Ladies and gentlemen, thank you for standing by, and welcome to Lufax Holdings Limited Third Quarter 2021 Earnings Call. [Operator Instructions] Please note, this event is being recorded. Now I'd like to hand the conference over to your speaker host today, Mr. Yu Chen, the company's Head of Board Office and Capital Markets. Please go ahead, sir.

Thank you, operator. Hello, everyone, and welcome to our third quarter 2021 earnings conference call. Our quarterly financial and operating results were released by our Newswire services earlier today and are currently available online. Today, you will hear from our Chairman, Mr. Ji Guangheng, who will start the call with some general updates on our achievements for the quarter and share our thoughts on recent regulatory developments and industry dynamics. Our Co-CEO, Mr. Greg Gibb, will then provide a review of our progress and details of our development strategy. Afterwards, our CFO, Mr. James Zheng, will offer a closer look into our financials before we open up the call for questions. In addition, Mr. Y.S. Cho, our Co-CEO; and Mr. David Choy, CFO of our Credit Facilitation Business, will also be available during the question-and-answer session. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. Please also note that we will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the International Financial Reporting Standards in our earnings release and filings with the SEC. With that, I'm now pleased to turn over the call to Mr. Ji, Chairman of Lufax.

Hello, everyone, and thank you for joining our 2021 third quarter earnings call. For today's call, I will start with an update of our key achievements in the quarter then address top concerns that investors and analysts reached in our recent communications and finally share our views on the latest market development. First, key achievements in 2021 Q3. Overall, we achieved steady and healthy growth during the third quarter. At the same time, we improved our regulatory compliance and corporate governance. We published our initial ESG report as part of our proactive effort in establishing ourselves as a low model for regulatory compliance and corporate governance among overseas listed Chinese companies. In the third quarter, our total income increased by 22% year-over-year. Excluding the impact of non-recurring expenses in the third quarter of 2020, our net profit in the third quarter increased by 18% year-over-year. While our net profit in the 9 months has ended September 30, 2021, increased by 28% year-over-year. Due to the steady and healthy growth of our operational results and our confidence towards market outlook and business prospects the Board of Directors decided to pay out 20% to 40% of our net profit in the previous years as dividends starting from 2022. We will release the details of our dividend payout plan in the fourth quarter earnings report in early 2022. Following the completion of our USD 300 million shares repurchase program in the second quarter, we announced additional USD 700 million in August. As of September 30, 2021, we had bought back about 60 million ADSs worth approximately USD 600 million with roughly USD 400 million remaining. Despite market fluctuations, we maintained a high level of confidence about our own future, build on our steady profit generation, excellent operating cash flow, abundant capital reserve and…

Thank you, Chairman, Ji. We delivered strong revenue and profit growth in the third quarter of 2021 despite the changing economic and regulatory environment. We grew our revenue by 21.8% and our net profit by 90.8% year-over-year, respectively. Excluding the impact of the C-round restructuring expenses in the third quarter of 2020, our adjusted net profit increased by 18.1% year-over-year. Before James takes you through our detailed operational and financial updates, I'd like to cover three broader areas related to our business. First, industry concern on the real estate sector; second, an update on the rectification progress; and third, our financial position and capital-related plans. Concerns on the real estate sector. While we've observed the risk in the broader economic environment, including increased credit risk in the real estate sector, there has been no impact on our business performance to date. We do not provide lending services to property developers, although some of our small business customers produce construction materials and provide home decoration services. Our exposure to borrowers who are directly or indirectly linked to the property sector is quite limited. To-date, we have not detected any sign of credit deterioration in our secured or unsecured loan facilitation portfolios and we will remain vigilant and address credit positive quickly if needed. As of this third quarter flow-through rates indicating future credit quality remains stable and in line with the previous several quarters. Our wealth management business and proprietary investment book have limited exposure to the real estate sector. Second, a little bit more on the regulatory rectification progress. As mentioned by Chairman Ji, regulators recognize that the current industry rectification effort should see substantial progress by the end of the year and some industry observers believe the current stage of regulatory changes is reaching finalization. Based on our understanding…

