Lexinfintech Holdings Ltd. (LX) Q3 2021 Earnings Call Transcript

Lexinfintech Holdings Ltd. (LX 3.21%)
Q3 2021 Earnings Call
Nov 10, 2021, 8:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the LexinFintech third quarter 2021 earnings conference call. [Operator instructions]. Please be advised that today's conference is being recorded.

[Operator instructions]. I would now like to hand the conference over to your host today, Ms. Patricia Cheng, head of capital markets. Thank you.

Please go ahead.

Patricia Cheng -- Head of Capital Markets

Hello, everyone. Welcome to Lexin's Q3 earnings update. I'm joined today by Jay Xiao, chairman and CEO; Sunny Sun, CFO; Jayden Qiao, CRO; and Erwin Lu, CTO. During the call, we will discuss business outlook.

Any forward-looking statements that we make are based on assumptions as of today. The actual results may differ materially, and we undertake no obligation to update any forward-looking statements. Finally, unless otherwise stated, all numbers mentioned are in RMB. I will now turn the call over to Sunny to go through the financial performance.

Sunny, over to you.

Sunny Sun -- Chief Financial Officer

Thank you, Patricia. Good morning, everyone. It's my pleasure to speak to you and give you an update on our third quarter results. This quarter marks the execution of structural change of our core businesses, and I'm delighted to say the progress has been encouraging.

Loan originations rose 15.6% year on year to RMB 55.9 billion, of which 42.9% was priced within 24%, up from 37.6% in the second quarter. If we look at the last month of Q3, the improvement was even bigger. About half was priced within 24% in September. Average APR for the September intake was 26.8%, down 1.4 percentage points from June.

In line with regulatory direction, as we adjust down loan pricing and move away from high APR borrowers, there will be measured slowdown in top line metrics. Total operating revenue reached RMB 2.97 billion in the third quarter, down by 5.9% from last year and within management expectations. As our CEO, Jay, flagged in the earnings call of last quarter, we place quality over scale. Gross margins posted 54% increase to RMB 1.5 billion.

As a percentage of revenue, gross margin advanced by almost 20 percentage points year over year and held steady quarter on quarter at about 51%. Moving on to expenses. We have stepped up the overall spending to support new growth initiatives such as the further build-out of Maiya team and Yuehui team, as well as the technology upgrade that Erwin, our chief technology officer, is spearheading. At the same time, we have also been streamlining operations and keep a diligent eye on general expenditure.

G&A stays on the down trend going down by 2% year over year and 17% quarter on quarter. Net profit rose over 68% year on year to RMB 551 million in the third quarter. In addition, take rate stayed stable at 3.5% quarter over quarter. Top line optimization, cost management, and operational efficiency are critical to profitability and will remain as our priority.

There have been constant noises about the sector this year. We understand investors' concern. The third quarter results are proof that we are actively responding to change, and we are determined to enhance the resilience of our businesses. Next, I would like to turn the call over to Jayden, our chief risk officer, to discuss credit performance.

Over to you.

Jayden Qiao -- Chief Risk Officer

Thank you, Sunny. We have been progressive in mitigating the pressure on asset quality coming from the change in policy and macro environment. The 90-day plus delinquency ratio finished the quarter at 1.85%, unchanged from the end of Q2. In response to 24% policy, we have tightened the underwriting criteria and approval rate.

A sequential drop in the number of active users and loan origination volume reflects our proactive management of high-risk borrowers. In the transition, we do expect some volatility in short-term risk. With the industry moving to reduce funding price at about 24%, the drop in liquidity will weigh on repayment ability of some borrowers. In anticipation of the interruption, we have strengthened the risk management framework for new businesses, the risk strategies, and models to make sure there is strict control over loan origination, especially when early stage performance is not yet stable.

Risk management is built on identifying, assessing and monitoring risk, we will keep refining the process and will not compromise quality over volume. Finally, I would like to highlight another recent change that is engagement with the technology team. Our activities generate a vast amount of data from internal interactions to external relations. This wealth of knowledge is being turned into powerful analytics and predictive modeling.

We have been working more closely with the technology team to better manage risk at both the business level and the operational level. I will pass it to Erwin, who will talk more about this topic.

Erwin Lu -- Chief Technology Officer

Thank you, Jayden. I took up the CTO role in February this year. This was a newly created position, and my mandate is to sharpen our in-house technology capability. By leveraging my international experience, including over a decade in the U.S.

where I developed my career in software engineering at Microsoft and Facebook, optimization and innovation is our goal, and the people are the most valuable assets. A vast majority of the R&D spending is talent-related investments. We're taking new talents to improve the existing infrastructure and address new opportunities. At the back end, we have built up a core engineering team, dedicated to machine learning and data processing.

