Yiren Digital Ltd. (YRD) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Yiren Digital First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I’d now like to hand over to your first speaker today, Ms. Lydia Yu. Thank you. Please go ahead.

Thank you, and welcome to Yiren Digital's First Quarter 2020 Earnings Conference Call. Today's call features the presentation by the Founder, Chairman and CEO of CreditEase and CEO of Yiren Digital, Mr. Ning Tang, CFO of Yiren Digital, Mr. Zhong Bi, and CRO of Yiren Digital, Mr. Michael Ji. Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities and Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and factors that can cause actual results to differ materially from those contained in any such statements. Further information regarding potential risks, uncertainties or factors is included in Yiren Digital's filings with the U.S. Securities and Exchange Commission. Yiren Digital does not undertake any obligation to update any forward-looking statements, except as required under applicable law. During the call, we will be referring to several non-GAAP financial measures and supplemental measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance to U.S. GAAP. For information about these non-GAAP measures and reconciliations to GAAP measures, please refer to our earnings press release. I will now pass it on to our CEO, Ning for opening remarks.

Thank you all for joining our first quarter 2020 earnings conference call today. The first quarter of this year has been a challenging one as the Coronavirus shocks the entire global economy. During this unprecedented time, our core businesses remained stable. While we made substantial progress to diversify, and enrich our business lines, and continue our business transition to China's leading digital personal financial service platform. We took proactive measures to ensure our business operating at a healthy level giving customers the best service we can offer, making our own contribution to fight against the COVID-19. Now, let me talk about our credit tax business, to maintain business resilience and to position ourselves for the long-term, we were focused on three areas in our credit tax business this year. First, stabilize and improve risk performance. Second, invest in new areas of growth. And the third, grow our institutional funding mix. I'll now talk about our actions in each of these areas. Our first priority is stabilizing and improving risk performance. In the first quarter of 2020, loan originations decreased 77% from prior-quarter to RMB 1.8 billion as we proactively tightened credit and decrease the business volume to control credit risk in light of the COVID-19. Our fast and timely response allowed us to operate at profitable level in the first quarter, despite a challenging macro environment. Our second focus is on exploring additional opportunities and investing in new areas of growth. We have recently launched several new credit products to diversify our loan portfolio and to better meet a full spectrum of mainstream consumer credit needs. The short tenure smaller ticket size revolving loan products offers credit solutions for a wider range of online and offline consumption scenarios including travel, lifestyle, e-commerce and mobile wallets. This product has been very well received growing more than 100% month-over-month. For this product, we will partner with large traffic channels like Xiaomi and Oppo Finance, so that we will be able to significantly expand our business with diversified consumption scenarios, reduce customer acquisition costs and improve operating efficiency as well as portfolio quality. Last quarter, we mentioned that we will be rolling out auto loans this year, as auto loans typically have a better risk profile than unsecured consumer loans. Our auto loan segments have shown a visible growth momentum since March and in particular, our auto leasing business is estimated to reach RMB 1.5 billion in loan originations in the first half of this year, and we expect this product segment to be one of the main revenue drivers in the second half of this year. In the second half of the year, together with our channel partners, we also hope to build a consumption platform to enrich our credit ecosystem with a member only online e-commerce platform. Our third area of focus is on growing our institutional funding mix. We’re pleased to report that our institutional funding mix has increased to 40% in the first quarter of 2020 up from 14% last quarter, and we expect this proportion to increase to over 50% in the second quarter of this year. We're also actively expanding our institutional partners from banks to trust the companies, other license to financial institutions and the consumer finance companies. Next on wealth management, our online wealth management business has seen strong growth. In particular, for non-P2P wealth management products and services. The number of non-P2P investors increased by 23% from prior-quarter to 26,436 as of March 31 2020, the AUA of non-P2P products increased 37%, sorry 67% quarter-over-quarter to RMB 1.7 billion. Average investor investment amount of non-P2P wealth management products has seen steady growth to 65,000 RMB up from 48,000 RMB in previous quarter, driven by both increased investment amount for single product, as well as multiple product selection representing good progress in our efforts on developing investor habits in using an asset allocation investment strategy. For mutual fund products within wealth management, we witnessed strong demand during the first quarter with AUA increasing by 17% and with sales volume increasing by 30% from February to March 2020 driven by our new product offerings, we expect this growth trend to continue through the year. We have also been investing in Investor Education through a variety of online courses to help investors develop a long-term investment horizon. And we also noticed a significant improvement in average AUA per investor in mutual fund products, which has increased to RMB 36,800 in March 2020. With that, I will now turn the call over to our CFO Zhong who will discuss our financial results for the quarter.

