Q1 2024 Lufax Holding Ltd Earnings Call

Participants

Xinyan Liu; Head of Board Office and Capital Markets; Lufax Holding Ltd

Yong Suk Cho; Chairman & CEO; Lufax Holding Ltd

Gregory Gibb; Director & Co-CEO; Lufax Holding Ltd

David Chou; CFO; Lufax Holding Ltd

Himanshu Agrawal; Analyst; Bank of America

J.C. Qian; Analyst; Morgan Stanley & Co LLC.

Yada Li; Analyst; China International Capital Corporation Limited

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Lufax Holding Limited First Quarter 2024 earnings call. At this time, all participants are in a listen only mode. (Operator Instructions) Please note this event is being recorded.
Now I'd like to hand the conference over to your speaker host today, Xinyan Liu , the company's Head of board office and capital markets. Please go ahead, madam.

Xinyan Liu

Thank you very much, operator. Hello, everyone, and welcome to our first quarter 2024 earnings conference call. Our quarterly financial and operating results were released by our newswire services earlier today and are currently available online. Today, you will hear from our Chairman and CEO, Mr. Yong Suk Cho who will provide an update of the macro-economic trends and the recent developments in strategy of our business.
Our Co-CEO Mr. Gregory Gibb will then go through our first quarter results and provide more details on our business priorities. Afterwards, our CFO, Mr. David Choy, will offer also look into our financials before we open up the call for questions. Before we continue, I would like to refer you to our safe harbour statement in our earnings press release, which also applies to this call as we will be making forward-looking statements.
With that, I'm now pleased to turn over the call to Mr. Yong Suk Cho, Chairman and CEO of Lufax. Please.

Yong Suk Cho

Thanks for joining today's call. In the fourth quarter, we do see improvement in our early lead indicators. However, high quality loan demand from small business owners remained subdued. While (inaudible) can support just stemming from our 100% guarantee model means we'll be prudent and patient in new business development and our emphasis has to be on quality over quantity.
Before diving into business performance, let's take a look at the macro environment. Overall, the environment showed signs of improvement during the fourth quarter. The Purchasing Managers' Index or PMI, which measures prevailing trends in the manufacturing and service industries. What trended positively? The index increased from 49 in December, December 2023 to 15.8 in March 2024 for many (inaudible)
While moving from 49.3 or (inaudible) 52 for services. Despite improvement in the macro environment, the SBO segment recovered at a relatively slow pace. For example, the SME development index published by the China Association of Small and Medium Enterprises was RMB89.3 for the fourth quarter of 2024 compared to RMB89.1 for the fourth quarter of 2023 and RMB89.3 for the first quarter of 2023.
Now regarding these development. As discussed in our fourth quarter earnings call, in 2023, we've completed five major de-risking and diversification actions, including for mix changes and (inaudible) adjustment. Thus far, these actions have yielded signs of improvement in asset quality. Although we believe operational prudence remains critical to ensure long-term growth and sustainability.
During the fourth quarter, total unit sales decreased by 15.6% year on year, mainly due to weak quality loan demand from SBOs and our own emphasis on prudent operations. As we shifted our focus from SBO loans to a more diversified approach. US sales of our consumer finance business grew to RMB20.3 billion in the first quarter, representing an increase of 46% year over year.
On the other hand, (inaudible) continued to face pressure from a lack of high quality as your loan demand and decreased by 35.5% year over year. As mentioned previously, we successfully completed the transition into our 100% guarantee-based model for the pool business by the end of third quarter 2023. Starting from fourth quarter of 2023, all the new rules were either created by our consumer finance subsidiary as on-balance sheet loans were enabled by our guaranteed company under the 1% risk, they'll be smaller.
As a result, our risk-bearing increased from 39.8% of the total outstanding balance as of the end of 2023, 48.3% as of the end of the first quarter 2024. While the switch 200% automotive will exert a positive impact on our take rates as it alleviates the federal elevated CGI premiums, our profitability will take longer time to recover due to higher upfront provisioning.
Now let's turn to asset quality. As the successful execution of our de-risking of the customers, the mix of segments and products, region, channel and industry, together with improvements in the macro environment and removal of short term negative impact caused by restructuring of our direct sales and branches, we do see improvements in our all in these indicators in the first quarter.
So sequentially, flow rate for poor business decreased from 1.2% in the fourth quarter of last year to 1%, 1.0% in the first quarter of this year. The NPL ratio of our consumer finance loans also remained stable. While we are pleased with such improvements in asset quality, we are taking of patience and prudent approach to ensure this success is sustainable.
In terms of broader strategy, we are pleased to announce that we completed acquisition of Ping An One Connect bank in early April. As part of our strategic initiative to leverage on store licenses, these licenses have the potential to underpin a more expanded set of service offerings, allowing us to provide more dining services and to further diversify our business.
I would also like to provide an update on the special dividend arrangements that we announced earlier. On March 21, we announced a special dividend plan of USD2.42 per ADS, a USD1.21 per ordinary share. This special dividend remains subject to shareholder approval at the Annual General Meeting or AGM, which will be held on May 30, 2024. The record date for the annual general meeting is April 9, 2024.
To sum up, in the fourth quarter, we encountered preliminary improvements in asset quality which demonstrate that our derisking and diversification initiatives are starting to bear fruit. Despite this, we remain we maintain a prudent approach in our operations as we see a continued weakness in high-quality SBA loan demand.
Last but not least, our CFO, David will resign for personal reasons with an effective date of April 30. David has been with the company for nearly six years, and we thank him for his tremendous contributions to the company. We have appointed Zhu Peiqing as our new CFO. We assume the CFO role effective from April 30, Peiqing has extensive experience in finance industry, especially in audit and financial management. We look forward to his onboarding and future contributions.
I will now turn the call over to Greg to share more details in our operating results.

