Q2 2026 Qfin Holdings Inc Earnings Call
Speaker #1: Ladies and gentlemen, thank you for standing by, and welcome to the Qfin Holdings second quarter 2026 earnings conference call. All participants are in listen-only mode.
Speaker #1: There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number 1 on your telephone keypad.
Speaker #1: Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Ms. Karen Gee, Senior Director of Capital Markets.
Speaker #1: Please go ahead, Karen.
Speaker #2: Thank you, Aisha. Hello, everyone, and welcome to Qfin Holdings' second quarter 2026 earnings conference call. Our earnings release was distributed earlier today and is available on our IR website.
Speaker #2: Joining me today are Mr. Wu Haishen, our CEO; Mr. Alex Xu, our CFO; and Mr. Zhen Yan, our CRO. Now I will quickly cover the Safe Harbor statement.
Speaker #2: Today's discussions may contain forward-looking statements, particularly statements about our business and financial results, that are subject to risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements.
Speaker #2: Please refer to the Safe Harbor statements in our earnings release, which also contains a reconciliation of the non-GAAP financial measures to GAAP financial measures.
Speaker #2: Now, I will turn the call over to Mr. Wu Haishen. Please go ahead.
Speaker #3: Hello, everyone. Thank you for joining us today. Since the start of 2026, China's consumer finance industry has remained under pressure. According to the People's Bank of China, the outstanding balance of short-term household consumer loans fell by more than RMB 660 billion from the beginning of the year through the end of Q2.
Speaker #3: Reflecting continued voluntary and involuntary deleveraging among households, meanwhile, regulatory oversight continued to tighten. A series of measures were introduced to close regulatory gaps and promote a healthier, more compliant industry environment.
Speaker #3: These measures bring the entire credit industry under a stricter framework, covering pricing, marketing, funding, collections, and payments. In late June, an unexpected industry event then triggered a crisis of confidence in the loan facilitation sector.
Speaker #3: This caused liquidity to tighten sharply across the market. Against this backdrop of profound industry adjustment and structural shakeout, we remained committed to prudent operations, prioritizing compliance, risk management, and efficiency over scale.
Speaker #3: By continuously optimizing our user mix and business structure, we further enhanced operational efficiency and strengthened the resilience of our business model. As of the end of Q2, our AI-powered credit decision engine and asset distribution platform served 168 financial institutions.
Speaker #3: Delivering intelligent digital credit services to over 65 million credit line users on an accumulative basis, we maintained rigorous risk management standards while driving cost and efficiency improvements.
Speaker #3: In Q2, total loan facilitation and origination volume on our platform reached approximately RMB 63.4 billion, down 2.5% sequentially. Risk metrics continued to improve, accompanied by lower funding costs and greater operating efficiency.
Speaker #3: Amid a rapidly evolving industry landscape and a broad-based contraction in consumer credit supply, we maintained prudent balance across risk, scale, and profitability, demonstrating strong operational resilience.
Speaker #3: Risk management underpins every business decision we make, and is critical to our ability to navigate industry cycles and achieve sustainable growth. Since the second half of 2025, risk optimization has remained our top priority.
Speaker #3: By expanding our base of high-quality users and optimizing our business mix, we have kept the risk level of new loans at historical lows. In Q2, our risk indicators continued to improve.
Speaker #3: The C2M2 ratio declined by 17% sequentially to 0.66%, approaching the level in Q2 last year. This improvement reflected the benefits of our earlier asset mix adjustments and risk strategy optimization, as well as enhanced post-loan management capabilities.
Speaker #3: During the quarter, we further refined our pre-loan and in-loan risk strategies, with closer monitoring of multiple borrowing and changes in customer liquidity. By analyzing multiple signals, including recent customer behavior, external borrowing exposure, and changes in debt levels, we can quickly identify users with high debt burdens or declining income stability.
Speaker #3: This allows us to tighten risk strategies promptly and reduce our exposure to high-risk segments. For post-loan management, we continued to refine our collection scorecard, or C-scorecard, improving our ability to segment users by risk level, willingness to repay, and repayment capacity.
Speaker #3: We then tailored our outreach strategies and offered targeted relief or repayment plans, based on each customer's risk profile and actual ability to repay. These measures have improved customer experience and made our collection efforts more efficient.
Speaker #3: As a result, our 30-day collection rate improved each month throughout Q2 and averaged 88.1%, up 2.3 percentage points sequentially. We also embedded risk discipline earlier in the customer acquisition process.
Speaker #3: Given the uncertain regulatory environment, we moderated the pace of acquisition spending and continued to optimize our customer and loan mix. In Q2, customer acquisition expenses decreased by approximately 13% sequentially, while high-quality users accounted for a larger share of loans issued to new users.
