Q2 2023 CNFinance Holdings Ltd Earnings Call
Participants
Jing Li; Acting CFO, Assistant President and Head of Department of Finance & Internal Control; CNFinance Holdings Limited
Jun Qian; VP & Director; CNFinance Holdings Limited
Matthew Lou
William R. Gregozeski; Founder; Greenridge Global LLC
Presentation
Operator
Good day, and welcome to the CNFinance Holdings Limited Second Quarter and First Half of 2023 Financial Results Conference Call. (Operator Instructions) Please note this event being recorded. I would now like to turn the conference over to Matthew Lou, IR Manager. Please go ahead.
Matthew Lou
Thank you, Kate. Good morning and evening, and welcome to the CNFinance Second Quarter and First Half of 2023 Financial Results Conference Call. In today's call, our Director and Vice President, Mr. Jun Qian, will walk us through the operating results followed by the financial results from our acting CFO, Ms. 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 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, 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 this 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 statements as a result of new information, future events or otherwise, except as required under law.
Now please welcome Mr. Jun Qian.
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] Thank you for taking the time to join this conference call. We will discuss CNFinance second quarter and first half of 2023 operating and financial results and followed by a Q&A session.
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] During the second quarter and first half of 2023, the company achieved year-over-year growth in major performance indicators. In the second quarter of 2023, the total loan origination volume was RMB 4.5 billion, representing a year-on-year increase of 45%. Total interest income was RMB 430 million, representing a year-on-year increase of 5%. Net income came in at RMB 44 million, representing a year-on-year increase of 142%. In the first half of 2023, total loans originated was [RMB 8 billion], representing a year-on-year increase of 43%. Total interest income was RMB 885 million, representing a year-on-year increase of 7%.
The net income was RMB 93 million, representing a year-on-year growth of 52%. In the first half of 2023, we focused on achieving high-quality development and accomplished the following tasks.
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] First, we continued to promote commercial bank partnership. Since the launch of commercial bank partnership model, it has gradually gained recognition of the market and our partners given this competitive price and high-quality borrower base. After deepening the cooperation with private banks in the second half of 2022, the commercial bank partnership started to scale and has become an important part of the company's business and source of income. In the first half of 2023, we originated loans of RMB 3 billion under the commercial bank partnership, accounting for 40% of the overall loan origination volume and the associated net revenue was RMB 50 million.
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] Second, we continued to reduce funding costs and achieved a breakthrough in the scale of funds raised to support sales partners for uplift to repurchase delinquent loans. Under the current market condition, the company continued to maintain dialogue with funding partners on lowering the cost and optimizing the financing structure and made positive progress. As of the end of the second quarter of 2023, the accumulated amount of funding raised to support sales partners default repurchase was RMB 700 million which has helped to ease their liquidity pressure and has provided strong support to further expand their business.
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] Third, we continue to refine our credit decisioning mechanism. Since the beginning of the year, we have optimized our borrower assessment. We analyze influential factors of historical defaulted borrowers and started trial run of a risk control model procured from a while-established commercial bank. At the same time, we have strengthened the evaluation of collateral value by applying the property rating system. As of June 30 of 2023, the delinquency rate of loans originated by the company was approximately 15% down from 18% as of the end of 2022.
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] Currently, there are still uncertainties associated with China's economy and the downward trend of the real estate market has not been reversed. However, we believe that with China proposing to give full play, the role of both aggregate and structural monetary policy tools and to vigorously support scientific and technological innovations. The real economy as well as the development of SMEs, China's inclusive financial (inaudible) will continue to be in the period of strategic opportunity. Against this backdrop, in order to overcome the challenges and seize the opportunities. We will continue to pursue high-quality development by coordinating growth of scale asset quality and ensuring compliance, our plans include...
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] First, we will focus on growth. In order to reach a wider range of borrowers, we will continue to improve our product mix, launch differentiated products with low interest rates and leverage technology to empower sales.
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] Second, with the refined credit decisioning mechanism and optimize asset quality, we will continue to shift our business to core areas in first-tier and new first-tier cities. In credit decisioning process, we will thoroughly evaluate quality of borrowers, collateral and the sales partners introduced such borrower. We will better manage sales partners and evaluate collateral to reduce the delinquency rate and continue to help sales partners release pressure.
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] Third, we will continue to invest in science and technology to empower our business. We are developing a big data model to enhance our capability to evaluate borrowers. We are working on making the risk control model procured more suitable to our business using historical loan data we have accumulated in the past two decades. Our developers have completed the preliminary research and are working on developing the system. At the same time, we are also looking for opportunities to collaborate with or invest in other fintech companies whose advantages could be synergistical with our business.
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] Fourth, we will strengthen compliance inspections and audits to further [randomize] compliance risks by means of routine inspection, case audits and compliance training.
