Lufax Holding Ltd - ADR Stock

Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Second Quarter 2026 Earnings Call.

[Operator Instructions]

Please note, this event is being recorded. Now I'd like to hand the conference over to your speaker host today, Ms. Xinyan Liu, the company's Head of the Board Office and Capital Markets. Please go ahead, ma'am.

Thank you very much. Hello, everyone, and thank you for joining us on today's call, the company's first investor conference call in almost 2 years. Our financial and operating results were released by our newswire services earlier today and are currently available online. This represents a key milestone as we return to a normal reporting cadence.

Today, you will hear from our Director and CEO, Mr. Xiang Ji, who will provide an update of the recent developments and strategies of our business. He will also provide details on our financial performance and business operations.

Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements.

With that, I am now pleased to turn over the call to Mr. Xiang Ji, Director and CEO of Lufax, please.

Thank you, Xinyan. Thank you all for joining our second quarter 2026 earnings call. Today's release marks the first step towards a normal predictable reporting cadence of Lufax. We very much appreciate the continued patience and support of our shareholders and the broader investor community throughout the process. I want to begin with updating you on the progress our management team has made in restoring Lufax financial reporting and strengthening our governance.

Since taking on our roles, we completed the reaudit of our 2022, '23 financial statements and completed audits for 2024 and '25, with all financial reports now published. As a result, we have brought our SEC periodical filings current and regained compliance with New York Stock Exchange continued listing standards. We engaged Deloitte Consulting Shanghai as our new independent internal control consultant to conduct a comprehensive review of our internal controls and to provide rectification recommendations to enhance our internal control system.

We have implemented corresponding remedial measures to address identified internal control deficiencies in accordance with Deloitte's recommendations. Beyond engaging Deloitte, we also strengthened our corporate governance through a restructuring of our Board and the establishment of the position of Chief Compliance Officer. Independent Non-executive Directors now make up a majority of our Board and our Chairman, Mr. Dicky Yip, is an Independent Non-Executive Director himself.

Going forward, we remain committed to further strengthening our internal controls, including through our new company-wide compliance initiative and the compliance culture we're building across the organization. We're equally committed to delivering long-term value to our shareholders as we return to a normal, predictable reporting cadence. As you may note, while our ADSs have been trading normally on the New York Stock Exchange, our ordinary shares remain suspended from trading on the Hong Kong Stock Exchange, a matter we continue to work through with the Hong Kong Stock Exchange.

Now moving on, let me share a bit of update on the macro and regulatory environment. Amid numerous external uncertainties and instabilities, China's overall economic growth continued to moderate in the second quarter with GDP growing 4.3% year-over-year. The operating environment for small and micro enterprises stayed difficult and financing demand remained weak. Cheung Kong Business School SME Development Index fell month-over-month during the quarter and dropped below the 50-point boom and bust line in June. This basically reflects a challenging environment for our core small business customer base.

Consumer finance demand was similarly soft. Household consumer loan balances were down 1.7% year-over-year as of the end of June. On the regulatory side, regulators have issued a number of guidelines, policies since 2025, covering a wide range of things such as collection practices, data securities and personal information protection. Oversight now spans the full value chain from pricing and customer acquisition through management -- risk management, post loan operations and data governance.

Combined with continued interest rate compression and fee transparency requirements, industry margins are narrowing. The previous business model of offsetting high risks with high fees is no longer sustainable. We see this as near-term pressure on growth and profitability. Over time, however, we believe such tightened regulatory requirements will support healthier and more disciplined competition across the industry and enhance competitive advantage of top players with proper licenses and compliance mechanisms.

Now let me turn to our operating strategy. Given the environment, we are [ remaining ] a prudent strategy characterized by selective customer strategy and AI-powered refined operations. Our selective customer strategy is focusing on shifting our customer mix towards lower risk borrowers. Meanwhile, we aim to improve our performance through AI-powered refined operations. We're now focused on customer segmentation and on deepening our relationship with existing customer base. We launched our Industry+ product, which deploys differentiated product and operational priorities tailored to local industries and customers across different regions. So basically, the plus is industry plus region or even at a county level.