In customer acquisition, asset bank matching as well as risk management models, we have also been applying more AI and machine learning algorithms. In the middle tier, we have embarked on a rearchitecturing of the platform into our current operating structure to provide more flexibility and robustness in serving our technical development. As a result, the average engineering delivery cycle has been reduced by more than 30%. The new architecture has also improved its sensibility to enable new features for future business requirements.

On the business front, we've updated our apps to make sure they need the latest regulations and safety requirements without losing any of the existing user-friendliness. To cope with the new privacy protection, we have strengthened the web security encrypted storage of personal identifiable information data as well as restrictions in data usage. In short, we are pleased to see that technology is playing a bigger role in helping us manage cost, the compliance, and revenue. The upgrade has just begun.

I look forward to sharing more with you later.

Patricia Cheng -- Head of Capital Markets

Thank you, Erwin. Last but not the least, a few words from Jay.

Jay Xiao -- Chairman and Chief Executive Officer

[Foreign language]

Patricia Cheng -- Head of Capital Markets

It's a pleasure to talk to you all again. My colleagues have walked through the highlights of the quarter. I would like to take this opportunity to share with you about what we have been doing and will be doing. For the core FinTech business, we have been responding to recent regulatory developments by rebalancing the business structure, reducing risk, and improving efficiency, and our efforts are paying off.

Jay Xiao -- Chairman and Chief Executive Officer

[Foreign language]

Patricia Cheng -- Head of Capital Markets

As Sunny mentioned just now, we were able to increase exposure of loan price within 24% while keeping the scale steady. The mix went up to about half of the total in September, and the uptrend continues. Our 90-day delinquency ratio was unchanged at 1.85%, alongside the realignment of business mix with also improved operational efficiency. G&A expenses fell by 17% quarter on quarter to RMB 100 million, setting a new loan as a percentage of revenue and loan balance.

More importantly, take rate has not been compromised during the process. This demonstrates the effectiveness of our response. We are confident that once the transaction is completed next year, the sustainability and profitability of the business will be stronger.

Jay Xiao -- Chairman and Chief Executive Officer

[Foreign language]

Patricia Cheng -- Head of Capital Markets

Over in Maiya, we have been further enhancing the product and service model. It's gained more recognition from off-line merchants. GMV reached RMB 473 million in the third quarter, of which the off-line contribution almost doubled Q-on-Q to RMB 185 million. China is the world's largest consumer market.

Even though Maiya is still in early pilot stage, the impact it brings to brands and merchants is undisputable and the growth potential immense. The buy now pay later model is different in China. Maiya will shape its own local identity and unique value, bringing tangible transaction gain to merchants and benefits to consumers.

Jay Xiao -- Chairman and Chief Executive Officer

[Foreign language]

Patricia Cheng -- Head of Capital Markets

Also worth noting is the support to small and micro business owners. We are fully aligned with policy direction and increased the loan origination to this group by 32% Q-on-Q to 5.2 billion.

Jay Xiao -- Chairman and Chief Executive Officer

[Foreign language]

Patricia Cheng -- Head of Capital Markets

Finally, I would like to reiterate that quality growth has always been a top priority at Lexin. We are committed to optimizing the asset structure, enhancing credit quality and operational efficiency, and keeping our full year target unchanged. We will also continue to explore and develop new products such as Maiya and the bank technology service in order to strengthen our competitiveness and profitability in the long run. Thank you for your attention and support.

Operator, we will open now -- open up the floor for questions. Can you please repeat the instructions again?

Questions & Answers:

Operator

[Operator instructions]. First question comes from the line of Ivy Du of Nomura. Please go ahead.

Unknown speaker

Hi, management team. Thank you for giving me the opportunity to raise a question, and congratulations on the strong results. I have a specific question for our new CFO, Sunny. I was wondering if you would be able to give us more guidance on the loan origination amount and the outlook for fourth quarter this year?

Sunny Sun -- Chief Financial Officer

I didn't get the name.

Patricia Cheng -- Head of Capital Markets

Ivy.

Sunny Sun -- Chief Financial Officer

Good morning, Ivy. Thank you very much for your question. For the outlook, as you just said and as we reported, we had a very strong performance of the third quarter. And based on the information at hand, currently, we will maintain our full year guidance on the loan originations.

