FinVolution Group Q1 FY2022 Earnings Call

Hello, ladies and gentlemen. Thank you for participating in the First Quarter 2022 Earnings Conference Call for FinVolution Group. At this time, all participants are in a 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 first quarter 2022 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, and Mr. Jiayuan Xu, 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 US 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 US 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 US 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.

Thanks, Jimmy. Hello, everyone, and thank you for joining our earnings call. Due to the lockdown in Shanghai, our management team is dialing in from their homes, so please bear with us if we encounter any technical difficulties during the call. We're happy to speak with you today following the successful completion of another strong quarter against multiple headwinds. Since March 2020, Shanghai has been under lockdown due to the pandemic and similar lockdowns have been imposed upon additional cities in recent weeks. Furthermore, other fluctuations afflicting 2021's macro environment persisted through the first quarter of 2022 and have affected certain aspects of our business operations. However, our strong technological foundation and strategic transition towards better quality borrowers enabled us to flexibly navigate challenges and deliver solid consistent first quarter results, highlighted by our eighth consecutive quarter-over-quarter growth in total transaction volume, in line with our expectation. We achieved record-setting total transaction volume of RMB39.7 billion this quarter, representing a year-over-year increase of 48% and a sequential increase of 2%. Now, let me share some other major achievements for the first quarter. As we relentlessly and skillfully execute our strategy to acquire better quality borrowers, transaction volume originated for new borrowers surged to RMB6.4 billion, an increase of 14% year-over-year. Notably, our total outstanding loan balance also increased to RMB53.8 billion as of March 31, 2022, representing an increase of 66% year-over-year and 7% sequentially. Thanks to our progressive shift towards better quality borrowers, our ever-evolving credit risk assessment and our self-developed proprietary technologies such as Platform 9.75. We have stabilized our risk metrics at extremely low levels while continuously growing our transaction volume. Platform 9.75 is an algorithm learning system which combines automatic model design, deployment, and management into a one-step platform that requires just 100 seconds to acquire relevant resources and implement new models for our credit risk assessment. This is increasing our efficiency tremendously, allowing us to swiftly make efficient and appropriate adjustments on complex and iterative operating rules, saving us over 50% in both maintenance costs and time. Supported by our cutting-edge technologies and a prudent management framework, our recent day one delinquency rate in the first quarter of 2022 further improved to 5.3% from 5.6% in the fourth quarter of 2021. However, since then due to pandemic-related lockdowns, this metric has increased slightly to 5.5%, but is still within expectations. As our loan collection team is largely based out of Shanghai and spread across several cities, our loan collection recovery rate in May remained strong at above 90%. Our delinquency rate below 90 days remained low at 1.56% compared to 1.61% in the previous quarter. Our vintage delinquency rates have remained stable for the past several quarters. However, considering the impact of the COVID resurgence in China, we now expect our vintage delinquency rate for the first quarter to be around 2.4%. In the meantime, we will continue to closely monitor the risk performance of both existing and newly originated loans. The impact of the pandemic is manageable for us as we have been implementing preemptive measures such as strategically reducing loan transactions in riskier regions and adjusting the approval rate for sectors such as food and beverage, which have been badly affected by the prolonged lockdown. Our ongoing transition to better quality customers has been validated by the increased proportion of our category A and B borrowers, which accounted for 68% of our total borrowers in the first quarter compared to just 50% in the same period last year. Furthermore, the percentage of loans facilitated at or below an IRR of 24% increased to 84% in the first quarter, up from 78% in the previous quarter and from just 14% a year ago. On a separate note, for borrowers who lost their short-term payment capabilities due to COVID, our customer service team is providing additional assistance for them to help them through this difficult period. We are confident that our industry-leading digital capabilities and in-house developed technologies will empower us to overcome this challenging period while achieving regulatory compliance. While sustaining our strong growth trajectory over the quarter, we also advanced our strategy to optimize our overall funding structure. As we continue to augment and refine our mix of funding partners, we have diversified our platform with stable, secure, and ample funding sources. To date, we have cumulatively cooperated with over 60 financial institutions across different provinces and continue to cultivate a robust funding pipeline. Alongside our substantial progress in our consumer finance business, we also maintain solid growth momentum in our operations aimed at empowering small business owners. During the quarter, we served over 507,000 small business owners across multiple sectors such as retail, wholesale, and service industries, among others, representing an increase of 66% from the same period last year. While the segment's transaction volume increased 123% year-over-year to a record high of RMB9.8 billion, contributing 25% of total transaction volume for the quarter. Our dedication to providing small business finance is strongly aligned with the government's objective of promoting quality financing and access for SMEs, especially in the aftermath of the global pandemic. Going forward, we will remain focused on our efforts to assist small businesses, reaffirming FinVolution's commitment as a responsible corporate citizen. Turning now to our international expansion, which continues to gain traction alongside our domestic business to enhance our business stability. We have strategically implemented multiple measures such as the transition to better quality borrowers, improving our product mix, offering attractive interest rates, and expanding our partner base in the international markets. This approach is bearing fruit. The proportion of better quality borrowers increased to 64% in the first quarter of 2022 from 28% in the same period last year. With the transition to better quality borrowers, we have also further strengthened our institutional funding base in the region, and we are confident of securing additional funding as our business grows. With the COVID-19 situation largely under control in Southeast Asia, our transaction volume reached RMB0.86 billion in our international markets during the first quarter of 2022, representing an increase of 13% year-over-year. Of particular note, the outstanding loan balance for our international markets totaled RMB0.36 billion, representing an increase of 44% year-over-year and 9% sequentially. We will continue to cultivate our partnerships with different players in the region and introduce new products and services to improve our offering mix. We are confident that these efforts will support our goal of becoming one of the leading players in the region. Last but not least, I'd like to provide an update on our ESG performance, which is an important part of our growth and long-term value creation philosophy. This quarter's lockdown in Shanghai presented enormous challenges as well as opportunities for our team to develop effective ESG solutions. I'm incredibly proud to say that our entire organization stepped up to meet and overcome these challenges with creativity, determination, and grace. Our IT department quickly provided assistance and software solutions to enable our employees to work from home and minimize work disruptions, and our procurement and administrative teams are working relentlessly to obtain supplies and provide ongoing assistance for our employees and partners who are immobilized by the lockdown. On a community level, to assist local authorities, our IT department provided a notification system to deliver timely pandemic-related updates for residents in certain areas. Our employees also procured food supplies for volunteers stationed in the Songjiang district. Finally, we reported last quarter that we received a low-risk ESG rating from Sustainalytics, a leading independent global provider in ESG research, ratings, and data. Additional independent platforms have also included us in their ratings, providing our stakeholders with even greater insight into our ESG goals and accomplishments. We firmly believe that our long-term strategic plan, including financial, technological, and ESG goals, will lead FinVolution to its next phase of growth and prosperity. In summary, our excellent performance in the first quarter of 2022 underscores our strength and stability, as well as our team's ability to overcome any challenges. Taken together, our high-quality customer base, outstanding credit risk management system, and strong overall execution form a firm foundation that will empower us to drive sustainable and quality growth in the long run and further strengthen our leadership position in the industry. Going forward, we will remain dedicated to acquiring better quality customers both domestically and internationally while leveraging our technological capabilities to further define our credit risk assessment and management framework to optimize our product mix. With these advantages, we believe that we are well-positioned to capitalize on the massive opportunities ahead and to create great value for our customers, shareholders, and all stakeholders. With that, I will now turn the call over to our CFO, Jiayuan Xu, who will discuss our financial results for the quarter.

