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Lufax Holding Ltd (LU -5.54%)
Q2 2022 Earnings Call
Aug 04, 2022, 9:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gents, thanks for standing by and welcome to Lufax Holding Limited second quarter 2022 earnings name. At this time, all contributors are in a listen-only mode. After the administration’s ready remarks, we’ll have a Q&A session. Please word this occasion is being recorded.
Now, I’d like at hand the convention over to your speaker host in the present day, Ms. Nu Shing Yen, the corporate’s head of board workplace and capital markets. Please go forward, madam.
Unknown speaker
Thank you very a lot. Hello, everybody, and welcome to our second quarter 2022 earnings convention name. Our quarterly monetary and working outcomes have been launched by our Newswire companies earlier in the present day and are presently obtainable on-line. Today, you’ll hear from our newly appointed chairman and CEO, Mr.
Y.S. Cho, who will begin the decision by discussing change to our administration workforce after which present an replace of the most recent the regulatory developments, macroeconomic and the COVID affect, and our newest enterprise methods. Our co-CEO, Mr. Greg Gibb, will then undergo our second quarter outcomes and supply extra particulars on our operations.
Afterwards, our CFO, Mr. David Choy, will provide a better look into our financials earlier than we open up the decision for questions. Before we proceed, I want to refer you to our protected harbor assertion in our earnings press launch, which additionally applies to this name, as we shall be making forward-looking statements. Please additionally word that we’ll focus on non-IFRS measures in the present day, that are extra totally defined and reconciled to essentially the most comparable measures reported below the International Financial Reporting Standards in our earnings launch and the filings with the SEC.
With that, I’m now happy to show over the decision to Mr. Y.S. Cho, chairman and the CEO of Lufax. Please.
Y.S. Cho — Co-Chief Executive Officer
I thanks all for becoming a member of our second quarter 2020 earnings convention name. I’ll begin with in the present day’s name with modifications from administration workforce after which present an replace of the most recent regulatory developments, macroeconomic and COVID affect, adopted by updates on our newest enterprise methods. Earlier this month, our board accepted the resignation of Chairman Ji Guangheng and my appointment as chairman and CEO of Lufax. We want to thank Chairman Ji for his contributions to Lufax and need him each success in his new place as deputy basic supervisor of Ping An Group.
We have additionally appointed Chen Dongqi as our basic supervisor and David Choy as our CFO, and Y.J. Lim as our CRO. Greg, in persevering with to function our co-CEO, will tackle an prolonged function in our total enterprise going ahead. In addition to persevering with to supervise our wealth administration efforts, Greg will see our finance, treasury, IT, IR features, having CFO and CTO reviews to him, and play a lead function in growing new enterprise initiatives, which we’ll share extra about at a later stage.
Dongqi joined the corporate in 2013 and has held varied key administration positions, together with serving as the final supervisor for Puhui since 2020. Prior to becoming a member of Puhui, Dongqi served in a number of Ping An subsidiaries ranging from 1996. David has served because the CFO to our retail lending enterprise since becoming a member of 4 years in the past. Before becoming a member of us, David was the pinnacle of treasury division of Ping An Group and had served in varied management roles inside Ping An Group finance planning features for 11 years.
Y.J. joined the Puhui in 2008 and has been overseeing the danger administration perform of our retail lending enterprise for nearly 14 years. Prior to becoming a member of us. Y.J.
served in key danger administration positions with a number of international banks accumulating 25 years of expertise in shopper danger administration. Greg, Dongqi, and I, along with administration workforce, we proceed to drive Lufax’s enterprise growth technique operations sooner or later. On the regulatory entrance, our remark is that the general credit score atmosphere is bettering. Recently launched coverage statements search to stability incentivizing and regulating the urgent economic system to bolster wholesome growth over the long run.
We have additionally seen constructive recognition for the function credit score enhancement performs in supporting credit score availability for small companies. In phrases of key requirement of no direct information reference to monetary establishments, we will proceed our present partnership mannequin with funding companions all through the corporate. Under this financial institution [Inaudible] mannequin, we aren’t required to work with third-party credit score companies. As to the April 29 ratification course of, we’ve accomplished most of April 29 ratification-related initiatives and have detailed motion plans for the brand new remaining gadgets.
