Lufax Holding Ltd (LU) 2021 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Lufax Holding Limited Fourth Quarter 2021 Earnings Call. (Operator Instructions) Please note this event is being recorded.

Now I would now 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 2021 earnings conference call. Our quarterly 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 some key achievements in 2021, address current capital market concerns and, finally, share our outlook for 2022. Our co-CEO, Mr. Greg Gibb, will then provide a review of our progress and details of our development strategies in the quarter. 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 statement 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, Chairman of Lufax.

(foreign language)

[Interpreted] Hello, everyone, and thank you for joining our fourth quarter 2021 earnings conference call. I will start today's call with an update of our key achievements for the year then address current market concerns and, finally, share our outlook for 2022.

(foreign language)

[Interpreted] First, key achievements.

(foreign language)

[Interpreted] In 2021, we achieved steady growth, improved regulatory compliance and corporate governance and strengthened our status as the role model for compliance and governance in our overseas-listed Chinese companies.

(foreign language)

[Interpreted] Our full year 2021 total income increased by 19%, net profit by 36% and non-IFRS net profit by 29% when excluding the impact of noncore items. As a result, our basic earnings per ADS for 2021 reached RMB 7.11. At the same time, we increased our share of credit risk-bearing while proactively reducing the all-in cost of our 2021 average outstanding loan balance by 3 percentage points, improving regulatory compliance and contributing to the national goal of common prosperity.

(foreign language)

[Interpreted] In communicating with regulators, we had opened up frequent dialogues through all available channels at all levels and achieved satisfactory results. Upholding our principle of preemptive diagnosis and swift operational adjustments for timely optimal results, we maintained a proactive, candid, positive and responsible stance in aligning the direction of our business with the trend of regulatory changes.

(foreign language)

[Interpreted] Secondly, key investor concerns.

(foreign language)

[Interpreted] Since releasing our Q3 results, our management team had over 50 investor engagement events, including post earnings calls, plenty of road shows and other meetings.

(foreign language)

[Interpreted] Based on our data, 66% of the investor questions were about business operations, 24% about macroeconomic and regulatory trends and the remainder about capital market initiatives, such as dividend payout, share buybacks and Hong Kong listing. We're glad to see that investors are refocusing their attention back on to our core business as we gain more clarity on our regulatory front. I will share our thoughts on macroeconomic and regulatory direction. Then Greg and Y.S. will discuss our operational financial results.

(foreign language)

[Interpreted] Updates on the April 29 ratification.

(foreign language)

[Interpreted] By the end of 2021, we had completed the vast majority of our ratification initiatives, and we're on track to clear the remaining issues that require prolonged efforts, including the closing of redundant subsidiaries, running off our online deposit products and stopping sharing certain borrower data directly with financial institutions.

Judging from information and insights gathered from our channels, including a statement from Mr. Guo Shuqing, Chairman of CBIRC, during the Q&A session of a press conference on March 2, we believe that the regulatory ratification process is gradually entering its final phase. We'll continue to push the ratification process towards the finish line and cooperate with the regulatory authorities for final review.

Based on preliminary feedback from a number of relevant regulatory authorities, we are ranked in the front of the 14 companies undergoing regulatory review based on our ratification stance, execution plans and accomplished results. We envision that these aforementioned assessments will be validated over time.

(foreign language)

[Interpreted] Local financial supervision and administration measures, the preliminary draft.

(foreign language)

[Interpreted] Although the preliminary draft mandates that local financial institutions shall not conduct business across provisional administrative boundaries, we foresee rather limited impact on Lufax for the following reasons. First of all, our guarantee companies have largely completed the establishment of a nationwide local branch network that enables us to conduct local businesses. Secondly, we possess a nationwide consumer finance license. Thirdly, we have sufficient time to stay attuned to new licensing requirements, devise proactive plans and execute preparations as the draft regulation is currently still at the stage of public comments.

With our abundant capital reserves, excellent compliance infrastructure and sound corporate governance, we're well positioned to apply for a national micro lending license or any necessary license should they become available.

(foreign language)

[Interpreted] Response to Chinese ADR delisting risk.

(foreign language)

[Interpreted] Forcing ADRs to delist from the U.S. exchange will affect not just us, but all U.S.-listed Chinese companies. With such regulation's long lasting and widespread impact, we believe that both Chinese and U.S. authorities are engaged in constant discussions.

Since our public listing, Lufax has strictly complied with all relevant regulations in both countries and fulfilled our disclosure obligations. At the same time, we have explored ways for potential delisting on the Hong Kong Stock Exchange and engaged in preliminary communications with relevant regulatory departments.

(foreign language)

[Interpreted]

Thirdly, the outlook for 2022.

(foreign language)

[Interpreted] Having overcome many challenges in 2021, we enter into 2022 facing continued uncertainties. Knowing the further risk due to the macroeconomic slowdowns and pockets of COVID resurgence, we have made preemptive preparations.

In the fourth quarter, we placed a greater emphasis on credit asset quality by implementing more stringent risk management criteria. In 2022, we'll focus on deepening our business transformation and returning more value to our shareholders.

(foreign language)

[Interpreted] Deepening our business transformation.

(foreign language)

[Interpreted] To ensure the quality of our income and the sustainability of our growth, we plan to deepen our business transformation and strike a balance between scale, expansion and quality improvement in 2022.