Speaker #3: We also maintained strict discipline on payback periods. By improving the user experience, we increased retention and repeat borrowing, which, in turn, raised user lifetime value.
Speaker #3: In addition, we continued to scale back long-tail API channels with weaker customer quality and less stable returns. As a result, API channels' share of new credit line users declined by 11 percentage points sequentially, while the API contribution to new loan originations fell by 3 percentage points.
Speaker #3: Following this adjustment, ROA for API channels improved by around 1.87 percentage points. As our user and channel mix improved, the average pricing of new loans decreased further to 18.2% in Q2.
Speaker #3: A higher quality user mix allows us to align our assets more effectively with funding demand, while further strengthening our asset quality. On the funding front, we further optimized our funding mix by increasing the contribution of ABS to external funding, and proactively scaling back marginal assets with higher funding costs.
Speaker #3: As a result, our overall funding costs declined by approximately 10 basis points sequentially in Q2. Supported by our long track record of stable asset performance, our ABS issuance increased 90% sequentially to RMB 5.5 billion in the quarter, while issuance costs decreased by around 20 basis points.
Speaker #3: Following an unexpected industry event in late June, financial institutions have become increasingly risk-averse. Funding supply has fallen sharply, placing the industry under significant liquidity pressure.
Speaker #3: As a leading platform, we benefit from more diversified funding sources, stronger risk performance, and asset pricing that aligns well with regulatory guidance. As a result, our funding supply has held up better than most of our peers.
Speaker #3: We expect funding conditions to remain tight in the second half of the year, with funding costs potentially increasing. We will continue to build on our asset strengths and work to maintain stable funding supply. At the same time, we will better match funding with assets to improve capital efficiency and overall portfolio yields.
Speaker #3: Tighter funding conditions will also materially affect industry risk levels. To prepare for potential volatility ahead, we will continue refining our risk management and asset distribution strategies, while proactively optimizing the allocation of our collection resources.
Speaker #3: These steps will help us maintain an adequate margin of safety in a volatile market environment. On the regulatory front, new requirements covering comprehensive financing cost disclosures for personal loans and the online marketing of financial products are taking effect in Q3.
Speaker #3: Together, these measures establish higher standards for transparency and consumer protection across the industry. They also raise the bar for our operational execution. Meanwhile, an ongoing nationwide regulatory campaign targeting the collection industry has led to a severe shortage of collection capacity across the board and put significant near-term pressure on collection costs and efficiency.
Speaker #3: Over the longer term, however, these measures will help foster a healthier and more sustainable industry ecosystem. We expect industry resources to increasingly concentrate among leading players with reasonable pricing, strong risk management, and disciplined operations.
Speaker #3: As we strengthen the foundation of our credit business and refine our unit economics, we continued to advance our one-core, two-wings strategy, extending our proven technology and credit capabilities to tech solutions for financial institutions and our overseas business.
Speaker #3: In Q2, loan volume enabled by our tech solutions business reached RMB 10.5 billion, up approximately year over year, while outstanding loan balance reached around RMB 16.1 billion at quarter end, up 313%.
Speaker #3: Through focused PRO and other solutions, we embed our capabilities spanning customer acquisition, product, risk management, operations, and post-loan management into the workflows of financial institutions, enabling banks to serve customer segments typically priced between 3% and 12%.
Speaker #3: Our AI plus credit strategy also made meaningful progress. Recently, we secured two AI agent development projects with banks, covering marketing growth and credit risk management.
Speaker #3: Our AI loan officer will be deployed across the bank's retail, SME, and corporate banking businesses, supporting relationship managers from lead identification and customer engagement to conversion.
Speaker #3: Our AI credit officer will support SME lending in areas such as transaction analysis, audio and video due diligence, and credit review and approval, which will help banks improve credit assessment and approval efficiency.
Speaker #3: These wins demonstrate growing recognition of our AI agent capabilities in real-world environments at financial institutions. With both projects entering implementation, we are now positioned to provide deeper support for the digital and intelligent transformation of financial institutions.
Speaker #3: This progress comes as the regulatory framework for AI in financial services enters a new phase. Since July, regulators have issued a series of major policy documents, including guidance on the secure development and use of AI in the banking and insurance sectors.
Speaker #3: These policies mark that AI plus finance is shifting from encouraging innovation to prioritizing security and compliance. We believe this shift will create greater market opportunities for our AI solutions, which are secure, compliant, and deeply integrated into real-world financial workflows.
Speaker #3: Overseas markets represent a long-term growth opportunity for us. By combining the technology and know-how we have developed in China's credit market with strong local operations, we are trying to build an efficient and replicable model for overseas expansion.
