Lufax Holding Ltd
Q4 2020 Earnings Call Transcript

Published: 3 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Limited Fourth Quarter's 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, we will have a Q&A 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, Chen.

[Chen Yu:]

Thank you, operator. Hello, everyone, and welcome to our fourth quarter 2020 earnings conference call. Our fourth quarter 2020 financial and operating results were released by our Newswire services earlier today and are currently available online.

[Guangheng Ji:]

Hello, and thank you, everyone, for joining our fourth quarter 2020 earnings call. Before discussing our quarterly results, I would like to provide updates on three different aspects of our business

[Greg Gibb:]

Thank you, Chairman Ji. Before I begin, please note that all the numbers are in RMB terms, and all comparisons are on a year-over-year basis unless otherwise stated. In the face of regulatory uncertainties and overwhelming market noise, we upheld our commitment towards driving high-quality and profitable business growth. As such, we exceeded our previous guidance, delivering solid financial and operating results in the fourth quarter of 2020. As of December 31, 2020, our balance of loans facilitated have grown 17.9% to RMB545 billion, while our client assets and wealth management have also grown by 23% to RMB426 billion. Moreover, for the full year of 2020, our total income grew by 8.8% to RMB52 billion, while our non-IFRS adjusted net profit grew by 2.1% to RMB13.6 billion.

[James Zheng:]

