CNFinance Holdings Ltd. Q4 FY2022 earnings call

• Achievements in 2022: Generated interest income of RMB 1.7 billion and net revenue of RMB 58 million under the commercial bank partnership model for fiscal year 2022, with net profit up 111% year-over-year. Rigorously promoted new products, expanded customer base via commercial bank partnership; reduced funding costs in the second half of 2022; actively participated in the capital market and engaged with investors.
• Challenges: Impact of pandemic on borrowers' solvency led to increased delinquency ratio and sales partners facing greater pressure to repurchase default loans; allowed sales partners to use installment payments for repurchasing in 2022.
• Plans for 2023: Target to have total loan origination volume around RMB 20 billion (40% increase from 2022), with 40% from loans recommended to commercial banks; continue developing new products, upgrading models, and expanding customer base; deepen cooperation with commercial banks; upgrade funding model by negotiating with venture capital institutions; invest in technology for risk control; focus on asset quality by optimizing credit approval model and targeting specific regions.

For fiscal year 2022, CNFinance generated interest income of RMB 1.7 billion. The net revenue under the commercial bank partnership model was RMB 58 million. The net profit was RMB 140 million, an increase of 111% compared to the same period last year. In the fourth quarter of 2022, total loan origination volume was RMB 3 billion, and the total volume of loans recommended to commercial banks was RMB 2 billion. Total interest and fees income in the fourth quarter was RMB 455 million. For the fiscal year, total interest and fees income was RMB 1.7 billion, total interest and fees expense was RMB 785 million, net interest and fees income after collaboration costs was RMB 683 million (an increase of 11% from the previous year), provision for credit losses was RMB 238 million, net loss on sales of loan was RMB 45 million, other gains net was RMB 90 million, total operating expenses decreased by 11% to RMB 339 million, and net income increased by 111% to RMB 138 million. The delinquency ratio excluding loans held for sale for loans originated by the company was 18.3% as of December 31, 2022, and the NPL ratio decreased from 2.1% on December 31, 2021, to 1.1% on December 31, 2022.

• Targeted total loan origination volume in 2023 is around RMB 20 billion, a ~40% increase from 2022, with 40% of this expected to come from loans recommended to commercial banks.
• Expect interest income charged to sales partners to remain stable in 2023 with a slight decrease due to improving asset quality as the economy recovers.

• Impact of pandemic prevention and control policies on borrowers' solvency leading to increased delinquency ratio and sales partners' repurchase pressure.
• Economic uncertainty and downward pressure on China's real estate market in 2022 contributing to higher provision for credit losses.

Q: Could you talk about your expectations for origination for the current year, especially between the split between trust and commercial?

A: Our targeted total loan origination volume in 2023 is around RMB 20 billion, which is about 40% increase in that of 2022. And we're hoping 40% of that RMB 20 billion has come from loans recommended to commercial banks.

Q: Given the general economic uncertainty and property market uncertainty, are you guys seeing any more sales partners coming to the platform because of the additional services you guys provide in terms of the risk management and the installment plan compared to doing it on their own as they may have been doing before?

A: Based on the data, very happy to see that the number of active sales partners as of the end of 2020 actually increased about 100, which is a 10% increase as compared to the same period of -- as compared to the end of 2021. And also, I want to mention that besides the better services we can provide them, the better risk management and external fundings, I think there are 2 major reasons why the sales partners are more willing to join our platform. The first thing is their confidence in how China's economy is going to pick up. And I think the second reason is that the repurchase by installment policy we rolled out in 2022, I think that really could help them ease their liquidity pressure and also help them to better manage their own risks.

Q: As far as your current loan to value, do you guys have that ratio where it stood at the end of the year compared to the year ago period?

A: So at the end of 2022, the average LTV ratio is around 60%, which remained rather stable through the past 3 years.

Q: Given the -- you guys are now breaking up the income charge to sales partners for these installment loans, is this a number that you guys are expecting will rise over the course of the year? Or will it start to tail off as the economy and everything improves over the course of the year? How should we look at that line item?

A: Based on what we are seeing how the economy is picking up and recovery, I think the overall asset quality of the loans originated by us is going to be better and which is going to drive down the overall delinquency ratio. And therefore, I think the total scale of how much the sales partners have to repurchase is going to go down. And therefore, I think the interest income charged to our sales partners is going to remain rather stable in 2023 with a little going down.

Q: Given the current environment, what do you guys see as the biggest risk for the company and biggest opportunity for the current environment?

A: I think the major challenge to CNFinance is whether we can contain the increase of delinquency ratio given the adjustment -- post the adjustment of pandemic prevention and control policies. And that means we have to focus more on the asset quality. So to address this challenge, we're going to take a couple of measures, including I kind of want to focus more on expanding our businesses in Tier 1 and new Tier 1 cities and just to lower the proportion that we're doing in Tier 2 and Tier 3 cities. And also, we want to just use technology to refine the whole loan approval process and just to manage risks better. And also, I think the opportunities presented to us, including that the first thing, is how the -- how China's economy is going to pick up, going to recover post the adjustment to the pandemic prevention and control. And also the second thing is, so after the past 2 years, we have finally seen the trading volume and property price in core areas start to recover. And since the majority of our business was conducted in such regions, and I think that's another good news to us.