Thank you, Greg. I will now provide a closer look into our third quarter operational and financial results. Before I begin, please be reminded that all numbers are in RMB terms and all comparisons are on a year-over-year basis unless otherwise stated. We delivered another very strong quarter, achieving double-digit growth in both revenue and net profit. Our total income increased by 21.8% to 15.9 billion, and our net profit increased by 9.8% to 4.1 billion year-over-year. If compared to adjusted net income in the same period last year, which excludes the impact of the C1 restructuring expenses, net profit increased by 18.1% year-over-year. Let me share some of the business milestones we achieved during the quarter despite the economic slowdown and the regulatory overhead. First, we maintained stable unit economics despite APR declines. Our loan balance APR was 23.1% in the third quarter of 2021, a 0.9%-point decline from 24% in the second quarter of 2021 and a 3.5%-point decline from 26.6% in the third quarter of 2020. In comparison, our loan balance take rate remained stable at 9.7% in the third quarter of 2021, same as second quarter and a 0.3%-point increase from the third quarter of 2020. We were able to up the train because we continue to diversify our funding sources and increase the number of banking partners we work with. Additionally, we attained further reductions in the credit insurance premiums on our loan portfolio. Also, thanks to our new methods of charging customers, we experienced diminishing impact from the early loan repayments. Above all, we drove relentless improvements in our sales and marketing efficiency. All these initiatives combined should enable us to maintain stability in our take rate and the net margin even if the APR may reduce further in our retail credit facilitation business…

[Operator Instructions] Your first question comes from Richard Yu from MS. Please go ahead.

Thank you very much. Congratulations for the strong third quarter. Just have a couple of questions on the funding part at the moment. One is basically, are we seeing opportunity to further reduce the funding costs or basically the yield from the funding partners that we work with at the moment since we're expanding our cooperation population. And in addition to that, are we seeing these banks are taking more risk on their own. So what percentage of risks are taken directly by the banks at the moment? Thank you.

Okay. The proceeds of our funding call how much risk is there. As of today, we have 59 companies and 6 trust companies. And then in terms of mix, bank funding takes about 60% and then 40% are from first at different funding cost. The bank funding cost is at 6.4% and first at 5.6%. So going forward, we believe rates about take rate this year and next year. We believe we have more room in funding costs to further reviews and safeguard our take rate on the decrease in major environment. As of today, if you look at our fourth quarter number, our guarantee portion takes up to 20% renewals. And then our dependence on insurance companies, especially in P&C, it went down 70%. So the rest about 20% -- the rest of about 10% are taken by in terms of risk sharing, 10% are taken by bank and also insurance companies together.

Your next question comes from Winnie Wu from BoFA. Please go ahead.

Okay. Sorry. Yes. So I want to ask a high-level question regarding how does management think about the difference between the credit assistant lending model versus the co-lending model. I mean, apparently, regulators have made pretty strict rules regarding the co-lending model, right, the risk sharing the percentage funding sharing which is more capital intensive. But in fact, essentially, the way Lufax has been complying with the regulation, you are taking more risk because you are putting on long on balance sheet, and you do have the capital to be fully compliant. Whereas on the other side, the so-called assistant lending model has is facing more regulatory uncertainty regarding the license requirement regarding the disconnection from the banks. So strategically, how do you compare the protein costs of those two business models? And where do you see Lufax business model evolving over time? Thank you.

Thanks, Winnie, it's Greg. I'll take a first shot at your question and then to see if Ji anything to add. I think that the way the regulators increasingly look at this is really in two buckets, right? There's loans done by banks and then everything else is really regarded as a form of facilitation and cooperation. And I think that under the bucket facilitation and cooperation, and there's been some recent announcements in the last couple of days about ANS requirements in terms of how they partner with banks. The core of this is really that you have the skin in the game. And we have done it at 20% up to now, but we'll probably be moving to 30% over the next 12 to 18 months. And so that's getting the game is robust and very much in line with the overall spirit of regulation. The second is that when you take this skin in the game, you need to have a license that is regulated and where capital leverage is controlled within 10x. And so we do that through our guarantee company. Our leverage today on those guaranteed companies is under 3x. And so we're very well positioned to handle all of that. I think the other thing I would just highlight is that if you look at the requirements that have been announced around -- and over the last couple of days, they now have to split the lending they do through their consumer finance company and they're partnering with banks and it has to be separately branded. We are already compliant with that requirement in that our consumer finance business is separately branded. And when customers process a loan through our facilitation, the banks themselves are disclosed. And then each bank carries out its own risk process to prove the lender. So we think that we're unique in having that guarantee company in really taking shared risk on every loan and bringing that to 30% and then having the capital behind it and then in disclosing our bank partners in the process. And I think it will be -- honestly, is going to be difficult for some players in the market to really meet those capital requirements going forward. So I don't think there's that much of a distinction between co-lending and facilitation. The real issue is having that capital to back up risk sharing. David Choy, anything to add.

I think technically speaking, like, we are not calling for sure. We don't have any license. All for comes from bank were from first company. And then we are not the system either because we are financing guaranteed compliant. That's the way we do it is properly with our financing guarantee licensees core. But as we -- how do we -- we don't think regulator, they clearly separate co-lending and then to system lending. We believe going forward, one part one regulation we of cloud to all different model of loan services, including a system lending and also co-lending and other pure position, only effect the bank loan, which they pay all functional loans by themselves from base underwriting collection. In our case, our future model, I think we already we already have a clear in discussion with regulators. So going forward, we take all loan funds with to come from banks and set companies. We don't provide any fund, but we are only taking 40% credit risk and then the rest percentile eventually be taken by fund providers, but in some time, reach that point. So as a bridge, we use our management partners. So eventually is, if you ask what is our future model we spend, all funds come from banker, the risk sharing 30% by us and all the rest 70% are taken from the partners.

