According to Financial Tiger News on February 5, Lufax Holdings (NYSE: LU) recently released its fourth quarter financial report, with total revenue of 13.286 billion yuan, a year-on-year increase of 5.9%; net profit was 28.47 billion, a year-on-year increase of 17.4%. Subsequently, Lufax Chairman Ji Guangheng, two co-CEOs Ji Kuisheng and Zhao Rongshi, and Chief Financial Officer Zheng Xigui and other senior executives attended the earnings conference call and answered questions from analysts. In an analyst Q&A, Lufax CFO Zheng Xigui revealed that regarding online small loan licenses, it has three licenses in Chongqing, Hunan and Shenzhen, and three other online small loan licenses nationwide. However, there has yet to be clarity and confirmation from regulatory agencies on the next stage of development of these businesses. These license plates are currently not in use.

As of the end of last year, Ping An Consumer Finance’s closing balance was 3.5 billion yuan

Zheng Xigui also disclosed that the consumer finance license was obtained in April last year and started operations in May last year. As of December last year, there were more than 200,000 new customers, and the ending balance was about 3.5 billion yuan. According to Financial Tiger, this is the first time Ping An Consumer Finance has disclosed its operations since its opening. Lufax relies on three companies to control 70% of Ping An Consumer Finance. The previous prospectus disclosed that Ping An Consumer Finance and Ping An Puhui are both within the Lufax listing system.

When introducing Ping An Consumer Finance’s business, Zheng Xigui said: “We have made a good start. This is a complementary business to solve the problem of young borrowers and consumer borrowers. I believe this is a good start for us. It's an opportunity and then that can become a new benchmark for us moving forward."

Regarding issues related to consumer finance licenses, Zheng Xigui also revealed that this is very different from its traditional business. The credit limit does not exceed 200,000, but in fact, it is controlled below 50,000. He pointed out that the size of the borrowers was less than 20,000 yuan per borrower, the average price was very low, and the interest rate was below 17%.

When answering analysts’ questions, Zheng Xigui emphasized: “It is a credit line product. It is like a virtual credit card. So customers can choose to pay whenever they want, and then repay the service—— Sorry, they can use it for 3 months, 6 months or the next 12 months, then 24 months.”

The Internet deposit business accounts for 16% of the total assets

When talking about the discontinued Internet deposit business, Ji Kuisheng disclosed that as of the end of last year, the Internet deposit business accounted for approximately 16% of the total assets. 16%, or 660 billion yuan, which means that the revenue generated by this business is less than 0.4% of the company's total revenue. He emphasized that attempts will be made to redirect customers' funds from these products to other areas on the platform, just as has been done with P2P in the past. This will be an ongoing transition.

Ji Kuisheng pointed out that this will allow it to continue to meet revenue expectations for this business. But when optimizing the portfolio, the accelerator on customer assets will be turned off a little. So this is a near-term focus, but will be updated if the situation changes. On the subject of acceptance rates, we did have very strong growth in the fourth quarter before some of the changes such as deposits took effect. (Kevin)

The following is a summary of the analyst Q&A session:

Goldman Sachs analyst Elsie Cheng: I have two questions. The first is the revolving loan interest rate. Understand that in this environment, we are targeting a different, higher-quality customer base with lower interest rates. However, given the recent clarification on the applicability of the 4x LPR limit, we are just wondering if we can expect an increase in revolving loan rates now that we may have more flexibility in terms of rates and who we target. ? The second question is about guidance. If my calculations are correct, our new loan sales will grow at a solid 21% rate in the first half of 2021. So, could management share a little more color on the key drivers of growth? Can we really push this growth momentum into the second half of the year?

Zheng Xigui: Let me explain the first question first.

In the fourth quarter of last year, we had very little unit economic revenue from the new loans we made because we lowered our borrowing costs, so our loan rates and margins were lower. But financing costs, CGI premiums and our acquisition costs did not decline immediately, nor did new loans decline in the fourth quarter, which accounted for approximately 25% of the loan balance at the end of 2020.

This is why interest rates were lowered in the fourth quarter of last year. We have more trust funds and guaranteed portions than we did in 2019. There are other reasons. But if you look at the data from January 2021 or last month, in January this year, we achieved record new loan sales, almost close to 100 billion yuan in new loan sales in one month.

