LexinFintech Holdings Ltd. (NASDAQ:LX) Q2 2024 Earnings Call Transcript

LexinFintech Holdings Ltd. (NASDAQ:LX) Q2 2024 Earnings Call Transcript August 28, 2024

Operator: Good day, and thank you for standing by. Welcome to the LexinFintech Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I’d now like to hand the conference over to your first speaker today, Ms. Mandy Dong, Head of IR of Lexin. Please go ahead.

Mandy Dong: Thank you, Amber. Good morning and good evening, everyone. Welcome to Lexin’s second quarter 2024 earnings conference call. Our results were issued earlier today and can be found on our IR website. Joining me today are our CEO, Jay Xiao; CRO, Arvin Qiao; and CFO, James Zheng. Before we get started, I’d like to remind you of our safe harbor statement in our earnings press release, which also applies to this call. During the call, we may refer to business outlooks and forward-looking statements, which are based on our current plans, estimates and projections. The actual results may differ materially and we undertake no obligation to update any forward-looking statements. Last, unless otherwise stated, all figures mentioned are in RMB.

Jay will first provide an update on our overall performance. Arvin will discuss risk management updates. Lastly, James will cover the financial results in more details. I will now turn the call over to Jay. Please kindly note, different from the past, Jay will give his whole remarks in Chinese. Then, the English version will be delivered via Jay’s AI-based voice. Jay, go ahead, please.

Jay Xiao: [Foreign Language] [Interpreted] Good morning and good evening, everyone. It is my pleasure to share with you our performance for the second quarter of 2024. Amid the current macroeconomic environment and industry landscape, we have adopted a prudent and steady business strategy, adhering to a dual-driven approach of risk management and data analytics. During the quarter, we proactively controlled our loan origination base, tightened credit standards and overall risk levels has been gradually improving with our profitability steadily increasing. In the second quarter, total GMV of loan origination reached RMB51.1 billion. The managed loan balance stood at RMB115.2 billion. Revenue was RMB3.64 billion, an increase of 12.3% quarter-over-quarter.

Net profit was RMB230 million, an increase of 12.4% quarter-over-quarter. Based on the probability in the first half of the year, Board of Directors has approved a cash dividend distribution of approximately US$0.072 per ADS, continuing to return values to our shareholders. Next, let me elaborate on our business performance in the second quarter. In terms of risk management, we managed to strike a fine balance between business growth and asset quality, continuously result [Technical Difficulty] existing assets and strengthened our profitability. As a result, asset quality [Technical Difficulty] optimized, specifically for newly issued assets, deeply implemented the effective low and grow strategy, strictly controlled the quality of new assets and increased the proportion of high-quality users.

On one hand, we continuously optimized RTA model and bidding strategy of major acquisition channels, resulting in a more than 40% comparative increase in the proportion of high-quality [Technical Difficulty] channels. On the other hand, through the low and grow strategy, we implemented low credit line limit admissions and dynamically adjusted limits based on subsequent user performance. This approach increased the approval rate, while maintaining risk exposures. We utilized differentiated pricing, credit score and other tools for users with minimum risk levels at the credit approval stage to expand the volume of high-quality new assets [Technical Difficulty] overall asset risk. As a result of these measures, the approval rate for new customer credit application decreased by 20% compared to Q1, the early risk indicators, FPD7, for new customer assets decreased by 23% compared to Q1, the proportion of high-quality asset volume increased by 8% compared to Q1, and the payback period for new customers further shortened.

Regarding the management of existing assets in the second quarter, we moderately enhanced repayment reminders and optimized the overdue deduction strategy for users, resulting in a 7% decrease in the day-one delinquency rate at the end of the second quarter compared to the beginning of the quarter. For tail-end customers, we implemented measures such as transaction control and limit reduction to reduce long-term risk losses and improve profitability. By applying negative assets clearance, robots will be automated handling of high-risk users. These robots can generate disposal strategy suggestions within hours, significantly improving the efficiency and precision of handling high-risk users. In terms of building quality management capabilities, in the second quarter, we further deepened the upgraded our risk management system of the [indiscernible] of data, models, analysis and monitoring and strategies.

