Ladies and gentlemen, thank you for standing by, and welcome to Lufax Holding Ltd Q3 2021 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, I'd like to hand the conference over to your speaker host today, Mr. Yu Chen, the company's Head of Board Office and Capital Markets. Please go ahead, sir.
Thank you, operator. Hello, everyone, and welcome to our Q3 2021 earnings conference call. Our quarterly financial and operating results were released by our newswire services earlier today and are currently available online. Today, you will hear from our Chairman, Mr. Ji Guangheng, who will start the call with some general updates on our achievements for the quarter and share our thoughts on recent regulatory developments and industry dynamics. Our Co-CEO, Mr. Greg Gibb, will then provide a review of our progress and details of our development strategy. Afterwards, our CFO, Mr. James Zheng, will offer a closer look into our financials before we open up the call for questions. In addition, Mr. Y.S. Cho, our Co-CEO, and Mr. David Choy, CFO of our credit facilitation business, will also be available during the question and answer session.
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'll be making forward-looking statements. Please also note that we'll discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the International Financial Reporting Standards in our earnings release and filings with the SEC. With that, I'm now pleased to turn over the call to Mr. Ji, Chairman of Lufax. Hello, everyone, and thank you for joining our 2021 Q3 earnings call. For today's call, I will start with an update of our key achievements in the quarter, then address top concerns that investors and analysts raised in our recent communications, and finally share our reviews on the latest market development.
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First, key achievements in 2021 Q3.
Overall, we achieved steady and healthy growth during the Q3. At the same time, we improved our regulatory compliance and corporate governance. We published our initial post-IPO ESG report as part of our proactive effort in establishing ourselves as a role model for regulatory compliance and corporate governance among overseas-listed Chinese companies. In the Q3, our total income increased by 22% year-over-year, excluding the impact of non-recurring expenses in the Q3 of 2020. Our net profit in the Q3 increased by 18% year-over-year, while our net profit in the nine months ended September 30, 2021, increased by 28% year-over-year.
Due to the steady and healthy growth of our operational results and our confidence towards market outlook and business prospect, the board of directors decided to pay out 20%-40% of our net profit in the previous years as dividends starting from 2022. We will release the details of our dividend payout plan in the Q4 earnings report in early 2022. Following the completion of our $300 million shares repurchase program in the Q2, we announced additional $700 million in August. As of September 30, 2021, we had bought back about 60 million ADSs worth approximately $600 million, with roughly $400 million remaining. Despite market fluctuations, we maintain a high level of confidence about our own future.
Built on our steady profit generation, excellent operating cash flow, abundant capital reserve, and effective regulatory response, we plan to continue to return value to our shareholders through share repurchases and dividend payouts.
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On the compliance front, we proactively followed regulatory guidelines and fully completed the run-off of our legacy peer-to-peer products in the Q3, accomplishing a smooth and victorious withdrawal from the online lending business, setting a role model for the industry.
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In mid-October, Mr. Guo Shuqing, Chairman of CBIRC, stated publicly that in the process of rectifying and reforming the 14 Internet-based lending platforms, the financial regulators raised close to 1,000 issues, the majority of which have been addressed and about half of which have been resolved. We anticipate more material and substantive progress by the end of this year. Recently, we noted the speech by certain regulators on the boundaries of financial licenses.
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I want to reiterate among those companies undergoing regulatory review, Lufax has maintained constructive dialogues with the regulatory authorities and progressed smoothly through all aspects of the rectification by leveraging our domain expertise, financial DNA, and thorough understanding of regulations. Our early understanding is reasonably consistent with recent requirements, and we periodically review all of our business lines to ensure compliance. Upholding our principle of preemptive diagnosis and swift operational adjustment for timely optimal results. We will proactively adjust our business direction to more closely align with regulatory trends as always.
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On the ESG front, we devoted substantial resources to establishing ourselves as a role model for overseas listed Chinese companies in terms of compliance and governance. Our initial post IPO ESG report, published in September of this year, showcased our achievements in implementing strong governance, green finance and consumer services and protection. Also, our inclusion in the FTSE Russell's two major ESG indices demonstrated market endorsement of our accomplishments in ESG, corporate responsibility and social value.
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I want to share some of the key investor concerns. Since releasing our Q2 results, our management team have maintained frequent communications with investors by hosting more than 60 events, including post earnings calls, non-deal roadshows, and other meetings.
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We received 320 questions from investors, among which 253 questions, or 79% of the total, were about macroeconomics and regulatory trends. 51, or 16% of the total questions were about our business operations, and the remainder were about our capital market initiatives such as dividend payout and share buyback. I will share our thoughts on macroeconomics and regulatory directions. Then Greg and James will discuss our operational and financial details.
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Regarding macroeconomics, some investors are concerned about the impact of our future business from the tightening of China's property market and the slowdown of overall economic growth.
