On Monday, X Financial (NYSE:XYF) discussed second-quarter financial results during its earnings call. The full transcript is provided below.

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Summary

XYF's loan origination in Q2 2026 declined significantly by 70.2% year over year and 20.5% sequentially, focusing on higher quality borrowers and maintaining balance sheet strength.

Total net revenue decreased by 56.3% year over year to RMB 993.6 million, with a sequential decline of 15.5% due to lower loan volumes but partially offset by higher guarantee income.

Operating costs were reduced by 22.9% sequentially, and credit-related provisions decreased, reflecting improved credit conditions and tighter underwriting standards.

Net income for the quarter was RMB 47 million, down substantially from the previous year but up 23.8% from Q1 2026, indicating positive sequential improvement.

The company did not provide quantitative guidance for Q3 due to uncertain market conditions and remains focused on capital preservation and disciplined origination.

XYF continues its share repurchase program, with US$35.5 million remaining under the existing US$100 million program, and announced a cash dividend of US$0.28 per ADS.

Management highlighted a cautious approach to credit, improvements in delinquency rates, and a strong balance sheet with ample liquidity.

The company is exploring new revenue sources and operational efficiencies but remains cautious due to the challenging regulatory environment.

Full Transcript

OPERATOR

Good day, and welcome to the XYF second quarter 2026 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded.

I would now like to turn the conference over to Victoria Yu. Please go ahead.

Victoria Yu, Investor Relations

Thank you, operator. Hello, everyone, and thank you for joining today's call. Our financial results for the second quarter ended June 30, 2026 were released earlier today and are available on the Company's Investor Relations website ir.xiaoyinggroup.com. On the call today from XYF: Mr. Ken Li, President; Mr. Frank Fuyazheng, Chief Financial Officer; and Mr. Noah Kaufman, Chief Financial Strategy Officer. Mr. Li will begin with an overview of our business performance and the key operational developments.

Mr. Kaufman will then review the second quarter financial performance, followed by Mr. Jiang who will cover the detailed financial results, capital position and outlook. After the prepared remarks, Mr. Li, Mr. Jiang and Mr. Kaufman will be available to answer your questions during the Q&A session. I remind you that this call may contain forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such statements are based on management's current expectations and involve known or unknown risks, uncertainties and other factors. These factors are difficult to predict and many are beyond the Company's control, which may cause actual results, performance and achievements to differ materially from those described in these statements. Further information on these and other risks can be found in our SEC filings. The Company undertakes no obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required by law.

It is my pleasure to introduce Mr. Ken Li.

Ken Li, President

Thank you, Victoria, and hello everyone. In the second quarter of 2026, we maintained the disciplined operating posture that has defined our approach over the past several years. Conditions remain challenging, and we continue to place credit quality, liquidity and balance sheet strength ahead of near-term origination volume. During the quarter, we facilitated and originated RMB 11.63 billion in loans, a decline of 70.2% year over year and 20.5% sequentially from the first quarter.

The pace of contraction moderated meaningfully from the first quarter, consistent with our measured approach to origination in the current environment. Operationally, we continue to concentrate origination in our internally operated channels, where borrower quality and unit economics are strongest. Underwriting criteria for newer vintages were refined further. Automation was extended across servicing and collections, and discretionary spending remained tightly controlled.

The average loan amount per transaction rose to RMB 12,712, up 8.3% from the prior quarter and 21.3% year over year, reflecting the shift in transaction mix toward higher quality borrowers. From a volume standpoint, we served approximately 720,258 active borrowers in the quarter, down 74.8% year over year and 24.7% from the prior quarter. We facilitated approximately 0.91 million loans during the period. Outstanding loan balance at the quarter end stood at RMB 24.97 billion, a decline of 61.5% from the same period of 2025 and 29.2% from the end of the first quarter.

Credit trends showed encouraging sequential improvement in the second quarter, although overall conditions remain challenging. As of June 30th, our 31 to 60 day delinquency rate was 1.73%, compared with 2.61% at the end of Q1 2026 and 1.16% as of the same period of 2025. Our 91 to 180 day delinquency rate improved to 9.09%, compared with 9.95% at the end of Q1 2026 and 2.91% as of the same period of 2025. Both rates improved from the prior quarter, the first sequential improvement we have recorded in several quarters, which we attribute to the tighter underwriting standards applied to recent vintages and the additional resources deployed in collections.

