Chailease Holding Company Ltd
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Chailease Holding Company Ltd
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Welcome to the Chailease Third Quarter 2022 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. And for your information, a webcast replay will be available within an hour after the conference is finished.
And now I would like to turn the call over to Kimberly Lian, the Project Manager of the Chailease Holdings. Ms. Lian, please go ahead.
Hi, everyone. Thank you for joining us today for our third quarter 2022 results conference call. I'm joined by Ms. Sharon Fan, Head of IR Department, and she will open to your questions after my presentation.
Now let's begin the presentation by turning to Slide 3. Today's agenda, including management highlights for the third quarter of 2022, followed by the consolidated performance review and segment review for our major operating regions, including Taiwan, China and ASEAN. This quarter's earnings presentation is available for download on our corporate website under the Investor Relations section. As a reminder, please refer to the disclaimer regarding the forward-looking statements at the start of the presentation.
Now I would like to start the presentation on Slide 4, management highlights. First, the summary table here shows the loan portfolio growth for the quarter. On a year-over-year basis, Taiwan, China and ASEAN loan portfolio grew 27% and 15% and 32%, respectively. On the consolidated level, we achieved 23% year-over-year loan performance increase. As for the year to the third quarter portfolio growth, Taiwan increased 20%, China increased 8% and ASEAN increased 24%, and 16% growth on a consolidated basis.
With the growth pace of this quarter, we expect to achieve our full year consolidated portfolio growth target. Second, consolidated asset quality remains stable. We've maintained delinquency ratio at 2.2%. In terms of new delinquent amount for the quarter, it also remained at a healthy level. Third, in terms of profitability, the cost-to-income ratio maintained, and our operating efficiency maintained at a very efficient level.
Let's move to the next section and overview of our third quarter performance review. Moving on to Slide 6. Consolidated loan portfolio reached TWD 648 billion at third quarter end of 2022, with 23% year-over-year growth and 6% quarter-to-quarter increase. Business momentum slightly picked up in this quarter versus previous quarter for all 3 operating regions, namely Taiwan, China and ASEAN.
Next slide. Slide 7 shows you the trend of consolidated average loan year and cost of funds for the past 3 years. As you can see, we maintained relatively stable interest spread, with both increasing yield and cost of funds in the recent rising rate environment. We will discuss the changes of each operational region in the next section.
Slide 8. On the left-hand side, the consolidated revenue for the first 9 months of 2022 reached TWD 63.4 billion, representing 20% growth compared to the same period of last year. On the right-hand side, third quarter 2022 consolidated revenue increased by 5% from previous quarter.
Slide 9. On the left-hand side, the consolidated net profit for the first 9 months of 2022 totaled TWD 21.1 billion, and earnings per share was TWD 13.31. The higher net profit growth compared to revenue was mainly driven by the effective tax rate. This year, the consolidated effective tax rate is back to a normal level at around 28% compared to last year, which is at a level of around 33%. On the right-hand side, third quarter consolidated net profit was only up 1% quarter-over-quarter due to increased expected credit loss was booked for the third quarter.
Turning to Slide 10. This page shows you the loan portfolio mix and the profit contribution in terms of our operating regions. On the left-hand side, we can see Taiwan business accounts for 51% of group's total portfolio; China accounts for 33%; and ASEAN, 15%. On the right-hand side, for the first 9 months, Taiwan net profit contribution accounts for 50% and China accounts for 43%. ASEAN contributed 6% to the consolidated profit if excluding minority interest.
If we compare 2022 to 2021, as Taiwan and ASEAN's portfolio continued to grow and outperform in the first 3 quarters of 2022 22, each portfolio contribution to the group increased compared to previous year. China has a slow growth pace this year due to COVID lockdown policy. Therefore, the contribution decreased a little bit compared to the previous year.
Moving on to Slide 11. The chart on the left-hand side, cost-to-income ratio, continued to maintain at 25% for the first 9 months, with operational efficiency continued to stay efficient. The chart on the right-hand side, asset to equity, decreased to 5.7x for the quarter after our equity fundraising through GDR offering in July.
