Lufax Holding Ltd

NYSE:LU

Earnings Call Analysis

Net Profit Dip Amidst Stable Pricing and Growth Plans

The company maintained its pricing power amid a business model shift to a 100% guarantee model, where immediate profitability is expected to dip due to upfront provisions but with an improved long-term take rate. Despite the tougher macroeconomic environment, consumer finance thrived with a considerable year-over-year increase in new loan sales and total outstanding balance, alongside a reduction in the NPL ratio. However, total income fell to RMB 8.1 billion, largely due to a decline in the outstanding loan balance and pressure on the SBO segment. The firm posted a net profit of RMB 131 million for the third quarter and paid dividends amounting to $89 million. Additionally, acquisition plans for PAOB are underway, aiming for closure by the first half of 2024.

Adaptation to Market Changes and Emphasis on Direct Sales

The company has observed a positive trend in its direct sales, with 68% of new loans in the third quarter being facilitated by the direct sales team—an increase from 61% in the previous quarter. The Puhui business has maintained its loan pricing stability at 20% without any external pressures to reduce prices. The firm has also completed its transition to a 100% guarantee model, anticipating an increase in take rate and alleviation of costly guarantee insurance premiums over time, although profitability may suffer in the short-term due to upfront provisions required by this new model.

Managing Increased Risk and Maintaining Asset Quality

The Puhui business experienced an increase in its risk-bearing balance, rising to 25.7% by the end of the third quarter as a larger portion of loans fell under the 100% guarantee model. The company expects the total risk bearing, including consumer finance, to rise above 40% by year's end. Despite the challenges, the asset quality of the old loan book stabilized, which should result in fewer overdue payments. Tighter credit standards have been employed to ensure high-quality loans, particularly during uncertain macroeconomic conditions.

Growth in Consumer Finance and Operational Efficiency

The consumer finance sector continued to grow healthily, with new loan sales rising 15.3% sequentially and 48.5% year-over-year. The overall outstanding balance also increased by 9.9% from the previous quarter, highlighting the company's effort to diversity its operations, which also benefitted from the sector's lower funding costs. While the SBO segment faced pressure, operational efficiency was enhanced, resulting in a 6.1% reduction in operating expenses from the previous quarter and a net profit of RMB131 million for the third quarter.

Financial Performance and Prospects amid Macroeconomic Pressures

The company reported a third quarter total income of RMB8.1 billion, a 39% decrease from the prior year, mainly due to a negative growth in loan balance impacted by the difficult macroeconomic environment. Expenses were kept under control, decreasing significantly in sales, marketing, and administrative areas. However, credit impairment losses remained substantial, indicative of adjustments needed to improve the loan book quality. Notably, the company declared a dividend payout of $89 million for the first half of 2023, signaling confidence in its financial health and commitment to shareholder returns.

Strengthening Balance Sheet and Shareholder Value

The CFO highlighted a strong balance sheet with a cash balance of RMB39.8 billion and a conservative leverage ratio of 1.6 times for guarantee subsidiaries, indicating robust financial stability. Moving forward, the company intends to navigate macroeconomic shifts, maintain resilience, and explore avenues to deliver shareholder value, including the potential acquisition of PAOB in the first half of 2024, subject to necessary approvals. These strategic decisions underscore the company's agility in responding to external changes while focusing on long-term value creation.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Limited Third Quarter 2023 Earnings Call. At this time, all participants are in a 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, Ms. Liu Xinyan, the company's Head of Board Office and Capital Markets. Please go ahead, Madam.

[Xinyan Liu, executive]

Thank you, operator. Hello, everyone, and welcome to our third quarter 2023 earnings conference call. Our quarterly financial and operating results were released by our Newswire services earlier today and are currently available online. Today, you will hear from our Chairman and CEO, Mr. Y.S. Cho, who will provide an update of our latest business strategies, the macroeconomic trend and the recent developments of our business. Our co-CEO, Mr. Greg Gibb will then go through our third quarter results and provide more details on our business priorities. Afterwards, our CFO, Mr. David Choy, will offer a closer look into our financials before we open up the call for questions. 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.

