360 DigiTech Inc

NASDAQ:QFIN

Earnings Call Transcript 2020-Q1

[Operator]

Good day everyone and welcome to the 360 Finance First Quarter 2020 Earnings Conference Call. [Operator Instructions]

At this time, I’d like to turn the conference call over to Ms. Mandy Dole, IR Director. Please go ahead, Mandy.

[Mandy Dole, Director-Investor Relations]

Thank you, operator. Hello, everyone, and welcome to our first quarter 2020 earnings conference call. Our results were issued earlier today and it can be found on our IR website. Joining me today on the call are Mr. Wu Haisheng, our CEO and Director; Mr. Alex Wu, our CFO and Director; and Mr. Zheng Yan, our Vice President.

Before we begin our prepared remarks, I would like to remind you of the company’s Safe Harbor statements in connection with today’s earnings call. Except for any historical information, the material discussed on this conference call may contain forward-looking statements. These statements are based on our current plans, estimates and projections, and therefore you should not place undue reliance on them.

Forward-looking statements involve inherent risks and uncertainties. We caution that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. For more information about potential risks and uncertainties, please refer to the company’s filings with the SEC in its registration statements.

In addition, in this call will also include a discussion of certain non-GAAP financial matters. Please refer to our earnings release, which contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures.

Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB.

I will now turn the call over to our CEO and Director, Mr. Wu Haisheng.

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

Well, I will translate for our CEO. Hello everyone and thanks for joining our earnings call today. The first quarter of 2020 was a highly unusual one, during which the entire fintech industry went through COVID-19 induced extreme stress test. While maintaining a complaint and cautious operations strategy, we successfully passed the test with flying colors, attributing to our high-quality borrower base and the prudent internal management. Furthermore, we returned remarkable progress in every aspect of our business operations, despite the challenging market conditions.

Loan origination volume reached RMB 51.8 billion during the quarter and 25.6% year-over-year increase. Outstanding loan balance increased to RMB 73.1 billion from RMB 72.2 billion in the fourth quarter of 2019. In terms of our financial performance, total revenue reached RMB 3.18 billion for the first quarter. If we exclude the impact of the new accounting standards, non-GAAP net income reached RMB 764 million for the first quarter, one of the most exceptional results we have accomplished since our IPO.

[Foreign Language]

Despite the impact from the pandemic, every front of our operations improved centrally. Next, let me give you an update on the key progress, since our last call.

[Foreign Language]

In terms of risk management, whereas our risk models faced some pressure from the impact of the pandemic, they remained effective and stable. These posted a quick recovery of our underlying asset quality and improving momentum of the D1 delinquency rate and collection rate. Up to present, our D1 delinquency rate has fallen to 6.6%, while our M1 collection rate has increased to above 85.8%. Our M3 delinquency rate, which is a lagging indicator, went up to 2.17% compared to pre-pandemic levels. Nevertheless, this is a remarkable result amid a challenging environment.

We continued to ensure a provisional coverage of four times during the quarter. Thanks to our strong operational and technical capabilities, we managed to provide a full and a transparent industry-leading information disclosure throughout the pre-pandemic and the pandemic period.

[Foreign Language]

In terms of capital-light model and our Platform Services business, for which we take no principal risk, by the end of the first quarter, Platform Services business helped free up accumulated RMB 780 million in operational cash flow. Outstanding loan balance under the capital-light model accounted for 21.2% of total loan book, up from 19.5% in the fourth quarter of 2019. Going forward, our long-term growth strategy will focus on expanding our capital-light model, while cautiously pacing the growth to ensure it aligns well with market dynamics and maximize shareholders’ value.

[Foreign Language]

Well, in terms of operational efficiency, we proactively scaled that for our acquisition activities and continued to cut down sales and the marketing expense during the quarter in response to market change. As a result, acquisition cost for each new borrower with approved credit line fell to RMB 159 from RMB 228 in the fourth quarter of 2019. This drop down in customer acquisition cost was attributable to that, we brought down approval rate under a more prudent risk management strategy. Also, we carried on the diversified strategy in customer acquisition activities in an effort to expand more channels and obtain users with better credit profile.

We have established a cooperation with various high quality channel partners with consumption scenarios such as Hellobike, Xiaomi and ICE. Since we provided more superior user experience, we expect more and more channel partners would welcome our partnership. In terms of existing customer management, a virtual credit card product, called V-pocket, in Chinese, [Foreign Language], which we developed in the past, increasingly contributed to our users thickness in the first quarter.

