360 DigiTech Inc

NASDAQ:QFIN

Earnings Call Transcript 2019-Q4

[Operator]

Thank you for standing by and welcome to the 360 Finance Fourth Quarter 2019 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Ms. [Mandy Dole]. Please go ahead.

[Unidentified Company Representative]

Thank you. Hello, everyone, and welcome to our fourth quarter and full year 2019 earnings conference call. Our results were issued earlier today and 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 statement 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. 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 the forward-looking statement. For more information about potential risks and uncertainties, please refer to the company's filings with the SEC in the registration statement.

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

[Haisheng Wu, Chief Executive Officer and Director]

Thank you, Mandy. Hi, everyone. Thanks for joining our earnings call today. We delivered another quarter of strong results to finish the year on a high note. During the full year of 2019, our loan origination volume reached RMB 198.67 billion. Cumulative registered users reached 135 million at the end of 2019.

Users with approved credit lines increased by 12.18 million throughout the year. Total revenue reached RMB9.23 billion which is a quite strong pick to our guidance at the beginning of 2019.

During the fourth quarter, we continued to adopt stable and prudent management approach. Taking the ongoing regulatory trend into consideration we proactively slowed the pace of our cloud business development. Despite the challenging environment, we still achieved a good quarter with loan origination volume reaching RMB53.12 billion.

The fourth quarter of 2019 is atypical for Chinese fintech industry. A series of regulatory requirements were rolled out. All of this presents significant change for companies that are relatively weak in maintaining compliance standards. The measures also affected much stress on the end borrowers, which affects our business. Fortunately, we quickly and successfully adapted to this challenging environment. I believe we mainly benefited from two factors: Firstly, we remained in close communication with regulators on a regular basis as we are one of the leading fintech platforms in China; secondly, our main target market is prime borrowers with credit cards who are more resilient through economic downturns. As a result, this further strengthens our cooperation with institutional funding partners.

Next, I would like to brief you on a few key business updates during the quarter. In aspect of regulatory compliance, we successfully passed a rigorous assessment conducted through a joint government campaign by Cyberspace Administration of China, the Ministry of Industry and Information Technology, the Ministry of Public Security and the state administration for market regulation. This was a direct result of our strict standards for data collection and personal information collection. In addition, we took the initiative to apply for -- and one of the first batch of select companies to allow new borrower approved by National Internet Finance Association.

In January 2020, regulators removed the adopted version of the commercial banks Internet loan provisional regulatory measures. This legitimized the loans issued business model and with the new geographic restrictions placed on online lending business. These business regulations are beneficial to the fintech industry, which were allotted to growth in a more healthy manner.

In respect of customer acquisition, the proactively slowed borrower acquisition activities, these capital approval standards and cost acquisition costs of each new borrower. Efforts were on protecting users’ positive contribution through cost reduction of borrower acquisition and LTV accretion. In the meantime, we're devoted to loan repurchase through our consistent buyer operations, and the results. The contributions to loan origination volume during the fourth quarter increased to 81.9%.

In the aspect of funding, despite turbulent markets we continue to add our institutional funding partners. We now work with a total number of 81 in the fourth quarter, up from 74 last quarter, along with nearly 80 -- nearly 40 operator in nationalized areas, but geographic restrictions on online lending business have been removed. Our internal stress test indicate that we have tipped off the most difficult regulation. Our funding costs saw the long-term momentum throughout 2019, growing by more than 100 basis points and we expect this trend to continue in 2020.

During the COVID-19 outbreak, in the first quarter of 2020, with the capital issued RMB500 million ABS as the first consumer financial debt in 2020. In terms of equity stakeholders, it's an honor to welcome to the world-renowned project equity group FountainVest become a significant strategic investor and Board member in November last year. They were subsequently joined by our Chairman Mr. Hongyi and all key members of management team in December to announce a plan to jointly invest up to $60 million to purchase 360 Finance shares in the next 12 months. By the end of December 2019, the management team and FountainVest have already purchased US$20 million worth of shares in addition to the initial investment made by FountainVest in November. FountainVest's strategic investments in the repurchase of our share not only ease the pressure on our stock price due to large shareholders, but also is an attribute of solid vote of confidence by management in the future growth and the development of our business.