(foreign language)

[Interpreted] In our retail credit facilitation business, to mitigate the impact of shifting market dynamics, we plan to strengthen our direct sales channel, recruiting more capable direct salespeople, optimize our team structure and help them achieve greater productivity. In addition to increasing the contribution of direct sales to our overall loan volume, we'll also implement more prudent risk management measures to keep macroeconomic impacts under tight control.

(foreign language)

[Interpreted] In our Wealth Management business, we strive to optimize our product mix, improve our user experience, enhance our service quality and efficiency and secure our client assets principal value as well as return on investment.

(foreign language)

[Interpreted] These initiatives may cause some short-term fluctuations in our results, but we are confident we will resume our growth trajectory in the second half of 2022. We're convinced that these business transformation initiatives are necessary to lay a solid foundation for our long-term stability and growth. Greg will share more details on our business initiatives and financial guidance later.

(foreign language)

[Interpreted] Continue to reward shareholders.

(foreign language)

[Interpreted] Despite continued market volatility and uncertainties in 2022, we hold high confidence in our own prospects because of our steady profitability, quality cash flow, ample capital reserves and preemptive compliance measures. As such, we will continue to reward our shareholders through share buybacks and dividend payout.

(foreign language)

[Interpreted] In April 2022, we will distribute roughly 30% of our 2021 net profit to shareholders in the form of cash dividend equal to USD 0.34 per ADS.

So we go from here. (foreign language)

[Interpreted] In terms of share buyback, as of December 31, 2021, we had completed about USD 860 million or 86% of the USD 1 billion total share buyback announced in 2021. On top of it, our Board of Directors has approved another USD 500 million of share buybacks in 2022.

(foreign language)

[Interpreted] Finally, I would like to reiterate our core competitive advantages borne out of our exceptional business model.

First, our business is fully in sync with China's national policy directive of supporting the real economy as we primarily serve small and micro business owners, mostly in wholesale trade, manufacturing and retail industry. Second, we operate through guarantee licenses as well as our nationwide consumer financial license. Thirdly, we have attained unparalleled insight into regulatory trends through our close dialogues with regulatory authorities. We have also accomplished thorough implementation of regulatory requirements by leveraging our domain expertise and financial DNA. The combination of these unique factors enables us to achieve business transformation and grow steadily and sustainably in a constantly evolving policy environment.

Looking ahead, we will continue to uphold our commitment to maintaining full operational compliance, providing compassionate and inclusive financial services, setting ourselves as a role model for corporate governance among overseas-listed Chinese companies and generating growing value for our shareholders and our society.

(foreign language)

[Interpreted] With that, I'll turn the call over to Greg, who will share our business updates in detail.

Thank you, Chairman Ji. In 2021, we successfully and smoothly executed a series of operational adjustments to ensure the long-term sustainability of our growth and profitability.

We reduced the average APR of our loan portfolio, increased self-risk bearing and reduced our reliance on Ping An Life channel for sourcing. Our full year revenue growth grew by 18.8% year-over-year, and net profit grew by 36.1% year-over-year, both exceeding guidance.

In 2021, our retail credit facilitation business achieved a number of important milestones. First, we lowered our average loan portfolio pricing to 22.4% in the fourth quarter of 2021 from 25.7% in the same period of 2020 while maintaining overall unit economics. More details will be elaborated by James.

Second, our business model is more in line to meet regulatory requirements. As Chairman Ji mentioned before, our guarantee company has set up locally approved subsidiaries in all of Mainland China, except Tibet, Ningxia and Yunan provinces, allowing us to operate our financial licenses locally.

In terms of potential future license requirement, we have a consumer finance license, which enables us to leverage up to 10% or 10x our capital as opposed to a 5x leverage ratio that is currently contemplated for the proposed national micro lending license.

Should any changes occur that give rise to a national or nationwide micro lending license, we have the required capital reserves, eligibility and preparedness to initiate our application for such [one], giving us even more flexibility in serving our core small business owner segments.

Our current guarantee licenses allow us to share credit risk and process data flows with more than 65 national and local funding partners under existing regulatory frameworks. In addition, we are actively exploring new collaboration to meet expected credit rating license usage requirements, which come into effect by the mid of 2023.

We are prepared to connect to a third-party credit scoring company by the end of June this year. Based on our latest understanding, the cost of that connection and the potential changes to our business model will not have any material impact.

Third, we continue to increase our share of risk bearing in line with regulatory guidelines. During the fourth quarter of 2021, excluding the consumer finance company, we bore risk on 20.8% of new loans facilitated, up from 10% in the same period of 2020. Our guarantee company that bears credit risk operates with a leverage ratio under 2x at the end of 2021 against the maximum leverage requirement of 10x. Our healthy leverage ratio, together with strong capital position, gives us comfort to meet any new capital requirements that may come from regulatory changes.

Last but not least, we saw improvements in the direct sales productivity and operating costs to deliver steady gross and net returns despite sharply reduced reliance on Ping An. During the quarter, new loan sales from the Ping An Life channel continued to slow down, accounting for 24.6% of new loan sales during the fourth quarter, down from 36.4% in the same period of 2021.

