Lufax Holding Ltd
Q1 2021 Earnings Call Transcript

Published: 27 Apr 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Lufax Holding Limited First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, we will have a question-and-answer session. Please note that this event is being recorded. Now, I'd like to hand the conference over to your speaker host today, Mr. Yu Chen. The company's Head of Board Office and Capital Markets. Please go ahead sir.

[Chen Yu:]

Thank you very much. Hello everyone, and welcome to our first quarter 2021 earnings conference call. Our quarterly financial and operating results were released by our Newswire services earlier today and are currently available online.

[Guangheng Ji:]

Hello, everyone. And thank you for joining our first quarter 2021 earnings call. Before we go through the details of quarterly results, I would like to provide some general updates on two aspects of our business. First, the recent regulatory developments and their impact on our business; and second, our achievements in supporting small and micro businesses. Let's start with the recent regulatory developments and the impact on Lufax. First, with increased clarity on regulations in the first quarter, we have witnessed how regulatory authorities imposed various reform requirements on leading tech platforms. We believe that the intention of the new regulation has . First, all financial businesses must be rooted in financing powered by technology. Second, all financial activities should be placed under regulatory oversight. Third, the development of the sector must be built on the basis of compliance. These policy directions are largely in line with our previous expectations. The regulatory compliance has always been a key focus for Lufax. Although we were not directly affected by the recent announcement, we have always upheld our commitment to provide socially responsible, trustworthy, and convenient financial services. For our retail credit facilitation business, we promote responsible lending practices and educate buyers on rational borrowing. These efforts help us keep our credit services independent from other and prevents the misleading customers with excess lending practices.

[Greg Gibb:]

Thank you, Chairman Ji. Before I begin, please note that all numbers are in renminbi and all comparisons are on a year-over-year basis unless otherwise stated. Lufax had a strong first quarter. We exceeded our guidance and delivered strong top and bottom line growth. In the first quarter, total income increased by 16.9% to 15.3 billion and net profit grew by 18.7% to 5 billion. This is exceeding our earlier guidance of 4.2 billion. Our net margin reached 32.6% in the first quarter and a 11 percentage point improvement over the fourth quarter of 2020. Four key trends underpinned our first quarter performance. First, we experienced a significant rebound in our retail credit facilitation unit economics. While keeping all-in costs for new borrowers below 24%, the take rate based on loan balance was 10% in the first quarter of 2021, recovering from 9.1% in the fourth quarter of 2020. Funding cost optimization and credit and insurance premium reductions were key drivers of this improvement, as insurance partners lowered their pricing on the basis of better credit and customer quality. We also reduced our sales commissions in January and improved our operating efficiency. As a result, our net margin of lending facilitation essentially returned to the levels we saw prior to price reductions in 2020. As mentioned, reduction in credit insurance premiums is closely linked to credit performance. In the first quarter, our C-M3 flow rate for all loans facilitated was 0.4% versus the COVID peak of 1% in February 2020. The 30 days plus past due delinquency rate for all loans facilitated stabilized the 2% as of March 31, 2021 on par with December 31, 2020. The 90 plus day past delinquency rate for total loans facilitated improved to 1.1% as of March 31, 2021, from 1.2% on December 31, 2020. All of the aforementioned operating metrics exclude our consumer finance subsidiary and legacy products, which represent less than 1% of our total loan business. Second, we observed steady volume growth, while improving our business mix. On the retail credit side, our new loans facilitated grew by 17.3% to 172.4 billion in the first quarter, largely in-line with our expectations.