To elaborate, repeated purchase rate within 30 days, reached 80%, indicating a monthly transaction number of 10 times on average. Additionally, we offered a credit limit upgrade product called, [Foreign Language], in Chinese, which proved to be quite popular and it has accumulated 1.5 million users already. Moreover, we’re launching a product called Intelligent Credit Engine, [Foreign Language] in Chinese, aiming to activate borrowers who has to conduct their first credit draw down on our app. This product proves to be quite effective as well.

In summary, we intend to explore different initiatives to enhance operational efficiencies in every element of our business and boosting their stickiness further. In addition, we have successfully issued three ABS this year so far. The cost of the most recent one reached a coupon rate as low as 4.2% for the senior A tranche, contributing to our further decrease in overall funding cost for our credit driven service to only 7.7% from 8% in the fourth quarter of 2019.

[Foreign Language]

In terms of compliance, as a leading fintech platform in China, we have always adhered to the highest standard in compliance. Together with BAT, JD, Lufax and other platforms, we were among the first batch of companies to receive approval to file our mobile finance app with the National Internet Finance Association of China. Among those on the list, for the mobile app, we were one of the few platforms that is neither a financial institution nor a payment company. Moreover, our 360 Jietiao app has received a Level 3 testing certificate from China’s National Computer Virus Emergency Response Center, the highest level issued by the institution. In particular, our app, received a Level 3 rating for both privacy policy and data security.

[Foreign Language]

In addition, what’s also worth mentioning is that China Banking and Insurance Regulatory Commission, in short CBIRC, for the first time issued a consolidated trust on the guideline of commercial banks online lending business for public comment on May 9, 2020. The draft abounded some one size fits all in previous versions such as regional banks geography constraints and the funding constraint on gross lending. Instead it differentiates consumer finance loan from business loan and sets separate regulatory requirements in terms of credit cap and tender based on characteristic of respective loan product. We believe this will ultimately become the basic law for online lending business in China.

While maintaining a strict regulatory term, this draft further legitimize online lending platforms in terms of business operations, and substantially reduce regulatory overhangs. This marks a significant milestone for China online lending industry and the loan facilitation business. Also it manages the regulative measures and support roll out in a sequential manner. We view this regulation as beneficial to the industry, particularly leading players, as this promotes a more healthy business development environment. The regulatory development is in line with our anticipation.

[Foreign Language]

We always believe that the strict regulatory requirements and the economy downturn pressure would benefit top players led by industry giants, while gradually waiting out more in the media platform that are too weak to compete. This trend known as massive effect has so far been proven in the first quarter. As a booming demand within the consumer finance market continues, we will be well positioned to capitalize on the growing opportunities and will hire more market share with a promising outlook. Hence, we would like to illustrate our full-year guidance of loan origination volume, which is RMB 200 billion to RMB 220 billion.

In the short term, taking into consideration of the gradually recovering markets and the pandemic both in China and globally, our asset quality has always – already entered into a steadily improving momentum as indicated by recent recovering operation data. We will plan and carry out our business operation with cautious optimism for the rest of the year aiming to vigilantly grow lower origination volume and the number of borrowers. This will further boost up both quantity and the quality of our loan portfolios. We remain confident to deliver more outstanding returns to our shareholders in the coming quarters.

[Foreign Language]

Well, I will now hand over to our CFO to – remarks.

[Alex Wu, Chief Financial Officer]

Okay, thank you, Haisheng and thank you, Mandy. Good evening, everyone. Haisheng just shared with you a lot of exciting news about our first quarter and the coming quarters going forward. My part would be a little more boring talking about the new accounting standards. So, please bear with me.

So, we see a very quite unusual quarter compared with the previous ones, not only because of the outbreak of COVID-19, but also the complicated situation by the new accounting standards. So, let me start off by explaining the difference between the new accounting standards we adopted starting this quarter and the new ones, and the migration between this two. Hopefully, we will give you a clear guidance after this remarks on how to read our statements.

As a U.S. listed company, we are required to adopt the new accounting standard ASC 326: Financial instruments-Credit Losses from this year. In consequences, our results this quarter are not directly comparable with previous quarters on a like-for-like basis. In consideration of helping all stakeholders better understand the impact of the new accounting standards as well as provide a more accurate reflection of our business and financial performance, I would like to spend some time working you through how the new accounting standards have impacted our financial statements.

As we provide guarantee services for Credit Driven Services business, at the inception of each loan we estimate expected guaranteed revenue and recorded contingent guarantee liabilities with provisions for the potential credit losses. Under the old accounting standards, provision for the above mentioned guarantee liabilities and the guarantee revenue are net out directly on the very first day of loan inception. However, under the new accounting standards, guarantee revenue is required to be recognized at amortized schedule through a loan life cycle, whereas provision for this contingent guarantee liabilities remain to be recorded as a whole at Day 1.

