LexinFintech Holdings Ltd. (NASDAQ:LX) Q4 2023 Earnings Conference Call March 20, 2024 10:00 PM ET

Company Participants

Mandy Dong - Director of Investor Relations
Jay Xiao - Chief Executive Officer
Zhanwen Qiao - Chief Risk Officer
James Zheng - Chief Financial Officer

Conference Call Participants

Alex Ye - UBS
Yada Li - CICC
Yuying Zou - CLSA

Operator

Good day, and thank you, for standing by. Welcome to LexinFintech's Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Mandy Dong, IR Director. Please go ahead.

Mandy Dong

Hello, everyone. Welcome to Lexin's fourth quarter and full-year 2023 earnings conference call. Our results were issued earlier today and can be found on our IR website. Joining me today are our CEO, Jay Xiao; CRO, [Arvin Qiao]; and CFO, James Zheng.

Before we get started, I'd like to remind you of our Safe Harbor statement in our earnings press release, which also applies to this call. During the call, we may refer to business outlook and forward-looking statements, which are based on our current plans, estimates and projections. The actual results may differ materially, and we undertake no obligation to update any forward-looking statements. Last, unless otherwise stated, all figures mentioned are in RMB.

In today's call, Jay will first provide an update on our overall performance. Arvin will discuss risk management progress. Lastly, James will cover the financial results in more detail.

I will now turn the call over to Jay. His remarks will be in Chinese and English translation will follow.

Jay Xiao

Good evening and good morning. I'm pleased to give an update regarding our performance for the fourth quarter of 2023. In the face of the current macroeconomic environment and [industry] challenges, we adopted a prudent business strategy in the fourth quarter. We adhered to our strategy of dual business growth engine driven by data and risk management, achieving steady development.

Total loan origination in Q4 reached RMB61.2 billion, a 9% year-over-year increase. Total loan origination volume for the full-year was RMB249.5 billion, a 21.9% year-over-year increase. Loan balance grew to RMB124 billion, a 24.5% year-on-year increase. Revenue was RMB3.5 billion in Q4, a 15.1% year-on-year increase. Total revenue for the full-year was RMB13.1 billion, a 32% year-on-year increase.

In the fourth quarter, the industry faced increased challenges due to the slow recovery of macroeconomic with credit demand and intensified competition. As a result, the risk level across the industry went up and we faced some short-term pressure on profitability. In response, we took a series of measures in risk management and a refined operation to mitigate the impact.

To be specific, in terms of new customers, we developed the low-end growth [risk growth system] based on new customer segmentation and jointly built the RTA model in collaboration with platforms such as ByteDance, significantly improving our risk identification capabilities for online traffic in Q4, while the number of newly registered users remain the same compared to Q3. The number of new active users increased by 51.8% year-over-year. The early stage risk performance metrics of the newly issued loans stabilized and entered an improving momentum with nearly 15% decrease in December. This will effectively bolster the inflow of high quality customers and improve the overall asset quality.

In terms of existing customers, in Q4, we focused on upgrading credit lines, granting pricing and trading strategy system further enhancing the competitiveness of top tier customer offers. The proportion of transactions by super-prime and prime customer groups increased by 12% compared to the third quarter, and the risk level of new loans issued to existing customers decreased by over 15% compared to the previous quarter. We targeted potential customers who previously used our products, but not activate for long-term or never activate their accounts before and made offers to them, resulting in a conversion rate increase of over 50%.

Leveraging enterprise WeChat will further improve customer service efficiency and satisfaction, accumulating 1.9 million followers. Through this risk management and the refined operation measures, despite fluctuations in asset quality in the second half of 2023 across the whole loan facilitation sector, our overall asset quality started to stabilize in December with day-one delinquency rate dropped 6% compared to the previous month and collection rate remained stable. Since we entered 2024, the quality of new issued loans has continued to improve and the risk performance indicators of the overall asset portfolio are gradually improving as well. Our CRO, Arvin will elaborate on this later. [Indiscernible] bringing down the risk level of our assets going forward.

