Lufax Holding Ltd (LU) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holdings Third Quarter 2026 Earnings Call. [Operator Instructions] Please note this event is being recorded. Now I would like to hand the conference over to your speaker host today, Ms. Xinyan Liu, the company's General Manager of Board Office. Please go ahead, madam.

Thank you very much. Hello, everyone, and thank you for joining us on today's call. Our financial and operating results were released by our newswire services earlier today and are currently available online. Today, you will hear from our Director and CEO, Mr. Xiang Ji, who will share recent developments and provide insights into the company's overall performance. Our CFO, Mrs. Jia Liu, who joined Lufax in October, will then walk you through our financial results. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. With that, I'm now pleased to turn over the call to Mr. Xiang Ji, Director and CEO of Lufax.

Thank you, Xinyan. Thank you all for joining our third quarter 2026 earnings call. I would like to begin with 2 updates. First, trading in our ordinary shares on the Hong Kong Stock Exchange resumed on September 24, 2026. We thank all shareholders and the broader investor community for your patience and support throughout this process. Second, I'm actually very pleased to welcome Ms. Jia Liu, who joined us as CFO in October. Ms. Jia Liu brings extensive experience in audit banking and financial management of listed financial technology companies. Most recently, as CFO of CITIC AI Bank. She will walk you through our financial results following my remarks. Let me now share an update on the macro and regulatory environment. The operating environment for small and micro business owners remained challenging in the third quarter and financing demand stayed weak. Cheung Kong Business School's SME development index remained below the 50-point boom and bust line, indicating that the financing environment for small and micro enterprises remains under pressure. Consumer finance demand was also subdued. As of the end of September, household consumer loans declined year-over-year. Domestic consumption remains soft. Consumer confidence continued to be cautious and households continue to prioritize balance sheet repair. On the regulatory side, the industry continues to move towards greater standardization in the third quarter and meet the intensified enforcement against the debt collection industry. Both industry peers and Lufax have seen notable volatility in risk performance. The industry is currently recalibrating its compliance boundaries. Since the second quarter, tightening industry liquidity and heightened regulatory scrutiny, including collection practices have led us to observe rising risk across both small business owners and consumer finance lending markets. While we believe the tightened regulatory environment will benefit the industry in the long run. It has waited on the near-term risk performance. In response to the changing macro and regulatory environment, we maintained a very prudent operating strategy. In the third quarter, we continue to implement our selective customer strategy, adjusted our post loan collection approach and continue to deepen our refined operation. Firstly, under our selective customer strategy, we proactively reduced and exited certain high-risk customer segments and adopted a more cautious approach towards some market customer segments. Second, we continue to leverage our in-house collection force and adjust our personal collection strategies. On the recovery side, we increased our use of judicial recovery channels and leverage the model to identify high-quality accounts, improving recovery efficiency. Our in-house collection team provides dedicated internal collection capabilities mitigating our reliance on third-party collection service providers. We will continue to closely monitor regulatory developments and reinforce compliance controls across the collection process, including enhanced compliance training to ensure that all collection activities remain within the legal and regulatory framework. Third, we continue to deepen our refined operation. We continue to deploy differentiated products tailored to local industry and customers across different regions. Our industry PRISM program now covers over 700 subindustries, offering industry-specific products that meets industry-specific requirements of our customers. We have also established a dedicated direct sales team for consumer finance that targets quality salary customers. This team is moving our customer engagement model from single product sales to a full life cycle relationship manager approach, enabling long-term customer value realization. In addition, we're deepening our management of existing customers, leveraging our license advantage. We are building a diversified product portfolio and a multichannel customer management system to increase repeat borrowing. We are also deepening our use of AI to enhance operating -- operation efficiency. Our AI-powered digital twins have added new features, providing end-to-end AI enablement from customer acquisition to customer management and improving the efficiency and quality of our sales team. Looking ahead, we will further extend this AI capability to risk management. On the pre-loan side, we plan to further upgrade our risk models by leveraging AI capability in -- identification of risky customers and drive the optimization of our customer portfolio structure. In post loan management, we aim to further deepen collection reforms, expand application of AI-driven collections and improved collection effectiveness through intelligent assistance. Now turning to our operating model, operating results. Total new loan sales in the third quarter were RMB 58.3 billion, up 2.5% year-over-year and up 14.1% from the second quarter. Consumer finance continued to lead our growth, with new loan sales up 25.2% year-over-year to RMB 39.7 billion, representing 68.1% of total new loan sales. Our total outstanding loan balance was RMB 167.1 billion as of the end of third quarter, broadly stable from the second quarter and down 11.9% year-over-year. Our consumer finance loan balance grew 19.8% year-over-year to RMB 70.5 billion. Consumer products with smaller ticket sizes and short tenor carry lower risk in the current environment. Over the long term, supported by policies need to expand domestic demand and boost consumption, we believe consumer finance continue to hold growth potential. Turning to asset quality. Our risk performance in the third quarter was negatively impacted by the macro and the regulatory environment, especially the intensified enforcement actions against the debt collection industry. Our C-M3 flow rate for the total loan was 1.2% in the third quarter compared to 1.0% in the second quarter. C-M3 flow rates for the unsecured and secured loans were 1.2% and 1.1%, respectively, compared to 1.0% and 0.9% in the second quarter. Our DPD 30+ delinquency rate for total loan enabled, excluding consumer finance subsidiary, was 5.5%, down from 5.8% in the second quarter and our DPD 90+ delinquency rate was 3.2%, down from 3.7% in the second quarter. As of the second -- end of the third quarter, the NPL ratio for consumer finance loan was 1.3%, stable from the second quarter. Now let me turn to pricing and funding costs. The average pricing on the LONGi loan was 20.3% in the third quarter and the average pricing of consumer finance loans was 16.4% as we continue to implement our selective customer strategy. On funding, our cost of funds continued to decline. Our cost of funds by balance, excluding consumer finance was 3.6% in the third quarter, down 20 basis points sequentially and 80 basis points year-on-year. Finally, we continue to advance our compliance enhancement efforts, under the leadership of our Board of Directors, we are further strengthening our internal control and compliance standards. Going forward, we will remain prudent in our operations, focused on quality growth and committed to delivering long-term value to shareholders. With the onboarding of Jia Liu as the CFO, I'm confident that our financial reporting capability and quality will be further enhanced. With that, I will now turn the call over to Jia Liu, who will walk you through our financial results. Thank you.

