Hello ladies and gentlemen. Thank you for participating in the Fourth Quarter and Full Year 2019 Earnings Conference Call for FinVolution Group, formally known as PPDAI Group Inc also known as Paipaidai. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session.

Today’s conference call is being recorded. I will now turn the call over to your host Jimmy Tan, Head of Investor Relations for the Company. Mr. Jimmy, please go ahead..

Hello, everyone and welcome to our fourth quarter and full year 2019 earnings conference call. The Company’s results were issued via newswire services earlier today and are posted online. You can download the earnings release and sign up for the Company’s e-mail alert by visiting the IR section of our website at ir.finvgroup.com. Mr.

Feng Zhang, our Chief Executive Officer; and Mr. Simon Ho, our Chief Financial Officer will start the call with their prepared remarks and conclude with a Q&A session. During this call, we will be referring to several non-GAAP financial measures to review and access our operating performance.

These non-GAAP financial measurements are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with the U.S. GAAP. For information about these non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release.

Before we continue, please note that today’s discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such the Company’s results may be materially different from the views expressed today.

Further information regarding these and other risks and uncertainties are included in the Company’s filings with the U.S. Securities and Exchange Commission. The Company does not assume any obligation to update any forward-looking statements except as required under applicable laws.

Finally, we posted a slide presentation on our IR website providing details of our results for the quarter. I will now turn the call over to our CEO, Mr. Feng Zhang. Please go ahead sir..

Hello, everyone, and thank you for joining our fourth quarter and full year 2019 earnings conference call today. Despite the rapidly evolving market dynamics and uncertainties during the year, we have made a numerous positive strides.

Specifically, we have successfully repositioned our business by transitioning the funding on our platform from being primarily facilitated by individual investors to being fully funded through our institutional partners.

This is a huge accomplishment and while I would like to thank the hard work and the dedication of our partners and employees for making it happen. In the fourth quarter, 100% of our funding was from our institutional funding partners compared with just over 20% from the year ago period.

Funding on our platform is ample and we continue to work on driving down our funding costs, which has been declining quarter-over-quarter and year-over-year. We expect this decreasing trend to continue throughout this year. Our P2P loan balance has also been reduced progressively over the year.

This progress is exemplified by the P2P loan balance of RMB5.2 billion as of December 2019 compared with RMB19.5 billion as of June 2019. By the end of February 2020, the balance was further reduced to just RMB2.8 billion and we will continue to shrink this balance.

As you are aware, there will likely be new nationwide online micro lending licenses available for qualified P2P platforms. We are in regular communication with the related Shanghai regulators and we believe we are in a very good position to apply for such a license, which will further solidify our business foundation and enhance our core operations.

Amid our successful business transition, we have also delivered outstanding performance in 2019. On a year-over-year basis, our loan origination volume increased by 34% to RMB82 billion contributing to a 31% growth in operating revenue to RMB6 billion. Meanwhile, operating income grew 43% to RMB2.6 billion with non-GAAP operating margin of about 45%.

These impressive results demonstrates the resilience and the flexibility of our business with effective management execution as well as our strong brand equity that enabled us to rapidly expand our partnership with institutional investors.

We will continue to deepen relationships with our institutional partners through in-depth technological cooperation and further sharpen our capabilities to navigate through market dynamics.

In 2019, our number of cumulative registered users hit 106 million and the cumulative number of borrowers reached 18 million, indicating a healthy double-digit user base growth year-over-year.

Our extensive and a growing borrower base reflects the tremendous demand and a growth potential of consumer finance in China as well as the trust borrowers placed in us. Aside from our successful funding transition, we have concurrently been making significant progress in our strategic initiatives.

On the financial institution corporation front, we completed a strategic investment in Fujian Haixia Bank through acquiring 4.99% of its stake and entered into strategic partnership with them.

In terms of enhanced risk control, our online micro credit lending subsidiary has been approved to connect with PBOC Credit Reference Center contributing to a more transparent credit ecosystem.

Our international expansion has also achieved an important milestone with our subsidiary in Indonesia receiving the peer-to-peer lending license from the Financial Services Authorities of Indonesia.

With business department in multiple fields on track, we are now rapidly evolving ourselves into a comprehensive fintech company empowered by innovative technologies that serves borrowers and the financial institutions in the vast consumer finance space.

In order to better align with our current business model and strategy, we have also changed our group name and ticker symbol to better reflect the implementation of innovative technologies throughout our business operations and our expanding business scope. Now turning to credit.

We have experienced some deterioration in delinquency rates since the fourth quarter due to a complex effect of tightening loan collection practices, pressure from the widespread exit of P2P players across the country, and the impact of the recent coronavirus pandemic. We believe many of these factors are transitory.