Slide 12. The consolidated return on assets on an annualized basis was 3.8% for the third quarter end. The ROA improved compared to last year due to better profitability this year. The consolidated return on equity on the right-hand side was 26% for the quarter. The calculation of this ROE was excluding preferred shares.
Next slide, Slide 13. The consolidated delinquency ratio on the left-hand side at third quarter end of 2022 was maintained at 2.2% compared to prior quarters. Later in the presentation, I will talk about each region in more detail. Moving to the right-hand side, allowance-to-loan portfolio ratio also maintained at 2.1% compared to previous quarters.
Moving on to segment review, let's look at our operational performance region by region. Let's start with Taiwan operations first. On Slide 13, Taiwan's loan portfolio reached TWD 333 billion at third quarter end, representing 27% year-over-year increase and 7% quarter-to-quarter increase. The new disbursement for consumer financing-related business, such as used car financing and new car payments, overseas lending in U.S. dollar-denominated business, also including shipping financing, was the main growth driver for the year.
Slide 16. This slide shows the change of Taiwan Solar assets. Taiwan Solar net asset reached TWD 43.2 billion asset quarter end of 2022, representing 23% year-over-year increase and quarter-to-quarter was up 4%. The Solar asset account about 11% of Taiwan's total asset as of this quarter end.
On next slide, Slide 17. This page presents the trend of our Taiwan loan yield and funding costs. In recent quarters, the loan yield and funding cost slightly increased, reflecting the benchmark interest rates rising this year. Although our pricing strategy has been repricing to the new contracts based on the increasing funding cost, it will take some time to fully factor into our spread target.
Moving on to Slide 18. Revenue for our Taiwan operations for the first 9 months of 2022 reached TWD 33.6 billion, representing 27% year-over-year growth. The Solar revenue account about 13% of Taiwan's revenue for the first 3 quarters of this year. But the quarter-over-quarter compared to on the right-hand side. Third quarter revenue grew by 6% quarter-over-quarter, which is in line with our strong portfolio growth in the third quarter.
Turning to next slide, Slide 19. Taiwan's profit for the first 9 months of 2022 grew by 29% compared to the same period last year. Bottom line growth is in line with the top line increase, reflecting maintained cost-to-income ratio and stable asset quality. The third quarter current net profit grew by 11% quarter-over-quarter and the net profit growth rate was better than the portfolio growth due to more contribution from the disposal gain of operating lease assets in July.
Slide 20. On the left-hand side, Taiwan's delinquency ratio at third quarter 2022 was improved to 1.9%, with more write-offs and recovery from delinquency for the quarter.
Next slide, Slide 21. Allowance to loan portfolio for Taiwan is at 1.7% at third quarter end. The allowance amount remained sufficient at third quarter end.
Next slide, China's operation on Slide 22. China total loan and receivables reached TWD 214.2 billion at third quarter end, which grew by 15% year-over-year and 4% quarter-over-quarter, which shows gradual pickup of the business momentum in the second half of 2022.
Turning to Slide 23. This page shows the loan yield and cost of fund trend for our China operation. We continued to maintain stable spread over the quarters.
Next slide, Slide 24. China's revenue for the first 9 months totaled TWD 22 billion, increasing 8% year-over-year. The sequential increase on top line growth for the third quarter was 4%, and this growth rate is better compared to the previous 2 quarters.
Moving on to Slide 25. China, for the first 9 months of 2022, net profit reached TWD 10.1 billion, increased by 6%. The lower growth compared to the top line was mainly due to more expected credit losses booked starting from the second half of this year due to slightly increase of delinquency ratio and the lower visibility of macroeconomic in the near future.
On the right-hand side, China's third quarter 2022 net profit was down 9% as more expected credit loss was booked in the third quarter and, thus, tax rebate for China was recognized for the third quarter compared to the second quarter. The second quarter tax rebate is RMB 50 million versus RMB 30 million in the third quarter.
