Lufax Holding Ltd

NYSE:LU

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Ltd Second Quarter 2021 Earnings Call. At this time, all participants are in listen-only mode. After the management's prepared remarks, we will have a question-and-answer session. Please note this event is being recorded.

Now, I'd like to hand the conference over to your speaker host today, Mr. Yu Chen, the Company's Head of Board Office and Capital Markets. Please go ahead, sir.

[Chen Yu]

Thank you very much. Hello, everyone, and welcome to our second quarter 2021 earnings conference call. Our quarterly financial and operating results were released by our newswire services earlier today and are currently available online. Today, you will hear from our Chairman, Mr. Ji Guangheng, who will start the call with some general updates on our achievements, share our thoughts on recent regulatory developments and industry dynamics, and provide our plans for future business. Our Co CEO, Mr. Greg Gibb will then provide a review of our progress and details of our development in the quarter. Afterwards, our CFO, Mr. Xigui Zheng will offer a closer look into our financials before we open the call for questions.

In addition, Mr. Yong Cho, our Co CEO, and Mr. David Choy, CFO of our Retail Credit Facilitation Business will also be available during the question-and-answer session.

Before we continue, I would like to refer you to our Safe Harbor statement in our earnings press release, which also applies to this call, as we will be making forward-looking statements. Please also note that we'll be discussed non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the International Financial Reporting Standards in our earnings release and filings with the SEC.

With that, I'm now pleased to turn over the call to Mr. Ji, Chairman of Lufax.

[Guangheng Ji]

Hello, everyone. And thank you for joining our 2021 second quarter earnings call. I will start with some general updates on our achievements in the first half, and then share our thoughts on recent regulatory developments and industry dynamics before providing our plan for future business.

First, update in the first half. Generally speaking, all the Chinese ADRs stock prices have seen increased volatility recently, due to changes in macro policies and market conditions. At Lufax, we managed to deliver improvements in our operating performance, regulatory compliance and corporate governance in the first half. First, we achieved high quality growth in our core business. For the first half our total income increased by 17% year-over-year and net profit increased by 33% year-over-year. Later in the call Greg and James will elaborate more. Second, we responded to regulatory caused by phasing out our peer to peer production in smooth and compliant manner. In the second quarter, we substantially completed the run of legacy peer to peer products and further strengthen our regulatory compliance.

Third, we continuously enhance our corporate governance by restructuring our Board of Directors and establishing committees in key focus areas, including risk management, consumer protection, and ESG. We will also be actively advancing the seventh establishment of our ESG systems. Fourth, on May 24, 2021, our company announced US $300 million of share repurchases. As of June 30, 2021, we have substantially completed repurchase. In addition, our senior management purchased US $5 million worth of shares using their personal fund.

While there are still uncertainties in the market, our stable profitability, strong operating cash flow, abundant cash reserves and the actions we took to private our business data hours, understanding regulatory requirements all give us strong confidence about our future prospects.

As that I'm pleased to announce a new share repurchase program of US $700 million over the next 12 months, bringing our total price program to US $1 billion. In addition, we are actively evaluating other options to return shareholder value going forward. Second, the analysis of regulatory development and market dynamics. Since our Q1 earnings announcement, the Chinese government has continuously tightened supervision of technology platform companies. These include the direct sharing of borrower information by online loan facilitators and co lenders with financial institutions, mitigating an all-in cost ceiling of 24% for consumer loan and publishing the draft version of the amended cybersecurity real measures for public consultation.

Lufax has always been closed and in constant dialogue with regulators to fully grasp the latest regulatory trends, intentions and requirements. And make sure relevant authorities are fully aware of our business model and development in key areas. I'm pleased to report that so far we have maintained open communication lines with all levels of regulators with satisfactory frequency and results. Despite recent influx of new regulations and policy interpretations, our business has not been materially affected. Moreover, our business model operating results have remained resilient.

Now I will address a number of questions that attracted recent attention. The first topic with the sharing of borrower data by loan facilitators and co lender directly with financial institution. Recent media reports speculated that the CBIRC will prohibit online credit facilitation platforms from sending directly to their partner financial institutions borrower data, including personal information voluntary submitted by borrowers, data generated as part of the platform's process and other borrower information provided by third party vendors. Our interpretation is that it aims to regulate the consumer credit scoring process, emphasizing that credit assessment data from internet platforms must be transmitted solely through licensed credit agencies.