[James Zheng:]

Thank you, Greg. I will now provide a closer look into our first quarter financial results. Please note that all numbers are in R&D terms and all comparisons are on a year-by-year basis unless otherwise stated. As Greg mentioned, we experienced significant rebound in retail credit facilitations unit economics driven by lower funding costs, insurance premiums, and optimization of operating expenses. As a result, we have delivered strong financial results in the first quarter. Our total income was 15.3 billion, up 16.9% year-over-year. Our net profit increased by 18.7% to 5 billion in the first quarter, and our net margin further expanded to 32.6%. Now let's take a closer look into our Q1 numbers. During the first quarter, our total income increased by 16.9%, driven by strong business volumes and increased take rate. On the back of this growth, our retail credit facilitation business did see a change in revenue mix as our business and our risk-sharing model evolved. Why our platform service fees decreased by 9.4% to 9.7 billion, our net interest income grew 111.7% to 2.9 billion and our guaranteed income grew 597.5% to 551 million. In addition, other income directly linked to delivering services to our financial partners increased 241.8% to 1 billion. As a result, our retail credit facilitation platform service fees as a percentage of total revenue decreased to 63.4% from 81.8%. As we continue to fund more with consolidated trust plans, providing lower funding costs, our net interest income as a percentage of revenue increased to 19.1% from 10.5% in the previous year. And as we see more credit risk generating more guarantee income, our guarantee income as a percentage of total revenue increased to 3.6% from 0.6%. Through expanded services to our credit enhancement partners in account management, collections, and other value-added services, our other income as a percentage of total revenue increased to 6.8% from 2.3%. In wealth management, our platform transaction and service fees increased by 52.8% to 625 million in the first quarter from 409 million in the same period of 2020. The increase was mainly driven by the increase in fees generated from our current products and the revenue recognition arising from accelerated P2P runoff. Now, moving on to our expenses. In the first quarter, total costs grew by 17.1% to 8.5 billion. Total expenses, excluding credit impairment losses, financial costs and other losses however grew by only 10.1% as a result of improved operating efficiencies in most cases. Our sales and marketing expenses, which include borrower and the investor acquisitions expense and the general sales and marketing expense increased by 5.5% to 4.2 billion during the first quarter. Our borrower acquisition expense, which is a major component of overall sales and marketing expenses, increased by only 0.2% to 2.6 billion from a year ago, mainly driven by further optimization in sales productivity and sales commission. Our investor acquisition and retention expense decreased in the first quarter versus the year before, mostly driven by improved acquisition efficiency as we leverage data to achieve greater precision in investor profiling and targeting. Our general sales and marketing expense, which is mainly comprised of payroll and related expenses for marketing personnel, brand promotion costs, business development costs, as well as other marketing and advertising costs, increased by 24.8% to 1.5 billion in the first quarter from 1.2 billion a year. This increase was mainly due to lower bass in first quarter of 2020, resulting from this postponement of certain marketing campaigns due to COVID-19 at that time. Our general and administrative expenses increased by 24.1% to 854 million during the first quarter from 688 million a year ago. This increase was mainly due to lower rates in the first quarter of 2020, and a subsequent headcount expansion to support a new business development, including the consumer finance business. General and administrative expenses, as a percentage of revenue decreased to 5.6% from 7.4% during the fourth quarter of 2020. Consistent with the growth of our outstanding balance of loans facilitated, and in turn, the expanded loan repayment volume, our operation and services expenses increased by 17.7%, to 1.5 billion during the first quarter from 1.3 billion a year ago. Our technology and analytics expense increased by 8.2% to 447 million during the first quarter as we continue to invest in technology research and development. Our credit impairment losses increased by 109.8% to 1.1 billion during the first quarter of 2021 from 502 million during the same period of last year. This increase was due to increased loan related risk exposure, as our business model continues to evolve, leading to higher credit impairment losses upfront. Excluding the consumer finance subsidiary, the proportion of loans for which we bear the risk, accounting for 12.5% of new loans facilitated in the first quarter, up from 1.3% from the same period of 2020. It is worth noting that the increase in impairment loses is purely a function of increase in the proportion of credit risks borne by us, while the overall credit profile of our borrowers continues to improve. High quality borrowers, defined as G1-G3 borrower by our internal classification system, contributed to 65.9% of the new general unsecured those facilitated in the first quarter of 2021, compared to 58.7% for the same period of last year. In addition, our low quality indicators such as flow rate, DPD 30+, DPD 90+ have stabilized and in some cases improved substantially from a year ago. Our finance costs decreased by 36.3% to 284 million in the first quarter from 446 million a year ago, mainly due to the decrease in interest costs. Additionally, our effective tax rate decreased to 26% during the first quarter of 2021, from 37% in same period of 2020. Consequently, our net profit increased by 18.7% to 5 billion during the first quarter from 4.2 billion in the same quarter of 2020. Our basic and diluted earnings per ADS were RMB2.09 and RMB1.96 in the first quarter of this year. As of March 31, 2021, we had a cash balance of 34.5 billion compared to 24.2 billion as of December 31, 2020. Now, let me provide you with some guidance for the first half of 2021. For the second quarter of 2021, as we prioritize improvements in our loan mix and unit economics, we expect our new loan facilitated to be in the range of 145 billion to 155 billion, clients assets to be in the range of 410 billion to 420 billion. As we maintain our growth momentum, and we continue to improve our operating efficiency, we expect our total income to be in the range of 14.9 billion to 15.1 billion, and a net profit in the range of 3.7 billion to 3.9 billion in the second quarter. As indicated before, our quarterly financial results are subject to seasonality and fluctuation as a result of accounting treatment. However, as our underlying unit economics improved, our second quarter guidance translates into an estimated year-over-year net profit growth of 19% to 22%, in the first half of 2021, a level, which we believe should be sustainable for the remainder of the year. These forecasts reflect our current and preliminary views on the market and the operational acquisitions, which are subject to change. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