Speaker #3: During the quarter, we continued to refine our risk models and deepen our understanding of the European and Latin American markets. Based on small-scale sample data, our models have already shown competitive performance in select markets.
Speaker #3: With continued iteration and refinement, we believe our strengths in risk management and technology will set us apart in overseas markets. In Southeast Asia, we are steadily advancing licensing efforts, exploring partnership opportunities, and building local teams. We expect more progress in the second half of the year.
Speaker #3: At this stage, we are taking a disciplined approach to overseas expansion, carefully balancing risk and capital deployment to ensure efficient capital allocation. At the organizational level, we continued our transformation into an AI-native company.
Speaker #3: We are gradually turning the knowledge and capabilities accumulated across our teams, documents, and systems into organizational assets that AI can understand and use. We have also begun building our proprietary agent platform.
Speaker #3: The value of AI-native transformation extends beyond efficiency gains. It is about turning individual and team experience into shared, reusable organizational capabilities and creating a new form of organizational leverage.
Speaker #3: Over time, this will accelerate learning and iteration across the organization, while steadily raising both execution efficiency and the ceiling of what we can achieve.
Speaker #3: Looking to the second half, industry adjustments are still underway, and market volatility is accelerating the exit of weaker platforms. In this process, we have already seen many competitors leaving the market.
Speaker #3: As a result, customer acquisition costs have fallen sharply, and non-compliant practices are decreasing. Once the dust settles, we expect a more stable and predictable regulatory environment.
Speaker #3: We will remain disciplined and vigilant in our approach to both regulation and risk. Under the new regulatory framework, we will continue to strengthen our capabilities, refine our business model, and improve operating efficiency.
Speaker #3: Precedents from overseas markets suggest that, as the market transitions from disorder to order, even industry leaders often experience short-term pain. This is an inevitable part of the process.
Speaker #3: However, those that successfully navigate the transition will emerge better positioned for sustainable growth and long-term success. Going forward, we will remain firmly committed to our one-core, two-wings strategy, anchored by our domestic credit business and supported by tech solutions commercialization and overseas expansion.
Speaker #3: As we advance this strategy, we will continue to pursue sustainable, high-quality growth. We are confident that we will thrive over the long term. Thank you.
Speaker #3: With that, I will now turn the call over to Alex.
Speaker #2: Thank you, Hashim. Good morning and good evening, everyone. Welcome to our second quarter earnings call. It was a very eventful quarter, where unexpected crises at some peers in late June triggered an industry-wide liquidity squeeze, compounded by increasingly stringent regulatory scrutiny, which caused significant changes in industry behavior and reshaped the landscape.
Speaker #2: For the time being, our managerial priority is to maintain financial discipline and focus on cost reduction and risk mitigation. Total net revenue for Q2 was $3.57 billion, versus $3.91 billion in Q1 and $5.22 billion a year ago.
Speaker #2: Revenue from credit-driven service, capital-heavy, was $2.6 billion in Q2, compared to $2.96 billion in Q1 and $3.57 billion a year ago. The year-on-year and sequential decline was mainly due to a decrease in risk-bearing loans, as well as a decline in the average pricing of loans.
Speaker #2: Overall funding cost declined roughly 10 basis points quarter-over-quarter, as contribution from ABS increased in the funding mix and off-balance sheet loans further declined in Q2.
Speaker #2: Revenue from platform service, capital light, was $969.8 million in Q2, compared to $951.9 million in Q1 and $1.65 billion a year ago. The year-on-year decline was mainly due to significantly lower ICE contribution, due to drastic changes in market conditions.
Speaker #2: During the quarter, the average IRR of the loans we originated and/or facilitated was 18.2%, compared to 18.7% in the prior quarter. As we continued to focus on attracting and retaining high-quality users, looking forward, we may see modest fluctuations in average pricing under the current regulatory framework.
Speaker #2: Southern marketing expenses declined 13% quarter-on-quarter and 40% year-on-year. We added approximately 830,000 new credit line users in Q2 versus 1.19 million in Q1. We took a more cautious view in customer acquisition and will continue to maintain a controlled pace to acquire new users in the near term, in response to the volatile market environment and the restrictive regulatory changes.
Speaker #2: The 98 delinquency rate was 2.83% in Q2, compared to 3.5% in Q1, which reflects improved risk performance early in 2026. As a reminder, the 90-day delinquency rate is a lagging indicator and has little predictive power for future risk metrics.
Speaker #2: Day-one delinquency rate was 5.6% in Q2 versus 5.7% in Q1. The 30-day collection rate was 88.1% in Q2 versus 85.8% in Q1. C-M2, which represents the outstanding delinquency rate after the 30-day collection, was 0.66% in Q2 versus 0.8% in Q1.
