X Financial (XYF) Q2 2026 Earnings Call Transcript

Good day, and welcome to the X-Financial Second 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 one, on a touch-tone phone. To withdraw your question, please press star, then two. 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. All financial results for the second quarter ended June 30, 2026 were released earlier today and are available on the company's investor relations website, ir.xiaoyingroup.com. On the call today from X-Financial are Mr. Ken Lee, President, Mr. Frank Puiyazheng, 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 review the second quarter financial performance, followed by Mr. Zheng, who will cover the detailed financial results, capital position, and outlook. After the prepared remarks, Mr. Lee, Mr. Zhang, and Mr. Kaufman will be available to answer your questions during the Q&A session. I remind you that this call may contain forward-looking statements under the type of provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on 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, and achievements to differ materially from those described in these statements. Further information on these and other risks can be found in our ICC filings. 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 my pleasure to introduce Mr. Ken Lee.

Thank you, Victoria, and hello, everyone. In the second quarter of 2026, we maintained the discipline operating posture that has defined our approach over the past several years. Conditions remained challenging, and we continued to place credit quality, liquidity, and balance sheet strength ahead of near-term origination volume. During the quarter, we have facilitated and originated RMB 11.63 billion in loans, a decline of 70.2% year-over-year and 20.5% sequentially from the first quarter. The pace of contraction moderated meaningfully from the first quarter, consistent with our measure approach to originating in the current environment. Operationally, we continue to concentrate originating in our internally operated channels, where borrower quality and unit economics are strongest. Underwriting criteria for newer vintages were refined further. automation was extended across servicing and collections, and the discretionary spending remained tightly controlled. The average known amount per transaction rose to RMB 12,712, up 8.3% from the prior quarter, and 21.3% year-over-year, reflecting a shift in transaction mix toward a higher-quality borrowers. From a volume standpoint, we served approximately 720,258 active borrowers in the quarter, down 74.8% year-over-year and 24.7% from the prior quarter. We facilitated approximately 0.91 million loans during the period. Outstanding loan balance at a quarter-end stood at RMB 24.97 billion, a decline of 61.5% from the same period of 2025 and 29.2% from the year of the first quarter. From the end of the first quarter, credit quality. Credit trends showed encouraging sequential improvement in the second quarter, although overall conditions remain challenging. As of June 30th, our 31 to 60-day delinquency rate was 1.73 percent compared with 2.61 percent at the end of Q1 2026 and 1.16 percent as of the same period of 2025. Our 91 to 180-day delinquency rate improved to 9.09% compared with 9.95% at the end of Q1-2026 and 2.91% as of the same period of 2025. Both rates improved from the prior quarter, the first sequential improvement we have recorded in several quarters, which we attribute to the tighter underwriting standards applied to recent advantages and additional resources deployed into collections. That said, both rates remain well above prior year levels, and the 91 to 180 rates in particular remain elevated as earlier delinquency balances continue to season through the portfolio. We are not declaring victory on credit. We are maintaining the same conservative stance until the improvement proves due. With that, I'll turn the call over to Noah, who will take you through the financial results for the second quarter.

Thank you, Ken. Hello, everyone. It's great to speak with you again. Ken covered the operational and credit developments, so I'll take you through the financial performance for the second quarter. In the second quarter of 2026, total net revenue was $993.6 million RMB, or $146.4 million U.S., representing a 56.3% decline year-over-year and a 15.5% decline sequentially from Q1, 2026. The year-over-year decline primarily reflects substantially lower loan facilitation volumes, partially offset by higher guarantee income. Total operating costs and expenses came in at 798.6 million RMB or 117.7 million U.S. dollars, down 22.9% sequentially and 50% year-over-year. Borrower acquisition and marketing expense was 149.5 million RMB, or US$22 million, down from 219.8 million RMB in the first quarter and 756.3 million RMB in the same period last year, as we continued to prioritize capital efficiency over volume growth. Aggregate credit-related provisions were 183.1 million RMB, or $27 million U.S., down 35.3% sequentially from 282.9 million RMB in the first quarter and 36.4% below the same period last year. Within that, the provision for contingent guarantee liabilities declined to 57.6 million R&B, with a guaranteed loan portfolio broadly unchanged from both comparison periods. The decrease primarily reflected the reversal of a portion of provisions recognized in prior periods as a loan loss rate declined during the quarter. Provision for credit losses for deposits and other financial assets increased to 95.3 million RMB. Income from operations was 194.9 million RMB, or $28.7 million, a 71.1% decrease year-over-year, but an increase of 38.6% sequentially. Operating margin improved to 19.6%, up from 12% in the first quarter, though still below the 29.7% recorded in the prior year period. Income before income taxes was 220 million RMB, or $32.4 million U.S. dollars. Net income was 47 million RMB, or $6.9 million U.S. dollars in the second quarter, compared with 37.9 million RMB in Q1 2026 and 528 million RMB in the same period last year with income tax expense and investment-related items below the operating line accounting for the difference from pre-tax income. Net profit margin was 4.7% compared with 3.2% in the prior quarter and 23.2% a year ago. Return on equity was 2.4% for the quarter, reflecting the reduced earnings base. Taken together, the second quarter represents a second consecutive quarter of sequential improvement and operating performance. Revenue is still finding its floor, but margins, provisions, and net income all moved in the right direction. On the regulatory front, the environment continue to evolve during the quarter, we are monitoring developments closely and have nothing new to report beyond the disclosure in our 6K. With that, I'll hand things over to Frank to take you through the detailed results per ADS metrics, non-GAAP adjustments, and the balance sheet.