[Yong Suk Cho, executive]

Thank you for joining today's call. Macroeconomies recovered gradually in the first quarter. For small B segments, faced a complex landscape and needs more time to recover. We continue to pursue SBO de-risking and diversification, maintaining our asset quality with the goal of improving our asset put overall for long-term healthy and sustainable growth. During the third quarter, while high-quality loan demand from SBO remains weak. Our consumer finance business recorded a healthy growth with the new loan sales volume increase of 15.3% sequentially and 48.5% from the same period last year. We are also taking steps to further diversify our operations by acquiring a virtual bank in Hong Kong. Let me now provide some updates for the third quarter. On the regulatory front, the state count released guidance on promoting high-quality development of inclusive finance. The guidance recognizes the value of nonbank institutions such as guarantee, consumer finance and small lending companies and encourages market participants to take steps to serve the financial needs of SBOs as well as enhanced customer protection. We believe the guidance and recent relator development will promote healthy development of the industry and benefit leading players that upgrade businesses in a compliant manner and with proper licenses. As for the macroeconomic conditions, recent data has shown that China's economy is gradually recovering. GDP in the third quarter increased by 4.9% from the same period last year, putting the economy on track to meet the annual growth target of 5%. During the third quarter, large enterprises demonstrated the strongest signs of recovery, while SMEs continued to face pressure from the broader macro situation. The SME business conditions index published by the Cheung Kong Graduate School of Business declined from 50.2% in June to 49.9% in September. The small and medium enterprises development index published by the China Association of Small and Medium Enterprises was also below the critical threshold of 100 in the third quarter, indicating that the segment will likely cover more slowly than the rest of the economy. Let's explore the impact of these factors on our business. Under the pressure from complex macroeconomic environment, de-risking is crucial for the sustainability of our business. In the third quarter, we continued our strategy of prioritizing asset quality over quantity. We have completed the strategic adjustments initiated in the beginning of the year by reducing our footprint in less economically resilient regions with relatively high risk and optimizing our direct sales force. We believe this difficult but necessary steps will establish the foundation for long-term sustainable growth, as high-quality demand for SBO loans remained weak, and we continue to prioritize prudence in our strategic execution. Newer sales decreased slightly from RMB53.5 billion in the second quarter to RMB50.5 billion this quarter. In terms of asset quality, risk performance of the order book, which are loans enabled for 2023 has stabilized. Meanwhile, all indicators suggest that as the quality of new loans enabled in 2023 is in line with our expectation, although not yet recovered to pre-COVID levels. Next, let me show some strategic updates. We have completed our transition to a business model under which our guarantee subsidiary provides 100% of our credit enhancement. As CGI premiums remained elevated due to the impairment losses suffered by CGI partners. At present, we have secured sufficient credit lines from our funding partners to support our 100%-unit model for the remainder of 2023 and throughout 2024. We are able to make this shift in large part due to our strong capital position. At the end of third quarter, the leverage ratio of our guaranteed subsidiary was only 1.6x, well below the maximum rate to limit of 10x. Switching to our 100% guarantee model, we play an important role in alleviating the impact of elevated CGI premiums, resulting in our 13% to 14% take rate from a long-term perspective, but exerting pressure on medium-term profitability as upfront providence are recorded for new business. Last quarter, we mentioned our strategy to grow our consumer finance business by leveraging the other materials of our consumer finance license and synergies with the pool business, and we continued to implement this strategy. During the third quarter, the new loan sales of our consumer finance business was 20.6 billion, representing a 15.3% quarter-on-quarter and 48.5% year-over-year growth. The NPL of our consumer finance business decreased to 1.9% in the third quarter from 2.2% in the second quarter. The competitive advantages of our consumer finance business have made it an increasingly important part of our business. With our consumer finance license, we can operate this business in full compliance with regulations and benefit from lower funding costs enabled by interbank money markets. With the SEO segments likely to face continuing challenges from the macro environment in the near term, the consumer finance business serves as a good supplement to the pool business, enabling us to further mitigate risk and diversify product offerings. Together with our transition to 100% guarantee model, we will be able to provide more comprehensive products to our target customers with a simpler and better person experience. Now let's turn to a new initiative we are undertaking to further diversify our business. Subject to approval from the Hong Kong Monetary Authority and OneConnect shareholders will acquire 100% of the shares of Ping An OneConnect Bank PAO from OneConnect. At a cash consideration of HKD 943 million, representing 2.2% of our cash at bank as of the end of September. As 1 of the 8 portal banks in Hong Kong, PAOB is a fully licensed bank with a service score similar to traditional banks, but without physical operating branches.As of June 30, 2023, PAOB loan balance was HKD 1.8 billion, and its capital adequacy ratio was 100%, which was substantially higher than relevant regulatory requirement. All of its loans were SME loans in Hong Kong and a significant portion of outstanding balance is backed by Hong Kong government's SME financing at scheme. We believe the business entire customers of key PAOB think well with our existing operations, enabling us to leverage our operational experience and technological expertise in its business development. From a long-term perspective, the prospects of Greater Bay Area also bring upside potential via this banking license. Overall, with a number of steps in the third quarter to carry forward our efforts on de-risking and diversification, including the completion of our transition into 100% guarantee model, further developing our customer finance business and acquisition of the virtual bank in Hong Kong, aiming to create foundations for long-term sustainable growth. In the short term, as most of our strategic efforts on de-risking has been concluded by the end of the third quarter. We expect volume in new loan sales to be stabilized, and we are on track to meet our new loan sales guidance for the full year of 2023 to be in the range of RMB190 billion to RMB210 billion. I will now turn the call over to Greg for more details on our operating results.