[Operator:]

The first question comes from Winnie Wu with Bank of America. Please go ahead.

[Winnie Wu:]

Thank you very much for this opportunity and congratulations to Lufax for a very good first quarter results, and I have two questions. Firstly, regarding the guidance upgrades, you know, compared to the guidance provided as a full-year result, I think bottom line number for first half is now 11% higher than previous version, which is actually a quite significant upgrade. So, just want to see if management could elaborate on some of the key drivers and also the outlook for full-year. I think James just mentioned, expect that momentum to continue into second half. So, hopefully, it means the strong growth momentum will be maintained for the rest of this year. So that's first, and the key drivers for earnings upgrade and potentially some outlook for the second half of this year as well. Second is also back to the regulatory ground. You know, I think Chairman mentioned that there is more regulator clarity and I think investors are still concerned regarding stuff like, you know, will there be further window guidance to reduce APR, and what about some of the latest requirements on like data, like – and was talking about, they need to have a credit bureau license to provide loan facilitation business? So hopefully – second question is if management can give us also some expectation further requirements from regulator regarding particularly on data and NPR front? Thank you very much.

[Greg Gibb:]

Thanks Winnie. I'll take the first part and then turn the regular question over to Chairman, Ji in a second. The guidance upgrade really results from a number of improvements that really exceeded even our own expectations I think at the end of Q4 last year. We've seen continued improvement in funding costs. As we continue to improve the mix of our borrowers, the current insurance costs are coming down. So, those are two significant drivers that allowed the take rates to go back up to 10% in Q1, and these advantages that we're gaining on both the credit insurance costs should continue – to actually continue to improve as we move through the rest of the year. And then on our own operating costs, we continue to see efficiencies in our sales force, our commissions, our productivity. And so these are really the main drivers that allow us to really upgrade our profitability. And, you know, the net margin side of the business, of course, directly benefits from that. And we are seeing, you know, very good recovery, not only in the take rate line, but also in event margin line. And these are things that we think will continue for the rest of the year. So, as James indicated, we're projecting 19% to 22% profit growth for the first half. And this is something that we think as a level can be sustained for the balance of the year. Chairman Ji on the regulatory question.

[Guangheng Ji:]

