Good day, and thank you for standing by. Welcome to the LexinFintech's Third Quarter 2022 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. [Operator Instructions] Please be advised that today's conference is being recorded.

And now I would like to hand the conference over to Ms. Echo Yan, IR Director of LexinFintech. Thank you. Please go ahead..

Thank you, operator. Hello, everyone. Welcome to Lexin's third quarter 2022 earnings conference call. With us on the line today are our CEO, Jay Xiao; President, Jared Wu; and the CFO, Sunny Sun.

Before we get started, I'd like to remind you that the call and presentation contain business outlook and forward-looking statements, which are based on assumptions as of today. The actual results may differ materially, and we undertake no obligation to update any forward-looking statements.

Jay will first provide an update on our performance, Sunny will cover the financial results in more detail and lastly, Jared then will discuss risk management. I'll now turn the call over to Jay. His remarks will be in Chinese, and then English translation will be followed.

Jay, please?.

Hello, everyone. It is my pleasure to speak with you again. In the third quarter, [hence variety] of COVID resurgence and somewhat pressured macro economy will achieve a result that not only continue the recovery trend, but also the past [Technical Difficulty].

Our second and third quarter results demonstrated that our previous obstacles [indiscernible] the sustainable track of clear change for the better.

Our loan volume exceeded the previous guidance at RMB53 billion, reaching RMB56.2 billion for the last quarter, representing an increase of 14% quarter-over-quarter [Technical Difficulty] revenue at RMB2.7 billion, representing an increase of 12% quarter-over-quarter; net profit at RMB280 million, representing an increase of 65% quarter-over-quarter; overall outstanding loan balance at RMB94.6 billion, representing an increase of 9% quarter-over-quarter; total registered users at 180 million, representing an increase of 19% year-over-year.

Since the beginning of this year, our asset quality, funding cost and the loan volume improved quarter-over-quarter, providing improvement in our profitabilities. Net margin improved steadily from 4.8% in the first quarter to 10.2% in the third quarter.

The improvement continued in the fourth quarter based on our confidence in strategy [Technical Difficulty] potential, the company’s repurchase program remains in execution. As of September 30, 2022, the company had repurchased approximately 20 million ADSs for approximately US$44 million under this repurchase program.

In addition, a new share repurchase program has been authorized under which the company could purchase up to an aggregate of US$20 million of [Technical Difficulty] over the next 12 months from November 17, 2022. Our ongoing recovery trend is accomplished.

Thanks to our asset quality prioritized [indiscernible] strategy that’s been defined insistently, which is lowering our risk level, refining operations and backing asset quality to the improvement of the profitability.

In particular, the asset quality will continue to strengthen our risk management team by introducing several talents in the industry to join us this quarter. We have also strengthened our investment in data and the models to continuously improve the accuracy of risk identification, and I would like to elaborate more on these subjects now.

On acquisition front, in the third quarter, we reinforced our online customer acquisition capabilities by extending the leverage of the use of external data resources and deepening the cooperation bond with our advertisement partners to generate over 30 customer acquisition models.

For the last quarter, our acquisition went down 14% year-over-year, and new customer per capita increased by 31% in September compared with that number in June.

In terms of [average risking customers], we continue to enhance our capabilities into a more refined operation in customer management by incorporating external data resources with our own database, which contained many years of data, and increased our data abundance by 30%, extended the degree of the direct connection of the use of the credit reports from PBOC and derived nearly 400,000 risk identification dimensions.

On top of that, we established and perfected a new risk model based on different trading patterns, increasing its accuracy by 10%.

On the operational strategy front, we followed one of our priorities in exploring the potential of our qualified customers to whom we provided higher quality lines and lower interest rates, and boosted their contribution in values throughout their life cycles.

Meanwhile, we are continuing the course of a steady reduction of high risk customers to further stabilize our risk levels. Through these approaches, our asset structure was improved to the next level for the third quarter. Low risk customer loan origination volume increased by 17% quarter-over-quarter and average contribution increased by 44%.

