LexinFintech Holdings Ltd. (NASDAQ:LX) Q1 2022 Earnings Conference Call May 30, 2022 9:30 PM ET

Company Participants

Jamie Wang - IR Manager
Jay Xiao - Chairman & CEO
Jayden Qiao - Chief Risk Officer
Sunny Sun - CFO

Conference Call Participants

Alex Ye - UBS
Ethan Wang - CLSA

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the LexinFintech First Quarter 2022 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, Ms. Jamie Wang, IR Manager. Thank you. Please go ahead.

Jamie Wang

Thank you, operator. Hello, everyone. Welcome to Lexin's First Quarter 2022 Earnings Call. With us on the line today are our CEO, Jay Xiao; CFO, Sunny Sun, and CRO, Jayden Qiao.

Before we get started, I'd like to remind you that the call and presentation containing business outlook and forward-looking statements, which are based on assumptions as of today. The actual results may differ materially, and we undertake no obligation to update any forward-looking statements. Jay will first provide an update on our performance. Jayden will then discuss risk management. And lastly, Sunny will then cover the financial results in more detail.

I'll now turn the call over to Jay. His remarks will be in Chinese and English translation will follow. Jay, please?

Jay Xiao

Good morning, everyone. 1Q '22 was a quarter full of uncertainty and challenges. In China, a number of major cities like Shenzhen, Shanghai and Beijing have had to deal with the resurgence of COVID. The unpredictability of the pandemic has dented consumer confidence and led to a slowdown in the economy. Beyond China, the external environment is also highly volatile with high inflation in the U.S., a Federal Reserve that is committed to further rate hike, the squeeze in liquidity, volatility in Sino-U.S. relations and the conflict between Russia and Ukraine. These factors combined have been clouding the performance of capital markets.

They have also caused more uncertainty to our company and the whole sector. It's difficult to predict how these factors will develop in the next few quarters and how they will affect our operations and the execution of our strategy. From COVID alone, the impact to the society and economy has surpassed that of 2020.

We have always been proactively analyzing the situation, how consumer behavior will change and how the change in capital markets will affect listed companies. Given the core economy, pursuing scale at all costs will expose the company to more risk. We will work on the following instead: First, proactively responding to external change and adjusting operations and strategy to ensure asset quality; Second, further solidifying our foundation, increasing the operational efficiency; Third, staying committed to our strategy in order to improve the diversification and quality of revenue.

The management are committed and confident that we can handle the challenge and continue to build up a solid foundation to achieve long-term sustainable development. We have successfully navigated multiple policy changes in the past few years. Since our inception, we have facilitated over RMB 702 billion of loans and mapped the user base over 171 million. These are a testament to our capability.

In the first quarter, the loan origination volume reached RMB 43.2 billion and the outstanding loan balance RMB 83.8 billion. To be honest, we're not pleased with the quarterly results. We have the potential to do more. But on the other hand, it should not be a disappointment because we had already done our best in responding to change and adjusting the operations.

First, we further manage risk and control the impact from COVID by focusing on serving existing low-risk users and reducing the high-risk sales. Comparing the 1Q 2022 to 1Q 2020, all risk and profitability indicators were better this time around.

Second, we have been broadening the founding channels. Nationwide partners already made up 76% of the total funding in the first quarter. The mismatch in asset and liability due to the original policy restriction that we experienced from the end of 2021 is now being addressed.

Third, we continue to invest in new growth opportunities, including the technology-driven and new consumption-driven businesses. It's our strategic goal to further promote the revenue diversification and our risk management capability. In the first quarter, noncredit driven services made up 47.7% of total revenue, up by 10 percentage points year-over-year.

Fourth, in compliance, we have been making further progress in bringing down the APR. In the first quarter, the APR went down to 25%. The mix of assets within 24% reached already 77.8%.

Lastly, as a leading Fintech platform, Lexin is fully aligned with regulatory priorities. We have been providing credit support to SMEs and sole proprietors, facilitating the resumption of their operations. In the first quarter, loans to small and micro businesses amounted to RMB 4.24 billion, up 9.5% quarter-over-quarter.

As I explained earlier this year, we are committed to three strategic priorities. First, strengthening the management of existing customers so as to increase the profitability while ensuring risk performance. Second, enhancing the revenue structure to promote more diversification and service nature as a platform provider. Third, optimizing the management system to further increase operational efficiency.

Given the uncertainty of the macro and operational environment, it's challenging to achieve loan growth of 10% this year, though we do expect 2Q loan origination volume to be higher than this quarter. We will bring our best business structure and risk performance matters more than scale. We will also work towards the 24% policy goal and keeping full year take rate at a similar level to this quarter, the first quarter 2022, while trying our best to aim for 3%.

