Earnings Call Transcript - YRD Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Yiren Digital First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I’d now like to hand over to your first speaker today, Ms. Lydia Yu. Thank you. Please go ahead.

Lydia Yu, Chairwoman

Thank you, and welcome to Yiren Digital's First Quarter 2020 Earnings Conference Call. Today's call features the presentation by the Founder, Chairman and CEO of CreditEase, and CEO of Yiren Digital, Mr. Ning Tang, CFO of Yiren Digital, Mr. Zhong Bi, and CRO of Yiren Digital, Mr. Michael Ji. Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities and Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and factors that can cause actual results to differ materially from those contained in any such statements. Further information regarding potential risks, uncertainties or factors is included in Yiren Digital's filings with the U.S. Securities and Exchange Commission. Yiren Digital does not undertake any obligation to update any forward-looking statements, except as required under applicable law. During the call, we will be referring to several non-GAAP financial measures and supplemental measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance to U.S. GAAP. For information about these non-GAAP measures and reconciliations to GAAP measures, please refer to our earnings press release. I will now pass it on to our CEO, Ning for opening remarks.

Ning Tang, CEO

Thank you all for joining our first quarter 2020 earnings conference call today. The first quarter of this year has been a challenging one as the Coronavirus shocks the entire global economy. During this unprecedented time, our core businesses remained stable. While we made substantial progress to diversify and enrich our business lines, we continue our business transition to China's leading digital personal financial service platform. We took proactive measures to ensure our business operated at a healthy level, giving customers the best service we can offer, making our own contribution to fight against COVID-19. Now, let me talk about our credit tax business. To maintain business resilience and to position ourselves for the long term, we are focused on three areas in our credit tax business this year. First, stabilize and improve risk performance. Second, invest in new areas of growth. And the third, grow our institutional funding mix. Our first priority is stabilizing and improving risk performance. In the first quarter of 2020, loan originations decreased by 77% from the prior quarter to RMB 1.8 billion as we proactively tightened credit and decreased the business volume to control credit risk in light of COVID-19. Our fast and timely response allowed us to operate at a profitable level in the first quarter, despite a challenging macro environment. Our second focus is on exploring additional opportunities and investing in new areas of growth. We have recently launched several new credit products to diversify our loan portfolio and better meet a full spectrum of mainstream consumer credit needs. The short tenure smaller ticket size revolving loan products offer credit solutions for a wider range of online and offline consumption scenarios including travel, lifestyle, e-commerce and mobile wallets. This product has been very well received, growing more than 100% month-over-month. For this product, we will partner with large traffic channels like Xiaomi and Oppo Finance, enabling us to significantly expand our business with diversified consumption scenarios, reduce customer acquisition costs, and improve operating efficiency as well as portfolio quality. Last quarter, we mentioned that we would be rolling out auto loans this year, as auto loans typically have a better risk profile than unsecured consumer loans. Our auto loan segments have shown visible growth momentum since March, and in particular, our auto leasing business is estimated to reach RMB 1.5 billion in loan originations in the first half of this year, and we expect this product segment to be one of the main revenue drivers in the second half of this year. In the second half of the year, together with our channel partners, we also hope to build a consumption platform to enrich our credit ecosystem with a member-only online e-commerce platform. Our third area of focus is on growing our institutional funding mix. We’re pleased to report that our institutional funding mix has increased to 40% in the first quarter of 2020, up from 14% last quarter, and we expect this proportion to increase to over 50% in the second quarter of this year. We're also actively expanding our institutional partners from banks to trust companies, other licensed financial institutions, and consumer finance companies. Next on wealth management, our online wealth management business has seen strong growth. In particular, for non-P2P wealth management products and services, the number of non-P2P investors increased by 23% from the prior quarter to 26,436 as of March 31, 2020, and the AUA of non-P2P products increased by 67% quarter-over-quarter to RMB 1.7 billion. The average investor investment amount of non-P2P wealth management products has seen steady growth to 65,000 RMB, up from 48,000 RMB in the previous quarter, driven by both increased investment amounts for single products, as well as multiple product selection representing good progress in our efforts on developing investor habits in using an asset allocation investment strategy. For mutual fund products within wealth management, we witnessed strong demand during the first quarter, with AUA increasing by 17% and sales volume increasing by 30% from February to March 2020 driven by our new product offerings. We expect this growth trend to continue through the year. We have also been investing in investor education through a variety of online courses to help investors develop a long-term investment horizon. We also noticed a significant improvement in average AUA per investor in mutual fund products, which has increased to RMB 36,800 in March 2020. With that, I will now turn the call over to our CFO Zhong, who will discuss our financial results for the quarter.

