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Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Third Quarter 2024 Earnings Call. [Operator Instructions] After the management's prepared remarks, we will have a Q&A session. Please note this event is being recorded. Now I'd like to hand the conference over to your speaker host today, Ms. Liu Xinyan the company's Head of Board Office and Capital Markets. Please go ahead, ma'am.

Thank you very much. Hello, everyone, and welcome to our third quarter 2024 earnings conference call. Our financial and operating results were released by our newswire services earlier today and are currently available online. Today, you will hear from our Chairman and CEO, Mr. Y.S. Cho, who will provide an update of the recent developments and the strategies of our business. Our CFO, Mr. Peiqing Zhu, will then provide more details on our financial performance and the business operations. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call, as we will be making forward-looking statements. With that, I'm now pleased to turn over the call to Mr. Y.S. Cho, Chairman and CEO of Lufax, please.

Thank you for joining us today for our third quarter 2024 earnings call. During the third quarter, while Puhui loan demand remained weak as small business owners continue to face a complex macro environment, we saw ongoing growth in our consumer finance business. We are hopeful that policy stimulus measures introduced by the Chinese government in late September will help improve the macro environment and have a positive impact on our business performance in the long run. Meanwhile, we plan to stay vigilant and prudent in the execution of our business strategies in light of the increased risk exposure on the 100% guarantee business model. Before we discuss the business details, let me share some updates on the macro environment. In the third quarter, the macro environment remains challenging for small business owners. The SME development index declined by 0.3 points quarter-over-quarter to 88.7 in September. The Business Conditions Index published by the Cheung Kong Graduate School of Business also declined from 49.3 in June to 46 in September, suggesting persistent challenges faced by small business sector. On the other hand, we are encouraged by signs of mild recovery in the consumption sector during the third quarter as the CPI showed improvement from 0.2% in June to 0.4% in September. In late September, we are glad to see that the Chinese government announced a number of new stimulus policies, including measures to help to the recovery of the real estate sector and increase liquidity, such as the cut to reserve requirement ratio and the lowering of existing mortgage rates. Local governments also launched a series of stimulus initiatives relating to real estate and consumption to boost consumer confidence and strengthen the economy. We believe all of these efforts will have a positive impact on SBOs in China. Meanwhile, we recognize it will take time for SBOs to benefit from these measures and improve performance, so we remain prudent as we execute our business strategies in the short term. Furthermore, we also put more emphasis on our non-SBO customers and continue to grow our consumer finance business. This should help us take full advantage of gradual effects of consumption recovery, and we'll be in a solid position for our future growth. Now let's turn to our operating results. First, let's take a look at our loan volume. Total new loans sales in the third quarter were RMB 50.5 billion, flattish year-over-year and improving by 11.7% from last quarter. The quarter-on-quarter growth despite the macro challenges, was mainly attributable to the continued growth of our consumer finance business, which offset the ongoing weakness in Puhui loan demand from high-quality SBOs. New consumer finance loans increased by 27.8% year-over-year and accounted for 52% of our total new loans sales in the third quarter as a result of our continued efforts to roll out smaller tickets and revolving product structures. Balance-wise, our total loan balance stood at RMB 213.1 billion as of the end of third quarter, of which consumer finance loans took up 22%. Turning to asset quality. Our tightened risk control policies and enhanced risk assessment systems have helped maintain stable asset quality. The C-M3 flow rate of Puhui loans remained at 0.9% during the third quarter despite a decrease of total balance as compared to the second quarter. The asset quality of our consumer finance loans also stayed strong, with NPL ratio further decreasing to 1.2% from 1.4% in the second quarter. As loans enabled under the 100% guarantee model kept increasing as a percentage of total loans, our balance take rate rose by 1.9 percentage points year-over-year to 9.7% during the third quarter of 2024. Cost of funds continued to decrease driven by both monetary policy stimulus and our diversified license strategy. As mentioned during our last earnings call, we acquired a nationwide small lending license in July. We started to provide new loans under this newly acquired nationwide small lending license in August. As of the end of third quarter, we have provided more than RMB 1 billion in new loans under this new license. We believe our small lending license has a potential to further reduce our funding costs, diversify our product portfolio and improve our capital management efficiency. Finally, I want to provide an update on Ping An Group's mandatory general offer. On September 27, Ping An Group dispatched offer document and commenced the offer period. If there are no additional requirements from regulators, the offer period will end on October 28. As stated in the offer document, Ping An Group is making the offer solely to comply with applicable rules and has no intention to privatize Lufax. The intention is that Lufax will continue to remain an independent entity listed on the New York Stock Exchange and Hong Kong Exchange. Looking ahead, we seek to continue to deepen our synergies with Ping An Group, leveraging its brand, reputation, technological resources and extensive network to strengthen our market position. I will now turn the call over to Peiqing, who will provide more details on our financial performance and business operations.

Thank you, Y.S. I will now provide a closer look into our third quarter results. Please note, all numbers are in RMB terms and all comparisons are on a year-on-year basis, unless otherwise stated. In the third quarter of 2024, our total income decreased by 31.1% to RMB 5.5 billion from RMB 8.1 billion, mainly due to a decrease of outstanding loan balance by 41.8%, partially offset by our increased take rate as loans enabled under 100% guarantee model constitute a higher proportion of our total loan book. Meanwhile, our total expenses decreased by 19.2% to RMB 6.3 billion from RMB 7.7 billion, among which the total operating expenses declined by 35.9% to RMB 3 billion from RMB 4.7 billion. And credit impairment losses increased by 9% to RMB 3.3 billion from RMB 3 billion. Operating efficiency improved, with our operating expenses to income ratio decreasing from 53.8% from 57.8% in the third quarter of 2023. The increase in credit impairment losses was mainly due to increased provision related to our loan book and certain investment assets. As a result, we recorded a net loss of RMB 725 million for the third quarter. Turning to the unit economics of our loan business. Our APR by balance decreased 19.5% from 20.1%. Despite the decrease in APR, our take rate by balance increased to 9.7% from 7.8%, primarily due to the removal of negative impact from high CGI premium to our transition to the 100% guarantee model, and also thanks to the decrease in our funding costs. We expect that the take rate will further increase as the percentage of the loans enabled under the 100% guarantee model continues to increase and that funding cost will continue to decrease as we continue to optimize our funding structure by leveraging our consumer finance and small lending license. On the expense side of the unit economics, while sales and marketing expenses remained stable, credit costs and other operating expenses were a drag on our net margin. Credit costs increased primarily due to the increased risk exposure and provision for our loan book. As discussed before, while we anticipate loans under the 100% guarantee model will be lifetime profitable, it's important to note that these loans may incur accounting losses in the first calendar year due to higher upfront provisions. This accounting treatment affects our short-term profitability but is expected to lead to improved long-term financial performances as the loan portfolio matures. The increase of other operating expenses was primarily due to the contraction of our loan balance and the reduced economies of scale. Now let me highlight a few key P&L items. During this quarter, our technology platform-based income was RMB 1.6 billion, representing a decrease of 49.9%, mainly due to a decrease in retail credit service fees as a result of 41.8% decrease in outstanding loan balance. In addition, it was also negatively affected by cessation of the Lujintong business in April 2024. Our net interest income was RMB 2.7 billion. a decrease of 18.8% from the same period last year. The relatively lower decrease in net interest income was the result of an increase in consumer finance revenue. Meanwhile, our guarantee income was RMB 818 million, a decrease of 13.1%. In terms of revenue mix, technology platform-based income accounted for 29.5% of our total revenue, down from 40.5% in the same period of last year. Net interest income and guarantee income accounted for 48.5% and 14.7% of total revenue in the third quarter, respectively, as compared to 41.1% and 11.7% in the same period of last year. In terms of expenses, our credit impairment losses increased by 9% to RMB 3.3 billion, mainly due to increased provisions related to loans as we applied a more prudent approach in our ECL model to reflect the complex macroeconomic environment in the third quarter as well as increased provision related to certain investment assets. Our total sales and marketing expenses, which include expenses for borrower acquisition costs as well as the general sales and marketing expenses decreased by 49.9% to RMB 1.1 billion, mainly due to reduced loan-related expenses resulting from the decrease in new loan sales and outstanding loan balance as well as the elimination of expenses associated with our Lujintong business. Operation and servicing expenses decreased by 25.8% to RMB 1.1 billion as a result of our continued effort to control expenses and decreased loan balance, partially offset by increased commission associated with the improved collection performance. Our finance costs increased by 48.9% to RMB 59 million from RMB 40 million, mainly due to the decrease of interest income from bank deposits, partially offset by the decrease of interest expenses after repayment of our C-round convertible promissory notes upon the maturity on September 30, 2023. In terms of capital, as of the end of September 2024, our main operating entities remain well capitalized. Our guarantee subsidiary's leverage ratio stood at 2.6x and our consumer finance subsidiary's capital adequacy ratio stood at 14.9% as compared to the 10.5% regulatory requirement. As we deal with the complexity of the broader economic environment, we are now seeing encouraging signs in terms of asset quality and in the growth of our consumer finance business. We will remain committed to our prudent strategy as we seek to build a solid foundation for long-term sustainable future operations, and we'll uphold the commitment to bring value to our shareholders. That concludes our prepared remarks for today. Operator, we are now ready to take questions.

[Operator Instructions] The first question today comes from Betty Li with CLSA.

So I have two questions. The first one, could you kindly express what will be the impact of the new policy stimulus on your business? The second is, could you share more about the business outlook for this year and beyond?

Thanks, Betty. About stimulus policy, it is surely a positive impact, I think, on our economy and in our SBO segment as well. But knowing small business owners in general are in difficulty now, it will take more time for them to benefit from these measures and improve performance. So in the near term, we remain prudent and put asset quality over quantity for SBO lending. But at the same time, we’ll take full advantage of the gradual recovery by putting more emphasis and focus on non-SBO segments and expedite small- and medium-sized ticket loan growth using our CF license, consumer finance license, and the newly acquired small lending license with their funding cost advantage and customer experience advantage of our guarantee model. And then about your outlook question, so our volume guidance of RMB 190 billion to RMB 220 billion and loan balance of RMB 200 billion to RMB 230 billion, that remains unchanged. On a single account basis, we know that due to the upfront provision of the 100% guarantee model, so profitability is under pressure in the very first calendar year. But going forward, we know and we believe the overall lifetime profitability will surely improve than before.

The next question comes from Judy Zhang with Citi.

I have two questions. The first question is regarding asset quality. I understand that Lufax has been derisking the loan book for some time, which is bearing fruit in the recent quarters. Could management share a bit more color on our latest asset quality performance? And how has our low rate delinquency rate been trending since 3Q? And second question is, does management have any plan to announce another round of special dividend this year or any other measures that you are considering to boost the shareholders' return?

Okay. Thanks, Judy. The asset quality indicators remained stable in the third quarter, with C-M3 flow rate of our Puhui loans remaining at 0.9% despite decline on balance. So while our consumer finance NPL ratio continued to improve from 1.4% to 1.2%, knowing that our loan balance reduction will come to an end a few months later and the portfolio account mix in terms of account vintage, that mix will continue to optimize, so I believe we’ll be able to demonstrate more obvious asset quality improvement measured by net flow not before long. So in that, we have confidence. About shareholder return, we do not have any specific plan yet after our special dividend this year, but the management team is committed to provide long-term shareholder returns as always, and we consider all positive ways to return value to shareholders going forward.

The next question comes from Yada Li with CICC.

My first question is regarding the credit impairment loss. Could you please share a little bit more about why the credit employment losses increased this quarter, while the risk indicators remained stable? And secondly, I was wondering, what is the trend of the funding costs going forward? That's all.

Thank you, Yada. I’ll try to answer the first question. The increase is mainly to the provision associated with our loans and certain investment assets. Increase of loan provision was driven mainly by the upfront provision of loans under 100% guarantee model, as we discussed, right, and also the prudent approach in our model to reflect our conservative forecast based on the macro environment in the third quarter. We’re still seeing some uncertainties in the macro economy. And as to the second question, I know you’re interested about our funding cost trend, right? And our funding costs further decreased in the third quarter, thanks to the favorable monetary policy and our diversified license strategy. And also we try to spend more time to work with our partners and try to cut down some of the funding cost in terms of different products. And also, we expect funding costs will further decrease as we continue to optimize our funding structure by leveraging our consumer finance and small lending licenses.

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

Thank you. This conference is now concluded, and thank you for joining today’s call. If you have any more questions, please do not hesitate to contact our IR team. Thanks again.

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

Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Second Quarter 2024 Earnings Call. [Operator Instructions] Please note, this event is being recorded. Now I'd like to hand the conference over to your speaker host today, Ms. Liu Xinyan, the company's Head of Board Office and Capital Markets. Please go ahead, madam.

Thank you very much. Hello, everyone, and welcome to our second quarter 2024 earnings conference call. Our financial and operating results were released by our newswire services earlier today and are currently available online. Today, you will hear from our Chairman and CEO, Mr. Y.S. Cho, who will provide an update of the recent developments and the strategies of our business; our CFO, Mr. Peiqing Zhu, will then provide more details on our financial performance and business operations. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. With that, I'm now pleased to turn over the call to Mr. Y.S. Cho, Chairman and CEO of Lufax. Please.

Thank you for joining us today for our second quarter 2024 earnings call. In the second quarter, the macroeconomic environment remains complex for small business owners. Despite this, we saw continued improvements in asset quality across both our Puhui and customer finance businesses as we continued to implement our prudent business strategies. We believe this will provide a solid foundation for our future growth. Let me provide some updates on the macro situation before we discuss the business details. The SME development index trended down by 0.3 points quarter-over-quarter to 89 in June. Meanwhile, the Business Conditions Index published by the Cheung Kong Graduate School of Business declined from 50.1 in March to 49.3 in June, falling below the 50 threshold and reaching its lowest level for the first half of 2024. These indicators underscore the persistent challenges faced by the small business sector. Now let me provide some updates on our operating results. First, let's take a look at our loan volume. Our total new loan sales in the second quarter of 2024 were CNY 45.2 billion, representing a 15.5% year-over-year decline. The decline was mainly caused by a 35% year-over-year decrease of Puhui loans, which comprised 51% of total new loan sales in the second quarter, reflecting our continued emphasis on quality over quantity and sluggish demand for Puhui loans on high-quality SBOs. Meanwhile, our consumer finance business continues to grow and delivered a solid performance during the quarter. Consumer finance loans saw a 23.6% year-over-year increase in new loan sales, representing 49% of our new loan sales. As a result of our continuous efforts to roll out smaller tickets and revolving product structures. Furthermore, we are pleased to observe a notable improvement in asset quality as we adopt more stringent credit standards with focus on higher-quality customer segments and resilient geographies bolstered by our enhanced risk assessment system. For Puhui loans, the C-M3 flow rate improved to 0.9% from 1.0% in the previous quarter, mainly driven by the improvement of C-M3 ratio of unsecured loans. Our consumer finance loans also saw asset quality improvements with NPL ratio decreasing to 1.4% from 1.6% in the first quarter. Next, let's take a look at our loans under the 100% guarantee model. As discussed previously, since the fourth quarter of 2023, all new Puhui loans have been enabled under the 100% guarantee model. As our Puhui loan balance increasingly represents loans enabled under this model, our balance take rate has trended upwards, reaching 9.3% during the second quarter, as a negative impact from our high CGI premiums has been eliminated. Thanks to this improved asset quality, our credit costs have remained stable despite increased risk exposure. However, it is worth noting that due to decrease in loan balances, our unit operating expenses have increased, which has become a key drag on our unit profitability. Let me now provide some updates on our newly acquired PAObank. By leveraging strategic synergies, with Lufax following the acquisition, PAObank delivered solid growth in the first half of 2024, its total loan balance stood at CNY 2.4 billion by the end of second quarter, representing a 45% year-over-year increase. Going forward, PAObank is planning to roll out new initiatives, including insurance, wealth management products to better serve SME and retail customers. To reinforce the strong license strategy we have discussed in the past, we recently acquired a nationwide small lending license. We believe this new license will help further reduce our funding costs, diversify our products and improve our capital management efficiency. Now turning to the progress of our special dividend. I am pleased to announce that we completed the distribution of special dividends at the end of July as scheduled. After receiving the dividend, Ping An Group's ownership increased to 56.8% and Ping An Group now consolidates our financial results. Lufax will remain an independent entity listed on New York Stock Exchange in Hong Kong. Meanwhile, we seek to enhance synergies with Ping An Group, primarily in the following 3 key areas. First is branding. Ping An Group is a Fortune 500 company and a leading global financial institution, with a strong global reputation and financial standing we serve as a powerful endorsement for Lufax, deepening trust among our customers and funding partners. This enhanced brand association will improve our domestic and international standing and can potentially have lower funding costs. Second is technology. We will leverage Ping An Group's extensive technological resources, including its advanced AI systems to further strengthen our risk management and fraud prevention measures. Our goal is to provide small business owners and consumers with efficient, secure and cost-effective financial services. So these channel resources while adhering strictly to applicable laws and regulations, we aim to expand our reach by tapping into Ping An Group's extensive nationwide network for online and off-line channels. This expansion will complement our efforts to strengthen our direct sales force. In summary, our expanded relationship with Ping An Group will help us better serve our SBO customers, using their difficulty and expense of financing. With our strengthened capabilities, we strive to be a benchmark company with an unique law in supporting the growth of China's vital, small and micro enterprise economy. While the macro environment remains complex, we are encouraged by the improvements in asset quality and the products of our strategic initiatives. We remain committed to our deliberate strategic approach as we continue to navigate the economic landscape and have set our sights on achieving sustainable quality growth. I will now turn the call over to Peiqing, who will provide more details for our financial performance and business operations.

