Operator: Good day, and thank you for standing by. Welcome to LexinFintech First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I'd now like to hand the call over to Mandy Dong, IR Director of Lexin. Please go ahead.

Mandy Dong: Thank you, Desmond. Good morning, and good evening, everyone. Welcome to Lexin's First Quarter 2024 Earnings Conference Call. Our results were issued earlier today and can be found on our IR website. Joining me today are our CEO, Jay Xiao, CRO, Arvin Qiao, and CFO, James Zheng.

Before we get started, I'd like to remind you of our safe harbor statement in our earnings press release, which also applies to this call. During the call, we may refer to business outlook and forward-looking statements, which are based on our current plans, estimates and projections. The actual results may differ materially, and we undertake no obligation to update any forward-looking statements. Last, unless otherwise stated, all figures mentioned are in RMB.

Jay will first provide an update on our overall performance. Arvin will discuss risk management updates. Lastly, James will cover the financial results in more details.

I will now turn the call over to Jay. His remarks will be in Chinese and English translation will follow.

Jay Xiao: [Interpreted] Hello, everyone. It's my pleasure to give an update regarding our performance for the first the quarter of 2024. Considering current macroeconomic environment and industry dynamics, we adopted a cautious and prudent business strategy in the first quarter. We maintained a dual driven approach of risk and data, aiming to strike a fine balance between growth and quality and achieved a set of healthy results.

Here are the key highlights. In the first quarter, total loan origination for the first quarter reached RMB 58 billion. Loan balance stood at RMB 121.5 billion, a year-over-year increase of 13.5%. Total revenue amounted to RMB 3.2 billion, with a year-over-year growth of 8.7%. Net profit reached RMB 202 million.

In terms of asset quality, in the face of the moderate recovery of macroeconomic environment, the intensified competition among loan facilitation industry and a relatively high risk level of some parts of our existing loan portfolios. We strengthened efforts to collect tail-end assets and disposal of delinquent assets in the first quarter. For newly issued loans we undertook the high credit standards, ensuring the good quality of new assets to be more specific on these 2 grounds of asset quality measures.

For existing assets, we strengthened efforts to collect tail-end assets in the first quarter. This included improving the intelligent cost routing strategy for multiline management to minimize the negative impact of light control. We also continued to advance the construction of a localized integrated system for collection, mediation and litigation services, ensuring an efficient user experience and effectiveness in post loan collections. Simultaneously, we accelerated the disposal of tail-end assets by introducing strategy robust, replacing manual decision-making with machine learning algorithm, significantly enhancing the efficiency and effectiveness of asset disposal.

Regarding new assets, firstly, we undertook measures to reduce the increase of high-risk assets. In the first quarter, the low and grow new customer risk management system was fully implemented across all business lines by initially granting a low credit limit to new users and gradually increasing the limit as we know the customer better as time passed by. We reduced the likelihood of credit loss for new credit approvals and maintained the increase of approval rate of new customers. We also enhanced our offer competitiveness for high-quality customers through dynamic credit limit growth to facilitate conversion.

The approval rate for new customer credit increased by over 30% and the proportion of super price and prime segment customers growth from 24% in January to 40% in March. The early risk performance indicator for new customer assets FPD30 shows a continuous downward change.

The second measure targeting at newly issued loans is that we continued to increase the proportion of high-quality new assets through pricing experiments and casual influence models. We improved the matching of differentiated priced products among various customer segments, enhancing the competitiveness of offers for super prime and prime customers leveraging the advantage of losing a large user base of over 200 million accumulated registered users. We targeted potential customers who have churns or not yet converted and conducted with offering program, which contributed to the increasing proportion of good quality assets.

Through the above-mentioned measures, the risk performance of new customers has gradually improved and the risk of newly issued assets has been under management. Although the disposal of existing delinquent loans and the resolution of risks associated with existing assets still require time. As the proportion of new assets in the asset structure gradually increases, it's expected that the overall risk performance will gradually improve in the second half of the year.

In terms of required operations for different customer segments, we continue to prioritize customer orientation and leverage our product matrix to drive customer activities and improve asset quality. In the first quarter, we increased efforts in promoting [Foreign Language], in Chinese, [Foreign Language] to serve our top-tier customers better. [Foreign Language] is a consumer loan product with interest rates below 18%, targeting at high-quality working class consumers. After more than 6 months of testing, user of [Foreign Language] demonstrated higher user activity levels in the first quarter.