To counter this, our direct sales team contributed more by improving productivity. Compared to the fourth quarter of 2020, our direct sales generated 21.6% more volume in new loan sales, but head count only increased 8.4% and productivity rose 12.1%. This increased investment in O2O direct sales reaffirms our view that our off-line to online service approach is the most effective way to increase coverage of this otherwise hard to reach small business owner segment.

Our Wealth Management business is also making good progress in a transitioning market. In the fourth quarter, total client assets of $432 billion is overall flat, but grew 13% year-over-year when excluding P2P and online bank deposit products. Meanwhile, we also deepened our product reform to effectively shift our focus toward high-value clients and higher take rate products.

As of December 31, 2021, contribution to total client assets from customers with investments of more than CNY 300,000 on our platform increased to 81% from 76% of the same period in 2020. Client assets from customers with investments over CNY 1 million on the platform grew by 14% year-over-year. And these customers have a clear preference for higher take rate products.

We have differentiated ourselves by demonstrating consistent growth in high-value customers and higher take rate products, laying a solid foundation for future growth. As a result, our take rate in the fourth quarter was 64 basis points, increasing 19.9 basis points compared to the previous quarter.

Driven by the optimization in product and investor mix, our wealth management business has improved economics. Going forward, we will further focus on higher take rate products and new growth in upper middle class customers as we continue to develop additional value-added services to bolster wealth management revenues.

Now let's take a look at the future strategies. In the second half of 2021, the transformation of Ping An Life has led to more notable decline in the business velocity and credit quality of customers sourced through the life channel. The impact of this decline is seen in the change in our overall C to M3 flow-through rates, which deteriorated from 0.4% in Q3 to 0.5% in Q4.

This deterioration deepened our resolve in Q4 to initiate change in our channel mix, further reducing reliance on the life channel and increasing the quality, productivity and then the number of direct sales. In 2022, we will strengthen our direct sales channel by raising our recruiting standards, hiring more capable direct salespeople, providing them with more systematic training, equipping them with new technology and overall helping them achieve greater productivity.

Increasing contribution of direct sales will help sustain our new loan sales growth and should improve our overall loan portfolio quality as our direct sales force exerts higher control over the assessment of borrower credit worthiness than our referral channels. As a result of actions taken, we expect the C to M3 flow-through rate to peak in the first quarter and normalize in the second half, creating limited financial impact in the course of 2022. In the next few months, we will closely monitor new loan sales, channel mix, asset quality and productivity of direct sales to track our progress and demonstrate our success in this transition.

Finally, regarding our guidance. Most of the impacts from these channel adjustments will occur in the first half of 2022, resulting in slower profit growth in the first half, but accelerated new business and profit growth in the second half. Our guidance for 2022 is therefore more detailed to reflect the timing of planned adjustments and onetime items. We expect our new loan sales growth to be relatively flat to low single digit in Q1 and gradually picking up to 3% to 6% for the first half. An accelerated growth in new loan sales should be witnessed during the second half, and we expect to grow new loan sales at 9% to 12% for the whole year.

We expect total income to grow 8% to 10% for Q1; 10% to 12% for both the first half and the full year. Projected profit growth for the full year is 11% to 13%, with profit growth of negative 2% to 2% in Q1 and the first half. The slower profit growth in the first half reflects a number of year-over-year legacy-related items in the first and second quarter, which suppressed relative profit growth in the first half of 2022.

If we remove the impact of these specific items, year-over-year net profit growth is expected to be 6% to 10% in Q1 and 6% to 9% in the first half, respectively.

Lufax's management team has a track record of executing transformations to ensure business sustainability and profitability. And we believe this time is no different. By taking the short-term pain of making the channel transition in the first half at a time we believe it is prudent to be prudent with overall growth, we will set strong foundations for steady high-quality long-term growth.

I will now turn the call over to James Zheng, our CFO, to go through the detailed operating and financial performance and our guidance for the year.

Thank you, Greg. I will now provide a closer look into our fourth quarter results. Please note that all numbers are in RMB terms and all comparisons are on a year-over-year basis, unless otherwise stated.

We concluded the fourth quarter with a solid financial results, achieving consistent growth in both the top line and the bottom line. During the quarter, our total income was RMB 15.8 billion, up 19.2% year-over-year, and our net profit increased by 1.7% to RMB 2.9 billion year-over-year. Without considering the onetime asset impairment cost, our net profit is RMB 3.4 billion, about 19.7% year-over-year growth. For the full year of 2021, our total income was RMB 61.8 billion, up 18.8% year-over-year, and our net profit increased by 36.1% to RMB 16.7 billion year-over-year. And the growth in both income and the net profit for the full year of 2021 exceeded the high end of our previously announced guidance range. Additionally, our net margin for the full year of 2021 improved to 27% from 24% last year.

Let's have a closer look at our operating numbers. First, we further reduced our APR while maintaining stable retail credit facilitation business unit economics. Our loan balance APR was 22.4% in the fourth quarter of 2021, a 3.3 percentage point decline from 25.7% in the fourth quarter of 2020.

In comparison, our loan balance take rate was 9% in the fourth quarter of 2021, only 0.1 percentage point decline from 9.1% in the fourth quarter of 2020.

Our loan balance APR was 23.5% in the full year of 2021, a 3 percentage point decline from 26.5% in 2020, while our 2021 take rate only declined 0.2 percentage points to 9.6%.

