Earnings Call Transcript - LU Q2 2021

Yu Chen, Head of Board Office and Capital Markets

Thank you very much. Hello, everyone, and welcome to our second quarter 2021 earnings conference call. Our quarterly 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 some general updates on our achievements, share our thoughts on recent regulatory developments and industry dynamics, and provide our plans for future business. Our Co-CEO, Mr. Greg Gibb, will then provide a review of our progress and details of our development in the quarter. Afterwards, our CFO, Mr. Xigui Zheng, will offer a closer look into our financials before we open the call for questions. In addition, Mr. Yong 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 statement in our earnings press release, which also applies to this call, as we will be making forward-looking statements. Please also note that we will 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, everyone. And thank you for joining our 2021 second quarter earnings call. I will start with some general updates on our achievements in the first half, and then share our thoughts on recent regulatory developments and industry dynamics before providing our plan for future business. First, an update in the first half. Generally speaking, all the Chinese ADRs stock prices have seen increased volatility recently due to changes in macro policies and market conditions. At Lufax, we managed to deliver improvements in our operating performance, regulatory compliance and corporate governance in the first half. First, we achieved high-quality growth in our core business. For the first half, our total income increased by 17% year-over-year and net profit increased by 33% year-over-year. Later in the call, Greg and James will elaborate more. Second, we responded to regulatory changes by phasing out our peer-to-peer products in a smooth and compliant manner. In the second quarter, we substantially completed the run-off of legacy peer-to-peer products and further strengthened our regulatory compliance. Third, we continuously enhanced our corporate governance by restructuring our Board of Directors and establishing committees in key focus areas, including risk management, consumer protection, and ESG. We will also be actively advancing the establishment of our ESG systems. Fourth, on May 24, 2021, our company announced US $300 million of share repurchases. As of June 30, 2021, we have substantially completed the repurchase. In addition, our senior management purchased US $5 million worth of shares using their personal funds. While there are still uncertainties in the market, our stable profitability, strong operating cash flow, abundant cash reserves, and the actions we have taken to comply with regulatory requirements all give us confidence about our future prospects. As such, I am pleased to announce a new share repurchase program of US $700 million over the next 12 months, bringing our total repurchase program to US $1 billion. In addition, we are actively evaluating other options to return shareholder value going forward. Second, the analysis of regulatory developments and market dynamics. Since our Q1 earnings announcement, the Chinese government has continuously tightened supervision of technology platform companies. These changes include prohibiting online credit facilitation platforms from sharing borrower data directly with financial institutions, implementing an all-in cost ceiling of 24% for consumer loans, and publishing draft amended cybersecurity measures for public consultation. Lufax has always maintained close communication with regulators to fully grasp the latest regulatory trends, intentions, and requirements. I am pleased to report that so far we have maintained open communication lines with all levels of regulators with satisfactory frequency and results. Despite the influx of new regulations and policy interpretations, our business has not been materially affected. Moreover, our operating results have remained resilient. Now I will address some questions that have attracted recent attention. The first topic is the sharing of borrower data by loan facilitators and co-lenders directly with financial institutions. Recent media reports speculated that the CBIRC will prohibit online credit facilitation platforms from sending borrower data, including personal information submitted by borrowers, data generated as part of the platform's process, and other borrower information provided by third-party vendors. Our interpretation is that this aims to regulate the consumer credit scoring process by emphasizing that credit assessment data from internet platforms must be transmitted solely through licensed credit agencies. Lufax has been utilizing its licensed guarantee company to conduct its retail credit facilitation business and perform credit assessments authorized by our partner banks in full compliance with the regulations. We refer potential clients to our banking partners, transmit the guarantee company's approval results, and share timely updates on post-origination repayment status. Therefore, every aspect of our business calculation is done in accordance with current guidelines and differs from an unlicensed company's loan facilitation model. In the meantime, we will continue our dialogues with the regulatory authorities to seek their feedback and guidance. We are also prudently exploring the viability of applying for a credit scoring license or collaborating with third-party credit scoring companies because, with the mandatory completion of credit scoring requirements due by the end of 2022, there should be sufficient time for both regulatory authorities and market participants to test new models and make adjustments. Based on currently available information, we believe that cooperating with third-party credit scoring companies will not materially impact our business model or profitability. The second topic relates to consumer borrowing costs. At the end of July, some media reported that regulatory authorities would require financial institutions, including consumer