Thanks, Ning. Hello, everyone. For our financial update, I will focus on key items of our business operation and the financial performance. And you can refer to the detailed financial results in our earnings release. Under the challenging operating environment amid the pandemic in the first quarter of 2020, we maintained profitability and the strong liquidity position. Loan originations for the quarter was RMB 1.8 billion, a drop of 77% quarter-over-quarter mainly driven by the COVID-19 outbreak which heavily hit our offline lending business. More specifically, due to the temporary closure of our physical branches, as well as our call centers, which are based in Wuhan, we saw a significant drop in loans originated from offline channels as compared to prior-quarter. Total net revenue was RMB 1 billion down 57% from previous quarter. Despite the significant business volume drop during the quarter, our strong cost control and operating efficiency efforts have kept our business at a profit and the good cash position. The sales and marketing expenses reduced by 45% to RMB 616 million, net profit for the quarter was RMB 19 million, representing a 95% decrease quarter-over-quarter. As of March 31 2020, our cash and cash equivalents remained stable at RMB 3.2 billion. We’re expecting major business rebound and a substantial growth in the second half of the year as our shorter-term smaller ticket size loans are quickly ramping-up along with other new credit products launched in the second quarter plus a comprehensive consumption finance ecosystem is being built with rich and the diversified external partners on various platforms. On wealth management side, as of March 31 2020, Yiren Wealth has served approximately 2.2 million investors cumulatively. And close to 221,000 investors currently hold investment on our platform. The total AUA for Yiren Wealth reached RMB 32.2 billion as of March 31 2020 with an average AUA per investor remaining stable at RMB 146,000. For this quarter, our account management service fee which is mainly from our wealth business was RMB 413 million relatively modest decline of 16% quarter-over-quarter. The allowance for contract assets has declined to RMB 143 million from prior-quarter due to the overall lower loan volume and allowance was equivalent to 7.8% of the loan volume as compared to RMB 588 million last quarter, which was equivalent to 7.4% of loan volume. Meanwhile contributions to the credit assurance program was at 12% this quarter to ensure adequate coverage. The decrease of 2% as compared with the last quarter was the result of shorter loan tenures and tightened credit control to new customers. Our credit assurance program remains adequately funded, with a total balance equivalent to 10.5% of the total performing loans. With that, I will now pass it on to Michael, our CRO for an update on credit risk.

Thank you, Zhong. Hello, everyone. For credit performance and the risk management, overall early delinquencies increased in the fourth quarter and the risk is peak at the end of March, due to the pandemic situation before it quickly declined in April, and returned to near pre-pandemic levels in May. More specifically 15 to 90-day delinquency rate stood at 8.9% as of March 31 2020 compared to 4.8% as of December 31 2019. However, the delinquencies jumped quickly moving into April, thanks to our tightened risk policy and the efficient risk management. As of end of May, delinquency rates for 15 to 29 days, 30 to 59 days, and 50 to 89 days had already declined to 1.3%, 2.2% and 2.1% respectively and we expect delinquencies to further improve in June. Meanwhile, visible progress has been made in prioritizing our business toward higher quality customers, which was reflected in risk performance improvement. Looking at our vintage performance, we’re delighted to see essential improvements trend in 2019. And we expect a more substantial improved trend in 2020. I will conclude my prepared remarks here and give it to the operator. Operator, please continue.

Thank you. [Operator Instructions] Our first question comes from Alex Ye from UBS. Please go ahead.