Thank you, Y.S. I will now provide a closer look into our Q2 results. Please note that all numbers are in RMB terms and all comparisons are on a year-on-year basis, unless otherwise stated. In Q2 2024, our total income decreased by 35.5% to CNY 6 billion from CNY 9.3 billion in Q2 2023, mainly due to a decrease of outstanding loan balance by 44.8% from CNY 426.4 billion as of June 30, 2023, to CNY 235.2 billion as of June 30, 2024, partially offset by our interest increased take rate as loans enabled under 100% guarantee model constitute a higher proportion of our total loan book. Meanwhile, our total expenses decreased by 20.3% from CNY 8 billion to CNY 6.3 billion, among which the total operating expenses declined by 29.7% from CNY 5 billion to CNY 3.5 billion, and credit impairment losses decreased by 14.6% from CNY 3 billion to CNY 2.6 billion. The gap between the decrease of revenues and operating expenses was mainly caused by the decreased economy of scale, which resulted in increased fixed expenses to income ratio. The decrease of credit impairment losses was mainly due to the decrease in actual losses of loans as a result of improvement of credit performance, partially offset by the upfront provision from loans and 100% guarantee model. As a result, we recorded a net loss of CNY 730 million for the second quarter. Turning to our unique economy for Puhui business. Our APR by balance decreased from 20.3% in the Q2 2023 to 19.6% in Q2 of 2024, primarily due to the change of customer mix as we continue to prioritize high-quality customers. Despite the decrease in APR, our take rate by balance increased to 9.3% from 7% in Q2 2023 due to our successful transition to the 100% guarantee model. We expect the take rate will further increase as the percentage of loans enabled under 100% guarantee model continues to increase. In addition, our funding cost also decreased slightly, thanks to the favorable monetary policy and the support of our funding partners. On the other hand, while sales and marketing expenses remain stable, credit costs and other operating expenses flat on our net margin. This was primarily due to the contraction of our loan balance. Furthermore, while the actual losses decreased as a result of improvement in asset quality, we recorded more upfront provision for loans enabled under 100% guarantee model, as discussed before. While we anticipate this part of the loans will be lifetime profitable, it's important to note that these loans may incur accounting losses in their first calendar year due to higher upfront provisions. This accounting treatment affects our short-term profitability, but it is expected to lead to improve long-term financial performance as the loan portfolio matures. Now let me highlight a few key P&L items. During this quarter, our technology platform-based income was CNY 2 billion, representing a decrease of 51%, mainly due to the decrease in retail credit services fees as a result of 44.8% decrease in outstanding loan balance. In addition, it was also negatively affected by the close of the Lujintong business in April 2024. Our net interest income was CNY 2.7 billion, a decrease of 19.3% from the same period last year. The relatively lower decrease in net interest income was the result of an increase in consumer finance revenue. Meanwhile, our guarantee income was CNY 850 million, a decrease of 26%. In terms of revenue mix, technology platform-based income accounted for 33.4% of our total revenue, down from 44% in the same period last year. Net interest income and guarantee income accounted for 45.4% and 14.2%, respectively, of total revenue in Q2 as compared to 36.3% and 12.4% in the same period last year. In terms of expenses, our credit impairment losses decreased by 14.6% to CNY 2.6 billion. Our total marketing expenses, which includes expenses for acquisition costs as well as general sales and marketing expenses, decreased by 46% year-on-year basis to CNY 1.4 billion in Q2. The decrease was mainly due to reduced loan-related expenses resulting from a decrease in the new loan sales and outstanding loan balances as well as the elimination of expenses associated with our Lujintong business. Operation and service expenses decreased by 15.8% year-on-year to CNY 1.3 billion in Q2, as a result of decreased loan balance and our continued efforts to control expenses, partially offset by increased commissions associated with improved collection performance. Our finance costs decreased by 90.2% to CNY 13 million in Q2 from CNY 136 million in the same period of 2023, mainly due to decreased interest expenses after the repayment of C-Round convertible promissory notes and other debts, partially offset by the decrease of interest income from bank deposits. In terms of capital at the end of June 2024. Our main operating entities remain well capitalized. Our guarantee subsidiary's leverage ratio stood at 2.4x and our consumer finance subsidiary's capital adequacy ratio stood at 14.7%, well above the 10.5% minimum regulatory requirement. As we deal with the complexity of the broader economic environment and our strategy -- strategic shift to the 100% guarantee model, we are seeing encouraging signs in terms of asset quality and in growth of our consumer finance business. We will remain committed to our prudent strategy as we seek to build a solid foundation for long-term, sustainable, future success. I will uphold our commitment to bringing value to our investors. That concludes our prepared remarks for today. Operator, we are ready to take questions.

[Operator Instructions] The first question comes from Emma Xu with Bank of America Securities.

Actually, I have two questions. So the first question is about the loan demand. So how is the overall loan demand currently? So we see that in second quarter, you granted RMB 45.2 billion new loans and the cumulative amount of the new loans issued in the first half reached RMB 93.3 billion, accounting for around 42% to 49% of your full year guidance at the beginning of the year. So do you think you are still on track to meet your full year target? And when will we see the turning point of the loan growth recovery? And the second question is that, congratulations on the continued improving asset quality. So your M3 flow rate has declined 2 quarters in a row and down to 0.9% in the second quarter. So do you think you can continue to see the improvement in the flow rate? And how will management try to sustain this good trend?

Thank you, Emma, for your question. The first question, loan demand. Yes, loan demand overall is still weak. For loan growth recovery, it largely depends on macro environment improvement. So while we keep our prudent strategy on SBO lending, we see that from our CF business, the consumption loan demand is actually more and stable. So we focus more on consumer finance and relatively large [indiscernible] consumption loan to cope with declining SBO loan demand in near term, especially in the regions where our loan volume consumption is more significant. And for your second question, we all know that it is not easy to improve C-M3 flow rates while loan balance keeps declining. But with continuous portfolio mix improvement, what I mean is, now we see them more and more accounts from 2023 and 2024 takes a bigger part of the whole portfolio, which is [indiscernible] account. So we believe our asset quality measured by C-M3 flow rate with continuous improvements. And also, we put tremendous efforts in our risk model – underwriting model and also collection model upgrade and then asset quality management process. So all in all, we are confident that about sustainability of our asset quality going forward. Thank you.

The next question comes from Yada Li with CICC.

I have four questions today. Firstly, I was wondering in what areas do we see more collaboration potential in the future with the Ping An Group? And secondly, I'd like to ask do we have any plans to further increase the shareholder returns? Looking at the cash at hand and the future loan size, what could be the potential amount available to distribute to the investors? Third, I will notice that the funding cost decreased slightly in the second quarter, and I was wondering what's the outlook for the future funding cost? And I'll ask -- I want to ask why the OpEx to income ratio hiked in the second quarter? Do we see any room to further improve this ratio? That's all.

Okay. Let me answer your -- this question on 1 to 3. Thanks, Yada. Let me see my notes. So after special dividends, Ping An Group's ownership increased much close to 57%, so 56.8%. And that we have been working closely with Ping An Group from the very beginning in a few key areas like customer sourcing, right, using their online, offline channels and technology developments and then brand maturing. But with increased Ping An Group ownership now, we expect it will help us to reduce funding cost in [indiscernible] finance standing. So actually, your third question is about funding costs. We believe funding cost is cumulatively decreasing or optimizing. We believe this trend will continue. And also with the acquisition of that nationwide small loan lending license, that lending license, that comes with better low-funding cost going forward. So we are confident about the funding cost further improvements. And then about the second question, although the Board of Directors has determined that no semiannual dividend will be paid at this time because we made a net loss recorded for the first half of 2024, but management is dedicated to returning value to shareholders. We always seek out potential ways to increase shareholder returns as demonstrated in this special dividend this time. And our annual dividend policy, which is 20% to 40% of net profit and we pay semiannually, that policy does not change, remain unchanged.

Okay. About the funding cost, I would like to share some of my view. For our Puhui loan, we expect that just because of the APR policy, the Central Bank released the variable monetary policy to the market and support -- that will definitely support our partners. And of course, they were partnered to our companies. So together with the synergy of the Ping An Group will enable -- which will enable us to enjoy a low funding cost. For consumer finance loans, I believe that we will continue to such a lower interest rate in the incumbent market. That actually, you can see the trend also in [indiscernible] market, right, the rate was led by the Central Bank to going down. And we expect that funding cost to remain at a relatively low level. And generally, we will say that we are optimistic to our overall funding cost that will continue to decrease. And another question about to our income ratio increased in the second quarter. Although we remain committed to the cost optimization, our OpEx to income ratio trended upwards during this quarter. This was mainly due to our loan scale contraction, that led to a decline in economy of scale. In addition, some of the fixed expenses contributed to the increase. Looking forward, we will continue to improve our operational efficiency by leveraging the technology and synergy and the digitalization and the work together with the Ping An Group and our internal efforts. Thank you.

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

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

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

Ladies and gentlemen, thank you for standing by, and welcome to Lufax Holding Limited First Quarter 2024 Earnings Call. [Operator Instructions] After the management's prepared remarks, we will have a Q&A session. Please note, this event is being recorded. Now I'd like to hand the conference over to your speaker host today, Ms. Liu Xinyan, the company's Head of Board Office and Capital Markets. Please go ahead, madam.

Thank you very much, operator. Hello, everyone, and welcome to our first quarter 2024 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 and CEO, Mr. Y.S. Cho, who will provide an update of the macroeconomic trends and the recent development and the strategy of our business. Our co-CEO, Mr. Greg Gibb, will then go through our first quarter results and provide more details on our business priorities. Afterwards, our CFO, Mr. David Choy, will offer a closer look into our financials before we open up the call for questions. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. With that, I'm now pleased to turn over the call to Mr. Y.S. Cho, Chairman and CEO of Lufax, please.

Thank you for joining today's call. In the first quarter, we witnessed an improvement in our early risk indicators. However, high-quality loan demand from small business owners remained subdued. While our increased risk exposure stemming from our 100% guarantee model means, we'll be prudent and patient in new business development. Our emphasis continues to be on quality over quantity. Before diving into business performance, let's take a look at the macro environment. Overall, the environment showed signs of improvement during the first quarter. The Purchasing Managers' Index or our PMI, which measures prevailing trends in the manufacturing and service industries, both trended positively. The index increased from 49 in December 2023, to 50.8 in March 2024 for manufacturing, while it increased from 49.3 to 52 for services. Despite improvement in the macro environment, the SBO segment recovered at a relatively slow pace. For example, the SME development index published by the China Association of Small and Medium Enterprises was 89.3 for the first quarter of 2024 compared to 89.1 for the fourth quarter of 2023 and 89.3 for the first quarter of 2023. Now regarding this development, as discussed in our fourth quarter earnings call in 2023, we completed five major de-risking and diversification actions, including four mix changes and one business model adjustment. Thus far, these actions have yielded signs of improvement in asset quality, although we believe operational prudence remains critical to ensure long-term growth and sustainability. During the first quarter, total new loans sales decreased by 15.6% year-on-year, mainly due to weak quality loan demand from SBOs and our own emphasis on prudent operations. As we shifted our focus from SBO launch to a more diversified approach, new loan sales of our consumer finance business grew to RMB20.3 billion in the first quarter, representing an increase of 46% year-over-year. On the other hand, new loan sales of Puhui business continued to face pressure from a lack of high-quality SBO loan demand and decreased by 35.5% year-over-year. As mentioned previously, we successfully completed transitioning to our 100% guaranteed business model for the Puhui business by the end of third quarter of 2023. Starting from fourth quarter of 2023, all the new loans were integrated by our consumer finance subsidiary as own balance sheet loans were enabled by our guarantee company under the 100% risk-bearing business model; as a result, our risk being increased from 39.8% of the total outstanding balance as of the end of 2023 to 48.3% as of the end of the first quarter of 2024. While the switch to 100% guarantee model will exert a positive impact on our take rate, as it alleviates the effect of elevated CGI premiums, our profitability will take a longer time to recover due to higher up-front provisioning. Now let's turn to asset quality. After successful execution of our de-risking adjustments to the mix of segments and products, region, channel and industry, together with improvements in the macro environment and removal of short-term negative impact caused by restructuring of our direct sales and branches, we witnessed improvement in our early risk indicators in the first quarter. The C-M3 flow rate for Puhui business, decreased from 1.2% in the fourth quarter of last year to 1%, or 1.0% in the first quarter of this year. The NPL ratio of our consumer finance loans also remained stable. While we are pleased with such improvements in asset quality, we are taking a patient and prudent approach to ensure this success is sustainable. In terms of broader strategy, we are pleased to announce that we completed acquisition of Ping An OneConnect Bank in early April, as part of our strategic initiative to leverage on strong licenses. These licenses have the potential to underpin a more expanded set of service offerings, allowing us to provide more dynamic services and to further diversify our business. I also -- I would also like to provide an update on the special dividend arrangement that we announced earlier. On March 21, we announced a special dividend plan of USD 2.42 per ADS or USD 1.21 per ordinary share. This special dividend remains subject to shareholder approval at the Annual General Meeting or AGM, which will be held on May 30, 2024. The record date for the Annual General Meeting is April 9, 2024. To sum up, in the first quarter, we encountered preliminary improvements in asset quality, which demonstrate that our de-risking and diversification initiatives are starting to bear fruit. Despite this, we remain -- we maintain a prudent approach in our operations as we see continued weakness in high-quality SBO loan demand. Last but not least, our CFO, David, will resign for personal reasons with an effective date of April 30. David has been with the company for nearly six years, and we thank him for his tremendous contributions to the company. We have appointed our Zhu Peiqing as our new CFO, who will assume the CFO role effective from April 30. Peiqing has extensive experience in finance industry, especially in audit and financial management. We look forward to his onboarding and future contributions. I will now turn the call over to Greg to share more details in our -- on our operating results.

Thank you, Y.S. I'll provide more details on our first quarter 2024 results and our operational focus for this year. Please note, all figures are in renminbi unless otherwise stated. Let's begin with an overview of our first quarter performance. During the quarter, ongoing weakness in demand for high-quality loans from SBO, small business owners, combined with our continued emphasis on operational prudence weighed on new loan sales. New loan sales in the first quarter were RMB48.1 billion, representing a 15.6% year-on-year decline. Among the total new loan sales, 42% were contributed by our consumer finance business. This is up from approximately 24% in the same period last year. Revenue in the first quarter was RMB7 billion, a decrease of 30.9% year-over-year. Decline was mainly due to the decreases in our new loan sales and outstanding loan balance and was partially offset by our increased take rate as more of our book comes from the 100% guarantee model. Our net loss for the first quarter was RMB830 million, mainly due to increased tax associated with the special dividend. On a pre-tax basis, Lufax was marginally profitable in the first quarter. Earnings before tax were RMB447 million in the first quarter of 2024, which compares to RMB1.1 billion in the same period for last year. For this quarter, pre-tax profitability remains relatively under pressure as a result of declining loan balances and new business being loss-making in the first 12 months due to up-front provisioning under the 100% guarantee model. Partially offsetting these pressures were continued improvements in cost structure, reduction in credit costs and continued strength in our later-stage recoveries. As Y.S. mentioned earlier, we witnessed the impact of our de-risking and diversification initiatives on our asset quality during the first quarter of 2024. I will now walk through our operating metrics and how they've evolved in light of these strategic changes. First, in terms of product mix, we saw our consumer finance segment continued to grow. In the first quarter, consumer finance sales accounted for 42% of new loan sales, up from 24% in the same period last year. Concurrently, the proportion of unsecured loans and secured loans decreased to 37% and 21%, respectively, from 48% and 28% last year. In light of these changes, we have seen a gradual ongoing shift in our balance mix. Consumer finance balances, as a percentage of our total balance reached 14% as of March 2024 compared to 6% at the end of March '23. Meanwhile, the proportion of unsecured loans decreased to 64% from 72% at the end of March 2023, while the proportion of secured loans has largely remained flat. In terms of our business model, we continue to build up a roster of new loans under the 100% guarantee model. As we previously mentioned, this has reshaped our portfolio mix and increased our risk bearing. As of the end of the first quarter, 26% of Puhui's loan balance was enabled under our new 100% guarantee model and our risk-bearing by balance has grown to 48.3% as of the end of the first quarter, up from 39.8% as of the end of the fourth quarter of 2023. We also kept our focus on prioritizing sales in more economically resilient regions. In terms of our channel, we maintained our emphasis on excellence within the direct sales team, which continues to be our major sales channel and contributes to a majority of our new loan sales. Next, our asset quality, our overall C-M3 improved to 1% from 1.2% in the fourth quarter of 2023. This was mainly due to improvement in the macro environment, removal of temporary negative impact from our geographic and direct sales restructuring in third quarter and the vintage runoff as we build up a new book. While we observed improvement in C-M3 ratio during the first quarter, we remain cautious about the future sustainability of this trend. Given this and considering our heightened risk exposure, we will continue our prudent strategy of prioritizing quality over quantity during 2024. Now let's take a more detailed look at our unit economics of the Puhui business. During the quarter, funding costs remain stable. In addition, our overall APR decreased slightly to 19.7% as we maintained our focus on higher-quality customers. Our take rate, based on loan balance, has risen to 9% from 7.3% for the first quarter as loans under the 100% guarantee model comprises a slightly higher percentage of the total loan balance. While we anticipate that loans under the 100% guarantee model will be lifetime profitable, it is important to note that these loans may incur accounting losses in their first calendar year due to a standard but higher up-front set of provisions. Under our projected business scale, we believe we have a strong balance sheet to support the business, its operations, capital and liquidity requirements. At the end of the first quarter of 2024, our guaranteed subsidiaries leverage ratio was 2.4 times, mainly driven by the increase of our guaranteed balance associated with our increased risk exposure and the decrease of net assets due to the distribution of the special dividend. Our consumer finance capital adequacy ratio stood at approximately 15.1%, well above the required 10.5%. As for our balance sheet, we hold net assets of RMB92.8 billion with our cash bank balance amounting to RMB39.4 billion at the end of the quarter. I'll now turn over the call to David, our CFO, for more details on our financial performance.