finance companies and banks, to adopt an all-in cost ceiling of 24% for personal lending. From our perspective, we think that this new requirement has crystallized the direction of loan pricing and eliminated potential uncertainties. Since September 2020, we have been preemptively implementing an all-in cost ceiling of 24% for all new loans we facilitated. Going forward, we will continue to follow regulatory directions, leverage technology to broaden access to cost-effective financing for small and micro-business owners, and maintain our own profitability by improving our operating efficiencies. The third topic I would like to discuss is cybersecurity. Since July, regulatory authorities have been conducting special audits on several internet platforms in accordance with cybersecurity review measures, demonstrating the nation's heightened attention to cybersecurity and data safety. To ensure full regulatory compliance regarding data processing business operations, we promptly conducted debriefing seminars and performed internal reviews. Lufax achieved the internationally accredited ISO 27001 certification for information security management and the level three registration certificate from the Ministry of Public Security of China. Going forward, we will continue to strictly adhere to policy requirements and maintain regulatory compliance in all key areas of operations, such as network equipment and service procurement, critical data reviews, and many others. The fourth topic is market development and competitive dynamics. In recent years, several internet platforms and traditional financial institutions have entered the market to serve the financial needs of small and micro-businesses. Some platforms have started to replicate the overall business model that we pioneered. On one hand, this validates the attractiveness of our business segments and the effectiveness of our model. On the other hand, intensifying competition challenges Lufax to perform even better. Over the past 16 years, we have built a highly effective offline sales and service team, a comprehensive management system, and a proven risk management model that has been stress-tested over multiple market cycles. This combination serves as a high barrier to entry and prevents peer replication within a short period of time. At the same time, increasing competition also motivates us to work harder, ensure regulatory compliance, innovate, recruit, advance our technology, and strengthen our industry leadership. In terms of future development plans, based on our analysis of regulatory intentions and industry dynamics, we believe competitor focus will gradually shift from volume growth to quality growth. Consequently, we are determined to uphold the following three principles: first, we shall keep our operations fully compliant with regulations and adhere strictly to policies. As an organization with financial DNA, we have always prioritized regulatory requirements and operated in a compliant manner. Based on our principles of preemptive diagnosis and swift operational adjustments for optimal results, we plan to continue enhancing our communications with regulatory authorities to keep a close watch on the course of regulatory developments and timely execute our policy requirements. Second, we aim to create value for society by providing quality financial services to small and micro-business owners as well as the middle class. As of June 30, 2021, Lufax had cumulatively provided credit facilitation services to more than 15.5 million borrowers with an outstanding loan balance exceeding RMB 600 billion. Over the past five years, we have effectively satisfied small and micro-business owners' financing needs by facilitating nearly RMB 2.3 trillion worth of loans. Recently, we launched special assistance plans for small and micro-companies aimed at supporting companies in labor-intensive industries such as retail, hospitality, restaurants, and manufacturing, thereby creating a significant number of employment opportunities. For small and micro agricultural businesses, we are collaborating with the China Women's Development Foundation to distribute our farmers' assistance funds to rural female entrepreneurs and cooperative leaders. As a result of this work, we are making meaningful contributions to the economy in rural areas. Going forward, Lufax will provide more products and services tailored to the needs of small and micro-business owners, leverage technology to reach customers more effectively, simplify the loan application process, improve efficiency in reviewing and approving online loan applications, fulfill our commitment to financial inclusion, and support the nation's economic development agenda. In our wealth management business, Lufax operates as an information and empowerment platform to help the Chinese middle class manage their wealth. We will continue to provide a variety of financial products, optimize product mix and composition, enhance customer experience, improve service quality and efficiency, and contribute to our clients' wealth preservation and growth goals. We aim to empower our business development and quality improvement through technology. In accordance with our principle of integrated solutions and customized offerings, we have consistently advanced our technologies in big data, artificial intelligence, and other sectors. In retail credit facilitation, we have launched an AI-powered Smart Loan Solution named Xingyun. In wealth management, we are promoting an intelligent customer service solution aimed at improving user experience. All of these solutions demonstrate our capacity to enhance our financial services' efficiency by leveraging technology. In conclusion, although our path ahead is not without challenges, we are confident that we will be able to carve out our own unique path to long-term sustainable success by maintaining operational compliance, generating social value, and continuing technological advancements. And with that, I will now turn the call over to Greg, who will share our business updates for the quarter.

