Lufax Holding Q2 2026 Earnings Call - Restoring Compliance and Pivoting to AI-Driven Growth Amid Regulatory Headwinds

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding second quarter 2026 earnings call. At this time, all participants are in a listen-only mode. After the management’s prepared remarks, we will have a question and answer session. Please note this event is being recorded. Now, I’d like to hand the conference over to your speaker host today, Ms. Xinyan Liu, the company’s Head of the Board Office and Capital Markets. Please go ahead, ma’am.

Xinyan Liu, Head of Board Office and Capital Markets, Lufax Holding: Thank you very much. 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.

Zhi Xiang, Director and CEO, Lufax Holding: 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.

Operator: We will now begin the question and answer session. To ask a question, please press star then 1. If you are using a speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, please press star then 2. In addition, I would like to remind you to please mute yourself after stating your question. Thank you. The first question today comes from Richard Xu with Morgan Stanley. Please go ahead.

Richard Xu, Analyst, Morgan Stanley: Thank you for taking my question first. Two questions. One on strategy. I just want to see from the view of management team, what will be the top 2 or 3 priorities over the next 2 to 3 years? Will there be any material changes versus previous strategy? Secondly, is on the loan growth and business mix. New loans return to positive in second quarter. Obviously, the consumer finance accounting for a rising share of business. Is this sustainable, there is still a lot of policies trying to obviously influence the growth in this area’s pricing. Under the new strategy, what should be the long-term balance between consumer and, I guess, the SME loan portfolio? Thank you very much.

Zhi Xiang, Director and CEO, Lufax Holding: Thank you, Richard. Thank you for your questions. Basically, the first question is around strategy, right? Over the next 2 to 3 years, our top priorities are pretty clear, right? First, growing the mid- to low-risk customer base. We want to focus on high-quality customers across three segments. Small business owners, which is really the stronghold of Lufax over the years. Individually owned businesses or self-employed. That is basically a new customer segment we want to broaden. And salaried employees, right? Through consumer finance, we see some good momentum and want to see that to continue. By increasing the proportion of mid- to low-risk customers, build a more diversified product matrix, right? Deepen refined operations by customer segment and achieve improvement in risk and profitability. So that is our basically the very much the top line priority.

Second priority, with all the pricing compression and sort of credit cost going up in the market, we want to continue to optimize our cost structures. We are going to comprehensively apply and promote AI applications across business to optimize customer acquisition, risk, operating costs, and create more rooms for improved profitability while we are lowering the price. Third, strengthening internal controls and compliance, right? Like what Xinyan Liu said, it has been 2 years, we have not been able to talk to you. So we want to strengthen internal control and compliance, strictly implement regulatory requirements to achieve a long-term sustainable development. The previous strategy, as is set out in 2024, 2 years ago in the earnings call, centered around 2 pillars. Number one, prudent operation, prioritizing asset quality over scale growth. Number two, business diversification, growing consumer finance, expanding our non-SBO consumer base.

Going forward, this is still the sort of the strategy we are basically trying to implement. We will further strengthen our due engine strategy for small business lending and consumer finance, while also relying on our new selective customer strategy to optimize customer base, drive growth in the business scale, and improve profitability. When it comes to the second question, right? The second question around, we have the consumer finance going up, whether that is sustainable with the proportion between the consumer finance business and SME. Our strategy is to build 2 growth engines. One is small business lending, the other is consumer finance, with resources concentrated on the 2 core consumer segments. As you can see, consumer finance is a new growth engine and will continue to be the driver for growth.

We are testing new customer acquisition models as we speak and product combinations to serve higher quality customers. We believe this growth is sustainable. When it comes to small business lending. Small business lending, we see that as our traditional strength. Our focus there is to return to growth through improved customer acquisition efficiency and broadened product portfolio and stronger risk management capability. We see small business lending and consumer finance complementary. They have different demand characteristics and risk profiles. So going forward, we will endeavor to continue to optimize our business mix based on market conditions to achieve balanced growth.

Operator: The next question comes from Emma Xu with Bank of America. Please go ahead.

Emma Xu, Analyst, Bank of America: Thank you. Thank you for the opportunity to ask the question. I have 2 questions. The first one is about the regulation. Following recent stress amongst the smaller online lending platforms, has management observed any tightening in institutional funding or borrower refinancing conditions, and how will you deal with this? The second one is about the capital return. Given the large free cash balance and improving operating trajectory, what level of capital do you consider is necessary to support this business under the full guarantee model? Once sustainable profitability is restored, should investors expect the existing 30%-40% payout framework to remain the base policy? Under what conditions would you consider additional capital distribution? Thanks.

Zhi Xiang, Director and CEO, Lufax Holding: Yeah. Thank you for the question. Basically, first of all, talking about the regulation. As well, the sizable players in the market, we fully welcome the tightened compliance regulation, et cetera, right? Strengthened compliance across the industry is inevitable trend. Recent policy changes are aimed at comprehensively strengthening compliance requirements, protecting consumer rights, and promoting the healthy and sustainable development of the industry. We will continue to implement the adjustment in line with regulatory requirements at our full strength. The tightened regulatory requirements will bring some pressure to our business in the short term, for sure. We will accelerate our selective customer strategy, strengthen cost management, optimize cost structure, and improve capital efficiency, among other measures, to continue optimizing customer acquisition, risk, and operating costs. This will further create room to lower pricing while ensuring stable profitability.

