On August 22, the domestic leading financial services provider for small and micro business owners, Lufax Holdings (LU.N; 06623.HK), released the financial report for the second quarter of 2024.

According to the financial report, the total revenue for the first half of the year was 12.94 billion yuan; with a net loss of 1.56 billion yuan. In the second quarter, the total revenue reached 5.976 billion yuan, and the net income changed from a profit of 1.004 billion yuan in the same period of 2023 to a loss of 0.73 billion yuan.

Many investors who saw the financial report criticized the company for being "laying flat" and "performing poorly".

Although Lufax Holdings is indeed facing short-term growth pressure from the profit data, the continuous year-on-year growth of the customer base and consumer credit balance, as well as the continuous improvement of various key indicators such as delinquency rate and non-performing loan ratio, all reflect the company's gradually improving operational quality in adversity.

A deeper analysis reveals that the company is adopting a strategy of turning retreat into advance.

Proactively slowing down to improve quality, multiple key indicators continued to improve in the second quarter.

As of June 30, Lufax Holdings' loan balance was 235.2 billion yuan, a 44.8% year-on-year decrease. In the second quarter, the total amount of new loans empowered by the company was 45.2 billion yuan, also a 15.5% decrease.

Prudent development is the current operating strategy adopted by many leading financial services listed companies, reflecting the trend of slowing down in scale. For example, in the second quarter, Qifu Technology's loan scale decreased to 95.4 billion, a decrease of 28.8 billion compared to the previous quarter, with the balance dropping to 157.78 billion. However, while the scale is decreasing, risk indicators are improving, indicating that Lufax Holdings has shown signs of stabilizing risks.

As of June 30, the company's delinquency rate for loans that have been empowered (excluding consumer finance subsidiaries) for more than 30 days decreased by 1.2% compared to the end of the first quarter. Among them, the delinquency rate for unsecured loans for more than 30 days decreased by 1.6% compared to the previous quarter, and the delinquency rate for secured loans for more than 30 days decreased by 0.4% compared to the previous quarter.

At the same time, as of June 30, the company's delinquency rate for loans that have been empowered (excluding consumer finance subsidiaries) for more than 90 days decreased by 1% compared to the previous period; the delinquency rate for unsecured loans for more than 90 days decreased by 1.3% compared to the previous period; and the delinquency rate for secured loans for more than 90 days decreased by 0.1% compared to the previous period.

As of June 30, the non-performing loan (NPL) ratio for the company's consumer finance loans was 1.4%, a decrease of 0.2% compared to the first quarter.

More importantly, in the second quarter, due to Lufax Holdings' optimization of risk management, upgrading of digital risk control systems, focusing on key customer segments and areas with more resilient small and micro economies, the quality of credit assets improved comprehensively. The year-on-year credit impairment losses decreased by 14.6% to 2.856 billion yuan, and all delinquency rate indicators showed comprehensive improvement.

Combining the descriptions from the past two quarters' financial reports, it seems that the risk reduction measures taken by Lufax Holdings have achieved certain results over the period of time.

Against the backdrop of the delayed release of vitality in micro and small enterprises this year and the slowdown in business scale under the company's prudent business strategy, it is remarkable that so many important indicators have shown significant improvement. This fully reflects the effectiveness of the company's transformation.

Continued improvement in key data validates the effectiveness of the new model.

Digging deeper into this financial report, we can also find some overlooked but very important highlights.

First and foremost, the 100% guarantee mode has increased the ability to monetize the business.

Starting last year, the company's small and micro-loan business has undergone a comprehensive transformation into a 100% guarantee mode, introducing its own financing guarantee subsidiary to enhance the creditworthiness of small and micro-enterprise owners, improve the sense of financing acquisition, and also increase its own ability to monetize the business through guarantee fees.

Under the new model, as of the end of the second quarter, the proportion of loans (including consumer finance subsidiaries) bearing risk by the company increased from 27.5% as of June 30, 2023 to 56.7% (excluding the proportion of loans bearing risk by consumer finance subsidiaries increased from 22.4% as of June 30, 2023 to 49.9%). As a result, the retail credit empowering business revenue rate (take rate) calculated based on loan balance reached 9.3% in the second quarter, a significant increase of 2.3% compared to the same period last year.