Greg Gibb, Co-CEO

Thank you, Chairman Ji. Although the regulatory environment continues to transform and some uncertainties remain, our business performance is sound. Let me get straight into the key figures, noting that all numbers are in RMB and all comparisons are on a year-over-year basis unless otherwise stated. Profits in the first half reached RMB 9.7 billion, up 33.4% versus a year ago. Our second-quarter profit was RMB 4.7 billion, up 53.2% versus a year ago. Our second-quarter revenues of RMB 14.8 billion grew 17.3% versus last year. Our second-quarter total operating expenses of RMB 7.1 billion decreased by 1.7% for the same period. As a result, our net margin reached 31.9%, a 7.5 percentage point improvement over the second quarter last year, driven by ongoing improvements in operations and technology. We are confident that the profit growth levels achieved in the first half will be sustained throughout the remainder of this year. On the back of solid performance, it is important to note our strong balance sheet and cash position. As of June 30 of this year, our net assets reached RMB 91.1 billion, of which approximately RMB 42 billion were liquid assets maturing within 90 days or less. Our net cash flow has increased by RMB 9.6 billion in the last 12 months. This strong position allows us to do several things. First, it provides us with a resilient ability to meet any new capital requirements that may arise from regulatory changes. We believe that in lending facilitation, all platforms, regardless of business model or customer segment, will ultimately be required to bear 20% to 30% of related credit risks, with a capital leverage of no more than 10x with a portion of shared risk. In the second quarter, excluding the consumer finance subsidiary, we bore credit risk on 16% of all new loans facilitated, and we have more than sufficient capital to meet increased levels if needed. Second, our strong profitability provides multiple avenues to generate value for shareholders. Today, we announced that we will extend our corporate buyback program, initiating a new plan to repurchase US $700 million of shares over the next 12 months. We continue to explore other avenues to return more value to shareholders over time. Third, our resources allow us to continue investing in and enhancing our unique business model. For the sake of general understanding, I'd like to highlight three aspects of our business model and the developments currently underway. First is our unique auto direct salesforce business model, which allows us to unlock the unmet borrowing needs for China's small and micro-business owners. In the second quarter, excluding the consumer finance subsidiary, 77.6% of new loans facilitated were for the small business owner segment. We continue to find that our direct salesforce of more than 58,600 professionals is key to reaching small business owners and building the required levels of trust to serve their larger and long-term lending needs, matching a range of unsecured and secured products to their diverse business and industry purposes. In the second quarter, new loan sales reached RMB 152.7 billion, growing 11.1% versus a year ago, in line with prior guidance. During the quarter, new loan sales from other channels slowed down a little; however, the increased fees on volume from our own direct sales teams have offset that weakness in other channels, demonstrating the resilience and flexibility of our direct sales team as well as the strength of our O2O business model. Furthermore, with continued technology upgrades, we have greatly improved the productivity and efficiency of our direct sales team. In the second quarter, 6.5% of new loans facilitated were in a new secured auto lending product, demonstrating the ability of our auto direct sales team to capitalize on changing market conditions and customer relationships. The productivity of our direct sales force increased by 10% over the last 12 months. We continue to invest in new risk data, industry insights, and technology tools to further enable our unique O2O sales force to tap this hard-to-reach segment, which we believe cannot be served efficiently through a purely online model. The second unique aspect of our business model is how we deploy our licenses. This has become an increasingly important factor in the tightening environment to satisfy both regulatory and funding partner needs. All new loans that we facilitate today either flow through our guarantee companies or the consumer finance license, or guarantee companies with operations all over the nation except Tibet, Xinjiang, and Hunan provinces allow us to share credit and process data flows with our more than 65 national and local funding partners under well-established legal frameworks. The deployment of these licenses, together with successful tapping of the ABS and interbank ABN market, is helping optimize our funding costs for the first half of this year. We are now actively exploring new collaborations to meet expected credit rating license future requirements which will come into effect by the end of next year. The third unique aspect of our business model is that we seek to serve our customers across a full range of financial services, not just lending. While our wealth management platform is a smaller contributor to total company revenues today, the China Wealth Management market is witnessing substantial new growth as customers and providers adjust to the full implementation of the new asset management regulations and a new framework for cross-border investing between China's Greater Bay and Hong Kong. Our domestic wealth and insurance sectors primarily serve the affluent. The emerging affluent continues to grow, with client assets of RMB 421.1 billion as of June 30, 2021, expanding 12.4% versus a year ago and 28.8% excluding legacy P2P assets, which have now been substantially run off. Our platform in Hong Kong is currently entering new partnerships in preparation for the rollout of Greater Bay policies. In the third quarter of this year, we will merge our online client interface for all borrowers and investors to deepen services across small business owner lending, consumer finance, wealth management, and protection and pension insurance. Company analysis suggests many of our small business owners are middle class and emerging affluent customers, and a notable proportion of our wealth customers are small business owners. With a rapidly changing operating environment, we believe our capital strength and unique business model, combined with our deep financial credit experience and commitment to compliance, will allow us to remain resilient. Before turning it over to James to go through the detailed operating and financial performance and second half guidance, I would like to highlight one final figure. We have continued to make progress in bringing down ADR to our borrowers, with the second quarter ADR for the overall portfolio reaching 24% versus 26.7% a year ago. This reduction has been executed without negatively impacting our net margins. In the medium term, we will seek to lower ADR and maintain our net margin by driving down relevant operating credit insurance and funding expenses. I will now turn the call over to James Zheng, our CFO.

