Lufax Holding Ltd (LU) Q1 2024 Earnings Name Transcript

Lufax Holding Ltd (NYSE:LU) Q1 2024 Earnings Convention Name April 22, 2024 9:00 PM ET

Firm Members

Xinyan Liu – Head of Board Workplace and Capital Markets
Yong Cho – Co-CEO & Chairman of the Board
Gregory Gibb – Co-CEO & Director
David Choy – Chief Monetary Officer

Convention Name Members

Emma Xu – Financial institution of America Securities
Chiyao Huang – Morgan Stanley
Yada Li – CICC

Operator

Girls and gents, thanks for standing by, and welcome to Lufax Holding Restricted First Quarter 2024 Earnings Name. [Operator Instructions] After the administration’s ready remarks, we may have a Q&A session. Please be aware, this occasion is being recorded.

Now I might like handy the convention over to your speaker host as we speak, Ms. Liu Xinyan, the corporate’s Head of Board Workplace and Capital Markets. Please go forward, madam.

Xinyan Liu

Thanks very a lot, operator. Hi there, everybody, and welcome to our first quarter 2024 earnings convention name. Our quarterly monetary and working outcomes have been launched by our newswire companies earlier as we speak and are at the moment accessible on-line.

Right now, you’ll hear from our Chairman and CEO, Mr. Y.S. Cho, who will present an replace of the macroeconomic developments and the current improvement and the technique of our enterprise. Our co-CEO, Mr. Greg Gibb, will then undergo our first quarter outcomes and supply extra particulars on our enterprise priorities. Afterwards, our CFO, Mr. David Choy, will supply a more in-depth look into our financials earlier than we open up the decision for questions.

Earlier than we proceed, I wish to refer you to our secure harbor assertion in our earnings press launch, which additionally applies to this name as we shall be making forward-looking statements.

With that, I am now happy to show over the decision to Mr. Y.S. Cho, Chairman and CEO of Lufax, please.

Yong Cho

Thanks for becoming a member of as we speak’s name. Within the first quarter, we witnessed an enchancment in our early threat indicators. Nevertheless, high-quality mortgage demand from small enterprise house owners remained subdued. Whereas our elevated threat publicity stemming from our 100% assure mannequin means, we’ll be prudent and affected person in new enterprise improvement. Our emphasis continues to be on high quality over amount.

Earlier than diving into enterprise efficiency, let’s check out the macro setting. General, the setting confirmed indicators of enchancment in the course of the first quarter. The Buying Managers’ Index or our PMI, which measures prevailing developments within the manufacturing and repair industries, each trended positively. The index elevated from 49 in December 2023, to 50.8 in March 2024 for manufacturing, whereas it elevated from 49.3 to 52 for companies.

Regardless of enchancment within the macro setting, the SBO section recovered at a comparatively gradual tempo. For instance, the SME improvement index printed by the China Affiliation of Small and Medium Enterprises was 89.3 for the primary quarter of 2024 in comparison with 89.1 for the fourth quarter of 2023 and 89.3 for the primary quarter of 2023.

Now concerning this improvement, as mentioned in our fourth quarter earnings name in 2023, we accomplished 5 main de-risking and diversification actions, together with 4 combine modifications and one enterprise mannequin adjustment. So far, these actions have yielded indicators of enchancment in asset high quality, though we imagine operational prudence stays vital to make sure long-term development and sustainability.

Throughout the first quarter, whole new loans gross sales decreased by 15.6% year-on-year, primarily resulting from weak high quality mortgage demand from SBOs and our personal emphasis on prudent operations. As we shifted our focus from SBO launch to a extra diversified strategy, new mortgage gross sales of our client finance enterprise grew to RMB20.3 billion within the first quarter, representing a rise of 46% year-over-year.

Then again, new mortgage gross sales of Puhui enterprise continued to face strain from a scarcity of high-quality SBO mortgage demand and decreased by 35.5% year-over-year. As talked about beforehand, we efficiently accomplished transitioning to our 100% assured enterprise mannequin for the Puhui enterprise by the top of third quarter of 2023.