We developed customized financing solutions based on the unique operational characteristics and funding needs of different sectors, enabling more precise and customized support to satisfy the financing needs of our SBO, Small Business Owner customer base. Moreover, we're using AI to further improve our operational efficiency. We introduced AI-powered digital twin. This supports our direct sales team across acquisition, product recommendation, post loan management and customer engagement, improving both service quality and operational efficiency. We're also improving our customer management model, moving from single product sales towards full life cycle account management. Leveraging our direct sales team's expertise and interaction with customers, we believe this effort will enable long-term customer value cultivation.

Turning now to our operating results. Total new loan sales in the second quarter were RMB 51.1 billion. This was up 4.6% year-over-year and up 4.8% from the first quarter. This growth was driven by consumer finance, where new loan sales grew 27.6% year-over-year to RMB 36.9 billion. We continue to gain share in a pretty contracting market. Our total outstanding loan balance was RMB 167.3 billion as of the end of the second quarter, down 13.5% year-over-year, reflecting continued weak demand in the SBO business segment, combined with our prudent underwriting approach.

Turning to asset quality. We prioritized improvement of our intelligent risk control system by further optimizing our risk strategy and upgrading our models. On the post loan side, we expanded our collection model reforms and broadened the use of AI-powered collection. These efforts delivered an improvement in asset quality on a sequential basis. Our C-M3 flow rate was 1.0% in the second quarter, down from 1.2% in the first quarter. C-M3 flow rate of unsecured loans was 1% and secured loan was 0.9% as compared to 1.2% and 1.0%, respectively, in the first quarter.

DPD 30+ delinquency rate, excluding consumer finance subsidiary, was 5.8%, down from 6.1% sequentially. As of the end of the second quarter, the NPL ratio for consumer finance loan was 1.3% as compared to 1.4% as of March 31, 2026.

Now let me turn to pricing and funding costs. The average pricing of LONGi loans, previously known as Puhui loans before the rebranding in 2025 was 20.4% in the second quarter, flat sequentially and up slightly year-over-year. The average pricing of consumer finance loan was 19% in the second quarter. On funding, we continue to optimize our cost. We leveraged our long-term relationships with our banking partners to reduce funding costs under our guaranteed model. Our cost of funding by balance, excluding consumer finance was 3.8% in the second quarter down around 90 basis points year-over-year.

As for consumer finance loans enabled by our consumer finance subsidiary, we continue to access low-cost funding in the interbank market, leveraging our license advantage and consistent with broader downward trend in the interest rate.

All right. Now let me briefly discuss the key business drivers behind our second quarter results. On the top line, total income declined by 15.5% year-over-year, driven primarily by decrease in the balance of our LONGi loans as small business owners demand remained weak, and we maintained a prudent underwriting approach in light of the increased risk associated with certain long-tail customers. This was partially offset by continued growth in our consumer finance loan balance, which grew nearly 20% year-over-year.

On the bottom line, while our net loss narrowed substantially from the same period last year, recorded net loss for the quarter continued to reflect credit costs that remain elevated relative to our income base. This is heightened by the challenging macro environment for small business owners and by tightened regulatory requirements that impacted supply of high-priced products. While we believe such tightened regulatory requirements will benefit the development of industry in the long run, in the short term, the reduction in supply to high-risk customer segments adversely impacted the repayment capability and increased our credit costs.

Going forward, we remain focused on disciplined execution, strengthening our governance and controls and on building a sustainable, high-quality growth path for Lufax. Again, we very much appreciate your continued support.

And this concludes our prepared remarks for today. Operator, we're now ready to take any questions.

[Operator Instructions]

The first question today comes from Richard Xu with Morgan Stanley.

Two questions, one on strategy. I just want to see from the view of management team, what will be the top 2 or 3 priorities over the next 2 to 3 years? Will there be any material changes versus previous strategy?

Secondly is on the loan growth and business mix. Now new loans returned to positive in the second quarter. Obviously, the consumer finance accounting for a rising share of business. Is this sustainable? There's still a lot of policies try to obviously influence the growth in this area's pricing. And under the new strategy, what should be the long-term balance between consumer and I guess, the SME loan portfolio?