Lufax has been utilizing its licensed guarantee company to conduct its retail credit facilitation business and perform credit assessment authorized by our partner banks in full compliance with the banking sector financial institution and financial guarantee company business cooperation guide. We refer potential clients to our banking partners, transmit the guarantee company's approval results and share timely updates on post origination repayment status. As such, every aspect of our business calculation is done in accordance of the current guide. And it is that different from an unlicensed company's long facilitation model.

In the meantime, we have - we will have constructed dialogues with the regulatory authorities to seek their feedback and guidance. We are also prudently exploring the viability of applying for a credit scoring license or cooperating with third party credit scoring companies. Because the mandatory completion of credit scoring requirements, that's the end of 2022, there should be sufficient time for both regulatory authorities and market participants to test new models and make adjustments. Based on currently available information, we believe whether to cooperate with third party credit scoring companies will not materially impact our business model or profitability.

The second topic relates to consumer borrowing costs. At the end of July, some media reported that regulatory authorities would require financial institutions including consumer finance companies and banks to implement an all-in cost ceiling of 24% for personal lending. From our perspective, we think that this new requirement has crystallized the direction of loan pricing and eliminated potential uncertainties. Since September 2020, we have been preemptively implementing an all-in cost ceiling of 24% for all new loans we facilitated. Going forward, we'll continue to follow regulatory direction, leverage technology to broaden small and macro business owners' access to cost effective financing and maintain our own profitability by improving our operating efficiencies.

The third topic I would like to discuss is cybersecurity. Since July regulatory authorities have been conducting special audits on several internet platforms in accordance with cyber security review measures demonstrating the nation's heightened attention to cybersecurity and data safety. To ensure full regulatory compliance about data processing business operations, we promptly conducted debriefing seminars and performed the internal reviews. Lufax achieved the internationally accredited ISO 27001 certification for an information security management and the level three registration certificate from the Ministry of Public Security of China. Going forward, we'll continue to strictly adhere to policy requirements and ensure regulatory compliance in all key aspects of operations, such as network equipment and service procurement, critical data reviews and many others.

The fourth topic is market development and competitive dynamic. In recent years a number of internet platforms and traditional financial institutions have jumped into the foray of serving small and macro business financial needs. Some platforms have started to copy the overall business model that we pioneered. On one hand, this validated the attractiveness of our business segments and the effectiveness of our auto model. On the other hand, intensifying competition challenges Lufax to perform even better.

Over the past 16 years, we have built highly effective offline sales and service team, a comprehensive management system and a proven risk management model, stress tested over multiple market cycles. That combination serves as high barrier of entry and precludes peer replication within a short period of time. At the same time, increasing competition also motivates us to work harder, ensure regulatory compliance, innovate, recruit and advance our technology and fortify our industry leadership. Credit rating development plans for the future. Based on our analysis of regulatory intentions and industry dynamics, we believe competitor focus will gradually shift from volume growth to quality growth. Consequently, we are determined to uphold the following three principles to keep our operations fully compliant, to create value to society and to advance our technology.

First, we shall keep our operators in full regulatory compliance and strict policy adherence. As an organization with financial DNA, we have always prioritized regulatory requirements and operated in a compliant manner. Based on our principles of pre emptive diagnosis and swift operational adjustments for timely optimal results, we plan to continue enhancing our communications with regulatory authorities so that we can keep a close tap on a course of regulatory developments and timely execute our policy requirements. Second, which are keep creating value to the society by providing quality financial services to small and micro business owners as well as the middle class.

As of June 30, 2021, Lufax had cumulatively provided credit facilitation services to more than 15.5 million borrowers with an outstanding loan balance of more than RMB600 billion. Over the past five years, we have effectively satisfied small and micro business owners financing needs by facilitating nearly RMB2.3 trillion worth of loans. Recently, we launched Special Assistant plans for small and micro companies mainly aimed at supporting companies in labor intensive industries, such as retail, hospitality, hospitality, restaurant and manufacturing, creating a significant number of employment opportunities. For small and micro agricultural businesses, we're working with the China Women's Development Foundation to distribute our farmers' assistant funds to rural female entrepreneurs and cooperative leaders. As a result of this work, we are making meaningful contributions to the economy of rural areas. Going forward, Lufax will provide more products and services catering to the needs of small and micro business owners, leverage technology to reach customers more effectively, simplify loan application process, improve efficiency in reviewing and approving online loan applications, fulfill our commitment to financial inclusion and support the nation's economic development agenda.

