Hello, ladies and gentlemen. Thank you for participating in the Second Quarter 2020 Earnings Conference Call for FinVolution Group. 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. Jimmy, please go ahead..

Hello, everyone, and welcome to our second quarter 2020 earnings conference call. The company results were issued via newswire services earlier today and are posted online. You can download the earnings release and sign up for the company email alerts 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 assess our operating performance.

These non-GAAP financial measures are not intended to be considered in isolation, or as a substitute for the financial information prepared and presented in accordance with 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 results may be materially different from the views expressed today.

Further information regarding these and other risks and uncertainties are included in the company 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 law.

Finally, we posted a slide presentation on our IR website providing details of the 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 second quarter 2020 earnings conference call today.

We are pleased to report healthy and solid results for the second quarter, thanks to the timely measures we took in response to the pandemic outbreak, the subsequent gradual economic recovery in China since the beginning of the second quarter and our unwavering focus on comprehensive credit risk controls.

Given the lingering uncertainties due to COVID-19, we remain agile in our operations with a prudent risk management approach in the second quarter.

Encouragingly, numerous operating metrics showed improving trends in the second quarter in particular credit risk across our platform has further improved, thanks to our continued investment in risk management technology, our prudent approach to risk management and our strategy to serve better quality borrowers.

In terms of our most recent delinquency trends, our day one delinquency rate in recent weeks has further improved to about 7.5%. If you recall, on our previous earnings call, our day one delinquency rate was 9.7% for the May period and a 12.4% in the fourth quarter of last year before COVID-19 appeared.

Our 30-day loan collection recovery rate has further improved to about 88%, which is roughly four percentage points higher than the levels in May on our last earnings call and also in the fourth quarter of 2019. These improving trends can be clearly seen in the delinquency data provided in our earnings release.

Delinquency performance for our first quarter 2020 vintage is about 30% to 40% below levels one year ago, and at historically low levels. And lastly, our vertical delinquency rates disclosed showed improve -- showed improvement quarter-on-quarter in almost all times buckets.

And the improvement is particularly significant in the early stage of delinquencies. That is for loans that are 15 to 90 days past due. Such an early stage delinquency ratios have fallen back to levels at the end of last June, September.

And this is achieved despite our total loan balance contracting by 30% to 40% compared to a year ago, which means that the underlying improvement in credit risk is actually larger than the figures suggest.

These figures all showed that our credit risk profile today is significantly better than what it was before the COVID-19 and the versus our historical range, thanks to our strategy to serve better quality borrowers, our continuous investment in risk assessments technology like our Magic Mirror technology system and our strong risk management capabilities.

Another improving training in the quarter can be found in funding on our platform. Funding from our institutional partners continues to be stable and ample. And with the shift to higher quality borrowers, we have seen keen interest by institutions to land through our platform. One of our big focus this year has been on lowering funding costs.

We are pleased to report that the current cost of funds from institutions have recently fallen to around 8.5% compared to over 9% at the beginning of this year and over 10% last year.

Despite all the challenges in the first half of the year, our business operations remain resident and profitable, thanks to our technological capability and the relentless focused on executing our plan and strategy.

Now, let me address the implications of the Supreme Court's latest decision to lower the rate cap on private lending to four times that of the loan prime rate. It appears that the general understanding of the Supreme Court's decision is first rate. It only applies to private lending and not licensed financial institutions.

And secondary, the cost rate caps seems to be defined on a nominal APR basis. Although, these caps seems to apply only to private lending and since the first quarter of 2019, all the fundings on our platform has been from institutions.

We decided to move proactively and swiftly after the Supreme Court's decision and adjust our cap on total borrowing for new loan originations to 15.4% on a nominal APR basis. This proactive approach supports the regulatory deduction for lower lending rates.

The cap is equivalent to around 27% for our loan tenant profile, and it is lower than the average borrowing costs previously on our platform, which prior to the adjustments was running at around 33%. To meet the cost rate cap, we will discontinue service to some borrowers.

