Earnings Call Transcript - LX Q1 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to LexinFintech First Quarter 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. I'd now like to hand the call over to Mandy Dong, IR Director of Lexin. Please go ahead.

Mandy Dong, IR Director

Thank you, Desmond. Good morning, and good evening, everyone. Welcome to Lexin's First Quarter 2024 Earnings Conference Call. Our results were issued earlier today and can be found on our IR website. Joining me today are our CEO, Jay Xiao, CRO, Arvin Qiao, and CFO, James Zheng. Before we get started, I'd like to remind you of our safe harbor statement in our earnings press release, which also applies to this call. During the call, we may refer to business outlook and forward-looking statements, which are based on our current plans, estimates, and projections. The actual results may differ materially, and we undertake no obligation to update any forward-looking statements. Last, unless otherwise stated, all figures mentioned are in RMB. Jay will first provide an update on our overall performance. Arvin will discuss risk management updates. Lastly, James will cover the financial results in more detail. I will now turn the call over to Jay. His remarks will be in Chinese, and the English translation will follow.

Jay Xiao, CEO

Hello, everyone. It's my pleasure to provide an update on our performance for the first quarter of 2024. Given the current macroeconomic environment and industry dynamics, we adopted a cautious business strategy during this period. We maintained a balanced approach of risk management and data utilization, aiming to achieve growth while ensuring quality, and we saw a set of healthy results. Here are the key highlights. In the first quarter, our total loan origination reached RMB 58 billion, and our loan balance stood at RMB 121.5 billion, reflecting a year-over-year increase of 13.5%. Our total revenue amounted to RMB 3.2 billion, with an 8.7% year-over-year growth, and our net profit reached RMB 202 million. Regarding asset quality, amid a moderate recovery in the macroeconomic environment and intensified competition in the loan facilitation sector, we strengthened our collection efforts for underperforming assets and managed delinquent assets in the first quarter. For newly issued loans, we implemented stringent credit standards to ensure high-quality assets. Specifically, we intensified efforts to collect underperforming assets using improved strategies and advanced our collection services to provide an efficient user experience. We also enhanced our asset disposal process by employing a machine-learning algorithm, which significantly boosted our efficiency in handling these assets. For new credit approvals, we implemented a low-risk management system to gradually increase credit limits as we gain more insights into new customers, which helped minimize potential credit losses while maintaining higher approval rates. The approval rate for new customers rose by over 30%, and the share of super prime and prime customers increased from 24% in January to 40% in March, indicating continuous improvement in the early risk performance for new customer assets. Additionally, we focused on increasing the proportion of high-quality new assets through targeted pricing strategies and improved product match-ups for different customer segments. Our efforts in these areas led to better risk management of newly issued assets, and although resolving issues with existing delinquent loans will take time, we anticipate an improvement in overall risk performance as new assets make up a larger portion of our asset structure by the second half of the year. We are committed to prioritizing customer needs and leveraging our product offerings to drive customer engagement and enhance asset quality. In the first quarter, we promoted a consumer loan product with interest rates below 18% aimed at high-quality working-class customers, which resulted in higher activity levels among users, with significant increases in transactions and loan balances. We also targeted micro and small business owners with a new low-interest loan product, which has shown promising early risk performance metrics. On the overseas front, we made significant progress in the Mexico market, achieving double-digit growth in loan origination volume while remaining profitable. Our partnerships with national-level financial institutions helped reduce our funding costs. In May, we issued our first internationally rated ABS with an AAA rating. In the first quarter, we invested RMB 130 million in research and development, further integrating large language models into our operations to enhance efficiency and customer experience, which has been positively reflected in customer satisfaction. Looking forward to the second quarter, we will remain committed to prudent operations, prioritize risk management, and focus on improving profitability despite external challenges. As we enhance our profitability, we will continue to distribute cash dividends and provide returns to our shareholders.