As we continue to diversify funding sources, engage with more banking partners, reduce credit insurance premiums on our loan portfolios and improve customer charging mechanism which lead to diminishing impact from the early loan repayments, we will continue to maintain stable unit economics and drive relentless improvement in our sales and operating efficiencies despite APR declines.

Second, we maintained a stable growth in our overall loan volume and further penetrated into core and targeted customer segments. On the retail credit side, we grew our new loan sales by 14.3% to RMB 151.6 billion during the fourth quarter of 2021, in line with our business focus on risk management under the current macro conditions. At the same time, we continued focusing on serving small business owners.

During the fourth quarter, excluding our consumer finance subsidiary, 79.6% of new loans facilitated were disbursed to small business owners, up from 74.4% in the same period of 2020.

On the wealth management side, despite the negative impact of P2P and online deposit products runoff, we managed to grow our total client assets to RMB 432.7 billion as of December 31, 2021.

Third, we continue to execute our plans to evolve our risk sharing business while simultaneously maintaining asset quality. In line with prevailing regulatory requirements, we bore credit risks for 21% of the new loans we facilitated in the fourth quarter of 2021, up from 20% in the third quarter and 10% in the fourth quarter last year.

As of December 31, 2021, our outstanding balance of loans facilitated with guarantees from third-party credit enhancement partners accounted for 78.9% of the total outstanding balance of loans facilitated, down from 89.4% as of December 31, 2020.

All of the aforementioned operating metrics exclude those of our consumer finance subsidiary.

Due to the slowdown of macroeconomic growth, COVID-19 pandemic and life channel changes, we saw some deterioration of overall asset quality. Thanks to our risk management system, the negative impact on our risk indicators are limited.

Excluding consumer finance subsidiary, our DPD 30 day plus and DPD 90-plus delinquency rates were 2.2% and 1.2% for the total loans we facilitated as of December 31, 2021, compared to 1.9% and 1.1% as of September 30, 2021. We will remain vigilant and to be prudent on our borrower acquisition and risk management strategy.

Fourth, we've optimized our product mix to improve the take rate of our wealth management segment. During the quarter, our take rate for the segment increased by 19.9 bps to 64 bps from 44.1 bps in the previous quarter, primarily driven by our continuous product mix optimization as we sharpened our focus on products with a higher take rate.

Now let's take a closer look at our fourth quarter financial numbers. At the highest level, our total income in fourth quarter grew by RMB 2.5 billion or 19.2% year-over-year growth, while total expense increased by RMB 2.4 billion or 26.2% year-over-year growth. And then the net profit grew by 1.7% year-over-year to reach RMB 2.9 billion.

While operating related costs continue to remain flat due to efficiencies, total expense increase is primarily driven by the credit impairment costs due to higher risk sharing and onetime asset impairment costs. Excluding onetime asset impairment costs, which was mainly due to the impairment loss of intangible assets related to Qianhai Asset Exchange and the Tianjin guarantee company, total net profit was RMB 3.4 billion, reaching 19.7% year-over-year increase.

Next, let's go through financial numbers line by line. As the total income mix of our retail credit facilitation business continued to improve, thanks to the evolution of our business and our risk-sharing model, total income increased by RMB 2.5 billion or 19.2% year-over-year. During the quarter, while the platform service fees decreased by 10.4% to RMB 8.8 billion, our net interest income grew 81.5% to RMB 4.2 billion, and our guaranteed income grew by more than 538% to RMB 1.6 billion.

In addition, other income, which is directly linked to delivering services to our financial partners increased to RMB 769 million in the fourth quarter from RMB 452 million in the same period of last year.

As a result, our retail credit facilitation platform service fees as a percentage of total income decreased to 51% from 70%. Because consolidated trust plans provide lower funding costs, we continue to utilize them in our funding operations, enabling our net interest income as a percentage of total income to increase to 27% from 18% a year ago.

Moreover, as we continue to bear more credit risk, we generated more guaranteed income, reaching 10% as a percentage of total income, compared to 2% a year ago.

By expanding our service to creating enhancement partners in account management, collections and other value-added services, other income as a percent of total income increased to 5% from 3% a year ago. Our investment income decreased by 7% to RMB 359 million in the quarter from RMB 386 million in the same period of last year, mainly due to the fair value losses from investment assets.

In terms of wealth management, our total platform transaction service fees increased by 23% to RMB 708 million in the fourth quarter from RMB 576 million in the same period of 2020. This increase was mainly driven by an increase in fees generated from our current products, which was partially offset by the runoff of legacy products.

Turning to our expenses. In the fourth quarter, our total expenses grew by RMB 2.4 billion or 26.2% to RMB 11.5 billion from RMB 9.1 billion in the same period of 2020, primarily driven by increase of credit impairment costs and onetime asset impairment costs. Total expenses, excluding credit and asset impairment losses, financial costs and other losses increased by 4% to RMB 8.3 billion in the fourth quarter of 2021 from RMB 8 billion in the same period of 2020, remain almost the same as we further improved operating efficiency.

Our total sales and marketing expenses, which include expenses from borrowers and investor acquisition as well as general sales and marketing expenses, decreased by 1% to RMB 4.8 billion in the fourth quarter. Our general and administrative expenses decreased by 1.5% to RMB 971 million in the fourth quarter from RMB 986 million in the same period of 2020. This decrease was mainly due to our expense control measures.

