LexinFintech Holdings Ltd. (NASDAQ:LX) Q1 2020 Earnings Conference Call June 4, 2020 7:00 AM ET

Company Participants

Tony Hung - Senior Director of Capital Markets and Investor Relations
Jay Xiao - Founder, Chairman and Chief Executive Officer
Craig Zeng - Chief Financial Officer
Ryan Liu - Chief Risk Officer
Stanley Zhou - Senior Financial Director

Conference Call Participants

Jacky Zuo - China Renaissance
Eddie Leung - Bank of America Merrill Lynch
Alex Ye - UBS
Martin Ma - Nomura Securities Co. Ltd.
Sanjay Jain - Aletheia Capital
John Cai - Morgan Stanley & Co.
Daphne Poon - Citigroup Inc.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the LexinFintech’s First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. I must advise you that this conference has been recorded today.

I would now like to hand the conference over to your speaker today, Mr. Tony Hung, Senior Director of Capital Markets. Thank you. Please go ahead, sir.

Tony Hung

Thank you, operator. Hello, everyone and welcome to Lexin's first quarter 2020 earnings conference call. The Company's results were issued earlier today and are posted online. Joining me today on the call are Mr. Jay Xiao, our Founder, Chairman and Chief Executive Officer; Mr. Craig Zeng, our Chief Financial Officer; Mr. Ryan Liu, our Chief Risk Officer; Mr. Stanley Zhou, our Senior Financial Director; and other members of our team.

For today's agenda, Mr. Xiao will provide an overview of our recent performance and highlights, Mr. Zeng will discuss our financial results, and Mr. Liu will discuss our credit performance.

Before we continue, I refer you to our Safe Harbor statement in the earnings press release, which applies to this call as we will make forward-looking statements. Also please note that this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in renminbi.

I will now turn the call over to our CEO, Mr. Xiao, whom I will translate for.

Jay Xiao

[Foreign Language]

Hello everybody. It’s certainly the unusual circumstances in environment created by the COVID-19 outbreak that we released our first quarter 2020 results. Lexin's cloud business, operating metrics continue to be stable. We achieved our loan origination target for the first quarter. And our user numbers, our revenues and other core metrics continue to exhibit healthy and strong growth rates.

In the first quarter, Lexin facilitated RMB34.1 billion in loans, an increase of 69.5%, exceeding the previously stated target of RMB32 billion. Registered users reached RMB84.2 million, an increase of 99.7%, achieving a record high. At the end of the first quarter, outstanding loan balance reached RMB58.5 billion, an increase of 67.2%, and first quarter revenues reached RMB2.5 billion, an increase of 40.9% year-on-year.

During the ongoing pandemic, we have chosen to employ a more prudent and stable policy towards managing assets, maintaining the stability of our operations and growth. At the same time, we proactively reduced costs and fees for the recovery and growth of our ecosystem, investing a total of RMB340 million.

We have also donated RMB15 million towards the pandemic relief efforts. Responding to the government’s call, we put out RMB25 million worth of consumption coupons on the basis of maintaining stable operations. We have allocated RMB900 million to prepare for the impact of the pandemic, which in turn led to our first quarter loss of RMB678 million.

Provisions, of course, is not the equivalent losses, and they represent the company's preparations for the possible consequences of a pandemic. And if the actual losses are lower than our provisions, some of the amounts will be written back over time. This positioning will help the company's future and help promote stable development.

We believe that in the phase of the pandemic, there will be no one that wins by themselves. And that is only by working with our partners in our ecosystem together through this difficult period of time that will allow our business to emerge towards a sustainable and positive direction and outcome.

We have accepted our responsibility towards our customers, our partners and society. And while in the short-term, our accounting profits maybe affected. In the long-term, the steps taken to help our ecosystem recover from the pandemic will bring us closer and to more user growth and activity, better protect the interests of our funding partners, and ensure the stable long-term growth of our business. This is consistent with our core values of generating long-term value.

In the first quarter, our new consumption platform strategy continues to deliver, generating user growth, scale and revenues, while installment consumption in the first quarter, Lexin’s online and offline consumption scenarios generated RMB10.5 billion in transactions, an increase of 337% of which offline scenarios were RMB9.3 billion, an increase of 1239%. In the second quarter, our growth will be even stronger.

April's offline transactions increased by 12.7% month-on-month versus March, and May's transactions increased by 17.8% versus April with increasing growth in each passing months.

Our membership benefits program contained members related products have served customers nearly 2 million usage times and generated a repeat rate of 63.5%. In the second quarter, our membership benefit programs members, usage types and transactions rises demonstrated increases in April on a month-by-month basis of 141%, 260%, and 846% for each category respectively.

