Ladies and gentlemen, thank you for standing by and welcome to Lufax Holding Ltd first quarter 2023 earnings call. At this time, all participants are in a listen only mode. After the management's prepared remarks, we will have a Q&A session. Please note this event is being recorded. Now like to hand the conference over to your speaker- host today, Ms. Xinyan Liu, the company's Head of Board Office and Capital Markets.
Thank you very much.
Please go ahead.
Hello, everyone, welcome to our first quarter 2023 earnings conference call. Our quarterly financial and operating results were released by our News wire services earlier today and are currently available online. Today, you will hear from our Chairman and CEO, Mr. Y.S. Chou, who will provide an update of our latest business strategy, the macroeconomic trends, and the recent development of our business. Our Co-CEO, Mr. Greg Gibb, will then go through our first quarter results and provide more details on our business priorities and the key drivers. Afterwards, our CFO, Mr. David Choy, will offer a closer look into our financials before we open up the call for questions. 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 am now pleased to turn over the call to Mr. Y.S. Chou, Chairman and CEO of Lufax. Please.
Thank you for joining. As you reflect on the first quarter, it is clear that macro and operating environments continue to pose challenges for many small business owners. However, we are encouraged by some indications of an economic rebound, giving us cautious optimism in our U-shaped recovery. We remain committed to navigating the challenges that lie ahead and maintain our unwavering focus on building a more resilient business. We continue to exercise patience, prudence, and preparedness for the anticipated macro upswing in our SBO segment. Let me provide some updates for the first quarter. First, there are some signs of a gradual recovery in the macro environment, though they remained unevenly distributed at the nascent stage. China's first quarter GDP growth, expanding by 4.5% year on year, indicates that the country is on track for its 2023 growth target of 5%.
In addition, China's National Bureau of Statistics stated that first quarter was a promising start to the macro recovery. Chinese industrial profits declined 21% year-over-year, and we continue to see a divergence in the pace of recovery across industries. Small business owners are becoming more confident, it may still take some time for macroeconomic tailwinds to flow through to our core SME segments. To give an example of this improving sentiment, the Ant- Peking University survey results published in February show that approximately 80% of SBOs are optimistic about their business outlook in 2023. Over half of survey participants are expecting business volume increases of more than 50% this year.
However, it is important to note that SBOs have had less than two months of normal operations in the first quarter after the spike in COVID cases and the Chinese New Year holiday. It'll take time for SBOs to fully resume new business investments, which underpins lending demand. Let me talk about the impact on our business. I would like to start by sharing our outlook on the U-shaped recovery. During the first quarter, we observed an improvement in credit rating mix and credit quality for new loans initiated in the last two quarters. Unsecured loans in the first quarter fell within our top three credit rating categories versus 41% a year ago. New loan growth in middle third regions, which we believe will prove to be more resilient as the macro environment improves.
Notably, the deterioration in asset quality has slowed down substantially in the first quarter. We have also witnessed early signs of improvements in asset quality in certain economically resilient regions and industries. We expect that flow rate will continue to improve gradually through the end of this year when operations of SMEs gradually recover. We also expect that credit charge-offs for the risk-bearing loans will likely peak in the second quarter and then gradually decline in the second half of this year. In the second half, we'd expect total credit costs to remain elevated, but underlying driver will shift from past charge-offs to upfront provisioning, arising from increasing the portion of loans we provide full guarantees for. This will be supportive for net margins in 2024 and beyond.
As new loan growth and the portion guaranteed by us increases progressively over the next several quarters, we anticipate that the revenues will decline at a slower pace than they did this quarter. By year end, we expect the portion of loans that we bear risk as a percentage of entire portfolio to exceed 40%. This ratio stood at 24.5% at the end of the first quarter. Our ability to focus more on new business is made possible by three factors. One, the improving macro environment. Two, ongoing progress in vetting funding partners for our deployment of the model where we provide the entire guarantee. And three, the recent completion of our front-line restructuring, which was difficult but necessary. As a result, the main drivers of our U-shaped recovery are taking shape.
As we have stated previously, we expect a notable recovery in profits underpinned by stabilized ANR to be a 2024 event. As part of our U-shaped recovery plan, we have implemented several strategic initiatives. We have completed the restructuring of our direct sales force and further optimized our headquarter and front line operating costs. Total expenses excluding credit impairment losses, finance and other costs in the first quarter decreased by 21.5% versus a year ago. The total number of direct sales force, 70% a year ago. Now that we have completed our organizational restructuring, we are focused on several priorities. Firstly, we continue to increase the proportion of risk bearing on new loans we enable, under which our guarantee subsidiary provides 100% credit enhancement. These key initiatives are supported by our continued investment in technology.
