will strive to obtain one one of these new page Michael lending licenses and we are in constant communication with our local Regulators. The timetable is likely to have slipped because of the coronavirus a.m. But we still believe we are in a good position to successfully apply for this license and I think the continued smooth and successful Wine Down of our P2P loan balance adds to our case for obtaining such a license. So, you know, the timing is is is not a hundred percent off here. I I don't believe you know, China has not yet accepted applications. It's being pushed back a little bit but we're you know, we're still we're still we still think we're in a, you know, pretty good position.

Hey, I was just chatting with.

I'll just add a couple of thoughts on the funding cost peace. I think you know from both supply and demand size. We are very optimistic that we will see further funding cost decline wage throughout the year. I think, you know from the demand side as economic impact of coronavirus the global the global governments are going to put more stimulus package and there will be we we expect to see ample funding monetary easing and funding Supply and on the demand side going through this cycle, you know, you actually will clearly see that there will be smaller proof of quality providers in the in the market and we have you know, in the recent months definitely seen increasing demands from institutional partners for Quality asset from our company. So combining these two factors. We are very optimistic that throughout the year. We will continue in we will be continuing to see

funny cost declines

So do I have any Target I guess on the coming calls and I guess in that sense with that actually help your pay rate. Is there any chance for your take-home actually to improve that because of spending cost all the time and also on the uh on the lines of the they just sent me sent about I guess we should expect the doctors who couple each week you or whether it's the second half of the year. Yeah, just maybe any more than that.

Yeah, yeah, that's a good question. I think you know on the phone side funding call side. I think it's difficult to put on an exact number as Simon has mentioned off in the range of 9 to 9 point like in the lines 9 to 9.5% I think you know, there's there's definitely space to go close to 9 or even a 9% So but like, you know where exactly they're can go I think we will need to see how the market goes and obviously in a month, you know, and it beeps drop on these contribute very direct straight to allow it. So it's it's a pretty easy math and I will let Simon handle the microlending questions.

Sure. So definitely. We really don't know I think our original expectations and this is just sort of our field was originally was that by sort of the end of the first quarter of there'll be obviously more concrete actions being taken. I wouldn't say we were expecting the license to be given out at least the process would have been um, you know started more evident. Uh, clearly, I think a lot of things in China being off for several months. So, uh, you know, we're we're we're hopeful that sometime in the second quarter, they'll be obviously concrete activity towards this front.

Okay.

Our next question today will come from Alex of UBS, please go ahead.

Thanks for taking my question. So I have a couple of quick questions first one on your volume by so you mentioned that in q1 so long you have taken a more cautious approach given the outbreak of nineteen. So just wondering how is the demand looks like currently. So for example in a sense of the daily long applications was the current level u r c versus the normal time before this outbreak and apart from the demand off perspective. So, how may be you are also tightening on your approval. So just want to have a sense of your current approval rate versus your normal time at home. So that's my first question and secondly on your delinquency. So you've mentioned that we have been seen gradual Improvement in the past.

Yeah continued.

so

Just wondering how much of that would you attribute to the gradual work reception in China. And how much would you attribute to the home improving the recovery of your loan collection deficiencies so which would be great to have some color on that and also it's so given you mentioned that you are dealing Quincy is now I'm gradually back to the levels between before the virus outbreak. So does that mean we will probably not see a very big mac Market loss in q1. So given given the Assumption on these things.

Right Alex. I think I'll I'll have a I'll talk about your second question first. I mean whether there's a big Park to Market loss. I hit I think we'll have to we'll have to wait a bit and see clearly the magnitude of the delinquency rate increases as we you know, reiterate it. It's been you know, relatively manageable. So, uh, I think we'll have to see how the accounts actually come out when we run all the numbers now, It's really not easy to differentiate between you know, I think both of those factors you mentioned on, you know, people resuming work loan collection and efficiency Effectiveness. I think all these help for us. So I I don't know from my side. I find it hard to separate the two. Yep.

And we definitely have seen improvements in our loan collection rates over the last several weeks. It's been steadily improving. We're not quite back down to sort of December and November levels, but we're heading in that direction. So I think these are very encouraging signs.

Which regards to loan volume?

The demand I mean, I think there's there's definitely strong demand Out There Our constraints or approach right now is obviously we have a Keen Eye on credit risk off. If you look at the daily the loan applications Trend we see in fact, they they actually kind of mirror our our loan volume Trends. Okay, and actually from the numbers I seen they have come down in the first quarter versus uh, the fourth quarter in part it could be because we're in a marketing advertising less and all those applications as you are suggesting. We have been approving a lower percentage of them. Hence Home Alone volume decline. That is that is that that we're experiencing in the first quarter our approval rates. I think we are probably down maybe

roughly 40%

40% or so from where it used to be but this is quite a dynamic process. And when we feel that conditions have become more normalized we will obviously we took healthy loan volume growth again, and that is our obviously that is our aim and goal.

