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PPDAI Group Inc. (NYSE:PPDF)
Q2 2019 Earnings Call
Aug 20, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen. Thank you for participating in the Second Quarter 2019 Earnings Conference Call for PPDAI Group, also known as Paipaidai. [Operator Instructions]

I'd now like to turn the conference over to your host, Mr. Jimmy Tan, Investor Relations Director for the Company. Jimmy, please go ahead.

Jimmy Tan -- Head of Investor Relations

Hello, everyone, and welcome to Paipaidai's Second Quarter 2019 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 distribution list by visiting the IRR section of our website at ir.ppdai.com.

Mr. Cliff Zhang, our Chairman and Co-Chief Executive Officer; Mr. Feng Zhang, our Co-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 measurements are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with US GAAP. For information about these non-GAAP measures and reconciliation to the GAAP measures, please refer to our earnings press release.

Before we continue, please note that today's call will contain forward-looking statements under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company's results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in the Company's filings with the US 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 our results for the quarter.

I will now turn the call over to our Chairman and Co-CEO, Cliff. Please go ahead.

Jun Zhang -- Chairman and Co-Chief Executive Officer

Okay. Thank you, Jimmy. Hello, everyone, and thank you for joining our second quarter 2019 earnings conference call today. During the second quarter, we continued our focus on driving healthy results and maintaining robust and above-standard regulatory compliance. Our solid growth momentum amid a dynamic and volatile market environment reflects the constant demand for technology-driven consumer finance services in China. We are particularly pleased with the following metrics for the quarter.

Firstly, our institutional funding base showed a continuous progression translating into a 29% year-over-year and 13% quarter-over-quarter increase in our total loan origination volume, which reached RMB21.6 billion. Secondly, our operating revenue achieved a 47% year-over-year and a 7% quarter-over-quarter increase. And thirdly, our dedicated efforts to grow both our user and borrower basis continued to show encouraging results as the number of registered user exceeded 99 million and the number of cumulative borrowers exceeded 16.5 million at the end of June.

Investment in technology and artificial intelligence is at the heart of PPDAI. By leveraging our technologies as a service offering, we are enabling our institutional partners in consumer finance and creating deeper relationships with our partners. The rapid uptake and acceptance by external third-party financial service providers reaffirms PPDAI's presence as a leading consumer finance marketplace with strong technology -- technological capabilities. We are also extending our technologies and our capabilities to overseas markets, and have started to operate in Indonesia and the Philippines this year, with plans to explore other Southeast Asian markets.

Looking ahead, we will remain committed to expanding our core strengths while placing a sharp focus on our business strategies. We expect PPDAI to continue to capture the enormous potential in the consumer finance market, both domestically and abroad.

Now, I'd like to pass the call over to our Co-CEO Feng to discuss on an update of our business.

Feng Zhang -- Co-Chief Executive Officer

Thank you, Cliff, and hello, everyone. We are thrilled by our second quarter performance that not only illustrates the sustained market demand, but also our high resiliency supported by a vibrant user base, diverse funding structure and a structure -- and a strong technological capability. As Cliff mentioned, we remain confident in our ability to deepen the diversification in funding sources and extend our institutional funding partners, driving healthy growth in the long term. As all of you are aware of, the diversification of our funding has been a major strategic initiative for us over the past year. This funding transformation has been rapid.

In the second quarter, 45% of our loan origination volume was funded by institutional partners, up significantly from 10% in the same period a year ago, and a further increase from 31% in the previous quarter. The proportion of institutional funding further increased to 53% in July. We now have more than 20 institutional funding partners active on our platform. This has enabled us to deliver a steady growth in low volume quarter-by-quarter, and our low volume in the second quarter is nearly 30% higher than a year ago.

The profitability of our loans funded by institutional partners is healthy. In the second quarter, 40% of our operating revenue came from loans funded by institutional partners, a significant increase from 24% in the first quarter.

Now, turning to credit, delinquency rates were generally stable in the second quarter and continues to perform within our expectations. If you look carefully at our vertical delinquency rates at the end of June, you will see that there have, in fact, been small improvements versus the previous quarter and the delinquency rates are mostly -- actually the lowest levels since September 2017, thanks to our strong and effective risk management. We expect delinquencies to remain stable in the near term.

Turning to regulations, there continues to be uncertainty in regulations, specifically on P2P registration process. It is uncertain whether there will be a registration process, and if so, when it will happen. As most of you are aware, we have been adhering to the government's triple decline policy since the beginning of the year. This refers to the monthly reduction in the outstanding loan balance, the number of investors and the number of borrowers for part of our business that is funded by individual P2P investors.