Hi, good morning. Thanks for taking my question. So I have a couple of questions about your credit business. So first of all, on your traditional launch site to get five unsecured business. So could you just remind me whether was your strategy on this specific loan product going forward? So we have seen your repeat customer for this quarter is almost zero. So going forward are you going to completely worn down this business or what’s the strategy on this. And also will it be still offline or online? And second question is about your auto loan. So given you expect that it's going to be a major contribution to your loan presentation volume in the second half of this year, may I just ask for more color on it. So for example was the specific product features like used car, new car market and what is your customer acquisition channel is still many offline right? So and what was the funding coming from? Where the funding come from? And my last question is about your growth outlook for this year. So given you also have the sort of term tenure product. Just wondering if you could give us some guidance on how you plan to maintain your growth mix in the near-term and also from a longer-term perspective? Thanks.

Okay. Thanks, Alex. I'll try to answer your question and then maybe Zhong can add on any of the points that may be missing. So from the large ticket size traditional loan we have, our strategy right now is that for the online business, we're going to focus on the smaller size shorter tenure revolving loans as we mentioned in our remarks and it's actually getting very good tractions. And then for the larger ticket size traditional business we will continue to operate but mainly on our offline networks, because that does have a unique credit screening process that helps us to improve the quality of the loan asset performance. The reason that in the first quarter, the repeat business was signaling lower first for the online business, we're moving to the higher credit grade, so we significantly changed the customer segmentation and then for the offline, as our CFO has mentioned, it was impacted by the pandemic situation. So the productivity really dropped significantly for the operation. So that's why the repeat business is pretty low in the first quarter. So, in terms of the auto loans, we actually have two type of auto loans business, one is that we have been already operating which is the borrowers that you already have in cars. So basically is credit enhancement business and that business is actually as we mentioned, it's going to ramping-up to RMB 1.5 billion in the first half. This business has shown quite well credit performance, the ticket size and the pricing is rather similar to the larger ticket size traditional consumer loans we have in 70,000 or 80,000 for loans, 36 months, 24 to 36 months, and the fees are relatively similar. However, the credit performance is actually significant better, if you think about the charge-off is in the mid-single digit level. So as you can see, it's quite well, quite profitable business. And from funding perspective, we're working with licensed financial institutions to provide the funding for this type of both loans. And then we’re starting the second hand car consumption loans, basically at the point of purchase for this as you know, it's also offline driven operation, we’re building the team and getting very early good tractions, the channels will be from the auto cars, sell centers. Also, we're working with some online auto channels that we hope to do online to offline conversions as well. And if this business will all being funded by institutional funding, yes. And then in terms of the loan mix towards the year from online perspective, the shorter-term revolving loan will be majority going through the year. And for offline, you can think about the auto loan and the traditional larger ticket size consumer loans half and half. So that will probably reduce our overall loan tenure to more close to 20 months from previous more 30 months range as we go through building up the volume through the year. Yes, see if you have any add to this?

I think you asked a fairly thorough just probably add a one more point, with our funding partners, their risk appetite towards a longer tenure loans significantly reduced towards excuse me, lower tenure loans. So that's why presented by Dennis remark. Average loan tenures in Q1 reduced to 22 months versus Q4 and we foresee the average loan tenure will continue to reduce and so will be easier for us to secure the institutional funding. That’s all I want to add.

Thanks.

Okay, thanks. Very clear, so just want to kind of follow-up question. So, first of all, on the loan mix both online versus offline, could you also give us color on how are you planning to split the two in terms of volume for this year, and the second, about your short-term revolving loan, do you have an expectation about the current vintage loss rate on that particular product type? And lastly on could you also give us some update on your P2P operations. So, like you also have some funding coming from P2P in Q1 and what's the current status on the compliance perspective? And would you to what extent do you expect that something will continue in the rest of this year?

Okay, so I think maybe I can answer the online, offline split. It's around 50% from sales volume perspective, and it's probably going to maintain that way through the year, as you can see the major part of the auto loans are providing offline. So that's going to be important portion and plus the traditional larger ticket size business where continued to ramp-up, recover the volume. I think maybe Michael can actually give comments on the credit performance expectation on the shorter-term loans and later on we'll talk about the P2P operation and compliance status.