Ranging from fourth quarter of 2023, all the brand new loans have been built-in by our client finance subsidiary as personal stability sheet loans have been enabled by our assure firm below the 100% risk-bearing enterprise mannequin; in consequence, our threat being elevated from 39.8% of the overall excellent stability as of the top of 2023 to 48.3% as of the top of the primary quarter of 2024. Whereas the swap to 100% assure mannequin will exert a constructive affect on our take price, because it alleviates the impact of elevated CGI premiums, our profitability will take an extended time to get better resulting from larger up-front provisioning.

Now let’s flip to asset high quality. After profitable execution of our de-risking changes to the combo of segments and merchandise, area, channel and trade, along with enhancements within the macro setting and removing of short-term destructive affect brought on by restructuring of our direct gross sales and branches, we witnessed enchancment in our early threat indicators within the first quarter.

The C-M3 movement price for Puhui enterprise, decreased from 1.2% within the fourth quarter of final yr to 1%, or 1.0% within the first quarter of this yr. The NPL ratio of our client finance loans additionally remained steady. Whereas we’re happy with such enhancements in asset high quality, we’re taking a affected person and prudent strategy to make sure this success is sustainable.

When it comes to broader technique, we’re happy to announce that we accomplished acquisition of Ping An OneConnect Financial institution in early April, as a part of our strategic initiative to leverage on robust licenses. These licenses have the potential to underpin a extra expanded set of service choices, permitting us to offer extra dynamic companies and to additional diversify our enterprise.

I additionally — I’d additionally like to offer an replace on the particular dividend association that we introduced earlier. On March 21, we introduced a particular dividend plan of USD 2.42 per ADS or USD 1.21 per peculiar share. This particular dividend stays topic to shareholder approval on the Annual Basic Assembly or AGM, which shall be held on Could 30, 2024. The report date for the Annual Basic Assembly is April 9, 2024.

To sum up, within the first quarter, we encountered preliminary enhancements in asset high quality, which show that our de-risking and diversification initiatives are beginning to bear fruit. Regardless of this, we stay — we keep a prudent strategy in our operations as we see continued weak spot in high-quality SBO mortgage demand.

Final however not least, our CFO, David, will resign for private causes with an efficient date of April 30. David has been with the corporate for almost six years, and we thank him for his large contributions to the corporate. We now have appointed our Zhu Peiqing as our new CFO, who will assume the CFO position efficient from April 30. Peiqing has in depth expertise in finance trade, particularly in audit and monetary administration. We look ahead to his onboarding and future contributions.

I’ll now flip the decision over to Greg to share extra particulars in our — on our working outcomes.

Gregory Gibb

Thanks, Y.S. I am going to present extra particulars on our first quarter 2024 outcomes and our operational focus for this yr. Please be aware, all figures are in renminbi until in any other case said.

Let’s start with an summary of our first quarter efficiency. Throughout the quarter, ongoing weak spot in demand for high-quality loans from SBO, small enterprise house owners, mixed with our continued emphasis on operational prudence weighed on new mortgage gross sales. New mortgage gross sales within the first quarter have been RMB48.1 billion, representing a 15.6% year-on-year decline. Among the many whole new mortgage gross sales, 42% have been contributed by our client finance enterprise. That is up from roughly 24% in the identical interval final yr.

Income within the first quarter was RMB7 billion, a lower of 30.9% year-over-year. Decline was primarily as a result of decreases in our new mortgage gross sales and excellent mortgage stability and was partially offset by our elevated take price as extra of our e-book comes from the 100% assure mannequin. Our internet loss for the primary quarter was RMB830 million, primarily resulting from elevated tax related to the particular dividend. On a pre-tax foundation, Lufax was marginally worthwhile within the first quarter. Earnings earlier than tax have been RMB447 million within the first quarter of 2024, which compares to RMB1.1 billion in the identical interval for final yr.