In the coming months, we plan to set up -- we plan to step up our implementation of the government's triple decline policy and we expect the loan origination volume funded by individual P2P investors to decline more significantly than in the first half of the year. We will continue to accelerate our strategy to extend our funding from institutional sources. The momentum and outlook are strong. Credit commitments from our institutional partners totaling over RMB45 billion. In the first half of 2019, RMB15.6 billion of loan originations were funded by institutions, and in the second half of 2019, we expect loan originations funded by those partners to be in the range of RMB32 billion to RMB38 billion implying at least double that in the second half of the year versus the first half.

Despite the expected decline in P2P funded loan origniations, we still expect our total loan volume in the third quarter to be in the range of RMB22 billion to RMB24 billion, representing moderate quarter-over-quarter growth, and we expect roughly 70% of such loan originations to be funded by institutional partners. We believe there continue to be a certain degree of fluidity and uncertainty in the regulatory environment. So it is hard to say how much more decline there will be with any great certainty.

I want to emphasize that P2P funding from individuals is becoming less and less important, as we continue to accelerate our strategy to diversify our funding sources. We are confident in our ability to achieve these targets given our proven technologies and end-to-end capabilities to support financial institutions from customer acquisition, risk assessment to loan servicing and collections, our skill and experience with 99 million registered users, over 16 million cumulative borrowers, and the 12 years that we have been in this business, and our strong management team and ability to execute.

Looking forward, consumer finance in China remains a large and underpenetrated market. The market demand is huge and we are confident in capturing the potential of this vast market.

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

Simon Tak Leung Ho -- Chief Financial Officer

Thank you, Feng and hello, everyone. We are delighted to have achieved solid operational and financial results in the second quarter as lending volume steadily increased, underscoring the strength of our markets and the growth trajectory of our business. In particular, our operating efficiency and profitability continued strong momentum highlighted by a 60% year-over-year increase in non-GAAP adjusted operating income and a healthy non-GAAP operating margin of 50%, thanks to our effective cost control.

Our balance sheet remained solid with approximately RMB2.4 billion of cash and short-term liquidity. Notably, our quality assurance fund remains efficient with a total balance of RMB5.8 billion, equivalent to 22.5% of the total outstanding loan principal and interest with quality assurance. Our results demonstrate the strength and resilience of our business model and our ability to navigate changing market dynamics.

Now, let me briefly go over the financial results for the second quarter. In the interest of time, I will not walk through each item line-by-line on this call. Please refer to our earnings release for more details.

Operating revenues for the second quarter of 2019 increased by 47% to approximately RMB1.6 billion from RMB1.1 billion in the same period of 2018, primarily due to the increase in loan facilitation service fees, post-facilitation service fees and interest income from loans invested mainly through trusts. Loan facilitation service fees increased by 25% to RMB940 million for the second quarter of 2019 from RMB753 million in the same period of 2018, primarily due to the increase in loan origination volume. Loan facilitation service fees from loans funded by institutional funding partners were RMB378 million in the second quarter of 2019. Post-facilitation service fees increased by 53% to RMB316 million for the second quarter of 2019 from RMB206 million in the same period of 2018, primarily due to the increase in loan origination volume and the rolling impact of deferred transaction fees. Post-facilitation service fees from loans funded by institutional funding partners were RMB55 million in the second quarter of 2019.

Net interest income and loan provision losses were an income of RMB195 million compared to an income of RMB18 million in the same period of 2018, mainly due to increased interest income from the expansion in the outstanding loan balances of consolidated trusts.

Non-GAAP adjusted operating income, which excludes share-based compensation expenses before tax, was RMB779 million for the second quarter of 2019, representing an increase of 60% from RMB487 million in the same period of 2018.

Other income was RMB46 million for the second quarter of 2019, compared with RMB297 million in the same period of 2018, primarily due to a decrease in the gain and quality assurance and returns from short-term investments.

Income tax expenses were RMB153 million for the second quarter of 2019, compared with RMB158 million in the same period of 2018.

Net profit increased by 8.7% to RMB661 million for the second quarter of 2019 from RMB608 million in the same period of 2018.