Thank you, Greg. I will now provide a closer look into our fourth quarter financial results. Please note that all numbers are in RMB terms and all comparisons on a year-over-year basis unless otherwise stated. We continued to deliver solid financial results in the fourth quarter of 2020. Our total income was RMB13.3 billion, up 5.9% year-over-year. More importantly, our net profit increased by 17.4% to RMB2.8 billion in the fourth quarter, while our net profit margin further expanded to 21.4% from 19.3% in the same period of 2019. Before diving deeper into our Q4 numbers, I want to highlight two factors that create a mismatch between our revenue and earnings growth and the actual business growth. These factors have impacted our 2020 Q4 results, and will continue to impact our 2021 results. First, our increase in on-balance sheet loan slows the pacing of revenue recognition in comparison to that of off-balance sheet loans. Revenue and expenses are recognized over the life of the loan. So loans that will facilitate retail credit facilitation service fees are recognized under IFRS 15 and a great portion of the revenue is thus recognized in month one, reflecting a larger portion of the service that is provided to the borrowers in month one. We utilize trust as a funding channel. Certain trust-funded loans for which we need accounting consolidation requirements are recognized as on-balance sheet lending and the revenue for these type of loans is recognized as net interest income under IFRS 9. Recognition of monthly revenue and IFRS 9 is more evenly spread out across the lifecycle of the loan. Furthermore, under IFRS 9, all revenue associated with these loans whether facilitation, interest or guarantee in nature, is all recorded as net interest income. Whether a loan is funded by a bank, therefore recognized under IFRS 15 or funded by a consolidated trust, and therefore recognized under IFRS 9 makes a little bit difference as the overwhelming majority of the loans are funded by third-parties in any case. However, the accounting treatment differs greatly as on-balance sheet revenue is recognized at a slower pace than off-balance sheet revenue in month one, therefore, creating a temporary deviation between accounting results and the business performance. Second, self-risk bearing loans front-load loan credit costs. As we start to bear more risks, we expect to earn more margin over the life of the loan as the margin previously earned by our insurance partners will now come to us. However, the accounting standards require us to record a provision determined by IFRS 9 for the month in which we take on a new loan, while the revenue associated with bearing that risk is recognized over the loan's entire life. This timing mismatch means that our net margin will also be under pressure during those periods in which we increase our whole risk-bearing balance. Nonetheless, once this stabilizes, we expect our net margin to return to its previous levels. These factors affected the pace of our recognition for revenue and expenses creating a timing mismatch between our financial and business results and it will likely result in more quarterly movement and volatility. With that, now let's take a closer look into our Q4 numbers. During the fourth quarter, our total income increased by 5.9% while our revenue mix continue to change as a result of our business model's ongoing evolution. As discussed earlier, such revenue mix change has slowed the pace of revenue recognition. Following our decision to increase funding from those consolidated trust plans that offered lower funding costs and continue to increase the volume of our loans for which we will bear credit risks. Our net interest income and guarantee income grew significantly to RMB2.6 billion or 19.5% of total income in the fourth quarter from RMB1 billion or 8.2% of total income in the same period of 2019. As a result, our retail credit facilitation service fees decreased by 9.9% to RMB9.3 billion or 69.9% of total income from RMB10.3 billion or 82.1% of total income in the same period of 2019. The annualized take rate for current products and services on our wealth management platform was 31.4 bps in Q4, as compared to 21.5 bps a year ago. We calculate the take rate by dividing total wealth management transaction and service fees for current products by our average current product client assets. As we upgrade our business from product distribution to focus more on providing our partners with comprehensive technology enablement offering, we are generating a greater portion of revenue from the service fees that are not directly linked to products. In light of this ongoing transition, we believe this take rate measurement better reflects our business and thus plan to continue using it going forward. Now, moving on to our expenses. In the fourth quarter of 2020, our total expenses increased by 11.7% to RMB9.1 billion, driven by accounting factors related to early customer repayments and the credit cost from self-risk bearing loans, as I mentioned previously. Our sales and marketing expenses increased by 20.5% to RMB4.9 billion during the fourth quarter from RMB4.1 billion a year ago. Our borrower acquisition expenses, which are a major component of our sales and marketing expenses, increased by 22.3% to RMB2.8 billion from RMB2.3 billion a year ago, mainly due to the accelerated recognition of selling expenses that we recorded in the quarter as a result of customers' early repayment. Since we started to change how we charged monthly fee in September 2020, the negative impact of early customer repayments on revenue has largely been minimized. However, early customer repayment also impacts our sales and marketing expenses. When a loan is repaid early, we are required to recognize all of the remaining sales and marketing costs that have not yet been amortized in the same month. Therefore, in a period of high early repayments, sales and marketing costs are likely to be inflated when compared to actual activity in the period. Meanwhile, our investor acquisition and retention expenses decreased by 17.5% to RMB227 million in the fourth quarter from RMB275 million a year ago, mostly due to our improved investor acquisition efficiency as we leverage technology to achieve greater position in investor profiling and targeting. At the same time, our general sales and marketing expenses, which are mainly comprised of payroll and related-expenses for marketing personnel, brand promotion costs, consulting service fees, business development costs as well as other marketing advertising costs, increased by 24.9% to RMB1.8 billion in the fourth quarter from RMB1.5 billion a year ago. This increase was mainly due to our previous postponement of marketing campaigns and the subsequent resumption in the quarter as businesses across the country restarted their operations in the post-pandemic period. Our general and administrative expenses increased by 47.8% to RMB986 million during the fourth quarter from RMB667 million a year ago. The increase included employee social security payments for the first three quarters of 2020, which were previously delayed following the release of government policies made in response to the outbreak of COVID-19. In addition, we also recorded a higher share-based compensation expense for the fourth quarter. Consistent with the growth of our outstanding balance of loans facilitated, our operations and servicing expenses increased by 10.6% to RMB1.7 billion during the fourth quarter from RMB1.5 billion a year ago, while our outstanding balance of loans facilitated grew by 17.9% to RMB545.1 billion as of December 31, 2020 from RMB462.2 billion as of December 31, 2019. Meanwhile, an increase in our loan repayment volume led to an increase in our payment processing expenses and the consolidated trust plan fees to trustees during the fourth quarter. This increase was partially offset by our use of AI to improve efficiency of our loan approval and collection process helping to reduce the related costs. Our technology and analytics expenses decreased by 17.4% to RMB461 million during the fourth quarter from RMB558 million a year ago as we continue to improve our efficiency. Our credit impairment losses increased by 1.4% to RMB985 million during the fourth quarter from RMB971 million during the same period of last year. This increase was primarily due to our higher loan-related risk exposure as our business model continue to evolve, causing us to start to bear more risks and record credit impairment losses upfront. The increase was also due to an increase in our loan-related receivables, which was mostly driven due to the residual effects of COVID-19. Conversely, the increase in credit impairment losses was partially offset by the year-over-year decrease in our asset management impairment losses during the fourth quarter. Our finance costs decreased by 17% to RMB326 million in the fourth quarter from RMB393 million a year ago, mainly due to the decrease in our borrowing cost during the period. Consequently, our net profit increased by 17.4% to RMB2.8 billion during the fourth quarter from RMB2.4 billion in the same period of 2019. Our basic and diluted earnings per ADS were both RMB1.25 as compared to RMB1.12 in the same period of 2019. As of December 31, 2020, we had RMB24.2 billion in cash at bank compared to RMB7.4 billion as of December 31, 2019. Looking into 2021, because of the previously discussed accounting and the temporary business factors, we expect our margin in Q1 to be somewhat impacted, but profit growth to resume starting from Q2 and beyond. For Q1 2021, we expect the new loan sales to be in the range of RMB175 billion to RMB180 billion, client assets to be in the range of RMB385 billion to RMB395 billion, total income to be in the range of RMB14.3 billion to RMB14.6 billion, and net profit to be in the range of RMB4 billion to RMB4.2 billion. For the first half of 2021, we expect new loan sales to be in the range of RMB340 billion to RMB350 billion, client assets to be in the range of RMB375 billion to RMB385 billion due to the stoppage of online bank deposits. Total income to be in the range of RMB28.5 billion to RMB29.3 billion, and the net profit to be in the range of RMB7.8 billion to RMB8 billion. This forecast reflects the company's current and preliminary views on the market and the operational conditions, which are subject to change. This concludes our prepared remarks for today. Operator, we're now ready to take questions.