Speaker #2: The noticeable risk-bearing improvement in Q2 was mainly related to our risk tightening measures and loan mix shift toward new loans. While overall risk performance in July remained largely unchanged from June, the positive trend took a sudden reversal in August.
Speaker #2: The aftermath of the liquidity crisis at some peers, and the nationwide regulatory action against credit collection operations, has recently caused significant headwinds in risk management across the entire financial services industry.
Speaker #2: In response to the drastically changing industry dynamic, most participants started to lift their risk bar in August, which in turn caused further tightening of liquidity supply in the market.
Speaker #2: We observed a sharp upward swing of C-M2 in recent weeks, which may significantly impact our operations for the rest of the year. While we already took proactive measures since late June, and even more decisive actions in August, it will probably still take at least two to three quarters to bring the C-M2 ratio back to a reasonable level.
Speaker #2: Given the current macro environment and regulatory changes, we continued to take a prudent approach to booking provisions against potential credit losses. Total new provisions for risk-bearing loans in Q2 were approximately $1.72 billion versus $1.68 billion in Q1.
Speaker #2: The new provision booking ratio, which is defined as total new provision divided by total quarterly risk-bearing loan volume, reached a historical high at 5.36% in Q2.
Speaker #2: Write-backs of previous provisions were approximately $649 million in Q2 versus $308 million in Q1. Provision coverage ratio, which is defined as total outstanding provisions divided by total outstanding delinquent risk-bearing loan balance between 90 and 180 days, was 472% in Q2 compared to 391% in Q1.
Speaker #2: Non-GAAP net profit was $455 million in Q2, compared to $946 million in Q1 and $1.85 billion a year ago. The significant year-on-year decline in profitability was mainly due to lower loan volume and pricing.
Speaker #2: And the deleveraging in operation. In Q2, we incurred a one-off tax-related expense of approximately RMB 500 million, which was caused by a change in tax treatment of a certain entity based on the updated interpretation of related tax regulations by the tax authorities.
Speaker #2: As a result, the effective tax rate for Q2 was 60.3%, significantly higher than normal. Based on the tax authorities' guidance, we now expect the effective tax rate for the operations to be around 20% going forward.
Speaker #2: Leverage ratio, which is defined as risk-bearing loan balance divided by shareholders' equity, was 2.1 times in Q2 versus 2.4 times in Q1, due to the lower risk-bearing loan balance.
Speaker #2: We expect to see leverage ratio fluctuate around this level in the near future. We generated approximately $1.09 billion in cash from operations in Q2, compared to $2.1 billion in Q1.
Speaker #2: Total cash and cash equivalents and short-term investments were $10.63 billion in Q2, compared to $10.79 billion in Q1. In Q2, we aggregate repurchased approximately 463,000 of our ADS in the open market for a total amount of approximately $7 million US.
Speaker #2: Inclusive of commissions, at the average price of $15.19 per ADS. We suspended the repurchase in late June due to the sudden outbreak of the liquidity crisis at some peers that triggered an industry-wide liquidity squeeze and panic.
Speaker #2: In accordance with our current dividend policy, our board has approved a dividend of USD 23 cents per class A ordinary share or USD 46 cents per ADS for the first half of 2026 to holder of record of class A ordinary share and ADS as of the close of the business day on September the 9th, 2026, Hong Kong time and New York time, respectively.
Speaker #2: The dividend payout ratio is approximately 30%. As we have discussed, given the volatile market environment, serious mishaps among some peers, and intensifying regulatory scrutiny, we continue to face heavy headwinds in the coming quarters.
Speaker #2: We believe the top priorities for the company and the management at this point in time are to mitigate risks, streamline operations, cut costs, and support strategic initiatives.
Speaker #2: Meanwhile, we may need to build additional financial buffers in the intermediate term to counter any unexpected industry volatility. In the long run, though, we still believe that optimized capital allocation is key to driving long-term value for the company and stakeholders.
Speaker #2: Finally, regarding our business outlook, given the macro and regulatory headwinds, we will take an extra cautious approach in business planning for the rest of 2026.
Speaker #2: For the third quarter of 2026, the company expects to generate non-GAAP net income between RMB 400 million and RMB 500 million, representing a year-on-year decline of between 67% and 73%.
Speaker #2: This outlook reflects the company's current and preliminary view, which is subject to material changes. With that, I would like to conclude our prepared remarks.
Speaker #2: Operator, we can now take some questions.
Speaker #1: Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2.
Speaker #1: If you are on speakerphone, please pick up the handset to ask your question. For those who can speak Chinese, please start your question in Chinese, followed by an English translation.
Speaker #1: To allow enough time to address everyone on the call, please keep it to one question and one follow-up. Then, return to the queue if you have more questions.
Speaker #1: Thank you. The first question comes from Richard Zhu with Morgan Stanley. Please go ahead.
