Lexinfintech Holdings Ltd (LX) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the LexinFintech First Quarter 2020 Earnings Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Mr. Tony Hung, Senior Director of Capital Markets. Thank you, and please go ahead, sir.

Thank you, operator. Hello, everyone, and welcome to the Lexin's First Quarter 2020 Earnings Conference Call. The company's results were issued earlier today and are posted online. Joining me today on the call are Mr. Jay Xiao, our Founder, Chairman and Chief Executive Officer; Mr. Craig Zeng, our Chief Financial Officer; Mr. Ryan Liu, our Chief Risk Officer; Mr. Stanley Zhao, our Senior Financial Director; and other members of our team.

For today's agenda, Mr. Xiao will provide an overview of our recent performance and highlights. Mr. Zeng will discuss our financial results and Mr. Liu will discuss our credit performance.

Before we continue, I refer you to our safe harbor statement in the earnings press release, which applies to this call as we will make forward-looking statements. Also, please note that this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures.

Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in renminbi.

I'll now turn the call over to our CEO, Mr. Xiao and I will translate for him.

(foreign language)

[Interpreted]

Hello, everybody. It's certainly unusual circumstances and environment created by the COVID-19 outbreak that we released our first quarter 2020 results. Lexin's core business operating metrics continue to be stable. We achieved our loan origination target for the first quarter. And our user numbers, our revenues and other core metrics continue to exhibit healthy and strong growth rates.

In the first quarter, Lexin facilitated CNY 34.1 billion in loans, an increase of 69.5%, exceeding the previously stated target of CNY 32 billion.

Registered users reached 84.2 million, an increase of 99.7%, achieving a record high. At the end of the first quarter, outstanding loan balance reached CNY 58.5 billion, an increase of 67.2%. And first quarter revenues reached CNY 2.5 billion, an increase of 40.9% year-on-year.

(foreign language)

[Interpreted]

During the ongoing pandemic, we've chosen to employ a more prudent and stable policy towards managing assets, maintaining the stability of our operations and growth. At the same time, we proactively reduced cost and fees for the recovery and growth of our ecosystem, investing a total of CNY 340 million. We've also donated CNY 15 million towards the pandemic relief efforts. Responding to the government's call, we put our CNY 25 million worth of consumption coupons on the basis of maintaining stable operations. We've allocated CNY 900 million to prepare for the impact of the pandemic, which in turn led to a first quarter loss of CNY 678 million. Provisions, of course, is not the equivalent losses, and they represent the company's preparations for possible consequences of a pandemic. And if the actual losses are lower than our provisions, some of the amounts will be written back over time. This provisioning will help the company's future and help promote stable development.

(foreign language)

[Interpreted]

We believe that in the face of a pandemic, there will be no one that wins by themselves. And that it's only by working with our partners in our ecosystem, together, through this difficult period of time that will allow our business to emerge towards a sustainable and positive direction and outcome. We've accepted our responsibilities towards our customers, our partners and our society. And while in the short term, our accounting profits may be affected. In the long term, the steps taken to help our ecosystem recover from the pandemic will bring us closer to more user growth and activity, better protect the interest of our funding partners and ensure the stable long-term growth of our business.

This is consistent with our core values of generating long-term value.

(foreign language)

[Interpreted] In the first quarter, our new consumption platform strategy continues to deliver, generating user growth, scale and revenues. While installing consumption in the first quarter, versus online and offline consumption scenarios generated CNY 10.5 billion in transactions, an increase of 337%, of which offline scenarios were CNY 9.3 billion, an increase of 1,239%.

In the second quarter, our growth will be even stronger. April's offline transactions increased by 12.7% month-on-month versus March. And May's transactions increased by 17.8% versus April with increasing growth in each passing months.

(foreign language)

[Interpreted]

A membership benefits program and paying members-related products have served customers nearly 2 million usage times and generated a repeat rate of 63.5%. In the second quarter, our membership benefit programs members, user types and transactions types demonstrated increases in April on a month-on-month basis of 141%, 260% and 846% for each category, respectively.

(foreign language)

[Interpreted]

Under our policy of stable risk control, our overall asset quality is stable with declining risk. First quarter 90-day delinquencies reached 2.57%. As we enter the second quarter, asset quality trends continue to improve.

Our first quarter 7-day delinquency rate was 3.7%, recovering with the domestic Chinese economy. As of today, our 7-day delinquency rate has declined to 2.77%, recovering to pre-pandemic levels. This strong performance has helped us win the trust of even more partners. Our total number of funding partners continues to increase.

(foreign language)

[Interpreted] The worst of the pandemic in China seems to have passed and both consumption and employment is rapidly recovering and our business has now recovered to pre-pandemic levels.