We can see significant declines in financing costs, CGI premiums and borrower costs. So both interest rates and margins were very consistent with what we had expected. So overall, this is going to be back to 2020 overall rate and net margin levels, and we believe that's going to continue. We're very confident for full year 2021 that our RCF new business (inaudible) rates and net margins won't change much.

The Supreme Court’s ruling on LPR’s 4 times interest rate does not apply to financial lending institutions, including lending companies, customer financing and small companies. However, we believe overall guidance remains unchanged at 24%. Therefore, we do not have any plans to adjust prices.

Then gradually and slowly reduce borrowing costs based on the results of financing costs, credit cost reduction and operating cost optimization, becoming more affordable and competitive in this weak transaction market, while maintaining the current interest rates and net profit margin levels. So we don't currently have any plans to reduce prices throughout the year. But going forward, over the long term, we still plan to significantly reduce borrowing costs. This is the answer to the first question.

The second question is, yes, our sales are growing. As I just mentioned, in January this year, our sales were almost close to 100 billion yuan, which is very strong sales. momentum. Going forward, we believe sales will grow, market demand will be sufficient, and then our sales force productivity will increase. Obviously, compared to last year, we achieved 14.4% annual sales growth without adding sales personnel. So we're going to focus on more and more margin enhancement, and at the same time, as AI appreciates in value, like AI, we're trying to acquire and develop new inbound channels.

But at the same time, because in China's interest rate market, our experience is that currently we have not seen any other online channels that can provide us with high-quality borrowers like offline channels. So during this period, our offline drives sales, which will continue to contribute approximately 85%. But in the future, we are planning to develop more self-acquisition channels.

May Yan, analyst at UBS: My question, the first one is related to regulation. This question is related to the credit rating business. Some people think that this may apply to the loan facilitation business. and loan facilitation companies. So, will a credit rating license be required? Is this related to Lufax? The second question is still the adoption rate. From what I understand, interest rates may have dropped temporarily. In the fourth quarter, net pre-tax profit accounted for 3.1% and revenue accounted for 9.1%, but it was lower than previous expectations. This year, you said that the net interest rate will gradually return to between 3.4% to 3.5% to 4%. So what to do? What are the recent CGI costs you mentioned? 6.7% in the fourth quarter, and the cost of financing partners? Our loan size and new loan interest rate are both below 24%. Are they - size - much larger than before? I remember, in the third quarter, you mentioned about RMB 200,000 per loan? Is it higher than it is now? Is there any guidance on increasing the 20% credit risk exposure to something higher, maybe around 30%?

Ji Guangheng: As far as the credit scoring business is concerned, we think the current guidelines are quite early and preliminary. The rules governing the business requirements and shareholder requirements of credit scoring agencies are currently unclear. We do believe that leading agencies (particularly public agencies) may be targeted and that is why this is done as part of an approval programme.

Of course, news that applies to special circumstances may later be applied broadly to the industry.

In terms of the loan facilitation business, we do not believe it is directly involved at the moment. We do not believe that our business would be classified as a credit scoring agency at this stage. We are maintaining various dialogues with regulators. So if this does arise in the future, rest assured that we will be given adequate warning so that we can plan ahead and position our business accordingly.

Overall, we believe this is an early and preliminary stage. We need clearer requirements before we can respond. So it could be another quarter before the rules are clarified.

Zheng Xigui: Actually, I think there are more problems. So the third question is the adoption rate in Q4, which was 9.1%, and I would expect that to be primarily due to the lower adoption rate for new loans in Q4 and the margins that have to move higher borrowing costs from last year in September It dropped to less than 24% in January, but that's January's number. I believe these numbers will change. Overall, our interest rates and net profit margin have returned to our expected levels. Overall, it is no lower than the overall level in 2020.

So we are in good shape right now. How did you achieve this? There are obvious borrowing financing costs and CGI premium. Our interest partner CGI premium has also changed the charging method from the amount date - the loan amount date to the balance date starting from mid-January. Therefore, we adopt a CGI premium rate that also reduces the borrower's outsourcing costs.

In January, I'm going to start in January, we reduced the sales commission by 15%. As a result, we save significant borrower acquisition costs. So our net profit margin has returned very well to its original level. As for the next question, share size, we don't see much change in recent times or months.