For this quarter, pre-tax profitability stays comparatively below strain on account of declining mortgage balances and new enterprise being loss-making within the first 12 months resulting from up-front provisioning below the 100% assure mannequin. Partially offsetting these pressures have been continued enhancements in value construction, discount in credit score prices and continued energy in our later-stage recoveries.

As Y.S. talked about earlier, we witnessed the affect of our de-risking and diversification initiatives on our asset high quality in the course of the first quarter of 2024. I’ll now stroll by means of our working metrics and the way they’ve advanced in mild of those strategic modifications.

First, when it comes to product combine, we noticed our client finance section continued to develop. Within the first quarter, client finance gross sales accounted for 42% of latest mortgage gross sales, up from 24% in the identical interval final yr. Concurrently, the proportion of unsecured loans and secured loans decreased to 37% and 21%, respectively, from 48% and 28% final yr. In mild of those modifications, we have now seen a gradual ongoing shift in our stability combine. Client finance balances, as a share of our whole stability reached 14% as of March 2024 in comparison with 6% on the finish of March ’23.

In the meantime, the proportion of unsecured loans decreased to 64% from 72% on the finish of March 2023, whereas the proportion of secured loans has largely remained flat. When it comes to our enterprise mannequin, we proceed to construct up a roster of latest loans below the 100% assure mannequin. As we beforehand talked about, this has reshaped our portfolio combine and elevated our threat bearing.

As of the top of the primary quarter, 26% of Puhui’s mortgage stability was enabled below our new 100% assure mannequin and our risk-bearing by stability has grown to 48.3% as of the top of the primary quarter, up from 39.8% as of the top of the fourth quarter of 2023. We additionally stored our give attention to prioritizing gross sales in additional economically resilient areas. When it comes to our channel, we maintained our emphasis on excellence throughout the direct gross sales group, which continues to be our main gross sales channel and contributes to a majority of our new mortgage gross sales.

Subsequent, our asset high quality, our general C-M3 improved to 1% from 1.2% within the fourth quarter of 2023. This was primarily resulting from enchancment within the macro setting, removing of non permanent destructive affect from our geographic and direct gross sales restructuring in third quarter and the classic runoff as we construct up a brand new e-book. Whereas we noticed enchancment in C-M3 ratio in the course of the first quarter, we stay cautious concerning the future sustainability of this pattern. Given this and contemplating our heightened threat publicity, we’ll proceed our prudent technique of prioritizing high quality over amount throughout 2024.

Now let’s take a extra detailed take a look at our unit economics of the Puhui enterprise. Throughout the quarter, funding prices stay steady. As well as, our general APR decreased barely to 19.7% as we maintained our give attention to higher-quality prospects. Our take price, primarily based on mortgage stability, has risen to 9% from 7.3% for the primary quarter as loans below the 100% assure mannequin includes a barely larger share of the overall mortgage stability.

Whereas we anticipate that loans below the 100% assure mannequin shall be lifetime worthwhile, you will need to be aware that these loans might incur accounting losses of their first calendar yr resulting from a normal however larger up-front set of provisions. Underneath our projected enterprise scale, we imagine we have now a robust stability sheet to assist the enterprise, its operations, capital and liquidity necessities.

On the finish of the primary quarter of 2024, our assured subsidiaries leverage ratio was 2.4 occasions, primarily pushed by the rise of our assured stability related to our elevated threat publicity and the lower of internet belongings as a result of distribution of the particular dividend. Our client finance capital adequacy ratio stood at roughly 15.1%, nicely above the required 10.5%. As for our stability sheet, we maintain internet belongings of RMB92.8 billion with our money financial institution stability amounting to RMB39.4 billion on the finish of the quarter.

I am going to now flip over the decision to David, our CFO, for extra particulars on our monetary efficiency.

David Choy

Thanks, Greg. I’ll now present a more in-depth look into our first outcomes. Please be aware that each one numbers are in renminbi phrases, and all firm — all comparisons are on a year-over-year foundation until in any other case said.

