Earnings Call Transcript
CNFinance Holdings Ltd. (CNF)
Earnings Call Transcript - CNF Q4 2023
Operator, Operator
Hello, and welcome to the CNFinance Fourth Quarter and Fiscal Year of 2023 Financial Results Conference Call. All participants will be in a 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
Good morning and evening, and welcome to the CNFinance fourth quarter and fiscal year 2023 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 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 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, believe, estimate, target, going forward, outlook, and similar statements. Such statements are based upon management's current expectations and current market 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 U.S. Securities and Exchange Commission. The company does not undertake 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, Vice President
The company's actual results, performance, or achievements may vary significantly from the forward-looking statements. Additional details on these and other risks, uncertainties, or factors can be found in the company's filings with the U.S. Securities and Exchange Commission. The company has no obligation to update any forward-looking statements due to new information, future events, or other reasons, except as legally mandated. Now please welcome Mr. Jun Qian.
Matthew Lou, Investor Relations Manager
Thank you for taking this time to join this conference call. We will discuss CNFinance fourth quarter and fiscal year of 2023 operating and financial results, followed by a Q&A session.
Jun Qian, Vice President
Thank you for taking this time to join this conference call. We will discuss CNFinance fourth quarter and fiscal year of 2023 operating and financial results, followed by a Q&A session.
Matthew Lou, Investor Relations Manager
2023 is another important year in the history of CNFinance. As the condition of China's macro economy and real estate market continues to be complex, we were still able to deliver a solid result at year-end. We concluded the year facilitating loans of RMB 17.3 billion, representing a year-on-year growth of 18%. In 2023, our interest income increased slightly compared to 2022. Yet, our interest expense was 8% lower than that of 2022. In 2023, the liquidity pressure on our sales partners has eased due to the installment policy we have implemented. Also, as we started to involve sales partners under the commercial bank partnership, the protection for the loans is much stronger, which led to a 23% decrease in provision for credit losses. As a result, we recorded a net income of RMB 165 million in 2023, representing a year-on-year growth of 21%.
Jun Qian, Vice President
In 2023, we recorded a net income of RMB 165 million, which is a 21% increase compared to the previous year. Our interest expense was 8% lower than in 2022. The liquidity pressure on our sales partners has eased due to the installment policy we implemented, and the involvement of sales partners under the commercial bank partnership has strengthened loan protections, resulting in a 23% decrease in provisions for credit losses.
Matthew Lou, Investor Relations Manager
The company has faced many challenges in 2023. We have completed the following tasks to ensure smooth operations.
Jun Qian, Vice President
The company has faced many challenges in 2023. We have completed the following tasks to ensure smooth operations.
Matthew Lou, Investor Relations Manager
First, we promoted the commercial bank partnership and enriched the product mix. Since its launch, the commercial bank partnership has gradually gained recognition from the market and our partners due to its high-quality borrower base and low financing cost. In 2023, we originated loans of RMB 5 billion under the commercial bank partnership and recorded a net revenue of approximately RMB 88 million. As of December 31, 2023, the outstanding loan principal under the commercial bank partnership was RMB 4.3 billion.
Jun Qian, Vice President
Since its launch, the commercial bank partnership has gradually gained recognition from the market and our partners due to its high-quality borrower base and low financing cost. In 2023, we originated loans of RMB 5 billion under the commercial bank partnership and recorded a net revenue of approximately RMB 88 million. As of December 31, 2023, the outstanding loan principal under the commercial bank partnership was RMB 4.3 billion.
Matthew Lou, Investor Relations Manager
Second, we optimized our funding structure. As the market environment evolves, management started negotiating with our funding partners to optimize the funding structure. Based on the mutually beneficial relationship between the founders and CNF, our funding partners were very supportive on that subject. As a result, our interest expense in 2023 was 8% lower compared to the same period of 2022. We believe this has laid the foundation for us and the founding partners to continuously expand the business.
Jun Qian, Vice President
We optimized our funding structure. As the market environment evolves, management started negotiating with our funding partners to optimize the funding structure. Based on the mutually beneficial relationship between the founders and CNF, our funding partners were very supportive on that subject. As a result, our interest expense in 2023 was 8% lower compared to the same period of 2022. We believe this has laid the foundation for us and the founding partners to continuously expand the business.