Thank you, Richard. Thank you for your questions. So basically, the first question is around strategy, right? So over the next 2 to 3 years, our top priorities are pretty clear, right? So first, growing the mid- to low-risk customer base.

We want to focus on high-quality customers across 3 segments: small business owners, which is really the stronghold of Lufax over the years. individually owned businesses or self-employees, that's basically a new customer segment we want to broaden and salaried employees, right? So through consumer finance, we see some good momentum. I want to see that to continue. In increasing the proportion of mid- to low-risk customers, build a more diversified product matrix, right, deepen refined operations, that customer segment and achieve improvement in risk and profitability. So that's basically very much the top line priority.

Second priority, with all the pricing compression and sort of credit costs going up in the market, we want to continue to optimize cost, our cost structures. We are going to comprehensively apply and promote AI applications across the business to optimize customer acquisition, risk operating costs and create more room for improved profitability while we're lowering the price.

Third, strengthening internal controls and compliance, right? It's like what [ Xinyan ] said is, in 2 years, we haven't been able to talk to you. So we want to strengthen internal control and compliance, strictly implement regulatory requirements to achieve a long-term sustainable development.

The previous strategy as is set out in 2024, 2 years ago in the earnings call, centered around 2 pillars: number one, prudent operation, prioritizing asset quality over scale growth. Number two, business diversification, growing consumer finance, expanding our non-SBO consumer base. Going forward, this is still the sort of the strategy we're basically trying to implement. We will further strengthen our dual engine strategy for small business lending and consumer finance, while also relying on our new selective customer strategy to optimize customer base, drive growth in the business scale and improve profitability.

And when it comes to the second question, right, the second question around we have the consumer finance going up, whether that's sustainable, what's the proportion between the consumer finance business and SME. Our strategy is to build 2 growth engines. One is small business lending, the other is consumer finance with resources concentrated on the 2 core consumer segments. And as you can see, consumer finance is a new growth engine and will continue to be the driver for growth. We are testing new customer acquisition models as we speak and product combinations to serve higher-quality customers, and we believe this growth is sustainable.

When it comes to small business lending, small business lending, we see that as our traditional strength. Our focus there is to return to growth through improved customer acquisition efficiency and broadened product portfolio and stronger risk management capability. We see small business lending and consumer finance complementary, and they have different demand characteristics and risk profiles. So going forward, we will endeavor to continue to optimize our business mix based on market conditions to achieve balanced growth.

The next question comes from Emma Xu with Bank of America.

So I have 2 questions. The first one is about the regulation. So following recent stress amongst the smaller online lending platforms, so has management observed any tightening in institutional funding or borrower refinancing conditions? And how will you deal with this?

And the second one is about the capital return. So given the large free cash balance and improving operating trajectory, what level of capital do you consider necessary to support this business under the full guarantee model. Once sustainable profitability is restored, should investors expect the existing 20% to 40% payout framework to remain the base policy? And under what conditions would you consider additional capital distribution?

Yes. Thank you for the question. So basically, first of all, talking about the regulation. As one of the sizable players in the market, we fully welcome the tightened compliance regulation, et cetera, right? Strengthened compliance across the industry is inevitable trend. Recent policy changes are aimed at comprehensively strengthen compliance requirements, protecting consumer rights and promoting the healthy and sustainable development of the industry. We will continue to implement adjustments in line with regulatory requirements at our full strength.

The tightened regulatory requirements will bring some pressure to our business in the short term for sure. We will accelerate our selective customer strategy, strengthen cost management, optimize cost structure and improve capital efficiency, among other measures to continue optimizing customer acquisition, risk and operating costs. This will further create room to lower pricing while ensuring stable profitability.

Nevertheless, over midterm to long term, this trend will help healthy growth of the industry, compliant leading platforms such as Lufax will benefit from further optimization of the industry landscape and gain market share. So in short, short term, we do feel pressure in terms of our business performance, but we're also sort of optimistic around midterm and long-term performance because a more sort of compliant market will benefit players such as us.

And you also asked a question around capital return, right? Management believes our current cash position is appropriate relative to the scale of our business. It reflects both the capital requirements and the applicable financial regulations and the need to maintain a buffer to support future growth. Now management is focused on executing our strategy, right? Our top priority is returning to profitability as soon as possible in order to create long-term value for shareholders. Our dividend policy, once we achieve our profitability target, management will review the dividend policy together with the Board and to decide whether we should have payout framework.