In summary, the external environment and COVID situation remain highly fluid. There will be both difficulties as well as opportunities. We have been implementing mitigating measures and will continue to work towards our target.

On the policy front, the authorities have been sending signals to support the economy, driving credit demand and promoting market liquidity. Moreover, the PBOC has also made positive comment on the industry ratification for Internet finance. The policy regime and development of the sector is getting more mature. These are all steps in the right direction.

In the second half of the year, we believe that the domestic economy will gradually turn around in the presence of stimulus policies. And we are confident that we can ride out this cycle and continue to create more value for our shareholders.

Now we'll pass it to Jayden, and he will discuss about our risk management. Jayden, please?

Jayden Qiao

Thank you, Jay. Thank you, Jamie. Good morning, everyone. Let me elaborate more on what we've been doing in response to the resurgence of COVID. We have tightened the entire user acquisition process from advertising, credit in areas most hit by COVID, marketing spending has been reduced and selection criteria revisited in order to manage this quarter to high-risk users. We are dedicating more resources to existing relationships where the visibility on credit performance is much higher.

Overall day one delinquency has been going down every month this year. Since the second half of last year in response to the 24% loan pricing, we have already taken mitigating actions to reduce exposure to high-risk users. The customer structure is, therefore, much stronger than a year ago. This has strengthened our defense against the surge in COVID in this wave.

With the improvement in customer mix, day one delinquency is also better and is now 12% lower from the end of December last year. 30-day collection rate, on the other hand, recorded a modest decline in March and April. But we are seeing signs of stabilization in May.

Back two years ago, when the pandemic first started in Wuhan, most of the collection team was located in city and the operations suffered a major interruption. After the incident, we have decentralized the presence, upgraded the system and revisited the credit policy to make sure that we can respond more swiftly. We are, therefore, in a significantly better position to cope with the situation this time.

The increase in 90-plus delinquency was within expectations given the macro environment and the reduction in outstanding loan balance. The extent of increase is a better indicator of our ability in managing asset quality. And relative to some of the bigger players, we have been able to show more resilience.

What China is going through is unprecedented. The visibility on the path to recovery is not the best but we are constantly refining our strategies to enhance the risk models and analytics. The risk management team is also working more closely with marketing and business development teams to budget customer acquisition as well. In short, we are much better prepared than two years ago.

Thank you. I will now pass it over to Sunny.

Sunny Sun

Thank you, Jayden. Thank you, Jay. Hello, everyone. It's my pleasure to speak to you again. The management team are dialing in from different locations today. With wide lockdown measures to contain the pandemic, economic activities have faced different degrees of interruptions or even complete shutdown.

In the first quarter, we made a decision to step up the provision, so we can have a stronger buffer to weather the turbulences. Most of the increase was reflected in day 1 provision for new loan originations. This is the main reason behind the drop in revenue. Just to recap, both of the provision for our contracts is recognized as deduction to revenue.

Further decline in loan pricing is another factor. Loans priced within 24% APR reached 78% of loan originations in the first quarter, up by 40.5% year-over-year and 18.5% quarter-over-quarter. Volume did hold up well given the current environment. Loan originations reached RMB 43.2 billion, down only by less than 1% quarter-over-quarter. The outstanding loan balance stood at RMB 83.8 billion, just a slight drop of 2.5% quarter-over-quarter. Consumer sentiment has become much more subdued. And most of all, we have also tightened credit assessment.

On the funding side, about 76% of the funding in the first quarter came from nationwide funding partners, up by more than 10% from the fourth quarter. Funding costs began to climb at the end of last year, where regional financial institutions pulled back from cross-border lending. This shock led to a mismatch between assets and liabilities, which has since been gradually resolved. The offline Puhui team has been effective in meeting the needs of our regional partners.

At the headquarter level, we have also got more nationwide relationships. The uptrend in funding cost has since reversed. With now a dedicated sales team, we expect to bring on board more national partners.

The top line performance is always subject to external volatility from regulatory, to macro, to COVID. This is the nature of the credit business. We are proud to see how quickly Lexin is able to adapt to new changes and how teams from across the company can quickly adjust our operations and support each other.

Now let me go through the expenses. Sales and marketing expenses rose 4% year-over-year to RMB 360 million, a seasonal trend as we laid out the full year foundation in first quarter. For the loan facilitation business, we did adjust the acquisition strategy and scale back advertising in areas affected mostly by COVID. This was done in March.

