FinVolution Group Q3 FY2020 Earnings Call

Hello ladies and gentlemen. Thank you for participating in the Third Quarter 2020 Earnings Conference Call for FinVolution Group. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. I will now turn the call over to your host Jimmy Tan, Head of Investor Relations for the company. Jimmy, please go ahead.

Hello everyone and welcome to our third 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 email alerts by visiting the IR section of our website at ir.finvgroup.com. Mr. Feng Zhang, our Chief Executive Officer; Mr. Simon Ho, our Chief Financial Officer; and Mr. Jiayuan Xu, our Senior Vice President for Finance 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 discussion will contain forward-looking statements made under the Safe Harbor provisions 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's 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 our results for the quarter. I will now turn the call over to our CEO, Mr. Feng Zhang. Please go ahead, sir.

Thank you, Jimmy. Hello everyone and thank you for joining our third quarter 2020 earnings conference call today. We are pleased to report continued progress in our operations with a shift to higher quality customers. Our operational and financial results were better than expected in the third quarter 2020, a further testament to the agility and the robustness of our core capabilities. For the three-month period between August to October, our average IRR declined to 28%. As China gradually emerges from the aftermath of COVID-19, our loan business recovery has been gathering momentum. Our loan origination volume in Mainland China for the third quarter reached RMB17 billion, representing a 30% increase quarter-over-quarter and exceeding the top end of our guidance range. More encouragingly, our operating income increased by 21% quarter-over-quarter to RMB689 million. Our focus on prudent credit risk management, coupled with our proprietary risk assessment technology, continues to support improvement across multiple operating metrics in the third quarter in the following ways. First, the vintage delinquency rate for loans originated in the second and third quarter of this year is expected to come in below 4%. And going forward, we expect the vintage delinquency rate to further lower to around 3.5% by the end of the year. Next, the vertical delinquency disclosed continued to show sequential improvement in all-time buckets. Notably, the early stage delinquency rates that are 15 to 89 days past due have fallen to 1.9%. It's a historically low level for the company. Finally, all of these continued improvements despite the COVID-19-induced economic challenges demonstrate that our diligent efforts in targeting and serving better quality borrowers paid off, as bolstered by our enhanced technology capabilities to build greater synergies with our partners. As expected, we continue to experience strong demand from our partners for quality assets. With our strategic shift towards better quality borrowers, we were able to steadily lower the cost of funding on the platform over the past year. We are glad to report an average cost of funds on the platform of institutional funding partners declined to 8.2% in the third quarter. The cost of new funds on the platform is even lower at below 8%. Given market dynamics in the aftermath of COVID-19 and evolving regulatory environment, our business operations remained healthy and profitable in the third quarter. This performance was powered by our technological capabilities and a strong execution of our corporate strategies with a faster and better-than-expected transition to adjust towards higher-quality borrowers. We now expect our loan volume in the domestic market for the fourth quarter to be between RMB18 billion to RMB20 billion, representing an increase of between 6% to 18% over the third quarter. Now, I'd like to update you on our other strategic initiatives as we continue to leverage our technological capabilities to drive our growth in the long run. First, we are making impressive strides in our international business expansion, in particular, in Indonesia which today forms the bulk of our international business. In Indonesia, we operate under a lending license issued by the OJK and we are now one of the leading fintech platforms in that market with over 3 million registered users. Our business operations in Indonesia are gaining strong traction. Loan origination experienced a significant rebound of 5 times from the depressed levels in the second quarter 2020 during which many nationwide lockdown measures in response to COVID-19 were implemented. Loan volumes in Indonesia are now well above pre-COVID levels and at the highest level since we began operating there. The strong momentum is continuing and we expect loan origination volume in Indonesia to increase another 40% or so quarter-over-quarter. We also have operations elsewhere in Southeast Asia. For example, in the Philippines, where the fintech ecosystem is emerging in a highly promising and dynamic manner we will continue to capitalize on our experience, industry know-hows and technological capabilities to explore growth potential in the technology-driven financial services in these countries. Liang Fortune, our wealth management tech initiative remains on track in expanding its product and service offerings with continued growth in cumulative investments facilities of around RMB1.6 billion representing an increase of 33% quarter-over-quarter. In addition, speaking of the development of our technology-as-a-service, we have been making steady progress in empowering banks and other financial institutions to implement digital transformation in their consumer finance operations. We currently have a healthy pipeline of institutions in discussion and we'll continue to spearhead our strategy of exporting our technologies to more financial institutions. In summary, our proven track record in technology innovation, responsible risk management and effective measures taken to navigate across credit and economic cycles have allowed us to successfully manage through the various regulatory challenges in recent years. We have repositioned our core business. All fundings on the platform have transitioned from P2P to financial institutions and the customer base has significantly shifted towards the higher quality segment resulting in lower lending rates for our borrowers and much stronger credit risk profiles. We continue to invest in new strategic initiatives leveraging our technology and know-how. And some of these initiatives such as Indonesia are gaining momentum and are starting to pay-off. We are financially solid and well-positioned to generate sustainable growth and unlock the vast potential in consumer finance in China and abroad. Lastly, I would like to take this opportunity to thank Simon for his remarkable contributions to the company during his tenure. Simon will join our Board and we look forward to his continued contributions as a Director of the Board. At the same time, I would like to extend a warm welcome to Mr. Jiayuan Xu as our new CFO. We look forward to his contributions in the new role. With that, I will now turn the call over to Simon who will discuss our financial results for the quarter.

