Lufax Holding Ltd

NYSE:LU

Earnings Call Analysis

Lufax Q2 2024: Improved Asset Quality Amid Declining Revenues

In Q2 2024, Lufax Holdings reported a 35.5% decline in total income to CNY 6 million, driven by a decrease in outstanding loan balances. Expenses decreased by 20.3% to CNY 6.3 billion, resulting in a net loss of CNY 730 million. Despite a challenging macroeconomic environment and a decline in new Puhui loan sales by 35%, customer finance loans grew by 23.6%. The firm's credit impairment losses decreased by 14.6%, signaling improved asset quality. Lufax's strategic shift to a 100% guarantee model led to a higher take rate by loan balance. Looking ahead, the company emphasized leveraging synergies with Ping An Group to enhance branding, technology, and operational efficiency.

Navigating a Challenging Environment

In Q2 2024, Lufax Holdings faced a turbulent macroeconomic environment, where the SME development index dipped slightly to 89, indicating persistent challenges for small business owners. This backdrop influenced the company’s performance, notably reflected in a 15.5% year-over-year decline in total new loan sales, falling to CNY 45.2 billion. A deeper look reveals a staggering 35% drop in Puhui loans, which emphasizes Lufax’s strategic shift towards prioritizing quality over volume amidst sluggish demand.

Income and Expense Dynamics

Lufax reported a total income of CNY 6 million, a dramatic decrease of 35.5% compared to CNY 9.3 billion in Q2 2023. This decline was largely driven by a significant reduction in outstanding loan balances, dropping by CNY 44.8 million to CNY 235.2 billion. On the expense front, total expenses saw a more moderate decline, dropping 20.3% to CNY 6.3 billion, suggesting that while the company is controlling costs, its fixed expenses relative to income may rise due to decreased economies of scale.

Credit Performance and Risk Management

One silver lining in the report was a notable improvement in asset quality, with credit impairment losses decreasing by 14.6% to CNY 2.6 billion. This reflects a proactive approach to risk management and an ongoing focus on high-quality customer segments. The C-M3 flow rate for Puhui loans improved to 0.9% from 1.0%, indicating better overall credit performance, while the NPL ratio for customer finance loans decreased to 1.4%.

Strategic Shift to 100% Guarantee Model

Lufax’s transition to a 100% guarantee model has started to yield positive results, with the take rate rising to 9.3% from 7% in Q2 2023. This model aims to provide better financial security and improved returns in the long term. Although upfront provisions for these loans may incur short-term losses, the company believes they will turn profitable over time as the loan portfolio matures.

Operational Efficiencies and Future Outlook

The company also reported significant improvements in operational efficiencies, achieving a 46% reduction in marketing expenses, primarily due to decreased loan-related costs. However, the ratio of operating expenses to income has risen, prompting management to focus on enhancing operational efficiency. Encouraging signs of improvement give hope for a positive outlook on funding costs, which are expected to decrease with the synergies developed from its relationship with Ping An Group.

Shareholder Returns and Future Guidance

Although Lufax reported a net loss of CNY 730 million for the quarter, management has reiterated its commitment to maximizing shareholder value. The special dividend announced earlier reflects this dedication, while the management remains optimistic about potential future dividends, which may range between 20% to 40% of net profit in alignment with the company’s stated policy. Despite current financial challenges, Lufax appears poised for a more robust performance as they navigate the evolving landscape.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Second Quarter 2024 Earnings Call. [Operator Instructions] Please note, this event is being recorded.

Now I'd like to hand the conference over to your speaker host today, Ms. Liu Xinyan, the company's Head of Board Office and Capital Markets. Please go ahead, madam.

[Xinyan Liu, executive]

Thank you very much. Hello, everyone, and welcome to our second quarter 2021 earnings conference call. Our financial and operating results were released by our newswire services earlier today and are currently available online.

Today, you will hear from our Chairman and CEO, Mr. Y.S. Cho, who will provide an update of the recent developments and the strategies of our business; our CFO, Mr. Peiqing Zhu, will then provide more details on our financial performance in the business operations.

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.

With that, I'm now pleased to turn over the call to Mr. Y.S. Cho, Chairman and CEO of Lufax. Please.

[Yong Suk Cho, executive]

Thank you for joining us today for our second quarter '20 earnings call. In the second quarter, the macroeconomic environment remains complex for small base owners. Despite this, we saw continued improvements in asset quality across both our Puhui and customer finance businesses as we continued to implement our prudent strategies. We believe this will provide a solid foundation for our future growth.

