Ladies and gentlemen, thank you for standing by, and welcome to Lufax Holding Limited Second Quarter 2022 Earnings Call. [Operator Instructions] Please note that this event is being recorded. Now I would like to hand the conference over to your speaker host today, Ms. [Nu Shin Yen], the company's Head of Board Office & Capital Markets. Please go ahead, madam.

Thank you very much. Hello, everyone, and welcome to our second quarter 2022 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 newly appointed Chairman and CEO, Mr. YS Cho, who will start the call by discussing change to our management team and then provide an update of the latest regulatory developments, macroeconomic, and COVID impacts and our latest business strategies. Our co-CEO, Mr. Greg Gibb will then go through our second quarter results and provide more details on our operations. Afterwards, our CFO, Mr. David Choy, will offer a closer look into our financials before we open up the call for questions. 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 the filings with the SEC. With that, I'm now pleased to turn over the call to Mr. YS Cho, Chairman and CEO of Lufax. Please?

Thank you all for joining our second quarter 2022 earnings conference call. I will start with today's call with changes to our management team and then provide an update of the latest regulatory developments, macroeconomic and COVID impacts followed by updates on our latest business strategies. Earlier this month, our Board approved the resignation of Chairman Ji Guangheng and my appointment as Chairman and CEO of Lufax. We would like to thank Chairman Ji for his contributions to Lufax and wish him every success in his new position as Executive General Manager of Ping An Group. We have also appointed Chen Dongqi as our General Manager; and David Choy as our CFO; and YJ Lim as our CRO. Greg is continuing to serve as our co-CEO, who will take an expanded role in our overall business going forward. In addition to continuing to oversee our wealth management efforts, Greg will oversee our finance, treasury, IT, IR functions, having CFO and CTO reported to him, and play a lead role in developing new business initiatives which we'll share more about at a later stage. Dongqi joined Puhui in 2013 and has had various senior management positions, including serving as a general manager for Puhui since 2020. Prior to joining Puhui, Dongqi served in multiple Ping An subsidiaries from 1996. David has served as the CFO to our retail lending business since joining 4 years ago. Before joining us, David was the Head of Treasury Department of Ping An Group and has served in various leaders roles within Ping An finance planning functions for 11 years. YJ joined Puhui in 2008, and has been overseeing the risk management function of our retail lending business for almost 14 years. Prior to joining us, YJ served in key risk management positions with several global…

Thank you, YS. I'll now go through our second quarter results and provide more details on our operations. Please note that all numbers are in renminbi terms, and all comparisons are on a year-over-year basis unless otherwise stated. The second quarter was both a difficult and [indiscernible] time for the economy and our business. Difficult for our business in terms of needing to be very selective in new growth while facing increased credit costs resulting mostly from COVID. Steadying is that our early-stage risk indicators peaked in April and are now showing size of recovery while we continue to pursue ongoing improvements in our operations. Through this period we've remained committed to providing inclusive funding solutions to small business owners with 86.1% of new loans sales distributed to small business owners, up from 77.6% in the same period last year. However, our committed stance on prioritizing quality over volume for the last several quarters resulted in second quarter total income growth of 3.1% year-on-year. We have taken a firm stance on cost control, with total second quarter expenses, excluding credit and impairment losses and other financial costs and losses declining 11% year-on-year. Nonetheless, the increase in credit losses, where we directly bear risk through our guarantee company, led to a profit decrease of 37.9% in the second quarter versus a year ago. Our net profit in the first half decreased by 15.2% versus a year ago. While these results are clearly below the expectations we set for ourselves at the beginning of the year, we believe our strategy provides protection on the downside that will allow us to adjust quickly as the macro environment gradually recovers. Now let's take a closer look at several of the core drivers for our business model and operating performance. As YS just mentioned, first,…

Thank you, Greg. I will now provide a close look into our second quarter results. Please note that all numbers are in renminbi terms and all comparisons are on a year-over-year basis unless otherwise stated. Our total income for the first half grew by 8.4%, in which the total income for the second quarter grew by RMB 416 million or 3.1% year-over-year. Our total expenses for the first half grew by 24.1%. The increase in the total expense is primarily driven by the significant increase in impairment costs and also foreign exchange revaluation losses due to U.S. dollar appreciation. While our operating-related expenses actually decreased by 11% due to operating efficiency and optimizations. Net profit for the first half decreased by 15.2% and the same quarter net profit decreased by 37.9%. Next, let me highlight some of the key changes in the financials. First of all, we still achieved positive top line growth amidst a very difficult second quarter for China. Total income increased by 3.1% in the second quarter year-over-year or 8.4% in the first half. As we have advocated for building up a more sustainable business model, the total income mix of our retail credit facilitation business continued to evolve. During the second -- during the quarter, while platform service fees decreased by 23.1% to RMB 7.4 billion, our net interest income grew 55.3% to RMB 5 billion, and our guarantee income grew by 117.3% to RMB 1.9 billion. As a result, our retail credit facilitation platform service fees as a percentage of total income decreased to 45.2% from 62%. And as the trust funding model provides significantly longer funding cost, in particular in the [indiscernible] model. We continue to utilize them more in our funding mix, whereas the respective accounting treatment of revenue under this model is…

[Operator Instructions] Our first question is coming from Meizhi Yan from UBS.