Under our policy of stable risk control, our overall asset quality is stable with declining risk. First quarter 90-day delinquencies reached 2.57%. As we enter the second quarter, asset quality trends continue to improve. Our first quarter seven-day delinquency rate was 3.7%, recovering with the domestic Chinese economy. As of today, our seven-day delinquency rate has declined to 2.77%, recovering to pre-pandemic levels. This strong performance has helped us win the trust of even more partners. Our total number of funding partners continues to increase.

The worst of the pandemic in China seems to have past and both consumption and employment is rapidly recovering, and our business has now recovered to pre-pandemic levels. In the second quarter, we expect loan originations to exceed RMB38 billion, an increase of 46%. We expect to return to profitability as well in the second quarter. And we are confident in our ability to achieve our full-year guidance of RMB170 billion to RMB180 billion.

New consumption and new infrastructure is becoming the twin engines for driving the recovery of the economy. This year, the government’s work report indicated a strategy of expanding domestic demand, driving a recovery and consumption and encouraging financial technology companies to help decrease the cost of financial services.

The CBIRC has issued draft guidelines for comments on the loan facilitation model, firmly recognizing the value and importance of Internet, finance platforms within society. In an environment, recovering consumption and favorable underlying regulatory policies, we will seek to more rapidly advance Lexin's new consumption platform strategy, bringing in greater room for growth and expansion.

Next, I'd like to invite our CFO, Craig to discuss our recent financial performance.

Craig Zeng

Thank you, Jay, and hello everyone. I'm pleased to announce that we have once again delivered strong growth in our business, as reflected in our strong loan origination volume. Before we begin our discussion of our underlying business, the performance for the first quarter of 2020, I would like to first discuss our recent accounting policy change, the adoption of CECL.

As we had already disclosed and noted a few months earlier in our 2019 year-end results, we fully expected CECL to have a material impact to our financial for this year. And today everyone can see the impact to not only our results, but also the results of our peers as well.

As many of you have probably noted as well, we had also disclosed many additional details in our 20-F specifying the impact of our accounting change and have previously communicated with many of you on the likely material after the impact and how potentially view and adjust forecast accordingly.

In the interest of time, given the fact that we and more recently, many of our peers have already described and provided many details on the accounting change and its full impact, we will just provide a more of a high-level overview of our impact of the change.

The CECL guidance replaced existing incurred loss methodology. And it reduced our forward-looking expected loss approach refer to as a current expected credit loss CECL methodology. And there is the incurred loss methodology, credit losses are recognized only when the loss are proper or have been incurred. For guarantee in the scope of the ASC 326 and subject to the CECL methodology, as many of you are already fully aware from a high level perspective, the prime difference between the new and the old accounting standard is essentially a timing difference.

And the new accounting standard guarantee revenues are required to be recognized over time through the amortize schedule over the life of the off-balance sheet loan and recorded in a separate financial statement line item. And the provision for the contingent liability for the loan would be recorded as a whole immediately at the inception of the loan in another separate financial statement line item. This is in contrast to the old accounting standard, where we only needed to book the guarantee liability on the one.

And many of you are probably already know this change in accounting has no impact to the underlying profitability of our loan. It is simple time change in the recognition of the revenue and the profit from the loan. And that all of you should know the change in accounting also, obviously, does not change our underlying business and is not indicative of changes to credit performance or asset quality.

In term of assets, asset quality, the underlying assets are still the same quality with similar provisions in facing the same circumstances. However, as a company that is continuing to grow rapidly and the new accounting standard, which requires the recognition of provisions for contingent liability be recorded upfront as a whole.

The new accounting standard effectively penalize faster growth, at least in the short-term by producing higher provisions on the P&L relatively to the old standard. It should also be noted, that the new accounting standard, we are not having the impact to our accounting treatment for financial guarantee derivatives.

In the first quarter, we also encompassed unique challenges as a result of COVID-19. Due to COVID-19, we believe that our financial performance could be potentially be negatively impacted by the pandemic in the foreseeable future. This combined with the fact that the CECL lifetime methodology required us to take into consideration all microeconomics variables, and in particular the impact of the ongoing COVID-19 pandemic on the economics. It means that we have to incur additional cost cuts.

As a result of this combination of CECL and COVID-19 and in accordance with the new accounting requirements, we have decided to take a position that is consistent with ongoing uncertainties in the markets. When it comes to our provisions, guarantee liability and financial guarantee derivatives and we incur additional RMB0.9 billion in additional cost and the related charges as a result of combination of CECL and COVID-19.

Now return to our financials. In the interest of time, I will not go over line item by line item of our P&L. For a more detailed discussion of our first quarter results, please refer to our earnings press release.

Total operating revenue for the first quarter reached RMB2.5 billion, driven by strong growth in our financial service income which reached RMB2.0 billion of which loan facilitation and service fee was RMB1.05 billion. Adjusted net loss was RMB596 million, reflecting our continuing strong growth and the performance, except the impact of the pandemic.