Your next question comes from May Yan from UBS. Please go ahead.

Thank you. Can you hear me?

Yes. Go ahead, May.

Okay. Maybe I'll follow up on Winnie's earlier question, still about regulation. So the CBRC, the tank regulator have said that they -- or PBOC as well, they were separate, make clear boundary between financial services, the lending technology services and credit scoring. So it looks like it's maybe targeting to have first -- each operator should have certain type of licenses that will allow you to do this -- to be engaged in such activities. And then secondly, to source split or separate the whole the operation current loan facilitation model, which covers the whole of the business chain. So does that mean that in the end, so the service part, the technology service part will be segregated out of the lending and also maybe guarantee as well? So -- because is that being technically happening in how you can conduct your lending or the whole business. I don't know if I'm clear or not on that question. And then also earlier mentioned that by March, we will be connected to the credit some kind of credit scoring services and paying a small fee of about less than RMB 100,000 per month. I just want to confirm that, so you already -- is there a guidance that the companies or do so and to which credit scoring sort of the agencies. And also, sorry, on the operating front, we saw insurance groups, the sales force has quite a lot of turnover and has sales force has declined a lot this has that impacted through your customer acquisition, selling by their sales force, et cetera. By the way, it's very good, very strong third quarter results and also great to hear about the dividend payout. Congratulations. Thank you.

Thank you, May. So let me start from the back. The live agents, number of live agents has been declined from now reached about 70,000, right? Then it affects our business growth, that's true. If you look at our -- the sales channel mix, last year they used to contribute about almost 40% or [indiscernible] a few years back. But if you look at broad quarter number, they now contribute only 28% of total loans. So now we have a lot less dependence on live channels. Why our on our sales force their sales contribution increased up to more than 50% by now. In again -- we are that the latter contribution, while the absolute sales content amount, we decrease for the but we are late because even if they decreased a little bit from that 28% contribution, our conditions on that, that part our annual growth is almost 20%. So that is enough move enough to cover the short from live agent channel I don't let discuss this number before. We have direct full capacity ratio this full capacity ratio of margin was less than 90% in the second quarter. But when you titrate it's already 100%. I think our guidance reform. We started us having putting more investment on this developing and rating and curating our higher performance director. And now we see an interest at and then we have full protect ratio. So I think that means that we are very much confident despite larger decline bothered yesterday confidence, overall, we can deliver -- we can achieve 2 billion sales growth. And the second question is what about something credit scores point, right? That we are in close discussion with PBOC directly. And then we build our process in detail. If I may question numbers, normally we share with banks about 300 base for one customer. And as Ji said, I in that about 8 data basically must go through the company who had credit license. So that process, now we are working with. And as Greg said, these new process will be in place by March next year. Why -- do the comments from June 2023. So we will be already a lot ahead of your requirement. And then at names of business. We estimate the total is 60,000 or 70,000 of common which is very much minimal. Pay out this process, it doesn't offset our profitability.

And so maybe to go to the top end of your question, the way that we got holdings is set up is that each business line is very clearly segregated, very clearly segregated in terms of operation, technology stack, equal, corporate governance, et cetera. So we are already very clearly split by business line. The lending business is also very clearly split in its enablement to partner banks and trust companies and that is really where we process the flow of borrowers that is done through our technology platform. And it passes all of the data, as Y.S. just mentioned, to our banks and trust partners for their separate decision-making. All of our process there does not touch upon a payments license which I think was one of the more major focus areas for Ant, which is really to separate payments and lending. Our lending is entirely separate in that regard. But the other thing I want to highlight is that no matter what your business model is, this requirement by regulators to have skin in the game, that part of it must be licensed. And so we do that through our guarantee company in terms of being able to provide that skin in the game. So I think as you look down the path of regulation, your processes in terms of where you're partnering with institutions on the technology side have to be clear and separate from other services. But where you have to bear skin the game, you have to have requisite licenses to do that. And then in the corporate governance, you have to have separation in that setup, which we have today. May, just to double check that we've answered your questions.

Can I follow up? Thank you, thank you for answering the question. Follow-up on that. If the -- I guess, the edge for Lufax models having the guaranteed side of the business, which is licensed and in the intention of the Central Bank and CBRC is to have all the information flow into the credit scoring agencies and that can be used and shared with other financial institutions, et cetera. Then with the other loan certification companies or Internet technology companies, they can also have the guarantee try to get guarantee license and then they can sort of kind of avoid the credit scoring, extending data to the scoring agencies, too, right? So I understand it may take some time for them to get the guarantee license, but that could also be a way to avoid the regulation, right? Why we...

