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CNFinance Holdings Limited (NYSE:CNF)
Q1 2020 Earnings Call
May 26, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and evening, and welcome to the CNFinance First Quarter 2020 Financial Results Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Simon. Please go ahead.

Simon -- Investor Relations

Thank you. Good morning and evening, and welcome to the CNFinance first quarter 2020 financial results conference call. In today's call, our CEO, Mr. Zhai will walk us through operating results, followed by financial results from our CFO, Mr. Li. After that, we will have a Q&A session.

Before we start it, I would like to remind you that this conference call contains forward-looking statements with the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expect, anticipate, future, intends, plans, believes, estimates, targets, going forward, outlook and similar statements. Such statements are based upon management's current expectation and current market and operating conditions and related to events that involve known and unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the Company's control, which may cause Company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in the Company's filing with the U.S. Securities and Exchange Commission. The Company does not undertake any obligation to update any forward-looking statements such as -- as a result of new information, future events or otherwise, except as required under law.

Now, please welcome our CEO, Mr. Zhai. [Foreign Speech]

Bin Zhai -- Chairman and Chief Executive Officer

[Foreign Speech] Thank you. Thank you all for joining our call today. We would like to report on the business operations and the financial results in the first quarter of 2020 and I will talk more about the impact of COVID-19 outbreak on CNFinance business, the challenges and potential opportunities it present. Later, I and our CFO will answer your questions.

[Foreign Speech] The impact by the COVID-19 pandemic, our operating revenue was RMB490 million [Phonetic] for the first quarter of 2020, adapting a prudent approach that a pandemic might drive up the size of the delinquent loans and NPLs. In accordance with U.S. GAAP, we recorded a provision for credit loss of RMB220 million. As a result, we recorded a net loss of RMB66 million during the quarter. It is worth noticing that the new collaboration model has reached a more mutual stage after being fine-tuned for a year. During the quarter, our loan origination volume reached RMB1.17 billion, representing an increase of 17% compared to the same period of 2019. The number of effective sales partners reached 742, representing an increase of 148% compared to the same period of 2019. At the same time, during the outbreak of this pandemic, our asset-backed operating loan business has shown strong capability to reduce risks even though the total loan origination in this quarter was short of our target set at the beginning of the year. The first quarter performance in loan origination under the pandemic is a testament to the facility and the advantage of our product, as well as new business model. These result is also in line with our new strategy of being aggressive in business and conservative in accounting.

[Foreign Speech] Now, I would like to discuss the impact of the pandemic, along with the measures taken by the Company to deal with such impact. Also, I will address the opportunities and -- the pandemic may present.

[Foreign Speech] The impact of the pandemic on the Company's business are twofold. [Foreign Speech] Firstly, the pandemic directly impact the amount of loan originated. Facing the sudden outbreak of the pandemic, enterprise across China quickly responded to the government's call of extending the spring festival holiday and imposing strict control on returning to work. Most businesses were temporarily shut down during the quarter. MSE owners, who are also our main customers, have shown very limited demand for capital because their operations were halted. Government's lockdown policy has also made it impossible for our employees to conduct onsite due diligence. As a result, we proactively imposed more stringent risk control measure, thus it lessened [Phonetic] the impact to our business volume and efficiency.

[Foreign Speech] Secondly, the pandemic also lead to increase in delinquency rates. Since their operations were halted, our borrowers experienced significant income drop, which lead to a liquidity [Indecipherable]. [Foreign Speech] At the same time, due to the restriction of onsite collective activity -- collection activity, our post-loan management cannot operate at full capacity. Our NPL disposition time is also prolonged due to the lockdown nationwide, including law enforcement and cloud [Phonetic] services. All of those has contributed to a higher delinquency rate and NPL rate in the first quarter. In order to quickly respond to the above-mentioned sudden changes in the marketplace and impact on the business, the Company actively initiated communications with sales partners as well as trust company partners during the Chinese New Year to develop action plans. Consequently, the following modification will implement improved product terms, loan approval process, and post-loan management.

[Foreign Speech] In terms of product design, we have made adjustment based on actual situation. We have adjusted the qualification criteria of prospective borrowers, the LTV ratio, as well as the risk assessment procedure accordingly. We have set clear guidelines and encourage employees to maintain communications with our customers through phone call. Our ultimate goal was to maximize business turnover and reduce risk during the pandemic.

[Foreign Speech] In terms of loan approval process assessment, it was almost impossible to conduct onsite due diligence during the countrywide lockdown. In order to maintain the efficiency of loan origination, we decided to take advantage of our risk control system established over the year and move many of our business procedures online, including reviewing the borrowers' background and collateral. At the same time, in order to maintain loan quality, we also adapt a more flexible LTV policy across different geographies to reduce the risk in certain cities.

[Foreign Speech] We also urged our trust company partners to reduce interest rate and guarantee sufficient funding. During the pandemic, many MSE owners are facing liquidity problems. As an important supplement of inclusive financial system and support of private economies, we are committed to work together with our trust company partners in serving the financing needs of MSE owners and reduce their financing cost.