The number of transactions, average transaction amount and average loan balance per user increased by 14%, 13% and 19%, respectively, on a Q-on-Q basis with early risk performance indicator less than half of our overall portfolio. We also focused on operating high-quality micro and small business customers by introducing a low interest and a large ticket size product called [Foreign Language] in Chinese. This product primarily serves high-quality micro and small business owners based on current tracking data. The early risk performance indicator for customers using [Foreign Language] are significantly lower than the overall inclusive loan portfolios, and we plan to continue expanding its scale while maintaining good asset quality.

[Foreign Language] and [Foreign Language] are 2 key products targeting our top-tier customers aiming to boost the activity of high-quality borrowers on our platform and promote the return of more high-quality lost customers.

In the first quarter, overseas business that we previously explored achieved a breakthrough in the Mexico market. Total loan origination volume grew by double digits on a quarter-over-quarter basis, and it remained profitable. In terms of funding costs, we continued to bringing in more financial institutions with strong comprehensive capabilities. In the first quarter, we established a partnership with several national wide large-scale institutions, further increasing the proportion of funds from national level financial institutions. Our funding cost reached a new historical low level with a 34 basis point decrease compared to the previous quarter.

In May, we issued the company's first internationally rated ABS with AAA rating. Moreover, in the future, we will further progress the regular insurance of ADS. In the first quarter, we invested RMB 130 million in research and development, further integrating large language models with our business to improve work efficiency and customer experience. We introduced real-time intent recognition technology based on large language models leveraging years of accumulated data from customer service and sales scenarios. This technology improved the accuracy of customer intent recognition enabling personalized solution tailored to customer needs in customer service and talemarketing scenarios, greatly enhancing customer satisfaction.

In terms of user profiling, through continuous training the large language model's ability to automatically analyze and identify information such as the profession and repayment waviness has improved with an accuracy rate exceeding 70%, effectively supporting refined operation for different customer segments. In terms of corporate social responsibility, in the first quarter, we launched the consumer protection and warm season campaign, providing consumer protection service through institutional building, product features, user experience and financial knowledge cultivation. We assisted the police force in several cities in cracking 2 cases of illegal agency, continuously combating financial fraud.

In April, Lexin became the official partner of Chinese National Fencing team. We launched the leading-edge empowerment and STRIDE program to support local industries for micro and small enterprise with over RMB 20 billion funds, offering RMB 1 billion interest-free dream funds to support young graduates in pursuing their dreams and collaborating with merchants to develop multiple product categories with monthly sales exceeding tens of millions. Looking ahead to the second quarter, we will continue to adhere to a prudent operating principle, prioritize risk management and continuously enhance profitability in the face of a complex and low visibility external environment. As our profitability grows, in the future we will continue to distribute cash dividends and provide more returns to shareholders.

Next, I will hand over to our CRO, Arvin, for risk management update. Thank you.

Zhanwen Qiao: [Interpreted] Thank you, Jay. I will give an update regarding risk management in the first quarter. In the first quarter, we observed uncertainty persisted in the external environment without a notable improvement from last quarter. This can be shown by a continued weak recovery pace of macroeconomic conditions and extended lower consumer credit demand and the seasonal factor of the Chinese Spring Festival.

Based on these observations, we firmly continued to implement our risk management upgrading and profit enhancement strategies in the first quarter. We focused on a series of initiatives such as enhancing credit profile identification capabilities, optimizing asset structure, increasing the disposal of high-risk customers and upgrading differentiated pricing capabilities, which achieved non-feasible results.

Through the above-mentioned measures, although the risk performance of new customers has gradually improved with the risk level of new assets has been under management, the disposal of existing delinquent loans and resolution of risk associated with existing assets still require time. Looking ahead, as the proportion of new assets in the asset structure gradually climbs it is expected that overall risk performance will gradually improve in the second half of this year.

Next, let me elaborate on the specific risk management measures we implemented in Q1. First, in terms of continuous enhancement of risk identification capabilities. In the first quarter, we further increased the exploration of external scenario-based data and introduced a cutting-edge algorithm to significantly improve risk identification capabilities. Regarding the continuous optimization of risk scoring for new and existing customers, we established a partnership with several platforms that protect their proprietary ecosystem data. Through joint modeling and utilizing additional data dimensions for key feature extraction, we enriched the types of model features. This resulted in an approximate 10% improvement in the KS value for the main risk models, further enhancing the risk identifying capability between good and bad customers.

