Earnings Call Transcript - CNF Q3 2023

Operator, Operator

Good day, and welcome to the CNFinance Holdings Limited Third Quarter of 2023 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 Ms. Jae, Manager of Capital Marketing. Please go ahead.

Unidentified Company Representative, Company Representative

Good morning and good evening, and welcome to CNFinance third quarter Financial Results Conference Call. In today's call, our Director and Vice President, Mr. Jun Qian, will walk us through the operating results, followed by financial results from our acting CFO, Ms. 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 and Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expect, anticipate, future, intend, plan, belief, estimate, target, going forward, outlook and similar statements. Such statements are based upon management's current expectations and current market and operating conditions and relate to the 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 this and other risks, uncertainties, and factors is included in the company's filings with the U.S. 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. Qian Jun.

Jun Qian, Director and Vice President

Thank you for taking the time to join this conference call. We will discuss CNFinance's operating and financial results for the third quarter of 2023, followed by a Q&A session. During this quarter, the company focused on expanding its business scale and improving asset quality, achieving year-on-year growth in all key indicators. The company facilitated loans totaling RMB5.1 billion, a 20% increase from the previous year, and recorded a net income of RMB53 million, up 15% year-on-year. Due to its strong risk control mechanisms, the company maintained a recovery rate of 110%. Highlights for the quarter included significant business expansion, with a total loan organization volume of RMB5.1 billion, reflecting a 20% year-on-year increase and a 12% rise compared to the second quarter of 2023. Of the RMB5.1 billion in loans facilitated, RMB3.9 billion came from the trust lending model and RMB1.2 billion from commercial bank partnerships. We have continued to enhance our services for sales partners, effectively easing their liquidity pressures. As a result of our installment policy, many sales partners who had previously defaulted were able to restart their installment payments, thereby reducing the company's risk exposure. We optimized our offerings to make financing more accessible. In the third quarter of 2023, our average funding costs were slightly lower than at the start of the year, prompting adjustments to lower interest rate products in our portfolio. By refining our product mix and lowering customer interest rates, we provided real benefits to MSC owners and established a solid foundation for meeting the needs of borrowers with strong credit histories. To enhance asset quality, we continuously refined our credit adjustment factors and leveraged technology to improve the accuracy of borrower and collateral assessments. Furthermore, we focused our business in core regions, with loans in first-tier and new first-tier cities comprising 80% of total loans facilitated during the quarter. Management believes that China's market is currently recovering, and real estate prices are still subject to fluctuations. We anticipate further policy introductions in China and see continued opportunities in the inclusive finance sector. Our guiding principle of high-quality development emphasizes scale, quality, and compliance, with specific objectives to optimize our product mix, enhance sales capabilities, refine our risk control systems, and target prospective borrowers with high-quality collateral and good credit records. To achieve these goals, the company must continually expand financing channels, attract new partners, and introduce new loan products. We will also promote the use of models, systems, and data in credit approval to make the process more standardized, efficient, and intelligent, reducing human intervention. Additionally, we aim to transform our model by accelerating the disposal of non-performing loans, planning to transfer a significant amount of defaulted loans to third parties before year-end to recover cash and minimize risk exposure. Now I'd like to hand the call over to Ms. Jing Li, who will provide an overview of the third-party financials.

Jing Li, Acting CFO

Thank you. Now we will go over the financials. Please note that the currency we use will be in RMB and all comparisons will be made on a year-on-year basis unless otherwise stated. For the third quarter of 2023, total interest and fees income was RMB425 million, compared to RMB445 million. Interest and financing service fees on loans were RMB388 million, compared to RMB413 million. The decrease was due to the decline in the weighted average interest rate of loans outstanding. Interest income charged to sales partners was RMB32.7 million, compared to RMB33.5 million. Total interest and sales expenses decreased by 13% to RMB117 million, compared to RMB195 million. The decrease was primarily due to the lower funding costs of trust company partners as a result of recent regulatory developments. Net interest and fees income increased slightly from RMB254 million to RMB255 million, which is an increase of 0.4% from RMB254.3 million in the same period of 2022. Net revenue under the commercial bank partnership model was RMB27.6 million, compared to RMB0.4 million. The outstanding loan principal under the commercial bank partnership was RMB5 billion as of September 30, 2023, compared to RMB0.6 billion as of September 30, 2022. Collaboration costs for sales partners were RMB87 million, compared to RMB85 million. Next interest and fees income after collaboration costs increased by 15.5% to RMB196 million from RMB117 million. Provision for credit losses decreased by 72% to RMB12 million from RMB41 million. In the third quarter of 2023, some sales partners who forfeited their credit risk mitigation position due to their inability to fulfill their obligation to repurchase delinquent loans in the last few quarters were able to resume their payments, which provided more protection to the loans. Total operating expenses increased by 27% to RMB106 million from RMB83 million. Employee compensation and benefits increased by 16% to RMB58 million from RMB50 million, due to an increase in performance-based bonuses as a result of higher loan origination volume during the third quarter of 2023. Other expenses increased by 71% to RMB35 million from RMB20 million, primarily due to the increase in fees paid to local channels who are rewarded for referring sales partners to the company and will also receive commissions of a certain percentage of loans recommended to the company by the sales partners they referred. Net income increased by 15% to RMB53 million from RMB46 million. Now, we would like to start the Q&A session. Operator, please.

Operator, Operator

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