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] Now I would like to hand the call over to Mr. Jing Li, who will walk you through our second quarter and first half financial results.
Jing Li
Thank you. Now I would like to turn the second quarter and first half financials results. Please note the currency in use is RMB (inaudible) otherwise for the second quarter of 2023 total increase in fee income increased by 5% in (inaudible)...
Operator
Please hold on for the speaker line to be reconnected.
We have the speaker line rejoined.
Matthew Lou
Thank you, Kate. Sorry, now please welcome Ms. Jing Li to continue with the financial results of CNFinance.
Jing Li
Total interest and fees expenses decreased by 3% to RMB 182 million compared to RMB 187 million, primarily due to lower funding cost from trust companies. Net interest and fee income was RMB 250 million, representing an increase of 12% from RMB 223 million. Net revenue under the commercial bank partnership model represented same charge to commercial banks for (inaudible), including introducing borrowers, initial credit assessments facilitating loans from the banks to the borrower and providing technical assistance to the borrower and bank, net of fees paid to third-party insurance company and commissions paid to the sales channels was RMB 29 million as compared to RMB 0.7 million. The company has been collaborating with commercial banks since 2021, and such collaboration grow in scale in the second half of 2022.
The outstanding loan principle under the commercial bank partnership were RMB 4.5 billion as of June 30, 2023, as compared to RMB 0.3 billion as of June 30, 2022. Collaboration cost for sales partners was RMB 83 million as compared to RMB 77 million, primarily due to the increase of loans recommended by sales partners under the commercial bank partnership. Net increase and fee income after collaboration cost was RMB 196 million, representing an increase of 33% from RMB 147 million provision for credit losses representing provision for credit losses under the trust lending model and the expected credit losses of guaranteed under the commercial bank partnership model in relation to certain financial guarantee arrangement, the company entered into with a third-party guarantor who provides guarantee service to commercial bank partners decreased by 26% to RMB 51 million from RMB 68 million primarily due to the decrease in outstanding loan principles of delinquent loans resulting from our constantly improving credit risk control mechanisms.
Realized gains on sales of investments net, representing realized gains from the sales of investment securities of RMB 12 million as compared to RMB 8 million, the increase was primarily due to effective funds management.
Other gains net decreased by 97% to RMB 0.8 million from RMB 30 million primarily due to the decrease of Credit Risk Mitigation Positions forfeited by the sales partners as a result of our refined management on sales partners.
Total operating expenses increased by 8% to RMB 99 million compared with RMB 91 million. Employee compensation and benefits were RMB 51 million as compared to RMB 49 million, primarily attributed to an increase in the performance-based bonuses as a result of an increase in loan origination volume during the second quarter of 2023.
Other expenses increased by 26% to RMB 36 million from RMB 29 million primarily due to the increase in fees paid to local channels for introducing sales partners to the company.
Net income increased by 142% to RMB 44 million from RMB 18 million for the first half of 2023.
Total interest and fee income increased by 7% to RMB 885 million from RMB 827 million. Interest and financing service base on loans increased by 5% to RMB 807 million from RMB 766 million primarily attributed to the increase of average daily outstanding loan principal in the first half of 2023 as compared to the same period of 2022.
Interest income charged to sales partners increased by 18% to RMB 66 million from RMB 56 million, primarily due to the fact that the company allow more sales partners to repurchase the default loans in installments to help sales partners ease their pressure on cash flow in the first half of 2023.
Total trade and fees expenses decreased by 6% to RMB 336 million from RMB 388 million, primarily due to lower funding cost from trust companies in the first half of 2023.
Net interest and fees income was RMB 518 million representing an increase of 18% from RMB 439 million.
Net revenue under the commercial bank partnership model was RMB 50 million as compared to RMB 0.9 million.
Collaboration cost for sales partners increased by 6% to RMB 166 million from RMB 156 million in the same period of 2022 primarily due to the increase of loans recommended by sales partners under the commercial bank partnership.
Provision for credit losses increased by 136% to RMB 130 million from RMB 55 million. The increase was a combined effect of the increase in expected credit loss of guarantee under the commercial bank partnership model as origination volume grew and scaled rapidly in the first half of 2023 and a reversal of allowance in the first quarter of 2022 due to the fact that the company disposed the remaining loans under the traditional facilitation model to third parties and the allowance of such loans were reversed.
Net losses on sales of loans was RMB 4 million as compared to RMB 42 million in the same period of 2022. The net losses in the first half of 2022 was primarily attributed to the fact that the company disposed the remaining loans under the traditional facilitation model, which were all facilitated prior to 2019 to third parties in bulk during the first quarter of 2022.
Other gains net decreased by 65% and to RMB 17 million from RMB 48 million in the same period of 2022, primarily due to the decrease of Credit Risk Mitigation Positions forfeited by the sales partners as a result of our refined management on sales partners.
