Liu Xinyan; Head of Board Office and Capital Markets; Lufax Ltd
Yong Suk Cho; Chairman of the Board, Co-Chief Executive Officer; Lufax Holding Ltd
Alston Zhu Peiqing; Chief Financial Officer; Lufax Holding Ltd
Emma Xu; Analyst; BofA Securities
Yada Li; Analyst; CICC
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding second quarter 2024 earnings call. (Operator Instructions) 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, Ms. Liu Xinyan, the company's Head of Board Office and Capital Markets. Please go ahead, madam.
Liu Xinyan
Thank you very much. Hello, everyone, and welcome to our second quarter 2024 earnings conference call. Our financial and operating results were released by our newswire services earlier today and are currently available online. Today, you will hear from our Chairman and CEO, Mr. Y.S. Cho, who will provide an update of the recent developments and strategies of our business. Our CFO, Mr. Peiqing too will then provide more details on our financial performance in the business operations.
Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements.
With that, I'm now pleased to turn over the call to Mr. Y.S. Cho, Chairman and CEO of Lufax. Please?
Yong Suk Cho
Thanks for joining us today for our second quarter 2024 earning call. In the second quarter, the macroeconomic environment remained complex for small-business owners. Despite this, we saw continued improvements in asset quality across both our portfolio and consumer finance businesses, as you continued to implement our prudent strategies. We believe this will provide a solid foundation for our future growth. Let me provide some updates on macro situation before we discuss the various details.
The SME development index trended down by 0.3 points quarter-over-quarter to [RMB89 billion] in June. Meanwhile, the business conditions index published by the Chongqong greatest growth business declined from [50.1 points in March to 49.3 points] in June, falling below the 50 threshold and reaching its lowest level for the first half of 2024. These indicators underscore the persistent challenges faced by the small business sector.
Now let me provide some updates on our operating results. First, let's take a look at our loan volume. Our total new loan sales in the second quarter of 2024 was RMB45.2 billion, representing a 15.5% year over year decline. The decline was mainly caused by a 35% year over year decrease of poor loans, which comprised 51% of total unit sales in the second quarter, reflecting our continued emphasis on quality over quantity and sluggish demand for prevalence of more high-quality SVRs.
Meanwhile, our consumer finance business continued to grow and delivered a solid performance during the quarter. Consumer finance loans saw a 23.6% year over year increase in new loan sales, representing 49% of our new loan sales. As a result of our continued efforts to roll out smaller tests and evolving product structures.
Furthermore, we are pleased to observe notable improvements in asset quality to be up as we adopt more stringent credit standards with focus on higher quality customer segments and resilient geographies, bolstered by our enhanced risk assessment system. (inaudible) improved 2.9% from 1.0% in the previous quarter, mainly driven by the increment of C-M3 of unsecured loans.
Our personal finance loans also saw asset quality improvements with NPL ratio decreasing to 1.4% from 1.6% in the first quarter.
Next, let's take a look at our loans under the 1% model as discussed previously. Since the fourth quarter of 2023, all new fully loans have been enabled under the 1% guarantee model. As our full loan balance increasingly represents loans enabled under this model, our balanced take rate has trended upwards, reaching 9.3% during the second quarter as the negative impact from high CGI premiums has been eliminated.
Thanks to this improved asset quality, our credit costs have remained stable despite increased risk exposure. However, it is worth noting that due to decrease in loan balances, our unit operating expenses have increased, which has become a key drag on our units profitability.
Let me now provide some of these updates on our newly acquired PAO or PAObank by leveraging strategic synergies with Lufax following the acquisition, PAObank delivered solid growth in the first half of 2024, it's total loan balance stood at RMB2.4 billion by the end of second quarter, representing a 45% year over year increase.
Going forward, PAO Bank is planning to roll out new initiatives, including insurance, wealth management products to better serve SMEs and retail customers. To reinforce the strong license severity we have discussed in the past, we recently acquired a nationwide small lending license. We believe this new license will help further reduce our funding costs, diversify our products and improve our capital management efficiency.
Now turning to the progress of special dividends, I'm pleased to announce that we've completed the distribution of special dividends at the end of July as scheduled. After receiving the script dividend, Ping An Group's ownership increased to 56.8%, and Ping An Group now consolidate our financial results. Officially remain on independent entity listed on New York Stock Exchange in Hong Kong.
Meanwhile, we seek to enhance synergies with Ping An Group, primarily in the following three key areas. First is branding. Ping An Group is a Fortune 500 company and a leading global financial institution. Its strong global reputation and financial standing will serve as a powerful endorsement for effects, deepening trust among our customers and funding partners. This enhanced brand association will improve our domestic and international standing and can potentially help lower funding cost.
Secondly, technology. We will leverage groups extensive technological resources including its advanced AI systems to further strengthen our risk management and forward prevention measures. Our goal is to provide small business owners and consumers with efficient, secure and cost effective financial services.
For these channel resources, while we are hearing quickly to applicable laws and regulations, we aim to expand our reach by tipping into Ping An Group's extensive nationwide network of online and offline channels. This expansion will complement our efforts to strengthen our direct sales force.