In the second quarter, we expect loan originations to exceed CNY 38 billion, an increase of 46%. We expect to return to profitability as well in the second quarter, and we are confident in our ability to achieve our full year guidance of CNY 170 billion to CNY 180 billion.

(foreign language)

[Interpreted]

New consumption and new infrastructure is becoming the twin engines for driving the recovery of the economy. This year, the government's work report indicate a strategy of expanding domestic demand, driving a recovery in consumption and encouraging financial technology companies to help decrease the cost of financial services. The CBIRC has issued draft guidelines or comments on the loan facilitation model, firmly recognizing the value and importance of internet finance platforms within society.

In an environment with recovering consumption and favorable underlying regulatory policies, we will seek to more rapidly advance versus new consumption platform strategy, bringing in greater room for growth and expansion.

(foreign language)

[Interpreted]

Next, I'd like to invite our CFO, Craig, to discuss our recent financial performance.

Thank you, Jay, and hello, everyone. I'm pleased to announce that we have once again delivered strong growth in our business as reflected in our strong loan origination volume. Before we begin our discussion of our underlying business performance for the first quarter of 2020. I would like to first discuss our recent accounting policy change, the adoption of CECL.

As we had already discussed, disclosed and noted a few months earlier in our 2019 year-end results. We fully expected CECL to have a material impact to our financials for this year. And today, everyone can see the impact to not only our results, but also the results of our peers as well. As many of you have probably noted as well, we had also disclosed many additional details in our 20-F specified -- specifying the impact of accounting change and have previously communicated with many of you on the likely material of the impact and how potentially view and adjust forecast accordingly.

In the interest of time, given the fact that we, and more recently, many of our peers have already described and provided many details on accounting change and its full impact, we will just provide more of a high-level overview of impact of the change. The CECL guidance replace existing incurred loss methodology and introduce our forward-looking expected loss approach, referred to as a current expected credit loss, CECL methodology. And there the incurred loss methodology. Credit losses are recognized only when the loss are probably -- proper or have been incurred. For guarantee in the scope of the ASC 326-20, the -- and subject to the CECL methodology, as many of you are already fully aware, from a high-level perspective, the prime difference between the new and the old accounting standard is essentially a timing difference and the new accounting standard. Guaranteed revenues are required to be recognized over time through an amortize schedule over the life of the off-balance sheet loan and recorded in a separate financial statement line item.

And a provision for the contingent liability for the loan would be recorded as a whole immediately at the inception of the loan in another separate financial statement line item. This is in contrast to the old accounting standard, where we only needed to book the guarantee liability on day 1. And many of you probably already know, this change in accounting has no impact to the underlying profitability of a loan. It is simple, a time change in the recognition of the revenue and the profit from the loan.

And as all of you should know, the change in accounting also, obviously, does not change our underlying business and is not indicative of changes to credit performance or asset quality. In terms of asset quality, the underlying assets are still the same quality with similar provisions in facing the same circumstances. However, as a company that is continuing to grow rapidly and the new accounting standard, which requires that the recognition of provisions for contingent liability be recorded upfront as a whole, the new accounting standard effectively penalize faster growth.

At least in the short-term, by producing higher provisions on the P&L relatively to the old standard. It should also be noted that the new accounting standard will not have the impact to our accounting treatment for financial guaranteed workers.

In the first quarter, we also encompassed unique challenges as a result of COVID-19. Due to COVID-19, we believe that our financial performance could be potentially be negatively impacted by the pandemic in the foreseeable future. This combined with the fact that the CECL lifetime methodology required us to take into consideration all microeconomic variables. And in particular, the impact of the ongoing COVID-19 pandemic economics means that we had to incur additional costs.

As a result of this combination of CECL and COVID-19 and in accordance with the new accounting requirements, we have decided to take a position that is consistent with ongoing uncertainties in the market when it comes to our provisions, guarantee liability and financial guaranteed derivatives and will incur additional RMB 0.9 billion in additional cost and related charge as a result of combined combination of CECL and COVID-19.

Now returning to our financials. In the interest of time, I will not go over line item by line item of our P&L. For a more detailed discussion of our first quarter results, please refer to our earnings press release. Total operating revenue for the first quarter reached CNY 2.5 billion, driven by strong growth in our financial service income, which reached CNY 2.0 billion, of which loan presentation and service fee was CNY 1.05 billion. Adjusted net loss was CNY 596 million, reflecting our continuing strong growth and performance except the impact of the pandemic. Fully diluted adjusted net losses per ADS was CNY 3.31.

We continue to see the future potential of our business model. In the performance of the customer cohort, whom we acquired in the first quarter of 2015, whose balance is now RMB 12,684 and whose 30-day delinquency rate is approximately 1.4% with a quarterly active rate of 13.9%.