On the client entrance, the COVID-19 resurgence in China within the second quarter has had a detrimental affect on small enterprise house owners, creating challenges to our operations, with April and May being essentially the most adversely impacted month. Our C-M3 month-to-month stream fee, which is a number one danger indicator, peaked in April at 0.83% and decreased to 0.61% in June. We consider when it comes to home credit score atmosphere, the worst is now behind us. Nonetheless, home and worldwide macro uncertainties, together with COVID-19 resurgence, inflation, and recession fears proceed to proceed and can possible place some stress on our enterprise operations and development prospects.
In the face of this tough macro working atmosphere, we stay prudent operations and prioritizing high quality over quantity development for the stability of this 12 months. Why we stay cautious? Key initiatives launched final 12 months are beginning to bear fruit for the medium time period. We consider the sourcing contribution from Ping An has bottomed out and is now stabilized, contributing about 22% of our new mortgage gross sales within the second quarter. Our decreased mortgage development this 12 months is essentially the results of a collective concentrate on high quality.
Our selective tightening of credit score requirements by buyer segments and geographies has resulted in a significant narrative rating of recent enterprise sourcing within the first half. However, on account of cautious focusing on of recent development by our direct gross sales workforce in better-performing areas, we’ve been in a position to offset among the sourcing battle introduced by these tight credit score requirements. As of June, the proportion of high-quality expertise in our direct gross sales power elevated as we proceed to execute our channel transformation. Our direct gross sales made up 53.6% of recent mortgage gross sales within the second quarter, up from 49% a 12 months in the past.
As and when the COVID affect recedes in negatively impacted areas, we can shortly alter our credit score coverage and totally deploy our strengthened gross sales power for accelerated enterprise development. While the particular timing for acceleration requires extra remark, we’re assured that when it happens we’re very well-positioned to regulate shortly. In truth, within the second quarter, we restated our 70% improve in variety of mortgage purposes for direct gross sales 12 months on 12 months. Market demand and coverage assist is clearly evident, and it’s now a matter of selecting the correct timing to increase our buyer sourcing purpose.
Finally, I want to share some updates on our enterprise methods. In the long run, we are going to proceed to concentrate on fixing the monetary wants of small enterprise house owners who signify an vital and rising share of China’s center class [Inaudible] and improve our capabilities within the small enterprise proprietor for our SBO section. In the second quarter, our loans to small enterprise house owners made up 86.1% of recent mortgage gross sales versus 77.6% a 12 months in the past. Going ahead, we increase our choices to fulfill all rounded wants of SBOs corresponding to offering business insights, on-line instruments, and different value-added companies to assist SBOs with their combine and set of features.
On these stable foundations, we [Inaudible] complete monetary companies, together with lending, wealth administration, and insurance coverage merchandise by way of expanded partnerships. This strategic path seeks to increase our buyer life cycle, deepen data-driven insights, strengthening buyer loyalty, and optimize our buyer acquisition and administration prices. Through our wealth administration enterprise, we are going to proceed to concentrate on serving clients within the on-line fund distribution house, serving to them to realize their monetary planning aims by way of improved content material and instruments each pre and publish funding. The on-line know-how developed traditionally within the wealth administration enterprise for dynamic buyer administration we are going to additional leverage and align with future companies for small enterprise house owners.
Lufax has an extended and confirmed historical past of creating changes to anticipate and reply to the altering working atmosphere. In response to in the present day’s atmosphere, we’re additional intuiting our mid and again workplace and know-how groups and realigning our construction to realize higher nimbleness and optimize useful resource allocation. Recent changes create extra shared sources to raised place our firm for future development alternatives. The scope of this adjustment won’t set off materials modifications in our income or price construction within the close to time period.
Overall, we’re assured within the steps we’ve taken and can proceed to assist the expansion and growth of small and micro companies and the actual economic system at massive. We additionally plan to regulate our dividend distribution to twice a 12 months from annually, to ship worth to our shareholders. With that, I’ll flip the decision over to Greg, who will share our enterprise updates intimately.
Greg Gibb — Co-Chief Executive Officer
Thank you, Y.S. I’ll now undergo our second quarter outcomes and supply extra particulars on our operations. Please word that every one numbers are in renminbi phrases, and all comparisons are on a year-over-year foundation until in any other case acknowledged. The second quarter was each a tough and [Inaudible] time for the economic system and our enterprise.
Difficult for our enterprise when it comes to needing to be very selective in new development whereas going through elevated credit score prices ensuing principally from COVID. Steadying is that our early stage danger indicators peaked in April and are actually exhibiting dimension of restoration whereas we proceed to pursue ongoing enhancements in our operations. Through this era, we have remained dedicated to offering inclusive funding options to small enterprise house owners with 86.1% of recent mortgage gross sales distributed to small enterprise house owners, up from 77.6% in the identical interval final 12 months. However, our dedicated stance on prioritizing high quality over quantity for the final a number of quarters resulted in second quarter complete revenue development of three.1% 12 months on 12 months.