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Our direct and indirect client exposure to the real estate industry is rather small. Also bear in mind that even though the macro economy may be under pressure in the near term, medium, small and micro size businesses are extremely resilient and serve as crucial blood vessels of the Chinese economy. Consequently, we have seen healthy and stable numbers in business and risk metrics.
At the same time, we will remain vigilant and closely monitor all aspects.
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We believe that China is at a critical point of transitioning from high-speed to high-quality growth.
The nation's reform and open stance remains unchanged. Its capital market stays connected to the world economy.
It needs investment from around the globe to develop a healthy domestic capital market, and its regulatory authorities aim to maintain long term market stability.
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In a speech given at the opening ceremony of the fourth China International Import Expo, President Xi reaffirmed China's willingness to open to the rest of the world.
At the 2021 annual Financial Street Forum held in late October, Vice Premier Liu He declared that the objectives of China's financial system should include promoting a high level of openness, establishing a fair market environment, protecting the legal rights of foreign enterprises in China, prioritizing the development of financial technology, and improving the quality and efficiency of financial services.
We believe that the government will keep refining regulatory policies to foster a stable and sustainable environment for capital market development.
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When it comes to implementing industry-specific regulations such as licensing requirements for credit scoring, preventing loan facilitators and co-lenders from sharing borrower data directly with financial institutions, and reducing borrowing costs, the direct impact on our business is rather muted.
Our business model and operational performance remain steady and healthy thanks to our preemptive regulatory assessment, proactive operational adjustments, and anticipatory business realignment. Going forward, we will continue to maintain open and frequent dialogues with regulators at all levels and through all available channels in order to maintain a tight and accurate grasp of policy intentions and achieve a more thorough implementation of regulatory requirements.
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Thirdly, Lufax's unique business model.
I would like to reiterate the compliant and unique nature of our Retail Credit Facilitation business, as well as the core competitive advantages of our business model. First, we focus on serving small and micro businesses. In the Q3 of 2021, 81% of our new loans were distributed to small and micro business owners. By the end of September, we have cumulatively served approximately 16.21 million inclusive finance customers.
As of the end of September, we had provided credit facilitation services to 16.21 million cumulative borrowers.
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Second, we conduct our business activities through licensed financial guarantee subsidiaries.
What differentiates us from those unlicensed and pure play loan facilitators is that we have a business license to provide financial guarantees backed with registered capital, that we participate in the lending business in a mature manner, and that we ensure strict regulatory compliance in every aspect of our business process.
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Third, we bear the credit risks on those new loans that we facilitate.
In accordance with regulatory guidance and requirements, we have established a sustainable risk sharing business model and increased our risk exposure. In the Q3 of 2021, excluding our consumer finance subsidiary, our credit risk exposure to the new loans facilitated increased to 20%.
Going forward, to stay in sync with regulatory guidance, we plan to make additional preparations for further expansion of our credit risk exposure.
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Third, we continue to reduce our borrowers cost.
Thanks to our technology advancement and managerial efficiency improvement. Since the Q3, we have reduced the all-in cost of new loans facilitated to 21.8%. Going forward, we'll continue to optimize our cost structure through technology and fulfill our commitment to financial inclusion. In conclusion, we believe that fintech industry's regulatory oversight and rectification should achieve more progress, which in turn should cultivate stable and sustainable industry growth. Our Retail Credit Facilitation and Wealth Management businesses are fully aligned with China's policy objectives of supporting small and micro businesses to attain common prosperity in a constantly evolving regulatory environment. Our unique business model and strong corporate governance enable us to accomplish gradual business transformation and achieve steady growth.
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Looking ahead, we will continue to uphold our commitment to maintaining full operational compliance, providing compassionate and inclusive financial services, setting ourselves as a role model for corporate governance among overseas listed Chinese companies, and generating increasing value for our shareholders and our society.
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With that, I will turn the call over to Greg, who will share our business updates for the quarter.
Thank you, Chairman Ji. We delivered strong revenue and profit growth in the Q3 of 2021, despite the changing economic and regulatory environment. We grew our revenue by 21.8% and our net profit by 90.8% year over year respectively. Excluding the impact of the C-round restructuring expenses in the Q3 of 2020, our adjusted net profit increased by 18.1% year over year. Before James takes you through our detailed operational and financial updates, I'd like to cover three broader areas related to our business. First, industry concern on the real estate sector. Second, an update on the regulatory rectification progress. Third, our financial position and capital related plans. Concerns on the real estate sector.
While we've observed the risks in the broader economic environment, including increased credit risks in the real estate sector, there has been no impact on our business performance to date. We do not provide lending services to property developers. Although some of our small business customers produce construction materials and provide home decoration services, our exposure to borrowers who are directly or indirectly linked to the property sector is quite limited. To date, we have not detected any sign of credit deterioration in our secured or unsecured loan facilitation portfolios, and we will remain vigilant and adjust credit policy quickly if needed. As of this Q3, flow through rates indicating future credit quality remained stable and in line with the previous several quarters. Our wealth management business and proprietary investment book have limited exposure to the real estate sector.