On our operating leverage, operating expense as a percentage of the average loan balance was 3.1% for the quarter and now advertising, marketing, advertising G&A and R&D was 0.7%, 0.9%, 0.7% and 0.8% of average loan balance, respectively.

We currently have 84.2 million registered users and 20.7 million customers with credit line, up from 19.4 million in December 31, 2019.

We acquired nearly 965,000 new active customers in the first quarter. Overall, our average credit limit was RMB 9,170, while our average tenure is now 10.7 months, our weighted average was 27.1%.

In terms of our funding, for the quarter, no funding for new loan origination came from the Juzi Licai platform and all of our funding for new loan origination came from our institutional funding partners. The ongoing COVID-19 outbreak has brought and continue to bring many challenges to our business, but we are now seeing a gradual recovery. We believe that with the gradual recovery and determined effort of our team, we may still be able to achieve our previously stated guidance for the year.

Next, Ryan will discuss our credit situation. Ryan, please.

Thank you, Craig. In spite of the challenging conditions in the market arising from the ongoing COVID-19 pandemic. We were able to maintain credit quality within expected levels and having seen marked improvement in our leading credit deficit and indices in the second half of the first quarter. And we fully expect our credit deficit to continue to improve over time and perform at expected levels.

Our 90 days post delinquency ratio is currently at 2.57%, and we continue to see stable credit performance as our lifetime charge-off ratio is around 3%.

As stated in the past, due to the ongoing COVID-19 pandemic under the high number of new customers we acquired in 2019, we expect that the vintage charge-off ratios for our loan book to increase to approximately 3.5% to 4.5% over the course of the next few months before improving in the third quarter. This is consistent with our previous statements and accordingly, within our range of expectations, and we fully expect our stable performance to continue in 2020.

Initial path has been noted. And as many of you have already fully aware, the certain credit deficits are effectively lacking indicators. With that, I conclude our prepared remarks. Operator, please proceed with the question-and-answer session.

(Operator Instructions)

We have the first question from the line of Jacky Zuo with China Renaissance.

(foreign language)

I will translate my questions. So I have 3 questions. Number 1 is about our loan origination outlook. So just wondering what is our underlying assumptions for our second half loan origination targets. So are we going to increase the customer acquisition efforts? And just wondering what is the loan volume for the April and May months. Just wondering if you can give us some number on that.

And second question is about the asset quality. So just our CFO mentioned that we actually set aside around CNY 900 million additional provision in the first quarter. Just wondering, can you give us some details where we can find this additional provisions in the P&L and in which item, we can see the details? And following on that is what is the vintage loss assumptions we are using in the first quarter?

And last question is about the ADR issue. So given the U.S.-China tension, and recently, a lot of investors are concerning the listing issue of the ADR. So just wondering how our management tried to tackle this issue?

(foreign language)

[Interpreted]

So Jacky, on your question on our guidance and whether or not we can achieve certain things. And obviously, as you know, in the first quarter, we guided for CNY 32 billion. We exceeded that, we achieved CNY 34 billion, and this is, of course, in under very difficult conditions. But nevertheless, we did very well. And we did well because we do have a lot of channels. And it's so interesting to note that, yes, we have a lot of channels, and we have online and offline. And the offline was offline, so all we had to rely on was online. Nevertheless, we still achieved and exceeded our targets.

And for the second quarter, as you see from the press release, we've given a target of CNY 38 billion. So needless to say, for the full year, we're pretty confident. And we're pretty confident for a few reasons, one of which is that we have diversified customer acquisition methods. We have online. This includes ads, this includes referrals, this includes natural traffic, and we have offline, we have e-commerce, et cetera. So essentially, even 1 channel and within 1 channel, we have actually multiple channels within 1 channel. So we have room, and we can adjust. And hence, we're pretty confident in our ability to execute on this.

Now in fact from the customer acquisition and second reason is that we do have a very large customer base. We have over 20 million customers. And there's plenty of value and room to develop there. The customers we acquired last year, there's room for growth on this space. So hence, we already have a very, very strong fundamental base to grow and develop them.

And third reason is that we've managed to maintain asset quality, and we've adjusted our model accordingly. So right now, when we look at the underlying situation, we have a very balanced model, a very balanced and healthy portfolio. So for the second half, in light of the situation, we're planning to strengthen our growth. And you can see that the first quarter, the marketing expense has been adjusted. It has gone down. So this has left room, and we're going to apply that to the second half of the year to grow.