That said, growth rates remained well above prior year levels, and the 91 to 180 day delinquency rate in particular remained elevated as earlier delinquency balances continue to season through the portfolio. We are not declaring victory on credit. We are maintaining the same conservative stance until the improvement proves durable. With that, I'll turn the call over to Noah, who will take you through the financial results for the second quarter.

Noah Kaufman, Chief Financial Strategy Officer

Thank you, Ken. Hello everyone. It's great to speak with you again. Ken covered the operational and credit developments, so I'll take you through the financial performance for the second quarter. In the second quarter of 2026, total net revenue was RMB 993.6 million, or US$146.4 million, representing a 56.3% decline year over year and a 15.5% decline sequentially from Q1 2026. The year-over-year decline primarily reflects substantially lower loan facilitation volumes, partially offset by higher guarantee income.

Total operating costs and expenses came in at RMB 798.6 million, or US$117.7 million, down 22.9% sequentially and 50% year over year. Borrower acquisition and marketing expense was RMB 149.5 million, or US$22 million, down from RMB 219.8 million in the first quarter and RMB 756.3 million in the same period last year, as we continued to prioritize capital efficiency over volume growth. Aggregate credit-related provisions were RMB 183.1 million, or US$27 million, down sequentially from RMB 282.9 million in the first quarter and 36.4% below the same period last year.

Within that, the provision for contingent guarantee liabilities declined to RMB 57.6 million, with a guaranteed loan portfolio broadly unchanged from both comparison periods. The decrease primarily reflected the reversal of a portion of provisions recognized in prior periods as the loan loss rate declined during the quarter. Provision for credit losses for deposits and other financial assets increased to RMB 95.3 million. Income from operations was RMB 194.9 million, or US$28.7 million, a 71.1% decrease year over year, but an increase of 38.6% sequentially.

Operating margin improved to 19.6%, up from 12% in the first quarter, though still below the 29.7% recorded in the prior year period. Income before income taxes was RMB 220 million, or US$32.4 million. Net income was RMB 47 million, or US$6.9 million in the second quarter, compared with RMB 37.9 million in Q1 2026 and RMB 528 million in the same period last year, with income tax expense and investment-related items below the operating line accounting for the difference from pre-tax income.

Net profit margin was 4.7%, compared with 3.2% in the prior quarter and 23.2% a year ago. Return on equity was 2.4% for the quarter, reflecting the reduced earnings base. Taken together, the second quarter represents a second consecutive quarter of sequential improvement in operating performance. Revenue is still finding its floor, but margins, provisions and net income all moved in the right direction. On the regulatory front, the environment continued to evolve during the quarter.

We are monitoring developments closely and have nothing new to report beyond the disclosure in our 6-K. With that, I'll hand things over to Frank to take you through the detailed results, per ADS metrics, non-GAAP adjustments and the balance sheet. Go ahead, Frank.

Frank Fuyazheng, Chief Financial Officer

Thank you, Noah, and hello everyone. I will walk through the key financial highlights for the second quarter and then cover the balance sheet, capital returns and our outlook. Please note that all numbers stated are in RMB. Full details are available in the 6-K filed with the SEC. Financial results: Total net revenue for the second quarter was approximately RMB 994 million, down around 56% from the same period last year and about 16% from the prior quarter.

The decline continues to reflect the deliberate reduction in origination activity we have been pursuing, partially offset by growth in guarantee income. Net income for the quarter was RMB 47 million, up 23.8% from RMB 38 million in the first quarter and down substantially from RMB 528 million in the same period last year. Non-GAAP adjusted net income was RMB 166 million, up 104.3% sequentially and down 72% year over year. We view the sequential improvement in both measures as an early indication that our credit and cost actions are taking hold.

On a per ADS basis, basic earnings were 1.26 RMB cents, compared with 0.96 RMB in the prior quarter and 12.6 RMB a year ago. Non-GAAP adjusted basic earnings per ADS were 4.44 RMB, or US$0.65. Revenue mix across our business lines: Loan facilitation service fees declined 85.5% year over year to RMB 199 million, in line with lower origination volumes. Post-origination service fees decreased 41.2% to RMB 160 million, consistent with the smaller outstanding portfolio.