I'm very glad to share a couple of the operations that were a part of our Board meeting. First, in order to support those synergies with 360 Group, the Board appointed Wei Liu as Senior Vice President at 360 Group as Vice Chairman of our Board. Second, one of our affiliated established Internet Insurance business last year which delivered very outstanding result during the COVID-19 outbreak. The Board authorized us to undertake a minority equity investment in this business through which we expect to generate synergies with our loan business. I understand everyone's concerned about the impact of the COVID-19 outbreak on our operations and what measures we have undertaken with funds. I would like to state with full confidence that, taking into account our 2020 year-to-date operational performance, our loan volume and the risk management has already fully recovered after a short challenging period. This is another front in application of our business resilience, our traditions to our customer base and the risk management capabilities.

I want to highlight that we are one of the very first companies to take proactive action in response to outbreak before the last great outbreak and delivered loan collection devices. So I will start at home and put in place set up to assure the critical recovery of our business operations while working remotely in anticipation of a difficult operational environment following the Chinese New Year holiday. By the end of February, our loan collection operations have been 100% recovered. In addition, 360 Group jointly outlined a number of charitable activities to deliver crucial medical supplies. During the Chinese New Year holiday, a team of several hundred of our staff continued to work in two shift from abroad through Wuhan. This results that we are not only a team with professional capability, but also we've done commitment to corporate responsibility.

Now a few words on our 2020 outlook. The largest uncertainty comes from the ongoing COVID-19 outbreak, especially overseas. Hence we are implementing more prudent approach to manage risk and risk opportunity. In addition, I believe platform selecting is central key element to upgrade to Fintech business that impacted to a much larger extent than the [indiscernible]. Our affiliation with 360 Group provides with structural advantage in terms of compliance, funding risk management and customer acquisition, which will allow us to take more market share in the long run. Taking into account our 2020 year-to-date operational performance, we are confident to achieve our business goal in 2020.

Now I will turn the call over to Alex to discuss our financial results.

[Alex Wu, Chief Financial Officer]

Thank you, Haisheng. And hello everyone. First, let me give you a quick update on our full year financials. Our total net revenue reached RMN9.22 billion in 2019, a remarkable launch and 7% year-over-year increase and non-GAAP net income reached RMB2.75 billion in 2019, a 53% up year-on-year increase as well. We are thrilled to deliver these results, and this is a strong fit to our guidance RMB8 billion to RMB8.5 billion net revenue, announced in early 2019. These solid results further proves our capability to fully deliver our promises committed to all our stakeholders.

Specifically in the fourth quarter, as Haisheng just mentioned, our stable operation translate into healthy financial results. Total net revenues increased by 53% year-over-year to RMB2.4 billion and non-GAAP net income reached RMB515 million in the same quarter. In spite of the industry turbulence during the fourth quarter, we proactively adopted a more prudent strategy and successfully carried out a series of initiatives on various operation fronts such as risk management, borrower's acquisition, fund management, etc. In summary, we're focused on two aspects. One, the increase of the operational efficiency and, two, maintain sufficient margin up to 50. In terms of operational efficiency, we witnessed a significant reduction of borrower acquisition costs, continue the decreasing trend of funding cost and enjoying a full year low effective tax rate.

Firstly, we proactively refined borrower acquisition strategy and trimmed down sales and marketing expenses. The acquisition cost continue to drop to RMB228 for each new borrower with a full credit line, in comparison of RMB246 in the previous quarter. With this, we delivered the decreasing units acquisition cost in two consecutive quarters and we are confident to see the trend to continue in the first quarter of 2020.

Secondly, in spite of the challenging industry environment, we successfully issued RMB1 billion of ABS with attractive all-in cost at around 5.6%. By this, our total ABS issue for the full year of 2019 reached RMB2.3 billion, with all-in cost of 5.6%. Moreover, we have expanded our co-efficient with financial institutions. The number of financial institutions working with us increased to 81 by end of 2019 in comparison of 26 by end of 2018. And thanks for all this effort, our overall funding cost slid down from 9.2% in the fourth quarter of 2018 to 8% in the fourth quarter of 2019.

Thirdly, we have spend a great effort to reach a record low effective tax rate of 14.5% in 2019 in comparison to slightly higher than 20% in 2018. Again, this is a good indicator to show our sound relationship with all the regulators. In terms of the margin and safety, we're focused on maintaining a healthier leverage ratio and to proactively increase our provisions. Firstly, we continue to expand the capital-light model business which is without any risk taking. During the quarter, loan origination under the capital-light model accounted for 22% of the total loan origination volume up from 20% in the prior quarter, with a Q-on-Q increase of 27% in terms of outstanding loan balance.

