FinVolution Group Q1 FY2020 Earnings Call

Good morning, everyone. Thank you for joining the first quarter 2020 Earnings Conference Call for FinVolution Group. Today's conference call is being recorded. I will now hand it over to your host, Jimmy Tan, Head of Investor Relations for the company. Jimmy, please proceed.

Hello, everyone, and welcome to our first quarter 2020 earnings conference call. The company results were issued via newswire services earlier today and are posted online. You can download the earnings release and sign up for the company's email alerts by visiting the IR section of our website at ir.finvgroup.com. Mr. Feng Zhang, our Chief Executive Officer; and Mr. Simon Ho, our Chief Financial Officer, will start the call with their prepared remarks and conclude with a Q&A session. During this call, we will be referring to certain non-GAAP financial measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. For information about these non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release. Before we continue, please note that today's discussions will contain forward-looking statements made under the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties are included in the company filings with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Finally, we post a slide presentation on our IR website providing details of the results for the quarter. I will now turn the call to our CEO, Mr. Feng Zhang. Please go ahead, sir.

Thank you, Jimmy. Hello, everyone, and thank you for joining our first quarter 2020 earnings conference call today. Faced with a challenging start to the beginning of 2020, we adopted effective measures to ensure the continuity of our business, the safety of our employees, and to provide continuous service and support for all our users, all while doing our part to contribute to the broader fight against COVID-19. During these unprecedented market conditions, we took action early to control credit risks and proactively reduce loans originated on our platform, which resulted in a sequential decline of 23% in our loan origination volume in the first quarter compared to the fourth quarter of 2019. These timely and proactive measures we took ensured that our business operations remain resilient and allowed us to deliver solid performance and positive profitability in the first quarter despite the challenging environment. Throughout this period, funding on our platform remained stable and ample. Our institutional funding partners continue to show key interest in lending on our platform. As mentioned on our previous earnings call, lowering the funding cost is a high priority for us this year. We are therefore pleased to report that our current cost of funds has fallen to just above 9%, representing a roughly 50 basis point decline over the past 3 months. We expect further declines in funding costs throughout the remainder of the year. Thanks to our continued efforts to improve credit quality of our borrower base, our prudent approach to risk management, and our timely response to the shifts in the external credit environment and also China's successful containment and recovery from the virus impact, delinquencies are under control and are improving. As mentioned on our previous earnings call, following a period of deterioration due to the virus outbreak in China, we began seeing signs of improvement in delinquency trends in early March. This improvement trend has continued in April and May as China gradually contains the virus spread and recovers from societal suspension. Our Day 1 delinquency rate is now about 20% lower than pre-pandemic levels, thanks to our continuous efforts to shift towards better quality borrowers and a prudent risk management approach. As a result of our strengthened efforts in loan collections, our 30-day loan collection recovery rate has now returned to pre-pandemic levels. We therefore expect vintage delinquency rates for loans originated in the past 2 months to be about 6%, which is at the lower end of our vintage delinquency rates over the past 2 to 3 years. We will continue to strengthen our risk management and expect vintage delinquency rates to fall below 6% in the second half of the year. You may wonder why this improving trend is different from the total vertical delinquency rates disclosed in the earnings release, which instead shows