In the meantime, the ARPU of our active customers increased by 33% year-over-year, and the incremental scale of loan origination conversion of the existing users exceeded RMB2 billion.

In the third quarter, the 30-plus day delinquency rate was 4.61%, which decreased 0.24 percentage point quarter-over-quarter, while the 90-plus day delinquency rate was at 2.66%. The day-one delinquency rate continued to be decreased quarter-over-quarter, while the 30-day collection rate was maintained at above 90% with a steady increase.

All these cannot be done without the assistance of the optimization of other data and technology capabilities, which has always been the core driving engine of the development of the company. In the third quarter, research and development expenses were at RMB140 million, a 7% increase year-over-year, continuing to take the lead of the industry.

The smart business engine continued to be iteratively upgraded. In terms of the system capabilities, we established mechanisms or system such as our user LTV model, indicator variation alert, and intelligent attribution scheme.

We increased the coverage of agile [Technical Difficulty] business scenarios to 100%, which quickly improved the company's decision making and operational efficiency.

In terms of AI applications to strengthen the exploration application of deep learning to identify user risks from more dimensions and the risk identification ability of new customers has been improved by 20%.

The series of marketing models based on federal learning and the joint modeling has improved the marketing conversion of new and existing customers by more than 35%. [Technical Difficulty] a little bit on the business ecosystem surrounded by our three main businesses.

The Double 11 e-commerce festival has just passed, and our Fenqile platform delivered an encouraging performance. From October 24 to November 12, total GMV increased by 97% year-over-year, and the number of the transactions and users increased by 94% and 70%, respectively.

Benefiting from the consumption scenarios of the Fenqile platform, our installment consumption scenarios led by Le Hua Card reached 15% increase year-over-year in transaction volume and ARPU of transaction uses increased by 30% year-over-year.

Leveraging the advantages of consumption scenarios and focusing on high-quality customer operations, our new consumption-driven local-based service business has continued to grow this year.

Lexin's address in consumption scenarios and the core capabilities of data analysis and technology keep its progress of integrating with the business, which forms a circular enhancement task.

Our high frequency consumption-driven local-based business – add advantage of having opportunities to generate more high-quality customers for credit-driven business.

Accumulated technology and risk management experience and capabilities of credit-driven business allow us to further provide services to our financial institutions and merchants, as well as promote synergetic development of our technology-driven platform business.

The synergetic development makes Lexin connected with more funding pools and [indiscernible] of virtual circle, thus formed Lexin's unique business ecosystem with three diversified revenue drivers allow us to more robust – respond to the complex and the changing external environment.

Let me spend a few minutes to update you about Lexin's corporate social responsibility, our CSR initiatives. In the second quarter, we launched a specific program called [indiscernible] to help SMEs to deal with their cash liquidity challenges, and the program continues.

The total amount of small and micro loans was RMB5.4 billion in the third quarter. For SMEs, more affected by the pandemic resurgence, we took several measures to help them hide over the difficulties.

In addition, we also upgraded our customer protection initiative in the fourth quarter by launching the 5S Guardian system, which makes full use of the AI technology to strengthen data security, anti-fraud protection, safeguard, conduct, standards, intelligence, customer service, and strike for [fighting] financial blackmail.

All of the 5S’ together, allows us to build a comprehensive security firewall for customers. Looking into the future, we will stay positive with our optimistic attitude to pursue continued sustainable quality development.

We will do all that to eight offline stores or even real business development, our advanced fintech technologies will provide support to young people and SMEs.

We will continue to strengthen the company's underlying capabilities, optimize our customer segmentation operation strategy, and improve profitabilities by reducing the cost while increasing efficiency, first, making us better prepared for any future challenges and uncertainties.