Does that help? Okay, go ahead.

Hey, I'll add a few points, you know with regard to the you know, what do you call it as a market market and I think previously there was another question about do we expect much bigger provisioning wage. I think the answer is no we we don't expect that. I think mainly, you know, many reasons Simon talks a lot about our Prudence just management philosophy and approach and I you know addition to that. I think the the virus the pandemic outbreak impact, we believe in that transitory as I mentioned, you know, the the situation in Mainland is steadily improving in terms of the pandemic and you know, I'm assuming work normal life resumes and our collection operation has resumed hundred percent fully normal status as wage.

Now and you know, we we do we expect the we do see uh, the collection the correction rates the real rate returning to very close returning study and Thursdays. We have seen those numbers getting to level that is very very close to the pandemic level. And the other reason is as we mentioned that we have been very prudent in managing our risk and doing out provisioning. So in a way prior to you know, before the q1 Vintage and also the fact we have been very conservative prudent in providing the the quality assurance fund. So the short answer is due to all these factors. We do not expect a big fluctuation in provisioning for the QR and you know, all the mark-to-market impact that you are worried about.

And that's very helpful. Thank you.

Our next question today will come from your on saint of Credit Suisse, please go ahead.

Hi, thank you management for taking my question. I got dropped off earlier. So I'm sorry if this has been addressed but just a quick follow-up on John's question earlier on the same extra, you know color on the recent delinquency impacts. It was 0.5 to one percentage point of increase but you also mentioned that you take a given some sort of lenient treatment to the borrowers impacted by the virus situation, right? So just wondering if that accounted for in your guidance of that page. Um delinquency rate impact are these flowers feel treated as delinquent in your calculations?

That's my question. Yes. Yes. It's included.

Oh, okay. Sure. And also also one more question for me the the average loan size of new board in 4q seems to have increased am quite a lot by my calculation 20% going to you wonder what the reason behind that with the change in product strategy.

Yeah, you know it's a it's a good question and also is actually very simple. I think the main reason, you know, it's not really due to our changing of our product strategy or credit policy. We are suspending in this time. It's really because we are tightening our approval rate. And when we tightening we cut off the people in the tail end of the credit Spectrum. So as a result the approved people, you know, their quality is actually better and the the line that showing up for the approved customers, you know compared to previous life as appropriate was much higher, you know seems to be a little bit higher. Does that make sense?

Yep. Yep. Got it. Thank you very much for next question today will come from Jackie's of China Renaissance, please go ahead.

Hi, good evening management. Just two questions from me. First one is you're talking about, you know, structural improvements of the same quality. So just wondering can you give us some idea of what kind of power Matrix you would be looking at to differentiate better quality boards off and what is typical profile of your current Forest versus the previous one? That's the first one. So second question is the following month on the microlending license. Uh, so it's saying the documents are released early that um, this online micro-lending license probably will get a higher level. So I guess that the leverage can be the key of whether this new life is will be useful or not and we've seen some news recently that I'm offline micro. Yep.

License, sorry lending companies have been given a favorable treatments, uh, for example higher leverage cats during the virus situation. So the extreme, you know, the government probably will allow a higher average for this knee online micro-lending license as well. So just want to get an idea from home. Thank you.

Okay. Thanks. Jackie quick questions. Yeah, in terms of the structural the the profile of the borrowers and how they've improved and shifted off. I mean if you recall we have seven credit levels for approve borrowers levels 1 through 7, 1 being the boss lowest risk seven being the highest risk, and if you look back, you know numbers and you know say about a about a year ago I was so we were primarily originating in credit levels four five six sort of in that Spectrum in the in the you know mid to high school with

today

You know the latest numbers I've actually looked at the look over ninety percent of our borrowers are coming from credit levels 1 to 4. In fact levels one two three accounted for over 70% So it's that shift which you know in the in the risk profile that we've made over the past twelve months and and as you can see the Vintage delinquency rates that we disclose for the third quarter of 2019 starts to starts to show this affects the data that will come out after this will you know, the next data points will be a bit clouded up by all the events going on in the market in recent months. I I don't know if that helps wage. I think that's sort of the quantification that we can give you at this point. And in terms of your question on the microlending license The Leverage ratios, we uh, the simple answer is we really dead.

We we don't know. I mean I we need to have a closer chat with The Regulators on this but we we we we don't we we hope so, but we don't know about yet maybe a follow-on question that so if we get the license probably we can switch our lending model to a you know, sheets principal then the in the expect a lower funding costs, um, because of of of this change of obviously this is like early discussion of our business model, so just want to get some ideas.