an increase quarter-over-quarter. The reason is that the reported figures are firstly lagging and secondarily overstated because this metric is measured as a percentage of the outstanding loan balance. And due to further slowdown in loan origination volume in the first quarter, our outstanding loan balance declined by 18% quarter-over-quarter to RMB 24 billion at the end of March. We have a long and proven track record in managing risk prudently and responsibly through various credit and economic cycles. Our strong culture, coupled with proprietary technologies, such as Magic Mirror credit risk assessment and access to credit bureaus, such as Baihang Credit and in the future, the PBOC Credit Bureau, enhances our abilities to manage risk effectively. As China gradually recovers from the aftermath of the coronavirus, we believe our delinquency rates will continue to show structural improvement as the borrowers we engage with today have stronger credit risk profiles than those we engaged during the P2P era. If we take a step back and look at where we stand today, many of the challenges and uncertainties we faced over the past 12 months are largely behind us. Firstly, the uncertainties with the P2P business are now behind us. We are very close to fully winding down our back book of P2P loans. As at the end of April, the outstanding balance of P2P funded loans was only RMB 1.3 billion, representing a contraction of 94% compared to a year ago. Since the fourth quarter of last year, 100% of our loan originations have been funded by institutions. We have been completely relying on this new loan facilitation model based on partnerships with financial institutions for over 6 months now. Funding on our platform has been stable, and we have brought on board more and more financial institutions. Our financial results show that this business model is stable and profitable. Secondly, we believe the regulatory environment for our business is becoming clearer. The CBIRC recently released the consultation on commercial banks' online lending rule provides much greater clarity on the types of partnerships and loan facilitation services that banks and online lending platforms can engage in. We believe the regulator stance towards the loan facilitation model is supportive and recognizes the value that online lending platforms bring to financial institutions in terms of enhancing innovation, efficiency, and access to credit. We believe much of the regulatory uncertainty over the past year is now behind us. Finally, the worst of the pandemic and its impact is also behind us. As described earlier, delinquency trends have peaked and are improving as China's economy is reopening. There are still lingering uncertainties due to the virus, especially with regards to the shape of economic recovery overseas, and we will continue to remain vigilant and agile during this period. But we are cautiously optimistic on the outlook for the rest of the year, and we plan to resume growth in loan originations in the third quarter and expect steady growth in the second half of the year. All in all, we see ourselves as being in a better position with better visibility and a greater certainty than 6 to 12 months ago. Throughout this very challenging period, our employees, partners, and other stakeholders have provided us with tremendous support, and I would like to express my gratitude for all of them for all they have given us. As China slowly lifted restrictions, Beijing and other cities have been lowering their coronavirus emergency response measures in the recent weeks with hope that they can now help the economy recover and return to normalcy. All the while, we are maintaining our focus on the vast consumer finance market in China by sharpening our technological capabilities and providing higher quality service to both customers and partners. Before I move the call over to Simon, I'd like to take this opportunity to thank Mr. Honghui Hu for his contribution in shaping the company's direction and strategy for nearly a decade. We look forward to his continued support in his new role as our adviser. We are confident that our core strengths position us well to continue to capture the enormous potential in the consumer finance market. With that, I will now turn the call over to our CFO, Simon Ho, who will discuss our financial results for the quarter.