The current momentum can be maintained in the fourth quarter and our loan origination is expected to be in line with the volume of this quarter. Let me now hand over the call to our CFO for financial updates. Thank you..

Thank you, Jay. Good morning, and good evening, everyone. It is my pleasure speaking to you, again. I am excited to report that despite external uncertainties, our third quarter performance continued with [indiscernible] and upward trend guided by our principle of pursuing sustainable and quality growth.

We continue to build up a diversified revenue structure, advanced risk identification capabilities, and operational efficiencies. Our never ending efforts on technology innovation and digital transformation also contributed to the achievement of Q3 performance. Now let me go through some key financial and operational metrics with you.

Total loan origination in the third quarter was RMB56.2 billion, representing a 14.4% growth quarter-over-quarter. The outstanding loan balance stood at RMB94.6 billion, delivering a 9.2% increase compared with last quarter.

If we look at the result at the end of fiscal year 2021, our outstanding loan balance as of Q3 already increased by 10.1%, demonstrating the ongoing resilience of our business.

We are delighted to see that the positive momentum of both our loan origination and outstanding loan balance has continued for two consecutive quarters and based on current information, it is on course for the rest of the year.

While driving a solid growth continuity, we are keeping a close eye on potential saturations externally, such as COVID resurgence-related economic impact, and are confident to make the corresponding adjustments if needed.

At the current point of time, the management believes quality over quantity is the right approach to sustain a healthy status of our business. Total operating revenue was RMB2.7 billion, achieving 11.5% increase quarter-over-quarter.

Revenue from new consumption-driven location-based services was RMB525 million, an increase of 31.3% from the same period of last year, a modest decrease of 2.5% quarter-over-quarter. It is worth noting that the June 18, online shopping festival made meaningful contribution to the Q3 revenue.

Revenue from technology-driven platform services was RMB500 million, representing a 14.6% increase quarter-over-quarter. Revenue from credit-driven platform services was RMB1.7 billion, delivering a 15.8% increase quarter-over-quarter.

I'd like to take the opportunity to emphasize again, that we have reorganized our revenue segmentation since Q1 this year, which we believe better reflected diversity and resilience of our revenue and the nature of our business.

Once again, the contribution from nine credit-driven services was about 40% of the total revenue this quarter and has reached RMB1 billion, achieving a 5.1% increase quarter-over-quarter.

This is in line with our strategic goal of realizing high-quality and complimentary revenue structure, which enables us to better overcome future external challenges in the long run. In compliance with government guidance, loan pricing in Q3 continue to fall and moved closer to 24%. The mix within 24% APR was above 80% like the last quarter.

Let me move on to the expense side of the third quarter. Sales and marketing expenses decreased by 11.1% quarter-over-quarter and by 13.5% year-over-year to RMB425 million. This is as intended by the management to maintain a prudent overall spending in view of the uncertain trading conditions.

However, we are reaching our customers more precisely through various online and offline channels. Thanks to our digitalized and data-driven marketing program. Research and development expenses increased by 7.3% year-over-year to RMB141 million, reflecting our continuous investment in upgrading our technology capabilities.

G&A expenses went down by 7.7% quarter-over-quarter to RMB104 million. While the loan origination and topline revenue kept their upward trend this year, our G&A expenses remained stable and decreased on Q-on-Q basis for two quarters.

I'm particularly happy to note that the net profit of Q3 was RMB276 million, achieving a 64.4% significant increase quarter-over-quarter. It is encouraging to see that our profitability has continued its strong recovery trend on a Q-on-Q basis.

While our major risk indicators remained stable, we expect net profit to be further improved in Q4 based on the current external conditions. On March 16, 2022, the company's Board of Directors authorized a US$50 million share repurchase program.

As of Q3, the company had repurchased approximately 20 million ADSs for approximately US$44 million under this program. The Board has also authorized a new US$20 million repurchase program. However, prioritizing and concentrating resources on strategic and meaningful performance related initiatives will be our guiding principle.