Thanks, Dennis. Let me take on the question for the shorter term revolving loan credit performance. For this type of loans, we’re expecting to see the performance to be on par to our competitors. From the vintage performance perspective, it should in the single-digits because we have a pretty well established and tightened credit scrutiny (inaudible) acquisitions, that is to ensure our credit performance will be at the market level. As to the next question, probably, I will give back to Dennis about the P2P operations.

Yes, I think from funding mix perspective, as we mentioned, we already reached more than 50% of the new sales volume funded by the institutions and we have sufficient funding sources and partners that will be able to significantly increase that portion of the funding of our total business volume. However, at this current moment, our P2P operations are still operating with the compliance with our local regulators. So we'll see how that part regulators requirements will evolve. And then we can always adjust accordingly so that we can switch up our institutional funding to meet all the demands, if we need to. Right now it’s more of our own judgment. We're continuing to operate both funding sources in parallel.

Okay, got it. Thank you.

[Operator Instructions] Our next question comes from Daphne Poon from Citi. Please go ahead.

Hi, good morning. Thanks for taking my question. So just two questions for me. The first one is regarding your loan volume. I was just wondering if you can give any color in terms of what level of loan origination volume are you seeing or expecting in the second quarter? And also, would you have any rough guidance on a full-year basis? And then the second question is regarding your account management fee that, if I understand correctly most of the fees are still coming from the P2P path that you basically you get to earn this traffic to your actual return versus the expected return that you're offering to investors. So currently the fee rate is actually quite high is around 5% annualized of your average AUM. So I'm just wondering if you continue to shrink your P2P business well ramp-up the non-P2P part, should we expect this fee rate to decline? And if you can share like what is the fee rate for the P2P versus of the non-P2P business? Thank you.

Okay, so I will try to answer this question and Zhong can add in later on, if anything points. So from the loan volume perspective as we mentioned before, we're still on our plan trajectory to recover and ramp-up our overall loan volume sales volume run rate back to our 2019 average level by mid or later part of second half of this year, if you look at our 2019 quarterly run rate is probably around RMB 10 billion, RMB 8 billion, RMB 9 billion to RMB 10 billion level. So divided by three, that's a monthly run rate that we're targeting by the mid of the second half. As for full-year, we don't want to give a guidance, but you can use that math, try to curve it up, then you probably will get an estimate assumption on the sales volume for the year. But however as you probably also want to look at the revenue side as we have more multiple streams of revenues now that’s probably gives you a better sense of our business and skill and growth. In terms of account management service fee. Yes, you're right. I think majority of that's coming from the balance of the P2P amount. As we’re shifting more from the P2P investors into more institutional investors, actually that the revenue opportunity is not missed. It's just that going to be captured from the revenue take rate upfront. So, we're not missing that part of revenue of course, it's our new loan origination volume does not catch up to the repayment schedule of the remaining loan balance, overall ending balance dropping definitely going to impact this portion of the revenue coming in. But we think as we mentioned, we're in the process of recovering the run rate back to normal, you will see that catch-up later on. And then from the non-P2P business, we’re ramping-up nicely from both the sales volume as well as the AUA, you have seen that AUA is actually going very steadily quarter-over-quarter more than 60%. And in terms of the take rate, I think the standard wealth management product is a bit of, it has a bit of different scheme. Some of the products would be 0.5%, some of the products would be 1%. In particular, if we were able to work with some of the product supplier on the strategic level exclusive base, we can actually get up to 1%. But at the same time, I think we have mentioned other than the bank wealth management products, mutual fund products, we're also introducing the insurance products to our wealth management clients. And as you know that for the wealth management products, the commission rate is rather high. We’re actually expecting some good contribution from this business. So in the mix, we will see whether overall on AUA basis, we'll be able to reach the similar level, but longer-term definitely, we're going to see the non-P2P wealth management business to become significant revenue contribution in 2021 and beyond.

Okay, understood. Thank you.

[Operator Instructions] I have no further questions come through. [Operator Instructions] We have no further questions at this time. I will pass back to management for closing comments.

Okay, thank you very much. That concludes the call.

Thank you. Ladies and gentlemen, that does conclude the call today. Thank you for attending. You may now disconnect.