Thank you, Greg. I will now provide a closer look into our first results. Please note that all numbers are in renminbi terms, and all company -- all comparisons are on a year-over-year basis unless otherwise stated. As Y.S. and Greg have mentioned, our performance was still impacted by broader economic conditions that have been exerting pressure on the small business sector throughout this period. While strategically shifting to 100% guarantee model with higher take rate, higher quality customer segments and more favorable geographical regions, we opted to forgo some of our business scale with the aim of enhancing the quality of our future loan portfolio, which we believe, it is important for the long run for the company. Our strategic transition unavoidably led to continued declines in our average loan balance and total income. Meanwhile, the expected credit loss provision, which must be accounted for up-front, on the first day, amplified the accounting loss in the early stages of the product life cycle under the new business model. In the first quarter of 2024, our total income was RMB7 billion, representing a decrease of 30.9%. During the quarter, our technology platform-based income was RMB2.6 billion, representing a decrease of 49%. Our net interest income was RMB2.8 billion, a decrease of 15% and guarantee income was RMB2.92 billion, a decrease of 34.7% or are basically in line with the decrease of outstanding loan balance, in which guarantee income decreased, by lesser matter too, due to the offsetting effect of an increase in risk borne by the company. Turning to our expenses, we remain committed to cost optimizations. I want to highlight that our total expenses, excluding credit losses, finance losses and other losses, decreased by 37% year-over-year to RMB3.6 billion this quarter as we continue to enhance operational efficiency. This 37% magnitude of decrease in expense is greater than that of the 30.9% decline in the total income. Let's highlight just a few of the key expense items. Our total sales and marketing expenses, which mainly include expenses for borrower acquisition costs as well as general sales and marketing expenses decreased by 50% to RMB1.5 billion in the first quarter. The decrease was mainly due to a decrease in loan-related expenses as a result of the decrease in new loan sales and decreased retention expenses as well as referral expenses from platform services attributable to the decreased transaction volume. Our credit impairment losses decreased by 8.6% to RMB2.9 billion in the first quarter, primarily due to the decrease in provision of loans and receivables as a result of the decrease of loan balance and improved asset quality. Our finance costs decreased by 69.3% to RMB58 million in the first quarter from RMB189 million in the same period of 2023, mainly due to the decrease of interest expense as a result of the payment of C-Round Convertible Promissory Notes and other debts and partially offset by the decrease of interest income from bank deposits. The key item in this quarter is really the income tax. Whilst we achieved the pre-tax profit of RMB447 million in the first quarter, our income tax expenses increased to RMB4.3 billion in the first quarter from RMB2.4 billion in the same period of 2023. This is mainly due to the increase in withholding tax associated with one-off dividends that were paid by our PRC subsidiaries in order to support potential distribution of the special dividend we announced on March 21, 2024 As a result, net loss for the first quarter was RMB830 million, compared with a net profit of RMB732 million in the same quarter of 2023. Meanwhile, our basic and diluted loss per ADS during the first quarter were both RMB1.52 or USD 0.21. Turning now to our balance sheet, as of March 31, 2024, we had net assets of RMB92.8 billion and a cash balance of RMB39.4 billion. In terms of capital as of the end of March 20, 2024, the two main operating entities were well capitalized. Our guarantee subsidiary's leverage ratio increased to 2.4x as driven by the increase of our guaranteed products associated with our increased risk exposure and also the decrease of net assets due to the different upstream to the parent companies. And our consumer finance company capital adequacy ratio well stood at approximately 15.1% and well above the required 10.5% regulatory requirement. All these factors provide significant support for the company to navigate fully evolving macroeconomic landscape and the business transition period while laying the groundwork for us to continuously rewarding our interests in the future. That concludes our prepared remarks for today. Operator, we are now ready to take questions.

[Operator Instructions] Your first question comes from Emma Xu with Bank of America Securities. Please go ahead.

Thank you for giving me the opportunity to ask the first question. I have two actually. So my first question is about your special dividend. Could you give us more update on the progress of your special dividend? So with the incurred tax, I guess the money should have been offshore. And what's the progress of this special dividend distribution? And then, in the longer term, do you have any mid-term plans for your future shareholder returns after this special dividend? And my second question is for your asset quality, so I do notice that your flow rate and your 30-day delinquency rate did achieve a notable decline in the first quarter. So do you think this improvement of the asset quality is sustainable into the coming quarters and then -- which can also lead to lower impairment losses in the coming quarters? Thanks.

Thank you. This is Y.S. speaking. So your first question about special dividends, we announced a special dividends plan on March 21. And we also announced, on March 25, that shareholders of record at the close of June 4, 2024, will be entitled to receive this special dividend. But it is subject to shareholder approval at the AGM, Annual General Meeting, which will be held on May 30 and then our long-term dividend policy, it remains unchanged, which is about 20% to 40% of the annual net profit. And then answering your second question about asset quality improvement; yes, we see that C-M3 net flow improved in fourth quarter, down to 1.0% from 1.2% in the last quarter of 2023. We believe our de-risking efforts taken in 2023, those gradually come into effect such as credit policy tightening, underwriting process, and then sales control measures strengthening, segment mix optimization and churn optimization and so forth. And also, the -- as Greg explained, the concentrated impact from geographic restructuring in the third quarter last year, that has been gradually fading away. And also our new portfolio we built from 2023 with better quality, with tightened underwriting policy debt, that portion will take, gradually, a larger part of total loan balance. So that will further help to improve going forward. However, while we observed this improvement in the third -- in C-M3 net flow in the first quarter, we still remain very cautious about the future sustainability of this trend. And we'll continue to take prudent action and approach, considering our higher risk exposure under this 100% guarantee model.

Thank you. Your next question comes from Chiyao Huang. Please go ahead.

Hi, good morning. Thanks, management. This is Chiyao from Morgan Stanley. Really happy to see some early improvement on the risk indicator and the pre-tax profitability in the quarter; so I have two questions. One is the -- on asset quality, you can see, there's an early improvement. What's the management view on the loan growth into the rest of the year? This is one. And the second question is on the unit economics. And how do management expect it to evolve as we transition to 100% of a guarantee model. Could you, management, discuss this a little bit during the previous talks? And could you give more color and more detailed color on the unit economics.

Thanks. Greg, here responding. So on the -- while we've seen the improvement, as Y.S. just outlined, which is clearly good news, in terms of demand by customers, particularly of the quality that we're targeting, that demand is still to be on a somewhat subdued, right? So when we look at the first quarter, we haven't seen an uptick, a meaningful uptick in the demand among strong borrowers. So that is really going to drive our continued prudence because we really want to see stronger demand before we would expand beyond where we are today in terms of volumes. Obviously, given that we're now transitioning, we have transitioned all new business to the 100% guarantee model and more and more of our total book will be that 100% guarantee model. We do want to observe, for a few quarters, what we think is right as we are taking on more risk, so we stick to -- in terms of the guidance we've given for this year, new loan volume, we expect to be still RMB190 billion to RMB220 billion, which at the end of the year would take us to an ending balance of about RMB200 billion to RMB230 billion. So that's the outlook, remains unchanged, I guess, since the last quarter and we gave guidance on this. In terms of Puhui, I think this is really the most important trend also to watch now that we've shifted fully to the 100% guarantee model. As we've said, if we look at our loan balance, given that more and more is coming from the 100% guarantee model, our take rate has increased now to 9% from 7.3%. And if you look at new business, that's now being done under the 100% guarantee model, the gross take rate is approaching 14 percentage points, right? So basically, it's effectively a doubling from where we were a couple of quarters ago as we shift from the CGI model now to, more and more, under the guarantee model. So this is a trend that we will expect to continue. So as we move throughout the course of this year, such that more and more of the book is 100% guarantee model, you should see the overall take rate converge up to about 14%. And then from there, it's a question of our cost management, and it's a question of continued improvement, hopefully, on the credit quality, which will then drive the bottom line. And we haven't given guidance on that yet. But just to highlight that we note, when we do new loans -- for example, in 2024, new loans under the 100% guarantee model, we do expect them to be lifetime profitable, but we also do expect that in the first calendar year, due to up-front standard provisions, they will have a negative P&L contribution but again, lifetime profitable. So that's our outlook on the unit economics side.

Your next question comes from Yada Li with CICC. Please go ahead.

Hello management, thanks for taking my questions. This is Yada with CICC, and my first question is regarding the risk of bearing percentage. Since last quarter, the company has completed the transition towards a 100% guarantee model. Looking forward, could you please give us more color on how to view the risk-bearing percentage at the end of this year and the future? Secondly, I was wondering if you could share more about the outlook for the bottom line. In addition, if possible, can you elaborate more about once we have gone through the transition period, what is the expected margin or the profit take rate for the SME loans? That's all.

Thanks, Yada, for your question. Let me pick up your first question, and then I will pass the second to David. The -- about 100% guarantee model transition, you know that started from fourth quarter, the fourth quarter last year, that all new loans that we booked were granted by -- either by customer finance company as on-balance sheet loans or was granted by our guarantee company on the 100% risk-bearing base model, right? And then knowing that, as of the end of fourth quarter this year, including safe business loans, the total loan balance, for which we are bearing risk responsibility is 48.3% out of total loan balance and then -- which is up from 39.8% from the previous quarter. And it is 26% of total Puhui loan balance, that was enabled on our new 100% guarantee model. And then going forward, surely, because this is our new model in place, so it gradually -- I mean, the portion of our risk-bearing balance will gradually and continues to grow.

All right. So Yada, thanks for the question on this quarter net loss. I think as we mentioned before, we did achieve a pre-tax for this quarter. The key item actually affecting this quarter is really on the income tax. Income tax expenses increased to RMB1.3 billion, as you know, in this quarter, from RMB7.4 billion in the same period of 2023. This is really mainly due to the RMB1.05 billion withholding tax, which associated with our cross-border dividend upstream from PRC operating entities to the immediate holding company offshore. So as I mentioned, this cross-border dividend upstream arrangement is primarily to support the distribution of a special dividend plan as we all called out, that we announced on March 21 and of course, for other general liquidity arrangement progress at offshore. That's my comment I want to make.

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

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

Thank you. This conference is now concluded. You may now disconnect.

Ladies and gentlemen, thank you for standing by, and welcome to Lufax Holding Limited Fourth Quarter 2023 Earnings Call. [Operator Instructions]. After management's prepared remarks, we will have a Q&A session. Please note, this event is being recorded. Now, I'd like to hand the conference over to your speaker host today, Ms. Liu Xinyan, the company's Head of Board Office and Capital Markets. Please go ahead, madam.

Thank you very much. Hello, everyone, and welcome to our fourth quarter 2023 earnings conference call. Our quarterly financial and operating results were released by our newswire services and are currently available online. Today, you will hear from our Chairman and CEO, Mr. Y.S. Cho, who will provide an update of our latest business strategies, the macroeconomic trend, recent developments of our business and special dividends. Our co-CEO, Mr. Greg Gibb, will then go through our fourth quarter results to provide more details on our business priorities and outlook. Afterwards, our CFO, Mr. David Choy, will offer a closer look into our financials before we open up the call for questions. 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 make forward-looking statements. With that, I'm now pleased to turn over the call to Mr. Y.S. Cho, Chairman and CEO of Lufax. Please.

Thank you. Thanks for joining today's call. During the fourth quarter, the economy environment remains complex and SBOs continue to come under pressure. Nevertheless, as we prioritize quality over quantity, we have now completed our major derisking actions and will continue to carry out a prudent strategy. We are confident that the strategic initiatives we have implemented from a solid foundation for longer control and profitability and believe that cumulative impact of our strategic upgrades will optimize and recalibrate our risk return profile to align with the prevailing macro environment in China. Now, let me provide some updates to our quarter -- for the quarter. First, the broader macro environment remained challenging for SBOs. This is reflected in the SME development index published by the China Association of Small and Medium Enterprises, which declined slightly to 89.1 in the fourth quarter of 2023. Furthermore, the SME business conditions index published by Cheung Kong Graduate School of Business declined from 49.9 in September to 47.8 in December. This indicates that SBO segment is likely to recover at a somewhat slower pace. Next, let's turn to our business. Throughout 2023, we've made 5 major derisking and diversification actions, including 4 mix changes and 1 business model adjustments. First, we have changed our segment and product mix. Our heavier concentration in the SBO segment and offerings or both business loans generated hasty profit prior to 2022. However, with the change of macro environment, macro economic environment, such concentration drove a deterioration in both our operational and financial results in the past 18 months. To address this, we have strategically adjusted both product offerings and segments. In terms of product offerings, we have shifted from a predominant focus on SBO loans to a more balanced offering of business and consumption loans. For our product portfolio, we've expanded our offerings to be more comprehensive encompassing both installment and revolving payment options. Within the SBO segment, we refined our focus by targeting customers with better risk profiles, specifically those in the R1 to R3 rating range. Second, we have adjusted our regional mix. Since the second half of 2022, we will observe significant variations in credit performance and resilience across different areas. Accordingly, we have completed the reduction in our footprint and are focusing on higher-quality geographies with expected greater economic resilience. Third, we have optimized our channel mix, especially our direct sales channel, which is the most important for our business. We recognize that our repeat historical expansion had resulted in lower productivity and higher risk with direct sales team and responded by optimizing the scale of our direct sales team. As a result, the number of direct sales team reduced from 47,000 at the end of 2022 to around 21,000 at the end of 2023. Fourth, we have adjusted our industry mix, reflecting the relative sustainability of industries under the changing macro environment. In our internal assessment, we have assigned great importance to conservation of each industry's economic cycle stage within our models and increased KYB and industry factors for enhanced model predictiveness. Finally, we have completed migration of our business model. As discussed previously, the high CGI premium charged by our business partners had negatively impacted our revenue and profit. We recognize the high third-party reliance reduced our technical freedom, therefore, restarted negotiations with our funding partners at the end of 2022 and successfully completed transitioning to a 100% guarantee business model by the end of third quarter of 2023. In the fourth quarter of 2023, all the new loans were either granted by our customer finance subsidiary as on-balance sheet loans are enabled by our guarantee company under the 100% risk-bearing business model, thus eliminating the drag factor of CGI. On a single account basis, new loans enabled on the 100% guarantee models are expected to realize lifetime profitability. However, made record net accounting loss for the first calendar year due to higher upfront provisioning as compared with the launch on the CGI model. While this strategic shift enables us to capture greater economic value, it has also increased our risk exposures. Therefore, we remain prudent and prioritize quality over quantity throughout 2024. In terms of asset quality compared to the third quarter, C-M3 flow rate experienced an increase in the fourth quarter. This was mainly driven by the reduction in our outstanding loan balance and short-term impact from the restructuring of our direct sales team and branches. With the completion of all the restructuring measures, we have seen gradual improvement of the flow rate in the first quarter of 2024. To sum up, during the fourth quarter, with the completion of derisking initiative, the downsize of our business is under control and we have strong visibility of our businesses. However, the upside we still need more time due to our prudent strategy and transformation of our business model. Finally, over the past quarters, we have consistently heard our shareholders' request for us to improve investor returns and capital efficiency, considering the progress in business derisking and business model transformation as well as our outlook for the growth and capital requirements for the next several years, we believe we have the capability and now is the right time to return value to our shareholders through a special dividend and an estimated dividend size of approximately RMB 10 billion. Thanks. I will now return the call over to Greg.

Thanks, YS. I'll now provide more details on our fourth quarter and full year 2023 results and our operational focus for this year. Please note all figures are in renminbi unless otherwise stated. I'd like to start with an overview of our performance during the fourth quarter. During the fourth quarter of 2022, our performance remained under pressure from the complex macro environment and challenges faced by SBOs. Our overall new loan sales were RMB 47 billion, representing a year-on-year decline of 39.6%. This was mainly due to subdued demand for high-quality loans from SBOs, coupled with our prudent strategy as we transit to the 100% guarantee model. Among total new sales, approximately 40% was contributed by consumer finance as we transition our portfolio mix. Fourth quarter revenue was RMB 6.9 billion, a decrease of 44.3% year-over-year. This was primarily due to the reduction of our outstanding loan balance, which stood at RMB 315 billion at the end of 2023, a decline of 45% on an annual basis. We recorded a net loss of RMB 832 million in the fourth quarter. This was mainly driven by elevated credit losses stemming from front-loaded provisions associated with loans enabled under the 100% guarantee model, heightened risk exposure under the model and certain one-off nonoperating losses. Now, let's delve into our derisking initiatives that we have made progress on in 2023. As YS just explained, we have executed on 5 major derisking strategies, which included 4 significant changes to our business mix and transition to the new business model. First, our segment adjustments have fundamentally shifted the new business mix in favor of R1 to R3 rated customers. In 2023, 73% of unsecured loan new customers were rated R1 to R3 compared to 49% in 2022. In addition, strategic adjustments to our product offerings have resulted in a new business mix that reflects our significant derisking measures. This has prompted a gradual transformation of our existing portfolio mix. In 2023, consumer finance sales accounted for 34% of new loan sales, up from 12% in 2022. Concurrently, the proportion of unsecured loans and secured loans decreased to 44% and 22%, respectively, from 64% and 24% in 2022. As a result, our balance mix has shifted with consumer finance balance as a percentage of total balance rising to 12% at the end of 2023 compared to 5% at the end of 2022. The proportion of unsecured loans decreased from 66% from 73% as of the end of '22, while the proportion of secured loans remained flat. During 2024, we anticipated continued consumer finance diversification and majority of the unsecured balances will fall under the 100% guarantee model by the end of 2024. Next, our regional adjustments have involved the target reduction of our footprint in less economically resilient regions characterized by relatively higher risk. This strategic shift is reflected in our geographic coverage, which has decreased from over 300 cities at the end of 2022 to 146 cities at the end of 2023. In terms of channel adjustments, we have concluded the restructuring of our direct sales. The number of direct sales team members was reduced from 47,000 at the beginning of the year to 21,000 by the end of the year. In 2023, the direct sales channel contributed to 63% of new sales, up from 57% in the previous year. Turning to our business model, starting in the fourth quarter, we completed a strategic pivot as we fully transition to the 100% guarantee model. This move has transformed our portfolio mix and increased our risk-bearing as vintages run-off and the loans under the new model take shape. As a result, our risk-bearing by balance increased to 39.8% at the end of 2023, up from 23.5% at the end of the previous year. During the fourth quarter, our overall C-M3 increased to 1.2% from 1.1% in the prior quarter. This was primarily due to a reduction in our Puhui business outstanding balance and temporary negative impact from our geographic and direct sales restructuring in the past quarter. Although, we have seen improvement in the C-M3 ratio in the first quarter, given our increased risk closure under the new model, we continue our prudent strategy to prioritize quality over quantity in 2024. Now, let's turn to our outlook for 2024. We expect new loan sales of 2024 to be in the range of RMB 190 million to RMB 220 billion and the ending balance to be between RMB 200 billion and RMB 230 billion. Meanwhile, although we expect loans under the 100% guarantee model will be lifetime profitable on a single account basis, it is important to highlight that loans under this model may record accounting loss in the first calendar year due to higher upfront provisions. Under our projected business scale, we believe we have a strong balance sheet to support the business operations, capital and liquidity requirements. At the end of 2023, the leverage ratio of our guaranteed subsidiary was 1.8x, far below the regulatory limit of 10x. Our consumer finance capital adequacy ratio stood at approximately 15.3%, well above the required 10.5%. As for the balance sheet, we hold liquid assets of RMB 84 billion, with our cash and bank balance outstanding at RMB 39.6 billion. With the strong capital position and visibility into our business growth in the medium term, we are well positioned to further respond to our shareholders' consistent feedback to increase shareholder returns. And on top of the regular dividend and share buybacks that we have performed over the past 3 years, our Board of Directors has approved, subject to shareholders' approval, a special dividend of USD 2.42 per ADS or $1.21 per ordinary share with a total estimated size of approximately RMB 10 billion. To offer our shareholders full flexibility, each shareholder may elect to receive the dividend either all in cash or all in scrip. As we are dual listed in the U.S. and Hong Kong stock markets, the shareholders in each market will have to follow the respective procedures for receiving the special dividend. More details will be disclosed in our announcements and the statutory circulars in due course. The special dividend is subject to the approval of shareholders at the Annual General Meeting, which will be held on May 30, with a record date of April 9. I will now turn the call over to David, our CFO, for more details on our financial performance.