Thank you, Feng and hello, everyone. In the third quarter amid a recovering COVID-19 environment in Mainland China, we delivered non-GAAP operating profit of RMB698 million, representing a sequential increase of 21%, further demonstrating the sustained profitability of our core business model. Our balance sheet and liquidity remained strong with RMB3.4 billion in unrestricted cash and short-term liquidity. Leveraging on our strong technology, we look to capture new opportunities and expand our relationships with business partners. Now turning to the financial results for the third quarter. In the interest of time, I will not walk through each item line by line on this call. Please refer to our earnings release for more details. Net revenue for the third quarter of 2020 increased by 13% to approximately RMB1.8 billion from RMB1.6 billion in the same period of 2019, primarily due to the adoption of ASC 326 at the beginning of the year. Loan facilitation service fees decreased by 46% to RMB 486 million for the third quarter of 2020 from RMB 894 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 46% to RMB 161 million for the third quarter of 2020 from RMB 301 million in the same period of 2019 primarily due to a decline in outstanding loans serviced by the company and the rolling impact of deferred transaction fees. Guarantee income was RMB 747 million for the third quarter of 2020 due to the adoption of ASC 326. Net interest income decreased by 24% to RMB 261 million for the third quarter of 2020 from RMB 345 million in the same period of 2019 mainly due to the decrease in interest income from the reduction in outstanding loan balances of consolidated trusts. Other revenue increased by 159% to RMB 138 million for the third quarter of 2020, from RMB 53 million in the same period of 2019, mainly due to increased customer referral fees through third-party service providers. As we have shifted towards higher-quality borrowers on our platform, we have increased the referral of borrowers that do not meet our requirements to third-party platforms. Non-GAAP adjusted operating profit which excludes share-based compensation expenses before tax was RMB 698 million for the third quarter of 2020 representing an increase of 6% from RMB 658 million in the same period of 2019. Other income decreased by 49% to RMB 26 million for the third quarter of 2020 compared with RMB 52 million in the same period of 2019, which other income primarily consists of gains from investment. Net profit was RMB 597 million for the third quarter of 2020, compared to RMB 599 million in the same period of 2019. Now before I close, I want to address the regulators' recent consultation paper on micro-lending. In short, this does not materially affect us. We do not rely on our micro-lending company nor do we have co-lending arrangements with our funding partners. We do have a micro-lending company, but loans disbursed through our micro-lending company are small and account for less than 1% of outstanding loans on the platform. Our core business model is based on a loan facilitation model, whereby institutional funding partners on the platform provide 100% of the funds needed by borrowers. And our role is to provide value-added services to funding partners, as well as providing access to credit to borrowers. We have a well-capitalized balance sheet and our leverage is conservative. If you divide the total outstanding loans in our platform of RMB 22 billion by our shareholders' equity the leverage ratio across the business was only 2.8x. And our liquidity position remains strong with approximately RMB 3.4 billion of unrestricted cash and short-term investments as of the end of September 2020. Our strong balance sheet means we are well positioned in the current environment and it gives us significant flexibility. On buybacks, we have continued to buy back our shares. Since our last earnings call we have deployed $11 million to buy back our shares. Since we began repurchasing our shares in 2018 we have cumulatively deployed $122 million on buybacks. Finally, I wanted to thank you all and to Feng and our team for all the support and partnership over the past several years. I will continue to serve the company in my new role on the Board and I am excited to hand over to Alexis Xu Jiayuan who is well prepared to lead FinVolution which has strong technology and management capabilities and is very well positioned to adapt to the evolving environment and deliver long-term value to shareholders. With that I will conclude my prepared remarks. We will now open the call to questions. Operator please continue.