Zhong Bi, CFO

Thanks, Ning. Hello, everyone. For our financial update, I will focus on key items of our business operation and financial performance. You can refer to the detailed financial results in our earnings release. Under the challenging operating environment amid the pandemic in the first quarter of 2020, we maintained profitability and a strong liquidity position. Loan originations for the quarter were RMB 1.8 billion, a drop of 77% quarter-over-quarter mainly driven by the COVID-19 outbreak which heavily impacted our offline lending business. More specifically, due to the temporary closure of our physical branches, as well as our call centers, which are based in Wuhan, we saw a significant drop in loans originated from offline channels compared to the prior quarter. Total net revenue was RMB 1 billion, down 57% from the previous quarter. Despite the significant business volume drop during the quarter, our strong cost control and operating efficiency efforts have kept our business in a profit and a good cash position. Sales and marketing expenses reduced by 45% to RMB 616 million, net profit for the quarter was RMB 19 million, representing a 95% decrease quarter-over-quarter. As of March 31, 2020, our cash and cash equivalents remained stable at RMB 3.2 billion. We’re expecting a major business rebound and substantial growth in the second half of the year as our shorter-term smaller ticket size loans ramp up along with other new credit products launched in the second quarter plus a comprehensive consumption finance ecosystem being built with rich and diversified external partners on various platforms. On the wealth management side, as of March 31, 2020, Yiren Wealth has served approximately 2.2 million investors cumulatively, and close to 221,000 investors currently hold investments on our platform. The total AUA for Yiren Wealth reached RMB 32.2 billion as of March 31, 2020 with an average AUA per investor remaining stable at RMB 146,000. For this quarter, our account management service fees, which mainly derive from our wealth business, were RMB 413 million, a relatively modest decline of 16% quarter-over-quarter. The allowance for contract assets has declined to RMB 143 million from the prior quarter due to the overall lower loan volume and the allowance was equivalent to 7.8% of the loan volume compared to RMB 588 million last quarter, which was equivalent to 7.4% of loan volume. Meanwhile, contributions to the credit assurance program were at 12% this quarter to ensure adequate coverage. The decrease of 2% compared with the last quarter was the result of shorter loan tenures and tightened credit control for new customers. Our credit assurance program remains adequately funded, with a total balance equivalent to 10.5% of total performing loans. With that, I will now pass it on to Michael, our CRO, for an update on credit risk.

Michael Ji, CRO

Thank you, Zhong. Hello, everyone. For credit performance and risk management, overall early delinquencies increased in the fourth quarter and the risk peaked at the end of March due to the pandemic situation before it quickly declined in April and returned to near pre-pandemic levels in May. More specifically, the 15 to 90-day delinquency rate stood at 8.9% as of March 31, 2020 compared to 4.8% as of December 31, 2019. However, the delinquencies dropped quickly moving into April, thanks to our tightened risk policy and efficient risk management. As of the end of May, delinquency rates for 15 to 29 days, 30 to 59 days, and 60 to 89 days had already declined to 1.3%, 2.2%, and 2.1% respectively, and we expect delinquencies to further improve in June. Meanwhile, visible progress has been made in prioritizing our business toward higher quality customers, which was reflected in risk performance improvement. Looking at our vintage performance, we’re delighted to see essential improvements trending in 2019. We expect a more substantial improved trend in 2020. I will conclude my prepared remarks here and give it to the operator. Operator, please continue.

