Q1 2023 Lufax Holding Ltd Earnings Call
Thank you.
Ladies and gentlemen, thank you for standing by and welcome to Lufex Holding Limited First Quarter 2023 earnings call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, we will have a Q&A session. Please note this event is being recorded.
Now I'd like to hand the conference over to your speaker host today, Ms Liu Xinyan, the company's head of board office and capital market.
Thank you very much. Hello everyone and welcome to our first quarter 2022 earnings conference call. Our quarterly financial and operations accounts were released by our new wire services earlier today and are currently available online. Today you will hear from our chairman and CEO .
Mr. Y. S. Cho will provide an update of our native business strategy, the macroeconomic trends, and the recent development of our business. Our co-CEO, Mr. Greg T. will then go through our first report and results, and provide more details on our business priorities and the key drivers.
Afterwards, our CFO , Mr. David Choi, will offer a closer look into our financials before we open up the call for questions. Before we continue, I would like to refer you to our State Harbor Statement in our earnings week, which also applies to this call.
As we welcome you, may come forward in open
Thank you for joining. As you reflect on the first quarter, it is clear that macro and operating environments continue to pose challenges for many small business owners.
However, we are encouraged by some indications of an economy rebound, giving us cautious optimism in our U-shaped recovery. We remain committed to navigating the challenges that lie ahead and maintain our unwavering focus on building a more resilient business.
We continue to exercise patience, prudence, and preparedness for the anticipated macro upstream in our SEO statement.
Let me provide some updates for the first quarter.
Of course.
There are some signs of a great recovery in the macro environment.
Though they remained unevenly distributed at the nascent stage.
China's first quarter GDP growth, expanding by 4.5%, year-on-year, indicates that the country is on track for its 2023 growth target of 5%.
In addition, China's National Bureau of Statistics stated that first quarter was a promising start to the macro recovery. However, Chinese industrial profits declined 21% year over year and we continue to see a divergence in the pace of recovery across industries.
Why small business owners are becoming more confident?
It may still take some time for macroeconomic tailwinds to flow through to our core SM segments.
to give an example of this inputting sentiment.
The end of the Peking University survey, survey results published in February , showed that approximately 80% of SPUs are optimistically about their business outlook in 2023.
Over half of survey participants are expecting business volume increases of more than 50% this year. However, it is important to note that SBOs have had less than two months of normal operations in the first quarter after the spike in COVID cases and the Chinese New Year holiday.
Thus, it takes time for SBOs to fully resume new business investments, which underpin lending demand.
Now let me talk about the impact on our business.
I would like to start by showing our outlook on the U-shaped recovery.
During the first quarter, we observed an improvement in credit rating mix and credit quality for neurons initiated in the last two quarters.
82% of new unsecured loans in the fourth quarter fell within our top three credit rating categories.
versus 41% a year ago.
Urine growth is increasingly concentrated in our preferred topsoil and middle soil regions.
which we believe will prove to be more resilient as the macro environment improves.
Notably, the situation in ECC has slowed down substantially in the first quarter.
We have also witnessed early signs of improvements in asset quality in certain economically resilient regions and industries.
We expect that flow rates will continue to improve.
through the end of this year when operations of SMEs gradually cover. We also expect that credit charge-offs for the risk-bearing loans will likely peak in the second quarter and then gradually decline in the second half of this year.
In the second half, we'd expect total credit costs to remain elevated, but the underlying driver will shift from past charge ops.
to afford oxygen.
arising from increasing the proportion of loans we provide full guarantees for.
This will be supported for NAND margins in 2024 and beyond.
As new growth and the portion guaranteed by us increases progressively over the next several quarters.
we anticipate that revenues will decline at a slower pace than they did this quarter.
By year end, we expect the portion of loans that will bear risk.
end. We expect the portion of loans that we bear risk.
as a percentage of entire portfolio to exceed 40%.
This ratio stood at 24.5% at the end of the first quarter.
Our ability to focus more on new business is made possible by three factors.
