LexinFintech Holdings Ltd. (LX) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the LexinFintech Fourth Quarter and Full-Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your first speaker today, Mr. Tony Hung, Senior Director of Capital Markets. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to Lexin's fourth quarter and full-year 2020 Earnings conference call. The company's results were issued earlier today and are posted online. Joining me today on the call are Mr. Jay Xiao, our Founder, Chairman and Chief Executive Officer; Mr. Craig Zeng, our Chief Financial Officer; Mr. Yang Qiao, our Vice President; Mr. Stanley Zhao, our Senior Financial Director and other members of our team. For today's agenda, Mr. Xiao will provide an overview of our recent performance and highlights; Mr. Zeng will discuss our financial results; and Mr. Zhao will discuss our credit performance. Before we continue, I refer you to our safe harbor statement in the earnings press release, which applies to this call as we will make forward-looking statements. Also, please note that this call includes discussion of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in renminbi. I will now turn the call over to our CEO, Mr. Xiao, whom I will translate for.

[Foreign Language]

In the fourth quarter, Lexin's bank technology loan facilitation model achieved significant growth. As a percentage of new originations, our risk-free pure technology service model reached 50% of total new originations for the very first time. We are creating a comprehensive technology service system that will cover all aspects of customer acquisition and operations, enabling financial institutions to immediately and seamlessly integrate with our system. On this basis, fourth quarter platform revenues reached RMB720 million, an increase of 232%. For the full-year, platform revenues reached RMB2 billion, an increase of 150% and increased as a portion of total revenues to 17.5% versus 7.7% from a year ago.

[Foreign Language]

In the fourth quarter, Lexin generated loan originations of RMB53.2 billion. Our non-GAAP net income reached over RMB600 million, and total loan originations last year reached RMB176.5 billion, representing a year-on-year increase of 40%. Revenues were RMB11.6 billion. We've also recorded our sixth consecutive quarter where new registered user growth reached 10 million. In addition, quarterly active users reached 8.2 million, a new record high for us. And as of the end of 2020, Lexin's total registered users reached 118 million, representing a year-on-year increase of 61%.

[Foreign Language]

So as a result, I'm pleased to announce to everyone that in the face of a complex macro environment, we successfully executed our new consumption strategy, achieving once again good results. Our To Bank financial technology services has achieved high-quality growth. Our To Business products, Yuehui, Maiya and other new products are rapidly gaining recognition and opening a new avenue for growth, which will continue to firmly establish our position as a leader in the industry.

[Foreign Language]

Our asset quality continues to improve. Our 90-day delinquency declined from 2.6% in the third quarter to 1.95% in the fourth quarter. New loans made in the fourth quarter are currently exhibiting even better levels of credit quality than loans made in 2018.

[Foreign Language]

Even while our financial technology service business continues its rapid growth and development, we are also establishing a new consumption ecosystem and expanding our potential customer base from 120 million to the 500 million new consumption consumers. Our business scope will expand from installment loans to cover the larger new consumption market. We will establish ourselves as a new consumption digital technology service provider and we have confidence that our many years of accumulated technology capabilities and operational experience in the financial technology sector will ultimately enable us to find opportunities and succeed in the larger new consumption market.

[Foreign Language]

Yuehui has already established working relationships with hundreds of merchants, including movie theaters, restaurants, shopping centers and hotels, totaling over 10 different industries and sectors and has been recognized by 17 industry associations in their consumption documents and proposals. Maiya is now online and operating within our Fenqile e-commerce platform. And we estimate that in the first month, we will generate approximately RMB50 million in GMV with strong potential growth in the second quarter.

[Foreign Language]

Following the pandemic, the economy has continued to recover and grow rapidly, and we now see even more growth opportunities. Based on the strong growth and improving asset quality that we are seeing in the first quarter, we are raising our full-year 2021 loan origination guidance to RMB240 billion to RMB250 billion, representing an year-on-year increase of approximately 40% versus our 2020 numbers.