Thank you, Feng, and hello everyone. Welcome to our first quarter 2022 earnings call. In the interest of time, I will not go through all of the financial line items on this call. Please refer to our earnings release for further details. As Feng mentioned, we are encouraged that despite multiple challenges in the first quarter, we still achieved quarterly transaction volume goals for the eighth consecutive quarter while maintaining our risk metrics that are relatively stable. Our transaction to better quality borrowers coupled with strengthened relationships with funding partners and consistent technological enhancements has resulted in the loan approval rate for our funding partners rising to 76% in March compared to 62% in the same period last year. Our pipeline of potential partners remains strong, and we are confident to achieve meaningful improvement in our funding cost in the near future. Driven by our consistent efforts in research and development, we have continuously enhanced our share of technologies throughout our business operations, including customer acquisition and credit risk assessment among other areas. These efforts have been validated by marked improvements across our operational metrics. Leveraging these trends, our net revenues for the first quarter rose to RMB2.4 billion, an increase of 16% year-over-year. Even more encouragingly, we also delivered a strong non-GAAP operating profit of RMB602 million and maintained a substantial balance sheet with RMB10.8 billion in total shareholders' equity. During the first quarter, our average borrowing cost remained stable at around 24.3% compared with 26.7% in the same period last year. Notably, nearly all loans originated for our new borrowers are at 24%, reflecting our ongoing commitment to financial inclusion and our growing ability to comply with regulatory directives. We maintained our take rate for the quarter at a stable pace of 3.9%. Together with our partners' quotes and our consistent effort in optimizing operating efficiency, we are confident that we can continue to deliver solid results going forward. With the cooperation of our capital-light model stabilizing at around 21%, our leverage ratio, which is defined as risk-bearing loan balance divided by shareholders' equity, remained stable at 4.1 times. Our unrestricted cash and short-term liquidity position increased to RMB6.3 billion compared with RMB5.6 billion in the previous quarter, representing a sequential increase of 15% and further demonstrating the robustness of our balance sheet. During the first quarter, we continued to target higher quality borrowers, both in the domestic and international markets with attractive borrowing rates as part of our ongoing strategic transactions. Our customer acquisition channels remain diversified across online and offline sources, ranging from online information feeds, Internet search engines, and mobile app stores to customer referrals and our robust offline direct sales team, supporting a healthy and stable customer acquisition cost. Apart from our annual dividend policy, we have also been returning value to our shareholders in the form of share repurchase. Between January 2022 and April 2022, we deployed about $15 million to buy back our shares in the public market. Since we initiated our share repurchase program in 2018, we have cumulatively deployed $147 million, representing 81% of our total share repurchase programs. Before I conclude my remarks, let me provide some additional color on our business outlook for 2022. Despite the recurring COVID-19 lockdown in parts of China and a more challenging macro environment, we're still confident that our business operations will continue to gain momentum both domestically and internationally. As a result, we now expect our transaction volume in the second quarter to be in the range of RMB40 billion to RMB41 billion, representing an increase of around 20% to 23% year-over-year. Based on our current assessment, I would like to reiterate that our full year guidance for 2022 remains unchanged. With that, I will conclude my prepared remarks. We will now open the call to the questions. Operator, please continue.

