Qfin Holdings, Inc. (QFIN) Earnings

Management highlights

- Industry Headwinds: The Chinese consumer finance industry faces pressure from household deleveraging (outstanding short-term loans fell by RMB 660 billion) and tighter regulatory oversight covering pricing, marketing, and collections. An unexpected liquidity crisis among peers in late June triggered a confidence crisis, leading to tight liquidity across the sector. - Risk Management & Asset Quality: The company prioritized prudent operations, compliance, and efficiency over scale. Risk metrics improved in Q2, with the C2M2 ratio declining 17% sequentially to 0.66%. However, risk levels reversed in August due to the liquidity crisis and nationwide collection crackdowns, with C2M2 expected to rise sharply. Early risk indicators (FPD3/FPD7) for August showed a ~20% increase month-over-month. - Operational Efficiency: Customer acquisition expenses decreased 13% sequentially as the company moderated spending and optimized user mix. API channels' share of new users declined by 11 percentage points, while ROA for these channels improved by 1.87 percentage points. Average pricing of new loans decreased to 18.2%. - Funding Optimization: Overall funding costs declined by approximately 10 basis points sequentially in Q2 due to increased ABS contribution (up 90% to RMB 5.5 billion) and scaling back high-cost marginal assets. Despite this, management expects funding conditions to remain tight in H2 2026 with potential cost increases. - Strategic Expansion (One-Core, Two-Wings): - Tech Solutions: Loan volume enabled reached RMB 10.5 billion (up 515% YoY), with outstanding balance at RMB 16.1 billion. Secured two AI agent development projects with banks for marketing and credit risk management. - Overseas Markets: Disciplined expansion in Europe, Latin America, and Southeast Asia. Models showing competitive performance in select European/Latin American markets; licensing and partnership exploration ongoing in Southeast Asia. - Organizational Transformation: Building a proprietary AI agent platform to turn individual/team knowledge into reusable organizational assets, aiming to improve execution efficiency and operational leverage.

Guidance

- Q3 2026 Non-GAAP Net Income: Expected between RMB 400 million and RMB 500 million, representing a year-on-year decline of 67% to 73%. - Loan Volume: Expects a meaningful decline from Q2 levels in Q3 due to tightened risk control measures and cautious origination strategies. - Risk Metrics: Anticipates the C-M2 ratio to rise noticeably from Q2 levels in Q3 due to liquidity pressure and collection resource constraints. - Funding Costs: Expects overall funding costs to trend up in H2 2026 due to heightened investor risk aversion and tighter ABS subscription activity. - Tax Rate: Effective tax rate is expected to normalize to around 20% going forward, following a one-off RMB 500 million expense in Q2 that pushed the Q2 rate to 60.3%.

Segment performance

Total net revenue was $3.57 billion, down from $3.91 billion in Q1 and $5.22 billion a year ago. Revenue from credit-driven service capital heavy activities was $2.6 billion, compared to $2.96 billion in Q1 and $3.57 billion a year ago, driven by lower risk-bearing loan volumes and decreased average pricing. Revenue from Platform Service was $969.8 million, compared to $951.9 million in Q1 and $1.65 billion a year ago, with the year-on-year decline attributed significantly to lower ICE contribution due to market changes.

Risks & headwinds

- Liquidity Crisis: An unexpected industry event in late June triggered a severe liquidity squeeze, causing financial institutions to become risk-averse and tightening funding supply across the market. - Regulatory Crackdown: A nationwide regulatory campaign targeting the collection industry has led to a severe shortage of collection capacity, impacting recovery rates and increasing near-term operational pressure. - Deteriorating Asset Quality: Risk metrics reversed in August, with C2M2 rising sharply. Management estimates it will take 2-3 quarters to return C2M2 to reasonable levels. - Provisioning Pressure: New provision booking ratio reached a historical high of 5.36% in Q2. While coverage is strong (472%), continued volatility requires prudent provisioning against potential credit losses. - Market Volatility: Accelerating exit of weaker platforms and ongoing regulatory uncertainty create a volatile environment, potentially impacting customer acquisition costs and long-term growth trajectories.

Analyst Q&A

• Q: Analyst asked about measures taken to control asset quality during liquidity tightening, expected vintage loss increases, and impact of collection policy tightening on recovery rates.

  A: CIO Zheng Yan explained that risk spikes were triggered by chain reactions from peer liquidity crises and collection crackdowns. FPD3/FPD7 rose ~20% MoM in August, with C2M2 expected up ~25%. Measures include escalating risk strategy from precautionary to accelerated tightening, updating models weekly, and identifying high-risk segments like multi-platform borrowers. CFO Alex Xu added that provisions are sufficient, with Q2 new provision ratio at 5.4%, well above the normalized 3-3.5% target, ensuring buffers for potential losses.

• Q: Analyst inquired about July-August loan volume run rates, causes of decline (funding vs. risk appetite), and expectation of rebound post-recovery.

  A: Management stated July volume dropped 15% due to both funding tightness (10% direct impact) and proactive risk tightening. August decline was primarily driven by further risk appetite reduction rather than funding issues, as capital-heavy/unbalanced sheet funding remained stable. Given the 2-3 quarter timeline for risk optimization and ongoing industry shakeout, management does not expect volume to return to Q2 levels soon, prioritizing asset quality over growth until stability returns.

• Q: Analyst asked if shareholder return policy would adjust given deteriorating environment.

  A: CFO Alex Xu clarified that while profitability and cash flow face pressure, the company maintains decent earnings. Near-term priority is safeguarding operational stability and building financial buffers. Long-term intent remains to maintain reasonable shareholder returns, but capital allocation will be continuously assessed based on sustainable normalized earnings and cash flows amidst regulatory uncertainty.

• Q: Analyst sought assumptions behind Q3 guidance and views on long-term trends.

  A: CFO Alex Xu outlined that Q3 assumes meaningful loan volume decline due to strict risk controls. C-M2 is expected to rise noticeably due to liquidity pressure and collection challenges. Funding costs are anticipated to trend up in H2 due to investor risk aversion. The company focuses on acquisition efficiency and user lifecycle value rather than volume, expecting industry normalization and consolidation over the next few quarters.