Two key points to emphasize here, first, the amortized recognition of the guarantee revenue is not related to the actual credit loss after the loan. To put it in a plain way, even if the loan eventually becomes defaulted, guarantee revenue will still be recognized by each installment as originally scheduled. The credit losses are accounted for by adjusting provisions and guarantee liabilities.

Second, from the perspective of asset quality, the old and the new accounting standards make no difference. The only change lies in the accounting treatment on paper and the timeline of recognition. As a result, for each quarter going forward, there will be two additional items on our income statement. One, is provision for contingent liabilities under the expense line, which accounts for the estimated credit loss associated with the contingent guarantee liabilities, driven by the new loan originated during the specific quarter, and the other one is, revenue from releasing of guarantee liabilities, under the revenue line for guarantee revenue released at amortized schedule, driven by the historical loan assets.

During the first quarter of this year, provision for contingent liabilities were 1.7 billion, while revenue from releasing of guarantee liability was RMB 1 billion. Furthermore, the new accounting standards require a one-time adjustment of expected credit loss related to existing loan portfolios, which is reflected in open balance of the return earnings at the beginning of 2020. This translated into an RMB 1.4 billion reduction in our return earnings.

I would like to draw your attention here that the decrease of the return only mainly results from the recognition of the contingent guarantee liabilities and stand-ready guarantee liabilities at the inception of the guarantees in accordance with the new standards. The stand-ready guarantee liabilities, which is asset item will be recognized, or say, released as guarantee revenue on an amortized basis over the lifetime of the loan. This has no impact whatsoever on net income, business operations and asset quality when the guarantee service expires. Hopefully, that provides more conceptual clarity on the impact of new accounting standards.

Now, let’s take a look at the numbers changes on our financial statements due to this new accounting standard. First, as you can see on our P&L, there was a revenue line on the Credit Driven Services segment, titled revenue from releasing of guarantee liabilities, which represents the above mentioned guarantee revenue recognized for historical loan portfolios at amortized schedules. This line amount RMB 1 billion under the new standards and the RMB 107 million under the old standards.

Second, there was an expense line titled, provision for contingent liabilities, which stands for provisions set aside for the estimated credit loss associated with the contingent guarantee liabilities, driven by the new loan originated in the first quarter, which is RMB 1.4 billion. The remainder is the additional provision of RMB 280 million, which accounted for the additional provision to cope with the deterioration of asset quality of the historical loan portfolios due to COVID-19.

Thirdly, on balance sheet for a sub-line titled, return earning in shareholder equity section, the balance of accumulated return earnings decreased by approximately RMB 1.25 billion compared with year-end 2019. The decrease represented an accurate amount of RMB 1.4 billion reduction to opening balance of the return earnings, which accounted for one-time provision for existing loan book required by the new accounting standards and RMB 183 million increase in – to return earnings attributable to net income attributable to ordinary shareholders in the first quarter.

Well, hopefully you are not lost in my boring explanation on the accounting standards, just in case that you are already lost, we have prepared a few slides, which will be available on our IR website in the coming few days to illustrate the migration from the old accounting standards to the new one. So, which is essentially what I mentioned just now.

Okay. With the clarification on the new accounting standards, I would like to now go over a like-for-like basis analysis on financial performance under the old accounting standards in an effort to help stakeholders better understand our business operation in the first quarter.

Firstly, as Haisheng just mentioned, that under the old accounting standards, the total net revenue was RMB 2.3 billion, representing a 16.7% year-over-year increase and relatively flat on a quarterly basis, which was remarkable in our sense given the heat of the COVID-19 during the same period. Non-GAAP net income was RMB 764 million, representing a 48% quarter-over-quarter increase, one of the most exceptional quarters we have ever had since IPO.

Secondly, in phase of significant macroeconomic uncertainty during the pandemic, we have undertaken decisive initiatives to cut on cost and enhance operational efficiency. For instance, customer acquisition cost for each new borrowers with approved credit line dropped down further to want RMB 159 million in the past quarter compared with RMB 228 million in the fourth quarter of 2019.

Total sales and marketing expense fell to RMB 223 million in the past quarter from RMB 425 million in the fourth quarter in 2019. This was the third consecutive quarter on the improvement of customer acquisition efficiency and the financial discipline. And another solid cost efficient enhancement laid out our funding side, as Haisheng just mentioned, in the past quarter would continue to develop cooperation with more institutional funding partners, despite the severe challenging market conditions.

The number of the institutional funding partners we work with increased from 81 to 84 by end of the past quarter. This further brought down the overall funding cost to 7.57%. In addition, we successfully issued three rounds of ABS in 2020 with a total size of more than RMB 1 billion. The latest round of issuance hit historical low record of funding costs at the 4.2% for the Senior A tranche. We believe this is a strong reflection of financial institutions faith with us.