While our total outstanding loan balance continue to grow, the outstanding balance with risk taking business decreased to RMB58 billion from RMB59 billion last quarter. Our net equity increased by 6.9% year-over-year to RMB7.2 billion as our leverage ratio continue to decrease to 8.1 times from 8.8 times in the previous quarter. We expect that leverage ratio will continue to its downward trend in the coming quarters.

Secondly, in terms of the provision, we would like to highlight that different platforms might undertake different accounting approaches. And as a result, there may not be a direct like for like benchmarking amount of it among different platforms. Our approach is to assess quality in a perspective of our entire loan life cycle and focus sufficient provision covering the whole cycle and infection of the loan origination. We add more provision this time when we see the negative impact is slightly worse than our original expectation so as to maintain four times provision coverage. More importantly before loan expire, we do not recognize any gain from over reserve provision items when asset quality turns out to be better than our original expectation. Therefore you won't see any negative numbers on any of the provision items and even on our P&L. The gain from excessive provision will be booked on the other revenue line only after loans retire.

In light of the economy uncertainties and drag on the collection process, we enhance our provisions cushion for the whole outstanding loan portfolios and maintain a sufficient coverage ratio of more than four times, take into consideration of our 2020 year-to-date operation performance. Our preliminary expect a further increase of provisions due to the impact of COVID-19 situation, but we can assure you that this will be a manageable level. Furthermore, in regard to compliance, I would like to add that the contribution for our P2P funding continue to decline in the fourth quarter. As of December 31, 2019, the PDP funding dropped to 4.5% of our total loan outstanding balance. We expect that this downtrend continue in the coming quarters. Currently the credit line granted by our institutional funding partners is more than two times of our total loan origination volume, which provides easy replacement for the PDP funding. This is another solid demonstration of our sufficient and various institution of funding resources.

In closing, despite the unexpected outbreak of COVID-19 and the volatile global economic conditions, our business remains stable and healthy. In the meantime, we will continue to focus on asset quality and launch our marginal safety through careful cash management and also stay alert on any minor turmoil down the road and accomplish our full-year business target in 2020. Additionally, I would like to emphasize on that our management are in firm consensus that we are facing a golden opportunity to further solidify our market leading position and remain in fullest confidence in our long-term growth prospects.

Now I would like to turn the page to our CRO, Zheng Yan.

[Yan Zheng, Chief Risk Officer]

Thank you, Alex. Now let me give an update on risk management. We maintain a solid stable risk performance through 2019. In spite of the outbreak turbulence during the fourth quarter, we added a more prudent risk stated strategy to keep our asset quality and we adopted this prudent strategy through the whole product lifecycle. To elaborate in more details, when we granted the credit lines to customers, we adopted a tight credit approval policy for new customers leveraging a no pass to risk model with higher precision and more underlying variables. Half the borrowers' made a credits drawdown that enhanced the management of customers with relative worst credit profiles in order to control risk case closure. Our D1 delinquency ratio was 6.77% with a mortgage to job compared to 6.93% in the last quarter of 2018, and a slide increase compared to 6.4% in the third quarter of 2019 despite the turbulence environment. This is a clean demonstration that our risk policy refinement came into good effect already.

In addition, during the second quarter of 2019, we started a pilot program applying different terms to borrowers according to their credit profiles. In the AV test, we offered different products so that borrowers with relatively bad credit profiles will provide you with longer terms to ease financial pressure and the borrowers with relatively worse credit profiles will provide you with short terms to accelerate their repayments. In the fourth quarter, we took more efforts to shut-in low panel to borrowers with risk credit profiles and intended toward the gap to this pilot program in the future. In the long traction process, we'll continue to improve the performance of our AI robots and increase strategic communication times of our collection teams' new technology requirement.

