LexinFintech Holdings Ltd. (LX) Q4 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the LexinFintech Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I'd now like to hand the conference over to your first speaker today, Ms. Patricia Cheng, Head of Capital Markets. Please go ahead.

Thank you. Good morning. Welcome to Lexin's fourth quarter and full year 2021 earnings call. I'm joined today by CEO, Jay Xiao, CFO; Sunny Sun, and CRO; Jayden Qiao. A quick reminder, before we begin. During the call we will discuss business outlook. Any forward-looking statements that we make on the call are based on assumptions as of today. The actual results may differ materially and we undertake no obligation to update any forward-looking statements. And, unless otherwise stated, all numbers mentioned are in RMB. I will now turn the call over to Jay. His remarks will be in Chinese and English translation will follow. Jay, jump in.

Good morning. It's my pleasure to share with you my thought about the macro environment, industry development and our business development. The macro environment will likely remain volatile in the short-term. I think you'll see from the two sessions meeting, China has set a GDP target of 5.5%, a record low for the past three decades. As well as in the past year, because of geopolitical tensions, trading in US versus Chinese companies have been very volatile, with market sentiment heard and moving away from company fundamentals. There have been major changes on the regulatory front, such as the cap on loan pricing at 24%, the restriction on the geographic operations of regional banks and also more scrutiny on internet platforms and the personal information protection. So far, we have been very actively responding to these changes and mitigating measures include reducing our exposure for non-tel [ph] customers and focus on existing customers. Also to broaden the relationship with financial institutions and targeting more nationwide funding and to enhance our ability in asset liability matching, and also to roll out new risk model to strengthen the compliance in response to personal information protection. [Foreign Language] In direct to long-term demand for consumer finance remain solid, and the growth fundamentals remain attractive. We see strong potential coming from Tier 2 a below study with the cohort and making up 65% of the consumer finance population and the market reaching RMB6 trillion. We also expect strong growth in the next 13 years. [Foreign Language] We’ll continue to innovate in order to strengthen our competitiveness and compliance, and also to look for new growth opportunities. In customer acquisition, we will expand more into our offline channels to breadth and depth of the offline channels as online becomes more expensive. In customer service, we also enhance the management of existing customers to drive further growth. And also, we'll be monetizing our core capability and we will look into generating new revenue from exporting our niche in customer acquisition risk management to financial institutions. In addition, in the Platform business, we’ll be also developing. We’ll be leveraging our insights into consumers to further build our e-commerce and to B solutions. [Foreign Language] Next, let me give you an overview of our treatments in 2021. Our loan origination volume grew by 21% year-over-year to RMB213.8 billion, in line with expectations at the beginning of the year. While 24% policy put pressure on our operations in the second half of the year, full year revenue was largely stable at RMB11.4 billion. Our net profit for the full year reached record high of RMB2.33 billion, reflecting our quality of focus. We have also brought in some 20 top talent in recent years, demonstrating our commitment to drive growth with R&D investment. [Foreign Language] Well, there will be fluctuations in the change process. We continue to focus on the compliance. There's some slowdown in the quarterly trend due to our banking partners adjusting to the new regional policy and also the 24% pricing cap changing the consumer behavior and also the risk model has to be fine tuned as a result. The drop in pricing as a result affected both revenue and profit. Nevertheless, the six core capabilities of machine remain intact. Number one, our technology driven risk identification and management; and number two, our data advantage from over eight years of experience; and number three, we've been creating a traffic loop from proprietary consumption scenarios; and number four, multiple touch points online and offline for customer acquisition. Number five, stable funding relationship with financial institutions; and lastly, more refined customer segmentation. And these will continue to drive our success in the future. [Foreign language] This year 2022 is a pivotal year in strategic transformation in our journey. We will continue to strengthen our competitiveness and compliance. Look, we will step-up our compliance. And we will also step-up customer management and also risk management. And also our funding efficiency will continue to optimize our funding structure and cost to broaden the cooperation with financial institutions, to introduce more nationwide funding and to expand into new channels like ABS. [Foreign language] This year we will continue to optimize our asset liability structure and has digitization in our operations and to expand into new opportunities. We expect no origination volume to increase by about 10% this year. We're confident that we can complete the execution of the 24 policy and to keep full year rate about 3%. [Foreign language] Although, the external headwinds remain, we're confident that our full year target will be met. We're committed to strengthening the business fundamentals and achieving strategic transformation is critical to driving shareholder value. We believe the current share price fell to reflect the value of the company. With the authorization of the board, we have adopted a share repurchase program which will allow us to purchase up to $50 million worth of stock in the coming 12 months. With that, next Sunny will go over the financial results, Sunny, over to you.

