Lufax Holding Ltd (LU) Q4 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Limited Fourth Quarter 2022 Earnings Call. [Operator Instructions] Please note, this event is being recorded. Now, I would like to hand the conference over to your speaker host today, Ms. Liu Xinyan, the company's Head of Board Office and Capital Markets. Please go ahead, ma'am.

Thank you very much. Hello, everyone, and welcome to our fourth quarter 2022 earnings conference call. Our quarterly financial and operating results were released by our newswire services earlier today and are currently available online. Today, you will hear from our Chairman and CEO, Mr. Y.S. Cho, who will provide an update of our business performance, the macroeconomic impact and our business strategies. Our Co-CEO, Mr. Greg Gibb, will then go through our fourth quarter results and provide more details on our business priorities. Afterwards, our CFO, Mr. David Choy, will offer a closer look into our financials before we open up the call for questions. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. Please also note that we may discuss non-IFRS measures today, which are more thoroughly explained and are reconciled to the comparable measures reported under the International Financial Reporting Standards in our earnings release and filings with the SEC. With that, I'm now pleased to turn over the call to Mr. Y.S. Cho, Chairman and CEO of Lufax, please.

Thanks for joining. I would like to start by providing some perspective on where we are and on our business performance in Q4. While the fourth quarter was undoubtedly challenging, we are confident in our strategy to achieve a U-shaped recovery. At present, we must be patient, prudent and prepared. We need to be patient for the macroeconomic tailwinds to flow through to the SMB segment, be prudent in implementing new risk strategies and embedding lessons learned from the pandemic period and be prepared to gear up new business when the improved environment arrives. Recently, we have made the hard decisions on rightsizing risk and resources with many related execution work streams to be completed in the fourth quarter. In the first half of 2023, our focus will continue to be on asset quality over growth and depth over breadth in terms of upgrading our direct sales capabilities in prioritized geographies and within SBO customer segments. Our focus will also include optimizing credit enhancement approaches to provide further support to our operating margins and business sustainability in the midterm. We believe these strategies will lead to a U-shaped recovery. And we remain patient in terms of preparing ourselves for this recovery and delivering sound operating and financial results. Now I would like to share some updates for the fourth quarter. On the macro environment, we saw that the operating environment for SMBs remained challenging during Q4 although they are having signs of recovery in the midterm since the change of zero COVID policy on December 7, 2022. The company PMI was 49% in October, decreased to 47.1% in November and further decreased to 42.6% in December. Nominal GDP in the fourth quarter grew at only 2.9% year-over-year. Our SBO segment was hit particularly hard as a result. With the adjustment of zero COVID policy, we believe China's economy will recover over the next several quarters. We have already seen signs of robust tourism activity and witnessed consumption boom during the Spring Festival. Nonmanufacturing PMI returned to expansion after 6 consecutive months of contraction in January. And manufacturing sector PMI hit 52.6% in February, the highest since April 2012. The IMF has also raised its forecast for China's economic goals in 2023. Meanwhile, the government has called for more efforts to implement policy package for shoring up the economy. The Chinese government has stressed enhancing the local finance in stabilizing the macro economy and improving financial services for the real economy. As SMBs are highly dependent on the macro environment and operating continuity, it is expected that SMBs' operations will gradually return to normal post-reopening. While it is too early to say when a notable recovery in performance will arrive, the indicators that we are monitoring closely include our C-M3 net flow ratio and the asset quality of new loans, new vintages compared with older ones. For new business volumes, due to a challenging macroeconomic environment in 2022, we have prioritized asset quality over growth by tightening our customer selection standards and focusing new customer acquisitions in more economically resilient regions as we have seen a better credit performance from customers in these regions, and we have turned away potential customers who do not meet our credit standards. For example, for our general unsecured loans, we ranked the quality of our borrowers using our R1 to R6 risk rating system, which is based on the customer's credit risk score and their available assets. R1 represents customers with the highest quality and R6 with the lowest quality. Currently, we have -- currently, we only enable loans for borrowers that are ranked at 4 or better. We have also optimized our risk rating system by factoring in the differences in economic resilience and underwriting -- underlying credit performance by region and industry. Meanwhile, we have been optimizing our direct sales force to be more nimble, productive and effective in customer targeting as we focus on higher-quality borrowers. We reduced the size of our direct sales force from over 58,000 as of the end of Q3 to approximately 46,000 as of the end of Q4. We have managed to retain the most productive members of our sales force to target more economically resilient regions. During Q4, we made many difficult decisions, including adjustments to customer selection strategy and the operational optimization of the sales force. The above factors coupled with seasonality caused our new loans enabled in Q4 to drop by 37% quarter-over-quarter to CNY 77.8 billion. We believe that seasonality accounts for approximately 10% of the decrease between Q3 and Q4 based on the data over the past 2 years. As a result of the aforementioned factors in Q4, our revenue declined by 6.6% quarter-over-quarter. However, the new loans that we enable should generate better results as compared to loan vintages as a whole from a loan life cycle point of view. At the same time, while our core SBO customers were impacted by the deteriorating macro environment, we observed that our customer finance sector was less affected, allowing us to continuously develop and grow our customer finance business. The outstanding balance of customer finance loans has grown substantially from CNY 3.6 billion as of December 31, 2020, to CNY 29.7 billion as of December 31, 2022, representing 188% compound annual growth over the 2 years. Similarly, our borrowers with outstanding customer finance loans increased from 168,000 as of December 31, 2020, to 1.3 million as of December 31, 2022, representing 179% compound annual growth. We are in the process of optimizing our risk-bearing model. CGI premiums charged by our insurance partners remained elevated in fourth quarter as they typically price the risk based on historical loan vintages that were impacted by the challenging macroeconomic environment. While we continue to work closely with our credit enhancement partners, we cannot ensure that the outcome of the CGI premium pricing negotiations will align with our expectations. In circumstances and to the extent where we no longer find these partnerships to be commercially attractive, we are looking to increase our risk-bearing portion on the loans that we enable through our licensed financing guarantee subsidiary and reduce the size of cooperation with the external credit enhancement partners. We are now in discussions with our funding partners regarding potential adjustments to our model where we reduce usage of external credit enhancement partners. We target to complete these adjustments with the models of our funding partners over the next few quarters to increase our operating flexibility. As of the end of Q4, we had net assets of CNY 94.8 billion on a consolidated basis, and our financing guarantee subsidiary had net assets of CNY 48 billion. The strong capital position provides a solid foundation for us to increase the percentage of risk we bear and support the optimization of our risk-bearing model. On regulation, we have largely completed our rectifications, and the industry will enter into a stage of normalized position. In January 2023, the regulators confirmed that rectifications on the financial business of the 14 platform companies have largely been completed with only a few pending issues currently in progress to be resolved. The regulatory authorities will maintain normalized position in general going forward, according to guidance provided by the regulatory authorities. Finally, I'm pleased to share that we are pursuing our Hong Kong listing. We submitted the A1 filing for dual primary listing by introduction on the main board of Hong Kong Exchange on February 1, 2023. And we will continue to communicate with the Hong Kong Stock Exchange regarding the listing plan. I will now turn the call over to Greg for more details on our operating results and business priorities.

