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Financial Instruments And Risks | 12 Months Ended
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Dec. 31, 2022
Financial Instruments And Risks [Abstract] |
Financial instruments and risks |
4 | Financial instruments and risks
The Group’s activities expose it to a variety of market risks (comprising foreign currency risk and interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. Risk management is carried out by the senior management of the Group.
4.1 | Financial risk factors
4.1.1 | Market risk
Market risk is the risk of changes in fair value of financial instruments and future cash flows from fluctuation of market prices, which includes two types of risks from volatility of foreign exchange rates (foreign currency risk), and market interest rates (interest rate risk).
(a) | Foreign currency risk
Foreign currency risk is the risk of loss resulting from changes in foreign currency exchange rates. Fluctuations in exchange rates between the RMB and other currencies in which the Group conducts business may affect its financial position and results of operations. The foreign currency risk assumed by the Group mainly comes from movements in the USD/RMB exchange rates. The Company and major overseas intermediate holding companies’ functional currency is USD. They are mainly exposed to foreign exchange risk arising from their cash and cash equivalents and loans to subsidiaries denominated in RMB. The Group has entered into spot-forward USD/RMB currency swaps to manage its exposure to foreign currency risk arising from loans to subsidiaries dominated in RMB. The subsidiaries of the Group are mainly operating in mainland China with most of the transactions denominated in RMB. The Group considers that business in mainland China is not exposed to any significant foreign exchange risk as there are no significant financial assets or liabilities of these subsidiaries denominated in the currencies other than RMB. The table below illustrates the impact of an appreciation or depreciation of RMB spot and forward rates against USD by 5% on the Group’s profit before income tax expenses.
|  | As of December 31, |
|  | 2021 |  |  | 2022 |
|  | RMB’000 |  |  | RMB’000 |
5% appreciation of RMB |  |  | 699,049 |  |  |  | (124,798 | )
5% depreciation of RMB |  |  | (699,049 | ) |  |  | 124,798 |
(b) | Interest rate risk
Interest rate risk is the risk that the fair value/future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Interest on floating rate instruments is repriced at intervals of one year or less. Interest on fixed interest rate instruments is priced at inception of the financial instruments and is fixed until maturity. Floating rate instruments expose the Group to cash flow interest rate risk, whereas fixed rate instruments expose the Group to fair value interest risk. The Group’s interest rate risk mainly arises from fixed rate instruments including cash at bank, accounts and other receivables and contract assets, loans to customers, accounts and other payables and contract liabilities, etc. The Group’s interest rate risk policy requires it to manage interest rate risk by managing the maturities of interest-bearing financial assets and interest-bearing financial liabilities. The following table sets out the Group’s financial assets and financial liabilities exposed to interest rate risk by repricing date, contractual maturity date or expected maturity date (whichever is the earlier):
|  | As of December 31, 2021 |
|  | Less than 3 months |  |  | 3 months to 1 year |  |  | 1-2 years |  |  | 2-3 years |  |  | More than 3 years |  |  | Overdue |  |  | No interest |  |  | Total |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash at bank |  |  | 29,263,128 |  |  |  | 70,579 |  |  |  | 363,691 |  |  |  | 1,538,551 |  |  |  | 3,507,239 |  |  |  | — |  |  |  | — |  |  |  | 34,743,188 |
Restricted cash |  |  | 27,792,006 |  |  |  | 554,499 |  |  |  | 1,786,219 |  |  |  | 306,371 |  |  |  | 14,444 |  |  |  | — |  |  |  | — |  |  |  | 30,453,539 |