Let me provide some updates on the macro situation before we discuss the details. The SME development index trended down by 0.3 points quarter-over-quarter to 89 in June. Meanwhile, the business conditions index published by the Chango Gradeco business declined from 50.1 in March to a 49.3 in June, falling below the 50 threshold and reaching its lowest level for the first half of 2024. These indicators underscore the persistent challenges faced by the small business sector.

Now let me provide some updates on our operating results. First, let's take a look at our loan volume. Our total new sales in the second quarter of 2024 were CNY 45.2 billion, representing a 15.5% year-over-year decline. The decline was mainly caused a 35% year-over-year decrease of Puhui loans, which comprised 51% of total unit sales in the second quarter, reflecting our continued emphasis on quality over quantity and sluggish demand for Puhui loans on high-quality SBOs.

Meanwhile, our customer finance business continues to grow and delivered a solid performance during the quarter. Customer finance loans sold a 23.6% year-over-year increase in new loan sales, representing 49% of our new loan sales. as a result of our continuous efforts to allow smaller and revolving product structures.

Furthermore, we are pleased to observe a notable improvement in the quarter as we adopt more stringent credit standards with focus on higher-quality customer segments and resilient geographies bolstered by our enhanced risk assessment system.

For Puhui loans, the C-M3 flow rate improved to 0.9% from 1.0% in the previous quarter, mainly driven by the improvement of ratio of unsecured loans. Our customer finance loans also saw asset quality improvements with NPL ratio decreasing to 1.4% from 1.6% in the first quarter.

Next, let's take a look at our loans under the 100% guarantee model. As discussed previously, since the fourth quarter of 2023, all new Puhui loans have been enabled under the 100% guarantee model. As our Puhui loan balance increasingly represents loans enabled under this model, our balance take rate has trended upwards, reaching 9.3% during the second quarter, as a negative impact from our high CGI premiums has been eliminated. Thanks to this improved asset quality, our credit costs have remained stable despite increased risk exposure. However, it is worth noting that due to decrease in loan balances, our unit operating expenses have increased, which has become a key drag on our unit profitability.

Let me now provide some updates on our newly acquired POA Bank. By leveraging strategic synergies, with Lufax following the acquisition, PAO Bank delivered solid growth in the first half of 2024, its total loan balance stood at CNY 2.4 billion by the end of second quarter, representing a 45% year-over-year increase. Going forward, PAO Bank is planning to roll out new initiatives, including insurance, wealth management products to better serve SME and retail customers.

To reinforce the strong license strategy we have in the past, we recently acquired a nationwide small lending license. We believe this new license will help further reduce our funding costs, diversify our products and improve our capital management efficiency.

Now turning to the progress of our special dividend. I am pleased to announce that we completed the distribution of special dividends at the end of July as scheduled. After receiving the dividend, Ping An Group's ownership increased to 56.8% and Ping An Group now consolidates our financial results.

Lufax will remain an independent entity listed on New York Stock Exchange in Hong Kong. Meanwhile, we enhanced synergies with Ping An Group, primarily the following 3 key areas. First is branding. Ping An Group is a Fortune 500 company and a leading global financial institution, is a strong global expectation and financial standing we serve as a powerful endorsement for Lufax, deepening trust among our customers and funding partners. This enhanced brand association will improve our domestic and international standing and can potentially have lower funding costs.

Second is technology. We will leverage Ping An Group's extensive technological resources, including AI systems to further strengthen our risk management and food prevention measures. Our goal is to provide small business owners and consumers with efficient, secure and cost-effective financial services. So these channel resources while adhering strictly applicable laws and liberations, we aim to expand our reach by taking Ping An Group's extensive nationwide network for online and off-line channels. This expansion will complement our efforts to strengthen our direct sales force.

In summary, our expanded relationship with Ping An Group will help us better serve our existing customers, using their difficulty and expense of financing. With our strengthened capabilities, we strive to be a benchmark company with an unique law in sustaining the growth of China's vital, small and micro enterprise economy.

While the macro environment remains complex, we are encouraged by the improvements in asset quality and the projects of our strategic initiatives. We remain committed to our deliberate strategic approach as we continue to navigate the economic landscape and have set our sights on achieving sustainable quality growth.

I will now turn the call over to Peiqing who will provide more details for our financial performance and business operations.

[Peiqing Zhu, executive]

Thank you, I will now provide a closer look into our Q2 results. Please note that all numbers are RMB terms and all comparisons are on a year-on-year basis, unless unwise stated.