Gregory Gibb

Thank you, Yong. I will now provide more details on our first quarter 2024 results and our operational focus for this year. Please note, all figures are in RMB unless otherwise stated. Let's begin with an overview of our first quarter performance. During the quarter, ongoing weakness in demand for high-quality loans from SBO small business owners, combined with our continued emphasis on operational prudence weighed on new loan sales.
New loan sales in the first quarter were RMB48.1 billion, representing a 15.6% year on year decline. Among the total new loan sales, 42% were contributed by our consumer finance business. This is up from approximately 24% in the same period last year. Revenue in the first quarter was RMB7 billion, a decrease of 30.9% year over year. The decline was mainly due to the decreases in our new loan sales and outstanding loan balance and was partially offset by our increased take rate as more of our book comes from the 100% guarantee bottle.
Our net loss for the first quarter was RMB830 million, mainly due to increased tax associated with the special dividend. On a pretax basis, Lufax was marginally profitable in the first quarter. Earnings before tax were RMB447 million in the first quarter of 2024, which compares to RMB1.1 billion in the same period for last year.
For this quarter, pretax profitability remains relatively under pressure as a result of declining loan balances and new business being loss-making in the first 12 months due to upfront provisioning under the 100% guarantee model.
Partially offsetting these pressures were continued improvements in cost structure, reduction in credit costs and continued strength in our later stage recoveries. As why as mentioned earlier, we witnessed the impact of our de-risking and diversification initiatives on our asset quality during the first quarter of 2024, I will now walk through our operating metrics and how they've evolved in light of these strategic changes.
First, in terms of product mix, we saw our consumer finance segment continued to grow. In the first quarter. Consumer finance sales accounted for 42% of new loan sales, up from 24% in the same period last year. Concurrently, the proportion of unsecured loans and secured loans decreased to 37% and 21% respectively, from 48% and 28% last year.
In light of these changes, we have seen a gradual ongoing shift in our balanced mix. Consumer finance balances as a percentage of our total balance reached 14% as of March 2024 compared to 6% at the end of March '23. Meanwhile, the proportion of unsecured loans decreased to 64% from 72% at the end of March 2023, while the proportion of secured loans has largely remained flat.
In terms of our business model, we continue to build up a roster of new loans under the 100% guarantee model. As we previously mentioned, this has reshaped our portfolio mix and increased our risk bearing. As of the end of the first quarter, 26% of Puhui's loan balance was enabled under our new 100% guarantee model and our risk-bearing by balance has grown to 48.3% as of the end of the first quarter, up from 39.8% as of the end of the fourth quarter of 2023.
We also kept our focus on prioritizing sales in more economically resilient regions. In terms of our channel, we maintained our emphasis on excellence within the direct sales team, which continues to be our major sales channel and contributes the majority of our new loan sales.
Next, our asset quality, our overall C-M3 improved to 1% from 1.2% in the fourth quarter of 2023. This was mainly due to improvement in the macroenvironment removal of temporary negative impact from our geographic and direct sales restructuring in the third quarter and the vintage runoff as we build up a new book. While we observed improvement in C-M3 ratio during the first quarter, we remain cautious about the future sustainability of this trend. Given this and considering our heightened risk exposure, we will continue our prudent strategy of prioritizing quality over quantity during 2024.
Now let's take a more detailed look at our unit economics of the prepaid business. During the quarter, funding costs remained stable. In addition, our overall APR decreased slightly to 19.7% as we maintained our focus on higher quality customers. Our take rate based on loan balance has risen to 9% from 7.3% for the first quarter as loans under 100% guarantee model comprises a slightly higher percentage of the total loan balance.
While we anticipate that loans under the 1% guarantee model will be lifetime profitable is important to note that these loans may incur accounting losses in their first calendar year due to a standard but higher upfront set of provisions. Under our projected business scale, we believe we have a strong balance sheet to support the business, its operations, capital, and liquidity requirements.
At the end of the first quarter of 2024, our guaranty subsidiaries leverage ratio was 2.4 times, mainly driven by the increase of our guarantee balance associated with our increased risk exposure and the decrease of net assets due to the distribution of the special dividend. Our consumer finance capital adequacy ratio stood at approximately 15.1%, well above the required 10.5%. As for our balance sheet, we hold debt assets of RMB92.8 billion with our cash at bank balance amounting to RMB39.4 billion at the end of the quarter.
I'll now turn over the call to David, our CFO, for more details on our financial performance.