[Gregory Dean Gibb, executive]

Thank you, Y.S. I will now provide more details on our third quarter results and our operational focus for this year. Please note old book refers to unsecured loans enabled before January 1, 2023, and new book refers to unsecured loans enabled afterwards. All figures are in Renminbi unless otherwise stated. During the third quarter of 2023, our performance remained under pressure from the complex macro environment and challenges faced by SBOs. Total new loan sales during the third quarter was $50.5 billion, amongst which approximately 40% was contributed by the consumer finance business. Now let's dive into the detailed performance of the Puhui business and the consumer finance business. First, let's take a closer look at our Puhui business. During the third quarter, we enabled 29.9 billion of new loans under the Puhui brand. Despite the pressure on new loan sales, the productivity of our direct sales team further improved during the third quarter. Average productivity for our direct sales team rose by 25.4% quarter-over-quarter, continuing the positive trend we noted in the second quarter. 68% of new loans enabled during the third quarter came from our direct sales team compared to 61% in the second quarter. The overall pricing by balance of loans enabled under the Puhui business remained stable at 20%. We have not encountered any pressure to decrease price and we have the flexibility to adjust our prices to the extent commercially sensible. As we have completed the transition into the 100% guarantee model, we expect to improve our take rate by alleviating the negative impacts of elevated CGI premiums in the long term. Our profitability, however, will suffer in the medium term due to the impact of upfront provisions under the 100% guarantee model. Now let's look at the risk performance of Puhui business during the third quarter. The risk-bearing by balance of Puhui business at the end of the third quarter increased to 25.7% from 22.4% as of the end of second quarter, mainly due to a greater portion of loans enabled under our 100% guaranteed model. By the end of this year, we expect our total risk bearing, including consumer finance to increase to above 40%. The C-M3 flow rate of the Puhui business increased from 1% as of the end of June to 1.1% as of the end of September. Partially due to the 16.1% decrease in outstanding loan balance of the Puhui business. Taking a closer look into the Puhui portfolio, asset quality of our old book was stabilized as the amount of the old book decreased as a percentage of total portfolio, the absolute amount of old book that would become overdue will continue to decrease, although the C-M3 ratio remains at an elevated level. On the other hand, though not yet recovered to pre-COVID levels, asset quality on the new book is in line with our expectation. And we continue to operate with tighter credit standards and focus on higher quality demands from stronger SBOs based in economically resilient regions. In light of the macro environment, we plan to maintain our emphasis on quality over quantity for the foreseeable future. Now let's move on to our Consumer Finance business. Our Consumer finance continued to record a healthy growth during the third quarter. New loan sales in the third quarter amounted to 20.6 billion, increased by 15.3% sequentially and 48.5% from the same period last year. The total outstanding balance of consumer finance loans at the end of the third quarter was 36.1 billion, up 9.9% from the end of the second quarter and up 29.4% year-over-year. The NPL ratio of consumer finance business was 1.9% in the third quarter as compared to 2.2% in the second quarter. Providing smaller ticket size, shorter tenure consumption loans helps to enhance our product line as well as diversify our business operations. In addition, with the increased amount of consumer finance loans as a percentage of new loan sales, the lower funding cost of the consumer finance business will help bring down our overall funding costs. We plan to continue our efforts to grow the consumer finance business while the SBO segment remains under pressure. Due to the aforementioned factors, our total income decreased from 9.3 billion in the second quarter to 8.1 billion in the third quarter, mainly due to a decline in our outstanding loan balance and new loans enabled to SBOs. On the expense front, we maintain our emphasis on optimizing our operational efficiency and decreased our operating expenses by 6.1% from the previous quarter and 31% from the same period last year. Credit impairment losses remained at 3 billion for the quarter, mainly due to the impairment losses arising from the old book. As a result, we recorded 131 million of net profit for the third quarter. As Y.S mentioned earlier, we plan to acquire 100% of the equity interest of PAOB to bring additional diversity to our business. Subject to regulatory and OneConnect shareholders approvals, we hope to close the deal in the first half of 2024. Finally, we are pleased to announce that we have paid out the first half 2023 dividend in October with an aggregate amount of USD 89 million. We'd like to thank our shareholders for their continued support, and we'll continue to use our best efforts to deliver value to our shareholders. I will now turn the call over to David, our CFO, for more details on our financial performance.