Matthew Lou, Investor Relations Manager
Third, we continued to support our sales partners. In 2023, to help those partners alleviate their liquidity pressure, we further refined our installment policy for repurchasing delinquent loans. As a result, some sales partners who failed to fulfill their obligations were able to recommence the installments and start to introduce new borrowers to the company.
Jun Qian, Vice President
We continued to support our sales partners. In 2023, to help those partners alleviate their liquidity pressure, we further refined our installment policy for repurchasing delinquent loans. As a result, some sales partners who failed to fulfill their obligations were able to recommence the installments and start to introduce new borrowers to the company.
Matthew Lou, Investor Relations Manager
Fourth, we improved asset quality due to the uncertainty associated with the real estate market. Management decided to strategically shift CNF’s business to core areas of Chinese core cities. 90% of loans CNF facilitated in 2023 were in Tier 1 and Tier 2 cities. In addition, in the fourth quarter of 2023, the company disposed of a bulk of nonperforming loans, which helped the company to reduce its risk exposure and recover cash.
Jun Qian, Vice President
We improved asset quality due to the uncertainty associated with the real estate market. Management decided to strategically shift CNF’s business to core areas of Chinese core cities. 90% of loans CNF facilitated in 2023 were in Tier 1 and Tier 2 cities. In addition, in the fourth quarter of 2023, the company disposed of a bulk of nonperforming loans, which helped the company to reduce its risk exposure and recover cash.
Matthew Lou, Investor Relations Manager
Fifth, we used technology to refine credit assessments. In 2023, we applied the property rating system to make more accurate evaluations of collaterals. We also applied a risk control model designed by one of our commercial bank partners by adding more variables to provide a more thorough analysis of applicants. As a result, our delinquency ratio dropped to 15.6% as of the end of 2023 compared to 19.2% as of the end of 2022.
Jun Qian, Vice President
In 2023, we utilized technology to enhance credit assessments. We employed a property rating system to improve our evaluations of collaterals. Additionally, we implemented a risk control model created by one of our commercial bank partners, which involved incorporating more variables for a comprehensive analysis of applicants. Consequently, our delinquency ratio decreased to 15.6% at the end of 2023, down from 19.2% at the end of 2022.
Matthew Lou, Investor Relations Manager
We believe that the company will continue to face challenges in 2024 as there are still uncertainties associated with China's real estate market; it is equally important for us to maintain growth and contain risks. Our major tasks for 2024 include the following:
Jun Qian, Vice President
We believe that the company will continue to face challenges in 2024 due to ongoing uncertainties in China's real estate market. It is equally important for us to maintain growth while managing risks. Our key objectives for 2024 include the following:
Matthew Lou, Investor Relations Manager
First, we will continue to innovate in our product mix. In 2023, we optimized our geographic footprint. Our goal for 2024 is to diversify our product offerings to meet borrowers' needs in different scenarios and target high-quality collaterals as well as borrowers with better risk profiles. At the same time, we will further optimize our sales team to accommodate the adjustment of the product mix.
Jun Qian, Vice President
We will continue to innovate in our product mix. In 2023, we optimized our geographic footprint. Our goal for 2024 is to diversify our product offerings to meet borrowers' needs in different scenarios and target high-quality collaterals as well as borrowers with better risk profiles. At the same time, we will further optimize our sales team to accommodate the adjustment of the product mix.
Matthew Lou, Investor Relations Manager
Second, facing the complex property market, we will prioritize asset quality. We will refine our risk control mechanism; in addition to collateral value, we will also assign greater importance to evaluating borrowers in decision-making. For example, we will take into account the applicant's industry as that may impact their ability to make payments. Other than that, we will apply differentiated review procedures for large cases. We will continue to dispose of nonperforming loans to control our risk exposure.
Jun Qian, Vice President
In the complex property market, we will focus on asset quality. We will enhance our risk control mechanisms; alongside collateral value, we will give more weight to evaluating borrowers in our decision-making process. For instance, we will consider the applicant's industry, as it could affect their payment capability. Additionally, we will implement differentiated review procedures for larger cases. We will keep disposing of nonperforming loans to manage our risk exposure effectively.
Matthew Lou, Investor Relations Manager
Third, as one of the leaders in the industry, CNFinance fully recognizes the importance of compliance building for the company's sustainable growth. In 2024, we will continue to strengthen compliance building. We will refine our internal control mechanism, conduct compliance training regularly to enhance our employees' awareness, and apply regular inspections, case audits, and other critical means.