In terms of window guidance, the first one, and further requirements to reduce further. So far, based on our dialogues with the regulators, we've asked is there a specific number or project you'd like us to go through? And we have not received any answer from the regulators apart from that, you know, as an industry leader, you should continue to show or demonstrate your willingness to lower the financing costs. But there's no specific number mentioned. I think, our own judgment, we think below 24% where we are today is pretty safe at the moment. So of course, we understand that regulators will always want lower financing costs, and we will continue to maintain variety of dialogues with them. In fact, I'm flying over to Beijing this afternoon to speak to a few of the authorities. So, we're hoping the regulator understand for a market to exist and to develop in a healthy way. All participants in the market needs to have enough room to maintain and grow their operations. If APR continues, if The APR still continues to go down endlessly during that process you will see the exit of many credit providers in the industry. I personally don't think that's what the regulator wants to see. As we enjoy lower funding costs and lower credit on CGI costs as a result of better risk management and lower operating costs as a result of improved efficiency, improvement in efficiency, we hope to pass on those cost savings to lower the overall cost all-in cost of our borrowers. So we do have our own in terms of lowering future cost from our borrowers as we optimize the aforementioned cost. In terms of the credit bureau license or core scoring license, I want to point out again that we have been using a guarantee license as the main entity, while Ant has been using a micro license, those two licenses are quite different. The model has existed for many, many years, in the process, using the guarantee company to collect information and collect customer data. In fact, the scope is much smaller than what a smaller company would collect. So far, we have received no or any other communications from regulators on this front. Of course, we will be adhering to lot of strict data protection, . If we do receive anything further, we'll be letting everybody know.

[Operator:]

The next question comes from Piyush Mubayi with Goldman Sachs. Please go ahead.

[Piyush Mubayi:]

Thank you Greg, , and James for taking the question. Congratulations on a good set of numbers. Can I just take you through to particular questions, talk about the loan growth that you saw and with SMEs being a greater percentage? Could you take us through color on how that is playing out, the sort of growth rates we can continue to expect into the second quarter. And I realize you mentioned, of the second quarter, but you also mentioned that the levels are sustainable for the rest of the year. So, could you just take a step back and take us through where you can disclose from the loan that is going to come from and what the size of the loans has been as possible? And the second question has to do with the far better cost control to be demonstrated in the quarter? It that and you pointed out that it's lower sales commissions that you're paying out for the quarter, as well as better sales productivity? Could you just take us through these two aspects and to look through the rest of the quarters? And whether this is a structural change we're seeing in the business and we can model the new levels of marketing spend? Thank you.

[Greg Gibb:]

Piyush, your line is a bit blurry, can I just repeat all questions to make sure we're …

[James Zheng:]

I will repeat as I go, and then I think Y.S. will probably add in. I think on the first question Piyush you’re asking is really about loan growth that we've seen in the first quarter, and then is it sustainable for the balance of the year. Our view is that we're seeing quite good and strong demand from the market. I think we've seen a number of indicators that say that SME owners, SME businesses are increasingly using money to grow their businesses and not to repay debt. So, I think there's a healthy environment there for our customer base. And so the – if there is one thing to point to, when we look at growth on the second half, we will be prioritizing more on the unsecured side, we’ve seen the greatest need there, we also see our greatest competitive advantage there. And so that's something that we will drive a bit more. So that has the benefit of really maintaining the revenue growth in particular, into the second half as we meet that demand. On the cost control side, it really is multi-part, right. So, at the top line level, as I mentioned, we are seeing funding costs continue to come down. We are seeing our credit insurance costs coming down. We expect those credit insurance costs to continue to be optimized, because as the new loan book grows as a percentage of the total, than our overall customer mix will improve. The second thing that goes with that, as you may recall from the first of the IPO is that as we move more and more to high quality SME owners, which now make up 75% of total new loans, the average ticket size of those loans increase. And so that's sort of the rate of, I believe about 10% to 15% increase, which therefore allows us to reduce commissions at a proportionate level without reducing the absolute income of the direct sales. So, if you take all that, and then the ongoing efforts we’re really making on the technology side, to really empower our DS more to bring more of an online engagement with those customers to deepen, both on the lending side and other products, that's what allows us to reduce costs while keeping the top line strong. I don't know if there's any that Y.S. wants to add.

[Y.S. Cho:]

I’d probably add some more numbers. From , we reduced our sales since we reduced price much, our increased accordingly. So as a result, the income didn't change at all. So, this monthly income is still around RMB8,500 per month, which is very stable. And then, it’s about – more about . If you compare first quarter with the same period last year, our progress in cost improvement is very obvious. Our expected APR decrease from I think about 29% for years, and now it's about 20%. But at the same time, funding costs decreased much, it's now close to about 6%, previously about 7%. And the was worth about 9%. Now it's getting close to 6%, which they will indicate our customer mix has been changing a lot since we reduced the highest HR. And then equally take the states that have gone since changing our price charging mechanism based on based on the last charge. So, as a result, pay credit is about 10%, which is almost exactly the same as one year ago. So that is why is confident about the second half, first half the overall the profit growth.

