Lufax Holding Ltd. American Depositary Shares, each representing two (2) Ordinary Shares 2026 Q1 Earnings Call

Hello, everyone, and thank you for joining us on today's call, the company's first investor conference call in almost two years. Our financial and operating results were released by our Newswire services earlier today and are currently available online. This represents a key milestone as we return to a normal reporting cadence. Today, you will hear from our Director and CEO, Mr. Zhi Xiang, who will provide an update of the recent developments and strategies of our business. He will also provide 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 am now pleased to turn over the call to Mr. Zhi Xiang, Director and CEO of Lufax.

Please. Thank you, Xinyan. Thank you all for joining our second quarter 2026 earnings call.

Today's release marks the first step towards a normal, predictable reporting cadence of Lufax. We very much appreciate the continued patience and support of our shareholders and the broader investor community throughout the process. I want to begin with updating you on the progress our management team has made in restoring Lufax financial reporting and strengthening our governance. Since taking on our roles, we completed the re-audit for 2022, 2023 financial statements and completed audits for 2024 and 2025, with all financial reports now published. As a result, we have brought our SEC periodical filings current and regained compliance with New York Stock Exchange continued listing standards.

We engaged Deloitte Consulting (Shanghai) Co., Ltd. as our new independent internal control consultant to conduct a comprehensive review of our internal controls and to provide rectification recommendations to enhance our internal control system. We have implemented corresponding remedial measures to address identifying internal control deficiencies in accordance with Deloitte's recommendations. Beyond engaging Deloitte, we also strengthened our corporate governance through a restructuring of our board and the establishment of the position of Chief Compliance Officer. Independent non-executive directors now make up a majority of our board, and our Chairman, Mr. Nikki, is an independent non-executive director himself. Going forward, we remain committed to further strengthening our internal controls, including through our new company-wide compliance initiative and the compliance culture we're building across the organization. We are equally committed to delivering long-term value to our shareholders as we return to a normal, predictable reporting cadence.

As you may note, while our ADSs have been trading normally on the New York Stock Exchange, our ordinary shares remain suspended from trading on The Stock Exchange of Hong Kong Limited. A matter we continue to work through with The Stock Exchange of Hong Kong Limited. Now moving on, let me share a bit of update on the macro and regulatory environment. Amid numerous external uncertainties and instabilities, China's overall economic growth continued to moderate in the second quarter, with GDP growing 4.3% year-over-year. The operating environment for small and micro enterprises stayed difficult, and financing demand remained weak. Tsinghua Business School SME Development Index fell month-over-month during the quarter and dropped below the 50-point boom-bust line in June. This basically reflects a challenging environment for our core small business customer base. Consumer finance demand was similarly soft.

Household consumer loan balances were down 1.7% year-over-year as of the end of June. On the regulatory side, regulators have issued a number of guidelines, policies since 2025, covering a wide range of things such as collection practices, data securities, and personal information protection. Oversight now spans the full value chain from pricing and customer acquisition through risk management, post-loan operations, and data governance. Combined with continuous interest rate compression and the fee transparency requirements, industry margins are narrowing. The previous business model of offsetting high risks with high fees is no longer sustainable. We see this as near-term pressure on growth and profitability. Over time, however, we believe such tightened regulatory requirements will support healthier and more disciplined competition across the industry, and enhance competitive advantage of top players with proper licenses and compliance mechanisms. Now, let me turn to our operating strategy.

Given the environment, we are remaining a prudent strategy characterized by selective customer strategy and AI-powered refined operations. Our selective customer strategy is focusing on shifting our customer mix towards lower-risk borrowers. Meanwhile, we aim to improve our performance through AI-powered refined operations. We are now focused on customer segmentation and on deepening our relationship with existing customer base. We launched our Industry+ product, which deploys differentiated product and operational priorities tailored to local industries and customer across different regions. So basically, the plus is industry, plus region, or even at a country level. We develop customized financing solutions based on the unique operational characteristics and funding needs of different sectors, enabling more precise and customized support to satisfy the financing needs of our SBO, mobile owners customer base. Moreover, we are using AI to further improve our operational efficiency. We introduced AI-powered digital twin.

This supports our direct sales team across acquisition, product recommendation, post-loan management, and customer engagement, improving both service quality and operational efficiency. We are also improving our customer management model, going from single product sales towards full lifecycle account management, leveraging our direct sales team expertise and interaction with customers. We believe this effort will enable long-term customer value cultivation. Turning now to our operating results. Total new loan sales in the second quarter were RMB 51.1 billion. This was up 4.6% year-over-year and up 4.8% from the first quarter. This growth was driven by consumer finance, where new loan sales grew 27.6% year-over-year to RMB 36.9 billion. We continue to gain share in a pretty contracting market.

Our total outstanding loan balance was RMB 167.3 billion as of the end of the second quarter, down 13.5% year-over-year, reflecting continued weak demand in the SBO business segment, combined with our prudent underwriting approach. Turning to asset quality. We prioritize improvement of our intelligent risk control system by further optimizing our risk strategy and upgrading our models. On the post-loan side, we expanded our collection model reforms and broadened the use of AI-powered collection. These efforts delivered improvement in asset quality on a sequential basis. Our CM3 flow rate was 1.0% in the second quarter, down from 1.2% in the first quarter.

CM3 flow rate of unsecured loans was 1%, and secure loans was 0.9% as compared to 1.2% and 1.0% respectively in the first quarter. DPD 30+ delinquency rate, excluding consumer finance subsidiary, was 5.8%, down from 6.1% sequentially. As of the end of the second quarter, the NPL ratio for consumer finance loan was 1.3% as compared to 1.4% as of March 31st, 2026. Now let me turn to pricing and funding costs. The average pricing of Rongyi loans, previously known as Puhui loans before the rebranding in 2025, was 20.4% in the second quarter, slight sequentially and up slightly year-over-year. The average pricing of consumer finance loan was 19% in the second quarter. On funding, we continue to optimize our costs.

We leverage our long-term relationships with our banking partners to reduce funding costs under our guaranteed model. Our cost of funding by balance, including consumer finance, was 3.8% in the second quarter, down around 90 basis points year-over-year. As for consumer finance loans enabled by our consumer finance subsidiary, we continue to access low-cost funding in the interbank market, leveraging our license advantage and consistent with broader downward trend in the interest rate. All right. Now, let me briefly discuss the key business drivers behind our second quarter results. On the top line, total income declined by 15.5% year-over-year, driven primarily by decrease in the balance of our Rongyi loans as small business owners demand remained weak. And we maintained a prudent underwriting approach in light of the increased risk associated with certain long-tail customers.

This was partially offset by continued growth in our consumer finance loan balance, which grew nearly 20% year-over-year. On the bottom line, while our net loss narrowed sequentially from the same period last year, we recorded net loss for the quarter continue to reflect credit costs that remain elevated relative to our income base. This is heightened by the challenged macro environment for small business owners and by tightened regulatory requirements that impacted supply of high-priced products. While we believe such tightened regulatory requirements will benefit the development of industry in the long run, in the short term, the reduction in supply to high-risk customer segments adversely impacted their repayment capability and increased our credit costs. Going forward, we remain focused on disciplined execution, strengthening our governance and controls, and on building a sustainable high-quality growth path for Lufax.

Again, we very much appreciate your continued support, and this concludes our prepared remarks for today. Operator, we are now ready to take any questions.