It can be anticipated that in the future, as the proportion of 100% guarantee mode loans in Lufax's loan balance continues to increase, the take rate reflecting the new business monetization capability is expected to continue to rise.

Secondly, Lufax Group has a strong balance sheet performance. Moreover, as of the end of the second quarter, the leverage ratio of the guarantee subsidiary was only 2.4 times.

With such ample asset reserves, Lufax Group is capable of continuing to implement the "100% guarantee" new model strategy in a complex economic environment, building brand strength for long-term development in the future, and consolidating its market position to solidify its foundation.

It should be noted that under the 100% guarantee mode, the company needs to set aside a certain proportion of risk reserves, which is significantly higher than the previous method of relying on external partners to enhance creditworthiness. In this case, the company's short-term profitability will be affected, so since the implementation of the new model last year, the company has incurred losses in net income.

However, one major advantage of this model is that the company will be able to realize profits through gradually collecting fees throughout the entire life cycle of the loans. At the same time, when the loan is fully repaid, the previously over-provisioned portions can be "reversed".

In other words, the impact of the loan business under the new model on the company's profit is "short-term book loss, long-term profitability", but overall it is profitable. To put it simply, it means going through some hardships before enjoying the benefits.

According to the latest data, the forward-looking indicator C-M3, which reflects the trend of asset quality, has continued to improve in the second quarter, with a migration rate of 0.9%, compared to 1.0% in the first quarter. The migration rates of unsecured loans and secured loans enabled by the company in the second quarter were 0.9% and 0.7% respectively, compared to 1.0% and 0.7% in the first quarter.

In the short term, when the denominator of the company's loan balance significantly decreases, the above indicators, combined with all the delinquency indicators, can continue to show sustained improvement, which is a very rare performance.

At the same time, this means that the cost loss caused by the risk provision under the company's 100% guarantee model will be much reduced than previously expected, and it will significantly increase the company's future profit recovery space.

In the first half of the year, Lufax Holdings has made significant progress in various aspects of loan asset quality, demonstrating the effectiveness of its strategic choices. As Mr. Zhao Rongshi, Chairman and CEO of Lufax Holdings, said: "In the second quarter, we focused on the "quality" rather than the "quantity" of our business. As the proportion of loans enabled by the 100% guarantee model continues to increase in the inclusive loan balance, we expect that ongoing transformation will further enhance our future revenue rate.

Epilogue

In recent years, the volatility of the macroeconomic environment has increased the challenges for small and micro enterprises. Financial institutions must strengthen their risk control capabilities in order to establish a solid foundation. Currently, Lufax Holdings has chosen the "100% guarantee" model, which is crucial for controlling risks and leveraging financial resources to support the lending capacity of small and micro enterprises.

Lufax Holdings has a strategic foresight and is a good choice for securing a better future.

Because this model provides better credit enhancement services for those in need and improves the availability of financing, it can significantly gain customer recognition and favor. As a result, there will be more and more customers and businesses in the future. This is actually a higher strategic layout.

According to publicly reported data, lufax holdings has made significant progress in leveraging financial resources to serve micro and small businesses through its guarantee model, benefiting the people. For example, the overall rate for micro and small business financing services continues to decline. In the first half of the year, it serviced 1.25 million micro and small business owners, providing precise support in economically developed areas like Jiangsu and Guangdong, focusing on manufacturing and industries related to national economy and people's livelihood. In the first half of the year, it helped a total of 11,042 technology-oriented micro and small businesses obtain 5.11 billion yuan in financing.

Compared to those who choose to reduce their guarantee business to compete with less risky peers, lufax holdings seems to be at a disadvantage and carrying a heavy burden. However, in reality, it is taking a step back to move forward and finding the journey increasingly easier. Therefore, it is worth giving lufax holdings some more time to see how it performs in the future.