In addition, I would like to highlight our system automatically logged every collection action including activities of outsourced teams. 100% of the record are monitored in real time by robots and ensure compliance to the greatest extent. In face of the coronavirus outbreak, we continue to maintain this more prudent risk management strategies as we did in the fourth quarter. We're quickly tightening credit quality in those areas most affected by the pandemic and for those customers whose occupations may be significantly affected in the economic slowdown. Nevertheless, we are onto some pressure of assets quality during the outbreak. We expect our D1 delinquency rate during the first quarter to be in the range between 7.2% to 7.3%. As the outbreak gradually stabilized in China, we saw D1 delinquency and the collection rate have normalized and improved gradually.

Moreover, we took [indiscernible] effective management of both the cost and outsourced collection employees. As a result, collection operations were 100% recovered by the end of February. During the outbreak, we are glad to find out that borrowers in some certain risk categories stay at the same -- stay at their normal risk level showing strong risk and resilience. All of those data during the outbreak which is a huge stress test are variable to further refine our customer acquisition strategy and risk management strategy. We are using data to further identify our borrowers, according to different credit profiles and explore more different risk strategies.

In 2020, we have continued to implement this competitive strategy and I have more confidence in maintaining the risk management actions. That's all. Thank you. Operator, we can now start the Q&A session. Thank you.

[Operator]

Thank you. [Operator Instructions] The first question today comes from Jacky Zuo. Please go ahead.

[Jacky Zuo, China Renaissance]

Hi, management. Thanks for taking my questions. I have two questions. First is on the loan originations in our guidance. So can you give us some color on the first quarter loan originations given that we are coming to the end of March and also regarding our 2020 loan origination guidance. Just want to know, was the assumptions behind -- for example, what's the distribution of the quarterly originations we are expecting for this year?

And second question is about the asset quality. So it's very helpful to know our D1 delinquency rates is expected to be 7.2% to 7.3% at the end of this quarter, up from about 7, sorry, 6.8% from last quarter. So I just want to know in terms of vintage loss, which will be the level we are expecting given the current virus? And also I noted that we actually set aside a large provision during the quarter, it's over RMB700 million. So just want to know what is the assumption behind this additional provisioning. It seems it's about 1% of our loan balance at the end of last year. Is that the kind of level of provisions we expect for the impact from the virus? Thank you so much.

[Alex Wu, Chief Financial Officer]

Thank you, Jacky. Let me take the question first. And probably Haisheng and Zheng Yan will add on that. This is a very important question. The first one is to guidance. Yes. We issued our guidance for the full year, the loan origination RMB200 billion to RMB220 billion. The rationale behind that is spending at today's situation is a little bit unclear for the future, but we are very confident that we are -- everything's under control. But just as you know our company always take a relatively conservative measure in terms of daily operation. So we want to keep the guidance as flat as last year, because last year, the overall loan origination -- the total loan origination is RMB198 billion. So that's the key rationale for that and hopefully if we see any recovery signs from the outbreak of COVID-19, this number will have a positive adjustment in the future. And just add other few color on this, our underlying assumption is that we would expect the capital-light model will continue this growth and to pursue our strategy that technology enables us.

And the second thing is that we would continue to see the acquisition cost to remain at a relatively low level and that's the information we can share with you on this call. And the second -- your second question talking about the asset quality. Oh, yes, For the first question you asked about Q1. Certainly as of today, all the numbers are subject to the auditors' review, but all we can say is that we see the loan origination for the first quarter should be around RMB50 billion, so that give you a rough sense of how we conclude the guidance for the whole year. Your second question talking about asset quality. Yes. I think I will defer D1 delinquency ratio question to our CRO, but for the provision, let me explain a little bit further. As I mentioned in my speech just now, different platform have different measure to accounting approach to take a provision. Our approach is to assess as a quality for the entire long life based on the situation we were facing. Okay? So what we do is to, standing at the Q4, the situation we reevaluate as usual for the whole historical assets or outstanding balance, we will see that there is some impact on the asset quality. So we take the additional provision.

In terms of vintage, what we can see by the end of Q4, the overall asset vintage is around 2.6%. It's still manageable and that number can be compared with maybe, our CRO will mention later, full-year estimate for this year. I would defer the D1 delinquency ratio question to our CRO.

[Yan Zheng, Chief Risk Officer]

[Foreign Language]. So for the new transactions in 2020, the D1 delinquency rate will be expected to be around 6.5% to 7.5% and our expectation of the vintage delinquency rate will be around 2.5% to 3.5% on average, which depends on if the ongoing COVID-19 virus outbreak in China will be eased soon or not. So now we can see that the epicenter control in China is very effective. We believe in our government and we are fully confident that our credit performance will be fully within our range of expectations. Hope that can clarify.