Jun Qian, Vice President
As one of the leaders in the industry, CNFinance fully recognizes the importance of compliance building for the company's sustainable growth. In 2024, we will continue to strengthen compliance building. We will refine our internal control mechanism, conduct compliance training regularly to enhance our employees' awareness, and apply regular inspections, case audits, and other critical means.
Matthew Lou, Investor Relations Manager
Now I will hand the call over to our CFO, Mrs. Li, to walk you through the fourth quarter and fiscal year of 2023 financials.
Jing Li, CFO
Thank you, Mr. Qian, and welcome to our conference call. Now I would like to walk you through the fourth quarter and fiscal year of 2023 financials. Please note that the currencies that we use are in RMB, and all comparisons will be made on a year-over-year basis unless otherwise stated. For the first quarter of 2023, the total interest and fee income remained rather stable at RMB 445 million. The interest income charged to sales partners increased by 11% to RMB 36 million from RMB 33 million in the prior year. This is primarily attributable to an increase in the delinquent loan staff recruited by sales partners in installments. Total interest and fee expenses decreased by 7% to RMB 187 million compared to RMB 201 million last year, primarily due to the lower funding cost of trust company partners. Net interest and fees income increased by 2% to RMB 258 million compared to RMB 253 million last year. Net revenue under the commercial bank furnishing model was RMB 10 million compared to RMB 56 million last year. The decrease was primarily due to a decrease in loans recommended by the commercial banks in the fourth quarter of 2023 compared to last year. Collaboration costs for the sales partners increased to RMB 91 million from RMB 80 million, primarily attributable to an increase in the daily average outstanding loan principals under the trust lending model during the fourth quarter of 2023 as well as the involvement of sales partners in the commercial bank partnership model since the beginning of this year. Provision for credit losses was RMB 42 million compared to RMB 143 million last year, primarily attributable to the lower delinquency ratio. Additionally, in the fourth quarter of 2023, some sales partners who forfeited their credit risk mitigation positions due to their inability to fulfill their obligation to repurchase delinquent loans during the first half of 2023 were able to recommend their payment before the year-end. Furthermore, we started to involve sales partners under the commercial bank partnership since the beginning of 2023, which jointly led to an increased guarantee asset and also provided more protection to the loans. Net loss on sales of loans was RMB 12 million compared to RMB 1 million last year. Total operating expenses increased by 15% to RMB 97 million compared to RMB 84 million last year. Net income decreased by 33% to RMB 19 million from RMB 28 million. For the fiscal year of 2023, total interest fees income increased by 1% to RMB 1,755 million compared to RMB 1,731 million. Interest income charged to sales partners increased by 10% to RMB 125 million from RMB 122 million last year; this is primarily due to an increase in the delinquent loans repurchased by the sales partners in installments. Total interest and fees expense decreased by 8% to RMB 723 million compared to RMB 785 million, primarily due to the lower funding costs of trust company partners. Net revenue under the commercial bank partnership model increased by 53% to RMB 88 million from RMB 58 million. The increase was primarily due to an increase in loans recommended by the commercial banks this year compared to last year. Collaboration costs for sales partners increased by 7% to RMB 334 million compared to RMB 321 million last year, primarily attributable to an increase in daily average outstanding loan principals under the trust lending models in 2023 and also the involvement of sales partners in the commercial bank partnership model since early this year. Provision for credit losses was RMB 183 million compared to RMB 238 million last year, primarily due to the lower delinquency ratio. Despite the fact that, in the fiscal year of 2023, some sales partners who forfeited their credit risk mitigation positions due to their inability to fulfill their obligation to repurchase delinquent loans were able to recommend their payments. Additionally, we started to involve sales partners under the commercial bank partnership since the beginning of 2023, which has jointly led to an increased guarantee asset and also provided more protection to the loans. Other gains amounted to RMB 5 million for this year compared with RMB 90 million last year. Starting in the second half of 2023, the balance of credit risk mitigation positions forfeited by the sales partners decreased as we refined our installment policy to ease the liquidity pressure on sales partners when the credit risk mitigation positions deposited by trust partners are managed by the company. The company will recognize the amount of future profit and other gains. In the first quarter of 2023, some sales partners who forfeited their credit risk mitigation positions were able to continue to fulfill their guarantee responsibilities; associated with the credit risk mitigation positions were not deemed as confiscated. Total operating expenses were RMB 381 million compared to RMB 339 million, and the net income increased by 22% to RMB 165 million compared to RMB 135 million last year. As of December 31, 2023, the company held cash and cash equivalents of RMB 2 billion compared with RMB 1.8 billion as of December 31, 2022. The delinquency ratio for loans originated by the company decreased from 19.2% as of December 31, 2022, to 15.6% at the end of 2023. The NPL ratio for the loans originated by the company increased to 1.2% as of the end of this year compared with 1.1% as of December 31, 2022. With that, we would like to start the Q&A session.