We have taken a agency stance on price management, with complete second quarter bills, excluding credit score and impairment losses and different monetary prices and losses declining 11% 12 months on 12 months. Nonetheless, the rise in credit score losses, the place we immediately bear danger by way of our assure firm, led to a revenue lower of 37.9% within the second quarter versus a 12 months in the past. Our web revenue within the first half decreased by 15.2% versus a 12 months in the past. While these outcomes are clearly under the expectations we set for ourselves at first of the 12 months, we consider our technique supplies safety on the draw back that may enable us to regulate shortly because the macro atmosphere progressively recovers.
Now let’s take a better have a look at a number of of the core drivers for our enterprise mannequin and working efficiency. As Y.S. simply talked about, first, we consider that the current coverage and regulatory bulletins are constructive for our enterprise mannequin medium time period. Supporting small companies is just changing into extra vital in China’s present financial priorities.
On the regulatory entrance, there was elevated recognition of the function that credit score enhancement can play in serving to funding availability for small enterprise house owners. In the second quarter, excluding our shopper finance subsidiary, credit score insurance coverage offered by our seven insurance coverage companions to clients lined 76% of recent loans. The function of our assure firm and its function in information transmission to our funding companions has lately been clarified. We have acquired suggestions that we’ll not have to share information with funding companions by way of a third-party credit score company below the present financial institution assure mannequin.
In the second quarter, the common APR to loans facilitated portfoliowide reached 21.4%, down from 21.8% within the earlier quarter. We will proceed to leverage our distinctive enterprise mannequin and take steerage from central coverage initiatives to proceed to reinforce our market positioning. Second, our channel transformation continues to push forward. New enterprise sourced from Ping An channels within the second quarter dropped to 22% from 31% a 12 months in the past.
Importantly, new clients sourced within the first half of this 12 months are a greater high quality than these sourced within the second half of final 12 months. In areas the place we have been profitable in hiring higher-quality direct gross sales, the expansion in productiveness enhancements have additionally been stronger. When combining our channel changes with selective regional development, differentiated by superior credit score efficiency, we’re managing to optimize the general high quality of our new enterprise in in any other case tough market situations. Third, we’re seeing improved funding prices throughout our companion community.
In the second quarter, total financial institution and institutional funding prices have decreased by about 10 foundation factors. This enchancment is pushed each by the benign rate of interest atmosphere and powerful demand by funding companions. Demand amongst our funding companions displays each their need for our high quality belongings and their want to extend publicity to the small enterprise proprietor section. Our variety of funding companions within the second quarter reached 78%, a couple of 10% improve over the primary quarter.
Fourth, our stability sheet stays sturdy. As of the top of the second quarter, our web belongings stood at RMB 97 billion, was RMB 43 billion in money available, and the leverage ratio for our assure firm stood at roughly two occasions, demonstrating our resilience within the face of danger fluctuations. We consider that our robust capital place will allow quicker resumption of development when the macro atmosphere stabilizes. At this level within the cycle, our unit economics are holding up moderately properly.
Despite the lower in efficient rate of interest APR, we’ve noticed relative resilience when it comes to the take fee, reflecting ongoing enhancements made in funding prices, credit score insurance coverage prices, and early compensation affect during the last 12 months. In phrases of web margins, gross sales and working bills within the second quarter have improved considerably versus a 12 months in the past to offset partially the elevated credit score price we bear by way of our assure firm. Let me dive additional into the change in credit score prices, as this has had the biggest affect on our total profitability. Total credit score prices within the second quarter have been RMB 3.5 billion, a rise of 152% versus a 12 months in the past.
The improve was primarily as a consequence of elevated danger sharing by way of the assure firm and the deterioration of underlying quantity pushed largely by the COVID resurgence. As a reference, excluding the patron finance subsidiary, the self-guaranteed portion of recent mortgage gross sales elevated from 16% within the second quarter of 2021 to 22% within the second quarter of 2022. If we additional look into the early danger indicators, in December 2021, the C-M3 stream fee was 0.53%. In April, following the COVID resurgence in Shanghai and different areas, the portfolio’s C-M3 stream fee peaked at 0.83%.