In our wealth management business, Lufax operates as an information and empowerment platform to help the Chinese middle class manage their wealth. Lufax will continue to provide a variety of financial product, optimized product mix and composition, enhanced customer experience, improve service quality and efficiency and contribute to our clients' wealth preservation and growth goals. Certainly wish to empower our business development and quality improvement through technology. In adherence to our principle, auto integration, multi service offering and customized solution, we have continuously advanced our technologies in big data, artificial intelligence and others.

In retail credit facilitation, we have launched an AI-powered Smart Loan Solution named Xingyun. In wealth management, we are promoting an intelligent customer service solution aimed at improving user experience. All these solutions demonstrate our ability to enhance our financial services efficiency by leveraging technology.

In conclusion, although our road ahead is not without challenges, we are confident that we will be able to lay our own unique path to long-term sustainable success by maintaining operational compliance, generating social value and continuing technology advancements.

And with that, I will now turn the call over to Greg who will share our business updates for the quarter.

[Greg Gibb, Co CEO and Director]

Thank you, Chairman Ji. Although the regulatory environment continues to transform and some uncertainties remain, our business performance is sound. Let me get straight into the key figures noting that all numbers are in RMB and all comparisons are in a year-on-year basis unless otherwise stated. Profits in the first half reach RMB9.7 billion, up 33.4% versus a year ago. Our second quarter profit was RMB4.7 billion, up 53.2% versus a year ago. Our second quarter revenues of RMB14.8billion grew 17.3% versus last year. Our second quarter total operating expenses of RMB7.1 billion was decreased by 1.7% for the same period.

As a result, our net margin reached 31.9%, a 7.5 percentage point improvement over the second quarter last year, driven by ongoing improvements in operations and technology. We are confident that profit growth levels achieved in the first half will be sustained throughout the balance of this year. On the back of the solid performance, it is important to note our strong balance sheet and cash position. As of June 30 of this year, our net assets reach RMB91.1 billion of which approximately RMB42 billion liquid assets maturing returning in 90 days or less.

Our net cash flow has increased by RMB9.6 billion in the last 12 months. This strong position allows us to do several things. First, it provides us with a resilient ability to meet any new capital requirements that may come from regulatory changes. We believe that in lending facilitation, all platforms, regardless of business model or customer segment will ultimately be required to bear 20% to 30% of related credit risks, with a capital leverage of no more than 10x with a portion of shared risk. In the second quarter, excluding the consumer finance subsidiary, we bore credit risk on 16% of all new loans facilitated and we have more than sufficient capital to meet increased levels if needed.

Second, our strong profitability provides multiple avenues to generate value for shareholders. Today, we announced that we will extend our corporate buyback program initiating a new plan to repurchase US $700 million of shares over the next 12 months. We continue to explore other avenues to return more value to shareholders over time.

Third, our resources allow us to continue to invest in and enhance our unique business model. For the sake of general understanding I'd like to highlight three aspects of our business model and the developments currently underway. First is our unique auto direct salesforce business model which allows us to unlock the unmet borrowing needs for China's small and micro business owners. In the second quarter, excluding the consumer finance subsidy rate, 77.6% of new loans facilitated with a small business owner segment, we continue to find that our direct salesforce of more than 58,600 professionals is the key to reaching a small business owners and building the required levels of trust serve their larger and long-term lending needs, and being able to match an array of unsecured and secured products to their diverse business and industry purposes.

In the second quarter, new loan sales reached RMB152.7 billion growing 11.1% versus a year ago, in line with prior guidance. During the quarter, new loan sales from other channels slowed down a little, however, the increased fees on volume from our own direct sales teams has offset that weakness in other channels, thus demonstrating the resilience and flexibility of our direct sales team as well as the strength of O2O own business model. Furthermore, with continued technology upgrades, we have greatly improved the productivity and efficiency of our direct sales team. In the second quarter, 6.5% of new loans facilitated were in a new secured auto lending product demonstrating the ability of our auto direct sales to capitalize on changing market conditions and customer relationships. The productivity of our direct sales force increased 10% over the last 12 months. We continue to invest in new risk data, industry insights and technology tools to further enable our unique O2O sales force to tap this hard to reach segment, which we believe could not be efficiently served through a pure online model.