Yeah, I think Jackie I think that we will probably run in parallel the sort of what we call our our own micro lending company model versus loan facilitation with third-party institutional funding Partners. I think those both models will have to run together for some time. I think that's the that's our expectation, of course having our own micro lending company and license with with a sizeable more sizable Capital registered Capital will give us more flexibility the funding cost. Um, uh, I think it's early days. It could be it could be lower because you are now a you know, a fully licensed wage, you know financial institution with at least a billion R&B of capital, you know in that company, but also bear in mind that we are we will also be using our dog

Capital to be lending out at the same time today. We we don't really do much of that. Right? So, you know the Blended funding cost from that perspective should be favorable.

And of course if some of the channels that are allowed like tapping into the you know, the bond markets Etc. I mean I would imagine those would be lower than 9% in the funding cost for those should be lower than 5% I think we're optimistic about that.

Yeah, you know I I I I would add that because you know, the the the guidance on the new new new micro lending company allows. I I can specifically talks about funding through the ABS market. So I think you know once we get micro-lending license, you know, they all would be open and if we have that. Open, you know a walk through then I think there's a lot of opportunity to drive down funding costs.

Thanks a lot. Clean.

Our next question today will come from Sanjay sakhrani, please. Go ahead.

Hi, this is actually Steven Fox and we decided thanks for taking my questions. The first one I have is just around is to give an update on the number of institutional Plumbing Partners. You have believe it was Thursday and then put the pipeline looks like.

Oh, okay Steven. Hi. So we we have over 30 at the moment between 30 to 40. You know, I think given that are volumes and volumes are down. The constraint really isn't about adding on so much adding on new institutional Partners, but we're obviously trying to optimize the funding cost actually more money. So we have more than ample funding needs at the funding, uh lines at the moment through support our business. And yeah, so I hope that helps with your question.

Is it and then just just around the guidance in the first quarter of twelve to thirteen billion R&B. Can you talk about how friends have done since the beginning of the year? So what have you seen in January February? What's the expectations for March?

I'm sorry the sort of on a monthly the trend on a monthly basis. Yeah. Yeah for your loan origination.

I think I mean, I mean Steven we started the year obviously on a on a relatively conservative town. Anyway, because coming out of last year. We saw some increase in delinquency wage levels. Um, I think uh, the trough that we're seeing would probably be I would say, you know, February is probably a lower month March back up probably at a you know, a similar one wait and January's a bit higher just I think these are just margin. Yeah small differences. We're not talking about like, you know febru is the cratered into you know into two zero nothing nothing like that.

Okay. Got it. Okay, that's helpful just in terms of sizing what it could be at least would take those Trends and extrapolating it to the remainder of the year and how things are that that's what the line requesting was around.

Okay.

Those are my questions.

Okay. Thanks Steven. Okay, and our next question today will come from Anna Brown Seahawk, please go ahead.

Thank you Simon and congratulations for the solid quarter. I just have one question. So Market has the rumor of that you're considering privatization. Although like this is logically like against the action that you did the share repurchase. And you said the dividend. Can I can Mister Johnson Mister reaffirmed the market that you are like not faking privatization. Thank you.

Well, thank you very much Anna. I think in this day and age we have to be very very careful about fake news. Who knows what is new and what is what is what is not I think on this particular issue, let me just make a few comments. I think we are committed to delivering shareholder value and we continuously review all of our strategic options to deliver and maximize shareholder value. So we are all aligned in this process and I can report to you that we have not received any proposal to take the company private nor are there any transaction that is being discussed and of course, uh, as as as a ugh as part of the company, we will have to assess any proposals that we do receive the basis of Office Max amaizing shareholder value.

Thank you, Thank you.

Our next question today will come from Lucy Li of Goldman Sachs, please. Go ahead.

Thank you for taking a question is more questions to follow up. The first one is I noticed a higher proportion of unbalanced. She knows this quarter. Just wondering on the phone and this is all financial position. Is it a profitability? Is there a significant difference in a possibility and hence the decision or is it a matter of the funding part number exchange and secondly on the loan rescheduling for the borrowers that impacted by the virus situation wondering how many clients or or the proportion? Um, I rescheduled impacted and in normal quarter-page. What's the level done?

We book those loans at noon. So stupid questions.