My question is on asset quality. Greg mentioned that the flow rate seems to have bottomed out. And what's the recent trend in July and August? And given the Chinese economy, it doesn't look like it's going to improve much in the next few months or in the near term. What's your expectation then in the second half of this year for our asset quality?

Okay. So your question about asset quality, Meizhi. So we said, if you look at our C-M3 monthly net flow rate, it picked in April at 0.83% and decreased down to 0.61% in June. So we strongly believe the worst time is already over. However, we understand the current macroeconomic situation environment is not as good as back in 2020. So we take very prudent stance. And we anticipate that the return to normalized C-M3 flow rate's previous levels will require a more extended time. And it might stay at a relatively high level throughout this year. So we estimate the overall asset quality will remain at current levels in the second half as it relates to our credit impairment cost.

Can I follow up a bit?

Sure, sure. Please go ahead.

Yes. And I understand that I think the overall market concern has been on the property sector. I don't know if your -- maybe that has anything to do with the secured portfolio. I understand the secure portfolio is probably 20% or less of the total. But has the property sector situation impacted your asset quality at this point?

Actually, we have -- we don't see much impact from the secured portfolio. It takes about -- as of today, it takes about 20% of total loan balance. We have house secured loans. And then for that loan, our [APP] is not more than 70%. And then -- so from the house, the property market, that impact, actually we don't have any [indiscernible] from the secured loans.

Our next question comes from Chiyao Huang from Morgan Stanley.

So I got two questions. The first is, how do management see the current COVID control measures are impacting the underground operation of our direct sales? And second question is also about asset quality. Just wondering what the -- what are the active proactive measures we are taking to defend the asset quality currently.

Yes. Regarding, answering your first question about that, our ground force, the operation, you are well aware we have so-called offline/online [indiscernible] operational process. So during the COVID control period, our customers they have no problem to apply for loans through online app. So we don't see any barriers in loan application and underwriting procedures during -- even during the COVID control time. And then we are taking quite many corrective measures to cope with the arising concerns on the credit environment. So we tightened our underwriting policy very much, quite much starting from last year end and then continuously through the first half this year. And then as a result, our sales volume actually didn't increase. But if you look at it, it's mostly operated by our live agent Ping An channel, they decreased much. But if you look at our direct sales, I want to emphasize they still make positive growth. And then, more importantly, despite we tightened our automation policy much. Actually, their acquisition volume increased by almost 20%, right, so which -- where indicates market demand is still there. So as soon as we are ready, as soon as we see that the overall economy is turning better then we believe we have enough capacity to start our growth again.

Our next question comes from Yi Wu from Bank of America Security.

So just want to follow up on that. Since the second quarter lockdown, how do the company see the demand from the SME segment? And let's say, if China stays with this 0 COVID policy in the next 1 to 2 years, will that change your midterm loan growth target, right? Previously, I think the company is looking for generally the double-digit teens sort of the sustainable growth. If the 0 COVID doesn't change, will that impact your target? And also, is there any like sensitivity analysis you've done? Every 1 percentage point change in loan origination, how will that impact the net profit growth for the following 1, 2, 3 years?

Okay. Thanks. Our market demand, I want to say one more time, the overall market demand is now concerned because, yes, we all know that the overall market demand on loan from SBO segment are not as strong as before. That's true because they don't want to invest in the business expansion in this time. However, we also know that our market share is nearly about 1%. And then, as I just mentioned, if you look at our acquisition volume of direct sales channel, it increased [indiscernible] increased despite really reduced target market much. It increased by almost 20% in the first half. So the demand is there. We don't have any concern. Anytime we have more comfort on the credit environment, we can grow and then can deliver higher sales volume. And then your question about that, the sensitivity. This is quite -- yes, simply put, if you look at -- if you compare our annual ending loan balance, so loan balance at the end of December 31 every year and then compare that number with our new loan sales in that year, it's very close, it's very close. And then you know that loan balance -- average loan balance is a key driver of our net margin, net profit. So 1% sales volume drop, it means roughly 1% balance swap. So assuming there is no unit economics change, it means it's a 1% profit drop. And other questions.

Yes. No, I think just to follow up, the thing that I would emphasize is -- if you look at, as YS said, we really started to tighten credit kind of end of the third quarter last year and then more significantly fourth quarter. And then we had the transformation on channels with the change in thing on life. If you fast forward to today, over the last two quarters we've really been self-imposing restriction on our growth because if we're not comfortable with the credit quality, what we're really doing region by region is cutting out what we view to be the highest potential risk customers. And so if you look at what's going on today on the ground, two things are happening. One is the new customers that we do in regions that we do choose are of higher quality today than they were six months ago. So the key factor for us is the judgment on timing, right. We have more than enough funding, we have more than enough capital. We have full confidence in our credit models, but we need to be comfortable that the macro environment justifies putting our foot back on the gas. And we have our foot on the gas in probably about 2/3 of the regions today where we actually think there hasn't been as severe COVID impact and where we think the dynamics are right to do so. But there is a 1/3 of the regions that we're being very cautious on today. And so that's how we're planning it out. So to your question around if COVID policy continues for the long term, they will continue to have to be selective on credit quality, will have to continue to be selective on region. But if we do look at the third quarter now compared to where we were 3 months ago, it is better, right? It is clearly better from the time of the Shanghai lockdown and surrounding regions. But we'll continue to have to look at it region-by-region, quarter-by-quarter.