Financial assets at fair value through profit or loss |  |  | 12,544,935 |  |  |  | 3,459,334 |  |  |  | 919,458 |  |  |  | 262,969 |  |  |  | — |  |  |  | 1,164,095 |  |  |  | 12,672,420 |  |  |  | 31,023,211 |
Financial assets at amortized cost |  |  | 1,168,502 |  |  |  | 500,740 |  |  |  | 920,815 |  |  |  | 107,676 |  |  |  | — |  |  |  | 1,086,880 |  |  |  | — |  |  |  | 3,784,613 |
Financial assets purchased under reverse repurchase agreements |  |  | 5,527,177 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 5,527,177 |
Accounts and other receivables and contract assets |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 22,344,773 |  |  |  | 22,344,773 |
Loans to customers |  |  | 51,563,466 |  |  |  | 98,295,888 |  |  |  | 51,345,667 |  |  |  | 11,182,096 |  |  |  | 1,002 |  |  |  | 2,583,991 |  |  |  | — |  |  |  | 214,972,110 |
Total financial assets |  |  | 127,859,214 |  |  |  | 102,881,040 |  |  |  | 55,335,850 |  |  |  | 13,397,663 |  |  |  | 3,522,685 |  |  |  | 4,834,966 |  |  |  | 35,017,193 |  |  |  | 342,848,611 |
|  | As of December 31, 2021 |
|  | Less than 3 months |  |  | 3 months to 1 year |  |  | 1-2 years |  |  | 2-3 years |  |  | More than 3 years |  |  | Overdue |  |  | No interest |  |  | Total |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Payable to platform investors |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,747,891 |  |  |  | 2,747,891 |
Borrowings |  |  | 13,074,069 |  |  |  | 12,853,348 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 25,927,417 |
Accounts and other payables and contract liabilities |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 8,814,255 |  |  |  | 8,814,255 |
Payable to investors of consolidated structured entities |  |  | 46,086,474 |  |  |  | 95,848,045 |  |  |  | 48,048,309 |  |  |  | 5,463,312 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 195,446,140 |
Financing guarantee liabilities |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,697,109 |  |  |  | 2,697,109 |
Lease liabilities |  |  | 141,719 |  |  |  | 322,317 |  |  |  | 238,250 |  |  |  | 83,166 |  |  |  | 9,092 |  |  |  | — |  |  |  | — |  |  |  | 794,544 |
Convertible promissory note payable |  |  | — |  |  |  | — |  |  |  | 10,669,498 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 10,669,498 |
Optionally convertible promissory notes |  |  | — |  |  |  | — |  |  |  | 7,405,103 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 7,405,103 |
Total financial liabilities |  |  | 59,302,262 |  |  |  | 109,023,710 |  |  |  | 66,361,160 |  |  |  | 5,546,478 |  |  |  | 9,092 |  |  |  | — |  |  |  | 14,259,255 |  |  |  | 254,501,957 |
Nominal amount of interest rate swap |  |  | (8,224,653 | ) |  |  | — |  |  |  | 8,224,653 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total interest rate sensitivity gap |  |  | 76,781,605 |  |  |  | (6,142,670 | ) |  |  | (19,249,963 | ) |  |  | 7,851,185 |  |  |  | 3,513,593 |  |  |  | 4,834,966 |  |  |  | 20,757,938 |  |  |  | 88,346,654 |
|  | As of December 31, 2022 |
|  | Less than 3 months |  |  | 3 months to 1 year |  |  | 1-2 years |  |  | 2-3 years |  |  | More than 3 years |  |  | Overdue |  |  | No interest |  |  | Total |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash at bank |  |  | 33,218,805 |  |  |  | 42,142 |  |  |  | 1,602,690 |  |  |  | 3,490,181 |  |  |  | 5,528,309 |  |  |  | — |  |  |  | — |  |  |  | 43,882,127 |
Restricted cash |  |  | 24,333,782 |  |  |  | 1,544,978 |  |  |  | 482,037 |  |  |  | 147,478 |  |  |  | 356 |  |  |  | — |  |  |  | — |  |  |  | 26,508,631 |
Financial assets at fair value through profit or loss |  |  | 7,128,410 |  |  |  | 1,131,041 |  |  |  | 313,221 |  |  |  | — |  |  |  | — |  |  |  | 2,454,227 |  |  |  | 18,062,548 |  |  |  | 29,089,447 |
Financial assets at amortized cost |  |  | 2,502,673 |  |  |  | 647,026 |  |  |  | 112,128 |  |  |  | 856,808 |  |  |  | — |  |  |  | 597,813 |  |  |  | — |  |  |  | 4,716,448 |