Second unique aspect of our business model is how we deploy our licenses. This has become an increasingly important factor in the tightening environment to satisfy both regulatory and funding partner needs. All new loans that we facilitate today either flow through our guarantee companies or consumer finance license, or guarantee companies with operations all over the nation except Tibet, Xinjiang and Hunan provinces allow us to share credit and process data flows with our more than 65 national and local funding partners under well-established legal frameworks. The deployment of these licenses together with successful tapping of the ABS and interbank ABN market is helping the ongoing optimization of funding costs for the first half this year. We are now actively exploring new collaboration to meet expected credit rating license futures requirements will come into the effects by the end of next year.

A third unique aspect of our business model is that we seek to serve our customers across a full range of financial services not just lending. While our wealth manager platform is a smaller contributor to total company revenues today, the China Wealth Management market is witnessing substantial new growth as customers and providers are adjusting to full implementation of the new asset management regulations and a new framework for cross border investing between China's Greater Bay and Hong Kong, our domestic wealth and insurance serving primarily the affluent. The emerging affluent continues to grow with client assets of RMB421.1 billion as of June 30, 2021, expanding 12.4% versus a year ago and expanding by 28.8%, excluding legacy P2P assets, which have now been substantially run off. Our platform in Hong Kong is currently entering new partnerships in preparation for the rollout of Greater Bay policies. In the third quarter of this year, we will merge our online client interface for all borrowers and investors to deepen services to all customers across small business owner lending, consumer finance, wealth management, and protection and pension insurance.

Company analysis suggests many of our small business owners are middle class and emerging affluent customers, and a notable proportion of our wealth customers are small business owners. With a rapidly changing operating environment, we believe our capital strength and unique business model combined with our deep financial credit experience and commitment to compliance will allow us to remain resilient.

Before turning over to James to go through the detail operating and financial performance and second half guidance, I would like to highlight one final figure. We have continued to make progress in bringing down ADR to our borrowers with the second quarter ADR for the overall portfolio reaching 24% versus 26.7% a year ago, this reduction has been executed without negatively impacting our net margins. In the medium term, we will seek to lower ADR and keep our net margin steady by driving down relevant operating credit insurance and funding expenses.

I will now turn over the call to James Zheng, our CFO.

[Xigui Zheng, Chief Financial Officer]

Thank you, Greg. I will now provide a closer look into our second quarter operational and financial results. Before I begin, let me remind everyone that all numbers are in RMB terms and all comparisons are on the year-over-year basis unless otherwise stated.

Our second quarter of 2021 results characterized by strong business growth, continued operational improvement and extended profit margins. Our total income increased by 17.3% to RMB14.8 billion, while our core business income excluding investment income grew by 19.1%. Our net profit increased by 53.2% to RMB4.7 billion, exceeding our earlier guidance of RMB3.7 billion to RMB3.9 billion. Our net margin reached 31.9% in the second quarter, a 7.5 percentage point improvement from the second quarter of 2020.

Fourth, [Indiscernible] our continued growth and profitability are four key factors. First, we further optimize the unit economics in our retail credit facilitated business even as we reduce our all-in cost. Our loan balance ADR declined by 2.7 percentage points to 34% in the second quarter of 2021 from 26.7% in the second quarter of 2020. While our take rate based on loan values improved to 9.7% from 9.5%. And our net margin also extended over the same period. This achievement is a result of four initiatives. First, we continue to increase our number of banking partners and diversify our funding sources, which have allowed us to obtain cheaper funding from partners with better asset quality. Second, the credit insurance premium on our loan portfolio has also been reduced as our insurance partners took the better credit and the customer quality into consideration to lower their pricing and without a greater portion of the credit risk.

Third, the early payoff effect decreased significantly because we have changed the way we charge our customers. Fourth, we achieved significant efficiency gains in our sales and marketing as well as our operations. As a result, we are confident that even if we reduce our ADR further into the future, we should be able to maintain the stability in our fixed rate and net margin in retail credit facilitation. Second, we maintain a strong pace of low volume growth coupled with big improvement. On the retail credit side, we grew our new loan sales by 11.1% to RMB152.7 billion during the second quarter of 2021 in line with our previous guidance of what RMB145 billion to RMB155 billion. At the same time, we continue to focus on serving small business owners and improving the risk profiles of our borrowers.

In the second quarter, excluding our consumer finance subsidiary, 77.6% of new loans facilitated will be first the small business owners, up from 72.6% for the same period of 2020. High quality borrower defined as G1 to G3 borrowers by our own internal classification system, contributed 63.7% of the new general unsecured loans facilitated in the second quarter compared to 59.4% for the same period of 2020.

