CNFinance Holdings Limited — FY2021 Form 20-F
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing; the filing does not provide a clear standalone Q4 income statement. Financial statements are prepared under U.S. GAAP and presented primarily in RMB.
Business context
CNFinance provides home-equity loan facilitation and servicing to micro- and small-enterprise owners in China. Most lending is funded through trust-company partners, with the company consolidating the trust plans in its financial statements. In 2021, 99.8% of reported home-equity loan originations used the trust lending model. The company also introduced a small commercial-bank partnership channel, under which it remains exposed to default risk through repurchase obligations.
Key financial and operating metrics
| Metric | FY2021 | FY2020 |
|---|---|---|
| Total operating income | RMB196.5 million | RMB887.9 million |
| Net income | RMB65.2 million | RMB114.9 million |
| Net interest and fees income after sales-partner collaboration costs | RMB581.0 million | RMB698.4 million |
| Operating expenses | RMB380.9 million | RMB447.7 million |
| Net cash provided by operating activities | RMB689.7 million | RMB1,119.6 million |
| Net cash used in investing activities | RMB2,350.6 million | Net cash provided: RMB524.1 million |
| Net cash provided by/(used in) financing activities | RMB1,932.6 million | Net cash used: RMB1,367.1 million |
| Cash, cash equivalents and restricted cash at year-end | RMB2,231.4 million | RMB1,960.9 million |
| Total assets / total liabilities / shareholders’ equity | RMB14,386.2 million / RMB10,567.9 million / RMB3,818.3 million | RMB12,233.5 million / RMB8,492.2 million / RMB3,741.3 million |
| Interest-bearing borrowings | RMB8,087.1 million | RMB6,158.2 million |
| Leverage ratio (assets to equity) | 3.8x | 3.3x |
Year-end cash includes RMB1,515.8 million held in restricted trust-plan accounts and unavailable for general liquidity needs. Management said current cash and anticipated financing cash flows should meet working-capital and capital-expenditure needs for at least 12 months.
Home-equity originations rose approximately 45% to RMB12.8 billion; borrowers served increased 24.6% to 22,060. The weighted-average effective interest rate declined to 16.5% from 17.3%, and average loan tenor shortened to 15 months from 24 months. The company reported a 57.9% average LTV ratio for 2021.
For loans including loans held for sale, year-end delinquency was 24.11% (22.63% in 2020), NPL ratio was 9.42% (11.66%), allowance ratio was 11.91% (6.80%), and NPL provision coverage was 126.49% (58.44%). Excluding loans held for sale, the reported NPL ratio was 2.13% and delinquency ratio 16.17%; these measures have a materially different scope.
Changes, unusual items and management commentary
- Total operating income fell 77.9% and net income fell 43.3% year over year, despite higher originations. Management cited lower loan pricing, higher funding costs, sales-partner incentives and a large loss on loan sales.
- Net losses on loan sales were RMB450.7 million in 2021, compared with gains of RMB149.6 million in 2020. The company attributed the 2021 loss primarily to bulk transfers in Q4 of legacy, mostly long-delinquent loans under the traditional facilitation model. Transferred loans had carrying amounts totaling RMB2,466.2 million for the year.
- Provision for credit losses was a reversal of RMB278.2 million in 2021, versus an expense of RMB277.6 million in 2020. The reversal reflected allowance releases on bulk loan transfers, partly offset by CECL estimates incorporating continued COVID-19 effects. The year-end allowance balance nevertheless increased to RMB975.9 million.
- Interest and financing-service-fee income declined 3.2%; interest expense rose 6.1%, reflecting higher borrowing balances and trust funding costs. The company said it lowered loan rates in response to regulatory developments around private-lending rate limits, although it does not believe those limits directly apply to its trust-facilitation model.
- Operating cash flow declined year over year. Investing cash use was driven in part by loan originations and purchases of investment securities; financing cash flow turned positive as borrowing proceeds exceeded repayments.
- Management cited COVID-19 and 2021 Delta outbreaks as disrupting site visits, borrower acquisition, collections and other offline work, while also weakening some borrowers’ repayment capacity. The filing does not provide financial guidance. Management reported no other trends reasonably likely to have a material adverse effect beyond those disclosed.
Outlook, risks and contingencies
- Credit and collateral: Delinquency increased, loans are concentrated in real-property collateral, and 60.5% of 2021 originations were secured by second liens. Foreclosure may be lengthy or uncertain. The commercial-bank channel also leaves CNFinance ultimately responsible for repurchasing defaulted loans.
- Funding and leverage: Trust plans funded 99.8% of reported 2021 originations, and FOTIC funded 62.1% of trust-model originations. Higher leverage and reliance on partner funding could constrain liquidity or increase financing costs.
- China regulatory and cross-border exposure: The filing discusses uncertainty around overseas-listing filings and approvals, cybersecurity and personal-information rules, credit reporting, financial marketing, lending and credit-enhancement arrangements, and the ability to move cash from PRC subsidiaries offshore. The 2021 overseas-listing rules cited were drafts as of the filing date.
- Audit and controls: KPMG issued an unqualified opinion on the financial statements. Management concluded internal control over financial reporting and disclosure controls were ineffective as of year-end due to a material weakness involving insufficient U.S. GAAP/SEC-reporting expertise and inadequate accounting policies. The auditor did not attest to internal-control effectiveness. The company also disclosed that the PCAOB could not inspect its China-based auditor, creating HFCAA delisting risk.
- Legal matters: The company reported 1,032 borrower-collection proceedings pending at year-end, with RMB527.9 million in dispute; it said it was not party to material legal or administrative proceedings. It also identified potential regulatory and licensing challenges to its credit-strengthening and sales-partner models.
- Other investor considerations: The company said it was likely a PFIC for U.S. tax purposes in 2021 and likely to remain so. It does not expect to pay dividends in the foreseeable future. A share-repurchase authorization of up to US$20 million was announced in March 2022, after year-end, and was not fully consummated as of the report date.
Important facts for investors to verify
- Reconcile the RMB450.7 million loan-sale loss, transferred loan balances and proceeds, including the Q4 legacy-portfolio disposal and its effect on future credit costs.
- Confirm the composition and availability of year-end cash, especially the restricted RMB1,515.8 million, and the maturity, rate and terms of RMB8.1 billion in borrowings.
- Assess credit quality using consistent definitions and loan populations: delinquency and NPL measures including versus excluding loans held for sale, allowance coverage, and recoveries after bulk sales.
- Monitor funding concentration, trust-partner continuity, structural leverage requirements, and the company’s exposure to defaults under credit-strengthening, CRMP and commercial-bank arrangements.
- Track remediation of the material weakness, any PCAOB inspection access, and developments in PRC listing, cybersecurity, data and lending regulation.
- Review the audited financial statements and notes for trust-plan consolidation, guarantee assets and liabilities, and the assumptions underlying CECL allowances and loan-sale accounting.