(foreign language)

[Interpreted]

So with regards to the CNY 900 million provision. Well, as you know, there is the ongoing pandemic, and then we believe that in order to be conservative, we should have this. In terms of the exact details on where to find it, if you will, Craig will describe it a little bit later. Now overall, as you know, the credit trends and where we're heading, we're still pretty stable, as mentioned before, and we're consistent on this. We believe that the final vintage charge-offs will be about 3.5% to 4.5%.

(foreign language)

[Interpreted]

So continuing from what Ryan mentioned, unfortunately, because we do have the on-balance sheet, off-balance sheet model, different guaranteed liabilities number. So it's definitely not something that you can simply take 1 line, add another line and then put it together out there. For modeling and other things, we'll be sure to guide you in the future.

But fundamentally, what's going on here, as you understand, is that we have different funding partners, and they have different requirements. And based on the requirements, the contracts is written a certain way. And then in turn, the auditors will view it and view it a certain way and treat it under different accounts.

With regards to the ADR issue, after the U.S. Congress went through the registration -- through the legislation, sorry. There have been certainly some concerns out there in the market, and we have certainly heard from some of our shareholders and investors on this topic. And indeed, the Hong Kong listing is a possibility. And certainly, there are many companies looking at it, and some companies have done it already. And likewise, we're examining the possibility among several possibilities. And if you look at, for example, an article on (inaudible) apparently, based on their assessment, only 22 companies right now were qualified. Fortunately, we are one of them. And we're certainly going to continue to assess the situation. And at the appropriate time, do what it takes to protect our investors and shareholders because that is very much very important to us, if the need arises to -- or sue a Hong Kong listing. So this is something that we're looking at very carefully, and we'll continue to assess.

The next question comes from the line of Eddie Leung from Bank of America Merrill Lynch.

(foreign language)

So my question is about the customer acquisition strategy. As Jay mentioned that there are multiple customer acquisition channels. Just wondering whether we will adjust our strategy across different channels in the upcoming couple of quarters, given our focus in credit risk management.

(foreign language)

[Interpreted]

So Eddie, I think you fully understand it, but for the benefit of everybody, different channels will definitely have different quality customers and there'll be some very pronounced and clear differences. The offline channels, as a whole, definitely have lower risk. It also has a higher contribution over the long term. We can definitely get a better understanding and a more appropriate, shall we say, assessment of the credit risk for the offline customers and then give the customers a more appropriate amount of credit.

Now online, inherently, is going to be riskier. It's going to be uncertain, and it also has higher incidences of draw. However, we do have a very strong risk control system, and we do have accurate assessments of our customers. And naturally, when we get different assessments, we're taking into account these risks and we adjust the amounts to credit, et cetera and based on the credit risk level of the customers we acquired online.

Now the first quarter and second quarter was affected by the pandemic. And this, of course, in turn, impacted our customer acquisition channels. In particular, the offline. But now we can see that as a whole, our customer acquisition is recovering and recovering very strongly. Offline channels will not only recover, but it's going to increase versus last year. So this is one of the ways that we're planning to acquire more customers in the second half of the year. Another way would be our platform where we help with other platforms to sell, including several large platforms, including, for example, QQ Music, and with others who have traffic.

And a third method that we will continue to use to acquire customers would be our Lehei Card, which opens up a lot of offline channels. So these 3 areas for the year will probably all be stronger. Now ads will be adjusted appropriately. Accordingly, as is something -- online ads is something that will always depend on the costs, and you have to assess the risk accordingly. And then in turn, it will depend on the inventory. And also, in terms of the situation, we have to see what the ads can bring. And based on what the ads can bring, which in theory, it could bring a lot of traffic, we'll have an integrated approach accordingly for our customer acquisition. So I hope that answers your question.

We have our next question from the line of Alex Ye from UBS.

(foreign language) Okay. I will briefly translate my question. So my first question is about the company's business model on the partnership with financial institutions. So as we know, it doesn't always have a portion of its loan volume through the nonguaranteed model where you share the revenue with financial institution without providing guarantees. So just wondering what's the portion of this particular risk sharing business in our Q1 loan volume? And what's our target for the coming 1 to 2 years?

And my second question is about our take rate trend. So I've noticed, we have seen some decline in the Q1 take rate. So apart from, obviously, an increased provision for the credit costs, so are there any other reasons that have led to a slower take rate during the first quarter, in particular? During the prepared remarks, management mentioned that there is some waiving of fee and interest of around CNY 340 million related to the COVID-19. So just wondering how much of this has been reflected in Q1 revenue.

And my last question is about the competitive landscape, in particular, related to our Lehei Card. So I have noticed some more and more peers are also providing similar products that allow users to link their credit line to their WeChat or Alipay.com. So just wondering if management could share, add some color on how we are -- we win this rising competition in the future.

