Earnings Call Transcript - LU Q4 2020

Yu Chen, Head of Board Office and Capital Markets

Thank you, operator. Hello, everyone, and welcome to our fourth quarter 2020 earnings conference call. Our fourth quarter 2020 financial and operating results were released by our Newswire services earlier today and are currently available online. Today, you will hear from our Chairman, Mr. Ji Guangheng, who will start the call with updates on recent changes to corporate governance structure as well as regulatory developments. Our Co-CEO, Mr. Greg Gibb, will then provide a review of our business in the quarter and future strategies. Afterwards, our CFO, Mr. James Zheng will offer a closer look into our financials, before we open up the call for questions. In addition, Mr. Y.S. Cho, our Co-CEO and Mr. David Choy, CFO of our Retail Credit Facilitation business will also be available during the question-and-answer session. Before we continue, I would like to refer you to our Safe Harbor statements in our earnings press release, which also applies to this call as we'll be making forward-looking statements. Please also note that we'll discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the International Financial Reporting Standards in our earnings release and filings with the SEC.

Guangheng Ji, Chairman

Hello, and thank you, everyone, for joining our fourth quarter 2020 earnings call. Before discussing our quarterly results, I would like to provide updates on three different aspects of our business: first, changes to our corporate governance structure since becoming a US-listed company; second, our interpretation of recent regulatory development; and third, our view of future regulatory trends as well as the steps we are taking to stay in front of these changes. Starting with corporate governance, Mr. Renjie Li, Chairman of the Board, has submitted his retirement application as he reaches the age of 65. In accordance with US listing regulations, our Board held a meeting on January 29 and approved Chairman Li's retirement along with the resignation of four other shareholder directors and one independent director. As the previous Co-Chairman of the Board, I will now assume the sole role of Chairman of the Board, in addition to my role as Chairman of the Lufax Executive Committee. We have also appointed Mr. Yunwei Tang and Mr. David Xianglin Li as our independent directors and Mr. Rui Li as our shareholder director. Following these changes, our Board now consists of nine directors, of which three are Executive Directors, five are Independent Directors, and one is a Shareholder Director. Additionally, our nomination and remuneration committee as well as our audit committee now consist solely of independent directors. These changes have ensured our full compliance with the NYSE listing requirements for a majority independent board and for both committees to consist exclusively of independent directors. As a representative of a US-listed company, our new Board of Directors will remain committed to enhancing the company's corporate governance, protecting minority shareholders' interests, and establishing a prudent corporate strategy efficiently. In addition, after careful reviews and thorough discussions, our Board of Directors has decided to adopt a Co-CEO executive structure. Consequently, Mr. Yong Suk Cho and Mr. Gregory Dean Gibb will serve as the company's Co-CEOs moving forward, with Mr. Cho overseeing our retail credit facilitation business and Mr. Gibb managing our wealth management business. We strongly believe that this new management structure is in the best interest of all stakeholders, enabling us to create more synergies across business segments and better integrate our overall business resources. Now turning to regulatory developments...

Greg Gibb, Co-CEO

Thank you, Chairman Ji. Before I begin, please note that all the numbers are in RMB terms, and all comparisons are on a year-over-year basis unless otherwise stated. In the face of regulatory uncertainties and overwhelming market noise, we upheld our commitment towards driving high-quality and profitable business growth. As such, we exceeded our previous guidance, delivering solid financial and operating results in the fourth quarter of 2020. As of December 31, 2020, our balance of loans facilitated have grown 17.9% to RMB545 billion, while our client assets and wealth management have also grown by 23% to RMB426 billion. Moreover, for the full year of 2020, our total income grew by 8.8% to RMB52 billion, while our non-IFRS adjusted net profit grew by 2.1% to RMB13.6 billion. Underpinning these positive outcomes with several driving factors. First, we continue to observe improvement in our credit quality. The flow rate, the leading indicator of risk performance on our lending platform continue to stabilize around its pre-COVID-19 levels. In Q4, 2020, our flow rate was 0.4% as compared to 0.4% in Q4, 2019. Additionally, our 30 Days past due further improved to 2% in the fourth quarter from 2.2% in the third quarter of 2020, while our 90 Days past due decreased to 1.2% in the fourth quarter, up from 1.3% in the third quarter. Second, we received more clarity surrounding the interpretation of the application of interest rate caps. We're pleased to see the recent Supreme Court guidelines and local court cases providing additional clarity on interest rate cap. These developments were largely in line with our expectations, and all of our loans from September 4th last year have been below 24%. We do not expect any further adjustments to our lending rates in the short term. Third, in line with our clients, we continue to make good progress in establishing a more sustainable risk-sharing business model. It's encouraging to see that our funding and insurance partners have remained supportive and embraced this new model. Our outstanding balance of loans facilitated with guarantees from third-party insurance partners decreased to 88.8% from 95.6% a year ago. Lastly, we observed strong growth in our current product client assets in the wealth management business. Current product client assets grew by 67.2% year-over-year, and thus accounted for 95.5% of our total client assets as of the quarter-end.