In summary, our expanded relationship with P&G who will help us better serve our customers using their difficulty and expense of financing. With our strengths and capabilities, we strive to be a benchmark company with a unique role in supporting the growth of China's vital small and micro enterprise economy. While the macro environment remains complex, we are encouraged by the improvement in asset quality and the progress of our strategic initiatives. We remain committed to our deliberate strategic approach as we continue to navigate the economic landscape, and we have set our sights on achieving sustainable quality growth.
I will now turn the call over to Peiqing who will provide more details on our financial performance and business operations.
Alston Zhu Peiqing
Thank you, YS. I will now provide a closer look into our Q2 results. Please note that all numbers, are in RMB terms and all comparisons are on a year-over-year basis, unless otherwise stated. In the Q2 2024, our total income decreased by 35.5% to RMB6 billion from RMB9.3 billion in Q2 2023, mainly due to a decrease of our outstanding loan balance by RMB44.8 billion from full RMB26.4 billion as of June 30, 2023 to RMB235.2 billion as of June 30, 2024, partially offset by our interest increase take of rate as loans enabled and a 100% guarantee model constitute a higher proportion of our total loan book.
Meanwhile, our total expenses decreased by RMB20.3 billion from RMB8 billion to RMB6.3 billion, among which the total operating expenses declined by 29.7% from RMB5 billion to RMB3.5 billion and the credit impairment losses decreased by 14.6% from RMB3 billion to RMB2.6 billion. The gap between the decrease of revenues and operating expenses was mainly caused by the decreased economy of scale, which resulted in increased fixed expenses to income ratio.
The decrease of credit impairment losses was mainly due to the decrease in actual losses on loans as a result of improvement of credit performance, partially offset by upfront provision for loans and a 100% guarantee model. As a result, we recorded a net loss of RMB730 million for the second quarter.
Turning to our unique economy for the poor business, our APR by balance decrease from 20.3% in the Q2 2023 to 19.6% in Q2 of 2024. Primarily due to the change of customer mix as we continue to prioritize high quality customers. Despite the decrease in APR, our take rate by balance increased to 9.3% from 7% in Q2 2023 due to our successful transition to the 100% guarantee model.
We expect the take rate will further increase as the percentage of loans enabled under 100% guarantee model continues to increase. In addition, our funding cost also decreased slightly, thanks to the favorable monetary policy and support of our funding partners. On the other hand, while sales and marketing expenses remained stable, credit costs and other operating expenses spread on our net margin. This was primarily due to the construction of our loan balance.
Furthermore, while the actual losses decreased as a result of improvement in asset quality, we recorded more upfront provision for loans enabled under 1% guarantee model. As discussed before, while we anticipate that this part of the loans will be lifetime profitable, it's important to note that these loans may incur accounting losses in the first calendar year due to a higher upfront provisions. This accounting treatment affects our short-term profitability, but this is expected to lead to improved long-term financial performance as the loan provision portfolio matures.
Now let me highlight a few of key P&L items during this quarter. Our technology platform base income was RMB2 billion, representing a decrease of 51%, mainly due to the decrease in retail credit services fees as a result of 44.8% decrease in outstanding loan balance. In addition, it was also negatively affected by the closing of Lujintong home business in April 2024. Our net interest income was RMB2.7 billion, a decrease of 19.3% from the same period last year. The relatively lower decrease in net interest income was the result of an increase in consumer finance revenue. Meanwhile, our guarantee income was RMB850 million, a decrease of 26%.
In terms of revenue mix, technology, platform-based income accounted for 33.4% of our total revenue, down from 44% in the same period last year. Net interest income and guarantee income accounted for 45.4% and 14.2% respectively, of total revenue in Q2 as compared to 36.3% and 12.4% in the same period last year.
In terms of expenses, our credit impairment losses decreased by 14.6% to RMB2.6 billion. Our total marketing expenses, which includes expenses for acquisition cost as well as general sales and marketing expenses, decreased by 46% year on year basis to RMB1.4 billion in Q2. The decrease was mainly due to reduced loan related expenses resulting from decrease in new loan sales and outstanding loan balances, as well as the elimination of expenses associated with our Lujintong companies.
Operation and service expenses decreased by 15.8% year on year to RMB1.3 billion in Q2. As a result of a decreased loan balance and our continued effort to control expenses, partially offset by increased commissions associated with improved collection performance.
Our finance cost decreased by 19.2% to RMB13 million in Q2 from RMB136 million in the same period of 2023, mainly due to decreased interest expenses after the repayment of a C-Round convertible promissory notes and other debts, partially offset by the decrease of interest income from bank deposits.
In terms of capital as of the end of June 2024, our main operating entities remain well capitalized. Our guaranty subsidiaries leverage ratio stood at 2.4 times, and our consumer finance subsidiaries, capital adequacy ratio stood at 14.7%, well above the 10.5% minimum regulatory requirement. As we deal with the complexity of the broader economy environment and our strategic shift to the 100% guarantee model, we have seen encouraging signs in terms of the asset quality and the growth of our consumer finance business. We will remain committed to our prudent strategy as we seek to build a solid foundation for long-term sustainable future success. I will uphold our commitment to bringing value to our investors.