However, we believe the vast majority of our customers, roughly 90% can continue to be serviced profitably.

And our loan volume guidance for the third quarter of RMB15 billion to RMB16 billion representing an increase of 15% to 22% over the second quarter, shows that we can and will continue to service the vast majority of our borrowers under the new cap.

Profitability will inevitably be lower than before, but as a result of the grid progress we have made in improving risk performance and operating efficiency in the past year. We believe we will be able to continue to operate the business in a profitable and a sustainable way. We have a number of levels to pull.

Firstly, with a higher quality borrower base, credit risk will be lower. And we expect the vintage delinquency rates for these borrower profile to be below 4.5%. Secondary, we expect the funding costs to further decline to below 8%. These targets are expected to be reached by the end of this year.

And thirdly, we will continue to drive operating efficiency. In addition, we will also collaborate more closely with our institutional partners to explore capitalized lending models.

The significantly improve the credit profiles of our borrowers and our strong technological capabilities make these new model an attractive proposition to our institutional partners.

Our timely and successful transition of funding our platform from P2P to institutions demonstrates our agility and the cost strength in our technology and management capability. Let me now update you on where we are on P2P. Our back book of P2P funded loans have shrunk to RMB2 million in July, so effectively none P2P.

So, effectively P2P is not a hindrance for us anymore. Finally, let me update you on other strategic initiatives in particularly how we are leveraging our technology capabilities to enable businesses in financial services. Our international business is one example with Indonesia as our oldest and the most developed international market.

Our operations there was severely affected by the pandemic, especially between February and May. But as the Indonesia economy reopened, we have seen some very encouraging signs of recovery, and we are pleased to report that delinquency rates and loan volumes in our Indonesian business are back to levels at the start of the year.

We also continue to leverage our technology and operational experience to empower banks and the financial institutions in their consumer finance operations. We expect an increasing number of institutional partners to deploy our technologies. Another example of how we are leveraging our technology is our new wealth management business.

Some of you who are individual investors on our platform previously may have received text messages about our wealth management offering, call it [foreign language] or LY Fortune in English.

Our new wealth management business focuses on servicing the huge mass affluent segment in China, joining on our technology and extensive experience in acquiring customers online and in serving retail investors. We're confident in our ability to succeed in this new business initiative.

Although, the worst of the pandemics seems to be behind us, especially in China, we will remain vigilant towards the lingering risk from COVID-19.

Given that the situation internationally is still fairly severe with a long and proven track record in technology, innovation and managing risk prudency and responsibly through credit and economic cycles, we believe our innovative and vigorous culture will enable us to navigate challenges, unlock -- and unlock the vast potential in China's enormous consumer finance and the FinTech markets.

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. In the second quarter, despite the challenging COVID-19 environment, we delivered non-GAAP operating profit of RMB576 million, representing a sequential quarter-on-quarter increase of 24.2% further demonstrating the sustained profitability of our core business model.

Our balance sheet and liquidity remains strong with RMB3.4 billion in unrestricted cash and short-term liquidity. Leveraging on our strong technology, we look to capture new opportunities and expand our relationships with business partners. Now, turning to the financial results for the second quarter.

In the interest of time, I would not walk through each item line by line on this call. Please refer to our earnings release for more details. Net revenue for the second quarter of 2020 increased by 10.3% to approximately RMB1.8 billion from RMB1.6 billion in the same period of 2019, primarily due to the adoption of ASC 326.

Loan facilitation service fees decreased by 57% to RMB405 million for the second quarter of 2020 from RMB940 million in the same period of 2019, primarily due to the decline in loan origination volume and a decrease in the average rate of transaction fees.

Post-facilitation service fees decrease by 52% to RMB153 million for the second quarter of 2020 from RMB316 billion in the same period of 2019, primarily due to a decline in outstanding loans service by the company and the rolling impact of deferred transaction fees.

Net interest income was RMB333 million compared to RMB274 million in the same period of 2019, mainly due to the increased interest income from expansion and outstanding loan balances of consolidated trusts. Guarantee income was RMB821 million for the second quarter of 2020 due to the adoption of ASC 326.

