Lufax Narrowed Its Loss 86% – Was the Improvement Mostly Tax-Driven?

Lufax Holding Ltd (NYSE:LU) recently reported a significant reduction in its second-quarter net loss, with the figure plummeting by 86.2% to RMB82 million from RMB594 million in the same period last year. However, the improvement in the company’s financials was largely driven by a favorable tax comparison, with pretax profit declining to RMB30 million from RMB266 million.

Total income decreased by 15.5% to RMB6.23 billion, while total expenses declined by 12.7%. The company’s operating costs excluding credit impairments, finance costs, and other gains or losses fell by 27.5%. Despite these positive developments, Lufax Holding Ltd (NYSE:LU) remained loss-making, and its first-half net loss widened by 33.7% to RMB694 million.

Bull Case: Lufax Holding Ltd (NYSE:LU) Is Building Consumer-Finance Momentum

One of the key drivers of Lufax Holding Ltd (NYSE:LU)’s growth is its consumer-finance business, which saw a 27.6% rise in originations to RMB36.9 billion. The outstanding consumer-finance balance grew by 19.9% to RMB65.4 billion, making it the clearest source of expansion within a shrinking overall portfolio.

The company’s asset-quality indicators also improved sequentially, with the C-M3 flow rate declining to 1.0% from 1.2% and the DPD 30+ delinquency rate falling to 5.8% from 6.1%. The consumer-finance nonperforming-loan ratio decreased to 1.3% from 1.4%.

Bear Case: Lufax Holding Ltd (NYSE:LU) Has Not Yet Improved Pretax Profitability

Despite the company’s growth in consumer-finance, total income and pretax profit both declined. The outstanding loan balance fell by 13.5% to RMB167.3 billion, and management noted that credit costs remained elevated. Second-quarter impairment losses decreased by 3.2%, while the June-end loan balance was 13.5% lower than a year earlier.

Lufax Holding Ltd’s (NYSE:LU) risk-bearing share of the outstanding portfolio increased to 93.2% from 83.7%. Because the overall loan book contracted, the approximate absolute risk-bearing balance declined from RMB161.9 billion to RMB155.9 billion. The company is therefore assuming a greater proportion of risk on a smaller portfolio.

Late-stage credit performance also remained mixed, with the DPD 90+ delinquency rate for loans excluding consumer finance increasing to 3.7% from 3.4%. Lufax Holding Ltd (NYSE:LU) declined to declare a semiannual dividend because it remained loss-making during the first half.