Second, a little bit more on the regulatory rectification progress. As mentioned by Chairman Ji, regulators recognize that the current industry rectification efforts should see substantial progress by the end of the year, and some industry observers believe the current stage of regulatory changes is reaching finalization. Based on our understanding of the current regulatory requirements, we do not anticipate any major changes to our business model nor substantial impact on future business development. Over the last year, regulatory rectification of lending businesses has really included the following elements for platforms. Separating lending services from other financial and payment services. Rationalizing personal consumption risks. Facilitating lower loan pricing to support the real economy. Having skin in the game to share credit risk with requisite licenses and capital requirements.
Rectification has also required partnering banks to demonstrate independent risk management, set limits for cooperation with any one platform, and limit lending to their geographic footprint. Finally, rectification requires data sharing between platforms and financial institutions to be conducted via a credit rating license by the mid of 2023. Lufax continues to make consistent progress on all rectification requirements. Lufax conducts lending facilitation independent of any other financial service. About 81% of all new loans facilitated as of the Q3 were to small business owners in line with policy priorities. All-in pricing for loan balance has dropped to 23.1% as of the Q3 of this year, down from 26.6% a year ago. As of this Q3, we now bear risk on 20% of all new loans.
Our nationwide guarantee companies with shared credit risk on all new lending operate with a leverage ratio under 3x as of September 31 st this year. Given our strong capital position and likely future regulatory requirements, we expect to bear risk on 30% of all new loans in the future, probably about by the end of next year. All of the aforementioned operating metrics exclude those of our consumer finance subsidiary. Lufax's 589 bank partners operate with their independent risk systems. Given our diversified partnerships, current cooperation is fully aligned with the regional footprint matching requirements, and each partnership operates within the single platform concentration limits. We are currently in discussions with a number of parties to establish a credit enhancement license within the stated rectification period if this indeed becomes a requirement. Here I'll just elaborate a bit.
We will be prepared to connect to a third-party credit enhancement license by March of next year. Based on our latest understanding, the cost of that connection will not exceed more than CNY 100,000 per month. Indeed, it will not bring additional substantial costs to the way that we operate. Third, on our financial position and capital plans. Through this Q3, we have been able to meet the rectification requirements and optimize customer pricing while sustaining both our revenue take rates and net profit margins at or above historical levels. As of September 31st, our net asset is around CNY 93 billion. Liquid assets maturing in 90 days or less total CNY 47 billion, providing us with position of strength to maximize shareholder value and make ongoing investments in the business.
In terms of capital management, as just mentioned, we've completed about 60% of the CNY 1 billion in shareholder buyback that we've announced in recent quarters. Despite our plans to increase skin in the game in the lending facilitation business, our strong ongoing capital allows us to announce today that starting the next year, we will begin to pay 20%-40% of net profit of the previous year, in cash dividend to shareholders. These plans should allow us to continue to improve shareholder return on equity, and leave us with more than sufficient resources to continue to invest in our core business while taking advantage of opportunities which may arise medium term due to the changing industry and regulatory landscape.
Within the core business, our primary areas for investment remain upgrading our lending services direct sales force with new technology enablement tools, deepening deployment of AI capabilities in risk management and collections infrastructure, adding new functionality to our product lines, and sharing technology capabilities with financial partners in both lending facilitation and wealth management. The main goals for our technology deployment are increasing market reach, enhancing our unique O2O business model productivity, deepening partner connectivity, and further automating services to improve both service quality and cost efficiency. Worthy of note is we did increase our O2O sales force, serving primarily small business owners in Q3 to around 64,000, up from 59,000 at the end of Q2 to further expand market reach. The increase in direct sales was matched by an increase in sales force productivity.
Excluding new recruited sales force in Q3, our productivity rose 8% quarter-on-quarter and 7% year-over-year. If we include the new recruited sales force, our productivity rose 4% quarter-on-quarter. This increased investment in O2O direct sales reaffirms our view that our offline to online servicing approach is the most cost-effective way to increase the coverage of this otherwise hard to reach small business owner segment. Also worthy of note is emerging affluent investors, those investing RMB 300,000 or more on the platform, made up 81% of customer assets on our wealth management platform, up from 78% a year ago.
The revenue take rate for wealth management platform increased from 31.8 basis points to 44.1 basis points quarter-over-quarter due to the increased mix of qualified investor products, insurance services, and technology enablement fees. Our overall performance for the Q3 is in line with our prior guidance, and today we reaffirm our prior guidance for the full year for revenue and profit growth. I'll now turn the call over to James Zheng, our CFO, to go through the detailed operating and financial performance and our reaffirmed guidance for the year.