[Siu Kam Choy, executive]

Thanks, Greg. I will now provide a closer look into our third quarter results. Please note that all numbers are in revenue terms and all comparisons on a year-over-year basis, unless otherwise stated. In the third quarter 2023, our total income was 8.1 billion. Total expenses were 7.7 billion and net profit was 131 million. As Y.S and Greg mentioned before, our performance was impacted by the macroeconomic situation affecting the SBO segment, and of course, the negative growth in loan balance. This resulted in a 39% decrease in our top line this quarter. During the third quarter, our technology platform-based income was 3.3 billion, representing a decrease of 51.2%. Our net interest income was 3.3 billion, a decrease of 28.4%, and our guaranteed income was 941 million, a decrease of 49.5%. Furthermore, primarily due to the decline in the loan balance, guaranteed income was 941 million compared with 1.9 billion a year ago. For our other income, which mainly includes account management fees collections and other value-added services charged to our credit enhancement partners as part of the retail credit enablement process. The amount was 291 million in the third quarter of 2023 compared to other loss of 129 million in the same period of 2022. Turning to our expenses. We are committed to cost optimization for sustainable growth whilst preserving our core capability. Our total expenses excluding credit assets and impairment losses, finance costs and others decreased by 31.1% year-over-year to 4.7 billion this quarter as we continue to enhance our operational efficiency.In the third quarter, our total expenses decreased by 3.1% to 7.7 billion from 11.1 billion a year ago. This decrease was primarily due to decreases in sales and marketing expenses and credit impairment losses. Our total sales and funding expenses, which mainly include expenses for orders and investor acquisition costs as well as general sales and mining expenses decreased by 43.7% to 2.3 billion in the third quarter. The decrease was mainly due to decreased for acquisition costs as a result of the decrease in the new loan sales and decrease in investor acquisition and retention expenses and referral expenses from platform services attributable to the decreased transaction quarter. Our general and administrative expenses decreased by 15.6% to 500 million in the third quarter, mainly due to our expense control measures and decreases in surcharges. Our operation and subsidy expenses decreased by 7.6% to 1.5 billion in the third quarter, mainly due to our efforts in finance control and decrease of loan balance partially offset by increase in resources invested in collection services. Our credit impairment losses decreased by 24.1% to 3 billion in the third quarter, primarily due to the decrease in provisions of lower receivables as a result of the increased loan balance. Our finance costs increased by 86.9% to 14 million in the third quarter from 3.6 million in the same period of 2022, mainly due to the increase of interest income from bank deposits, plus the decrease in interest costs resulted from a repayment of our CB and our other U.S. dollar debt. As a result, net profit for the first quarter was 131 million compared to the net profit of 1.4 billion in the same quarter of 2022. Meanwhile, our basic and diluted earnings per ADS during the third quarter were both relatively 0.4 or USD 0.1. Turning now to our balance sheet. Our balance sheet remains strong and solid as our cash advance balance has increased since the end of our last fiscal year. As of September 30, 2023, we had a cash balance of 39.8 billion as compared with 43.9 billion as of last year. And as of the end of September 2023, our guaranteed subsidiary leverage ratio was only 1.6x as compared to maximum regulatory limit of 10x. All of these factors offer a substantial backing for the company through the changing macroeconomic landscape, maintaining our residence and creating options to deliver value to our shareholders in future. That concludes our prepared remarks for today. Operator, we're there ready to take questions.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Emma Xu with BofA Securities.