In Q4, we invested RMB136 million in research and development, further advancing the application of AI large language models in our operations to improve work efficiency and customer experience. Through advanced training, our large language model can automatically analyze multiple data source and identify user’s industry applications, repayment intentions and other relevant information. This capability enables us to create differentiated and personalized customer profiles and the laboring systems, allowing us to implement data-driven precise customer segmentation strategies.

In 2024, we will focus on the following key areas. First, bringing down risk level of overall assets and enhancing profitability. We recently upgraded our risk team and invited Mr. Qiao Zhanwen to join us as our CRO. Mr. Qiao has over 10 years of experience in Ant Group, managing more than trillions of assets, and has extensive experience in risk management space. Under his leadership, we have gained deeper understanding and set clear goals for improving our risk management framework and the developing of full lifecycle risk management system.

Accordingly, we have planned out specific measures. In the year ahead, we will implement risk management work in three main aspects: new customers, existing customers, and loan collections. For the first aspect, for new customers, we will continue to increase customer acquisition efforts, strengthen the development of our own customer acquisition channels, especially targeting white-collar newcomers, blue-collar workers, and mini or micro SME owners. Through the effective dynamic growth strategy of low-end growth, we will improve credit profile identification of high quality customer groups, increase the volume of high quality new assets and the drive down to overall risk levels.

For the second aspect, for existing customers, we will strengthen the construction of underlying identification capabilities and match differentiated risk strategies based on different customer segments. Particularly, we are applying flexible pricing strategies to widen the price range for different customer segments. For high quality customers, we will strengthen competitive offer, capture a large share of their wallet and simultaneously lower overall portfolio risk. With over 200 million registered users, Lexin still has ample room for growth.

For the third aspect, in terms of loan collection, we will strengthen collaboration with financial institutions, expand the scope of legal action and improve its efficiency. We will continue to advance the development of the localized collection and recovery integrated system to effectively ensure user experience and efficiency in delinquent loans recovery. We will strengthen AI technology to enhance delinquent loan management systems, such as intelligent routing systems and leverage large language models to improve loan collection efficiency.

Secondly, we will continue adhering to the customer-oriented principle and improve our operation based on a refined customer segmentation metrics. On one hand, we will strengthen customer credit profiling to offer differentiated products for various customer segments. In 2024, we will sharpen our focus on the [indiscernible] for SME customer segments and [indiscernible] for high-quality consumer segments and products such as [indiscernible] and speedy lending for growing customer segment.

On the other hand, through the dynamic growth strategy system of low-end growth, we will serve the customer's need and manage their risks throughout the entire lifecycle. Under this dynamic approach, we are able to offer appropriate – to their credit needs at each phase of the whole lifecycle. In addition to various products, we will continue to reinforce our work on the customer rights protection front.

We have formed a consumer rights protection committee and the consumer rights protection center. In 2024, we will better meet customer demand and effectively improve customer satisfaction by enhancing consumer protection governance system and the mechanism thereby reducing the impact of malicious compliance around illegal groups.

Thirdly, our Lexin consumption ecosystem starts to show driving force for steady growth of our business at our tech-empowerment service business line. We will invest more in customer acquisition and expand to more city commercial banks and the rural commercial banks, which will further fuel the growth in scale and revenue. As for our offline inclusive loan business [indiscernible], we will continue to focus on low-tier cities that locate in industrial belt, conducting grid-based operations and target micro SME customers, self employee business owners, high-quality salary workers, and offer more competitive products. We will continue to scale up our team, upgrade salesforce management system, enhance the team management and underline the differentiation advantages of customer acquisition and firsthand information-based credit profile identification.

As for the e-commerce business, while maintaining our advantages in 3C products, we will expand to more trendy goods SKU that attracts the youngsters will strengthen differentiated trading and risk management strategies, upgrade risk management system, improve user credit profile identification accuracy and uplift approval and the transaction rates aiming to expand scale and profitability.

Fourth, for funding costs, currently our funding costs have already hit low 6%. This year, we will issue ADS and though we expect this will further reduce funding costs.

Looking ahead into 2024, we will adhere to prudent operation principles, prioritize risk management and to maintain steady growth in transaction volume throughout the year. We are confident that as our skills expand and risk performance continue to improve, our profitability will further increase. We will continue our recurring cash dividend program and in-house shareholders return. The Board has approved the plan to distribute cash dividends of approximately US$0.066 per ADS for the second half of 2023.