Thirdly, given the negative impact from volatile markets on the asset quality, we’ll continue to roll out the prudent operational and financial initiatives to offset the impact. While the effort will primarily reflect in three dimensions. First, in terms of the leverage ratio, under the old accounting standards, it went down continually to 7.7 times from 8.1 times in the fourth quarter of 2019. This was primarily driven by the increased proportion of our capital-light model as Haisheng just mentioned. While the – our total outstanding loan balance continued to grow, the portion of the Credit Driven Services business actually decreased to RMB 57.6 billion at the end of the first quarter from RMB 58.1 billion at the year end of 2019.

Second, in the fourth quarter of 2019, we booked additional provision of RMB 735 million to enhance our provision coverage ratio to 4.4 times, as we noticed the challenge on the asset quality due to unfavorable market conditions. In the first quarter of this year, we had witnessed a deterioration of the asset quality in February, but then it’s slowly returning back to the normalized level. Hence, we further booked provision of RMB 280 million to maintain a four times provision coverage ratio.

Third, our cash result hit a historical record of RMB 6.8 billion. Excluding cash deposit required in operations, registered capital for various business license and operational working capital, our free cash flow recorded at the highest level of RMB 1.6 billion in the first quarter. This was largely benefited from our diligent efforts on cost control and operational efficiencies such as reducing the turnover days of account receivables and reasonably increase the turnover days of payables to our business partners during the COVID-19 situation. All these efforts have not only equipped us with the flexibility to navigate the pandemic storm, but also positioned us to capture the historic and the enormous growth opportunities when we exit this crisis.

Finally, let me give you some color about our outlook for the second quarter and full years from a financial perspective. First, our business during the second quarter has improved remarkably on a sequential basis and should be reflected in our financial performance in the coming quarter. We expect a decent growth in terms of both top line and bottom line on our P&L in the second quarter. Based on our current assessment, we do not expect to incur any further additional provisions for credit losses triggered by the deterioration of asset quality in the near future. With the guarantee revenue from historical loan book being recognized over time, we expect shareholders’ equity to gradually return to a healthier level.

Second, we are still evaluating market conditions to decide whether we will resume on a scalable expansion of business. However, we should remain vigilant on the potential second round of negative impact due to the global pandemic development. Hence, we would like to maintain our full-year 2020 guidance, no change.

That concluded my remarks. Thank you, everyone. Now, we are open for questions.

[Operator]

Thank you. We will now begin our question-and-answer session. [Operator Instructions] Our first question is from John Cai at Morgan Stanley. Please go ahead.

[John Cai, Morgan Stanley]

Hi, thank you management for taking my questions and congratulations on the results. So, I have a few, I’ll probably ask them one by one. So first is on the accounting adjustment. So, I noticed that the release mentioned, there is around RMB 140 million revenue resulting from these accounting change and then there is RMB 1.4 billion cost. So simply put, the difference is the accounting adjustments, and I think it’s roughly RMB 540 –, I’m sorry RMB 580 million. So, and when I add this number to our profit, it seems to be in line with the RMB 764 million non-GAAP net profit under you standards. So the first question is really just, whether this understanding is correct?

[Alex Wu, Chief Financial Officer]

John, yes, you are correct.

[John Cai, Morgan Stanley]

Okay. So and follow-up on that is on the RMB 1.4 billion incremental costs. So if I look at this number in the context of the guarantee of balance sheet origination, I guess that’s what the situation would have. So, if I divided this by the origination of guarantee loan, the number is 4.5%. So does that reflect our lifetime loss estimate for the first quarter origin at the loan? And it seems a little bit high given our Day 1 delinquency is roughly 6% to 7%, so just want to confirm this.

[Alex Wu, Chief Financial Officer]

First of all, I need to take a look at your calculation formula, but the number is quite close compared with our calculations. And just a small reminder, this is not vintage, this is our provision. So it’s more like a coverage, right. So, probably our CRO will give you more flavors, on the vintage loss numbers, but here what I can say is that this is to cover the first quarter’s estimate loss throughout the lifetime, and we provide a sufficient buffer, as I just mentioned, we will maintain the four times coverage ratio to secure this – to make sure the stability of our business.

[John Cai, Morgan Stanley]

Okay, thank you. And so, also related to risk, basically as, and we mentioned that the provision for loans originating in previous period is RMB 280 million. So, I guess, if we exclude the content change, the guarantee release from the old loans with our – the accounting impact is also around RMB 280 million. So basically, we don’t have any incremental provision for this quarter, meaning that the release of the previous status, I guarantee is able to fully offset the incremental provision. Is that a proper understanding as well?