Before September 4th, our average size was RMB 160,000, if you remember, then as we reduced the higher borrowing costs, starting from September 5th at a lower The price turned to a better quarter, the scale increased to 200,000 yuan, an increase of a little over 20%, which is why we can reduce the sales commission by 15%. Finally, about our 20% sales guaranteed share. As of December last year, we increased the sales guarantee component of our new loans to 13.6%, and in June we also increased the sales guarantee component of new loans to 20%, which is part of our discussions with regulators.

But for more than 20%, we don’t have any plans yet. All I can say is that the regulatory requirements are over 20%, over 30%, and we have enough organic cash flow to support the additional, more sales guarantee portion. So we don't have to worry too much.

Winnie Wu, analyst at Bank of America Merrill Lynch: I have two questions. First, about regulations and our license. Since November last year, the China Banking Regulatory Commission has released the "Draft for Comments on Online Small Loan Company Licenses." Have you started communicating with regulatory authorities about applying for a national business license? Any feedback from regulators on the prospects of when we will get a state license to operate? In addition, Lufax obtained a consumer finance license earlier last year. So, how is the use of consumer finance licenses going? How much business, whether loan facilities or outstanding balances, is done with a consumer finance license? What's the plan?

Secondly, there is the issue of the difference between on-balance sheet and off-balance sheet accounting. As of the end of last year, you had over 20% outstanding loans on your balance sheet. So what's the plan? Do you think it will grow further to 30% or 40%? Or will it remain stable at around 20%? That said, the relevant question is when will we see a normalization or stabilization of accounting accounts such as revenue and expenses? When will this base-like effect be normalized?

Zheng Xigui: The first question is about the two licenses, the online small loan license. We have three licenses in Chongqing, Hunan and Shenzhen, and three additional online microfinance licenses nationwide. But we have not yet received clarity and confirmation from the regulatory authorities on the next stage of development of these businesses. These licenses are currently not in use.

Then there is the consumer finance license. We obtained it in April last year and started operating in May last year. As of December last year, we had - we had booked 6.5 billion euros, about more than 200,000 new customers, and the ending balance was about 3.5 billion yuan.

So we're off to a great start. This is a complementary business that addresses young borrowers and consumer borrowers. So we believe this is an opportunity for us and then this can be a new benchmark for us moving forward.

Online balance sheet or offline balance sheet, it depends on our funding mix, and I think it has stabilized. Going forward, our financing mix will remain stable, 70% from cooperative banks and 30% from trust banks, and I believe this mix will not change much. So, on and off the balance sheet, I think this combination is pretty stable.

Winnie Wu, analyst at Bank of America Merrill Lynch: So the 70-30 split between fines and trust has stabilized. Are there any plans that, for example, growth in the consumer finance business might mean you'll have more loans funded by yourself? Will this change the status quo?

Zheng Xigui: Yes. that's right. This is very true. But if you think about our size, our loan balance as of today is close to RMB 600 billion. But how much is client financial management? Only 3.5 billion yuan. So no matter how fast it grows, it won't be a large portion of our total loan balance sheet. So it takes some time.

Ji Kuisheng: I think it can be said that the stability of funds between banks and trusts on other balance sheets will basically depend on our credit lines next year, which is why I say our The goal is to reach 20% by June. So over time it's a little bit more, but roughly stable.

Zheng Xigui: I think it is 25%.

Winnie Wu, analyst at Bank of America Merrill Lynch: Yes. So for the consumer finance license, it's going to be more restricted to doing a very different line of business, which is unsecured consumer lending. What's the average amount there? What is the loan interest rate? Is this very different from our traditional business?

Zheng Xigui: Yes. This is very different from our traditional business. If you take this as an example, it does not exceed 200,000, but in fact, it is controlled below 50,000. The size of our borrowers are all below RMB 20,000 per borrower, the average price is very low, and the interest rate is below 17%.

Winnie Wu, analyst at Bank of America Merrill Lynch: How mature is it? Are these loans similar to short-term loans, with a maturity date of only a few months?

Zheng Xigui: I don’t know if it is very open. It is a line of credit product. Like a virtual credit card. So customers can choose, whenever they pay, and then repay the service - sorry, they can use it for 3 months, 6 months or the next 12 months and then 24 months.