Guarantee income more than doubled year over year to RMB 225 million, reflecting continued recognition of revenue from our existing guaranteed loan portfolio. Financing income was RMB 278 million, down 13.2%. For the full breakdown by line item, please refer to the 6-K. Balance sheet and liquidity: Our balance sheet remains strongly capitalized. At the end of the quarter, total assets were approximately RMB 12.1 billion and shareholders' equity was approximately RMB 7.8 billion, giving us an equity-to-asset ratio of approximately 64%, up from around 57% at the end of the first quarter.

Total cash, including restricted cash, was approximately RMB 2 billion. Liquidity remains ample for the current environment. Capital return to shareholders: We continue to repurchase shares. During the period from January 1, 2026 through 14, we repurchased approximately 2.63 million ADS for total consideration of approximately US$12.49 million. We have approximately US$35.5 million remaining under the existing US$100 million program, which runs through November 30, 2026.

Returning capital to shareholders remains an important part of our capital allocation framework. Dividend update: As a part of our seventh annual dividend policy, the Board has approved a cash dividend of US$0.28 per ADS, which is equivalent to approximately US$0.0467 per ordinary share. Shareholders of record as of September 10, 2026 will be entitled to receive the dividend, and the payments are expected to be distributed on or around September 28, 2026.

ADS holders will receive their dividend payments through our depository at The Bank of New York Mellon shortly thereafter, with timing subject to brokerage processing. Business outlook: Turning to the outlook, given the material uncertainties in the current operating environment, we are not providing quantitative guidance for the third quarter at this time. Our priorities are unchanged: capital preservation, disciplined origination, rigorous cost control and protecting the balance sheet.

We will resume providing guidance when visibility improves. That concludes our prepared remarks, and we will now take questions. Operator, please go ahead.

OPERATOR

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Brian Garden with Warburg Asset Management.

Please go ahead.

Brian Garden, Analyst at Warburg Asset Management

Good morning. I'm very pleased to see that the results have been improving in the last quarter. My question is quite a broad one. I'm a relatively new shareholder to the company. I want to understand, theoretically, why this company is publicly traded. Given that tangible book value is over US$20 per ADS, why don't you just take this company private?

Ken Li, President

Let me try to answer that question. I think a previous investor asked a similar question before. In China, you know, being a listed company is kind of a privilege and a special status. If we privatize, we might lose the opportunity, you know, for current business to be listed again. Because if you want—if a China-based company tries to be listed overseas, you need to get approved from the government, and based on our current industry situation, as long as for our industry it is not going to be listed.

So that probably is the main reason you will rarely see Chinese listed companies in the U.S. go private. Many years ago some companies did this kind of thing and they are trying to, you know, change the venue and try to be listed in Hong Kong or in China. But in general everyone still, you know, prioritizes or prefers to be listed in the U.S. That's why.

Brian Garden, Analyst at Warburg Asset Management

Given that there's such a large gap, what's going to be your process for maybe returning more cash to shareholders or driving the company towards a much higher valuation that's much more close to, say, U.S.-style valuations?

Ken Li, President

U.S. compared with U.S. valuation is probably kind of a—based on the current business and the current regulation environment—and I think the best way for us and also for investors is that we find new revenue sources, basically re-engineer the company to, you know, other than facilitation business as we are. That probably is the best way currently, and we are, you know, doing the best we can. And, you know, basically based on the very low volume right now, we are doing the almost maximum buyback in the normal buyback rules and still preserve enough capital to explore, you know, new business opportunity, even though those new venture opportunities are far not very clear at this point.

Brian Garden, Analyst at Warburg Asset Management

Right, thank you very much, appreciate it.

Noah Kaufman, Chief Financial Strategy Officer

Yeah, Brian, this is Noah Kaufman. Yeah, just to add kind of to what Frank was saying, you know, so we have had two consecutive quarters of sequential credit improvements, and so the credit metrics at least over the last couple of quarters have moved a bit in the right direction, and the cost base is also getting a bit leaner. So I think certainly what Frank says is true: going private is sort of like a one-way door, and so coming back in the public market, especially as a Chinese-headquartered fintech, is very difficult.