Before I hand the call over to Q&A, I'd like to conclude by emphasizing a few points regarding our funding transition. We expect institutional loan volumes to at least double in the second half of the year versus the first half and the revenue margin of loans funded by institutional partners is only slightly lower as shown by the fact that revenue contribution from institutional funding is 40% of total revenues, a slightly lower proportion versus the loan volume contribution from institutional funding of 45% in the second quarter.

Finally, over the past year, despite the changes and challenges to the industry, we have continued to deliver consistent performance. So in conclusion, we are confident in our ability to navigate this transition and changes in the industry. And the long-term opportunity in China's consumer finance market is huge. Our core capabilities position us well to enjoy the benefits of this vast opportunity.

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

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question today comes from John Cai with Morgan Stanley. Please go ahead.

John Cai -- Morgan Stanley -- Analyst

Hi, good evening, Benjamin [Phonetic]. Thank you for taking my questions. I have three questions. So the first one is about the make-self institution and retail funding. So can you disclose it by balance? How many balance -- outstanding balance funded by institution versus retail? And in terms of balance, what kind of the expected loan balance funded by P2P toward the end of the year? And related to that, it's on the economics of institution and the retail fund, and it seems the take rate is similar, because the portion from institutional funding in terms of loan volume and the revenue contribution seems similar. So my understanding is that the products are different, so maybe just can you provide more colors on the economics?

And the second question is about customer acquisition. I noticed that origination service and expense, and sales and marketing pick up on a sequential basis. Can the management share more about the customer acquisition efforts and the costs?

And the final question is about some trends. So I noticed that customer acquisition picked up and then -- but the repeat ratio or the repeat borrowing ratio also picked up and the average ticket size declined sequentially and also the tenure also declined. So I just wonder -- my understanding is that if we lend more to the new borrowers potentially, the ticket size and tenure might decline, but it seems that repeat ratios is telling the other story. I just wonder if there is any underlying reasons behind that? Thank you very much.

Simon Tak Leung Ho -- Chief Financial Officer

Sure. John, let me try to attack some of those -- address some of those questions. In terms of the loan balance, our peer-to-peer -- sorry, our institutional loan balance at the end of the June quarter was roughly around RMB12 billion. This was up about maybe 70% on a quarter-on-quarter basis. And our peer-to-peer balance at the end of the year was close to -- sorry, in June, was close to about RMB20 billion -- just under RMB20 billion, OK. That just gives you an idea. We haven't quite extrapolated all that till the end of the year. But I think you're pretty good at your math. So you might be able to do some very -- very well educated guesses, given the volume guidance we've just provided.

Now, in terms of the -- your questions about -- obviously, I'm going to jump around to customer acquisition costs. The customer acquisition cost in the second quarter, you're right, did increase somewhat. On average, it was about RMB190 per new borrower in the second quarter. This increase versus the first quarter was due mainly to the shift in the borrow mix toward the higher credit quality segment, which we've flagged before and this is in line with the strategy and our focus, and this segment has somewhat higher acquisition costs.

But overall at about RMB190, this is still a relatively low level compared to our peers. Going forward, we do expect customer acquisition costs to somewhat increase as our borrowing base continues to shift toward this higher credit quality segment. You did mention about our ticket size and our loan tenure. Our ticket size declined a little bit on the quarter on average, mainly because the proportion of repeat loans went up in the quarter as you highlighted. And the ticket sizes for repeat loans tend to be a bit smaller than first-time loans. Some of these, as you know, may be just top-up loans utilizing unused credit limits. So there is a bit of an influence there.

The loan tenure shortened very slightly during the quarter, and from what I can see where I can see it, it's mainly because certain -- some institutional partners that we were servicing preferred shorter, a bit shorter tenure. So -- but there's really no change in our strategy in either of these areas.

Now, with regards to your second question, John, you mentioned about take rates, economics, institutional retail being not too different, what specifically did you want to know more about?

John Cai -- Morgan Stanley -- Analyst

Yeah, so probably just can you give us some -- like waterfall, the gross customers pay in, deduct by a funding cost and probably some estimated credit cost? Yeah, so sort of the product difference. Yeah.

Simon Tak Leung Ho -- Chief Financial Officer

I think -- let me put it this way, John. I mean, we could obviously go through a lot more details afterwards. I think if you compare the profitability of our institutional funding business versus sort of the P2P side, there are a few differences to take in mind first. One is, there is a bit of a borrower profile difference. The borrowers that are funded by institutional funds tend to be at the better credit quality end of our range of borrowers that we service. So, the expansion in our institutional funds means we are extending into borrowers with better credit quality. And generally speaking, we do offer lower borrowing rates to the segment, but they also have lower delinquency rates.