[Alex Wu, Chief Financial Officer]

Well, that, those numbers are slightly off. So for the revenue from releasing of guarantee liabilities under the old standards was RMB 170 million, RMB 170 million, not RMB 280 million.

[John Cai, Morgan Stanley]

Okay.

[Alex Wu, Chief Financial Officer]

And by the way, that was the highest level throughout and since our IPO. Then for the additional provision on the guarantee liabilities for – to cope with the COVID-19 was RMB 280 million. That part, you’re correct. That was under...

[John Cai, Morgan Stanley]

Okay, thank you. And so finally on the Day 1 – I’m sorry, on the M3+ delinquency, I think this is led by a quarter, so the ratio is above 2% now, and pricing, it does not include the impact from COVID-19. So, because it happens in the first quarter. So, how should we expect this number to trend in second quarter? And also, is it – does the pickup in the first quarter due to the collection tighten in the first quarter other than the COVID-19. Thank you.

[Alex Wu, Chief Financial Officer]

Well, do you mind to translate in Chinese, so our CRO can answer a little bit?

[John Cai, Morgan Stanley]

Yes, sure.

[Foreign Language]

[Zheng Yan, Vice President]

Yeah, Okay. Hi, John, this is response from our CRO’s view. First of all, M3 delinquency rate is time lagging indicator. Well, we will suggest all to look at more meaningfully metrics as we stated in the presentation, will put on our IR website, which is adjusted delinquency rate with the denominator it – loan balance as of the two quarters ago and the numerator is the delinquency amount. That’s the first point.

Second point, as for the impact came back to for this M3 delinquency rate, yes you are correct, as this is a time lagging indicator, it will be affected by the government restrictions in – which happened in the fourth quarter of 2019. But moreover we think you should look at some leading indicator, as we disclosed, one is D1 delinquency rate, the other one is expected and M1 collection rate. So all in all, we will expect to see the M3 delinquency rate based on pressure in the coming quarter, but still our recommendation is to focus the leading indicator will give you a better sense of our business performance.

[Foreign Language]

Let me translate for our CRO. Again, we’d like to stress, is a better way to understand our business by looking at an indicator, which is the D1 and M1. To elaborate more recently our D1 delinquency has dropped down to a similar level as our debt in the fourth quarter of 2019. In addition, if we look at this data week-by-week, week-by-week is that a descending trend. For M1 collection rate, it recovered to above 86% already. Recently, if we take a closer look, we believe it has a – it probably will go higher reaching 87% in the near future. So all in all, we believe the asset quality of our business is in the steadily recovery momentum. That’s the first point.

The second point, to address your question about M3 delinquency rate, we will suggest you to look at our provision coverage ratio, which we successfully maintained four times pre-pandemic and now.

[John Cai, Morgan Stanley]

[Foreign Language]

So, my final confirmation is about whether the current provision level has fully reflected the potential loss due to the tightening of collections in the first quarter and also, the COVID-19 in the first quarter?

[Alex Wu, Chief Financial Officer]

Yes, John. you’re right.

[John Cai, Morgan Stanley]

Thank you very much.

[Operator]

Thank you. [Operator Instructions] Our next question is from Jacky Zuo at China Renaissance. Please go ahead.

[Jacky Zuo, China Renaissance]

Hi, good evening, management. Thanks for taking my questions. So, first question from me is on the second quarter outlook. Can you share with us about the recent loan origination volume trend. So, I think we guided a stable volume for the second quarter, but just wondering if we see some pickup signs recently. And probably, more on that is on what condition, we will increase our loan origination volume? Would that happen in the third quarter given the current attachment? And the second question is on the funding. So, I heard that our funding cost further reduced to 7.7% in the first quarter, just trying to get some color on the reasons behind this declining funding cost. Are we seeing more demand after the new regulations on banks, on the lending business? And are we getting more funding from like national big banks? And definitely, we have some impact from the low ABS issuance as well, low cost ABS issuance as well. So that’s on funding. And my final question is on the new product mentioned by our CEO is called V-pocket. So, it’s basically the virtual credit card product. So, just want to get more color about the number of users and kind of the profitability of this new product. So, I will translate my questions.

[Foreign Language]

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

Okay. Let me translate for our CEO in response to your question, Jacky. First of all, if you look at – if we anticipate outlook in Q2 as the Chinese government gradually contend the pandemic domestically, and the market is – and the market is recovering, we do witnessed the improving trend in our operating data, our asset quality and the operating efficiency. Therefore, we believe we can expect stronger quarter in the coming in both in operational and financial aspect.

