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CNFinance Holdings Limited (NYSE:CNF)
Q2 2020 Earnings Call
Aug 24, 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 2Q 2020 financial results conference call and webcast. [Operator Instructions] Please note, this event is being recorded.

I now would like to turn the conference over to Jane [Phonetic]. Please go ahead.

Jane

Good morning and good evening, and welcome to CNFinance second quarter and first half of 2020 financial results conference call. Before this call, our financial results has been distributed through PR Newswire and CNFinance official website.

In today's call, our CEO, Mr. Zhai, will walk us through the operating results, followed by the financial results from our CFO, Mr. Li. After that, we will have a Q&A session.

Before we start, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities and 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 terminologies such as will, expects, anticipates, future, intends, plans, believes, estimates, targets, going forward, outlook and similar statements. Such statements are based upon management's current expectations and current market and operating conditions and related to events that involve known or 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 the 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 filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law.

Now, please welcome our CEO, Mr. Zhai.

Bin Zhai -- Chairman and Chief Executive Officer

[Foreign Speech] Thank you, host, and thank you for taking the time to join this conference call.

During today's call, I would like to discuss the business operations of CNF in the second quarter of 2020. We will also share with you the opportunities brought up during the COVID-19 recovery, and the corresponding decisions made by the company. After all that, I will take your questions with our CFO.

In the second quarter of 2020, as China's economy recovered from COVID-19, our major operational and financial indicators have improved as compared to the first quarter. Loan origination volume this quarter increased by 51% to RMB1.9 billion. We recorded a provision for credit losses of RMB57 million in accordance with U.S. GAAP. As a result, we were able to turn first quarters' loss into profits, with a net income of RMB25 million. We also maintained a recovery rate of 103% for NPL disposal. By the end of this quarter, the total number of client sales partners has reached 1,500; 840 of which have facilitated loans.

As our discussion in last quarter, the company implemented multiple measures immediately after the outbreak of COVID-19. First, to ensure the company's operations to the greatest extent, we took advantage of our IT infrastructure and moved majority of our business procedures online.

Second, after thoroughly communicating with our trust company partners, we adjusted the qualifying criteria of the perspective borrowers, the LTV ratio, as well as the risk assessment procedures based on the actual situation; and last, we have accelerated the disposal of non-performing assets and maintained a healthy liquidity.

These measures ensured our smooth transition through the pandemic. However, in the COVID-19 recovery period, we are also facing other challenges. On August 20th, a revised regulation of interest rate was made public by The Supreme People's Court. The Supreme People's Court ordered a cap of private lending interest rate to be set at 4 times China's one-year loan prime rate. The cap is about 15.4%, based on the latest LPR rates of 3.85%, representing a huge drop from the legal protection interest rate of 24% before the new regulation.

This new regulation materially affected almost every participant in the private lending business, including consumer loans, business operation loans, online p2p loans and loan referral services.

As CNF collaborates with licensed financial institutions to facilitate loans, we will honor our leading role within industry and adjust our products to make it compliant with the revised regulation.

It is a big challenge to CNF; our customers, sales partners and trust company partners are all affected by the change of regulation. Our short-term interest income is expected to be materially impacted due to the reduced interest rate. It is likely that our disposal of NPLs will be affected as well. We may also experience higher delinquency rates caused by intentional late payments during the time.

We have dedicated a team to provide more detailed read on the new regulation, based on which, we will make consistent operating adjustments. Our mission remains unchanged: to provide accessible, affordable and efficient financing solutions to micro and small enterprise owners in China. We support the core order, as it would help reduce the financing costs of MSE's. We also keep our communication with sales partners and trust company partners, to set up feasible plans to comply with the new regulation and to minimize our office [Phonetic]. Our goal is to maintain the same interest rate for our operation, even after the revision.

As we are facing this challenge, we believe it is also a good opportunity to test our business model and management ability. In order to capture this opportunity, we have made the following strategies.

We will focus on originating home equity loans for MSEs business operating purposes. Home equity loans are highly resistant if and when the borrower's ability to service debt is deteriorated. In a worst-case scenario, we are still able to reduce loss by disposing the collaterals. For example, during the pandemic, with both delinquency and NPL rates increasing, our actual loss remained zero, and achieved an overall recovery rate of 103%.

Also, major of loans for business operating allowed us to engage with customers with only business operation, which usually generates strong cash flows to service their debts. In addition, Chinese Government has devoted massive resources to ensure MSE's stability and prosperity, due to its importance in Chinese economy. We believe our tailor-made loan service for MSE owners are in line with government's intentions.

We will continue to promote and expand the collaboration model. As a result of operating our business to a collaboration model in 2019, we were able to cut costs in employee compensations and office space rentals. At the same time, with the CRMP mechanism, the company and the sales partners share profits and bear risks altogether.

