Q3 2024 Lexinfintech Holdings Ltd Earnings Call

Arvin Qiao

(interpreted)
In the third quarter, we continue to adhere to the strategy of tight-end resender, and focus on generating more high quality assets and improve the accuracy and efficiency of high risk asset control. We also upgraded the real-time anti-flow detection capability, further refined the third-party data management system, and build a real-time interactive risk management capability.
Leading risk indicators for new assets and the overall assets continue the downward trend from the previous quarter, FPD-7 of new assets decreased. by about 13% compared to the second quarter. And the overall asset day one delinquency rate decreased by about 9% compared to the second quarter. We expect the star war chance of leading risk indicators will continue in the fourth quarter.
Specifically, in terms of risk management for new assets from new customers, we have made significant progress in both new customer acquisition through online advertising channels, and activating dormant customers on Lexin’s existing user base. In terms of new customer acquisition through online advertising channels, we have focused on key high-quality channels and accelerating phasing out long-tail high-risk channels. Meanwhile, we have continued to strengthen our risk identification capabilities and upgraded risk strategies for new customers, resulting in a stable decline in the risk level of new customers acquired through online advertising channels.
To compare to the second quarter, the risk level of new customers acquired through this channel has decreased by 10%. By the end of the third quarter, leading indicators, FPD7, for new customers, have significantly decreased by about 50% compared to its peak in Q4 last year. Currently, the risk level of new customers of acquired food on the advertising channel has generally declined to a reasonable range.
In terms of reactivation and conversion of dormant customers, we have deeply explored their borrowing of over 200 million customer converting existing user base. To fully leverage losing large customer advantage, we have strengthened our risk identification capabilities and improved our risk strategy systems to identify high-quality users.
The third-party that we offered in coordination we our operational key, we have precisely reached and reactivated high-quality dormant customers with potential borrowing demand. In the third quarter, the number of reactivating dormant customers nearly doubled compared to the second quarter, with the credit-broadened rate of approved customers increasing by 47% comparatively in the AB test. Moreover, the customer acquisition cost of reactivated domain customers is low. And the risk level is about 20% lower than that of new customers acquired through online advertising channels.
In the fourth quarter, we will continue to intensify efforts to reactivate and convert existing customers, in order to sustain the growth of new customers at low cost and low risk.
In the third quarter, we focus on three major projects. Management of high-risk assets, portfolio structure optimization, and tailor risk management for different customer segments.
In terms of managing high-risk assets, we strengthened control measures of alert high-risk transactions, and further upgraded our anti-floor detection capabilities. The extensive use of risk strategy robots enable us to accelerate the early alerting and disposal of medium to high risk assets.
In terms of portfolio of structure recommendation, we continuously improve the proportion by optimizing various elements of our financial products. By continuously growing the volume oh high-quality asset, we further income a stable decline chance in risk level. The proportion of prime and super prime assets, the newly issued loans to existing customers and new customers has exceeded 75%.
In terms of tailor risk management for different customer segments, we focused on optimizing risk management of micro and small business customers in the third quarter. Through a dedicated acquisition model, the introduction of micro and small business operational data, and the specialized risk identification model for micro and small business owners, we have strengthened our ability to manage the risk level of micro and small customers loans. This has also improved the user experience to micro and small business owner customers with our offers and reduce the risk associated with these customers.
In terms of data management capability, we have established a full lifecycle management platform for third-party data, integrating data onboarding, data performance evaluation, feature derivation, performance monitoring, and decommissioning evaluation into a single management platform. This has significantly improved efficiency, as well as the standardization and optimization of data management. Also, we have established data linkage, enabling real-time monitoring, automatic alertings, and coordinated handling across the entire chain of data, features, models, and strategies.
This greatly improves the effectiveness of data applications and enhances the efficiency of SIP commissioning ineffective or inefficient third-party data.
Looking ahead into the fourth quarter, we will continue to strengthen our capabilities of risk management, credit identification, risk decision-making, and risk (inaudible). Our goal is to reduce the proportion of delinquent assets and increase the generation of high quality assets, further optimizing the health of our asset structure.
At the same time, we will continue to enhance the performance and stability of risk scoring across all business lines and implement intelligent decision-making tools for credit lines and hyphens to improve the efficiency and accuracy of our risk management. Through this effort, we aim to ensure that the risk levels of total assets continue to decline and profitability continues to improve.
In the meantime, we will accelerate the development of risk sharing models among the new risk-based customer segmentation, increase the proportion of our capital light business, and smooth the impacts of predecessors on our profitability.