Thank you, Feng, and hello, everyone. In the first quarter, we delivered non-GAAP operating income of RMB 464 million, a solid result given the unprecedented market conditions. Our balance sheet and liquidity remained strong with RMB 2.4 billion of cash and short-term liquidity. Leveraging our strong technology, we look to capture new opportunities presented in the post-pandemic environment and expand our relationships with business partners. Before I go over the financial results for the first quarter, I would like to make a few comments on the new accounting standard, ASC 326, commonly known as CECL, which we adopted from January 1, 2020. As a result of CECL, we recognized a decrease in the opening balance of retained earnings of RMB 883 million. There were essentially two adjustments made as a result of CECL, and this is laid out in a table in the earnings release. Firstly, we adopted a uniform credit loss model for all on- and off-balance sheet credit exposures that reflects lifetime expected credit losses. The adjustments you see on the asset side of our balance sheet, mainly in loan receivables and accounts receivables, reflect this change in credit model from an incurred loss method to an expected loss method. Secondly, for guarantee accounting, CECL has meant that both a guarantee liability and CECL liability have to be set up upfront on day one for each loan. The guarantee liability reflects the value of us providing quality assurance services to our institutional funding partners, which is then released over the term of each loan as income, while the CECL liability is consistent with the overall requirements of the CECL standard to recognize credit risk upfront. The increase in the opening balance of our quality assurance payable of RMB 690 million, primarily reflects this change in accounting treatment. The adoption of CECL also means we now present our results from quality assurance in our income statement differently. Before CECL, gains or losses related to quality assurance were recorded in one single line item within other income. Under CECL, the income and credit losses related to quality assurance are recorded separately within operating revenues and operating expenses. Now turning to the financial results for the first quarter. In the interest of time, I will not walk through each item by line on this call. Please refer to our earnings release for more details. Net revenue for the first quarter of 2020 increased by 40.8% to approximately RMB 2.11 billion from RMB 1.5 billion in the same period of 2019, primarily due to the adoption of ASC 326. Loan facilitation service fees decreased by 60% to RMB 375 million for the first quarter of 2020 from RMB 939 million in the same period of 2019, primarily due to the decline in loan origination volume and a decrease in the average rate of transaction fees. Post-facilitation service fees decreased by 41% to RMB 183 million for the first quarter of 2020 from RMB 308 million in the same period of 2019, and primarily due to the rolling impact of deferred transaction fees. Net interest income was RMB 315 million compared to RMB 171 million in the same period of 2019, mainly due to the increased interest income from the expansion and the outstanding loan balances of consolidated trusts. Guarantee income was RMB 1.15 billion for the first quarter of 2020 due to the adoption of ASC 326. Non-GAAP adjusted operating income, which excludes share-based compensation expenses before tax, was RMB 464 million for the first quarter of 2020, representing a decrease of 43% from RMB 807 million in the same period of 2019. Other income increased by 105% to RMB 54 million for the first quarter of 2020 compared with RMB 26 million in the same period of 2019, primarily due to government subsidies. Net profit was RMB 420 million for the first quarter of 2020 compared to RMB 703 million in the same period of 2019. Next, let me give a few further updates. COVID-19 has brought unprecedented levels of macroeconomic disruption and uncertainty across the globe. At present, many aspects of daily life in China are starting to return to more normal routines. Since late March, we have also seen signs of improvement in our loan collection rates and delinquency trends. As a result, we expect loan origination volume in the second quarter of 2020 to be at a similar level compared to the first quarter of 2020. Although the first quarter has not been easy, we are well positioned for the resumption of growth in the second half of the year. Turning to share buybacks, we repurchased approximately 5.5 million ADS between January 2020 and May 22, 2020. As of May 22, we have cumulatively deployed approximately USD 84.6 million to repurchase the company's ADS under our share repurchase program with a total authorized amount of USD 120 million. We are very comfortable with our balance sheet and liquidity position. In particular, our cash position remains strong with approximately RMB 2.4 billion of cash and short-term investments as of the end of March 2020. During these times of uncertainty, our strong capital and liquidity position is an important source of confidence for all our stakeholders, including our employees and institutional partners. We are confident that our core strengths position us well to continue to capture the enormous potential in the consumer finance market. With that, I will conclude my prepared remarks, and we will now open the call to questions. Operator, please continue.