Turning to the next slide, Slide 26. On the left-hand side, China's delinquency ratio at the third quarter was up 0.2 percentage points to 2.4% compared to prior quarters. The more delinquent amount is rising a bit compared to last year. However, our asset quality is still regarded healthy at this delinquency ratio, if you compare our historical delinquency ratio of our China operation for the past 10 years. Please refer to the appendix on Page 43 for your easy reference.
Slide 27. China's allowance to portfolio ratio at the third quarter 2022 was slightly increased to 2.3%, and more provision was reserved this quarter.
Moving to ASEAN on Slide 28. The ASEAN total loan and receivable at third quarter end of 2022 reached TWD 95.2 billion, up 32% year-over-year and 7% increase quarter-over-quarter. Thailand, Vietnam and Malaysia remained as the main growth driver for ASEAN this year.
Let's turn to Slide 29, the left-hand side. ASEAN's revenue for the first 3 quarter of 2022 totaled TWD 7.5 billion, grew 31% compared to the same period last year. On the right-hand side, ASEAN's third quarter revenue was up 8% sequentially.
Moving to Slide 30. ASEAN's first 9 months of 2022 net profit reached TWD 2.1 billion, increased by 27%, which is quite in line with portfolio and revenue growth. On the right-hand side, our third quarter 2022 net profit was also down 5% sequentially. The bottom line grew much slower than top line for ASEAN this quarter, which has more expected credit losses booked at the third quarter and more [ exchanges ] expense.
The last slide, Slide 31. On the left-hand side, ASEAN's delinquency ratio at the third quarter decreased 0.2 percentage points to 2.8% compared to second quarter of 2022, showing slightly improved and stable asset quality. On the right-hand side, ASEAN's allowance to portfolio ratio at the third quarter 2022 was 2.9% as more write-off in the third quarter.
And this also brings us to the end of my presentation. Thank you for your time. And I would like to turn the call to Jason to open the line for questions. Jason?
[Operator Instructions] Our first question is coming from Yafei Tian of Citi.
I have three. The first one is on the spread. This is the second quarter we actually see double-digit dips of decline in our spread. It's mainly driven by funding. But can you give us a little bit of color on the funding cost trajectory that you can see in the quarters to come, given that the CBC, as well as you said, are likely to continue with the hiking path. So could we expect the net -- the spread, the margin to be under pressure for a few more quarters before it's stabilized?
The second one is on delinquency. It looks like there is a bit of a difference in how you classify delinquency in different markets. Can I just double check that delinquency in Taiwan and China in 30-day past due and in 90-day past dues in ASEAN?
Because the reason for asking is that in the Chinese call, it looks like the CFO was explaining the increase in the ASEAN credit cost was driven by a bit of increase in probably less-than-30-day past due, which is more recognized as delinquency yet. Just wanted to get a little bit more color on what's driving the increase probably in overdue loan in the ASEAN region. My thinking was that ASEAN has been on an improving trend this year.
And the third question is on loan growth. Obviously, quite a strong year for markets outside Mainland China. Just wanted to understand the sustainability of this growth momentum outside China, particularly Taiwan, given it's a very mature market. Do you expect that pace to sustain? What is driving this very strong loan growth so far?
Okay. Let's start on the first question about our funding costs and this increased rate environment. Actually, I think we are still in this rising interest rate kind of a scenario. And also, we don't expect this funding cost will go down too soon. And -- but however, we've been communicating that, actually, we are able to reprice for the new loans.
And also, our asset duration for this equipment leasing is relatively like short term and no longer than 3 years. So we will continue to try to factor in our increased funding cost into our new pricing. But it will take some time to gradually like fully factor in. So I think, in the near term, we still have some negative impact on this interest rate increase impact.
So -- but so far, as you can see, we still can maintain our -- the spread at a reasonable like level. Especially if you look at our China spread for this quarter, it's already improved a little bit from previous quarter. And I think, hopefully, that we can like get our target spread back to normal level and -- that's about the increased rate.