There was also spending related to the expansion of technology-driven services and the new consumption-driven services. Research and development rose 23% to RMB 153 million, reflecting our continuous investment in technology to support business initiatives.

G&A expenses went down by 11% year-over-year to RMB 170 million. It was a drop both year-to-year and quarter-over-quarter, demonstrating the continued improvement of our operational efficiency.

Net profit did decline and went down to RMB 81 million in the first quarter, but the business remained profitable. Our cash reserve also remains solid. Cash position stood at RMB 5.6 billion at the end of March, 9% above last year. The increase in shareholders' equity was 30% in the same period to RMB 8.2 billion.

In these challenging times, we remain focused on building our long-term capabilities in order to stay compliant and resilient. On the regulatory front, we maintain constant dialogue with regulators. We have been reinforcing internal control and processes and carrying out self-examinations based on the same requirement as the 13 platforms. The priority is to ensure the stability of the credit-driven business while broadening the reach into technology-driven and new consumption-driven services.

The contribution from noncredit driven services increased by 10% year-over-year to 47.7% of total operating revenue in the first quarter, demonstrating the progress in diversification. We have already built up a large base of individual users and insights into Chinese consumers which we can leverage to generate more 2B and 2F opportunities. And our relationships with 2B and 2F can also serve to further enhance our interactions with 2C.

The current environment is not easy. The past quarter saw a sharp rise in COVID numbers in a few regions and the government instituting lockdown and other restricted measures, some of which are much more stringent than the previous outbreaks. But this is not the first time that Lexin has to come from uncertainty. The business fundamentals are more solid than two years ago when COVID first started. We are at a stronger position to respond to change. The recovery path will not be a straight line, but we believe both China and Lexin will come out of it stronger. Thank you.

Jamie Wang

Operator, we're now open to taking some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Alex Ye at UBS. Please go ahead.

Alex Ye

So my first question is on the outlook for take rate. So just now you mentioned, the company will try to maintain your take rate for the full year at -- around the Q1 level of around 3%. So I'm wondering if you could give us more color on how the both the asset quality and your pricing cut will have different impacts for your outlook in the coming quarters. In particular, if we assume your asset quality is sequentially improving from May, shouldn't we expect your take rate to also improve sequentially?

Second question is on your capital-light percentage contribution in terms of loan volume. Could you give us the -- some color on the current percentage in Q1 and the plan ahead?

Sunny Sun

So the first question regarding the take rate. I understand the question is about how we can maintain the take rates at the Q1 level, which is currently at 2.7%. And while we are trying our best and strive to maintain the 3% take rate for the full year.

To start with, as Jay and Jayden and myself outlined earlier, obviously, there are a lot of uncertainties associated with the micro environment. And if the COVID situation is not getting worse in China, we believe that we'll be able to, first of all, maintain a stable funding cost. In Q4 and Q3 this year, our funding cost went up a little bit to above 8%. But we have seen a very clear trend that it has been stabilized in Q4 and we believe that the funding cost will be stabilizing and will be maintained at between 7.5% to 8% this year.

Secondly, I think in terms of the risk cost and the level of risk, Jay and Jayden has also outlined. First of all, we will be focusing on managing the existing customers. And we have a lot of data about them. We understand their behavior, and we also have clearer -- we also have digitalized segmentation analysis regarding these existing customers. Therefore, we feel that we'll be able to manage the risk in a more consumable manner going forward.

And thirdly, I think in terms of the overall business performance, Jay has outlined earlier that the second quarter, our loan scale is expected to be slightly higher than Q1. And our revenue will continue to be stabilized. So therefore, we feel that with all the efforts and the measures that were taken to contain the risk and also to contain the funding cost, the take rate should be able to be maintained at the Q1 level. And of course, we will do our very best to strive for the 3%.

Okay, the second question is regarding the profit-sharing model. We have not deliberately maintained a percentage or a fixed percentage of the profit-sharing model. Because for us, as we have repeatedly emphasized, focusing on controlling risk, focusing on profitability is our priority. Therefore, the profit-sharing model is a natural result of us taking such measures. But traditionally, I mean, historically, our profit-sharing model has been maintained at about between 25% to 30% or so within our overall loan origination.

Alex Ye

Okay. Thank you very much.

Operator

[Operator Instructions] Our next question will come from Xiao Liang [ph] at Morgan Stanley. Please go ahead.

Unidentified Analyst

So my first question is about the full year loan growth. Any change of the plan given the current situation, and any target new targets? And second question is about from the risk perspective. I wonder if there is any color on the early indicators such as day 1, et cetera, and the management can share with us any quantitative metrics on that front by the end of last year, by the end of first quarter. And the latest trends we can get a color on? Thank you.