Thank you, Y.S. I will now provide more details on our Q4 and full year 2022 results and our operational focus for this year. Please note all figures are in renminbi unless otherwise stated. The challenging macro environment has adversely affected our top line and bottom line financial performance for the fourth quarter and full year 2022. Our revenue in Q4 declined slightly to CNY 12.3 billion, down 6.6% compared with Q3. In aggregate, 2022 full year revenue was CNY 58.1 billion, a 6% decline compared with 2021. Due to a further spike in our credit impairment loss in the fourth quarter, which reflected the impact of a challenging macroeconomic environment for both our customers and operations, we made a net loss of CNY 0.8 billion in Q4, while the full year net income declined 47.5% year-over-year to CNY 8.8 billion. Similarly, asset quality metrics in Q4 worsened across the board with DPD 30+ and DPD 90+ reaching 4.6% and 2.6%, respectively, increasing from 3.6% and 2.1% compared to Q3. Our credit impairment loss increased from CNY 4 billion in Q3 to CNY 6.3 billion in Q4, reaching an aggregate of CNY 16.6 billion for the full year of 2022. We have also seen continued deterioration in our C-M3 ratio, which worsened by 21 basis points compared to Q3 and reached 1.0% in Q4 as compared to 0.5% in Q4 2021. In spite of the challenges we faced in Q4, there are some bright spots in our performance. For instance, our funding costs in Q4 declined by 33 basis points compared with a year ago as we were able to tap public trust funding. As Y.S. mentioned, our consumer finance business saw steady growth in 2022, and credit performance for our consumer finance was healthy and in line with the industry. As part of our business strategy, we continued to focus on regions demonstrating more economic resilience given divergence in performance between different regions while further enhancing our operating efficiency and optimizing our channels. As we mentioned in last quarter's earnings release, we have seen variations in performance across different regions, and this remained the case in Q4. Last quarter, we saw a clear divergence between the top, average and less desirable-performing regions that we had categorized in Q3. We have therefore adopted and applied differentiated strategies in different regions as we strive to grow in regions that demonstrate more resilience in credit performance. Although we witnessed credit deterioration across the board in Q4, our asset quality metrics for top and average-performing regions suffered less deterioration than those of less desirable-performing regions. For example, the C-M3 ratio of general unsecured loans for top and average-performing regions worsened by 14 basis points and 19 basis points, respectively, in the fourth quarter compared to the third quarter. While the C-M3 ratio for less desirable-performing regions deteriorated by more than 28 basis points during the same period. New loan sales, we achieved stronger contribution in new loan volumes from top-performing regions due to our differentiated strategy targeting such regions. Compared with Q3, contribution of new loans enabled from top-performing regions increased from 43% in Q3 to 46% in Q4. Average-performing regions remained stable at 30% while less desirable-performing regions declined from 27% to 24%. In Q4, we continued our efforts to enhance efficiency and optimize our channels for new loans enabled in the full year of 2022, including consumer finance. Contribution from direct sales increased by 4.7% from 49.5% in 2021 to 54.2% in 2022. And contributions from online and telemarketing channels also increased from 12.8% in 2021 to 19.6% in 2022. Meanwhile, contribution from other channels declined from 37.7% in 2021 to 26.6% for the full year of 2022. We optimized our direct sales force during the fourth quarter to make our operations nimbler and more efficient. The overall size of our direct sales force downsized from about 58,000 employees at the end of Q3 to about 46,000 as of the end of Q4. We have retained the more productive direct sales workforce in the top-performing region whose average productivity is more than twice those of the less productive sales members who departed in Q4. In addition to our differentiated strategies mentioned above, we have enacted prudent cost control measures to enhance operating efficiency. As a result, our cost-to-income ratio decreased from 48.8% in 2021 to 46.3% in the full year 2022. At the end of Q4, we bore 23.5% of credit risk on the outstanding loan balance and an increase from 22.5% as of the end of Q3. As Y.S. just mentioned, we