[Piyush Mubayi:]

Can I chip in a third question please, it's very quick. If I compete online, industry – one of the comments is about the company bore risk of 12.5% of new loans facilitated, how does this compares to the 20% to 30% range you talk about as a percentage of risk if you take ?

[Y.S. Cho:]

Yes, so the question about our set risk portion change, the first quarter is about close to 50%. So, you can get our March single month number, our credit risk taking portion is around 70%. So, we plan to complete, we plan to reach about 20% credit risk bearing portion for by the end of June or more lately in July. That is our commitment and discussion we had with regulator. And at the same time, the risk bearing portion, which is has been greatly reducing, it's gone down to almost 70% by now. So, the rest are taken by five additional partners and then 17 partner events. We have now 52 partner events and then out of 52 partner events already 17 banks they joined our risk sharing model. So, going forward, we see that our set risk taking portion will go up to 20% and then will further decline and you will see that risk will be directly taken by, either by partner events or other insurance partners.

[Piyush Mubayi:]

Thank you, very much.

[Operator:]

The next question comes from Thomas Chong with Jefferies. Please go ahead. Thomas Chong, your line is live.

[Thomas Chong:]

Good morning. Thank you taking my questions. Can you comment about the trend in terms of the wealth management take rates in the long-term? How should we think about investors’ adoption of higher NAV products in service products and financial advisory services?

[Greg Gibb:]

Thanks Thomas. We would expect the take rate on the wealth management side to improve as we move through the year, and that improvement in the near-term and longer-term are a combination of factors. So in the near term, it is really about continuing to increase our service to the higher-end customer providing more qualified investor product on the fund side, and the asset management side. So, those are drivers in the near term, which are pulling upward our overall take rate. And then if you go out slightly longer term, so if you do kind of more 6 months to 12 months out from today, we would expect the insurance business, the insurance products that we have on the platform to grow at a more rapid pace, and those carry attractive economics for the take rate. And we will then over the longer term, obviously, there's – we're still in the process of looking at the financial advisory license. And once we had that we expected there would be a further lift from the mutual fund side. So those are in the near term and in the longer-term. But generally we think we should see continued improvement as we move through the quarters of this year.

[Operator:]

The next question comes from Hans Fan with CLSA. Please go ahead.

[Hans Fan:]

Hi, thank you very much for letting me ask questions. I got two questions here. One is about the regulation. Clearly that recently, there's a lot of investigations from regarding the misuse of the consumption loans, and business loans from banks for the purpose of property purchase, there’s a lot of rounds of investigation going on in , Shanghai and Beijing. So, we are just wondering does that really have some any implication on those facts? And how do we usually control and monitor the use of funds? That's number one question. And number two question is really on the other income in the financial statements because in the first quarter, there's no increase in the audit income, and just want to maybe can management system elaborates regarding what's the key drivers of the other income here? And can this be sustainable in the future? Thank you very much.

[Y.S. Cho:]

Okay, then, let me take the first question Hans. Thanks for your very tough question. You know, our partner events, as a – respond the provider, they take the family's perspective for this loan proposed management. However, we do all we can do within our capacity from sales, application, underwriting and collection. In every stage of operation, we can help loan proposed management. For example, during the application process the customer needs to confirm their loan proposal and then they need to sign on the commitment letter that says that the loan proceeds, I’m very aware, loan proceeds cannot go into property or market or aftermarket and during underwriting process, during interview we ask for more time, and we check for , we check that payment account. So, if their account is repeatedly used by multiple applicants, then we will reject. And then lastly, during collection process, after loan, three months after loan, we check people's report and if there is a record of new mortgage then we will assume customer used our loan proceeds to buy a new house, then customer must repay as soon as possible. So, this is what we are doing, because we don't have account, but without capacity, we can do everything – we do everything we can do. And to better support our partner banks, banks are paying also loan proposed management because they are taking final responsibility. And our partner is little bit different from bank by bank. Some banks, they want our powers to open their type accounts so that they can monitor our loan proceeds and sometimes they want our insurance partners to make all indemnity for the customers or loan propose violate by violation case. So those we support. However, knowing that our about RMB200,000. So this is quite small scale size, which can be used for the property purchase. So, we are paying more attention to our secured loan. And then those actions we are taking to help ourselves and to help our partner banks.

