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CNFinance Holdings Limited (CNF 1.09%)
Q3 2020 Earnings Call
Nov 24, 2020, 8:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day and welcome to the CNFinance Third Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded.
I would now like to turn the conference over to Matthew Lou [Phonetic]. Please go ahead, sir.
Matthew Lou -- Investor Relations
[Speech Overlap] [Foreign Speech] Good morning and evening, and welcome to the CNFinance third quarter of 2020 financial results conference call. 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 section.
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 Exchange Act of 1934 as amended and as defined in the US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expects, anticipates, future, intends, plans, believes, estimates, target, going forward, outlook and similar statements. Such statements are based upon management's current expectations and current market and operating conditions and relate 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 US Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements 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, operator and thank you all for joining this conference call today. On today's call, I will introduce the operation and financial results of CNFinance during the first quarter. We will also introduce the new challenges and opportunities presenting this quarter and last, I would take your questions with our CFO.
[Foreign Speech] During the third quarter of 2020, the company witnessed recovery in major operating and financial indicators by collaborating with multiple [Indecipherable] loans of RMB3,093 million with outstanding interest of 64% from the last quarter. We recorded a net income of approximately RMB50 million, representing an increase of 99% from the last quarter.
[Foreign Speech] The recovery in operating and financial results are mainly attributable to the following reasons.
[Foreign Speech] Firstly, China have successfully contained the COVID-19 pandemic. As a result, national consumption and production have recovered [Indecipherable] as more enterprises across the country have started to operate in full capacity. GDP in this quarter was also the highest of the year. As I have introduced in the past two quarters, based on the management's estimation and as the [Indecipherable] surge of demand for our capital when there is still operations and our [Technical Issues] and efficient loan products will well-serve their time-sensitive financing needs. Such judgment was very well approved by the high loan origination volume in the third quarter.
[Foreign Speech] Secondly, the collaboration model has gone in play to its capacity advantage.
[Foreign Speech] The third advantage of the collaboration model is that the insurer is complying to regulation, we have always been collaborating well-established and licensed trust company, a leverage ratio of our joint established trust plan is finally compliant with the regulation. On August 20, the Supreme People's Court has issued a new order to set the capital private lending interest rate at 4 times LTR as we collaborate with licensed trust companies, we are not subject to get new regulation. However, after dedicating the teams to provide more detail read on the new regulation, we have actually communicated with our trust company partner and sales partner and we decided to support the court's order that benefit MSE owners by voluntarily reducing the interest rate of our loan products. As soon as August 23rd, we successfully rolled out our loan products within interest rate cap of this new regulation.
[Foreign Speech] Another advantage of the collaboration model is its efficiency and flexibility. In 2020, the collaboration model has overcome two major challenges. When the industry was facing the deterioration caused by the COVID-19 in the first half of the year, we are able to keep those operating costs and risks low. When the market started to recover rapidly in the third quarter, sales partner and the collaboration model responded quickly to the market demand and captured the opportunity to expand market foundation and growth. During the quarter, we have held our trust company partner facility loans amounting RMB3.1 billion with outstanding interest of 64% from the last quarter. This quarter has been high risked in loan origination volume since the launch of the collaboration model.
[Foreign Speech] I also want to point out since the third quarter, we have been facing two major regulatory challenges. One is the regulation to limit the scale of non-standard product issued by the trust company. And the other one is the new capital interest rate of private lending.
[Foreign Speech] Firstly, we are seeing regulator suppressing the total loan size of the trust company, this may cause a higher funding cost to our business which might necessary affect our growth and raise difficulty of further reducing the funding cost. However, CNF will try to start collaborate with more trust companies to avoid such possibilities.
[Foreign Speech] Secondly, our profit margin is lower after we voluntarily reduced the interest rate of loans facilitate. In response to that, we will consistently be working on reducing financial cost by optimizing the efficiency of our operations.
[Foreign Speech] Currently and most importantly, I think CNF is sharing profits and bearing debt [Phonetic] together with the trust partner in our collaboration model. We have also adjusted profit with sales partner and the trust company partners to assume their profitability.
[Foreign Speech] Fortunately, this challenge also percent along with opportunities to us. After this quarter in which new regulation were published recently, we were pleased to find our model and products being well received by the market. During the quarter, number of [Indecipherable] partner has reached 1,617 compared with 1,500 of last quarter while the number of sales partner who has [Indecipherable] reached 1,020 compared with 840 of last quarter, outstanding interest of 11% and 21% respectively.