Thank you. We will now begin the question-and-answer session. Today's first question comes from Daphne Poon with Citi. Please go ahead.

Hi. Good evening, management team. Thanks for taking my question. So, I have three questions here. So first is just regarding your financial side. So, we noticed that there seems to be a meaningful decline in the credit cost intra-quarter on new loans. So if I take your credit loss for quality assurance divided by the off-balance sheet loan volume, it's only like 2.3%. So just wondering there, what's the reason behind, whether there is any write-back in the quarter? And second is regarding your economic outlook. So, after you adjust your loan pricing now to all below 27%. Also, what is the long-term sustainable economic outlook? And if possible, can you break it down into the average APR funding cost and credit cost, et cetera? And lastly, I just want to check, I guess on the regulatory side. I guess apart from this new online micro-lending rule, we do see quite a number of statements like from government officials. Seems the tone is more towards the tightening side on this overall FinTech sector or the online consumer lending sector. So this management can share your thoughts on the future regulatory direction or maybe like what you have been hearing from your funding partners or from the regulators on that front? Thank you.

Thank you for your questions, Daphne. I'll address them one at a time. The first question concerns the low credit cost and provisioning levels. We experienced write-backs in the third quarter due to better-than-expected credit risk outcomes, which we've mentioned in previous commentary. Specifically, for the guarantee credit loss, the RMB 327 million included a write-back of approximately RMB 690 million related to loans outstanding before the second quarter. Regarding your second question about profitability and unit economics, our transition to lower lending rates has exceeded expectations. Delinquency rates are improving faster than anticipated, funding costs are decreasing, and we're increasing our loan volume. Because of these positive trends, we only expect a slight decline in our take rate for the fourth quarter compared to the third quarter. Our take rate was 3.9% in the third quarter, and we anticipate it will fall within the range of 3.5% to 3.9% in Q4. Looking ahead, we expect the take rate to stabilize or even improve as we enhance our credit quality and reduce credit costs. Additionally, as we focus on higher-quality borrowers, we've seen an increase in fees from customer referrals. These borrowers, who don't meet our new standards, are referred to other platforms, generating referral fees of about RMB 90 million in the third quarter that carry no credit risk. We will continue to work on improving profitability and see potential for efficiency gains as our volumes grow and we optimize costs. We are confident in achieving healthy and sustainable profitability. On your final question regarding the regulatory outlook, I can share a few thoughts. Government regulations recognize the advantages that fintech companies provide, including online customer acquisition and servicing, data management, and risk management, which has been consistent in recent comments. The fintech sector complements traditional banks, broadens credit access, and increases efficiency, all of which are positive developments. The recent micro-lending and co-lending regulations seem primarily targeted at larger companies, which do not impact us since we do not depend on a co-lending model. Our loan facilitation model is acknowledged in the CBIRC's online lending rules for commercial banks released in July. Stricter requirements aim to prevent monopolization, which should favor established companies like us and raise entry barriers for smaller competitors while limiting competition from larger internet firms. In the long term, this approach should promote healthy and sustainable growth in the industry. I hope this answers your questions, Daphne.

Yeah, yeah, sure. Thanks, Simon. Maybe just one quick follow-up, regarding the loan pricing. May I know, what will be the average APR after you have adjusted – made all the adjustments?

And I think – as Feng said, in the three-month period between August to October our average IRR was running at about 28%. And I think in recent months, or so it's been around 27%. So we're around the levels that we want to be. This is where we want to be going forward roughly speaking.

And this is Feng. I'll add that this is dynamic. We will continue to observe closely what the regulators do and how our funding customers perceive their demand, as well as how our competitors are pricing their offerings. Currently, our internal rate of return is around 27% to 28%, but it is quite flexible, and we will monitor all these factors and make adjustments as needed.

And our next question today comes from Hanyang Wang with 86Research. Please go ahead.