During the first quarter, we deployed new technology to help us gain deeper insights into our small business owners' daily operations. For customer onboarding, we strengthened our capabilities by further embedding facial, voice, and location verification features. As a result, we further enhanced our ability to assess owners' business status. For the underwriting process, we introduced real-time assessment of customers' online marketing activities, allowing us to further evaluate their business momentum and repayment capabilities. These changes in credit process are augmenting our historical individual credit assessment, so-called KYC, with a deeper insight with owners, business and industries, KYB. Let's move on to the capital markets. We successfully completed our Hong Kong listing by introduction on April 14th, marking an important milestone in our corporate development.
The listing will increase our exposure to the Hong Kong market and broaden our investor base to continue to create value for our shareholders. Additionally, we are pleased to announce that we paid out the second half of 2022 dividends on aggregate amount of $114.6 million in April 2023, demonstrating our commitment to maintain a stable dividend policy. Finally, as we shared in our last earning call, we have substantially completed our regulatory rectification efforts, and the industry is now entering a phase of normalized provision supervision. We believe this normalized supervisory framework will provide greater stability and predictability for our industry, and we will work closely with regulatory authorities to ensure our compliance with all relevant regulations. I will now turn the call over to Greg for more details on our operating results.
Thanks.
Thank you, YS. I will now provide more details on our first quarter results and our operational focus for this year. Please note all figures are in Renminbi unless otherwise stated. The first quarter of 2023, our top line and bottom line performance were adversely impacted by the challenging macro environment. Our total income was CNY 10.1 billion, representing a decrease of 18.2% compared with the last quarter of 2022. This was mainly driven by the decrease in new loans and the pricing pressure from our credit insurance partners. Despite the challenges on our top line performance, we did turn the corner and achieve profitability this quarter with a net profit of CNY 732 million, primarily due to a decrease in credit impairment losses.
Let's dive into the details of our key drivers of the top line performance. One of the key drivers is our loan volume. In the first quarter of 2023, our new loans enabled were CNY 57 billion, representing a year-over-year decrease of 65%. This was mainly driven by our tightened credit standards on new loans enabled. Executing on our strategic initiative in response to the elevated credit impairment losses in the first quarter, we continued to prioritize higher quality SBO customer segments concentrated in economically more resilient geographies. The proportion of new unsecured loans enabled in the R1 to R3 customers, which are our top three rankings in our R1 to R6 scale, increased to 82% in the first quarter from 41% in the same period of last year.
Meanwhile, the contribution from customers in the top third and middle third regions continued to increase and reached more than double that of those who departed. We believe that we are on the right path, and we expect to see the results reflected in upcoming quarters. Additionally, we observed that new loan vintages enabled after we tightened our credit standards demonstrate improved asset quality compared with older loan vintages. As we focus on higher quality SBOs, the average ticket size has naturally increased as a result. Average ticket size of unsecured loans for the first quarter of 2023 increased to roughly CNY 270,000 from CNY 240,000 average for the year of 2022. Our consumer finance business saw healthy growth in the first quarter despite the challenges in our retail enablement model.
The total outstanding balance for consumer finance loans in the first quarter of 2023 was CNY 29.6 billion, up 39% year-over-year, and credit performance was in line with the industry credit performance. Contribution from our consumer finance business grew as a percentage of new loans enabled, and it increased from 11% in the first quarter of 2022 to 24% this quarter, further diversifying our products offerings. Another key driver of our top line performance is take rate. As mentioned earlier, our take rate remains compressed, which is mainly due to the elevated premiums charged by credit insurance partners. Although our tightened credit standards have improved asset quality of new loans, credit insurance premiums have remained at an elevated level to date. We are proactively addressing the take rate pressure by continuing to modify our credit enhancement arrangements.
Under these arrangements, our guarantee company provides full credit enhancement without the involvement of external credit insurance partners. We are encouraged by the fact that our funding partners are supportive of the shift. As of mid-May, five out of six trust partners and 37 out of 78 bank partners have agreed to extend credit under the model where we provide the entire guarantee. In addition, 31 of our funding partners are already extending new loans under the model where we provide the entire guarantee. As a result, our credit, our risk-bearing by balance in the first quarter further increased to 24.5% and is expected to exceed 40% by the end of this year.
We believe we have adequate capital to support the increase in risk-bearing loans, as the leverage ratio of our guarantee subsidiary was less than 2 x as of the end of the first quarter, well below the regulatory limit of 10 x. As such, we expect our take rate will gradually improve over the next several quarters as we increase the guarantee portion for new loan business. Let's go to the details of our bottom-line drivers. The main driver of recovery in our bottom line was a decrease in credit impairment losses. In the first quarter, credit impairment losses declined by more than 50% to CNY 3.1 billion from CNY 6.7 billion in the fourth quarter of 2022.
