Earnings Call Transcript - CNF Q1 2023

Operator, Operator

Hello and welcome to the CNFinance First Quarter of 2023 Unaudited Financial Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Matthew Lou, Investor Relations Manager. Please go ahead.

Matthew Lou, Investor Relations Manager

Thank you. Good morning and evening. Welcome to the CNFinance First Quarter of 2023 Financial Results Conference Call. In today's call, our Director, Vice President, Mr. Jun Qian, will walk us through the operating results followed by the financial results from our Acting CFO, Mrs. Li. After that, we will have a Q&A session. Before we start, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expects, anticipates, future, intends, plans, believes, estimates, targets, going forward, outlook and similar statements. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the US Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under law. Now please welcome Mr. Jun Qian.

Jun Qian, Director, Vice President

Thanks, everyone for taking your time to attend this conference call. Today, we will introduce CNF's operational and financial results in the first quarter of 2023 followed by a Q&A session. In the first quarter of 2023, we have maintained our momentum and achieved year-on-year growth in key operational and financial indicators. In this quarter, loan origination volume increased 48% from the same period of 2022 to RMB3.4 billion, including RMB1.2 billion under commercial bank partnership. Net revenue under the commercial bank partnership model came in at RMB21.5 million for the first quarter of 2023. The total interest and fees income for Q1 2023 was RMB450 million, representing a year-on-year increase of 9%. We continued to provide installment services and funding support for sales partners who were obligated to repurchase delinquent loans and recorded interest income charged to sales partners of RMB37.5 million. Net income in Q1 2023 increased 14% year-on-year to RMB49 million. In the first quarter of 2023, we have done the following works. We continued to promote and refine the commercial bank partnership. Targeted borrowers of the commercial bank partnership generally have better credit ratings, and bank lending products require less capital from the company. Since its launch in 2021, the commercial bank partnership model has gradually gained recognition from the market and our partners because of its low interest rates. After deepening cooperation with private banks, the origination volume of bank lending products began to increase quickly in the second half of 2022 and continued to grow in the first quarter of 2023. In Q1 2023, loan origination volume of bank lending products accounted for 35% of total loans originated by the company and has become one of the company's major revenue streams. In this quarter, we brought sales partners into the commercial bank partnership and further reduced our risk exposure. We have reduced the funding cost and diversified the financing mix. As we achieved consensus with funding partners on reducing interest rates in the second half of 2022, our interest and fees expense in Q1 2023 decreased by 8% year-on-year to RMB180 million. In this quarter, we successfully established several funds with third-party AMCs which provided sufficient and consistent funding support for sales partners who needed to repurchase substantial loans. With that, sales partners' liquidity improved, motivating them to expand their business. We have enhanced asset quality. In this quarter, we analyzed historical loan originations and conducted risk factor analysis on defaulted loans. Based on these results, we refined our model for risk assessment and shifted our prioritization to business operations, Tier 1, and new Tier 1 cities. Consequently, the delinquency ratio at the end of Q1 of 2023 has decreased compared to the end of the previous year. We remain confident that China's inclusive financing industry is in its growth window. However, the uncertain environment has made it essential for us to pursue high-quality development while expanding our business. We will focus on increasing loan origination volume. We will continue taking measures to better service high-quality sales partners and support their growth. We will keep promoting the commercial bank partnership, refining the trust lending model, and discovering opportunities to deepen our collaboration with partners. We will adjust our products based on market conditions. We look forward to rolling out a new bank lending product that charges an annual interest rate of less than 12% in the second quarter of 2023. We will keep refining our funding model, maintaining dialogues with trust company partners on adjusting the structure of trust plans, and negotiating with AMCs on reducing the interest rates they charge to further ease liquidity pressure for sales partners.

Operator, Operator

Excuse me. This is the operator. I'm sorry. We're getting a lot of noise. I'm going to see if we can reconnect. Just one moment please. Excuse me. This is the operator. I have Matthew to resume. Thank you. Please go ahead.

Matthew Lou, Investor Relations Manager

Welcome back, and we'll just pick up from wherever we probably hung up. Now please welcome again Mr. Jun Qian to give his remarks.