Our CRO will provide a more detailed introduction in the next session. With the measures taken in the management of newly issued assets, existing assets and core capability building, the risk of newly assets has gradually improved during the quarter, leading to a gradual drop in the overall asset risk from its peak. By the end of second quarter, the day-one delinquency ratio had decreased by approximately 7% compared to the beginning of the quarter, and the 30-day collection rate has increased by approximately 1.5% compared to the beginning of the quarter. Reflecting on the past year’s risk management work, the credit cycle within the loan facilitation sector that began in the second half of last year has had a significant impact on the entire industry.

For Lexin, our previous risk management capabilities did not properly match the market changes. However, after the comprehensive upgrade of our risk management team and risk management system at the beginning of the year, we have seen a very noticeable improvement in our overall risk management capabilities and business resilience. Our ability to navigate through credit cycles has been continuously strengthening. Although achieving significant growth in scale and profitability will require more time, it is foreseeable that the improvement in risk management capabilities will gradually enhance our profitability in the future. Regarding our overseas business segment, the Mexican market continued to deliver a rapid growth in the second quarter.

The loan origination volume increased by 61%, and revenue grew by 113% on a quarter-on-quarter basis. Regarding funding costs, during the quarter, our funding costs further dropped by 58 basis points compared to the first quarter, reaching a new record low. In May and July, we issued [indiscernible] of RMB600 million, which were oversubscribed by a great number of high-quality investors. As domestic interest rates further go down, we will engage in differentiated collaborations with more financial institutions that have complementary risk preference, balancing risk and scale to enhance returns. In the second quarter, we invested RMB143 million in research and development, further deepening the application of AI large models. In telemarketing and loan collections, the accuracy of real-time intent recognition by the large model has significantly improved.

In the second quarter, the intent recognition accuracy of robots in telemarketing scenarios reached as high as 98%, and in collection scenarios, it reached 91%. For code assistance applications, the AI large model was used by 100% of engineer staff in the second quarter, significantly enhancing the efficiency and accuracy of programmers’ code writing. Due to our innovative exploration in AI large models, Lexin received a technology award from The Asian Banker in the second quarter. In terms of consumer rights protection, during the second quarter, we further strengthened digitization of [Technical Difficulty] customer service, including improving standards and verification system to quickly identify and respond to customers’ issues, enhancing the consumer negotiation and communication mechanism, as well as customer service management systems, allowing frontline customer service representatives to be fully empowered to respond quickly and address customer concerns, establishing a multi-point tracking customer service process system, which includes the introduction of a series of management systems, training, programs and sales behavior tracking processes.

These measures aim to enhance the customer service experience from the very beginning of the business process and better protect consumer rights. Looking ahead to the second half of the year, in light of the current external environment, we will continue to adhere to the prudent principles, prioritizing risk management and focusing on the following key tasks. First, while we will ensure to bring risk level down to an industry normal range, we will promote steady growth in scale. Over the first half year, we have intensified our efforts in building risk management capabilities. And risk management system and refined operational system have gradually improved. The risk of newly issued assets has returned to a healthy and reasonable level. Moving forward, we will appropriately increase our customer acquisition efforts, leverage our advantages in scenario-based operations and gradually drive steady growth in scale.

At the same time, we will continue to invest more resources into our credit line limit and pricing strategies, conducting more refined operations by segmenting products and customer groups. We are confident that profitability will gradually return to the robust level as we have achieved in the past. Second, we will leverage the high frequency consumption scenarios of our e-commerce business and [Le Card] (ph), both online and offline, to enhance user stickiness and boost user activity. For the e-commerce business, we will offer a wider range of products and portfolios tailored to different users, including [indiscernible] products for premium customers and highly cost-effective products for growing customer segments. For Le Card, we will enhance user activity and conversion rates among premium users by implementing a differentiated management system based on customer segmentation and expanding customer acquisition across different scenarios.

Additionally, we will create an exclusive benefit system to further boost overall user engagement and retention. Third, we will actively pursue overseas market expansion. After preliminary exploration, the business in Mexico is currently maintaining a rapid growth. In the future, we will closely monitor more emerging market opportunities and actively engage in exploration. We believe that as the asset structure continues to optimize and overall risk level gradually trends better in the second half of the year, our profitability will steadily improve. Next, I will hand the floor over to our CRO. Thank you.