This was mainly driven by a notable decrease in provisions compared with the previous quarter as we've taken a more conservative view on the outlook for credit quality prior to post-pandemic reopening. As the macro environment gradually normalizes and activity is picking up in the first quarter, we partially released a portion of the previously made provisions, which had a positive impact on our P&L. The improvement in our credit impairment losses is also visible in our C-M3 ratios, the forward indicator on asset quality that we monitor closely. It stood at 1% in the first quarter, remaining unchanged compared with the fourth quarter of 2022. This was primarily attributable to the increase in C-M3 for general unsecured loans from 1.1% in the fourth quarter of 2022 to 1.2% in the first quarter.
This was partially offset by a decrease in flow rate for secured loans from 0.6% to 0.5%. While the asset quality of secured loans is clearly improving, it is worth noting the deterioration in asset quality of unsecured loans has slowed down substantially in the first quarter, and the delta of C-M3 flow rate was 10 basis point increase versus a 20 basis point increase in the fourth quarter of 2022. We will continue to monitor closely of our U-shaped recovery. Looking ahead, for the remainder of 2023, we expect credit impairment losses in each quarter to be on par with those during the first quarter. This is mainly due to our planned expansion of the model where we provide the entire guarantee during the coming quarters.
The extension of such model will increase upfront provision levels but should result in improved net margins over the medium term. During the first quarter, we continued to make progress in our new SBO ecosystem. As a recap, our new value-added services platform, branded Lu Dian Tong, is an open platform populated with digital operating tools and industry content to support business development for our small business owners. We intend to use this platform to engage potential customers at an earlier stage, deepen our interaction with existing customers, and create both new cross-sell opportunities and a new source of customer referral.
As of March 31st, 2023, we had approximately 1.9 million registered customers on Lu Dian Tong who had submitted their complete business or personal information, an expansion of roughly sevenfold from the end of 2022, and through this 1st quarter. As Y.S. mentioned, in the face of an uneven post-pandemic economic recovery, we are cautiously optimistic in realizing our U-shaped recovery. However, we will remain prudent on absolute levels of new growth until we see definitive improvement in overall lending demand and credit quality. While we expect to see gradual recovery in our core business metrics in the second half of this year, notable bottom-line performance improvement is expected to be a 2024 event. I will now turn it over to David, our CFO, for more details on our financial performance.
All right. Thank you, Greg. I will now provide a close look with our first quarter results. Please note that all numbers are in relative terms and all comparisons are on a year-over-year basis unless otherwise stated. As Y.S. and Greg mentioned before, our performance was impacted by the macro environment and our customer selection, resulting in 41.8-Top line total income to CNY 10.1 billion for first quarter. While total expenses decreased by 11.8% to CNY 9 billion. As a result, our net revenue was CNY 732 million in the first quarter of 2023. During this quarter, our technology-based income, platform-based income was CNY5 billion, representing an increase of 46.1% of our revenue.
Our net interest income was CNY 3.3 billion, a decrease of 32.8% and our guarantee income was CNY 1.4 billion, representing a decrease of 35.5%. As a result, our technology platform-based income services as a percentage of total income declined to 29.7% from 53.7% a year ago. In addition, due to the increase of income from consumer finance loans, our net interest income as a percentage of total income actually increased to 33.2% from 28.8% a year ago. Furthermore, as we continue to better utilize our guarantee company's abundant capital to bear more credits for ourselves instead of through our P&C insurance partners, we generated more guarantee income reaching 14.1% of the total income as compared with 11% a year ago.
Our other income, which mainly includes accounts management fees, collections, and other value-added service fees charged to our credit and consumer partners as part of the retail credit enablement process, was CNY 227 million in the first quarter of 2023, compared with CNY 704 million in the same period of 2022. The change was mainly the change in the fees for credit as we charged to our primary credit and consumer partner. Turning to our expenses. We continue to prudently manage our operational expenses. Operating expenses, excluding credit and asset-enhanced losses, finance costs, and other losses decreased by 21.5% year-over-year to CNY 5.7 billion this quarter, as we further improve our operating efficiency.
In the first quarter, our total expense decreased by 11.8% to CNY 9 billion from CNY 10.2 billion a year ago. This decrease was primarily driven by sales and marketing expenses. Our total sales and marketing expenses, which mainly includes expenses for borrowers and investor acquisition costs, as well as general sales and marketing expenses, decreased by 13.4% to CNY 3 billion in the first quarter. This decrease was driven by three factors. First, decrease in new loan sales and reductions of commissions. Second, the decrease in investor acquisition and retention expenses and referral expenses from platform services driven by decreased transaction volume. Finally, the decreased general sales and marketing expenses, which was driven by the decrease in new loan sales.