As Y.S. and Greg have talked about, our efficiency was nonetheless impacted by broader financial situations which have been exerting strain on the small enterprise sector all through this era. Whereas strategically shifting to 100% assure mannequin with larger take price, larger high quality buyer segments and extra favorable geographical areas, we opted to forgo a few of our enterprise scale with the goal of enhancing the standard of our future mortgage portfolio, which we imagine, it can be crucial for the long term for the corporate.

Our strategic transition unavoidably led to continued declines in our common mortgage stability and whole revenue. In the meantime, the anticipated credit score loss provision, which should be accounted for up-front, on the primary day, amplified the accounting loss within the early phases of the product life cycle below the brand new enterprise mannequin. Within the first quarter of 2024, our whole revenue was RMB7 billion, representing a lower of 30.9%.

Throughout the quarter, our know-how platform-based revenue was RMB2.6 billion, representing a lower of 49%. Our internet curiosity revenue was RMB2.8 billion, a lower of 15% and assure revenue was RMB2.92 billion, a lower of 34.7% or are mainly consistent with the lower of excellent mortgage stability, during which assure revenue decreased, by lesser matter too, as a result of offsetting impact of a rise in threat borne by the corporate.

Turning to our bills, we stay dedicated to value optimizations. I need to spotlight that our whole bills, excluding credit score losses, finance losses and different losses, decreased by 37% year-over-year to RMB3.6 billion this quarter as we proceed to boost operational effectivity. This 37% magnitude of lower in expense is larger than that of the 30.9% decline within the whole revenue.

Let’s spotlight only a few of the important thing expense gadgets. Our whole gross sales and advertising and marketing bills, which primarily embody bills for borrower acquisition prices in addition to basic gross sales and advertising and marketing bills decreased by 50% to RMB1.5 billion within the first quarter. The lower was primarily resulting from a lower in loan-related bills on account of the lower in new mortgage gross sales and decreased retention bills in addition to referral bills from platform companies attributable to the decreased transaction quantity.

Our credit score impairment losses decreased by 8.6% to RMB2.9 billion within the first quarter, primarily as a result of lower in provision of loans and receivables on account of the lower of mortgage stability and improved asset high quality. Our finance prices decreased by 69.3% to RMB58 million within the first quarter from RMB189 million in the identical interval of 2023, primarily as a result of lower of curiosity expense on account of the cost of C-Spherical Convertible Promissory Notes and different money owed and partially offset by the lower of curiosity revenue from financial institution deposits.

The important thing merchandise on this quarter is admittedly the revenue tax. While we achieved the pre-tax revenue of RMB447 million within the first quarter, our revenue tax bills elevated to RMB4.3 billion within the first quarter from RMB2.4 billion in the identical interval of 2023.

That is primarily as a result of improve in withholding tax related to one-off dividends that have been paid by our PRC subsidiaries with a view to assist potential distribution of the particular dividend we introduced on March 21, 2024 In consequence, internet loss for the primary quarter was RMB830 million, in contrast with a internet revenue of RMB732 million in the identical quarter of 2023. In the meantime, our primary and diluted loss per ADS in the course of the first quarter have been each RMB1.52 or USD 0.21.

Turning now to our stability sheet, as of March 31, 2024, we had internet belongings of RMB92.8 billion and a money stability of RMB39.4 billion. When it comes to capital as of the top of March 20, 2024, the 2 principal working entities have been nicely capitalized. Our assure subsidiary’s leverage ratio elevated to 2.4x as pushed by the rise of our assured merchandise related to our elevated threat publicity and likewise the lower of internet belongings as a result of totally different upstream to the mother or father firms.

And our client finance firm capital adequacy ratio nicely stood at roughly 15.1% and nicely above the required 10.5% regulatory requirement. All these elements present important assist for the corporate to navigate totally evolving macroeconomic panorama and the enterprise transition interval whereas laying the groundwork for us to constantly rewarding our pursuits sooner or later.

That concludes our ready remarks for as we speak. Operator, we are actually able to take questions.