Arvin Qiao: [Foreign Language] [Interpreted] Thanks, Jay. Let me give an update regarding risk performance in the second quarter. [Foreign Language] [Interpreted] In the second quarter, we continued to adhere to the strategic principle of risk management upgrade and profitability improvement, consistently enhancing our risk management system and risk management capability. By strengthening our risk identification capability, building a full lifecycle risk management strategy system, upgrading our risk monitoring and risk detecting capabilities, developing strategy robots to promptly handle risk alerts and implementing refined risk management for new and existing customers, as well as existing assets, we achieved a gradual reduction in risk levels for both newly issued and the total assets in Q2.

Specifically, the FPD7 rate for new assets in the second quarter decreased by approximately 14% compared to the first quarter. Day one delinquency rate for total assets at the end of the second quarter decreased by about 7% compared to the beginning of the quarter. And 30-days collection rate has gradually improved, up by about 1.5 in absolute value from the start of the quarter. We anticipate that the downward trends in risk levels will continue in the second half of the year. [Foreign Language] [Interpreted] Let me elaborate on various measures we have implemented in Q2. On the data front, we have intensified the introduction of high-quality scenario-based data source and customized in-depth joint modeling. We have also phased out and replaced ineffective third-party data source, thereby laying a solid data foundation for risk management.

[Foreign Language] [Interpreted] On the front of model system development, we have completed the optimization and upgrade of risk assessment models for various business lines. First, we continued to introduce new partners with proprietary ecosystem data, enriching the underlying data dimension. Second, we consistently optimized samples by [detecting] (ph) those that are more similar to our current customer base. This approach ensures sufficient coverage of different customer groups while also enhancing our ability to identify the latest customer segments. Third, we further increased application of deep learning algorithms. These measures have led to significant improvement in the performance and the stabilities of our models. Additionally, through more data introduction and algorithm innovation, we have upgraded and iterated various models, including profiling models, response models and fraud detection models.

As a result, both coverage and accuracy have continuously improved. [Foreign Language] [Interpreted] On the front of management strategy system development, we have further implemented a full lifecycle risk management system across various business lines. This allows for more targeted and effective risk management to our customers at their each stage of lifecycle. [Foreign Language] [Interpreted] On the front of risk monitoring and detecting, in the second quarter, we launched an automated asset risk inspection system from scratch. This system can detect more segmented portfolios, promptly identify and locate trends in risk trends and anomalies, respond and finally handle them quickly. [Foreign Language] [Interpreted] On the front of handling high-risk customers, the disposal strategy robot has been fully implemented across various business and scenarios.

This has strengthened our automated strategy capability for managing high-risk customers, enabling the generation of disposal strategy recommendation within hours and improving the efficiency and accuracy of handling such high-risk assets. [Foreign Language] [Interpreted] In terms of risk management for new customer assets, we have comprehensively implemented the low and grow risk management strategy across all new customer acquisition channels. This strategy represents a complete upgrade from our previous risk management approach for new customers. The low and grow risk management strategy employs an initial small amount of approved credit line and dynamically managing the credit line amount across the different stage of customer lifecycles, effectively controlling the risk exposure of the first time delinquency among new customers.

At the same time, for high-quality customers transitioning to the next phase of lifecycle, we uplift their credit limits to promote scale growth, thereby increasing the proportion of high-quality assets. With the comprehensive implementation of the new risk management strategy for new customers, the credit approval rate for new customers has increased by approximately 20% compared to the first quarter. Meanwhile, the early risk indicator, FPD7, for new customers has decreased by 23% compared to the first quarter. This lays a solid foundation for the commute — nation of high-quality customer and sustain business growth. [Foreign Language] [Interpreted] In terms of risk management for new assets from existing customers, our work in Q2 focused on three key areas: first, high-risk asset management; second, structural optimization; third, differentiated pricing.

To strengthen high-risk asset management, we restructured the entry and the transaction stage. During the entry stage, we managed the risk through differentiated products for different risk levels. In the transaction stage, we introduced real-time transaction risk information for agile decision making, resulting in a 20% decrease in risk level for existing customers compared to Q1. Additionally, we reduced credit limit for customers with mismatched credit profile and credit line amounts, reclaiming their credit exposure and effectively helping to reduce long-term risk. In terms of risk management products, the application of automated asset inspection and risk strategy robot accelerated the early alerts and disposal of medium- to high-risk assets.