Nevertheless, over midterm to long term, this trend will help healthy growth of the industry. Compliant leading platforms, such as Lufax, will benefit from further optimization of the industry landscape and gain market share. In short-term, we do feel pressure, in terms of our business performance. But we are also optimistic around midterm and long-term performance because a more compliant market will benefit players such as us. You also have a question around capital return, right? Management believes our current cash position is appropriate relative to the scale of our business. It reflects both the capital requirements and the applicable financial regulations, and the need to maintain a buffer to support future growth. Management is focused on executing our strategy, right? Our top priority is returning to profitability as soon as possible in order to create long-term value for shareholders.

Our dividend policy, once we achieve our profitability target, management will review the dividend policy together with the board and to decide whether we should have payout per month.

Operator: The next question comes from Alex Ye with UBS. Please go ahead.

Alex Ye, Analyst, UBS: Hi, many thanks for taking my question. Two questions from me. First one is regarding our unit economics. Now with our transition to the full guarantee model largely complete, can you give us more color about underlying profitability of the new loans and what is the expected net rate for this new full guarantee business? Second question is on asset quality. We have seen some early indicators, including CM3 and consumer finance NPL ratios improved quarter-on-quarter in Q2. Some of the lagging indicators still remain elevated. We have also seen there has been some risky banks across the smaller platforms in the industry since the end of Q2. Could you comment a little bit on the latest asset quality trend? Thank you.

Zhi Xiang, Director and CEO, Lufax Holding: Sure. This is first time that I talk to our shareholders, investors, analysts. However, the new strategy has been implementing, I would say, since the earlier beginning of the year. With the new strategy, we have seen improvements in the asset quality of new Rongyi loans enabled in 2026. We believe our overall profitability will continue to improve as we continue to implement the new strategy. What I can see for this call is the new loans we have issued over the first half of the year have improved profitability over the assets we have accumulated in the year of 2025. That leads us to asset quality. Since the start of this year, we have upgraded our risk control measures. We actually take a very prudent approach. We also refined our risk strategy and enhanced our risk models.

On the post-loan side, we have broadly rolled out collection models reforms and expanded the use of AI-powered collection. All this initiative has delivered initial positive results with sequential improvement in asset quality in the second quarter. Asset quality has been gradually worsening since the second half of last year. However, as you can see, in the second quarter, our CM3 flow rate declined notably compared to the first quarter. The management is expecting the trend to continue over the second half of the year. Thank you.

Operator: The next question comes from You Fan with CICC. Please go ahead.

You Fan, Analyst, CICC: Okay. Thanks management for taking my questions. This is You Fan from CICC. I also have two questions here. The first one is about customer communication. We noticed that the secured loans of Rongyi price around 17%. Do the credit characteristics of these customers qualify them for bank loans? For the relatively high-quality customers, how does the company compete with banks or other lower price channels? The second question is about Hong Kong trading. I just wonder how is the processing of the resumption of our trading in Lufax Hong Kong sales, and could you share, is there any better visibility on the trading resumption timeline? These are my two questions. Thank you.

Zhi Xiang, Director and CEO, Lufax Holding: Yeah. Thank you. First of all, we don’t see ourselves competing head-to-head with most of the banks, right? Our Rongyi product targets small business owners and individually owned businesses, a customer base that different from typical bank customers. Why I say different? Many of these customers either cannot access bank loans or cannot obtain sufficient loan amount from the bank. Basically, Rongyi fills this supply gap and complements bank rather than competing head-to-head. Rongyi and bank products are priced differently, which allows the two to complement each other well. Our products differentiated advantage, including higher loan amounts, a more convenient process, and typically take less than a day, and flexible repayment terms, which better meets customer supplementary and emergency financing needs. On refined operation, we launched our Industry+ initiative, which is tailored to the distinct operating characteristics and financing needs of different regions and industries.

For example, I’ve been to province such as Shandong, such as Guangdong, et cetera. At a county level, they typically have industries which are basically serving the entire nation. Right? For example, cooking wares in a particular county in Shandong and lighting facilities in a particular county in Guangdong. Right? We are basically leveraging our direct sales to penetrate it to county level. This allows us to design dedicated product solutions that more precisely address small business finance needs across different sectors. Right? You also asked a question around Hong Kong trading resumption. We have now completed the receipt of our 2022, 2023 financial statements, the audits of 2024 and 2025, right? With all reports now published and released, we now also completed the internal control review and upgrades with the help of external professionals.

The company is still responding to outstanding questions and comments raised by The Stock Exchange of Hong Kong Limited regarding the relevant fundings. We will keep investor updated on any developments in a timely manner, and will make appropriate announcements as necessary.

Operator: 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.

Xinyan Liu, Head of Board Office and Capital Markets, Lufax Holding: Thank you, operator. This concludes today’s call. Thank you for joining the conference call. If you have more questions, please do not hesitate to contact Lufax IR team. Thanks again.

Operator: Thank you. The conference is now concluded. You may now disconnect.