[Foreign Speech] On the other hand, even the profit margin after interest rate adjusted is lower for CNF's sales partner and trust company. The huge demand for our new loan products have helped to boost the loan origination warrant during the quarter by 64% to RMB3.1 billion from RMB1.8 billion in Q2. We are keeping monetary implementation and development of this high court order. When opportunity shows, we might talk to our sales partner and trust partner to readjust the interest rate of our products on the premise of being fully compliant.
[Foreign Speech] The result of third quarter has shown our response to the new regulation, our interest rate are timely and effective. We believe that this new regulation will bring another consolidation to the industry and qualify participants with true cost control will gradually roll-out, however to [Indecipherable] finance we believe it will be our great chance to increase market share.
[Foreign Speech] Facing the future, we are aware that the era of extensive growth for loan industry is over and this is the time for our industry leader to consolidate the market to maintain our lending growth in the next decade, we will focus on scaling and detail-oriented practice.
[Foreign Speech] In terms of operating with a bigger scale, our advantage is that the collaboration model has already been well received. The service sector for sales partner is well-established at the moment and we have been consistently looking for more economical funding sources. Our future focus is to continue upgrading the service expense and [Indecipherable] with sales partner in order to invite more qualified loan facilitator to join our platform and capture larger market share with our partners.
[Foreign Speech] At the same time, another strategic focus is to push our diversified products to serve the needs of customers. Our plan is to discover more specific demand of our specific customers by analyzing the existing customers to better match the needs of new customers with different types of financial institutions and enhance our role of the leading service provider in the home equity loan industry.
[Foreign Speech] The detail oriented project means achieving higher efficiency with lower costs. To achieve that, we plan to invest more on technology to enhance our capacity of system management and data analysis. The ultimate goal is to improve the efficiency of the whole business procedure while receiving loan applications, reviewing materials, just facilitating and disposing of loans. At the same time, we will also work on broadening our funding resources, such as launching our own ABS products to reduce funding costs.
[Foreign Speech] 2020 is a special year. Like many other financing enterprise, CNFinance has experienced significant disruption to its operations. Due to the COVID-19 pandemic, China's new regulation on trust companies' non-standard products and private lending have also adversely affect our business. Fortunately, our resilience and dedicated teams have worked closely together to overcome those challenges. We were able to improve our governance while operating with trust company partners to make necessary adjustments. We were also able to make timely response to the new regulation on private lending interest rates. Just as our President Xi Jinping once said, finding new opportunities in crisis set new starts in kiosks. CNF is confident and capable as always to keep refining this every opportunity. We will carry forward the momentum with third quarter, continuously achieve new growth and ultimately increase our shareholders' return.
[Foreign Speech] Now I would like to hand the call over to our CFO, Mr. Li Ning who will walk you through the financial results of third quarter 2020. Thank you.
Ning Li -- Executive Director and Chief Financial Officer
Okay. Thanks, Zhai Bin and thanks again for everyone for joining us today. I will walk you through our third quarter 2020 financials. Basically, 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 all numbers I'm going to give will be in renminbi.
As of September 30, 2020, total outstanding loan principal decreased to RMB7.4 billion compared to RMB11.3 billion as of December 31st, 2019. Total loan origination volume was RMB3,093 million compared to RMB1,709 million in the same period of 2019. Interest and financing service fee on loans was RMB473 million, a decrease of 30%, primarily due to the combined effect of, first, the decrease in the balance of average daily outstanding loan principal, such decrease was the result of smaller loan origination volume as compared to the amount of loan repaid or collected during the third quarter of 2019. And second, the lowered interest rate on loans facilitated after the publish of new regulation on private lending interest rate on August 20, 2020.
Interest expenses was RMB184 million compared to RMB295 million, primarily due to the decrease in principals of the borrowing under agreement to repurchase and other borrowings.
Collaboration costs for sales partners increased to RMB113 million for the third quarter of 2020 compared to RMB57 million, primarily due to the increase of outstanding loan principal under the new collaboration model as compared to the same period of 2019.
Provision for credit losses was RMB31 million, a decrease of about 43% from RMB55 million in the same period of 2019. The decrease was mainly attributable to the combined effect of, first, the decrease in outstanding principal of non-delinquent loans and the loans delinquent within 90 days which resulted in decrease in collectively assessed allowance and the second, the increase in credit risk litigation position put up by the sales partners which led to larger amount of guarantee assets recognized compared to the same period of 2019.