(foreign language)

[Interpreted] So I'll answer your first and third question. And on the first question, the loan facilitation model, in particular, the model where we do not take on the reserves ourselves is an important strategic direction for the company this year. And of course, this is an area where there are several benefits, not the least of which is the fact that we do not have any cash requirements and we do not need to put the reserves at the banks.

It's a basically very straightforward process where ultimately, we get a revenue share of something like 30% to 35%. This particular model, where we do not set aside the risk reserves, and we don't take the risk, has made up about 26% of our funding in the first quarter. And it's currently taking up about 30% of our funding, and our goal is to have it reach 50% by year-end. So again, it's definitely an important direction for this year. And as we open this up, this will allow us to have greater and greater growth because of the lower capital requirements.

Now another reason why this is so important is that, as you can see from the graph documents and the general direction, this is something that's very much welcomed by financial institutions themselves and more importantly, perhaps, also by the regulators as a future general direction. So this is something that we're definitely going to develop more and more of this year.

(foreign language)

[Interpreted] So on your third question on the Lehei Card. Well, as you know, we were basically the first company out there with this type of product. The idea of opening up our credit line and the amount of credit for our customers to the off-line scenarios, and as the leader in this, we now have probably something like 1 million transactions on a daily basis and 10 million customers using it. So obviously, we're the clear leader. Now I will say that there's definitely difficulties, even like I say, barriers to this business. The transactions and the payments, they're integrated within this, and you need them to be stable. So you need, actually, some time, and it took us quite some time in order to ensure that everything runs smoothly. And that these micro transactions can be facilitated in a very stable manner for all these transactions. And on the micro transaction, another fundamental barrier, of course, is the funding partners.

You need the funding partners to cooperate and be willing to fund these small transaction sizes, so in order for them to cooperate to allow for this type of stable payment system. Now fundamentally, whenever you have a successful product that's doing very well. Whenever you have a good product, it's going to attract competition. We're confident in our ability to continue to provide a better product, a good product for our customers. So this is one of the areas and one reason why we feel strongly that we'll continue to lead in this area.

Another area is just fundamentally our customer acquisition and our risk control around the customer acquisition. As long as you'll have success in these particular areas, then you're going to be able to maintain certain leads over the competition because all they would have is a product. So hence, this is another area where we feel that we definitely have a strength.

And finally, I do want to say that, well, it's a good market. It's an interesting market, and we welcome others to come and help grow the market with us. So competition is natural, and we'll basically grow the market together.

(foreign language)

[Interpreted] And so on your second question, Alex, on the take rate trend. Long term, it's definitely going to be stable, and we feel that the key to our profitability is not going to be so much off of this but rather the scale of our business. Because we do see that in the long term, again, the take rate should be stable, and we do focus very much on the long term, not the short term.

So on the whole concept of cost of funding, if you will. If you think about it in the past, we started off with P2P as many other platforms did. The cost of funding there was 8% to 9%. But nevertheless, we took the long-term view to open up to more funding partners and to expand to more funding channels. And at the time, when we opened up these channels to the banks, we were talking about 10% or higher in terms of funding cost. But clearly, we would have first to do it before many, many others to pursue this particular avenue and channel.

Now naturally, at the beginning, when we're doing this, we were suffering from higher funding costs as a result relative to the P2P. Now currently, in terms of what we're developing, we're developing increasingly the revenue sharing or rather the banks take on the risk reserves themselves model, which frankly, we were probably the first, last year, to do this at the beginning of the year. And this is something that we're going to increase and focus on.

Now over time, due to the development and due to increasing trust from our funding partners, we returned to a 8% to 9% funding cost, just like the P2P before. So hence, in that context, over the long term, we were able to lower the cost and secure our future. Now naturally, when you continue to develop funding partners, you're going to have to give up some profitability, some profits to them. But we believe that in the long term, our profit, our take rate, et cetera, will be stable, and that's really going to be a matter of scale that continues our growth and profitability.

The next question comes from the line of Martin Ma from Nomura.

(foreign language)

My first question is on the statement in the first quarter report that due to the assessment of COVID-19 pandemic impact and especially on the -- especially, the impact on the Chinese and global economy. There is additional RMB 0.9 billion additional credit costs. What is -- I'm going to -- looking at -- looking into the second quarter, the COVID-19 pandemic is not finished. And even though in China, this pandemic has been largely under control.

And the second question is on the new line on the balance sheet. There's a new line called deposit to insurance companies and guarantee companies. So just wonder what is that line, and what is the difference between this line and the restricted cash and restricted time deposit?

And the third question is on the PBT. On the investor PBT released on the website. On Page 13, there is a cost of funding this quarter, which is recorded at around 8%, which is different from the 9.7% in previous investor PBT. So just wonder what is the difference between -- why there is a 2% difference between the current disclosure and the previous disclosure?