Speaker #3: 感谢这个第一个提问的机会。想问两个问题。一个就是刚才海生总还有许总都说到了流动性的一个收紧的状况。想问一下，公司在三季度又采取了哪些措施来控制资产质量？我们预期vintage——two questions. One is on the liquidity in third quarter. Essentially, the company has taken what measures to control the credit quality? And what is the expected vintage loss increases?
Speaker #3: And also, are there room in the provisions to cushion the impact? Second is, given the tightening of the collection policies, what's the expectation of the recovery ratio?
Speaker #3: And what are the measures the company has taken to mitigate the problems? Thank you.
Speaker #4: Okay, thank you, Richard. I think both of the questions are regarding risk management and the collection issue, so I'll pass it over to Mr. Chen Yen.
Speaker #4: I'll see how.
Speaker #3: 好的。这一轮风险上升确实是因为行业极端事件引发的一系列连锁反应。叠加7月底开始全国的催收行业整治所带来的一个双重影响。7月初开始，金融机构的风险偏好明显。我们看到明显的收紧。全行业普遍资金短缺。资质不足的小平台更是面临了资金枯竭的局面。8月资金会进一步的收紧。到目前为止，我们依然没有看到好转的趋势。同时目前正在全国范围内开展的针对催收行业的相关整治工作也导致了催收资源的极度紧张。对于回收效率也有比较明显的影响。这个是全行业的普遍情况。
Speaker #1: Okay, I will briefly translate for Mr. Chen. The current uptake in risk was indeed triggered by a chain reaction set of, by well-known industry incidents.
Speaker #1: Compounded by the nationwide crackdown on the collection industry that began in late July. Since early July, financial institutions have visibly tightened their risk appetite.
Speaker #1: This has led to a widespread funding shortage across the industry. Smaller platforms with weaker qualifications have faced even more severe funding constraints. Funding conditions tightened further in August and have shown no sign of improvement to date.
Speaker #1: At the same time, the ongoing nationwide regulatory campaign targeting the collection industry has created severe shortages in collection capacity, with a notable impact on recovery efficiency.
Speaker #1: This is a challenge faced universally across the industry.
Speaker #3: 从风险指标角度来看，7月份整体风险表现相对稳定。CMI跟6月份相比相差不大。进入8月后，风险水平开始出现上升。从8月份已有的表现的早期风险指标FPD-3和FPD-7来看，环比7月份上升了20%左右。我们预计8月份的CMI环比会上升大约25%。我们基于和同业的一些交流，大部分平台的风险在8月份都出现了跳升的现象。近期都在积极调整风险策略。不过目前风险表现的时间还是有些短。未来一段时间还需要结合市场环境变化和实际回收情况进一步判断最终的风险水平。
Speaker #1: On the risk front, overall performance remains relatively stable in July, with CQM-2 remaining largely flat compared to June. However, risk levels began to rise in August.
Speaker #1: Based on early-stage risk indicators, for FPD-3 and FPD-7 in August, we have seen an increase of approximately 20% month over month. We expect CQM-2 for August to increase by roughly 25% sequentially.
Speaker #1: Based on our discussions with peers, most platforms experienced a sharp spike in risk in August and have been actively adjusting their risk strategies. That said, the observed risk trends are still relatively short-term in nature.
Speaker #1: And we will need more time to assess the ultimate risk level, taking into account evolving market conditions and actual collection performance.
Speaker #3: 因此对风险进行控制是我们近期工作的重中之重。基于对市场环境的动态观察，我们逐步从6月底、7月初的预防性收缩升级到8月份的加速收紧。我们从风控策略和带后管理方面迅速做了一些部署。
Speaker #1: As such, risk management has become our top priority in recent months. Based on our ongoing monitoring of evolving market conditions, we have progressively escalated our response from a precautionary tightening stance in late June to early July, to an accelerated tightening approach in August.
Speaker #1: We moved swiftly to deploy measures across two key areas: risk strategy and post-loan management.
Speaker #3: 风控策略方面，我们会进一步加强高风险客群的识别，重点关注多平台共债、腰尾部平台暴露、流动性断裂，以及频繁短余收入不稳定等风险客群。加快了短期风险模型的一些迭代速度，将重点模型更新的频率由原来的月度提升至周度的一个频率，提高对风险拐点客户的识别能力。同时我们会全面收紧新增资产，优化客户结构，分别会从经营、交易和资产分发环节压降风险敞口，降低额度收紧交易批核率，并提高善表和住贷资产的一些准入门槛。后续将持续观察新增资产的FPD-3、FPD-7，以及存量的DPD-7及不同客群和渠道的一些风险分化情况。如果指标未见企稳，我们计划于8月底至9月初进一步加码专项客群的准入和资产分发的收紧。
Speaker #1: In terms of risk strategies, we will further strengthen the identification of high-risk customer segments, with a particular focus on those exhibiting multi-platform borrowing and exposure to mid- and lower-tier platform distress.
