Lufax Holding Ltd. Q1 FY2023 earnings call

Macroeconomic Outlook

• China's first quarter GDP grew 4.5% year-on-year, but industry profits declined 21% year-over-year. 80% of small business owners (SBOs) were optimistic about their 2023 business outlook.

Business Impact

• Improvement in credit rating mix for new loans: 82% of new unsecured loans in Q1 fell within top 3 credit rating categories vs. 41% a year ago. Credit charge-offs expected to peak in Q2 and gradually decline in the second half of 2023.

Strategic Initiatives

• Increase proportion of risk-bearing new loans with 100% credit enhancement from guaranteed subsidiary.
• Focus on product diversification and cross-selling between retail credit and customer finance businesses.
• Enhance post-loan recovery efforts and continue technology investments for better customer onboarding and underwriting.

Corporate Milestones

• Successfully completed Hong Kong listing on April 14, 2023. Paid out the second half of 2022 dividend amounting to USD 114.6 million in April 2023. Substantially completed regulatory rectification.

In the first quarter of 2023, Lufax's total income was CNY 10.1 billion, a decrease of 18.2% compared to the last quarter of 2022. Technology-based income was CNY 5 billion, representing an increase of 46.1% of revenue. Net interest income was CNY 3.3 billion, down 32.8%, and guaranteed income was CNY 1.4 billion, a decrease of 25.5%. The Consumer Finance business saw a healthy growth with total outstanding balance for consumer finance loans in Q1 2023 at CNY 29.6 billion, up 39% year-on-year, and contributing 24% of new loans enabled in Q1 2023 compared to 11% in Q1 2022.

Financial Guidance

• Expect credit impairment losses to be on par with Q1 levels for the remainder of 2023.
• Risk-bearing loans ratio expected to exceed 40% by year-end. Notable profit recovery anticipated in 2024.

Risks

• Macroeconomic uncertainties affecting the pace of SBO recovery.
• Elevated credit insurance premiums impacting the take rate.
• Potential regulatory changes or pressure on loan pricing.

Q: On pricing outlook, average loan pricing and regulatory comments A: Blended APR for all new loans in Q1 is less than 20%. No further regulatory pressure on APR expected; overall price determined by market supply and demand.

Q: Asset quality and loan demand A: Asset quality deterioration slowed in Q1; loan demand not a concern as market share is small. Progress in 100% guaranteed model with 5 out of 6 trust partners and 37 out of 78 bank partners supporting the model.

Q: Funding costs and take rate with shift to guaranteed model A: Funding costs around 6%, expected to remain stable. Take rate expected to stabilize at ~14% when the shift to 100% guaranteed model is largely complete.

Q: Risk-bearing percentage trend A: Risk-bearing loans ratio expected to exceed 40% by year-end. Impact on top line: revenue increase as credit guarantee insurance costs shift to balance sheet. Impact on bottom line: credit impairment costs front-loaded but expected to improve net margins in 2024