James Zheng

This is James. Now it’s my turn. Thank you, Arvind. I will now give a more detailed update on our financial results, noting that all figures are presented in RMB unless stated otherwise.
During the past quarter, we adhered to our principles of prudent operation and continued the upgrading of our risk management capabilities and the transformation of overall business. Our efforts yielded satisfying results evidenced by stable, long-origination volume and a strong (technical difficulty).
Total revenue amounted to approximately CNY3.7 billion, remaining steady compared to Q2. Net profit showed a significant growth, increasing by 36.7% quarter over quarter to reach CNY310 million.
Here are three key highlights explaining our robust financial performance. First, substantial profit increase driven by higher revenue take rate. The sharp increase in net profit was primarily driven by higher take rate, which reached a record high of 3.25%, up by 35 basis points from 2.91% of Q2 and 81 basis points from 2.44% of the same quarter last year. The take rate calculation is derived by adding credit-oriented income and tech empowerment income, subtracting funding costs and various provisions, then dividing by new loan origination volumes for the quarter.
A few core drivers supported this increase, including the following. One, the continuous improvement in the risk level of new loans in Q3, evidenced by FPD7, which decreased by about 13% from Q2.
Two, a new record low in funding costs of 4.28%, which fell by nearly 100 basis points from Q2 of 5.26% and 6.36% of the same quarter a year ago. We achieved this through ample funding and partnerships with cost-efficient national financial institutions. It also underscores the increasing confidence of our funding partners in our assets.
Three, continued optimization of user loan early payoff ratio and the revenue from some very added preform services.
Second key highlight is improved asset quality. The asset quality of our total loan book improved in Q3. Total provision costs, the four lines in our income statement, including provisions for financial receivables, counter assets and receivables, provision for contingent guarantee liability and fair value change in our financial guarantee derivatives and fair value loans. Decreased by CNY21 million. to CNY1.6 billion from Q2.
The day one delinquency rate of total portfolios increased by 9% compared to Q2, thanks to our ongoing business transformation initiatives, especially in the risk management upgrading project. As we are gradually facing out higher risk existing loans and generate a better quality new loans, we believe the peak risk level of our total portfolio is behind us.
The third key highlight is the intense efficiency in customer acquisition. In Q3, we improved customer acquisition efficiency through two major channels. One, reactivating door-bending customers from our over 200 million accumulated registered user base and the rating, the RTA model in online and advertising channels.
New users with improved credit lines increased to 756,000, up by 44% from Q2. However, the acquisition cost for new users with improved credit lines dropped by 35% compared to Q2. Moving forward, we will continue leveraging our large user base to reactivate more high quality users at relatively low cost.
To summarize the aforementioned operational highlights, despite the macro environment and the stable new low volumes in Q3, we have achieved strong sequential profit growth through healthy and sustainable improvement in revenue take-away, assisted by improved asset quality, low funding costs, and the optimization of all business operations, including user acquisition efficiency.
Next, I’m going to provide some more detailed overview and explanation of financial statement items. First, on the revenue side. The credit facilitation and service income increased by 11.3% quarter over quarter, mainly driven by the higher facilitation volume growth and higher take rate in off balance sheet loans facilitated, offsetting the lower volume in off balance sheet loans.
Tech-empowered service income fell by 28.2% to CNY384 million quarter over quarter due to the product mix upgrade in Q3. As Jay mentioned, although the newly launched capitalized ICP platform is still in its early stage, we are confident in its future market demand and future volume growth.
E-commerce business revenue has dropped by 29.5% quarter over quarter due to the higher base of GNV in Q2 from the 618 shopping festival. We expect e-commerce business line back to the growth trajectory in Q4.
Next, on the cost and expense items. Processing and servicing costs increased by 16.1% quarter over quarter due to intensified loan collection efforts. Sales and marketing expenses dropped by 6.3% to CNY438 million in Q3. As we focused on reactivating dormant users, we’re using spending on online advertising business.
G&A expenses decreased by 11.4% quarter over quarter due to cost efficiency initiatives. As a summary of the above, the net income improved by CNY83 million or 36.7% quarter over quarter.
The overall net profit margin improved from 6.2% in Q2 to 8.5% in Q3. This is primarily driven by higher revenue from the flat quarterly low volume, lower credit cost, lower operating cost, partially offset by the increasing processing and servicing costs due to collection, and a minor losses related to the e-commerce spins quarter over quarter. This breakdown analysis underscores the healthy profit improvement made in the loan facilitation business despite a flat quarterly loan volume growth.
Here is another way to look at the probability improvement. If we use net income to divide by current quarter GMV, we get the ratio of 0.61% in comparison with 0.44% in Q2. Clearly, if we measure the net income against the average loan balance, it is 1.09% in Q3 versus 0.77% in Q2.
For balance sheet items, in Q3, our total cash position was approximately $4 billion , impacted temporarily by the maturity of some trust products. We maintained solid shareholders’ equity of over CNY10 billion. Our provision coverage ratio remained sufficiently at approximately 240% at the end of Q3.
As Jay mentioned, we are committed to sustainable value creations for shareholders. The Board has approved and amended dividend payout policy, increasing the payout ratio to 25% of total net profits starting, January 1, 2025. We may further increase this ratio as profitability improves in the future.
Looking ahead, with the government economic stimulus package gradually taking effect and the continued transformation of our business, we expect net profit to grow at considerable rate on the year-over-year basis for 2025. Although the profit recovery process may take a bit of time, Q3 has already marked a strong start.
For Q4, we still remain patient with the macroeconomic conditions and will continue to adhere to prudent operating principles to lay a solid foundation for growth and profitability next year. Based on our current estimates, we expect the GMB of loan originations in Q4 to grow at flat to a lower single-digit rate on a quarter-over-quarter basis.
This concludes my portion of the prepared remarks. Operator, we are now open for questions.