David Chou

Thank you, Greg. I will now provide close look into our fourth quarter results. Please note that all numbers are in RMB terms and all company -- all comparisons are on a year-over-year basis unless otherwise stated.
As Yong and Greg have mentioned, our performance was still impacted by broader economic conditions that have been exerting pressure on the small business sector for this period by strategically shifting to a 100% guarantee model with higher tech rate, higher quality customer segments and more favorable geographical regions. We opted to forgo some of our business scale with the aim of enhancing the quality of our future loan portfolio which we believe is an important for the long list for the company.
Our strategic transition unavoidably led to continued declines in our average loan balance and total income. Meanwhile, the expected credit loss provisions, which must be accounted for upfront on the first day, amplified accounting loss in the early stages of the product life cycle under the new business model.
In the first quarter of 2024, our total income was RBM7 billion, representing a decrease of 30.9%. During the quarter, our technology platform-based income was RMB2.6 billion, representing a decrease of 49%. Our net interest income was RMB2.8 billion, a decrease of 15%, and our guarantee income was RMB2.92 billion a decrease of 34.7%. All are basically in line with the decrease of outstanding loan balance in which guarantee income decreased by less similar two due to the offsetting effect of an increase in risk borne by the company.
Turning to our (inaudible), we remain committed to cost optimizations. I want to highlight that our total expenses is excluding credit losses, finance courses and other losses decreased by 37% year over year to RMB3.6 billion this quarter as we continue to enhance operational efficiency. This 47 magnitude of decrease in expense is greater than that of the 30.9% decline in the total income.
Let's highlight just a few of the key expense items. Our total sales and marketing expenses which mainly include expenses for our acquisition costs as well as general sales and marketing expenses decreased by 50% to RMB1.5 billion in the first quarter. The decrease was mainly due to decrease in nonrecurring expenses as a result of a decrease in new loan sales and decreased retention expenses as well as reform expenses from platform services attributable to the decrease transaction for them.
Our credit impairment losses decreased by 8.6% to RMB2.9 billion in first quarter, primarily due to the decrease in provision of loans and receivables as a result of the decrease of loan balances and improved asset quality.
Our finance costs decreased by 69.3% to RMB58 million in the first quarter from RMB189 million in the same period of two to three, mainly due to the decrease of interest expense as a result of the payment of cedron convertible promissory notes and other debts, and partially offset by the decrease of interest income from bank deposits.
The key item in this quarter is really the income tax. Whilst we achieved free profit pretax profit of roughly RMB447 million in the first quarter. Our income tax expenses increased to RMB1.3 billion from the first quarter from RMB2.4 billion in the same period of two to three. This is mainly due to the increase in withholding tax associated with one-off dividends that were paid by our PRC subsidiaries in order to support the potential distribution of the special dividend we announced on March 21, 2024.
As a result, net loss for the first quarter was RMB830 million compared with net profit of RMB732 million in the same quarter 2023. Meanwhile, our basic and diluted loss per ADS during the first quarter are both going to be $1.52, $0.21.
Turning now to our balance sheet. As of March 31, 2024, we had net assets of RMB92.8 billion and a cash balance of RMB49.4 billion. In terms of capital as of the end of March 2024, the two main operating entities were well capitalized. Our guarantor subsidiaries leverage ratio increased to 2.4 times as driven by the increase of our guarantee policy associated with our increased risk exposure and also the decrease of net assets due to the dividend upstream to the parent companies.
And our consumer finance company capital adequacy ratio well stood at approximately 15.1% and well above the required 10.5% rectory requirement. All these factors provide significant support for the company navigate through the evolving macroeconomic landscapes and the business transition period while laying the groundwork for us to continuously rewarding our interests in the future.
That concludes our prepared remarks for today. Operator, we are now ready to take questions.