And we do expect maybe some temporary volatility on the operation metrics as all the players along the value chain will take a bit of time to adjust to the 24 new policies. And for the fourth quarter, as we emphasized, we will continue to place healthy growth over pure scale. And we are also expecting that new growth areas will make higher contributions perhaps in the long run. So overall, we will maintain our outlook for the full year.

And also, we will focus on structural changes, as we just mentioned, and also on operational efficiency.

Unknown speaker

Thank you for the guidance.

Operator

Thank you for the question. Do you have any follow-up?

Unknown speaker

No, that's it from my side. Thank you.

Operator

Next question comes from the line of Alex Ye of UBS. Please go ahead.

Alex Ye -- UBS -- Analyst

Good morning. Thanks for taking my question. I have two questions. Firstly, so you have mentioned that your current pricing mix is about 50% [Inaudible] of the interest rate.

I'm just wondering when do you expect our pricing transition to finish and fully comply? And also related to that, when do you expect you could probably -- you're more comfortable to resume growth after that adjustment? And second question is on your asset quality. So I have seen your early indicators, the FPD ratio, picking up a little bit in Q3. So I'm just wondering if you could give us some color on the reasons and also give us some forward-looking outlook.

Patricia Cheng -- Head of Capital Markets

[Foreign language]. Alex, we'll get Jay to take your first question, and then Jayden will take your second question. [Foreign language]

Jay Xiao -- Chairman and Chief Executive Officer

[Foreign language]

Patricia Cheng -- Head of Capital Markets

As I mentioned in the past, the 24% policy is a window guidance given by local authorities to some of the financial institutions, asking them to complete by June next year. But of course, not all financial institutions have received such window guidance. As to Lexin ourselves, we do target to finish the transition by June next year, and we're going to speed up the process. But of course, since not financial institutions, they are told to do so.

So next year, for the market, there might still be some doing like 24% after the June deadline.

Jay Xiao -- Chairman and Chief Executive Officer

[Foreign language]

Patricia Cheng -- Head of Capital Markets

While we are doing this structure change, the idea is to bring down the risk as well so as to minimize the impact on take rate. And you can see that from our 3Q results, we've been able to keep take rate steady. And for the newly acquired borrowers within the 24%, the take rate is above 3%.

Jay Xiao -- Chairman and Chief Executive Officer

[Foreign language]

Patricia Cheng -- Head of Capital Markets

That's why we are confident that we will be able to maintain take rate at a healthy level after the transition next year.

Jayden Qiao -- Chief Risk Officer

OK. I'll take the next question. As I mentioned in the call earlier, in the transition period, we do expect some volatility in short-term risk because the industry is moving to reduce funding priced at about 24%. So as you noticed, the FPD30 release is picking up, but still maintained under 1%.

As we keep focusing on improving our asset quality mix, going forward, we do expect that our long-term risk will continue to be maintained at a relatively stable level. And we have also noticed that for new acquired customers, the new orders placed with pricing at or below 24%, actually, the FPD7 is well below the general population of the -- our entire portfolio. So that is a good sign because we are acquiring high-quality customers as we -- the percentage is going higher in the next couple of quarters. As Jay mentioned, once by the end of the second quarter next year, we believe our short-term risk will be -- continue to be maintained at the previous level.

Thank you.

Operator

Thank you. Next question comes from the line of Ethan Wang of CLSA. Please go ahead

Ethan Wang -- CLSA -- Analyst

Thank you. I have two questions. The first one is on the requirement by PBOC to disconnect our data feed with funding partners early, but through the licensed credit agencies or [Foreign language] in Chinese. So just wondering, in our case, do we have a time line to make the change? And right now are we working with any one of those license credit agencies already? And which one is that? And the profit sharing, the amount of profit sharing in the future because that may affect our take rates a little bit.

And maybe more importantly, the details of this collaboration because with one -- another layer in the middle, does that mean we need to change the way we collect data and the way we process them and the way to handle those data. So that's the first question. My second question is on some data, some disclosure. So we do see a lot more disclosure from this quarter.

So we really appreciate that. But it seems that there are two things I'm missing, which were reported in the past. One is the percentage of profit share model of the total loan origination. So there's a chart there, but there's no numbers.

It's kind of difficult to understand the exact percentage. And the second one is the funding cost in the third quarter.

Patricia Cheng -- Head of Capital Markets

Yes. Thank you. [Foreign language]. Ethan, Jayden is going to take your first question, and then Sunny will do the second one.