We will see that our total delinquency rate increased by a few percentage points in the fourth quarter, but this figure significantly overstates the degree of deterioration as this metric is measured as a percentage of outstanding loan balance.

And due to the slowdown in loan origination volume in the fourth quarter, our outstanding loan balance declined by 16% quarter-over-quarter to RMB29 billion at the end of December. We have a long and proven track record in managing risk prudently and responsively through credit and economic cycles.

Our strong culture and mentality of respecting risks, coupled with the proprietary technologies such as our Magic Mirror credit assessment system will enable us to manage risk effectively.

As the effects of the coronavirus subside, we believe our delinquency rate will show structural improvements as the borrowers will engage with today – we engage with today have stronger credit risk profiles than those on average we engage with say six months or a year ago. Next, let me elaborate more on how the coronavirus has impacted us.

Our hearts are with the people who are affected and we would like to extend our respect to those who are fighting against the outbreak. Together with our employees, we have made monetary donations and the donations of masks, medical suits and other supplies to various hospitals. We now have detected the following key impacts.

First, we have deliberately taken a more conservative stance and have purposely slowed down loan origination volume during this period. Second, we have provided the borrowers who have been affected with greater flexibility in their repayment schedules.

Third, delinquencies have moderately increased as a result of the impact on the economy as well as the disruptions to loan collection operations. We will continue to closely monitor the pandemic situation and together with our partners FinVolution is adjusting its business strategies to minimize the impact on our operations.

We have also announced some management transitions. Cliff is stepping down as Chairman and the co-CEO. This transitioning has been well panned for some time. Back in September 2018, I became co-CEO together with Cliff. And for the past 18 months, Cliff’s responsibilities have been shifting towards my way.

I would like to take this opportunity to thank Cliff for his outstanding contribution to the company over the past decade. We look forward to his continuous support in his new role as our adviser. At the same time, I would like to extend a warm welcome to Mr. Gu or Jack as we all call him in the company as the Chairman of the Board of Directors.

We look forward to Jack's contribution in his new role leading the company to greater heights. In spite of the dynamic and the volatile operating environment, our strong performance in 2019 reaffirmed the enormous underserved demand for consumer finance services in China.

By leveraging our extensive proprietary technologies and market leadership, we are dedicated to strengthening our ability to provide a superior experience to both individual borrowers and financial institutions.

Last but not least, I would like to take this time to thank our employees for the tremendous efforts they have put into – they are putting to keep our company strong throughout a tough time during the outbreak. Our culture is as stronger than ever and we will continue to be innovative and aggressive about navigating and growing our business.

With that, I will now turn the call over to our CFO, Simon Ho, who will discuss our financial results for the quarter..

Thank you, Feng, and hello everyone. We realized solid profitability amid fast evolving market conditions in 2019. Despite our full transition into institutional funding, we delivered non-GAAP operating income of RMB445 million and maintained a healthy non-GAAP operating margin of 36% in the fourth quarter.

Our operating margin did declined versus the third quarter, but this is mainly because loan origination volume decreased and not because of the take rate. In fact, our take rate in the fourth quarter was stable compared to the third quarter.

And this is a quarter in which all 100% of loan originations were funded by institutional partners providing very clear evidence that our institutional funding model is robust, profitable and sustainable. Our balance sheet has also remained solid with approximately RMB2.4 billion of cash and short-term liquidity.

Notably, our quality assurance fund remains sufficient with a total balance of RMB5.1 billion equivalent to 24% of the total outstanding loans off-balance – total outstanding off-balance-sheet loans and interest with quality assurance.

Our results demonstrate the resilience of our business model and our ability to adapt to the changing regulatory and market dynamics. Now let me briefly go over the financial results for the fourth quarter. In the interest of time, I will not walk through each item line by line on this call. Please refer to our earnings release for more details.

Operating revenues for the fourth quarter of 2019 decreased by 4.4% to approximately RMB1.23 billion from RMB1.29 billion in the same period of 2018, primarily due to the decrease in loan facilitation service fees.

Loan facilitation service fees decreased by 36% to RMB539 million for the fourth quarter of 2019 from RMB837 million in the same period of 2018, primarily due to the decline in loan origination volume and the decrease in the average rate of transaction fees.

Post facilitation service fees increased by 10% to RMB276 million for the fourth quarter of 2019 from RMB250 million in the same period of 2018 primarily due to the rolling impact of the deferred transaction fees.

Net interest income was RMB317 million compared to RMB70 million in the same period of 2018, mainly due to the increased interest income from the expansion in the outstanding loan balances of consolidated trusts.