Additionally, in terms of customer credit profiling, occupation model, education model and the income prediction model were all developed and implemented in Q1. This significantly enriched our outstanding and insights into customer credit needs, greatly improving the matching effectiveness between loan products and the user needs.

Next, in terms of optimizing asset structure, in the first quarter, we launched the risk management strategy system for new customers based on the low-end growth methodology. On the customer acquisition side through strengthened front-end risk identification RTA model and optimized user application completion models, the efficiency of acquiring high-quality customers significantly increased. The proportion of high-quality loan applications increased by over 20% while achieving a more than 30% uplift in the credit approval rate for customers. The FPD7 for new customer loans decreased by around 20% compared to Q4, resulting in a monthly improvement in new customer risk level.

In terms of risk management for existing customers, we have restructured the entire system of credit line limit, pricing and transaction monitoring strategy, significantly enhancing differentiation in credit line limits and pricing. This has resulted taking a more rational alignment of credit line limits and pricing within various risk levels. The competitiveness of loan products offered to high-quality customers has been significantly strengthened leading to a monthly rise in the proportion of high-quality customers. At the same time, it effectively reduced the credit limits and potential credit loss for customers with medium to high risk levels.

Third, regarding the disposal of high-risk customers. In the first quarter, we strengthened efforts to close accounts, intercept transactions and reduce credit limits for high-risk customers. We developed and deployed intelligent disposal tool, which has been applied in the implemented [indiscernible], such as customer accounts closing, anti-fraud detection and transaction intersection. This tool has significantly improved efficiency and precision in high-risk asset disposal. It can generate strategy recommendations on a daily basis, enabling efficient high-risk transaction interception and account closing for high-risk customers.

It has significantly improved the response speed of high-risk asset disposal and reduced the generation of delinquent loans. Additionally, in terms of our cooperation with traffic channels, recently, we have conducted a comprehensive risk versus profitability analysis of the existing traffic channels, channels with small scale and high-risk work closed, thereby contributing to a tangible positive results in reducing the risk level of new assets.

Fourthly, in terms of risk-based differentiated pricing and customer churn prevention. In the first quarter, we also spent great efforts on strengthening the management system of risk-based differentiated pricing strategy. This led to a substantial improvement in the alignment and the rationality of risk level and pricing, enhancing the matching of risk and profitability for various class of assets and driving the growth of profitability. While maintaining average price of the whole portfolio almost stable, we increased the intensity of time limited price promotion for high-quality, low-risk customers to boost transaction convention and drive growth in high-quality loan volumes. We also lifted the price for tail portion customer segment to ensure risk and price alignment.

In Q1, we launched an offline and real-time customer churn prevention strategy system, targeting customer group with high churn probability. As a result, the number of churn customers in the first quarter declined compared to the same period last year. This achievement increased the size of our operatable customer base. Additionally, we provided -- we offered for customers who historically obtained approved credit line but never conducted a drawdown through which we successfully record those silent customers. Compared to the control group, the number of record customers increased by over 30%.

In the second quarter, we will continue to focus on enhancing credit profile identification, intensifying the disposal of high-risk customers, accelerating the acquisition of high-quality new customers, scaling up the loan volume of high-quality existing customers and continued to push forward the risk-based differentiated pricing strategy. These key initiatives aim to promote risk management enhancement, improve profitability and strengthen our capabilities.

We believe that in the second quarter as our new risk management system and methodology gradually come into more effect, it will effectively drive a decline in the risk level of new loans while accelerating the disposal and the resolution of risk in existing loans. Based on current estimations, we expect the risk performance of overall assets will gradually improve in the second half of this year.

This ends the risk performance update for this quarter. Now I will hand over to our CFO, James to share the recent financial updates.

Xigui Zheng: Thank you, Arvin. I will now dive into our financial results. Noting that all figures are presented in RMB, unless stated otherwise. As Jay and Arvin highlighted, given the macroeconomic conditions and the continued cautious consumer behavior as well as the new year seasonality, we strategically adjusted our Q1 operations. We tightened our credit standards and moderated loan originations to ensure the resilience of our financial performance. This approach not only helped manage volume but also enhance the quality of our operations, which I will elaborate across the following 5 key aspects.

Number one, resilient net profit margin. Despite a decline in new loan volume to $58 billion, down 5.3% from the previous quarter and the total revenue falling to RMB 3.2 billion, down 7.6% quarter-over-quarter, profit reached RMB 202 million. The net profit margin remained relatively stable at about 6.2% in comparison with the pro forma Q4 net income without investment losses, reflecting the robustness of our business model and the profitability.