Jayden Qiao -- Chief Risk Officer

OK. Thank you. So I'll take the first question. Due to the new requirement from PBOC, we're actually actively working with the credit bureaus, especially Baihang.

We have -- actually, after a couple of negotiations that we have already drafted up a plan -- a detailed plan to work with Baihang and a financial institution. But at this time, I cannot reveal the name of the financial institution. So we expect by the end of this year, we will actually implement the new schedule according to our plan. Once this worked, we plan to propose this -- the plan to PBOC and see if it can be approved by the regulators.

So that's our plan. But in the process of this implementation, we do not expect any change to our cost because this is actually a test pilot program for them and for us, too. So we agreed that during this test pilot progress, we actually will not incur any cost to the data actually transferred or to add any implementation that we carry through. So that's the current plan.

But going forward, once the plan gets approved by PBOC, we still expect very minimal change to our cost structure because Baihang or Pudao are actually positioned as an infrastructure. So as a credit bureau or infrastructure institution, they do not -- actually, they do not aim to make profit because of this change. So I do believe the cost, once it's incurred in the future, is actually going to be very minimal to our underwriting process. Thank you.

Sunny Sun -- Chief Financial Officer

OK. Thank you, Jayden. For the second question, the first one, I understand, is regarding the contribution percentage of [Foreign language] or profit sharing. The profit sharing business contributed 43.7% of the overall GMV in the third quarter.

The second question about the funding cost is that thanks to the efforts of our fund-sourcing colleagues, the funding cost has remained very stable at 7.4%. Thank you.

Operator

Thank you for the questions. Next question comes from the line of Ryan Roberts of Navis Capital. Please go ahead.

Ryan Roberts -- Navis Capital -- Analyst

Good morning. My question is kind of on Maiya a little bit. I think some of the earlier numbers on volumes look pretty promising. And I want to just kind of check on the evolution of that business model.

I believe that is kind of more on the merchant side. And I was just curious, number one, if you can share some more color on that on how the development is going? And number two, on the kind of the borrower user side, so to speak. If you're seeing any synergy in those users that choose BNPL services and how that might interact with your lending business and your efforts to drive loan growth from higher-quality borrowers. I believe earlier you said those were typically high-quality potential customers that use BNPL.

I'm just kind of curious how that's all shaking up. Thank you.

Patricia Cheng -- Head of Capital Markets

[Foreign language]

Jay Xiao -- Chairman and Chief Executive Officer

[Foreign language]

Patricia Cheng -- Head of Capital Markets

Maiya is still in pilot stage at the moment. Most of our focus is in Shenzhen and Guangdong province. But we have been exploring some outside studies with shopping mall partners. And the feedback has been promising so far.

And the feedback has been done during festivals such as National Day Holiday and Mid-Autumn Festival. If you look at for the same merchant, for their outlook that work with Maiya versus those without such cooperation, we see an obvious uplift in the transaction and contribution to them.

Jay Xiao -- Chairman and Chief Executive Officer

[Foreign language]

Patricia Cheng -- Head of Capital Markets

So our merchant partners, they have a trial period. And we've seen a strong response to conversion after the trial period into a paying customer. And the fee that we charge is between 3 and 4%. And in terms of asset quality, when we look at FPD7, it's very low from offline merchants, as in several like basis points.

And customer profile, mostly female with strong spending power. So at the moment, our focus is on bringing the value to the merchants to making sure that we can help them improve their transaction activity, repeat sales, and then to improve the version before scaling out. And at this moment, we were also not considering -- not be considering bringing the Maiya users into the loan facilitation business because right now, our focus is on improving the emerging value and also making sure that this remains a very important retail consumption to the users but before we move into the next space.

Operator

Thank you for the questions. Next question comes from the line of Richard Xu of Morgan Stanley. Please go ahead.

Richard Xu -- Morgan Stanley -- Analyst

[Foreign language]. Just two questions for me. One is any plan to reduce long-term interest rates to 20% given there's some rumored guidance in some regions? Secondly is any detailed cooperation plan with Baihang at the moment? Thanks.

Jay Xiao -- Chairman and Chief Executive Officer

[Foreign language]

Patricia Cheng -- Head of Capital Markets

On your question about the 20%, that one guidance, we have not heard anything from the regulators about that new level. First of all, for CBIRC, they have always said this 24% level for commercial banks, even though that has some local window guidance for different financial institutions, but then you have to look at the nature of our business. We do consumer finance. And the 24% level is in line with policy and also global level.