Non-GAAP adjusted operating income, which excludes share-based compensation expenses before tax was RMB445 million for the fourth quarter of 2019 representing a decrease of 6% from RMB472 million in the same period of 2018.

Other income was RMB35 million for the fourth quarter of 2019 compared with RMB94 million in the same period of 2018 primarily due to a lower gain from the quality assurance fund in the quarter. Net profit decreased by 47% to RMB413 million for the fourth quarter of 2019 from RMB775 million in the same period of 2018.

Next, let me give a few further updates on guidance. Now due to the moderate increase in delinquencies we saw towards the end of last year and with the prolonged impact of the coronavirus, we have taken a more conservative stance on origination volume in the first quarter.

As a result, we expect loan origination volume in the first quarter of 2020 to be in the range of RMB12 billion to RMB13 billion. Although, the first quarter has not been easy, we expect these trends to be transitory and we’ll be in a position for growth when the conditions normalize.

We have seen some early signs of improvement in recent weeks as people across the country are returning to the office and work floors. Economic activity is picking up. We have seen delinquency and loan collection rates improve steadily and returning in recent days close to the levels we saw before the outbreak of the coronavirus.

These are very encouraging trends for our business and the economy and during this period we are keeping a tight discipline on our expenses. For example, we are spending less on customer acquisition as we have shifted loan originations further towards repeat borrowers.

We are also proactively managing down funding costs with our institutional partners. Now turning to capital return and share buybacks, we repurchased approximately 4.2 million ADS between December, 2019 and January, 2020.

As of January 31, 2020 we have cumulatively deployed approximately $79 million to repurchase the company's ADS under our share repurchase program with a total authorized amount of $120 million. We are very comfortable with our balance sheet and liquidity position.

In particular, our cash position remains strong with approximately RMB2.4 billion of cash and short term liquidity as at the end of December, 2019. During these times of uncertainty, our strong capital and liquidity position is an important source of confidence for all our stakeholders, including our employees and institutional partners.

Finally, we are very pleased to announce a dividend of $0.12 per ADS for the fiscal year 2019. Despite the volatility and challenges in the operating environment, this validates our commitment to enhancing shareholder value and our continued confidence in the business, our capabilities, and the long-term market potential.

With that, I will conclude my prepared remarks. We will now open the call to questions. Operator, please continue..

Thank. [Operator Instructions] Our first question today will come from John Cai with Morgan Stanley. Please go ahead..

Hi. thank you management for taking my questions. So, I have two questions.

The first one is on the risk given the outbreak of virus in the first quarter, just wonder, is there any more colors or quantitative measures that we can provide on the increase of the delinquency and also how would that impact our provision in the first quarter and because I think some of the peers expecting a material loss in the first quarter, just wonder is there any more colors on our profitabilities in the first quarter given the situations.

My second question is about to take rate. So just wonder what is the take rate now and if we are talking about the borrower's API and what is the current level and the API and the take rate is that the level that we should expect in the coming years. Thank you very much..

Thanks John, for the questions. I'll start off with the answer to your question about delinquencies and Feng can chime in and add on if there's more information to discuss.

So, as we mentioned earlier, we have experienced simply deterioration at the linked delinquency rates since the fourth quarter, because of tightening of loan collection practices, there's pressure from the widespread exit of P2P players and of course there's the impact of the coronavirus.

Whilst we have said in the past that our delinquency rates will structurally improve due to our gradual shift towards a better quality borrower segment, the events in the past few months have delayed this improvement. We believe the coronavirus impact recently has added around 0.5% to 1% to our vintage delinquency rates.

As a result, we expect our recent vintages to show cumulative delinquency weights remaining in the 6% to 8% range. We will continue to closely monitor the situation, but believe that as the impact of the coronavirus recedes, conditions normalize, we expect our vintage delinquency rates to improve and decline below the 6% level.

And as mentioned earlier, we have in recent weeks seen some encouraging signs of improvement in delinquency and loan collection rates, which are back close to levels seen before the coronavirus outbreak. I want to see if Feng wants to have anything else to add on the risk side..

Nope..

Okay. Now, your question about where the provisions in the first quarter could be. I think Q1 is a challenging quarter for everyone. Delinquency rates are for us, I would call it moderately really higher, loan volumes have declined versus the previous quarter. Clearly, revenues and earnings are being impacted.

Now, our preliminary thinking is we don't think we report a loss, but we'll have to wait of course until the first quarter ends, the earnings come in and see where the numbers actually come in on. So I think, but take comfort, we are obviously doing as much as we can on the cost front.

And the obviously recent signs on the delinquency side have been encouraging as we've highlighted just now.

Now in terms of where we are in terms of the take rate and sort of lending weights levels, let's talk about the lending rate level as many of you know, there is no official form that is still, or a method for calculating the 36% legal maximum for the total borrowing cost.