Okay. Thank you, Patricia. Good morning, everyone. Before talking about Lexin's fourth quarter and the 2021 full year results, I would like to first of all, thank you for attending our call and your continued interest in the team. The year 2021 was a year full of challenges. For companies operating in China, policy changes were constant companion regardless of the industry. Amidst these difficult times, we delivered a solid set of results with profit reaching new highs for the full year. The progress from the pricing policy change is also encouraging. Let me start with the update on the 24 policies. For the fourth quarter, the average pricing for our loan origination went down to 25.8% versus 27.3% in Q3 and over 28% in Q2. About 59% of loan origination in Q4 was priced within 24%, up from 43% in Q3. Our strategy has been to gradually bring down ADR to 24% over 12 months. The assessment at the midpoint of the process -- progress confirmed that we're on track to meet the targets by June 2022. The adjustment does come with short-term pain. The amount of loan origination achieved in Q4 was RMB43.6 billion, representing a quarter-on-quarter drop of 22%. The result was below our earlier expectations. Risk appetite from Chinese financial institution became more subdued towards the end of the year. There was the lower loan quota towards year end, a seasonal pattern. This year, two additional factors came in place. The shift to reduce funding price at above 24% almost across the board and constraints on geographic exposure for regional financial institutions. Like our peer, we also experienced a sequential decline in loan volume. Lower loan volume and lower loan pricing at the same time means lower revenue. Operating revenue fell 26% to RMB2.2 billion in Q4 from RMB2.97 billion in Q3. The impact on gross profits was smaller, gross profits decline -- decreased by 19.5% quarter-on quarter-to RMB1.2 billion in the fourth quarter. Gross margin held up well rising to 55.1% in Q4 from 50.7% in Q3. This reflects the improvement in quality of new loan. So, topline number has been achieved by external headwinds. The measures taken in safeguarding asset quality have proved effective. My colleague, Jayden will elaborate on this later. The other thing we've been working on is how we manage our organization. The nature of lending will always subject us to external forces that are outside our control such as interest rates, liquidity, all these macro trends. We have been beefing up internal management to boost our defense in these uncertain times. We continue to invest, especially in technology, ramping up infrastructure and know-how so we can have a stronger back-end, be more efficient in operations, and more equipped to address new opportunities at the front. R&D expenses increased 72% year-over-year and 25% quarter-over-quarter to RMB164 million in Q4. Total operating expenses fell 16% quarter-over-quarter to RMB610 million. Discipline and efficiency, while we move our goal. Moving on to the bottom line, for the fourth quarter, net profit was RMB256 million. The industry's response to the change in policy environment largely began in the latter part of Q3 and therefore, the disruption became more evident in our results into Q4. For the full-year, we overcame the slowdown in the second half and achieved a net profit of RMB2.3 billion, 292% higher year-over-year and setting a new record for the company. While some of the uncertainties surrounding our sector are still around. We believe this year things will likely stabilize. We are in constant dialogue with the regulators to better understand their intentions and how we can cope and continue to move forward. The business is taking on new dimensions as we expand into new areas. From to C focus to a more interactions would to B i.e. business and to F, i.e. financial institutions as well. This integral approach is what sets Lexin apart from competition. Our customer-centric ecosystem expands from lifestyle to finance, giving us more points of access into to C, which in turn leads to broader and deeper relationships with business and financial institutions. We’re going through unprecedented times. There will be volatility in our operation but as Jay outlined earlier, the strategic roadmap and operational priorities have been well defined. With the foundation solidly laid and the agility of the team to respond, we're fully confident that we can move the business forward and continue to deliver quality performance. I will now hand over to our CRO, Jayden. Thank you.

Thank you, Sunny. The year 2021 put our team to test. It’s one of the most challenging times as we are working with policy tightening and macro slowdown at the same time. Following the introduction of 24% pricing cap, financial institutions have been moving away from serving a medium part of the market, especially in Q4 it has simply being a very tight to interior from many supply perspective in the financial system. When the liquidity goes down, repayment ability of borrowers goes down as well. The 30 day plus delinquency ratio finished year at 3.99% versus 3.68% at the end of September. The 90 day plus delinquency ratio increased by 7 basis points to 1.92% in the same period. The pressure on asset quality can be felt across the whole industry. As we started the process with a higher proportion, our customers priced at above 24%, we expect it to experience more volatility in the adjustment process. We did experience interruptions, but so far, we have managed to keep the asset quality trend in line with or better than peers. The results reflect our prudent approach and the strengthening of risk management across the board. At the front, we have revised the acquisition strategies, scaling back from relatively low quality online channels and expanding the offline [Indiscernible]. As the addressable market is redrawn, we have been continuously refining our risk models. In the middle layer, portfolio management has been enhanced to strengthen customer segregation and real-time risk monitoring. We have also stepped up the collection effort for the late bucket of overdue loans. The pressure on credit quality is going to remain in the near term, as we still face the pressure in the policy and the macro environment. Nonetheless, signs of improvement in early day performance indicators have began to emerge. The restructuring of the asset mix is still ongoing. But once we get through the transition, we're confident that the business can enter a new chapter. Thank you.