Our operations and servicing expenses increased by 15.2% to RMB 1.9 billion in the fourth quarter from RMB 1.7 billion a year ago. This increase was primarily due to the increase in trust plans management expenses resulting from the increase in the usage of consolidated trust plans and growth in the outstanding balance of loans facilitated.

Our technology and analytics expense increased by 29.5% to RMB 597 million in the fourth quarter of 2021 from RMB 461 million in the same period of 2020, mainly due to our ongoing investments in technology, research, development and the lower base in fourth quarter of 2020 as a result of social security relief during the COVID-19 outbreak.

Our current impairment losses increased by 157.2% to RMB 2.5 billion in the fourth quarter from RMB 985 million a year ago. This was mainly due to the increase of provision and indemnity loss driven by increased risk exposure as the risk sharing at the total balance level has increased from 6.3% to 16.6%. It is worth noting that we grew our guarantee income by 539%, a faster pace than expenses, and continue to achieve positive profitability for our guaranteed business.

Included in the credit impairment losses, there is also a RMB 216 million increase related to legacy product in wealth management business.

Our finance costs decreased by 18% to RMB 267 million in the fourth quarter from RMB 326 million a year ago, mainly due to the decrease in the balance of convertible bonds following our C-round convertible notes restructuring and the increase in interest income resulting from the increase in deposits. Additionally, our effective tax rate was 33.3% during the fourth quarter of 2021 and the increase in interest income resulting from the increase in deposits. Additionally, our effective tax rate was 33.3% during the fourth quarter of 2021 versus 31.9% in the same period of 2020 due to onetime deferred tax asset impact.

For the full year of 2021, our effective tax rate was 28.6% versus 31.5% in 2020.

As a consequence of the aforementioned factors, our net profit increased by 1.7% to RMB 2.9 billion during the fourth quarter from RMB 2.8 billion in the same quarter of 2020. Meanwhile, our basic and diluted earnings per ADS during the fourth quarter were 1.26 and 1.21, respectively.

Our basic and diluted earnings per ADS during the year of 2021 were RMB 7.11 and RMB 6.69, respectively, represented a 27.2% and a 20.5% growth year-over-year. As of December 31, 2021, we had a cash balance of RMB 34.7 billion compared to RMB 24.2 billion as of December 31, 2020.

Looking ahead, we expect annual new loan sales growth to be at 9% to 12%, but the growth will notably be much higher in the second half due to the completion of channel optimization initiatives. Similarly, we expect the total income growth of 10% to 12% throughout the year. Operating related costs will stay stable across the year with annual increase at about 6% to 8%.

Credit-related provision growth will even out in the second half given the increased risk sharing already started in the second half of 2021. As a result, we expect our total profit to grow at 11% to 13% for the whole year.

Year-over-year growth will be similarly lower in the second half due to onetime legacy POP-related items in 2021. The profit growth rates were picked up in the second half once the channel optimization impact starts to come through and the credit costs are normalized on an annual basis.

Next, let me give you some specific guidance for Q1, first half and all year. For the full year of 2022, we expect new loans to grow by 9% to 12% year-over-year to the range of RMB 706.8 billion to RMB 726.2 billion and wealth management assets to grow by 2% to 3% year-over-year to the range of RMB 441.3 billion to RMB 445.7 billion.

We expect our total income to grow by 10% to 12% year-over-year to the range of RMB 68 billion to RMB 69.3 billion and net profit to grow by 11% to 13% year-over-year to the range of RMB 18.6 billion to RMB 18.9 billion.

For the first quarter of 2022, we expect new loans to grow by minus 2% to 2% year-over-year to the range of RMB 169 billion to RMB 175.8 billion and wealth management client assets to grow by 2% to 3% year-over-year to a range of RMB 429.6 billion to RMB 433.8 billion.

Since retail credit presentation income is recognized over the life of a loan and is more driven by loan balance, we expect the total income to grow by 8% to 10% year-over-year to the range of RMB 16.5 billion to RMB 16.8 billion. In the first quarter, net profit will grow minus 2% to 2% year-over-year to the range of RMB 4.9 billion to RMB 5.1 billion. But if excluding the legacy P2P impact in 2021, net profit is expected to grow by 6% to 10% year-over-year.

For the first half of 2022, we expect new loans to grow by 3% to 6% year-over-year to the range of RMB 334.8 billion to RMB 344.6 billion and wealth management client assets to grow by 3% to 4% year-over-year to the range of RMB 433.7 billion to RMB 437.9 billion.

We expect our total income to grow by 10% to 12% year-over-year to the range of RMB 33.1 billion to RMB 33.7 billion, and net profit to grow by 1% to 3% year-over-year to the range of RMB 9.8 billion to RMB 10 billion and by 6% to 9%, excluding the legacy P2P impact in 2021. This forecast reflects our 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) We have our first question from Richard Xu from Morgan Stanley.

I have just some additional questions on the, I guess, reform of the direct marketing channels. Could management provide a little bit more details in terms of what's entailed?

And then I noticed basically in the past couple of years, management in China had been reducing the -- I guess, the cost for the direct marketing channels. Will this lead to rising costs, cost to income ratio, from the reform of direct marketing channels?

And for the insurance channels, any expectations in terms of the contribution from those channels in a couple of years?

Okay. Let me answer this question, and then Greg can supplement if I miss any.