And so I think with a couple quarters kind of moving in the right direction, we're very focused on what are the operational efficiencies that we can add, obviously as APRs have come down, and then beyond that what are areas of organic growth. And certainly with the strength of the balance sheet, you know we have the ability that, you know, as the loan book comes down, cash is freed up. So certainly we have the ability to continue to pay quite a healthy dividend.

But I think, you know, on the back of maybe we'll call it like a really rough year, we're not, you know, quite ready to throw in the towel. You know, I think things are going in a little bit better direction and, you know, we're obviously watching it. Thanks, Brian.

OPERATOR

As a reminder, if you would like to ask a question, please press star then one to join the question queue. The next question comes from Kenning Zhao with Norton Andrews. Please go ahead.

Kenning Zhao, Analyst at Norton Andrews

Hi. Thanks for taking my call from Norton Andrews. My first question is that there's a significant decrease in provision for contingent guarantee liabilities, down from like 200 million in the first half in 2025 to 57 million this half year. I see there's a significant decreasing loan balance—outstanding loan balance—but the delinquency rate has jumped as well. So I wonder, why did you make such adjustment? Like, is there from some evidence from the most recent linkages?

Yeah, that's my first question.

Noah Kaufman, Chief Financial Strategy Officer

Hi, Kenning, this is Noah. Thanks for your question. Yeah, the main driver is the loss rate assumption. So the guaranteed portfolio itself was, you know, broadly unchanged against both the comparison periods, so I don't believe it's a size effect. And what moved in our estimate was the average loss rate on the book, which came down during the quarter. And because a portion of that we'd reserved in prior periods was no longer required at that level, we reversed it.

So that reversal is what makes the line look as low as it does, so I'd treat it that way rather than as a new lower run rate for the provision. On your second point, you're right that the two things sit somewhat uncomfortably next to one another. And the distinction that I draw is between the stock and the flow. So the elevated delinquencies that you're seeing are concentrated in older paper that's seasoning through the portfolio—that's the roughly 91 to 180 bucket—and it's still, you know, very high.

Whereas the recent vintages, originated under materially tighter criteria, are performing better than what preceded them. And so both delinquency buckets improved sequentially for the first time in several quarters. So the reserve reflects where we think losses on the book are, and where it's composed of today, which is increasingly newer vintages rather than the old book as it looked a year ago. Did you have a second question?

Kenning Zhao, Analyst at Norton Andrews

Yes, if I may. There's another item: provision for credit losses for deposits and other financial assets. It wasn't material before, but it jumped—it's quite big now. It's like 95 million, I think. 95 million RMB from only like 700,000 before. May I ask what's in that item?

Frank Fuyazheng, Chief Financial Officer

Oh, that involved one funding institution from the comprehensive income. Yeah. It's involved with one funding institution, and the business we are in is already, you know, basically gone unfinished, and they haven't returned, you know, our guarantee money yet. So, you know, that guarantee money is kind of in arrears. So it doesn't mean it will eventually not return to us, but I think for whatever reason, you know, it's behind schedule, and so we took cautious—accounting-wise—to write them off at this time.

That's about it. So it only involves one institution funding item.

Kenning Zhao, Analyst at Norton Andrews

Right, I understand. Okay, thank you. If I may, one more question, but actually quite similar to the previous one: if you have any further capital return plans apart from the existing ones, given the current market.

Frank Fuyazheng, Chief Financial Officer

At this point we are doing all we can under the normal buyback circumstances and rules. We don't have, at this time, particular, you know, buyback or prioritization plans at this moment.

Kenning Zhao, Analyst at Norton Andrews

Right. Thank you. Thank you very much.

OPERATOR

This concludes our question and answer session. I would like to turn the conference back over to Victoria Yu for any closing remarks.

Victoria Yu, Investor Relations

Okay, thank you everyone for joining us today. If you have additional questions, please reach out to our Investor Relations team directly. We appreciate your interest and look forward to speaking with you again soon. Operator, back to you.

OPERATOR

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.