[Emma Xu, analyst]

Actually, I have two. The first one is about the loan demand and new loan pricing. So previously, you mentioned that you are on track to meet your full year loan growth target now, but we just want to get more details about the overall loan demand in fourth quarter so far, including the SME loans and the consumer finance law. And how it will impact the loan pricing for different loan products. And the second one is about the unit economics under the full guarantee model. So we understand that you have been progressing with this model for a while, and we probably get some more data now. So could you please run us through the unit economics under this new model.

[Yong Suk Cho, executive]

Thank you for your question. We see the macro economies surely is gradually recovering, but our major target segments, small business segments attaining more time. So as a result, loan demand of especially prime extra segments remain quite weak. The confidence level within hasn't reached to back to the previous level. So we see a weak current demand. But regardless, as we said in the previous the announcement, we believe we'll deliver this year's newer sales guidance as planned. And regarding overall API, our overall level on portfolio remained stable at around 20%. And then we do not see any further pressure to reduce our loan price YPR. Through our continuous communication with regulators, we see that they are also gradually getting aware that price cannot be simply lowered again and again. Otherwise, we cannot ensure the financial service coverage for the whole SBO segments. So we believe we have more flexibility in the future than before to adjust our loan price as necessary. And to your question about our UE on the full guarantee model. Now we fully switch it to 100% self guarantee model. So this model -- mix of our guarantee plus bank funding to have CGI patterns anymore. So as normal CGI premium paid, our take rate will be a lot higher than before to around 14%, 1-4, 14% level. And going forward, with care, we continue to optimize while reduce our funding cost, but of the 100% receptance model will affect our bottom line in a short-term 1-year term. Thank you.

[Operator]

And our next question today comes from Victor Xu with Morgan Stanley.

[Richard Xu, analyst]

This is Richard from Morgan Stanley. A question on the cost side. Given obviously the loan size has been shrinking and the company had been optimizing the loan side and the client base in the risk environment. Is there any room to optimize the sales force? Because at the moment, I guess, cost control is also a very important aspect that we can probably analyze and see the profitability of the business? Any thoughts on that?

[Yong Suk Cho, executive]

Okay. Thanks for the question. By now, we have completed the adjustment of our sales team. We reduced our sales team, especially in the regions. The local economy is not resilient and then we don't see much development potential. So as a result, we have a lot less number of teams. But our plan has been completed. And now our focus is, we don't have any further optimized plan for sales team. Our focus is more about how to retain our remaining -- the best quality, a lot better than before our quality sales team. And then their project has been -- we see that the platform has been continuously improving at optimization, although we all know that we tightened underwriting policy very much from this year. But still, the remaining direct team, their pathway has been improving. And then we understand the part enhancement is the best way to optimize our cost ratio but also, we to continue our efforts to further optimize our funding costs and other operational costs.

[Gregory Dean Gibb, executive]

So just, Richard, Greg here to add to Y.S' comment. If you look at the third quarter, quarter-on-quarter operation expense is down 6% and year-on-year operation expense is down 31%. So actually, starting in the fourth quarter last year and then progressively up until about July, August this year, we went through quite substantial restructuring. And that restructuring included frontline mid and back office, so pretty far reaching.And as Y.S said, I think given that we have made those adjustments and that we're starting to see improved productivity in the front line. The key now is really to capture the benefits from the ongoing change in the mix of our business, right? So if you look at, for example, Y.S mentioned funding cost, right? Our funding costs through the Puhui guarantee model, when we partner with banks and other trust companies is still ranging around 5.5% on average. But when you look at the consumer finance business, that funding cost is about 3.5%, 3.6%. And then if you look at the new business mix in the third quarter where Consumer Finance made up about 40% of all new business, you can see as that change in the mix of the business occurs, it creates an overall lower funding cost as well. So there's still more room, we believe, in the current interest rate environment here in China to optimize funding costs on the guarantee model, and we'll be working to do that with our bank partners. But the key now really is to take advantage of the fact that the old book, which has really been the source of our challenges, the book written before 2023, that old book as a percentage of our total business, right? So if you take, let's say, unsecured loans written prior to 2023 versus the total, which includes also unsecured business generated post January 1 this year, secured business, consumer finance business, that old book is roughly about half of our outstanding today. And by the next 12 months out, that percentage will drop to low double digit. So we have a situation that the old runs off, the new is performing in line with expectation. Productivity for the direct sales has been lifting consistently in both Q2 and Q3. So we think that the rightsizing things that we have done in terms of the front line are now largely completed, and it's really just now to sort of work through the remaining part of the old book, continue to improve our mix and to continue to be prudent in our new loan growth. And we think that with those steps, I wouldn't say that we are at the end of all challenges at this point, but we've certainly worked through a large part of it. And we think we've rightsized for our future steps.

