Earnings Call Transcript - CNF Q2 2024

Operator, Operator

Hello, and welcome to the CNFinance Holdings Limited First Half of 2024 Financial Results Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Simon Tong, Manager of the Capital Markets Department. Please go ahead.

Unidentified Company Representative, Company Representative

Thank you, Joe. Good morning and welcome to the CNFinance First Half of 2024 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 the financial results from our Acting CFO, Ms. Li. After that, we will have a Q&A section. Before we started, 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 terminology 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 expectation 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 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 take any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law. Now, please welcome Mr. Jun Qian.

Jun Qian, Director and Vice President

Good day, everyone. Thank you for joining us today. In the first half of 2024, our focus was squarely on navigating the microeconomic uncertainties by reinforcing our business fundamentals and ensuring the quality of our assets. During this period, we originated loans of RMB6.9 billion. As of June 30, 2024, our outstanding loan principal was approximately RMB16 billion, reflecting a year-over-year growth of about 10%. To manage potential risks, we continue refining our credit approval strategy and have strengthened our efforts in collecting and disposing of non-performing loans. As a result, we maintained our non-performing loans ratio at approximately 1.2% as of June 30, 2024, consistent with the level at the end of last year. We recorded an interest income of approximately RMB930 million, up 5% compared to the same period last year. However, while we benefit from a continued decline in interest rates of our trust financing, the increase in average daily loan principal under the trust model led to a slight year-over-year rise in interest expense. Since the start of the year, we have enhanced our collaboration with third-party asset management institutions, particularly in the area of overdue loan collections. This strategic move significantly boosted our recovery efforts. This will also lead to a corresponding increase in operating expenses due to service fees paid to the third-party institution. Despite these additional costs, our net income from operating activities for the first half of 2024 was approximately RMB220 million, remaining largely flat compared to the same period last year. We have maintained a prudent approach in provision for impairment, with the increase in our outstanding loan principal, the provision for credit losses increased to RMB172 million; consequently, our net profit for the period decreased to RMB48 million. Our key area of focus for the half-year period includes, first, we continue to drive down our funding costs. With market interest rates trending downward, we actively engaged in negotiations with our funding partners to secure more favorable financing terms. Leveraging our long-term relationships, we achieved a reduction in our average financing rate by approximately 4% year-over-year. This reduction allowed us to pass on benefits to our customers, with end-user interest rates decreasing by about 1 percentage point. Second, we strengthened our support for sales partners. This quarter, we observed a further easing of liquidity pressure on our sales partners, who are more often resuming their repurchase obligations to protect long-term recommendations. This shared benefit, shared risk model has been instrumental in reducing our risk exposure. Third, we maintain our focus on asset quality. We concentrate our business efforts on the core area of first-tier and new first-tier cities, with over 90% of our loans in the period being originated in these areas. In addition, we deepened our cooperation with third-party asset management companies, enhancing our capability in collecting delinquent loans. Through these efforts, we successfully maintained our NPL ratio at 1.2% as of June 30, 2024, while achieving a recovery rate of 110% during the period. As we look ahead, we recognize the ongoing uncertainty in the macroeconomic environment and the adjustment in the real estate market. We are committed to adjusting liquidity pressure on our existing loans and navigating the uncertainty surrounding new loans. To that end, we will continue to adjust our strategy, focusing on ensuring asset quality and enhancing operational efficiency. Our goal is to improve both the quality and profitability of our business. Our specific measures moving forward include enhancing our focus on asset quality. We will rigorously manage our credit approval standards for new loans, ensuring the quality of forward loan closings. Additionally, we will continue to improve the efficiency of our delinquent loan recoveries, particularly through settlement recoveries, which offer the advantages of fast recovery and high recovery rates. We plan to deepen our cooperation with third-party asset management companies to leverage their advantages, improving both recovery speed and recovery rates. Further, we will strengthen our product innovation, maintaining the high quality and prompt advantage of our products while expanding our product portfolio to adapt to various scenarios. To support these new business scenarios and enhance overall efficiency, we will continue to optimize our sales system and adjust our credit approval policies, incorporating additional dimensions into our approval models. Additionally, we are committed to continuously improving our risk control and compliance processes through targeted actions, which will help us prevent non-market risk cases. Now I will hand over the time to our CFO, Ms. Li Jing, who will introduce the financial results for the first half of 2024 to you.

Jing Li, Acting CFO

Our total interest and fees income increased by 4.7% to RMB926.5 million from RMB884.5 million. Total interest and fees expenses increased to RMB401.7 million from RMB366.3 million. The increase in total interest and fees expenses was mainly due to the increase in average daily balances of interest-bearing borrowings. Net interest and fees income was RMB524.8 million, representing an increase of 1.3% from RMB518.2 million. Net revenue under the Commercial Bank Partnership model was RMB58.4 million as compared to RMB50.1 million in the same period of 2023. In the first half of 2024, the majority of borrowers were introduced by sales partners, and the commission paid to sales channels has decreased, which has ultimately led to an increase in net revenue under the commercial bank partnership model. Collaboration costs for sales partners decreased by 3.9% to RMB159.2 million from RMB165.6 million. Net interest and fees income after collaboration costs increased by 5.3% to RMB424 million from RMB402.7 million in the same period of 2023. Provision for credit losses increased to RMB170.8 million from RMB129.6 million in the same period in 2023. The increase was mainly due to the increase in outstanding loan principles. Other expenses increased by 62.2% to RMB97 million from RMB59.8 million in the same period of 2023, primarily due to the increase in fees paid to third-party asset management companies to collect delinquent loans. The net income was RMB48 million as compared to RMB93.1 million in the same period of 2023. As of June 30, 2024, the company had cash and cash equivalents and restricted cash of RMB1.6 billion, including RMB1 billion from structured funds as of June 30, 2024, which could only be used to grant new loans and activity. The deliverance ratio for loans originated by the company increased from 15.5% as of December 31, 2023, to 16.4% as of June 30, 2024. The NPL ratio for loans originated by the company was 1.2% as of June 30, 2024 compared to 1.1% as of December 31, 2023. With that, we would like to start the Q&A session.

Operator, Operator

Okay, at this time, I understand that this will conclude the question-and-answer session. I would like to turn the conference back over to Simon Tong for any closing remarks.

Unidentified Company Representative, Company Representative

That's all for today. Thank you for joining us. If you have any more questions, please feel free to reach us at ir@cashchina.cn. Thank you.

Operator, Operator

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