We will now begin the question-and-answer session. The first question comes from Alex Ye with UBS.

I have a couple of them. First on your transaction fee rate or your announcement disclose that your average transaction fee rate has declined. So could you give us an update on what's your average APR in Q1? So was the decline due mainly to moving forward of your to a higher credit profile customers? And would you expect that to continue in the coming quarters? Secondly, about your guarantee income booked in the revenue line. So for the RMB 1.2 billion of guarantee income, could you give us a breakdown of how much of that is related to release back from previous loan? And how much was due to the new loan from Q1? And my third question is on the asset quality trend you have mentioned. So your Day 1 delinquency have fallen to about 20% below the pre-pandemic level, right? So my understanding is that your asset quality is now running even better than the pre-COVID-19 level. So was that also due to shifting to the higher credit profile customers? And would you expect that kind of customer profile mix to continue for the rest of this year?

Thank you for your questions, Alex. Let’s address them one by one. Regarding the transaction fee rate, I want to clarify that our commentary was based on a year-over-year comparison. Currently, our transaction fee rates in the first quarter average around 4%, maybe just slightly above that. This rate is relatively stable compared to the fourth quarter of 2019, but it's lower when compared to the first quarter of 2019. In 2019, we shifted a significant portion of our funding from peer-to-peer sources to institutional sources and continuously upgraded our borrower customer segment throughout that year. At this moment, the lending rates charged by our lenders on the platform are capped at 36%, which has remained consistent, even in the fourth quarter, since we were entirely funded by institutions. I hope that provides some clarity. That comment was indeed on a year-over-year basis. As you may remember, about six to nine months ago, there was debate surrounding whether institutionally funded loans would have a lower take rate compared to peer-to-peer funded loans, which is reflected in the year-over-year comparison. For your second question regarding guarantee income, I don’t have an exact breakdown available. However, from the table in the earnings release detailing the impact of CECL on the January 1 opening balances, you can observe that the RMB 690 million increase in our quality assurance payables primarily resulted from the recognition of additional guarantee liability, which will be released over time in 2020. You might get a sense of what that figure could be, and we can follow up with more detailed information if this does not fully address your inquiries. Regarding the Day 1 delinquency rate, yes, it is approximately 20% lower than the pre-pandemic level, representing a historically low point in our company’s history. This improvement is largely due to our ongoing efforts to target a better credit profile of borrowers. Specifically, we've been proactive in managing credit risk during this period. If I provide another statistic—of the approved borrowers on our platform, we categorize them into seven credit levels, with Level 1 being the lowest risk and Level 7 being the highest. Referring to our 20-F Annual Report, we disclosed the distribution of loan originations across these credit levels. For the entire year of 2019, 50% of our originated loans fell within the top three credit levels. In the first quarter of 2020, approximately 80% of the loans originated were in those top three levels, highlighting a significant shift in our borrower mix. As Feng mentioned, we expect to further enhance our credit risk management in the latter half of this year, and we foresee this trend continuing. Does this answer your questions, Alex?

Yes, sure. Just a bit of follow-up. So on your comment about your credit profile mix in Q1, 80% falling in level 1 to 3. So, obviously, in Q1, you have taken a very tight credit approval policy. But going to have to, when you are more comfortable to resume growth, would you expect this kind of mix to relax somewhat in order to better balance your risk and growth?

Yes, Alex. There may be some variations, but our goal is to further improve credit risk simultaneously.

And the next question comes from John Cai with Morgan Stanley.

I have a few questions. First, could the management provide a breakdown of the first quarter loan facilitation and the outstanding balance, distinguishing between on-balance sheet and off-balance sheet? What is the total outstanding balance at the end of the quarter? Second, I have several questions regarding Day 1 delinquency. Can we obtain an actual number or the trend regarding how much it increased during the COVID-19 period?

Sure. John, the total loan outstanding balance at the end of March was RMB 23.9 billion. You'll find the on-balance sheet proportion represented as loan receivables on our balance sheet. Regarding loan originations, I will follow up with those numbers; I currently don't have the percentage available. As for Day 1 delinquency rates, the latest figure is approximately 9.7%. Pre-COVID, in the fourth quarter, the average was about 12.4%. You can see the difference there. In February, which marked the peak of our credit issues, we were around 12.8%.

So I guess I'll follow up on that regarding the loss assumption of the provision. So obviously, we make a profit this quarter, which is great. Just wonder is all the provision we needed for COVID-19 has already been provided for? And related to that is the loss assumption or the vintage assumptions for the loans originated in the first quarter. Can we provide the assumptions we use in making the CECL impairment costs? And I think on Day 1, we need to provide for a standby liability and a CECL liability. Just wonder if the Day 1 recognition in terms of the ratio between these two components, are they the same or different?