General and administrative expenses increased by 4.2% to CNY 756 million in the first quarter, mainly due to the ceiling fixed costs, which are less impacted by decreased loan volume. Operational and subsidy expenses decreased by 6% to CNY 1.6 billion in the first quarter, mainly due to the expense control measures and decreases in loan volumes and new loan sales. Credit-enhanced losses was CNY 3.1 billion in the first quarter compared with CNY 2.8 billion a year ago, increase of 10.9%, which was primarily driven by the increase in debt losses as a result of worsening credit performance due to the large increasing of strong bank profits, partly offset by the increase of interest expense driven by increased business rates.
As a result, net profit for the first quarter was CNY 732 million compared with net profit of CNY 5.3 billion in the same quarter of 2022. Meanwhile, our basic and diluted earnings per ADS during the first quarter were CNY 0.3 or $0.04 . On the balance sheet side, our balance sheet remains strong and solid as our cash and bank balance increased. As of March 31st, 2023, with our cash balance of CNY 51.3 billion as compared with CNY 43.9 billion as of the end of last year. In addition, liquid assets maturing in between 90 days or less amounted to CNY 40.2 billion as at the end of March 2023.
As of the end of March 2023, our current company's debt-to-equity ratio is only 1.7x , while supervisory limit is up to 10x . All this provide strong support for the company to maintain stability in the face of economic downturn, as we continue our stable and prudent payout policy. That concludes our prepared remarks for today. Operator, we are now ready to take questions.
Thank you very much. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two to withdraw your question. When preparing to ask your question, please ensure your phone is unmuted locally. In addition, I would like to remind you to please mute yourself after stating your question. Thank you.
We now have our first-
My question is mainly on the pricing outlook. Could you give us some color in terms of what's the average loan pricing for our portfolio and about the pricing for the new unsecured loans? I guess there are two parts to this question.
your question. So far, we haven't got any further instructions from regulators about further lowering APR. If you look at the first quarter APR, the blended APR for all new loans in the first quarter is already less than 20%. If you compare with other peers, we are absolutely and obviously lower than other peers' average APR. We are quite lower. So, I believe we are in a good shape in terms of overall APR level. And I believe that really will meet regulatory requirements. Now we also have more flexibility than others to adjust APR upwards or downwards whenever necessary. Our overall price is more determined by market demand and supply
Also we consider our operating cost, which includes funding cost and then credit cost and then the operating cost, which include our sales expense, right? We don't believe we don't think that the target time segments will necessarily further reduce our APR. We are already less than, again, less than 20% for all new loans. I expect I do not expect noticeable change in terms of APR in the near future.
Thank you very much. We now have our next question from Emma Xu of Bank of America. Please go ahead.
Thank you for taking my questions. I have two. The first one is about asset quality. We see, on one hand, we see some encouraging side of your portfolio, as the management mentioned earlier, said there is already some green shoots in the business, and you expect flow rate to gradually improve in the coming quarters. However, on the other hand, we see the flow rate of your unsecured loan continue to increase in first quarter while your total flow rate just remains flat, quarter-over-quarter. Could you give us more discussion about your the asset quality of your legacy loan portfolio?
A related question is how is the collection of your charge-off loans, as the management also mentioned in the report that you are try to increase the effort to recover the past credit losses, which may contribute to the net profit in the future. Could you give us more details on this front? The second question is about the loan demand. How is the loan demand so far? Is the high CGI cost the major reason that limits your loan growth in first quarter? What's your progress of moving to the 100% guarantee model? Will we expect to see more strong loan growth in the second half when you move to this entire guaranteed model?
Thank you.
Thanks, Emma. The deterioration in asset quality has slowed down substantially in the first quarter. If you look at C-M3 flow rate for the total loans was 1.0% in the first quarter this year, which remained unchanged from first quarter last year. If we consider that our balance, loan balance has been declining in recent months, right? Months after months. If we analyzing this way, for example, if you only compare the accounts whose months on book is less than 6 months or 10 months, so to remove the impact from declining balance on our net flow rate, then now we already see certain improvement trend.