1. The improving macro environment.
Two, ongoing progress in vetting funding patterns for our deployment of the model, where we provide the entire guarantee.
and three, the recent completion of our 4-to-5 research train, which was difficult but necessary.
As a result, the main drivers of our U-shaped recovery are taking shape.
But as we have stated previously, we expect a notable recovery in profits underpinned by stabilized ANR to the 2024 event.
As part of our U-shaped recovery plan, we have implemented several strategic initiatives.
We have completed the restoration of our direct sales force.
and further optimize our headquarters and full-time operating costs.
Total expenses including excluding credit impairment losses.
Finance and other costs in the fourth quarter decreased by 21.5% versus a year ago.
The total number of direct sales falls.
decreased from 47,000 as of the end of 2022 to around 36,000 as of the end of the first quarter.
We managed to retain the most part of members of our
that of those who departed.
In line with our plan, 80% of new businesses in the fourth quarter came from top third and middle third regions versus 70% a year ago.
Now that we have completed our organizational restructuring, we are focused on several priorities. Firstly, we continue to increase the proportion of risk bearing on neurons we enable.
under which our guarantee subsidiary provides 100% credit enhancement.
We are encouraged to see our funding partner support for the model where we provide
the entire guarantee.
Furthermore, as we deepen our position as an SVP advisor, we focus on product diversification and co-selling between our retail credit enablement model and our consumer finance business to meet customer needs.
This will diversify our landing duration mix.
gradually adding shorter duration products for a longer duration base.
Finally, we'll continue to enhance parts work in our post-loan recovery efforts to claw back a portion of past credit losses.
These key initiatives are supported by our continued investment in technology. During the first quarter, we deployed new technology to help us gain deeper insights into our small business owners' daily operations.
For customer onboarding, we strengthen our capabilities by further embedding facial, voice, and location verification features. As a result, we further enhance our ability to access to assess owners' business status.
For the underwriting process, we introduced real-time assessment of customers' online marketing activities, allowing us to further evaluate their business momentum and repayment capabilities.
These changes in credit process are augmenting our historical individual credit assessment.
so called KYP with a different size with owners, business and industries, KYP.
called KYT with a deeper insight with owners, business and industries, KYB. Next, let's move on to the capital market.
We successfully completed our Hong Kong listing by introduction on April 14.
marking an important milestone in our corporate development.
The listing will increase our exposure to the home-home market and broaden our investor base to continue to create value for our shareholders. Additionally, we are pleased to announce that we paid out the second half of 2022 dividends on aggregate amounts of US$114.6 million.
in April 2023, demonstrating our commitment to maintain a stable dividend policy.
Finally, as we shared in our last Awning Call, we have substantially completed our regulatory and German specification efforts.
And the industry is now entering a phase of normalized provision.
We believe this normalized supervisor framework will provide greater stability and predictability for our industry.
and we work closely with regulatory authorities to ensure our compliance with all relevant regulations.
I will now turn the call over to Greg for more details on our operating results. Thanks.
Thank you, Waiya. I will now provide more details on our first quarter results and our operational focus for this year. Please note all figures are in Rembrandt B unless otherwise stated.
In the first quarter of 2023, our top line and bottom line performance were adversely impacted by the challenging macro environment. Our total income was $10.1 billion, representing a decrease of 18.2% compared with the last quarter of 2022. This was mainly driven by the decrease in new loans and the pricing pressure from our credit insurance partners.
Despite the challenges on our top-line performance, we did turn the corner and achieve profitability this quarter, with a net profit of $732 million, primarily due to a decrease in credit impairment losses.
Now let's dive into the details of our key drivers of the top-light performance.
One of the key drivers is our loan volume. In the first quarter of 2023, our new loans enabled were $57 billion, representing a year-over-year decrease of 65%. This was mainly driven by our tightened credit standards on new loans enabled. Executing on our strategic initiative in response to the elevated credit impairment losses in the first quarter, we continue to prioritize higher quality SBO customer segments.
concentrated economically more resilient geographies. The proportion of new unsecured loans enabled in the R1 to R3 customers, which are our top three rankings in our R1 to R6 scale, increased to 82% in the first quarter from 41% in the same period of last year.