Arvin Qiao, CRO

Thank you, Jay. I will provide an update on risk management in the first quarter. We noted that uncertainty in the external environment continued with no significant improvements from the previous quarter. This was evident in the ongoing slow recovery of macroeconomic conditions and reduced consumer credit demand, influenced by the seasonal factor of the Chinese Spring Festival. Given these observations, we continued to implement our risk management upgrades and profit enhancement strategies in the first quarter. We focused on several initiatives, including improving our ability to identify credit profiles, optimizing our asset structure, increasing the disposal of high-risk customers, and enhancing differentiated pricing capabilities, which yielded positive results. Although the risk performance of new customers has gradually improved, it still requires time for the existing delinquent loans to be resolved. We anticipate that overall risk performance will improve in the second half of this year as the proportion of new assets in the asset structure increases. Specifically regarding our risk management measures in Q1, we enhanced our risk identification capabilities by exploring external scenario-based data and implementing advanced algorithms, leading to significant improvements. We partnered with platforms that protect their unique data and used joint modeling to enrich model features, achieving about a 10% improvement in the KS value for our main risk models. This has strengthened our ability to differentiate between good and bad customers. We also developed occupation, education, and income prediction models, enhancing our understanding of customer credit needs, which improved the matching of loan products to user demands. Furthermore, we rolled out a new risk management strategy for new customers, resulting in a more than 20% increase in high-quality loan applications and over a 30% uplift in the credit approval rate for those customers. In managing existing customers, we restructured our credit line limits, pricing, and transaction monitoring strategies for better alignment based on various risk levels. The competitiveness of our loan products for high-quality customers has significantly improved, increasing their proportion while effectively reducing credit limits and potential losses for medium to high-risk customers. We also made significant strides in managing high-risk customers by enhancing efforts to close accounts, intercept transactions, and reduce credit limits. We developed intelligent disposal tools that improved the efficiency and precision in the handling of high-risk assets. After analyzing our existing traffic channels, we closed those associated with small scales and high risk, leading to a noticeable reduction in the risk level of new assets. Looking ahead to the second quarter, we will continue to focus on improving credit profile identification, intensifying the disposal of high-risk customers, and accelerating the acquisition of quality new customers. These initiatives are designed to enhance risk management, improve profitability, and strengthen our operational capabilities. Based on our current estimates, we expect overall asset performance to gradually improve in the latter half of this year.

James Zheng, CFO

Thank you, Arvin. I will now dive into our financial results, noting that all figures are presented in RMB unless stated otherwise. As Jay and Arvin highlighted, given the macroeconomic conditions and the continued cautious consumer behavior along with the new year seasonality, we strategically adjusted our Q1 operations. We tightened our credit standards and moderated loan originations to ensure the resilience of our financial performance. This approach not only helped manage volume but also enhanced the quality of our operations, which I will elaborate on across the following five key aspects. First, resilient net profit margin. Despite a decline in new loan volume to RMB 58 billion, down 5.3% from the previous quarter, and total revenue falling to RMB 3.2 billion, down 7.6% quarter-over-quarter, profit reached RMB 202 million. The net profit margin remained relatively stable at about 6.2% compared to the pro forma Q4 net income without investment losses, reflecting the robustness of our business model and profitability. Second, record low funding costs. We achieved a significant reduction in funding cost by 34 basis points from the previous quarter, bringing it to under 6%. This improvement stems from the overall market rate as well as strengthening our network of funding partners and increasing the proportion of funds sourced from national banks to around 70%. Additionally, we resumed ABS issuers in May, raising RMB 350 million. We plan to continue optimizing our funding costs through further ABS issuances as market conditions allow. Third, revenue take rate uptick. There was a slight increase in the revenue take rate of new loans to 2.54% in Q1, up by 7 basis points quarter-over-quarter and up by 5 basis points year-over-year. This is attributed to lower funding costs and a continuously refined early repayment ratio. The total credit impairment costs lowered slightly quarter-over-quarter. The total credit impairment cost items—including provisions for financing receivables, provision for contract assets receivables, provision for contingent guaranteed liabilities, and change in fair value of financial guaranteed derivatives—decreased by 7.5% on a quarter-over-quarter basis due to the decrease in new loan amounts and improvements in risk trends of new customer loans. Fourth, improved risk profile of new customer loans. As explained by Jay and Arvin earlier, our focused risk management efforts have gradually improved loan quality among new customers from super prime and prime segments. However, due to the size of the existing loan balance, the overall 90-day plus delinquency rate still increased by 10 basis points to 3.0%. Our overall provision coverage ratio remains at over 300%, reflecting a strong buffer against potential bad debt. Lastly, operational expense control. We continue to optimize costs, particularly in operational expenses. Our total operating expenses—including sales and marketing, R&D, and G&A— as a percentage of the average loan balance further dropped to 2.09%, reflecting our strategic focus on maintaining effectiveness in essential operations while reducing expenditures in other operational areas. Looking ahead, while the macro environment remains uncertain and consumer credit demand is weaker than expected, we will stay focused on enhancing risk management, refining efficiencies, and optimizing costs for the second quarter. We currently anticipate a total GMV of loan origination volume to be around RMB 54 billion to RMB 55 billion. This estimate reflects the company's current expectations, which are subject to change. We are now ready to take your questions.