Go ahead, Frank.

Thank you, Noah, and hello, everyone. I will walk through the key financial highlights for the second quarter and then cover the balance sheet, capital returns and outlook. Please note that all numbers stated in RMB and around it. Full details are available in the 6K slide with the SEC. Financial results. Total net revenue for the second quarter was approximately 994 million RMB, down around 56% from the same period last year, and about 16% from the prior quarter. The decline continues to reflect the deliberate reduction in origination activity we have been pursuing, partially offset by growth in the guaranteed income. Net income for the quarter was 47 RMB, up 23.8% from 38 million RMB in the first quarter, and down substantially from 528 million RMB in the same period last year. Non-GAAP adjusted net income was $166 million RMB, up 104.3% sequentially and down 72% year-over-year. We view the sequentially improvement in both measures as an early indication that our credit and cost options are taking hold. On a per ADS basis, basic earnings were 1.26 RMB, or 19% U.S., compared with 96 RMB in the prior quarter and 12.6 RMB a year ago. Non-GAAP adjusted basic earnings per ADS were 4.44 RMB or US$0.65. Revenue mixed. A growth of our business lines, loan facilitation service fees declined 85.5% year-over-year to $199 million RMB in line with low origination volumes. Post-origination service fee decreased 41.2% to 160 million RMB, consisting with the smaller outstanding portfolio. Guarantee income more than double year-over-year to 225 million RMB, reflecting continued recognition of the revenue from our existing guarantee loan portfolio. Finance income was 278 million RMB, down 13.2%. For the full breakdown by items, please refer to the 6K. Balance sheet and liquidity. Our balance sheet remains strongly capitalized at the end of the quarter. Total assets were approximately 2.1 billion RMB, and shareholders' with equity was approximately 7.8 billion RMB, giving us equity to asset ratio approximately 64%, up from around 57% at the end of the first quarter. So total cash, including restricted cash, were approximately 2 billion RMB. The equity remain at Apple for the current environment. After return to the shareholder, we continue to purchase shares during the period. From January 1, 2026 through August 14, we repurchased approximately $2.63 million EDS for the total consideration of approximately $12.49 million U.S. We have approximately $35.5 million U.S. remaining under the existing $100 million U.S. program, which runs through November 30, 2026. Returning capital to shareholders remains an important part of our capital allocation framework. Dividend update. As a part of our semi-annual dividend policy, the board has approved a cash dividend of $0.28 U.S. per AES, which is equivalent to approximately $0.0467 U.S. per ordinary share. Shareholders of a record as of September 10, 2026 will be entitled to receive the dividends and the payments are expected to be distributed on and around September 28, 2026. ADS holders will receive their dividend payments through our depository. The Bank of New York, Maryland, shortly thereafter, with timing subject to the brokerage processing. Business Outlook. Turning to the outlook, given the material uncertainties in the current operational environment, we are not providing quantitative guidance for the third quarter at this time. Our priorities are unchanged, capital preservation, discipline origination, reckless cost control, and protecting the banishes. We will resume providing guidance where visibility improves. That concludes our prepared remarks, and we now take questions. Operator, please go ahead.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone 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 two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Brian Gard with Warburg Asset Management. Please go ahead.

Good morning. I'm very pleased to see that the results have been improving from the last quarter. My question is quite a broad one. I'm a relatively new shareholder to the company. I want to understand theoretically why this company is publicly traded, given that tangible book value is over $20 US per ADS.

Why don't you just take this company private?

Let me try to answer that question again. I think a previous investor asked a similar question before. So in China, you know, being a list company is kind of a privilege and a special status. If we privatize, we might lose the opportunity, you know, for current business to be listed again. Because if you want a Chinese-based company to try to be listed overseas, you need to get a pool from the government. And based on our current industry situation, advance for our industry is not going to be a list. So that's probably the main reason, you know, you will rarely see the Chinese list company in the U.S. go private. But, you know, many years ago, some companies did this kind of thing, and they try to, you know, change the venue and try to be listed in Hong Kong or in China. But it's not, in general, everyone still, you know, prioritized or prefer to be listed in the U.S. That's why.