So let me first give you the overall picture on the new loan sales trend by China, before I talk about this reform.

If you look at our total new loan sales growth ratio, in 2021, it was 14.8%, 16.9% from direct sales, while life channel made negative 7% growth. In the fourth quarter, quarter-on-quarter, the total new loans grew by 14.3%, in which direct sales, they delivered 21.6% growth, while life channel made negative 20% growth.

And if I share January, February number, DS channel, they are still delivering 2-digit growth, but life channel contribution, their sales volume dropped -- I mean, compared with the same period in 2021, their sales volume dropped by almost 40%, 40%, right?

So as a result, the life channel contribution ratio to our new loan sales, it dropped from 36% in 2020 down to 29% in 2021 and then down to 24% in fourth quarter last year. And if I measure January, Feb number, it already came down to 20%. It's quite a rapid decrease.

And this is a result of our management decision. This is what we exactly intended because if you understand the difference of net flow, [sequence and] net flow of DS channel and life channel, as of today, the life channel's credit quality, which is measured by net flow is almost 50% higher than that of direct sales channel, so we have control. And we safeguard our portfolio quality.

So going forward, I believe this 20% life channel contribution ratio will be maintained because we believe we took all the necessary actions by now to cope the rise in risk of life channel.

Then going to direct sales reform. So it's understood, we have to increase sales volume from direct sales to [cope the shock] from life channel. Make sure, I want to emphasize, this reform -- what I think about this reform is not to fix some issue. DS channel stand alone is a good channel. As Greg said, fourth quarter last year, DS channel, sales volume growth rate was 21.6%, which was delivered by 8% head count growth and then 12% productivity growth.

So DS channel is very strong now in terms of new sales delivery and credit quality. So yes, this reform we are doing now, this is to increase DS channel contribution in sales -- new loan sales volume.

Of course, we want to achieve this through [continuous] productivity increment rather than having more and more direct sales, right? So what we do is we create a (foreign language) that we launched from our fourth quarter last year. So if we analyze our DS mix, we find that the group whose sales experience is more than 3 years before they joined us and married and have reasonably -- reasonably are indebted so they need to work hard for family, so those group used to take about less than 10% of our new hire. But it increased to 45% by January this year. For that, we put extra input. We increased the fixed salary to affect more our (foreign language). And then gradually, we change fixed salary to a variable commission.

There is still the others that (inaudible) time will be 6. Our analysis shows that this group of (foreign language), they show obviously higher productivity than other groups. And then if we have more and more (foreign language) group, eventually this will further reduce our sales expense because direct sales expense components: 1/3 are variable -- are fixed; and then 2/3 are variable. So when we have more and more higher productivity our direct sales, it will eventually also decrease our direct sales cost.

And then once those group [too], they can deliver higher productivity and the low delinquency ratio, then we want to change their role from simple sales force to customer relationship managers so they can manage not only sales but also second loan, third loan [play], complaint handling and (inaudible) delinquency management. And eventually, we incentivize them based on balance -- current balance instead of loan amount, new loan amount.

And then if you see our (inaudible), I believe this task compared with value achieved in the last 2 years, for example, like recovery from the pandemic impact ahead of other players who are increasing sales yield portion from 1% to about 20% in cooperation with our 65 partner banks, (inaudible) companies and keeping the net margin unchanged despite we sharply decreased our APR. Compared with those tasks, I think this is relatively simple task. Then we have full confidence. Then you can see that how we deliver this.

Richard, any follow-up question on that?

That's pretty clear.

We now have our next question from Hans Fan from CLSA.

I actually have 2 questions, if I may. So the first one is actually on the take rate in fourth quarter. We note that the take rate was down a lot Q-on-Q to 9%. Can you please elaborate on the drivers behind this? And also if you look into this year in terms of take rates, how do we see the change there? That's the first question.

And the second question is on the regulatory sides. The -- just now Chairman Ji mentioned -- sorry, Greg mentioned that the -- by end of June is likely, look like we are finished and connect to the third-party credit scoring companies. So just wondering how likely this to happen. Is that 100% sure? Have we consult with regulation on this yet? So this is something really cared about by the market. So just wondering how confident we are on this.

Thanks, Hans. Let me answer your first question first about the take rate. Normally, the fourth quarter is the period we have the lowest take rate and margin. So if you compare year-on-year 2020 and 2021, the balance-based [UE] actually didn't change at all. I mean if you also look at -- I will show later, if you look at our new business UE , our net margin didn't change any while our APR dropped by -- from like a 20 -- almost 27% down to 23% which is like a full percentage point.

So going forward, this year, how do you see the take rate and net margin trend? Greg said in his speech, he said the [older tier] lines, like the new loan sales, the balance revenue and net profit, which he estimates will increase by around 10%. So that will indicate, we believe, this year, our take rate net margin will not change much.

Why? Number one, about the price discussion. Our average blended APR for new loan now is around 20%, 20%. So we believe this well meets regulatory requirement. And then we don't see any need to further reduce our APR for new loans.

So price, we think we can maintain the current level for new loans, while we can save further expense from operational cost and net funding cost. But they can be offset by that increase in credit cost in the first quarter, second quarter. So overall, I believe this year net margin will remain not much changed.

And on the regulatory -- the [financial year end] for June?