And as for the delinquency, actually, we never changed our definition of the delinquency for like SME equipment leasing, which is a major product offering we offer like in China and still account for like 30% of the business in Taiwan. We are still using the 30 days past due as the definition of the delinquency. But for more like auto financing, the kind of product offering that was our core product, we offer in like Thailand, Malaysia, that we are using 90 days. It's more similar to the consumer financing kind of definition.
So for that kind of auto financing product, it's more like using the consumer financing product, that we are using the different vintage to estimate the required provision. And so we have like different buckets. Like for overdue 30 days, overdue 50 days and 90 days, for different buckets, we have different reserve ratio.
And what our CFO mentioned in the Chinese session of this conference results call is that, in ASEAN for this quarter, although you didn't see too much change of the delinquency ratio because we are using 90 days as the definition of the delinquency, but actually, from the viewpoint of the provision setup, we have different provision ratio for different buckets, like 30 days, 60 days and 90 days. So yes, we probably -- we have some more like -- several growth among those 3 buckets. So that's a little bit different. It's nothing to do with the definition change. And yes, that's about the delinquency.
And about the loan portfolio growth outlook for Taiwan, I think management has been consistently like communicating that for mid- to longer term. Our Taiwan can achieve around the kind of double-digit growth rate. But since in the recent couple of years, we are able to perform long-term growth target more because we have some relatively new business units. You can generate higher than like 10% of the annual growth rate, like our Solar business, like our consumer-related financing business units, used car financing and buy now, pay later, that kind of business.
And in the recent couple of quarters, also one of the sector-growing business is like overseas financing business, also contribute quite good growth driver to Taiwan operations. So yes, so that, I think, from a mid- to long term, we are still confident that we can generate like double digit of the growth. And -- but for a more clear growth plan for next year, probably we need to wait later, that's after we complete our year-end like annual business planning review session. And our CEO will share our growth target for next year with you, yes.
Can I follow up on that spread? And from the question, I just want to understand what percentage of your funding is floating rate, i.e., it's repriced relatively quickly. And obviously, asset side, you mentioned, is on average 2 to 3 years repricing, right? So I just wanted to understand the timing of the repricing.
For example, like if our phasing is for 3 years, but every month, our customers need to repay. So probably, every year, 1/3 of that asset will be retired, so for the new business that we are able to reprice to reflect the new funding cost. And in terms of the borrowing cost, because in Taiwan, the increase -- benchmark rate increase, I think, the scale is not as big as like in the U.S.
And not mentioning in China, actually, is -- the benchmark rate even like decreased a little bit currently. So -- and also, in China, we are more -- rely on the bank borrowing through the syndication loan. And it will like -- we -- based on the benchmark rate, adjust it every quarter. So -- so far, we didn't see significant change of our borrowing cost in -- for China operation. And for Taiwan, still within the manageable like range.
So the U.S. dollar part, if you were...
For U.S. dollar business, it's much less subject to the interest rate variation because we are more using the floating rate for the lending rate.
Okay. So the funding cost increase is mainly because of CBC rate hike. So the spread contraction is mainly because the Taiwan CBC rate hike. So your funding actually repriced within 1 quarter in Taiwan and the asset takes time to come through, right?
Yes. Yes, you are right.
Next question is coming from Chung of Credit Suisse.
Sharon, I actually want to ask about Taiwan asset quality. I think, on surface, it looks like it's benign. But when I input your Q3 number into our model, we've seen a pretty rapid increase in Taiwan's new NPL influx of around 3.3% annualized. That comes from about 2.7% a few quarters ago. It was as low as 1%-ish about a year -- slightly over a year ago.
Just wondering, what's driving this increase in new NPL influx? Is it because of our growing new business in consumer segment and auto leasing? And do you see this coming down soon because this new NPL influx rate, I'm not sure if we can maintain credit cost run rate at 1.1% that we see in the first half this year. And so I just wanted to get some color and clarity on this first.