[Operator]

The next question comes from Daphne Poon with Citi. Please go ahead.

[Daphne Poon, Citigroup]

Hi, thanks for taking the question. So I also have some more questions regarding your positioning and your asset quality. So first is, we see that in the 4Q, on-balance sheet provision actually also increased, and if we calculate the annualized credit cost, it's around 14% of your assets on-balance sheet loan balance. So it just seems like quite a high percentage. Just wondering whether that was also because of front-loading of provision reflecting in the coronavirus impact or was that effect just because of the Q4 rising at current risks. And also, do you see on-balance sheet loans customers as currently compared to the off-balance sheet one?

And then, you did make -- I'm just trying to understand more about your provisioning outlook for Q1, in particular, I think on the current your ability that number in Q4. So just want to be -- I just wanted to confirm whether that has -- if also that has to come into consideration of the coronavirus impact and how much more provision you expect to set aside in the first quarter. Do you expect a similar around RMB700 million additional guarantee liability? So should we see the recurring number for Q1? And also regarding your guidance -- so just want to confirm because it just seems that you mentioned earlier, your Q1 origination is already at RMB50 billion and your full year is around RMB200 billion to RMB220 billion. So is this being very conservative given you also mentioned you feel pretty confident about the recovery of your asset quality and coronavirus situation. So, just wanted to understand more on the rationale behind that you see the whole industry like the penetration is high and the room for growth is declining so that you return more conservative on the customer addition front or is it just because of the uncertainty of this macro coronavirus outbreak situation here.

And lastly on the capital-light model, I wonder if you have any specific target set model and what potential contribution do you expect to have, say, by the end of this year. Thank you.

[Alex Wu, Chief Financial Officer]

So, thank you, Daphne. To your first question, the provision on the balance sheet assets. What we can see that we achieved on-balance asset and off-balance asset in the same way in terms of taking provisions. The methodology is the same. So, the only difference is that the asset quality mat vary, different types of -- under different type of the models. But in terms of methodology of provision, it is the same. Okay?

And to answer your second question, just following the accounting rules, we are not allowed to take in provision for the things that never happened in that quarter. For example, in the fourth quarter, if we take a provision, strictly follow the accounting rules, we can only take provision based on the assumption that there is no coronavirus. That's the base assumption. But as you know this is just at the most. And we tend to provide higher provision coverage. So we -- first of all, we follow the rules, accounting rules, secondly, we put our best effort to do the estimate. So in the Q1, though it's already 27 of March, but in terms of the provisions, we're still in discussions with our auditor and we can't give you a specific guidance whether this number -- what number it will be. But what we can reemphasize here is, that number should be manageable.

The question three, the guidance, the conservative guidance is based on -- not based on our forecast for the whole industry, but also in our industry, purely based on the uncertainty of this COVID-19 incidents. Because even if China is under control, the whole world is in turmoil. So I'm sure that factors fully show up their impact, we would take relatively conservative in terms of guidance, but as you mentioned, we will closely monitor the whole daily operation, all the data to see if there is any signs of recovery also certainty in the future in this year. We would definitely speed up our growth in the coming few quarters. So that's the reason we are very confident to deliver this guidance.

The fourth question is about the capital-light target model. We do have a general target for the capital-light proportion. By end of this year -- last year 2019, the new loan origination on the capital-light model contributed around 22% of the whole book and we expect that number will increased to 30% to 40% by end of this year under this relatively conservative guidance. Hopefully I answered your questions. Regarding guidance, Haisheng need to add some points.

[Haisheng Wu, Chief Executive Officer and Director]

[Foreign Language] Actually there are like 420 million customers of credit card holders in the China market and among that a 50% are revolvers that are waiting to borrow some of the money from the bank. So these are our potential customers and compared to what we have now, that is -- there are 20 times for the customer space that are still available for us to grow. So to add on Alex's answer of that question.

[Daphne Poon, Citigroup]

Yes. Thank you. Just want to follow-up on the capital-light. So you mentioned 30% to 40% as based on the conservative loan volume guidance. Does this mean that the percentage will drop like if your loan volume like turns out to deposit on your current expectations?