In June 2022, the C-M3 indicator stood at 0.61%. In the 2020 COVID wave, the C-M3 stream fee peaked at 0.98% after which return to pre-COVID ranges inside a three-month interval. Given the weaker macroeconomic atmosphere in the present day versus 2020, we anticipate that the return to normalized C-M3 flow-through charges would require a extra prolonged interval. This actuality mixed with the uncertainty of potential for additional COVID outbreaks is the inspiration for sustaining a prudent stance.
In the second half of this 12 months, we do anticipate our lending-facilitated unit economics take fee to be negatively impacted by elevated credit score insurance coverage prices on new enterprise as our credit score insurance coverage companions value up in response to COVID’s resurgence within the first half. We are reviewing attainable pricing changes to mirror the change in credit score insurance coverage prices. However, we don’t anticipate absolute credit score prices to extend considerably within the second half as we consider the worst is already behind us based mostly on the early danger indicators. But a return to our historic unit financial ranges, each prime and backside line will definitely have to attend till 2023 with a bunch enchancment within the total macroeconomic situations.
We consider we’re planting the correct seeds for the medium time period, and are taking a prudent method, however proceed to construct on robust underlying fundamentals to have the ability to reengage in web new enterprise development when the timing is correct. It is with this in thoughts that we flip to our steerage for the second half. For the complete 12 months 2022, we anticipate our new loans facilitated to be within the vary of RMB 563 billion to RMB 590 billion, and our consumer belongings and wealth administration to be within the vary of RMB 390 billion to RMB 430 billion. We anticipate our complete annual revenue to be within the vary of RMB 60.3 billion to RMB 61.7 billion, and our web revenue to be within the vary of RMB 13 billion to 13.4 billion for the complete 12 months 2022.
This suggests flat to barely detrimental income development for the complete 12 months and a decline in annual income as much as 22%. If noncash international trade losses are excluded from the calculation of web revenue, the projected decline in annual income shall be roughly 17%. These forecasts mirror our present and preliminary views in the marketplace and operational situations, that are topic to alter. Surprises to the upside derived from presumably extra aggressive financial coverage assist usually tend to be seen in 2023.
Finally, we’re totally conscious of potential delisting dangers within the U.S. and are able to provoke a Hong Kong itemizing plan as quickly as permissible and topic to related regulatory necessities. As Y.S. talked about earlier, ranging from this 12 months, we shall be distributing our dividends twice a 12 months to ship higher worth to our shareholders.
Our board has accepted a dividend distribution of $0.17 per ADS for the primary half of 2022. I’ll now flip it over to David for extra particulars on our monetary efficiency.
David Choy — Chief Financial Officer
Thank you, Greg. I’ll now present an in depth look into our second quarter outcomes. Please word that every one numbers are in renminbi phrases and all comparisons are on a year-over-year foundation until in any other case acknowledged. Our complete revenue for the primary half grew by 8.4%, by which the full revenue for the second quarter grew RMB 416 million or 3.1% 12 months over 12 months.
Our complete bills for the primary half grew by 24.1%. The improve within the complete expense is primarily pushed by the numerous improve in impairment prices and likewise international trade revaluation losses as a consequence of U.S. greenback appreciation. While our operating-related bills really decreased by 11% as a consequence of working effectivity and optimizations.
Net revenue for the primary half decreased by 15.2% and the identical quarter web revenue decreased by 37.9%. Next, let me spotlight among the key modifications within the financials. First of all, we nonetheless achieved constructive top-line development amid a really tough second quarter for China. Total revenue elevated by 3.1% within the second quarter 12 months over 12 months or 8.4% within the first half.
As we’ve advocated for increase a extra sustainable enterprise mannequin, the full revenue mixture of our retail credit score facilitation enterprise continued to evolve. During the second — in the course of the quarter, whereas platform service charges decreased by 23.1% to RMB 7.4 billion, our web curiosity revenue grew 55.3% to RMB 5 billion, and our assure revenue grew by 117.3% to RMB 1.9 billion. As a outcome, our retail credit score facilitation platform service charges as a proportion of complete revenue decreased to 45.2% from 62%. And because the belief funding mannequin supplies considerably longer funding price, particularly within the [Inaudible] mannequin.
We proceed to make the most of them extra in our funding combine, whereas the respective accounting remedy of income below this mannequin is acknowledged below web curiosity revenue. We discover that our web curiosity revenue as a proportion of complete revenue really elevated to 32.8% from 31.8% a 12 months in the past. Moreover, as we proceed to raised make the most of our assure firm’s considerable capital to bear extra credit score danger by ourselves as a substitute of our P&C insurance coverage companions, we generated extra assured revenue, reaching 12.7% as a complete of revenue in contrast with 6% a 12 months in the past. In phrases of wealth administration, our platform transactional service charges elevated by 14.7% to RMB 467 million within the second quarter from RMB 407 million in the identical interval of 2021.