Meanwhile, the contribution from customers in the top third and middle third regions continued to increase and reached 80% in the first quarter of 2023 compared to 70% a year ago.
New loans were virtually impacted in the short run by the optimization of our direct sales team, which was difficult but necessary for the long-term development of the company. The optimization was completed in the first quarter, and we managed to retain the more experienced and productive members of our direct sales force. The average productivity of our retained direct sales employees is more than double that of those who departed.
We believe that we are on the right path and we expect to see the results reflected in upcoming quarters. Additionally, we have observed that new loan vintages enabled after we tightened our credit standards demonstrate improved asset quality compared with older loan vintages.
As we focus on higher quality SBOs, the average ticket size has naturally increased as a result. Average ticket size of unsecured loans for the first quarter of 2023 increased to revenue B270,000 from 240,000 average for the year of 2022. Our consumer finance business saw healthy growth in the first quarter despite the challenges in our retail enablement model.
The total outstanding balance for consumer finance loans in the first quarter of 2023 was 29.6 billion, up 39% year over year, and credit performance was in line with the industry credit performance. Contribution from our consumer finance business grew as percentage of new loans enabled, and it increased some 11% in the first quarter of 2022.
to 24% this quarter, further diversifying our product's offerings. Another key driver of our top-line performance is take rate. As mentioned earlier, our take rate remains compressed, which is mainly due to the elevated premiums charged by credit insurance partners. Although our Titan credit standards have improved asset quality of new loans, credit insurance premiums have remained at an elevated level to date. We are proactively addressing the take rate pressure by continuing to modify our quality of life.
partners are already extending new loans under the model where we provide the entire guarantee. As a result, our credit risk-bearing by balance in the first quarter further increased to 24.5% and is expected to exceed 40% by the end of this year. We believe we have adequate capital to support the increase in risk-bearing loans.
as the leverage ratio of our guarantee subsidiary was less than two times as of the end of the first quarter, well below the regulatory limit of ten times. As such, we expect our take rate will gradually improve over the next several quarters as we increase the guarantee portion for new loan business.
Next, let's go to the details of our bottom line drivers. The main driver of recovery in our bottom line was a decrease in credit impairment losses. In the first quarter, credit impairment losses declined by more than 50 percent to $3.1 billion from $6.7 billion in the fourth quarter of 2022.
This was mainly driven by a notable decrease in provisions compared with the previous quarter as we've taken a more conservative view on the outlook for credit quality prior to post-pandemic reopening.
As the macro environment gradually normalizes and activities picking up in the first quarter, we partially released a portion of the previously made provisions, which had a positive impact on our P&L. The improvement in our credit impairment losses is also visible in our C to M3 ratios. The forward indicator on asset quality that we monitor closely. It stood at 1% in the first quarter.
remaining unchanged compared with the fourth quarter of 2022. This was primarily attributable to the increase in CDAEM-3 for general unsecured loans from 1.1% in the fourth quarter of 2022 to 1.2% in the first quarter, but this was partially offset by a decrease in flow rate for secured loans from 0.6% to 0.5%. While the asset quality of secured loans is clearly improving,
It is worth noting that the deterioration in acid quality unsecured loads has slowed down substantially in the first quarter, and the delta of C to M3 flow rate was 10 basis point increase versus a 20 basis point increase in the fourth quarter of 2022. We will continue to monitor closely such indicators in the coming quarters.
as they are critical to determining the speed of our U-shaped recovery. Looking ahead for the remainder of 2023, we expect credit impairment losses of each quarter to be on par with those during the first quarter. This is mainly due to our planned expansion of the model, where we provide the entire guarantee during the coming quarters.
The extension of such model will increase upfront provision levels, but should result in improved net margins over the medium term.
During the first quarter, we continued to make progress in our new SBO ecosystem. As a recap, our new value-added services platform, branded Boudia & Tung, is an open platform populated with digital operating tools and industry content to support business development for our small business owners. We intend to use this platform to engage potential customers at an earlier stage, deepen our interactions with existing companies, and move forward their creep ourOf our interacting
through this first quarter.