Operator, Operator

Thank you. Our first question comes from Alex Ye from UBS. Please go ahead.

Alex Ye, Analyst

Hi, good morning. Thanks for taking my question. So I have a couple of questions about your credit business. So first of all, on your traditional loan site to get unsecured business. Could you just remind me what your strategy is on this specific loan product going forward? We have seen your repeat customer rate for this quarter is almost zero. Going forward are you going to completely wind down this business or what’s the strategy on this? And will it still be offline or online? And second question is about your auto loan. Given you expect that it's going to be a major contribution to your loan presentation volume in the second half of this year, may I just ask for more color on it? Specifically, what are the product features like used car, new car market, and what is your customer acquisition channel? Is it still mainly offline? Where is the funding coming from? And my last question is about your growth outlook for this year. Given you also have the shorter-term products. Just wondering if you could give us some guidance on how you plan to maintain your growth mix in the near-term and also from a longer-term perspective? Thanks.

Dennis Cong, CFO

Okay. Thanks, Alex. I'll try to answer your question and then maybe Zhong can add on any of the points that may be missing. So for the large ticket size traditional loan we have, our strategy right now is that for the online business, we're going to focus on the smaller size, shorter tenure revolving loans as we mentioned in our remarks, and it's actually gaining very good traction. For the larger ticket size traditional business, we will continue to operate but mainly through our offline networks, because that has a unique credit screening process that helps us to improve the quality of the loan asset performance. The reason that in the first quarter, the repeat business was low for the online business is because we're moving to higher credit grades, so we've significantly changed the customer segmentation. And for the offline, as our CFO mentioned, it was impacted by the pandemic situation, so productivity dropped significantly. Now in terms of auto loans, we actually have two types of auto loans business. One is for borrowers that already have cars, which we have been operating. This is basically a credit enhancement business, which, as we mentioned, is ramping up to RMB 1.5 billion in the first half. This business has shown quite strong credit performance, with ticket sizes and pricing similar to larger ticket size traditional consumer loans at around RMB 70,000 or 80,000 for loans, and 24 to 36 months tenures. The fees are relatively similar; however, the credit performance is much better, with a charge-off rate in the mid-single digit range. From a funding perspective, we're working with licensed financial institutions to provide the funding for this type of both loans. We’re also starting second-hand car consumption loans, basically at the point of purchase. This, as you know, is also an offline-driven operation, and we’re in the process of building out the team and getting very early traction. The channels will be through auto sales centers, and we're also collaborating with online auto channels to facilitate online to offline conversions. This business will be totally funded by institutional funding. In terms of loan mix for the year, from online perspective, the shorter-term revolving loans will be a majority. For offline, you can see both auto loans and traditional larger ticket size consumer loans being half and half, which will likely reduce our overall loan tenure to closer to 20 months from the previous range of more than 30 months as we go through building up volume for the year. Yes, do you have anything to add to this?

Zhong Bi, CFO

I think you asked a fairly thorough question. I would probably add one more point: with our funding partners, their risk appetite for longer tenure loans has significantly reduced, which supports Dennis' remarks. The average loan tenures in Q1 reduced to 22 months compared to Q4, and we foresee the average loan tenure will continue to decrease, making it easier for us to secure institutional funding. That’s all I want to add.

Dennis Cong, CFO

Thanks.

Alex Ye, Analyst

Okay, thanks. Very clear. I have a follow-up question. So, first, on the loan mix, both online and offline, could you give us some color on how you are planning to split the two in terms of volume for this year? Second, about your short-term revolving loan, do you have an expectation about the current vintage loss rate on that particular product type? Lastly, could you also provide an update on your P2P operations? I see you also had some funding coming from P2P in Q1. What is the current status from a compliance perspective? To what extent do you expect that to continue in the rest of this year?

Dennis Cong, CFO

Okay, so from the online-offline split, it's around 50% from a sales volume perspective and that's likely to maintain that way throughout the year, as the major part of the auto loans are provided offline. So that's going to be important, along with the traditional larger ticket size business which will continue to ramp up and recover volume. I think Michael can actually comment on the credit performance expectations for the short-term loans and afterward we can talk about the P2P operation and compliance status.