Question and Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions)
Himanshu, Bank of America Securities.

Himanshu Agrawal

Thank you for giving me the opportunity to ask the first question. I have two, actually. So my first question is about your special dividend. Could you give us more update on the progress of your special dividend. So with the incurred tax, I guess the money should have been offshore and what's the progress of these special dividend distribution? And now in the longer term, do you have any midterm plans for your future shareholder returns after this special dividend.
And my second question is for your asset quality. So I do notice that your flow rate and your 30-day delinquency rate, they achieved a notable decline in the first quarter. So do you think this improvement of the asset quality is sustainable into the coming quarters and there which can also lead to lower impairment losses in the coming quarters. Thanks.

Yong Suk Cho

Okay, thank you. This is Yong speaking. So your first question about special dividends. We announced specialty plan on March 21, and we also announced on March 25, the shareholders of [records] at the close of June 4, 2024, will be entitled to receive this special dividend. But it is still subject to shareholder approval at the AGM Annual General Meeting, which will be held on May 30. And our long-term dividend policy remains unchanged, which is about 20% to 40% of the annual net profit.
And then the second question about asset quality improvement. Yes, , we see that C-M3 net will improve in fourth quarter down to 1.0% from 1.2% in the last quarter of 2023. We believe our de-risking efforts taken in 2023 does gradually come into effect such as credit policy tightening, underwriting process and then sales control measures strengthening, segment mix optimization and channel optimization and so forth and also as Greg explained the concentrated impact from geographic risk trained the source last year, debt has been gradually fading away and also our new portfolio will be from 2023 now with better quality, with our high related party debt portion, we take gradually larger part of total loan balances.
So [televised]to help us to improve going forward. However why we absorbed this improvement in the sort -- in terms of the net flow in the fourth quarter, we still remain very cautious about the future sustainability of this trend. And we have continued to take a prudent action and approach considering our higher risk exposure under this wanted to push and get into more there.

Himanshu Agrawal

Very clear. Thank you so much.

Operator

J.C. Qian

J.C. Qian

Hi good morning. Thanks, management. This is Qian from Morgan Stanley. I'm really happy to see some early improvement on the risk indicator and the pretax profitability in the quarter. So I have two questions. One is on the asset quality; we can see there's some early improvement. What's the management view on the loan growth into the rest of the year? This one.
And the second question, just on the unit economics and how you manage the expected to evolve as we transition to 100% of our guarantee model. Could you -- I am on management discuss this a little bit during the previous talk. Frank, could you give more color and more detail color on the unit? Thank you.

