Lufax Holding Ltd (LU) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Ltd Fourth Quarter's 2020 Earnings Call. (Operator Instructions) 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.

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.

Today, you will hear from our Chairman, Mr. Ji Guangheng, who will start the call with updates on recent changes to corporate governance structure as well as regulatory development; our co-CEO, Mr. Gregory Gibb, will then provide a review of our business in the quarter and future strategies. Afterwards, our CFO, Mr. James Zheng, will offer a closer look into our financials before we open up the call for questions. In addition, Mr. Y.S. Cho, our co-CEO; and Mr. David Choy, CFO of our retail credit facilitation business, will also be available during the question-and-answer session.

Before we continue, I would like to refer you to our safe harbor statements in our earnings press release, which also applies to this call, as we will be making forward-looking statements. Please also note that we will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the international financial reporting standards in our earnings release and filings with the SEC.

With that, I'm now pleased to turn over the call to Mr. Ji Guangheng of Lufax.

Okay. (foreign language)

[Interpreted] 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 3 different aspects of our business: first, changes to our corporate governance structure since becoming a U.S.-listed company; second, our integration of recent regulatory development; and third, our view of future regulatory trends as well as the steps we are taking to stay in front of these changes.

(foreign language)

[Interpreted] Starting with corporate governance. Mr. Renjie Li, Chairman of the Board, has submitted his retirement application as he reaches the golden age of 65. In strict adherence to U.S. listing regulations, our Board held a meeting on January 29 and approved Chairman Li's retirement, along with the resignation of 4 other shareholder directors and 1 independent director.

As previous co-Chairman of the Board, I will now assume the sole role of Chairman of the Board, in addition to my role as Chairman of Lufax Executive Committee. We have also appointed Mr. Yunwei Tang and Mr. David Xianglin Li as our independent directors and Mr. Rui Li as our shareholder director.

Following these changes, our Board now consists of 9 directors, among whom 3 are executive directors, 5 independent directors and 1 is a shareholder director. Additionally, our Nomination and Remuneration Committee as well as our Audit Committee now solely consist of independent directors. Such changes have brought us into full compliance with the NYSE listing requirements for a majority independent Board and for both of the aforementioned committees to solely consist of independent directors.

As a representative of a U.S.-listed company, our new Board of Directors will remain dedicated to improving the company's corporate governance, protecting minority shareholders' interest and establishing prudent corporate strategies in an efficient manner.

(foreign language)

[Interpreted] In addition, after careful reviews and thorough discussions, our Board of Directors has decided to adopt a co-CEO executive structure. As a result, Mr. Yong Suk Cho Mr. Gregory Dean Gibb will serve as the company's co-CEOs going forward with Mr. Cho in charge of our retail credit facilitation business and Mr. Gibb in charge of our wealth management business. We strongly believe that this new management structure is in the best interest of our stakeholders, enabling us to cultivate more synergies across business segments and better integrate our overall business resources.

(foreign language)

[Interpreted] In addition, Y.S. -- in addition to his role as running the retail credit facilitation business, he will also assist me in managing the planning and treasury functions of the company.

(foreign language)

[Interpreted] And in addition to running the wealth management business, Greg will also assist me in managing the technology and IR functions of the company.

(foreign language)

[Interpreted] Now turning to regulatory development. Fintech industry regulations continue to be tightened in China throughout 2020. At the end of 2020 and beginning of 2021, for example, regulators introduced a series of new regulations, including the interim measures for the administration of online micro finance business, the anti-trust guidelines for the platform economy industry, the interim measures for the administration of sales of wealth management products from wealth management subsidiaries of commercial banks and the notice on regulating commercial banks to conduct personal deposit business through the Internet. At a fundamental level, these regulations represent the government's desire to promote prudent innovation, prohibit monopolistic practices, protect consumer interest and maintain financial stability and security.

Facing increasingly stringent regulatory oversight, we have adopted an overarching strategy of embracing regulatory change, engaging in proactive dialogues with regulators and forging collaborative and productive relationships with local authorities. While we do recognize that stricter and more standardized regulatory requirements may result in some short-term pressure on the company, we also believe that such changes should foster more long-term benefit for fintech market leaders such as Lufax.