However, most of our institutional funding partners require the 36% to be defined in the strictest way on an IRR basis. So as we've been saying, all along, all the loans that are funded by our licensed institutional partners are strictly kept at the 36% measured on an IRR basis.

And this will remain this way as long as we continue to work with our – such institutional partners of ours. In terms of the take rate, so our take rate was stable, pretty stable in the fourth quarter versus – sorry in the fourth quarter versus the third quarter, the absolute level was just over a little over 4%.

And, the point is even though we shifted completely to institutional funds this does show the economics of our institutional funding model is healthy and profitable. Now as you know, the take rates as we account for it in the fourth quarter is also a function of credit risk levels.

And as we've guided, the delinquency rates have increased this year and so this will naturally put some pressure on the take rate. But as we've said before, the magnitude of our delinquency rate increase has been relatively moderate and manageable.

But before John, before I hand over back to you and see if you have any further on questions, I do want to take the opportunity to speak a bit more about how we do risk management at FinVolution. We have all along been emphasizing our strong capability and culture of risk management in the company. We have a long proven track record in managing risk.

We have proprietary technologies and systems such as our Magic Mirror credit assessment system, fraud detection technologies. We also have a large in-house loan collection team with over a thousand collection agents. And so those of you who have followed us since our IPO, you'll recall that our CEO Feng joined the company as our Chief Risk Officer.

So the culture of risk management runs deeply in the company. We are always vigilant on credit risk. Over the past few years, our average loan tenures and ticket sizes have not changed much and we have been shifting our borrower base towards better credit risk profiles.

And in fact, if you look closely at the vintage delinquency rates we disclosed today, you'll see that our third quarter 2019 vintage is meaningfully better than the earlier vintages.

Obviously the data you see do not yet reflect the impact of the coronavirus, but the improving trend in the data is evident of this shift in the borrower profile that we have been talking about.

And lastly, we’ve obviously been conservative in setting aside reserves for credit risks, and you can see this in this quality assurance coverage ratio, which we disclosed at around 24%.

Again, I just want to emphasize, we have a prudent approach to managing risk and it does put us in a better position than some of our peers when credit risk is rising. John, I’ll hand it over to you if you have any further questions..

Yes. Thank you, Simon. It sounds encouraging given the situation. So a little bit follow-up on the QAF, I think, it’s 24% now, but, I look at the mix a little bit. So it seems the restricted cash portion decline quarter-on-quarter probably due to the reduction from balance, but my question is on the receivable.

So just wonder do we consider the potential delinquent provision that we need to make on the QAF receivable, and also in the first quarter given the risk level should we expect the 24% to come down a little bit? Thank you very much..

So, I think those are great questions. The movements in the quality assurance related restricted cash and the quality assurance receivables in the fourth quarter really all relates to the fact that during the fourth quarter we began returning funds to certain investors, a portion of our investors in our investment programs ahead of schedule.

And we early repaid these investors back their money. So the movements you see in our restricted cash, which fell about RMB2.3 billion in the fourth quarter. And also the movements in the quality assurance receivables is actually a reflection of this, it’s nothing to do with increased credit risks.

But if you want, I could – I’d be very happy to go through with you some of this accounting offline and walk you through the details..

Thank you, Simon..

Our next question today will come from Daphne Poon of Citi. Please go ahead..

Hi, thanks for taking my questions. So, my first question is regarding the funding cost trend. So, you’ve mentioned in the prepared remarks that the funding cost has been trending down. So just want to check on the magnitude, like what the funding cost looks like in 4Q and also in Q1 2020.

And like given the reasons, coronavirus situation do you see any change in the attitudes of your funding partners like whether they’re getting more cautious about the partnership recently? And the second question is regarding the license, the micro lending license, you also mentioned earlier that you are seeing some progress.

So just wondering any color on the timetable like when we should expect that license should be approved? Thank you..

Sure. Thanks, Daphne. Firstly on funding costs, managing down our funding cost is a high priority for us this year. The banks has appetite to work with us remains strong, and we have a healthy and robust funding pipeline.

The tightness in funding in the fourth quarter was seasonal and in the first quarter liquidity in the banking system is back to normal and is ample. Currently the funding costs for our new contracts is running between 9% to 9.5%.

If you recall a year ago, we were running more closer to the 11% level and as we went – as we approached the end of the year, it was closer to around the 10% level. So, our funding cost has been declining over the past year and we expect this declining trend to continue throughout this year.

With regards to the micro lending loan license as we said, we are interested, and we’ll strive to obtain one, one of these new micro lending licenses. And we are in constant communication with our local regulators. The timetable is likely to have slipped because of the coronavirus.