Thank you, Greg Gibb. I will now provide a closer look into our Q3 operational and the financial results. Before I begin, please be reminded that all numbers are in RMB terms, and all comparisons are on a year-to-year basis unless otherwise stated. We delivered another very strong quarter, achieving double-digit growth in both revenue and net profit. Our total income increased by 21.8% to RMB 15.9 billion, and our net profit increased by 90.8% to RMB 4.1 billion year-over-year. If compared to adjusted net income in the same period last year, which excludes the impact of the C-round restructuring expenses, net profit increased by 18.1% year-over-year. Let me share some of the business milestones we achieved during the quarter despite the economic slowdown and the regulatory overhang.
First, we maintained stable unit economics despite APR declines. Our loan balance APR was 23.1% in the Q3 of 2021, a 0.9 percentage point decline from 24% in the Q2 of 2021, and a 3.5 percentage point decline from 26.6% in the Q3 of 2020. In comparison, our loan balance take rate remained stable at a 9.7% in the Q3 of 2021, same as the Q2, and a 0.3 percentage point increase from the Q3 of 2020. We were able to buck the trend because we continue to diversify our funding sources and increase the number of banking partners we work with. Additionally, we attained further reductions in the credit insurance premiums on our loan portfolio.
Also, thanks to our new method of charging customers, we experienced diminishing impact from the early loan repayment. Above all, we drove relentless improvements in our sales and marketing efficiency. All these initiatives combined should enable us to maintain stability in our take rate and the net margin, even if the APR may reduce further in our retail credit facilitation business in the future. Second, we sustained growth in our overall loan volume with an optimized business mix. On the retail credit side, we grew our new loan sales by 16.2% to RMB 171.7 billion during the Q3 of 2021, in line with our expectations. At the same time, we continued focusing on serving small business owners and improving the risk profiles of our borrowers.
In the Q3, excluding our consumer finance subsidiary, 80.5% of new loans facilitated were dispersed to small business owners, up from 75.7% in the same period of 2020. On the wealth management side, our total client assets increased by 12.4% to CNY 435.1 billion as of September 30, 2021. Client asset contributions from mass affluent customers investing more than 300,000 increased to 80.8% as of September 30, 2021, up from 77.5% as of September 30, 2020. Third, we continue to evolve our risk-sharing business and stabilize asset quality.
In line with prevailing regulatory requirements, we bore credit risks for 20% of the new loans we facilitated in the Q3 of 2021, up from 16% in the Q2 and at 7% in the Q3 last year. As of September 30, 2021, our outstanding balance of loans facilitated with guarantees from third-party credit enhancement partners had decreased to 81.1% from 91.8% a year ago. All of the aforementioned operating metrics exclude those of our consumer finance subsidiary.
Driven by the evolving risk-sharing business development and ongoing technological and operational improvements, excluding our consumer finance subsidiary and the non-guaranteed products, DPD 30-plus and DPD 90-plus delinquency rate remained stable at 1.9% and 1.1% for total loans we facilitated as of September 30, 2021, compared to 1.9% and 1.1% as of June 30, 2021. 4. We improved the take rate of our wealth management segment through product mix optimization. During the quarter, our take rate for the segment increased by 12.3 basis points to 44.1 basis points from 31.8 basis points in the previous quarter, primarily driven by our continued product mix optimization as we sharpened our focus on products with higher take rate. Now let's take a closer look into the financials.
As the revenue mix of our Retail Credit Facilitation business continued to improve, thanks to the evolutions of our business and risk-sharing model, total income increased by 21.8% year-over-year. During the quarter, while the platform service fees decreased by 3.5% to CNY 9.6 billion, our net interest income grew 57.2% to CNY 3.8 billion, and our guaranteed income grew by more than 600% to CNY 1.3 billion. In addition, other income, which is directly linked to delivering services to our financial partners, increased by 144% to CNY 1 billion. As a result, our Retail Credit Facilitation platform service fee as a percentage of total revenue decreased to 57.1% from 72%.
Because consolidated trust plans provide lower funding costs, we continue to utilize them in our funding operations, enabling our net interest income as a percentage of total revenue to increase to 23.9% from 18.5% a year ago. Moreover, as we continue to bear more credit risk, we generated more guarantee income reaching 8.1% as a percentage of total revenue compared to 1.3% a year ago. By extending our services to credit enhancement partners in account management, collections, and other value-added services, our other income as a percentage of total revenue increased to 6.3% from 3.1% a year ago.
Our investment income increased by 149% to RMB 266 million in the quarter from RMB 107 million in the same period of last year, mainly driven due to the increase of investment assets and reserve. In terms of wealth management, our platform transaction and service fees decreased by 4.7% to RMB 467 million in the Q3 from RMB 490 million in the same period of 2020. This decrease was mainly driven by the runoff of legacy products and partially offset by the increase in fees generated from the company's current products. Now moving on to our expenses. In the Q3, our total expenses grew by 5.1% to RMB 9.9 billion, excluding the RMB 1.3 billion C-round restructuring expenses in the Q3 of 2020.