As Wyeth mentioned, in the face of an uneven post-pandemic economic recovery, we are cautiously optimistic in realizing our U-shaped recovery. However, we will remain prudent on absolute levels of new growth until we see definitive improvement in overall lending demand and credit quality.
While we expect to see gradual recovery in our core business metrics in the second half of this year, notable bottom line performance improvement is expected to be a 2024 event. I will now turn it over to David, our CFO , for more details on our financial performance. All right, thank you. lacks outpe
I would like to provide a closer look at our first quarter results. Note that all numbers are irrelevant returns, and all comparisons are on a year-over-year basis. And that's on a life-saving basis.
As wired to Grand Nature before, our performance was impacted by the macro environment and our customer selection, resulting in a 41.8% decrease in our top line total income to $10.1 billion for first quarter.
The total expenses decreased by 8.8% to 9 billion. That result was going to be 732 million in the first quarter of World Cup 3.
During this quarter, our technology-based income was 5 billion, representing an increase of 46.1% of our revenue.
Our net income was 3.3 billion, a decrease of 32.8%, and our guarantee income was 1.4 billion, representing a decrease of 35.5%.
As a result, our technology platform-based income service fees as an percentage of total income declined to 49.7% from 53.7% a year ago. In addition to the increase of income from consumer finance loans, our net interest income as an percentage of total income actually increased to $2.7%.
33.3% from 28.8% a year ago.
Furthermore, as we continue to better utilize our charity companies' abundance capital to bear more credit rates by ourselves in battle throughout TMT universe partners.
We generate such more guaranteed income reaching 14.1% of total income as compared to 11% a year ago. Our other income is mainly due to a price of medical fees, collections, and other value-addressed service fees charged up by the end customer order.
and positive retail credit enablement process was 227 million in first quarter of 2003 compared with 704 million in the same period of 2022.
The change was mainly the change in the future that we are taught to by the primary study at Mr. Porter.
change in the future that we are talking about our primary study and housing partner. Turning to our expenses.
We continue to quickly manage our operational expenses. Our total expenses is including credit and asset repayment losses, finance courses, and other losses decreased by 21.5% year-over-year to 5.7% year-over-year. As is goody with all great efficiency.
In the first quarter, our total expense decreased by 11.8% to 9.2 billion a year goal.
This decrease will primarily driven by delta mining expenses.
Our total sales and market prices reached mainly in his expresses for followers and investors' access reports, as well as general sales and market expenses decreased by 32.4% during the first quarter.
The decrease was three by three factors. First, a decrease in minimum sales and reduction of commissions. Second, a decrease in investor access to any kinds of expenses and referral expenses from platform services driven by platform services, driven by decreased traffic and oil.
and finding the decreased general cells were not expensive, because certain products decrease the general cells.
Our general and administrative expenses increased by 4.2% to 736.8% in the first quarter, mainly due to the utility cost, which are less than 5% decrease in low volume. Our operations are subject to expenses.
a decrease by 2% to 1.16 in the first quarter, mainly to say 10 control measures, and decreases in the on-product and the on-sales.
Our credit in Hamel losses was 3.1 billion in the first quarter compared with 2.8 billion a year ago, which is about 10.9%. It was primarily to provide an increase in debt losses as a result of the US rate-
challenging economic problems, partially offset by decreasing food issues.
of low products that repair revenues. Our finance costs increased by 7.5% to under 89, meaning it was quarter from $2,000 in the interest rate in the day to year 2022, mainly due to the increase of interest income from bank deposits, partially off-leads, but the increase of interest spent by the interest rate.
As a result, that profit for the first quarter was similar in 32 minutes compared with that profit of 1.3 minutes in the third quarter off to the 2.0 meanwhile, our basic and diluted earnings per area during the first quarter both will be 2.3 yen or USD 2.0.
What but?
On the partnership side, our partnership remains strong and solid. Let us catch a fan-paradise increase. That's all. March 31st.