This is not an SME business, which is at a different level. So that's why we do not expect a further tightening on this level from regulators. And also last year, you could see that from the Supreme Court decision about that 15.4% on the LP debt level. CBIRC is still sticking to 24%.

Jay Xiao -- Chairman and Chief Executive Officer

[Foreign language]

Patricia Cheng -- Head of Capital Markets

When we look at our risk management and also our customer base, we are confident that we can still make a profit when loan pricing goes down to 15%. Let me give you our numbers to illustrate this. Funding cost at the moment is about 7%. And if loan pricing goes down, that means that our risk preference would also go down.

So our risk costs will go down to 3 to 4%. And for our operation expenses, it's going to be about 2 to 3%. That's why we're confident that even though we don't believe that the 24% rule is going to change, but if it goes down, we'll still be profitable.

Richard Xu -- Morgan Stanley -- Analyst

Sorry, go ahead. Sorry.

Jayden Qiao -- Chief Risk Officer

I'll briefly talk about the second question. So the project with Baihang have three phases. We are currently in phase 1. So phase 1 is to -- actually, we've been working very closely with Baihang and the financial institution regarding the details of the plan.

So right now, we have agreed on the specifics and all the key milestones of the project. And we are going to sign a project contract to get it implemented around the end of this year. So this is phase 1. Phase 2 is implementation phase.

So we expect the entire project to be completed around the end of this year or early next year in the first quarter. So once the plan is implemented successfully, phase 3 is to get the whole plan approved by PBOC. So we're going to put together a document and propose to PBOC and see if this plan can be approved eventually. So that's our current progress.

Thank you.

Richard Xu -- Morgan Stanley -- Analyst

OK. Just one quick follow-up. When do you expect the plan to be approved? When do you plan to submit the plan for approval to the PBOC?

Jayden Qiao -- Chief Risk Officer

Right. We do not have a specific date to submit the plan. But if everything goes smoothly, we expect to get maybe a first round of submission toward the end of this year or early next year.

Richard Xu -- Morgan Stanley -- Analyst

Got it. Thank you.

Operator

Thank you for the questions. [Operator instructions]. We got a new question from the line of Hans Fan from CLSA. Please go ahead.

Hans Fan -- CLSA -- Analyst

[Foreign language]. So my question is a follow-up on the recoupling of data feeds from fintech to banks. So when you collaborate with Baihang Credit, can you elaborate in terms of what kind of data you're going to pass through to Baihang? And do you also pass the algorithm to them as well? And what types of products generated from Baihang which can be passed to banks? Yes, just some details. Thank you.

Jayden Qiao -- Chief Risk Officer

Right now, I cannot say exactly what the plan is because some of the details are still underway. And there are some back and forth discussions with Baihang at the moment. The reason is to be fully compliant, as you mentioned, eventually, the algorithm might be placed at the Baihang site. But right now, I mean, due to the technical capability and based on the valuation of the time it will take for us to implement the whole process, it's way too complicated for the financial institutions and for Baihang.

So right now, I mean the plan is to actually transfer all the required data to them, and they will actually process the data and eventually transfer the process data to our financial -- cooperative financial institutions. That's the process. So basically, it's not just -- for Baihang, it's not -- they do not just act like a transitional institutions. So what I mean is they take -- do take an active role in this process.

We transfer the data required by PBOC to them. They actually take some processing of the data and they transfer the process data to the financial institutions. That's actually how this plan would work eventually. But as you mentioned, in the future, according to PBOC, we still need to wait for the instructions.

Eventually, the algorithms might be placed at Baihang's site.

Hans Fan -- CLSA -- Analyst

Thank you.

Operator

[Operator instructions]. At this time, there are no more questions from the line. I would like to hand the call back to the management for closing remarks.

Patricia Cheng -- Head of Capital Markets

Thank you, everyone, for your time and interest. We'll wrap up the call here, and we look forward to speaking with you. Thank you.

Operator

[Operator signoff]

Duration: 45 minutes

Call participants:

Patricia Cheng -- Head of Capital Markets

Sunny Sun -- Chief Financial Officer

Jayden Qiao -- Chief Risk Officer

Erwin Lu -- Chief Technology Officer

Jay Xiao -- Chairman and Chief Executive Officer

Unknown speaker

Alex Ye -- UBS -- Analyst

Ethan Wang -- CLSA -- Analyst

Ryan Roberts -- Navis Capital -- Analyst

Richard Xu -- Morgan Stanley -- Analyst

Hans Fan -- CLSA -- Analyst

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