Jefferies analyst Thomas Chong: First of all, I have a question about wealth management. Can you give us an update on how we're using technology in our automated portfolio strategies in Q4? On the other hand, I'm talking about online deposits. How much does it contribute to our client portfolios? And then my second question is about the outlook for the second half of the year. Considering that we have the first quarter and the first half of the year, how should we think about the full-year revenue and profit?

Ji Kuisheng: In terms of wealth management in the fourth quarter, we basically did two things . So, within our existing portfolio management tools, we continue to use more and more market data to provide clients with a diversified set of investment strategies, and that strategy continued to make progress in the fourth quarter, as it did last year. What we do is open up the platform and allow other financial consulting service providers to join in, basically providing customers with more products and services.

So this is an area that continues to grow at a good rate and we think it's going to become more important in the overall market. We will continue to drive more and more automation and increasingly share content with clients in the industry so they can adapt to diversified investments.

Regarding deposits, if you look at the total assets of customers at the end of last year, deposits accounted for about 16% of total assets, which is 660 billion yuan, which means that the revenue generated by this business is less than 0.4% of the company's total revenue. So as we let these deposit products mature naturally, we will try to redirect customer funds from these products to other areas on the platform, just like we have done with P2P in the past. So this will be an ongoing transition.

Hans Fan, analyst at CLSA: I have two questions. The first is wealth management. Just mentioned the strong growth in AUM in the fourth quarter of last year. Looking at the guidance for the first quarter and the first half of the year, looking at customer assets, growth is actually slowing. So, I'm wondering why we are cautious about the asset outlook for our wealth management clients. Also related to wealth management, we wanted to know why product inclusion rates were actually down quarter over quarter. What's the reason behind this? The second question is, I want to know about dividends. We understand that management has previously mentioned that there are currently no short-term plans to pay any dividends. But I wonder, long term, once we do well on the capital side, are we going to pay dividends to investors?

This will allow us to continue to meet our revenue expectations for this business. But when optimizing the portfolio, we turn off the accelerator on client assets a little bit. So this is a near-term focus, but we will update if the situation changes. On the acceptance rate issue, we did have very strong growth in the fourth quarter before some changes like deposits took effect.

The growth in the fourth quarter was a combination of bank asset management products and bank deposits, so the growth rate in the denominator accelerated. We've lowered our acquisition rate a little bit, so it was down 5% quarter over quarter, but up 10% year over year. So as we look ahead to this year, 2021, we expect that over the next three to four quarters we will continue to see an improvement in acquisition rates. Because we drive product mix on the platform.

Cho Yong-seok: Previously tried to limit the interest rate cap to 15.4%. The Supreme Court suggested that the 4 times LPR does not apply to financial lending institutions such as us or small companies, while for CBI it is 2%, so the mixed part is not important. As long as the total interest rate is lower than 24%, we believe this is very consistent with the requirements and is no problem in the current lending environment.

The first question is about the assessment of charges. The overall impact of interest rates will remain unchanged in 2021. We do not have any plans to increase or decrease our borrowing costs. And then referring to the January numbers, I said our margins and net margins are back to 2020 levels. So overall, our profitability and net margin are very much in line with our previous expectations for rates to remain the same or change slightly, not much change in 2021.

Ji Kuisheng: So, I think part of the problem may be the combination of service fees and other interest income, because we also increased risk sharing or changed the risk sharing model.

Zhao Yongseok: Yes, in terms of our fee mix, we will increase the sales guarantee portion of new loans to 20% by the end of June. This will increase our fee mix. I think it's going to increase our guaranteed portion, and then the service fees, they're going to decrease -- quite a bit, and the service fees are going to increase.

Zheng Xigui: I can add a little bit. As I explained in my section, changes in the earnings mix are basically driven by two factors. One is the change in the mix of online vs. on-balance sheet vs. off-balance sheet, because you've seen on-balance sheet loans increase from 10% at the end of 2019 to 22% in 2020, and that's due to us having more trust loans, right? This is a change.

The second change is that we are taking more risks. Self-insured risk increased to 6.3% from 2.2% at the end of 2019. Because of those two factors, it's changing the revenue structure, so you're going to see a decrease in platform fees in the revolving loan category, but a significant increase in interest income from guaranteed revenue. That's why at the beginning -- in the middle, we discussed that because of changes in these business factors, that's reflected in our financial data.