On wealth management side, our total client assets increased by 12.4% to RMB421.1 billion as of June 30, 2021, exceeding our previous guidance target of 12.1% growth or RMB420 billion. Client asset contribution from mass affluent customers, who invest more than RMB300, 000 further increased to 80.2% as of June 30th, 2021, up from 76.3% as of March 31, 2021. Third, we continue to make progress in executing our plan for a more sustainable risk-sharing business model. Loan where we get risk accounted for 16% of new loans facilitated in the second quarter, up from 4.4% in the same period of 2014. New loans facilitated with guarantees from Ping An P&C accounted for 76.3% of new loans facilitated in the second quarter, down from 89.1% a year ago.

While our funding partners borne the risk for 4.8% of new loans facilitated in the first quarter. As of June 30 2021, our outstanding balance of loan facilitated with guarantee from third party credit enhancement partners have decreased to 84.3% from 94.3% a year ago, all of the aforementioned operating metrics exclude our consumer finance subsidiaries. At the same time, we continue to sharpen our focus on improving our asset quality. In the second quarter, our C-M3 flow rate for all facilitated was 0.4% versus 0.5% a year ago. The 30+ days, past due delinquency rate for all loans facilitating was further improved to 1.9% as of June 30, 2021, from 2% as of March 31, 2020.

The 90+ day past delinquency rate for the total facilitated stabilized at 1.1% as of June 30th, 2021, on par with 1.1% as of March 31, 2021. All of aforementioned operating metrics exclude our consumer finance history and legacy products, which represent roughly 1% of the total loan business. Four, we substantially completed the run off of legacy P2P products in our wealth management business. During the quarter, client assets from legacy P2P products were reduced to RMB44 million from RMB4 billion in the previous quarter, effectively completing our business transformation. Meanwhile our take rate for the segment was 31.8 bps increasing by 3.6 bps from the previous quarter. These improvements were finally driven by our continued development in standard wealth insurance products, offset by a decrease in deposit products.

Now let's take a closer look into our second quarter financials. During the second quarter, our total income increased by 17.3%. And our core business excluding investment income grew by 19.1%. On the back of this growth, our business and the risk-sharing model continue to evolve driving a change in the revenue mix of our retail credit facilitation business. For example, during the quarter, while the platform service fees decreased by 8.8% to RMB9.2 billion, our net interest income grew 98.7% to RMB3.2 billion and our guaranteed income grew by more than 800% to RMB891 million.

In addition, other income, which is directly linked to delivering services to our financial partners, increased by 205.1% to RMB1.1 billion. As a result, our retail credit facilitation platform service fees, as a percentage of total revenue decreased to 62% from 79.8%. In addition, as we continue to utilize consolidated trust plans, which provide lower funding costs even more funding operations, our net interest income as a percentage of total revenue increased to 21.8% from 12.9% a year ago? Moreover, as we continue to bear more credit risk, we generated more guaranteed income, causing our guarantee income as a percentage of total revenue to reach 6% as compared with 0.7% a year ago.

By expanding our services to our credit enhancement partners in account management, collections, and other value added services, our other income as a percentage of total revenue increased to 7.2% from 2.8% year ago. Our investment income decreased by 83.2% to RMB37 million in the second quarter from RMB220 million in the same period of 2020, mainly due to losses from the change in fair value of assets.

On the wealth management fund, our platform transaction and service fees increased by 39.9% to RMB407 million in the second quarter, from RMB291 million in the same period of 2020. This increase was mainly driven by the increase in fees generated from our current products and services.

Now moving out to our expenses. In the second quarter, total expenses grew by 2.2% to RMB8.5 billion. However, excluding credit impairment losses, financial costs and other losses, total expenses actually decreased by 1.7% in the second quarter, underscoring the steady improvement of our operating efficiencies across most of these areas.

Our sales and marketing expenses, which include expenses for borrowers and investor acquisition, as well as general sales and marketing, decreased by 6.3%, to RMB4.3 billion in the second quarter. As a result of our efforts to further optimize our sales productivity and sales commissions, as well as the higher base in the second quarter of 2020 due to nonrecurring expenses. Our borrower acquisition expense, which are a major component of our total sales and marketing expense, decreased by 19.5% year-over-year to RMB2.6 billion.