Speaker #1: Liquidity strain, frequent short-term delinquencies, and unstable income profiles. We will accelerate the iteration of our short-term risk models, increasing the update frequency of key models from monthly to weekly to enhance our ability to identify inflection points in customer risk behavior.
Speaker #1: At the same time, we are tightening underwriting standards across new originations and optimizing our customer mix. We are reducing risk exposure across three dimensions: customer engagement, transaction approval, and asset distribution.
Speaker #1: By lowering credit limits, tightening approval rates, and raising the bar for both off-balance-sheet and capital-heavy loan facilitation assets. Going forward, we will continue to monitor early-stage risk metrics, such as FPD-3 and FPD-7 for new loans, as well as DPD-7 for existing portfolios.
Speaker #1: While tracking risk divergence across different customer segments and channels, should these indicators not stabilize, we plan to further tighten segment-specific screening criteria and asset distribution controls by late August to early September.
Speaker #3: 带后管理方面，我们短期将优先稳定在岗人力和回收产能，优化案件分配，控制入吹率回收率，防止进一步恶化。针对高共债、重复入吹、C-squared高风险等客户，我们会提前人工介入，并且配置纾困方案。中期我们会通过智能协商、差异化纾困和带前带中带后的联动，逐步形成兼顾回收和合规的产能化的带后能力。然后拨备这一块请CFO可以补充回答一下。
Speaker #1: On the post-loan management front, our near-term priority is to stabilize staffing and collection capacity, optimize case allocation, and prevent further deterioration in both delinquency inflow and collection rates.
Speaker #1: For high-risk segments, such as those with significant multi-platform borrowing, repeat delinquencies, or high-risk scores from our collection scorecard, we are intervening early with dedicated personnel and offering relief plans.
Speaker #1: Over the medium term, we aim to build a sustainable post-loan management capability that balances recovery performance with regulatory compliance through intelligent negotiation tools, differentiated relief solutions, and closer integration between pre-loan and post-loan processes.
Speaker #1: And now, I will pass over to the CFO for the questions regarding provisions.
Speaker #4: Okay. On provision, given the current market conditions, the volatility, and the significant challenges to asset quality, we have maintained a very prudent provision approach, right?
Speaker #4: In Q2, as I mentioned, new provision as a percentage of risk-bearing loans reached a historical high at approximately 5.4%. As you may know, our normalized risk control target is to keep the venture loss largely within the range of 3.0% to 3.5%.
Speaker #4: And historically, we only have two quarters to breach that level to be around 4%. So basically, even under the most extreme assumptions, we believe our current provision levels are more than sufficient to cover potential losses in any dramatic industry or market events.
Speaker #4: Okay. Operator, next one.
Speaker #1: The next question comes from Alex Yu with UBS. Please go ahead.
Speaker #5: 感谢给我这个提问的机会。我这个问题想请教我们现在7到8月份所看到的一个新增贷款的volume的一个run rate大概环比是一个什么水平。然后这个环比我估计是下降的。那这个主要的原因是应该归因于资金瓶颈的一个供应的一个瓶颈，还是说自身风险偏好的一个收缩？那我们是就是鉴于这近期行业的一个风险事件吧，我们是应该把Q3当前的一个run rate当做一个暂时性的冲击吗？那如果后续我们确实看到一些资金的恢复，后续我们是否应该期望有一定的一个回暖？ So I'll translate from a question. So what's the current loan volume run rate for your July and August? So how much does it decline from the Q2 level?
Speaker #5: And was this decline largely due to the shortage of funding supply, or is it more due to your prudent risk appetite control? And so, should we take this as a temporary shock, given the ongoing industry difficulties?
Speaker #5: And let’s say, if we do see the funding supply getting normalized afterwards, should we expect this loan volume to somehow recover to your Q2 level?
Speaker #5: Thank you.
Speaker #4: Okay, Alex, let me take this one. In terms of loan volume, starting in July we saw a significant tightening of industry-wide funding supply. Our ICE business was the most affected segment.
Speaker #4: The capitalized model experienced a minor impact, while funding for unbalanced sheet and capital-heavy loans remained relatively ineffective. The liquidity issue caused about a 10% direct impact on our loan volume in July.
Speaker #4: At the same time, given early signs of customer co-borrowing and the liquidity stress, we also proactively tightened some risk exposure. Combined, these factors led to a 15% decline in July loan volume.