In terms of profitability, as we've mentioned before, there is obviously some small difference, but not hugely different from our overall profitability. And you can see this, obviously, by comparing those ratios I've given of contribution of loan volume versus revenues.

And I think overall, if you look at our institutional funded business, I would say that we would think that the overall profitability of the segment will be quite similar to other online lending platforms that are currently funded by -- mainly by institutions. And I think the ROAs that we eventually -- that we generate from this part will be pretty similar, I think, with other players in this space as well. So probably in the sort of 5%, 7% mid-to-higher single-digit level ROAs, which I think is a very respectable and attractive level for a consumer finance business.

John Cai -- Morgan Stanley -- Analyst

Thank you. That's very helpful. So if I may follow up on the institutional funding. I just want to know what would be -- any balance sheet impact? I understand the [Indecipherable] we really need to consolidate it there. But for -- we have RMB12 billion [Phonetic] institutional fund and then the trans [Phonetic] is roughly at around RMB5 billion. So I just wanted to -- the rest RMB7 billion, whether we have any guarantee liabilities that would need to take on the balance sheet for the institutional funding? Thank you.

Simon Tak Leung Ho -- Chief Financial Officer

So you're referring to the treatment of the credit risk, right, for the institutional business. So no, the remainder of the non-trust part of our institutional funded loans do not sit on our balance sheet. They -- where we do give sort of credit -- some sort of, we call it risk assurance, a credit assurance protection, it is accounted for in the same way as what we do for the quality assurance fund. It is under guaranty accounting. It's considered a guarantee liability on our balance sheet, and you'll see that together at the moment, with the quality assurance fund payable and quality assurance fund receivable on our balance sheet.

John Cai -- Morgan Stanley -- Analyst

Thank you very much.

Simon Tak Leung Ho -- Chief Financial Officer

Okay. Thanks, John.

Operator

And our next question comes from Daphne Poon with Citi. Please go ahead.

Daphne Poon -- Citi -- Analyst

Hi. Thanks for taking my question. So I have a couple of questions on the institutional funding side. So first is about the mix of the funding partners that you have. I would like to have an update, like in terms of how many are from trust versus how many are from maybe banks and the other consumer finance companies?

And also, we noticed that the take rate for your institutional funding loans was up slightly quarter-over-quarter. So I wonder what would be the drivers behind, and maybe more specifically, the institutional funding costs was to trend over the past quarter?

And lastly is that, you mentioned earlier that you have about RMB45 billion in terms of credit commitment on the financial institutions. So does that mean that you can actually, like fully replace your P2P funding with these institutional funding that even in the worst case that there's no P2P registration at all? And I'm not sure like whether there would be any hurdle again in preventing that. So that's my question. Thank you.

Simon Tak Leung Ho -- Chief Financial Officer

Okay. Thanks, Daphne. In terms of the breakdown and the mix of our institutional funding, currently the majority of our institutional funding comes from commercial banks and consumer finance companies. And we will continue to focus on working with banks and consumer finance companies. As we said, in total, we have over 20 institutional funding partners active with us. I would say roughly around half of those are commercial banks and consumer finance companies, OK.

The institutional funding cost trend, currently it's between around 10% to 11%. The demand that we see from institutions remains strong and we do see room going forward for the lower funding costs from institutions, OK. And the take rate for the institutional --- for the quarter-on-quarter -- I don't know how you calculate, but I mean, from where we're sitting, it's obviously it's largely similar. It hasn't changed much on a quarter-on-quarter basis. So that might just be the way things are accounted for, or you know, you might be looking at the trusts as well, which there's a lag, in fact, coming in.

With respect to the RMB45 billion credit commitments, I think we're pretty confident in it and achieving what we set out to achieve. And so far the performance of institutional funding has been beating up expectations every quarter.

Feng Zhang -- Co-Chief Executive Officer

Yeah. This is Feng. I would just add to the first question. You know, the way we are looking at it, we would expect in the third quarter, the volumes from institutional funding will be accounting for about 70% of our total loan origination volume and this percentage will continue to increase fairly quickly toward the end of this year. So, yeah, to your question, we're fairly confident even in the -- in a possible scenario that the registration of P2P doesn't happen, we think the impact to us is going to be fairly limited and manageable.

Simon Tak Leung Ho -- Chief Financial Officer

Daphne, does that answer your questions?