Thank you, Xiang Ji. Hello, everyone. I'm pleased to join you for my first earnings call as Lufax's CFO. So my priorities are to deliver accurate and timely financial reporting, maintain disciplined oversight of liquidity and capital and support the execution of our operating strategy. I look forward to engaging with you in the quarters ahead. As I walk you through our results, please note that all amounts are in renminbi and all comparisons are year-over-year. So before jumping into the details, I would like to address the net loss we previewed in our profit warning announcement on October 16. We recorded a net loss of RMB 1,494 million, within the range of RMB 1,300 million to RMB 1,700 million that we indicated in the announcement compared with a net loss of RMB 380 million a year ago. Our net loss comprised of 2 components: One is the loss before income tax of RMB 721 million and the other is income tax expenses of RMB 773 million. Starting with our pretax performance. As Xiang Ji discussed, the operating and collection environment remained challenging during the quarter, contributing to higher credit impairment losses. This increase in credit impairment losses was the main driver of our pretax loss. Turning to income tax. Our tax expense included a charge from a reduction in deferred tax assets at our financing guaranteed subsidiary, based on our current assessment of its business performance and outlook. This was a noncash accounting charge. We also updated our offshore funding plan in connection with the redemption arrangements for convertible promissory notes. The plan includes dividend distribution from domestic to overseas subsidiaries to meet offshore funding needs. Thus, we also recognize the additional withholding tax on those expected distributions. After taking into account other tax items, total income tax expenses were RMB 773 million compared with RMB 74 million a year ago. Now let me walk through our third quarter financial results in more detail. Total income was RMB 6,180 million, down 4.6%, declines in technology platform-based income and guaranteed income were partially offset by growth in net interest income. Technology platform-based income was RMB 1,055 million, down 24.1%, reflecting lower retail credit and enablement service fees associated with the decrease in the new loan sales and outstanding balance of off-balance sheet loans. Net interest income was RMB 3,677 million, up 10.3% primarily driven by the expansion of our consumer finance and microlending business. Guaranteed income was RMB 1,020 million, down 24.6%, reflecting a lower average balance of off-balance sheet loans and the lower average fee rate. Other income was RMB 167 million, down 37.7%, primarily due to a decrease in account management fees caused by decreased collections. Investment income was RMB 261 million compared with RMB 134 million in the same period last year, primarily reflecting change in the valuation of financial assets made with our own funds. So in terms of expenses, total expenses were RMB 6.9 billion, up 1.7%. Credit impairment losses increased 10.3% to RMB 4,511 million. reflecting higher actual losses and provision of loans and receivables. Sales and marketing expenses were declined 13.7% to RMB 842 million, primarily due to the decreased outstanding balance of balance sheet -- off balance sheet loans. General and administrative expenses declined 12.1% to RMB 420 million, primarily due to our continuous expense optimization and control measures. Operation and servicing fees -- servicing expenses declined 16.1% to RMB 774 million reflecting expense control measures and the decrease in the loan balance. Technology and analytics expenses declined 4.2% to RMB 226 million primarily due to expense control measures. Finance costs were RMB 122 million, up 67.1% primarily due to lower deposit interest income partially offset by lower loan interest expenses. Other losses were RMB 5 million compared with RMB 10 million in the same period last year, reflecting higher foreign exchange gains in 2026 and lower government subsidies. Turning to our balance sheet. As of September 30, 2026. We had approximately RMB 21.2 billion in cash at bank, compared with RMB 22.1 billion at the end of 2025. Net assets amounted to approximately RMB 80 billion compared to RMB 82 billion at the end of 2025. Going forward, we remain focused on disciplined execution, strengthening our governance and controls and building a sustainable higher quality growth path for Lufax. We remain committed to our prudent strategy and to delivering long-term value to our shareholders. We appreciate your continued support. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