Fully diluted adjusted net loss per ADS was RMB3.31. We continue to see the future potential of our business model. In the performance of the customer cohort whom we acquired in the first quarter of 2015, whose balance is now RMB12,684 and whose 30-day delinquency rate is approximately 1.4% with quarterly active rates of 30.9%.

On our operating leverage, operating expense as a percentage of the average loan balance was 3.1% for the quarter. And then non-advertising, marketing, advertising, G&A and R&D was 0.7%, 0.9%, 0.7% and 0.8% of average loan balance, respectively.

We currently have 84.2 million registered users and 20.7 million customers with credit line, up from 19.4 million in December 31, 2019. We acquired nearly 965,000 new active customers in the first quarter. Overall, our average credit limits was RMB9,117 while our average tenor is now 10.7 months, our weighted average was 27.1%.

In term of our funding, for the quarter, no funding for new loan origination came from the Juzi Licai platform and all of our funding for new loan origination came from our institutional funding partners. The ongoing COVID-19 outbreak has stopped and continued to bring many challenges to our business, but we are now seeing a gradual recovery. We believe that with the gradual recovery and that determined effort of our team, we may still be able to achieve our previous stated guidance for the year.

Next, Ryan will discuss our credit situation. Ryan, please.

Ryan Liu

Thank you Craig. In spite of the challenging conditions in the markets arising from the ongoing COVID-19 pandemic, we were able to maintain credit quality with expected levels. And have seen marked improvement in our leading credit statics and indicating that second half of the first quarter.

We fully expect our credit statics to continue to improve over time to perform at expected levels. Our 90-day plus delinquency ratio is currently at a 2.57% and we continue to see stable credit performance as our lifetime charge-off ratio is around 3%.

As stated in the past, due to the ongoing COVID-19 pandemic under the high number of new customers we acquired in 2019, we expect the vintage charge-off ratios for our loan book to increase to approximately 3.5% to 4.5% over the course of the next few months before improving in the third quarter.

This is consistent with our previous statements and according within our [indiscernible] expectations. And we fully expect our stable credit performance to continue in 2020. Initial path has been noted. And as many of you have already fully aware, the certain credit statistics are effectively lacking indicators.

With that, I conclude our prepared remarks. Operator, please proceed with the question-and-answer session.

Question-and-Answer Session

Operator

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

Jacky Zuo

[Foreign Language] I will translate my questions. So I have three questions. Number one is about our loan origination outlook. So just wondering what is our underlying assumptions for our second half loan origination targets? So are we going to increase the customer acquisition efforts? And just wondering what is the loan volume for the April and May months? Just wondering if you can give us some number on that.

And second question is about the asset quality. So just our CFO mentioned that we actually set aside around RMB900 million additional provision in the first quarter. Just wondering, can you give us some details where we can find this additional provisions in the P&L, and in which item, we can see the details? And following on that is what is the vintage loss assumptions, we are using in the first quarter?

And last question is about the ADR issue. So given the U.S.-China tension and recently a lot of investors are concerning the listing issue of the ADR. So just wondering how our management tried to tackle this issue? Thank you.

Jay Xiao

[Foreign Language]

Tony Hung

So Jacky, on your question on our guidance and whether or not we can achieve certain things, I mean, obviously, as you know, in the first quarter we guided for RMB32 billion. We exceeded that. We achieved RMB34 million, and this is, of course, in under very difficult conditions. But nevertheless, we did very well, and we did well, because we do have a lot of channels. And interesting to note that, yes, we have a lot of channels, and we have online, offline and the offline goes offline. So all we had to rely on is online. Nevertheless, we still achieved and exceeded our targets.

And for the second quarter as you see from the press release, we've given a target of RMB38 billion. So needless to say, for the full-year, we're pretty confident, and we're pretty confident for a few reasons, one of which is that we have diversified our customer acquisition methods. We have online, this includes ads, this includes referrals, this includes natural traffic and we have offline, that's e-commerce, et cetera. So essentially, even one channel, and within one channel, we have actually multiple channels within one channel. So we have room and we can adjust and hence, we're pretty confident in our ability to execute on this.

Now in fact on the customer acquisition and second reason is that we do have a very large customer base. We have over 20 million customers, and there's plenty of value and room to develop there. The customers we acquired last year, there is real growth in this space. So hence we already have a very, very strong fundamental base to grow and develop them.

And third reason is that we've managed to maintain asset quality and we've adjusted our model accordingly. So right now, when we look at the underlying situation, we have a very balanced model, a very balanced and healthy portfolio. So for the second half, in light of the situation, we are planning to strengthen our growth. And you can see that the first quarter, the marketing expense has been adjusted, it has gone down. So this has left room and we're going to apply that to the second half of the year to grow.

Jay Xiao

[Foreign Language]

Tony Hung

So with regards to the RMB900 million provision, well, as you know, there is the ongoing pandemic and then we believe that to be conservative, we should have this. In terms of the exact details on where to find it, if you will, Craig will describe it a little bit later. Now overall, as you know the credit trends and what we're heading, we're still pretty stable as mentioned before, and we're consistent on this. We believe that the final vintage charge-offs will be about 3.5% to 4.5%.