Accounts and other receivables and contract assets |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 15,758,135 |  |  |  | 15,758,135 |
Loans to customers |  |  | 51,150,197 |  |  |  | 95,812,445 |  |  |  | 49,552,823 |  |  |  | 9,616,373 |  |  |  | 158,248 |  |  |  | 5,156,559 |  |  |  | — |  |  |  | 211,446,645 |
Total financial assets |  |  | 118,333,867 |  |  |  | 99,177,632 |  |  |  | 52,062,899 |  |  |  | 14,110,840 |  |  |  | 5,686,913 |  |  |  | 8,208,599 |  |  |  | 33,820,683 |  |  |  | 331,401,433 |
|  | As of December 31, 2022 |
|  | Less than 3 months |  |  | 3 months to 1 year |  |  | 1-2 years |  |  | 2-3 years |  |  | More than 3 years |  |  | Overdue |  |  | No interest |  |  | Total |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Payable to platform investors |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,569,367 |  |  |  | 1,569,367 |
Borrowings |  |  | 9,086,732 |  |  |  | 27,828,781 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 36,915,513 |
Bond payable |  |  | — |  |  |  | 2,143,348 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,143,348 |
Accounts and other payables and contract liabilities |  |  | 3,745,929 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 5,385,010 |  |  |  | 9,130,939 |
Payable to investors of consolidated structured entities |  |  | 42,664,737 |  |  |  | 86,300,977 |  |  |  | 44,005,269 |  |  |  | 4,111,964 |  |  |  | 64,779 |  |  |  | — |  |  |  | — |  |  |  | 177,147,726 |
Financing guarantee liabilities |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 5,763,369 |  |  |  | 5,763,369 |
Lease liabilities |  |  | 126,034 |  |  |  | 294,856 |  |  |  | 253,475 |  |  |  | 67,629 |  |  |  | 6,813 |  |  |  | — |  |  |  | — |  |  |  | 748,807 |
Convertible promissory note payable |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 5,164,139 |  |  |  | — |  |  |  | — |  |  |  | 5,164,139 |
Optionally convertible promissory notes |  |  | — |  |  |  | 8,142,908 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 8,142,908 |
Total financial liabilities |  |  | 55,623,432 |  |  |  | 124,710,870 |  |  |  | 44,258,744 |  |  |  | 4,179,593 |  |  |  | 5,235,731 |  |  |  | — |  |  |  | 12,717,746 |  |  |  | 246,726,116 |
Nominal amount of interest rate swap |  |  | (8,984,334 | ) |  |  | 8,984,334 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total interest rate sensitivity gap |  |  | 71,694,769 |  |  |  | (34,517,572 | ) |  |  | 7,804,155 |  |  |  | 9,931,247 |  |  |  | 451,182 |  |  |  | 8,208,599 |  |  |  | 21,102,937 |  |  |  | 84,675,317 |
The Group performs interest rate sensitivity analysis on profit for the Group by measuring the impact of a change in interest rate of financial assets, liabilities and interest rate derivative instruments. The table below illustrates the impact to profit before tax of the coming year as of each reporting date based on the structure of interest-bearing assets, liabilities and interest rate derivative instruments as of December 31, 2021 and 2022, caused by a parallel shift of 100 basis points in interest rates.
|  | As of December 31, |
|  | 2021 |  |  | 2022 |
|  | RMB’000 |  |  | RMB’000 |
Change in interest rate |  |  |  |  |  |  |  |
-100 basis points |  |  | (648,804 | ) |  |  | (497,888 | )
+100 basis points |  |  | 648,804 |  |  |  | 497,888 |
In the sensitivity analysis, the Group adopts the following assumptions when determining business conditions and financial index:
| • |  | The fluctuation rates of different interest-bearing assets and liabilities are the same;
| • |  | All assets and liabilities are re-priced in the middle of relevant periods;
| • |  | Analysis is based on static gap on reporting date, regardless of subsequent changes;
| • |  | No consideration of impact on customers’ behavior resulting from interest rate changes;
| • |  | No consideration of impact on market price resulting from interest rate changes;
| • |  | No consideration of actions taken by the Group.
Therefore, the actual changes of net profit may differ from the analysis above.