In terms of structure optimization, we increased credit limits for high-quality customers based on our enhanced risk identification capability, effectively increasing the proportion of high-quality GMV. We also intensified the reoffer efforts for customers showing signs of customer churn and those who have already stopped using our products, aiming to prevent churn and encourage return. In terms of differentiated pricing, we made an enhancement in the differentiated pricing capability across all product lines with the take rate of each product line showing a steady increase compared to Q1. [Foreign Language] [Interpreted] In terms of managing the collection efficiency for existing assets, Q2, we focused on three main areas: first, increasing the coverage rate of third-party debit transfer; second, optimizing debit transfer strategy; third, refining pre-delinquency reminder strategies.

These measures have proven effective, leading to a gradual improvement in the collection rate for existing assets. [Foreign Language] [Interpreted] Looking ahead to the third quarter, we will continue to strengthen our risk identification capabilities, risk strategy systems and intelligent risk management tool upgrades. Additionally, we will further deepen the development of differentiated risk management capabilities by segmenting based on various customer cohorts, products and scenarios. In terms of financial institution collaboration, we’ll enhance partnership with various financial institutions who have different and complementary risk preference and strategies. Our goal is to ensure that the risk level of both new and existing assets continue to decline in third quarter, consistently promote the growth of high-quality assets, further optimize the asset structure and gradually improve profitability.

[Foreign Language] [Interpreted] Next, I will hand over to our CFO, James, for financial updates.

James Zheng: Thank you, Arvin. I will now give a more detailed update on our financial results. Please note that all figures are presented in RMB, unless otherwise stated. As Jay and Arvin mentioned, in the second quarter, the macroeconomic recovery remained sluggish. The consumer confidence continued to be at historical lows. In this context, we maintained a cautious operating strategy, controlling the pace of loan issuers and further tightening credit standards. This timely adjustment strategy not only brought us healthy financial results, but also laid a solid foundation for future growth. The strong financial performance in the second quarter can be highlighted in the following four aspects. First, significant increase in revenue take rate.

This is the key highlight of the quarter. The revenue take rate of credit business rose to 2.91%, an increase of 37 basis points quarter-over-quarter and 54 basis points quarter-over-quarter. Despite a 12% quarter-over-quarter decline and a 20.1% year-over-year decline in quarterly loan issuers, we achieved a 12.3% quarter-over-quarter and a 19.1% year-over-year revenue growth. The increase in take rate was primarily driven by record low funding costs, risk based differentiated pricing optimization, a slight refinement in the early repayment ratio and a continued improvement in asset quality of new loans. Arvin has detailed the downward trend in risks of new assets, and we’re confident that we will see more improvement in the overall loan portfolio towards later this year.

Secondly, record low funding costs and more balanced funding channels. In the second quarter, funding costs further declined to 5.26%, down 58 basis points quarter-over-quarter and 131 basis points year-over-year. This significant drop in funding cost was due to a relaxed monetary policy environment and an increased market demand for high-quality assets from our platform and efficiency improvement brought by diversified funding sources. We successfully resumed ABS issuance in May after break up more than two years. And in July, we issued a second ABS of this year with the funding cost for senior tranche as low as 2.8%. Moving forward, we plan to issue ABS regularly to further diversify our funding sources and to reduce overall funding costs.

In the second quarter, we added two new financial institutions as funding partners that maintained approximately 70% of our funding from national institutions. Thirdly, small increase in risk-free new loans. New loans and the risk-free segment as a percentage of total GMV, in Chinese, [Foreign Language], increased from 23% in Q1 this year and 22.8% in Q2 of last year to 27.2% in Q2 this year. The risk-free segment mainly consists of new loans facilitated and the risk-free profit sharing model as well as tech empowerment SaaS services to banking partners. Additionally, the revenue split proportion in profit sharing model, [Foreign Language], in Chinese, increased by 1 percentage points quarter-over-quarter and 4 percentage points year-over-year.