In addition, our investor acquisition and retention expenses also decreased in the second quarter, mostly due to our optimization of investor acquisition channel costs. Our general, sales and marketing expenses, which are mainly comprised of payroll and related expenses for marketing personnel, brand promotion costs, consulting fees, business development costs as well as other marketing and advertising costs increased by 33.8% to RMB1.5 billion in the second quarter from RMB1.1 billion a year ago. This year increase was largely due to the lower base in the second quarter of 2020, resulting from the Social Security relief during the COVID-19 outbreak in the same period.

Our general and administrative expenses increased by 21.1% to RMB798 million in the second quarter, from RMB659 million a year ago. This increase was mainly due to the lower base in the second quarter of 2020, and headcount expansion in the second quarter of 2021 to support our new business developing initiatives, including the development of our consumer finance business.

Our operation and services expenses decreased by 3.3% to RMB1.48 billion in second quarter from RMB1.53 billion a year ago. This decrease was primarily due to a decrease in post-origination management expenses, driven by our improvements in management and collection efficiency, and partially offset by the increase in a trust plan management expenses resulting from increase in usage of consolidated trust plan.

As we maintain our commitment to investing in technology research and development, our technology and analytics expense increased by 18.6% to RMB517 million in the second quarter. Additionally, our credit impairment losses increased by 133.5% to RMB1.4 billion in the second quarter from RMB597 million, a year ago. This was due to the continuing evolution of our business model, which led to increased low related risk exposure and higher upfront credit impairment losses. It is worth noting that the increase in impairment losses is purely a function of the increase in the proportion of the credit risks borne by us. While the overall credit profile of our borrowers has continued to improve, as mentioned earlier.

Our finance costs decreased by 37.4% to RMB276 million in the second quarter from RMB441 million a year ago, mainly due to the decrease in our balance of convertible bonds, which led to lower borrowing costs and increase in interest expense resulting from the increase in deposits. As a result of foreign exchange rate gains, we booked RMB301 million in other gains for the second quarter of 2021 while our effective tax rate decreased to 36% from 39% a year ago.

Consequently, our net profit increased by 53.2% to RMB4.7 billion in the second quarter from RMB3.1 billion a year ago. Meanwhile, our basic and diluted earnings per ADS were RMB2 and RMB1.9 respectively, in the second quarter of 2021. As of June 30, 2021, we had a cash balance of RMB29 billion, compared to RMB24 billion as of December 31, 2020. Net cash flow from operating activities was RMB2.1 billion in the second quarter of 2021.

Now turning to all guidance for the second half and the full year of 2021; for the second half of 2021, we expect our new loan facilitated to be in the range of RMB324 billion to RMB340 billion, and the client assets to be in the range of RMB450 billion to RMB460 billion. Meanwhile, as we maintain our growth momentum, and it continues to improve our operating efficiency, we expect our total income to be in the range of RMB31 billion to RMB31.3 billion. Our net profit to be in the range of RMB6.6 billion to RMB6.8 billion in the second half of 2021. This translates into a year-over-year net profit growth of 32% to 36% for the second half of 2021 and a 33% to 34% for the full year 2021. These forecasts reflect our current and preliminary views on the market and operational conditions, which are subject to change.

This concludes our prepared remarks for today. Operator, we're now ready to take questions.

[Operator]

[Operator Instructions]

Your first question comes from Winnie Wu from Bank of America.

[WinnieWu]

Thank you very much for giving me this opportunity. And congratulations for a solid second quarter results. I guess two things. Firstly, in terms of the credit business, can you provide the latest numbers in terms of the effective ADR in second quarter this year both for the new business and also for the total outstanding loan balance? So the ADR and then the breakdown of funding cost that CGI and EPO. Second question is related to what Chairman Ji talked about on the information and credit license, credit bureau, credit scoring license. Can you talk about any progress any application if you're applying for the credit scoring license and any expectation on that? And also with the new regulation restrictions on the usage of credit information. Is that going to impact how much data, credit data Lufax is able to access or the scope of data that you're able to leverage on. And is that going to impact your credit scoring. Thank you very much.

[GregGibb]

Thanks Winnie. I think on your first question, what we have just disclosed for the second quarter on the overall portfolio, is that the ADR is 24%. And that's down from 26.7% a year ago; we don't disclose the rate for the new loans. But what you can very clearly calculate is in order for us to go from 26.7%, down to 24%. That means that the new loans that we've been issuing, clearly one have all been below 24%. And at least a couple 100 basis points below 24%, in order to get that overall average of 24%. And so this is something that we've been doing for some time. And we'll continue to execute that.