Go to the cache file, so quickly 1.3k in it.
and somewhere we have 43.9 billion at the end of last year. The electrician liquid atoms are actually using light-based solar, the magnitude 4C, for 2 minutes at the end of March, 23.3.
As of the end of March 2023, our GALI company's legacy result is only 1.7 times closer to the images of the ten-time. All this provides strong support for our company through many new feelings in the face of an economic crisis.
That concludes our webinar. For today, operator will now read the questions.
Thank you very much. Ladies and gentlemen, if you would like to ask a question, please press star followed by 1 on your telephone keypad now. If you change your mind, please press star followed by 2 to withdraw your question. When preparing to ask a question, please ensure your phone is unmuted locally.
In addition, I would like to remind you to please mute yourself after stating your question. Thank you. We now have our first question from Alex from UBS. Please go ahead.
Hi, thanks for taking my question. So my question is running out in the pricing outlook. So could you give us some color in terms of what's the average loan pricing for our portfolio and about the pricing for the new unsecured loans? So and I guess there's two parts to this question. First, on the regulatory front, so we have been lowering the loan pricing up you
and demand dynamics for the SBO segment. Should we expect some further downward pressure on bloom pricing ahead, given now that we are further upgrading our customer profile to better quality borrowers, and given the current pace of economic recovery appear to be quite modest? We are keen to hear your view. Thank you.
Thanks Alex for your question. So far we haven't got any further instructions from regulators about further ruling APR.
Thanks Alex for your question. So far we haven't got any further instructions from regulators about further ruling APR.
If you look at the first quarter API, the blended API for all neurons in the first quarter, it's already less than 20%. And then that, if you compare with other peers.
We are actually low than other peers average APR. We are quite low. So I believe we are in good shape in terms of over APR level. I believe that really well meets the regulatory requirements.
which includes funding costs and then credit costs and then our, the operating costs, which include our state expense, right? So we don't believe, we don't think that the time to time segment will necessarily...
further reduce our API. We are already less than, again, less than 20 percent for all neurons. So I do not expect noticeable change in terms of API in the future.
So we see on one hand, we see some encouraging side of your portfolio. As the management mentioned earlier, there is already some green shoes in the business and you expect flow rate to gradually improve in the coming quarters. However, on the other hand, we see the...
portfolio and a related question is how is the collection of your charge of loans as the management also mentioned in the report that you are try to increase the effort to recover it past our credit losses which may contribute to the net profit in the future so could you give us
model and where we expect to see the long growth more, to see more strong long growth in the second half when you move to this entire guaranteed model. Thank you.
Take them off.
The situation in the asset quarter has slowed down substantially in the first quarter. If you look at C2M3 flow rate for the total loans was 1.0% in the first quarter this year, which remained unchanged from the first quarter last year.
But if we consider that our loan balance has been declining in recent months, so if we analyze this for example, if we only compare the accounts whose monsoon book is less than 60 miles per hour, then we can see that our loan balance has been declining in recent months. So if we consider that our loan balance has been declining in recent months, then we can see that our loan balance has been declining in recent months.
So to remove the impact from declining balance on our net flow rate, then now we already see an increment trend. I believe we can show, we can demonstrate more obvious improvements from the next quarter onwards. So there we have confidence. And, others I believe are going to benefit from a consumer Cindy-
As the company continuously carries on, we said we could plan. Now we observe an improvement in credit rating mix and credit quality for neurons initiated in the last two quarters.
Yes, you know that we had large amount of car jobs last year, so that is one of our focus this year. We are now sensing post-recovery accidents to call back.
more from the past credit losses.
more from the past credit losses. And then I ask you a question about loan demand.
Our loan demand is decided by how our SEO customers see their future contracts. And in this regard, we haven't seen any obvious change in the world. But no matter what, if you understand our monthly news series volume, we are going to reentry of the program and prepare for this calm down expiring period. And we all want to share this information with you – leave a comment below, right now and in the meantime wanted to Leah territory staff have computerized the%
And then our market share. Actually, loan demand is not your level concern because we are compared to the market size. Our market share is very small. So we don't really worry about loan demand at this moment. And the decrease of neuron growth, recent decrease.