Operator

(Operator Instructions) Yada Li, CICC. Please go ahead.

Yada Li

(interpreted) Hello, management. Congrats to the exciting results, and thanks for taking my questions. My first one is what’s management view on the growth strategy for the fourth quarter following the rollout of government policies doing this at the end of September? And can we see signs of consumer loans demand recovery based on the current operational data?
And secondly, what’s the core drivers for the significant net profit growth this quarter? And will this growing momentum of net profit continue in the following quarters? Thank you very much. Okay, the first question is for me. After the government’s 4G policy was introduced in September, we saw some changes in the short term demand.

Mandy Dong

(interpreted)
Hi, Yala. This is Mandy. Let me translate for Jay.
Well, since the government rolled out the economic stimulus measures at the end of September, we did observe some positive change in the short-term demand. However, whether it will turn into a long-term sustainable recovery still depends on the ongoing improvements in the macroeconomic environment in the future.
So based on the quarter to date, Q4 operational data, we see that total volume long-term generation is generally flattish compared to the same period in Q3. We think this is due to our continued prudent operational strategy. We focus on maintaining an asset quality especially controlled at higher risk parts. Therefore, there hasn’t been a significant growth in the overall loan ordination volume.
Well, although the total volume remained roughly at the same level, there has been a continuous optimization in our asset structure. We have seen a slight increase of the high-quality customer with consistent recovery and enhancement in the high-quality demand. At the same time, we are actively promoting the growth high quality assets, continuing to increase the portions of high quality assets and improve overall asset quality.
Additionally, our recent upgrades in the customer acquisition strategy have to be effective. So we are actively deploying for the growth of new customers we think which would lay a solid foundation for the growth next year. Xiexie.