First of all, regarding your earlier question about loan origination volume and how much was on-balance sheet versus off-balance sheet, the figures I have indicate that 76% was off-balance sheet and 24% was on-balance sheet in the first quarter of this year. Concerning the loss assumptions, we indeed must set aside provisions for expected credit loss from the outset for the duration of each loan. I understand there are concerns about this new accounting standard. There are two key aspects of CECL to note. First, it increases the sensitivity of earnings to the credit cycle because it requires all provisions for expected credit losses to be made upfront. Therefore, if the credit cycle deteriorates, earnings will be more negatively impacted, and conversely, if credit improves, there may be opportunities for releases. Second, the guarantee income from quality assurance is recognized gradually over the loan's term, which means that during periods of rapid volume growth, earnings may experience a temporary negative impact because credit losses are recognized upfront while guarantee income is acknowledged gradually. However, it's important to remember that CECL is an accounting standard that alters revenue timing and credit loss measurement but does not alter the overall cash flows of the business. Regarding our CECL assumptions and estimates, we have always maintained a prudent risk management culture, which we continue to observe under the new accounting standard. The CECL framework requires our estimates to consider expected credit losses over the loan's complete life while accounting for anticipated future macroeconomic changes. Given the uncertainty in the outlook, we have incorporated a moderate upward adjustment into our CECL estimate for caution. The figures you see today reflect this adjustment for prudence. Additionally, we have noticed improvements in delinquency trends recently, and if these trends persist, we may find our credit loss estimates to be overly conservative, leading to potential provision releases in the future. Thus, we are being cautious with our risk management assumptions. Regarding your final question about the CECL liability versus the guarantee liability, these represent different aspects. On our balance sheet, the CECL liability is termed expected credit losses for quality assurance commitments, essentially reflecting the expected loss component. The guarantee liability, which you referred to as the standby obligation, represents the fair value of the quality assurance services provided to our institutional partners. This serves as the income component and is recognized as revenue in the profit and loss statement throughout the life of each loan. I hope this clarifies your questions.

Yes, of course. We previously indicated that for the loans originated in March and April, we anticipate the vintage loss to be around 6%. I'm curious if we are using this assumption for the first quarter origination or if it will be higher due to the impact of COVID-19. Additionally, we had previously reported the QAF assets as a percentage of the QAF protected loan, and I understand that these figures should decrease as we move down the risk curve. I would like to know if we have similar metrics for that as well.

On your second question regarding the quality assurance fund protected loan, all our loans are currently under quality assurance. Therefore, there isn't a significant need to keep disclosing that type of number. Essentially, all our loans have quality assurance. For March and April, we expect vintage delinquency rates to be around 6%. We tend to take a more conservative outlook regarding the future, incorporating a certain level of prudence during these uncertain times. If we happen to be overly cautious and the delinquency trends do not match our expectations, we could potentially see credit provision releases in the future.

And the next question comes from Daphne Poon with Citi.

I have a couple of questions regarding the CECL and the provisioning. First, from the table in your earnings release, it appears that the CECL impact on your on-balance sheet items, such as loans receivable and accounts receivable, is significantly larger than the off-balance sheet component, which is the quality assurance payable. Could you explain this? For instance, the allowance for loans receivable nearly doubled after CECL adoption, while the quality assurance payable only increased by a few percentage points. Secondly, regarding the guarantee income of RMB 1.1 billion in the first quarter, that number seems to be much larger than the additional QAF payable of RMB 690 million that you set aside as the beginning balance. Can you clarify this? Additionally, do you have a figure for what your net income would be for the first quarter under the new accounting policy? I sense that there is a positive impact from the CECL adoption on the Q1 earnings.

Thank you, Daphne, for your questions. I realize we are focusing a lot on CECL today, but I'll do my best to address everything. Regarding your first question about why the adjustments for loan and account receivables appear larger than those for quality assurance, I think it's important to mention that looking at percentages may not provide the best perspective. Additionally, the nature of the adjustments for loan and account receivables differs from quality assurance. We previously utilized the incurred loss method for loan and account receivables, so we've shifted to expected loss under CECL. In contrast, for quality assurance payable, we have consistently used an expected loss basis, which relates to the vintage delinquency rates we discuss. Therefore, the credit risk component has always aligned with CECL or a similar framework. The guarantee liability we added reflects the value of the services we provide, which is distinct from credit risk, making the comparison challenging. Regarding your second question about the RMB 1.1 billion guarantee income being significantly higher than the RMB 690 million payable adjustment, it's important to note that the RMB 1.1 billion in guarantee income also accounts for new bookings from the first quarter. This includes income released from loans originated in January and February, as well as loans from the latter half of last year. As for your final question about our earnings under the previous accounting standard, it's quite difficult to provide a precise answer given the changes in how we account for quality assurance payables and liabilities. The way these items flow through the income statement has also changed significantly. The income release from quality assurance positively impacted our first-quarter revenues, particularly as it relates to the release of additional guarantee liabilities established when we implemented CECL. Although our loan originations declined in the first quarter, this release of guaranteed income contributed positively to revenues. Even without this factor and considering the increased provisions for credit exposures that switched from the incurred method to CECL, our underlying business remained profitable. However, quantifying this is challenging due to the different accounting standards we've adopted. I'm happy to discuss the specifics with you in more detail offline if you're interested. Ultimately, I want to emphasize that this is an accounting adjustment that does not alter the overall cash flows or outcomes for the business.