Total operating expenses increased by 5% to RMB 179 million compared with RMB 171 million in the same period of 2022.
Employee compensation and benefits increased by 4% to RMB 95 million from RMB 92 million in the same period in 2022.
Other expenses increased by 14% to RMB 60 million from RMB 53 million primarily due to the increase in fees paid to local channels for introducing sales partners to the company.
Net income increased by 52% to RMB 93 million from RMB 61 million in the same period of 2022.
As of June 30, 2023, the company had cash and cash equivalents and restricted cash of RMB 1.9 billion compared with RMB 1.8 billion as of December 31, 2022, including RMB 1.3 billion and RMB 1.2 billion from structured funds as of June 30, 2023, and December 31, 2022, respectively which could only be used to grant new loans and activities.
The delinquency ratio, excluding loans held for sale, for loans originated by the company decreased from 18.3% as of December 31, 2022, to 15.2% as of June 30, 2023.
The NPL ratio, excluding loans held for sale, for loans originated by the company increased from 1.1% as of December 31, 2022, to 1.4% as of June 30, 2023. Now we would like to start the Q&A section.
Question and Answer Session
Operator
We will now begin the question-and-answer session. (Operator Instructions) The first question is from William Gregozeski of Greenridge Global.
William R. Gregozeski
I was hoping you could kind of provide an update on the demand you're seeing from the SME clients in terms of the number of SMEs trying to take out loans, the size, the type, whether it's the trust or the commercial? And how does that compare to last year?
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] So based on the released, that as a figure of July, we're seeing the overall loan demand of MSE owners to decrease. So I have a set of data for you here. So the new loans in July -- China's new loans in July was RMB 528 billion which has decreased to RMB 270 billion as compared to the same period of last year. And among them, new loans issued to the [real] economy was RMB 36 billion which has decreased by RMB 389 billion as compared to the same period of last year.
As of CNFinance, so in the second quarter and the first half of 2023, our number of transactions 6,269 and 11,812 respectively, which representing a year-on-year growth of 18% and 16%. And the loan origination volume was RMB 4.5 billion and RMB 8 billion, in the second quarter and first half of 2023, respectively, which representing a year-on-year growth of 45% and 43%, respectively.
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] Okay. So as for the split from trust model and bank model, so in the second quarter of 2023, we originated [4,101] loan transactions under the trust lending model. And that number under the commercial bank partnership was 2,167. As for the first half of 2023, the number of transactions under trust lending model was 7,734 and that number under commercial bank partnership was (inaudible).
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] So I think the reason why we achieved growth when the entire market is going on a downward trend has the two -- the reason was twofold.
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] So first of all, in the same period of 2022, our business was under the negative influence of the pandemic control and prevention. So the business number is rather low.
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] And I think the second reason of our growth is that we're still relatively small. And our market share is relatively low. So with our continued efforts to build our sales to push out more products we were able to achieve a growth when the entire market is a downward trend in the first half of 2023.
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] As for the average ticket size, so in the same period of 2022, our average ticket size was somewhere near 600,000 and it has increased in 2023 to around 700,000.
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] So I think the reason behind the increase of average ticket size was mainly due to that we have since the fourth quarter of 2022, to maintain the overall asset quality, we have made a decision to shift our business to the core area of Tier 1 and new Tier 1 cities.
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] So we still believe, despite the overall downward trend and uncertainties associated with the China's real estate market the assets in the core area of Tier 1 -- new Tier 1 city will still maintain its value and even gradually go up.
William R. Gregozeski
Great. Are you guys even with the uncertainty of the economy, do you still think you'll see origination growth over the remainder of the year?
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] So first of all, we are still sticking to the target we made at the beginning of the year of reaching loan origination of RMB 20 billion.
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] Secondly, we will still insist on our high-quality development but are not giving in the valuation of borrowers as well as the estimation of collateral value.
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] So as I have mentioned, our market share is still relatively low even though given the RMB 20 billion origination target.
William R. Gregozeski
Okay. And then last question is regarding the sales partners. The interest on the loans to the sales partners was down this quarter. Is that a sign of just less loans going into defaults or sales partners having more liquidity? And what's kind of the -- how active are the sales partners right now?
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] So we see this change as a positive indicator. So we believe that means there are less default and which indicates that the overall asset quality is improving, which has caused less sales partners, that have to repurchase the defaulted loans, and that has caused such number to decrease. And also...
Jun Qian
(foreign language)
Matthew Lou
[Interpreted] I think in the future, if this number keeps going down, it only means that our business is getting better. It means our sales partners are doing better, are performing well.
Operator
That concludes the question-and-answer session. I would like to turn the conference back over to Matthew Lou for closing remarks.
Matthew Lou
Thank you, and thank you again for joining us today. If you have any other questions, please feel free to contact us at ir@cashchina.cn. Thank you.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