are making process in implementing an optimized risk-bearing model with our funding partners, underpinned by our strong capital position to address the challenges brought about by elevated insurance premium charged by credit enhancement providers. We have already engaged most of our funding partners to discuss the model under which our guarantee subsidiary provides full provision of credit enhancement. We aim to complete these discussions with the majority of our funding partners in the next few quarters. Among our 81 funding partners, 15 funding partners have already agreed to the model where our guarantee company provides full provision of credit enhancement, gradually alleviating future margin pressure from the elevated fees currently sought by insurance partners. As mentioned before, our strong capital position provides us with a solid foundation to transform to an optimized risk-bearing model. As of December 31, 2022, our net assets stood at CNY 94.8 billion with CNY 43.9 billion of cash at bank. Our financing guarantee subsidiary had net assets of CNY 47.9 billion at a leverage ratio of 2x as of the same date. At the same time, we have continued to make progress on our new SBO ecosystem. We launched our new small business owner value-added services-driven platform in November '22. This value-added services platform branded LuDianTong is an open platform design populated with digital operating tools and industry content to support businesses' development for the small businesses themselves. We intend to use this platform to engage potential customers at an earlier stage, deepen our interaction with existing customers and create both new cross-sell opportunities and a new source of customer referrals. Our goal is to create an ecosystem that fosters both customer-to-customer and customer-to-sales team interactions and supports business owners whose end customers are both other small businesses and consumers. As of December 31, 2022, we had approximately 250,000 registered customers with complete business or personal information, of which 130,000 are C-end customers, 120,000 are B-end customers. Growth of the new ecosystem has continued to accelerate quickly into 2023 with the total number of registered customers expanding roughly fivefold in the first 2 months of 2023. Although we are not able to provide detailed guidance for 2023 at the moment due to the uncertainty as to the speed of the U-shaped recovery, which largely depends on the speed of recovery of the Chinese economy and the outcome of negotiation with credit enhancement providers, I'd like to provide some directional guidance on our outlook for 2023. We project a return to profitability in Q1, albeit at a more subdued level given the challenging operating environment we described earlier. As challenging as the macro and operating environment for SBOs are, we do see signs of recovery in the medium term resulting from zero COVID policy changes. And we are confident we will achieve our U-shaped recovery, and we must remain patient, prudent and prepared for this recovery, as Y.S. said earlier. As far as we can see, there are 3 stages in this U-shaped recovery process: stage 1, broader credit policy adjustment we have made during the course of 2022 featured by tightening up of credit standards and focusing on regions and industries showing more economic resilience; stage 2, business adjustment and operating efficiency improvement, which we initiated in Q4 2022 and expect to complete within the next several months, including optimization of direct sales, streamlining of management layers and optimization of the risk-bearing model; and then stage 3, back to sustaining growth and profitability as the economy is returning to normal. During the process, we need to be patient for the macroeconomic tailwinds that flow through to the SBO segment, be prudent in implementing new risk strategies and embedding lessons learned from the pandemic period and be prepared to gear up new business when the improved environment arrives. Finally, we would like to thank our shareholders for their continued support. To deliver greater value to our shareholders, our Board has approved the distribution of 40% of our 2022 net profit on a full year basis as cash dividends. In October, we paid our first half of 2022 dividends of USD 0.17 per ADS, representing 32% of our net profit for the first half of 2022. We will distribute an additional cash dividend of USD 0.05 per ADS for the second half of 2022, bringing the full year dividend to $0.22 per ADS. I will now turn it over to David for more details on our financial performance.