But we still believe, we are in a good position to successfully apply for this license. And I think the continued smooth and successful wind down of our P2P loan balance adds to our case for obtaining such a license. So, the timing is not a 100% clear. I don’t believe – Shanghai [ph] has not yet accepted applications.

It’s being pushed back a little bit, but we’re – we’re still – we still think we’re in a pretty good position..

Hey, I would just add a couple of thoughts on..

Okay..

Hey, Daphne, I would just add a couple of thoughts on the funding cost piece. I think, from both supply and demand size we are fairly optimistic that we will see for the funding costs decline throughout the year.

I think, from the demand side as the economic impact of coronavirus the global governments going to put more stimulus and there will be – we expect to see ample funding monetary easing and a funding surprise.

And on the demand side going through this cycle, you actually will clearly see that there will be smaller pool of quality asset providers in the market. And we have a – in the recent months, definitely seen increasing demand from our institutional partners for a quality asset from our company.

So combining these two factors, we are very optimistic that throughout the year we will continuing – we will be continuing seeing funding cost declines. Yes, continue. Please continue..

So, do you have any target I guess on funding cost, and I guess in that sense, would that actually help your take rate, is there any chance for your pick rate actually to import because of the funding costs are declining.

And also on the licensing, it just any sense about, I guess whether we should expect the license to couple in 2Q or whether it’s in the second half of the year. Yes, just maybe any more color on that..

Yes, that’s a good question. I think, on the funding side – funding cost side, I think it’s difficult to put on an exact number. As Simon has mentioned currently we are in the range of 9% to like in the low 9%s, 9% to 9.5%. I think, there’s – there’s definitely a space to go close to 9% or even below 9%. So, but like know where exactly that can go.

I think, we will need to see how the market goes. And obviously any bps drop on these contributes very direct way to our way. So it’s a pretty easy math. And all I’ll let, Simon handle the micro lending questions..

Sure. So, Daphne, we really don’t know. I think our original expectations, and this is just sort of our field was originally was that by sort of the end of the first quarter and there’ll be obviously more concrete actions been taken. I wouldn’t say, we were expecting the license to be given out at least the process would have been started more evident.

Clearly, I think a lot of things in China are being put off for several months. So, we’re hopeful that sometime in the second quarter there’ll be obviously concrete activity towards this front..

Okay. That’s very helpful. Thanks, Simon..

Okay..

Our next question today will come from Alex Ye of UBS. Please go ahead..

Hi management, thanks for taking my questions. So, I have a couple of quick questions. So, first one on volume wise. So, you mentioned that in Q1, so you have taken a more cautious approach, given the outbreak of COVID-19.

So just wondering, how is the demand looks like currently? So like family in terms of daily long vacations, what’s the current level you’re seeing versus the normal time before this outbreak? And apart from the demand prospective, so help maybe also tightening on your approval.

So just one to have a sense of your current approval rate versus your normal time approval rate. So that’s my first question. And secondly, on your delinquency, so you’ve mentioned that we have been gradual improvement in past few weeks.

So, I’m just wondering how much of that would you attribute to the gradual work resumption in China, and how much would you attribute to the improving the recovery of your loan collection efficiencies, so would be great to have some color on that.

And also given you mentioned that your delinquency is now gradually back to the levels between before the virus outbreaks. So does that mean, we will probably not see a very big mark-to-market loss in Q1 for given the affirmation on the delinquencies? Thanks..

Right. Alex, I think, I’ll have a – I’ll talk about your second question first. I mean, whether there’s a big mark-to-market loss hit, I think, we’ll have to – we’ll have to wait a bit and see clearly the magnitude of the delinquency rate increases as we’ve – we iterated, it’s been relatively manageable.

So, I think, we’ll have to see how the accounts actually come out when we run all the numbers. Now, it’s really not easy to differentiate between, I think both of those factors you mentioned on people resuming work long collection efficiency, effectiveness. I think all of these help for us.

So, I don’t know from my side, I find it’s hard to separate the two. And we definitely have seen improvements in our loan collection rates over the last several weeks it’s been steadily improving. We’re not quite back down to sort of December, November levels, but we’re heading in that direction. So, I think these are very encouraging signs.

With regards to loan volume, the demand, I mean, I think, there’s definitely strong demand out there. Our constraints for approach right now is obviously we have a keen eye on credit risk. If you look at the daily the loan applications trend, we see in fact, they actually kind of mirror our loan volume trends.

Okay? And actually from the numbers I seen, they have come down in the first quarter versus the fourth quarter in part it could be because we’re – marketing advertising less.