Now allow me to elaborate on these -- how these policies have impacted our own businesses.

(foreign language)

[Interpreted] First, for our retail credit facilitation business, we seek to thoroughly understand the spirit of regulations and proactively communicate the value of our services to the regulatory authorities. Our understanding is that current policies intend to prevent excess consumer borrowing costs and over expansion of consumption credit limits by younger consumers.

In respect to lending costs, the latest legal explanation from the Supreme People's Court of China stipulates that the 4x LPR interest rate cap is neither applicable to the lending businesses of financial institutions nor local financial organizations. Since September 2020, we have restricted our all-in lending costs for facilitating all new loans to no more than 24%, which is in line with the latest requirements.

What is noteworthy is that our loan facilitization services differ from other Internet consumer lending services in borrowers' use of loan proceeds. We primarily serve micro and small business owners and meet their operating needs. In doing so, we help the fiscal economy to grow and prosper, which is in full alignment with policy directions.

Although we face temporary pressure from the uniform enforcement of regulations across the board, we are engaging in active and persistent dialogues with the regulatory authorities so that our business' mission and societal values are fully understood and appreciated.

(foreign language)

[Interpreted] Secondly, for our wealth management business, we have stopped facilitating online deposits and shifted our focus to wealth management technology empowerment. In fact, before the PBOC and the CBRC jointly issued the notice on regulating commercial banks to conduct personal deposit businesses through the Internet on January 15, 2021, we had already ceased offering online deposit products. Since these products only represent a small portion of our total income, we expect that the financial impact of these adjustments on our business will be both limited and manageable.

Looking ahead, we will continue to promote standardized products and structured products on our platform, propelling the growth of our business through superior product recommendations and user experience. We will also continue to work towards empowering small- and medium-sized commercial banks through advanced technologies.

(foreign language)

[Interpreted] As a U.S.-listed company, Lufax will remain in compliance with the regulatory rules of both China and the United States. Moreover, to improve the compliance and transparency of our business operations, we'll also remain vigilant of relevant regulatory development. We believe that our unique hub-and-spoke model will enable us to enjoy sustainable growth even under strict regulatory oversight. Although the increased scrutiny towards certain companies may severely affect small- and medium-sized platforms, we believe that stricter regulations will be more advantages to Lufax in the long run.

As an industry leader, Lufax poses advanced technology capability, sophisticated management know-how, strong pricing power and versatile risk mitigation expertise, all of which should enable us to thrive in any environment.

(foreign language)

[Interpreted] Finally, I would like to share our views on the future development of regulatory policies. As mentioned on our previous quarterly earnings call, we expect that regulations for retail credit facilitation will focus on 7 different areas, including: interest rate cap; capital requirements; bundled sales; geographic coverage restrictions; funding institution risk management; use of proceeds verification; and consumer protection. We are actively preparing our businesses to maintain compliance in those 7 aforementioned areas.

In addition to lowering our lending cost, we have also increased our overall risk-taking rate to 6.3% as of December 31, 2020. By mid-2021, we intend to have increased our overall risk-taking rate to 20% for all new loans facilitated. Based on our analysis and forecast, we will have sufficient net assets to cover potential capital needs going forward.

In regards to geographic coverage restrictions, in recent years, we have established branch offices in key cities across the country to ensure that our nationwide operations remain smooth and compliant. Furthermore, on the consumer protection front, we have upgraded our apps and processes, implementing more timely response protocols for customer complaints and providing our borrowers with more credit-enhancement choices to better protect their interest.

(foreign language)

[Interpreted] In conclusion, we believe that we are well prepared to navigate through the regulatory uncertainties as we engage in active communications with the regulatory authorities. We are confident that we will complete our business transition smoothly while maintaining regulatory compliance. With our refund operational processes, technology-enabled cost optimization and risk-matching pricing mechanism, we should be able to sustain our healthy and profit growth for the long run.

(foreign language)

[Interpreted] I will now give the floor to Greg, who will share our business updates for the quarter.