Thank you, Jay, and hello, everyone. I'm pleased to announce that we have once again delivered strong results. In the interest of time, I will not go over line item by line item of our financials. For a more detailed discussion of our fourth quarter and full-year 2020 results, please refer to our earnings press release. Total operating revenue reached RMB11.6 billion for 2020, and the credit-oriented service income reached RMB7.5 billion. Platform-based service income reached over RMB2 billion, representing an increase of 150% from 2019. Adjusted net income was RMB903 million for 2020. Fully diluted adjusted net income for the quarter per ADS was RMB2.93. Our operating leverage. Operating expense as a percentage of average loan balance was 3.1% for the quarter, and non-advertising marketing, advertising, G&A and R&D was 0.7%, 1.2%, 0.7% and 0.5% of average loan balance, respectively. As Jay mentioned, we currently have 118 million registered users and our customers with credit line reached 27.7 million, up by 43.2% versus December 31, 2019. We acquired nearly 6.1 million new active customers in 2020. For the last quarter, our average tenor was 12 months. Our nominal APR was 16.1%. Next, we will discuss our credit situation.

[Foreign Language]

I am also pleased to announce a management change. Ryan Liu, our CRO, has now been promoted to our Senior Vice President in charge of new business initiatives, where he will handle various new initiatives as well as overseas business. We strongly thank Ryan for his service to our company. And we feel that based on his personal preference and desires, he will be able to meet the challenges in his new business responsibilities. I'd also like to introduce Mr. Qiao Yang, who has decades of overseas experience as well as domestic experience in the credit industry and has deep experience and know-how when it comes to credit scoring, risk control and asset management. Next, I would like Mr. Yang to discuss our current credit situation.

Thank you, Jay, for the introduction. We continue our stable credit performance in the quarter. In spite of challenging conditions in the past year in the market, our credit quality continues to be high and within expected levels, and we fully expect our credit statistics to perform well within expected levels and to improve over time. As Jay mentioned, our 90-day-plus delinquency ratio declined from the third quarter to 1.95% in the fourth quarter, and we continue to see stable or improving credit performance as our lifetime charge-off ratio has stabilized. In addition, our first payment default rates for new loan originations have been at low -- have been below 1% for the past five months now, and our one-month delinquencies for all our key past vintages have peaked. As a result, we fully expect our credit performance to remain strong, stable and improve in 2021. With that, I conclude our prepared remarks. Operator, please proceed with the questions-and-answer session.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Your first question today comes from the line of Jacky Zuo from China Renaissance. Please go ahead.

So I will translate my questions. Thanks for taking my questions. So I have three questions. Number one is about our loan growth guidance. I saw that we are guiding 40% loan growth for this year. I just want to understand the key drivers behind. And we actually lift our loan guidance within two months. So I just want to check the first quarter trend regarding the loan growth. And I also want to check what is the loan balance growth according to our 40% loan volume guidance. And second question is about the regulation. We observed that the recent document regarding the strengthening of regulation regarding the college loan, so just want to check what is the impact to us because the document actually mentioned that third-party cannot direct the college student traffic to licensed financial institutions. And third question is regarding our asset quality. Because we mentioned that we try to maintain a high-quality growth this year, so just trying to understand what is our risk management strategy this year? And also, what is our vintage loss target for 2021? Thank you.

[Foreign Language]