Okay. I think in the time line, delinquency ratio actually improved. But if you calculate the new delinquency amount increase like compared to last quarter, I think it's more because we have a bigger like base for the Taiwan portfolio. Taiwan achieved like 15% to 20% of the portfolio growth for the past couple of years.
And so even with this kind of increased delinquency amount compared to our bigger portfolio base, I think we still believe our Taiwan quality still maintain a very healthy level. And so therefore, the credit cost should be mentioned around similar level, yes.
Yes. And I know the delinquency ratio dropped because of the big charge-off in the quarter, right? But the increase in delinquency loan amount is outpacing the pace of your portfolio growth, right? So your delinquency influx ratio is running at 3.3% in the third quarter. I'm just wondering if this is a one-off in Q3? Or...
No. Because you cannot just do this kind of comparison for exactly the same quarter, our -- the delinquency, sometimes it will pour into like a different period of time. So if you want to see more representative, probably, we need to like look at the yearly number. So this kind of quarter-over-quarter variation actually is quite normal to us.
Okay. Is there any seasonality -- that Q3 new NPL influx ratio is higher?
I think it's not about seasonality. Probably, I need to check back to last year because, as we explained before, usually, the peak of the possibility of it being -- going default is -- occur like around 10 months or 12 months after the new disbursement. So I need to check back to like 1 year ago, whether, for that particular month, we have a better like business volume.
Okay. Perhaps I can follow on with you after the call. And my second question is on the -- China. In the past, we talked about this account receivable recovery rate. Can you give us like a number on that? And appreciate you gave us the appendix, Page 43 is historical annual delinquency ratio for China. Just wanted to ask of you is, what do you see as the average cycle, average delinquency ratio for China? Is it 2.5%? Or is it 3% based on this chart?
The monthly account receivable collection rate, actually, we didn't see it continue to improve from like previous couple of months. Right now, it's still below 99%, above 98%. So we are not satisfied with this collection rate, actually. So that's the reason why management decided to increase a little bit of the provision and for this low visibility of the macro economy.
And so currently, it's below 99%, about this monthly account receivable collection rate. And we already like accumulate like 10 years of this China delinquency ratio historical statistics. I think probably, internally, we expect that probably, right now, we are more confident to say that the China reasonable delinquency ratio probably will be ranging from like 2-point something to 3-point something percent, yes.
Next question, Gurpreet Sahi of Goldman Sachs Hong Kong.
I just wanted to follow up regarding the credit question in China. So when the general provision step-up that we did YTD, and our outlook, as Sharon right now mentioned, is like between 2% to 3% delinquency range in that. And also, collection efficiency has improved, but not at the maximum level. So our outlook should be that credit cost in China is like at 1.5% or between 1.5% to 2%. That's the kind of peak for this cycle? That's what we are trying to commit here?
Okay. I think our CFO in the China session results call session mentioned that for this year, we expect our China credit costs will be, for the full year, average should be around 1.6%, yes. But because we have lower credit cost in the first half, so in the second half or third quarter or fourth quarter, I think, for the individual quarter, the credit cost will be a little bit higher than 1.6%. But for the full year, it should be around this 1.6% of the credit cost for China this year.
And if our China delinquency ratio can maintain at this like 2% to 3% or 3-point-something percent this kind of range, I think, probably we will maintain around similar credit cost for this year and probably increase a little bit. Because remember, for the first -- although, this year, the full year average is like 1.6%, but we have a low credit cost in the first 2 quarters this year is kind of -- we were from the overprovision in last year. So yes. But I think the more confirmed numbers need to be waited until we finalize our next year's budget plan.
Okay. Understood. And then on the spread, following up on the reply that you gave, it seems like the cost of funds has gone up a lot, if it is just driven by Taiwan dollar and U.S. dollar funding cost. So help us think out like, let's say, we assume that there is no further pickup in U.S. dollar interest rates and Taiwan dollar interest rates, so then this group cost of funds of 2.5% for the third quarter, can that be flatlined? In other words, is there a lag in terms of market rates and then move into the funding cost?