[Foreign Speech] We continue to accelerate the disposal of non-performing loans. During the quarter, we received RMB300 million from disposing NPLs. Our recovery rate was 106%. A quick turnaround of NPLs is crucial to maintain a healthy liquidity of our Company and prevent risks from holding NPLs for a long period of time.

[Foreign Speech] We also believe that challenges are accompanied by opportunities, and this pandemic is no exception. We believe this pandemic will bring following opportunities to the Company as well as help the Company make future decisions.

[Foreign Speech] First, the Chinese government formed a massive scale of response to contain this pandemic were unprecedented in the world. The government has also rolled out policies to stimulate economy. We are confident in the resilience of the Chinese economy in all aspects. The management expects to see the commercial and product activities will gradually recover in China. More importantly, we expect real estate price to maintain stable. Consequently, as our home equity loans are all secured by real estate collateral, our business model has shown its risk resistance. Even during the pandemic, we believed that the asset-backed nature of our product will also give the Company resistance to any systematic risk while we continue to scale up in the home equity loan business in the future.

[Foreign Speech] Secondly, we will focus on reducing funding costs in near future during the annual NPC and CPPCC session, State Council point out to help MSE gain access to capital and further reduce their funding cost. Following these guidelines, we will deepen our collaboration with existing trust company partners while exploring possibilities to set up new forms of collaboration with various type of financial institutions, all in an effort to reduce our funding costs to provide a more affordable and accessible financial services to MSE owners.

[Foreign Speech] Thirdly, as a result of upgrading our business to collaboration model in 2019, CNFinance as a whole was able to cut down fixed costs, such as employee compensation and office space rental. The new model has also established a mechanism where the Company and sales partners share profit and bear risk together. Even though we're seeing temporary increased delinquency rates, we are able to mitigate risk and operating smoothly. Therefore, another focus of this year is to increase efficiency of the collaboration model and provide more refined and effective services to our sales partners.

[Foreign Speech] Fourthly, this pandemic will also bring consolidation to the home equity loan industry. Many smaller competitors in the industry will go out of business in a tough environment. As a leader of the home equity loan industry, CNFinance has the ability to survive the pandemic and even emerge stronger. Our goal is to invite and cherry pick the qualified loan facilitators across the country to join our platform and then work together with them to increase our market share.

[Foreign Speech] Fifthly, based on the report by IF Financial, there are approximately 230 million MSE owners in China. The 2020 report on the work of government has suggested the importance of existence and the future growth of MSEs. As the business is resuming with the support of the government, these large group of MSE owners will show a surge of demand for working capital. If we capture this opportunity, we expect to see a greater growth in our loan origination in the near future.

[Foreign Speech] Lastly, due to our continuous investment in IT systems during the past year, our self-developed online risk control system enable us to complete most of the process online, including credit check, risk assessment, loan facilitation and etc. Conducting business online helped offset negative impact brought by the pandemic. We will continue to leverage science and technology to empower our future equity loan business.

[Foreign Speech] Although I didn't attend the last conference call, but as I mentioned in last quarter, 2020 will be a year of both challenge and opportunities for CNFinance. Through this pandemic, we are now even more confident that business model upgrade in 2019 has enabled us to better cope with potential risk and achieve long-term sustainable growth. In the next few quarters, we will hold on to our strategy of aggressive in business and conservative in accounting. Our task is to capture every opportunity to scale up the business and provide better financial services to MSE owners across the country. Thank you.

Now, I would like to hand the call over -- [Foreign Speech] Now, I would like to hand the call over to our CFO, Mr. Li Ning [Phonetic], who will walk you through the financial result of the first quarter of 2020.

Ning Li -- Executive Director and Chief Financial Officer

Hello, everyone. Now I'll walk you through our first quarter of 2020 financials. With these, year-over-year comparison is the best way to review our performance. Unless otherwise stated, all percentage changes I'm going to give will be on that basis. As of March 31, 2020, total outstanding loan principal decreased to RMB10.8 billion compared to RMB11.3 billion as of December 31, 2019. Total loan origination volume was RMB1.2 billion compared to RMB1 billion in the same period of 2019. Interest and financing service fee on loans was RMB489 million, a decrease of 45%, primarily due to a decrease in the total outstanding loan amount. Such a decrease was a result of a smaller loan origination volume as compared to the amount of loans repaid or collected during the same period of time due to the fact that most of the economic activities were halted because of the COVID-19 pandemic as well as the Company's focus to ensure loan quality over loan growth since the adoption of the collaboration model.

Interest and fees expenses decreased by 51% to RMB201 million compared to RMB409 million in the same period of 2019, primarily due to a combined effect of the decrease in interest bearing borrowings and the instant repayment to trust companies after borrowers made payments for the underlying loans, which resulted in a decrease of idle cash.