Thank you, Greg. I will now provide close look into our fourth quarter results. Please note that all numbers are in renminbi terms and all comparisons are on a year-over-year basis unless otherwise stated. As YS and Greg mentioned before, our performance was impacted by macroeconomic environment in which the small business-owned sector has been under pressure throughout the period. Through strategic adjustments to 100% guarantee model and prioritizing higher-quality customer segments and better geographical regions, we sacrificed some of our business scale for backlog quality in the future. This strategic transition inactively caused our average loan balance and total income to continue to decrease. Whilst the expected credit loss provision is required to be booked upfront in day 1, boosting the accounting loss in early quarter life cycle under the business model. In the fourth quarter 2023, out total income was RMB 6.9 billion, decreasing by 44.3%. During the quarter, our technology platform based income was RMB 3 billion, representing a decrease of 29%. Our net interest income was RMB 2.3 billion, a decrease of 47% and our guarantee income was RMB 886 million, a decrease of 47%. All are basically in line with the decrease of outstanding loan balance, in which guarantee income decreased by a lesser magnitude due to the offsetting effect of an increase in [indiscernible] by the company. Turning to our expenses. We remain committed to cost optimization. Our total expenses, excluding credit and asset impairment losses, finance costs and other losses decreased by 33.2% year-over-year to RMB 4.4 billion this quarter, as we continue to enhance operational efficiency. In the fourth quarter, total expenses decreased by 38.5% to RMB 7.9 billion from RMB 12.9 billion a year ago. This decrease was primarily due to a decrease in credit impairment losses and sales and marketing expenses. Highlighting just a few of the key expense items here. Our total sales and marketing expenses, which mainly include expenses for acquisition costs as well as general sales and marketing expenses decreased significantly by 45.9% to RMB 2 billion in the fourth quarter. The decrease was mainly due to decreased loan-related expenses as a result of the decrease in the new loan sales and decreased retention expenses and referral expenses from the platform service attributable to the decreased transaction volume. Our credit impairment losses decreased by 43% to RMB 3.6 billion in the fourth quarter, primarily due to the decrease in provision of loans and receivables as a result of the decrease in loan volume. Our finance costs decreased by 90.1% to RMB 50 million in the fourth quarter from RMB 501 million in the same period of 2022, mainly due to the decrease of interest expenses as a result of the repayment of Ping An and C-Round Convertible Promissory Notes during the year. As a result, net loss for the fourth quarter was RMB 832 million, basically flat as compared to RMB 806 million net loss in the same quarter of 2022. Meanwhile, our basic and diluted loss per ADS in the fourth quarter were both RMB 1.48 or USD 0.21. Turning now to our balance sheet. With abundant cash, we had repaid the outstanding bond of RMB 2.1 billion, an optionally convertible promissory note of RMB 8.1 billion for the year 2023. After all these payments as of December 31, 2023, we have total equity attributable to owners of company of RMB 92.1 billion and a cash balance of RMB 39.6 billion and financial assets through fair value through P&L of RMB 28.9 billion. In terms of capital as of the end of December 2023, the 2 main operating entities are well capitalized. Our guaranteed subsidiary's leverage ratio was only 1.8x as compared to a maximum regulatory limit of 10x, and our consumer finance company capital adequacy ratio well stood at approximately 15.3%, well above the required 10.5% regulatory requirement. Overall speaking, we are in a net cash position after taking into account all the external bank debt. All of these factors offer substantial backing for the company to navigate through the challenging macroeconomic environment and the transition period while providing foundations for us to continue rewarding back to our investors. That concludes our prepared remarks for today. Operator, we are now ready to take questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Emma Xu with Bank of America Securities.

I think, first and foremost, everybody care about the special dividend. So, what's the consideration behind this RMB 10 billion special dividend? What are the key numbers or information that you rely on to arrive this RMB 10 billion special dividend? And I have another question about your asset quality. So your flow rate, a leading indicator for the delinquency continued to rise in the fourth quarter to 1.2%. But I also noticed in your report, you also mentioned that you actually see improvement of the flow rate in first quarter or quarter-to-date. So, could you tell us how much improvement you already seen in first quarter? And what's your expectation for the overall asset quality trend in the coming quarters?

Thanks for your question. Let me answer. Let me start with why we believe now is the right time for this special dividend. With successful completion of our 5 major derisking initiatives I mentioned, including 4 mix changes and 1 business model adjustments, we believe now the risk is under control and we have a clear visibility of our capital requirement for the coming next 2 to 3 years, 2, 3 years. And then our stock has been traded at less than 0.2x PV and then we have been continuously requested by investors to enhance investment return. And you see that our ADS price is -- if you compare with our -- the cash per ADS is far lower, far lower. So, market has not even reflected the operable cash on our book in our valuation. So, we hope to unlock hidden value behind our cash on hand by increasing our shareholder value through this dividend. And if I explain why we arrived, how we arrived at this amount, why RMB 10 billion, right, this number. Of course, first, we first started our future 3 years development potential and how much capital we need to support the development. And then we also assumed, in this characterization, we also assumed a reasonably large buffer to ensure our stable operation in the future. So this is how we arrived at RMB 10 billion. And then the size of dividend, it seems maybe -- it looks like a very big company with our the market cap. But I want to emphasize, actually, it is only just roughly 10% of our net asset. So, this is a reasonably good amount, I believe. And then to answer your last question about asset quality. Let me explain first about what's going on with our consumer finance business. Their NPL ratio has been consistent at around 1.5%, 1.4%. And then if I explain about Puhui side, we said C-M3 net flow ratio for Puhui loan increased from 1.11% in third quarter last year to 1.25% in the fourth quarter last year, right? And then it increases mainly due to reduction of our Puhui's outstanding loan balance and the temporary [indiscernible] impact from our adjustment in our geography and direct sales restructuring. But fourth quarter, we see improvements in net flow. And we believe with completion of all those resourcing measures, we see gradual improvements of flow rate in the coming quarters. And also, you understand the old portfolio that we booked before 2023 is of worst quality. And that port is now running off. So when you get to the end of 2024, that our legacy portfolio, OI in other words, accounts we booked before 2023, we take nearly 10% of total portfolio. So in that sense, I think our gradual continuous improvement is of no doubt.

Your next question comes from Richard Yu with Morgan Stanley.

A couple questions from me. First of all on capital gain, after the special dividend, what do you think the capital needs to support the growth for loans? Will there still be enough buffer given obviously most of the loans will be guaranteed by your own capital at the moment. So on the flip side, given the projection on the reduced loan volume, are there some room to further reduce maybe the capital base and then do more special dividends with the smaller loan balance [Technical Difficulty]. Lastly...

You were just cutting off there. Could you just repeat the last 2 sentences?

Sure. I just want to say, like, one, are there enough capital to support the loan volume growth after the special dividend? And secondly, if are there still potentially excessive excess capital if the loan volume will be smaller, right? I mean whether there's opportunities for another release of dividends down the road. And then lastly is the funding cost trends that we're seeing at the moment. So, two on the capital. One is on the funding cost.

Richard, thanks. This is Greg speaking here. Overall, we have gone through, as YS was just laying out quite a comprehensive process looking out over the next couple of years on expected industry trend, our relative growth trend, capital requirements, liquidity requirements, buffer, we operate multiple licenses. We obviously have the guarantee license. We have the consumer finance license and we always keep our mind open for other licenses in the future. So after going through all that, we arrived at -- given our significant cash position, a view on what we could release today that gives us still a very substantial buffer going forward over the next couple of years. Obviously, our outlook for the market right now is still quite prudent. We're still focusing on quality over quantity. But in a year or 2, that macro situation were to change and there were more opportunities, we've certainly retained enough capital that we can deploy in our current licenses to meet higher growth. So, I think that your question is whether or not there could be additional capital release down the road. We're not considering that for the moment. We want to keep our flexibility for maybe a more positive market outlook, let's say, 12 to 24 months down the road. So, I think our strategy here has been to provide the reward to make it meaningful to deliver it in a way that allows investors to make a choice on whether they want to take some cash or do they actually want to effectively double down with the company in taking shares to make that a meaningful number today. But while leaving the company flexibility to continue to do the right thing and capture opportunities going forward with sufficient buffer. So that's, I think, the grounding or the ranging on this. In terms of funding cost, we did see funding costs over the last 12 months continue to come down. There's been 2 drivers of that. One has been the overall lower rate environment. The second, though, has been the change in the mix of our new business between guarantee and consumer finance. Consumer finance able to tap the interbank market, multiple funding sources has a lower net funding cost than the facilitation model by working with banks and trust companies. So, as we continue to see the mix change so that there is a greater proportion of consumer finance, even though we don't think the rate environment will necessarily drop that much in the foreseeable future, we do think that our mix change will continue to optimize slightly the overall cost of funds in the model.

Your next question comes from Yada Li with CICC.

This is Yada with CICC. And my first question is by 4Q '23, the company has completed the transition into 100% guarantee model, but the bottom line was still under pressure. And I was wondering what are the main causes and how long does it take before profits could be released? And what are the main drivers for the profitability recovery? And secondly, for the consumer finance company, how was the profitability and the future development, how we could balance the growth of the SBO and consumer finance segments and which one could be the strategic focus. And lastly, I was wondering, are we considering additional buybacks? And what is the main cost that we choose the special dividend instead of buying back?

Let me pick up your first question. This is YS speaking. Because of our decline in new loan volume and the revenue we generate from new book cannot offset the decrease caused by all the group shrinkage. And on the 100% guarantee model -- new model, you know that we have to accrue a lot higher, a lot higher off-loan provision that delay the public account of our new business. But on a single account basis, new loans that we enable on the 100% guarantee model is delivering lifetime profitability, but adjust record net accounting loss for the first calendar year because of the higher account provision. So that's original delaying public [indiscernible]. And if I explain about what are the main drivers for profitability recovering. How can you understand this ahead? I would say 3 things, right? The first is actually the portfolio credit performance, which we can measure by net flow rate. And the second is optimization, further optimization of what Greg mentioned, operating costs and also importantly, funding costs. And then lastly, our pace of new sales loan growth. We decided 3 factors will make -- mostly decide our profitability recovery in coming years. And then if I was to answer your -- the last question, it was about why special dividends over buybacks, have you considered buyback. If you compare dividend versus buyback, we believe considering the situation we are in, dividend has several more advantages. First, our ability to deliver return to shareholders through buyback is quite limited because of low liquidity. The second as a dual primarily listed company in U.S. and also in Hong Kong, we do maintain a list, 25% public float by Hong Kong listing rules. And our current public float is only less than 32% now. So we have very, very limited space for buyback at this moment. And this time, our dividend that it comes with an option to choose cash or scrip. So we believe this provides more flexibility than buyback to our shareholders. So that's the reason why we decided to provide special dividends over buybacks. And then one more question.

Yes. Greg here. On consumer finance, basically, 2023 was the third kind of full year of operation for the company and it has been scaling up from scratch when the license was acquired. So, 2023 is a profitable year for consumer finance. As the scale of that business continues to increase, it's relative efficiency, there's still some room there as it continues to scale up and we change the overall mix of the portfolio. The question of how do we balance this and what is our main strategic focus going forward. So, I think the way for us to describe this is our main strategic focus, our differentiation in the market remains around serving the small business owner. This is still our core element. Where we see consumer finance playing an important role is really in 2 ways. One is that we do believe that there are good consumer finance opportunities to work through multiple channels to diversify our product offering into providing more smaller ticket, shorter-term loans that makes us to be more nimble in a dynamic environment, but also providing these capabilities to small business owners as well because small business owners sometimes act in the capacity of their company needs, which we cover under the Puhui business model. And sometimes, they have their individual needs. Of course, we're looking at these customers from a full credit view, right? But we sometimes find that small business owners, once they have taken a long-term loan, they may still have smaller interim needs. And so we want to be in a position to serve these customers kind of on a longer life cycle with more opportunities to interact with them and through the interaction, creating more data points to understand them and their needs. So it is a way, consumer finance is a way to diversify our product offering to provide some nimbleness in terms of ticket size to provide some additional data in terms of behavior as well as additional touch points to our existing customers as well as a deeper reach into the market. So, we will continue to have SBO as a core capability. But if you look at the mix between the Puhui model and the consumer finance model, you've seen that mix change quite a bit over the last 12 months and that transition to a more balanced development, you'll probably see continue in the near to medium term.

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

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

Thank you. This conference is now concluded. You may now disconnect.

Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Limited Third Quarter 2023 Earnings Call. [Operator Instructions] Please note this event is being recorded. Now I would like to hand the conference over to your speaker host today, Ms. Liu Xinyan, the Company's Head of Board Office and Capital Markets. Please go ahead, ma'am.

Thank you, operator. Hello, everyone, and welcome to our third quarter 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 and CEO, Mr. Y.S. Cho, who will provide an update of our latest business strategies, the macroeconomic trend and the recent development of our business. Our Co-CEO, Mr. Greg Gibb, will then go through our third quarter results and provide more details on our business priorities. Afterwards, our CFO, Mr. David Choy, will offer a closer look into our financials before we open up the call for questions. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. With that, I'm now pleased to turn over the call to Mr. Y.S. Cho, Chairman and CEO of Lufax. Y.S., please.

Thank you for joining today's call. While the macro economies recovered gradually in the fourth quarter. The small business segments, still face a complex landscape and needs more time to recover. We continue to purchase virtual derisking and diversification, maintaining our asset quality with the goal of improving our asset quality overall for long-term, healthy and sustainable growth. During the third quarter, while high quality loan demand from SBO remains weak. Our customer finance business recorded a healthy growth, with the new loan sales volume increased of 15.3% sequentially and 48.5% from the same period last year. We are also taking steps to further diversify our operations, by acquiring a virtual bank in Hong Kong. Let me now provide some updates for the third quarter. On the regulatory front, the state council released guidance on promoting high quality development of inclusive finance. The guidance recognizes the value of non-bank institutions, such as guarantee, consumer finance, and small lending companies and encourages market participants to take steps to solve the financial needs or SBOs, as well as enhanced consumer protection. We believe the guidance and recent well equipped development, we promote healthy development of the industry. And better fit leading players that operate businesses in a compliant manner and with proper licenses. As for the macroeconomic conditions, the recent data has shown that China's economy is gradually recovering. GDP in the third quarter increased by 4.9% from the same period last year, putting the economy on track to meet the annual gross target of 5%. During the third quarter, large enterprises demonstrated the strongest signs of recovery, while SMEs continued to face pressure from the broader macro situation. The SME Business Conditions Index published by the Hong Kong Graduate School of Business declined from 50.2 in June to 49.9 in September. The Small and Medium Enterprises Development Index published by the China Association of Small and Medium Enterprises was also below the critical thresholds of 100 in the third quarter, indicating that the SBO segment will likely recover more slowly than the rest of the economy. Let's explore the impact of these factors on our business. Under the pressure from complex macroeconomic environments, derisking is crucial for the stability, sustainability of our business. In the third quarter, we continued our strategy of prioritizing asset quality over quantity. We have completed the strategy of just a month, initiated in the beginning of the year, by reducing our footprint in less economically resilient regions with relatively higher risks, and optimizing our direct search force. We believe these difficult but necessary steps will establish the foundation for long-term sustainable growth. As high quality demand for SBO loans remained weak and we continue to prioritize prudence in our strategic execution. New loan sales decreased slightly from RMB53.5 billion in the second quarter, to RMB50.5 billion in this quarter. In terms of asset quality, risk performance of the order book, which are launched enabled for 2023 has stabilized. Meanwhile, all indicators suggest that as the quality of new loans enabled in 2023 is in line with our expectation, although not yet recovered to pre COVID levels. Next, let me show some strategic updates. We have completed our transition to being smoother under which our guarantee subsidiary provides 100% of our credit enhancement, as CGI premiums remains elevated due to the impairment losses suffered by CGI partners. At present, we have secured sufficient credit lines from our funding partners to support our 100% guarantee model for the remainder of 2023 and throughout 2024. We are able to make this shift in large parts due to our strong capital position. At the end of third quarter, the leverage ratio of our guaranty subsidiaries was only 1.6 times, well below the maximum regulatory limit of 10 times. Switching to our 100% guarantee model will play an important role in elevating the impact of elevated a CGI premiums, resulting in a 13% to 14% tax rate from a long term perspective. But exerting pressure on medium term profitability as upfront projects are recorded for new business. Last quarter, we mentioned our strategy to grow our consumer finance business by leveraging the advantages of our consumer finance license and synergies with the Puhui business, and we continued to implement this strategy. During the third quarter, the new loan sales of our consumer finance business was RMB20.6 billion, representing 15.3% quarter-on-quarter, and 48.5% year-over-year growth. The NPL of our consumer finance business decreased to 1.9% in the third quarter from 2.2% in the second quarter. The competitive advantages of our consumer finance business have made it an increasingly important part of our business. Without consumer financial license, we can operate this business in full compliance with regulations and benefit from lower funding cost enabled by interbank money market. With SBO segments likely to face continuing challenges from the macro environment in the near term. The consumer finance business serves as a good supplement to the Puhui business, enabling us to further mitigate risk and diversify product offerings. Together with our transition to the 100% guarantee model, we will be able to provide more comprehensive products to our target customers with a simpler and better customer experience. Now let’s turn to our new initiative we are undertaking to further diversify our business. Subject to approval from the Hong Kong Monetary Authority and OneConnect shareholders, we acquire 100% of the shares of Ping An OneConnect Bank or PAOB from OneConnect, at a cash consideration of 933 million Hong Kong dollars, representing 2.2% of our cash at bank as of the end of September. As one of the eight virtual banks in Hong Kong, PAOB is a fully licensed bank with a service scope similar to traditional banks, but without fiscal operating branches. As of June 30, 2023 PAOBs loan balance was 1.8 billion Hong Kong dollar. And if capital adequacy ratio was 100%, which was substantially higher than relevant regulatory requirements. All of these loans were SME loans in Hong Kong, and a significant portion of outstanding balance is backed by Hong Kong government's SME financing guarantee scheme. We believe the business and higher customers of PAOB think well with our existing operations, enabling us to leverage our operational experience and technological expertise in its business development. From a long-term perspective, the prospects of Greater Bay Area also bring upside potentials, via banking license. Overall, we took a number of steps in the third quarter to carry forward our efforts on de risking and diversification, including the completion of our transition into 100% guarantee model, further developing our consumer finance business and acquisition of the virtual bank in Hong Kong, aiming to create foundations for long term sustainable growth. In the short term, as most of our strategic efforts on derisking had been concluded by the end of the third quarter, which peg volume in new loan sales to be stabilized and we are on track to meet our new loan sales guidance for the full year 2023 to be in the range of RMB190 billion to RMB210 billion. I will now turn the call over to Greg for more details on our operating results.