Xigui Zheng, CFO

Thank you, Greg. I will now provide a closer look into our second quarter operational and financial results. Before I begin, let me remind everyone that all numbers are in RMB terms, and all comparisons are on a year-over-year basis unless otherwise stated. Our second quarter 2021 results are characterized by strong business growth, continued operational improvement, and extended profit margins. Our total income increased by 17.3% to RMB 14.8 billion, while our core business income, excluding investment income, grew by 19.1%. Our net profit increased by 53.2% to RMB 4.7 billion, exceeding our earlier guidance of RMB 3.7 billion to RMB 3.9 billion. Our net margin reached 31.9% in the second quarter, a 7.5 percentage point improvement from the second quarter of 2020. The strong growth and profitability are driven by four key factors. First, we further optimized the unit economics in our retail credit facilitation business even as we reduced our all-in cost. Our loan balance ADR declined by 2.7 percentage points to 34% in the second quarter of 2021 from 26.7% in the second quarter of 2020, while our take rate based on loan values improved to 9.7% from 9.5%. Our net margin also extended over the same period. This achievement is the result of four initiatives. First, we continue to increase our number of banking partners and diversify our funding sources, which have allowed us to obtain cheaper funding from partners with better asset quality. Second, the credit insurance premium on our loan portfolio has also been reduced as our insurance partners took the better credit and customer quality into consideration to lower their pricing without taking on a greater portion of the credit risk. Third, the early payoff effect decreased significantly because we have changed the way we charge our customers. Fourth, we achieved significant efficiency gains in our sales and marketing as well as our operations. As a result, we are confident that even if we reduce our ADR further in the future, we should be able to maintain stability in our fixed rate and net margin in retail credit facilitation. Second, we maintain a strong pace of loan volume growth coupled with big improvements. On the retail credit side, we grew our new loan sales by 11.1% to RMB 152.7 billion during the second quarter of 2021, in line with our previous guidance of RMB 145 billion to RMB 155 billion. At the same time, we continue to focus on serving small business owners and improving the risk profiles of our borrowers. In the second quarter, excluding our consumer finance subsidiary, 77.6% of new loans facilitated were for small business owners, up from 72.6% for the same period of 2020. High quality borrowers, classified as G1 to G3 by our internal system, contributed 63.7% of new general unsecured loans facilitated in the second quarter compared to 59.4% for the same period of 2020. On the wealth management side, our total client assets increased by 12.4% to RMB 421.1 billion as of June 30, 2021, exceeding our previous guidance target of 12.1% growth or RMB 420 billion. Client asset contributions from mass affluent customers, who invest more than RMB 300,000, further increased to 80.2% as of June 30, 2021, up from 76.3% as of March 31, 2021. Third, we continue to make progress in executing our plan for a more sustainable risk-sharing business model. Loans where we take on risk accounted for 16% of new loans facilitated in the second quarter, up from 4.4% in the same period of 2020. New loans facilitated with guarantees from Ping An P&C accounted for 76.3% of new loans facilitated in the second quarter, down from 89.1% a year ago, while our funding partners bore the risk for 4.8% of new loans facilitated in the first quarter. As of June 30, 2021, our outstanding balance of loans facilitated with guarantees from third-party credit enhancement partners decreased to 84.3% from 94.3% a year ago. All of the aforementioned operating metrics exclude our consumer finance subsidiaries. At the same time, we continue to sharpen our focus on improving asset quality. In the second quarter, our C-M3 flow rate for all facilitated loans was 0.4% versus 0.5% a year ago. The 30+ days past due delinquency rate for all loans facilitated further improved to 1.9% as of June 30, 2021, from 2% as of March 31, 2020. The 90+ day past due delinquency rate for the total facilitated loans stabilized at 1.1% as of June 30, 2021, on par with 1.1% as of March 31, 2021. All of the aforementioned operating metrics exclude our consumer finance history and legacy products, which represent roughly 1% of the total loan business. Fourth, we substantially completed the runoff of legacy P2P products in our wealth management business. During the quarter, client assets from legacy P2P products were reduced to RMB 44 million from RMB 4 billion in the previous quarter, effectively completing our business transformation. Meanwhile, our take rate for the segment was 31.8 basis points, increasing by 3.6 basis points from the previous quarter. These improvements were driven by our continued development in standard wealth insurance products, offset by a decrease in deposit products. Now let's take a closer look into our second quarter financials. During the second quarter, our total income increased by 17.3%. Our core business, excluding investment income, grew by 19.1%. On the back of this growth, our business and risk-sharing model continue to evolve, driving a change in the revenue mix of our retail credit facilitation business. For example, during the quarter, while platform service fees decreased by 8.8% to RMB 9.2 billion, our net interest income grew by 98.7% to RMB 3.2 billion, and our guaranteed income grew by more than 800% to RMB 891 million. In addition, other income, which is directly linked to delivering services to our financial partners, increased by 205.1% to RMB 1.1 billion. As a result, our retail credit facilitation