Daphne Poon -- Citi -- Analyst

Yes, yes. That's very helpful. Thank you.

Operator

And our next question comes from Alex Ye with UBS. Please go ahead.

Alex Ye -- UBS -- Analyst

Hi, good evening management. Thanks for taking my questions. So my first question is about the peer-to-peer funding. So, in opening remarks, you just mentioned that in the second half, the Company is going to execute the triple decline more vigorously, and -- so I wonder what was the reason for that? Is it due to the regulatory requirements or is it because we are proactively shrinking our P2P balance, and I wonder what's our future strategy on this?

And my second question is about the institutional funding part. So, obviously we are looking at very strong growth in the second half with a doubling of the loan volume funded by institutions. So I want to know what's the underlying driver for that? How are we going to achieve that? So are we expecting more funding to connect with that, funding partners connect with us, or are we just -- need to ramp up our current credit lines and that's enough to take us there?

And finally, I wonder if you could give us an update on your latest pricing trend on integration and any shrink in your product strategy? Thanks.

Simon Tak Leung Ho -- Chief Financial Officer

Sure. Alex, thanks for your question. With regards to the triple decline, clearly, there's been as you've read and been aware, this has been the government's policy since the beginning of this year. We -- obviously, we do have an active regular communication with regulators. And obviously, we believe that at the moment there is still a certain amount of uncertainty and fluidity as we have been guiding -- we've been emphasizing, but the right way to go is to continue and to more strictly implement this triple decline. But again, if there's any more significant -- anything significant to update, we will come back with that, right. This is what we know at the moment. But as Feng mentioned, P2P funding is becoming a less and less important part of our overall business and they will become pretty much a minor part by the end of this year.

Maybe I'll hand over to Feng to talk about the institutional growth and the credit commitments and what drives our confidence and outlook?

Feng Zhang -- Co-Chief Executive Officer

Yeah, sure. I think -- as we disclosed that right now, at this point, we have about 20 active partners and the [Indecipherable] approved by these partners totaling RMB45 billion. So that essentially means, that is actually more than what we expect to issue the volume that we need from institutional partners for the second half of the year. But I don't think we stop there. We have a very healthy pipeline for institutions and we think we're going to continue to expand the base of our institutional partners, and we'll continue to expand total credit line extended to us by our institutions.

Simon Tak Leung Ho -- Chief Financial Officer

Yeah. And Alex, finally, on your question about pricing and the take rate. As we guided on our previous call in -- for the first quarter, we did say our take rate, which is that we used to disclose that's mainly for -- mainly applied to the P2P funded -- retail funded part of the business. That take rate will return to more historical normal levels in the 6% to 7% range as we focus more on borrowers with better credit quality and strengthen our cooperation with institutional funding partners.

What we did in the second quarter -- early in the second quarter was, we did lower borrowing costs where we thought they are deserved in order to meet the requirements for our institutional partners, and also to obviously, achieve our mission of wider, bolder financial inclusion. And as a result, this take rate in the second quarter did decline. It fell to 6.4% in the second quarter compared to 7.7% in the first quarter, because of these pricing changes and adjustments we implemented into the second quarter. But from here going forward, we expect this takeaway to be relatively stable in the near term. So, I hope this answers your question. Does it? Alex? Is this OK?

Alex Ye -- UBS -- Analyst

Yeah, thanks. I have no further questions.

Simon Tak Leung Ho -- Chief Financial Officer

Okay. Thank you.

Operator

And our next question comes from Sanjay Sakhrani with KBW. Please go ahead.

Sanjay Sakhrani -- Keefe, Bruyette & Woods North America -- Analyst

Thanks. Just some follow-up questions. I guess, on the institutional funding, that commitment that you have for RMB45 billion, what's the duration of that commitment? And I guess, are you guys thinking about sort of longer-term funding sources outside of -- sort of the shorter-term stuff that you've done thus far?

Simon Tak Leung Ho -- Chief Financial Officer

Yeah, Sanjay, I think typically if we look at the structure for institutional funding, they tend to be, minimum of 12 months. They tend to be further -- longer than 12 months plus in tenure and duration. And given the ramp up of our institutional funding, which we really started ramping up big way over the last 12 months, I think a lot of this is -- a lot of these commitments are pretty new commitments that have come on to the books in recent months. And obviously, you've been tracking us for a while. This progression that we've seen in institutional funding, I think, has been accelerating on a quarter-on-quarter -- quarterly basis.