These two increases effectively enhanced our risk-free revenue quality and helped improve profitability. The increase in the share proportion was due to a growing demand for high-quality assets in the financial market and the gradual improvement in our overall asset quality. This demonstrates that our risk management capabilities are increasingly recognized by our [indiscernible]. Also as a side note, in the portion of the risk-free revenue, we are also exploring value-added services offered to our customers to improve the user experience. In the future, we plan to continue to increase the proportion of risk-free model to expand issuing volume and diversifying our business model, which in turn will better serve the needs of the financial partners with different risk preferences.

Fourth, strong recovery in e-commerce business. In the second quarter, e-commerce business revenue surged to RMB437 million, up 88.5% quarter-over-quarter. Gross profit in the e-commerce business rebounded from a loss in the first quarter to RMB14 million in the second quarter. The total transaction volume in the e-commerce segment increased by 3.3% quarter-over-quarter, indicating an improvement in the revenue take rate and profitability. This turnaround was mainly due to the decisive measures taken in previous quarters to reduce risk levels and upgrade to tightened risk management strategies. Despite short-term disruptions in the first quarter, such as declines in transaction volume and gross profit, business growth and profitability quickly recovered and returned to the growth trajectory, a trend we expect to continue in the future.

In addition to the above four operational highlights, I would like to add some details to some items on the income statement. First, on revenue. Technology-enabled services revenue grew to RMB535 million in the second quarter, up 47.9% quarter-over-quarter, driven mainly by increased GMV in the risk-free loans, higher revenue share proportion and other services. In the second quarter, as mentioned earlier, the loan issuance and the risk-free profit split model accounted for 27% of the total loans, up 4% from the first quarter of 2024. Moving forward, we plan to continue expanding the risk-free portion of our business. Second, on cost and expense items. First, loan provision costs. There are four provision line items in our income statement, including provisions for financing receivables, contract assets and receivables, provision for contingent guarantee liabilities and the fair value change in financial guarantee derivatives and fair value loans.

Total provision cost in Q2 increased by 12.6% quarter-over-quarter due to higher risk levels in the existing loan book. However, as Arvin mentioned, during the second quarter, we saw an improving trend in the day one delinquency rate, which peaked in April and gradually came down from April to June. Additionally, the increase in the 90-day-plus delinquency rate was mainly due to a quarter-over-quarter decline in the loan balance, driven by lower new originations and lapse of time. This is a mathematical calculation due to lower denominator and 90-plus-day delinquency ratio only serves as a lagging indicator and provides one angle to review the risk performance among an array of risk metrics. While risk profile for new loans has substantially improved, the risk for the existing loans has also been stabilized.

However, the provision of the total portfolio will still have some lingering effect in the coming quarters. Second, funding cost. The on-balance sheet loan amount and the funding cost remained relatively stable due to the flat size of the trust funding. Third, processing and service costs decreased by 11.7% quarter-over-quarter due to a reduction in the loan issuance and the facilitation volume in the second quarter. Fourth, sales and marketing expense increased by 12% quarter-over-quarter. Most of the incremental expenses were invested in the expanding overseas markets as our base in Mexico is rapidly expanding. Therefore, dividing total sales and marketing expense by the number of newly approved users shows some increase in the customer acquisition cost, while actually the unit cost of the domestic customer acquisition has been relatively stable.

Fifth, net profit margin. Despite the challenging environment in the second quarter, our net profit margin remained stable compared to the first quarter. Apart from the above income statement items, next on the balance sheet items. In the second quarter, we strengthened our strong cash position to RMB4.6 billion through refined operational efficiency and maintained a solid shareholders’ equity of over RMB10 billion. Lastly, regarding the shareholders’ return, as Jay mentioned, we are committed to creating sustainable value for shareholders and have announced a cash dividend of US$0.072 per ADS for the first half of 2024 with a record date of September 16, 2024, equivalent to approximately 20% of the total net profit for the first half of 2024.

Based on the current share price and our annualized cash dividend payout, the cash dividend yield reached about 8.7%, which we believe is in the top range among the ADR companies. Looking ahead to the third quarter, in the context of continued uncertainty among the macroeconomic recovery, we will continue to adhere to a prudent operating principle. Based on current forecast, which is subject to managerial updates, we expect the total loan issuance and the profit in the third quarter to remain at similar levels compared to the second quarter. That concludes the financial segment. Operator, we can now open the floor for questions.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Yada Li from CICC. Please ask your question, Yada.