Next, I will hand over the floor to our CRO, Zhanwen to discuss risk management.

Zhanwen Qiao

Thank you, Jay. I'm glad to give an update regarding the risk management performance in Q4. First, let me give a few words introduction about myself. I joined Lexin in December 2023. Prior to that, I served at Ant Group for over 10 years, in-charge of the holistic risk management work of consumer credit products such as Ant Huabei and Ant Jiebei. I also served as the deputy general manager of Ant Consumer Finance Company in Chongqing, overseeing comprehensive risk management for consumer finance. I have deep involvement in the construction and the integration of Ant’s consumer credit risk management system with extensive practical experience in building risk management team, innovative risk management technologies and the consumer credit risk management.

In Q4, our asset quality showed some pressure mainly due to the slow macroeconomic recovery with consumer demand and the turmoil in the loan collection industry, which resulted in fluctuation in the risk performance of our existing loan book. We have taken timely and effective countermeasures to mitigate the impact including strengthening risk identification capabilities, reclassify customer segmentation, in-housing risk management of existing customers, upgrading risk management towards and accelerating talent acquisition.

Looking at the asset quality of overall loan book. The FPD7 of newly issued loans reached its peak level at beginning of Q4 2023 and has since being gradually trending better on a monthly basis. The day-one delinquency rate of the overall assets reached its peak level in the middle of Q4 2023 and has been improving month by month, reaching its lowest point recently with over 10% improvement compared to the peak level. The collection rate of the overall assets started to come under pressure in the second half of 2023, but began to stabilize and recover from January 2024.

Next, let me give an update regarding the major progress we have made in risk management work streams in Q4. Firstly, in Q4, we further strengthened our risk identification capabilities. On the data front, we conducted in-depth joint modeling with several leading platform-based Internet companies. By fully leveraging their massive amounts of scenario data, we have greatly improved accuracy and stability of our risk scoring models.

Additionally, in the development of risk models, we have introduced and applied cutting edge algorithms such as time series models and relationship graph models, effectively expanding our risk identification capabilities in the temporal and spatial dimension. Based on richer scenario data and the model algorithm, we have comprehensively iterated and upgraded the risk management system for our three core business lines that are consumer finance, offline inclusive finance [indiscernible] and e-commerce. The performance of our risk identification capabilities has seen an improvement of nearly 30%.

Secondly, in Q4, we reconstructed our customer segmentation by using customer basic information – credit profiles and customer credit scores to classify customers into four categories that are super prime, prime, neo-prime and sub-prime. Compared to the previous customer segmentation, this new approach has significantly improved risk level differentiation and the stability among various customer segments.

In the consumer finance business line, we have reconstructed the risk strategy and operational system throughout the customer lifecycle based on the new customer segmentation. This has led to a 35% increase in credit approval rate and 10% decrease in risk level for new customer loans. In the future, we will further enhance our precedent targeting of high quality customer groups and leverage a dedicated growth strategy system to boost the draw down rate of high quality customers, thus expanding the scale of high quality assets.

Thirdly, in terms of risk management for existing customers, we have upgraded and improved the overall credit approving, pricing and transaction strategy system through refined risk management for different customer segments. We have in-housed the competitiveness of offers for our super prime and prime customer groups. The ratio of GMV loss volume for our super prime and prime customer segments has increased by 12% compared to Q3, effectively improving our asset structure and reducing the risk of new loans to existing customers by 15%. Furthermore, we have achieved significant results in customer retention through measures and prevent churn and recall loss of customers, particularly for our high quality customer segment.

Fourthly, we have further upgraded our risk management tool and established a standardized risk strategy management process and framework. This enable standardized data input and decision output as well as the ability to orchestrate highly visualized and complex decision strategies. This has greatly improved the operational efficiency of risk management system, supporting rapid strategy iteration and the launch of new business products. The upgraded risk management framework can effectively support end-to-end standardized link between risk management and marketing systems, further enhancing the responsive iteration and the refinement among different parts of our operation process.

Lastly, as we accelerate the implementation of the four mentioned risk management upgrade measures, we have also brought in a group of outstanding meet to senior level risk management talents from leading platform in the industry. In the next quarter, we plan to further strengthen risk management from the following three aspects to ensure a continued decline in the risk level of a newly issued loan.