Thank you, Y.S. I will now provide more details on our third quarter results and our operational focus for this year. Please note, old book refers to unsecured loans enabled before January 1, 2023 and new book refers to unsecured loans enabled afterwards. All figures are in renminbi unless otherwise stated. During the third quarter of 2023, our performance remained under pressure from the complex macro environment and challenges faced by SBOs. Total new loan sales during the third quarter was RMB50.5 billion, amongst which approximately 40% was contributed by the consumer finance business. Now let's dive into the detail performance of the Puhui business and the consumer finance business. First, let's take a closer look at our Puhui business. During the third quarter we enabled RMB29.9 billion of new loans under the Puhui brand. Despite the pressure on new loan sales, the productivity of our direct sales team further improved during the third quarter. Average productivity for our direct sales team rose by 25.4% quarter-over-quarter, continuing the positive trend we noted in the second quarter. 68% of new loans enabled during the third quarter came from our direct sales team compared to 61% on the second quarter. The overall pricing by balance of loans enabled under the Puhui business remained stable at 20%. We have not encountered any pressure to decrease price and we have the flexibility to adjust our prices to the extent commercially sensible. As we have completed the transition into the 100% guarantee model, we expect to improve our take rate by alleviating the negative impacts of elevated CGI premiums in the long term. Our profitability however, will suffer in the medium term due to the impact of upfront provisions under the 100% guarantee model. Now let's look at the risk performance of Puhui business during the third quarter. The risk bearing by balance of Puhui business at the end of the third quarter increased to 25.7% from 22.4% as of the end of second quarter, mainly due to a greater portion of loans enabled under our 100% guarantee model. By the end of this year, we expect our total risk bearing including consumer finance to increase to above 40%. The C-M3 flow rate of the Puhui business increased from 1% as of the end of June to 1.1% as of the end of September, partially due to the 16.1 decrease and outstanding loan balance of the Puhui business. Taking a closer look into the Puhui portfolio. Asset quality of our old book was stabilized as the amount of the old book decreased as a percentage of total portfolio, the absolute amount of old book that would become overdue will continue to decrease. Although the C-M3 ratio remains at an elevated level. On the other hand, though not yet recovered to pre COVID levels, asset quality on the new book is in line with our expectation and we see -- we continue to operate with tighter credit standards that focus on higher quality demands from stronger SBOs based in economically resilient regions. In light of the macro environment, we plan to maintain our emphasis on quality over quantity for the foreseeable future. Now let's move on to our consumer finance business. Our consumer finance continued to record a healthy growth during the third quarter. New loan sales in the third quarter amounted to RMB20.6 billion increased by 15.3% sequentially and 48.5% from the same period last year. The total outstanding balance of consumer finance loans at the end of the third quarter was RMB36.1 billion, up 9.9% from the end of the second quarter, and up 29.4% year-over-year. The NPL ratio of consumer finance business was 1.9% in the third quarter, as compared to 2.2% in the second quarter. Providing smaller ticket size, shorter tenure consumption loans helps to enhance our product line, as well as diversify our business operations. In addition, with the increased amount of consumer finance loans as a percentage of new loan sales, the lower funding costs of the consumer finance business will help bring down our overall funding costs. We plan to continue our efforts to grow the consumer finance business, while the SBO segment remains under pressure. Due to the aforementioned factors, our total income decreased from RMB9.3 billion in the second quarter to RMB8.1 billion in the third quarter, mainly due to a decline in our outstanding loan balance and new loans enabled to SBOs. On the expense front, we maintain our emphasis on optimizing our operational efficiency, and decreased our operating expenses by 6.1% from the previous quarter, and 31% from the same period last year. Credit impairment losses remained at RMB3 billion for the quarter, mainly due to the impairment losses arising from the old book. As a result, we recorded RMB131 million of net profit for the third quarter. As Y.S. mentioned earlier, we plan to acquire 100% of the equity interest of PAOB, to bring additional diversity to our business, subject to regulatory and OneConnects shareholders approvals, we hope to close the deal in the first half of 2024. Finally, we are pleased to announce that we have paid out the first half 2023 dividends in October with an aggregate amount of $89 million. We'd like to thank our shareholders for their continued support, and we'll continue to use our best efforts to deliver value to our shareholders. I will now turn the call over to David our CFO, for more details on our financial performance.

Thanks, Greg. I will now provide outlook into our third quarter results. Please note that all numbers are in renminbi terms and all comparisons on a year-over-year basis, unless otherwise stated. In the third quarter 2023, our total income was RMB8.1 billion, total expenses were at RMB7.7 billion and net profit was RMB131 million. As Y.S. and Greg mentioned before, our performance was impacted by the macroeconomic situation affecting the SBO segment, of course, the negative growth in the loan balance. This resulted in a 39% decrease in our top line this quarter. During the third quarter, our technology platform-based income was RMB3.3 billion, representing a decrease of 51.2%. Our net interest income was RMB3.3 billion, a decrease of 28.4%, and our guarantee income was RMB941 million, a decrease of 49.5%. Furthermore, primarily due to the decline in the loan balance, guarantee income was RMB941 million compared with RMB1.9 billion a year ago. For our other income, which mainly includes account management fees, collections, and other value added services charged to our credit enhancement partners as part of the retail credit enablement process, the amount was RMB291 million in third quarter of 2023, compared to other loss of RMB129 million in the same period of 2022. Turning to our expenses. We are committed to cost optimization for sustainable growth, whilst preserving our core capability. Our total expenses, excluding credit and assets and impairment, losses, finance costs and others, decreased by very 31.1% year-over-year to RMB4.7 billion this quarter, as we continue to enhance our operational efficiency. In the third quarter, our total expenses decreased by 38.1% to RMB7.7 billion to RMB1.1 billion a year ago. This decrease was primarily due to the decreases in sales and marketing expenses and credit impairment losses. Our total sales and marketing expenses, which mainly include expenses for borrowers and investor acquisition costs as well as general sales and marketing expenses decreased by 43.7% to RMB2.3 billion in the third quarter. The decrease was mainly due to decrease for acquisition costs as a result of the decrease in the new loan sales and decrease in investor acquisition and retention expenses, and impairment expenses from platform services attributable to the decreased transaction model. Our general and administrative expenses decreased by 15.6% to RMB500 million in the third quarter, mainly due to our expense control measures and decreases in tax and surcharges. Our operations and subsidy expenses decreased by 7.6%, RMB1.5 billion in the third quarter, mainly due to our efforts in expense control, a decrease of loan balance, partially offset by increase in resources we invested in collection services. Our credit impairment losses decreased by 24.1% to RMB3 billion in the third quarter, primarily due to the decrease in provision of loan receivables, as a result of the increased loan balance. Our finance costs increased by 86.9% to RMB40 million in the third quarter, from RMB306 million in the same period of 2022, mainly due to the increase of interest income from bank deposits, plus the decrease in interest costs resulting from our early repayment of our CP and other U.S. dollar debt. As a result, net profit from the third quarter was RMB131 million, compared to the net profit of RMB1.4 billion in the same quarter of 2022. Meanwhile, our basic and diluted earnings per ADS during the third quarter, were both RMB0.04 or $0.01. Turning now to our balance sheet. Our balance sheet remains strong and solid as our cash at bank balance has increased since the end of our last fiscal year. As of September 31, 2023, we have a cash balance of RMB39.8 billion as compared with RMB43.9 billion as of last year. And as of the end of September 2023, our guarantee subsidiaries leverage ratio was only 1.6 times as compared to a maximum regulatory limit of 10 times. All of these factors have substantial backing for the company to navigate through the change in macroeconomic landscape, maintain our resilience and creating options to deliver value to our shareholders in future. That concludes our prepared remarks for today, operator, we're now ready to take questions.

[Operator Instructions] Today's first question comes from Emma Chu with BofA Securities. Please go ahead.

Thank you for giving me the opportunity to ask the first questions. Actually, I have two. The first one is about the loan demand and new loan pricing. So previously, you mentioned that you are on track to meet your full year loan goals targets now. But we just want to get more details about the overall loan demand in fourth quarter so far, including the SME loans and the consumer finance loan, and how it will impact your loan pricing for different loan products? And the second one is about the unit economics under the full guarantee model. So we understand that you have been progressing towards this model for a while and we probably get some more data now. So could you please run us through that unit economics under this new model? Thank you.

Thank you for your question. We see the macro economy is surely is gradually recovering, but our major target segments are small business segments, they need more time. So as a result, loan demands, or especially time expense segments remain quite weak. Their confidence level we think hasn't restored back to the previous level, so we see a weak current demand. But the reality is, as we said in the previous announcement, we believe we’ll deliver this years new loan sales guidance as planned. Now regarding over APR. Our overall APR level on portfolio remained stable at around 20%. And then we do not see any further pressure to reduce our loan price via APR. So our continuous communication with regulators, we see that they're also gradually getting aware of that, question that we simply arose again and again, otherwise, we cannot ensure the financial service coverage for the whole SBO segments. So we believe we have more flexibility in the future than before to adjust our room price as necessary. And to your question about our UE on the full guarantee model. Now we fully switch it to 100% sales guarantee model. So it's a model – mix of our guarantee plus bank funding, we don't have CGI partners anymore. So as normal CGI premium paid, our take rate will be a lot higher than before to around 14%, 14, 14% level. And going forward this year, we’ll continue to optimize while reducing our funding costs. But upfront primarily on the sales 100% guarantee model will affect our bottom line in short of one-year term. Thank you.

Thank you. And our next question today comes from Victor Chu with Morgan Stanley. Please go ahead.

Thank you. I’m Richard from Morgan Stanley, a question on the cost side. Given obviously, the loan size has been shrinking and company had been optimized in the loan size and client base in the risk environment? Are there any room to optimize the sales force, because you know, at the moment, I guess, cost control is also a very important aspect that we can probably analyze and see the profitability of the business. Any thoughts on that? Thank you.

Okay, thanks for your question. By now, we have completed the adjustment of our sales team, we reduced our sales team, especially in the regions, the local economy is not resilient, and then we don't see much development potential. So as a result, we have a lot less number of teams. But our plan has been all completed, and now our focus is, we don't have any further optimized plan for sales team. Our focus is more about how to retain our remaining the best quality or lot better than before quality sales team. And then department has been -- we see the department has been continuously improving customization. Although, we all know that we tighten underwriting policy very much from this year, but see the remaining Directors team, department has been improving. And then we understand the productivity enhancement is the best way to optimize our cost ratio. But also, we’ll continue our efforts to further optimize our funding costs and other operational costs.

So just Richard, Greg here. T add to YS’s comment. If you look at the third quarter, quarter on quarter operational expenses down 6% and year-on-year, operational expenses down 31%. So actually starting in the fourth quarter last year, and then progressively up until about July, August this year, we went through quite substantial restructuring, and that restructuring included frontline mid and back office, so pretty far reaching. And as YS said, I think, given that we have made those adjustments, and that we're starting to see improved productivity in the front line, the key now is really to capture the benefits from the ongoing change in the mix of our business. Right. So if you look at, for example, YS mentioned, funding cost. Our funding costs, through the Puhui guarantee model, when we partner with banks and other trust companies, it's still raising around 5.5%, on average, but when you look at the consumer finance business, that funding cost is about 3.5%, 3.6%. And then if you look at the new business mix in the third quarter, where our consumer finance made up above 40%, of all new business, you can see as that change in the mix of the business occurs, it creates an overall lower funding costs as well. So there's still more room we believe, in the current interest rate environment, here in China, to optimize funding costs on the guarantee model. And we'll be working through that with our bank partners. But the key now really, is to take advantage of the fact that the old book, which has really been the source of our challenges, the book written before 2023, that old book is a percentage of our total business. So if you take, let's say, unsecured loans written prior to 2023, versus the total, which includes also unsecured business generated post January 1 this year, secured business, consumer finance business, that old book is roughly about half of our outstanding today. And by the next 12 months out that that percentage will drop to low double digit. So we have a situation where that the old runs off the new is performing in line with expectation, productivity for the direct sales has been lifting consistently in both Q2 and Q3. So we think that the right sizing things that we have done in terms of the front line are now largely completed. And it's really just now to sort of work through the remaining part of the old book, continue to improve our mix and needs to be prudent in our new loan growth. And we think that with those steps, I wouldn't say that we are at the end of all challenges at this point, but we've certainly worked through a large part of it. And we think we've right sized for our future steps.

Thank you. Next question comes from Alex Ye with UBS. Please go ahead.

Good morning. Thanks for taking my questions. I have two questions. First one is on asset quality. So, where are we in terms of the legacy as equity risk, did the company see any early indicators that the asset quality on this part could actually improve? And what driver will be needed for that improvement? And second, regarding your PAOB, can you also share some color on that including any initial thoughts on the future strategy on that bank? For example, what kind of growth prospects should we be expecting? How is it profitability now and when to expect it to breakeven and also any color on the asset quality of SME loan book? Thank you.

Sure. On asset quality for the domestic Puhui branded SBO business. As we've highlighted, the C-M3 ratio, which is that lead indicator still remains at an elevated level. So for Q3, it was at 1.1% versus about 1% in Q2. So it has remained at an elevated level. But if you factor in that are this is a numerator denominator issue when you met through the ratio. Actually, the denominator, for example, has shrunk about 16%. If you look at just a quarter on quarter change. So if you were to factor that in, you would actually start to see gradual improvement. And we look through the overall book because that old business, written prior to 2023, as I said, is now approaching to be about half of the total portfolio and that will continue to decline over the next 6 to 12 months. So the absolute loss that comes from the old book will continue to decline. And then what will drive these signals going forward is the portion of the overall portfolio which is coming from new business. And the performance of that part is in line with our expectation. I think YS has outlined that if you look at the quality of new business written since January 1 of this year, it is actually better than new business written in 2022 and 2021. It's not back to 2019 levels, because we would expect an improved quality because we are focusing on a higher quality customer base, we've narrowed our focus on to the best credit quality groups. But we do see that it is generating a profitable outcome, we believe that the new business that we are doing today through its lifetime will be a positive contributor to the company in 2023 and beyond on a per account basis. So we think the asset quality well, it is still challenging, the environment is still challenging, we are seeing a gradual improvement. One other indicator that we've seen recently is that the amount that were able to recover post indemnity, post 90 days, where it's been charged off, that recovery is actually gradually improving as well, this year and in the third quarter, so that we believe will bring some room going forward. So I don't think it's time to celebrate that everything has returned to normal. But I think it is time that we know that we probably have seen the worst and we will see gradual improvement in overall quality going forward. In terms of POB, the digital virtual bank license in Hong Kong, we've actually, Lu Holdings has been looking at this market for some time, when the initial licenses were issued at eight of them back in 2019, we did consider at that point, looking into it, but then didn't pursue it for other reasons. Given the opportunity to fully acquire this license today at roughly about 1.2 1.3 times book value, we think is actually quite a good medium term growth options, a very affordable, medium term growth option for us. If you look at POB, in the context of the eight virtual banks in Hong Kong, by loan assets and total assets, it's roughly ranked third. And if you look at its relative profitability, it actually has the least losses of any player in the market and the focus of POB, while it's still relatively small, of about 1.8 billion Hong Kong outstanding loans, a majority of those backed by the Hong Kong SME government guarantee program, it's quite low risk, if you look at the losses that it incurred last year is about 160 million Hong Kong. And we would expect losses this year to be in that range. We would expect to grow the business in the context of Hong Kong, on the loan side diversifying its products a little bit more, diversify its acquisition channels a bit more, taking our experience in technology risk and salesforce deployment in bringing those into the mix. And we will also look at opportunities. If you look out over the next one to two year, in addition to lending opportunities which may extend into the Greater Bay, we have to continue to watch the policy on that closely. But we do think that is the general direction that people want to go. We'll also look at non-lending businesses, where the bank has the ability obviously beyond deposits to also do a number of other products and so those are areas that we will look to develop. So, over the next two to three years with investment in development, we believe this will become a profitable venture for us and I think, if you take the broader perspective of Lu Holdings, and I think if you look at the words that YS used today mentioned several times, diversification, so the focus really for the last two plus years in the current environment has been to derisk to reduce our exposure to the SBO segment, while focusing on the high quality customers and start to diversify our business in domestically with consumer finance, and also, I think through Hong Kong, with this full banking license that gives us long term opportunities in Hong Kong, Greater Bay, but also can be a launch point for other markets over time. So we look at it as an important and affordable option for us to continue to pursue diversification strategies.