[XiguiZheng]

Yes, probably what I can add is, if you look at this [Indiscernible] this closest number, if you can look at our [Indiscernible] our ADR decreased by almost 6% from one year ago, but take rate remain almost unchanged. So they are to stay and as to your second question about the data sharing with banks, we are credit licensed company, their regulation are traded with Chairman Ji, we met PBOC a few times. And then also we have probably about two questions. The first is whether we need a credit license. I'll give you; the outcome process of data collection, ensuring we have no debt is fully within, and it's perfectly within the guarantee business, the approved scope. So we think we don't need this credit license, if we need we miss that all arbitrary companies or other insurance companies who see that business, see results, they all needed credit license. But we take unit, we talk by credit license while you can join others as a shareholder, first of all, we talked to this, we got - and confirm whether we need to have this license or not. The second question we have here is then what process do you need to change to follow this regulation. We might need to share our data, we want to partner to the company who has credit license going forward. And this regulation becomes effective from the end of last year.

[GregGibb]

Next year.

[XiguiZheng]

From next year, - next year and now we are working with a one credit license company and then working on the new process. So we are probably ready within first half next year. And then in case we need to take a project but it's not confirmed yet, we are working on it.

[GregGibb]

But in terms of scope of data wise that we can access or we need to use doesn't get impacted by this new structure.

[XiguiZheng]

There is one small impact, how we collect data, there are three types of data. The first is personal information that we collect directly from borrowers, and it does not change. And the second data is the PDS data taken directly, getting data from PDS, PDS does not change, the prototype that other customer defined as a data insurance data, how to collect those with personal asset data that we have to collect through the company's credit license going forward, that is our understanding. So in all we didn't must impact our opinion.

[Guangheng Ji]

So it was Vice Chair our Co CEO responsible for retail credit facilitation venue who just answered on top of that, I just want to add that we are maintaining very active dialogue with the credit scoring viewer of the PBOC all the relevant key decision makers within the bureau. So far, there's no material impact to our business model. And based on what they've indicated to us, there's no need for us to change now. I think their key focus is on the data or the information you collected, whether you could use it for yourself, or do you actually pass it on to external parties, or in some cases even monetize on that data. We believe that is their key focus, they're also asking us to our views, what it would like to share our data with credit bureaus. And our response was, look, if there's a PBOC requirement and everybody's required to do that, we will comply. Again, their key focus is on whether we accumulate, whether the data we accumulated or stored is just for self-use, or will be passed on to third parties or [Indiscernible], of course, that's something we'll never do. They also recognize that we run quite a different business model by our guarantee company. So far, that's the communication we've all had. We don't need to make any changes right now. We'll continue to have those conversations and let the market know if we hear anything otherwise.

[Operator]

Your next question comes from May Yan from UBS.

[MayYan]

[Foreign Language]

[XiguiZheng]

Yes, let me ask comment on the question number two first and then I'll answer question number three. The question number three is about loan weight should be within 24% by June 2022, right. This requirement was given to save companies. And it's very precise what they said is total borrowing costs should be less than 24% for renewals by June 2022 and average ADR should be less than 20% within three years' time, meaning that by June 2024. That's what they said. And then we believe this will become like a standard regulation for all. And this is because it will have no impact for us, if you can look at our peer company, as of today, highest ADR is less than 24%. And average ADR is less than 90%, so we already there. And then probably highest ADR is less 24%. And as of July our ADR for newer is all-in less than 24%.

So basically, we see no impact from this new regulation. So we are in a very safe position. And the third question self-guarantee portion, in August this month, our self-guarantee portion for newer, we reach - final reach 20%. So we are done. And the next step whether we want to further move up to a 40% if we haven't decided yet, we are in discussion with our regulator, but once the demand we have to go up to 30% that we can do that very easily. We can because our company we have already more than RMB22 billion net assets, which is more than enough to support 30% asset guarantee a portion for newer.

[Operator]

Your next question comes from Thomas Chong with Jefferies.