Thank you, Jayden. Operator, we can now open the line for questions.

Thank you very much. [Operator Instructions] First question comes from the line of Yada Li of CICC. Please, go ahead.

[Foreign Language] I’d now do the translation. So the first one is about the transmission mechanism of data related to the credit reporting team. Have we started to experiment the cooperation with financial institutions and the credit bureau and are we still in the exploration stage? And when can we expect the implementation of the final plan? And the second one is regarding our risk matrix. I've noticed that the delinquency went up and I was wondering if you can elaborate more about the underlying reasons. And for 1Q 2022 and going forward, can we expect to see an improvement on the risk matrix? Thank you.

[Foreign Language] Jayden is going to take the questions.

Okay.

[Foreign Language] Okay, so

As I - okay.

Okay. So ever since we get the information for disconnecting from direct transition of data, credit bureau data to financial institutions we've been in active discussion with different credit bureaus and the financial institutions and we take compliance as first priority. Our plan and design of this schedule has been passed the test and approved by one credit bureau and it has been online since the end of 2021. Now we are in active discussion with at least one of the financial institutions and we expect that before June this year, we will complete the cooperation between a credit bureau our platform and at least one financial institution. At the same time, we're still in discussion with other credit bureaus and financial institutions to push forward this plan. And the mode of our plan is for lurching to upload all relevant information data to the credit bureaus, credit bureau well do the data processing and output of the end results to the financial institutions. It's more like what the team that works in Europe and the United States. Last, but not least, the PBOC has not given us a specific deadline for putting this plan in place. So based on our current schedule, we're very confident that before the end -- before June this year, we'll be able to implement a plan at least with one financial institution. [Foreign Language] Okay. Now the translation. [Foreign Language]

[Foreign Language]

Okay. Okay. So, as I mentioned in the conference call, the risk performance has fluctuated across industry and so did we. But we have noticed that from the beginning of this year, especially early stage, risk indicators have begun to improve quite significantly. As Jay mentioned in his part of the conference call, as we continue to increase our online and offline acquisition channels. As we continue to refine our customer segregation and risk strategy and modeling effort, and also by enhancing our cooperation with large and high quality financial institutions. We expect that this year will increase the proportion our high quality customers, especially customers priced below at or below 24%. And our risk performance will continue to increase at high speed. Thank you.

Thank you for the questions. [Operator Instructions] Next question comes from the line of Ethan Wang from CLSA. Please go ahead.

[Foreign Language] Thank you. I had two questions. The first is on the funding costs. So Jay has mentioned in his remarks that we're preparing to have some new method through security funding this year, including ABS. Just wondering with that that's over the course of the funding costs, and what our view on the future trend of our funding costs going forward. And second question is on the platform versus capital heavy business model. We want to get some color of a percentage of a platform-based services in terms of loan origination in the fourth quarter, and maybe more importantly, is there any difference or maybe any discrepancies, trading platform and capital heavy business model in terms of asset quality from our latest data? Thank you.

[Foreign Language]

Okay, go ahead.

We will look into expanding our nationwide funding this year. For the ABS issuance, we're looking into both our standardised and also non-standardised i.e. the non public side of the ABS issues. ABS is the channel itself allows that doesn't have any geographical constraints unlike the regional banks. So that's why we're looking into doing ABS. Last year in fourth quarter, some of the slowdown in our loan volume, part of it was due to the constraints faced by the original [ph] financial institutions. So there was some mismatch in asset and liability. And looking into first quarter this year, the situation has much improved and the nationwide funding volume has been going up. So looking at the funding costs for this year, we don't expect any much volatility versus last year.

[Foreign Language] Let me translate. We did three ABS issuances last year, but towards the end, the market became a bit calmer or there was some slowdown towards the end because of the reservation of some local governance. And for the target this year, it depends on the policy development. And on the second question about the difference in the quality between the profit sharing model and also the capital-heavy model, in terms of the asset quality for the profit sharing model is slightly better, but the difference is minor.

[Foreign Language] Thank you.

Thank you for the questions. [Operator Instructions] At this time, there are no further questions from the phone line. May I hand the call back to the management for closing remarks?

Thank you. We're going to conclude the call here. Thank you for your interest in Lexin. You can find our contact information on our IR website. Do you feel free to get in touch if you have any follow-up questions. Keep well and see you soon. [Foreign Language]

That does conclude today's conference call. Thank you for your participation. You may now disconnect your line.