[Greg Gibb:]

Hans, on the question of other income, a couple points, one is it's actually directly tied to our core business, and what it involves is the services that we provide to our financial institution partners on account management and also to the extent that they outsource services back to us such as collections. So this is a number on other income, which we'll – you will see continue to be strong at least for the balance of this year. It does also – the reason you see it popping up a little bit is, as we changed our overall pricing structure in September last year, in terms of how we gather revenue from various partners, you see this increase in other income, but for the purposes of understanding the overall impact on the economics, at least for the balance of this here, you will see that level of performance in this line item.

[Hans Fan:]

Thank you much. Thank you.

[Operator:]

The next question comes from Katherine Lei with J.P. Morgan. Please go ahead.

[Katherine Lei:]

Hi, good morning. Thanks for giving me the opportunity to ask this question. I mainly have two questions. The first one, I would like to ask about the take rate, because just now management mentioned about that, you will pass on some of the benefits of lowering funding costs and insurance costs to the borrower’s right? So, now I think the take rate has improved back to the first Q 2020 level. So what is your target to take rate? How much do you expect that you pass on to consumers? And do you expect take rates within this year to stay at this level or continue to improve? And then within like say two, five years where do you see the take rate goes? So, this is the first question. Second part of my question is mainly on clarifications of questions asked previously by my peers. So, mainly on like the risk taking portion, because for the disclosure, in disclosure about 12.5% of new loans, the risk-bearing is Lufax is – is a risk bearing long-term Lufax. So what is that on existing stock of loans? Maybe you have talked about that just now, but then I didn't get it, because the line is a bit blurry and also that for the portions of restoring by third parties, what is the portions on the stock of loans? Is there offer to new loans? Can we just clarify a few numbers on that? Thank you.

[Y.S. Cho:]

Okay, about the take rates, we explained now our takeaway for new business, expect to about 10% level, which is almost same as last year. And then going forward, we try to deliver 10% take rates, and then we are confident. And then if we can further improve, further optimize our cost lines, like funding costs while insurance premium or our power efficient costs, then we can return for our consumers so we can be more price affordable and competitive. But my view is, so within this year, as soon as you take 10% take rate, you can as much as you have a room you can further reduce our overall HR by probably 1% or 2%. But it depends on our palette, or how much we can afford to save our operational cost and the funding costs and then our insurance costs. And the second question about the 20% risk-bearing and then now you're wondering about how about our balance. So, in terms of total balance, because our loans are three years duration. So, although we are taking more sec risk bearing portion of the 10% it gradually affects our overall portfolio. So, in terms of portfolio, I'll say risk bearing portion is about 8.7% as of the first quarter this year, and therefore they take about 82%.

[Katherine Lei:]

Thank you.

[Operator:]

The next question comes from Jack Zuo with China Renaissance. Please go ahead.

[Jack Zuo:]

Thanks for taking my question. So, I have two questions to ask. Number one is a follow-up on your take rates. So, could you help us go through your unit economics for the existing balance in Q1 and for new loans in Q1 and probably in April that will be very helpful? And second question is, also related to regulation. So, regarding the rectification plan, the plan to move their consumer credit to consumer finance company under their license, so just wanted to check whether we have any change in terms of our consumer finance, license, and no, just want to check, firstly our progress, our consumer finance companies especially and any change towards our business regarding this issue, sorry, ? Thank you.

[Greg Gibb:]

Okay. On take rate, do you want to go first?

[Y.S. Cho:]

Sure. So about take rate for full balance, first half this year, our take rate is 10% And then, more importantly, if you understand our take rate for new business, because that will affect our future profitability. Take rate for new business in the fourth quarter is also 10% besides the over portfolio. So that means, going forward, 10% take rates in this are meant to take significant change in some sort of . So, we are confident with 10% take rate throughout this year. And then, for new beginners, second quarter, third quarter. So, we estimate about 10% take rate for new business without much change.