Jun Qian, Director, Vice President

Our future tasks include: First, we will focus on increasing our origination volume. We will continue to take measures to better service high-quality sales partners and support their growth. We will keep promoting the commercial bank partnership, refining the trust lending model, and discovering opportunities to deepen our collaboration with insurance companies. We will adjust our products based on market conditions. We look forward to rolling out a new bank lending product that charges an annual interest rate of less than 12% in the second quarter of 2023. Second, we will keep refining our funding model. We will maintain dialogue with trust company partners on adjusting the structure of trust plans and negotiate with AMCs to reduce the interest rates they charge to further ease liquidity pressure on our sales partners. Third, we will continue investing in technology and fully recognize its importance in refining product design and risk assessment. We will analyze historical data of loans originated and tailor products for loans secured by collaterals in core areas of Tier 1 and new Tier 1 cities. We will also roll out trust lending products that charge lower interest to increase our market share through deeper analysis of different factors of collaterals and borrowers to refine our risk assessment model and improve asset quality and our resistance to market fluctuations. Now I would like to hand the call over to our Acting CFO, Mrs. Jing Li, who will walk you through the financial results of Q1 of 2023.

Jing Li, Acting CFO

Thank you. Thank you, Jun. So for the first quarter of 2023 financial results, before we start, I want to remind you that unless otherwise stated, the currency we use is RMB. Also, unless otherwise stated, all comparisons will be made on a year-over-year basis. The interest and financial service fees on loans increased by 5% to RMB412 million from RMB391 million, primarily attributable to the increase of average daily outstanding loan principals in the first quarter of 2023 compared to the same period last year. The interest charged to sales partners, representing the fee charged to sales partners who choose to repurchase default loans in installments, increased to RMB38 million from RMB23 million. This is primarily due to the company allowing more sales partners to repurchase loans in installments to help ease their pressure on cash flow. Fees expense decreased by 8% to RMB185 million compared to RMB200 million last year. As a result of a decrease in funding cost from the trust company, net income from fees was RMB22 million. The company has started collaborating with commercial banks since 2021, and such collaboration has grown and scaled since the second quarter of 2022. The outstanding loan principal under the commercial bank partnership was RMB3.4 billion as of March 31, 2023, in comparison with RMB1.8 billion in the same period last year. Collaboration costs for sales partners, representing sales incentives paid to them, increased by 4% to RMB83 million compared to RMB80 million last year, primarily due to the increase of average daily outstanding loan principal in the first quarter of 2023. Provision for credit losses relates to the trust lending model and the expected credit losses guaranteed under the commercial bank partnership model. This provision was RMB79 million for the first quarter of 2023, compared to a reversal of RMB14 million in the same period of last year. The reversal last year was primarily due to the transfer of remaining loans under the traditional facilitation model to third parties which led to the reversal of allowances.

Operator, Operator

Excuse me. This is the operator again. I'm sorry. What I will try to do is reconnect, and we'll try to find a better connection. Thank you. If you'd like to disconnect and I'll call back out to your location. Thank you. Excuse me. This is the operator. I'd like to reintroduce Matthew once again. Please go ahead, sir.

Matthew Lou, Investor Relations Manager

Thank you. Thank you. Welcome again to this conference call. Sorry for the connection issue. Now I would like to introduce our Acting CFO, Mrs. Jing Li, who will go over the financial results of Q1 2023 with you. Please go ahead.