I think the funding cost is more -- reflect the current situation. And yes, you're right. The increase of the funding cost mainly driven by the Taiwan funding cost because Taiwan CBC also adopted an increase like increased policy over the past couple of quarters. And also, the U.S. dollar increased the funding cost. But we are not able -- say, worry about it, the U.S. dollar increased rate increase for our Taiwan business, because most of the product, which is denominated in the U.S. dollar, actually, we repriced with the growth in rate. So the impact is minimal. But for the Taiwan dollar like business, yes, it will have some impact.
Okay. So in summary, and this is the last thing I'm going to ask about, let's say, the Taiwan loan yield, right, it only went up to like 8.6% now. But if you look at cost of fund, it has really gone up like 60, 70 basis points from the low. So loan yields, we should expect it to go up in the next couple of quarters as you kind of have the floating option and things reprice up?
Actually, it still should be several mixed factors about our branded pricing yield for Taiwan business. Remember, in Taiwan, we also have some higher spread business, especially for those relatively new business units, like consumer-related financing business, that has a higher growth rate compared to the traditional like SME leasing business. So without interest rate -- benchmark interest rate increase, actually, we should be able to gradually like increase the spread, right? So I think it's a mix result -- it's a result of the mix factor.
Yes. So that has happened. The mix thing has played out over the last 2 or 3 years, right? So Taiwan has gone up a lot. But just the interest rates that happened in the Taiwan dollar over the last 2, 3 quarters, would that then lead to higher loan yield -- even higher loan yield?
Yes, yes, yes. In terms of the product mix gradually like adjust.
Okay. Understood. So it's mostly mix, right? In terms of, let's say, if you are doing equipment leasing in Taiwan and your cost of fund has gone up. So that particular customer, over the next couple of quarters, will not get higher borrowing rate?
Yes, for the existing contract, we didn't change the price. It's fixed.
Next question, Edwin Liu of CLSA.
So my first question is actually to follow with my peers. So in terms of the growth -- portfolio growth in Taiwan and ASEAN, I just wonder how much of it is due to structural trend or how much is more cyclical? The reason we ask is because, maybe next year, we could see possibly a recession coming. So how that is going to affect the portfolio growth momentum for Taiwan and ASEAN? So that would be my first question.
Are you referring to the next year growth?
Yes, yes, yes. I know you won't give us guidance right now, but just in terms of the trend of the momentum, if, say, there's a recession next year, how much growth it would be affected due to recession?
Actually, usually, it's November, right, we're in process of doing our annual business review and start to build the next year's business client profile. We are still planning for growing in every operating region. And especially for Taiwan, I think we have better visibility here because it's our home market. And we have a much more diversified product offering that we can drive our growth -- overall growth in Taiwan.
And in ASEAN, right now, we already set up our ASEAN operation for some years and built up some solid foundation in every country, so -- and has more experience for each product in the market. So we are also optimistic, I mean, comfortable continuing to drive some business growth for our ASEAN operation. So I think that's so far we can share. So probably, we need to wait before we finalize next year's business plan.
Just another question in terms of growth, and we switch to Mainland China. So could you give us the latest headcount for your China operation, just to gauge what would be the headcount growth there year-to-date?
Headcount, so far, we still maintain our mid- to long-term growth strategy that we will increase like around 10%, 10% to 12% of the headcount net increase, to continue to implement our geographical expansion business plan in China market, yes. And also, if you look closely at our quarterly, the China portfolio growth, you can see actually for the third quarter, we already see some driving momentum pickup in terms of the portfolio growth compared to second quarter. So I think this is kind of a positive time for us.
Sure. So just my last question, we'll go to ASEAN. So as you mentioned, the credit cost in third quarter is higher than the second quarter. But in terms of allowance level, it actually dropped compared to last quarter. So I just wonder how we should think about the math here. Because if you increase your credit cost, I suppose, I guess, the allowance level should increase, right?