The next question comes from Alex Ye with UBS.

Two questions from me. First one is regarding our unit economics. So now with our transition to the full guarantee model largely complete, could you give us more color about the underlying profitability of the new loans? And what is the expected rate for this new full guarantee business?

Second question is on asset quality. So we have seen some early indicators [ including SME ] and consumer finance NPL ratios improved Q-on-Q in the Q2, but some of the lagging indicators still remain elevated. So -- and we have also seen there has been some risk events across the smaller platform in the industry since the end of Q2. Could you comment a little bit on the latest asset quality trend?

Sure, sure. This is the first time that I talked to our shareholders, investors, analysts. However, the new strategy has been implementing, I would say, since the earlier beginning of the year, right? And with the new strategy, we have seen improvements in the asset quality of new LONGi loans enabled in 2026. And we believe our overall profitability will continue to improve as we continue to implement the new strategy, right? So what I can see for this call is the new loans we have issued over the first half of the year has improved profitability over the sort of the assets we have accumulated in the year of 2025, right?

And that leads us to asset quality. Since the start of this year, we have upgraded our risk control measures. We actually take a very prudent approach, right? We also refined our risk strategy and enhanced our risk models. On the post loan side, we have broadly rolled out collection models reforms and expanded the use of AI-powered collection, right? And all these initiatives have delivered initial positive results with sequential improvement in asset quality in the second quarter. Asset quality has been gradually worsening since the second half of last year. However, as you can see, in the second quarter, our C-M3 flow rate declined notably compared to the first quarter. And the management is expecting the trend to continue over the second half of the year. Thank you.

The next question comes from You Fan with CICC.

This is You You Fan from CICC. I also have 2 questions here. The first one is about customer competition. We noticed that the secured loans are originally priced around 17%. Do the credit characteristics of these customers qualify them for bank loans? And for the relatively high-quality customers, how does the company compete with banks or other lower-priced channels?

And the second question is about Hong Kong trading. I just wonder how is the processing of the resumption of our trading in Lufax Hong Kong shares? And could you share is there any better visibility on the trading resumption time line? These are my 2 questions.

Yes. Thank you. So first of all, we don't see ourselves competing head-to-head with most of the banks, right? Our LONGi product targets small business owners and individually owned businesses, a customer base that's different from typical bank customers. Why I say different? Many of these customers either cannot access bank loans or cannot obtain sufficient loan amounts from the bank. So basically, LONGi fills this supply gap and complement bank rather than competing head-to-head. LONGi and bank products are priced differently, which allows the 2 to complement each other well.

Our product differentiated advantage, including higher loan amounts, a more convenient process and typically take less than a day and flexible repayment terms, which better meets customer supplementary and emergency financing needs.

On refined operation, we launched our Industry+ initiative, which is tailored to the distinct operating characteristics and the financing needs of different regions and industries. For example, I've been to province such as Shandong, such as Guangdong, et cetera. At a county level, we typically have industries which are basically serving the entire nation, right? So for example, cooking wares in a particular county in Shandong and lighting sort of facilities in a particular county in Guangdong, right? And we are basically leveraging our direct sales to penetrate to county level, and this allows us to design dedicated product solutions and more precisely address small business financing needs across different sectors, right?

And you also asked a question around Hong Kong trading resumption. We have now completed the restatement of our 2022, 2023 financial statements, the audit of 2024 and '25, right? And with all reports now published and released, we now also completed the internal control review and upgrades with the help of external professionals. The company is still responding to outstanding questions and comments raised by the Hong Kong Stock Exchange regarding the relevant fundings. We will keep investors updated on any developments in a timely manner, and we'll make appropriate announcements as necessary.

That concludes our question-and-answer session for today. I will now turn the call back over to our management for closing remarks.

Thank you, operator. This concludes today's call. Thank you for joining the conference call. If you have more questions, please do not hesitate to contact Lufax's IR team. Thanks again.

Thank you. The conference has now concluded. You may now disconnect.