platform service fees, as a percentage of total revenue, decreased to 62% from 79.8%. Furthermore, as we continue to utilize consolidated trust plans, which provide lower funding costs even more funding operations, our net interest income as a percentage of total revenue increased to 21.8% from 12.9% a year ago. Moreover, as we continue to bear more credit risk, we generated more guaranteed income, causing our guarantee income as a percentage of total revenue to reach 6% compared with 0.7% a year ago. By expanding our services to our credit enhancement partners in account management, collections, and other value-added services, our other income as a percentage of total revenue increased to 7.2% from 2.8% a year ago. Our investment income decreased by 83.2% to RMB 37 million in the second quarter from RMB 220 million in the same period of 2020, mainly due to losses from the change in fair value of assets. On the wealth management fund, our platform transaction and service fees increased by 39.9% to RMB 407 million in the second quarter, from RMB 291 million in the same period of 2020. This increase was mainly driven by the rise in fees generated from our current products and services. Now moving on to our expenses. In the second quarter, total expenses grew by 2.2% to RMB 8.5 billion. However, excluding credit impairment losses, financial costs, and other losses, total expenses actually decreased by 1.7% in the second quarter, underscoring the steady improvement in our operating efficiencies. Our sales and marketing expenses, which include expenses for borrower and investor acquisition, as well as general sales and marketing, decreased by 6.3% to RMB 4.3 billion in the second quarter. This decrease was a result of our efforts to further optimize our sales productivity and sales commissions, as well as the higher base in the second quarter of 2020 due to nonrecurring expenses. Our borrower acquisition expenses, which are a major component of our total sales and marketing expenses, decreased by 19.5% year-over-year to RMB 2.6 billion. In addition, our investor acquisition and retention expenses also decreased in the second quarter, mostly due to the optimization of investor acquisition channel costs. Our general sales and marketing expenses, which mainly comprise payroll and related expenses for marketing personnel, brand promotion costs, consulting fees, business development costs, as well as other marketing and advertising costs, increased by 33.8% to RMB 1.5 billion in the second quarter from RMB 1.1 billion a year ago. This increase was largely due to the lower base in the second quarter of 2020 resulting from the Social Security relief during the COVID-19 outbreak in the same period. Our general and administrative expenses increased by 21.1% to RMB 798 million in the second quarter from RMB 659 million a year ago. This increase was mainly due to the lower base in the second quarter of 2020 and headcount expansion in the second quarter of 2021 to support our new business development initiatives, including the development of our consumer finance business. Our operation and service expenses decreased by 3.3% to RMB 1.48 billion in the second quarter from RMB 1.53 billion a year ago. This decrease was primarily due to a decline in post-origination management expenses, driven by our improvements in management and collection efficiency, partially offset by higher trust plan management expenses resulting from increased usage of consolidated trust plans. As we maintain our commitment to investing in technology research and development, our technology and analytics expenses increased by 18.6% to RMB 517 million in the second quarter. Additionally, our credit impairment losses increased by 133.5% to RMB 1.4 billion in the second quarter from RMB 597 million a year ago. This increase was due to the continuing evolution of our business model, which led to increased risk exposure related to loans and higher upfront credit impairment losses. It is worth noting that the increase in impairment losses is purely a function of the increase in the proportion of credit risks borne by us. While the overall credit profile of our borrowers has continued to improve, as previously mentioned. Our finance costs decreased by 37.4% to RMB 276 million in the second quarter from RMB 441 million a year ago, mainly due to the decrease in our balance of convertible bonds, which led to lower borrowing costs and an increase in interest expense resulting from the rise in deposits. As a result of foreign exchange rate gains, we booked RMB 301 million in other gains for the second quarter of 2021, while our effective tax rate decreased to 36% from 39% a year ago. Consequently, our net profit increased by 53.2% to RMB 4.7 billion in the second quarter from RMB 3.1 billion a year ago. Meanwhile, our basic and diluted earnings per ADS were RMB 2 and RMB 1.9 respectively, in the second quarter of 2021. As of June 30, 2021, we had a cash balance of RMB 29 billion, compared to RMB 24 billion as of December 31, 2020. Net cash flow from operating activities was RMB 2.1 billion in the second quarter of 2021. Now, turning to our guidance for the second half and the full year of 2021: for the second half of 2021, we expect our new loans facilitated to be in the range of RMB 324 billion to RMB 340 billion, and client assets to be in the range of RMB 450 billion to RMB 460 billion. Meanwhile, as we maintain our growth momentum and continue to improve our operating efficiency, we expect our total income to be in the range of RMB 31 billion to RMB 31.3 billion. Our net profit is expected to be in the range of RMB 6.6 billion to RMB 6.8 billion in the second half of 2021. This translates into a year-over-year net profit growth of 32% to 36% for the second half of 2021, and 33% to 34% for the full year of 2021. These forecasts reflect our current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks for today.