This improve was primarily pushed by the rise in charges generated from our present services, partially offset by the runoff of legacy merchandise. Turning to our bills. We are price aware, and our working bills, excluding credit score asset impairment losses and different losses really decreased by 11%. In the second quarter, our complete bills grew by RMB 2.5 billion or 29% to RMB 10.9 billion from RMB 8.5 billion in the identical interval of 2021, primarily pushed by the rise of credit score impairment prices.
Credit impairment losses really elevated by 152% to RMB 3.5 billion within the second quarter of 2022 from RMB 1.4 billion in the identical fall of 2021. Total bills, excluding credit score and asset impairment losses, finance prices, and different losses decreased by 11% to RMB 6.3 billion within the second quarter of 2022 from RMB 7.1 billion within the interval of 2021 to additional enhance our working effectivity. Our complete gross sales and advertising and marketing bills, which primarily embrace bills for debtors and investor acquisition prices, in addition to basic gross sales and advertising and marketing bills decreased by 19% to RMB 3.5 billion within the second quarter. This lower was in step with the lower in new mortgage gross sales, the commission-based compensation construction.
Of course, the continued optimization of productiveness of our direct gross sales power additionally present us with flexibility in our price construction. Our basic and administrative bills additionally decreased by 4.5% to RMB 762 million within the second quarter from RMB 798 million in the identical interval of 2021, due to our stringent price management measures as common. Our operation and repair bills mildly elevated by 7.1% to RMB 1.6 billion within the second quarter from RMB 1.5 billion a 12 months in the past, primarily as a result of improve of belief plan administration bills, which is in step with the rise in consolidated belief plans. Our credit score impairment losses elevated by 152% to RMB 3.5 billion within the second quarter from RMB 1.4 million a 12 months in the past.
This was primarily pushed by two components. First, the availability and indemnity losses pushed by the elevated danger publicity as we transfer towards a extra balanced proscribing mannequin. As a reference, the corporate bore danger on 21.2% of its excellent stability, up from 11.3% as of June of final 12 months 2021. Secondly, the change in credit score efficiency as a result of affect of COVID-19 outbreak additionally contributed to the rise in credit score and impairment losses.
Our asset impairment losses elevated to RMB 352 million within the second quarter from the RMB 2 million a 12 months in the past, primarily as a consequence of impairment losses of 1 legacy fairness funding in [Inaudible], which is unrelated to our [Inaudible] which we’ve already deliberate to discontinue. Other losses have been RMB 527 million within the second quarter in contrast with different positive aspects of RMB 301 million a 12 months in the past, primarily as a result of international trade losses on our U.S. greenback debt publicity within the second quarter of 2022 as we witnessed an enormous market volatility of U.S. {dollars} and renminbi in April.
As a consequence of [Inaudible] our web revenue decreased by 37.9% to RMB 2.9 billion in the course of the second quarter from RMB 4.7 billion in the identical quarter of 2021. Meanwhile, our fundamental and diluted earnings per ADS in the course of the second quarter have been RMB 1.27 or $0.19, and RMB 1.23 or $0.18 respectively. On the stability sheet aspect. Our stability sheet stays robust and stable with money and financial institution stability elevated to RMB 42.9 billion.
As of June, finish of June 2022, we had a money stability of 42.9 billion in money at financial institution as in contrast with RMB 34.7 billion as of December 2021. In addition, liquid belongings maturing in 9 days or much less amounted to RMB 42.3 billion as of finish of June 2022. As of finish of June 2022, our assured firm’s leverage ratio, leverage occasions is just at 2.03 occasions, whereas regulatory necessities enable us to leverage as much as 10 occasions. All this supplies robust assist for the corporate to stay resilient within the face of financial downturn and continued potential in our dividend payout.
That concludes our ready remarks for in the present day. Operator, we are actually able to take questions.
Questions & Answers:
Operator
Thank you. [Operator instructions] Our first query is coming from Meizhi Yan from UBS. Please proceed together with your query.
Meizhi Yan — UBS — Analyst
Thank you. Thanks for giving me this chance to ask the primary query. My query is on asset high quality. Greg talked about that the stream fee appears to have bottomed out.