Number two, record low funding costs. We achieved a significant reduction in funding cost by 34 basis points from the previous quarter, bringing it to under 6%. This improvement stems from the overall market rate as well as enhancing our network of funding partners and increasing proportions of funds sourced from national banks to around 70%. Additionally, we resumed ABS issuers in May, raising RMB 350 million. We plan to continue optimizing our funding costs through further ABS insurances as market conditions allow.

Number three, revenue take rate uptick. There is a slight increase in the revenue take rate of new loans to 2.54% in Q1, up by 7 basis points quarter-over-quarter and up by 5 basis points year-over-year. This is due to the lower funding cost, a continuously refined early repayment ratio and slightly improved credit provisioning quarter-over-quarter. The total credit impairment costs lowered slightly quarter-over-quarter. The total credit impairment cost items, including the provision for financing receivables, provision for contract assets receivables, provision for contingent guaranteed liabilities and the change in fair value of financial guaranteed derivatives and loans at fair value decreased by 7.5% on a quarter-over-quarter basis, due to the decreased new loan amount and the improvement in risk trends of new customer loans.

Number four, improved risk profile of new customer loans. As explained by Jay and Arvin earlier, our focused risk management efforts have gradually improved the loan quality among new customers from super prime and prime segments. However, due to the size of the existing loan balance, the overall 90-day plus delinquency rate still increased by 10 basis points to 3.0%. Now our overall provision coverage ratio remains at over 300%, which is defined as total provision amount divided by the principal amount of 90-day-plus delinquent loans. This reflects our strong buffer against potential bad debt. An additional note, as explained by Arvin, the enhancement of overall credit indicators will likely accelerate in the second half of the year, along with our risk mitigating initiatives as well as the macro improvement.

Number five, operational expense control. We continue to optimize costs, particularly in operational expenses. Excluding the processing and servicing costs, which is driven by the credit cycle and the collection operations. Our total operating expenses, including sales and marketing, R&D and G&A as a percentage of average loan balance further dropped to 2.09%, 11 basis points down from last quarter and 49 basis points down from 1 year ago. This reflects our strategic focus on maintaining effectiveness in essential operations at loan collections to manage credit cost while reducing expenditures in other operational areas. Apart from the above operations related highlights, I also want to provide some additional perspectives related to income statement line items.

Operating revenue increased by 8.7% year-over-year and decreased by 7.6% to RMB 3.2 billion quarter-over-quarter, slightly more than the decline in loan origination volume of 5.3% quarter-over-quarter mainly due to a proactive tightening of credit in the e-commerce business segment. Our balance sheet funding costs increased by 19.1% quarter-over-quarter due to high volume in all balance sheet loan facilitation. Year-over-year, the on-balance sheet funding cost amount decreased by 39.7% due to the decline of both the rate and on-balance sheet loan amount.

Processing and servicing costs growth by 14.3% quarter-over-quarter and 11.1% year-over-year. This is because we have intensified our efforts in loan collections to manage risk. Sales and marketing expenses decreased by 2.8% quarter-over-quarter and 5.1% year-over-year aligning with our strategy to scale back customer acquisitions amidst seasonal and macroeconomic challenges.

On the balance sheet side, our cash position remains strong, ending the quarter with approximately RMB 4 billion on hand and a solid equity position of RMB 9.9 billion. While looking for ways to continue increasing shareholder value when market conditions improve, currently, we will maintain our dividend payout policy and the upcoming dividend payout, payment scheduled for May '24.

Looking ahead, while the macro environment remains uncertain and the consumer credit demand is weaker than expected, we will stay focused on enhancing risk management, refining efficiencies and optimizing costs for the second quarter, we currently anticipate a total GMV of loan origination volume to be around RMB 54 billion to RMB 55 billion. This estimate reflects the company's current expectation, which is subject to change.

We are now ready to take your questions. Operator, please open the floor. Thank you.

Operator: [Operator Instructions] Our first question comes from Frank Zheng from UBS.

Frank Zheng: [Foreign Language]

Since April and the second quarter, how does the credit demand look like? What does the trend look like? And what are the management expectations for total loan volume in the second quarter.