In terms of longer-term funding, it's clearly something that we love to have and we continue to explore. Clearly, there are certain limitations within the Chinese markets. I'm happy to sit down and walk through those with you in more detail. But suffice to say that, if the options become available, we would definitely not -- we would definitely consider using them.

Sanjay Sakhrani -- Keefe, Bruyette & Woods North America -- Analyst

And as far as the QAF, sort of, like how relevant is it going forward? I mean, is that still being used for even the institutions, or should we expect that to decline over time?

Simon Tak Leung Ho -- Chief Financial Officer

The QAF, a large part of the QAF, mainly services at the moment, relate to the retail P2P funded part of the business. So if that retail P2P part of the business declines, then in relative terms that -- it will also decline in the QAF. So among the institutional funding that we do, there is some QAF in there. So the buffer is not as large as what we have for, P2P -- retail P2P investors. So there is going to be a mixed effect that will play through, but largely it will continue to be relevant going forward.

Sanjay Sakhrani -- Keefe, Bruyette & Woods North America -- Analyst

Okay. I guess, final question. You know, we've heard obviously the economy is mixed around the world and in China. I mean, it's interesting that we're not really seeing that in your credit metrics. I mean, is that partly because you're going up market or is it that you're seeing relative strength within your portfolios, generally speaking?

Simon Tak Leung Ho -- Chief Financial Officer

No, I personally think it's partly the nature of the segment we service, our internal risk management ability. And if you look at our numbers, we haven't seen a huge impact coming through from the softening of the economy and all that. And I just want to highlight, if you look at our credit numbers, delinquency numbers, the context of this over the last 12 months, it is that we've been through a lot of volatility in this industry from the pretty severe credit cycle we saw at the end of 2017, early 2018, we had the closure of a significant number of P2P platforms over the past 12 months, over 1,000 P2P platforms closed down, and we also had put up quite a bit of a liquidity squeeze in the last summer and periodically. So we've been through a lot. And I think it's also a testament of obviously our own ability at the same time.

Sanjay Sakhrani -- Keefe, Bruyette & Woods North America -- Analyst

Yeah, absolutely. And I guess I'm sorry, one final question. On the regulatory process, when do we know in finality, your guess to which direction this will go? And has anyone else in the market gotten close or even -- is operating any -- under any license or any purview on the peer-to-peer side?

Simon Tak Leung Ho -- Chief Financial Officer

No. I don't think -- we're not -- I don't think any platform has gotten any license or registration as you suggested. And in terms of the timing, I think it's -- again, it's not certain from where we sit and it's fluid. And we just have to keep in touch and we'll keep you updated.

Feng Zhang -- Co-Chief Executive Officer

Yeah. I agree with Simon. This is Feng, Sanjay. I'm with Simon. We don't know for sure whether this will happen and if so, when. But I think -- I want to reemphasize, as I mentioned, that we would expect that by end of this year, the proportion of the P2P funded loans, loan originations is going to be accounting for a very small percentage of our total organization. So by that point, and I think whether this happened, is not going to be that important to us.

Sanjay Sakhrani -- Keefe, Bruyette & Woods North America -- Analyst

I appreciate it. All right. Thank you.

Operator

[Operator Instructions] And your next question comes from Tian X Hou with T.H. Capital. Please go ahead.

Tian X Hou -- T.H. Capital -- Analyst

Yes. Good evening, management. The question is related to a recent news. And so, the regulatory agencies asking P2P lenders to -- what that term is? You know access to certain government system and -- not access, it's tough to say. It means your system and government system has to be at -- your system has to be accessible by the government, something like that. So I wonder if the PPDAI has -- Paipaidai has already finished that? And the reason I ask for that, because in this government policy that they quote number like a 22 [Phonetic] something, they say if you are not -- bring your date in your system to their system, so you may not be able to practice P2P business. So it looks like really serious policy measurements. So that's the -- what my question comes from, just wonder what's the progress on that front?

Simon Tak Leung Ho -- Chief Financial Officer

Okay, Tian. There's various systems that are required for P2P platforms to connect into government systems to be compliant.

Tian X Hou -- T.H. Capital -- Analyst

Yes.

Simon Tak Leung Ho -- Chief Financial Officer

And frankly, we comply to those and we are live and feeding data with all the systems that are required by us, I can tell you that. And that is not a reason in our case for rejecting any of our applications in our view. So we are connected to all those systems that you hinted. Yeah.