And what is the current pattern in July and August? And given the Chinese economic system, it would not appear like it will enhance a lot within the subsequent few months or within the close to time period. What’s your expectation then within the second half of this 12 months for our asset high quality? Thank you.
Y.S. Cho — Co-Chief Executive Officer
OK. So your query about asset high quality, Meizhi. So, we stated, for those who have a look at our C-M3 month-to-month web stream fee, it picked in April at 0.83% and decreased all the way down to 0.61% in June. So we strongly consider the worst time is already over.
However, we perceive the present macroeconomic scenario atmosphere is inferior to again in 2020. So we take very prudent stance. And we anticipate that the return to normalized C-M3 stream fee’s earlier ranges would require a extra prolonged time. And it’d keep at a comparatively excessive degree all through this 12 months.
So we estimate the general asset high quality will stay at present ranges within the second half because it pertains to our credit score impairment price.
Meizhi Yan — UBS — Analyst
Thank you. Can I comply with up a bit?
Y.S. Cho — Co-Chief Executive Officer
Sure, positive. Please go forward.
Meizhi Yan — UBS — Analyst
Yeah. And I perceive that I feel the general market concern has been on the property sector. I do not know in case your — possibly that has something to do with the secured portfolio. I perceive the safe portfolio might be 20% or much less of the full.
But has the property sector scenario impacted your asset high quality at this level?
Y.S. Cho — Co-Chief Executive Officer
Actually, we’ve — we do not see a lot affect from the secured portfolio. It takes about — as of in the present day, it takes about 20% of complete mortgage stability. We have house-secured loans. And then for that mortgage, our APP is just not greater than 70%.
And then — so from the home, the property market, that affect, really we haven’t any [Inaudible] from the secured loans.
Meizhi Yan — UBS — Analyst
OK. Thank you. Thanks very a lot.
Operator
Thank you. Our subsequent query comes from Chiao Huang from Morgan Stanley. Please proceed together with your query.
Chiao Huang — Morgan Stanley — Analyst
Hi, thanks, administration. So I obtained two questions. The first is, how does administration see the present COVID management measures are impacting the underground operation of our direct gross sales? And second query can also be about asset high quality. Just questioning what the — what are the energetic proactive measures we’re taking to defend the asset high quality presently.
Y.S. Cho — Co-Chief Executive Officer
Yeah. Regarding, answering your first query about that, our floor power, the operation, you’re properly conscious we’ve so-called offline/on-line [Inaudible] operational course of. So in the course of the COVID management interval, our clients they don’t have any downside to use for loans by way of on-line app. So we do not see any obstacles in mortgage utility and underwriting procedures throughout — even in the course of the COVID management time.
And then we’re taking fairly many corrective measures to deal with the arising issues on the credit score atmosphere. So we tightened our underwriting coverage very a lot, fairly a lot ranging from final year-end after which repeatedly by way of the primary half this 12 months. And then, because of this, our gross sales quantity really did not improve. But for those who have a look at it, it is principally operated by our stay agent Ping An channel, they decreased a lot.
But for those who have a look at our direct gross sales, I wish to emphasize they nonetheless make constructive development. And then, extra importantly, regardless of we tightened our automation coverage a lot. Actually, their acquisition quantity elevated by virtually 20%, proper, so which — the place signifies market demand remains to be there. So as quickly as we’re prepared, as quickly as we see that the general economic system is popping higher then we consider we’ve sufficient capability to begin our development once more.
Chiao Huang — Morgan Stanley — Analyst
Thank you.
Operator
Thank you. Our subsequent query comes from Yi Wu from Bank of America Security. Please proceed together with your query.
Unknown speaker
Yeah, positive. Thank you. So simply wish to comply with up on that. Since the second quarter lockdown, how do the corporate see the demand from the SME section? And to illustrate if China stays with this zero COVID coverage within the subsequent one to 2 years, will that change your midterm mortgage development goal, proper? Previously, I feel the corporate is on the lookout for usually the double-digit teenagers form of the sustainable development.
If the zero COVID would not change, will that affect your goal? And additionally, is there any like sensitivity evaluation you’ve got finished? Every 1 proportion level change in mortgage origination, how will that affect the online revenue development for the next one, two, three years? Thank you.
Y.S. Cho — Co-Chief Executive Officer
OK. Thanks. Our market demand, I wish to say yet one more time, the general market demand is now involved as a result of, sure, everyone knows that the general market demand on mortgage from SBO section are usually not as robust as earlier than. That’s true as a result of they do not wish to spend money on the enterprise growth right now.