Yada Li: [Foreign Language] Well then, I’ll do the translation. Hello, management. Thank you for taking my questions. Mr. Jay mentioned that the growth of the overseas business this quarter far outpaced overall business. Could you provide more details on the overseas expansion and when we expect the overseas business to scale up in volume and make a profit? Second, the management mentioned that the company continued a prudent strategy this quarter, but we noticed that sales and marketing expenses increased compared to the first quarter, which means the customer acquisition cost per active user also went up if we do the calculation. Could management give more color on this? That’s all. Thank you.

Jay Xiao: [Foreign Language] Okay. I will translate for Jay. [Interpreted] In Q2, amid tepid macroeconomic recovery, we adopted a prudent strategy in the domestic market, further tightening our risk approval standards and maintaining a healthy controlled scale of loan origination. Compared to our domestic market, our overseas business has developed rapidly. You see, total loan origination in Q2 grew by 60.8% and the loan balance increased by 76.8% Q-on-Q, far outpacing our overall business growth. Furthermore, the overseas business is accelerating, growing speed quarter-by-quarter. The Q-on-Q growth in Q2 is roughly 2 times to 3 times of that in Q1. However, we’d like to also point out that the scale of our overseas business is still relatively small compared to our domestic business scale.

We anticipate that it still will take some time and require more investment to expand and subsequently make a profit in the future for the overseas business. So looking forward, we plan to step up our investment in overseas market and accelerate the expansion. [Foreign Language] Well, I will do translation for Jay. [Interpreted] Yeah, now for your question, explaining in short, the majority of the incremental sales and marketing expense comes from our investment in overseas markets. The overseas market, as you see, is still in its early stage of high growth rate, and it requires significant investment. Therefore, if you just purely do the calculation based on the financial statement, it may appear to show that the customer acquisition cost per active user went up, but that is misleading.

Based on our detailed analysis, the total cost related to acquiring new customers in the domestic market and also if we see the unit cost of customer acquisition remains relatively stable compared to Q1, and that’s within our expectation. Moreover, as we continue to improve our customer acquisition efficiency in the domestic market in the future, we believe the quality of our customer cohort will improve and the payback period will shorten and the unit cost per customer will gradually go down.

Mandy Dong: Operator, that answers the two questions of Yada. We can go ahead for the next questions.

Operator: Thank you. Our next question comes from Zoe Zou from CLSA. Please go ahead, Zoe.

Zoe Zou: [Foreign Language] Okay. Let me do the translation. First one, as James mentioned, although the loan volume decreased this quarter, revenue increased quarter-over-quarter, which implies a significant rise in the revenue take rate. Could the management elaborate on the driving factor behind this and provide an outlook on the future trend of the revenue take rate? The second question, both CEO and CFO mentioned a significant reduction in funding cost this quarter. Could you elaborate on the specific measures taken to bring down funding cost and share management’s outlook on the trending of funding cost for the third quarter and the rest of 2024? Thank you.

James Zheng: Thank you, Zoe. I will answer your questions. The first question, basically, in Q2, because of the slow recovery of the macro economy, we continue to adopt a prudent strategy. Basically, the total loan origination declined by 12%, and the loan balance dropped by about 5% quarter-over-quarter. However, because of our focus on improving the operational efficiency and strengthened core capabilities, the revenue take rate increased significantly from 2.54% in Q1 to 2.91%. Basically, it’s a substantial rise of 37 basis points quarter-over-quarter and about 54 basis point if you compare year-over-year. This is really because of many reasons. Basically, the first one is, as Arvin mentioned, tightened risk standards boasted a continuous improvement in the quality of new loans this quarter.

And also secondly, a significant reduction in the funding cost. And thirdly, some further optimizations of early repayment ratio, a risk-based differentiated pricing and more value-added services. Looking ahead into the third quarter, we will continue to uphold the prudent operational strategy, and we expect the revenue take rate to maintain a slight uptick momentum in the near future. As for the second question related to funding cost, basically, this quarter, the funding cost reached a new record low, stood at about 5.26%. It decreased by 58 basis point quarter-over-quarter. It is a really big reduction. Really, this is driven by many factors. The first is the overall liquidity in the market. It remains relatively ample, and our quality assets are in high demand amongst the trending — funding partners.