[Operator]

And our next question comes from Alex Ye with UBS.

[Xiaoxiong Ye, analyst]

I have two questions. First one is on asset quality. So where are we in terms of the legacy asset quality risk? Did the company see any early indicators that asset quality on this part could actually improve? And what driver will be needed for that improvement? And second, regarding your PAOB deal, can you also share some color on that, including any initial thoughts on the future strategy on that bank? For example, what kind of growth prospects should we be expecting? How is the profitability now? And when do you expect it to break even? And also, any color on the asset quality of SME loan book.

[Gregory Dean Gibb, executive]

Sure. On asset quality for the domestic Puhui-branded SBO business right, as we've highlighted, the C-M3 ratio, which is that lead indicator still remains at an elevated level, right? So for Q3, it was at 1.1% versus about 1% in Q2. So it has remained at an elevated level. But if you factor in that our -- this is a numerator denominator issue when you do the ratio, actually, the denominator, for example, has shrunk about 16%. If you look at just a quarter-on-quarter change, right? So if you were to factor that in, you would actually start to see gradual improvement. And if we look through the overall book because that old business written prior to 2023, as I said, is now approaching to be about half of the total portfolio, and that will continue to decline over the next 6 to 12 months. So the absolute loss that comes from the old book will continue to decline. And then what will drive these figures going forward is the portion of the overall portfolio, which is coming from new business. And the performance of that part is in line with our expectation. I think Y.S has outlined that if you look at the quality of new business written since January 1 of this year, it is actually better than new business written in 2022 and 2021. It's not back to 2019 levels because we would expect an improved quality because we are focusing on a higher-quality customer base. We've narrowed our focus on to the best credit quality groups. But we do see that it is generating a profitable outcome. We believe that the new business that we are doing today through its lifetime will be a positive contributor to the company in 2023 and beyond on a per account basis. So we think the asset quality well, it is still challenging. The environment is still challenging. We are seeing a gradual improvement. One other indicator that we've seen recently is that the amount that we're able to recover post indemnity, post 90 days where it's been charged off, that recovery, is actually gradually improving as well this year and in the third quarter. So that we believe will bring some room going forward. So I don't think it's time to celebrate that everything has returned to normal. But I think it is time that we know that we probably have seen the worst, and we will see gradual improvement in overall quality going forward. In terms of PAOB, the digital virtual bank license in Hong Kong, we've actually -- Lu Holdings has been looking at this market for some time. When the initial licenses were issued at 8 of them back in 2019, we did consider at that point looking into it, but then didn't pursue it for other reasons. Given the opportunity to fully acquire this license today at roughly about 1.2x, 1.3x book value, we think is actually quite a good medium-term growth option, a very affordable medium-term growth option for us. If you look at PAOB in the context of the 8 virtual banks in Hong Kong by loan assets and total assets, it's roughly ranked third. And if you look at its relative profitability, it actually has the least losses of any player in the market. And the focus of PAOB while it's still relatively small of about HKD 1.8 billion outstanding loans with about a majority of those backed by the Hong Kong SME government guarantee program. It's quite low risk. If you look at the losses that it incurred last year, it's about HKD 160 million, and we would expect losses this year to be in that range. We would expect to grow the business in the context of Hong Kong on the loan side, diversifying its products a little bit more, diversify its acquisition channels a little bit more, taking our experience in technology, risk and sales force deployment in bringing those into the mix. And we will also look at opportunities, if you look out over the next 1 to 2 years, in addition to lending opportunities, which may extend into the Greater Bank, we have to continue to watch the policy on that closely, but we do think that is the general direction that people want to go. We'll also look at nonlending businesses, where the bank has the ability, obviously, beyond deposits to also do a number of other products. And so those are areas that we will look to develop. So over the next 2 to 3 years with investment in development, we believe this will become a profitable venture for us. And I think if you take the broader perspective of Lu Holdings. And I think if you look at the words that Y.S used today, he mentioned several times, diversification. So the focus really for the last 2-plus years in the current environment has been to de-risk. To reduce our exposure to the SBO segment, while focusing on the high-quality customers and start to diversify our business domestically with consumer finance.And also, I think, through Hong Kong, with this full banking license that gives us long-term opportunities in Hong Kong, Greater Bay, but also could be a launch point for other markets over time. So we look at it as an affordable option for us to continue to pursue diversification strategy.

