When a company reports a sudden shift from profit to loss, investors naturally question its prospects. LexinFintech Holdings' latest Q1 earnings presented such concerning data at first glance. However, beneath the surface lies the impact of new accounting standards and extraordinary pandemic provisions that obscure the company's true growth trajectory.
Financial Overview: Challenges Amid Transformation
Lexin reported its first earnings under the ASC 326 accounting standard ("Financial Instruments—Credit Losses"), showing 2.5 billion yuan ($350 million) in revenue—a 40.9% year-over-year increase. However, the company posted a 678 million yuan ($95 million) non-GAAP net loss compared to a 460 million yuan profit in Q1 2019.
This apparent reversal stems primarily from two factors: the new accounting treatment of loan loss provisions and Lexin's decision to set aside 900 million yuan ($126 million) as special pandemic reserves. These technical adjustments created paper losses rather than operational deterioration.
The ASC 326 Effect: Changing How Provisions Flow Through Financials
The key difference between old and new standards lies in how loan loss provisions are recorded. As a credit facilitator connecting borrowers with licensed lenders, Lexin traditionally set aside reserves to cover potential defaults—deducting these amounts from revenue recognition.
Under ASC 326, these provisions now flow through both revenue and expense lines simultaneously. The company records the full loan facilitation fee as revenue (including reserves previously deducted) while immediately expensing the estimated default costs. This creates timing mismatches where expenses precede related revenue recognition.
For Q1, this accounting shift added approximately 680 million yuan ($95 million) to reported revenue while creating corresponding expense charges.
Revenue Composition: Financial Services Drive Growth
Lexin's revenue structure reveals strategic shifts. While direct sales declined 22.5% year-over-year to 530 million yuan ($74 million) due to pandemic impacts, financial services revenue surged 80.2% to 1.97 billion yuan ($276 million)—confirming this segment as the core growth engine.
The company also absorbed 340 million yuan ($48 million) in waived fees and interest to support pandemic-affected users and merchants, demonstrating corporate responsibility while temporarily reducing income.
Cost Structure: Accelerated Bad Debt Recognition
ASC 326's most significant impact appears on the cost side. Whereas previous standards amortized bad debt expenses over loan terms, the new rules require upfront recognition of estimated lifetime losses when loans originate. This front-loads expenses while spreading related revenue recognition, creating temporary profitability pressure.
Lexin CFO Yan Zeng noted: "The combined effect of accounting standard transition and COVID-19's global economic impact created approximately 900 million yuan ($126 million) in negative profit impact this quarter."
Pandemic Provisions: Prudence in Uncertain Times
Lexin's 900 million yuan pandemic reserve reflects conservative risk management amid unprecedented uncertainty. These provisions serve as buffers against potential future defaults, with any unused amounts eventually flowing back to profits if actual losses prove smaller than estimated.
Operational Metrics: User Growth Offsets Strategic Pullback
The company facilitated 34.1 billion yuan ($4.8 billion) in loans—a 69.7% annual increase—while ending-quarter loan balances grew 67.1% to 58.5 billion yuan ($8.2 billion). However, both metrics declined sequentially as Lexin prioritized asset quality over expansion.
User metrics remained robust, with registered users reaching 84.2 million (up 99.7% year-over-year) and credit-approved users hitting 20.7 million (up 78.9%).
Long-Term Perspective: Timing Differences Don't Affect Lifetime Profitability
While ASC 326 creates temporary profitability distortions, Lexin emphasizes these are timing differences that net out over loans' entire lifecycle. The company maintains its fundamental earnings power remains intact.
Strategic Positioning: Navigating Post-Pandemic Recovery
As China's economy recovers, Lexin reports improving asset quality—with first-payment default rates declining to 2.77% (pre-pandemic levels). The company's recent inclusion in the central bank's credit reporting system should further strengthen risk management by deterring deliberate defaults.
Lexin's offline consumption financing business grew 1,239% year-over-year to 9.3 billion yuan ($1.3 billion), with sequential growth continuing into Q2 (17.8% month-over-month in May). Its "Le Card" membership program—now integrated with Tencent Music and Pinduoduo—shows particular promise, with users spending 52% more frequently than non-members.
CEO Jay Wenjie Xiao projects Q2 loan facilitation exceeding 38 billion yuan ($5.3 billion)—46% annual growth—with a return to profitability and confidence in achieving full-year targets of 170-180 billion yuan ($24-25 billion).
Through accounting transitions and pandemic challenges, Lexin appears positioned to emerge stronger—having balanced prudent risk management with strategic investments in growth areas.