So on the year one, year two profit impact, I think my question was more about because of the delay, because the revenue was booked throughout the life cycle of the loan, so the slowdown this year will probably have a delayed impact. So how is that spread impacting next year or year three as well?

Yes. So there's clearly a roll-on effect of this, right? I mean, if you add less to your portfolio this year, then your base for next year gets somewhat impacted, that's for sure. But generally, the way we look at this business is on each new loan, new economics over a two to three-year period. And so if we're comfortable with that, it's really a question of then how much do you add year-by-year or quarter-by-quarter, and then you can really project down the road. So there is no question that -- you can see that our revenue growth through the second quarter this year was 3%, and that's because of actions we started to take 3 quarters ago, right? And so we will have to be a bit more prudent in our guidance around the medium term. But I think that when we look about kind of more medium to long term, it's really finding the right time to reengage and then you kind of know what the path is from there.

Our next question comes from [Yada Li] from [CICC].

I'm Yadav from CICC, and we have two questions for today. The first one is about the insurance cost. I'd like to know that what is the trend of our insurance cost in 2Q '22 and how to view the trend in the next two quarters? And if the pandemic repeats and when we see the macroeconomic uncertainty intensifies, how can we ensure that we have enough, the insurance partners to provide the credit enhancement. And the second one is about, we adopted a prudent business development strategy this year, and however when the business growth is not our primary goal, other changes to our direct selling teams through team work and how to control the operating cost brought by a large direct selling team at this stage.

Okay. Thank you, Yadav. I guess your first question is about the insurance cost. Yes, as we all know, insurance itself is a risk business. I do and we all trust our insurance partner, the ability and the know-how to price risk in the long-term and sustainable perspective. Of course, short-term volatility in credit risk do exist and it do add volatility in our insurance costs. But I think in the long term you get normalized bidding to our business model. What I want to emphasize is that at Lufax we have established quite an extensive credit enhancement sharing mechanism with our partners. Looking at quarter 2 as an example, we take 22% of risk from our new sales and only less than 70% of the risk is taken by our insurance partners. Our reliance on property insurance has been reduced to less than 7%. And second, we do have sufficient capital to increase our self-guarantee ratio and further reduce the pressure on credit enhancement or the pressure on the uses cost. And just to mention and emphasize again, our guarantee company's leverage ratio is only 2x, but the regulatory requirement can allow us to go up to 10x. And we are currently considering to further increase the self-financing ratio to probably first, say, in the medium term and when we feel timing is appropriate. So this is my comments on your first question. And I don't see any issue to have our insurance company partners to continue to [work above] because we are building up this business relationship and partnership for a very, very long-term perspective. The second question I think is about with the changing of our business development strategy, what kind of changed our [VF] team in terms of the routine work and what is the impact to operating costs. I think our core duty of our VF team hasn’t primarily changed at all. It still remains the core for business customer acquisition, but we are actually adding more context to them in building stickiness with our small business owner customers and to know more about them on the risk to help us better price our customers. So we do expect them to cooperate with the collection team to communicate and build more connections between the customers. And I think -- I don't think it will take too much time to help them, and it won't incur additional cost as well. In terms of the cost, as you will know and as all know, our cost structure is very flexible. Our commission-based structure allow us to be resilient in tough times and have energy to source, to fuel business in good times. So I don't think we have extra burden for us for our cost, and you already see a kind of rate optimization in cost in the first half of this year.

Yes, Yadav, I would just add, on the specifics of the numbers, if you look, new loan sales year-on-year are reduced by about 15%. And then if you look at our direct sales headcount, we are down about 10% from the end of last year. So we -- but the reduction in the total sales force is coming mostly from removal of a middle layer of management. So our actual number of frontline people have not decreased by that much, which goes back to the point that YS has made, which is the total amount of new loan growth from VF has actually increased year-on-year for the first half. So while we've optimized the structure of the sales force, what they do hasn't changed, but their productivity has actually been improving while, we've maintained an overall headcount control through the way we deploy those resources. If you actually look through the second quarter, sales and marketing expenses are optimized versus a year ago by about 19%. So as the volumes change, we are adjusting our expenses accordingly. And so I think we're in quite good positioning for our overall cost optimization. And the only issue that we have to deal with, I think, in the next two quarters is our insurance partners where there's more than enough capacity will price up because of the changes in the first half. But this is something that's rolling on a quarterly basis. So as the risk flows through, as we move in towards next year, then there will be repricing again. So overall, we've been showing quite a bit of flexibility on that front.

Thank you. I will now hand over the time to management team for closing remarks.

Okay. So this concludes our second earnings conference call. And thank you all for attending this call. Thank you.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.