Thank you management for taking my questions. Congratulations on impressive quarter. My first question is on the funding side. So given the recent regulatory environment, is there any change in attitude of your funding partners? And what is the proportion of the breakdown for your institutional funding partners mainly a few of your top fund partners? And my second question is about the business model involvement. So what is the progress on your profit-sharing model for which you do not get credit risk?

Yes. This is

Thank you. The first question, we'll have Alexis Xu to answer.

Yeah. Hello. This is Alexis. I will take this question. And for the first question, I want to say, our funding partners remain supportive as you can tell on the gradual decline in funding costs to our platform. And in this quarter, banks and the consumer finance companies facilitate around 85% of our loan volume, while trust companies facilitate around the remaining 15%. And for your second question about our business model, we have already begun working capital-light models such as profit-sharing models with some of our institutional funding partners. And we will continue to update the market when there is progress. Hopefully, it can help you.

Thank you. I have a following question on the regulation environment. So basically, I saw some local courts turning to out some financial institutions from the full-time LPR lending interest rate cap. But it seems that the regulatory authorities such as PBOC, CBIRC are still staying silent. So any new color on your side will be very helpful?

Hi. This is Feng. Yes, I'll share my thoughts. Yes. With regard to the Supreme Court rate cap decisions, the Supreme Court four times LPR cap only applies to private lending and not to licensed financial institutions. This was clearly stated in the Supreme Court decision. And I don't know if you noticed, it was also evidenced by a recent court ruling involving Tian Bank in Zhejiang province. And all lenders on our platform are licensed financial institutions. Now despite all this in the spirit of reducing borrowing costs for our customers, providing better services to them also in line with our strategy of targeting better quality customers we have voluntarily significantly lowered the borrowing rates for new loan originations since August. As I mentioned, the average borrowing rate on our platform in the last three months, August to October was about 28% on an IRR basis, compared to 33% in August prior to the Supreme Court decision. And our current average IRR is about 27%. And I also mentioned that we will watch the market and watch the regulators' movements closely and it is all flexible. Now we believe we are fully compliant with current regulations and are able to achieve significantly better credit quality and deliver healthy and sustainable profit under current pricing. And we are continuing to monitor the development in the country, in the industry and when necessary, make appropriate adjustments that are in line with regulatory requirements and industry norms.

Thank you. It's very helpful.

Our next question comes from Alex Ye with UBS. Please go ahead.

Hi. Good evening. Thanks for taking my question. I have a few follow-up. First one is on your credit loss for quality assurance commitment. So previously, you guys mentioned that there was a write-back of RMB690 million, if I take it right. So if we add it back into the RMB300 million of credit loss for the quarter, then essentially the company is making RMB1 billion of credit loss provision then that would be equivalent for around 7% of your off-balance sheet loan volume. So that compared to your expected vintage loss of only is like 4% to 4.5%. So I'm wondering how we should reconcile these two numbers? Why are you still making such loss provisions currently for the current quarter? And my second question is on your take rate outlook. So it was mentioned in an earlier question that the take rate for the next quarter is going to be slightly lower or even close to this quarter. But given your average IRR is lowering from 36% to 27%, I'm just wondering where the savings in unit economics are coming from? Obviously, your lower credit cost is one of the important factors, but just wondering where are the other parts of the economic savings? And my last question is on your international business expansion. So we have seen a lot of more details in this quarter. So I'm just wondering if those international continue to gain scale, how would that impact your P&L? So where are they booked at currently? Thanks.

Right, Alex. You asked some very good and insightful questions. I'll address them one by one. Regarding your first question about the guarantee credit loss, you're correct that new provisions were around RMB1 billion. We continue to exercise a degree of caution in our loan provision assumptions due to the inherent uncertainty of the future. If the improving delinquency trends persist, our assumptions might be overly conservative, which could lead to provision releases in the future. So please keep that in mind. Secondly, about the take rate, delinquency rates have been steadily declining and have exceeded our expectations, positively influencing our take rate. In hindsight, our take rate in the second and third quarter was understated because we overestimated credit risk at that time. If we had accurately predicted our credit performance, our take rate for those quarters would have been higher than what appeared in our income statement. Therefore, the reported decline in take rates, or what we anticipate to be reported in the fourth quarter, is expected to be relatively small. I hope that clarifies things for you. Lastly, concerning Indonesia, it currently represents a small, low single-digit segment of our loan volume. However, it is growing much faster than our business in China. While its contribution to loan volume is likely to remain small, it is more profitable. Generally, Southeast Asia tends to be more profitable than China. Currently, it isn't affecting our bottom line, but we wanted to highlight the success and momentum we are experiencing there. As our international businesses start having a greater impact on our numbers and bottom line next year, we will provide relevant updates and disclosures.