In Q2 2024. Our total income decreased by 35.5% to CNY 6 million from CNY 9.3 billion in Q2 2023, mainly due to a decrease of outstanding loan balance by CNY 44.8 million from CNY 26.4 billion as of June 30, 2023, to CNY 235.2 billion as of June 30, 2024, partially offset by our interest increased take rate has enabled a 100% guarantee model considered a higher proportion of our total loan book.

Meanwhile, our total expenses decreased by 20.3% from CNY 8 billion to CNY 6.3 billion, among which the total operating expenses declined at 29.7% from CNY 5 billion to CNY 3.5 billion, and credit impairment losses decreased by 14.6% from CNY 3 billion to CNY 2.6 billion. The gap between the decrease of revenues and operating expenses was mainly caused by the decreased economy of scale, which resulted in increased fixed expenses to income ratio. The decrease of credit impairment losses was mainly due to the decrease in actual losses of loans as a result of improvement of credit performance, partially offset by the upfront provision from loans and 100% guarantee model. As a result, we recorded a net loss of CNY 730 million for the second quarter.

Turning to our unique economy for Puhui business. Our APR balance decreased from 20.3% in the Q2 2023 to 19.6% in Q2 of 2024, primarily due to the change of customer mix as we continue to prioritize high-quality customers. Despite the decrease in API, our take rate by balance increased to 9.3% from 7% in Q2 2023 due to our successful transition to the 100% guarantee model. We expect the take rate will further increase as the percentage of loans enabled and 100% guarantee model continues to increase. In addition, our funding cost also decreased slightly thanks to the favorable monetary policy and the support of our funding partners.

On the other hand, while sales and marketing expenses remain stable, credit costs and other operating expenses spread on our net margin. This was primarily due to the construction of our loan balance. Furthermore, while the actual losses decreased as a result of improvement in asset quality, we recorded more upfront provision for loans enabled under 100% guarantee model, as discussed before. While we anticipate this part of the loans will be lifetime profitable, it's important to note that these loans may incur accounting losses in their first calendar year due to higher upfront provisions. This accounting treatment affects our short-term profitability but it is expected to lead to improve long-term financial performance as the loan portfolio matures.

Now let me highlight a few key P&L items. During this quarter, our technology platform based income was CNY 2 billion, representing a decrease of 51%, mainly due to the decrease in retail credit service fees as a result of 44.8% decrease in outstanding loan balance. In addition, it was also negatively affected by the close of the Lujintong business in April 2024.

Our net interest income was CNY 2.7 billion, a decrease of [ 90.3% ] and from the same period last year. The relatively lower decrease in net interest income was the result of an increase in consumer finance revenue. Meanwhile, our guaranteed income was CNY 850 million, a decrease of 26%. In terms of revenue mix, technology platform-based income accounted for 33.4% of our total revenue, down from 44% in the same period last year.

Net interest income and guaranteed income accounted for 45.4% and 14.2%, respectively, of total revenue in Q2 as compared to 36.3% and 12.4% in the same period last year.

In terms of expenses, our credit impairment losses decreased by 14.6% to CNY 2.6 billion. Our total marketing expenses, which includes expenses for acquisition costs as well as general sales and marketing expenses, decreased by 46% and year-on-year basis to CNY 1.4 billion in Q2. The decrease was mainly due to reduced loan-related expenses resulting from a decrease in the new loan sales and outstanding loan balances as well as the elimination of expenses asserted with our Lujintong business.

Operation and service expenses decreased by 15.8% year-on-year to CNY 1.3 billion in Q2, as a result of decreased loan balance and our continued efforts to control expenses, partially offset by increased commissions associated with improved collection performance.

Our finance costs decreased by 90.2% to CNY 13 million in Q2 from CNY 136 million in the same period of 2023, mainly due to decreased interest expenses after the repayment of CRM convertible promissory notes and other debts, partially offset by the decrease of interest income from bank deposits.

In terms of capital at the end of June 2024. Our main operating entities remain well capitalized. Our guaranteed subsidiary leverage ratio stood at 2.4x and our consumer finance subsidiaries capital adequacy ratio stood at 14.7%, well above the 10.5% minimum regulatory requirement. As we deal with the complexity of the broader economic environment and our strategy -- strategic shift to the 100% guarantee model, we are seeing encouraging signs in terms of asset quality and in growth of our consumer finance business. We will remain committed to our prudent strategy as we seek to build a solid foundation for long-term, sustainable, future success. I will uphold our commitment to bringing value to our investors.

That concludes our prepared remarks for today. Operator, we are ready to take questions.

[Operator]

[Operator Instructions] The first question comes from Emma Xu with Bank of America Securities.