Thank you, Greg. I will now provide a closer look into our fourth quarter results. Please note, all numbers are in renminbi terms, and all comparisons are on a year-on-year basis unless otherwise stated. In the fourth quarter, our total income decreased to CNY 12.3 billion and the total expenses grew to CNY 12.9 billion. The increase in total expenses were primarily driven by the increase in credit impairment costs, while our operating-related expenses actually decreased by 20.8% to CNY 6.6 billion. For the full year of 2022, we recorded CNY 58.1 billion in total income and CNY 8.8 billion in net profit. Next, let's have a closer look at our total income. First, as Y.S. and Greg mentioned before, our performance took a hit from the sluggish macro conditions in China, resulting in a 22.2% decrease in our top line performance in this quarter. As we are dedicated to building up a more sustainable business model, the total income mix of our credit enablement business continue to involve. During this quarter, while platform service fees decreased by 33.5% to CNY 5.9 billion, our net interest income grew 3.2% to CNY 4.4 billion, and our guarantee income grew by 2.2% to CNY 1.7 billion. As a result, our technology platform-based income service fees as a percentage of total income decreased to 47.7% from 55.8% a year ago. In addition, due to the increase in the consumer finance loans, our net interest income as a percentage of total income actually increased to 35.5% from 26.7% a year ago. Furthermore, as we continue to better utilize our guarantee company's abundant capital to bear more credit risk by ourselves instead of by our P&C insurance partners, we generated more guarantee income, reaching 13.6% of our total income compared with 10.3% a year ago. Our other income, which mainly includes account management fees, collections fees and other value-added service fees charged to our credit enhancement partners as part of the retail credit enablement process was CNY 131 million in the fourth quarter of 2022 compared to CNY 769 million in the same period of 2021. The decrease was mainly due to the change of fee structure that we charge to our primary credit enhancement partner. Turning to our expenses. We continue to prudently manage our operating expenses. Our total expenses, excluding credit and asset impairment losses, finance costs and other losses, decreased by 20.8% year-over-year to CNY 6.6 billion this quarter as we further improved our operating efficiency. In the fourth quarter, our expense grew to CNY 12.9 million from CNY 11.5 billion a year ago. This increase was primarily driven by an increase in credit impairment losses of CNY 3.7 billion year-over-year. Our total sales and marketing expenses, which mainly includes expenses for borrowers and investor acquisition costs as well as general sales and marketing expenses, decreased by 23.4% to CNY 3.7 billion in the fourth quarter. This decrease was driven by 3 factors: first, the decrease in new loan sales and reductions in commissions; second, the decrease in investor acquisition and retention expenses and referral expenses from platform service driven by decreased transaction volume; and the last, the decreased general sales and marketing expenses driven by the decrease in new loan sales. Our general and administrative expenses decreased by 22.8% to CNY 750 million in the fourth quarter from CNY 971 million in the same period of 2021 because of decreased personnel expenses. Our operation and services expenses decreased by 12.7% to CNY 1.7 billion in the fourth quarter from CNY 1.9 billion a year ago mainly due to our expense controlling measures and decrease of loan balance and new loan sales. Our credit impairment losses increased by 147.1% to CNY 6.3 billion in the fourth quarter from CNY 2.5 billion a year ago mainly driven by an increase of provision and indemnity losses as a result of the increased credit risk exposure and worsening credit performance due in large part to the accumulated impact of challenging macroeconomic environment. Our asset impairment losses decreased to CNY 7 million in the fourth quarter from CNY 689 million a year ago mainly due to the large -- higher basis of impairment losses in fourth quarter of 2021 driven by impairment losses of intangible assets. Our finance costs increased by 87.6% to CNY 501 million in the fourth quarter of 2022 from CNY 267 million in the same period of 2021 mainly due to nonrecurring interest costs due to early repayments of group convertible notes. Other gains were CNY 419 million in the fourth quarter compared to CNY 300 million a year ago mainly due to the increase in government subsidies. As a result, net loss for the fourth quarter was CNY 806 million compared to net profit of CNY 2.9 billion in the same quarter of 2021. Meanwhile, our basic and diluted losses per ADS during the fourth quarter were both CNY 0.36 or USD 0.05. Our basic and diluted earnings per share during the year of 2022 were CNY 3.8 or USD 0.55. On the balance sheet side, our balance sheet remains strong and solid and our cash and bank balance increased. As of December 31, 2022, we have cash balance of CNY 43.9 billion in cash at bank as compared to CNY 34.7 billion as of December 31, 2021. In addition, liquid assets maturing in 90 days or less amounted to CNY 49.9 billion as of the end of December 2022. As of the end of December 2022, our guarantee company's leverage is only at 2x, whilst regulatory funds allow us to leverage up to 10x. All of these provide strong support for the company to remain resilient in the face of economic downturn and continue with our dividend payout. That concludes our prepared remarks for today. Operator, we are ready to take questions.