It was mainly driven by our tight-end underwriting credit policy and was a part of our DST reform.
It was mainly driven by our titans underwriting credit policy and also part due to our DST reform. That was the reason.
In the spin-off of 100% guarantee model, we are making a great progress. We are very happy. We are encouraged to see that our funding partners, they provide good support for the model where we provide the entire guarantee. By now
five out of six trust partners
they agreed and 37 out of 78 bank partners, they also agreed to extend credit under the model where we provide a full guarantee. In addition, 31 of our funding partners are already providing the hangover launch.
under this model. So we are making a good progress and then I think the full definition can be relatively quick.
Thank you very much. We now have our next question from Richard Xu of Morgan Stanley . Please go ahead. Sure. Thank you. I have a question on the funding costs. Just wondering, you know, what the funding costs are for the funding costs. I'm wondering, you know, what the funding costs are for the funding costs.
the model is largely complete. Thank you.
Thank you, Richard. It's Greg here. If we look at the funding costs, which are about 6% overall, they have come down about 30 basis points if you look at the first quarter on a year-on-year basis. As we shift to the 100% guarantee model, we're not seeing much change in the overall budget.
as we look forward to the remainder of the year.
On the take rate, if you kind of go and look at historically, our take rate has been in the sort of 8 to 10 percent range. More recently, due to the higher credit guarantee insurance costs, that take rate is now closer to about 7 to 8 percent rate.
As we then move to the 100% guarantee model, so if you look out over a year or a year and a half from now when more of the portfolio will be 100% guaranteed, that credit premium or credit insurance premium that was previously paid.
to our CGI partners will be earned by us. And that number was historically about 5 to 6%.
So if you take a base today of seven to eight, which is obviously compressed because of the higher CGI fees, and we move to the guarantee model, where that take rate moves over to us, then you should be looking at, on a stabilized basis over the longer term, a take rate of about 14%. So we think that's where things will end up probably in about a year and a half.
from now when we've made more of the complete shift. Thank you.
Thank you very much. We now have our next question from Yadaly of CICC. Please go ahead.
Hello, management. This is Yada from CICC and thanks for taking my question. My question today is regarding the risk of varying percentage and I was wondering what is the trend of this going forward and how to view this change and potential impact.
on our top line, quite in parallel losses and the bottom line. And that's all, thank you. Thank you. In terms of the risk-bearing percentage, as of the end of this first quarter, it was at about 24%. We expect by the end of the year,
on a portfolio basis to be over 40%. And that means as you move through the second half of the year for new loans, a much higher percentage will be under this 100% self-guarantee model. Now, as we go through that process, similar to the question that Richard just asked,
that will increase our top-line revenue because you're basically moving what was paid previously to credit guarantee insurance partners onto the balance sheet, and therefore the revenue will come with it. So that will provide a basis for revenue increase.
As we take on more credit risk, we initially have to provision for the new loans. So that is front-loaded in the model. So what you'll see in our overall credit impairment cost, right, we had credit impairment cost in Q1 of $3.1 billion.
We expect this number over the next couple quarters to remain stable, but what's driving it the mix is changing
So 3.1 in the first quarter is mostly from the credit impairment cost from the legacy portfolio, if you will, the existing past book.
As we move into the second half of this year, you'll still be at about 3 billion or so credit impairment costs, but more and more of it will be coming from the fact that the new business is done, a higher percentage of new businesses done through self guarantee.
So while that carries a higher upfront cost, if we look forward into 2024, it should also improve our net margin, right? Because you're shifting from a very high credit insurance cost today of over 10%, right, to a model where we think that the new business that we're doing should perform more in line with historical levels.
concludes our question and answer session for today. I will now turn the call back over to our management for closing remarks. Thank you.
Thank you for joining the conference call. If you have more questions, please do not hesitate to contact the conference IRQ. Thank you for joining the conference call.
Thank you. This concludes today's call. Thank you for joining the conference call. If you have more questions, please do not hesitate to contact the conference IRQ just again.
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