And of those applications, as you are suggesting, we have been approving a lower percentage of them hence the loan volume decline that is that that we’re experiencing in the first quarter. Our approval rates, I think we are probably down maybe roughly 40 percentage – 40% or so from where it used to be. But this is quite a dynamic process.

And when we feel that conditions have become more normalized, we will obviously resume healthy loan volume growth again, and that is our – obviously, that is our aim and goal. Alex, does that help? Okay. Go ahead..

Alex, it’s Feng. I’ll add a few points. With regard to the – what you call it as a mark-to-market. And I think previously, there was another question about do we expect a much bigger provisioning in Q1. I think the answer is no. We don’t expect that. I think many reasons, Simon talks a lot about our prudent risk management philosophy and approach.

And in addition to that, I think the virus, the pandemic outbreak impact we believe it’s a transitory. As Simon mentioned, the situation in Mainland is steadily improving in terms of the pandemic. And people are resuming work, normal life resumes. And our collection operation has resumed 100% fully normal status as of now.

And we do expect – we do see the collection rates, the roll rate returning to very close – returning steadily. And in recent days, we have seen those numbers getting to a level that is very, very close to the pre-pandemic level. And the other reason is, as we mentioned, that we have been very prudent in managing our risk and doing our provisioning.

So in a way, prior to – before the Q1 vintage and also, the Q1 vintage, we have been very conservative, prudent in providing the quality assurance fund. So the short answer is, due to all these factors, we do not expect a big fluctuation in provisioning for the Q1 and all the mark-to-market impact that you are worried about..

And that’s very helpful. Thank you..

Our next question today will come from Yiran Zhong of Credit Suisse. Please go ahead..

Hi, thank you, management for taking my question. I got dropped off earlier, so I’m sorry if this has been addressed. But just a quick follow-up on John’s question earlier on the – your extra color on the recent delinquency impacts. I think it was 0.5% to one percentage point of increase.

But you also mentioned that you’ve – given some sort of lenient treatments to the borrowers impacted by the virus situation, right? So just wondering if that accounted for in your guidance of that delinquency rate impact, are these borrowers still treated as delinquent in your calculation? That’s my question..

Yes, it’s included..

Okay, sure. And also one more question for me. The average loan size of new borrowers in 4Q seems to have increased quite a lot.

My calculation, 20% Q-on-Q, I wonder what’s the reason behind that? Was there a change in product strategy?.

Yes, it’s a good question. And also it’s actually very simple. I think the main reason, it’s not really due to our – change of our product strategy or credit policy we are expanding in this time. It’s really because we are tightening our approved rate. And when we’re tightening, we cut off the people in the tail end of the credit spectrum.

So as a result, the approved people, their quality is actually better, and the line that’s showing up for the approved customers compared to previously as our approved rates was much higher, seems to be a little bit higher.

Does that make sense?.

Yes. Got it. Thank you very much..

Our next question today will come from Jacky Zuo of China Renaissance. Please go ahead..

Hi, good evening, management. Just two questions from me. First one is you’re talking about structural improvements of the borrow quality.

So just wondering, can you give us some idea what kind of borrower matrix you’ve been looking at to differentiate better quality borrowers? And what is the typical profile of your current borrowers versus the previous one? That’s the first one. So second question is the follow-on question on the micro lending license.

So we’re seeing the documents released earlier that this online micro lending license probably will get to higher leverage. So I guess that the leverage cap is the key whether this new license will be useful or not. And we’ve seen some news recently that some offline micro lending license, sorry, lending companies have been given favorable treatments.

For example, higher leverage cap during the virus situation. So do you expect the government probably will allow a higher average for this new online micro lending license as well? So just want to get an idea from you. Thank you..

Hey, thanks, Jacky. Great questions. Yes, in terms of the structural – the profile of the borrowers and how they’ve improved and shifted, I mean, if you recall, we have seven credit levels for approved borrowers. Levels one through seven, one being the lowest risk, seven being the highest risk.

And if you look back in our numbers and say about a year ago – a year ago or so, we were primarily originating in credit levels four, five, six, sort of in that spectrum, in the mid to higher risk. Today, the latest numbers I’ve actually took a look, over 90% of our borrowers are coming from credit levels one to four.

In fact, levels one, two, three account for over 70%. So it’s that shift, which in the risk profile that we’ve made over the past 12 months. And as you can see, the vintage delinquency rates that we disclosed for the third quarter of 2019 starts to show this.

Of course, the data that will come out after this will – the next data points will be a bit clouded up by all the events going on in the market in recent months. I don’t know if that helps. I think that’s sort of the quantification that we can give you at this point.

In terms of your question on the micro lending license, the leverage ratios, we – the simple answer is we really we don’t know. I mean, I – we need to have a closer chat with the regulators on this. But we don’t – we hope so, but we don’t know..