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 CNY 545 billion, while our client assets in wealth management have also grown by 23% to CNY 426 billion. Moreover, for the full year of 2020, our total income grew by 8.8% to CNY 52 billion, while our non-IFRS adjusted net profit grew by 2.1% to CNY 13.6 billion.

Underpinning these positive outcomes were several driving factors. First, we continue to observe improvement in our credit quality. The [C to M3] flow rate, the leading indicator of risk performance on our lending platform, continue to stabilize around its pre-COVID-19 levels. In Q4 2020, our flow rate was 0.4% as compared to 0.4% in Q4 2019. Additionally, our 30 days past due plus further improved to 2% in the fourth quarter from 2.2% in the third quarter of 2020, while our 90 days past due decreased to 1.2% in the fourth quarter from 1.3% in the third quarter.

Second, we received more clarity surrounding the interpretation of the application of interest rate caps. We're pleased to see, as Chairman Ji just mentioned, the recent Supreme Court guidelines and Underpinning these positive outcomes were several driving factors. First, we continue to observe improvement in our credit quality. The C to M3 flow rate, the leading indicator of risk performance on our lending platform, continued to stabilize around its pre-COVID-19 levels. In Q4 2020, our flow rate was 0.4% as compared to 0.4% in Q4 2019. Additionally, our 30 days past due plus further improved to 2% in the fourth quarter from 2.2% in the third quarter of 2020, while our 90 days past due decreased to 1.2% in the fourth quarter from 1.3% in the third quarter.

Second, we received more clarity surrounding the interpretation of the application of interest rate caps. We're pleased to see, as Chairman Ji just mentioned, the recent Supreme Court guidelines and local court case is providing clarity on the interest rate cap. These developments were largely in line with our expectations, and all of our loans from September 4 last year have been below 24%. We do not expect any further adjustments to our lending rates in the short term.

Third, in line with our plans, we continue to make good progress in establishing a more sustainable risk-sharing business model. It's encouraging to see that our funding and insurance partners have remained supportive and embraced this new model. As of December 31, 2020, our expanding balance of loans facilitated with guarantees from third-party insurance partners decreased to 88.8% from 95.6% a year ago. Moreover, Ping An PMC accounted for 77.7% of new loans sold in the quarter, down from 93.2% a year ago, while our funding partners bought the risk for 6.7% of new loans in the fourth quarter.

Fourth, we further penetrated into our core and target segments -- customer segments. During the fourth quarter, 72.7% of new loans facilitated were dispersed to our core segment of small business owners, up from 62.1% in the same period in 2019. In the wealth management business, the contribution from customers with investments of more than CNY 300,000 as a percentage of our total platform client assets increased to 75.5% as of the fourth quarter versus 73.1% a year ago. Moreover, our 12-month investor retention rate remained high at 96.8% as compared with 93.3% in the same period of 2019.

Lastly, we observed strong growth in our current product client assets in the wealth management business. Current product client assets grew by 67.2% year-over-year, and thus, accounted for 95.5% of our total client assets as of the quarter end. The remaining legacy client assets decreased to RMB 19.4 billion or 4.5% of total client assets as of the quarter end.

Next, let me provide some more context regarding new loan sales, take rate and pretax margin in the fourth quarter.

In retail credit facilitation, our new loan sales for the quarter were CNY 132.7 billion, slightly ahead of our prior guidance and representing a 3.2% year-on-year increase. We also observed stable credit demand from our small business owners in Q4 as well as a very strong start in the new year. In fact, for January '21, we just recorded our highest-ever single month new loan sales, representing a year-on-year double-digit increase.

As a result of our adjustments to borrowing costs back in September 4 last year, our revenue take rate did experience temporary pressure in the fourth quarter, declining to 9.1% in Q4 from 10.3% a year ago. As these adjustments at the time occurred overnight, we believe this decline is temporary in nature. And nevertheless, we are now renegotiating with our partners to reduce our funding and credit costs as we continue to adjust our cost structure that will take some time. We believe our revenue take rate and net margin will improve in the future throughout the course of this year. I'm going to circle back on this in just a moment to explain to everyone how we're going to get there in 2021.

For now, despite the regulatory uncertainty, we expect double-digit top line and bottom line growth going forward through this year.