Adjusted total expenses grew by 22.2% year-over-year, mainly driven by the increase in credit impairment costs. However, excluding credit and asset impairment losses, financial costs, and other losses, total expenses increased by 10.5% in the Q3 as we maintained our growth trajectory and further improved operating efficiency. Our sales and marketing expenses, which include expenses for borrowers and investor acquisition, as well as general sales and marketing expense, increased by 7% to CNY 4.6 billion in the Q3. Our borrower acquisition expenses, which are a major component of our total sales and marketing expenses, decreased by 8.5% year-over-year to CNY 2.6 billion, mainly driven by increased sales productivity and a decreased sales commission.
Our investor acquisition and retention expenses increased by 10.1% to CNY 0.2 billion in the Q3, mostly due to the increase in marketing efforts to attract and retain investors. Our general sales and marketing expenses, which are mainly comprised of payroll and related expenses for marketing personnel, brand promotion costs, consulting fees, business development costs, as well as other marketing and advertising costs, increased by 39.2% to CNY 1.8 billion in the Q3 from CNY 1.3 billion a year ago. This year-over-year increase was largely due to the increase in sales costs and lower base in the Q3 of 2020, resulting from the Social Security relief during the COVID-19 outbreak in the same period.
Our general administration expenses increased by 46% to RMB 937 million in the Q3 from RMB 642 million a year ago. This increase was mainly due to the increase of accrued bonus driven by better performance, lower base in Q3 of 2020, and headcount expansion in the Q3 of 2021 to support our new business development initiatives, including the development of our consumer finance business. Our operating and servicing expenses increased by 6.3% to RMB 1.7 billion in the Q3 from RMB 1.6 billion a year ago. This increase was primarily due to the increase in trust plan management expenses resulting from the increase in usage of consolidated trust plans.
We remain committed to investing in technology research and development as our technology and analytics expense increased by 8.7% to CNY 534 million in the Q3. Our credit impairment losses increased by 74.8% to CNY 1.7 billion in the Q3 from CNY 952 million a year ago. This was due to the continuing evolution of our business model, which led to increased loan-related risk exposure and higher upfront credit impairment losses. It is worth noting that the increase in impairment losses is purely a function of the increase of the proportion of credit risks borne by us, while the overall risk profile of our borrowers has continued to improve, as mentioned earlier. Our asset impairment losses increased to CNY 410 million in the Q3 due to the impairment losses of intangible assets and goodwill.
Our finance costs decreased by 89.8% to CNY 168 million in the Q3 from CNY 1.7 billion a year ago, mainly due to the higher base in the Q3 last year, which included CNY 1.3 billion of C-round restructuring expense. Additionally, our effective tax rate decreased to 31% during the Q3 of 2021 from 40% in the same period of 2020. Consequently, our net income increased by 90.8% to CNY 4.1 billion during the Q3 from CNY 2.2 billion in the same quarter of 2020. Excluding impact of the C-round restructuring expenses in the comparable quarter, adjusted net income increased by 18.1% year-over-year.
Net margin was 25.8% in the quarter compared to a net margin of 16.5% and adjusted net margin of 26.6% in the same period of last year. Meanwhile, our basic and diluted earnings per ADS were 1.76 RMB and 1.66 RMB respectively. As of September 30, 2021, we had a cash balance of RMB 30.5 billion compared to RMB 24.1 billion as of December 31, 2020. Net cash flow from operating activities was RMB 1.7 billion in the Q3 of 2021. Now turning to the outlook. We reiterate our guidance for the full year of 2021. We expect our new loans facilitated to be in the range of RMB 649 billion-RMB 665 billion.
The client assets to be in the range of CNY 430 billion-CNY 450 billion. Meanwhile, as we continued our efforts to maintain growth momentum and continue improving our operating efficiency, we expect our total income to be in the range of CNY 61.1 billion-CNY 61.4 billion, and our net profit to be in the range of CNY 16.3 billion-CNY 16.5 billion. This translates into year-over-year total income growth of 17%-18% and a year-over-year net profit growth of 33%-34% for the full year of 2021. These forecasts reflect our current and preliminary views on market and operational conditions, which are subject to change. This concludes our prepared remarks for today. Operator, we are now ready to take questions.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star two. At this time, we will now pause momentarily to assemble our roster. Thank you. Your first question comes from Richard Xu from Morgan Stanley. Please go ahead.
Thank you very much, and congratulations for the strong Q3. Just have a couple questions on the funding part at the moment. One is, basically, are we seeing opportunity to further reduce the yield from the funding partners that we work with at the moment since we're expanding our cooperation population? In addition to that, are we seeing these banks are taking more risks on their own? What percentage of risks are taken directly by the banks at the moment? Thank you.