Operator, Operator

[Operator Instructions] Your first question comes from Winnie Wu from Bank of America.

Winnie Wu, Analyst

Thank you very much for this opportunity. And congratulations on solid second quarter results. I have two questions. Firstly, regarding the credit business, can you provide the latest numbers in terms of the effective ADR in the second quarter this year, both for the new business and for the total outstanding loan balance? Secondly, related to what Chairman Ji mentioned about the information and credit license, can you discuss any progress regarding the application for the credit scoring license and any expectations on that? Additionally, with the new regulatory restrictions on the usage of credit information, will that affect how much data Lufax is able to access or the scope of data that you can leverage? Will it impact your credit scoring? Thank you very much.

Greg Gibb, Co-CEO

Thanks, Winnie. To address your first question, we disclosed for the second quarter that the overall portfolio ADR is 24%, down from 26.7% a year ago. We do not disclose the rate for new loans specifically, but it is clear that the loans we've been issuing are below 24%. This decrease is something we have been working on for some time and will continue to execute.

Xigui Zheng, CFO

In response to your second question regarding data sharing with banks, we are a credit licensed company. We have been in dialogue with the PBOC multiple times. As for whether we need a credit license, we are clarifying the necessary processes to ensure compliance with current regulatory expectations. If we do need it, we will follow obligations just as other licensed entities do.

Greg Gibb, Co-CEO

In terms of the data scope we can access or need to use, this new structure does not impact it significantly.