Michael Ji, CRO

Thanks, Dennis. Let me take the question on short-term revolving loan credit performance. For this type of loans, we’re expecting to see the performance to be on par with our competitors. From the vintage performance perspective, it should be in the single digits because we have established and tightened credit scrutiny in our acquisition processes to ensure our credit performance remains at market level. As for the next question, I will give back to Dennis about the P2P operations.

Dennis Cong, CFO

Yes, from a funding mix perspective, as we mentioned, we have already reached more than 50% of the new sales volume funded by institutional sources, and we have sufficient funding sources and partners that will significantly increase that portion of funding for our total business volume. However, at this moment, our P2P operations are still complying with local regulators. We will see how the regulatory requirements evolve and adjust accordingly, so we can switch our institutional funding to meet all demands if needed. Right now it’s more of our own judgment. We're continuing to operate both funding sources in parallel.

Alex Ye, Analyst

Okay, got it. Thank you.

Operator, Operator

Our next question comes from Daphne Poon from Citi. Please go ahead.

Daphne Poon, Analyst

Hi, good morning. Thanks for taking my question. So, just two questions for me. The first one is regarding your loan volume. I was just wondering if you can provide any color regarding the level of loan origination volume you are seeing or expecting in the second quarter? And would you have any rough guidance on a full-year basis? The second question is regarding your account management fee: if I understand correctly, most of the fees are still coming from the P2P path, where you basically earn this traffic against the actual return versus the expected return you’re offering to investors. Currently the fee rate is quite high at around 5% annualized of your average AUM. If you continue to shrink your P2P business while ramping up the non-P2P part, should we expect this fee rate to decline? Can you share what the fee rate for the P2P versus the non-P2P business is?

Dennis Cong, CFO

Okay, I will try to answer this question, and Zhong can add in later if I miss any points. From the loan volume perspective, as we mentioned before, we're still on our targeted trajectory to recover and ramp up our overall loan origination volume run rate back to our 2019 average level by the mid or later part of the second half of this year. If you look at our 2019 quarterly run rate, it’s around RMB 10 billion, RMB 8 billion, or RMB 9 billion to RMB 10 billion level. Dividing that by three gives us a monthly run rate that we're targeting by the middle of the second half. For guidance on a full-year basis, we don't want to provide specific guidance, but you can utilize that math to estimate an assumption on sales volume for the year. However, you may also want to focus on the revenue side, as we have multiple streams of revenue now that may give you a better sense of our business scope and growth. Regarding account management service fees, yes, you're correct that the majority currently comes from the P2P segment. As we shift more towards institutional investors, the revenue opportunity isn't lost; it's just going to shift toward the revenue take rate upfront. Thus, we are not losing that part of revenue, but we do expect that as our new loan origination volume does not catch up to the repayment schedule of the remaining loan balance, the overall ending balance drop will impact this portion of revenue coming in. As we continue to recover the volume back to normal, you will see that catch-up later. In terms of the non-P2P business, we’re ramping up nicely across both sales volume and AUA, which is steadily increasing, over 60% quarter-over-quarter. The standard wealth management product fee rates are somewhat different. Some are around 0.5%, while others could be up to 1%. In particular, if we work with product suppliers on a strategic exclusive base, we can attain that higher rate. At the same time, we are also introducing insurance products to our wealth management clients where commission rates tend to be higher. We expect this business to be a good contributor to revenue. In the mix, we will see if we can reach similar levels on an AUA basis; but longer-term, the non-P2P wealth management business is anticipated to become a significant revenue contributor by 2021 and beyond.

Daphne Poon, Analyst

Okay, understood. Thank you.

Operator, Operator

I have no further questions. I will pass back to management for closing comments.

Dennis Cong, CFO

Okay, thank you very much. That concludes the call.

Operator, Operator

Thank you. Ladies and gentlemen, that concludes the call today. Thank you for attending. You may now disconnect.