As I mentioned, we've already had a very strong start for the year, recording the highest-ever single monthly use loan sales, while maintaining the full and steady backing of our insurance and funding partners. We also decreased our sales commission rate starting this January, and we've continued to optimize our funding cost, and we started to enjoy lower CPI costs since insurance partners adjusted their pricing on the back of better credit and customer quality. All of these factors are leading to a recovery in pretax net margin as compared to Q4 2020, as we expect this trend to continue throughout the remainder of 2021.

Due to the complex accounting treatment of revenue recognition for loans that we facilitate versus trust-funded loans and the initial recognition of credit costs for our risk-bearing loans, there will likely be some quarterly volatilities in our net margins, which James will elaborate more on next. But in spite of this, our strong performance in January has given us confidence in the healthy momentum of new loan sales as well as our underlying unit economics. In fact, after overlooking the accounting treatment complexities, we believe that both, and here we're talking about take rate and unit economics have already bottomed out and will continue to improve throughout 2021.

For our 2021 business priorities, we'll continue to monitor the new regulatory requirements and be prepared to adjust quickly when required, similar to how we have operated in the past. Now as we look ahead in retail credit facilitation, the stabilization of borrower rates and continued optimization of external and internal costs are expected to improve our underlying unit economics. We will also continue to execute our plans for the new risk-sharing model, diversify our funding channels, secure more funding partner support and enhance our deployment of technology.

In wealth management, we are prioritizing revenue optimization and product mix over client asset growth. The reason we had made this decision is, in reflection of the tightening regulations in some areas that we've seen, such as the bank deposit distribution. But we expect revenue growth to be in line with our own expectations as we explore more qualified investor products and increase our focus on those insurance and equity-related products capable of generating better returns for our business.

Our 2 businesses will also be working together to expand our technology-enabled services in lending and wealth management to small bank partners. We expect this strategy to deepen our ties with the partner banks and to generate additional revenue opportunities.

I will now turn the call over to James Zheng, our CFO, to go through the financial details.

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 continue to deliver solid financial results in the fourth quarter of 2020. Our total income was CNY 13.3 billion, up 5.9% year-over-year. More importantly, our net profit increased by 17.4% to CNY 2.8 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 2 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. For loans that we'll facilitate, retail credit facilitation service fees are recognized under IFRS 15, and a great portion of the revenue is, thus, recognized in month 1, reflecting a larger portion of the service that is provided to the borrowers in month 1. We utilize trust as a funding channel. Certainly, trust-funded loans for which we meet accounting consolidation requirements are recognized as on-balance sheet lending, and revenue for these type of loans is recognized as net interest income and IFRS 9. Recognition of monthly revenue and IFRS 9 is more evenly spread out across life cycle of a 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 by a bank, therefore recognized under IFRS 9 (inaudible) or funded by a consolidated trust, and therefore recognized under IFRS 9 makes little business 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 1, therefore, creating a temporary deviation between accounting results and the business performance. Second, self-risk gearing loans, front-load loan credit costs. As we start to bear more risk, we expect to earn more margin over the life of a loan as the margin previously earned by our insurance partners will now come to us. However, 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 time in mismatch means that our net margin will also be under pressure during those periods in which we increased our own 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 will likely result in more quarterly movements 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 continued 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 spending from those consolidated trust plans that offered lower funding costs and continue to increase the volume of loans for which will bear credit risks.

Our net interest income and guarantee income grew significantly to CNY 2.6 billion or 19.5% of total income in the fourth quarter from CNY 1 billion or 8.2% of total income in the same period of 2019. As a result, our retail credit facilitation service fee decreased by 9.9% to CNY 9.3 billion or 69.9% of total income from CNY 10.3 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 transactions 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 CNY 9.1 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 CNY 4.9 billion during the fourth quarter from CNY 4.1 billion a year ago. Our borrower acquisition expenses, which are a major component of our sales and marketing expenses increased by 22.3% to CNY 2.8 billion from CNY 2.3 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 fees in September 2020, the negative impact of early customer repayments on revenue has largely been minimized. However, early customer repayment also impact our sales and marketing expenses. When the 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 the 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 CNY 227 million in the fourth quarter from CNY 275 million a year ago, mostly due to our improved investor acquisition efficiency as we leverage technology to achieve greater precision 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 CNY 1.8 billion in the fourth quarter from CNY 1.5 billion a year ago. This increase was mainly due to our previous postponement of marketing campaigns and subsequent resumption in the quarter as business across the country restarted their operations in the post-pandemic period.