4.1.2 | Credit risk
Credit risks refer to the risk of losses incurred by the inabilities of debtors or counterparties to fulfill their contractual obligations or by the adverse changes in their credit conditions. The Group is exposed to credit risks primarily associated with its deposit arrangements with commercial banks, financial assets at fair value through profit or loss, accounts and other receivables, loans to customers, etc. The Group uses a variety of controls to identify, measure, monitor and report credit risk. Credit risk management The Group’s financial assets at fair value through profit or loss mainly include trust products, wealth management products, asset management plans and other equity investments. The Group executes due diligence, assesses counterparties’ qualification and manages credit risks of existing investments. The Group has formulated a complete set of credit management processes and internal control mechanisms, so as to carry out whole process management of credit business. Credit management procedures for its retail loans comprise the processes of credit origination, credit review, credit approval, disbursement, post-disbursement monitoring and collection. Risks arising from financing guarantee contracts and loan commitments are similar to those associated with loans. Transactions of financing guarantee contracts and loan commitments are, therefore, subject to the same portfolio management and the same requirements for application and collateral as loans to customers. To those accounts and other receivables and contract assets, there are policies to control the credit risk exposures. The Group evaluates the possibility of guarantee from third parties, credit record and other factors such as current market condition. The Group monitors customer credit records at regular intervals, and takes action such as official notifications, shortening credit periods or canceling credit periods etc. to ensure the Group’s credit risk remains under control when the customers with bad credit records are identified. Credit exposure Without taking collateral and other credit enhancements into consideration, for on-balance sheet assets, the maximum exposures are based on net carrying amounts as reported in the financial statements. The Group also assumes credit risk due to financing guarantee contracts. The following table sets forth the credit exposure of the Group as of December 31, 2021 and 2022:
|  | As of December 31, |
|  | 2021 |  |  | 2022 |
|  | RMB’000 |  |  | RMB’000 |
On-balance sheet |  |  |  |  |  |  |  |
Cash at bank |  |  | 34,743,188 |  |  |  | 43,882,127 |
Restricted cash |  |  | 30,453,539 |  |  |  | 26,508,631 |
Financial assets at fair value through profit or loss |  |  | 31,023,211 |  |  |  | 29,089,447 |
Financial assets at amortized cost |  |  | 3,784,613 |  |  |  | 4,716,448 |
Financial assets purchased under reverse repurchase agreements |  |  | 5,527,177 |  |  |  | — |
Accounts and other receivables and contract assets |  |  | 22,344,773 |  |  |  | 15,758,135 |
Loans to customers |  |  | 214,972,110 |  |  |  | 211,446,645 |
|  |  | 342,848,611 |  |  |  | 331,401,433 |
Off-balance sheet |  |  |  |  |  |  |  |
Financing guarantee contracts |  |  | 64,731,369 |  |  |  | 68,502,938 |
Collateral and other credit enhancements The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the types of collateral and the valuation parameters. The collateral obtained are typically residential properties. Management monitors the market value of the collateral, adjusts credit limits when needed and performs an impairment valuation when applicable. It is the Group’s policy to dispose of repossessed properties in an orderly fashion. The proceeds are used to reduce or repay the outstanding balance. In general, the Group does not occupy repossessed properties for business use. Expected credit loss Credit risk measurement The estimation of credit exposure for risk management purposes is complex and requires the use of models, as the exposure varies with changes in market conditions, expected cash flows and the passage of time. The assessment of credit risk of a portfolio of assets entails further estimations as to the likelihood of defaults occurring, of the associated loss ratios and of default correlations between counterparties. The Group measures credit risk using PD, EAD and LGD. This is similar to the approach used for the purposes of measuring ECL under IFRS 9. Measurement of ECL IFRS 9 outlines a ‘three-stage’ model for impairment based on changes in credit quality since initial recognition as summarized below:
| • |  | A financial instrument that is not credit-impaired on initial recognition is classified in ‘Stage 1’ and has its credit risk continuously monitored by the Group.
| • |  | If a significant increase in credit risk (‘SICR’) since initial recognition is identified, the financial instrument is moved to ‘Stage 2’ but is not yet deemed to be credit-impaired.
| • |  | If the financial instrument is credit-impaired, the financial instrument is then moved to ‘Stage 3’.
Financial instruments in Stage 1 have their ECL measured at an amount equal to the portion of lifetime ECL that result from default events possible within the next 12 months. Instruments in Stages 2 or 3 have their ECL measured based on ECL on a lifetime basis.
| • |  | A pervasive concept in measuring ECL in accordance with IFRS 9 is that it should consider forward- looking information.