Yes. Maybe a follow-on question on that. So if we get the license, probably we can switch our lending model to a – on balance sheet principal lender. And do you expect a lower funding cost because of this change? Obviously, this is like early discussion of our business model. So just want to get some idea..

Yes, I think, Jacky, I think that we will probably run in parallel the sort of what we call our own micro lending company model versus loan facilitation with third-party institutional funding partners. I think both models will have to run together for some time. I think that’s the – that’s our expectation.

Of course, having our own micro lending company and license with a sizable – more sizable capital, registered capital will give us more flexibility. The funding cost, I think it’s early days. It could be lower because you are now a fully licensed financial institution with at least RMB1 billion of capital in that company.

But also bear in mind that we will also be using our own capital to be lending out at the same time. Today, we don’t really do much of that, right? So the blended funding cost from that perspective should be more favorable.

And of course, if some of the channels that are allowed, like tapping into the bond market, et cetera, I mean, I would imagine those would be lower than 9% – and the funding cost for those should be lower than 9%. So I think that we’re optimistic about that..

Yes. I agree. I would just add that because the guidance on the new micro lending company allows, specifically talks about funding through the ABS market. So I think once we get the micro lending license, that all would be open. And if we have that all open, work through, then I think there’s a lot of opportunity to drive down funding costs..

Thanks a lot. That’s clear..

Our next question today will come from Sanjay Sakhrani of KBW. Please go ahead..

This is actually Steven Kwok filling in for Sanjay. Thanks for taking my questions. The first one I have was just some around if could give an update on the number of institutional funding partners you have. I believe last quarter, it was 30.

And then what the pipeline looks like?.

Okay. Steven, hi. So we have over 30 at the moment, between 30 to 40. I think given that our volume – our loan volumes are down, the constraint really isn’t about adding on, so much adding on new institutional partners, but we’re obviously trying to optimize the funding cost actually more.

So we have more than ample funding needs at the – funding lines at the moment to support our business. And yes, so I hope that helps to answer your question..

It does. And then, I guess, just around the guidance in the first quarter of RMB12 billion to RMB13 billion.

Can you talk about how trends have done since the beginning of the year? So what have you seen in January and February? What’s the expectations for March?.

I’m sorry, the sort of on a monthly – the trend on a monthly basis?.

Yes, the loan originations..

Yes, I think – I mean, Steven, we started the year, obviously, on a more – on a relatively conservative tone anyway. Because coming out of last year, we saw some increase in delinquency levels. I think the trough that we’re seeing would probably be, I would say, February is probably a lower month.

March is shaping up probably at a similar run rate, and Jan was a bit higher. Just – I think these are just margins, yes, small differences. We're not talking about like February is cratered into zero, nothing like that..

Okay. Got it..

Relatively just want to evenly distributed..

Okay. That's helpful..

Just in terms of sizing what it could be if we would take those trends and extrapolating it to the remainder of the year and how things are – that's what the line of question was around?.

Okay..

Okay. Thanks, Steven..

Okay. And our next question today will come from Anna Brown of Seahawk [ph]. Please go ahead..

Thank you, Simon, and congratulations for the solid quarter. I just have one question. So market has the rumor that you're considering about privatization. Although like this is logically like against the action that you did the share repurchase and you did the dividend. Can Mr. Zhang or Mr.

Gu reaffirmed the market that you all like not taking privatization? Thank you..

Well thank you very much, Anna. I think in this day and age we have to be very, very careful about fake news. Who knows what is new and what is not. I think on this particular issue, let me just make a few comments.

I think we are committed to delivering shareholder value and we continuously review all of our strategic options to deliver and maximize shareholder value. So we are all aligned in this process and I can report to you that we have not received any proposal to take the company private, nor are there any transaction that is being discussed.

And of course as part of the company, we will have to assess any proposals that we do receive on the basis of maximizing shareholder value..

Thank you, Simon..

Thank you..

Our next question today will come from Lucy Lee of Goldman Sachs. Please go ahead..

Thank you management for taking the question. Just two small questions to a follow-up. The first one is, I noticed a higher proportion of on-balance sheet loans this quarter. I'm just wondering on the own versus off balance sheet position.

Is it a profitability – is there a significant difference in profitability and has the decision? Or is it a matter of the funding partner mix change? And secondly on the long rescheduling for the borrowers that are impacted by the virus situation.

I'm wondering how many clients or the proportion are we scheduled are impacted and in normal quarters what's the level then? Do we book those loans as new loans? So just those two questions..

Yes. Lucy regarding on balance sheet versus off balance sheet, for us it's not really such an active decision on – such an active decision as such because our on balance sheet – the loans that you see on our balance sheet and loan receivables are primarily from trusts.