Operator, Operator
The first question comes from William Gregozeski with Greenridge Global. Please go ahead.
William Gregozeski, Analyst
With the continued decrease in the borrowing costs, do you think that the rate you've seen in the last quarter is the rate that we should expect you guys to be borrowing at going forward?
Matthew Lou, Investor Relations Manager
With the continued decrease in borrowing costs, do you think that the rate you've seen in the last quarter is the rate that we should expect you to be borrowing at going forward?
Jun Qian, Vice President
Matthew Lou, Investor Relations Manager
So the average rate that we charge our borrowers in 2023 was 16.1%, down from 16.3% in 2022. Going forward, in 2024, I think based on the market conditions, our goal is to keep lowering the financing cost for our borrowers.
William Gregozeski, Analyst
Can you talk kind of generally about the demand for the loans that you're seeing in terms of the size and the split between trust and commercial?
Matthew Lou, Investor Relations Manager
The average rate we charged our borrowers in 2023 was 16.1%, a decrease from 16.3% in 2022. Looking ahead to 2024, our aim, based on market conditions, is to continue reducing the financing costs for our borrowers.
Jun Qian, Vice President
Matthew Lou, Investor Relations Manager
In 2023, due to uncertainties associated with the real asset market, the loan demand from MSE owners was actually not as expected. Therefore, in the first two months, we don't see the strength to recover in the first two months of the year 2024. If you take a look at the release data, China's new RMB loans in the first two months of 2024 were actually RMB 1100 billion lower than the same time in 2023. In the year of 2023, we facilitated loans of RMB 12.2 billion under the trust lending model and RMB 50 billion under the commercial bank model. So the loan facilitation under the commercial bank model accounted for 30% of the total loans originated, which well met our goals set at the beginning of 2023. For the year 2024, we still target the ratio between loans facilitated under the trust lending and commercial lending to be RMB 723 million, mainly with the commercial bank model taking up 30% of our loan originations. Our target for loan origination in 2024 is RMB 20 billion in total.
William Gregozeski, Analyst
You mentioned doing some things like the compliance training and the audits and the increase in borrower quality evaluation. Does that tie in at all to the technology upgrades for the platform you've been talking about? Or is that something different?
Matthew Lou, Investor Relations Manager
You mentioned initiatives such as compliance training, audits, and improvements in borrower quality evaluation. Do these relate to the technology upgrades for the platform you have been discussing, or are they separate matters?
Jun Qian, Vice President
Our target for loan origination in 2024 is RMB 20 billion in total.
Matthew Lou, Investor Relations Manager
Those are two different tasks. As a participant in the financial industry, we believe that compliance building is one essential thing that we should do. For the year of 2024, we will certainly enhance our compliance building, and we aim to make all audits and training a fundamental part of our company's culture. As for the investment in technology, in 2023, we essentially invested in two things: one is to enhance our evaluation of collaterals to provide a more accurate appraisal of their value. The other thing is that we have collaborated with one of our commercial bank partners to integrate a big data model to provide more thorough ratings for our borrowers. Additionally, in 2024, we will maintain our investment in technology; we plan to utilize the practical data we collect from our daily operations to adjust and improve the aforementioned systems to make them more suitable for our business.
William Gregozeski, Analyst
And then last question. The share repurchase plan looks like it expired. Is there any plans to renew that?
Matthew Lou, Investor Relations Manager
I'm sorry, could you say that again?
William Gregozeski, Analyst
Yes. The share repurchase plan looks like the term on that expired about 1.5 weeks ago. Are there any plans to renew that?
Jing Li, CFO
The share repurchase plan seems to have expired about 1.5 weeks ago. Are there any plans to renew that?
Matthew Lou, Investor Relations Manager
That was absolutely from our CFO, Mrs. Li. She said we will present it in front of our Board of Directors, hoping to extend this share repurchase plan for another year.
Operator, Operator
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, everyone, for joining us today in this conference call. If you have any questions, please feel free to contact us at ir.cashchina.cn. Thank you.