[Operator Instructions] Our first question comes from Yada Li of CICC.

This is Yada from CICC. I have 2 questions for today. First, I was wondering, when will the market see the U-shaped recovery? And among the expansion of new loan sales and improvement of credit impairment losses, which one should the market expect first? And my second question is in regards to the improvement in credit risk after the COVID pandemic, are there any positive signs of loan recovery collection and customer management? And is there any improvement in borrowers' willingness to repay after reopening? And what are the main causes if we still find some of the borrowers fail to repay? That's all.

Thank you, Yada. So let me answer your question. When to see U-shaped recovery and then you are asking, among new loan sales, while credit impairment improves, which one we expect to see first, and then you also asked that whether we are seeing any signs of recovery inflection and there was a reason for our borrowers failing in their repayment. So over recovery, it depends on, yes, our U-shaped curve. It depends on the recovery of overall economy or, in particular, SBO economy, and the outcome of negotiation with credit enhancement partners, as Greg said, which can largely affect our net margin. Although we see that in some industries, like travel, accommodation or restaurants, we see the sign of the initial improvement, but in overall, it's too early to say when a notable recovery will arrive with supporting numbers. New loan sale expansion and improved incremental credit impairment loss, I think they will come at a similar time, but new loan sales expansion will precede. We are monitoring all indicators of loan -- the credit performance, like net flow rate, and will be delinquency rates. And for each segment, region and industry, when we see the impairment seasonal, then we expand with targets expanding loan volume growth while credit performance impairment will follow as it carries a lag effect. And for your second question, yes, we see some positive signs of consumption and travel boom, but knowing that activity sector got seriously hit during the last year, it'll take -- I believe it will take more time to show obvious recovery. And then it's not because -- and the reason our customers failing in repayment is not because they are unwilling to repay, but their ability to repay the loan got damaged last year the most. So they'll obviously pay. We believe we'll gradually return to normal post-reopening. So it will take a bit of time, but trends are -- I think we are sure about that.