Right. Understood. I want to clarify how we should view your provisioning or credit cost. Essentially, we can combine your provision charge with the credit cost for guarantee assurance commitment. That represents your total provisioning for the quarter, meaning there are no other items affecting the revenue line as in the past. Is that correct?

Correct. Yes, if I understand your question correctly, all the provisions for credit exposures would be in those three items. The credit loss on quality assurance commitments, the provisions for loan receivables, provisions for accounts receivable. That's it. Right. Loan receivables are on-balance sheet loans. Account receivables are basically our transaction fees, our service fees, that obviously would be affected by credit risk. And then quality assurance credit losses would be for the off-balance sheet component. Correct.

Right. Understood. And lastly, just wondering if you have any update regarding your micro-credit license on the progress.

Right. The timetable has slipped, obviously, because of COVID, and we will update you when there is progress. But I still want to reiterate that we are in a good position to apply for this license. We are one of the largest platforms in Shanghai. We have a good relationship with our local regulators. And of course, the wind down transition of our P2P business has been obviously one of the most successful in the industry. And beyond that, at the moment, there's nothing concrete to report back, but we will update you when there is.

And the next question comes from Stephen Cheng with Hitomi International.

It's Stephen here. I have three quick questions. Firstly, I would like to follow up on the guarantee income and credit loss related to the quality assurance commitment. If we compare this with the first quarter of 2019, the net figure for this area, excluding the provision for loan receivables, shows a net release in the first quarter. In contrast to 1Q '19, where there was a net charge, it's intriguing to understand what led to the net release in such a challenging environment. Is it due to excessive provisions made in Q4, or was there an accounting adjustment in January that aimed to enhance your opening balance significantly, leading to what I’d classify as a net release of guarantee liabilities? If Q1 has indeed been the toughest period and you managed this well, does it imply that we might see continued net releases in the upcoming quarters? This would suggest that guarantee income could remain higher than the credit loss associated with quality assurance. Additionally, regarding the take rate for the off-balance sheet loan facilitation business that Alex mentioned, you indicated a shift from P2P to institutional clients and a focus on selecting quality customers. Have you observed any increase in guarantee costs as a result? It seems unlikely, given that we need to deduct guarantee costs when reviewing the take rates. Therefore, in terms of effective guarantee costs in Q1 compared to Q4, did you notice an increase or a decrease, considering the net release in guaranteed liabilities? This is the first question I wanted to clarify.

Sure, Stephen. Regarding the accounting question, I think there's a misunderstanding. Comparing 2020 and 2019 isn't quite straightforward. It seems you've taken our guarantee income from the first quarter, subtracted credit losses and quality assurance, resulting in a net positive figure. Then, you are comparing this to a net charge in the first quarter of 2019, which I don't have the specific number for. Let me clarify. The gap you're observing is mainly due to timing differences. When our loan origination volumes decrease under the new accounting standards, revenues are accrued and released monthly. However, provisions only account for the current quarter's origination. If origination is down, the current quarter's figure might be small, leading to a situation where income appears larger than the bottom line. Conversely, during periods of rapid growth, you might experience a lot more volume that requires provision adjustments. Under the new accounting standard, we clearly differentiate these two items, while the old standard does not allow for such comparisons. We previously reported quality assurance gains or losses, which were calculated differently, and it's too complicated to explain in detail in this setting, but we can discuss it with you privately. Essentially, it's not accurate to compare these figures directly. Your main question seems to be whether there will be net releases moving forward. It wouldn't be reasonable to expect net releases indefinitely. If credit risk is assessed correctly and growth remains stable, the outcomes should balance out. However, there can be temporary discrepancies. As I mentioned earlier, we've taken a conservative approach to credit risk in this quarter due to macroeconomic uncertainties, and we've made some upward adjustments. We are seeing improvements, and if these trends continue, we might find that we've been overly conservative in our credit loss estimates, which could lead to provision releases. If your estimates are accurate, there shouldn't be significant deviations. You're right that the past take rate was net of credit risk and other factors, which means it could drop due to credit risk. But under the new accounting standards, all components are separated. This may help clarify, but you can't simply assume that trends from 2019 will apply to 2020 due to the differences associated with the CECL standard.