We will continue to pursue a sustainable and resilient business approach and will also keep ourselves in the know of any material signs of external changes that may impact our business. We are very confident that we are well positioned to react quickly and responsibly.

With that, I will turn the call over to our President, Jared Wu, who is overseeing the risk department. Jared, please..

Thank you, Sunny. Good morning, and good evening, everyone. It is a great pleasure to speak to all of you today. Now let me elaborate on the risk management performance of our business. Last quarter resulted to be a quarter of improvement amid market environment uncertainties and residual impact of sporadic COVID resurgence.

We are witnessing a continued lowered day-one delinquency rate as of the end of the September and our 30-plus day delinquency was at 4.61% this quarter, representing a decrease of 0.24 percentage points from the last quarter.

As for our 90-plus day delinquency, it held relatively steady at 2.66% this quarter, which fell into our prediction at up 3 basis points and we expect the impact from second quarters COVID restriction has been fitted out, and our 90-plus day delinquency has picked in the third quarter.

Should no interruptions caused by external force – happened, we are prudently optimistic to state that our delinquency metrics are to go on a stable downward trend to reach a more balanced level, and our overall risk level to continue to fell in a more favorable direction.

In the last quarter, further assuming high-quality users and boosting the contribution of our high-quality users was one of our priorities.

Surrounding such with standard the best and breadth of the use of our more high-quality data resources and post our strengthening, the exploration and application of credit reports from the PDOC as well as further upgrading the refinement model for different user segment.

These measures helped us identify high-quality users more accurately and match them with lower interest rates. So our API has continued to decline for multiyear significant increase in customer unit price of high-quality users. In the last quarter, the multipoint resurgence of the pandemic has in fact impacted our risk management front.

And we can see that the risk of assets in high risk cities moves to some degree. But ever since last year, we started to build a risk monitoring and targeted strategy of adjustment mechanism for pandemic areas.

And this system has matured to the point that we are now able to quickly adjust our pre-landing, mid-landing and post-landing strategies according to the situation in each pandemic areas, which is one of the important measure for us to continue to improve our risk performance in this quarter.

As we continue to the vote resulted to our risk management section, our refined risk management capabilities advanced rapidly for the past two quarters. On one hand, we actively brought in several risk management talents in the industry.

On the other hand, we have been accelerating the relative upgrade of various model of risk management and have been increasing the investment in data resources and models, which have had a timely effect on refining the identification of our user risk.

We have made good progress in all aspects, respectively from customer acquisition to asset management from quite a – granting to pricing, and the corresponding initiatives in the aforementioned have demonstrated effectively in their early stage results in this quarter.

Going forward, we will keep on working on supplementing these initiatives to further enhance our risk management capabilities and continue to improve our asset mix and the risk of performance. Thank you. This concludes our prepared remarks. Operator, we are now ready to take questions..

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Hans Fan from CLSA. Please ask your question..

I got two questions – first of all, this is Hans Fan, CLSA. Congrats to the improvement in the results on a quarterly basis. I got two questions. One is on regulation, another one is on APR.

So can you give us some updates regarding the regulation process, especially the decoupling of the data feeds to the banks, especially that over the recent days and weeks, we have noticed some signs of pivots in China FinTech regulation, so just wondering what's our progress there? Number two is about the APR.

The APR of our company has been coming down in the past few quarters based on regulatory requirements and also our adjustment of the customer base. So just wondering what's the outlook for the APR and also what's the exact APR in the third quarter? That's my question. Thank you very much..

Let me take the question. The first one is about the regulations, [as you were] not in the first batch of the name list. So currently, there is no specific requirements to our company yet. But however, we are closely working the situations and want to get the ideas of what is the specific requirements to the first batch of name list.

Meanwhile, we are maintaining very close communications with [indiscernible] two vendors in the industry, and we are very aware of the solutions of these two companies. And currently, we are already [about all the plans] as long as the requirements from the authorities can be clear and the current conducted plans have been approved.