Hi Alex, this is Feng. I want to provide some additional insight regarding the question about the profit and loss statement, take rate, and unit economics. To supplement what Simon mentioned, our internal rate of return is approximately 27%, and our funding cost to FTP is about 8%. We expect the vintage loss rate, based on the original balance, to be around 3.5%. Given that our loan tenor is about eight months, this 3.5% translates to an annualized loss rate of roughly 8.8% when converted to an IRR basis. Therefore, when we calculate our take rate on an IRR basis by subtracting 8% and 8.8% from 27%, we arrive at around 10%. Typically, we discuss take rates based on the original loan amount, which gives us about 4% when considering our loan tenor of around eight months. This is a simplified explanation, as accounting differs slightly for trust-based origination versus our loan facilitation model, and a small portion of our fee is recognized later. However, based on our current credit quality and pricing, a roughly 4% take rate seems reasonable. I hope this helps.

Okay. Thanks. So, if I may just one follow-up on the write-back. So I'm wondering sort of given we are now in the fourth quarter – middle of the fourth quarter, just wondering, do we have any visibility on any potential more write-back in the fourth quarter because we have been having consistent write-back in the past two quarters? I'm just wondering, do we further expect that in the near term? And yes, any color on that.

Yes, Alex. I think as Feng has been saying, risk performance has been obviously fairly – pretty good at the moment. And we are expecting the vintage delinquency rates to be in the new originations that we're doing this quarter to be down in the sort of 3.5% range versus the sort of just below 4% range in the last two quarters. So I think the credit metrics are heading in – obviously in a positive direction and we'll have to see at the end of the quarter where things end up at.

Yes. I think if the credit quality the environment has been benign. And I think if these trends continue that would be like better than what we had assumed in the provisioning. I think it is possible that we may have some further release moving forward. But that's a yes.

Today's next question comes from Jacky Zuo with China Renaissance. Please go ahead.

Hi. Many thanks. Congrats on the solid results and congrats Simon and Alexis for the new role. And yes and thanks Simon for all the help in the past years. So just two questions from my side. Number one is, the drivers behind the solid recovery of the loan volume in the third quarter – and I observed that the ticket size also increased. So how much of the loan volume increase would you attribute to the larger ticket size? And how much will you attribute to the new borrowers especially the high-quality borrowers? And any change to our customer acquisition strategy? Any color will be helpful. And second question is on regulation again. So just looking into details of the new online micro-lending license rules. Since the capital requirement is quite high and it's a bit difficult for all the listed players to get the national license, so will that affect your business, if at the end you can't get an online micro-lending license? Thanks.

Yes Jacky, let me just quickly address some of those questions. I think in terms of the ticket size increase, I think it's expected and normal because as we shift to a better quality, higher quality borrower segment as you can see from the credit metrics that we're showing at the moment delinquency rates down in the sort of 3.5%, 4%. Our borrowers in these segments just don't – they tend to borrow a bit larger than what we used to give out. So actually for first-time borrowers, the ticket sizes are now roughly – the average ticket size in the third quarter for first-time borrower was about RMB 8,500. It is edging upwards. But typically speaking RMB 9,000, RMB 10,000 sort of is not uncommon. So this is sort of the area we are operating in at this moment. And that's actually been an ongoing process over the last several quarters. So it isn't just suddenly a big bump. That number is an average for the third quarter. So – and of course, the better-than-expected loan volume in the third quarter is related to sort of the better-than-expected transition we've had to a lower lending rate environment. So we've had the confidence to actually grow to expand the book, as we saw the sort of numbers and the performance come in. So I think that's – it's hard to separate. It's ticket sizes but it's an ongoing transition which we – as we consistently said has been – it's been better than expected. It's been faster and more successful than expected. Now in terms of the customer acquisition channel strategy, it hasn't changed significantly. We mainly rely on a range of social media platforms, information feeds and advertising such as WeChat, Toutiao, Douyin. And the types of channels haven't changed much, but the message, the optimizations, we are continuously improving. And we work very closely with our key channels to build models and deploy technology that can more accurately target the customers that we seek. And I think we will continue to optimize and expand these channels to effectively reach out to our customer segment. So it is quite detailed and quite technology-driven. But we are seeing that the adjustment overall has been smoother than expected. And your final question is just simple. Yes, the capital requirements of micro-lending licenses are much higher than the previous version of the consultation paper. But, I think, at this point in time we will just have to: A, wait for the final rules; and B, assess what we ought to be doing. At the moment, we don't rely on the micro-lending license, as we said. So we use the loan facilitation model. Yes. But we'll have to see. We're still, obviously, waiting and thinking.