Thank you. We will now begin the question-and-answer session. Our first question will come from Yada Li with CICC. Please go ahead.

Okay. I will handle the translation part. The first question is regarding our funding. Due to limited supply, our funding costs actually increased in the fourth quarter of last year. Are there any improvements this quarter? What can we expect moving forward, and what is the trend for funding costs in the future? The second question is about our international business. Can you provide more details on the progress of our product development and the optimization of our client base? Thanks.

Due to the limited supply, our funding costs actually increased in the fourth quarter last year. Are there any improvements this quarter? What can we expect to see? What is the trend of the funding cost in the future? Also, could you please elaborate more on the progress of our product development and the optimization of our client base? Thank you.

Hi, Yada. This is Jimmy. Let me do the translation for you. Our all-in funding costs in the first quarter were around 7.8%, and going forward, from the industry, we see a significant demand for better quality borrowers this year. During the next few quarters, we are very confident that our funding costs will improve by between 30 to 50 basis points. Apart from the funding cost trend, we also see that our approval rates from our funding partners have improved greatly. This has significantly enhanced our operating efficiency. These metrics improved from 60% to 76% on a year-on-year basis.

In the first quarter, the figures were approximately 7.8%, and looking ahead, there is considerable demand from the industry for higher quality borrowers this year. Over the next few quarters, we are very optimistic that our funding costs will decrease by 30 to 50 basis points. Besides the trend in funding costs, we have also noted a substantial improvement in approval rates from our funding partners, which has greatly boosted our operating efficiency. These metrics have risen from 60% to 76% compared to the previous year.

Yada, this is Jimmy again. I'll do the translation for you. For our international business, during the second half of 2021, we transitioned to better quality borrowers, just like what we have been doing in China. We have experienced better-than-expected progress in this transition. You can see that on a year-over-year basis, our transaction volume grew by 13% from RMB760 million to RMB860 million. Of particular note, our outstanding loan balance grew by 44% from RMB215 million to RMB360 million. At the same time, the proportion of our better quality customers improved, growing to 54% in the first quarter of 2022 from just 28% in the same period last year. Lastly, you can also see that from the proportion of our installment loans, this grew to 55% in the first quarter from the same period last year at 22%.

Our next question will come from Frank Zheng with Credit Suisse. Please go ahead.

Let me quickly translate myself. Thank you to management for the opportunity to ask questions. I have two questions. The first is regarding credit quality. We see that 19-day plus delinquency continues to rise slightly in the first quarter. Can management provide more information on early risk indicators for the second quarter to date? What adjustments has the company made for better risk management, and what is your outlook for the second quarter and the second half of this year as we gradually recover from COVID? My second question is a follow-up on the international markets. For international markets, what kind of growth in terms of volume and earnings contribution should we expect for this year? Thank you.

Could management provide more details on early risk indicators for the second quarter to date? What adjustments has the company made for improved risk management, and what is your outlook for the second quarter and the second half of this year as we continue to recover from COVID? My second question is a quick follow-up on international markets. What growth in terms of volume and earnings contribution should we expect from international markets this year? Thank you.