We can take very quick initiative to be connected as well. In this quarter, our APR is very close to 24% – 24.3%, only a little bit above 24% and the pricing, which is above 24 percentage is very, very limited. And going forward, we'll continue to further decreasing our APR.

And we believe together with the increased percentage of our high-quality customers and the increase of our asset qualities, our pricing will continue to be decreased. From our perspective, we believe the higher quality customers, the better quality of the asset management is actually in line with the further decreasing of our APR.

Only with a better APR, we have attracted a higher quality of the customers..

Thank you very much..

Great. Thank you. Our next question comes from the line of Frank Zheng from Credit Suisse. Please ask your question, Frank..

This is Frank from Credit Suisse. Thank you management for giving me the opportunities to ask questions. I've got two questions. The first one is on credit quality. We see that in this quarter 90-day kept flattish quarter-on-quarter, 30-day started to fall already and a company suggested it's likely to improve going forward.

If the credit quality continues to improve, should we see some sizable ride backs on the provision expenses in the next few quarters? And the second question is on funding costs. This quarter, funding costs improved by 20 basis points. What is the main driver behind this? And also, recently we have seen some marginal tightening in the monetary market.

Do we expect further optimization on the funding costs in the fourth quarter? Thank you..

I will translate myself for the English speaking audience. For the first question, we are also very happy to see that our asset quality remained stable and is going a upward trend.

However, we were probably not in a position to say that there will be significant reduction in provision due to the uncertainties of the external environment, particularly the COVID resurgence-related economic impacts. Of course, we do see the possibility of such a reduction of the provisions, but at the moment, we think that it will remain stable.

We will closely – we will keep a close eye on the external conditions in the markets. So at this moment, I think there are uncertainties. And the second questions regarding the drivers of the cost of funding, we are also happy to say that we have 20% – basis point reduction for the last quarter.

And this is of course, due to the favorable policies adapted by government on one hand, and also thanks to the years of a relationship that we have built up with our partners and we are having close and close co-operations. And so I guess this is a result of both drivers..

Thank you. Our next question comes from the line of Alex Ye from UBS. Please ask your question, Alex..

So I will translate for my question. The first one is on our customer mix migration. So I've noticed that our per customer loan volume, the [take rate] side has increased sizably Q-on-Q. So I would presume that was largely driven by our customer mix upgrade.

But just want to get more color on the – for example, what's the percentage of our – the high-quality customers per our definition and how does they change Q-on-Q and what's our outlook from here? And second question is on the take rate.

So given our ongoing customer mix appraisal, how has been the impact to our take rate, so specifically want to know more about the take rate for this quarter on the new volume perspective, and how does it compare to our total take rate from our total portfolio? And could we say that we have probably seen our take rate bottom from here? Thank you..

Talking about the premium or high-quality customers, we divided our customers into different dimensions from the risk levels. And currently, internally, we are mainly focusing on the level one to three as our major targeted high-quality customers. We are from three dimensions.

First of all, we are – further understand via good performance customers – attracted back our original existing customers. And in the future together we further provide better services and better – based on the better understandings of our current high-quality customers, we are also taking the assets to further limit the high risk customers.

Internally, we divide them as the risk level from six to eight. So together with all these assets, we believe our overall risk management structures or asset structures will be continued to be optimized.

Talking about the take rate, together with the further optimization of our risk management and asset structures, we believe our take rate will be also on app trend in the future. At the beginning of this year, we have the overall view of our take rate level for the whole year, which is 3%. Currently, this whole year view has now changed..

Thank you. [Operator Instructions] All right. There are no further questions. I'd like to turn the call back to the management team for closing remarks..

Thank you, all, again everyone for joining us today. If you have further questions, please contact us. Well our contact information available on our IR website. Thank you..

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect..