Good day, and thank you for standing by. Welcome to the LexinFintech third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your host today, Ms. Patricia Cheng, Head of Capital Markets. Thank you. Please go ahead.
Hello, everyone. Welcome to Lexin Q3 earnings update. I am joined today by Jay Xiao, Chairman and CEO, Sunny Sun, CFO, Jayden Qiao, CRO, and Erwin Lu, CTO. During the call, we will discuss business outlook. Any forward-looking statements that we make are based on assumptions as of today. The actual results may differ materially, and we undertake no obligation to update any forward-looking statements. Finally, unless otherwise stated, all numbers mentioned are in RMB. I will now turn the call over to Sunny to go through the financial performance. Sunny, over to you.
Thank you, Patricia. Good morning, everyone. It's my pleasure to speak to you and give you an update on our third quarter results. This quarter marks the execution of structural change of our core businesses, and I'm delighted to say the progress has been encouraging. Loan origination rose 15.6% year-on-year to RMB 55.9 billion , of which 42.9% was priced within 24%, up from 37.6% in the second quarter. If we look at the last month of Q3, the improvement was even bigger. About half was priced within 24% in September. Average APR for the September intake was 26.8%, down 1.4 percentage points from June.
In line with regulatory direction, as we adjust on loan pricing and move away from high APR borrowers, there will be measured slowdown in top-line metrics. Total operating revenue reached RMB 2.97 billion in the third quarter, down by 5.9% from last year and within management expectations. As our CEO, Jay, flagged in the earnings call of last quarter, we place quality over scale. Gross margin posted 54% increase to RMB 1.5 billion. As a percentage of revenue, gross margin advanced by almost 20 percentage points year- over- year and held steady quarter on quarter at about 51%. Moving on to expenses. We have stepped up the overall spending to support new growth initiatives, such as the further build-out of Maiya team and Puhui team, as well as the technology upgrade that Erwin, our Chief Technology Officer, is spearheading.
At the same time, we have also been streamlining operations and keep a diligent eye on general expenditure. G&A stays on the downtrend, going down by 2% year-over-year and 17% quarter-over-quarter. Net profit rose over 68% year-on-year to RMB 551 million in the third quarter. In addition, take rate stayed stable at 3.5% quarter-over-quarter. Top line optimization, cost management, and operational efficiency are critical to profitability and will remain as our priority. There have been constant noises about the sector this year. We understand investors' concern. The third quarter results are proof that we are actively responding to change, and we are determined to enhance the resilience of our businesses. Next, I would like to turn the call over to Jayden, our Chief Risk Officer, to discuss credit performance. Over to you.
Thank you, Sunny. We have been proactive in mitigating the pressure on asset quality coming from the change in policy and macro environment. The 90-day plus delinquency ratio finished the quarter at 1.85%, unchanged from the end of Q2. In response to 24% policy, we have tightened the underwriting criteria and approval rate. The sequential drop in the number of active users and loan origination volume reflects our proactive management of high-risk borrowers. In the transition, we do expect some volatility in short-term risk. With the industry moving to reduce funding price at above 24%, the drop in liquidity will weigh on repayment ability of some borrowers.
In anticipation of the interruption, we have strengthened the risk management framework for new businesses, the risk strategies and models to make sure there's strict control over loan origination, especially when early stage performance is not yet stable. Risk management that build on identifying, assessing, and monitoring risk, we will keep refining the process, and it will not compromise quality over volume.
Finally, I would like to highlight another recent change. That is engagement with the technology team. Our activities generate a vast amount of data from internal interactions to external relations. This welcome knowledge is being turned into powerful analytics and predictive modeling. We have been working more closely with the technology team to better manage risk at both the business level and the operational level. I will pass it to Erwin, who will talk more about this topic.
Thank you, Jayden. I took up the CTO role in February this year. This was a newly created position and my mandate is to sharpen our in-house technology capability by leveraging my international experience, including over a decade in the U.S., where I developed my career in software engineering at Microsoft and Facebook. Optimization and innovation is our goal, and people are the most valuable assets.
The vast majority of the R&D spending is talent-related investments. We're taking on new talent to improve the existing infrastructure and address new opportunities. At the back end, we have built up a core engineering team dedicated to machine learning and data processing in customer acquisition, asset-bank matching, as well as risk management models. We have also been applying more AI and machine learning algorithms. In the middle tier, we have embarked on a re-architecturing of the platform into our kernel plugin structure to provide more flexibility and robustness in serving our technical development.
As a result, the average engineering delivery cycle has been reduced by more than 30%. The new architecture has also improved expandability to enable new features for future business requirements. On the business front, we've updated our apps to make sure they meet the latest regulations and safety requirements without losing any of the existing user friendliness. To cope with the new privacy protection, we have strengthened the web security, encrypted storage of personally identifiable information, as well as restrictions in data usage. In short, we are pleased to see that technology is playing a bigger role in helping us manage cost, compliance and revenue. The upgrade has just begun. I look forward to sharing more with you later.
Thank you, Erwin. Last but not the least, a few words from
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It's a pleasure to talk to you all again. My colleagues have walked through the highlights of the quarter. I would like to take this opportunity to share with you about what we have been doing and will be doing. For the core fintech business, we have been responding to recent regulatory developments by rebalancing the business structure, reducing risk and improving efficiency. Our efforts are paying off.
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As Sunny mentioned just now, we were able to increase exposure of loan pricing within 24% while keeping the scale steady. The mix went up to about half of the total in September and the uptrend continues. Our 90-day delinquency ratio was unchanged at 1.85%. Alongside the realignment of business mix, we've also improved operational efficiency. G&A expenses fell by 17% quarter-on-quarter to RMB 100 million, setting a new low as a percentage of revenue and loan balance. More importantly, take rate has not been compromised during the process. This demonstrates the effectiveness of our response. We are confident that once the transaction is completed next year, the sustainability and profitability of the business will be stronger.
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Over in Maiya, we have been further enhancing the product and service model. It's gained more recognition from offline merchants. GMV reached RMB 473 million in the third quarter, of which the offline contribution almost doubled QoQ to RMB 185 million. China is the world's largest consumer market. Even though Maiya is still in early pilot stage, the impact it brings to brands and merchants is indisputable and the growth potential immense. The buy now pay later model is different in China. Maiya will shape its own local identity and unique value, bringing tangible transaction gain to merchants and benefits to consumers.
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Also worth noting is the support to small and micro business owners. We are fully aligned with policy direction and increased the loan origination to this group by 32% QoQ to RMB 5.2 billion.
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Finally, I would like to reiterate that quality growth has always been a top priority at Lexin. We are committed to optimizing the asset structure, enhancing credit quality and operational efficiency, and keeping our full year target unchanged. We will also continue to explore and develop new products such as Maiya and TuBank technology service in order to strengthen our competitiveness and profitability in the long run. Thank you for your attention and support. Operator, we will open up the floor for questions. Can you please repeat the instructions again?
First question comes from the line of Ivy Du of Nomura. Please go ahead.
Hi, management team. Thank you for giving me this opportunity to raise a question and congratulations on the strong results. I have a specific question for our new CFO, Sunny. I was wondering if you would be able to give us more guidance on the loan origination amount and the outlook for fourth quarter this year. Thank you.
I didn't get the name.
Ivy.
Ivy. Hi, good morning, Ivy. Thank you very much for your question. For the outlook, as you just said, and as we reported, we had a very strong performance of the third quarter. Based on the information at hand, currently, we will maintain our full year guidance on the loan originations. We do expect maybe some temporary volatility on the operational metrics as all the players along the value chain will take a bit of time to adjust to the 2024 new policy. For the fourth quarter, as we emphasized, we'll continue to place healthy growth over pure scale. We are also expecting that new growth areas will make higher contributions perhaps in the long run.
Overall, we will maintain our outlook for the full year and also we will focus on structural changes, as we just mentioned, and also on operational efficiency. To Ivy.
Yeah. Thank you. Thanks for the guidance.
Thank you for the question. Do you have any follow-up?
No. That's it from my side. Thank you.
Certainly. Next question comes from the line of Alex Ye of UBS. Please go ahead.
Hi. Good morning. Thanks for taking my question. I have two questions. Firstly, you have mentioned that your current pricing mix is about 50% under 24% interest rate. I'm just wondering when do you expect our pricing transition to finish and fully comply? Also related to that, when do you expect you're more comfortable to resume growth after that adjustment? Second question is on your asset quality. I have seen your early indicators, the FPD ratio building up a little bit in Q3. I'm just wondering if you could give us some color on the reasons and also give us some forward-looking outlook. Thank you.
Alex [Non-English content] Alex, will get Jay to take your first question and then Jayden will take your second question. Jay, [Non-English content]
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As I mentioned in the past, the 24% policy is a window guidance given by local authorities to some of the financial institutions, asking them to complete by June next year. Of course, not all financial institutions have received such window guidance. As to Lexin ourselves, we do target to finish the transition by June next year, and we're going to speed up the process. Of course, since not all financial institutions are told to do so, next year for the market, there might still be some doing like 24% after the June deadline.
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While we are doing this structure change, the idea is to bring down the risk as well, so as to minimize the impact on take rate. You can see that from our three key results, we've been able to keep take rate steady for the newly acquired borrowers within the 24%, the take rate is above 3%.
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That's why we are confident that we will be able to maintain take rate at a healthy level after the transition next year.