Query-and-Reply Session

Operator

[Operator Instructions] Your first query comes from Emma Xu with Financial institution of America Securities. Please go forward.

Emma Xu

Thanks for giving me the chance to ask the primary query. I’ve two truly. So my first query is about your particular dividend. May you give us extra replace on the progress of your particular dividend? So with the incurred tax, I suppose the cash ought to have been offshore. And what is the progress of this particular dividend distribution? After which, in the long term, do you’ve got any mid-term plans to your future shareholder returns after this particular dividend?

And my second query is to your asset high quality, so I do discover that your movement price and your 30-day delinquency price did obtain a notable decline within the first quarter. So do you assume this enchancment of the asset high quality is sustainable into the approaching quarters after which — which may additionally result in decrease impairment losses within the coming quarters? Thanks.

Yong Cho

Thanks. That is Y.S. talking. So your first query about particular dividends, we introduced a particular dividends plan on March 21. And we additionally introduced, on March 25, that shareholders of report on the shut of June 4, 2024, shall be entitled to obtain this particular dividend. However it’s topic to shareholder approval on the AGM, Annual Basic Assembly, which shall be held on Could 30 after which our long-term dividend coverage, it stays unchanged, which is about 20% to 40% of the annual internet revenue.

After which answering your second query about asset high quality enchancment; sure, we see that C-M3 internet movement improved in fourth quarter, right down to 1.0% from 1.2% within the final quarter of 2023. We imagine our de-risking efforts taken in 2023, these regularly come into impact akin to credit score coverage tightening, underwriting course of, after which gross sales management measures strengthening, section combine optimization and churn optimization and so forth.

And in addition, the — as Greg defined, the concentrated affect from geographic restructuring within the third quarter final yr, that has been regularly fading away. And in addition our new portfolio we constructed from 2023 with higher high quality, with tightened underwriting coverage debt, that portion will take, regularly, a bigger a part of whole mortgage stability.

So that can additional assist to enhance going ahead. Nevertheless, whereas we noticed this enchancment within the third — in C-M3 internet movement within the first quarter, we nonetheless stay very cautious concerning the future sustainability of this pattern. And we’ll proceed to take prudent motion and strategy, contemplating our larger threat publicity below this 100% assure mannequin.

Operator

Thanks. Your subsequent query comes from Chiyao Huang. Please go forward.

Chiyao Huang

Hello, good morning. Thanks, administration. That is Chiyao from Morgan Stanley. Actually glad to see some early enchancment on the danger indicator and the pre-tax profitability within the quarter; so I’ve two questions. One is the — on asset high quality, you’ll be able to see, there’s an early enchancment. What is the administration view on the mortgage development into the remainder of the yr? That is one.

And the second query is on the unit economics. And the way do administration anticipate it to evolve as we transition to 100% of a assure mannequin. May you, administration, focus on this a little bit bit in the course of the earlier talks? And will you give extra shade and extra detailed shade on the unit economics.

Gregory Gibb

Thanks. Greg, right here responding. So on the — whereas we have seen the development, as Y.S. simply outlined, which is clearly excellent news, when it comes to demand by prospects, significantly of the standard that we’re focusing on, that demand continues to be to be on a considerably subdued, proper? So after we take a look at the primary quarter, we have not seen an uptick, a significant uptick within the demand amongst robust debtors.

So that’s actually going to drive our continued prudence as a result of we actually need to see stronger demand earlier than we’d increase past the place we’re as we speak when it comes to volumes. Clearly, on condition that we’re now transitioning, we have now transitioned all new enterprise to the 100% assure mannequin and an increasing number of of our whole e-book shall be that 100% assure mannequin.

We do need to observe, for a couple of quarters, what we predict is true as we’re taking up extra threat, so we follow — when it comes to the steerage we have given for this yr, new mortgage quantity, we anticipate to be nonetheless RMB190 billion to RMB220 billion, which on the finish of the yr would take us to an ending stability of about RMB200 billion to RMB230 billion. So that is the outlook, stays unchanged, I suppose, because the final quarter and we gave steerage on this.