[Operator]

Thank you. And our next question today comes from Yada Li with CICC.

[Yada Li, analyst]

This is Yada from CICC, and I have two questions for today. The first one is about our Consumer Finance segment. I was wondering how we shifted the strategic focus towards the consumer finance. And looking forward, how much it will contribute to the whole loan book and compared with the consumer finance peers, what are the unique advantages that we have to develop such business? And the second one is that I noticed you have almost 40 billion cash in bank as of this quarter's end. And besides the normal dividend payout, will management consider share repurchase or through special dividend to defer more value to the shareholders?

[Gregory Dean Gibb, executive]

Sure. I'll take your first question on consumer finance. So I think we have to first define what is consumer finance for us. How does it add to what we already have been doing for many years. So if you look at our traditional focus on the small business owner segment. Over time, we've enabled lending to more than 6 million small business owners. And as you know, those loans have always been granted in the form of -- to the individual, mostly for use in their businesses. So actually, we have quite a large installed base of customers that we have interacted with and continue to interact with. Now most of the lending that we have done traditionally has been larger ticket RMB200,000 to RMB300,000 and has typically been for a duration of 2 to 3 years. With our consumer finance license, we have an opportunity to provide a higher frequency service to customers that we have served for many years. So we have the ability to understand those customers, to understand beyond some of their longer-term needs, particularly as they repaid over time, they may have shorter-term requirements as individuals as well. And those requirements could be in form of consumption of their own personal needs. So we have been developing a product that serves these individuals. We've also been developing a product set, which allows us to partner with a number of other online platforms so that we're also reaching out into new customer segments. Today, the business is developing around half with the ability to serve small business owners and their individual needs and the other half through partnerships that extends our reach into the customer base. We continue to invest in this business to generate more and more scenarios, which are closely linked to customers' consumption behavior. I think what's very important, if you look at consumer finance in the context of Lu Holdings, is that it increases our frequency of interaction for those customers we serve. It also gives us a broader data set to understand some of their needs and behaviors, which allows us to better judge their overall credit risk in their various needs. So it's an opportunity to leverage what we have to also broaden who we serve. To deal with a broader set of products with shorter durations, which gives us more flexibility and adds to data that we can use to assess customers more broadly. Today, as we said in the third quarter of total new loan sales enabled through the company, about 40% were for consumer finance. It makes up about 11% of the total outstanding today. If you roll forward over the next 12 to 18 months, we would expect that it will still be a very large share of new sales. It will increasingly make up a larger part of the portfolio, right? So we're now low double digits in percentage of portfolio, and we believe that will continue to increase over the next 12 to 18 months. So it is an important diversification initiative, but it also helps reinforce our overall position in terms of customers and risk and service. David, do you want to address the second question?

[Siu Kam Choy, executive]

Thanks, Yada, for your second question. Yes, we have been exploring all the ways to deliver value to our shareholders as in our listing. As you may aware, we did some buybacks in the previous years, and we continue to pay our dividend in recent years. We will continue to do so, of course. And as you may be aware, we just paid out the first half 2023, the dividends in October with an amount of about USD 89 million. It's just a relatively small amount in terms of -- relative to our cash position. And I think, after all, we won't exclude any means of ways that we can deliver value to our shares as a whole. For the perspective of total shareholders return. And we also find ways to preserve cash or deploying capital in a way to support the sustainable growth for our business model in the future or to create options for future business model and growth.

[Operator]

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

[Xinyan Liu, executive]

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

[Operator]

Thank you. That concludes the call today. Thank you, everyone, for attending, and you may now disconnect.