Total operating expenses were RMB118 million, an increase of 5% compared with RMB113 million in the same period of 2019. It's primarily due to the combined effect of, the first, the increase in share-based compensation expenses related to the new option plan on December 31st, 2019 and the second, the decrease in employee expense and operating lease costs.
Income tax expenses were RMB25 million, a decrease of 60% from RMB62 million in the same period of 2019, primarily due to a decrease in the amount of taxable income. Net income was about RMB50 million, a decrease of 72% from RMB177 million in the same period of 2019.
As of September 30, 2020, the company had cash and cash equivalents of RMB1.7 billion, which remain the same as of December 31st, 2019. The aggregate delinquency rate for loans originated by the company, which represents total balance of outstanding loan principal for which an instalment payment is past due as a percentage of the aggregate total amount of loan we originated since 2014 slightly increased from 5.4% as of December 31st, 2019 to about 5.6% as of September 30, 2020.
With that, we now like to open up the call for Q&A.
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from William Gregozeski with Greenridge Global. Please go ahead.
William R. Gregozeski -- Greenridge Global LLC -- Analyst
Hi. Were all the loans changed after the regulation or just the new issuances. [Foreign Speech]
Bin Zhai -- Chairman and Chief Executive Officer
I will answer your question. [Foreign Speech] We haven't done any adjustments to loans facilitated previous to the publish of the new order, which is on August 20th.
[Foreign Speech] As for the loans we have facilitated after, meanwhile that came out, we have strictly controlled interest rate under as Other which is around 15.4% annually. [Foreign Speech] And we have been communicating and monitoring the reactions and implementations of the new rules and monitoring different regulators in the markets.
[Foreign Speech] Based on the information we get from the regulators and related authorities, we are planning to -- their opinion is that -- this new rule only apply to private builders and lenders, now for our institutional lenders. [Foreign Speech] Which means that the licensed institutional lenders such as banks, trusts are not subject to this new order.
[Foreign Speech] So as I have introduced, all the loans they facilitate are collaborated with trust companies now as we consider ourselves as lessors and institutional lenders too. So we don't think we are subject to this new order. [Foreign Speech] So in the coming months, we might readjust our interest rate to products with longer tenure. [Foreign Speech] Now that too much, we won't exceed 18% annually for any products visibility. [Foreign Speech] And we will take actions gradually in the coming months and I think they have appeared on our financial results as well.
William R. Gregozeski -- Greenridge Global LLC -- Analyst
Okay, great. And then what was the average loan size and loan duration in the quarter? [Foreign Speech]
Bin Zhai -- Chairman and Chief Executive Officer
[Foreign Speech] And there are a couple of factors in the coming -- I mean in the fourth quarter. The first thing is the national holiday of China. [Foreign Speech] This may have an adverse effect on the loan origination and our business. [Foreign Speech] Based on our experience in the past, the first quarter tends to be one of the best quarters in the year. [Foreign Speech] So with these two factors offsetting each other, we still have, I think the results of the fourth quarter will be positive.
[Foreign Speech] In terms of average ticket size, we don't expect it to be too much different than as euro. [Foreign Speech] And since the regulators are now asking the trust companies to be more actively managing trust products, I think the time period for us to facilitate loans will be longer than before. [Foreign Speech] And based on our results from first quarter to the third quarter, we are mainly focusing on facilitating one-year loans. [Foreign Speech] And as I introduced just now if we are to readjust the cap of the loan -- at the interest rate on the loans that facilitate we might shift our focus back to the three-year loans in the November and December.
William R. Gregozeski -- Greenridge Global LLC -- Analyst
Okay, great. Thank you.
Operator
[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Matthew Lou for closing remarks. Please go ahead, sir.
Matthew Lou -- Investor Relations
That will be all for today. Thank you for joining us. If you have any further questions, please feel free to contact our IR services at [email protected]. Thank you.
Operator
[Operator Closing Remarks]
Duration: 39 minutes
Call participants:
Matthew Lou -- Investor Relations
Bin Zhai -- Chairman and Chief Executive Officer
Ning Li -- Executive Director and Chief Financial Officer
William R. Gregozeski -- Greenridge Global LLC -- Analyst