When it comes to Puhui, I believe that is actually crucial pattern additionally to look at now that we have shifted totally to the 100% assure mannequin. As we have mentioned, if we take a look at our mortgage stability, on condition that an increasing number of is coming from the 100% assure mannequin, our take price has elevated now to 9% from 7.3%. And in the event you take a look at new enterprise, that is now being performed below the 100% assure mannequin, the gross take price is approaching 14 share factors, proper?

So mainly, it is successfully a doubling from the place we have been a few quarters in the past as we shift from the CGI mannequin now to, an increasing number of, below the assure mannequin. So it is a pattern that we are going to anticipate to proceed. In order we transfer all through the course of this yr, such that an increasing number of of the e-book is 100% assure mannequin, you must see the general take price converge as much as about 14%.

After which from there, it is a query of our value administration, and it is a query of continued enchancment, hopefully, on the credit score high quality, which can then drive the underside line. And we have not given steerage on that but. However simply to focus on that we be aware, after we do new loans — for instance, in 2024, new loans below the 100% assure mannequin, we do anticipate them to be lifetime worthwhile, however we additionally do anticipate that within the first calendar yr, resulting from up-front customary provisions, they’ll have a destructive P&L contribution however once more, lifetime worthwhile. In order that’s our outlook on the unit economics facet.

Operator

Your subsequent query comes from Yada Li with CICC. Please go forward.

Yada Li

Hi there administration, thanks for taking my questions. That is Yada with CICC, and my first query is concerning the danger of bearing share. Since final quarter, the corporate has accomplished the transition in direction of a 100% assure mannequin. Wanting ahead, may you please give us extra shade on the right way to view the risk-bearing share on the finish of this yr and the long run?

Secondly, I used to be questioning in the event you may share extra concerning the outlook for the underside line. As well as, if potential, are you able to elaborate extra about as soon as we have now gone by means of the transition interval, what’s the anticipated margin or the revenue take price for the SME loans? That is all.

Yong Cho

Thanks, Yada, to your query. Let me choose up your first query, after which I’ll cross the second to David. The — about 100% assure mannequin transition, you already know that began from fourth quarter, the fourth quarter final yr, that each one new loans that we booked have been granted by — both by buyer finance firm as on-balance sheet loans or was granted by our assure firm on the 100% risk-bearing base mannequin, proper?

After which understanding that, as of the top of fourth quarter this yr, together with secure enterprise loans, the overall mortgage stability, for which we’re bearing threat accountability is 48.3% out of whole mortgage stability after which — which is up from 39.8% from the earlier quarter. And it’s 26% of whole Puhui mortgage stability, that was enabled on our new 100% assure mannequin. After which going ahead, absolutely, as a result of that is our new mannequin in place, so it regularly — I imply, the portion of our risk-bearing stability will regularly and continues to develop.

David Choy

All proper. So Yada, thanks for the query on this quarter internet loss. I believe as we talked about earlier than, we did obtain a pre-tax for this quarter. The important thing merchandise truly affecting this quarter is admittedly on the revenue tax. Earnings tax bills elevated to RMB1.3 billion, as you already know, on this quarter, from RMB7.4 billion in the identical interval of 2023.

That is actually primarily as a result of RMB1.05 billion withholding tax, which related to our cross-border dividend upstream from PRC working entities to the fast holding firm offshore. In order I discussed, this cross-border dividend upstream association is primarily to assist the distribution of a particular dividend plan as all of us referred to as out, that we introduced on March 21 and naturally, for different basic liquidity association progress at offshore. That is my remark I need to make.

Operator

Thanks. That concludes our question-and-answer session for as we speak. I’ll now flip the decision again over to our administration for closing remarks.

Xinyan Liu

Thanks. This concludes as we speak’s name. Thanks for becoming a member of the convention name. In case you have extra questions, please don’t hesitate to contact the corporate’s IR group. Thanks once more.

Operator

Thanks. This convention is now concluded. You could now disconnect.