Now, I believe, we can show, we can demonstrate more obvious improvements, from the next quarter onwards, so that we have confidence. As the company continuously carry on reset recovery plan, now we observe an improvement in credit rating mix, and credit cost for new loans initiated in the last two quarters. Yes, you know that we had large amount of charge-off last year. That is one of our focus, this year. We are now strengthening our post-recovery, actions to grow back, more from the past credit losses. Then answering your question about loan demand. Our loan demand is decided by how our SBO customers see their future economy, right? In this regard, we haven't seen any obvious change, in overall.
No matter what, if you understand our monthly new loan sales volume. Then our market share. Actually, loan demand itself should not be of our concern because we are compared to other market size, our market share is very, very small. So we don't really worry about loan demand at this moment. The decrease of new loan growth, recent decrease was mainly driven by our tightened underwriting credit policy and also partly due to our GST reform. That was the reason. Speaking of 100% guarantee model, we are making great progress. We are very happy. We are encouraged to see that our funding partners, they provide good support for the model where we provide the entire guarantee.
By now, five out of six trust partners, they agreed. 37 out of 78 bank partners, they also agreed to extend credit under the model where we provide full guarantee. In addition, 31 of our funding partners are already providing disbursement loans under this model. We are making good progress. I think the full transition can be relatively quick. Thanks.
Thank you very much. We now have our next question from Richard Xu of Morgan Stanley. Please go ahead.
Sure. Thank you. I have a question about the funding cost. Just wondering, you know, what's the funding cost at the moment, you know, basically as we change from the, you know, insurance model to the guarantee model? What's the, you know, overall impact on take rate and what will be the level expected to stabilize when shift to a guarantee model is largely complete? Thank you.
Thank you, Richard. It's Greg here. If we look at the funding costs, which are about 6%, overall, they have come down about 30 basis points if you look at the first quarter, on a year-on-year basis. As we shift to the 100% guarantee model, we're not seeing much change in that funding cost. In fact, probably you're seeing the market more broadly coming down. Any shift to the guarantee model is really not having a net impact in terms of funding cost increase. We think it will be quite stable as we look forward through the remainder of the year.
On the take rate, if you kind of go and look at historically, our take rates has been in the sort of 8%-10% range. More recently, due to the higher credit guarantee insurance costs, that take rate is now closer to about 7%-8% range. As we then move to the 100% guarantee model, right? If you look out over a year or a year and a half from now, when more of the portfolio will be 100% guaranteed, that credit premium or credit insurance premium that was previously paid to our CGI partners will be earned by us. That number was historically about 5%-6%.
If you take a base today of 7%-8%, which is obviously compressed because of the higher CGI fees, and we move to the guarantee model, where that take rate moves over to us, then you should be looking at on a stabilized basis over the longer term, a take rate of about 14%. We think that's Rich, where things will end up, probably, in about a year and a half from now, when we've made more of the complete shift.
Got it. Thank you.
Thank you very much. We now have our next question from Yada Li of CICC. Please go ahead.
Hello, management. This is Yada from CICC. Thanks for taking my question. My question today is regarding the risk of bearing percentage. I was wondering what is the trend of this percentage going forward? How to view this change and potential impacts on our top line credit impairment losses and the bottom line? That's all. Thank you.
Thank you. In terms of the risk-bearing percentage, as of the end of this first quarter, it was at about 24%. We expect by the end of the year, on a portfolio basis, to be over 40%. That means as you move through the second half of the year for new loans, a much higher percentage will be under this 100% self-guarantee model. Now as we go through that process, similar to the question that Richard Xu just asked, that will increase our top line revenue, because you're basically moving what was paid previously to credit guarantee insurance partners onto the balance sheet, therefore the revenue will come with it. That will provide a basis for a revenue increase.
As we take on more credit risk, we initially have to provision for the new loans. That is front-loaded in the model. What you'll see in our overall credit impairment costs, right? We had credit impairment costs in Q1 of CNY 3.1 billion. We expect this number over the next couple quarters to remain stable, but what's driving it, the mix is changing. CNY 3.1 in the first quarter is mostly from the credit impairment costs from the legacy portfolio, if you will, the existing past books.
As we move into the second half of this year, you'll still be at about CNY 3 billion or so, credit impairment costs, but more and more of it will be coming from the fact that the new business is done, a higher percentage of new business is done through self-guarantee. While that carries a higher upfront cost, if we look forward into 2024, it should also improve our net margin, right? You're shifting from a very high credit insurance cost today of over 10%, right? To a model where we think that the new business that we're doing should perform more in line with historical levels. That should be therefore constructive for our 2024 profitability.
Thank you very much. There are no more questions on the line. That concludes our question and answer session for today. I will now turn the call back over to our management for closing remarks. Thank you.
Thank you. This concludes today's call. Thank you for joining the conference call. If you have more questions, please do not hesitate to contact the company's IR team. Thanks again.