Ladies and gentlemen, thank you for standing by and welcome to the Lufax Holding third-quarter 2024 earnings call. (Operator Instructions) 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, ma'am.
Liu Xinyan
Thank you very much. Hello, everyone, and welcome to our third-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. YS Cho, who will provide an update of the recent developments and the strategies of our business. Our CFO, Mr. Peiqing Zhu, will then provide more details on our financial performance and 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. YS Cho, Chairman and CEO of Lufax. Please.
Yong Suk Cho
Thanks for joining us today for our third-quarter 2024 earning call. During the third quarter, while pre-loan demand remained weak as small business owners continue to face a complex macroenvironment, we saw ongoing growth in our consumer finance business. We are hopeful that policy stimulus measures introduced by the Chinese government in late September will help improve the macroenvironment and have a positive impact on our business performance in the long run. Meanwhile, we plan to stay vigilant and prudent in the execution of our business strategies in light of the increased risk exposure on the 100 Guaranteed Business model. Before we discuss the business details, let me share some updates on the macroenvironment. In the third quarter, the macroenvironment remains challenging for small business owners. The SME development index declined by 0.3 points quarter over quarter, to 88.7% in September. The business conditions index published by the Cheung Kong Graduate School of Business also declined from 49.3% in June to 46% in September, suggesting persistent challenges faced by small business sector. On the other hand, we are encouraged by sign of mild recovery in the consumption sector during the third quarter. CPI showed improvement from 0.2% in June to 0.4% in September. In late September, we are glad to see that Chinese government announced a number of new stimulus policies, including measures to help the recovery of the real estate sector and increase liquidity, such as a cut to reserve requirements ratio and the lowering of existing mortgage rates. Local governments also launched a series of stimulus initiatives relating to real estate and consumption to boost consumer confidence and strengthen the economy. We believe all of these efforts have a positive impact on SCOs in China. Meanwhile, we recognize it will take time for SCOs to benefit from these measures and improve performance. So we remain prudent as we execute our business strategies in the short term. Furthermore, we will also put more emphasis on our non-SCO customers and continue to grow our consumer finance business. This will help us take full advantage of gradual effects of consumption recovery and will be solid position for our future growth. Now let's turn to our operating results. First, let's take a look at our loan volume. Total new loan sales in the third quarter were RMB50.5 billion, flattish year over year, and improving by 11.7% from last quarter. The quarter-on-quarter growth, despite the macro challenges, was mainly attributable to the continued growth of our consumer finance business, which offset the ongoing weakness in pre-loan demand from high-quality SCOs. New consumer finance loans increased by 27.8% year over year and accounted for 52% of our total new loan sales in the third quarter as a result of our continued efforts to roll out smaller tickets and revolving product structures. Balance-wise, our total loan balance stood at RMB213.1 billion as of the end of third quarter, of which consumer finance loans took up 22%. Turning to asset quality. Our tightened risk control policies and enhanced risk assessment systems have helped maintain stable asset quality. The C-M3 flow rate of Puhui loans remained at 0.9% during the third quarter despite a decrease of total balance as compared to the second quarter. The asset quality of our consumer finance loans also stayed strong, with NPL ratio further decreasing to 1.2% from 1.4% in the second quarter. As loans enabled under the 100% guarantee model kept increasing as a percentage of total loans, our balance take rate rose by 1.9 percentage points year over year to 9.7% during the third quarter of 2024. Cost of funds continued to decrease, driven by both monetary policy stimulus and our diversified license strategy. As mentioned during our last earnings call, we acquired a nationwide small lending license in July. We started to provide new loans under this newly acquired nationwide small lending license in August. As of the end of third quarter, we have provided more than RMB1 billion in new loans under this new license. We believe our small lending license has a potential to further reduce our funding costs, diversify our product portfolio, and improve our capital management efficiency. Finally, I want to provide an update on Ping An Group's mandatory general offer. On September 27, Ping An Group dispatched offer document and commenced the offer period. If there are no additional requirements from regulators, the offer period will end on October 28. As stated in the offer document, Ping An Group is making the offer solely to comply with applicable rules and has no intention to privatize Lufax. The intention is that Lufax will continue to remain an independent entity listed on the New York Stock Exchange and Hong Kong Exchange. Looking ahead, we seek to continue to deepen our synergies with Ping An Group, leveraging its brand, reputation, technological resources, and extensive network to strengthen our market position. I will now turn the call over to Peiqing, who will provide more details on our financial performance and business operations.