[Alex Wu, Chief Financial Officer]

Well, we will evaluate that percentage if the outlook for this year is better than we expect it today and we will keep the guidance accordingly.

[Operator]

The next question comes from Steven Chan with Haitong International. Please go ahead.

[Steven Chan, Haitong International Research]

Good evening, management. I think three quick one, if I can. One follow-up question on the loan origination volume guidance and I think you had mentioned much about all of the assumptions you based on, but I would like to know one key assumptions. What will be your assumptions of the increase in cumulative borrowers in order to achieve the loan origination guidance for 2020? That's the first question.

And secondly, you mentioned that you are going to increase the share of capital-light model of business. I would like to know, because you have increased your provision coverage for non-guarantee. So does that affect your effective return or take rates from your no-guarantee model, meaning that, you are making more provisions for the guarantee model, does the impact for the non-guarantee model, only guarantee can get, also -- have also been rebuilt in the final quarter last year? And sub-question for that is, do you have any target of capturing 100% of your loan origination being capital-light? So that's the second question.

And finally, I think a follow up on these sort of like new item calling guarantee liability expenses. I would like for your clarification again. So is this item related to preparation for the new accounting rules in 2020, so that's why you are trying to make more provisions now and make sure that, that will likely to reduce the potential negative impact, especially in the first half of 2020 the economy or unemployment rate or whatever delinquency -- it's very, very high. And a sub-question for that is, in case if the economy start to pick up fairly significantly in second half of 2020, are you going to see potential write back because it seems to me that it's fairly similar to the IFRS 9 for banks. So when the economy is recovering, probably the provisions will likely be, so I'm not sure whether you are trying to make lot of excess provision in the final quarter of 2019 and then to expect -- that could be too much and probably there could be chance of write back if the economy actually pick up very fast.

[Alex Wu, Chief Financial Officer]

Okay. Thanks, Steven. Very good questions. The first one, yes, we do have some underlying assumptions in terms of new borrowers to generate this guidance -- to meet the guidance. Under that assumption base, we will continue our strategy in the fourth quarter last year, ie, with focus on our existing borrowers who we know much better instead of acquiring more new customers under such a circumstances. So based on that underlying assumption, our new borrowers for 2020 under such a guidance will be much lower compared with last year and we can easily meet up the guidance primarily focused on our existing customers and to better serve them.

The second question in terms of capital-light. A quick answer for your second piece of your question is ultimately this capital-light model will contribute the majority part of our business in the long run but not this year. So 100% even it will be accomplished over the five years -- at least five-years horizon. Okay?

The second part is -- your first piece of your question is the return on the capital-light and whether they have any negative impact triggered by the asset quality decrease. In short, answer is no. We have maintained our sound relationship with our financial institutions, because in the commercial terms with those financial institution, the threshold to decrease our service charge is very high. Of course, it's based on the industry general practice and industry standard, but just because our historical vintage is so much better compared with the industry average, so we have a significant buffer in terms of commercial terms. So even in the February this year, we still see strong support from the financial institutions under the capital-light model. So to answer your question, there is no negative impact on that front. We still have the similar unique economic as of today.

The third question about the expense of guarantee liability. As I mentioned, we -- this is Q4 results. So we didn't adopt a new accounting policy in the fourth quarter. The impact of that accounting policy are still in discussion with our auditor, but based on our preliminary discussion, we don't expect very strong -- very negative strong economic impact on us. The influence would be very limited. That's the key. The only thing I can mention at this moment for the [ASC 606] and the other thing is you mentioned how to -- when the loan expires. The excess coverage of the provision will definitely come back to our revenue. We did that every single quarter. Even in the fourth quarter, we have more than RMB70 million come back from the guarantee liability and to our revenue item. So we will see that trend continue in this year and going forward. Hope I answered your questions.

[Steven Chan, Haitong International Research]

Can I have a follow-up on that, just for the first question? So under your guidance on the new cumulative borrowers, so to put it on hold, there could be high chance that we're going to see a decline in sales and marketing expenses in 2020 compared to 2019.

[Alex Wu, Chief Financial Officer]

Yes. Yes, yes. Yes.

[Operator]

[Operator Instructions]. The next question comes from John Cai with Morgan Stanley. Please go ahead.