As to your question for the Q3 outlook, well, we believe it’s kind of too early to see, but we will stay in our vigilance manner to expand our business for the rest of the year, which depends on a few factors. Number one is the global pandemic situation. as you know, within our global village, no others stay safe if other fire – other houses catch fire. The second though a sector we’ll look at is the tension between Chinese – China and the U.S., which will lead to – which will impact the export industries in China. Luckily, from the current data, we see the limited impact from the second reason. So to summarize, when we can have better visibility we will communicate with market our business plan.

[Alex Wu, Chief Financial Officer]

[Foreign Language]

As for your question about the drawing down of the funding cost. Well, of course, we see a very sufficient liquidity in China market. For example, as you can see we successfully issued three ABS so far this year. However, we believe the main reason lysing that loan facilitation platform, who will get better quality assets gaining more and more bargaining power in the corporation with funding institutions. As you can see and you see it, more and more – more platforms are having trouble in their asset quality.

[Wu Haisheng, Chief Executive Officer]

Okay.

[Foreign Language]

Well, as for your question about the V-pocket Chinese [Foreign Language] in short, it’s – well, it’s same profitability level same as our core product 360 Jietiao. And also, it’s – have to increase our user fixed base to elaborate. Well, product we developed in the past and basically essentially is virtual credit payment and aiming to increase the user thickness and retention rate. As I stated in my remarks, the 30 days’ repurchase rate is 80%, which means 10 times transaction in a month on average. Nowadays, it accumulated 480,000 users with an average 30 million loan origination daily. Hope that answers your question, Jacky.

[Jacky Zuo, China Renaissance]

Yes, very clear. Thank you, Mandy.

[Operator]

Our next question is from Daphne Poon at Citi. Please go ahead.

[Daphne Poon, Citi]

Hi, good evening, management. Thanks for taking my question. So, I have three questions. First one is that on your Vintage delinquency rate, just can you update on your latest expectation for the Vintage loss rate for Q1 and also for the new loans originated in the second quarter? And second is related to that is what would be your outlook for the provision in the second quarter? I think you mentioned earlier is that you expect earnings both top line and bottom line to improve inventory. So, I think part of that is related to a lower operation. So, just wanted to get a better sense that should we expect both bigger release of the guarantee liability in Q2 and also will the provision on your new loans come down as well in the second quarter? And then the last question is regarding your customer acquisition. So that your Q1 traffic cost, we see a meaningful decline. Just wondering, what’s the driver behind? Do you see more of industry trend or more because of your access to that improve your customer acquisitions model? And do you expect that decline like this lower cost of acquisition cost to sustain or to decline further. And can you provide currency mix of your different customer acquisition in fact most especially, like how big is the contribution from those middle consumption scenarios that you were talking about in your prepared remarks.

[Foreign Language]

[Zheng Yan, Vice President]

[Foreign Language]

Okay. Let me translate the first question, Daphne. This is comments from our CRO. Well, we do see that D1 delinquency rate and the M1 collection rate came out better than what expected. However, we stay cautious and reiterate our previous guidance about the vintage loss between 2.5% to 3.5% for this year. Also, we do see a trending momentum quarter-on-quarter basis.

[Alex Wu, Chief Financial Officer]

And Daphne, let me answer your second question about provision. Before I dive into the details, just a small reminder on the Q4, on the earnings call, we mentioned that due to the uncertain macro situation, we provide roughly RMB 750 million additional provision due to the potential loss, right. So, when I just mentioned in my remarks that we will not see any further additional provision on that perspective, it’s under the same concept.

So, as our CRO just mentioned, our lifetime expected loss for the whole year would be within a range of 2.5% to 3.5%. And overall, on the quarter-by-quarter basis, you will see the vintage loss would decrease a lot in the coming few quarters. So that’s why when – what we said in the second quarter and the third quarter, and going forward and there will be no additional provision on that front. That obviously, that’s under the assumption that there is no second round of negative impact of COVID-19. Hopefully, I understood your question two. Now I turn to our CEO for your third question.

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

Sure. So, we need to dropdown our customer acquisition cost is for a few factors. Number one, for the industry Jiang Wu just mentioned, in our view the product being not the manner as we can see in the first quarter the fierce competition between e-commerce business and the vending – gaming business in the advertising sector is still increasing. Second, we believe the second reason may contribute more for the dropdown in customer acquisition cost as we slowed down in the scale back our customer acquisition activities, which lead to the decline in marginal cost. Thirdly, as we continuously refine our customer acquisition strategy and expand to more and various high-quality external partners, this will contribute to the dropdown.