That concludes our prepared remarks for today. Operator, we are ready to take questions.
Operator
We will now begin the question and answer session. (Operator Instructions) Emma Xu, Bank of America Securities.
Emma Xu
Thank you for the opportunity for the first question. Actually, I have two questions. So the first question is about the loan demand. So how is the overall loan demand currently? So we see that second quarter you granted RMB45.2 billion new loans and the accumulated amount of the new loans issued in the first half rigid RMB93.3 billion, accounting for around 42% to 49% of your full year guidance at the beginning of the year. So do you think you are still on track to meet your full year target and will we see the turning point of the loan growth recovery?
And the second question is that, congratulations on the continued improving asset quality. So your M3 flow rate has declined two quarters in a row and are down to 0.9% in the second quarter. So do you think you can continue to see the improvement in the flow rate and how well management try to sustain this good trend? Thank you.
Yong Suk Cho
Thank you Emma for your question. The first question, loan demand, yes, loan demand in overall is too weak. As for loan growth recovery, it largely depends on macro environment improvement. So why we keep our prudent strategy on SVR lending, we see that from our CF business, the consumption on demand is actually more stable. So we focus more on consumer finance and relatively large size consumption loan to cope with declining extra loan demand in near term, especially in the regions where our loan volume contraction is more significant.
And for your second question, as we all know that it is not easy to improve C-M3 flow rates, why loan balance keeps declining, but with continuous portfolio mix, implement our M&A, and now we see them more and more accounts from 2023 and 2024 which takes a bigger part of the core portfolio, which is better quality accounts. So we believe our asset quality measured by C-M3 flow relate with continuous improvements. And also we are putting tremendous efforts in our risk model, underwriting model and also collection model upgrade and then a safe quality management process. So all in all we are confident that about sustainability of our asset quality going forward.
Thank you.
Operator
Yada Lee, CICC.
Yada Li
Hello management. Thank you for taking my questions. I have four questions today. Firstly, I was wondering what areas do we see more collaboration potential in the future with Ping An Group? And secondly, I like to ask, but do we have any plans to further increase the shareholder returns? Looking at the cash at hand and the future loan size, what could be the potential amount available to distribute to the investors?
Third, I would notice that the funding costs decreased slightly in the second quarter. And I was wondering what's the outlook for the future funding costs? And I want to ask on why the OpEx to income ratio hike in the second quarter? Do we see any room to further improve this ratio? That's all. Thank you so much.
Yong Suk Cho
Okay. Let me answer your question from one to three. I think Yada -- let me see my notes here. So as a special dividend, Ping An Group's ownership increased much close to 57% to 56.8% and that we've been working closely with Ping An Group from the very beginning in future areas like customer sourcing. Right, using their online offline channels and technology development and their brand sharing, but with increased piano group owners now we expect it will help us to reduce funding cost in light of their good reputation finance standing.
So actually your third question is about funding costs. We believe funding costs has been relatively decreasing or optimizing. We believe this trend will continue and also with the acquisition of. That nationwide small loan lending license that that land license that comes with better or low funding costs going forward. So we are confident about the funding cost for the improvements.
And then about the second question, although the Board of Directors has determined that no semi-annual dividend will be paid at this time because we made a net loss recorded for the first half of 2024. But management is dedicated to returning value to shareholders. We will always seek out potential ways to increase shareholder returns, as demonstrated in this special dividend this time, our annual dividend policy, which is 20% to 40% of net profit and we pay semi-annually, that policy does not change, remain unchanged.
Alston Zhu Peiqing
Okay. About the funding cost, I would like to share some of my view, for our loan, we expect that just because the LPR policy and the Central Bank release the variable monetary policy to the market. And to support that, we'll definitely support our partners, and of course, they will pass to our companies together with the synergy of the Ping An Group will enable, which will enable us to enjoy a low funding cost.
For consumer finance loans, I believe that we will continue to fetch a lower interest rate in the interbank market. Actually you can see the trend also in the interbank market, right. The rate was led by the Central Bank to going down and we expect that funding cost will remain at a relatively low level. And generally, we will say that we were optimistic to our overall funding cost that will continue to decrease.
And another question about our income ratio increase in second quarter, although we remain committed to the cost of optimization, our assets to income ratio trended upward during this quarter. This was mainly due to our loan scale contraction that led to a decline in economies of scale. In addition, some of the fixed expenses continued to contribute to little bit to the increase. Looking forward, we will continue to improve our operational efficiency by leveraging the technology, and the synergy, and the digitalization, and the work together with Ping An Group and our internal efforts. Thank you.
Operator
Thank you. That concludes our question-and-answer session for today. I will now turn the call back over to our management for closing remarks.
Liu Xinyan
Thank you. This concludes today's call. Thank you all for joining the conference call. If you have more questions, please do not hesitate to contact Lufax's IR team. Thanks again.
Operator
Thank you. This conference is now concluded. You may now disconnect.
