Lufax Holding Ltd Q3 FY2023 earnings call

• Regulatory updates: The state council released guidance on promoting high-quality development of inclusive finance, recognizing non-bank institutions and encouraging solving financial needs of SBOs and enhancing consumer protection.
• Macroeconomic conditions: China's economy is gradually recovering, but SMEs face pressure; SME Business Conditions Index and SME Development Index are below critical thresholds.
• Business strategies: Prioritized asset quality over quantity, reduced footprint in high-risk regions, optimized direct sales force; completed transition to 100% guarantee model for guarantee subsidiary; consumer finance business growing; acquired virtual bank in Hong Kong.
• Third quarter results: Total new loan sales RMB50.5 billion, total income RMB8.1 billion, total expenses RMB7.7 billion, net profit RMB131 million; consumer finance business contributed ~40% of new loan sales; Puhui business direct sales productivity improved; risk bearing increased; asset quality of new book in line with expectation.

Puhui business: During the third quarter, RMB29.9 billion of new loans were enabled under the Puhui brand. The productivity of the direct sales team further improved, with average productivity rising by 25.4% quarter-over-quarter, and 68% of new loans coming from the direct sales team. The risk bearing by balance of the Puhui business increased to 25.7% from 22.4% at the end of the second quarter, and the C-M3 flow rate increased from 1% to 1.1%. Consumer finance business: New loan sales in the third quarter amounted to RMB20.6 billion, a 15.3% sequential increase and 48.5% year-over-year growth. The NPL ratio was 1.9% in the third quarter, down from 2.2% in the second quarter. The consumer finance business contributed approximately 40% of the total new loan sales during the third quarter.

• On track to meet full-year new loan sales guidance of RMB190 billion to RMB210 billion.
• Transition to 100% guarantee model expected to improve take rate long-term but impact medium-term profitability.
• Consumer finance business expected to continue growing.

• Continued challenges in SME segment due to macroeconomic environment.
• Impact of upfront provisions under 100% guarantee model on medium-term profitability.
• Uncertainty around macroeconomic recovery affecting loan demand.

Q: About loan demand and new loan pricing A: Y.S. Cho responded that loan demand in SME segments remains weak but the company is on track for full-year guidance; APR is stable at around 20% with more flexibility in pricing; under the full guarantee model, take rate will improve to ~14% long-term but upfront provisions impact short-term Q: On cost optimization A: Y.S. Cho and Gregory Gibb discussed sales team adjustment completed, productivity improvement, funding cost optimization, and mix change impact; operational expenses down 6% QoQ and 31% YoY, with further optimization of funding and operational costs expected