[Foreign Language]

Sure. let me translate for CEO. There are two points I wanted to stress here. Number one, we continue to refine our marketing strategy intended to have higher ROI. For example, among the top online channels, we launch our marketing strategies. For example, ByteDance as you know, it covers 50% of the market activities. We devoted under this refined marketing strategies. Secondly, the second point, as we mentioned in our remarks, we expanded the external channels with consumption scenarios. Nowadays, it contributes to 15% of our total traffic. Hope that answers all your questions, Daphne.

[Daphne Poon, Citi]

Yes. Can I just follow up on the channel partnership? How much lower can the customer acquisition cost be and is that actually based on the revenue-sharing model? So, I will translate in Chinese.

[Foreign Language]

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

Well, as you mentioned, mostly with corporate is turning with revenue sharing model, that’s first point. The second point, as you can see the traffic in those consumption scenarios are ways to covers to shop. Therefore, they can give us better quality users with a better credit profile.

[Daphne Poon, Citi]

Thank you.

[Operator]

[Operator Instructions] Our next question is from Steven Chan at Haitong International. Please go ahead.

[Steven Chan, Haitong International]

Good evening, management. I have three questions as well, just looking very quick, I think I better translate one by one and do it one by one. First of all, about my own estimation about the take rate of the capital-light business, it seems that it has been declining in Q1. So, just wanted to know whether it is related to you try to refer better quality customers to you and then of course, lower lending rate customers to the funding partners on that part all, because you have to share fewer profits from the funding partners, because of the deterioration in asset quality.

[Foreign Language]

[Alex Wu, Chief Financial Officer]

Steven, this is a very good question and you are really good to analyze it in such a short time. Thank you for asking the question. It’s kind of a – it’s kind of a hybrid. First of all, obviously, all assets deteriorated in the first quarter, especially in February. So, we have a lot of measure to pre-end to the situation and first thing is that we – we renegotiate some terms with some funding partners or the business partners in terms of the charge. So, to some extent the charge is slightly lower than the Q4, but the most important thing that after the negotiation with the business partners we kind of repeat what we did in the Q4, i.e., we speed up the return – the payback schedule before the terms.

So in our – internally, we call it the discount rate is actually higher. So, let me put an example. So there is, for example, there is 12 terms loan during the first quarter, we kind of work with our business partners to encourage the borrowers to repay the principal interest early, say now it’s only eight terms, four terms left. So we ask them, if you pay them back now, we will waive all the interest, not only for the rest of four times, but also probably give you one times interest-free treatment, something like that. So, the discount rate – so-called discount rate discussion, we got it higher a little bit. So, all in all our take rate on the capital-light would be slightly lower compared with Q4. So, your adjustment is right.

[Steven Chan, Haitong International]

Okay, thank you. I understand. Second question, I think it is similar to Daphne’s question, but I want to get more sense about this provision for contingent liabilities excluding that RMB 218 million you still have RMB 1.4 billion provisions in 1Q. So, I just want to clarify whether this RMB 1.4 billion is purely related to asset quality issue or you still have some supply macro or local other parameters putting into your credit risk model and resulting in some provisions. I mean comparing with banks, it’s just like whether you still have some Stage 1 and 2 provisions like what you see for banks means that it is more related to macroeconomic outlook rather than asset quality. If yes, how much will that be? And then I think the follow-up on Daphne’s question is do you expect there will be conversion – a converging trend between the provisions and the release in the revenue. That means that that the gap between the releasing liabilities and the provisions will be reduced.

[Foreign Language]

[Alex Wu, Chief Financial Officer]

Okay. Let me answer your question here. So, I think you have two parts of the questions. The first part is how do we value with the asset quality. Obviously, the valuation model need take into account of the macro-economy and even some potential impact of the Sino-U.S. tensions situation. So, it’s kind of blended together. It’s difficult to divide – quantify the impact of the macro economy versus the pure operation or industrial level or our company level’s numbers. So, everything are into – taken into consideration. And also, this is for the asset generate or originate for Q1. So as John just mentioned, there is an easy way to calculate that. You just used RMB 1.5 billion divided by the new loan originations under the capital heavy model in Q1.

It will give you a rough sense how much provision largely taken. And so the number was quite close to a four point something. This is taken into account of sufficient coverage ratio. Okay. Then your second question is whether there is sort of a calculation between this provision and the releasing of guarantee liabilities going forward. The short answer is it’s a very difficult question for everybody. Because every single quarter we need to reevaluate the asset quality based on that quarter’s situation. So, it’s hard to say that, but I can give you example.

So, this quarter just under the old accounting standards, the releasing of the guarantee liabilities is RMB 170 million. As I just mentioned in my remarks, it is the highest level of the releasing of guarantee liability. The reason is that in the Q4 last year, we take a more prudent measure to take provisions. It turns out the actual performance is better than our estimates. So, we released a significant amount of money to our revenue. So going forward, if today’s estimate is too pessimistic, compared with the future, we are confident to see the releasing of guarantee liability will go up.