James Zheng, CFO

Thank you, Greg. I will now provide a closer look into our fourth quarter financial results. Please note that all numbers are in RMB terms and all comparisons on a year-over-year basis unless otherwise stated. We continued to deliver solid financial results in the fourth quarter of 2020. Our total income was RMB13.3 billion, up 5.9% year-over-year. More importantly, our net profit increased by 17.4% to RMB2.8 billion in the fourth quarter, while our net profit margin further expanded to 21.4% from 19.3% in the same period of 2019. During the fourth quarter, our total income increased by 5.9% while our revenue mix continue to change as a result of our business model's ongoing evolution. Our net interest income and guarantee income grew significantly to RMB2.6 billion or 19.5% of total income in the fourth quarter from RMB1 billion or 8.2% of total income in the same period of 2019. Consequently, our retail credit facilitation service fees decreased by 9.9% to RMB9.3 billion or 69.9% of total income from RMB10.3 billion or 82.1% of total income in the same period of 2019. As for our expenses, our total expenses increased by 11.7% to RMB9.1 billion, driven by accounting factors related to early customer repayments and the credit cost from self-risk bearing loans. Our net profit increased by 17.4% to RMB2.8 billion during the fourth quarter from RMB2.4 billion in the same period of 2019. As of December 31, 2020, we had RMB24.2 billion in cash at bank compared to RMB7.4 billion as of December 31, 2019.

Elsie Cheng, Analyst

Good morning, Guangheng, Greg, Y.S., and James. Congratulations on the solid quarter again. And thank you for taking my questions. I have two questions here. First is on the RCF take rate. Understand that we're targeting different higher quality client cohort with lower interest rates amid this environment. However, given the recent clarification on applicability of 4 times LPR restriction, just wondering, can we expect some upside in RCF take rate for us now that we probably have more flexibility in interest rates as well as targeted client cohort? And my second question is really on the guidance. If my calculations are correct, our new loan sales in first half 2021 is guided to grow at a very solid pace of 21% year-on-year at the midpoint. So can management share a little bit more color on the major drivers of the growth? And can we actually extrapolate this growth momentum into second half as well? Thank you.

Y.S. Cho, Co-CEO

Yes. So let me first explain the first question about our unit economics. Fourth quarter last year, our new loans came with lower take rate and net margin because we reduced borrowing costs. But funding cost, CGI premium and our borrower sourcing cost, they didn't drop at the same case immediately. Fourth quarter new loans were about 25% of 2020 year-end loan balance. So that's why we had lower take rates in fourth quarter last year. But if you look at January 2021 or last month's number, as Greg said, in January this year, we delivered record high new loan sales, almost close to RMB100 billion new loan sales in one month. We believe this will continue. And we are very confident for full year 2021 that our take rate and net margin for our RCF new business will be without much change.

May Yan, Analyst

Thank you. Good morning, thanks for giving me this opportunity to ask questions, and congratulations on a very steady quarter again. My first question is related to regulation, can I ask Ji Guangheng about the PBOC's earlier draft consultation paper on the credit rating business? Some people interpreted this may apply to loan facilitation businesses, will it be required to have a credit rating licensing? Is this something relevant to Lufax?

Guangheng Ji, Chairman

In regards to the credit scoring business, we believe the current guidelines are still in the early stages and not fully developed. The business and shareholder requirements for a credit score institution, as well as the rules from the PBOC, are not yet clear. It seems to be aimed mainly at leading institutions, particularly public ones, as part of the ratification plan. However, new rules that apply to specific cases could eventually be used more broadly across the industry. As for our loan facilitation business, we do not anticipate being classified as a credit scoring institution at this time. We are actively engaging in discussions with regulators.

Winnie Wu, Analyst

Thank you very much for giving me this opportunity. Two questions, I guess. First, regarding, again, the regulation and our licenses. Since November last year, CBIRC published the consultation paper for those online micro loan companies' license. Have you started to communicate with the regulator regarding application for a national operating license?

Greg Gibb, Co-CEO

We do believe that, and certainly for the first half, we will continue to monitor the regulatory situation as it goes, but overall, we do think that the outcome for 2021 will be double-digit on both top and bottom-line.

Thomas Chong, Analyst

Hi, thanks management for taking my questions. I have a question about the wealth management first. Can you provide us some updates about how we are using our technology in our automated portfolio strategy in Q4?

Hans Fan, Analyst

Thank you for the opportunity to ask a question. I have two questions. The first one is about wealth management. Greg mentioned the strong growth in AUM in the fourth quarter last year. Looking at the guidance for the first quarter and the first half of this year, client assets appear to be showing a slowdown in growth rates. I am curious about the cautious outlook for wealth management client assets.

Binnie Wong, Analyst

Hi, good morning. Thank you for allowing me to ask a question. I have two questions. The first is regarding the retail credit facilitation service fee. We've observed a decline in the past two quarters, and it seems that consensus is anticipating further deceleration, particularly in the second half of this year.