I think, actually, if you -- I mean, for the delinquency ratio trend, you can see it still remained quite stable. So we can expect the credit cost for ASEAN overall should be stable -- to keep stable level at the similar level going forward, yes. Also, [indiscernible] will increase a little bit, but for the overall, it should be maintained at this level going forward.
Next question, Jemmy Huang of JPMorgan.
Just 2 questions from me on China. I think the first one is, if you look at your asset quality migration in different -- with different provinces, from your understanding, from your analysis, do you think the asset quality deterioration is mainly driven by the lockdown measures from time to time in different cities? Or any structural reasons behind for the overall China economy as most investors have been concerned about. So my question is, if we are seeing gradually lifting up on the lockdown measures in the coming quarters, in the next 12 to 18 months, should we expect asset quality to be stabilizing or maybe even further improve in 2023?
And the second question is, our understanding is most of your customers have interaction or relationship with small local banks there. So from your understanding, your customers' activities or transactions with the banking -- with their local banking partners, have they been receiving more support? Or actually, they've been facing some tightening, and therefore, they need to turn to you for more funding as a result.
Okay. Regarding your first question about the China delinquency ratio trend, whether it's because of the lockdown, I think, compared to like 2 years ago, this lockdown impact gradually like getting smaller and smaller. And I think this slightly increase of the delinquency ratio is more driven by the slowdown of the macro economy and across the board.
So probably, we do see some of our SME client, they -- their like revenue stream got impacted or their -- that because of this slowdown of the macro economy. So I don't think it's really driven by the lockdown practice. Lockdown probably will have some short-term like impact. But I think the major reason still will be related to this market demand, driven by the overall macro economy.
And -- so your second question about the -- our SME clients. The SME, they got more support from the local banks. I think probably if we compare to last down cycle in China, back to year 2015, '16, this time, actually, yes, the government policy is more supportive. They try to maintain or inject more liquidity into the market to help business, including the SME, who went through this difficulty, like economy cycle.
And actually, this is also good to us regarding our asset quality because our SME clients, they still can get the reasonable like support from the traditional commercial banks. And we also get the benefit to maintain our asset quality, yes.
If you think the asset quality trend is more related to the network slowdown, and if, let's say, the GDP growth will be somewhere around 4%, 5%, that kind of level or even lower, then what kind of reasonable credit cost or delinquent ratios or more normalized level that you think is reasonable for the China operation?
As I mentioned earlier, we already accumulated like about 10 years of data points. And we've got more diversified service, I mean, business in China operation. And so -- or more experienced team. And as I mentioned earlier, we -- I think probably like ranging from 3, 3-point -- like 2-point something to 3-point something will be a reasonable range for the China delinquency ratio.
[Operator Instructions] Next question is coming from Yafei Tian of Citi.
I just have a quick follow-up on that loan loss guidance for China of 1.6%. Because the loan loss is different to the provision ratio that you used on the new loans. Loan loss is loan losses. So I just wanted to be 100% certain on that guidance. So previously, you guided that the provision ratio for China is going to move towards 1.5%, 1.6%, right, you guided in Q3. And now the guidance is, for full year, 1.6%. So does that imply your first quarter is actually going to be a lot higher than 1.5%, 1.6%?
Because in first half, your credit cost was only 1%, right? I don't know what your Q3 credit cost for China. But does that mean Q4 credit costs will be higher than Q3 based on what you are seeing? And if yes, should we extrapolate the Q4 for next year? So I just want to back up what is the credit cost guidance for Q3?
No. I think the Q4 credit costs should be similar to Q3. And both Q3 and Q4 -- I mean the second half will be higher compared to the first half. But for the Q3, Q4, it should be similar level.
Around 2% then because we are guiding for 1.6%, right? So if you double 1.6%, that's 3%, right? 3% for -- and then you minus -- so around minus 1%, right? So guiding slightly over 2%, right? Slightly over 2% credit cost, yes?
Yes.
So what is the underlying allowance ratio for your new loans for Mainland China as a result of this credit cost?
Allowance ratio, what do you mean?
Yes. Because you make -- because when you make new lending, you make allowance on the expected...