However, we additionally know that our market share is almost about 1%. And then, as I simply talked about, for those who have a look at our acquisition quantity of direct gross sales channel, it elevated [Inaudible] elevated regardless of actually decreased goal market. It elevated by virtually 20% within the first half. So the demand is there.
We haven’t any issues. Anytime we’ve extra consolation on the credit score atmosphere, we will develop after which can ship increased gross sales quantity. And then your query about that, the sensitivity. This is kind of — sure, merely put, for those who have a look at — for those who examine our annual ending mortgage stability, so mortgage stability on the finish of December 31 yearly after which examine that quantity with our new mortgage gross sales in that 12 months, it’s extremely shut, it’s extremely shut.
And then you realize that mortgage stability — common mortgage stability is a key driver of our web margin, web revenue. So 1% gross sales quantity drop, it means roughly 1% stability swap. So assuming there isn’t a unit economics change, it means it is a 1% revenue drop. And different questions?
Greg Gibb — Co-Chief Executive Officer
Yeah. No, I feel simply to comply with up, the factor that I might emphasize is — for those who have a look at, as YS stated, we actually began to tighten credit score form of finish of the third quarter final 12 months after which extra considerably fourth quarter. And then we had the transformation on channels with the change in issues on life. If you quick ahead to in the present day, during the last two quarters we have actually been self-imposing restriction on our development as a result of if we’re not snug with the credit score high quality, what we’re actually doing area by area is chopping out what we view to be the best potential danger clients.
And so for those who have a look at what is going on on in the present day on the bottom, two issues are occurring. One is the brand new clients that we do in areas that we do select are of upper high quality in the present day than they have been six months in the past. So the important thing issue for us is the judgment on timing, proper? We have greater than sufficient funding, we’ve greater than sufficient capital. We have full confidence in our credit score fashions, however we should be snug that the macro atmosphere justifies placing our foot again on the fuel.
And we’ve our foot on the fuel in most likely about two-thirds of the areas in the present day the place we really suppose there hasn’t been as extreme COVID affect and the place we expect the dynamics are proper to take action. But there’s a third of the areas that we’re being very cautious on in the present day. And in order that’s how we’re planning it out. So to your query round if COVID coverage continues for the long run, they’ll proceed to need to be selective on credit score high quality, should proceed to be selective on area.
But if we do have a look at the third quarter now in comparison with the place we have been three months in the past, it’s higher, proper? It is clearly higher from the time of the Shanghai lockdown and surrounding areas. But we’ll proceed to have to have a look at it area by area, quarter by quarter.
Unknown speaker
Thank you very a lot. So on the 12 months 1, 12 months 2 revenue affect, I feel my query was extra about due to the delay, as a result of the income was booked all through the life cycle of the mortgage, so the slowdown this 12 months will most likely have a delayed affect. So how is that unfold impacting subsequent 12 months or 12 months 3 as properly?
Greg Gibb — Co-Chief Executive Officer
Yeah. So, there’s clearly a roll-on impact of this, proper? I imply, for those who add much less to your portfolio this 12 months, then your base for subsequent 12 months will get considerably impacted, that is for positive. But usually, the best way we have a look at this enterprise is on every new mortgage, new economics over a two- to three-year interval. And so if we’re snug with that, it is actually a query of then how a lot do you add 12 months by 12 months or quarter by quarter, after which you’ll be able to actually venture down the highway.
So, there isn’t a query that — you’ll be able to see that our income development by way of the second quarter this 12 months was 3%, and that is due to actions we began to take three quarters in the past, proper? And so, we should be a bit extra prudent in our steerage across the medium time period. But I feel that once we look about form of extra medium to long run, it is actually discovering the correct time to reengage, and then you definately form of know what the trail is from there.
Unknown speaker
Yep. Thank you very a lot.
Operator
Thank you. Our subsequent query comes from Yada Li from CICC. Please proceed together with your query.
Yada Li — CICC — Analyst
Hello, Management. Thanks for taking my query. I’m Yada from CICC, and we’ve two questions for in the present day. The first one is concerning the insurance coverage price.
I’d wish to know what’s the pattern of our insurance coverage price in 2Q ’22 and the right way to view the pattern within the subsequent two quarters. And if the pandemic repeats and once we see the macroeconomic uncertainty intensifies, how can we be sure that we’ve sufficient, the insurance coverage companions to supply the credit score enhancement? And the second is about, we adopted a prudent enterprise growth technique this 12 months, and nevertheless when the enterprise development is just not our major purpose, different modifications to our direct promoting groups by way of teamwork and the right way to management the working price introduced by a big direct promoting workforce at this stage. That’s all. Thank you.