Firstly, we will expand and utilize more core data sources to comprehensively improve our risk identification, customer profiling, preference identification and the stability identification capabilities. Secondly, we will continue to enhance the modularization building up of our risk management system, improving the standardization of risk strategies. We will transform core inputs from different dimensions into standardized modules such as income module, multiple platform module, responsive module, et cetera. This will further enhance the standardization and the consistency of risk management strategies.

Thirdly, we will develop intelligent risk management product capabilities by creating multiple products like risk management tools such as strategy robots and the strategy experimentation platforms. This tool will further enhance the efficiency and the precision of risk management work.

Looking ahead into 2024, we will continue to uphold the principles of risk management priority and the prudent operations. We will comprehensively upgrade our risk management capabilities in various aspects, including infrastructure, risk management framework, risk management data source, models, strategies, tools and talent teams. Our goal is to significantly enhance our risk identification capabilities for different customer segments.

We will expedite the implementation of multiple specialized initiatives to strengthen risk management and refine our ability to manage customer risk throughout their entire life cycle, including loan origination, loan servicing, and delinquent loans management. We will continue to enhance our ability to identify high risk customers and employ various measures such as account closure, credit line amount reduction and transaction interception to reduce the generation of delinquent loans.

With confidence, capability and effective methods, we aim to achieve a gradual decline in risk level on a quarterly basis, refine asset quality, support a steady growth and improve profitability margins.

Next, I'll hand over the floor to our CFO, James for financial updates.

James Zheng

Thank you, Zhanwen. I will now provide more details on our financial results. Please note that all numbers are in RMB unless otherwise stated.

In a challenging economic landscape marked by modest economic recovery and consumer spending portion, we closed 2023 on a positive note, achieving our business target. Despite industries wide risk volatility, our commitment to strategic pillars, rigorous risk management, customer segmentation and upgrading operational refinement and cost optimization has fortified our financial framework and yielded positive business results.

I'd like to highlight a few points related to our operations and the financial progress from last quarter. Loan origination and profitability growth. Despite the controlled loan growth in response to the industry risks in Q4, we have recorded commendable loan volume and profitability increase over the year. Our Q4 GMV reached RMB61.2 billion, a 3.3% sequential decline reflecting our tightened credit standards and focus on quality growth. The annual loan origination grew by 21.9% to RMB249.5 billion with outstanding loan balance up 24.5%. Annual revenue surged by 32% and the net income spiked by 56.2%, excluding investment-related impairment losses.

Second, we have demonstrated strong and resilient revenue generating and growth capability. Despite the GMV year-over-year growth of only 9.2% in Q4, the revenue growth outpaced at 15.1% year-over-year. In Q4, we have continued to lower borrowing costs for our users. We cut the weighted average APR by 0.4% to 23.7% from 24.1% in Q4 a year ago, therefore, resulting a 40 basis decline in pricing. Additionally, as a general practice to reduce the risk exposure, we have shortened the new loan tenor from average of 13.9 months to 12.3 months. The 40 basis point decline in pricing, the shortened tenor along with the industry-wide risk penetration did not significantly impact the overall Q4 revenue take rate.

We only saw a marginal revenue take rate dip of 25 basis points to 2.47% from 2.72% a year ago. This is due to the strong positive revenue uplifting effect from lowered funding costs and the continued improvement in customer early payoff. We have recorded a historically low funding cost of 6.18% in Q4, down 63 basis point year-over-year. We achieved this through ample funding and partnerships with cost efficient national financial institutions. The funding cost hit a new record low level below 6% in February, and we expected this downward trend to continue going forward. We have taken some proactive measures to reduce the borrower's early repayment. The repayment ratio lowered to only 87% of the peak level in 2023.

Thirdly, we have substantially optimized our cost structure. We trim down the total expense including the processing service, sales and marketing, R&D and G&A as a percentage of average loan amount from 4.51% in Q4 2022 to 3.88% in Q4 2023. Thanks to the execution of cost optimization project. One such an example is the user acquisition cost. We realized a big saving on acquisition costs per user in Q4. Thanks to our upgraded RTA marketing model and more attractive loan offerings. Our sales and marketing expense ascended a bit by 4.6% compared to last quarter, while our new users with approved credit line and a new active users grew much faster at a rate of 21.5% and 35.7%, which indicates a 14% and 17% unit acquisition cost of saving respectively.