Jay Xiao

[Foreign Language]

Tony Hung

So continuing from where Ryan mentioned, unfortunately because we do have the on-balance sheet off-balance sheet model different guarantee liabilities number, it's definitely not something that you can simply take one line, add another line and then put it together out there for modeling and other things, we will be sure to guide you in the future. But fundamentally what's going on here, as you understand is that we have different funding partners and they have different requirements and based on the requirements the contract is written in a certain way. And then in turn the auditors will review it and view it in a way and treat it under different accounts.

With regards to the ADR issue, after the U.S. Congress went through the legislation, there have been certainly some concerns out there in the market and we have certainly heard from some of our shareholders and investors on this topic. And indeed the Hong Kong listing is a possibility, certainly there are many companies looking at it and some companies have done it already. And likewise we're examining the possibility among several possibilities.

And if you look, for example, an article on [indiscernible] apparently based on their assessment only 22 companies right now were qualified. Fortunately we are one of them and we are certainly going to continue to assess the situation. And at the appropriate time, I'll do what it takes to protect our investors and shareholders, because that is very much, very important to us. If the need arises to or through a Hong Kong listing. So this is something that we are looking at very carefully and we'll continue to assess.

Jacky Zuo

[Foreign Language] Thank you.

Operator

Thank you. Can we move to the next question, sir?

Tony Hung

Please do.

Operator

Yes. The next question comes from the line of Eddie Leung from Bank of America Merrill Lynch. Please go ahead.

Eddie Leung

[Foreign Language] So my question is about the customer acquisition strategy. As Jay mentioned that there are multiple customer acquisition channels. Just wondering whether we view at just our strategy across different channels in the upcoming couple of quarters given our focus in credit risk management? Thank you.

Jay Xiao

[Foreign Language]

Tony Hung

So Eddie, I think you fully understand it, but for the benefit of everybody, different channels will definitely have different quality customers and there'll be some very pronounced including differences. The offline channels as a whole, definitely have lower risk. It also has a higher contribution of the long-term. We can definitely get a better understanding and a more appropriate, I would say assessment of the credit risk for the offline customers. And then give the customers a more appropriate amount of credit.

Now online inherently is going to be riskier, it's going to be uncertain and it also has higher incidences upfront. However, we do have a very strong risk control system and we do have accurate assessments of our customers. And that's really, when we get different assessments, we are taking into account these risks and we adjust the amounts to credit et cetera. And based on the credit risk level of the customers we acquire online.

Now the first quarter and second quarter was affected by the pandemic. And this of course in turn impacted our customer acquisition channels, in particular the offline. But now we can see that as a whole, our customer acquisition is recovering, and recovering very strongly. Offline channels will not only recover, but it's going to increase versus last year. So this is one of the ways that we're planning to acquire more customers in the second half of the year. Another way will be our platform, where we help with other platforms to sell including several large platforms, including, for example QQ Music and with others who have a traffic.

And the third method that we will continue to use to acquire customers would be Lehei/Black Card, which all ends up a lot of offline channels. So these three areas, for the year, would probably all be stronger. Now ads will be adjusted appropriately, accordingly as is something, online as is something that will always depend on the cost and you have to assess the risk accordingly.

And then in turn we'll depend on the inventory, and also in terms of the situation, we have to see what the ads can bring, and based on what the ads can bring which in theory, it could bring a lot of traffic will have an integrated approach accordingly for our customer acquisition. So I hope that answers your question.

Eddie Leung

[Foreign Language] Tony and Jay, thank you very much.

Operator

Thank you. We have our next question from the line of Alex Ye from UBS. Please go ahead.

Alex Ye

[Foreign Language] I will briefly translate my question. So my first question is about the company's business model on the partnership with financial institutions. So as we know Lexin always have a portion of its loan volume through the non-guarantee model, where you shared revenue with financial institution without providing guarantees. So just wondering what's the portion of this particular risk sharing business in Q1 non-volume and what's our target for the coming one to two years?

And my second question is about our take rate trend. So I've noticed, we have seen some decline in the Q1 take rate. So apart from obviously an increase provision for the credit cost, so are there any other reasons that have led to a lower take rate during the first quarter? In particular, during the prepared remarks you mentioned that there is some waving of fee and interest of around RMB340 million related to the COVID-19. So just wondering how much of this has been reflected in our Q1 revenue?

And then my last question is about the competitive landscape in particular related to our Le Hua Card. So I have noticed more and more peers are also providing similar product that allow users to link their credit line to their retail [indiscernible]. So just wondering, can management share some color on how we win this rising competition in the future? Thanks.