[Emma Xu, analyst]

Actually, I have 2 questions. So the first question is about the loan demand. So how is the overall loan demand currently? So we see that in second quarter, you granted RMB 45.2 billion new loans and the cumulative amount of the new loans issued in the first half reached RMB 93.3 billion, accounting for around 42% to 49% of your full year guidance at the beginning of the year. So do you think you are still on track to meet your full year target? And when will we see the turning point of the loan growth recovery? And the third question is that your congratulations on the continued improving asset quality. So your M3 floor rate has declined 2 quarters in a row and down to 0.9% in the second quarter. So do you think you can continue to see the improvement in the flow rate? And how will management try to sustain this good trend?

[Yong Suk Cho, executive]

Thank you, Emma, for your question. The first question, loan demand. Yes, loan demand overall is still weak. For loan growth recovery, it largely depends on macro environment improvement. So while we keep our prudent on lending, we see that from our CF business, the consumption on demand is actually more and stable. So we focus more consumer finance and relatively large consumption loan to cope with declining HCV loan demand in near term, especially the regions where our loan volume contraction is more significant.

And for your second question, we all know that it is not easy to improve flow rates while loan balance keeps declining. But with continuous portfolio mix improvement, what I mean is, now we see them more and more accounts from 2023 and 2024 takes a bigger part of the whole portfolio, which is better account. So we believe our asset quality measured by with continuous improvements. And also, we put tremendous efforts in our risk model underwriting model and also collection model upgrade and then same quality management process. So all in all, we are confident that about sustainability of our asset quality going forward. Thank you.

[Operator]

The next question comes from Yada Li with CICC.

[Yada Li, analyst]

I have 4 questions today. Firstly, I was wondering in what areas do we see more collaboration potential in the future with the Ping An Group?

And secondly, I'd like to ask do we have any plans to further increase the shareholder returns? Looking at the cash at hand and the future loan size, what could be the potential amount available to distribute to the investors? Third, I will notice that the funding cost decreased slightly in the second quarter -- and I was wondering what's the outlook for the future falling cost. And I'll ask, I want to ask why the OpEx to income ratio hiked in the second quarter do we see any room to further improve this ratio? That's all.

[Yong Suk Cho, executive]

Okay. Let me answer your -- this question on Q3. Thanks, Yada. Let me see my notes -- so after special dividends, Ping An Group's ownership increased much close to 57%, so 56.8%. And that we have been working closely with Ping An Group from the very beginning in a few key areas like customer sourcing, right, using their online, offline channels and technology development and maturing. But with increased Ping An bonus now, we expect for has to reduce funding cost in the reputation finance standing. So actually, your third question is about funding costs. We believe funding cost is cumulatively decreasing or optimizing. We believe this trend will continue. And also with the acquisition of that nationwide small loan lending license, that -- license, that comes with better low-funding cost going forward. So we are confident about the funding cost further improvements.

And then the second question, although the Board of Directors has determined that no semiannual dividend will be paid at this time because we made a net loss recorded for the first half of 2014, but management is dedicated to returning value to shareholders. We always seek out potential ways to increase shareholder returns as demonstrated in this special dividend this time. And our annual dividend policy, which is 20% to 40% of net profit and we pay them annually, that policy does not change, remain unchanged.

[Peiqing Zhu, executive]

Okay. About the funding cost, I would like to share some. For our Puhui loan, we expect that just because of the policy, the Central Bank release the variable monetary policy to the market and support -- that will definitely support our partners. And of course, they were partnered to our companies. Together with the synergy of the Ping An Group will enable -- which will enable us to enjoy a low funding cost.

For consumer finance loans, I believe that we will continue to such a lower interest rate in the interbank market. That actually, you can see the trend also in the back market, right, the rate was led by the center bank to going down. And we expect that funding cost to remain at a relatively low level. And generally, we will say that we are optimistic to our overall funding cost that will continue to decrease.

And another question about to our income ratio increased in the second quarter. Although we remain committed to the cost optimization, our OpEx to income material trend upwards during this quarter. This was mainly due to our loan scale contraction, that led to a decline in economic scale. In addition, some of the fixed expenses contributed to limit to the increase. Looking forward, we will continue to improve our operational efficiency by leveraging the technology and synergy and the digitalization and the work together with the Ping An Group and our internal efforts. Thank you.

[Operator]

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

[Xinyan Liu, executive]

Thank you. This concludes today's call. Thank you all for joining the conference call. If you have more questions, please do not hesitate to contact Lufax's IR team. Thanks again.

[Operator]

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