So Jay will answer, Jacky, your first couple of questions. With regards to the first question on why we raised guidance, well, it's primarily due to two reasons. One, you can say is a macro reason or a high-level reason. The second one, you can say, is a micro reason or a reason specifically attributable to us and our performance. First, on the first reason, we're seeing right now a very, very good and positive macro environment. And in particular, when it comes to the regulations and the regulatory environment, it's increasingly stable and also increasingly moving towards a favorable direction. While there may be some announcements that seem negative to us, we do see that as a hope, what is happening is that it is primarily impacting the much larger players. And it's primarily aimed at limiting the much larger co-lending model. For the model that we use, the loan facilitation model, what we're seeing and what we are hearing is actually quite the opposite, that it is actually being recognized and increasingly recognized by the regulators as a favorable part of the entire environment. And of course, that is the only model that we use. So hence, we see an environment where the regulatory environment is increasingly stable or even favorable, the larger players are, in turn, also being constrained because of the co-lending model. And hence, this is generating tremendous potential opportunities for us. So hence, we feel strongly that there's going to be new additional growth this year. So that's the macro reason. On the micro reasons, when we look at our first quarter numbers and how we have performed thus far, in particular, compared to the fourth quarter of last year, which, by the way, was a record quarter, we can actually see very, very strong growth. And not only do we see strong growth, we see, in fact, years to date, some of the best growth and not the best growth ever that we have experienced. And, in fact, this extends also to our asset quality, which we can see is among the historical best and may, in fact, even get better. So hence, for these two reasons, one, again, the larger environment or the macro environment, in particular, the regulatory; two, our own recent performance, we feel strongly about our ability to raise our guidance. So in regards to the specific loan balance, we feel that it will probably be something like 25% year-on-year growth in loan balance. So on the second question that you had, Jacky, with regards to the student loans and the impact from the recent regulatory announcement, as you know, from actually many years of covering us, this is nothing new in particular. This is something that has been out there and written in very, very similar ways literally years ago. And as a result, you can say that we have been prepared since years ago, and of course, the banks or the institutions that actually approve the credit and needs to go through their system and hence, we are already compliant in many ways on this. So in a lot of ways, with regards to the request or the actual details of the proposal and how it's implemented, we're very much within that system and range already. Now, of course, we may need to make some possible adjustments. But primarily, the adjustments will be made on our funding partner side, and we will work with them to make these adjustments. However, I think we do want to emphasize that we expect very limited change or impact to our underlying operations as we continue to work with our partners on instituting the appropriate changes.

To answer your third question, as I mentioned in the conference call, our 30 days plus and 90-day-plus delinquency ratios continue to improve. Our vintage delinquencies have also been decreasing over the past couple of months. And our day one delinquency and collection performance have also continued to improve. So we believe our current credit performance is at a very healthy condition. And we believe this credit performance will support our strategic plan to grow our portfolio. So in the future, we think we will maintain a cautious approach. Our credit performance will fluctuate within a very controllable and narrow range. And as our new business continue to grow, we'll attract lower risk customers into our portfolio. So our portfolio risk will continue to improve. So our target is to -- if I have to give a number, I think, I would say, well, our vintage loss target will be around or below 4% for the year 2021.

And your next question today comes from the line of Eddie Leung from Bank of America. Please ask your question.

So I have two fairly quick questions. The first one is about buy now, pay later model. What could be the contribution for -- from buy now, paying later for the full-year loan growth guidance? And then secondly, about the public sharing model. How might that affect the take rate and hence, the revenue growth for 2021? Thank you.

So Eddie, with regards to your first question on the buy now, pay later product or Maiya product, well, as you know, it's a totally new model. It's a different kind of model, where there is no charge to the customer, but there is a cost to the business, which no doubt they'll make back. And we're obviously very, very pleased to see all the positive reaction from our customers to this product, which is why we expect to do RMB 50 million in GMV in the very first month. Now that said, this is a new product, and this is still very, very early. So it's hard to say what it will do. And it also depends on how things develop. And depending on how things develop, we may deploy certain resources and commit additional resources to this product, which, of course, then, in turn, impacts its potential growth. So there's a few things going on here, and hence, it will probably not be appropriate for us right now to give a full year number on this. Now I think it's also very, very important to point out to everyone that this product, similar to what you would see if you look at Afterpay in Australia/U.S., this is not a loan product, and that is by definition, and by definition, actually mean by the regulatory authorities definition. This is not a loan product. So in that sense, there's no loan origination. There's no loan balance. So it is basically very different. And hence, it would not be regarded as, if you will, a financial product in the sense that you're used to looking at our underlying business.