Yes. [Financial year end] this financial year end , so we are ready with the new process working with [it by heart]. So that process can be [reflected] by June this year. But we haven't got clear signal, clear guidance from PBOC yet. We submitted our plan, but we haven't got clear answer, so we are waiting.

But even if we do that, let me add just one more comment regarding the cost. We did cost of about CNY 300,000 a month. So cost-wise, it's nothing, but I'm just telling you that process-wise, we are fully ready.

And Y.S., one of the reasons that the PBOC hasn't given us a clear answer yet is they're still also not sure in a sense that our guarantee license is already [able]...

Guarantee -- financial guarantee license company, they are not sure yet whether we have to follow this process. So we are waiting.

Right, right. And also, I remember in -- last time, in third quarter briefing, the management mentioned that there's also a potential chance we are seeking the possibility to seek -- to apply for license of credit scoring company. Is that still on the table?

Yes, that's on the table. But [by heart], you may know that 8% of their shares is owned by Ping An, right? So if any, we also have a stakehold in the company. And then that our -- the plan that you mentioned, this is still going on.

We now have a question from Thomas Wang from Goldman Sachs.

It's a good set of numbers, congrats on that. Can I just check on the full year '22 guidance? If I roughly work on new loan numbers, first half guidance is only 3 to 6 and the full year is 9 to 12, so roughly works out 15% to 20% implied for the second half.

Can I just sort of get your thought on, if you extend it a little bit further, do you think this is kind of a sustainable type of new loan facilitation growth? Or do you -- have you factored in some sort of pent-up demand in that number? We may see some even normalization going forward in 2023. Just to get your thought on why you think the sort of second half number is in that range.

Okay. So I think the key here is for new sales. But if you remember, fourth quarter, our guidance number, we believe new sales will not make obvious growth from the previous year. The biggest reason is, as I said, the life channel contribution, their sales volume dropped almost by 40%, right?

So even if direct sales channel grow by 2 digits, it cannot offset enough the shock from life channel decrease, sales volume decrease. So it will take some time. But going forward -- because we believe the 20% sales contribution ratio from life channel, this will be maintained because we do all the necessary actions right now. So the rest, going forward, we will gradually increase over sales volume by developing more and more direct sales channel.

So it takes time. So that will come. That will happen from second quarter. And then from second half, we reach the obvious sales growth ratio versus last year by more than 2 digits. So they will drive our revenue and our net income growth in the second half.

And so, Thomas, if you take that -- as far as we can tell, the contribution from Ping An Life this year will be about 20%. And that may be true for another year or 2, right, depending on the speed of the transition at Ping An Life itself.

And so if you take that into account, rolling into 2023 with the reform on the DS side or the strengthening of the direct sales side, then to go back to a more 15% level that you're seeing in the second half into 2023 is possible, right? So it is an adjustment in the first half of this year, which is slower. But as you look at the second half of the year, that is a good indication to where we think things are medium term.

Got it. So if I take it -- so basically, if the market is still there, it's not -- and it's kind of adjusting your internal on the channel, on your sales force so that's why you have this kind of dip in the first half for 2022. Then if I may have a follow-up, so obviously direct channel plays a bigger part in this growth to drive growth. Where are you hiring kind of those new direct sales personnel? And so what type of person are you hiring? And then how are you sort of training them?

Yes. We are hiring locally. So we have [35] local branches. They're hiring their own direct sales. And then we are specifically targeting, as I explained, we call them (foreign language). They have different profiles. If we analyze who's delivering higher sales volume, higher productivity and low delinquency ratio among our direct sales, almost 60,000 direct sales, that we found that, in general, who had sales experience more than 3 years before they joined us and then who got married. And then there are several profile indicators.

So we are specifically targeting to hire those group. And then those group, they used to take less than 10% of our new hire last year, especially first half. And as of today, they take about 40% -- more than 40% of new hire. So we are making good progress.

And then how to hire them because earlier, the reason they didn't want to -- why they hesitated to joining us was because our fixed salary at the beginning was very, very low. So then we changed it. So we are offering higher fixed salary in the first 6 months. And then gradually, we switched the portion -- we gradually reduced fixed part and increased variable format based on their performance. So this is resolving hire issue.

And then how we educate, how we train them? We have the (inaudible) supplement. We developed the online training tools through our sales app. So through that, we provide a lot more efficient training than before. It's not off-line. We provide by -- for different target group, different DS group, different profile, we provide different set of training through online, sales app.

So I think that the interesting thing here, Thomas, to sort of just hit your point is that for the first half, this is to a certain extent self-imposed because we want to make -- maintain the sort of long-term credit quality as a key criteria and just recognizing that was necessary, a necessary change to make, given some of the transformations on the Ping An Life side.

I think that what Y.S. has laid out, what becomes interesting over time when you move into maybe next year is this (foreign language) group, this more experienced, more stable group of salespeople over time, the ability to deliver on a customer management model rather than a pure loan sales model is very powerful for our economics and our productivity. And so that at the end of the day is what we're really trying to build.

And then the work behind that as well is really on the technology side to give them the tools to drive that customer management in an inefficient way. And so this is kind of a more medium-term transition that you should see come through. It's more about changing mix in the first half of this year, but then it also involves changing a little bit business model and how we serve customers as you go into medium term.

Please move to the next and last question, please, Operator.

We now have our last question from May Yan from UBS.

