Operator
Hello and welcome to the Ex Financial First Quarter 2026 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1, on a touch-tone phone. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Victoria Yu. Please go ahead.
Thank you, Operator. Hello, everyone, and thank you for joining today's call. Our financial results for the first quarter ended March 31, 2026, were released earlier today and are available on the Cognitive Investor Relations website at irgaoxiaoyinggroup.com. Other call today from X-Financial are Mr. Ken Lee, President, Mr. Frank Fuya-Zheng, Chief Financial Officer, and Mr. Noah Kaufman, Chief Financial Strategy Officer. Mr. Lee will begin with an overview of our business performance and the key operational developments. Mr. Kaufman will then discuss the regulatory environment and the first quarter financial performance, followed by Mr. Zhang, who will review the financial results, capital position, and outlook. After the prepared remarks, Mr. Li, Mr. Zhang, and Mr. Kaufman will be available to answer questions during the Q&A session. I remind you that this call may contain forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on the management's current expectations and involve known or unknown risks, uncertainties, and other factors. These factors are difficult to predict, and many are beyond the company's control, which may cause actual results, performance, or achievements to differ materially from those described in these statements. Further information on these and other risks can be found in our SEC findings. The company undertakes no obligation to update any forward-looking statements as a result of new information, future events, or otherwise, except as required by law. It is now my pleasure to introduce Mr. Ken Lee.
Thank you, Victoria, and hello, everyone. In the first quarter of 2026, we continued to operate with a high degree of discipline as the operating environment remained challenging. Carrying forward the more conservative posture we adopted in the second half of 2025, we further reduced the pace of activity in Q1, keeping our business closely aligned with evolving supervisory expectations while maintaining an unwavering focus on credit quality and risk management. During the quarter, we facilitated and originated RMB 14.63 billion in loans, a decline of 58.4% year-over-year and 35.8% sequentially from the fourth quarter. This pullback was deliberate as we continued to place greater priority on portfolio integrity and the non-term balance sheet stability over near-term origination volume. Operationally, we made further progress on a number of key initiatives during the quarter. We continued shifting our origination mix toward internally operated channels to deepen borrow relationships and reduce reliance on higher-cost third-party traffic. Underwriting criteria were further tightened. Compliance infrastructure was strengthened, and we continued rolling out process automation across servicing and collections, all with the goal of improving operational efficiency while keeping our cost-based need. From a volume standpoint, borrower activity continued to contract in the first quarter. we served approximately 956,520 active borrowers, down 60.6% year over year and 43.5% from the prior quarter. We facilitated approximately 1.25 million loans during the period with an average loan size of RMB 11,741 per transaction. Outstanding loan balance at a quarter understood that RMB 35.3 billion, a decline of 39.6 percent from the same period of 2025. Credit quality. Credit conditions remained under pressure in the first quarter, consistent with the broader stress we and other across the industry have been observing. As of March 31st, Our 31-to-60-day delinquency rate was 2.61% compared with 2.9% at the end of Q4 2025 and 1.25% as of the same period of 2025. Our 91-to-180 day delinquency rate increased to 9.95% compared with 6.31% at the end of Q4 2025 and 2.73% as of the same period of 2025. The data reflects a borrower base on the continued financial stream consistent with what we are seeing across the broader consumer credit industry. We have addressed this by further narrowing our approval criteria, deploying more resources into collections, and pulling back on our origination in segments where repayment risk has risen most sharply. Higher credit costs weighed on Carter's financial results, and we accepted that trade-offs no end. Protecting the integrity of the portfolio matters more to us than defending short-term earnings. Looking ahead, our focus is on keeping credit quality stable, managing liquidity carefully, and running the business with the same level of discipline we have maintained throughout this period. With that, I'll turn the call over to Noah, who will cover the key financial results for the first quarter as well as a regulatory environment.