Jing Li, Acting CFO

Thank you all, and I'm sorry for the issues. Now we are reconnected and we shall begin. Let us go over the first quarter 2023 financials. As I mentioned, unless otherwise stated, the currency we use will be RMB. All comparisons will be made year-over-year. Interest and financing service fees on loans increased by 5% to RMB412 million from RMB391 million, primarily attributable to the increase of average daily outstanding loan principals in the first quarter of 2023 compared to the same period of 2022. Interest income charged to sales partners, representing the fees charged to those who choose to repurchase deferred loans in installments, increased by 16% to RMB38 million from RMB23 million, mainly due to the company allowing more sales partners to repurchase default loans in installments, assisting them in easing cash flow pressures. Interest and fees expense decreased by 8% to RMB185 million compared to RMB201 million, primarily due to the decrease in daily average outstanding loan principals of other borrowings as well as the funding cost from the trust companies. Net interest and fees income increased by 24% to RMB269 million from RMB216 million. Net revenue under the commercial bank partnership model stood at RMB22 million. The collaboration has grown and scaled since its inception in 2021, and by the second half of 2022, the outstanding loan principal under this partnership was RMB3.4 billion as of March 31, 2023, compared to RMB1.8 billion as of last year. Collaboration costs for sales partners increased by 4% to RMB83 million compared to RMB80 million the previous year, driven by the increase in average daily outstanding loan principals in Q1 2023. Provision for credit losses, which include provisions under the trust company model as well as expected credit losses of guarantees under the commercial bank partnership model, amounted to RMB79 million in the first quarter of 2023, compared to a reversal of RMB14 million in the same period last year. The reversal last year was primarily due to the transfer of remaining loans under the traditional facilitation model to third parties, resulting in the reversal of allowances. Operating expense remained stable at RMB80 million. The income tax expense was RMB18 million compared with RMB15 million in the same period of last year, attributed to the increase in taxable income in the first quarter of this year. Net income increased by 14% to RMB49 million compared to RMB43 million last year. As of March 31, 2023, the company had cash, cash equivalents and restricted cash of RMB2.2 billion compared to RMB1.8 billion as of December 31, 2022. The delinquency ratio for loans originated by the company decreased from 18.3% as of December 31, 2022, to 15.2% as of March 31, 2023. The NPL ratio for loans originated by the company was 1.8% as of March 31, 2023, compared to 1.1% at December 31, 2022. Now we would like to go ahead and start the Q&A session. Please?

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question comes from William Gregozeski of Greenridge Global. Please go ahead.

William Gregozeski, Analyst

Thanks. The provision for credit losses bounced around the last few quarters. How should we look at that going forward for modeling purposes?

Jun Qian, Director, Vice President

We have always maintained a very consistent provision policy, based on a model supported by our auditors and industry peers. Since introducing the collaboration model four years ago, we believe that the sales partners are providing strong guarantees for the loans we originate. Especially in this quarter, as the sales partners are providing guarantees and protection for the loans they introduced, our delinquency ratio has indeed decreased. That's why, based on our provision model, we have required less provision. Moreover, since pandemic controls have ended in China and the macro economy has improved, that also impacts our future forecasts. Additionally, we recognize the success of the collaboration model; bringing sales partners into our partnership with commercial banks not only helps us contain risk but also enables us to expand our scale. Does that answer your question?

William Gregozeski, Analyst

Yes. Thank you. On the commercial lending side, you've talked in the past about that being around a third of origination. Do you think that will stay around that level given how fast the origination numbers are increasing and the new product you mentioned you're rolling out?

Matthew Lou, Investor Relations Manager

I didn't catch your first line. Could you repeat that?

William Gregozeski, Analyst

Yes. You guys have talked about the commercial lending being around a third of origination. Do you think that will get higher given how fast it's growing and the new product you're introducing?

Matthew Lou, Investor Relations Manager

Okay.

Jun Qian, Director, Vice President

Looking back at the data from the first quarter, loans originated under our collaboration with commercial banks accounted for 35%. This was above our expectations, and I think this is about the planned peak. In the future, I believe the origination volume of our commercial bank partnership will continue to grow. However, as long as overall loan origination keeps increasing, the proportion of commercial bank partnership is likely to remain between 35% to 40%. This is based on our current expectations and market conditions. However, should we manage to roll out the new loan product under the commercial bank partnership, which charges less than 12% annually, it could lead to a greater proportion of loans facilitated under this partnership.

William Gregozeski, Analyst

Okay. Great. Thank you. See you guys next week.

Operator, Operator

Seeing there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Matthew Lou for any closing remarks.

Matthew Lou, Investor Relations Manager

Thank you. And thank you again for attending this conference call, and I apologize once more for the connection issues. We will have a replay available on our IR website. If you have any questions, you can also contact us via email. Thank you again.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.