So, this reflects our continuously improving asset quality has gained more recognition from funding partners. Really, this helps us to drive down the funding cost. Secondly, as for our profit-sharing model, the revenue split ratio increased by 1 percentage point quarter-over-quarter and 4 percentage point year-over-year. Again, this demonstrates the competitiveness of our assets and our strong bargaining power, if you will. And the third point is the continuous ABS issuers. As Jay and I both talked about in our script, we issued two tranches of ABS with the senior tranche as low as 2.8%. This really significantly pull down our funding cost. And we plan to regularly issue ABS to further balance and diversify our funding channels. And in terms of funding structure, in Q2, we added two more funding partners to our existing 160 partners network.

So, with the proportion of funds from national funding partners maintaining at about 70% or so. So, looking ahead, with the acceleration pace of the ABS assurance and continuous improvement in asset quality, if the overall liquidity remains sufficient in the financial market, we believe there is still considerable room for further reduction in funding cost in the near future. So hopefully, this answers your questions.

Operator: Thank you. Our next question comes from the line of Alex Ye from UBS. Please ask your question, Alex.

Alex Ye: [Foreign Language] So, I have two questions on asset quality. First is on, so, after we have seen some early signs of asset quality improvement in both new loans and the overall portfolio, so when do we expect this improvement to be reflect in bottom-line more meaningfully in the future? And second question, regarding some of the risk indicators. For example, number one, the 90-days-plus NPL ratio has continued to edge up to 3.7% in Q2. So, I’m wondering when do we sort of expect to see this kicking. And then, also, on the [data still] (ph) 30-days vintage curve, we have noted the Q1 curve still following the similar trajectory of the past few quarters. Wondering when do we see an improvement to that? Thank you.

Arvin Qiao: [Foreign Language] Well, I’ll translate for Arvin. [Interpreted] As we continue to enhance risk management upgrading, we will further strengthen the risk identification capability, advance the construction of comprehensive lifecycle risk management strategy system, improve risk monitoring and early alerting capability and develop intelligent risk tools, such as we mentioned before, the strategy robot. We will continuously enhance the refined risk management for both new and existing customers as well as the existing assets. So, based on the above mentioned measures undertaken, we anticipate that a proportion of new loan will gradually increase and the risk level of the existing assets will gradually come down, leading to a gradual improvement in profitability in the future.

We expect this to show as a gradual quarterly improvement over time. [Foreign Language] So, I will translate for Arvin. [Interpreted] As you mentioned, 90-days delinquency rate is more like lagging indicator. We strongly suggest that the market pay more attention to those leading risk indicators that we actually monitor in the daily world of our risk management space. For example, we mentioned a few of them, the FPD7 were new issued assets. In Q2, we see it dropped by approximately 14% compared to Q1. The second lead indicator will be day one delinquency rate for the total assets. You see, it’s dropped about 7% from the peak time in April to June in the second quarter. The third lead indicator we recommend to witness the M1 collection rate, which gradually improved about approximately 1.5%.

That’s in absolute value from April to June. So, all the risk improvements in the new issued assets will gradually show in the 90-days, gradually [by in time] (ph). It will require some time to until we see the improvement in the 90-days delinquency rate. Second point, I’d like to explain from the mathematic calculation perspective to elaborate the increase of 90-days delinquency rate is, the 90-days delinquency rate, the denominator is the loan balance. As we mentioned, we actively [restrained] (ph) our loan origination in Q2. That resulted in a decrease in loan balance. So, there is a drop in the denominator. When we calculate 90-days delinquency, it naturally leads to a rise in the 90-days delinquency rate. As all the upgrade in the risk management work continues, we expect to see the downward trend when the risk level will continue in the second half of the year.

Mandy Dong: Well, Alex, hope that addressed your question regarding the risk management space. Operator, I think, if there’s no more questions on the line, I think we can close the call.

Operator: Thank you. I’m showing no further questions. I’ll now turn the conference back to the management team for closing comments.

Mandy Dong: Well, thank you, again, everyone for joining us today. If you have further questions, please feel free to contact us via the contact information on our IR website. Thank you all. Have a good day and good night.

Operator: Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.