So on the profit sharing model, as you know, in the fourth quarter, we were able to do over 50% of our loan originations in the profit sharing. So this was actually very, very rapid growth, and it demonstrated very clearly our ability to transfer the credit risk to our funding partners and their confidence in our credit risk abilities. So Eddie, you're absolutely right that by doing this and by doing more of this, this is going to definitely impact our take rate, since this is a natural result of the fact that the financial institutional partners will be taking on the credit risk. So hence, they should be getting more reward. Now that said, especially that -- given the fact that this is a new product, if you will, and that you need to get more and more partners on board, the pricing can vary, if you will. Because each time, it would need to be negotiated. And hence, you would have different levels. So one can expect that a more mature funding partner may get one pricing and a less mature funding partner may get or demand a different type of pricing. So hence, there's all these pieces going on, but it will definitely have an impact. Now I think within that context and having said that, last year, it was probably something like a 1% difference versus our traditional loan facilitation model. This year, we are hoping to target to lower that. So it should maybe be lower this year. And also, we may control the scope that we do, the profit sharing, to some degree, in the sense that it may not grow as rapidly as you saw, in particular in the last quarter of last year. It will still grow, but maybe not at that rate. Now when we come to the actual modeling and modeling purposes, I think what we may be looking at is maybe something like a 50 to 100 basis points adjustment versus the old take rate. So that's what we will recommend everyone do in terms of their adjustments.

And our next question today comes from the line of Richard Xu from Morgan Stanley.

I guess I have two questions. One is on the client acquisition channels. Any changes from last year because there's obviously a lot of regulatory changes that impact some of these major platforms in the industry. Whether that has changes -- impacted the dynamic of the client acquisition channels? Any strategic changes that we're trying to make? And secondly, on the profit sharing model, what are the key institutions that we're working with? And any potential, I guess, partners in the future?

So Richard, that's definitely right. We've had some changes when it comes to the customer acquisition. On the first question, if you look closely at what we did in 2019,and also contrast that to what we did in 2020, you'll see some interesting things. Now as I think everyone knows, in 2019, that was a year where we spent a lot of money and where we really began to advertise online. And we acquired a lot of customers that way. And we set all-time records when it comes to our customer acquisition in that year. And in 2020, we actually came very close to our numbers in 2019. But we did -- we greatly reduced sales and marketing costs. And we did it also by reducing greatly our use of online advertising, such as with the channels that you mentioned earlier. So we used a lot of innovative and, if you will, nonconventional methods to acquire nonstandard traffic, and we did basically the same amounts of arguably higher quality and at much lower cost. So overall, it was actually a very, very successful year last year as we switched to these new nonconventional, nonstandard channels. Now as mentioned, a lot of this is about strengthening cooperation and working with sources such as QQ Music, QQ Video [indiscernible]. And what we would do sometimes is, for example, if they refer a customer to us or our Lehua card, we then give a membership to these platforms. So this is a situation where we can actually go through a bidding or auction process as opposed to more standard online advertising and receive much more competitive, cheaper, favorable pricing. It is also a situation where it's actually a win-win for all sites involved. So hence, we have deployed rapidly on this particular front last year, and you can see from the results that on a monthly basis, we can get several 10,000, if you will, new customers from these nonconventional channels. Okay. Richard, so -- and I doublechecked there a little bit on the numbers. Right now, there's actually over 20 financial institution partners that are working with us on the profit sharing. But many, many more are very much interested. And one can certainly expect this because many, many more institutions or many funding partners are very comfortable with our risk levels and have accumulated literally years of data on what we have done and the risks that we have generated. So there is a very, very clear profile of the risk of our underlying assets and what risks are being generated. So hence, more and more partners on the pipeline and coming on board, being willing to assess the risk, and we certainly expect this to increase in scale. Now ultimately, of course, this will mean better returns for the funding partners. And hence, not surprisingly, for those partners that are not working with us directly or in the process of working with us directly yet, it's safe to say that everyone is interested and is interested in taking a look. Now in terms of the types of funding partners that are more active, if you will, right now, it would be city commercial banks, it will be consumer finance companies, which perhaps is not surprisingly as they are smaller, and if you will, more dynamic and can move quicker. And hence, we do expect this to gradually shift as well. But these are the types of institutions that are more interested right now. Overall, we expect the profit sharing as a whole to increase. We're also going to seek ways to balance this and to optimize this, and also experiment with new types of funding models to reduce our overall funding cost. It may be profit sharing, maybe non-profit sharing, maybe some type of mix in between. But overall, yes, profit sharing is definitely going to go up.

Your next question comes from the line of Alex Ye from UBS.