Yeah, Lucy regarding on balance sheet vs. Off-balance-sheet. It's it's for us. It's not really such an active decision on such an active decision a such because our on-balance-sheet the loans that you see on our balance sheet and Loan receivables are primarily from trusts. So unlike other peers that God will use a very large part of their own Capital to lend actually in our case. It's primarily through trust. So it's one form about institutional funding partnership wears off balance sheet loans would primarily be funded by commercial Banks and consumer finance companies. I think those are the main main ones. Okay. So in the fourth quarter of Banks and consumer finance companies accounted for roughly about 80% of our loan origination volume and trusts were the remaining 20% I think we suck.

keeping trusts

At around sort of the twenty-two maybe twenty-five percent level it's it's through us. We've been over the last year. We've been shifting towards Commercial Bank because they naturally have you know, lower funding costs than trust. So they have larger balance sheets. Right and we could cooperate on the wide spectrum of of of of of of of areas not just on funding so that's been the trend really so it isn't really an active inactive way of saying I want to do more on versus off. Your second question is on the rescheduled sort of loans and um, the I believe the percentage of loan of borrowers from who they province is only a few percent so actually dead

Whole impact to us. Uh-huh is Ben. I think it's it's small. I don't think it's a meaningful impact at all to our income statement. And and of course, you can't assume that all several percent of those borrowers defaulted that is not a reasonable assumption at all. So that's the reality.

Yeah, and and I think you know just

Oh, I was just yeah. Sorry. I just you know, I guess the question is more about the relief program. So, you know, the relief program is a month since volume is very low, you know a daily basis like it slow a few hundred customers will qualify and we do not do like in a rolling over owns essentially. We do not like, you know, give them a new wrong kind of like no mask the loss. We essentially kind of like wave the connection at all just delay the payments. So I think that's probably a question. So I don't think that you know, they are these kind of things that we hide hide the delinquency may impact. We push out the delinquency impact because we do not give them we do not give them a new room to pay back their own little and like make me look bad look better that's not the case.

So like I think you know, it's the volume is a very small the volume is very small and we do not do the overtones.

Does that answer your question you see? Yes, that was my question that you

Again, ladies and gentlemen. If you have a question, please press star and then one or next question is a follow-up from John of Morgan Stanley, please go ahead.

Hi, thank you for taking my questions I can so it's just to ask the the management assessment on the current, um sector risk level so long and it's it's quite the cycle. So that's it already Peak or what's I should be looking at home has the the the cycle. Just want to get some help from from from the expert in the in the industry and and and and related to that is is probably do we have expected grocery assumption in terms of volume. So maybe I'll second quarter also quarter. Thank you very much.

Hey John. Yeah, I know that's is a great questions. And you know, we we know like we've you like our business as a cyclical business and we are currently off and I think I think you know, there are a couple of things together here now in terms of the the pandemic impact as I mentioned earlier, we have seen Rover a low-rate getting considerate and early delinquency rate and more importantly collection rate returning to prestige level. So that is very encouraging and now, you know, we will need to wait and see how the pandemic situation develops their apps as of now. I know you probably also call it from news. I think the situation you may not China has really been stabilizing and the recovery, but kind of like an outside of the China now is dead.

The question here and there are people, you know flying back so we will wait and see if the pandemic situation will continue to improve and we are very, you know, we are veiny Mystics given the the capability of the government and what do we have seen the improving Trend over the last two months for that? So that that's good news. Now, I think the uh, the flipside is given the endemic developing situation worldwide and you know, you know, the the the boss know the well what happened in the financial Market worldwide, I think there's a real concern that there could be some kind of economic decline worldwide wage and then they have an impact on China's economy, you know over the mid-to-long term as well. Now we do think that the Chinese economy has its own protections. It is less connected ed.

I think you know as we saw what happened in 2008/2009 in China economy, actually sustain the pretty well while a lot of other economies down into the session. So but you know, there will be impact if the rest of the world turns into a recession. So I think we ought to be cautious to see you know, the mid to long-term economic impact and that in turn will Impact Credit as well. So I I hope that gives you more color of view about you know, whether we are at the bottom of the cycle. I think in short we think we are very optimistic that the pandemic impact, you know could be over soon, but we're a little bit a little bit concerned about the economic Outlook wage war wide and its impact to China's economy. And so given that I think it is very difficult to give give like a dog

A prediction, you know, you could precise prediction for what the volume.

Growth rates for Q2 Q3. The rest of the year will will be I think we need to take a very cautious approach prudent approach and observe the data as observe. Let things play out a little under State prudent and opportunity, you know opportunistic.

Somehow I don't know if you have anything on the app.

No, I think that makes very much sense. Thank you. Thank you, very helpful. Thank you.

At this time ladies and gentlemen, there are no further questions. So I would like to turn the call back over to the company for closing remarks. Thank you again for joining us today. If you have further questions, please feel free to contact involutions group investor relations team. Have a have a nice day. Thank you, bye-bye.

The conference is now concluded and we thank you for attending the presentation and you may now disconnect your lines.