So unlike other peers that will use a very large part of their own capital to lend, actually in our case it's primarily through trusts. So it's one form of our institutional funding partnership. Whereas the off balance sheet loans would primarily be funded by commercial banks and consumer finance companies. I think those are the main ones, okay.

So in the fourth quarter banks and consumer finance companies accounted for roughly about 80% of our loan origination volume and trusts where the remaining 20%. I think we are keeping trust at around sort of the 20 to maybe 25-ish percent level.

It's to us, we've been over the last year we've been shifting towards commercial banks because they naturally have lower funding costs than trusts. So they have larger balance sheets, right. And we could cooperate in a wide spectrum of areas not just on funding, so that's been the trend really.

So it isn't really an active way of saying I want to do more on versus off. Your second question is on the rescheduled sort of loans and the, I believe the percentage of loan – of borrowers from Hubei Province is only a few percent. So actually this whole impact to us is been, I think is small.

I don't think it's a meaningful impact at all to our income statement. And of course you can't assume that all several percent of those borrowers defaulted, that is not an reasonable assumption at all. So that's the reality..

Yes. And I think I’ll just add....

But we could provide such option?.

You just go ahead, I’ll just add..

Sorry, Yes, sure thing..

Sorry. I just had – I guess, your question is more about the relief program. So the relief program, the participant’s volume is very low on a daily basis like it's a low few hundred customers will qualify. And we do not do like rolling over owns. Essentially we do not like, nor give them a new loan. Kind of like no mosque.

The loss we essentially kind of like the wave their collection fee or just delay the payments. So I think that's probably a question. So I don't think that's, you know, yes these kinds of things that we had the high delinquency impact.

We push out the delinquency impact because we do not give them – we do not give them a new role to pay back the old loan and like make the old loan look better, that's not the case. So like, at least the volume is very small – the volume is very small and we do not do lower loans.

Does that answer your question, Lucy?.

Yes, that was my question actually..

Yes, great..

[Operator Instructions] Our next question is a follow-up from John Cai of Morgan Stanley. Please go ahead..

Hi. Thank you for taking my question, again. So it's just to ask the management assessment on the current sector risk level. So I didn’t – let's call it a cycle. So does it have already peaked? What I should we be looking add to assess the cycle. Just want to get some help from the expert in the industry.

And then related to that is probably, do we have expected gross assumption in terms of volume. So maybe second quarter or third quarter? Thank you very much..

Hey John. Yes, I know that's good – these are great questions. And we know like we view like our business as a cyclical business and we are currently in a cycle and I think there are a couple of things together here.

Now in terms of the pandemic impact as I mentioned earlier, we have seen low rate, delinquency rate and early delinquency rate and more importantly, the collection rate returning to pre-pandemic level, so that is very encouraging. And now, we will need to wait and see how the pandemic situation develops.

As of now, you probably also heard from news, I think the situation in Mainland China has really been stabilizing and recovering. But kind of like an outside of the China now is a question here.

And there are people flying back, so we will wait and see if the pandemic situation will continue to improve and we are very optimistic given the capability of the government and what do we have seen the improving trend over the last two months for that. So that's the good news.

Now I think the flip side is given the pandemic developing situation worldwide and the – what happened in the financial market worldwide. I think there is a real concern that there could be some kind of economic decline worldwide, and then they have an impact on China's economy over the mid- to long-term as well.

Now we do think that the Chinese economy has its own protections. It is less connected. I think, as we saw what happened in 2008/2009 in China economy actually sustain it pretty well, while a lot of other economies turned into recession. So – but there will be impact, if the rest of the world turns into recession.

So I think we are a bit cautious to see the mid- to long-term economic impact and that in turn will impact credit as well. So I hope that gives you more color on our view about whether we are at the bottom of the cycle. I think in short, we think we are very optimistic that the pandemic impact could be over soon.

But we’re a little bit concerned about the economic outlook worldwide and its impact to China's economy and the world. So given that, I think it is very difficult to give like a prediction – a precise prediction for what the volume gross rates for Q2, Q3, the rest of the year will be.

I think we'll need to take a very cautious approach, prudent approach and observe the data, observe these things play out a little bit and stay prudent and opportunistic. Simon, I don't know if you have anything you want to add..

No, I think that makes very much sense. Thank you..

Thanks guys. It’s very helpful..

Thank you..

At this time ladies and gentlemen, there are no further questions so I would like to turn the call back over to the company for closing remarks..

Thank you once again for joining us today. If you have further questions, please feel free to contact FinVolution’s Group Investor Relations Team. Have a nice day. Thank you. Bye-bye..

The conference is now concluded, and we thank you for attending the presentation, and you may now disconnect your lines..