POCI are those financial assets that are credit- impaired on initial recognition. Their ECL is always measured on a lifetime basis. The following diagram summarizes the impairment requirements under IFRS 9 (other than POCI). Change in credit quality since initial recognition
Stage 1 |  | Stage 2 |  | Stage 3
(Initial recognition) |  | (Significant increase in credit risk since initial recognition) |  | (Credit-impaired assets)
12-month ECL |  | Lifetime ECL |  | Lifetime ECL
The key judgments and assumptions adopted by the Group in addressing the requirements of the standard are discussed below:
(a) | Significant increase in credit risk (SICR)
For loans to customers, the Group considers a loan to have experienced a significant increase in credit risk if the borrower is overdue 30 days or above on its contractual payments. No qualitative criteria is considered by the Group since the Group monitors the risk of borrowers purely based on the overdue period. For other financial assets measured at amortized cost, the Group sets quantitative and qualitative criteria to judge if there is significant increase in credit risk, and the criteria include: overdue 30 days or above, the forward-looking information and various reasonable supporting information, when determining the ECL staging for financial assets. The criteria used to identify SICR are monitored and reviewed periodically for appropriateness by the credit risk team.
(b) | Definition of default and credit-impaired assets
For loans to customers, the Group defines a financial instrument as in default, which is fully aligned with the definition of credit-impaired if the borrower is more than 90 days (including 90 days) past due on its contractual payments. No qualitative criteria is considered by the Group since the Group monitors the risk of borrowers purely based on the overdue period. For other financial assets measured at amortized cost, the Group sets quantitative and qualitative criteria to define as in default, and the criteria include: overdue for more than 90 days (including 90 days) and various reasonable supporting information. The criteria above are consistent with the definition of default used for internal credit risk management purposes. The default definition has been applied consistently to model the PD, EAD and LGD throughout the Group’s expected loss calculations.
(c) | Measuring ECL – Explanation of inputs, assumptions and estimation techniques
The ECL is measured on either a 12-month (“12M”) or Lifetime basis depending on whether a significant increase in credit risk has occurred since initial recognition or whether an asset is considered to be credit-impaired. Key impacts used to determine ECL include PD, EAD and LGD, which are defined as follows:
| • |  | PD represents the likelihood of a borrower defaulting on its financial obligation (as mentioned in “Definition of default and credit-impaired assets” above), either over the next 12 months (“12M PD”), or over the remaining lifetime (“Lifetime PD”) of the obligation.
| • |  | LGD represents the Group’s expectation of the extent of loss on a defaulted exposure. LGD varies by type and availability of collateral or other credit support. LGD is expressed as a percentage loss per unit of exposure at the time of default.
| • |  | EAD is based on the amounts the Group expects to be owed at the time of default, over the next 12 months (“12M EAD”) or over the remaining lifetime (“Lifetime EAD”). For example, for a revolving commitment, the Group includes the current drawn balance plus any further amount that is expected to be drawn up to the current contractual limit by the time of default, should it occur.
The ECL is determined by projecting the PD, LGD and EAD for each future month and for each individual exposure or collective segment. These three components are multiplied together and adjusted for the likelihood of survival (i.e. the exposure has not prepaid or defaulted in an earlier month). The 12-month and lifetime PDs are determined based on the defaults developed with reference to historical observed data. The duration of historical observed data gathered which is most relevant to reflect the current risk profile of outstanding loan portfolio is determined by management by applying judgement, considering the latest changes in economy, trend in recent default rates under different portfolio and the latest strategy in customer selections. The 12-month and lifetime EADs are determined based on the expected payment profile. For amortizing products and bullet repayment loans, this is based on the contractual repayments owed by the borrower over a 12-month or lifetime basis. Early repayment assumptions are also incorporated into the calculation. The 12-month and lifetime LGDs are determined based on the factors which impact the recoveries made post default. These vary by product type. Forward-looking economic information is included in determining the 12-month and lifetime PD. These assumptions vary by product type. There have been no significant changes in estimation techniques during the years ended December 31, 2020, 2021 and 2022.
(d) | Forward-looking information incorporated in the ECL models
The Group has developed macro-economic forward-looking adjustment model by establishing a pool of macro-economic indicators, preparing data, filtering model factors and adjusting forward-looking elements, and the indicators include gross domestic product (GDP), customer price index (CPI), broad measure of money supply (M1) and other macro-economic variables. Through regression analysis, the relationship among these economic indicators in history with PD is determined, and PD then determined through forecasting economic indicators. The forecasting methods and critical assumptions applied had no material changes during the years ended December 31, 2020, 2021 and 2022. The impact of these economic indicators on PD varies to different businesses. The Group comprehensively considers internal and external data, future forecasts and statistical analysis to determine the relationship between these economic indicators with PD. The Group evaluates and forecasts these economic indicators at least annually at balance sheet date, and regularly evaluates the results based on changes in macroeconomics. The Group considered different macroeconomic scenarios. As of December 31, 2021 and 2022, the key macroeconomic assumptions used to estimate expected credit losses are listed below.