Tian X Hou -- T.H. Capital -- Analyst

That's very helpful. It makes me feel better. And then also this thing here is that you guys got lots of institution money and institution funding. So, I wonder what are those institutions? And so we saw some local bank like [Indecipherable] they have some problems. So I just wondered what kind of a institution you are teaming up with today and I just hope you guys not exposed to other people's risk? Thank you.

Sure. I think -- Tian, I think that's a great question. For -- let me just address a few things. Of course, for the consumer finance companies, clearly, they are -- they all belong to the nationwide consumer finance companies in the trust space. We work with basically all the leading trust companies that are active in consumer finance assets. For the banks, we do work with a number of city commercial banks and I think our concern is around there. We -- in terms of city commercial banks, we don't partner or work with any of the names that have been in the press lately, with their issues. And we do have criteria for selecting our bank partners. We look for those that have solid operating history, healthy financials, liquidity, capital adequacy. And at the end of the day, we do see still a lot of demand from this space, because there are still over -- even in the city commercial banks, smaller regional banks, there's 4,000 or over 4,000 of these city and rural commercial banks in China. And our balance sheet isn't that large relative to these names.

So I think there is still quite a lot of us -- room for us to expand and service these players. These banks are also fairly well suited to working with us, because at the moment, they don't have the sufficient capability to obviously, to do consumer lending. And therefore, they most need our services and support.

Okay. That's wonderful. Thank you.

Simon Tak Leung Ho -- Chief Financial Officer

Yeah. Thank you, Tian.

Operator

And our next question is a follow up from John Cai with Morgan Stanley. Please go ahead.

John Cai -- Morgan Stanley -- Analyst

Hi. Thank you for taking my questions again. So there's one ratio that I would like to follow up. In particular, it's related to the QAF projected on balance. I think now we have a QAF fund that's equivalent to 22.5% of the loans. I just wonder how do we see these ratios going forward? Because now it's -- I think it's a blended, or weighted average of institutional and retail. My understanding is that -- potentially there is room for this to decline because our institution and overall we are looking for better quality customers.

And another question about customer acquisition or growth actually, because also first of all, Feng you can you talk about the total customer acquisition costs that we spend this quarter? I think there's some sales and marketing and there's origination and servicing.

And then the second question is, what is the total cost we should expect going forward? Because it seems the acquisition cost is reasonable. And then the risk is to control above and we have sufficient funding, obviously, and it seems that we can spend more on customer acquisition to fuel growth going forward.

And I think the final question is about the -- maybe Plan B, because I think now we are moving to institutions and the other payers I heard they are trying to get some micro-loan licensed and just wonder, other than the loan facilitation or through the institution on this other, are there any other plan we are working in preparation of the potential no registration scenario for P2P? Thank you very much.

Simon Tak Leung Ho -- Chief Financial Officer

Yeah, Okay, John. Thanks for your questions. I think that in terms of the quality assurance fund, the coverage ratio, 22.5%, yes, I do think the future trend there will be lower. And exactly for the reasons as you mentioned, because of the mix effects, the fact that we're shifting toward a somewhat different segment of borrowers. But also to bear in mind that the buffer, the quality assurance fund buffer that we've had -- that we do have between individual -- P2P funding versus institutional funding is a bit different. The P2P funding historically has been very, very strongly over-reserved as you understand, right. And that's how we ended up winning over 20% coverage ratio, which is pretty, pretty, pretty big. Now -- so it'll come down, but I think we continue to maintain fairly prudent and conservative view on quality --on our quality assurance buffer and funds, right.

And then with regards to our customer acquisition costs, yes, you're right. There's -- the majority of our sales and marketing expenses, I think like maybe 80%, 90% of that is customer acquisition related and there's also some that is sitting in origination and servicing. And I recall from memory that maybe about 20% or so of the origination and servicing relates to, again, customer acquisition. So I think that'll help you just get a sense of the total amount that we're spending. I think the total amount we will spending would be similar in aggregate number to maybe the sales and marketing expenses we reported, and that as we build this business out, we will -- obviously we will need to spend more. But still, I think the long-term and lifetime value of the customers that we are getting and acquiring is still very, very profitable, as we mentioned earlier on the call about the profitability expectations for the institutional funded business.

And finally, in terms of the micro lending licenses and other licenses, I think we already have an Internet micro lending company ourself. But obviously, if we offered the opportunity for another one and we would definitely, certainly consider. So this is definitely one option down the road that we think will present itself. Yeah. But generally, we will keep an open mind and we will consider.