[Greg Gibb:]

Maybe I'll comment on that. And then Y.S. could add. I, you know, I think were answers come from historically is that what they use mostly was micro lending license, and co-lending with bank partners. And now that entire industry has to take on more risk bearing. They are obviously at the same time looking for something that is as capital efficient as possible from a leverage perspective. So, micro finance companies typically carry a cap leverage of three to five times. There's some differences by geography, but it's roughly in that range. For Ant, to use their consumer finance company that gives them the opportunity to bear risk at a 10 times leverage for capital. So, I think that's why you see Ant and their various announcements moving their model more towards the consumer finance license. Our risk bearing, as Chairman Ji mentioned, has really done through a guarantee company that operates nationwide. And that guarantee company where we're bearing the risk of up to 20% on the loans going forward, operates at a 10 times leverage ratio. So, for us, we've already achieved what we think in the market is kind of the best efficiency in terms of bearing risk and then putting capital against it. So, given our business model is different, right? The Ant business model has been around traditionally, those smaller ticket, shorter duration loans, that does fit well under our consumer finance license. Our business model, which is the focus on small business owners, larger tickets, relatively speaking, for longer duration is best suited by the use of the guarantee company. So, I think, you know, things that Ant are doing and versus what we do is they are driven by different factors.

[Y.S. Cho:]

Right. So, if we chose between smaller license and the consumer finance license, obviously, consumer finance license is based on some sort of leverage ratio. And they chose to do our nationwide loan disbursement, right, more regional limitation. But our case, this is to understand our borrowers, the average case size is way above 20,000. Not many of them get few hundred thousand and up to 1 million for unsecured loans. But consumer finance license, it does not support a lot of license is 200,000, but actually with our regulator window guidance the same 50,000 on . So which is not very applicable to our current model.

[Greg Gibb:]

So, I think the result of that, I think that the back part of your question is, today the consumer finance balances as a percentage of total is less than 1% of our facilitated amount. It's a new business. It's got about 300,000 borrowers. As we move in the second half of this year to integrate more, our online services across wealth and lending, we believe the consumer finance license will be very helpful concerning a lot of our wealth customers on some of their consumption needs. So, we would expect the business to continue to show healthy growth, but as a percentage of the total even by the end of this year, it'll still be probably less than 2%.

[Operator:]

The next question comes from with Morgan Stanley. Please go ahead.

[Unidentified Analyst:]

Hi, thanks management, congratulations on the solid quarter. I have basically two questions. The first one is related to the new economics of the – note that we are providing guarantees as we move closer to the 20% risk taking. So basically, I want to ask how much in terms of the loan balance that we are taking a risk? How much we could charge on the top line level? And then how much are we going to charge in the production cost in terms of the loan balance that we are taking risk? And the second question is, it turns out the overall industry, so if we view the SME loans as an asset class, I want to know how does management think of the supply and demand side of the industry with all these new regulatory changes and the changes of where – how do you see the supply of these assets and the demand for these assets evolve over time? And that's my questions. Thank you.

[Y.S. Cho:]

Well 20%, I don't emphasize, no matter you take 20%, or 25%, or 30%, it does not fundamentally change our profitability. If you take more of credit risk, it comes with risk premiums. So, actually it we can be a little more possible by taking more risk. And then for the full portfolio now we have about 8.7% risk taking. And there's a new business about 70%. About industry, supply and demand, demand assures that we all know about of demand for supplies. We see that on secured largest stateside . We don’t see much competitors. We don't see any other companies providing similar services for small business owners. Either they do like other banks, we see that more and more banks they're getting to this market with products. So this is a potential that we get when , but our major business lines on secure largest case as soon as I perform. any surprise from banks, or other companies. So I think this market is pretty much secure. It's very competitive. And then I don’t think it is for others to get into this market because they had to meet several preconditions like offline channels, underwriting model, and infrastructures, all those things.

[Operator:]

This concludes the question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.