But given that there's such a large gap, what's going to be your process for maybe returning more cash to shareholders or driving the company towards a much higher valuation that's much more close to, say, U.S.-style valuations?

U.S. compared with U.S. generation is probably kind of an outreach goal.

And based on the current business and the current regulation and environment, I think the best way for us and also from the rest of the steps But as we, you know, find the new revenue sources, basically re-engineer the company to, you know, other than facilitation business as we are, that probably is the best way it could. And we are, you know, doing the best we can and, you know, basically based on, you know, very low volume right now, we are doing the almost maximal buyback and the normal buyback cruise and still preserve enough capital to explore, you know, new business opportunity, even though those new venture opportunities are not very clear at this point.

All right. Thank you very much.

I appreciate it.

Yeah, Brian, this is Noah Kaufman. Just to add kind of to what Frank was saying, so we have had two consecutive quarters of sequential credit improvements. And so the credit metrics, at least over the last couple of quarters, have moved a bit in the right direction. And so the cost base is also getting a bit leaner. So, you know, I think certainly what Frank says is true. You know, going private is sort of like a one-way door. And so coming back to the public market, especially as a Chinese headquartered fintech, is, you know, very difficult. And so, you know, I think with a couple quarters kind of moving in the right direction, you know, we're very focused on, you know, what are the operational efficiencies that we can add, obviously, as APRs have come down. And then, you know, beyond that, what are areas of like organic growth? And certainly with the strength of the balance sheet, you know, we have the ability that, you know, as the loan book comes down, cash is freed up. So certainly we have the ability to continue to pay quite a healthy dividend. But I think, you know, on the back of, you know, maybe we'll call it like a, you know, rough year or really rough year, we're not, you know, quite ready to throw in the towel. You know, I think things are going, you know, in a little bit better direction. And, you know, we're obviously watching it.

Again, thank you.

Thank you for your answer. I much appreciate it. Thanks, Brian.

As a reminder, if you would like to ask a question, please press star, then one, to join the question queue. The next question comes from Kenning Zhao with Norton Andrews. Please go ahead.

Hi, thanks for taking my call. I'm Kenning from Norton Andrews. My first question is that there's a significant decrease in probation for contingent guarantee liabilities down from like $200 million in the first half in 2025 to $57 million this half year. I see there's a significant decrease in loan balance, outstanding loan balance, but the delinquency rate has jumped as well. So I wonder why did you make such adjustments and, like, if there are some evidence from the most recent vintages.

Yeah, that's my first question.

Yeah, hi, Kenning. This is Noah. Thanks for your question. Yeah, the main driver is the loss rate assumption. So the guaranteed portfolio itself was, you know, broadly unchanged against both the comparison period. So I don't believe it's a size effect. and what moved in our estimate was the average loss rate on the book, which came down during the quarter. And because a portion of that we reserved in prior periods, we were no longer required at that level to reverse it. So that reversal is what makes the line look as low as it does. So I treat that way rather than as a new overrun rate for the provision. um on on your second point you're right that the two things sit uh you know uh somewhat uh uncomfortably next to you know one another and the distinction that i draw is between the stock and the flow so the elevated delinquencies that you're seeing are concentrated in older paper that's soothing through the portfolio. That's roughly like 91 to 180 bucket, and it's still very high, whereas the recent vintages originated under the materially tighter criteria are performing better than what preceded them. And so both delinquency buckets improved sequentially for the first time in several quarters. So the reserve reflects where we think losses on the book are and where it's composed of today, which is increasingly newer advantages rather than the old book as it looked a year ago. Did you have a second question?

Yes. There's another item, like probation for credit losses for deposits and other financial assets. It wasn't material before, but it jumped from, it's quite big now. It's like 95 million, I think, 95 million RMB from only like 700,000 before. May I ask what's in that item?

Oh, that is from the institutional. you know, from the comprehensive income. Yeah, yeah, yeah. It's involved with one funding institution and the business we are then is already, you know, basically and gone and finished and they haven't returned to, you know, our guarantee money yet. So, you know, that can guarantee money is kind of in real. So, it doesn't mean it will eventually will not return to us, but I think for whatever reason, it's behind schedule, and so we took precautions to, accounting-wise, to write them off at this time. That's about it. So only involve one institution funding partner.

Right. I understand. Okay. Thank you. Thank you uh yeah that's uh yeah if i may one more question but actually quite similar to the previous one like if you have any further capital return plans apart from the existing ones given the current market at this point um we are we are doing all we can under the normal buyback circumstances and rules.

We don't have a particular, at this time, we don't have a particular buyback or privatization plan at this moment.

Thank you. Thank you very much.

This concludes our question and answer session. 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 soon. Operator, back to you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.