Non-GAAP adjusted operating profits, which excludes share-based compensation expenses before tax, was RMB576 million for the second quarter of 2020, representing a decrease of 26% from RMB779 million in the same period of 2019.

Other income increased by 24% to RMB34 million for the second quarter of 2020 compared with RMB28 million in the same period of 2019, primarily due to government subsidies. Net profit was RMB454 million for the second quarter of 2020 compared to RMB661 million in the same period of 2019. Turning to the balance sheet.

We have a solid and conservatively positioned balance sheet in particular our cash position remain strong with approximately RMB3.4 billion of unrestricted cash and short-term investments as at the end of June 2020. I also want to make two additional points about our balance sheet. First, our capital leverage is conservative.

If you compare the total outstanding loans on our platform of RMB21 billion by our shareholders equity, the leverage ratio across the business was only 2.8 times. Second, credit risks are well reserved.

We have RMB2 billion of restricted cash set aside specifically to cover quality assurance protection and guarantees given to our institutional funding partners. This restricted cash alone just about fully covers the expected credit losses from such guarantees, which were RMB2.1 billion.

On top of this restricted cash, we also have RMB1.3 billion of quality assurance receivables that will be available from borrowers as they repay to cover such credit risks. We have continued to buy back our shares. Between May 2020 and August 2020, we repurchased approximately 15.1 million ADSs.

As of August 24, 2020, we have cumulatively deployed approximately US$111 billion to repurchase the company's ADSs.

Since the amount repurchased is close to the prior authorized amount of US$120 million, our Board has approved a new share repurchase program of US$16 million bringing the cumulative value of ADSs that can be bought back from through our share repurchase programs up to US$180 million.

In closing, with strong technology, management capabilities and a conservative balance sheet, FinVolution is well-positioned to adjust to the new environment and develop a sustainable business for the long-term. With that, I will conclude my prepared remarks. We will now open the call to questions. Operator, please continue..

Yes. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Alex Ye with UBS..

Hi. Good evening management. Thanks all for taking my question. So, my first question is on the new interest rate cap. So, given the new 15.4% nominal will be equivalent to 27% IRR.

Could you share with us what's the current portion of your new loan that is price above and below that cap? And so, you mentioned that you are now moving towards the level one to level three better quality customers.

So, could you also share with us what's the pricing levels for those better quality customers you are currently serving? That’s the first question. And second question is on -- related to debt.

So, do you see any volatility through your asset quality? Lately over the past few days after the new interest rate cap news, given some borrowers may decide that they do not need to repay their debt, that is about the cap currently. And my last question is on your loan growth outlook. So, given we are on a great track to improving asset.

When would you be more comfortable to resume a better growth going forward? Thanks. .

Sure. Thanks, Alex for your questions. Actually, as we -- Feng mentioned on the call on his part just now, prior to the Supreme Court decision, our average IRR was running at 33%.

And this consists -- this is the average blended number, but about -- we were running roughly in -- around at that point -- around 20% of our loan originations were priced at 24% IRR. We've been working to increase the percentage of 24% IRR loans and our original plan was to further increase this going forward.

But of course, the Supreme Court decision accelerated those plans obviously fairly rapidly as a result. So, we were pretty much along that path already.

And essentially -- obviously the loans that we -- for the full of customers that we continue to service, the pricing for those that we will continue to service will have to be adjusted in line with the 15.4% nominal APR limit. So that's the first question. The second question is fairly simple.

Have we seen any sort of volatility in delinquencies and credit risks? And the answer is no. We haven't seen -- detected any issues with credit risk at the moment at all.

And finally, your question on the loan volume outlook, now -- because -- I just want to mention because of the adjustments we are making right after the Supreme Court's decision, our loan volume in September will come down moderately versus August. Because as Feng said, we are not servicing a hundred percent of all the customers.