(foreign language)

[Interpreted] So on the special provisions, long story short, we definitely considered the U.S. situation, the global situation, China situation. So it's probably a onetime special event. And based -- right now, we don't see any reason why we would need to do it again in the second quarter.

(foreign language)

[Interpreted]

And so I think what you were looking at before, it's more reflective of, if you will, on type of cost of funding. And now we switched to a more off type of cost of funding presentation, which I think better reflects the reality of our underlying business.

(foreign language)

[Interpreted]

So on your question on the deposits with the different insurance companies and guarantee companies. Yes, you could deal with that as kind of like restricted cash from before. Essentially, it's a reflection of the different type of funding models cooperation we have out there. So for example, funding partner may not want us to leave the money at the bank. They want us to have the money instead as a deposit at -- for the name of the account at the insurance company or the guarantee company. So it's simply a reflection of that.

(foreign language)

(foreign language)

Yes. So I'll translate your question for you.

[Interpreted] So essentially, obviously, the offer's 8%, as you mentioned. And if you add back the other things that we've taken out, such as the guaranteed costs, et cetera, where would it be?

And Craig's answer was, well, you can't exactly do that precisely. To get to kind of a clear answer because it very much again depends on the funding partner, it depends on the model and the requirements of the funding partner. So for example, if the funding partner does not require an external guarantee company, then it's 1 number. If the funding partner requires an external guarantee partner. Typically, the external guarantee partner charges, say, for example, 1%. So essentially, we can add 1% to that. But it really depends. And I might not, shall we say, present an accurate picture.

The next question comes from the line of Sanjay Jain from Aletheia Capital.

Two quick questions. First one may not be so quick, depends on you. So as I understand, you have 4 categories or types of loans within your loan book, which are subject to 3 different types of accounting policies. And again, as I understand, only about 40% of your loans are subject to the new ASC 326. And then you have interest income on the on-balance sheet loans and you have ASC 606 on the rest. So I don't know how my friends on the sell-side and buy side are doing your numbers, but I'm finding it incredibly complex or unnecessarily complex while working out the full year numbers. Can you help us, give us some framework, some way of figuring out how the full year will look and maybe next year? Because, again, this year is -- you still have CNY 677 million every quarter, perhaps, carry forward from last year. So -- and my back of the envelope is coming up with the same profit number as last year. So can you help us with something to go on?

Yes, Sanjay, I'll translate your question for you. But first, we probably need to do something maybe similar to like a modeling day with everyone in the future. Since, as you mentioned, and you're 100% correct, this is a complicated situation to say the least. So hence, we'll definitely need to set something up accordingly. Now let me translate your question for the team.

(foreign language)

(foreign language)

[Interpreted]

So Sanjay, I mean, again, you're absolutely right. And obviously, it's not only you. I think everybody out there is having these issues, if you will. And unfortunately, there has been changes, if you will. The SEC's approach on some of these accounting in the recent past has become complex. But based on what we've heard from the SEC, apparently, nothing else is forthcoming, whereas some of the more recent things this year, last year, they were kind of in discussions in 2018. So on that note, overall, it should, at the very minimum, get more stable, if you will. Over time, longer term, it should get a little bit easier. And then of course, we have to also distinguish between the short-term and the long term. Long term, as Jay mentioned, as the team mentioned, we're going to have more and more of the model where the reserves are taken by the banks.

So and hence, that will become a very, very sizable part of the business. And that should, hopefully, in turn, simplify things a little bit as well, accounting and otherwise. In the short term, again, you're absolutely right. It is complicated. And is this our choice? Absolutely not. We wish that it was a lot simpler. But for a variety of reasons, not the least of which is, you can say this is a new business. You can say this is a very unique environment in China with different operating models. You can say that there is inherently complicated accounting that was in a state of shift, literally from the SEC and you can say that all this combined to, frankly, make this a lot more complicated than anybody wants. And certainly, we don't want it to be so complicated. So hence, I think what we will target to do is something with all of you, ideally before the end of this month, where we will help investors and -- especially our covering analysts, understand this all better, with a very formal modeling day with myself, Tony, as well as Stanley, our Senior Financial Director in the finance team to help explain how to do this. And again, as you can imagine, apologies for the complexity, we wish it wasn't so complex. We wish we didn't have these things occur. But it should also be, I guess, said, for our case that we were probably one of the first, if not the first guys out there, to say that this thing with CECL is coming and that it will be complicated, and we help many people with understanding that it will be complicated. It will have an impact. So hence, I think we should have some credibility from that. And again, we certainly wish that it was simpler. And ideally, it will get simpler in the near future. So I hope that helps.