Okay. The first is of funding cost. How much risk they bear. As of today, we have 59 partner banks and six trust companies. In terms of mix, bank funding takes about 60% and then 40% are from trust at different funding costs. The bank funding cost is at 6.4% and trust at 5.6%. Going forward, we believe later we can discuss about take rates this year and next year. We believe we have more room in funding costs to further reduce and safeguard our take rates under decreasing HI environment. As of today, if you look at our Q3 number, our self-guaranteed portion it takes up to 20% renewals.
Our dependence on insurance companies, especially Ping An P&C, it went down to 70%. The rest, about 20%, about 10%, are taken in terms of risk sharing. 10% are taken by partner banks and also insurance companies together.
Thank you. Your next question comes from Winnie Wu from BofA. Please go ahead.
Hi. Hello?
Winnie, go ahead.
Oh, okay. Sorry. Yeah. I want to ask a high-level question regarding how does management think about, you know, the difference between the credit assistant lending model versus the co-lending model. I mean, apparently, you know, regulators has made pretty strict rules regarding the co-lending model, right? The risk sharing, the percentage funding sharing, which is more capital intensive. Essentially, you know, the way Lufax has been complying with the regulation, you are taking more risks. You are, you know, putting on loans on balance sheet, and you do have the capital to be fully compliant. Whereas on the other side, the so-called assistant lending model, you know, is facing more regulatory uncertainty regarding, you know, the license requirement, regarding, you know, the disconnection from the banks.
Strategically, how do you compare the pros and cons of those two business models? Where do you see Lufax business model evolving over time? Thank you.
Thanks, Winnie. It's Greg. I'll take a first shot at your question and then see if Wyatt says he need to add. I think that the way the regulators increasingly look at this is really in two buckets, right? There's loans done by banks, and then everything else is really regarded as a form of facilitation and cooperation. I think that under the bucket of facilitation and cooperation, and there's been some recent announcements in the last couple of days about Ant's requirements, in terms of how they partner with banks. The core of this is really that you have the skin in the game. You know, we have done it at 20% up to now, but we'll probably be moving to 30%, over the next 12- 18 months.
You know, that skin in the game is robust, and very much in line with the overall spirit of regulation. The second is that when you take the skin in the game, you need to have a license that is regulated, and where capital leverage is controlled within 10x. We do that through our guarantee company. Our leverage today on those guarantee companies is under 3x, and so we're very well positioned to handle all of that.
I think the other thing I would just highlight is that if you look at the requirements that have been announced around Ant over the last couple of days, they now have to split the lending they do through their consumer finance company, and they're partnering with banks, and it has to be separately branded. We are already compliant with that requirement in that our consumer finance business is separately branded. When customers process a loan through our facilitation, the banks themselves are disclosed, and then each bank carries out its own risk process to approve the lender.
We think that we're unique in having that guarantee company in really taking shared risk on every loan in bringing that to 30% and then in having the capital behind it and then in disclosing our bank partners in the process. I think it'll be honestly difficult for some players in the market to really meet those capital requirements going forward. I don't think there's that much of a distinction between co-lending and facilitation. The real issue.
is having that capital to back up your risk sharing. Wyatt, you have anything to add?
I fully agree. Technically speaking, right, we are not co-lending for sure. We don't have lending license. All funds come from bank or from trust companies. We are not the assisted lending either because we are financing guarantee licensed company. The way we do it is properly with our financing guarantee license. But we agree, we don't think regulators clearly separate co-lending and then assisted lending. We believe going forward, one policy, one legislation will apply to all different models of loan services, including guided assisted lending and also co-lending and other pure facilitation. Right? Only the bank loans which they play all functional roles by themselves from sales, underwriting, collection.
In our case, our future model, I think we already have a clear mind here in discussion with our regulator. Going forward, we take all loan funds we need to come from banks and trust company. We don't provide any funds. We are only taking 30% credit risk, and then the rest 70% will be eventually taken by fund providers, but it will take some time to reach that point. As of now we use more insurance partners. Eventually, in three years, if you ask me what is our future model as a three-year plan, all funds come from bank first for risk sharing, 30% by us and the rest 70% are taken by fund partners.
Thank you. Your next question comes from May Yan from UBS. Please go ahead.
Thank you. Can you hear me?
Yes, go ahead, May.
Okay. Thank you. Thank you, Greg. Okay. Maybe I'll follow up on Winnie's earlier question, still about regulation. The CBIRC, the bank regulator, had said that they or PBOC as well, they would separate, you know, make clear boundary between, you know, financial services, the lending, technology services and credit scoring. It looks like it's maybe, you know, targeting to have first, you know, each operators should have certain type of licenses that will allows you to do this, to be engaged in such activities.