On the contrary, there was a second round of the negative impact of COVID-19. We might take additional provision in down the road. That might mean we have less release of the guarantee liabilities on revenue, but there is a no-crystal ball, say you can’t accurately forecast a number or say the breach between this provision and the releasing of guarantee liabilities. Hope I answered your question.

[Steven Chan, Haitong International]

Thank you, very clear. Finally, my question is about the provision for loans receivable, which nobody has – was trying to ask, because if you try to estimate that using a credit cost concept, meaning that you divide it with the average outstanding loans. It seems that it has increased again, in Q1. So again, I just want to clarify one thing in this provision for loan receivable apart from asset quality, did you also put in the macroeconomic factors when you try to estimate so-called on balance sheet lending business.

[Foreign Language]

[Alex Wu, Chief Financial Officer]

Yes, Steven. This is a very good question. There were two main factors, leads to the decrease of the provision for loan at amortized cost. First of all, remember we talked about this in the past few quarters almost every call that we say, we see the funding cost from consolidated charge that was actually low compared with the funding cost from the financial – the banks. So, we take more on a – through the consolidated trust, right. But the situation changed in Q1, because the funding cost of financial institution, I mean banks decreased significantly, which leads to latter the relatively high funding costs of the trust.

So, in Q1, we actually intentionally decreased the contribution from the consolidated trust as a funding source. So that’s the primary reason for the decrease of provision. The second thing, yes, you are right, in Q4, we see the – unfavorable industry situation and also, when we prepared the results that was in Q1. So, we kind of estimate there will be a significant heat on the asset quality, but when we prepared Q1 results, we definitely take into account of the macro situation, obviously now, today, the pandemic issue is much less concern than what we’ve seen in Q1. So, the overall vintage loss – as expected, vintage loss decreased a little bit, slightly, not too much, but that will contribute to the relatively low provision on the on-balance sheet assets. So basically, these two key reasons drive the decrease. Hope I answered your questions.

[Steven Chan, Haitong International]

Thank you. very clear.

[Operator]

Our next question is from John Cai at Morgan Stanley. Please go ahead.

[John Cai, Morgan Stanley]

Hi, thank you for taking my questions again. It’s just one the management could maybe help me to understand that it was more product competition landscape. So, I think we operate in a segment with the price on average is 28%, correct me if I’m wrong, but it’s on average 28%. So, and we understand that the small or medium players as it is in the market. So, is there any – basically, the question is how many competitors mostly – so unless the competitors, because that is still when we can have a look by ourselves. But how many unlisted players with decent size in these on average 28% segment, we are seeing in the market and are they in very close competition to us in terms of the risk management et cetera. Thank you very much.

[Foreign Language]

[Wu Haisheng, Chief Executive Officer]

[Foreign Language]

Sure. Okay. Well, let me translate for our CEO. First of all, growing, you could have a very good way to segment long-market consumer finance in my head in China by APR. Well, as for the private competitors that you mentioned, we believe, you referred to Ant, WeBank and JD. Most of them operate of our products, which is below country 4% APR. So, by your segmentation, we now operate in the sub-segment with those private competitors. However, we do conduct some customer research and find out that in terms of the users, we may belong to the same category with those private competitors, which manifest that there are some – there are loan users that they may not be sensitive to the APR, but they lay more emphasis on the user experience and the service.

[Foreign Language]

Well, to provide our competitive strengths, compared to the three competitors you mentioned, the first one – the first type of competitor is the private competitor for example; Ant, WeBank will be low, because they operate in the lower APR market, the competition directly confronting them is quite limited. Second type compared to, as I mentioned is the discourse in U.S. market. Well, we have strong confidence, we – that we are Internet giant backed consumer finance company. We got a strong support from our parent called 360 Group. Therefore, we protect and structuring advantage in aspect of risk management, traffic and a brand and so on.

Thirdly, the third type, compared to the third type of competitor that we are trying to license the consumer finance, we view them as the most of the founding partners in this part – in these consumer markets. So, we overbank them in terms of the risk management capability and their user experience provided to the borrowers. Well, I hope that’s a little bit color on the competitive landscape, addressing your questions.

[John Cai, Morgan Stanley]

[Foreign Language]

[Mandy Dole, Director-Investor Relations]

Okay. Hi, operator, are there any more audience on the question line, if not, maybe we can conclude the call today.

[Operator]

Thank you. There are no questions on the line. So, this concludes today’s conference call. Thank you all for your participation. You may disconnect.