Gregory Gibb

Thanks. Greg here responding. So we've seen the improvement as YS just outlined, which is clearly good news. In terms of demand by customers, particularly of the quality that we're targeting, that demand is still, to be honest, somewhat subdued, right. So when we look at the first quarter, we haven't seen an uptick, a meaningful uptick in the demand among strong borrowers. So that is really going to drive our continued prudence because we really want to see stronger demand before we would expand it beyond where we are today in terms of volumes.
Obviously, given that we're now transitioning, we have transitioned all new business to the hundred percent guarantee model and more and more of our total book will be the 100% guarantee model. But we do want to observe for a few quarters. So we think as right as we are taking on more risk. So we stick to in terms of the guidance we've given for this year, new loan volume, we expect to be still RMB190 billion to RMB220 billion, which at the end of the year would take us to an ending balance of about RMB200 billion to RMB230 billion.
So that's the outlook remains unchanged. I guess since the last quarter we gave guidance on this. In terms of UE, I think this is really the most important trend also to watch now that we've shifted fully up to 100% guarantee model. As we said, if we look at our loan balance given that more and more is coming from 100% guarantee model, our take rate has increased now to 9% from 7.3%.
And if you look at new business that's now being done under 100% guarantee model, the gross take rate is approaching 14-percentage-points, right? So basically, it's effectively a doubling from where we were a couple of quarters ago as we shift from the CGI model now to more and more under the guarantee model.
So this is a trend that we will expect to continue. So as we move throughout the course of this year, such that more and more of the book is 100% guaranteed model, you should see the overall take rate can converge up to about 14%. And then from there, it's a question of cost management and it's a question of continued improvement, hopefully on the credit quality, which will then drive the bottom line.
We haven't given guidance on that yet, but just to highlight that we know when we do new loans, for example, in 2024 new loans under the hundred percent guarantee model, we do expect them to be lifetime profitable, but we also do expect that in the first calendar year due to upfront standard provisions, they will have a negative P&L contribution, but again, lifetime profitable. So that's our outlook on the unit economics side.

J.C. Qian

Thank you very much.

Operator

Yada Li, CICC.

Yada Li

Hello Management. Thanks for taking my questions. This is Yada with CICC. And my first question is regarding the risk of varying percentage . Since last quarter, the company has completed the transition towards a 100% guarantee model. And looking forward, could you please give us more color on how to view the risk of gearing percentage at the end of this year and in future.
Secondly, I was wondering if you could share more about the outlook for the bottom line. In addition, if possible, can you elaborate more about once we have gone through the transition period, what is the expected margin or the profit take rate for the SME loans?
That's all. Thank you.

Gregory Gibb

Thanks Yada for your question. Let me tackle your first question and then I'll pass the second to grow up to David. They are about 100 % guarantee model transition that started from fourth quarter, the fourth quarter last year that all new loans that we booked were granted by either by consumer finance company as on-balance sheet loans or was granted by our guarantee company under 100% risk bearing this motor.
Right and then loan debt as of the end of fourth quarter [tissue], including safe business loans, the total loan balance for which we are bearing a risk responsibility is 48.3% out of total indebtedness and then which is up from 39.8% from the previous quarter.
And it is 26% of port throughput loan balance that was enabled under our new 100% guarantee model. And then going forward shortly because this is our new model in place. So it is gradually I mean, beyond the portion of our risk bearing balance, we gradually and it continues to go up.

David Chou

All right. So Yada thanks for the question on this quarter, a net loss. And I think as we mentioned before, we did achieve a pretax for this for this quarter. The key item actually affecting this quarter is read on the income tax. Income tax expenses increased to RMB1.3 billion, as you know, in this quarter from RMB7.4 billion in the same period of two to three. This is really mainly due to the RMB1.25 billion withholding tax, which are associated with our cross-border developed trim from the PRC operating entities to the immediate holding company offshore.
So as I mentioned, this cross-border development arrangement is primarily to support the distribution of specialty in Japan at Holdco level that we announced on March 21. And of course, 400 general liquids, the original equipment at offshore. That's my comment was made.

Operator

Thank you. That concludes our question-and-answer session for today. I will now turn the call back over to our management for closing remarks.

Xinyan Liu

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 company's IR team. Thanks again.

Operator

Thank you. This conference is now concluded. You may now disconnect.