Fourth, the risk fluctuation and its impact. The industry-wide risk fluctuation during the second half of last year have impacted us as they did to our peers. Asset quality metrics have shown signs of stress, including the D1 delinquency rate, M1 collection rate, and the 90-plus days delinquency rate. Our 90-plus days delinquency rate moved to 2.9% versus 2.67% in last quarter. We have enacted risk mitigation strategies that are stabilizing the situation close to the end of the year and early part of this year.

The immediate financial impact is sequentially almost the flat revenue in Q4 and the increased provisioning of credit impairment costs. Total provision related cost items, including the provision for financing receivables, provision for contract assets and receivables, provision for contingent guarantee liabilities and the changing fair value of financial guarantee deliberative and loans at a fair value increased by 7.1% on a quarter-over-quarter basis due to the increased pressure on our asset quality in Q4. We are maintaining an ample bad debt provisions staying a robust coverage ratio of approximately 317%, which is defined as a total provision amount divided by the principal amount of 90-plus days delinquent loans.

Apart from the above four operation-related highlights, I would like to elaborate a little bit more on the specific items from financial statements. First, investment-related impairment losses. The major impact on earnings came from the investment impairment related to a domestic investment of a private bank, excluding after tax impact of RMB224 million of investment related impairment losses. The net profit for the fourth quarter was RMB236 million with a net margin of 6.7%.

Second, some notes on revenue line items. Guarantee income grew steadily by 11% on a quarter-over-quarter basis at a 42% on a year-over-year basis due to continuing releasing from existing loan book. Tech-empowerment service fell 6% from last quarter and increased 3.4% from last year, primarily due to the reduced volume in tech-empowerment business.

Third, some notes on cost line items. Funding costs on our income statement, which related to our on-balance sheet loan generation dropped significantly by 42.1% quarter-over-quarter and by 47.9% year-over-year due to the maturity of a portion of trust funding in Q4. Additionally, the processing and servicing cost increased by 15.3% in Q4 compared to the previous quarter due to the increased risk management initiatives and projects. General and administrative expenses rose by 26.6% in Q4 from last quarter due to the addition of more risk management talents.

Fourth, on-balance sheet items, our cash position is strong, ending the quarter with around RMB4.4 billion in hand and a solid equity position of RMB9.7 billion. We continued our cash, our recurring cash dividend plan and declared a cash dividend for the second half of 2023 amounting around US$10.8 million, equivalent to roughly 20% of total net profit for the second half of 2023. The total 2023 combined dividend payout is about US$0.182 per ADS with a dividend yield at roughly 10% based on the year end closing price of 2022.

Looking ahead, we will continue to either maintain or increase the dividend payout ratio to our shareholders when the market condition improves. Looking forward to 2024, due to the uncertainty of the economic growth and our prudent approach, we expected the annual GMV amount for the full-year 2024 to be no less than that of last year as we remain focused on the enhancement of risk management as a top priority and net profit will grow from last year as well.

In summary, 2023 was a year of rebound with a strong growth in both top and bottom line, surpassing many peers driven by our core strategies. We remain focused on improving risk management capabilities, upgrading user groups, operational excellence and cost optimization to capitalize our emerging opportunities.

That concludes our prepared remarks. Operator, we are now ready for the Q&A session. Please open the floor for questions. Thank you.

Question-and-Answer Session

Operator

Thank you very much. We will now conduct a question-and-answer session. [Operator Instructions] Our first question comes from Alex Ye of UBS. Please go ahead.

Alex Ye

[Foreign Language] I have the question for Mr. Qiao, who firstly was in charge of the risk management for Ant Group's trillion-dollar balance of consumer loans. Since you have been with Lexin for several months now, we would like to learn about the key reasons that have led you to choose to join the platform and as well as the many challenges and opportunities you have seen since joining? Thank you.

