Lufax Holding Ltd (LU) Earnings

Management highlights

Governance and Reporting Milestones - Restored full financial reporting compliance: completed reaudits of 2022 and 2023 financial statements, and completed full audits for 2024 and 2025, bringing SEC filings current and regaining compliance with NYSE continued listing standards. - Engaged Deloitte Consulting Shanghai as an independent internal control consultant, implemented all recommended remedial measures to address identified control deficiencies. - Strengthened corporate governance: restructured the Board of Directors to have an independent non-executive majority, named an independent non-executive Chairman, and established a new Chief Compliance Officer position. - Ordinary shares remain suspended from trading on the Hong Kong Stock Exchange, and management continues to work with the exchange to resolve this. Macro and Industry Environment - China's Q2 2026 GDP grew 4.3% YoY, with moderate overall growth; SME operating conditions remained difficult, with the Cheung Kong Business School SME Development Index falling below the 5-point expansion-contraction line in June, and consumer finance demand was soft, with national household consumer loan balances down 1.7% YoY as of June end. - New regulatory guidelines covering the full online lending value chain (collection practices, data security, personal information protection, pricing, fee transparency) have compressed industry margins and made the old high-fee/high-risk business model unsustainable. In the long term, tighter regulation will benefit compliant, large-scale players like Lufax through healthier industry competition. Operational and Strategic Updates - Management maintains a prudent strategy centered on a selective lower-risk customer approach and AI-powered refined operations. - Launched the Industry+ initiative, which develops customized financing solutions tailored to the unique needs of local industries and regional (down to county-level) SME customer segments. - Deployed AI-powered digital twin tools to support the direct sales team across customer acquisition, product recommendation, post-loan management, and customer engagement to improve service quality and operational efficiency. - Shifted to full lifecycle account management from single-product sales to cultivate long-term customer value. - Optimized risk control and collection: upgraded intelligent risk control models and expanded AI-powered collection, leading to QoQ improvement in asset quality: Q2 C-M3 flow rate fell to 1.0% from 1.2% in Q1, DPD 30+ delinquency (excluding consumer finance) fell to 5.8% from 6.1% QoQ. - Reduced funding costs: funding cost (excluding consumer finance) fell 90bps YoY to 3.8% via partnerships with banking institutions; consumer finance subsidiary leverages its license to access low-cost interbank funding.

Guidance

- Management expects the sequential improvement in asset quality seen in Q2 2026 to continue through the second half of 2026, as new risk control and collection initiatives continue to take effect. - Lufax maintains its existing 2-pillar dual engine strategy (SBO lending + consumer finance) first laid out in 2024, with no material strategic changes planned over the next 2-3 years. - Management expects consumer finance growth to be sustainable, and the segment will remain a core driver of overall growth going forward. SBO lending is expected to return to growth as customer acquisition efficiency and risk management improve. - Over the medium to long term, Lufax expects to gain market share as industry consolidation from tighter regulation benefits compliant, licensed leading players. - Management's top near-term priority is restoring sustainable profitability as soon as possible.

Segment performance

Total new loan originations in Q2 2026 were RMB 51.1 billion, up 4.6% year-over-year (YoY) and 4.8% quarter-over-quarter (QoQ). The consumer finance segment drove this growth, with new loan sales of RMB 36.9 billion, up 27.6% YoY, accounting for 72.2% of total new loan originations in the quarter. Consumer finance total outstanding balance grew nearly 20% YoY, with an NPL ratio of 1.3% as of Q2 end, down 10bps QoQ. The LONGi (formerly Puhui) small business owner (SBO) loan segment saw continued contraction: total outstanding loan balance for the firm overall was RMB 167.3 billion as of Q2 end, down 13.5% YoY, driven by weak SBO financing demand and the firm's prudent underwriting approach for this segment. Total firm income declined 15.5% YoY, primarily due to the reduced SBO loan balance, partially offset by consumer finance growth. The firm recorded a net loss in the quarter, though the net loss narrowed substantially YoY.

Risks & headwinds

- Persistent weak macroeconomic conditions have kept SME and consumer financing demand soft, elevating credit costs relative to income and contributing to continued net losses in the quarter. - Tighter regulatory requirements have compressed industry margins, eliminated the high-fee/high-risk legacy business model, and created short-term pressure on growth and profitability, as reduced lending to higher-risk segments has negatively impacted borrower repayment capacity and increased credit costs. - Recent stress among smaller online lending platforms has created ongoing industry uncertainty, even as larger compliant players are expected to benefit long-term. - Lufax's ordinary shares remain suspended from trading on the Hong Kong Stock Exchange, with no clear timeline for resumption as the firm continues to respond to exchange comments.

Analyst Q&A

• Q: What are Lufax's top 3 priorities over the next 2-3 years, is there a material strategic change from prior plans, and is the recent growth in consumer finance share sustainable, what will the long-term mix between consumer and SME lending look like? /

  A: Management's top three priorities are 1) grow the mid-to-low risk customer base across three core segments (existing SBO, new self-employed/individually owned business, and salaried employees), 2) optimize overall cost structures via expanded firm-wide AI adoption to free up room for better profitability at lower price points, and 3) continue strengthening internal controls and compliance to deliver long-term sustainable growth. No material changes to the 2024 two-pillar strategy of prudent operation prioritizing asset quality over scale and business diversification; Lufax will continue its dual engine growth model of SBO lending and consumer finance. Consumer growth is sustainable as a core new growth engine, while SBO lending will return to growth as a traditional strength, with the mix optimized dynamically based on market conditions for balanced growth. (697 characters)

• Q: Have recent regulatory tightening and small platform stress tightened institutional funding or refinancing conditions, and what is Lufax's capital needs and capital return policy once profitability is restored? /

  A: Management confirms short-term business pressure from tighter regulation but welcomes the trend, as it will lead to a healthier industry landscape that benefits compliant large players like Lufax, who will gain market share long-term. Lufax will offset short-term pressure via accelerating its selective customer strategy, cost optimization, and efficiency improvements. Lufax's current cash balance is appropriate for its current business scale, regulatory requirements, and future growth buffer; management's top near-term priority is restoring profitability, and the Board will review the dividend payout framework only after profitability targets are met. (592 characters)

• Q: How does Lufax compete with banks for higher-quality secured SBO borrowers, and what is the timeline for resuming Hong Kong share trading? /

  A: Lufax does not compete head-to-head with most banks, as its LONGi SBO product serves a customer segment that cannot access sufficient or any financing from traditional banks, filling a market gap complementary to bank lending. Lufax's differentiated advantages include faster approval, higher loan amounts, and flexible terms that meet SBOs' emergency and supplementary financing needs, paired with its tailored Industry+ county-level industry-specific solutions delivered via its direct sales network. Lufax has completed all required financial audits, restatements, and internal control upgrades, and is currently responding to outstanding Hong Kong Stock Exchange comments, with updates provided to investors timely as progress is made. (648 characters) Total characters: 1937