Our plan is to run at this level for the fourth quarter. Let the business fully adjust. So, this could mean that fourth quarter loan volume could be flat to slightly below the third quarter, but our goal is to use the time we have in the rest of the year to fully adjust to this new environment and start 2021 on a clean slate and resumed growth.

So, that's our plan. I hope that that answers your questions, Alex..

Sure. Sure. That’s clear. Thank you..

Thank you. And the next question comes from Daphne Poon with Citi..

Hi. Good evening management. Thanks for taking my question. So, my question is also regarding your pricing adjustments. So, first, can you share your take rates outlook other than yield pricing rate at your lower the IRR 27%.

And also in terms of the pricing range going forward, is it accurate to say that I guess going forward it will be a lower range, I guess, with most of the loans being concentrated around this twisted ceiling of this cap.

And also -- so, you mentioned earlier that most of your borrowers -- I think 90% of your borrowers continue to be served under this new, APR cap. So just wondering, does that means that that previously you are charging too much for this borrowers.

And I mean, it is mostly the same group of borrowers with a lower APR then does that means that credit costs will not come down as much that will be similar to before. And also -- one more question is regarding your longer term credit cost. So, do you seem that more room to decline and -- yeah, your expected credit cost to stabilize. Thank you..

Sure. Thanks, Daphne. All very great questions. I think, firstly, on the take rates, just why -- in the first half of 2020, our take rate was relatively stable throughout. It was running at about 4.4%.

As we have mentioned under the new limits, the profitability will inevitably be lower, but we will have room to improve on credit risk, funding cost and operating efficiency. And I think with the forward guidance, that Feng gave, which is by the end of the year funding costs below eight, vintage delinquency below 4.5.

You can get a pretty good sense of the potential economics, and that we're thinking of, and that our business can and will continue to operate profitably. But I do want to warn that this is not a static exercise, that this is very dynamic. There are obviously several parts that are adjusting at the same time.

And the end results are very, very much dependent on our own efforts and our management team, and we will strive to continuously improve and drive the profitability. And I think going into next year, obviously, we will look to try and improve those metrics even further.

And if you've looked at how we've transitioned from the P2P business over to the institutional funds, we do have -- I think we do have a clear track record of managing such processes. In terms of your question about whether we are charging -- over charging our customers, I think it's all a bit dynamic again.

Because what we have found, and if you just compare the -- what we said in the May earnings call about credit risk and what we are saying now, I think, the first half of the year overall has been -- it has turned out to be far better than we expected on the credit risk side.

So, if you look at -- in May, we were saying that second half vintage delinquency rates could be around 6%. Now we're saying 4.5% by the end of this year. So, I think that's really the gap. I think, it's -- again, it's all moving process. And what we've found is that actually the risk of our borrower base is lower than we had expected.

And long-term credit cost outlook, as I've said look 4.5% by the end of this year. And look, depending on the profile, I think, we'd like to do better, if we can..

Yeah. I'll just add that we are optimistic that in the long-term that the risk profile of vintage delinquency rate will be even better than the 4.5% guidance number we put out there. I think, Daphne, you followed us long enough and we have a pretty solid track record of being relatively conservative in last guidance on that front..

Great. Understood. So, maybe just one follow-up. So, on the cost side, in terms of operating expense, do you also see moving to reduce that because currency is still at around 7% to 8% of your operational balance, which looks still higher than some of your peers? Yeah.

So, just wondering on that front, do you see more room for cost optimization?.

Yeah. Daphne, thanks for that. I think one of the results of that is, we have been relatively quite conservative during the last six months -- six to nine months. And our loan origination volume has come off.

I think a lot of the -- sort of the cost concerns that you're flagging is related to our conservatism and prudence over the last six to nine months. Our loan balance FYI would have declined about 30% to 40% versus one year ago.

So, I think once we adjust to the new environment and we resume growth, I believe you will definitely see quite a fair amount of operating cost improvement coming through.

And we -- obviously, we will continue to drive work to improve operating efficiency using the various technologies we have, particularly -- we continue to optimize particularly a lot of the more labor intensive functions in the company like loan collections, et cetera. So, I think there is definitely room for us to improve on that front as well..