[Operator:]

Your first question comes from the line of Elsie Cheng from Goldman Sachs. Your line is open.

[Elsie Cheng:]

Good morning, Guangheng, Greg, Y.S., and James. Congratulations on the solid quarter again. And thank you for taking my questions. I have two questions here. First is on the RCF take rate, understand that we're targeting different higher quality client cohort with lower interest rates amid this environment. However, given the recent clarification on applicability of 4 times LPR restriction, just wondering, can we expect some upside in RCF take rate for us now that we probably have more flexibility in interest rates as well as targeted client cohort? And my second question is really on the guidance. If my calculations are correct, our new loan sales in first half 2021 is guided to grow at a very solid pace of 21% year-on-year at the midpoint. So can management share a little bit more color on the major drivers of the growth? And can we actually extrapolate this growth momentum into second half as well? Thank you. Thanks.

[Y.S. Cho:]

Yes. So let me first explain the first question, so a few of our unit economics. Fourth quarter last year, our new loans, it came with lower take rate and net margin because we reduced borrowing costs. But funding cost, CGI premium and our borrower sourcing cost, they didn't drop at the same case immediately. And fourth quarter new loans, it was about 25% of 2020 year-end loan balance. So that's why we had lower take rates in fourth quarter last year, and also versus 2019, we had more trust fund and self-guarantee portion. Those are other reasons. But if you look at January 2021 or last month's number, as Greg said, in January this year, we delivered record high new loan sales, almost close to RMB100 billion new loan sales in one month. And then we are able to see that the funding cost, CGI premium and borrower sourcing costs obviously drops. And take rate as a result, take rate and net margin, are very much in line with our previous expectations. So in overall, it's back to 2020 overall take rate and net margin level, and we believe this will continue. And we are very confident for full year 2021, our take rate and net margin for our RCF new business will be without much change. And in terms of LPR , as Supreme Court had clarified 4 times of LPR does not apply -- it does not apply to financial lending institutions, including guaranteed companies and consumer finance and small companies. However, we believe the general guidance from CBIRC remain unchanged at 24%. So we don't have any plans to adjust our price. And then depending on the product of funding cost, credit cost reduction and the operating cost optimization, we follow on to reduce our borrowing costs gradually, slowly, to be more price affordable and competitive in this weaker trading market, while we can maintain current take rate and net margin level. So we don't have any immediate plan to decrease price at this moment. But going forward, in the long term, we still plan to greatly decrease our borrowing costs. So that's the answer for the first question. And second question is, yes, our sales volume growth, as I just mentioned, in January this year, we delivered almost close to RMB100 billion new loan sales, which is very strong sales momentum. And going forward, we believe the salesforce, the market demand is plenty. And then our salesforce probably increased, it's very obvious, when compared to last year without any increase of salesforce headcount, we delivered 14.4% annual sales volume growth. So we'll focus on more and more profit improvement, at the same time, with AI applications, such as AI-driven one that we try to obtain and develop new inbound channels going forward. So in the meantime, in this tight take rate market, our experience is, for now, we do not see any other online channels, which can give us as good quality borrowers as offline channels such as our direct sales or life insurance agents with high ticket size and then with borrower acquisition cost at 3% . So in the meantime, our offline-driven sales, this will continue with about 85% contribution ratio. But going forward, we are planning to develop further self-acquisition channels.