Speaker #4: In August, ICE funding tightened further, while funding for off-balance sheet loans and capital-heavy and capitalized loans remained sufficient. However, given our own risk performance and our assessment of the current market environment—including liquidity pressures and constraints on collection resources—we decided to adopt a more conservative risk strategy and tightened further from July.
Speaker #4: As risk optimization takes time, we expect to remain cautious on origination throughout Q3. So, the volume decline in July was partly due to funding availability, while the pullback in August and September is more about our own risk appetite tightening.
Speaker #4: As a leading platform, we have more diversified funding. Stronger risk performance and regulatory-aligned pricing give us far greater funding resilience than most peers.
Speaker #4: Based on past experience, risk optimization typically takes two to three quarters, so we don't expect loan volume to return to Q2 levels anytime soon.
Speaker #4: On the funding side, with regulatory uncertainty still there and the shakeout of smaller players still ongoing, we will stay cautious and prioritize asset quality in the near term.
Speaker #4: We will revisit growth after the industry environment stabilizes. Thank you.
Speaker #1: Operator: The next question comes from Emma Hsu with BFA Securities. Please go ahead.
Speaker #3: 谢谢给我这个提问的机会。我这边就有一个问题，就是在目前这个行业盈利环境下行、叠加监管约束增强的情况下，公司的股东回报政策是否会有调整？So, given the deteriorating industry environment coupled with tightening regulatory constraints, will the company adjust the shareholder returns policy?
Speaker #4: Okay, Emma, I will take on this one. While we are still generating decent earnings and solid operating cash flow, the ongoing industry adjustment has clearly put pressure on our profitability and the cash flow for the next few quarters.
Speaker #4: In the near term, as regulatory uncertainty lingers and market volatility intensifies, we have established a clear set of priorities in terms of capital allocation.
Speaker #4: Our first and foremost priority is to weather the storm and safeguard both the safety of the company and the company's long-term operational stability.
Speaker #4: In addition, we will continue to allocate resources to our long-term strategic initiatives. And of course, in the long run, we still intend to maintain a reasonable shareholder return policy.
Speaker #4: And going forward, as the industry and the regulatory environment evolve, we will continuously assess and optimize our capital allocation strategy based on our sustainable, normalized earnings and cash flows.
Speaker #4: Thank you.
Speaker #1: The next question comes from Cindy Wang with China Renaissance. Please go ahead.
Speaker #3: 谢谢管理层给我这个提问的机会。我这边有个问题想请教，就是能否请管理层帮我们理解一下 Q3 guidance 背后的主要假设？这些关键指标的变化背后的驱动因素是什么？以及管理层如何看待这些指标的长期趋势？我这边很快翻译一下。Thanks for taking my questions. I have one question. Could management tell us the main assumptions behind the Q3 guidance, and what are the key factors behind the changes?
Speaker #3: And how does management view the long-term trends of these metrics? Thank you.
Speaker #4: Okay, Cindy, I will take this one as well. In Q3, we are obviously operating in a very highly volatile market environment. Funding supply across the industry has become extremely tight, with severe liquidity pressure on market players.
Speaker #4: The implementation of multiple new regulatory policies is also adding operational uncertainty. At the same time, a wave of small platforms is facing accelerated exiting due to funding depletion and deteriorating asset quality.
Speaker #4: Further amplifying the market volatility. In such an environment, I think we must remain highly disciplined—risk control and efficiency come first, and growth takes a backseat, okay?
Speaker #4: For Q3, in terms of loan volume, we are assuming a meaningful decline from Q2 as we have tightened our risk control measures significantly in this challenging market condition, okay?
Speaker #4: However, given the liquidity pressure and the impact of the ongoing regulatory campaign on collections, and the fact that the major platforms are all pulling back at the same time, we still expect the C-M2 for Q3 to rise noticeably from the Q2 level.
Speaker #4: On provisions, as I mentioned earlier, we will continue to take a prudent approach to reflect actual risk performance and the changes in the market dynamic.
Speaker #4: And in terms of funding cost, we have already seen external funding costs increase by around 25 basis points in July and August. We expect the recent risk volatility to heighten our funding partners' concerns and further tighten the funding supply.
Speaker #4: At the same time, some institutional investors have become more risk-averse in their ABS subscription. As a result, we anticipate overall funding costs will trend up in the second half of the year.
Speaker #4: And we take a more conservative approach to customer acquisition, as Hashim mentioned earlier. Rather than pursuing volume, we will focus on sharpening acquisition efficiency, improving customer quality, and enhancing user lifecycle value.
Speaker #4: Over the past two months, nearly every key element of our business has changed dramatically—and all in ways that interconnect with each other and are hard to untangle.
Speaker #4: This is not a company-specific issue. It's an industry-wide phenomenon making our operational environment far more complex. That said, as industry consolidation plays out, we expect consolidation conditions to normalize, and most of these factors to come back to their normal trajectory over the course of the next few quarters.