Thank you. And our next question today comes from Yada Li with CICC. Please go ahead.

Hello, management. Thanks for taking my question. This is Yada from CICC. And I only have two questions for today. The first one is about our consumer finance segment. I was wondering how we shifted the strategic focus towards the consumer finance. And looking forward how much it will contribute to the whole loan book? And compare with the consumer finance peers, what are the unique advantages that we have to develop such business? And the second one is that I notice you have almost a RMB40 billion cash in bank as of this quarters end and we paid a normal dividend payout, where management consider a share repurchase or a special dividend to deliver more value to the shareholders. And that's all. Thank you.

Sure. I'll take your first question on consumer finance. So I think we have to first define what is consumer finance for us? How does it add to what we already have been doing for many years? So if you look at our traditional focus on the small business owner segment, overtime, we've enabled lending to more than 6 million small business owners. And as you know, those loans have always been granted in the form of to the individual, mostly for use in their businesses. So actually, we have quite a large installed base of customers that we have interacted with and continue to interact with. Now, most of the lending that we have done traditionally has been larger ticket RMB200,000 to RMB300,000 and has typically been for a duration of two to three years. With our consumer finance license, we have an opportunity to provide a higher frequency service to customers that we have served for many years. So we have the ability to understand those customers to understand beyond some of their longer term needs, particularly as they repaid over time, they may have shorter term requirements as individuals as well. And those requirements could be in form of consumption of their own personal needs. So we have been developing a product set that serves these individuals. We've also been developing a product set, which allows us to partner with a number of other online platforms, so that we're also reaching out into new customer segments. Today, the business is developing around half with the ability to serve, small business owners and their individual needs. And the other half through partnerships that extends our reach to the customer base. We continue to invest in this business to generate more and more scenarios, which are closely linked to customer's consumption behavior. I think what's very important if you look at consumer finance in the context of Lu Holdings, is that it increases our frequency of interaction for those customers we serve. It also gives us a broader dataset to understand some of their needs and behaviors, which allows us to better judge their overall credit risk in their various needs. So it’s an opportunity to leverage what we have to also broaden who we serve, to do it with a broader set of products with shorter durations, which gives us more flexibility and adds to data that we can use to assess customers more broadly. Today, as we said in the third quarter of total new loan sales enabled through the company, about 40% were for consumer finance, it makes up about 11% of the total outstanding to-date. If you roll forward over the next 12 to 18 months, we would expect that it will still be a very large share of new sales and will increasingly make up a larger part of the portfolio. So we're now low double digits in percentage of portfolio and we believe that will continue to increase over the next 12 to 18 months. So it is an important diversification initiative but it also helps reinforce our overall position in terms of customers and risk and service. David, you want to address the second question?

Thanks, George. For your second question. Yes, we have been exploring all the ways to deliver value to our shareholders, very since our listing. As you may aware, we did some buybacks in previous years, and we continue to pay out dividends in recent years. We'll continue to do so of course. And as you may aware, we just paid out the first half 2023 the dividends in October with an amount of about $89 million. It's just a relatively small amount in terms of a relative to our cash position. And I think after all, we won't exclude any means the ways that we can deliver value to our shareholders as a whole, full perspective of total shareholders returned. And we also find ways to preserve cash or deploy capital in a way to support the sustainable growth for business model in the future, or to create options for future business model and growth. Thank you, Yada.

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

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

Thank you. That concludes the call today. Thank you everyone for attending. And you may now disconnect.

Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Limited Second Quarter 2023 Earnings Call. [Operator Instructions] Please note this event is being recorded. Now I would like to hand the conference over to your speaker host today, Ms. Liu Xinyan, the company's Head of Board Office and Capital Markets. Please go ahead, ma'am.

Thank you very much. Hello, everyone, and welcome to our second quarter 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 and CEO, Mr. Y.S. Cho, who will provide an update of our latest business strategies, the macroeconomic trend and the recent development of our business. Our co-CEO, Mr. Greg Gibb, will then go through our second quarter results and provide more details on our business priorities. Afterwards, our CFO, Mr. David Choy, will offer a closer look into our financials before we open up the call for questions. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. With that, I'm now pleased to turn over the call to Mr. Y.S. Cho, Chairman and CEO of Lufax. Please.

Thank you for joining today's call. During a complicated macro environment that has been particularly challenging for small businesses, we have doubled down on our efforts to optimize costs and adjust our strategy to achieve our U-shaped recovery. While we continue to make progress towards this recovery, we have also been embracing new initiatives to achieve long-term stability. In the second quarter, we were able to improve our bottom line sequentially and advance our efforts to attain higher quality new loans we enabled. We also drew closer to our goal of transitioning to a 100% guarantee model and continued our strategies to mitigate risk and diversify business. Let me provide some updates for the second quarter. First, China's macro economy steered [indiscernible] to recovery and landscape remains complex. In the second quarter, China's GDP demonstrated our year-over-year growth of 6.3%, indicating progress towards the country's annual growth target of 5%. However, the performance of producer price index and consumer price index as well as some other economic indicators such as import-export statistics signal a complicated situation. We continue to closely monitor market dynamics as we navigate China's evolving macroeconomic environment. Meanwhile, SBOs remain under pressure and continue to face difficulties in the current environment. The SME business conditions index published by the Cheung Kong Graduate School of Business, which considers factors including sales outlook, profit outlook and the finance environment declined from 58.9 in March to 50.2 in June. The small and medium enterprises development index and macroeconomic perception sovereign index, which reflects enterprise confidence published by the China Association of Small and Medium Enterprises were also below the critical threshold of 100 in the second quarter. This indicates that operational environment for SBOs remains challenging in the second quarter. And it may take more time for the SBO segment to recover. On the regulatory front, the over regulatory environment remained stable. Government authorities have indicated that their priority is to employ policies that will be favorable to economic growth in the private sector. This will hopefully provide a stronger foundation for private enterprises and platform economy. Next, let's get into the impact of these factors on our business. Because of challenging macroeconomic environment for the SBO segments, our U-shaped recovery has been progressing slow than we had anticipated. New loan sales in the second quarter declined sequentially due to weakened high quarter loan demand from SBOs as well as our continued emphasis on operational prudence. As we have discussed over the past several quarters, our goal is to prioritize asset quality over quantity, with the goal to improve our overall asset quality for long-term healthy and sustainable growth. We continue to see progress on this front. Our C-M3 ratio stabilized in the second quarter, though it remains elevated from historical levels, partially due to decreased outstanding balance. Moreover, we are pleased to observe that asset quality of new loans is in line with our expectations. All risk indicators suggest that asset quality of new loans enabled us to tighten credit standards is better than that of the vintages enabled during the past 3 years, although it has not yet fully recovered to the pre-COVID levels seen in 2019. Meanwhile, our consumer finance business continues to witness healthy growth. Customer finance loans as a percentage of total new loan sales increased during the second quarter and comprised over 1/3 of new loans enabled during this period. Total outstanding balance of consumer finance loans was up as well. In addition, the NPL of our consumer finance business decreased from 2.4% in the fourth quarter to 2.2% in the second quarter. In light of challenging macroeconomic environment encountered by these segments and a relatively long period of time it may take for this segment to recover, we expect our consumer finance business will become an increasingly important part of our portfolio over the next 12 to 18 months. On the financial side, our revenue decreased in tandem with our outstanding balance. In response to this anticipated top line pressure, we maintained our discipline with regard to expenses. Continuous optimization efforts enabled us to shrink our operating costs at a greater rate than the decrease in income. Together with stabilized asset quality, our bottom line improved over the last quarter. The events over the past several quarters have highlighted the importance of mitigating risk in regards to the long-term head of our business. As such, risk minimization and business diversification will be the key component of our medium-term strategic initiatives. Recognizing this, we have devised a multilayered approach, which we expect will help us achieve long-term stability. This approach involves maximizing the utility of our guarantee and customer finance licenses, continuing our operational shift towards high-performing regions, maintaining strength in direct sales channels and further enhancing our risk control mechanisms. We intend to make full use of our guarantee license to focus on growth in better performing economically resilient regions. We continue to transition towards the business model under which our guarantee subsidiary will provide 100% of credit enhancement. This approach will allow us to more completely utilize the benefits of our guarantee license and leverage our strong capital position and result in a better profitability in mid-term. Currently, our insurance company credit enhancement partners are charging elevated insurance premiums, which puts pressure on our take rates. Switching to the 100% guarantee model will resolve this and will improve our take rate and profitability. In addition, 100% guarantee model with our CGI partner is simpler. This means easier compliance with regulation and a better process for borrowers. We have discussed our transition towards this 100% guarantee model before. And now I'm pleased to report that we continued to make good progress. At present, we have already secured a sufficient credit line from our funding partners to be able to support this model for 2023 and beyond. During the second half of this year, we plan to continue to increase the proportion of the loans enabled under this model. As a result, we expect our risk-bearing percentage will further increase in the coming quarters. Our ability to do this is based in part on the strength of our capital position. At the end of second quarter, the leverage ratio of our guarantee subsidiary was 1.6x as compared to maximum regulatory limit of 10x. In addition to transitioning towards the 100% guarantee model, we also plan to further expand our consumer finance business. This decision is motivated by a number of factors. First, under the current macroeconomic environment, consumer finance loans with smaller ticket sizes and shorter durations complement our SBO loan enablement business, which is more heavily impacted by the macro conditions. By providing consumption loans, we can provide a more comprehensive product line to our customers to satisfy their consumption needs. Expanding our consumer finance business also opens opportunities for synergy with our [indiscernible] loan platform by leveraging our risk control capabilities and existing consumer base. Furthermore, our customer finance license allows us to operate the consumer finance business in full compliance with the regulations. With this money lending license, we are able to provide consumer loans directly to our consumers on the simple and straightforward business model, which improves customer experience. As we undertake these efforts, we intend to continue our strategy of focusing on strong regions, enhancing direct sales channel productivity and bolstering risk-controlled mechanisms in our operations. We have focused and we'll continue to focus on establishing scaled operations in more economically resilient regions. We have previously seen better credit performance from customers in these regions. In the second quarter of 2023, 74% of our direct sales were deployed in top third and mid-third regions, up from 71% during the same period a year ago. Meanwhile, we also concentrate on boosting the profitability of our direct sales channel. Average productivity for direct sales team increased by 10% sequentially in the second quarter. Risk control will also take the form of more stringent vetting process. We'll continue to prioritize quality over quantity, and only [indiscernible] follows that meet our tightened credit standards. This will keep us on track to improve overall loan quality in the long term. At the same time, we continue to improve our risk control model. We have developed a new AI plus expert model, which integrates our AI capabilities to meet the extensive data requirements of our dual KYC and KYB approach. By leveraging AI tools, we can conduct borrower interviews, collect data and identify potential risk within a short time frame. Our risk assessment experts then leverage the information provided by AI combined with their own personal experience to make well-informed decisions. This model strikes the balance between efficiency and accuracy in risk management. In addition to these enhancements, we have also upgraded our credit loss forecast model, which now considers a wider range of macro factors. As a result of our focus, we expect that our near-term loan growth will remain prudent and somewhat limited. And as we transition to the 100% guarantee model, the increase in risk bearing will lead to higher take rates and higher offload provision. This will suppress our bottom line performance for the near term. However, we are taking a long-term perspective with these decisions. We are confident that our approach will build a foundation from which we can achieve healthy and sustainable future profitability. I will now turn the call over to Greg for more details on our operating results.

Thank you, Y.S. I will now provide more details on our second quarter results and our operational focus for this year. Please note all figures are in renminbi unless otherwise stated. During the second quarter of 2023, our performance was negatively impacted by the challenging macro environment faced by SBOs. Our total income was CNY 9.3 billion, representing a decrease of 8% compared with the first quarter of 2023. This was mainly due to a decline in loan balance as well as reduced new loans enabled and continued pricing pressure from our credit insurance partners. Despite the challenges on our top line performance, we increased net profit to CNY 1 billion this quarter, up from CNY 0.7 billion in the first quarter, primarily resulting from our ongoing cost optimization. Now let's dive into the details of our performance. In the second quarter of 2023, our new loans enabled were CNY 53.5 billion, representing a sequential decrease of 6.1%. Our outstanding balance of new loans enabled decreased by 13.9% during the same period. These declines were mainly due to a weaker high-quality demand for loans, coupled with our prudent business strategy of employing tightened credit standards on new loans enabled. Though new loan sales remained under pressure, our direct sales productivity bottomed out in the first quarter and began to show signs of rebound in the second quarter. Average productivity for the direct sales team increased by 10% sequentially in the second quarter. During the second quarter, 61% of new loans enabled came from the direct sales team compared to 56% in the first quarter. In addition, we're confident that we are on the right path to prioritize higher-quality customer segments concentrated in more economically resilient geographies. As Y.S. mentioned, early indicators of new loans enabled after we tightened our credit standards have demonstrated improved asset quality compared with the vintages enabled in the past 3 years. Our C-M3 ratio, for instance, stood at 1% in the second quarter, which improved when compared to historical levels, but remained flat as compared with the first quarter of 2023, despite that our outstanding balance of loans decreased by 14%. If we neutralize for the impact of decreasing balances in the second quarter, an adjusted C-M3 flow rate shows gradual improvement. As we focus on better quality, borrowers' average ticket size has also naturally increased. Average ticket size of unsecured loans for the first quarter of 2023 increased to CNY 285,000 from CNY 270,000 for the last quarter. Our Consumer Finance business saw healthy growth during the second quarter despite the challenges faced by our retail credit enablement business. The total outstanding balance for consumer finance loans as of the end of the second quarter was CNY 33 billion, up 31% year-over-year and 11% up sequentially. The NPL ratio improved to 2.2% in the second quarter compared with 2.4% in the first quarter. We further diversified our product offerings as the contribution from our consumer finance business continued to grow. Consumer loans accounted for 33.5% of new loans enabled during the second quarter compared to 24.4% in the first quarter of 2023. Next, let's look at our take rate. During the second quarter, our overall pricing stood at 20.3%, flat as compared to 20.4% in the first quarter. While funding costs was stable, the take rate remained compressed at 7% as our credit insurance partners continue to charge elevated premiums despite improved asset quality of new loans. To address this issue, we've continued to advance towards the 100% guarantee model. We have secured sufficient credit line and funding partners to support our 100% guarantee model. As of mid-July, 46 out of 84 funding partners have agreed to extend loans under the business model where we provide 100% guarantee with sufficient credit line for 2023 and beyond. Excluding consumer finance, our risk-bearing by new loan sales in the second quarter increased to 39.2% as compared to 22.6% in the first quarter. Our risk bearing by balance of the overall portfolio as of the end of the second quarter also increased to 27.5% from 24.5% in the first quarter. At this rate, we expect our risk-bearing balance will exceed 40% by the end of this year. Our strong capital position has a solid foundation for our transition towards this 100% guarantee model. As Y.S. mentioned, the leverage ratio of our guarantee companies stood at 1.6x at the end of the second quarter, which leaves us with sufficient room to grow when appropriate. Next, let's go to the details of our bottom line drivers. Our persistent cost optimization efforts have been the primary driver of our bottom line's continued improvement. As a result of these initiatives, operating costs decreased by 14% sequentially, dropping to CNY 4.9 billion in the second quarter of 2023 from CNY 5.7 billion in the first quarter. Credit impairment losses also decreased slightly from CNY 3.1 billion in the first quarter to CNY 3 billion in the second quarter of 2023, mainly due to a decrease in provisions due to lower loan balance. Furthermore, in unsecured lending, when there is a large spike in credit costs driven by macro factors as we've seen in the last couple of years, market participants often witness higher levels of late-stage recovery as the economic environment improves. This trend has been seen in markets like the U.S., Taiwan and Korea in their respective retail credit crisis between 2000 and 2010. Consistent with this general observation, our absolute amount of recoveries in the first half of 2023 increased by 45% as compared to the same period last year. Finally, as Y.S. mentioned, our strategy to de-risk and diversify by fully leveraging our licenses to achieve growth in greater or better performing regions, while simultaneously retaining strong loan channels and creating solid risk control mechanisms, I'd like to discuss the impact of our approach that we will have in our business. The recovery of new loan sales will depend mainly on the recovery of macro demand. We do not expect a rapid macro recovery in the near term for SBOs. In combination with our strategy of prioritizing quality over quantity in light of the increased risk exposure when we transition to our 100% guarantee model, we do not anticipate significant growth in new loan sales in the coming months. Going forward, our new loan sales mix will likely shift as consumer finance loans will account for a greater portion of new loans enabled, new sales enabled. This increase in consumer finance loans will help offset some of the decrease in SBO loans. As a result of the aforementioned factors, we expect our total new loan sales for the full year of 2023 to be in the range of CNY 190 billion to CNY 210 billion. The drop in new loan sales and outstanding balance will continue to weigh on our revenues in the second half. This will be partially offset by the improvement in our take rate as we remove the impact caused by the elevated CGI premiums in transitioning to the 100% guarantee model, which is expected to result in a take rate of 13% to 14% for all new loans by the fourth quarter. We will maintain diligence with regards to the bottom line. At present, impairment costs are expected to remain at an elevated level, roughly CNY 3 billion per quarter through the remainder of 2023. However, starting in the second half, the driver of impairment expenses will gradually shift from past portfolio charge-offs to provisions for new loans under the 100% guarantee model. Under the 100% guarantee model, a significant portion of provisions for all new loans are front-loaded in our accounting, while revenue is recognized throughout the loan's life type. As such, our bottom line will be suppressed in the second half as we accelerate the transition to the 100% guarantee model. However, this shift is expected to result in higher margins and support our U-shaped recovery once the majority of the portfolio is supported by the 100% guarantee model. In the meantime, we continue to emphasize efficiency and expect operating costs will continue to decrease year-over-year. I will now turn the call over to David, our CFO, for more details on our financial performance.