[Elsie Cheng:]

Got it. That's very clear. Thank you.

[Operator:]

Your next question comes from the line of May Yan from UBS. Your line is open.

[May Yan:]

Thank you. Good morning, thanks for giving me this opportunity to ask questions, and congratulations on a very steady quarter again. Okay. My question, first one is related to regulation, if I can ask Ji Guangheng. I'll ask this in Chinese. Ji, this question is related to PBOC's earlier draft consultation paper credit rating business. And some people interpreted this may apply to loan facilitation business and loan facilitation companies, so will it be required to have a credit rating licensing? Is this something relevant to Lufax? Okay. And then second question, still on the take rate. As I understand that the take rate may be temporarily down in the fourth quarter, net take rate -- net pretax profit take rate 3.1% and revenue take rate 9.1%, but below sort of previous expectation. And so this year, you said, there's going to be -- gradually recover to the range of 3.4% to -- 3.5% to 4% on the net take rate. What would be the path for that? And what is the recent CGI cost that you mentioned will be 6.7% in fourth quarter and also the -- on the funding partners cost? And our loan size, the new loans all below 24% interest rate. Are the size much larger than before? I remember, in the third quarter, you mentioned about RMB200,000 per loan. Is it even higher than that as of now? And any guidance from the CBIRC to increase the 20% credit risk exposure to be higher, maybe to 30% or so? Thank you.

[Guangheng Ji:]

So in terms of the credit scoring business, we think the guidelines at the moment are reasonably early and preliminary. Business requirements and the shareholder requirements of a credit score institution, the rules from PBOC are not that clear as of yet. We do think it's probably targeted that leading institutions, specifically public and as part of the ratification plan, this is why this came out. Of course, new rules applying to a special case could be later on widely applied to the industry. In terms of loan facilitation business, we are not -- we don't think it's currently directly involved. We don't think our business will be classified as a credit scoring institution at this stage. We are maintaining various dialogues with the regulators. So in the future, if it does become the case, rest assured, we'll get enough pre-warning so we can plan and position our business accordingly and early. In conclusion, we think it's early and preliminary stage. We need more clear requirements from the PBOC before we can react with. So it may take another quarter for the rules to be cleared.

[May Yan:]

All right. Thank you.

[Y.S. Cho:]

Actually, I think there are a few more questions. So the third question is about fourth quarter take rate, 9.1%. And I explained that's mainly because the fourth quarter new loans came with lower take rate and net margin actually reduced a high borrowing cost to less than 24% from September last year. But if you see January number, I believe that number changed and they'll make sure will give the differentiation. January, our take rate and net margin already recovered back to our expected level. In overall, it's not less than overall 2020 level already. So we're in very good shape by now. And how reached to that point? There is obvious drive of funding costs and a CGI premium. CGI premium, our insurance partners, they also changed charging method from the amount base -- loan amount date to balance base from mid-January. So that, as a result, reduced the CGI premium ratio. And we also decreased our borrower outsourcing cost. In January, or starting from January, we reduced our sales commission by 15% . So as a result, we saved lots of borrower acquisition cost. So net-net our take rate and net margin recovered very nicely back to original level. And the next question, ticket size. Ticker size, we don't see much change in recent few months. Before September 4th, our average ticket size was, if you remember, it was RMB160,000. And then since we reduced high borrowing costs and then switched to better product segment from September 5th with low price, that increased ticket size from RMB160,000 to RMB200,000. So this is -- ticket size increased by about a little more than 20%. And this is the reason why we could reduce sales commission by 15%. And lastly, about our self-guarantee portion of 20%. As of December last year, for new loans, our self-guarantee portion increased to 13.6%. And then we want to make it up to 20% in June for new loans as part of discussion with regulator. But further than 20%, we don't have any plan at this moment. But what I can say is, regulatory requires more than 20%, more than 30% , for that we have enough organic cash flow to support the extra more self-guarantee portion. So we don't have much concern.