Jay Xiao

[Foreign Language]

Tony Hung

Okay. So I'll answer your first and third question. And on the first question the loan facilitation model in particular the model where we do not think on the reserves ourselves is a important strategic direction for the company this year. And of course, this is an area where there are several benefits, not the least of which is the fact that we do not have any cash requirements and we do not need to put the reserves at the banks. It's a basically very straightforward process, where ultimately we get a revenue share of something like 30% to 35%.

This particular model where we do not set aside the risk reserves and we don't take the risk has made up about 26% of our funding in the first quarter, and it's currently taking up about 30% of our funding and our goal is to have a reach 50% by year-end. So again it's definitely an important direction for this year and as we open this up, this will allow us to have greater and greater growth because of the lower capital requirements.

Now another reason why this is so important, is that, as you can see from the graphs documents and the general direction, this is something that's very much welcome by financial institutions themselves and more importantly for us, also by the regulators, as a future general direction. So this is something that we're definitely going to develop more and more this year.

Jay Xiao

[Foreign Language]

Tony Hung

So on your third question on the Le Hua Card, well, as you know, we were basically the first company out there with this type of product. The idea of opening up our credit line and the amount of credit for our customers to the offline scenarios and as the leader in this we now have probably something like 1 million transactions on a daily basis and 10 million customers using it. So obviously we're the clear leader.

Now, I will say that there is definitely difficulties, even, I can say barriers to this business. The transactions and the payments they're integrated within this and you need them to be stable. So you need actually some time. It took us quite some time in order to ensure that everything runs smoothly and that these micro transactions can be facilitated in a very stable manner for all these transactions. And on the micro transaction, another fundamental barrier, of course, is the funding partners. You need a funding partner to cooperate and be willing to fund the small transaction sizes. So in order for them to cooperate to allow for this type of stable payment system.

Now fundamentally whenever you have a successful product that's doing very well, whenever you have a good product, it's going to attract competition. But we're confident in our ability to continue to provide a better product, a good product for our customers. So this is one of the areas and one reason why we feel strongly, that we'll continue to lead in this area.

Another area, it's just fundamentally our customer acquisition and our risk control around the customer acquisition. As always you have success in these particular areas, then you're going to be able to maintain certain leads over the competition, because all they would have is a product. So hence this is another area where we feel that we definitely have a strength.

And finally, I do want to say that, well, it's a good market, it's an interesting market and we welcome others to come and help grow the market with us. So competition is natural and we will basically grow the market together.

Craig Zeng

[Foreign Language]

Tony Hung

So on your second question, Alex on take rate trend. Long-term is definitely going to be stable and we feel that the key to our profitability is not going to be so much off of this, but rather the scale of our business because we do see that in the long-term again to take rate should be stable and we do focus very much on the long-term, not the short-term.

So on the whole concept of cost of funding, if you will, if you think about it in the past, we started off with P2P as many other platforms did. The cost of funding there was 8% to 9%. But nevertheless, we took the long-term view to open up to more funding partners and to expand to more funding channels. And at the time when we opened up these channels to the banks, we we're talking about 10% or higher in terms of funding cost, but clearly we were first to do it, before many, many others to pursue this particular avenue and channel.

Now naturally at the beginning when we're doing this, we were suffering from higher funding costs as a result relative to the P2P. Now currently in terms of what we're developing, we are developing increasingly the revenue sharing or rather the banks take on the risks themselves model, which frankly, we were probably the first last year to do this at the beginning of the year. And this is something that we're going to increase our focus on.

Over time, due to the development and due to increasing trust from our funding partners, we were targeting to reach 8% to 9% funding cost just like the P2P before. So hence in that context of the long-term, we were able to lower the cost and secure our future. Now naturally when you continue to develop funding partners, you're going to have to give up some profitability, some profit to them. But we believe that in the long term, our profit, our take rate et cetera will be stable and that's really going to be a matter of scale that continues our growth and profitability. Okay. Operator?

Operator

Yes, sir. The next question comes from the line of Martin Ma from Nomura. Please go ahead.

Martin Ma

[Foreign Language] My first question is on the statement in the first quarter report that due to the settlement of COVID-19 pandemic impact and especially on the – especially the impact on the Chinese and global economy, there is additional RMB0.9 billion additional credit costs. What is – and I'm going to looking into the second quarter, the COVID-19 pandemic is not finished, and even though in China, this pandemic has been largely under control.

And the second question is on the new line on the balance sheet. There is a new line called deposits to insurance companies and guarantee companies. So just wonder what is that line and what is the difference between this line and the restricted cash and restricted time deposit.

And the third question is on the PPT. It's on the investor PPT released on the website. On Page 13, there is a cost of funding this quarter, which is recorded at around 8%, which is different from the 9.7% in previous investor PPT. So just wonder what is the difference between the – why there is a 2% difference between the current disclosure and the previous disclosure? Thank you very much.