[ThomasChong]

Hi, good morning. Thanks management for taking my questions. I have a question regarding our wealth management strategies. I think we've talked a lot about ADR size. But how about the [Indiscernible] size? I think we have able to talk about some of the upgrade in terms of the product features including our integration - in terms of the interface. Can we talk about how we should think about our long term goal for [Indiscernible]? And, in particular, the progress that are made with our automated AI portfolio, as well as any competitive landscape or regulations that we need to bear in mind. I think that's my first question, and then follow up question is about the recent outbreak of COVID. Are we seeing any changes in terms of the fundamentals recently? Thank you.

[GregGibb]

Right, Thanks Thomas. It's Greg. On the wealth management business, as we summarize through the first half of this year, as of June 30, the growth will exclude the P2P portion was about 28%. And so this is a business we continue to want to develop as fast as we can. And we continue to see very good progress on our affluent customers on our qualified investors across a range of higher end products, including ongoing development for portfolio services, an automated matching, which we're doing here in China, but we're also looking into Hong Kong as that market starts to evolve, as well. So this is an area that we will continue to invest, we will continue to automate; we will continue to apply more and more data to it to make sure that our middle class customers are generating good returns, particularly as the market shifts away from fixed income to more variable return products. And this is an area that we continue to invest in.

In terms of the COVID impact, I would say up to now we've not seen any impact is really too early and very, very narrow. I know that there are more headlines about it. But it really hasn't been anything that we've seen in terms of frontline impact.

[Operator]

Your next question comes from Katherine Lei from JPMorgan.

[KatherineLei]

Thank you. I think my peers have asked a lot about regulatory risk. And then I'm going to have a follow up questions on the regulatory risk as well. I think just now management saying that, like the way to maintain a stable profit margin is to control costs, right? So first, can you help to elaborate, like what room to move, I have to continue to cut costs so that the overall takeaway will be more stable. The second questions I have on investors return. There's already like RMB1 billion of buyback being announced and executed, some of them are being executed so far. So what is the asset on the balance sheet that you believe is deployable for like buybacks? Or maybe in the future dividends n general, thank you.

[GregGibb]

Choy, if you want to speak first about the cost optimization area.

[DavidChoy]

Okay, I think the future more data in the upcoming session, right. But if I give you a last picture, for US, for entrepreneurs, in the second quarter this year, our average ADR was less than 23%. But then margin state almost unchanged at around 4%. And lastly if you look at our components extending cost, CGI premium and each impact, you see that those are three numbers, obviously, including meaning decreasing, and going forward, we believe we can further optimize by about 2%. So we thought even if the over ADR goes out to close to 20% because we are confident with our main margin will be protected at around 4%, because I'm not saying that no matter how low ADR goes, we can deliver 4% margin, I'm not saying that, but is able to apply these around 20% that we are very confident that margin will not change.

[GregGibb]

And in terms of investor return, as we noted on our balance sheet and cash position, RMB91 billion overall, net assets RMB42 billion of relatively liquid assets with a 90 day so the share repurchase, the additional RMB700 billion taking us to RMB1billion still represents a very small portion of our total capabilities at this time. We will continue to explore other ways to generate returns for investors through all mean and we're exploring those structures and we'll certainly undertake them as soon as it makes sense to do so. But we certainly have a lot of room in which we to play.

[Guangheng Ji]

As Greg mentioned that not only that we have a strong balance sheet in addition we have very strong profitability and cash carrying capability. In terms of the question you ask whether it's buybacks or dividends, I can say that we are considering again all means to return value to shareholder. Once there's a decision made we will be making the right announcements. The US $10 billion which is roughly RMB7 billion of buyback is small compared to the gunpowder we have on our balance sheet. And let's not forget by the end of the year we would have generated another RMB10 billion plus of profit and that will go, also go into our cash reserves and balance sheet.

[Operator]

Thank you. That does conclude our time for questions. I'll now hand back to management for closing remarks.

[Guangheng Ji]

Thank you for attending our call today. And as mentioned earlier, the results are available online. And we will be having a number of one-on-one sessions with the sales analyst which we will elaborate more on our messages. Please do have full confidence that we have a very hard working management team and in the current environment where global capital markets view on China regulations, which caused a lot of volatility recently throughout the short not only that the companies have heard that I believe the relevant regulators in China have also heard the market views and subscribers have been telling me that today the biggest factors impacting Chinese ADR stock prices. Number one is regulation. Number two is industry, company specific fundamentals come later. Rest assured, the regulators have heard that and in a current environment, it is very prudent and as always be our principle to strengthen regulatory relationships, maintain open communication and make sure we are in the right side of the future direction. Thank you again for joining the call.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now disconnect.