Okay. Okay. So -- okay. And my second question is on the risk transfer loans. So legally on paper, as you're saying, the bank takes the reserves. But I know you have always been skeptical of the true risk transfer. And looking at the experience of such risk transfer loans in one of your competitors, I'm just wondering who are the partners who are doing these loans with you as opposed to doing loan facilitation? Are they the same lot? And what do they see? Are you giving them far better economics on a risk transfer loan compared to old style, the regular loan facilitation model loan? I mean, I cannot believe it that those guys, they are going for direct transfer loan only because it helps them show higher margins.

Okay. No problem, Sanjay. Let me translate that for you first.

(foreign language)

(foreign language)

[Interpreted] So first, I think I want to emphasize that as a fintech company, we should be quite responsible, if you will, in talking about this. I think unlike some of the other language that perhaps you have heard in the past from elsewhere, you can't just basically toss, dump, transfer, whatever you want to call it, risk out to the banks. Just inherently, it doesn't work that way. It's not possible. You work with the banks, and they accept the risk because they trust you. They trust that you have the risks under control. And hence, that's basically the premise or the foundation for doing this model, that you do have the ability to control the risk and that you have good quality assets and that together, you can control the risk on this. So hence, it's definitely not a situation where you can just simply transfer the risk in that sense. It's going to be an area where you share the risk. And the only reason why the banks accepts this is because of the fact that they trust your credit quality and your risk control.

(foreign language)

[Interpreted]

In terms of the funding partners and who we're working with, I think Jay wanted add. I mean, we certainly work with banks. We certainly work with consumer finance companies, and we work with trust. And quite often, actually, we do have 2 models with them, literally one where they take on the reserves themselves and then model also where we take on the reserves. And within that context, I mean, I think if you think about it from a standard model, it's really a simple question of, let's say, there's a 24% APR loan. We give the funding partner 8%. And then afterwards, we get the remaining 16%, which we need to apply to reserves, our costs, et cetera and that's our profit. This would be something like 30% to 35% ongoing model.

Now if we reverse it into the model where basically the banks take on the risk reserves. What happens? This almost literally reverses itself in the sense that we become the party that takes the 8%, they get to 16%. So do they make more money from this? Yes, absolutely, so as the risks are assessed correct. And do we get anything from this? Well, absolutely. Because this is an asset-light model for us where we are not capital constrained, and we can have a cleaner system, if you will, be also more compliant with potential future regulatory directions. And hence, it's very much a win-win situation for both parties. I think, again, it's basically predicated on a cooperation trust. And fundamentally, that the economics that we just talked about working. If they don't work, then you can't do this.

Okay. So just to be clear, because you -- just before Jay's reply, you did say that there was some risk sharing. Just to be clear that whatever loss happens, in these loans, then it is entirely on the bank. There is nothing which comes back on to you?

So let me translate that for you a little bit.

(foreign language)

(foreign language)

[Interpreted]

To be very, very clear on this. It is a revenue-sharing model. It is a model where the banks take on the risk. And in accordance to the contract, what is the worst-case scenario according to the contract? One, we won't get the revenue share; and two, the cooperation will stop in accordance with the contract.

(foreign language)

[Interpreted]

Now fundamentally, why does this model exist? It's because banks and the trust, et cetera, they are motivated. They are motivated by the proper motives, and they can't make more money under the circumstances under this model.

The next question comes from the line of John Cai, Morgan Stanley.

(foreign language)

So my -- I have several questions related to the business operations, provisions and our risk target in the future. So firstly, on the business operations, I would like to follow-up on the profit sharing or revenue sharing models. Just wonder what kind of the API assets that we transferring the risk to the funding partners at the moment. And also, we heard from some peers that there could be a situation that 1 borrower could have several loans. Some of them is guarantee by Lexin and some of them is risk sharing. So just wonder what's our model on that front? And also about the Lehei card, I've heard that it's also contributing to the new customers. Because my previous understanding is that it's mostly for existing customers, just wonder what's the contribution of new customers from Lehei Card and how is the outlook?

(foreign language)

[Interpreted]

So on the revenue sharing, I think, basically, you might see actually quite similar pricing, same pricing. Nothing, shall we say, separate or different. Ultimately, it's going to be based and determined based on the customer as well as the financial institution providing the financing, not based on, if you will, any specific set of revenue.

So I mean, for the financial institution, they may have certain requirements on the APR certain type of credit. Customers will have, certainly, preferences. So ultimately, it's determined on those bases, if you will.