Your question about non-guarantee models is noted. We have been actively exploring new economic models with our institutional funding partners, including profit sharing and risk-less models. However, the recent advancements have been hindered by the pandemic. We will share more updates once we have clearer progress in this area.

Yes. This is Feng. Let me add a bit to the last question. I believe you're inquiring about the new consultation regarding online commercial bank lending as well as recent news on governance guidance for insurance. In short, of our institutional partnerships, only a very small percentage involves insurance companies, so the impact on us is minimal. There is essentially no impact on our partnerships with our institutions. I also want to emphasize that we believe the recent consultation on the commercial banking online lending rule is very positive news for the industry because it establishes a fundamental framework for how banks can engage in online lending in partnership with fintech companies like us. The importance of this cannot be overstated for both the industry and for our company. We are very encouraged.

And the next question comes from Yiran Zhong with Crédit Suisse.

Just following up on the funding side to the last question. Can you please provide some more color on the funding costs? You mentioned it's on the decreasing trend. What's the average level, say, in 1Q versus 4Q last year? And how does it compare with what we're observing so far this quarter? And also, do you see any impacts from the new rules on the trust industry? And would that impact your funding structure going forward?

Thank you very much for your question, Yiran. Feng mentioned that funding costs are currently just above 9%. We expect them to be slightly higher in the first quarter, likely between 9% and 9.5%. In 2019, we previously indicated that funding costs were between 10% and 11%. The trend has been a decrease throughout the year, starting the year closer to 11% and finishing around 10%. Currently, we're seeing it drop to 9.5% and potentially as low as 9%. We are confident that we can continue to improve on these funding costs, and we anticipate further declines ahead. Regarding the trusts, we haven't observed much impact as they account for about a quarter of our loan volume, so there hasn't been a significant effect.

And the next question comes from Claire Yang with Seahawk Capital.

Congratulations on the results. I have three questions. First, can you explain how you transitioned from the P2P model to institutional funding last year? What is your outlook for funding costs in the first half of this year? Second, based on your guidance in the earnings results, if loan origination in the same quarter remains at the same level as the first quarter and with the NPL improving, do you expect quarterly net profit to increase from one quarter to the next? Third, can you discuss the regulations surrounding loan and NPL collection? Also, how do you plan to engage individual investors in your P2P model, especially with the introduction of the new business called Leon TaiFu?

Thank you, Claire. I missed the initial part of your first question, but I believe it's regarding the outlook for our funding costs and our business transition. Our funding cost has currently decreased to around 9%, down from 10% or 11% last year, showing a steady decline each month. We anticipate further reductions in the second half of the year, potentially dropping below 9%. Regarding your second question, we haven't provided any quarterly net profit guidance. We expect to have a profitable quarter, but we can't share specific details until the quarter closes, as we have not typically done that in the past. On the topic of regulations concerning NPL collections, last year we mentioned that we tightened certain loan collection standards. Despite disruptions caused by COVID-19 in February, our loan recovery rates have now returned to levels seen in the fourth quarter prior to the pandemic. Our loan collection measures appear to be effective, and we are back to those recovery rates. Lastly, concerning wealth management, we have a solid base of individual P2P investors who have had positive experiences and returns with our product. We're in the early stages of developing a wealth management offering tailored to these P2P investors, focusing initially on bank time deposits. We'll provide updates as we have more information on this initiative.

And as there are no further questions now, I'd like to turn the call back over to the company for closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact FinVolution Group Investor Relations team.

Thank you. This concludes the conference call. You may now disconnect your lines. Thank you.