Jay Xiao

(interpreted)
Okay. Yala. This is Jay. Let me answer your second question. Basically, the second question is giving more details in terms of net profit for this and also the forecast for next. In Q3, the net profit reached approximately about CNY310 million. It is a very significant quarter over quarter growth of 36.7%. Really, the growth is attributed to the companies continuing to focus on strengthening our core competencies, especially in risk management, continuous optimization of overall operations over the past two years.
Specifically, really two drivers. The first one is the improvement in asset quality as both Jay and [Zhang] were mentioned a few times. Basically, we’re benefiting from the 3D focus on the risk management. Overall upgrade, new asset quality continued to optimize in Q3. The overall quality in Q3 actually in terms of asset quality, it really reached the turning point. It’s beginning to stabilize and recover as the batch of loans with higher risks that are issued in the second half of last year gradually mature.
So based on our preliminary estimate, we would expect a considerable growth in net profit next year on a year-over-year basis. Obviously, as you know, we’re going to provide guidance for next year after we report our Q4 numbers.
In this quarter, the FPD7 for the new assets decreased by approximately 13% quarter over quarter, and the day one delinquency rate for the total assets decreased by about 9% in comparison with the second quarter. We would expect this downward trend of risk level continue in fourth quarter and into next year as well. So basically, that’s the first driver in the profit improvement.
The second driver really is the record low funding cost is really driven by ample market liquidity and a strong demand for the high-quality consumer credit assets. The funding cost continues to drive into Q3 is about 100 basis points lower than Q4 in marketing, our largest quarterly optimization in the past couple of years. I can dive a little bit more into the details, basically looking at the financial statement perspective.
If you look at the pre-tax profit increased by CNY95 million quarter by quarter. Obviously, if you look at the specifics, there are pluses and minuses here. If we look at the plus side, excluding the e-commerce revenue, there is an increase in revenue related to the loan business in the amount of about CNY150 million. And also there’s a reduction in the total risk provisions and contributing to about CNY20 million to the net profit, quote-unquote.
Obviously, the minus side includes the decreased e-commerce gross profit by about CNY30 million in Q3, and also there’s increased processing and servicing costs for collections and all packs of about CNY50 million. So if we net both the plus and minus sides together, it contributed to an increased pre-tax profit of about CNY108 million. And this lead to the net income increase of about CNY83 million quarter over quarter, record quarter over quarter growth of about 37%.
Again, we are happy with the result in Q3. And we expect a better profit increase for next year, which will provide more detailed guidance after report two four. Hopefully, this answers your question.

Operator

Zoe Zou, CLSA.

Zoe Zou

(interpreted)
The first question, management mentioned that it was the risk level of new loan has been continuously optimized quarter over quarter. And overall asset quality has also improved compared to Q2. Could you elaborate on the main measures taken in Q3 to optimize the risk level of new loans and provide an outlook on the expected progress of the overall asset quality recovery in the future?
The second question is about the newly launched Intelligent Credit Platform model. Could you elaborate more on the future plan on this new business line and its impact on the company business scale and profitability?

Arvin Qiao

(interpreted)
Hi Zoe, let me translate for Arvin.
So in Q3 regarding the key areas in risk management space, we primarily focus on improving several efforts. One, risk identification; two, risk decision making; three, risk pricing; four, different risk bearing model.
Firstly, for the new customer acquires through the online advertising channels, we put efforts in below four measures.
Number one, we focused on the high quality channels and accelerated the phasing out of long tail high risk channel. Secondly, we put efforts to build a joint model with the leading platforms with scenario data. Number three, we enhanced our anti-fraud detection capability. Number four, we expand our low and grow strategy to the all business line.
As a result, we have continuously strengthened our risk identification capability and the upgraded risk strategy for new customers, resulting in a stable decline in the risk level of new customers in this channel. So compared to Q2, the risk level has decreased by 10%. By the end of Q3, leading indicator at FPD7 for new customers has significantly decreased approximately by 50%, compared to the peak level in Q4 last year.
At the same time, we are able to uplift to some extent in the approval rate in order to promote the growth of high-quality loans for new customers. So we expect the risk level of new customers acquired through the online advertising channel to catch up with the leading platform in the industry by the end of 2024.
Regarding the latter part of your question, for the overall asset quality recovery progress, the day one delinquency rate of the total assets decreased by 9% in Q3 compared to Q2. We estimate this downward trend will continue in Q4. So based on our continued advancement of the overall risk management upgrade efforts, we are confident that with the ongoing optimization of asset structure, namely, we will reduce the portion of delinquent assets and promote the generation of high-quality assets.
Well, according to our schedule progression with the risk management initiatives, we expect to see a significant increase in our net profit in 2025. Hope that answers your question, Zoe.