The mechanism of the collaboration model enables us to mitigate risks and maintain a stable operation when the market conditions deteriorates. During the unexpected outbreak of COVID-19 and the change of regulation, the cost-efficient and risk controllable nature of our model, provided a solid infrastructure to consistently scale up in loan origination volume and likely to bring an increasing ROE in the future.

We will continue to promote and expand the collaboration model and keep upgrading the survey system for sales partners. The recent new regulation will further consolidate the industry. As the leader of home equity loan industry, we will invite and cherry pick the qualified loan facilitators to join our platform and, together, capture a larger market share.

In an effort to realize the potential of those sales partners who are highly qualified, while keeping risks under control, we will customize service plans, analyze feasibility of lowering the portion of CRMP, and appoint specialized survey personnel to assist them throughout the loan origination process.

We will broaden financing process to reduce financing costs. We will continue to negotiate with our existing trust partners to further optimize the repayment method and better manage our cash on both, all in an effort to benefit MSE owners.

Also, the management believes that property-related ABS and ABN products in China are now on the verge of being developed. We are well positioned to launch our asset-backed product with a huge collection of collateral assets we hold. The company will collaborate with our trust partners to carry forward the plan of asset securitization.

We will leverage buyers and technology to empower our home equity loan business. It is our improved IT system which enabled the company to complete major business procedures online during the pandemic. We believe that technology not only protects the company from unexpected challenges, but also provides strong momentum to make operation more efficient and drives down operating costs, and ultimately, contributes to the escalating growth of the collaboration model.

To sum up, it is always our mission to provide financing solutions to MSE owners. We will use technology as driving force to achieve higher efficiency. With the collaboration model as the strong foundation, we are aiming to scale up the loan origination volume and reduce the overall financing costs in the long term. Our ultimate goal is to improve the ROE and maximize the return to shareholders.

Now, I would like to hand the call over to our CFO, Mr. Li Ning, who will walk through the financial results of second quarter and the first quarter of 2020. Thank you.

Ning Li -- Executive Director and Chief Financial Officer

Thanks, Mr. Zhai, and thanks again to everyone joining us today. I will walk you through our second quarter and the first half of 2020 financials. We believe 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. Also, unless otherwise stated, all number I'm going to give will be in RMB.

We will go through the figures for second quarter of 2020 first, followed by the that for the first half. As of June 30, 2020, total outstanding loan principal decreased to RMB9.8 billion compared to RMB11.3 billion as of December 31, 2019.

Total loan origination volume was RMB1,883 million compared to RMB1,667 million in the same period of 2019. Interest and financing service fee on loans was RMB450 million, a decrease of 44%, primarily due to a decrease in the total outstanding loan amount.

Such decrease was caused by the smaller loan origination volume as compared to the amount of loans repaid or collected in the second quarter of 2020, given the slower economic growth and other COVID-19 pandemic, as well as the company's focus on ensuring loan quality over loan growth since adoption of the collaboration model.

Interest expenses was RMB187 million compared to RMB369 million, primarily due to the decrease in the principals of the borrowings and agreement to repurchase our other borrowings. Collaboration costs for sales partners increased to RMB104 million for the second quarter of 2020 compared to RMB32 million in the second quarter of 2019, primarily due to the divestment of the new collaboration model.

Provisions for credit losses was RMB57 million, a decrease of 40% from RMB95 million in the same period of 2019. Total operating expenses were RMB114 million, a decrease of 3% compare with RMB118 million in the same period of 2019.

Income tax expenses was RMB16 million, a decrease from RMB56 million in the same period of 2019. Net income was RMB25 million, a decrease of 84% from RMB151 million in the same period of 2019.

Now, we are moving on to our financials for the first half of 2020. Total loan origination volume was RMB3,050 million compared to RMB2,665 million in the same period of 2019. Interest and financing service fee on loans was RMB939 million, a decrease of 44%, primarily due to a decrease in the total outstanding loan amount. Such decrease was caused by the smaller loan origination volume as compared to the amount of the loans repaid or collected in the second quarter of 2020, giving us lower economic growth under the COVID-19 pandemic, as well as the company's focus on ensuring loan quality over loan growth since the adoption of the collaboration model.

Interest expenses was RMB388 million compared to RMB778 million in the same period of 2019, primarily due to the decrease in the principals of the borrowings and the agreements to repurchase our other borrowings. Collaboration costs for sales partners increased to RMB198 million for the first half of 2020 compared to RMB41 million in the same period of 2019, primarily due to the developments of the new collaboration model.

Provisions for credit losses was RMB277 million, an increase of 3% from RMB268 million in the same period of 2019, primarily attributable to the combined effect of, first, the impact of the new current expected credit loss model that took into account the deterioration in the economic outlook caused by the COVID-19 pandemic, and the -- second -- increase in the amount of NPL's, namely, loans being delinquent for over 90 days as a result of the inefficient legal proceedings under the COVID-19 pandemic.