|  | As of December 31, |
|  | 2021 |  | 2022 |
GDP – year on year percentage change |  | 5.0%-6.2% |  |  | 3.8%-5.5% |
CPI – year on year percentage change |  | 2.3%-2.6% |  |  | 2.0%-2.4% |
Broad measure of money supply (M1) – year on year percentage change |  | 8.1%-9.1% |  |  | 7.3%-8.6% |
Similar to other economic forecasts, the forecasts of economic indicators have high inherent uncertainties and therefore actual results maybe significantly different from the forecasts. The Group considered above forecasts as its best estimate as of December 31, 2021 and 2022. Sensitivity analysis Expected credit losses are sensitive to the parameters used in the model, the macro-economic variables of the forward-looking forecast, the weight probabilities in the three scenarios, and other factors considered in the application of expert judgment. Changes in these input parameters, assumptions, models, and judgments will have an impact on the measurement of expected credit losses. The Group has the highest weight of the base scenario. The loans to customers and financing guarantee contracts assumed that if the weight of the upside scenario increased by 10% and the weight of the base scenario reduced by 10%, the Group’s ECL impairment provision as of December 31, 2020, 2021 and 2022 would be reduced by RMB5 million and RMB15 million and RMB62 million, respectively; if the weight of the downside scenario increased by 10% and the weight of the base scenarios reduced by 10%, the Group’s ECL impairment provision as of December 31, 2020, 2021 and 2022 would be increased by RMB6 million and RMB32 million and RMB123 million, respectively. The following table shows the changes of ECL impairment provision on loans to customers and financing guarantee liabilities related to ECL assuming the financial assets in stage 2 reclassified to stage 1 due to significant improvement in credit risk.
|  | As of December 31, |
|  | 2021 |  |  | 2022 |
|  | RMB’000 |  |  | RMB’000 |
Total ECL and financing guarantee liabilities under assumption of reclassification of financial instruments from stage 2 to stage 1 |  |  | 4,897,881 |  |  |  | 10,479,472 |
Total ECL and financing guarantee liabilities related to ECL recognized in the consolidated balance sheet |  |  | 5,450,980 |  |  |  | 12,826,347 |
Difference-amount |  |  | (553,099 | ) |  |  | (2,346,875 | )
Difference-ratio |  |  | -10 | % |  |  | -18 | %
Maximum exposure to credit risk before collateral held or other credit enhancements The following presents the credit risk exposure of the financial instruments under the scope of expected credit loss mentioned in measurement of ECL without considering guarantee or any other credit enhancement measures:
|  | As of December 31, 2021 |
|  | Stage I |  |  | Stage II |  |  | Stage III |  |  | POCI |  |  | Maximum Credit Risk Exposure |
(in RMB’000)
Book value
On-balance sheet |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial assets at amortized cost |  |  | 2,697,852 |  |  |  | — |  |  |  | 584,739 |  |  |  | 502,022 |  |  |  | 3,784,613 |
Loans to customers |  |  | 213,665,161 |  |  |  | 1,263,965 |  |  |  | 42,984 |  |  |  | — |  |  |  | 214,972,110 |
Total |  |  | 216,363,013 |  |  |  | 1,263,965 |  |  |  | 627,723 |  |  |  | 502,022 |  |  |  | 218,756,723 |
Off-balance sheet |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financing guarantee contracts |  |  | 64,416,918 |  |  |  | 314,451 |  |  |  | — |  |  |  | — |  |  |  | 64,731,369 |
|  | As of December 31, 2022 |
|  | Stage I |  |  | Stage II |  |  | Stage III |  |  | POCI |  |  | Maximum Credit Risk Exposure |
(in RMB’000)
Book value
On-balance sheet |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial assets at amortized cost |  |  | 4,118,635 |  |  |  | — |  |  |  | 281,531 |  |  |  | 316,282 |  |  |  | 4,716,448 |
Loans to customers |  |  | 208,609,176 |  |  |  | 2,763,586 |  |  |  | 73,883 |  |  |  | — |  |  |  | 211,446,645 |
Total |  |  | 212,727,811 |  |  |  | 2,763,586 |  |  |  | 355,414 |  |  |  | 316,282 |  |  |  | 216,163,093 |
Off-balance sheet |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financing guarantee contracts |  |  | 67,011,692 |  |  |  | 1,491,246 |  |  |  | — |  |  |  | — |  |  |  | 68,502,938 |
For other on-balance sheet financial assets, the maximum credit risk exposure is their net carrying amount.