Thank you, Greg. I will now provide a close look to our second quarter results. Please note that all numbers are in renminbi terms and all comparisons are on a year-over-year basis unless otherwise stated. In the second quarter, our total income was CNY 9.3 billion, while total expenses decreased by 27.2% to CNY 8 billion. The decrease in total expenses was primarily due to the decrease in new sales and marketing expenses. As a result, our net profit was CNY 1 billion in the second quarter of 2023. Next, let's look at our total income. As Y.S. and Greg mentioned before, our performance was impacted by the complex macroeconomic situation affecting the SBO segment. This resulted in a 39.4% decrease in our top line this quarter. In the second quarter, our technology platform-based income was CNY 4.1 billion, representing a decrease of 44.8%. Our net interest income was CNY 3.4 billion, a decrease of 32.8%. And our guarantee income was CNY 1.1 billion, a decrease of 40.7%. As a result, our technology platform-based income service fees as a percentage of total income declined to 44% from 48.3% a year ago. In addition, due to the increase of income from our consumer finance business, our net interest income as a percentage of total income actually increased to 36.3% from 32.8% a year ago. Furthermore, due to the decline in loan balance and a lower fee rate, guarantee income was CNY 1.1 billion as compared to CNY 1.9 billion a year ago. Our other income, which mainly includes account management fees, collections and other value-added services charged to our credit enhancement partners as part of the retail credit enhancement process was CNY 310 million in the same quarter of 2023 compared to CNY 532 million in the same period of 2022. The change was mainly due to the change in the fee structure that we charge to our primary credit enhancement partners. Turning to our expenses. We have maintained our completement to cost optimization. Capital expenses excluding credit and asset impairment losses, finance losses and other losses decreased by 21.6% year-over-year to CNY 5.0 billion this quarter as we continue to enhance our operation efficiency. In the same quarter, our total expenses decreased by 27.2% to CNY 8 billion from CNY 10.9 billion a year ago. This decrease was primarily due to the decrease in sales and market expenses. Our total sales and market expenses, which mainly include expenses for borrowers and investor acquisition costs as well as general sales and marketing expenses, decreased by 27.3% to CNY 2.5 billion in the second quarter. This decrease was attributable to 3 factors. First, the decrease in fuel sales and corresponding reductions and commissions; secondly, the decrease in the investor acquisition expenses from capital service fee as a result of decreased transaction volume in our wealth management business; and thirdly, a decrease in general sales and marketing expenses as a result of the optimization of our sales force. Our general and administrative expenses decreased by 35.3% to CNY 493 million in the same quarter, mainly due to the expense control measures and decrease of taxes and surcharges. Our operations and servicing expenses decreased by 0.3% to CNY 1.6 billion in the second quarter, mainly due to our efforts in expense control and decreased loan volumes. Our credit impairment losses decreased by 14.7% to CNY 3 billion in the second quarter, primarily due to the decrease in provisions of loans and receivables as a result of decreased loan balance. Our finance costs decreased by 38.7% to CNY 136 million in the second quarter from CNY 221 million in the same period of 2022, mainly due to the increase of interest income from bank deposits and a decrease in interest resulting from our early repayment of the convertible promissory notes, partially offset by the increase in interest expense driven by risk interest rates. As a result, net profit for the second quarter was CNY 1 billion compared to the net profit of CNY 2.9 billion in the same quarter of 2022. Meanwhile, our basic and diluted earnings per ADS during the second quarter were both CNY 2.42 or USD 0.06. Turning now to our balance sheet. Our balance sheet remains strong and solid as our cash at bank balance has increased since the end of our last fiscal year. As of June 30 2023, we had a cash balance of CNY 46.9 billion in cash at bank as compared with CNY 43.9 billion as of last year-end. In addition, liquid assets maturing in 90 days or less amounted to CNY 38.2 billion as of the end of June. As of the end of June, our guarantee subsidiary's leverage ratio is only 1.6x as compared to a maximum regulatory limit of 10x. All of these factors offer substantial backing for the company to navigate a changing challenging macroeconomic environment while maintaining our resilience and continuing our dividend payout. That concludes our prepared remarks for today. Operator, we are now ready to take questions.

[Operator Instructions] We now have our first question from Alex Ye of UBS.

I have two questions on the loan demand side. So in the past few months, have you noticed any change in terms of your SME loan demand, for example, the application volume? And have you seen any sign of a sequential recovery? Or is it actually weakening? Second, I'm wondering if you have done any underground survey on your existing SME customer base regarding what you're [pulling back] their demand or what could potentially make them more positive? And in particular, I'm wondering if you think the current property downturn has anything to do with the weak demand from high-quality borrowers. For example, maybe they will suffer from the negative relative [fail] or maybe they think the property prices declining, which makes them like willing to risk their assets. I'll stop here.

Thanks, Alex. This is Y.S. answering your question. If you look at other market data such as total social financing or the bank loan, you can see that the market demand is not in a good shape, it's quite weak. And likewise, our high purchase for loan demand was weak indeed. While we believe the recovery of China [indiscernible] in the long term, but we believe it takes some time, especially for our SBO segments to recover that underpins our loan demand. Mostly our loan demand is driven by borrowers' willingness to borrow which, in turn, is mostly affected by how they see the investment opportunity and then how they see near-term economy for their business, right? So knowing that, we believe it will still take a while to receive the turnaround of loan demand from the high-quality SBO segments.

We now have our next question from Emma Chu of Bank of America.

I have 2. The first one is about your loan growth outlook. So we do notice that the management has already guided down to your full year loan growth to CNY 180 billion to CNY 210 billion compared to around CNY 300 billion previously. So could you tell us more what drove you to lower your full year loan growth plan? And further, could you tell us a little more about the loan mix of your new loan growth plan? As you mentioned earlier, you want to grow more of your consumer loan considering the weak demand on your SBO segment. And the second question is about the asset quality trend. So we do notice that your flow rate stayed flat sequentially in second quarter, partly due to the contracting loan balance. But how is the underlying trend of your legacy loan book? So from a vintage perspective, do they continue to improve? And what's your expectation of the asset quality trend in rest of the year?

Just before, Greg provided our new guidance on new sales for this year, right, which is in the range of CNY 190 billion to CNY 210 billion for this year. The reason is, the reason of adjustment is the recovery of new loan sales will mainly depend on the recovery of macro demand. And then as I said in answering the previous question, we do not expect a quick turn on of this demand side or recovery of macro economy in near term, especially for SBO segments. So that's why we adjust our new sales guidance. But at the same time, we, as also Greg said, we expedite our customer finance business growth. So it takes more and more part of our new loan sales. Our strategy is mainly to prioritize quality over quantity knowing that we are bearing increased risk with 100% safe guarantee model. But we believe this will eventually be a good foundation for long term for our sustainable profitability. Regarding asset quality, if you look at our net flow ratio over C-M3 net flow ratio, it didn't change from the last quarter and then it still remains elevated from historical levels. As we said, it's mostly because our declining new loan sales, thus decline in loan balance. But if you look at -- if you want to have a different look free from this balance change, the [ full ] new loans generated in 2023 this year, we can see obvious improvements in the asset quality as compared with all the vintages. Although it's obviously better than last year or 2 years ago, but it has not fully recovered back to before pre-COVID level in 2019. So in concluding in short, the asset quality for new loans obviously improving. But as a whole portfolio, you cannot see the incremental net flow because of declining balance.

We now have our next question from Chiyao Huang of Morgan Stanley.

I have two questions. One is, could you give us a little bit more color on the latest progress on the transition to 100% sure guarantee, especially with the arrangement with the funding partners? What type of institutions have been signing up for the new guarantee model? And what's the new credit line given by those funding partners and how does that compare to previous CGI model? And the second question is, could you elaborate a little bit more on your new product strategy and client and strategy because we're obviously transitioning to a higher quality or lower risk borrowers, but we're still targeting around 20% loan pricing? So I guess I'm just wondering what's the strategy to achieve that end while maintaining a similar pricing?

Sure. Greg here. I'll answer your questions. On the transition to the 100% guarantee model, we are very much in good shape that if we want, by the fourth quarter of this year, 100% of all new business can be done under this model. And that is what we will probably shoot to achieve. We've got out of our funding partners on ongoing process, so with 84 funding partners, 46 have already agreed to extend and out of this 46, a number have already starting to operate and cooperate with us under this model. This cuts across all types of funding partners. So be it large banks, mid-bank, smaller-sized banks and other trust-related cooperation that is -- it's across the board. So there isn't a trend that says it's just small banks signing up for the new model. It is really all types. In terms of credit line that we were able to achieve with our funding partners under having the credit insurance versus now the guarantee, it is a transition process. Roughly, if you look at the line -- I mean, some give actually more, some give less. But on average, we're probably seeing a reduction of about 40% -- 40% to 50%. But in the context of our focus on higher-quality customers and being more selective on regions in terms of the new business volume that we expect to generate this year and into next year, we have more than enough capacity with what we've got in place. The new guarantee model, based on our experience even in the past with CGI, once an institution cooperates with you on a model, they're comfortable with the performance, the chance to increase credit lines going forward is always there. So I think from a funding availability under the new model, really no issues at all. And in fact, given that all banks right now are being very tight on their own loan extensions, given their own views of the macro environment, being able to work with us where we do have the 100% guarantee, our assets are extremely attractive to them. And so we do see increasing competition amongst our funding partners to try and to get more business from us, right? So really no issue in terms of how it affects funding and the model will be very much complete, as I said, by the fourth quarter. In terms of the mix, right, I mean the -- obviously, our focus is really on achieving that credit quality, really ensuring that the new business we do is getting back to as close to 2019 levels as possible. So I'd like to highlight that this is -- there's really 4 things at play here, right? There's 4 areas where we're changing mix and emphasis to get the kind of growth we want and the credit quality we want. So on the customer side, clearly, what we're doing is we're prioritizing more what we call strong small business owners. And these are small business owners whose companies have a clear legal structure, have a longer operating history, operate more in industries with a stabler capital position and stronger long-term distribution networks of their own business. And these strong SBOs, if you look over the last 18 months, have performed significantly better than the rest of the portfolio. These strong business owners make up about 56% of our E&R today. So that is the #1 shift. Our mix will increasingly be focused on the non-consumer finance portion to these customers. And even for the consumer finance portion, we will also try and serve these customers' individual needs. So there's a change in mix on customer. The second is really greater emphasis on the more resilient economic regions. Historically, we have covered a large number of cities. Here, we're being more selective in terms of where we view new business growth based on our view of their ability to recover in a difficult environment and to be in reasonably good standing over the next couple of years perhaps compared to weaker geographies. Then on layering on top of that shift in region, you have the shift in mix on product where there's more emphasis on the consumer finance side. And then we have our shift in channel where if you remember, historically, we had 40% of the business, 40% more of the business coming from cooperation with third-party channels. Here, we're placing much greater emphasis on our direct sales and they make up now a greater proportion of our new business because they have tighter control, understanding the customer and in creating a more complete service bundle for the customer across now guarantee products and consumer finance products as well as being able to detect a better fraud where it may exist. So all of these shifts when you add them up, it does mean that we are operating off of a narrower scope, right, than historically in terms of our focus of customers. But within this prioritized scope, we believe that we can then achieve the new business at the credit quality we want. With regard to pricing, because we have a mixed year of a secured product, unsecured product, consumer finance product, what we're finding is that our ability, once we've got these good customers to provide them with the ticket size that they're looking for, to provide them with the duration they're looking for, there isn't as much price sensitivity to be honest. So we think that keeping kind of a 20% APR and then keeping within our focus is a way to obviously not grow very quickly, right -- we're still going for prudence -- but to serve business that will give us the right top line take rates and the right bottom line results as we look out over the next 12 months. So a lot of that transition, a lot of those changes in mix are really now underway for 6 to 9 months, and we'll continue to push in that direction.

Our next question comes from Yada Li of CICC.

This is Yada with CICC. And I just have one quick question for today. Could you please share more color on the F1 '23 outlook of the top line and bottom line? And how do I understand it in the current macroeconomic environment? And that's all.

All right. I think we did have a statement on our full year new loans outlook in our earnings release. It's due to record gains. Here, let me comment some more about how the top line -- but the bottom line may evolve with this kind of changing. First, on the top line, inevitably, the top line will be affected by the decrease of the [indiscernible] as a result of our more stringent credit acceptors criteria that we mentioned earlier. Of course, the decrease in the new sales we return affects the average loan balance, thus will also have an impact to the revenue. These 2 impacts will be mitigated by the improvement in take rate when we transition to the 100% guarantee model. For the bottom line, I think we've mentioned before, when our new business model moved towards the 100% guarantee model, a significant portion of our expected credit loss provisions of new loans will be front-loaded in day 1. From an accounting perspective, of course, they don't have any impact on the cash profit in that sense. Whilst the revenue is recognized throughout the loan's life cycle, as such, our bottom line will be suppressed in the second half as we accelerate the transition to the 100% guarantee mode. However, let me reemphasize one more time. This shift, we expect to have positive results in the longer term and support our U-shape recovery once the majority of the portfolio is supported by 100% guarantee model.

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

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

Thank you. That concludes the call today. Thank you, everyone, for attending. You may now disconnect.

Ladies and gentlemen, thank you for standing by, and welcome to Lufax Holding Limited First Quarter 2023 earnings call. [Operator Instructions]. Now I'd like to hand the conference over to your speaker host today, Ms. Liu Xinyan, the Company's Head of Board Office and Capital Markets.

Thank you very much. Hello, everyone, and welcome to our first quarter 2023 earnings conference call. Our quarterly financials and our briefly were released by our newswire services earlier today and are currently available online. Today, you will hear from our Chairman and CEO, Mr. Y.S. Cho, who will provide an update of our latest business strategy, the macroeconomic trends and the recent development of our business. Our co-CEO, Mr. Greg Gibb will then go through our first quarter results and will provide more details on our business priorities and the key drivers. Afterward, our CFO, Mr. David Choy, will offer a closer look into our financials before we open up the call for questions. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. With that, I now pleased to turn over the call to Mr. Y.S. Cho, Chairman and CEO of Lufax. Please.

Thank you for joining. As reflected on the first quarter, it is clear that macro and operating environments continue to pose challenges for many small business owners. However, we are encouraged by some indications of an economic bond, giving us cautious optimism in our U-shape recovery. We remain committed to navigating the challenges that lie ahead and maintain our unwavering focus on building a more resilient business. We continue to exercise patients, prudence and preparedness for the anticipated macro upstream in our SBO segment. Let me provide some updates for the first quarter. First, there are some signs of a great recovery in the macro environment though they remained unevenly distributed at a nascent stage. China's first quarter GDP growth expanding by 4.5% year-on-year indicated that the country is on track for its 2023 growth target of 5%. In addition, China's National Bureau of Statistics stated that first quarter was of promising start to the macro recovery. However, Chinese industry profits declined 21% year-over-year, and we continue to see a divergence in the pace of recovery across industries. While small business owners are becoming more confident and may takes some time for macroeconomic tailwinds to flow through to our core SME segments. To give an example of this improving sentiment and Peking University survey, a survey which was published in February, showed that approximately 80% of SBOs are optimistic about their business outlook in 2023. Over half of survey participants are expecting business volume increases of more than 50% this year. However, it is important to note that SBOs have had less than 2 months of normal operations in the first quarter after the spike in COVID cases and the Chinese New Year holiday. But it will take time for SBOs to fully resume new business investments, which underpins lending demand. Now let me talk about the impact on our business. I would like to start by showing our outlook on the U-shaped recovery. During the first quarter, we will resort on improvement in credit rating mix and credit quality for new loans initiated in the last 2 quarters. 82% of new unsecured loans in the first quarter fell within our top 3 credit rating categories versus 41% a year ago. Year on growth is increasingly concentrated in our preferred top-third and middle-third regions, which we believe will prove to be more resilient as the macro environment improves. Notably, the deterioration in asset quality has slowed down substantially in the first quarter. We have also witnessed early signs of increments in asset quality and certain economically vigilant regions and industries. We expect that flow rate will continue to improve gradually through the end of this year, when operations of SMEs gradually recover. We also expect that credit charge-offs for the risk-bearing loans will likely peak in the second quarter and then gradually decline in the second half of this year. In the second half, we do expect total credit costs to remain elevated, but underlying driver will shift from the past charge-offs to [indiscernible] arising from increasing the portion of loans, we provide full guarantees for. This will be supported for net margins in 2024 and beyond. As new growth and portion guaranteed by us increased progressively over the next several quarters. We anticipate that the revenues will decline at a slower pace than they did this quarter. By year-end, we expect the portion of loans that we bear risk as a percentage of entire portfolio to exceed 40%. This ratio stood at 24.5% at the end of the first quarter. Our ability to focus more on new business is made by -- made possible by 3 factors. One, the improving macro environment, two, ongoing progress in funding partners for our deployment of the model where we provide the entire guarantee. And three, the recent completion of our front line restructuring, which was difficult but necessary. As a result, the main drivers of our U-shaped recovery are taking shape. But as we have stated previously, we expect a notable recovery in profits underpinned by stabilized to the 2024 event. As part of our U-shaped recovery plan, we have implemented several strategic initiatives. We have completed the restructuring of our direct sales force and further optimized our headquarter and frontline operating costs. Total expenses, including -- excluding credit impairment losses, finance and other costs in the first quarter decreased by 21.5% versus a year ago. The total number of that exchange costs decreased from as of the end of 2022 to around as of the end of the first quarter. We managed to retain the most positive members of our direct sales team, whose average productivity is more than double that of those who departed. In line with our plan, 80% of new business in the first quarter came from top-third and middle-third regions versus 70% a year ago. Now that we have completed our organizational restructuring. We are focused on several priorities. Firstly, we continue to increase the proportion of risk-bearing or new loans we , under which our guaranteed subsidiary provides 100% credit enhancement. We are encouraged to see our funding partner support for the model where we provide the entire guarantee. Furthermore, as we deepen our position as an SBO adviser. We're focus on product diversification and cross selling between our retail credit in every month model and our customer finance business to meet customer needs. This will diversify our lending duration mix, gradually adding shorter duration products to our longer-term duration base. Finally, we continue to enhance in our post loan recovery efforts to claw back a portion of past credit losses. These key initiatives are supported by our continued investments in technology, during the first quarter, we deployed new technology to help us gain deeper insights into our small business owners daily operations. For customer onboarding, we strengthened our capabilities of -- by further embedding facial, voice and location verification features. As a result, we further enhance our ability to access -- to assess owners' business status. For the underwriting process, we introduced real-time assessment of customers' online marketing activities allowing us to further evaluate their business momentum and repayment capabilities. These changes in credit process are augmenting our historical individual credit assessment so-called KYC with a deeper insight with owners business and industries, KYB. Next, let's move on to the capital markets. We successfully completed our Hong Kong listing by production on April 14. Marking on important milestone in our corporate development the listing will increase our exposure through out of Hong Kong market and broaden our investor base to continue to create value for our shareholders. Additionally, we are pleased to announce that we paid out the second half of 2022 dividend an aggregate amount of USD 114.6 million, in April 2023, demonstrating our commitment to maintain a stable dividend policy. Finally, as we heard in our last only call we have substantially completed our regulatory rectification efforts, and the industry is now entering a phase of normalized provision -- supervision. We believe this normalized supervisory framework will provide greater stability and predictability for our industry, and we will work closely with regulatory authorities to ensure our compliance with all relevant regulations. I will now turn the call over to Greg for more details on our operating results.