Frank Zheng, Analyst

Since April and the second quarter, how does the credit demand look? What is the trend? What are management's expectations for total loan volume in the second quarter?

Jay Xiao, CEO

Okay, Frank, I will translate for Jay. In the first quarter, considering macroeconomic conditions and seasonal factors, the overall pace of loan origination remained within our expectations, with a total loan origination dropping only about 5% in Q1 compared to the previous quarter. We outperformed the industry average loan origination pace in Q1. Since entering the second quarter, we have observed that the overall external macroeconomic environment is showing a relatively slow recovery trend. Therefore, we will continue to adhere to our risk management upgrading strategy and maintain a relatively high standard of credit approval for both new customers and newly issued loans. As for effective credit demand in April and May, we have seen a slowing trend month-over-month, which is below our expectations. Based on our estimations, we anticipate that total loan origination volume for the second quarter will be around RMB 54 billion to RMB 55 billion. However, while adhering to the high standard and prudent risk management strategy, we will closely monitor the macroeconomic recovery and consider seizing business growth opportunities should the overall economic vitality improve significantly.

Yada Li, Analyst

Mr. Xiao mentioned that the overseas business achieved double-digit growth in the first quarter. Could you provide more detail about the business planning for overseas development, core business lines, and future profit expectations?

Jay Xiao, CEO

So Yada, I will translate for Mr. Xiao. Considering that China's macroeconomic developments have shifted from high-speed growth to high-quality growth, the loan position industry has entered a stable growing pace. We have made attempts overseas, and so far, it achieved good results. We made strategic investments in Southeast Asia, such as Indonesia, where an affiliated company conducts loan facilitation business in the local market. In the past quarter, the monthly loan origination volume in the Mexico market exceeded RMB 100 million, achieving profitability for that quarter. The loan origination volume for overseas business increased by double digits on a Q-on-Q basis, outpacing our overall business growth. However, the scale of our overseas business is still relatively small compared to our domestic business. We will continue to increase investments overseas to expand and strengthen business development. Regarding products, we will push forward the transition from the single cash flow model to more diversified product models. By optimizing targeted marketing, continuously integrating products, and enhancing risk management, we hope to increase the proportion of our overseas business and contribute more to profitability.

Zoe Zou, Analyst

Let me translate that. Mr. Qiao mentioned that the risk performance of loans issued to new customers is gradually improving, while the growth of the existing loan book will take some time to stabilize. Looking ahead, could you elaborate on the risk performance outlook for both existing and new assets, as well as the expected future performance of the overall asset?

Zhanwen Qiao, CRO

Well, Zoe, let me translate what Arvin mentioned for you. Certainly, the overall performance of our total assets draws market attention. In terms of the asset quality of loans issued to new customers in Q1, we enhanced risk identification capabilities and improved the efficiency of the RT model in acquiring new customers, implementing a low and grow life cycle risk management approach. As a result, we see a noticeable increase in the proportion of new good quality customers and a positive trend in asset quality indicators, such as a more than 20% decrease in the first payment default rate compared to Q4. However, while the risk performance for loans issued to new customers has gradually improved and the risk of new assets is under management, it still requires time for resolution of risks associated with existing assets. We expect that the overall risk performance will gradually improve in the second half of this year as the proportion of new assets in the overall structure increases and existing loan book risks are resolved.

Mandy Dong, IR Director

Well, operator, if there is no more queuing on the line, I think we are good to close the call for today.

Operator, Operator

That's the end of the Q&A session. I'll now hand the call back to you for closing.

Mandy Dong, IR Director

Well, thank you, everyone, again, for joining us today. If you have further questions, please contact us via the contact information on our IR website and offline. Thank you all. Have a good day and a good night. Goodbye.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.