Okay, I'll take the next question. As I mentioned in the call earlier, in the transition period, we do expect some volatility in short term risk because, you know, the industry is moving to reduce funding priced at above 24%. As you notice, the FPD30 released is picking up, but still maintained under 1%. As we, you know, keep focusing on improving our asset quality mix.
Going forward, we do expect that, you know, our long term risk will continue to be maintained at a relatively stable level. We have also noticed that, you know, for new acquired customers, the new orders placed with pricing at or below 24%. Actually the FPD7 is well below the, you know, the general population of our entire portfolio. So that is a good sign because we are acquiring high quality customers as we, you know, the percentage is going higher in the next couple of quarters. As Jay mentioned, by the end of the second quarter next year, we believe, you know, our short term risk will be continued to be maintained at the previous level.
Thank you
Great. Thank you. Next question comes from the line of Ethan Wang of CLSA. Please go ahead.
Thank you. Time management. I have two questions. The first one is on the requirement by PBOC to disconnect our data feed with funding partners directly, but through the licensed credit agencies or [Non-English content] in Chinese. So just wondering, in our case, do we have a timeline to make the change? And right now, are we working with any one of those licensed credit agencies already? And which one is that? And the profit sharing, the amount of profit sharing in the future?
Because that may affect our take rate a little bit. Maybe more importantly, the details of this collaboration, because with another layer in the middle, does that mean we need to change the way we collect data and the way we process them and the way to handle those data? That's the first question. My second question is on some data or some disclosure. We do see a lot more disclosure from this quarter. We really appreciated that. It seems that there are two things missing which were reported in the past. One is the percentage of profit share model of the total loan origination. There's a chart there, but there's no numbers.
It's kind of difficult to understand the exact percentage. The second one is the funding cost in the third quarter. Yeah. Thank you.
Yeah. Thank you, Jayden. [Non-English content ]. Ethan, Jayden is going to take your first question, and then Sunny will do the second one.
Yes. Thank you. I'll take the first question. Due to the, you know, the new requirement from PBOC, we're actually actively working with the credit bureaus, especially Baihang. We have actually, after a couple of negotiations, already drafted up a plan, a detailed plan to work with Baihang and a financial institution. But at this time, I cannot reveal the name of the financial institution. We expect by the end of this year, we will actually implement the new schedule according to our plan. Once this worked, we plan to propose this plan to PBOC and see if it can be approved by the regulators. That's our plan.
In, you know, in the process of this implementation, we do not expect any change to our cost because, you know, this is actually a test pilot program for them and for us too. We agreed that during this test pilot progress, we actually will not incur any cost to, you know, to the data actually transferred or to any implementation that we, you know, carry through. That's the current plan. Going forward, once the, you know, the plan get approved by PBOC, we still expect very minimal change to our cost structure because, you know, Baihang or Pudao are actually positioned as a infrastructure.
As a credit bureau or infrastructure institution, they actually do not aim to make profit because of this change. I do believe the cost, once it's incurred in the future, is actually gonna be very minimal to our, you know, underwriting process. Thank you.
Okay. Thank you, Jayden. For the second question, the first one I understand is regarding the contribution percentage of Fenrun or profit sharing. The profit sharing business contributed 43.7% of the overall GMV in the third quarter. The second question about the funding cost is that, thanks to the efforts of our fund sourcing colleagues, the funding cost has remained very stable at 7.4%. Thank you.
Sure. Very happy. Thank you.
Thank you for the questions. Next question comes from the line of Ryan Roberts of Navis Capital. Please go ahead.
Hi. Good morning. My question is kind of on Maiya a little bit. I think some of the earlier numbers on volumes look pretty promising. I wanna just kind of check on kind of the evolution of that business model. I believe that is kind of more on the merchant side. I was just curious, number one, if you'd share some more color on that, on how the development is going. Number two, on the kind of the borrower user side, so to speak, if you're seeing any synergy in those users that choose BNPL services and how that might interact with your lending business and your efforts to drive loan growth from higher quality borrowers.
I believe earlier you said those were typically high quality potential customers that use BNPL. I'm just kind of curious how that's all shaping up. Thank you.
Um, [Non-English content]
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Maiya is still in a pilot phase at the moment. Most of our focus is in the Shenzhen and Guangdong Province. We have been exploring some outside cities with shopping mall partners. The feedback has been promising so far. The feedback has been that during festivals such as National Day holiday and the Autumn Festival.
If we look at for the same merchant for their outlets that work with Maiya versus those outlets without such cooperation, we see an obvious uplift in the transaction contribution to them.