[Operator:]

Your next question comes from the line of Winnie Wu from Bank of America. Your line is open.

[Winnie Wu:]

Thank you very much for giving me this opportunity. Two questions, I guess. First, regarding, again, the regulation and our licenses. Since November last year, CBIRC published the consultation paper for those online micro loan companies' license. Have you started to communicate with the regulator regarding application for a national operating license? And is there any feedback from regulator on the outlook of when we will get clarity, certainty on getting this like national operational license? And also, we -- Lufax obtained the consumer finance license earlier last year. So what's the progress in using the consumer finance license? How much of the business, whether it's the loan facilitated or the outstanding balance, is being done via this consumer finance license? And what's the plan there? So that's the first regarding those licenses. And second, James mentioned that the accounting difference from booking loans online versus offline. I think by end of last year, roughly -- sorry, on-balance sheet versus off-balance sheet. As of end of last year, you have over -- slightly over 20% of the total loans outstanding on balance sheet. So what's the plan there? Do you see that further increase to 30%, 40%? Or is that going to stabilize at around 20% level? So meaning, the related question is when we will see the normalization of -- or stabilization of the account booking for those like revenue and expenses? When will this like base effect be normalized? Thank you.

[Y.S. Cho:]

Okay, thanks for the question. The first question about two licenses, online micro loan licenses. We have three licenses in Chongqing, Hunan and Shenzhen, and out of three, two are nationwide, online micro lending licenses. But we haven't got clarity and confirmation from regulator about the next step of development of those businesses. Those licenses are not in use at this moment. And then CF license, we got it in April last year. We started business from May last year. And then as of December last year, we have -- we booked 6.5 billion new loans with about a little more than 200,000 new customers. And the ending balance was about RMB3.5 billion. So we made a very good start. And then this is very much different from our Puhui business. This is a complementary business to serve younger and consumption borrowers. So we believe this is an opportunity for us, and then this can be our new base line going forward. And the comment on accounting method, yes, as James said online -- on-balance sheet versus offline balance sheet, it depends on our funding mix. And then it's already stabilized, I think. Thus going forward, our funding mix will be stable with 70% from partner banks and then 30% from trust. And I believe the mix will continue without much change. So as a result, on-balance sheet and off-balance sheet, this mix, I think, it already got stabilized.

[Winnie Wu:]

Sorry, just to clarify. How about you taking more -- so okay, so this 70-30 between banks and trust is already stabilized. Is there any plan like, for example, growing of the consumer finance business might mean that you will have more loans funded by yourself, is that going to change the picture?

[Y.S. Cho:]

Yes, that's correct. But if you think about our overall scale, our Puhui loan balance, as of today almost is almost RMB600 billion, but consumer finance business is how much, it's only RMB3.5 billion. So no matter how quickly it grows, it does not take much portion out of our total loan balance here. So it will take some time.

[Greg Gibb:]

So, I think we can say with the stabilization in funding between bank and trust in terms of other on-balance sheet will basically be driven by where we take the credit risk. And that is why I said our target would be to 20% by June. So, it will be a little bit over time, but it's roughly stable.

[Y.S. Cho:]

I think as we already shared .

[Winnie Wu:]

All right. And so for the consumer finance license, it will be more constrained to do pretty differentiated business line, which is sort of the unsecured consumer loan. What's the average ticket size there and what's the lending rate? Is this significantly different from our traditional business?

[Y.S. Cho:]

Yes, that is very much different from our personal businesses. The license this call the ticket size is nothing more than RMB200,000. But actually, it's controlled at less than RMB50,000, and our ticket size even for first borrowers is less than RMB20,000 per borrower at a weighted average price less than 17% HR .