Yes. Very helpful. Thanks again, Simon.

Our next question comes from Yiran Zhong with Crédit Suisse. Please go ahead.

Hi. Thank you for taking my questions and congratulations on the strong quarter. I just have one follow-up question on the customer side. It seems that you've been quite effective in your transformation to move up the quality curve for your customers. So can you please share your thoughts in terms of how you manage to achieve that so far? It seems that the number of new borrowers, as a percent of unique borrowers in 3Q was at a low level versus historical level. So can I read that as you're relying more on the better quality segment of your existing borrower pool? And what's the way forward from here? Thank you.

Sure, Yiran. The number of unique borrowers is indeed lower, which reflects the current loan origination volumes that are still below our desired levels. This situation indicates where the business stands, along with the larger ticket sizes we've discussed. Our shift towards better quality borrowers has been driven by several factors. First, we've stopped lending to borrowers with higher risk profiles. Second, we've adjusted rates for existing borrowers and are focusing on acquiring customers in higher quality segments. Third, we've successfully re-engaged previously inactive but good quality users by offering them lower lending rates, making it more appealing for them to return. We are confident that thanks to the improving credit quality and the credit loss metrics we've seen over the past year, we can sustain healthy profitability despite lower pricing. This summarizes how we've managed the transition. If you have any further questions or need clarification on any points, feel free to ask.

And our next question today comes from Terry Sun at CMBI. Please go ahead.

Hi, management. Thank you for taking my call. So just wanted to ask about the funding cost trend. You're saying the funding cost yield coming down in 3Q. I just want to understand the logic behind it because, we've seen some marginal tightening of liquidity and the interbank costs actually have been rising a bit. So, why are the funding costs still coming down?

That's an interesting question. There are a few aspects to consider. First, we're not a very large player in the market, so in terms of overall liquidity, we are relatively small compared to the banking system. Additionally, our lending volumes have decreased significantly over the past six to nine months due to COVID, credit risk concerns, and various changes in the environment. At one point, we experienced greater demand for our assets than the available supply. From the banks' perspective, this remains an attractive segment, especially given the returns they are seeing, which range from just below 7% to low 8%. It's a good return business for them, so it wouldn’t be unexpected for them to continue working with us, sourcing quality borrowers and assets. Overall, I believe this is a compelling opportunity for banks, and we are confident that our funding costs can continue to decrease from the current levels.

Okay. That’s great. Thank you.

Our next question comes from Steven Chan with Haitong. Please go ahead.

Good evening management, and congrats for your new role for Simon. I hope that is a half retirement life. Anyway, a few quick questions, a quick follow-up. First of all, if I use the sales and marketing expenses you estimated so-called per customer acquisition cost, it seems that there was a rise in average customer acquisition costs in 3Q compared with first half. So, I just wanted to know, whether it is correct or not and what has caused the rise in customer acquisition cost? Is it one-off? And how is it looking forward like? That's the first one. And the second question, just to clarify, you just mentioned that about 85% of funding partners are consumer finance companies and 15% trust companies. So, none of that is from banks? And my question is that, recently there are some court cases in different areas saying that, the consumer finance companies may have to apply for the High Court lending ceiling. So, if most of your funding partners are consumer finance companies, are you worrying about that you have to abide to the lending rate cap? So that's the second one. And finally, I think just to follow-up what Alex question about your assumptions in the expected credit loss. So, you have made RMB 1 billion in some write-back. Do you think that, you will relax your assumption a little bit in Q4 and maybe going forward in Q1 next year because of the improving vintage?