Our view, for what it's worth, and this has come from our -- a lot of interaction with regulators is that the core principle of data eventually being shared through the rating licenses as Y.S. just said, right? In our case, 80 of the 300 variables that we share with banks need to go through that license. I think that's going to be true no matter what your business model is, right? The second thing that we believe is that no matter what your business model is co-lending facilitation or other definition, you will have to have skin in the game. And then behind that finite game, you'll have to have an entity that can bear that capital. I think what I would highlight is other people can get guaranteed licenses. It does take time. But I think the more important thing is if you look through the regulation. What they're looking to prevent is instances where platforms are providing a lot of guarantees beyond what just indicated in the license. What they're going to do is really look through the total loans that you help facilitate that you are really bearing risk on 30% of that and that you then have capital to back up that 30%, right? We can't be under the table or side agreements or anything else, which doesn't fully disclose that capital requirement. So I think that's the core direction. And I think that where we are unique is having those licenses in place, having their national coverage and having more than enough capital to meet those requirements today.

Your final question comes from Hans Fan from CLSA. Please go ahead.

Sure. Thanks management for giving me this opportunity. And congratulations again for the decent results. I have two questions. I think first one is also regarding the regulatory trends. As you probably recall back in July, Mr. Zhou from the consumer protecting bureau of CBRC once mentioned that the platform companies charge too much profit from the loan. So what's your view on that? Is that means that potentially, CBRC really care about the net margin of up. Do we see any sort of pressure on the regulatory side in the coming years in terms of squeezing our net margin? I think that's the first question. Second one is more on the operating side regarding RCS. Because the loan growth in third quarter was quite strong. And also, we mentioned that the sales productivity was getting better. So here, I just want to check what's your view regarding the loan demand despite the economic slowing down. What you see the loan demand for our SME customers. And what we have done in terms of to promote the productivity of the direct sales team. And how can we reduce their sales commission rates, as we mentioned in the announcement, yes. So that's pretty much about the question. Thank you.

Let me. I think the first question later to do supplement. The about supplement from going actually, we don't have any concern because he's very who provided window guidance for Lufax in the last 3 years. So our verification products in terms of seen portion increase or price decrease reinvigorates partners are all following into guidance. So we haven't done any thought insertion from on the one that has the total fee charged by Lufax, including guaranteed fee service fee should be less than 5.5% of loan amount, not more than loan amount last year. So since then, we haven’t got any further instructions on loan demand while the other. So I can later add some more comments. And the third question the RCS loan demand. This year, if you look at year-on-year number, if I am not wrong phase grew by 16% and balance grew by 20%. So I think loan demand is still there. I think this is our unique positioning, because providing loan service for small and micros owners in sector, we don't see really many other key players we can select the customer we want. So loan demand-wise we don’t have any concern. Our major focus is leading therefore how we can provide more technology tools to support our company. And then also if you understand our phase mix that contribute almost 40% of total units. And then in that part from fourth quarter, yes, we hire highly performing that says more. And then that is created so tying those the high potential salesforce, we provided healthy salaries but a low commission in the first 12-months, so they that they can comment set with time. And then from many years we provide bonus so if you get the sales and marketing expense this year the total expense did increase at all, we add a little bit more. And next year, I don't think we have a room to reduce sales commission, or reduce margins passing because our debt that we have to guarantee our salesforce are really competitive and they are really ready worth it. But we see more room in funding cost and the size premium. In those two items I believe the more to say. So in the fourth quarter this year our average loan price for total loan about 20% and 22%. Our plan for the next phase, we don't need to dramatically and quickly use price, but we gradually very reduced funding costs and optimization. So we can safeguard our take and net margin. So next year in overall, the price because we very minimal, and then our take rate and margin will be content, I think.

So on a quick summary of the translation, which Ji just said basically 3 points to summarize. Number one, we're fully aligned with the regulatory and the overall society's intention to lower funding costs for small business owners, word the most by technology, efficient improvement, risk management better negotiations with funding partners to lower our cost components to achieve that. Second point, I believe the lowering of our funding cost for the society is going to take some time to achieve. It's not something that can be solved overnight. It requires all participants to work together to achieve that. And obviously, we are part of that. And thirdly, so far, there are no specific requirements on the exact number or timing from the regulators on us. But obviously, we do have internal targets. We fully understand the future direction, and we have internal targets to lower to a program level at the right time. Is there any other questions?

There are no further questions at this time.

Okay. Thank you, operator. Thanks, everyone, for listing our earnings call.