4.1.3 | Liquidity risk
Liquidity risk is the risk of not having access to sufficient funds or being unable to liquidate a position in a timely manner at a reasonable price to meet the Group’s obligations as they become due. The Group aims to maintain sufficient cash at bank and marketable securities. Due to the dynamic nature of the underlying businesses, the Group maintains flexibility in funding by maintaining adequate cash at bank. The following table analyses the Group’s financial liabilities into relevant maturity grouping based on the remaining period at the end of each reporting period to the contractual or expected maturity date. The amounts disclosed in the table are undiscounted contractual or expected cash flows including interest payments computed using contractual rates, or, if floating, based on current rates, and interests with financial liabilities denominated in foreign currencies translated into RMB using the spot rate as of balance sheet date:
|  | As of December 31, 2021 |
|  | Repayable on demand or undated |  |  | Within 1 year |  |  | 1 to 2 years |  |  | 2 to 3 years |  |  | Over 3 years |  |  | Total |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
Financial liabilities - |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Payable to platform investors |  |  | 2,747,891 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,747,891 |
Borrowings |  |  | — |  |  |  | 16,717,997 |  |  |  | 9,628,462 |  |  |  | — |  |  |  | — |  |  |  | 26,346,459 |
Accounts and other payables and contract liabilities |  |  | 8,814,255 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 8,814,255 |
Payable to investors of consolidated structured entities |  |  | 45,628 |  |  |  | 148,079,478 |  |  |  | 49,505,033 |  |  |  | 5,570,774 |  |  |  | — |  |  |  | 203,200,913 |
Financing guarantee liabilities |  |  | 64,731,369 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 64,731,369 |
Lease liabilities |  |  | — |  |  |  | 484,497 |  |  |  | 248,770 |  |  |  | 85,180 |  |  |  | 9,329 |  |  |  | 827,776 |
Convertible promissory note payable |  |  | — |  |  |  | 91,869 |  |  |  | 12,502,777 |  |  |  | — |  |  |  | — |  |  |  | 12,594,646 |
Optionally convertible promissory notes |  |  | — |  |  |  | 442,840 |  |  |  | 7,823,510 |  |  |  | — |  |  |  | — |  |  |  | 8,266,350 |
|  |  | 76,339,143 |  |  |  | 165,816,681 |  |  |  | 79,708,552 |  |  |  | 5,655,954 |  |  |  | 9,329 |  |  |  | 327,529,659 |
|  | As of December 31, 2022 |
|  | Repayable on demand or undated |  |  | Within 1 year |  |  | 1 to 2 years |  |  | 2 to 3 years |  |  | Over 3 years |  |  | Total |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
Financial liabilities - |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Payable to platform investors |  |  | 1,569,367 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,569,367 |
Borrowings |  |  | — |  |  |  | 37,506,884 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 37,506,884 |
Bond payable |  |  | — |  |  |  | 2,209,274 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,209,274 |
Accounts and other payables and contract liabilities |  |  | 5,385,010 |  |  |  | 3,745,929 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 9,130,939 |
Payable to investors of consolidated structured entities |  |  | 47,351 |  |  |  | 133,933,056 |  |  |  | 45,293,609 |  |  |  | 4,182,362 |  |  |  | 65,607 |  |  |  | 183,521,985 |
Financing guarantee liabilities |  |  | 68,502,938 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 68,502,938 |
Lease liabilities |  |  | — |  |  |  | 462,785 |  |  |  | 247,494 |  |  |  | 67,737 |  |  |  | 6,819 |  |  |  | 784,835 |
Convertible promissory note payable |  |  | — |  |  |  | 50,177 |  |  |  | 50,177 |  |  |  | 50,177 |  |  |  | 6,867,555 |  |  |  | 7,018,086 |
Optionally convertible promissory notes |  |  | — |  |  |  | 8,546,138 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 8,546,138 |
|  |  | 75,504,666 |  |  |  | 186,454,243 |  |  |  | 45,591,280 |  |  |  | 4,300,276 |  |  |  | 6,939,981 |  |  |  | 318,790,446 |
4.2 | Capital management
The Group’s capital requirements are primarily dependent on the scale and the type of business that it undertakes, as well as the industry and geographic location in which it operates. The primary objectives of the Group’s capital management are:
| • |  | To comply with the capital requirements set by the regulators of the markets where the Group operates.
| • |  | To safeguard the Group’s ability to continue as a going concern and to maintain healthy capital ratios in order to support its business and to maximize shareholders’ value.
| • |  | To maintain a strong capital base to support the development of its business.