Secondly, to split or separate the whole operational current loan facilitation model, which covers the business chain. Does that mean that in the end the service part, the technology service part, will be sort of segregated out of the lending and also maybe guarantees as well? Does that maybe technically happen in how you can conduct your lending or the whole loan facilitation business? I don't know if I am clear or not on that question.
Also, earlier mentioned that by March, you will be connecting the credit scoring services and paying a small fee about less than RMB 100,000 per month. I just wanna confirm that. Is there guidance that the loan facilitation companies or Lufax need to do so and to which credit scoring sort of agencies? Also, sorry, on the operating front, you know, we saw the Ping An Insurance Group's sales force has quite a lot of turnover and has declined a lot. Has that impacted through your customer acquisition, selling you know by their sales force, et cetera?
By the way, it's very good, very strong Q3 result and also great to hear about the dividend payout. Congratulations. Thank you.
Thank you, May Yan.
Let me start from the back.
Yeah.
The life agents, normal life agents, has been declined from more than 1 million nowadays about 700,000, right? Yeah, it surely affects our business growth. That's true. If you look at our sales channel mix, last year they used to contribute about almost 40% of total loans about 3 years back. If you look at Q3 this year number, they now contribute only 28% of total loans. Now we have a lot less dependence on life channels. Why? Our direct sales, our own sales force, their sales contribution increased up to more than 50% by now. What about next year? We believe that life channel contribution or the absolute sales contribution amount will decrease further.
We think so. We are ready because even if they decrease a little bit from that 28% contribution, our 50% contribution from direct sales, that part, our annual growth is almost 20%. That is enough, more than enough to cover up the shortfall from life agent channel. For example, I don't know if we discussed this number before. We have direct sales full compensation ratio. This full compensation ratio month-end was less than 90%, in the Q2. When you finish the Q3, it's already 100% thanks to our direct sales reform. We started inputting more investment on this developing and upscaling and cultivating a higher performance direct sales. Now we see an initial effect, and then we have full compensation ratio.
I think that means that we are very much confident, despite life channel decline further next year. We are still very confident overall we can deliver. We can achieve two-digit sales growth. The second question is about credit scoring, right? We are in close discussion with PBOC directly. They reviewed our process in detail. If I may provide some numbers, normally we share with banks about 300 data for one customer. The PBOC said out of 300, about 80 data, they believe it must go through the company who has credit license. That process now we are working with Baihang.
As Greg said, this new process will be in place by March next year. Why? The requirement from PBOC is June 2023. We'll be already a lot ahead of PBOC requirement. What does it mean for business expense? We estimate the total expense is like RMB 60,000 or RMB 70,000 per month, so which is very much minimal. It doesn't really affect our business process. It does not affect our business profitability.
Maybe to go to the top end of your question. You know, the way that Lufax Holdings is set up is that each business line is very clearly segregated. Very clearly segregated in terms of operation, technology staff, people, corporate governance, et cetera. We are already very clearly split by business line. The lending business is also very clearly split in its enablement to partner banks and trust companies, and that is really where we process the flow of borrowers. That is done through our technology platform. It passes all of the data, as YS just mentioned, to our banks and trust partners for their separate decision-making.
All of our process there does not touch upon a payments license, which I think was one of the more major focus areas for Ant, which is really to separate payments and lending. Our lending is entirely separate in that regard. The other thing I wanna highlight is that no matter what your business model is, this requirement by regulators to have skin in the game, that part of it must be licensed. We do that through our guarantee company in terms of being able to provide that skin in the game. I think as you look down the path of regulation, your processes in terms of where you're partnering with institutions on the technology side have to be clear and separate from other services.
Where you have to have skin in the game, you have to have requisite licenses to do that. Then in the corporate governance, you have to have separation in that setup, which we have today.
May I just double check that we've answered your questions?
Can I follow up? Thank you. Thank you for answering my question. Follow up on that. If the edge for new practices model is having these, you know, the guarantee side of the business, which is licensed, then is the intention of the central bank and CBIRC to have all the information flow into the credit scoring agencies, and that can be used and shared, you know, by with other financial institutions, et cetera. With other loan facilitation companies or internet, you know, technology companies, they can also have the guarantee, you know, try to get guarantee license or, and then they can sort of, kind of avoid the credit scoring, extending data to the scoring agencies too.
Right? I understand it may take some time for them to get the license, guarantee license, but that could also be a way to avoid the regulation, right? What I was thinking
Yeah. Our view of it is, May, for what it's worth, and this comes from a lot of interaction with regulators, is that the core principle of data eventually being shared through the rating license is why it's just said, right? In our case, you know, 80 of the 300 variables that we share with banks need to go through that license. I think that's gonna be true no matter what your business model is, right? The second thing that we believe is that, no matter what your business model is, co-lending, facilitation or other definition, you will have to have skin in the game. And then behind that skin in the game, you'll have to have an entity that can bear that capital.
