X Financial (XYF) Earnings

Management highlights

### Strategic Operating Stance - The company maintains a disciplined operating approach, prioritizing credit quality and balance sheet strength over near-term origination volume amid challenging market conditions. - The pace of loan volume contraction moderated meaningfully from Q1 2026, consistent with the company's measured approach to new originations. ### Operational Developments - Origination activity is concentrated in internally operated channels, which deliver the strongest borrower quality and unit economics. - Underwriting criteria for new loan vintages has been further refined, and automation has been expanded across loan servicing and collections processes. - Discretionary spending remains under tight control to prioritize capital efficiency. - Average transaction size rose to RMB 12,712, up 8.3% quarter-over-quarter and 21.3% year-over-year, reflecting a mix shift toward higher quality borrowers. ### Credit Quality - Credit trends recorded the first sequential improvement in several quarters: 31-60 day delinquency fell to 1.73% from 2.61% at the end of Q1, and 91-180 day delinquency improved to 9.09% from 9.95% at the end of Q1. - The improvement is attributed to tighter underwriting for recent vintages and additional resources allocated to collections. - Delinquency rates remain well above year-ago levels, with the 91-180 day bucket particularly elevated due to seasoning of older delinquency balances, so management retains a conservative stance. ### Balance Sheet and Capital Return - The balance sheet remains strongly capitalized, with total assets of 12.1 billion RMB and shareholders' equity of 7.8 billion RMB, for an equity-to-asset ratio of 64% (up from 57% at the end of Q1). - From January 1 to August 14 2026, the company repurchased approximately 2.6 million ADS for total consideration of $12.49 million, with $35.5 million remaining under the existing $100 million repurchase program (expiring November 30 2026). - The board approved a cash dividend of $0.28 per ADS, payable September 28 2026 to shareholders of record as of September 10 2026. ### Overall Financial Performance - Total net revenue fell 56.3% year-over-year and 15.5% quarter-over-quarter to 993.6 million RMB, driven by lower origination volumes and partially offset by higher guarantee income. - Operating income rose 38.6% quarter-over-quarter to 194.9 million RMB, while operating margin improved to 19.6% from 12% in Q1. - Net income rose 23.8% quarter-over-quarter to 47 million RMB, and non-GAAP adjusted net income rose 104.3% quarter-over-quarter to 166 million RMB, marking the second consecutive quarter of sequential operating improvement.

Guidance

- Due to material macroeconomic and regulatory uncertainty in the current operating environment, management is not providing quantitative guidance for the third quarter of 2026 at this time. - The company's core strategic priorities remain unchanged: capital preservation, disciplined loan origination, rigorous cost control, and balance sheet protection. - Management will resume providing quantitative forward guidance when visibility into operating conditions improves.

Segment performance

X Financial reports four main business segments with the following Q2 2026 financial performance: 1. Loan facilitation service fees: 199 million RMB, representing an 85.5% year-over-year decline, accounting for ~20% of total net revenue. 2. Post-origination service fees: 160 million RMB, a 41.2% year-over-year increase, accounting for ~16.1% of total net revenue. 3. Guarantee income: 225 million RMB, more than doubling year-over-year, accounting for ~22.6% of total net revenue. 4. Finance income: 278 million RMB, a 13.2% year-over-year decline, accounting for ~28% of total net revenue. Total net revenue for the quarter was 993.6 million RMB.

Risks & headwinds

- Ongoing challenging macroeconomic and industry conditions have led to elevated delinquency rates that remain well above pre-existing levels, with older non-performing loan balances still working through the portfolio. - The Chinese fintech sector faces ongoing regulatory uncertainty, with limited ability to re-list domestically or in other jurisdictions if the company were to privatize from its US listing. - The company has an outstanding disputed guarantee deposit with a single funding partner that is behind schedule on repayment, requiring a 95.3 million RMB credit loss provision in the quarter. - New business and revenue growth opportunities are still unproven and unclear at this stage, creating uncertainty around long-term revenue projections. - Actual future results may differ materially from forward-looking statements due to unforeseen risks and uncertainties, many of which are outside the company's control.

Analyst Q&A

• Q: Why does X Financial remain publicly traded in the US when its ADS trades at a large discount to tangible book value, rather than privatizing? /

  A: For Chinese-headquartered fintech firms, being publicly traded overseas is a privileged status that would be very difficult to regain. If the company privatized, it would be extremely unlikely to receive government approval to re-list on any public exchange, so remaining public is the preferred path. Management is not ready to exit the public market after two consecutive quarters of sequential improvement. /

• Q: What is the company's plan to close the valuation gap and return more cash to shareholders? /

  A: The most viable long-term path to improve valuation is to develop new revenue sources and reorient the business away from its traditional loan facilitation activity, which is currently operating at very low volumes. The company is already executing the maximum share buybacks allowed under its existing program while retaining sufficient capital to explore new opportunities, and can continue to pay healthy dividends as cash is freed up from the shrinking loan portfolio. /

• Q: Why did the provision for contingent guarantee liabilities fall sharply, despite elevated overall delinquency and a lower outstanding loan balance? /

  A: The guaranteed portfolio size was largely unchanged, so the decrease does not reflect lower portfolio size. The reduction comes from a downward revision to average expected loss rates on the existing portfolio, which allowed the company to reverse a portion of excess provisions reserved in prior periods. Elevated delinquency is concentrated in older vintages, while newer tighter-underwritten vintages are performing better, leading to lower overall expected losses. /

• Q: Why did the provision for credit losses on deposits and other financial assets jump to 95.3 million RMB from less than 1 million RMB previously? /

  A: This provision relates to a guarantee deposit held by a single former funding partner for a business line that X Financial has already exited. The deposit repayment is currently behind schedule, so the company took an accounting precaution to provision the full amount at this time. It does not guarantee that the funds will never be recovered in the future.