Great. Thank you, Kent. Hello, everyone. It's great to speak with you again. I haven't walked through the operational and credit developments, so I'll take you through the financial results for the quarter and then provide an update on the regulatory landscape. In the first quarter of 2026, total net revenue was 1.18 billion RMB, or $170.5 million U.S. dollars, representing a 39.3% decline year over year, and a 19.9% decline sequentially from Q4 2025. Total operating costs and expenses came in at 1.04 billion RMB, or $150.1 million, down 28.5% sequentially and 24.1% year-over-year. The year-over-year cost reduction was driven by the sharp pullback and borrower acquisition and marketing spend, which fell from 709 million RMB in Q1 2025 to 219.8 million RMB this quarter. Total provisions were 282.9 million RMB, or 41 million U.S. dollars, down substantially from 669.3 million RMB in Q4 2025, which was a meaningful sequential improvement, but still well above the 135.5 million RMB we recorded in the same period last year, continuing to weigh on profitability relative to prior year levels. On the discretionary spending side, we maintained tight control. Borrower acquisition and marketing expense was 219.8 million RMB or 31.9 million US dollars in the first quarter, significantly below the 709 million RMB we spent in Q1 2025 as we continue to prioritize capital efficiency over volume growth. Income from operations recovered to 140.7 million RMB or 20.4 million US dollars, a 75.4% decrease year-over-year, but a meaningful rebound from the depressed Q4 2025 level. Operating margin improved to 12% up from 1.4% in Q4 2025, that is still well below the 29.6% recorded in the prior year period. Income before income taxes was 136.8 million RMB or $19.8 million U.S. dollars as the sequential improvement and operating results was partially offset by investment-related items below the operating line. Net income was 37.9 million RMB or 5.5 million U.S. dollars in the first quarter compared with 57.2 million RMB in Q4 2025 and 458.1 million RMB in Q1 2025. Net profit margin was 3.2% compared with 3.9% in the prior quarter and 23.6% a year ago. Return on equity was 1.9% for the quarter, reflecting the substantial reduced earnings base. On the regulatory environment, the regulatory environment governing internet-based lending and the People's Republic of China continue to evolve during the first quarter of 2026, with authorities further strengthening oversight across the consumer credit business chain. The company continues to monitor these developments closely. However, management has limited visibility into the ultimate scope and direction of implementation. If current and emerging regulatory requirements are implemented as currently understood, the company's operating results may be materially and adversely affected and historical levels of profitability should not be assumed to be indicative of future performance. The first quarter results reflect a business and transition, revenue and profitability well below prior year levels as we work through a period of elevated credit costs and reduced origination activity, but with early signs of sequential stabilization and operating performance. We are managing carefully through this environment. With that, I'll hand things over to Frank to take you through the detailed financial results, per ADS metrics, non-GAAP adjustments, and the balance sheet.
Thank you, Norm, and hello, everyone. I will walk through the key financial highlights for the first quarter, then cover the balance sheet, capital returns, and our outlook. Please note that all numbers stayed in R&B and rounded up. Full details are available in the 6K file with SEC. Financial results. The total net revenue for the first quarter was approximately R&B $1.2 billion, down around 39% from the same period of last year, and about 20% from the prior quarter. The decline was driven primarily by the significant reduction in loan origination activity we have been deliberately pursuing and was partially offset by growth in guaranteed income and financing income. Operation income was $141 million with an operation margin of 12 percent, well below of the 29.6% we recorded a year ago, with a meaningful recovery from the 1.4% we reported in the fourth quarter of 2025. The improvement sequentially reflects the benefit of the low origination-related provisions as our credit tightening measures took hold. Next, net income for the quarter was R&B $38 million compared with R&B $458 million in the same period of last year. The sharp year-over-year decline reflects substantially higher credit provisions and the substantially low revenue base. NUMGAAP adjusted net income was R&B $81 million. Per ADS base, basic earnings were R&D .96 US dollar 14 cents compared with R&D 10.92 a year ago and the non-GAAP adjusted basic earnings per ADS were R&D 2.8 or US 30 cents. Revenue mix. Across our business lines, the pattern was consistent with the overall volume Povac. Facilitation fees fell sharply as orientation volume dropped. Post-origin fee declined more modestly in line with the smaller outstanding portfolio. On the positive side, guaranteed income more than triple year-over-year, reflecting continued recognition of revenue from our existing guarantee loan portfolio. Financing income was broadly stable. For the full breakdown by line item, please refer to the 6K. Balance sheet and liquidity. Our balance sheet remained well capitalized at the end of the quarter. Total assets were possibly R&B $13.6 billion, and the shareholders' equity was possibly R&B $7.8 billion, giving us an equity-to-asset ratio of around 57%. We remain in a solid liquidity position, and with total cash, including a restricted cash of possibly R&B $2.4 billion, and the balance is in good shape to navigate the current environment. Capital return to the shareholders. We continue our share repurchase program during the quarter. From January 1st to May 15th, 2026, we repurchase approximately $1.8 million ADS for the total approximately US dollar $8.2 million. We have a possibly U.S. 39.8 million remaining under the existing program, which runs to November 30, 2026. This reflects our ongoing commitment to returning value to the shareholders while maintaining balance sheet strength. Business outlook. Our near-term outlook remains cautious. The regulatory environment continues to evolve quickly and we have limited visibility into the full scope and timing of the implementations. We expect these dynamics to continue to influence our industry, price pricing, funding conditions and original activity for the foreseeable future. For the second quarter of 2026, we expect total loan origination to be in the range of R&B 11.5 to R&B 12.5 billion, consistent with our continued focus on quality of the We remain focused on capital preservation, discipline origination, and cost control. So we will keep investors updated as the regulatory picture becomes clear. That concludes our prepared remarks. We will now take questions. Operator, please go ahead.
Operator
We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Once again, to ask a question, please press star then 1 to join the question queue. We are showing no questions at this time. I would like to turn the conference back over to Victoria Yu for any closing remarks.
Okay. Thank you everyone for joining us today. If you have additional questions, please reach out to our investor relations team directly. We appreciate your interest and look forward to speaking with you again. Thank you. Operator, back to you.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