Jay Xiao

[Foreign Language]

Tony Hung

Yes. So on the special provisions long story short, we definitely consider the U.S. situation, the global situation, China situation. So it's probably a one-time special event. And right now, we don't see any reason why we would need to do it again in the second quarter.

Jay Xiao

[Foreign Language]

Tony Hung

And so I think we're looking at before, it's more reflective, if you will on type of cost of funding. And now we switched to a more off type of cost of funding presentation, which I think better reflects the reality of our underlying business.

Jay Xiao

[Foreign Language]

Tony Hung

Yes. So on your question on the deposits with the different insurance companies and guarantee companies. Yes, we could view that as kind of like restricted cash from before. Essentially, it's a reflection of the different type of funding models, cooperation we have out there. So for example, while the funding partner may not want us to leave the money at the bank, they want us to have to leave our money instead as a deposit at – for the name of the account at the insurance company or the guarantee company. So it's simply a reflection of that.

Martin Ma

[Foreign Language] So I'll translate your question for you. So essentially – obviously, the off is 8% as you mentioned. And if you add back the other things that we've taken out such as the guaranteed costs et cetera, where would it be?

Tony Hung

And that Craig answer was, well, you can't exactly do that precisely to get to kind of a clear answer, because it very much again depends on the funding partner, it depends on the model, and the requirements of the funding partner.

So for example, if the funding partner does not require an external guarantee company, then it's one number. If the funding partner requires an external guarantee partner, typically, the external guarantee partner charges, say for example, 1%. So essentially we can add 1% to that. But it really depends, and it might not, shall we say, represent accurate picture.

Martin Ma

[Foreign Language]

Operator

Thank you. Can we move to the next question, sir?

Tony Hung

Absolutely.

Operator

Yes. The next question comes from the line of Sanjay Jain from Aletheia Capital. Please go ahead.

Sanjay Jain

Hi, everyone. Thanks for the presentation. Two quick questions, first one may not be so quick depends on you. So as I understand, you have four categories or types of loans within your loan book, which are subject to three different types of accounting policies. And again, as I understand, only about 40% of your loans are subject to the new ASC 326, and then you have interest income on the on-balance sheet loans and you have ASC 606 on the rest.

So I don't know how my friends on the sell-side and buy-side are doing the numbers, but I am finding it incredibly complex or unnecessarily complex, while working out the full-year numbers. Can you help us give us some framework, some way of figuring out how the full-year will look and maybe next year because again this year is you still have the RMB677 million at the quarter perhaps carry forward from last year. So and my back of the envelope is coming up with the same profit number as last year. Can you help us with something to go on?

Tony Hung

Yes. Sanjay, I will translate your questions for you. But first, we probably need to do something maybe similar to you like a modeling day with everyone in the future. Since – as you mentioned and you're 100% correct, this is a complicated situation to say the least. So hence we'll definitely into set something up accordingly.

And now let me translate your question for the team. [Foreign Language]

Craig Zeng

[Foreign Language]

Tony Hung

So Sanjay, I mean again, you're absolutely right. And obviously, it's not only you. I think everybody out there is having these issues, if you will. And unfortunately, there has been changes if you will, the SEC's approach on some of these accounting in the recent past that's become complex.

But based on what we've heard from the SEC, apparently nothing else is forthcoming, whereas some of the more recent things this year and last year, they were kind of in discussions in 2018. So on that note, overall issues, at the very minimum, get more stable, if you will over time. Longer-term issue get a little bit easier.

And then of course, we have to also distinguish between the short-term and the long-term. Long-term, as Jay mentioned, as the team mentioned, we're going to have more and more of the model where the reserves are taken by the banks. So hence, that will become a very, very sizable part of the business and that should hopefully in term simplify things a little bit as well, accounting and otherwise.

In the short-term again, you're absolutely right. It is complicated. And is this our choice? Absolutely not, we wish that it was a lot simpler. But for a variety of reasons, not the least of which is you can say this is a new business, you can say this is a very unique environment in China with different operating models, you can say that there is inherently complicated accounting that was in a state of shift, literally from the SEC, and you can say that all this combined to frankly make this a lot more complicated than anybody wants, and certainly, we don't want it to be so complicated.

So hence, I think what we will target to do is something with all of you ideally before the end of this month, where we will help investors and especially our covering analysts understand this all – with a very formal modeling day with myself, Tony, as well as Stanley, our Senior Financial Director in the finance team to help explain them how to do this. And again, as you can imagine, apologies for the complexity, we wish it wasn't so complex.

We wish we didn't have these things occur, but it should also be, I guess, said for our case that we were probably one of the first, if not the first guys out there to say that this thing with CECL is coming and that it will be complicated and we help many people with understanding that it will be complicated, it will have an impact. So hence, I think we should have some credibility from that. And again, we certainly wish that it was simpler. And ideally, it will get simpler in the near future. So hope that helps.