Jay Xiao: [Interpreted] Okay, Frank, I will translate for Jay. In first quarter, considering macroeconomic conditions and seasonal factors, the overall pace of loan origination remain within our expectation. You can see our total loan origination only dropped about 5% in Q1. We are talking about a Q-on-Q basis. This has actually outperformed the industry average loan origination pace in Q1. Since we entered the second quarter, you mean April and May. When we look at the operational metrics, considering both the external and internal factors, we see the external macroeconomic environment is still showing -- we see a relatively slow coverage trend.

So therefore, internally, we will continue to adhere to the risk management upgrading strategy and maintain a relatively high standard of credit approval for both new customers and newly issued loans. Therefore, taking both the internal and external factor into consideration, as for the effective credit demand, we actually seen slowing down trend in April and May on a month-over-month basis. That is actually below our expectation.

Therefore, based on our current estimations, we expect that total loan origination volume for the second quarter will be around RMB 54 billion to RMB 55 billion. At the same time, while we are adhering to the high standard and prudent risk management strategy, we also closely monitor the macroeconomic recovery. If in the future, the overall economic vitality improves significantly, we will also consider seizing the opportunity for business growth in a very timely manner.

Mandy Dong: Okay. Frank, hope Jay addressed your question. Operator, I think we can take another question.

Operator: Our next question comes from the line of Yada Li from CICC.

Yada Li: [Foreign Language]

I will do the translation. Mr. Xiao mentioned that the overseas business achieved double-digit growth in the first quarter. Could you provide more detail about the business planning for overseas development, core business lines and the future profit expectations?

Jay Xiao: So Yada, I will translate for Mr. Xiao. Considering that China's macroeconomic developments have shifted from the high-speed growth to high-quality growth, And you see the loan position industry has entered a stable growing pace we have made some attempts overseas. And so far, it achieved good results. And a couple of years ago, we made some strategic investments in Southeast Asia regions such as Indonesia. In fact, the affiliated company in Indonesia conduct loan facilitation business in the local market. Besides that, we also have built up our own operation team and expand our business into South America region, for example, Mexico market.

Well, in the past quarter in Q1, the monthly loan origination volume in Mexico market has exceeded RMB 100 million, achieving profitability for the quarter. The loan origination volume for overseas business increased by a double-digit growth on a Q-on-Q basis, which far exceeded our overall business line growth. However, you see the scale of the overseas business is still relatively small compared to our domestic business. Therefore, in the future, we will continue to increase our investments overseas to expand and strengthen the business development.

Regarding the products, we will push forward the transition from the current single model cash flow model to more diverse products models. Moreover, by optimizing targeted marketing, continuous integrating products and enhancing risk management, we hope to increase the proportion of our overseas business and contribute more to our profitability.

Mandy Dong: Yada, I hope Jay gives you more color regarding our overseas business line. Well, operator, we can take next one.

Operator: The next question come from the line of Zoe Zou from CLSA.

Zoe Zou: [Foreign Language]

Let me do the translation. As CRO, Mr. Qiao, mentioned that the risk performance of issued to new customer is showing a trend of gradual improvement, while rates of existing loan book growth still need time to do results. So looking ahead, could you discuss in detail risk performance outlook of both existing and new assets and expected future performance of the overall asset.

Zhanwen Qiao: Well, Zoe, let me translate what Arvin mentioned for you. So certainly, I think the overall performance of our total assets really draws market attention, and I will address that. In terms of the asset quality of loans issued to new customers, you see in Q1, we enhanced risk identification capability improve the efficiency and accuracy of the front-end RT model acquiring new customers, and we also first implemented the low and grow life cycle risk management approach. As a result, we see a noticeable increase in the proportion of new good quality customers and the leading indicator for the asset quality for new customers. For example, first payment default rate 7 has decreased by more than 20% compared to the level in Q4, showing our month over month improving trend.

Although you see the risk performance for loan issued to new customers has gradually improved and the risk of new assets has under management through the measures we talk about. It still requires time for the resolution of risk of existing assets. Therefore, we expect in the future at the proportion of new assets in the overall asset structure gradually increased and the existing loan book risk are gradually resolved. We foresee that the overall risk performance will gradually improve in the second half of this year. Hope this answers your question regarding our risk performance of the overall asset, Zoe.

Mandy Dong: Well, operator, if -- can you look at the line, if there is no more queuing on the line, I think we are good to close the call for today.

Operator: That's the end of the Q&A session. I'll now hand the call back to you for closing.

Mandy Dong: Well, thank you, everyone, again, for joining us today. If you have further questions, please contact us via the contact information on our IR website and off-line. Thank you all. Have a good day and a good night. Bye-bye.

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

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]