Peiqing Zhu
Thank you, YS. I will now provide a closer look to our third-quarter results. Please note, all numbers are RMB terms and all comparisons are year-on-year basis, unless otherwise stated. In the third quarter of 2024, our total income decreased by 31.1% to RMB5.5 billion from RMB8.1 billion, mainly due to a decrease of outstanding loan balance by 41.8%, partially offset by our increased take rate as loans enabled under 100% guarantee model constitute a higher proportion of our total loan book. Meanwhile, our total expenses decreased by 19.2% to RMB6.3 billion from RMB7.7 billion, among which the total operating expenses declined by 35.9% to RMB3 billion from RMB4.7 billion. And credit impairment losses increased by 9% to RMB3.3 billion from RMB3 billion. Operating efficiency improved, with our operating expenses to income ratio decreasing from 53.8% from 57.8% in the third quarter of 2023. The increase of credit impairment losses was mainly due to increased provision related to our loan book and certain investment assets. As a result, we recorded a net loss of RMB725 million for the third quarter. Turning to the unique economies of our loan business. Our APR balance decreased 19.5% from 20.1% despite the decrease in APR. Our take rate by balance increased to 9.7% from 7.8%, primarily due to the removal of negative impact from high CGI premium to our transition to the 100% guarantee model, and also thanks to the decrease in our funding costs. We accept that the take rate will further increase as the percentage of the loans enabled under the 100% guarantee model continues to increase and that funding cost will continue to decrease as we continue to optimize our funding structure by leveraging our consumer finance and small lending license. On the expenses side of the unit economy, while sales and marketing expenses remained stable, credit costs and other operating expenses will attract on our net margin. Credit costs increased primarily due to the increased risk exposure and provision for our loan book. As discussed before, while we anticipate loans under the 100% guarantee model will be lifetime profitable, it's important to note that these loans may incur accounting losses in the first calendar year due to higher upfront provisions. This accounting treatment affects our short-term profitability but is expected to lead to improved long-term financial performances as the loan portfolio matures. The increase of other operating expenses was primarily due to the contraction of our loan balance and the reduced economy of scale. Now, let me highlight a few key P&L items. During this quarter, our technology platform-based income was RMB1.6 billion, representing a decrease of 49.9%, mainly due to a decrease in retail credit services fees as a result of 41.8% decrease in outstanding loan balance. In addition, it was also negatively affected by cessation of the Lujintong business in April 2024. Our net interest income was RMB2.7 billion. a decrease of 18.8% 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 RMB818 million, a decrease of 13.1%. In terms of revenue mix, technology platform-based income accounted for 29.5% of our total revenue, down from 40.5% in the same period of last year. Net interest income and guarantee income accounted for 48.5% and 14.7% of total revenue in the third quarter, respectively, as compared to 41.1% and 11.7% in the same period of last year. In terms of expenses, our credit impairment losses increased by 9% to RMB3.3 billion, mainly due to increased provisions related to loans as we applied a more prudent approach in our ECL model to reflect the complex macroeconomy environment in the third quarter, as well as increased provision related to certain investment assets. Our total sales and marketing expenses, which include expenses for acquisition costs as well as the general sales and marketing expenses decreased by 49.9% to RMB1.1 billion, mainly due to reduced loan-related expenses resulting from the decrease in new loan sales and outstanding loan balance, as well as the elimination of expenses associated with our Lujintong business. Operation and servicing expenses decreased by 25.8% to RMB1.1 billion as a result of our continued effort to control expenses and the decreased loan balance, partially offset by increased commission associated with the improved collection performance. Our finance costs increased by 48.9% to RMB59 million from RMB40 million, mainly due to the decrease of interest income from bank deposits, partially offset by the decrease of interest expenses after repayment of our C-round convertible promissory notes upon the maturity on September 30, 2023. In terms of capital, as of the end of September 2024, our main operating entities remain well capitalized. Our subsidiary's leverage ratio stood at 2.6x and our consumer finance subsidiaries capital adequacy ratio stood at 14.9% as compared to the 10.5% regulatory requirement. As we deal with the complexity of the broader economic environment, we are now seeing encouraging signs in terms of asset quality and in 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 operations and we'll uphold commitment to bring value to our shareholders. That concludes our prepared remarks for today. Operator, we are now ready to take questions.
