Lufax Holding Ltd Third Quarter 2026 Earnings Conference Call - LUFAX HOLDING LTD

Financial Performance:

• Recorded a net loss of RMB 1,494 million for Q3 2026, compared to a net loss of RMB 380 million in the prior year.
• Total revenue was RMB 6.18 billion, a 4.6% year-over-year decline; pre-tax loss was RMB 721 million.
• Credit impairment losses increased 10.3% to RMB 4.511 billion, driving the pre-tax loss due to higher actual losses and loan provisions.
• Income tax expenses rose to RMB 773 million (vs. RMB 74 million prior year) due to a non-cash reduction in deferred tax assets for a financing guarantee subsidiary and additional withholding taxes on planned offshore dividend distributions.
• Net interest income grew 10.3% to RMB 3.677 billion, driven by consumer finance and micro-lending expansion.
• Technology platform-based income fell 24.1% to RMB 1.055 billion, and guarantee income dropped 24.6% to RMB 1.020 billion due to reduced off-balance-sheet loan balances.
• Cash at bank stood at RMB 21.2 billion (down from RMB 22.1 billion end-2025); net assets were RMB 80 billion (down from RMB 82 billion).
• Funding costs declined 80 basis points year-over-year to 3.6% on a balance basis.

Guidance and Future Outlook:

• Management expects risk volatility from regulatory enforcement to be temporary, with asset quality projected to gradually improve over the coming months.
• The company is shifting focus from scale growth to high-quality growth, prioritizing prudent operations and compliance over rapid expansion.
• Long-term strategy involves leveraging AI to upgrade risk models pre-loan and enhance AI-driven collection post-loan to optimize portfolio structure and recovery efficiency.
• Anticipated long-term benefit from regulatory standardization, which is expected to enhance competitive advantages for licensed, compliant players like Lufax.
• Expect continued tightening in funding supply for the broader industry, though Lufax remains confident in its sufficient funding availability due to strong banking partnerships.

Business Segments and Product Lines:

• Consumer finance was the primary growth engine, with new loan sales rising 25.2% YoY to RMB 39.7 billion, representing 68.1% of total new loan sales.
• Total new loan sales reached RMB 58.3 billion, up 2.5% YoY and 14.1% sequentially.
• Total outstanding loan balance was RMB 167.1 billion (down 11.9% YoY); consumer finance loan balance grew 19.8% YoY to RMB 70.5 billion.
• Industry Prism program expanded to cover over 700 sub-industries, offering differentiated products.
• Established a dedicated direct sales team for consumer finance targeting quality salary customers, shifting from single-product sales to full-lifecycle relationship management.
• Deployed AI-powered digital twins to enhance operational efficiency across customer acquisition and management.

Market and Competitive Landscape:

• Operating environment for small and micro enterprises remains challenging, with the SME Development Index below the 50-point boom/bust line.
• Household consumer loan balances declined 3.6% YoY, indicating subdued consumer demand and balance sheet repair priorities.
• The industry is undergoing intensified enforcement against debt collection practices, leading to volatility and a need for compliance recalibration across the sector.
• Lufax distinguishes itself through a diversified license portfolio (consumer finance, guarantee, micro-lending) and an in-house collection force, mitigating reliance on third-party collectors who face supply shortages.

Risks and Challenges:

• Credit impairment losses surged due to a challenging macro environment and intensified regulatory enforcement against debt collection activities.
• Deferred tax asset valuation reduction created a significant non-cash tax expense impact on the bottom line.
• Short-term pressure on profitability and growth expected due to the transition toward a more compliant, lower-risk business model.
• Delinquency rates (CM3 flow rate) rose to 1.2% for total loans (up from 1.0%), while DPD 30+ and 90+ delinquency rates for non-consumer finance loans remained elevated at 5.5% and 3.2% respectively.
• Regulatory uncertainty regarding funding availability for peers, though Lufax reports stable funding sources.

Management Commentary and Tone:

• Tone was cautious yet confident regarding long-term strategic positioning; management emphasized "disciplined execution" and "sustainable, higher-quality growth."
• CEO highlighted the company's "selective customer strategy" and exit from high-risk segments as key responses to the macro environment.
• New CFO Liu Jia emphasized priorities of accurate financial reporting, disciplined liquidity oversight, and strengthening internal controls.
• Management expressed that while short-term results are negatively impacted, the regulatory tightening benefits the industry's long-term health and top-tier players.
• CEO reaffirmed the resumption of Hong Kong stock trading on September 24, 2026, and thanked shareholders for patience.

Analyst Questions and Answers:

• Credit Loss Drivers: Analysts inquired about the drivers of increased losses; management confirmed it was due to actual losses on existing assets and macro/regulatory pressure, noting that new 2026-originated loans performed within expectations.
• Collection Performance: Addressed concerns about reduced third-party collection supply; management stated their in-house force and judicial recovery channels mitigate this risk, with AI-driven collection improvements expected to take effect over the next few months.
• Funding Supply: Confirmed funding costs continue to decline and supply remains sufficient for Lufax, attributing this to strong banking relationships and license advantages.
• Regulatory Outlook: Stated that previous models of offsetting high risk with high fees are unsustainable; the business model is transforming to focus on compliant, licensed operations.
• Asset Quality Stabilization: Expects asset quality to improve as selective strategies deepen, though macro and regulatory impacts may persist through year-end.

Other Key Points:

• Trading on the Hong Kong Stock Exchange resumed on September 24, 2026, following a suspension.
• Ms. Liu Jia officially joined as CFO in October, bringing experience from CITIC AI Bank.
• The company recorded higher foreign exchange gains in 2026 and received lower government subsidies compared to the prior year.
• Management plans to further extend AI capabilities from operational efficiency to risk management pre-loan and collection post-loan.
• Lufax holds a consumer finance license, guarantee license, and micro-lending license, which management views as a key competitive moat.