[Winnie Wu:]

Thank you. And how about the maturity, are those like similar to the loans of Ant, WeBank, which is only like a few months of maturity?

[Y.S. Cho:]

Maturity is quite open, which is the line of credit products, it's like a virtual credit card. So customers can use whenever they spend and then use for monthly payments service. They can take three months, six months, 12 months and 24 months.

[Winnie Wu:]

I see. Thank you very much.

[Operator:]

Your next question comes from the line of Thomas Chong from Jefferies. Your line is open.

[Thomas Chong:]

Hi, thanks management for taking my questions. I have a question about the wealth management first. Can you provide us some updates about how we are using our technology in our automated portfolio strategy in Q4? And on the other hand, talking about the online deposit, how much does it contribute to our client asset mix? And then my second question is about the second half outlook. Given that we have a Q1 and the first half, how should we think about on a full year basis in terms of the top line and the bottom line? Thank you.

[Greg Gibb:]

Great, thank you, Thomas. This is Greg here. On the wealth management side, in Q4, we basically did two things. So there was the existing portfolio management tools, where we continue to use one more market data to help provide a set diversified investment strategy for the clients and that has continued to progress in the fourth quarter as it has in the recent year. What we've also done is opened up a platform to allow other financial advisory providers to come on and basically providing more product, more service to the customers. So this is an area that continues to grow at a good pace. And we think it will become more important in the market as a whole. And we're continuing to drive more and more automation, and more and more content sharing with the customers in that lines when they get used to the diversified investing. On the deposit question, if you go to the end of last year of the total client assets, the deposits made up about 16% of the total. So about RMB660 billion and that represented -- the revenue generated by the business was less than 0.4% of the total company. So as we let those deposit products to mature naturally, we will pay direct clients' money from those products into other areas on the platform as we've done in the past with the likes of PBT. So it will be an ongoing transition for that area. And then on the Q1, just a quick response. We do believe or rather in the first half and then for the full year, we do believe that we will see a double-digit top-line and double-digit bottom-line growth. We are pretty confident that, and certainly for the first half, we will continue to monitor the regulatory situation as it goes, but overall, we do think that the outcome to 2021 will be double-digit on both top and bottom-line.

[Thomas Chong:]

Got it. Thank you.

[Operator:]

Your next question comes from the line of Hans Fan from CLSA. Your line is open.

[Hans Fan:]

Thank you for offering this opportunity to ask question. This is Hans from CLSA. I got two questions. The first one is on the wealth management side. So Greg just mentioned that the strong growth in AUM in last -- in fourth quarter last year. Looking to the guidance for first quarter, and also, first half of this year, if you look at the client assets, is actually showing a slowing down in terms of growth rates. So just wondering why we are prudent in the wealth management client assets outlook? And also related to the wealth management side, we're wondering why the take rate for the current products were actually down quarter-on-quarter. So what's the reason behind this? That's number one. And number two is that, just wondering on the dividend side, we understand that the management mentioned previously that there is no near-term plan to pay out any dividends. But just wondering in terms of longer-term, once we are good at the capital front, do we have any intention to offer any dividends to investors? Thank you.

[Greg Gibb:]

Thanks, Hans. On the wealth management question, we anticipate two things happening in the first quarter with regards to client assets. Number one is, as those deposits mature, that 16% of the client assets mature, they will actually mature reasonably quickly. The average duration of those products was about six months to nine months. And so that will have some dampening effect on the CA growth. The other thing is that we continue to accelerate the final resolution of the P2P products in the first quarter. And so we really are going to probably put both the deposits and that P2P portion down, and then we will be shifting client money to other areas. But the outlook there for that we've taken at least in the first half for the wealth management is we will focus more and continue to optimize the product mix, that will allow us to continue to meet our revenue expectations for this business, but we will take the foot a little bit off the accelerator on the client assets as we optimize the mix. So that is the focus for the near-term, but we will update if that situation changes. On the take rate question, we actually did have very strong growth in the fourth quarter in CA before some of these changes like the deposits came into effect. The growth in the fourth quarter was a combination of bank asset management products and bank deposits and so you had an accelerating growth of the denominator with profit take rate down a little bit, so that you have a 5% decline quarter-on-quarter, but year-on-year increase of 10%. So as we look forward into this year 2021, we expect over the course of the next three or four quarters, we will continue to see improvement in take rate as we drive that mix in product on the platform. On especially the dividends, we have no immediate plans to issue dividends. You know, our intent is still very much to grow the business to deepen our use of technology, and in the later date, we could look at it, but it's not on the immediate radar.