So I have two questions. First question is on the outlook for pricing and funding cost. So I have seen the nominal APR have some recovery from the level in Q3. So I'm just wondering what's the outlook for the pricing going forward? And what's the current level of funding cost? Do we have room for further decline in the funding cost? And my second question is on the take rate for the risk-sharing model, it seems like the take rate for risk-sharing model has declined somewhat from Q3. So I'm wondering what's the reason. And would the take rate recover back to the previous level in Q2 and Q3 last year?

So on pricing, I think Jay wants to emphasize, there's 2 perspectives overall. One, if you will, that's a little bit longer term, and the second one, that's a little bit shorter term. So first, with regards to the slightly longer-term outlook. Fundamentally, as you know, we target a very high-quality, high-growth, a good cohort. And given that this is a high-quality, good and high-growth cohort of maturing and improving credit quality over time, rates naturally will decline over time. So hence, over the long term, we fully expect the rates that we charge to our customer over the long term to decrease. Now short term, if we look at the current situation, if there's no new, if you will, regulatory requirements, if there is no new guidance, in particular on this, then I think, at least for the current moment, you can expect the interest rates that we charge to be relatively stable.

So with regards, Alex, to your second question on the profit sharing take rate, I think it's important to note that there is all these things against the profit sharing ratio, the take rates, the negotiations there as well as, of course, the underlying cost of capital. Now for the fourth quarter, our underlying cost of capital probably increased slightly from 7.4% to about 7.7%. This is in no small part due to our continued strong growth. And as we's grow, we, of course, have to source additional institutional partners. And unfortunately, in the fourth quarter for a variety of reasons, the bigger institutional funding partners have had certain limits or requirements or otherwise, if you will. So hence, the funding was a little bit tighter in the fourth quarter, and we had to get other sources, which then impacted our cost of capital. So hence, it was for growth reasons, if you will, that some of these things occur. Now longer term, though, we fully expect the cost of funding to decrease. And in fact, the longer-term expense, if you looked at this year, this year, we certainly expect the cost of funding to continue to decrease. And of course, we have to balance all of this with the profit sharing model as well, which, in turn, reduces profitability. Also, of course, as we introduce new partners in whether as a funding partner or alternatively introducing them to the profit sharing model, this may require additional negotiations when it comes to the economics as they are a new partner in one way or another, which, of course, may mean that we need to give up some of the economics in order to gain them and gain their trust initially as a partner. So there's always these types of ongoing balances that we also talked about earlier and also involving the different models. So hence, there's different complicated things, if you will, going on in the background, which I think after you heard all this, you understand fully how it can be nuanced and again complex.

Your next question today comes from the line of Ethan Wang from CLSA.

So I have two questions. The first is a follow-up question on the BNPL model. Because on this model, most of the time the platform needs to pay the merchants first before granting the pay later scheme to the consumers, and they need to borrow from banks in order to do that. So the main version is they borrow more from banks in the future. My second question is regarding line item of change in fair value of financial guarantee derivatives within other income in the fourth quarter. We noticed that this line has incurred RMB700 million loss in the quarter. So just wondering what is the reason behind it.

So I think, Ethan, on this whole buy now, pay later model, as we emphasized earlier, this is very much a new model and a new product. So there's definitely a lot of moving parts and different things going on. And also, we're working inherently with different models, if you will. And right now, what we're seeing is that we can give the merchants and vendors 2 choices or rather they themselves would take on 2 choices. Some merchants, essentially, if we direct and have the right customer sent to them, they're totally willing by themselves to take on, if you will, the capital requirements. They can basically lend for the lack of a better term, or they can assess the installment payment over time by the customer. And I want to emphasize a little bit, again, the lack of a better term earlier. Now other merchants, they may want the cash immediately now. But of course, due to this buy now, pay later transaction, we generate an account receivable. So hence, we can work with various trusts, financial institutions, otherwise, to have the receivables financing, or to alternatively set-up other structures. So as I mentioned earlier, it's a new model, it's very dynamic. There's different things going on. I do want to emphasize that, again, and this is the part about -- for the lack of a better term. This is not a financial transaction. This is, if you will, a non-finance transaction, just like Afterpay, et cetera. So there will be no credit record, if you will, for the customer. It's not going to go to a database or anything like that. So hence, it's something fundamentally very different.