Yes, Steven, thank you for your questions. I believe your second question is straightforward. You may have misunderstood our response. The 85% figure refers to the combined total of banks and consumer finance companies. In fact, banks represent a significant majority—approximately 65% or two-thirds of the total. Consumer finance constitutes about 15% to 20%, possibly around 20% or just below that. Therefore, we don't see this as a major concern for us. As you know, most of the funding and liquidity in the market comes from banks, and there are far more banks in the system than consumer finance companies. Regarding your point about the increase in customer acquisition costs, you are correct—your calculations are largely accurate. We have noted a general rise in customer acquisition costs, which we have been highlighting on our calls over the past few quarters. This trend is primarily due to our shift towards better-quality borrowers who have stronger credit profiles and tend to borrow larger amounts. It's also important to remember that the second quarter and the first half of the year were not typical environments for customer acquisition due to COVID, which led everyone to be more cautious in acquiring customers. In Q3, we not only saw a rebound in market activity but also ramped up our own customer acquisition efforts as we aimed to resume growth. These factors contribute to the increase in customer acquisition costs in the third quarter: the shift in our customer segment, the rebound in activity, and our more aggressive strategy to gain new customers. However, I want to emphasize a couple of points for your consideration. Firstly, we estimate that a typical borrower will break even within the first 12 to 18 months. Thus, our newly acquired customers provide a healthy net present value despite the higher acquisition costs. Secondly, new borrowers make up about 10% of our loan volume right now, while 90% comes from repeat borrowers, for whom we do not incur any acquisition costs. I hope this clarifies and explains the trends we’re observing. Regarding your final question about our assumptions for the fourth quarter and write-backs, we have addressed this in detail. I cannot preemptively speculate on future assumptions, as that would be risky. However, if actual credit loss levels turn out to be better than expected, it could lead to write-backs and releases, so that will depend on the circumstances at that time.

Thank you. It’s very clear.

Thanks Steven. Thank you.

Thank you. Our next question comes from Liang Henry with Golden Dragon. Please go ahead.

Hey, management congrats on the good quarter results. I just have two quick questions to follow-up. One, can you guys share your secret sauce on managing down the delinquency ratio or the NPL, while most of the players in the industry is more or less still struggling or see the delinquency rate is still much higher than the pre-COVID period while we are just getting it down to record low again and again. Can you share like how you guys manage to do that? And second question is you speak of new customer acquisition, and it seems like the loan volume is gaining more momentum in the fourth quarter onwards. Can you share your plan of like the marketing input and expand forward and how you would think of acquiring new customers like what channels and what kind of plans onwards? Thank you.

I'll address the question regarding credit risk. This is Feng. The situation arises from a mix of the current environment and our proactive measures, as well as our risk management approach and company culture. We've seen improvements coming out of COVID-19, especially following the cleanup of P2P and fintech platforms that are now under stricter regulations. Overall, we have noticed enhancements in credit information availability, specifically from PBOC credit bureaus, which has contributed to a more favorable credit environment compared to the pandemic period, and even improved compared to last year. Importantly, we've implemented several proactive strategies. Beyond continually shifting towards acquiring higher quality borrowers, as Simon mentioned, we've intensified efforts to attract new, better-quality customers and reactivated dormant users by offering improved incentives and terms. This has led to positive selection among our previously inactive customers. Additionally, we're optimizing our technology for customer acquisition, focusing on accurately targeting low-risk individuals, and refining our risk models, credit policies, and loan collection methods. All these combined efforts have significantly impacted our loss rates, which are clearly reflected in the vertical loss rate tables and the vintage loss rate curves in our recent release, showing a continuous downward trend. I hope this provides clarity.

Thank you for your question, Henry. I'll respond to your second question about customer acquisition and marketing. As our loan volume increases, we will inevitably need to invest more in marketing and targeting new customers. We focus on assessing the profitability of each new user on our platform. We use an NPV model to estimate profitability and determine how much we should be paying. The appropriate customer acquisition cost will vary for each platform, depending on the types of borrowers, the loan amounts, and their ability to manage risk and generate returns. This makes direct comparisons challenging. While it's not my area of expertise, we would be happy to provide you with more detailed operational information. A lot of effort goes into optimizing our key channel partners and building effective models to target the borrowers we aim for. There has been significant work in these areas, which may not be apparent in the initial numbers, but it's a substantial part of our operations. Our front-end team dedicates a lot of resources to this, and we can certainly discuss this in greater detail during a follow-up, separate from today's call.

Yes. Thank you for that Simon. And we appreciate all the awesome efforts and being very. Congrats again on the strong quarter.

Thank you, Henry.

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 Investor Relations team. Good night.

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