Jay Xiao

So I'll answer the first question. As for loan volume, we have not yet changed our guidance for the full year 2021 despite challenges. But we actively believe that the economy will get better and we're still targeting and aiming for the 2022 guidance that we gave. Jayden?

Jayden Qiao

For new issue loans, thanks to the strategies introduced in fourth quarter last year, for the 24% pricing policy, early day risk indicators such as FPD30 trended better quarter-over-quarter. FPD30 stood at 0.63%, down by 15% compared with fourth quarter last year.

While for recent wealth, since we still face some impact from COVID, we see a little bit uptick from the trend, but the new customers' quality is better than existing ones. The overall asset quality 90-day plus delinquency and 30-day plus delinquency increased from Q4 last year. However, overall day 1 delinquency has been going down every month this year and is now 12% lower from the end of December last year.

30-day collection rate, on the other hand, recorded a modest decline in March and April. But we are seeing signs of stabilization and better trend in May. Some of the pressures include a further drop in pricing. Financial institutions continue to step away from high-risk users and also a slowdown in macro economy has impacted employment and consumption.

Together with the COVID lockdown and restrictions, we also see some different degrees of impact to our portfolio. But going forward, we believe risk performance will stabilize in the second quarter this year and continue to improve through the rest of the year.

Unidentified Analyst

Thank you, Management.

Operator

[Operator Instructions] We have no further questions. [Operator Instructions]. Our next question will come from Ethan Wang at CLSA. Please go ahead.

Ethan Wang

I have two questions. The first one is a follow-up on the asset quality to understand that for Lexin, the repetitive customers, repetition from rate base has always been quite high on the current environment. And Jayden has also mentioned that we have changed, we have tightened some lending standards. So for the new borrowers, they may be better in terms of asset quality performance.

So thus longer and going forward for Lexin, our strategic -- is there any strategic change in our lending standards? Are we looking at our existing borrowers and pick out the better ones or are we changing our customer profile, book them to learn more to lend to older borrowers with a different occupation? So that's the first question.

And secondly is on the Maiya business or buy now pay later business. So we understand for Lexin, a larger part of the average for the offline, but with the COVID situation here in China, will there be any change in the strategy going forward? For example, maybe we'll do more online business? Thank you.

Jay Xiao

Okay. So I'll translate the first question first. As of the first question about the asset quality for our current audience -- current customers or our old customers. Not that we did not to mean that old customers or our current assets are bad and the new ones are better. Statistically speaking, the new customers actually varies with higher risk. And the new -- the old customers, our current more assets are actually more stable. And our new customers actually get lower on their APR and their stability as we have more performance of them as we have more evaluations of them. And our current target is focusing on managing our current asset, exploring their potential.

As for our asset quality on our assets overall, it's not comparatively -- it is getting a little bit higher compared to ourselves, but not as -- it is still stable comparatively industry-wide. And as we mentioned earlier, we are seeing signs of this quarter being -- second quarter being stabilized, and we do expect the quality, asset quality trend to get even better if the economy recovers from the COVID and also if the macro economies gets better.

Okay. So I'll do the translation for the second one. As for the Maiya business, our offline team was currently -- was on trial run in our main city, Shenzhen, where our headquarter was. It used to collaborate with brand and as well as real estate offline. But our app actually went online in the first quarter, helping offline brands to go online and manage, helping them retain their traffic, and it's been going well.

The app also helps the offline brands in places to increase their sales volume. We are now seeing in the first quarter over 100 -- or sorry, over 1,000 tickets per day. And we are actually exploring more online platforms, connecting with more online platforms into our apps.

As for COVID, it did affect our 1Q sales volume as well as the ticket sizes and ticket numbers. Because as you might know, that Shenzhen actually went on lockdown for about a week or so in 1Q, which also had a short impact on our volume in this quarter. But Maiya are able to actually bring more than just buy now pay later functions and also value to our merchants. It was also capable of bringing our merchants more traffic and more customer retention and more ticket and bigger in ticket size. And I believe this is the future, and this is the direction that we're going with that is in trend with the overall economy. I hope that answers your question.

Ethan Wang

Thank you.

Operator

Thank you. We have no further questions, so I will pass back to management for closing remarks. Thank you.

Jamie Wang

Thanks again, everyone, for joining us today. If you have any more questions, please contact us offline. Our contact information is available on our website. Thank you.

Operator

Thank you. This concludes today's conference call. Thank you all for joining. You may now disconnect.