[John Cai, Morgan Stanley]

Hi, good evening, management. Thank you for taking my questions. I have I think three. So the first one is just to see if the management can share us -- share with us some insights on how they assess the current credit cycle. Is it fair to say that the worst is over? And what metrics would the management monitor to see whether we can consider it to close or not. And related to that is, we have heard some banks are getting very prudent in terms of the credit card business. So -- and some of them are -- reduced some credit lines and they see some various cut increasing in the portfolio as well. So if the banks scale back their credit card business, do we see it as a risk factor or an opportunity? And the reason is because we have our borrowers look for that is the bank's credit pretty much seems to be high. And so that's the first question on the industry.

And the second question is also related to the guarantee. So just wonder, what's the 4 times mean? Does it mean cover on kind of balance divided by the delinquent loan is 4 times or if there is any color you can share on the metric. And the final question is about basically customer acquisition and cash because on the customer acquisition, you have seen those total number decline in first quarter and also the unit cost, and so it's really a good trend. And I just wanted to going forward, do we expect the customer acquisition costs to remain at this low level and is it a function of our quantity and the unit price that means if we increase the voting that the unit price will go up. So if we could get lower, the unit cost is also low. And then so in the first quarter, we reduced the sales and marketing expense and it seems our loan balance is going much slower. So, if we take the acquisition cost low, do we see any pressure to grow the loan balance? And with our strategy to translate to the capital-light model and reduce or lower sales and marketing expense, it seems we may be big in our cash in 2020. I'm just wondering if there's any other pans on how we use the cash on hand. Thank you very much.

[Alex Wu, Chief Financial Officer]

Thank you, John. The latter -- I just caught on at least to four to five questions. Let me answer some first and I would leave the rest to our CEO and the CRO, Zheng Yan. Just backward, OK, for the customer acquisition. Yes. As I mentioned in my speech just now, we do expect the acquisition cost will follow this decrease in trend in the coming few quarters and maintain a relatively low level. That said, this is based on our conservative guidance at this moment. Okay. So to some sense, you are right. If the economy recover quickly in this year, we might decide to speed up our growth and we will invest more on customer acquisition in the coming few quarters. And that unit cost might go up a little bit. And -- but it's still too early to say because we take a lot of initiative to fine-tune our customer acquisition strategy and focus more on the high-tech and high quality customers in the coming few quarters. And we will see the positive impact on this acquisition strategy as well.

And yes, if the situation continues like this or even getting worse, of course, we will have more cash than the normal business needs. We might consider cash for some capital market activities and we don't rule out the options, and also we might take a closer look at the insurance business that we just plan to take a minority stake in as announced just now by Haisheng. But this are just options. We will carefully evaluate the situation based on the other macro and micro data we can get. Okay. That's the customer acquisition question.

The second -- the third one is the guarantee liability 4 times. Yes, this is a very good question. Thank you for the -- giving me an opportunity to explain this. Okay. And as I mentioned, different platforms have different policy on that but we maintain our prudent strategy to keep a high cushion to our delinquencies. So just put in a very simple way, might not be absolute correct, you can take a look at our M3+ delinquency ratio, then comes 4, slightly higher than 4, that will be our provisions -- the total provisions for the loan -- all outstanding loan.

And the second question regarding the bank's scale back of credit cards, if that is an opportunity or not or a risk for us. I think I would leave that question to our CEO. And for the credit cycle -- the macro-credit cycle question I will leave to our CRO. Haisheng?

[Haisheng Wu, Chief Executive Officer and Director]

[Foreign Launguage] Okay. So obviously I'll take the epidemic situation now in China as an example to answer the question of the credit cycle. So, actually, we have discovered that the epidemic has different impacts across different customer groups on our assets. For example, for Hubei province, the high delinquency rate during this period has doubled about -- it accounts for only around 5% of our total assets and for different industry the impact vary as well. So for instance, sports, fitness and entertainment industry, hotel and the catering industry and the retail industry have been affected a lot, while financial services, government, education and medical services have not been affected. For manufacturing, especially those who has orders from overseas countries might be affected later because of the death of lives in overseas countries, while delivery industry increased at the beginning or normalized very fast.

So with all these data, we have done market dimension clustering analysis and we found that around 80% of our customers are not being affected at all or even have lower credit risks, while 15%, slightly being affected and around 5% are severely disrupted. So those kind of a data and behavior are like a treasure for us and a real situation pressure test. So in the future, in terms of our credit cycle, we will emphasize on good customers that we have data and we have the evidence and the credit performance as well, and we also have a quite stable indicators and models to monitor the changes in the credit performance of the same customer. So we can see that we are truly prepared with all the data for the credit cycle. Hope this can clarify. So maybe the next question is for our CRO about the credit card.