Question and Answer Session
Operator
(Operator Instructions) Betty Li, CLSA.
Betty Li
So I have two questions. The first one, could you kindly express what will be the impact of the new policy stimulus on your business? The second is, could you share more about the business outlook for this year and beyond? Thank you.
Yong Suk Cho
Thanks, Betty. About stimulus policy, it is surely a positive impact, I think, on our economy and in our SCO segment as well. But knowing small business owners in general are in difficulty now, it will take more time for them to benefit from these measures and improve performance. So in the near term, we remain prudent and put asset quality over quantity for SCO lending. But at the same time, we take full advantage of the gradual recovery by putting more emphasis focused on non-SCO segments and expedite small and medium-sized ticket loan growth using our CF license, consumer finance license, and the newly acquired small lending license with their funding cost advantage and customer experience advantage over guarantee model. And then about your outlook question. So our volume guidance of RMB190 billion to RMB220 billion and loan balance of RMB200 billion to RMB230 billion, that remains unchanged. On a single account basis, we know that due to the upfront provision of the 100% guarantee model, so profitability is under pressure in the very first calendar year. But going forward, we know that we believe the overall lifetime profitability will surely improve than before.
Operator
Judy Zhang, Citi.
Judy Zhang
I have two questions. The first question regarding asset quality. I understand that Lufax has been derisking loan book for some time, which is the barring fruit in the recent quarters. Could management share a bit been in trending since 3Q? And second question is, does management have any plan to announce another run special dividend this year or any other measures that you are considering to put shareholders' return? Thank you.
Yong Suk Cho
Okay. Thanks, Judy. The asset quality indicators remained stable in the third quarter with C-M3 flow rate of our Puhui loans remaining at 0.9% despite decline in balance. So while our customer finance NPL ratio continued to improve from 1.4% to 1.2%, knowing that our loan balance reduction will come to an end in a few months later and the portfolio account mix in terms of account vintage, the mix will continue to optimize. So I believe we'll be able to demonstrate more obvious asset quality improvement measured by net flow, not before all. So that we have confidence. About shareholder return, we do not have any specific plan yet after our special dividend this year. But the management team is committed to provide long-term shareholder returns as always, and we consider all positive ways to return value to shareholders going forward.
Operator
Yada Li, CICC.
Yada Li
My first question is regarding the credit impairment loss. Could you please share a little bit more about why the credit employment losses increased this quarter while the risk indicators remain stable? And secondly, I was wondering what is the trend of the falling costs going forward. That's all. Thank you.
Peiqing Zhu
Thank you, Yada. I'll try to answer the first question. The increase is mainly to the provision associated with our loans and certain investment assets. Increase of loan provision was driven mainly by the upfront provision of loans under 100% guarantee model, as we discussed, right? And the prudent approach -- and also the prudent approach in our model to flat of our conservative forecast based on the macroenvironment in the third quarter, we're still seeing some uncertainties in the macroeconomy. And the second question, I know you're interested about our funding cost trend, right? And our outstanding costs further decreased in the third quarter, thanks to the favorable monetary policy and our diversified license strategy. And also, we try to spend the time to work with our partners and try to cut down some of the funding costs in terms of different products. And also, we expect funding costs to further decrease as we continue to optimize our funding structure by leveraging our consumer finance and small lending licenses. Thank you.
Operator
Thank you. That concludes our question-and-answer session for today. I will now turn the call back over to management for closing remarks.
Liu Xinyan
Thank you. This conference is now concluded and thank you for joining today's call. If you have any more questions, please do not hesitate to contact our IR team. Thanks again.
Operator
Thank you. The conference is now concluded. You may now disconnect.