Okay. Got it. Thanks..

Thank you. [Operator Instructions] And the next question comes from Jacky Zuo with China Renaissance..

Good evening, management. Thanks for taking my question. Just a follow-up question on regulation. So, from my understanding, the Supreme Court actually issued a document in October last year saying that the IRR above 36% will be illegal.

So, will that document still be valid from your understanding? So, how do we view for the loan pricing above 15.4% APR and below 36% IRR to that range -- will you consider continue doing that range? If not maybe another follow-up question is, so what do you think about that pricing range? And if everyone is exceeding that pricing range, do you see some contingent risk from these segments of borrowers if there's no credit supply to them? Thank you..

Jacky, thanks for your question. I think the answer is fairly simple. And as we laid out on the call, we have moved fairly very swiftly after the Supreme Court's decision to cap all of our new originations on the platform to the 15.4% nominal APR. So that's what we're doing.

We are not going to be -- as far as we know today, we're not operating up to the 36% IRR limit, obviously unless we have very concrete and very firm legal opinion that is obviously possible. And so, as of today, we have capped all of our new originations at the 15.4% APR -- nominal APR level.

Now, with regards to what happens if there are other people lending between that below 36% IRR, but above 15.4% APR, I think that is -- that I think will better off -- ask a lawyer. We are not planning to operate in that at this point. But I think there might be some time required to sort of for these full opinions and to come out.

Now, as we mentioned we haven't seen any issues with credit risk. But to be honest, even if there -- when there was 36% IRR cap or requirement actually as you probably know and you know the sector pretty well, there are still many players out there that do 36% nominal APR, which is much higher than the 36% IRR.

So, there will always be other people out there that will take that additional risk, I think. But no. But we're not and we are very focused on compliance within the company. So, we are very strict on this. Thanks..

Maybe a follow-up. So, for these new loans originated, you mentioned you plan to do 15.4% APR. So, for existing borrowers probably price at higher than the price currently. So, how soon you will offer this cheaper price loan to them? Will be that like instantly or like fourth quarter of this year? Thank you..

So, Jacky, we are applying this new rate cap on all new loan originations, right? So, I think if a borrower has an outstanding loan that is above that, that was obviously made prior to the Supreme Court's decisions, then I think that will continue to stay.

And then for all of the new originations that we facilitate, it will be based on the -- it will be capped at that new level..

Yeah. I would just add that will include new drawdowns from existing borrowers, if they have additional credit line. So, in essence, from yesterday, that -- essentially after the decision, all of the loans we issue either for completely new customers or for existing customers, new drawdown will be capped at a 15.4% nominal APR.

I want to be very clear on that..

Okay. Thanks. Good. Thank you so much..

Thank you. [Operator Instructions] And the next question comes from Yiran Zhong with Credit Suisse..

Hi. Good morning -- sorry -- good evening management. Just a follow-up on your customer acquisition as you continue to upgrade your customer base. I think given the current conservative originations volume, it seems you are sticking with existing customers for now, with very high repeat borrowing rates and slow new customer acquisitions.

But going forward, what's your customer acquisition strategy? When you do decide to be more aggressive to ramp up your volume? And do you expect a more intense competitive landscape in the new targeted borrower segment compared to your previous borrower base? Thank you..

Thanks, Yiran. I think you're right. I mean, if you look at -- you are right in some respect that we service a lot of existing customers. And I think that is in part because we've been more conservative, but also we have a large pool of existing customers as well, a very large base.

We have not completely stopped new customer acquisition at all at any time in point this year. It has been less, but actually lately it has been actually picking up. And within the exit -- the new customers we acquired in the market, a significant percentage has been in the higher quality segments, the 24% IRR segment in fact.

So, I think, a likely scenario is that we will probably run, roughly speaking, 15% of volume with new customers, 85% existing. I mean, that's been roughly where things have been over the last 12 months and I think that's sort of the norm for the time being until we fully adjust the business. So, we will continue to acquire.