Sanjay Jain

Okay. Okay, thanks. And my second question is on the risk transfer loans. So legally on paper as you are saying, the bank takes the reserves, but I know you have always been skeptical of a true risk transfer and looking at the experience of such risk transfer loans in one of your competitor. I'm just wondering who are the partners, who are doing these loans with you as opposed to doing loan facilitation?

Are they the same lot and what do they see? Are you giving them far better economics on a risk transfer loan compared to old style the regular loan facilitation model loan? I mean, I cannot believe you that those guys – they are going for the risk transfer loan only because it helps them show higher margins.

Tony Hung

Okay. No problem, Sanjay. Let me translate that for you first. [Foreign Language]

Jay Xiao

[Foreign Language]

Tony Hung

So first I think I want to emphasize that as a fintech company, we should be quite responsible, if you will in talking about this. I think unlike some of the other language that perhaps you have heard in the past from elsewhere, you can't just basically cost transfer, whatever you want to call it, risk, not to the banks, it just – inherently, it doesn't work that way. It's not possible.

You work with the banks and they have set the risk because they trust you. They trust that you have the risks under control. And hence, that's basically the premise or the foundation for doing this model that you do have the ability to control the risk and that you have good quality assets and that together, you can control the risk on this.

So hence, it's definitely not a situation where you can just simply transfer the risk in that sense. It's going to be an area where you share the risk. And the only reason why the banks accept this is because of the fact that they trust your credit quality and your risk control.

Jay Xiao

[Foreign Language]

Tony Hung

In terms of the funding partners and who we are working with, I think Jay wanted to add, I mean, we certainly work with banks. We certainly work with consumer finance companies and we work with trust. And quite often, actually, we do have two models with them.

Literally, one where they take on the reserves themselves, and then a model also where we take on the reserves. And within that context, I mean, I think if you think about it from a standard model, it's really a simple question, let's say, there is a 24% APR loan. We get the funding partner 8%. And then afterwards, we get the remaining 16%, which we need to apply to reserves or costs et cetera and that's our profit. This would be something like 30% to 35% in the ongoing model.

Now if we reverse it into the model where basically the banks pick on the risk reserves, what happens, this almost literally reverses itself in the sense that we become the party that takes the 8%. They get the 16%. So do they make more money from this? Yes absolutely, as long as the risks are assessed correct. And do we get anything from this?

Well, absolutely, because this is asset light model for us where we are not capital constrained and we can have a cleaner system, if you will, be also more compliant with potential future regulatory directions. And hence, it's very much a win-win situation for both parties. I think again, it's basically predicated on a collaboration trust and fundamentally that the economics that we just talk about working. If they don't work, then you can't do this.

Sanjay Jain

Okay. So just to be clear because you just – before Jay's reply, you did say that there was some risk sharing. Just to be clear that whatever loss happens in these loans then it is entirely on the bank. There is nothing which comes back onto you?

Tony Hung

So let me translate that for you a little bit. [Foreign Language]

Jay Xiao

[Foreign Language]

Tony Hung

So we're very, very clear on this. It is a revenue sharing model. It is a model where the banks take on the risk. And in accordance to the contract, what is the worst case scenario according to the contract? One, we won't get the revenue share. And two, the cooperation will stop in accordance with the contract.

Jay Xiao

[Foreign Language]

Tony Hung

Now fundamentally, why does this model exists? It's because banks and the trust et cetera, they are motivated. They are motivated by the profit models. And they can make more money under the circumstances, under this model. Operator?

Operator

Can we move to the next question? The next question comes from the line of John Cai from Morgan Stanley. Please go ahead.

John Cai

[Foreign Language] I have several questions related to the business operations, provisions, and our risk target in the future. So firstly, on the business operations, I would like to follow-up on the profit share in our revenue sharing models. Just wonder what kind of the APR assets that we are transferring the risk to the funding partners at the moment.

And also we heard from some peers that there could be a situation that one borrower could have safer rooms, some of them is guaranteed by loans, and then some of them is risk sharing. So just wonder what's our model on that front?

And also about the Lehua Card, I've heard that it's also contributing to the new customers because my previous understanding is that it's mostly for existing customer. I just wonder what's the contribution of new customer from Lehua Card, and how is the outlook?

Jay Xiao

[Foreign Language]

Tony Hung

So on the revenue sharing, I think basically, you might see actually quite similar pricing, same pricing, nothing, shall we say, separate or different. Ultimately, it's going to be based and – determined and based on the customer as well as the financial institution providing the financing.

Now based on if you will any specific set of revenue, so I mean for the financial institution, they may have certain requirements on the APR, certain type of credit customers, we have certain preferences. So ultimately, it's determined on those basis if you will.

On the Lehua Card and it's definitely going to end up becoming also very much a core part of our customer acquisition strategy this year. I think, if you for example, put commercials out there, ads out there on loans, you're going to have one thing, but we find that with Lehua Card, you're going to have a better returns because you're providing people the ability to go anywhere with it and also to spend on any platforms.