David Choy — Chief Financial Officer
OK. Thank you, Yada. I suppose your first query is concerning the insurance coverage price. Yes, as everyone knows, insurance coverage itself is a danger enterprise.
I do and all of us belief our insurance coverage companion, the power and the know-how to cost danger within the long-term and sustainable perspective. Of course, short-term volatility in credit score danger do exist and it do add volatility in our insurance coverage prices. But I feel in the long run, you get normalized bidding to our enterprise mannequin. What I wish to emphasize is that at Lufax we’ve established fairly an in depth credit score enhancement sharing mechanism with our companions.
Looking at Quarter 2 for instance, we take 22% of danger from our new gross sales and solely lower than 70% of the danger is taken by our insurance coverage companions. Our reliance on property insurance coverage has been decreased to lower than 7%. And second, we do have ample capital to extend our self-guarantee ratio and additional cut back the stress on credit score enhancement or the stress on the use price. And simply to say and emphasize once more, our assure firm’s leverage ratio is just two occasions, however the regulatory requirement can enable us to go as much as 10 occasions.
And we’re presently contemplating to additional improve the self-financing ratio to most likely first, say, within the medium time period and once we really feel timing is acceptable. So, that is my feedback in your first query. And I do not see any difficulty to have our insurance coverage firm companions to proceed to work above as a result of we’re increase this enterprise relationship and partnership for a really, very long-term perspective. The second query I feel is about with the altering of our enterprise growth technique, what sort of modified our VF workforce when it comes to the routine work, and what’s the affect to working prices.
I feel our core responsibility of our VF workforce hasn’t primarily modified in any respect. It nonetheless stays the core for enterprise buyer acquisition, however we are literally including extra context to them in constructing stickiness with our small enterprise proprietor clients and to know extra about them on the danger to assist us higher value our clients. So, we do anticipate them to cooperate with the gathering workforce to speak and construct extra connections between the purchasers. And I feel — I do not suppose it’ll take an excessive amount of time to assist them, and it will not incur extra price as properly.
In phrases of the fee, as you’ll know and as you all know, our price construction could be very versatile. Our commission-based construction permits us to be resilient in robust occasions and have vitality to supply, to gasoline enterprise in good occasions. So, I do not suppose we’ve an additional burden for us for our price, and also you already see a form of fee optimization in price within the first half of this 12 months.
Greg Gibb — Co-Chief Executive Officer
Yes, Yada, I might simply add, on the specifics of the numbers, for those who look, new mortgage gross sales 12 months on 12 months are decreased by about 15%. And then for those who have a look at our direct gross sales headcount, we’re down about 10% from the top of final 12 months. So we — however the discount within the complete gross sales power is coming principally from elimination of a center layer of administration. So our precise variety of frontline folks haven’t decreased by that a lot, which fits again to the purpose that Y.S.
has made, which is the full quantity of recent mortgage development from VF has really elevated 12 months on 12 months for the primary half. So whereas we have optimized the construction of the gross sales power, what they do hasn’t modified, however their productiveness has really been bettering whereas, we have maintained an total headcount management by way of the best way we deploy these sources. If you really look by way of the second quarter, gross sales and advertising and marketing bills are optimized versus a 12 months in the past by about 19%. So because the volumes change, we’re adjusting our bills accordingly.
And so, I feel we’re in a fairly good positioning for our total price optimization. And the one difficulty that we’ve to take care of, I feel, within the subsequent two quarters is our insurance coverage companions the place there’s greater than sufficient capability will value up due to the modifications within the first half. But that is one thing that is rolling on a quarterly foundation. So as the danger flows by way of, as we transfer in towards subsequent 12 months, then there shall be repricing once more.
So total, we have been exhibiting fairly a little bit of flexibility on that entrance.
Operator
Thank you. I’ll now hand over the time to administration workforce for closing remarks.
Unknown speaker
OK. So, this concludes our second earnings convention name. And thanks all for attending this name. Thank you.
Operator
[Operator signoff]
Duration: 0 minutes
Call contributors:
Unknown speaker
Y.S. Cho — Co-Chief Executive Officer
Greg Gibb — Co-Chief Executive Officer
David Choy — Chief Financial Officer
Meizhi Yan — UBS — Analyst
Chiao Huang — Morgan Stanley — Analyst
Yada Li — CICC — Analyst
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