I actually have 3 questions, if I may. The first one is to (foreign language)

(foreign language)

(foreign language)

May, sorry to interrupt. Please kindly replace most of your questions in English.

Sorry. So why don't I quickly do a quick summary of the first part of the Q&A. Sorry, May. So I'll do a quick summary of the Q&A just happened before we move on to the next.

Yes. Yes, please go ahead. Yes.

So the question was on the regulatory stance of the April 29 ratification and whether there's likely going to be more scrutiny or regulations coming for the loan presentation model. That was the question.

So the Chairman's answer was based on our overall judgment, obviously collecting information insights from a number of channels, including talking to various departments and talking to some of the other platforms, the 14 that's going through the review, we are forming a view that it is -- number one, it is coming to an end. The process is coming to -- nearing the end of completion, given it is about a year long.

Second LU Holdings is one of the better ones. We're not saying we're the best among the 14, but we're definitely one of the better ones. And that's based on our judgment I think from multiple departments and talking to multiple people.

In terms of the end results, personally, I don't think there will be an exact ranking of the 14 platforms, but I won't be surprised to see if they are grouping up different types of platforms. For example, there could be 2 types. The first type is the ratification is almost complete or there is clear and acceptable plan for the ratification. And the second group, there is not exactly acceptable plans to complete the ratification.

In terms of timing, look, we've been saying to the regulators long and hard, given it is coming to the 1-year anniversary, we do think we need this to conclude. And I'm pleased to say that I think people at the PBOC and the CBIRC and CSRC, they do hear our views and they do agree with us that they want to bring this to a conclusion.

In terms of what we've done in the past 2 years, I think, through this process, very importantly, we've kind of rebuilt our trust with the regulators. As to the process, obviously, we have redesigned a lot our business models to be more compliant.

In terms of the new regulations on loan facilitation, based on my communication, personal understanding, we think the regulations is already enough. The focus is more on the actual implementation of those regulations, including some that is still going through consultation. And the regulators would like to see the outcome of the early implementation rather than [sorting up] new ones.

May, go ahead with your other 2 questions, please.

(foreign language) Sorry, my question is so long. Okay, the other 2 questions I have, one is still regarding the business channel transformation that you mentioned the direct sales channel would have better asset quality.

I think, Greg, you mentioned that the M3 flow ratio has deteriorated a bit in the fourth quarter as you increase the business sources from direct channel. So is that mainly because of the macro environment changes that some retail loans are having some deterioration in the asset quality? Or is it also because of some other reasons that maybe the life insurance side business has deteriorated a lot more?

And second so a small question is about the take rate on the wealth management. You mentioned that the take rate has gone up. What kind of product was mainly driving that. And also, going into the future, how the take rate can improve further?

Okay. The second question about the asset quality situation in the fourth quarter, yes, we confirm, it's mainly because of the impact from life channel. If you exclude life channel and the only -- only fair performance of the other channels, especially direct sales channels, that is quite stable. A little bit impact in December, January because of the lockdown of (inaudible) and (inaudible) where we have 2 [creation] centers. So they made minor impacts on our creation performance, but mostly, the most [usual] impact came from the life channel situation. And that's why we made a rapid adjustment to channel mix.

Maybe, May, I'll take your question on wealth before going back to Chairman Ji. On wealth, basically, what we did through the course of 2021 is we let lower margin products kind of run off and replaced them more -- with more focus on qualified investor products. And also gradually the fund mix is also changing, too, within mutual funds, to higher-margin products. And then we're also adding insurance services, which are higher margins. So all of those together as well as some of our services to third-party platforms, things that we collect, providing our technology to other financial institutions have been growing as well.

Then we take those in cumulation, we see the number of, I think, 69 basis points in the fourth quarter, which was up a lot year-on-year. I expect in 2022 we'll continue to see improvement on this revenue over AUM. Adding another 10 basis points over the course of the year is probably a realistic expectation.

(foreign language)

Again, a quick summary of the Q&A just happened. The question was on the exact timing of the April 29 conclude announcement and whether that would impact the Lufax Hong Kong listing.

The answer is, again, the Chairman personally, and he stressed this many times that it's his personal judgment, that the announcement will likely be made in one go instead of separate announcement for each of the platforms.

And on that announcement, there's likely going to be that -- obviously, there's one group that the ratification is almost done or the plan is acceptable, so they're okay to move off to other things. And the remaining whose plans are not acceptable will require continued monitoring and scrutiny from the regulators. So he believes will be one announcement. And personally, he does not think that's going to be too long. But of course, the exact timing, we'll need to wait for regulatory formal announcement.

In terms of Hong Kong listing, yes, the April 29 ratification will impact the timing of Hong Kong listing before we complete that. We will not go to Hong Kong. We have made preliminary discussions with PBOC, CSRC, CBIRC and the China Cybersecurity Watchdog. So obviously, Lufax will not pursue a Hong Kong IPO until we get blessing from those relevant regulators.

And the last point on the China-U.S. relationship, through our channels, we believe the regulators from both sides are having continued dialogues. We trust in their wisdom. As you know, the impact of a forced delisting of the Chinese ADRs will be too big for both sides to take. So we think they are currently working very hard. And we hope a conclusion or some sort of plan or compromise will be reached soon.

Thank you, operator. I think that concludes our call today. Thank you, everyone.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.

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