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Our merchant partners, they have a trial period. We've seen a strong response to conversion after the trial period into a paying customer. The fee that we charge is between 3% and 4%. In terms of asset quality, when we look at FPD7, it's very low from offline merchants, in, you know, several like basis points. Customer profile mostly female with a strong spending power. At the moment, you know, our focus is on bringing, you know, the value to the merchants to making sure that we can help them improve their transaction activity, repeat sales, and then to improve the conversion before scaling up.
At this moment, we will also not be considering bringing the Maiya users into the loan facilitation business, because right now the focus is on, you know, improving the merchant value and also, you know, making sure that, you know, this remains a very important retail consumption tool to the users before we move into the next phase.
Sure. Thanks.
Thank you for the questions. Next question comes from the line of Richard Xu of Morgan Stanley. Please go ahead.
Hey, Jayden, [Non-English content]. Just two questions from me. One is any plan to reduce long term interest rates to 20% given there's some rumored guidance in some regions.
Secondly, is there any detailed cooperation plan with Baihang at the moment? Thanks.
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On your question about the 20%, that one guidance, we have not heard anything from the regulators about, you know, that new level. First of all, for CBIRC, they have always set this 24% level for commercial banks, even though that has some, you know, local window guidance for different financial institutions. Then you have to look at the nature of a business. We deal consumer finance. The 24% level has, you know, like, it's in line with a policy and also global level. This is not, you know, like SME business, which, you know, like, is at a different kind of level. That's why we do not expect a further tightening on this level from our regulators.
Also last year, you could see that, from the Supreme Court decision about that, you know, 13.4% on the LPR debt level. CBIRC is still sticking to 24%. When we look at our risk management and also our customer base, we're confident that we can still make a profit when loan pricing goes down to 15%. Let me give you our numbers to illustrate this. Funding cost at the moment is about 7%. If loan pricing goes down, that means that, you know, our risk preference would also go down. So our risk cost will go down to 3%-4%. For our operating expenses, it's going to be about 2%-3%.
That's why we're confident that even though we don't believe that the 24% rule is going to change, but, you know, if it goes down, we'll still be profitable.
Thank you for the question.
Oh, just a sec.
Sorry, go ahead.
I'll briefly talk about the second question. The project with Baihang has three phases. We are currently in phase one. Phase one is to, you know, actually we've been working very closely with Baihang and the financial institution regarding the details of the plan. Right now, we have agreed on the specifics and all the key milestones of the project, and we are going to sign a project contract to get it implemented around the end of this year. This is phase one. Phase two is implementation phase. We expect the, you know, the entire project to be completed around the end of this year or early next year in the first quarter.
Once the plan is implemented successfully, phase three is to get the whole plan approved by PBOC. We're going to, you know, put together a document and, you know, propose to PBOC and see if this plan can be approved eventually. That's our current progress. Thank you. Okay, just one quick follow-up. When do you expect the plan to be approved? You know, when do you plan to submit the plan for approval to the PBOC? Right. We do not have a specific date to submit the plan. You know, if everything goes smoothly, we expect, you know, to get maybe a first round of, you know, submission towards the end of this year or early next year.
Got it. Thank you.
Thank you for the questions. As a reminder, if you'd like to ask question, you can press star one and wait for your name to be announced. We got a new questions from the line of Hans Fan from CLSA. Please go ahead.
My question is a follow-up on the decoupling of data feeds from fintech to banks. When you collaborate with Baihang Credit, can you elaborate in terms of what kind of data are you gonna pass through to Baihang? And do you also pass the algorithm to them as well? And what types of products generated from Baihang, which can be passed to banks? Yeah, just some details. Thank you.
Right now I cannot, you know, say exactly what the plan is because, you know, some of the details are still, you know, underway and there are some, you know, back and forth discussions with Baihang at the moment.
The reason is, you know, to be fully compliant, as you mentioned, eventually the algorithm might be placed, you know, at Baihang's side. Right now, I mean, due to the technical capability and based on the evaluation of the time it will take for us to implement the whole process, it's way too complicated for the financial institutions and for Baihang. Right now, I mean, the plan is to actually transfer all the required data to them and they will actually process the data and eventually transfer the processed data to, you know, our cooperative financial institutions. That's the process.
Basically, it's not just for Baihang. They do not just act like a transitional institution. What I mean is they do take an active role in this process. We transfer the data required by PBOC to them. They actually take some processing of the data and they transfer the processed data to the financial institutions. That's actually how this plan would work eventually. As you mentioned, in the future, according to PBOC, we still need to wait for the instructions, you know. Eventually the algorithms might be placed at Baihang's side.
Thank you.
Thank you for the questions. Once again, to ask a question, you may press star one. At this time, there are no more questions from the line. I would like to hand the call back to the management for closing remarks.
Thank you everyone, for your time and interest. We'll wrap up the call here, and we look forward to speaking with you. Thank you.
That does conclude today's conference call. Thank you for your-