Our general and administrative expenses increased by 47.8% to CNY 986 million during the fourth quarter from CNY 667 million a year ago. The increase included employee social security payments for the first 3 quarters of 2020, which were previously been 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 CNY 1.7 billion (sic) [CNY 1.7 million] during the fourth quarter from CNY 1.5 million a year ago, while our outstanding balance of loans facilitated grew by 17.9% to RMB CNY 545.1 billion as of December 31, 2020, from CNY 462.2 billion as of December 31, 2019. Meanwhile, an increase in our loan repayment volume led to an increase in our payment processing expenses and consolidated trust plan fees to trustees during the fourth quarter.

This increase was partially offset by our use of AI to improve the efficiency of our loan approval and the collection process, helping to reduce the related costs.

Our technology and analytics expense decreased by 17.4% to CNY 461 million during the fourth quarter from CNY 558 million a year ago as we continue to improve our efficiency. Our credit impairment losses increased by 1.4% to CNY 985 million during the fourth quarter from CNY 971 million during the same period of last year. This increase was primarily due to our higher loan-related risk exposure as our business model continues 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 cost decreased by 17% to CNY 326 million in the fourth quarter from CNY 393 million a year ago, mainly due to the decrease in our borrowing costs during the period. Consequently, our net profit increased by 17.4% to CNY 2.8 billion during the fourth quarter from CNY 2.4 billion in the same period of 2019. Our basic and diluted earnings per ADS were both CNY 1.25 as compared to CNY 1.12 in the same period of 2019.

As of December 31, 2020, we had CNY 24.2 billion in cash advance compared to CNY 7.4 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 new loan sales to be in the range of CNY 175 billion to CNY 180 billion; client assets to be in the range of CNY 385 billion to CNY 395 billion; total income to be in the range of CNY 14.3 to CNY 14.6 billion; and net profit to be in the range of CNY 4 billion to CNY 4.2 billion.

For the first half of 2021, we expect new loan sales to be in the range of CNY 340 billion to CNY 350 billion; client assets to be in the range of CNY 375 billion to CNY 385 billion due to the stoppage of online bank deposits; total income to be in the range of CNY 28.5 billion to CNY 29.3 billion; and the net profit to be in the range of CNY 7.8 billion to CNY 8 billion. This forecast reflects the company's current and preliminary views on the market and operational conditions, which are subject to change.

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

(Operator Instructions) Your first question comes from the line of Elsie Cheng from Goldman Sachs.

Congratulations on the solid quarter again. I have 2 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 4x 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?

Yes. So let me first explain the first question. So few of our [unit economics], our fourth quarter last year, our new loans, it came with lower take rate and the margin because we reduced borrowing costs. But funding cost, CGI premium and our 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 (inaudible) 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 CNY 100 billion [new sales] in 1 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 margin, 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.

(inaudible) for full year 2021, our take rate and net margin for our RCF new business (inaudible) without much change. And the (inaudible), the Supreme Court (inaudible) 4x of [LHR] does not apply. It does not apply to financial lending institutions, including lending companies and customer 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 full year 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, (inaudible) January this year, we delivered almost close to CNY 100 billion [in sales], which is very strong sales momentum. And going forward, we believe that sales growth, the market demand is plenty. And then our sales force probably increase -- it's very obvious compared to last year. Without any increase of sales force 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 appreciation, such as AI (inaudible) that we try to obtain and develop new inbound channels going forward.

But in the meantime, because in this China take rate market, our experiences, 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 [TSI] and then with borrower (inaudible) for (inaudible).

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.