Hi Frank, this is Jimmy. Let me do the translation for Alex. Okay. I know the market is very concerned about the impact of the pandemic and we have also shared some credit risk earlier. For example, our vintage delinquency in the first quarter is around 2.4% and this is about a 5% fluctuation compared to the previous set of quarters. On our existing loan balance, the credit performance is expected to increase by another 5% to 10%. If you compare the situation today with the Wuhan lockdown back in 2020, the situation is actually a lot better because the fluctuation back then was more than 10%. This is due to the transition to better quality borrowers, a strategy that we have been adopting over the last few years. If you take a look today, the proportion of our better quality borrowers in China, in the first quarter, was around 70% compared to around 50% back then. Let me now talk about our early-day delinquency metrics. Our day one delinquency was about 5.3% in the first quarter versus 5.6% in the previous quarter. However, due to the impact of the pandemic, our day one delinquency increased to 5.5% in May, which is still within our estimation.

The strategy we have been implementing over the past few years has proven effective. Currently, approximately 70% of our higher-quality borrowers in China are in the first quarter, an increase from roughly 50% previously. Now, regarding our early-stage delinquency metrics, our day one delinquency rate was about 5.3% in the first quarter, down from 5.6% in the prior quarter. However, as a result of the pandemic, our day one delinquency rose to 5.5% in May, which remains within our expectations.

Hi Frank, let me do the translation again. For our international business side, we didn't have aggressive loan volume growth targets because our strategy this year is to transition to better quality borrowers. Based on the current data, the transitional progress is better than expected. We are very confident that our growth momentum for our international business will continue in the second half of the year. This will help diversify away from the risks we faced in China, such as the lockdown in different cities.

For our international business, we did not set aggressive targets for loan volume growth this year because our focus is on transitioning to higher quality borrowers. Current data indicates that this transition is progressing better than anticipated. We are confident that the growth momentum for our international business will persist in the latter half of the year, aiding in diversifying the risks we encountered in China, like the lockdowns in various cities.

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

I have two questions. First, regarding pricing, we have maintained an average loan pricing of 24.3% in Q1, which remains unchanged from the previous quarter. As we near the June deadline for the 24% cap, what is the plan for compliance with the debt, and what is the outlook on average loan pricing? Additionally, what does this mean for your take rate, and how do you anticipate your full-year take rate will compare to Q1? My second question is about your loan applications. How do your overall loan applications this year compare to the same period last year? Are you noticing a decline? Are you concerned that the fluctuating COVID situation may lead borrowers to be more conservative in their borrowing habits? How might this impact your growth prospects moving forward? Thank you.

What is the outlook on average loan pricing and its implication on your take rate? How do you expect your full year take rate to trend compared to Q1? My second question is about your loan applications. How do they compare to the same period last year? Are you observing a visible decline? Are you concerned that the fluctuations in COVID may cause borrowers to adopt more conservative borrowing behaviors? How would this affect your growth prospects moving forward? Thank you.

Alex, this is Jimmy. Let me do the translation. Our take rate in the first quarter was around 24.3%. Please bear in mind that in the fourth quarter of last year, our proportion of loans under IRR going forward was 80%, and during the first quarter of 2021, this proportion further increased to 84%. We believe we are ready in terms of customer preparation, financial preparation, and regulatory compliance preparation. Going forward, we will maintain flexibility on pricing, and we believe that in the second half of the year, our pricing will still be around 24%. Our take rate in the first quarter was 3.9%. We have stated earlier that we expect funding costs to improve in the second half of the year, but as our risks have some fluctuations, this will offset and our take rate will likely remain at this level.

We are well-prepared in terms of customer readiness, financial readiness, and regulatory compliance. Looking ahead, we will keep pricing flexible, and we expect our pricing to stay around 24% in the second half of the year. Our take rate in the first quarter was 3.9%. We previously mentioned that we anticipate funding costs to improve in the second half of the year; however, fluctuations in our risks may offset this, meaning our take rate will likely stay around this level.

Alex, let me do the translation. There is some impact on our performance, but it has less than a 5% effect. We also noticed that China has introduced positive policy measures to boost consumer confidence, and thus, we are adopting a cautiously optimistic attitude going forward.

There is some impact on our performance, but it has less than a 5% effect. We also noticed that China has introduced positive policy measures to boost consumer confidence, and thus, we are adopting a cautiously optimistic attitude going forward.

Thank you. That's all from me.

Thank you, Alex.

As there are no further questions, I would like to turn the call back over to the company for closing remarks.

Hello, everyone. Thank you once again for joining us today. If you have any further questions, please feel free to contact FinVolution's investor teams. Thank you so much.

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