Collaboration cost for sales partners increased by 914% to RMB94 million compared to RMB9 million in the same period of 2019, primarily due to the development of the collaboration model, which was started since December 2018. Provision for credit losses increased by 27% to RMB220 million from RMB173 million in the same period of 2019. The increase was mainly attributable to a combined effect of the impact of the new current expected credit losses model that took into account the deterioration in the economic outlook caused by the COVID-19 pandemic and the increase in the amount of NPLs, namely the loans being delinquent for over 90 days, as a result of the inefficient legal proceedings under the COVID-19 pandemic.

Total operating expenses decreased by 27% to RMB101 million compared to RMB137 million in the same period of 2019. Income tax expenses decreased by 136% to negative RMB17 million from RMB46 million in the same period of 2019. The first quarter of 2020 had losses before income tax of RMB82 million as compared to income before income tax of RMB181 million in the same period of 2019, leading to a negative tax effect.

Net losses was RMB66 million, decreased by 149% from net income of RMB136 million in the same period of 2019.

As of March 31, 2020, the Company had cash and cash equivalents of RMB1.7 billion compared to RMB1.7 billion as of December 31, 2019. The aggregate delinquency rate for loans originated by the Company, which is calculated by dividing total balance outstanding loan principal for which any installment payment is past due as of particular date by the aggregate total amount of loans we originated since 2014, increased from 5.4% as of December 31, 2019 to 7.1% as of March 31, 2020. The increase in the aggregate delinquency rate was a result of the changing market environment, slower growth of outstanding loan principal, and longer collection process.

With that, we now like to open the call for Q&A. Thank you.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question today comes from William Gregozeski with Greenridge Global. Please go ahead.

William Gregozeski -- Greenridge Global -- Analyst

Hi. Can you disclose the both number of transactions in the first quarter and then what the interest you're charging on those new loans was?

Operator

Apologies, sir, this is the operator. It looks like -- Simon, it looks like one of our speakers is disconnected. I need to dial back up. Please standby, sir. Thank you. And sir, this is the operator. We have reconnected the speaker line. Please proceed with your question again, Mr. Gregozeski.

William Gregozeski -- Greenridge Global -- Analyst

Can you disclose the number of transactions in the first quarter and then what the interest rate on average you're charging on those new loans is?

Bin Zhai -- Chairman and Chief Executive Officer

[Foreign Speech] We facilitated around -- approximately 2,500 loans during the first quarter. [Foreign Speech] Yes, just to make it exact, it's around 2,500. [Foreign Speech] And the loan origination volume is around RMB1.2 billion [Foreign Speech] with the average ticket size of RMB0.4 million. [Foreign Speech] Our average interest rate didn't change a lot comparing to that of last year [Foreign Speech] because we rolled out some shorter -- some products with shorter tenure this year. [Foreign Speech] So the average annual interest rate of our products we facilitated this quarter is around 19%. [Foreign Speech] It is slightly lower than that of last year, not much.

William Gregozeski -- Greenridge Global -- Analyst

Okay. And then when do you think all the loans from the old model will be fully off the books?

Bin Zhai -- Chairman and Chief Executive Officer

[Foreign Speech] We have stopped facilitating loans under the old model starting from the third quarter of 2018. [Foreign Speech] And we are expecting that the loans under the old model to be fully serviced during -- I mean, by the August of 2020. [Foreign Speech] Just to state again, it will be until this August that we are hoping all of the loans under the old model is serviced. [Foreign Speech] So the senior units under the old model should be fully serviced in this August. [Foreign Speech] And the rest would be the loans that are delinquent as well as the subordinated units that was subscribed by the Company. [Foreign Speech] So the trust product that we set up with our trust company partners will only end whenever the delinquent loans are fully recovered or fully collected in the future. [Foreign Speech] And that would be in the middle of next year. [Foreign Speech] It will be in the end of 2021, I'm sorry.

William Gregozeski -- Greenridge Global -- Analyst

Okay. All right. And last question is, assuming there is no other shutdowns or delays in operations from coronavirus or anything else, do you have an estimate of what you're expecting for loan origination for the whole of 2020?

Bin Zhai -- Chairman and Chief Executive Officer

[Foreign Speech] Our first quarter of operation was -- mostly was being impacted most severely by the pandemic. [Foreign Speech] As the operations and activities by the MSE owners resuming as for right now, our business has returned to its daily user schedule as well. [Foreign Speech] And those restrictions we mentioned earlier, including on the onsite due diligence, is all being implemented right now by us. [Foreign Speech] Our estimated goal of loan facilitation for 2020 is still RMB10 billion.

William Gregozeski -- Greenridge Global -- Analyst

Okay, great. Thank you, guys.

Bin Zhai -- Chairman and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Simon for any final remarks.

Simon -- Investor Relations

That will be all for today. Thank you for joining our call. If you have any further questions, please feel free to contact our IR services at ir.cashchina.cn [Phonetic]. Thank you so much.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Simon -- Investor Relations

Bin Zhai -- Chairman and Chief Executive Officer

Ning Li -- Executive Director and Chief Financial Officer

William Gregozeski -- Greenridge Global -- Analyst

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