I think what I would highlight is other people can get guarantee licenses. It does take time. I think the more important thing is if you look through the regulation, what they're looking to prevent is instances where platforms are providing a lot of guarantees beyond what's just indicated in the license. What they're gonna do is really look through the total loans that you help facilitate, that you are really bearing risk on 30% of that, and that you then have capital to back up that 30%, right? There can't be under the table or side agreements or anything else which doesn't fully disclose that capital requirement. I think that's the core direction, and I think that where we are unique is having those licenses in place, having the national coverage, and having more than enough capital to meet those requirements today.
Thank you. Your final question comes from Hans Fan from CLSA. Please go ahead.
Sure. Thanks, management, for giving me this opportunity, and congratulations again for the decent results. I have two questions. I think first one is also regarding the regulatory trends. As you probably recall back in July, Mr. Xiao from the Consumer Protection Bureau of CBIRC once mentioned that the platform companies charged too much profits from the loan facilitations. What's your view on that? That means that potentially, CBIRC really care about the net margin of Lufax. Do we see any sort of pressure on the regulatory side in the coming years in terms of squeezing our net margin? I think that's the first question.
Second one is more on the operating side regarding RCF, because the loan growth in Q3 was quite strong, and also we mentioned that the sales productivity was getting better. So here I just wanna check what's your view regarding the loan demands, in spite of the economic slowing down, what you see the loan demand for our SME customers, and what we have done in terms of to promote the productivity of the direct sales team, and how can we reduce the sales commission rates as we mentioned in the announcement. Yeah. So that's pretty much about my question. Thank you.
Okay. Let me add. I think the first question later, Ji Guangheng can supplement. About supplement from Guo Yuzhang, Shaobao and Xu Jiang. Actually we don't have any concern because she's a person who provided window guidance for Lufax in the last three years. Our facilitation products in terms of sales growth portion increase or price decrease or inviting more insurance partners are all following his window guidance. We haven't got any further instruction from Guo Yuzhang. Then once he said that the total fee charged by Lufax, including guarantee fee, service fee, should be less than 5.5% of loan amount, not balance, loan amount, which we already achieved last year.
Since then, we haven't got any further instruction or demand from Guo Yuzhang or the other department of the CBIRC, so we don't have any concern. I think later, Ji Guangheng may add some more comments. Second question about the RCF loan demand and their direct sales productivity. This year, if you look at year-over-year number, if I'm not wrong, sales grew by 16% and balance grew by 20%. I think loan demand is surely there, it's very strong. I think this is thanks to our unique positioning providing unsecured loan service for small and micro business owners. In this sector, we don't see really many other key players. We have huge demand, and then we select the customers we want.
Loan demand wise, we don't have any concerns. Prior to the sales, our main focus is graduates leading the effort, how we can provide more technology tools to support our direct sales. If you understand our direct sales mix, 10% of high performing direct sales, they contribute almost 40% of total new loans. Knowing that, starting from Q4, we launched a new direct sales management strategy. We hire and then train and cultivate high-performing direct sales more. Who are they? They are normal people who have three years of experience and then they are the college graduate. Tighten those the high potential sales force we provided. We added more input.
We provide higher fixed salary, but a lower commission in the first three months. They can come and settle with our time. Our senior managers, we provide year-end bonus based on current loan balance. This year, if you look at sales and marketing spending this year, actually total expense didn't increase at all. Starting from Q4, we added a little bit more. Next year, I don't think we have room to reduce sales commission or reduce our sales and marketing spending overall, because we have to guarantee, we have to ensure that our sales force are very competitive and they are very well rewarded. We see more room in funding cost and the CGI premium.
In those two lines, I believe we have more room to save. In the Q1 this year, our average loan price for total loan are about 20%, unsecured about 22%. Our plan for the next phase, we don't need to dramatically and quickly reduce price further. We don't need. We will gradually, very slowly reduce together with funding cost and CGI premium optimization. We can safeguard our take rate and net margin. Next year, in overall the price decrease will be very minimal. Our take rate net margin will be protected I think.
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One quick summary of the translation from Ji Guangheng just then. Basically three points to summarize. Number one, we're fully aligned with the regulatory and the overall society's intention to lower funding costs for small business owners. We'll do our utmost by technology, efficiency improvement, risk management, better negotiation with funding partners to lower our cost components to achieve that. Second point, I believe the lowering of overall funding costs for the society is going to take some time to achieve. It's not something that can be solved overnight. It requires all participants to work together to achieve that, and obviously we are part of that. Thirdly, so far there are no specific requirements on the exact number or timing from the regulators on us. But obviously we do have internal targets.
We fully understand the future direction, and we have internal targets to lower it to appropriate level, you know, at the right time.
Is there any other questions?
There are no further questions at this time. Okay.
Thank you, operator. Thanks everyone for joining our earnings call.