[Operator Instructions] And our first question will come from Richard Xu with MS.

I've got 2 questions. First of all, we're basically seeing some credit losses...

We were having issues hearing Mr. Xu. We're going to move on to the next question. Our next question will come from Yujie Jing with China International Capital.

Can you hear me? I'm Yujie Jing from CICC, and I have 2 questions. First, what has been the change in the company's loan origination and asset quality following the digital technology incident, when do you expect them to stabilize? And secondly, company has recognized a relatively large amount of asset impairment charges how is collections performing now? And will the future recovery on the underlying loans being affected?

Yes. Thank you for the question from the CICC. So as far as first question is concerned, Q3 new loan sales reached around RMB 58 billion, up 2.5% year-on-year and 14% quarter-on-quarter. Consumer finance new loan sales grew 25% year-on-year to roughly RMB 40 billion, representing around 58% of total. Asset quality wise, the consumer finance NPL ratio remained stable. C-M3 flow rate increased to 1.2% from 1.0% quarter-on-quarter due to macro and regulatory pressure, particularly enforcement actions against collection industry. We expect asset quality will gradually improve as we sort of deepen our selective customer strategy. But the macro and regulatory impact will continue for a couple of months towards the end of the year. The second question is around collection, right? Collection was definitely negatively impacted by the tightened industry liquidity and heightened regulatory scrutiny and intensified enforcement actions in Q3. But we think Lufax also have advantage. We have in-house collection capability to mitigate the reduced supply of third-party collection services. I think some of the -- our peers have really suffered from the reduced supply of third-party collection services. Well, we are basically not exactly having the same issue. At the same time, we have adjusted collection strategies to improve recovery efficiency while balancing compliance requirements, including greater use of judicial recovery channels model-based identification of high-quality accounts, expanded use of AI-driven collection and increased reliance on the in-house collection force. However, for those actions to take effective, we still need a couple of months to see how it's going. While we are not able to provide forecast for future recovery rates at the moment, we actually believe these measures will improve collection performance over time.