Yes. So for the RMB 700 million number, Ethan, you're obviously referring, of course, to the full year number, the change in fair value for financial guarantee derivatives. I think, basically, as you know, we have a changing financing model, risk model, et cetera, a model that in the past, in the larger modeling sessions we've held for everyone in the past, have outlined how it will work. So hence, as our funding/risk models continue to change, naturally, the mix will change, and the line items will change as well, just as you see, if you will, the profit sharing lines, et cetera. In the future, if you want, given we've done this in the past, and it's probably more worthwhile to do it that way, we're more than happy to schedule a more detailed modeling session with you off-line to go into how this will work.

Your next question today comes from the line of Steven Chan from Haitong International.

I have two questions. One is a follow-up on the profit sharing model. I want to clarify two things. One, are we expecting that the share of profit sharing business to you stay at around 50% for 2021? And what is our outlook for the take rate of the profit sharing business? Would that be stable or declining or increasing in '21? Second question is related to two items. One is the change in fair value of loans and then the other one is investment-related impairment. We saw that for these 2 items, actually, for the past two quarters, there are some impairment at all, negative change in fair value. But in the balance sheet, we've seen that these 2 items, indeed this is not a big amount, so if you're trying to calculate the impairment or negative change in fair value against the amount in the balance sheet, I think that the ratios would be quite large. So I would like to understand what has caused the negative change or the impairment loss. Are we going to expect that to recur in 2021?

So I think for this year, as a whole, we're going to definitely see many, many more funding partners come aboard and accept our profit sharing model, and we're going to see increasing numbers of that. But in light of everything, also our -- also increased scale in size, I think at least for the immediate term, right now, we're expecting the profit sharing to be fairly stable. So maybe at around 50% or so. But longer term, we certainly expect this ratio to increase over time. And the reason why we're now expecting this to be stable is that we feel that we really need to see better and have greater clarity on the underlying performance and the profitability of the model and to make the right choices when it comes to the balance of these things. But that said, we're pretty confident in the long-term direction and potential of this, given that there is going to be more and more funding partners coming aboard. There's more and more funding available. There's fewer of us, there's more of them. And hence, we should see improvements over time and ultimately, improvements in the underlying take rate.

So I think for the two parts, and definitely, Steven, correct us if we misunderstood you. For the first part, I believe we addressed that when according to the -- addressing the change in fair value of financial guarantee derivatives and talking about the different models. So it's for similar reasons. With regards to the second item you mentioned, with regards to the change or rather the investment-related items, this is actually related to a U.S. company, a relatively immaterial investment we made in the past of a company in the U.S. that specializes in making auto loans to foreign students in the U.S. and also providing other forms of debt. Now unfortunately, pandemic has impacted this company, not surprisingly, quite dramatically. So as a result, we decided to write off something like half of our investment in the third quarter and to continue to do that in the fourth quarter as well. So obviously, that I know the details of this. Yes, this is definitely not a long-term thing, and this is basically a onetime item.

[Foreign Language]

Sorry, Steve, can you translate that for everyone? I appreciate it.

Okay. Sorry, that maybe I did not clarify, I did not ask very clearly. I want to ask is about there's an item called change in fair value of loans, which is around RMB 47 million decline or negative change in fair value. But when we take a look at the balance sheet, the amount of these loans was not very -- not a big amount. So what has caused the decline or negative change in fair value? Is it related to interest rate or something else? Or is it related to asset quality problem? What sort of loans are we buying and from where?

Yes. So I think you understood that. Some fair value adjustments to some of the repayments.

And your next question today comes from the line of Dennis Zeng from Merchant Asset Management [ph].

I guess my question for the management is about the possible secondary listing. Later last year, the management in different occasions briefly mentioned a possible secondary listing back in Hong Kong or China Mainland stock market. I wonder if there's anything that the management can share today or any strategic direction change?

Yes. So I think when we've been asked this question in the past, we will say that we'll definitely consider all options and do what's in the best interest of our shareholders as a whole. So for, obviously, many, many reasons, we probably can't comment too much on too many additional details, given, if you will, the entire nature of the process. So we have to stick to the official line on this.

We have no further questions online, and that does conclude our conference for today. We thank you all for your participation. You may now disconnect.