On the Lehei Card, and it's definitely going to end up becoming also very much a core part of our customer acquisition strategy this year. I think, if you, for example, put commercials out there, ads out there on loans, you're going to have one thing, but we find that with Lehei Card, you're going to have better returns. Because you're providing people the ability to go anywhere with it and also to spend on any platforms. And when you work specifically with different platforms on it and you provide loans, it may or may not tie as neatly or well to their ecosystem or spending. Whereas for the Lehei Card, we've discovered that it seems to tie much better, especially if you attach benefits to it. So it's definitely going to become a core part of our strategy for customer acquisition this year.

(foreign language)

So a quick follow-up on the Lehei Card. And I think from the press release that you mentioned about around RMB 10 billion that translation is related to consumption scenario. Not sure if that's all about Lehei Card or there's other products. And it seems that the portion is quite high. It comes already close to 1/3 of our total loan origination.

Second question is about the provision. And as we see from the release that the company expects a decent profit in the second quarter, so -- and there's also a mention about that we don't expect any incremental provision related to COVID-19 in the second quarter. Just wonder if there's a chance of a buyback. And about the CNY 0.9 billion provision, I'm not sure if the company can tell us how much has already been incurred and what -- and how much is expected. And also, is there any coverage metrics that the company can give us some color about maybe the guarantee markup or maybe the loan loss reserve ratio?

(foreign language)

[Interpreted]

Yes, John. So I think you understood that, but basically, for the benefit of everyone, on the CECL, fundamentally, it's a policy that requires you to look at the future assessment, the long-term future assessment of the impact. And of course, in the first quarter, we had a very unique situation that perhaps has not been seen before in literally 100 years with COVID-19. And when we look at the long term implications, of course, this includes the recovery. So hence, when we look at the situation long term, it's not going to lead to, shall we say, any short-term changes in the immediate near future or adjustments. It will depend on our long-term forecast. But certainly, developments occur a certain way, then some of the things that you mentioned may be possible. And it may be possible that we make certain adjustments accordingly.

It's also worth noting that on the provisions, you can say that it's not just about the first Q, as we mentioned, it is very much about the loans as a whole under the current environment, and how they're likely to develop and change. And our assessment under CECL will need to reflect that accordingly.

The final question comes from line of Daphne Poon from Citi.

(foreign language)

So I will translate my questions. My first question is regarding the customer acquisition. First is that we saw the Q1 registered user number that's very strong. So just wonder what percentage is coming from like the organic users and what percentage is coming from like the channel partnerships? And on a full year basis, do you have like a target mix in terms of, say, the loan volume contribution from the repeat borrowers and the new borrowers? And since you mentioned earlier, it seems you do have like a more -- you're taking a more proactive stance in customer acquisition in the second half. So that would mean that on a full year basis, you still expect a more meaningful year-over-year growth in terms of your new borrowers number.

And the second question is regarding the funding side. Just want to check after this new regulation on the online lending coming out in early May. Do you see any less positive trends in terms of your funding partnership with banks, if there are more large banks willing to partner with you? And also do you see any downtrend on the funding cost, whether you have any like guidance or outlook on that?

(foreign language)

[Interpreted]

Yes. So on the first quarter, in terms of the new customer growth, it came primarily from natural traffic. And on your question on the new and old customer, I think when you look at the new customers, they've perhaps contributed about 20% to loans in the first quarter. So that's actually lower than last year. So this year, we're definitely, right now, looking at a trend where the old customers are contributing more. In terms of the new customer acquisition, hopefully, as we continue to watch things recover and as the year plays out, gradually, the new customer growth will become a little bit more like what we had last year as things develop. Now on your second question, with regards to bigger banks being more willing to cooperate with us as well as lower funding costs. Well, we're very happy to say that's not just the bigger banks, big, small, all sizes, all the banks out there, they're looking to work with us. We're seeing a lot of cooperation, a lot of initiatives. A lot of it, if you will, very forthcoming and proactive cooperation and setups that are coming from the different financial institutions, which in turn, has led us to a situation where funding is clearly plentiful, and there's definitely the opportunity to lower cost. So it's basically very broad cooperation. And as you know, big banks, ICBC has been with us very, very long time. And the banks themselves actually never mind us negotiating with them. They often are proactively coming to us and saying that they will lower their funding costs to us for access to the assets that we're providing. So quite often, we're hearing something like 7% cost of funding. And certainly, a lower rate from some of the funding partners of, say, 50 basis point is very common. So I think under the current conditions and the current macro environment, we're definitely looking at a very favorable situation with plentiful funding and opportunities to lower funding costs.

Thank you. As there are no further questions. I would like to hand the conference back to presenters for any closing remarks.

Thanks, operator. So thank you. And that does conclude the conference call. Thank you all for participating. You can all disconnect.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for participating. You may all disconnect. Thank you.