And when you work specifically with different platforms on it and you provide loans, it may or may not tie as neatly or well to their ecosystem of spending, whereas for the Lehua Card, we discovered that it seems to tie much better, especially if you attach our benefits to it. So it's definitely going to become a core part of our strategy for customer acquisition this year.

John Cai

[Foreign Language]

So just quick follow-up on the Lehua Card, and I think from the press release that you mentioned about around RMB10 billion that transaction is related to consumption scenario. I was not sure, if that's all about Lehua Card or there other products. And it seems the proportions, these are quite high. It accounts already – it's close to one set of our total origination.

Second question is about the provision, and as we see from the release that the Company expect decent profit in the second quarter. So and there is also a mention about that we don't expect any incremental provision related to COVID-19 in the second quarter.

I just wonder if there is a chance of a write-back and about the RMB0.9 billion provision. I'm not sure, but if the Company can tell us how much has already been incurred and what – and then, how much is expected? And also is there any coverage metrics that the Company can give some color about maybe the guarantee markup or maybe the loan loss reserve ratio? Thank you.

Jay Xiao

[Foreign Language]

Tony Hung

Yes, John. So I think you understood that, but basically for the benefit of everyone on the CECL fundamentally, it's a policy that requires you to look at the future assessment, the long-term future assessment of the impact. And of course in the first quarter, we had a very unique situation that perhaps has not been seen before in literally 100 years. We had COVID-19.

And when we look at the long-term implications, of course, this includes the recovery. So hence some when we look at the situation long-term, it's not going to lead to shall we say, any short-term changes in the near future or adjustments. It will depend on our long-term forecast.

But certainly, as developments occur in a certain way and some of the things that you mentioned maybe possible, and it may be possible that we make certain adjustments accordingly. It's also worth noting that on the provisions, you can say that it's not just about the first Q as we mentioned. It is very much about the loans of the whole under the current environment and how they're likely to develop and change. And our assessment on the CECL will need to reflect that accordingly. Operator?

Operator

Yes. The final question comes from the line of Daphne Poon from Citi. Please go ahead.

Daphne Poon

[Foreign Language] So I will translate my questions. My first question is regarding the customer acquisition. First is that we saw the Q1 registered user number is very strong. So I just wonder what percentage is coming from like the organic users and what percentage is coming from the channel partnerships.

And on a full-year basis, do you have like a target mix in terms of say the loan volume contribution from the repeat borrowers and the new borrowers? And since you mentioned earlier, since you do have like a more – you're taking a more proactive stance in customer acquisition in the second half. So that would mean that for on a full-year basis, you still expect more or like a meaningful year-over-year growth in terms of your new borrowers' number?

And the second question is regarding the funding side. I just wanted to check after this new regulation on the online coming out in early May, do you see any less positive trends in terms of your funding partnership with the banks, say, there are more large banks willing to partner with you? And also do you see any downtrend on the funding costs, whether you have any like guidance or outlook on that? Thank you.

Jay Xiao

[Foreign Language]

Tony Hung

So on the first quarter, in terms of the new customer growth, it came primarily from natural traffic. And on your question on the new and old customer, I think when you look at the new customers. They have perhaps contributed about 20% to loans in the first quarter. So that's actually lower than last year.

So this year, we're definitely right now looking at a trend where the old customers are contributing more. In terms of the new customer acquisition, hopefully, as we continue to watch things recover and as the year plays out, gradually the new customer growth will become a little bit more like what we had last year as things develop now.

On your second question, with regards to bigger banks being more willing to cooperate with us as well as lower funding costs, well, we're very happy to say that it's not just the bigger banks, big, small, all sizes, all the banks out there, they are looking to work with us. We're seeing a lot of cooperation and a lot of initiatives.

A lot of – if you will, very forthcoming and proactive cooperation and setups that are coming from the different financial institutions, which in turns led us to a situation where funding is clearly plentiful and there is definitely the opportunity to a lower cost.

So it's basically very broad cooperation. And as you know, big banks, ICBC, has been working with us very, very long time. And the banks themselves actually never mind us negotiating with them. They often are proactively coming to us and saying that they will lower their funding cost to us for access to the assets that we're providing.

So quite often, we're hearing something like 7% cost of funding. And certainly, a lower rate from some of the funding partners of say, 50 basis points is very common. So I think under the current conditions and the current macro environment, we're definitely looking at a very favorable situation, with plentiful funding and opportunities to lower funding cost.

Daphne Poon

Okay. That's very clear. Thank you.

Operator

Thank you. As there are no further questions, I would like to turn the conference back to presenters for any closing remarks.

Tony Hung

Thanks, operator. So thank you. That does conclude the conference call. Thank you all for participating. You can all disconnect.

Operator

Thank you. Ladies and gentlemen that does conclude the conference for today. Thank you for participating. You may all disconnect. Thank you.