Jay Xiao

(interpreted)
Let me translate for Jay’s comment.
Well, thanks to our continued effort to strengthen the internal coverability, especially the risk management coverability, we have been able to upgrade the risk identification coverability that enabled us to conduct a more precise customer segmentation and launch the new model ICP, short for Intelligent Credit Platform model.
ICP is a capital-light profit sharing model, the risk of principal loss. The new model expands our addressable market, while smooth the potential risk fluctuation across credit cycle. Through the ICP model, we can identify customers with different risk levels more precisely, provide more accurate segmentation and differentiated pricing, then distribute these assets to financial institutions with corresponding and complementary risk appetite.
This approach allows us to offer customers longer life cycle service, thereby, generating more sustainable revenue from technology service. Well, although the ICP model just got launched in Q3 and only accounts for a very small portion of our total loan volume currently, we believe this business line is crucial to adjusting our overall asset structure and turn our business model into a more sustainable one. We believe ICP model still has significant growth potential. We will continue to make product mix adjustment through expanding this model.
Zoe, hope this address your question.

Operator

Yuxuan Chen, Huatai Securities.

Yuxuan Chen

(interpreted)
Okay, let me do the translation.
Hello, management. I have two questions. The first one is, when noticed, you also mentioned that the funding cost hit a new record low this quarter. Could you elaborate how we drive this factors behind this and provide an outlook and funding cost on Q4?
The second one is in Q3. You made customer acquisition costs significantly decrease and the number of never-approved private land customers increased substantially quarter on quarter. Could you introduce the main measures taken and whether the customer acquisition costs will continue to drop in the future? Thanks.

James Zheng

Okay, I will take the first question. Funding costs decreased by approximately 100 basis points to 4.28% in comparison with Q2. This really marks the 11th consecutive quarter of reducing funding costs since Q1 of 2022, reaching a new historic low and achieving the largest quarterly reduction.
For the fourth quarter, given that we’re already at a historic low funding cost, and also considering kind of a seasonality of tight funding typically before the end of the year, right, for financial institutions. So we anticipate relatively moderate optimizations in funding costs for Q4.
Looking ahead to 2025, with the continued implementation of easing money policies supporting the macroeconomic recovery and more recognition from the funding partners as our asset quality continues to improve, so we have confidence that we will continue to optimize the funding costs and enhance our overall profitability next year.

Jay Xiao

(interpreted)
Hi, Yuxuan. Let me translate for Jay’s comment. So regarding your question about the [capital allocation], reduction of this is mainly attributable to several measures.
Number one, we have significantly improved our capability and efficiency in customer acquisition through the online advertising channel on a quarter-over-quarter basis. Unit cost of users with approved credit line dropped by 24%, Q on Q. And the number of users with approved credit line increased by 22%.
As for the question of good quality and high potential users, total number with approved credit line rose by 34% and the total amount of the credit drawdown increased by 3,0. 30%. Meanwhile, we are able to brought down the unit cost acquisition of good quality users by 4,0. 40%. As a result, the risk level of new customers dropped by 10% compared to Q2.
Moreover, the of good quality user continue to hike, and the payback period got shortened. We believe with the strengthened customer acquisition capability, we will probably increase investment in customer acquisition front in the future in order to lay a foundation for the business growth next year.
The second measure, we have intensified efforts to activate and convert dormant customer. You know, over the past 11 years, Lexin has accumulated a large user base, roughly more than 200 million users. In the future, we will continue to refine the operation in order to provide more accurate credit line granting and loan pricing for customers to activate dormant customers.
In Q3, the total number of reactive dormant customers nearly doubled compared to Q2. With the credit line drawdown rates of the approved customer increased by 47% comparatively in the AB test.
Moreover, the customer acquisition cost for the reactive state customer is low and the risk level is about 20% lower than that of the new customer from online advertising channel. Therefore, in Q4, we will continue to intensify efforts to reactivate and convert existing customers in order to sustain the low cost and the low risk.
For the third round, we have further strengthened our cooperation with the leading [K-A] channels in Q3. By far, the volume growth and the profitability looks good. We will continue to increase the investment in this channel in the future.
Hope this addressed your question, Yuxuan. Operator, can you check if there is more question on the line?

Operator

No more questions on the line. Please continue.

Mandy Dong

Okay, then, thank you everyone again for joining us today. If you have further questions, please contact us via the contact information on our IR website.
Thank you all, have a good day and good night. Bye bye.

Operator

That concludes today’s conference call. Thank you for your participations. You may now disconnect your line.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the company sponsoring this event.