[Yan Zheng, Chief Risk Officer]

[Foreign Language] Okay. So for now with the uncertainty of the COVID-19 situation, we cannot just say whether it's an opportunity or it's not. But in the future, when the situation is eased and we can say that basically we are complementary compared with the credit card instead of the competitor's directly. With the data and with all the credit cardholders’ base, we can have more opportunities when the situation is more certain.

[Operator]

The next question comes from [Claire] from Gold Dragon Asset Management. Please go ahead. Claire, your line is open. Claire?

[Unidentified Analyst]

Thank you. So I have three questions. First, management mentioned that you are much more conservative compared to your peers. So can you give a bit more color on our guarantee liability which I guess is calculated as current quarter like new provision of guarantee liability divided by the amount of newly originated off-balance sheet loans covered by our guarantee? And my second question is -- so how do you manage the collection of overdue loans during the coronavirus and why are you able to manage our NPL like better than our peers? And my third question is also like on the guarantee liability expense, can you mention -- provide more color on what’s the definition of guarantee liability expense and how much of our expenses are related to the current quarter and how much is more related to our expectation about the future for the full year? And what's our like guidance of this item in our Q1 and full year? Thank you.

[Alex Wu, Chief Financial Officer]

Thank you, Claire. Let me take the guarantee liability questions first. And I will defer the collection question to our CRO. So the extent of the guarantee liability, to put it in an, so called, unprofessional way, it's more like a fair value reevaluation of the guarantee liabilities. Okay. So basically when a transaction happened based on -- according to the [U.S. GAAP] or estimate, what is the potential there under that [reduction]? So that adds -- that number will go into this so-called guarantee liability. Every single quarter when we release the quarterly results, before that we need to ask our third-party -- independent third parties to reevaluate all the outstanding balance to see whether the original expectation or estimate is in line with the current situation.

If the situation is worse than our original expectations, we will add more guarantee liability, we'll add more provisions as well, but if the situation is better than our original expectation where we are seeing nothing under our current achievement, we will wait for the actual expire. And they accept guarantee liabilities, we'll cut those back to our revenue, that's the key methodology and this fair value change of the guarantee liability or say the expense of the guarantee liability is more like reevaluate all the outstanding balance in that specific quarter. And we'll see what -- what was their lifetime performance is like. Then we have our best estimate at that quarter for the future and book that into this further. So this change under the accounting -- based on the accounting rules, we take as purely standing at the end of Q4. So we make a forecast for the asset quality and we will reevaluate the asset quality by end of the first quarter before we released the first quarter results. And we will process that again in the same -- under the same position. Hope I answered the guarantee liability question. And I would turn to our CRO to respond to your collection question.

[Unidentified Company Representative]

Sorry, Claire. Can you please repeat the question about the collection actions in place during the COVID-19 situation?

[Unidentified Analyst]

Yes. So before that can I repeat my another unanswered question? So first, we are like recorded more than RMB700 million guarantee liability expense and we have RMB71 billion after new loan balance. So does that mean that we are expecting NPL to increase like 1% because of coronavirus? And also -- you also mentioned that our company is much more conservative than others in terms of [reserving]. So can you share like with us, if you're going to add any reserve potential for Q4 and also for the full year guidance?

[Yan Zheng, Chief Risk Officer]

[Foreign Language]

[Unidentified Analyst]

[Foreign Language]

[Yan Zheng, Chief Risk Officer]

[Foreign Language]

[Unidentified Analyst]

[Foreign Language]

[Yan Zheng, Chief Risk Officer]

[Foreign Language] So we are still estimating the impact -- negative impact of the COVID-19. So, at this moment, what we can say is that we will continue to increase the guarantee liabilities to maintain our reserve coverage to more than 4 times. But to extent, it's too early to say, because the situation is still evolving. We probably need a few more months to see the impact on our asset quality. But what we can see as of today is the impact is very limited, and it's acceptable.

[Operator]

The question-and-answer session is closed and this will also complete our conference. So thank you for participating today. You may now disconnect. Thank you again and have a great evening.