Our next question comes from Richard Xu of Morgan Stanley.

I've got 2 questions. So I understand basically the company is trying to use more guarantees rather than insurance CGI, insurance guarantees. So any long-term target in terms of the split between guaranteed by your guarantee company versus insurance? Any time line target on that as well? Second question is, recently, there's some news on CBIRC, well, a crackdown on some of the loan brokers. I don't know if there's any impact on our business. And how do we separate typical -- the loan brokers essentially targeted by the new regulatory scrutiny at the moment versus our agents on the ground? Yes, 2 questions.

Let me address our first question, and then Greg can take the second. I think you are aware that our CGI premium level remains high to now. That affects our new business net margin. We have been negotiating with our credit enhancement partners, but we have not made a clear progress in lowering our CGI premium rate so far. And as they price the rates based on historical loan vintage performance, right -- and then that was affected by the macro environment last year. So if we do not make good progress, meaning that if we do not find -- the CGI class in the future is not commercially attractive for us, then we can increase our risk-bearing portion and reduce our cooperation scale with CGI partners. Now we are discussing with funding partners. And as Greg mentioned, already a large number of our funding partners have agreed to switch to new CGI models in which we provide a full partner of credit enhancement. And then if you see how much net assets we have under our guarantee company, we already have almost CNY 50 billion net asset under our guarantee company, which can provide 10x leverage support. So in other words, about CNY 500 billion new loan sales. So I believe overall direction is clear. We will have less dependence on CGI partners. Because of the price issue, we will take more self-guarantee portion from 30% to above 50% or going forward even higher. That's possible. But we don't have any time line that we provide today. But I think we adhere to that.

Great. Richard, on your second question, I think you're reflecting an announcement that came out with the CBIRC this past Friday with regards to loan brokers. I think 2 points to make. The first is our core business itself is operated under the guarantee license. And so our sales force is able to find clients, introduce those to the banks, and the banks then make their judgment on providing a loan. So as such, we are really not acting as a broker with our funding partners. I think that is really the most critical point. The second point is if you look at the apparent reasons for the CBIRC to raise this, is there have been examples where there have been third-party agents without a license who have basically been either packaging customer information to make a loan look like it's to be used for business purposes, but that is used for other purposes and/or external brokers working with banks to charge customers other intransparent fees, therefore increasing total cost. So that is an area that we really don't touch. We do operate through our guarantee company. And when we do our business, at the end of the day, the banks are able to collect and see all information they need to determine the use of funds for the loan, be that secured or unsecured. So this is something that we will nonetheless keep a close eye on. The banks, the funding partners themselves will be going through a process, which goes from March until September to review. And certainly, if there's any higher standards or anything in our process we would need to uplook, we would do so. But we don't anticipate a major issue there, Richard.

Next question comes from Alex Ye of UBS.

Okay. My question is on pricing and take rate, so I will separate them into 2 parts. First is on the short-term outlook. So how should we expect the pricing trend going forward? And if you -- if we take into account the pricing and CGI cost, how does the take rate outlook look like for the rest of 2023 and in terms of the trajectory of that take rate recovery? And second, from a medium-term perspective of, say, in the next 1 to 2 years and after your U-shaped recovery did do materialize, so after that, what is a sustainable level of take rate that we should target at? And in the past, I remember management used to give high-level guidance of targeting a pretax margin of 3.5% to 4.0%. I'm wondering, is that still a reasonable target?