We have been and we will continue to acquire new customers, and we are acquiring in the higher quality segment, okay? So, this is not a new thing for us at all. And if you sort of calculate our acquisition costs for new borrower, they have been drifting up and this is a reflection of what we're doing on the acquisition front.

And the trend will -- I think, will continue. And I think we will -- but overall, I think acquisition costs -- the higher acquisition costs for these new segments is paid for by the better quality, the lower credit risk, and we will also -- and the ticket size will also be somewhat larger than in the past.

Of course, someone who has much better credentials don't want to be borrowing just RMB2,000, RMB3,000. So, you see these trends I think progressing going forward. Our acquisition strategy as a result I think it's going to be an ongoing optimization and gradual ongoing improvement.

We have mainly been relying on a range of social media platforms, information feeds, and on an advertising. And we will continue to optimize and expand these channels to reach the -- our target segment. We -- so far in our efforts to acquire customers in this new segment, we actually haven't come across competition that is not manageable.

I think, there will always being competition. I think we're pretty confident that we could be acquiring at the volumes that we need in this segment. .

Okay. Thank you..

Thank you. And the next question comes from Steven Chan with Haitong International..

Good evening, management. Two quick questions. First one, we heard about you're quite confident about lowering funding cost, improving operating efficiency and then lower delinquency. So, based on your new scenario, what will be your breakeven point? That means that the breakeven lending rate under your new business scenario.

Will the 20 -- for example, you mentioned about 24% some of your customers, are those customers making profit? So, this is my first question. Second question is about -- you mentioned about the wealth management business.

So, could you elaborate more about this new business? What sort of license are you getting on? Is it legal to sell wealth management products on the internet platform? So, basically these two questions..

Steven, thank you for your questions. Firstly, at the IRR 24% level, those customers are profitable otherwise we wouldn't be operating in that space at all. They are profitable, and has been rising as a percentage of our business.

And in terms of your question about breakeven rate, it's -- again, I don't want to directly give a number and that's it because as I said, this is -- profitability is not a static exercise.

It's actually dynamic process, right? So, you can say -- look on your spreadsheet, funding cost is fixed and then credit risk is fixed and then just lower the yield and then it goes to zero, right? Clearly, if it goes down too fast, then yes.

But if the yield goes down, quality goes up, right, risk goes down and funding cost potentially will also go down, because they are all actually inter related at the same time. So, I think, we'll leave it at that -- at this stage.

Clearly, if you wanted to go into more details, we'd be very happy to sit down and walk you through in more details on that topic. In terms of the wealth management business, I think just to give you some color on what we're doing first of all, we think the wealth management market in China is huge, particularly the mass affluent sector.

We have natural synergies to do this because we are leveraging again our -- the technologies we have. And we have also very good experience in servicing retail investors, which we gained back in the P2P days. As of -- I think, as of right now, we have had about RMB1.4 billion of investment facilitated through LY Fortune.

And it's still early days, but we will provide updates as our -- obviously our business develops. The model itself is we're not a manufacturer. We're not an asset manufacturer. We are -- in a sense we are introducing customers, introducing traffic to our partners, the partners who are obviously selling these -- providing these products.

So, actually if you open up the app or go to the LY Fortune website, you see that, for example, bank deposits is one area that we are active in and you don't need a license to be distributing that. We are actually just referring customers to the banks.

And for fund sales, we are at the moment partnering with a third-party company that has a fund distribution license. So, the business is -- the business that we're doing is fully compliant. And there are no regulatory issues around our business model. Yeah. I hope that helps to answer your questions, Steven..

Thank you. Thank you. Very clear. Thanks..

Thank you. [Operator Instructions] As there are no further questions, now I'd like to turn the call back over to the company for closing remarks..

Okay. Thank you once again for joining us today. If you have further questions, please feel free to contact FinVolution Investor Relations team. And good night everybody, and happy Valentine's Day..

Thank you. This concludes this conference call. You may now disconnect your lines. Thank you..