Total operating expenses were RMB250 million, a decrease of 16% compared with RMB255 in the same period of 2019. Income tax expenses was RMB1 million, a decrease from 101% in the same period of 2019, primarily due to a decrease in taxable income in the first half of 2020. Net loss was RMB41 million, a decrease of 114% from a net income of RMB296 million in the same period of 2019.

As of June 30, 2020, the company had cash and cash equivalents of RMB1.9 billion compared with RMB1.7 billion as of December 31, 2019. The aggregated delinquency rate for loans originated by the company, which represents total balance of outstanding loan principal, of which any instalment payment is past due as a percentage of the aggregate total amount of loans we originated since 2014, slightly increased from 5.4% as of December 31, 2019 to 6.4% as of June 30, 2020.

With that, we'd now like to open up the call for Q&A. Please begin. Operator?

Questions and Answers:

Operator

Yes, thank you. [Operator Instructions] And the first question comes from William Gregozeski with Greenridge Global.

William Gregozeski -- Greenridge Global -- Analyst

Hi, guys. Can you talk more about the sales partners? Are you seeing a lot of demand? Given the current economic environment, are you seeing -- are they seeing a lot of demand for loans? And then looking forward with the new interest rate, it seems like their fees are going to get cut quite a bit. I mean, how are they feeling about the change in what I imagine is going to be a pretty big cut to their fees?

Ning Li -- Executive Director and Chief Financial Officer

[Foreign Speech] I will answer the question. First, from our second quarter financial status, the matter from their outstanding loan principal by the second quarter, we see rates reduced compared with the first quarter.

We have seen the -- [Technical Issues] and we've been promoting our new model for a year-and-half for now. And it starts to show its advantage at this stage. I think from what we're seeing right now, the compatibility from our sales partners to the new collaborative model is increasing for now.

So, for your first question, I think the new model is pretty well recognized by the sales partner and the market at the same time.

About your second question regarding The Supreme People's Court order of cutting interest; as our CEO, Mr. Zhai, introduced in his statement earlier today, this will bring material effect to every participant in the market from these two perspectives.

So, there has been rumor like this going on in the market for a long time. But there are two parts we haven't really expected earlier. The first one is by how much the interest rate has been cut. And the second one is, how immediate it was to be effective.

So, no matter to us or to our sales partners, it's a huge rush. Since like I've introduced there was rumor going on in the market for a long time, we have been adjusting our products since the beginning of the year. And so, in our product structure for right now, the loans with shorter tenure has taken more and more percentages. 40% of our outstanding loans right now are those of tenures shorter than one year.

So, comparing to those long tenure products, shorter tenure loans usually bear lower interest for the customers. Also, our financing costs, the funding cost we're getting from trust companies are also lower.

So, if we and our sales partners bear this interest rate cut together, we all lower a little bit of our risks. It won't be -- in fact showed [Phonetic] an influence. But we will still have to keep communicating with every sales partner as well as see how the market reacts to this regulation change.

So, as I have mentioned, we think our loan origination in August and September will be mostly -- will be most severely impacted by this rate cut. That's the answer to your two questions.

William Gregozeski -- Greenridge Global -- Analyst

Okay. So, to clarify, you guys are -- are you expecting to see lower rates from the trust partners, either the short-term and the long-term because of this, or are you and the sales partners solely going to take the hit on this cut in the rates?

Ning Li -- Executive Director and Chief Financial Officer

[Foreign Speech] Okay. First, to clarify, for right now our loan products with shorter tenure, it is already about 2% lower than those -- than that of longer tenure products.

So, to say in the long run, since we have to -- we have to comply with the new regulation to cut our interest rate as well, we think it will be our only choice that to reduce our financing cost in the future by negotiating with trust company partners. And I think, by optimizing our customers quality, it is possible in the future to reduce our financing cost.

And as of reducing fees and reducing the interest we charge for our customers, I think it will have to be beared by both parties and the sales partners. I think, our option, we will have to be optimizing our services to -- the sales partners, to make it up for the part of interest they're earning.

Does that answer your question?

William Gregozeski -- Greenridge Global -- Analyst

Yes, yes. Thank you.

Operator

Thank you. And this concludes our question-and-answer session. I would like to turn the conference back over to Jane, for any closing comments.

Jane

That will be all for today's call. Thank you for joining us. If you have any further questions, please feel free to contact our IR webpage at ir.cashchina.cn. Thank you.

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Jane

Bin Zhai -- Chairman and Chief Executive Officer

Ning Li -- Executive Director and Chief Financial Officer

William Gregozeski -- Greenridge Global -- Analyst

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