[Hans Fan:]

Thank you.

[Operator:]

Your final question comes from the line of Binnie Wong from HSBC. Your line is open.

[Binnie Wong:]

Hi, good morning. Thank you for taking my question here. So my question here, actually two questions. One is on the retail credit facilitation service fee. I think there's -- of course, we see the decline in the past two quarters. And then, I guess consensus is also looking at this to decelerate especially into the second half this year. What are some of the challenges that you might foresee that might not be able to, yet, see the inflection point or might be later inflection point? And then with that also, can you have some color in terms of the service fee take rate as well? And then, also one follow-up question on the regulation side, is that, I remember earlier on since IPO, we talked about the interpretation, right, by different -- on the 4 times one-year loan rate and whether that also includes the credit guarantee fees. Interpretation as to different local costs, you also said there's different rulings; so just wanted to see any update on that. And I have just a very quick follow-up. Thank you.

[Greg Gibb:]

Y.S.?

[Y.S. Cho:]

Well, first on regulation, 4 times of LPR. So let me remind high price to be 24% LPR, and then within that, if we exclude guarantee -- I don't know, the credit investment fees, such as the LTPs and insurance premium, order rate, we try to cap within 15.4%. And I think now we have clarity. So we don't care about this mix. So the Supreme Court today clarified, so 4 times of LPR does not apply to financial lending institutions, and guaranteed companies, consumer finance or small companies, and the CBIRC guidelines of 24%. So the mix, it doesn't really matter. So as long as overall price is less than 24%, we believe this is very much compliant and then this is fine within current rate environment. And the first question is about outlook of fee. The overall effect of HR will remain unchanged throughout 2021. We don't have any plan to increase or decrease overall borrowing cost. And in terms of January number, I said, our take rate and net margin is already back to our 2020 level. Overall, our profitability in terms of take rate and net margin are very much in line with our previous expectation will stay unchanged or little bit changed, not much changes throughout 2021.

[Greg Gibb:]

Y.S., I think, one part of the question mentioned the mix in the service fees versus other interest income as we also increase the risk-sharing or change the risk-sharing model.

[Y.S. Cho:]

Yes. In terms of our fee mix, as we increase our self-guarantee portion to 20% for new loans by the end of June, so that will increase our fuel mix -- I think will increase our guarantee portion, and then service fee will decrease while guarantee fee increases.

[James Zheng:]

Maybe I can add a little bit. As I explained in my portion, basically, the revenue mix change is driven by two things, one is between online versus -- on-balance sheet versus off-balance sheet mix change, because you have seen that the on-balance sheet loan has increased from 10% by the end of 2019, up to 22% of 2020. As a result of -- we have consolidated more trust loans. Okay. So that won't change. The second change is we are taking more risks. The self-guaranteed risk has been risen from 2.2% at the end of 2019 up to 6.3%. So because of these two factors, it's changing the revenue mix so that you see the RCF kind of platform fees is coming down a little bit, but the revenue from the interest income from guaranteed income has substantially increased. And that's why at the beginning -- at the middle, we've talked about, because of these kind of business factor changes, it's reflected in our financial numbers.

[Operator:]

That concludes Q&A for today. I now turn the call back to management for closing remarks.

[Greg Gibb:]

I think so -- I think we've had a chance to lay out the basic situation here on the call, but we certainly look forward to engaging with the analysts very deeply over the next day or two to answer all of the questions that are out there. And we thank you for your attention and support. Thanks very much.

[Guangheng Ji:]

Thank you.

[Chen Yu:]

Thanks, everyone. That concludes the call.

[End of Q&A:]

[Operator:]

That concludes today's conference call. You may now disconnect. Thank you, everybody for joining today.