John Cai -- Morgan Stanley -- Analyst

Yeah. Thank you. So the total customer acquisition costs, how do we see that in the second half of this year? Any chance that it might go off significantly, because we want to go faster? Thank you.

Simon Tak Leung Ho -- Chief Financial Officer

I think if you -- it depends on obviously the overall growth. I think we are slowing down in the P2P side. We've guided toward pretty -- we've guided toward positive loan origination growth in the third quarter, but it's still obviously within moderate bounds and a likely similar situation, possibly in the fourth quarter as well. So we're not at the moment growing by 100%, you know, at that rate. So I don't think you need to worry -- overly worry about that and we'll try to keep good control over our overall costs.

John Cai -- Morgan Stanley -- Analyst

Yeah. I mean, I'm actually thinking that if the environment and that the acquisition efficiency is OK, it's probably OK to spend more? But yeah, it's just adds up to the Company. So thank you again for taking my six or seven questions in total. Thank you very much.

Simon Tak Leung Ho -- Chief Financial Officer

Thank you, John, for your interest.

Operator

And our next question is a follow up from Alex Ye with UBS. Please go ahead.

Alex Ye -- UBS -- Analyst

Hi. Thank you.

Simon Tak Leung Ho -- Chief Financial Officer

Hi.

Alex Ye -- UBS -- Analyst

Hi, Simon. So, I just had two quick questions. So first is so we have 20 funding partners active for now and 100 [Phonetic] on top of them thanks to all consumer finance companies, and we have RMB45 billion of credit lines. So I just wondered if we can have a comparative numbers in the last quarter so as to just have a sense of how much progress we have made in just the past quarter?

And my second question is on the loan volume of about RMB21 billion in the Q2 result. Could you give us a breakdown of that in terms of the recognition [Phonetic] by on and off balance sheet? Thanks.

Simon Tak Leung Ho -- Chief Financial Officer

So I think from the last quarter, we were probably looking at about, I think it was like 10-ish to 15-ish institutional funding partners. I might have to confirm that last quarter, 10 to 15. I think it was around there. We are now over 20. We're not at 20. We're over 20 by the way. I don't recall what the --- I don't recall what the credit line is for last quarter. Again, you're stressing me out, but I think the growth is pretty fast -- has been pretty fast during the quarter, right. If you look at the loan balance, that the outstanding balance of our institutional funding basically on a quarterly basis, we were growing at like close to 100% a quarter. So if you think about that type of rate, then, it'll be quite different three months ago, three months after.

And Alex, what is your -- sorry, your last final part of the question, I slipped my mind. Sorry, could you repeat that? Alex?

Alex Ye -- UBS -- Analyst

Yeah. Yeah. Hi, of the RMB21.6 billion of loan volume in the second quarter, right. So we have only 5% of that from institutions. So, I just wonder if you could give us a breakdown of that further into how much of them go -- that go through the on balance sheet and how much go to the off balance sheet? Thanks.

Simon Tak Leung Ho -- Chief Financial Officer

The only part of the institutional funding that goes on balance sheet is the trust, is the trust component and in the third -- in the second quarter, that component was roughly speaking about, maybe odd 30%-ish around there. The rest is off balance sheet. It's on another sheet. Yeah.

Alex Ye -- UBS -- Analyst

So just to confirm, is it 30% on balance sheet, right?

Simon Tak Leung Ho -- Chief Financial Officer

Yeah, yeah, yes, yes.

Alex Ye -- UBS -- Analyst

Okay, great. Thanks.

Operator

This will conclude our question-and-answer session. I'd like to turn the conference back over to the Company for closing remarks.

Jimmy Tan -- Head of Investor Relations

Thank you once again for joining us today. If you have further questions please feel free to contact Paipaidai Investor Relations through their contact information provided on our website or in our press release.

Operator

[Operator Closing Remarks]

Simon Tak Leung Ho -- Chief Financial Officer

Okay. Thank you.

Duration: 53 minutes

Call participants:

Jimmy Tan -- Head of Investor Relations

Jun Zhang -- Chairman and Co-Chief Executive Officer

Feng Zhang -- Co-Chief Executive Officer

Simon Tak Leung Ho -- Chief Financial Officer

John Cai -- Morgan Stanley -- Analyst

Daphne Poon -- Citi -- Analyst

Alex Ye -- UBS -- Analyst

Sanjay Sakhrani -- Keefe, Bruyette & Woods North America -- Analyst

Tian X Hou -- T.H. Capital -- Analyst

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