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

Congratulations on a very steady quarter again. Okay. My question, the first one is related to regulation, if I can ask Ji. I'll ask this in Chinese. (foreign language)

This question is related to PBOC's earlier dropped consultation paper credit rating business. And some people integrate 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 can create 3.1% of revenue take rate, 9.1%, but below sort of previous expectation. And so this year, you said it's going to be -- gradually recover to the range of 3.4% to -- 3.5% to 4% of 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 the fourth quarter and also the -- on the funding partners cost? And our loan size, the new loans are all below 24% interest rate. Are the size much larger than before? I remember, in the third quarter, you mentioned about CNY 200,000 per loan? Is it even higher than that as of now? And any guidance from the CBRC to increase the 20% credit risk exposure to be higher, maybe to 30% or so?

(foreign language)

[Interpreted] 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, news 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 prewarning 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.

(foreign language)

[Interpreted] So it may take another quarter for the rules to be cleared.

Actually, I think there are a few more questions. So the third question is about fourth quarter take rate, 9.1%. And I expect that's mainly because the fourth quarter new loans came with lower take rates and the margin has to reduce a high borrowing cost to less than 24% from September last year. But this is the January number. I believe that the numbers will change and they'll make sure we (inaudible) in their presentation. Generally, 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 have now very good share by now.

And how reach it to that point? There is obvious (inaudible) funding costs and a CGI premium. CGI premium, our interest partners, they also changed their charging method from the amount date -- loan amount date to balance date from mid-January. So that, as a result, we use CGI premium ratio. And we also decreased our borrower outsourcing cost.

In January, I'll start 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 net margin recovered very nicely and back to original level.

And the next question, [tier size] we don't see much change in recent or few months. Before September 4, our average tier size was, if you remember, it was CNY 160,000. And then since we reduced high borrowing costs and then switched to better quarter segment from September 5 with low price, that increased tier size from CNY 160,000 to CNY 200,000. So this is -- tier size increased by about a little more than 20%. And this is the reason why we could reduce sales commission by [50%].

And lastly, about our sales guarantee portion of 20%. As of December last year, for new loans, our sales guarantee portion increased to 13.6%. And then we also 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. A lot of this is -- regulatory requires more than 20%, more than 30%, for that we have enough organic cash flow to support the extra more sales guarantee portion. So we don't have much concern.

Your next question comes from the line of Winnie Yu (sic) [Winnie Wu] from -- Wu from Bank of America.

Two questions, I guess. First, regarding, again, the regulation and our licenses. Since November last year, CBRC 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 off-line. 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?

Okay. Thanks for the question. The first question about 2 licenses, online micro loan licenses. We have 3 licenses in Chongqing, Hunan and Shenzhen, and the other 3 throughout nationwide, online micro lending licenses. But we haven't got clarity and confirmation from regulator about the next stage 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 with [target] business from May last year. And then as of December last year, we have -- we booked [EUR 6.5 billion] with about a little more than 200,000 new customers. And the ending balance was about CNY 3.5 billion. So we made a very good start. And then this is very much different from our (inaudible) business. This is a complementary business to solve 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 it talks about accounting method that can (inaudible). Online -- on-balance sheet versus offline balance sheet. It depends on our funding mix. And then it's already stabilized, I think. Just going forward, our funding mix will be stable with 70% from partner banks and then 30% from (inaudible). 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, is already that stabilized.

Sorry, just to clarify. How about you taking more -- so okay. So this 70-30 between fines 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?

Yes. That's correct. That's very correct. But if you think about our overscale, our [pure] loan balance as of today is almost CNY 600 billion. But customer finance business is, how much, it's only CNY 3.5 billion. So no matter how quickly it grows, it doesn't take much portion out of our total loan balance sheet. So it will take some time.

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 last year. And that is why I said our target would be to 20% by June. So it'll be a little bit more [over time], but it's roughly stable.

I think it's (inaudible) 5%.

Right. And so for the consumer finance license, it will be more contained to do a 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?

Yes. That is very much different from our (inaudible). The (inaudible) license (inaudible), if you take that it's nothing more than 200,000. But actually, it's controlled at less than 50,000. And our (inaudible) even for both sales borrower is less than CNY 20,000 per borrower. At a weak average price, less than 17% [HR].