Speaker #4: Thank you.
Speaker #1: The next question comes from Yo-Yo Fan with CICC. Please go ahead.
Speaker #3: 好的。感谢管理层给我这个提问的机会。我是中金公司分析师樊宥宥宥。那我这边的话两个问题想要请教一下。一个的是我们看到橘子事件之后行业内很多的中小平台出现资金短缺，也想请教一下公司可能怎么去理解和看待现阶段的一个市场竞争环境。那在这么一个背景下，公司是如何去考虑下半年的一个获客和增长的策略？第二个问题的话是因为近半年来的话，其实我们看到国内的运营环境也发生了比较大的一个变化，也是想要请教一下管理层是否考虑去进一步的加速海外战略的一个推进，能分享一下当前海外市场的一个最新进展。那我这边快速翻译一下。Thanks for taking my questions. This is Yo-Yo Fan from CICC. Two questions, Hale. Firstly, let us more to medium platforms and now failing liquidity pressure.
Speaker #3: So, how do you view the current market environment and the competitive landscape? And what's your customer acquisition and growth strategy for the second half of the year?
Speaker #3: Secondly, we have seen quite big shifts in the domestic operating environment over the past six months. How do you consider building up the overseas strategy?
Speaker #3: Could you walk us through the latest updates on the overseas markets? Those are my two questions. Thank you.
Speaker #4: Okay, thank you, Yo-Yo. Let me take both as well. In terms of competition, the well-known incident has tightened industry funding and driven acquisition spending down across the board.
Speaker #4: Industry-wide spending fell nearly 15% month over month in July, with another 20% in August. Today, only a handful of platforms, including us, are still spending meaningfully.
Speaker #4: Most peers have pulled back sharply, and long-term players are even leaving the market. So purely on acquisition cost and spending intensity, market competition has clearly moderated compared to the past.
Speaker #4: From our perspective, however, liquidity remained tight. Regulations are still evolving, and the quality of new customers also requires ongoing monitoring. We are therefore focusing on the actual return from acquisition spending.
Speaker #4: At this stage, we placed greater emphasis on the returns from our acquisition spending. Rather than simply pursuing new customer volume, we aim to enhance the long-term value generated by each dollar spent on acquisition.
Speaker #4: While maintaining a disciplined approach to risk, on execution, we are bidding differently by user risk and value, prioritizing higher LTV users while keeping acquisition cost in check.
Speaker #4: We are also improving user experience and engagement to lift retention and repeat rate. On the API channel, we are reallocating resources dynamically based on profitability.
Speaker #4: Cutting back on long-tail channels with weaker quality and stability to build a safety margin. Following our adjustment in the first half of the year, our API channel improved by more than 1 percentage point.
Speaker #4: Further strengthening the resilience of our overall business against market volatility. Looking into the second half, we expect industry adjustment and the exit of weaker platforms to continue for some time.
Speaker #4: Our near-term focus is therefore to strengthen the fundamentals of our business, improve our customer and channel mix, as well as enhance the efficiency of our funding machine.
Speaker #4: Over the longer term, we believe the industry will become healthier after this round of adjustment, and market share is likely to become increasingly consolidated among leading platforms.
Speaker #4: For us, this is not only a process of refining our business structure, but also an opportunity to further strengthen our competitive position. Once the market becomes more sensible and competition returns to a normal level, we will be well-positioned to adjust our market spending in a timely manner and capture new growth opportunities.
Speaker #4: And for your second question, in terms of overseas expansion, we have made steady progress in Europe and Latin America, deepening market knowledge, localizing risk models, and balancing growth and risk through diversified business models.
Speaker #4: In Latin America, our self-built model are already showing encouraging early results. And we are iterating on models and user selection strategy. In Europe, we have deployed our own models and are leveraging local credit bureau and open banking data to sharpen risk detection in Southeast Asia and other high-potential markets.
Speaker #4: We are advancing license-building teams and exploring partnerships in every overseas market. We treat regulations and risk with deep respect. We also know that risk model validation and unit economics refinement take time.
Speaker #4: We are still early in all these markets. With more teams, more capital, more listed team tests, and learning on business model, customer acquisition, and risk control, working risk-reward closely as we prove our capabilities.
Speaker #4: We will bring in external funding to reduce the burden on our own balance sheet. For us, overseas expansion is a long game, and I think we have enough patience.
Speaker #4: That's all. Thank you.
Speaker #1: There are no further phone questions at this time. I'll now hand it back to management for closing remarks. Please go ahead.
Speaker #4: Okay. Thank you again for joining us. If you have additional questions, please reach out to us offline. Thank you.
Speaker #5: Thank you.