Mandy Dong

Okay. Alex, this is Mandy. Let me do the translation for Mr. Arvin. Well, I made my decision to join LexinFintech, there are several key considerations. Firstly, LexinFintech is one of the earliest established consumer finance platform in China. It has accumulated over 200 million registered users with immense growth potential, and Lexin has built its unique Lexin consumption ecosystem that consists of various business lines, including consumer finance, offline inclusive finance [indiscernible], e-commerce and SaaS tech products.

Well, we see there are tremendous synergy potential among these business lines. So in my perspective, Lexin has a very solid foundation and a strong customer base. For the second point, the reason, you can see the risk level of Lexin's assets nowadays stands at relatively higher level when we compared to other industry peers. However, I'm very confident that by implementing a proven quantitative risk management system and enhancing further refined risk management, we can bring down the risk level of our Lexin assets to match industry average level and in the future. Furthermore, we can gradually improve to the leading level of the industry. In addition, the company current PE ratio is quite low that may indicate ample room for returns as, in the future, we can gradually bring down the risk level and profitability will increase.

Well, after the past few months of my work in the risk management space, I see there maybe further rooms in the following points. First, Lexin has utilized a lot of third-party data sources, but may lack in quality in the future. In the future, we will improve the models, introduce more data source and improved models, stability, and risk identification accuracy.

Secondly, the risk model nowadays, mainly in the credit rating, credit scoring type, which shows a lack of variety, in the future, we will include more different types of models including the credit profile type, responsiveness type. There's still room for also – thirdly, there's still room for improvement of building a more robust risk management system and a more sufficient array of risk management tools.

Over the past few months, we have already made notable progress in upgrading risk identification system, establishing a full life cycle risk management system, building intelligent risk management tools, to achieve the above-mentioned measures. We see the asset quality of newly issued loans already showed a turning point since the last year-end with risk level declining on a monthly basis. Alex, hope that can address your question.

Alex Ye

Thank you.

Operator

Thank you. Our next question comes from Yada Li of CICC. Please go ahead.

Yada Li

[Foreign Language] I will do the translation. From the fourth quarter results, we observed the new users with credit lines went up by roughly 17% Q-on-Q, while the sales and marketing expenses grew by only 5%. And I think it indicates a significant implement in customer acquisition efficiency. And could management share some more recent moves and efforts on the customer acquisition? That's all. Thank you.

Mandy Dong

Well, yes, I'll do the translation for Jay. Firstly, you see, in Q4, we further upgraded our model and strategy based on our enhanced risk identification capability. We adopted low and grow growth strategy on the credit line approval and drawdown. This resulted in a notable improvement of users with credit line increased by 40%, credit drawdown by the good quality users increased by 45%, and risk level of those newly issued loans consistently decreased on a monthly basis.

Secondly, we have put more efforts to diversify our channels in terms of customer acquisition rather than, like in previous, solely relying on the online advertising channel. So we tailored products and services and catered needs for different customer segments. By that, we achieved a differentiated and diverse customer acquisition matrix. Well, to be more specific, for the fresh graduates, micro-SME owners, super-prime and prime users, we also developed customer acquisition approach and products.

Operator, we can see – open the question to the next listener.

Operator

Thank you. Our next question comes from Yuying Zou of CLSA. Please go ahead.

Yuying Zou

[Foreign Language] Let me do the translation. So as Jay mentioned in his remark, Lexin has launched a multiple growth strategy in 2024. That's the slow recovery of the domestic economic and the intensified competition in domestic market. More and more peers began to expand their business internationally. Does Lexin has the similar business plan in the future? Thank you.

Mandy Dong

Yes, you are right. Definitely expanding internationally is one of the – our key growth strategy. And nowadays, we have already have some business running in the overseas markets. In 2024, we will expand business in some selected overseas markets, either will by acquisition or building the business from the ground up by ourselves. We are confident to replicate our success in China market to overseas, but the business volume of our overseas business is relatively small. We will update more to the market once we achieve more progress in the future.

Well, operator, if there are no further questions on the line, maybe that – that's come to the end of our call today.

Operator

Thank you. I see no further questions at this time. Thank you all for coming to this conference call. This is the end of our conference call. You may now disconnect. Have a great day everyone.

Jay Xiao

Thank you. Okay, bye-bye.

Mandy Dong

Thank you. Bye.