Thank you, Alex. I think the view on pricing which today for new unsecured loans is just below 20%. I think it's about 19.7%. This pricing will largely remain stable in 2023. If you look at that headline pricing over the last couple of quarters, it's come down a little bit. But the reason for it coming down is really because of the way we prioritize our business focus. So we are prioritizing, as Y.S. said, serving customers who rate R1 to R4 in the better-performing regions. And those rated customers have traditionally had slightly better pricing. So what you see in our pricing on the APR side as it comes down a bit, it continues to represent the improvement in our overall customer mix. So we will not -- even though CGI pricing remains elevated, that really is reflecting the history of the macro economy over the last 12 months. But because of that, we're not going to change our customer focus to then try and drive up higher pricing because we really want to stay focused on those higher-quality customers. So the key for us to return to the historical level of net margins of pretax 3% to 4% is really doing 2 things. One is making sure that the new customers that we're acquiring and building out in the R1 to R4 rated group achieve what we believe to be the reasonable and targeted performance. And that is something that we've seen over the last couple of quarters to be largely intact. It's now a matter of continuing to build up that business in line with the speed of the economic recovery. That's point one. Point two, to achieve that historical level of 3% to 4% is indeed, as Y.S. just laid out, optimizing the mix of our credit guarantee versus credit insurance, right? Because if the credit insurance partners continue to charge a high amount, that reduces the net margin in the business model. So the transition to a higher percentage of our self-guarantee is the key to us achieving that historical level, which we do intend to achieve over the medium term. I think if you were to press on the number you asked medium term, the answer to that question is yes. Is that a 2023 or 2024, that we would see that more as likely as a 2024 event for the portfolio as a whole because we need to be -- that new business build up and replace the legacy business as it matures.

Our next question comes from Emma Xu of Bank of America.

I have 3. The first one is about your loan growth. What's your loan growth plan in the coming quarters? And what are the assumptions underpinning the current growth plan? The second one is about your cost. Are there room for you to continue optimizing costs, including funding cost, sales and marketing costs and other operating costs? And the third one is about your dividend policy. We note that you changed your dividend policy. So could management comment on the change and its impact to the shareholders?

Sure. So on the first 2, and I'll ask David to also elaborate on the third point, on loan growth, what we're really looking at is the overall improvement of the key lead indicator C-M3, right? So what we've seen is that being elevated through Q4, not increasing as fast as what we've seen in some of the other previous quarters but nonetheless remaining at a higher level. So while we continue to prioritize new loan growth at the moment to the best customer segments in the best regions, broader loan growth will depend upon us seeing a more across-the-board improvement in some of those lead indicators. So we hope that, that improvement will be something that we see in the next 1 to 2 quarters, right? As we see that improvement, we will then uptick in our overall loan growth. But as Y.S. said, our bias at the moment is to go for quality over volume. And so that's something that we will probably have that stance, I think, through Q1 and into Q2. But indeed, if we see that improvement then in the second half, there will be more opportunities to enhance that relative loan growth. On the cost side, we have been optimizing starting in Q4. It goes through into Q1 in terms of optimizing lower productivity sales force, reducing some management layering and indeed optimizing mid- and back-office costs. All of the execution of this is happening really mostly in Q1, a little bit into Q2. There's a little bit of room to optimize. I think it's something that really is in line with our overall business growth. But in terms of funding costs, we're probably not going to see a huge optimization in the near term on that front even though we have seen improvement there over the last couple of quarters. On dividend, just a high-level comment, which is that for the last 2 years, we basically have announced a dividend policy of 20% to 40%. This time, we basically kept within that range. Cash dividend for the full year of 2022 is 40%. So the overall range hasn't changed. What we did modify slightly is that for 2021, our dividend id out in 2 halves. And so what we have done is saying for the full year of 2022, we will take it to a total of 40%. The dividend that was paid out in the first half of 2022 was really based at 32%. And so we had basically brought it at par across the entire year of 40%. I don't know, David, if you want to add any other comments on the dividend policy.

Yes. Greg has given pretty comprehensive comments on the dividend. Yes, it is -- nothing changed in that the frequency of dividend paying money is not changed. The range, the dividend payout ratio that's approved by the Board didn't change of 20% to 40%. The subtle change is really on how to calculate on a semiannual basis or on a full year basis. That is the subtle change. This subtle change, we believe, will leave management more flexibility, and we are able to develop greater value to our shareholders. So I believe it is positive to all shareholders.

There are no further questions. This concludes our Q&A session for today. I'll now hand the call back over to our management team for closing remarks.

Thank you. So this concludes today's call. Thank you all for joining the conference call. If you have more questions, please do not hesitate to contact the company's IR team. Thanks again.

Thank you. That concludes today's call. Thank you, everyone, for attending. You may now disconnect.