Thank you, Y. S. I will now provide more details on our first quarter results and our operational focus for this year. Please note all figures are in renminbi unless otherwise stated. In the first quarter of 2023, our top line and bottom line performance were adversely impacted by the challenging macro environment. Our total income was CNY 10.1 billion, representing a decrease of 18.2% compared with the last quarter of 2022. This was mainly driven by the decrease in new loans and the pricing pressure from our credit insurance partners. Despite the challenges on our top line performance, we did turn the corner and achieved profitability this quarter. with a net profit of CNY 732 million, primarily due to a decrease in credit impairment losses. Now let's dive into the details of our key drivers of the top line performance. One of the key drivers is our loan volume. In the first quarter of 2023, our new loans enabled were CNY 57 billion, representing a year-over-year decrease of 65%. This was mainly driven by our tightened credit standards on new loans enabled. Executing on our strategic initiative in response to the elevated credit impairment losses in the first quarter, we continue to prioritize higher-quality SBO customer segments concentrated in economically more resilient geographies. The proportion of new unsecured loans enabled in the R1 to R3 customers, which are our top 3 rankings in our R1 to R6 scale, increased to 82% in the first quarter from 41% in the same period of last year. Meanwhile, the contribution from customers in the top third and middle-third regions continued to increase and reached 80% in the first quarter of 2023 compared to 70% a year ago. New loans were adversely impacted in the short run by the optimization of our direct sales team, which was difficult but necessary for the long-term development of the company. The optimization was completed in the first quarter, and we managed to retain the more experienced and productive members of our direct sales force. The average productivity are by retained direct sales employees is more than double that . We believe that we are on the right path, and we expect to see the results reflected in upcoming quarters. Additionally, we have observed that new loan vintages enabled after we tightened our credit standards demonstrate improved asset quality compared with older loan vintages. As we focus on higher-quality SBOs, the average ticket size has naturally increased as a result. Average ticket size of unsecured loans for the first quarter of 2023 increased to revenue CNY 270,000 from CNY 240,000 average for the year of 2022. Our Consumer Finance business saw healthy growth in the first quarter despite the challenges in our retail enablement model. The total outstanding balance for consumer finance loans in the first quarter of 2023 was CNY 29.6 billion, up 39% year-over-year, and credit performance was in line with the industry credit performance. Contribution from our consumer finance business grew as a percentage of new loans enabled and increased from 11% in the first quarter of 2022 to 24% this quarter. Further diversifying our product offerings. Another key driver of our top line performance is take rate. As mentioned earlier, our take rate remains compressed, which is mainly due to the elevated premiums charged by credit insurance partners. Although our tightened credit standards have improved asset quality of new loans, credit insurance premiums have remained at an elevated level to date. We are proactively addressing the take rate pressure by continuing to modify our credit enhancement arrangements. Under these arrangements, our guaranteed company provides full credit enhancement without the involvement of external credit insurance partners. We are encouraged by the fact that our funding partners are supportive of the shift as of mid-May, 5 out of 6 Trust partners and 37 out of 78 bank partners have agreed to extend credit under the model where we provide the entire guarantee. In addition, 31 of our funding partners are already extending new loans under the model where we provide the entire guarantee. As a result, our credit risk-bearing by balance in the first quarter, further increased to 24.5% and is expected to exceed 40% by the end of this year. We believe we have adequate capital to support the increase in risk-bearing loans as the leverage ratio of our guaranteed subsidiary was less than 2x. And as of the end of the first quarter, well below the regulatory limit of 10x. As such, we expect our take rate will gradually improve over the next several quarters as we increase the guarantee portion for new loan business. Next, let's go to the details of our bottom line drivers. The main driver of recovery in our bottom line was a decrease in credit impairment losses. In the first quarter, credit impairment losses declined by more than and to CNY 3.1 billion from billion in the fourth quarter of 2022. This was mainly driven by a notable decrease in provisions compared with the previous quarter as we've taken a more conservative view on the outlook for credit quality prior to post-pandemic reopening. As the macro environment gradually normalizes and activity is picking up in the first quarter, we partially released a portion of the previously [indiscernible] provisions, which had a positive impact on our P&L. The improvement in our credit impairment losses is also visible in our C-M3 ratios. The forward indicator on asset quality that we monitor closely, it stood at 1% in the first quarter, remaining unchanged compared with the fourth quarter of 2022. This was primarily attributable to the increase of C-M3 for general unsecured loans from 1.1% in the fourth quarter of 2022 to 1.2% in the first quarter, but this was partially offset by a decrease in the flow rate for secured loans from 0.6% to 0.5%. while the asset quality of secured loans is clearly improving, it is worth noting the deterioration in asset quality of unsecured loans has slowed down substantially in the first quarter, and the delta of C-M3 flow rate was 10 basis point increase versus a 20 basis point increase in the fourth quarter of 2022. We will continue to monitor closely such indicators in the coming quarters as they are critical to determining the speed of our U-shape recovery. Looking ahead for the remainder of 2023, we expect credit impairment losses at each quarter to be on par with those during the first quarter. This is mainly due to our planned expansion of the model where we provide the entire guarantee during the coming quarters. The extension of such model will increase upfront provision levels, but should result in improved net margins over the medium term. During the first quarter, we continued to make progress on our new SBO ecosystem, as a recap, our new value-added services platform, branded LuDianTong, is an open platform populated with digital operating tools and industry content to support business development for our small business owners. We intend to use this platform to engage potential customers at an earlier stage, deepen our interaction with existing customers and create both new cross-sell opportunities and a new source of customer referral. As of March 31, 2023, we had approximately 1.9 million registered customers on LuDianTong who has submitted their complete business or personal information, an expansion of roughly sevenfold from the end of 2022 and through this first quarter. As Y.S. mentioned in the face of an uneven post-pandemic economic recovery, we are cautiously optimistic in realizing our U-shape recovery. However, we will remain prudent on absolute levels of new growth until we see definitive improvement in overall lending demand and credit quality. While we expect to see gradual recovery in our core business metrics in the second half of this year, notable bottom line performance improvement is expected to be a 2024 event. I will now turn it over to David, our CFO, for more details on our financial performance.

Thank you. Greg. I'll now provides a closer look at our first quarter results. Please note, all numbers are in renminbi terms, and all comparisons are on a year-on-year basis unless otherwise stated. As Y.S. has [indiscernible] before our performance was impacted by the macro environment and our customer selection resulting of 41.8% our top line total income to CNY 10.1 billion for the first quarter. Loss of total expenses decreased by 8.8% to CNY 9 billion as a result on was RMB 732 million in the first quarter of 2023. During this quarter, our technology-based income -- techcom-based income was CNY 5 billion, representing an increase of 46.1% of our revenue. Our net interest income was CNY 3.3 billion, a decrease of 32.8% and our guaranteed income was CNY 1.4 billion, representing a decrease of 25.5%. As a result, our technology platform-based income service fees as a percentage of total income declined to 49.7% from 53.7% a year ago. In addition, due to the increase of income from consumer finance loans, our net interest expense of total income actually increased to 33.2% from 28.8% a year ago. Furthermore, as we continue to better utilize our guaranteed company's abundant capital to bear more credit risk by ourselves instead of through our P&C insurance partners, we generated more guarantee income, reaching 14.1% of the total income as compared with 11% a year ago. Our other income, which mainly includes account management fees, collections and other value-added service fees charged to our credit enhancement partners as part of the retail credit enablement process was CNY 227 million in the first quarter of '23 compared to CNY 704 million in the same period of '22. The change was mainly due to change in the fee structure that we charge to our primary credit enhancement partner. Turning to our expenses. We continue to prudently manage our operational expenses. Our total expenses excluding credit and asset impairment losses by this quarter and other losses decreased by 21.5% year-over-year to CNY 5.7 billion quarter. Returning to the operating efficiency, in the first quarter, our total expense decreased by 11.8% to CNY 9 billion from CNY 10.2 billion a year. This decrease was primarily driven by sales and marketing expenses. Our total sales and marketing expenses, which mainly includes expenses for borrowers and investor acquisition costs as well as general sales and marketing expenses decreased by 32.4% to CNY 3 billion in the first quarter. The decrease was driven by 3 factors, first, a decrease in new loan sales and reduction in commissions. Second, the decrease in investor acquisition and retention expenses and referral expenses for platform services driven by decrease [indiscernible]. And finally, the decreased general, sales and marketing expenses, which was driven by the decrease in new sales. Our general and administrative expenses increased by 4.2% to CNY 756 million in the first quarter, mainly due to the fixed cost, which decreased low volume. Our operating and servicing expenses decreased by 2% to CNY 1.6 billion in the first quarter, mainly due to the expense controlling measures and decreased loan balance and new loan sales. Our credit impairment losses was CNY 3.1 billion in the first quarter compared with CNY 2.8 billion a year ago, an increase of 10.9%, it was primarily driven by the increase in indemnity losses as a result of worsening credit performance due to -- largely due to the part of [indiscernible] of economic environment partially offset by the increase in [indiscernible] driven by the pace of . Our finance costs decreased by 10.5% to CNY 189 million in the first quarter from CNY 211 million for -- the in the same period of 2022, mainly due to the increase of interest from bank deposits, partly offset on the increase of the interest spend driven by increased business rates. As a result, net profit for the first quarter was CNY 732 million compared with net profit of CNY 1.3 billion in the same quarter of '22. Meanwhile, our basic and diluted earnings per ADS during the first quarter, both RMB 0.30 or USD 0.04 [indiscernible]. On the balance sheet side, our balance sheet remains strong and solid cash at bank products increased as of March 31, 2023 with a cash balance of CNY 51.3 billion as compared with CNY 43.9 billion as of the end of last year. In addition, liquid assets maturing in 90 days or less amounted to CNY 40.2 billion as of the end of March 2023, our guaranteed subsidiary income [indiscernible] 1.7x [indiscernible] regulatory limit of 10x. All this provides strong support the company to mainline base of other sensors actually continue our stable different payout policy. That concludes our prepared for today. Operator, we are now ready for the questions.

[Operator Instructions]. We now have our first question from Alex Ye from UBS.

So my question is mainly on the pricing outlook. So could you give us some color in terms of what's the average loan pricing for our portfolio and about the pricing for the new unsecured loans. So -- and I guess there are 2 parts to this question. First, on the regulatory front. So we have been lowering the loan price in the past 2 to 3 years due to some regulatory pressure. So I'm wondering if there any follow-up or comments from the regulators in terms of where we are? Do you think we have reached a level where the regulator is now more comfortable with? And second, if we just put aside the regulatory pressure for now and just focus on the supply and demand dynamics for the SBO segment, should we expect some further downward pressure on loan pricing ahead given now that we are further upgrading our customer profile to better quality borrowers, and given the current pace of economic recovery appear to be quite modest, Thanks to hear your view.

Thanks, Alex, for the question. So far, we haven't got any further instructions from regulators about further rolling APR. If you look at the first quarter APR -- blended APR for all new loans in the first quarter is already less than 20%. And then that, if you compare with other peers, we are absolutely and obviously lower than other peers, average APR. We are quite low. So I believe we are in a good shape in terms of our APR level. And I believe that really we'll met regulatory requirements and now we also have more flexibility in others for just APR upwards or downwards, whenever necessary. Our overall price is more determined by market demand and supply. And also, we consider our operating costs, which includes funding cost and the credit cost and then our -- the operating costs, which include sales expense, right? So we don't think that the it high-risk [indiscernible] segment, which will necessarily further reviews of our APR, we already less than again, less than 20% for all loans. So I expect -- I don't expect a notable change in terms of APR in near future.

We now have our next question from Emma Xu of Bank of America.

I have two. The first one is about asset quality. So we see -- on one hand, we see some encouraging signs of your portfolio. As the management mentioned earlier that there is already some green shoots in the business and you expect flow rate to gradually improve in the coming quarters. However, on the other hand, we see the flow rate of your unsecured loan continued to increase in first quarter while total flow rate just remained flat quarter-over-quarter. So could you give us more discussion about your -- the asset quality of your legacy loan portfolio. And a related question is how is the collection of your charge of loans as the management also mentioned in the report that you are trying to increase the effort to recover past credit losses, which may contribute to the net profit in the future. So could you give us more details on this brand? The second question is about the loan demand. So how is the loan demand so far? And is the high CGI cost, the major reason limit your loan growth in first quarter. What's your progress of moving to the 100% guaranteed model? And will we expect to see the loan growth more -- to see more strong loan growth in the second half when you move to this entire guaranteed model?

Thanks, Emma. The situation in asset quality has slowed down substantially in the first quarter. If you look at C-M3 growth rate for the total loans was 1.0% in the first quarter this year, which remained unchanged from first quarter last year. But if we consider that our balance -- loan balance has been declining in this month, month after month. So if we're analyzing this, for example, if you only compare the accounts, whose milestone book is less than 6 months or 12 months. So if we remove the impact from declining balance on our net flow rate. Then now we already see sort an increment trend. I believe we can show -- we can demonstrate more obvious implements from the next quarter onwards. So that you have confidence. And as the company continuously carry on new sales for credit plan, now we observe an improvement in credit rating mix and credit quality for new loans initiated in the last 2 quarters. Yes, you know that we had a large amount of charge-off last year, so that is one of our focus this year. We are now strengthening our cost recovery actions to claw back more from the past credit losses. And to answer your question about loan demand. Our loan demand is decided by how our SBO customers see your future economy, right? And industry regard you haven't seen any obvious change in a world but no matter what, if you understand our monthly new sales volume and then our market share, actually, loan demand is not about a concern because we are compared to the market size, our market share is very small. So we don't really worry about loan demand at this moment. And the decrease of new loan growth, recent decrease was mainly driven by our tightened underwriting credit policy and also partially to our GST reform. That was the reason. And spin of 100% guaranteed model, we are making a great progress. We are very happy. We are encouraged to see that our funding partners did provide good support for the model where we provide the entire guarantee by now 5 out of 6 trust partners they agreed and 37 out of 78 bank partners they also agreed to expand credit on the model where we provide a full guarantee. In addition, 31 of our funding partners are already providing loans under this model. So we are making a good progress. And then I think the formation can be relatively quick.

We now have our next question from Richard Xu of Morgan Stanley.

I have questions on funding costs. Just wondering what's the funding cost at the moment, basically, as we change from the insurance model to the guaranteed model? And what's the overall impact on take rate and what would be the level expected to stabilize when shift to guaranteed model is largely complete.

Thank you, Richard. It's Greg here. If we look at the funding costs, which are about 6% overall. They have come down about 30 basis points if you look at the first quarter on a year-on-year basis. As we shift to the 100% guaranteed model, we're not seeing much change in that funding cost. In fact, probably you're seeing the market more broadly coming down. So any shift to the guaranteed model is really not having a net impact in terms of funding cost increase. We think it will be quite stable as we look forward through the remainder of the year. On the take rate, if you kind of go and look at historically, our take rates has been in the sort of 8% to 10% range, more recently due to the higher credit guarantee insurance costs, that take rate is now closer to about 7%, 8% range. As we then move to the 100% guaranteed model, right? So if you look out over a year or 1.5 years from now when more of the portfolio will be 100% guaranteed, that credit premium or credit insurance premium that was previously paid to our CGI partners will be earned by us. And that number was historically about 5% to 6%. So if you take a base today of 7% to 8%, which is obviously compressed because of the higher CGIPs and we move to the guaranteed model, where that take rate moves over to us. Then you should be looking at on a stabilized basis over the longer term, a take rate of about 14%. So we think that's, Rich, where things will end up probably in about 1.5 years from now when we've made more of the complete shift.

We now have our next question from Yada Li of CICC.

This is Yada from CICC. My question today is regarding the risk-bearing percentage. And I was wondering what is the trend of this percentage going forward? And how to view this change and potential impact on our top line credit impairment losses and the bottom line. And that's all.

In terms of the risk-bearing percentage, as of the end of this first quarter, it was at about 24%. We expect by the end of the year, on a portfolio basis to be over 40%. And that means, as you move through the second half of the year for new loans, a much higher percentage will be under this 100% self-guarantee model. Now as we go through that process, similar to the question that Richard just asked, that will increase our top line revenue because you're basically moving what was paid previously to credit guarantee insurance partners onto the balance sheet, and therefore, the revenue will come with it. So that will provide a basis for a revenue increase. As we take on more credit risk, we initially have to provision for the new loans. So that is front-loaded in the model. So what you'll see in our overall credit impairment costs right? We had credit impairment costs in Q1 of CNY 3.1 billion. We expect this number over the next couple of quarters to remain stable, but what's driving it, the mix is changing. So CNY 3.1 billion in the first quarter is mostly from the credit impairment cost from the legacy portfolio, if you will, the existing past book. As we move into the second half of this year, you'll still be at about CNY 3 billion or so credit impairment cost, but more and more of it will be coming from the fact that the new business has done -- a higher percentage of new business is done through self-guarantee. So while that carries a higher upfront cost, if we look forward into 2024, it should also improve our net margin, right? Because you're shifting from a very high credit insurance cost today of over 10%, right, to a model where we think that the new business that we're doing should perform more in line with historical levels. And that should be, therefore, constructive for our 2024 profitability.

There are no more questions on the line. That concludes our question-and-answer session for today. I will now turn the call back over to our management for closing remarks.

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

This concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.