I think the more relevant should be the 1.6%, as our CFO mentioned. But the allowance ratio, which we call the general provision ratio, it's only applied to the [indiscernible] yes, it's only applied to the new business volumes, yes. And it was around 2-point something for the third quarter.
So this is slightly higher than what you guided in the end of second quarter, right? Because end of second quarter, you were guiding this ratio to be about 1.5%, 1.6%.
Starting from July, yes. I think in -- when we do the second quarter results call is in July and that's the first month of the third quarter. I think, at that time, our CFO, he based out what we see the overall like the asset quality. He planned to -- he said that probably we will have set up 1.6%, that kind of general provision ratio, yes. But right now, we have better visibility for the full year because it's already approaching to the third -- fourth quarter. And right now, our most updated credit cost should be 1.6% for the full year.
Okay. Yes, I just want to be very certain that you are actually guiding up credit costs versus the second quarter guidance, right?
Yes. A little bit, yes.
Yes, yes. So then the concern -- I think the question would again be, would we -- should we use the second half 2-point something as a reference for next year in terms of credit cost?
Second half, probably not. Because for the second half, we kind of need to set aside more to compensate for the first half lower, the reverse part.
Right. So you're saying there is some conservatism to your 2% number, so hence, we should not extrapolate?
Yes. So -- yes. But this is still a very dynamic kind of estimate. We would still need to see what the result for the most updated like for the fourth quarter as a part of the situation, like the delinquency ratio, et cetera. So -- but so far, as of now, what we can see is that your estimate is correct.
Can I also ask a little bit about the collection rate of slightly below 99% that you have been referencing in the recent conference calls, right? Because you have a very long operating history already. So based on what you observed historically, your collection rate reached this solid level, what is the corresponding delinquency or loan losses?
Because it looks like, for you, it has stabilized at this level, right? So there must be some visibility for you to use this collection rate as a kind of reference to estimate your credit cost and delinquency. So I just wanted to have an understanding to link that collection base to delinquency. And if, let's say, collection rate decreased a little bit further, what will be the implication? And what was the collection rate back then in 2015?
We just started to monitor this monthly account receivable collection rate since the pandemic outbreak, first outbreak in year 2020. So we don't have that kind of long history of statistics. And the only, I think, meaningful reference point is that during the -- I think it's in May of 2020 when the lockdown situation, the worst at that time, the lowest collection rate was 94.8%, below 95%. And during that quarter, our China delinquency ratio was 5.4%.
Got it. And then it recovered.
Yes, yes. It recovered quite soon, starting from the third quarter of that year, yes.
Got it. I understand. So it sounds like it's just 1% minus collection rate will be that delinquency, right? Is that kind of fair?
Yes. So it's only the reference point that we can refer to. And so, so far, currently, we can maintain like 98-point-something percent of the collection rate should be [ classified like good ], yes.
Next question, Gurpreet Sahi, Goldman Sachs Hong Kong.
A quick follow-up. So first of all, thanks for the comments regarding second half, first half credit cost. That helps. Because that was my understanding that you are doing some catch-up in the second half, and we should model for the full year credit cost in China and not the second half. So my question is, if you -- if we have conviction that the delinquency rate this time in China is at max 3%, right, that is the number you're saying, then can you help us think around loss given default?
So let's say, if we get to a loss given default from that 3%, then we can work on the likely credit cost. So a simple way I think about it is, whatever is the loss given default on the delinquency, I multiply and then get to a credit cost number. So just talk to us about how it has been very recently because, historically, you have given us a number closer to 40%, or something like that.
I think, so far, we -- our average loss ratio for China is still around [ 50% ]. So if our delinquency ratio is 3%, the actual credit cost will be around 1.5%.
Okay then, Kimberly, there are currently no questions at this point. Thank you.
Okay. We can end the call. Thank you.
Thank you. And ladies and gentlemen, we thank you for all your questions. That will be the end of the conference. We thank you for your participation in Chailease conference. You may now disconnect. Goodbye.