Xigui Zheng, CFO

There will be a minor impact on how we collect data. There are three types of data: personal information that we collect directly from borrowers remains unchanged; data directly from PDS also doesn't change; however, the method of collecting personal asset data will need to comply with the license requirements going forward. Overall, we do not expect significant disruptions.

Guangheng Ji, Chairman

Vice Chair Cho, our Co-CEO, responsible for retail credit facilitation, just addressed that. I would like to add that we maintain very active dialogues with the credit scoring division of the PBOC and all relevant key decision-makers within the bureau. So far, no material impact on our business model has been indicated. The main focus is on whether data we accumulate and store is utilized solely for internal purposes or passed on to third parties. We are maintaining compliance with all applicable regulations.

Operator, Operator

Your next question comes from May Yan from UBS.

May Yan, Analyst

I have a couple of questions regarding the loan weight and the impact of regulations. Could you clarify how loan weights should remain within 24% by June 2022? Additionally, what are the anticipated impacts from the new regulations? And finally, what is your current self-guarantee percentage?

Xigui Zheng, CFO

Regarding your second question about loan weights under the regulations, the directive given to save companies specifies that total borrowing costs must stay under 24% for renewals by June 2022, with an average ADR requiring to be less than 20% by June 2024. We deem this a standard regulation applicable to all, and we see no impact for us since the highest ADR for our peers is less than 24%. Our July ADR for newer loans has been consistently under that threshold. Regarding our self-guarantee portion, it has reached 20% for new loans in August. We are currently assessing whether to further increase this to 40%, and discussions with regulators are ongoing. However, we are well-positioned to accommodate any regulatory demands for a 30% guarantee.

Operator, Operator

Your next question comes from Thomas Chong with Jefferies.

Thomas Chong, Analyst

I have a question regarding our wealth management strategies. While we have focused on ADR size, can we discuss the growth in our wealth management size? Additionally, what progress have we made regarding our automated AI portfolio development, and what competitive and regulatory factors should we consider moving forward?

Greg Gibb, Co-CEO

In terms of our wealth management business, as of June 30, the growth, excluding P2P, was around 28%. This is a core area we will continuously invest in, particularly in developing higher-end products and services that align with the needs of our affluent customers. We're dedicated to using data and automation to optimize returns for our middle-class customers. The impact of COVID on operations has so far been minimal.

Operator, Operator

Your next question comes from Katherine Lei from JPMorgan.

Katherine Lei, Analyst

I'm curious to follow up on regulatory risks, specifically regarding cost-cutting measures to maintain stable profit margins. Additionally, with the announced RMB 1 billion buyback, what deployable assets exist on the balance sheet for future buybacks or dividends?

Greg Gibb, Co-CEO

In terms of cost optimization, our average ADR for US operations was below 23% in the second quarter, while margins remained stable around 4%. We anticipate potential for further optimization on several fronts. Even with a lower ADR, we believe we can maintain strong margins due to careful management of our operational efficiencies. Regarding investor returns, our balance sheet holds RMB 91 billion, including RMB 42 billion in liquid assets maturing in 90 days or less. The expanded buyback program and previously announced shares represent a small portion of our financial capabilities. We are actively exploring other ways to deliver value to shareholders and will undertake those as soon as feasible.

Guangheng Ji, Chairman

As Greg mentioned, we not only have a strong balance sheet but also substantial profitability and cash-generating capabilities. We are considering various means to return value to shareholders. Once decisions are confirmed, we will make appropriate announcements. The recent US $10 billion buyback, approximately RMB 7 billion, is minimal compared to our available capacity. By the end of the year, we expect to generate an additional RMB 10 billion in profit to further bolster our cash reserves.

Operator, Operator

Thank you. That concludes our time for questions. I'll now hand back to management for closing remarks.

Guangheng Ji, Chairman

Thank you for attending our call today. As mentioned earlier, the results are available online, and we will hold several one-on-one sessions with analysts to elaborate on our messages. Please have full confidence that we have a dedicated management team. In the current environment, where global capital markets view on China regulations has caused significant volatility, both companies and regulators in China have taken heed. The main factors impacting Chinese ADR stock prices currently are regulation and company-specific fundamentals. We will maintain strong regulatory relationships, open communication, and ensure we are aligned with future directions. Thank you for joining the call.

Operator, Operator

That does conclude our conference for today. Thank you for participating. You may now disconnect.