And how about the maturity? Are those like similar to the loans of (inaudible) bank, which is only like a few months of maturity?

Not sure if it's [quite] open. It is line of credit products. It's like a virtual credit card. So customers can choose, whenever they pay and then see that payment -- repayment service. That is like 3 months, 6 months or next 12 and then 24 months.

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

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?

Great. Thank you, Thomas. It's Greg here. On the wealth management side, in Q4, we basically did 2 things. So there was the existing portfolio management tools, where we continued to use more and more market data to help provide a set -- a 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 the 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's going to 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 customers in that line so they can get used to 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 CNY 660 billion. And that represented -- the revenue generated by that business was less than 0.4% of the total company. So as we let those deposit products mature naturally, we will try and direct clients' money from those products into other areas on the platform as we've done in the past with the likes of P2P. So it will be an ongoing transition for that area.

And then on the Q1, just a quick response. We do believe -- or rather the first half and then for the full year, we do believe that we will see double-digit top line and double-digit bottom line growth. We're pretty confident that, certainly, for the first half, we'll continue to monitor the regulatory situation as it goes. But overall, we do think that the outcome for 2021 will be double-digit on both top and bottom line.

Our next question comes from the line of Hans Fan from CLSA.

This is Hans from CLSA. I got 2 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, we look at the client assets. It's 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 (inaudible) 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 management mentioned previously that there's 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?

Thanks, Hans. On the wealth management question, we anticipate 2 things happening in the first quarter with regards to client assets. Number one is as those deposits mature, that 16% of the finances mature, they will actually return reasonably quickly. The average duration of those products was about 6 to 9 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 push both the deposits and the [PP] portion down. And then we will be shifting client money to other areas. But the outlook, therefore, 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'll take the full 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 accelerated growth of the denominator. We've brought the take rate down a little bit so that you had a 5% decline quarter-on-quarter but a year-on-year increase of 10%. So as we look forward into this year, 2021, we expect, over the course of the next 3 or 4 quarters, that we will continue to see improvements in take rate as we drive that mix in product on the platform.

On the question of dividends, we have no immediate plans to issue dividends. Our intent is still very much to grow the business to deepen our use of technology. And at a later date, we could look at it, but it's not on the immediate radar.

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

So my question here, actually 2 questions. One is on the retail credit facilitation service fee. I think there's -- of course, we see the decline in the past 2 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 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 4x 1-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.

Y.S.?

(inaudible) regulation are full time to the APR. So when (inaudible) a long time ago, (inaudible) high capacity 24% [HR]. And then within that, if we exclude guarantee, no, no -- the credit investment fees such as the LTPs and insurance premium, order rate, we're trying to cap within 15.4%. And I believe now we have clarity. So we don't care about this mix.

So the Supreme Court, (inaudible) 4x of LPR does not apply to financial lending institutions that (inaudible) company or our (inaudible) small companies. And the [CBI] (inaudible) [2%]. So the mix are -- it doesn't really matter. So as long as overprice is less than 24%, we believe this is very much compliant and that it is fine within current labor environment.

And the first question is about the asset of (inaudible). The overall effect of HR will remain unchanged throughout 2021. We don't have any plan to increase or decrease our borrowing cost. And then refer to January number, I said our take rate and net margin is already back to our 2020 level. (inaudible) our profitability (inaudible) take rate net margin are very much in line with our previous expectations. And (inaudible) HR will stay unchanged, while a little bit changes, not much changes throughout 2021.

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

Yes. In terms of our fee mix, as we increase our sales guarantee portion to 20% for new loans by the end of June, so that will increase our fee mix. I think that will increase our guarantee portion. And then service fee, they will decrease while (inaudible).

Maybe I can add a little bit. As I explained in my portion, basically, the revenue mix change is driven by 2 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 a consolidated more trust loans, okay? So that's one change.

The second change is we are taking more risks. The self-guaranteed risk has been risen from 2.2% by the end of 2019 up to 6.3%. So because of these 2 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.

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

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 2 to answer all of the questions that are out there. And we thank you for your attention and support. Thanks very much.

Thank you, everyone. That concludes the call.

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

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]