The Group adopts administrative measures issued by the regulators of subsidiaries with financial licenses. To meet these requirements, the Group monitor its capital adequacy ratio and the usage of regulatory capital on a quarterly basis and operate and manage assets at all levels in accordance with the provisions of these measures. The Group monitors capital by regularly reviewing the total equity attributable to owners’ of the Company. Adjustments to current capital structure are made in light of changes in economic conditions and risk characteristics of the Group’s activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid, return capital to ordinary shareholders or issue capital securities.
4.3 | Group’s maximum exposure to structured entities
The Group uses structured entities in the normal course of business for a number of purposes, for example, structured transactions for customers, to provide finance to public and private sector infrastructure projects, and to generate fees from managing assets on behalf of third-party investors. These structured entities are financed through the issue of notes or units to investors. Refer to Note 2 and Note 5.7 for the Group’s consolidation consideration related to structured entities. The following table shows the Group’s maximum exposure to the unconsolidated structured entities representing the Group’s maximum possible risk exposure that could occur as a result of the Group’s arrangements with structured entities. The maximum exposure of the Group in these unconsolidated structure entities is contingent in nature and approximates the sum of accounts receivables from unconsolidated structure entities and direct investments made by the Group.
|  | As of December 31, 2021 |
(In RMB’000) |  | Size |  |  | Carrying amount of investment in structured entities |  |  | Group’s maximum exposure |  |  | Interest held by Group |
Unconsolidated structured products managed by third parties (a) |  |  | NA |  |  |  | 8,661,387 |  |  |  | 8,661,387 |  |  |  | Investment income |
Unconsolidated structured products managed by affiliated entities (a) |  |  | NA |  |  |  | 12,219,226 |  |  |  | 12,219,226 |  |  |  | Investment income |
Unconsolidated structured products serviced by the Group. |  |  | 18,178,437 |  |  |  | — |  |  |  | 1,428,320 |  |  |  | Service fees |
|  | As of December 31, 2022 |
(In RMB’000) |  | Size |  |  | Carrying amount of investment in structured entities |  |  | Group’s maximum exposure |  |  | Interest held by Group |
Unconsolidated structured products managed by third parties (a) |  |  | NA |  |  |  | 17,312,195 |  |  |  | 17,312,195 |  |  |  | Investment income |
Unconsolidated structured products managed by affiliated entities (a) |  |  | NA |  |  |  | 8,321,066 |  |  |  | 8,321,066 |  |  |  | Investment income |
Unconsolidated structured products serviced by the Group. |  |  | 2,581,999 |  |  |  | — |  |  |  | 1,849,897 |  |  |  | Service fee |
These unconsolidated structured products mainly include asset management plans, trust plans, mutual funds, private fund and bank wealth management products which are all classified as financial assets at amortized cost or financial assets at fair value through profit or loss.
(a) | The information in relation to the size of these unconsolidated structured products is not available from open market.
4.4 | Fair value estimation
The Group’s main financial instruments carried at fair value are financial assets at fair value through profit or loss. The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation techniques: Level 1: Quoted (unadjusted) prices in active markets for identical assets or liabilities. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The primary quoted market price used for financial assets held by the Group is net asset value at daily basis. Financial instruments included in Level 1 comprise primarily equity investments, fund investments and bond investments traded on stock exchanges and open-ended mutual funds. Level 2: Valuation techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly (such as price) or indirectly (such as calculated based on price). These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity specific estimates. Level 3: Other valuation techniques which use any inputs which have a significant effect on the recorded fair value that are not based on observable market data (unobservable inputs). The level of fair value calculation is determined by the lowest level input with material significance in the overall calculation. As such, the significance of the input should be considered from an overall perspective in the calculation of fair value. Valuation methods for Level 2 and Level 3 financial instruments: For Level 2 financial instruments, valuations are generally obtained from third party pricing services for identical or comparable assets, or through the use of valuation methodologies using observable market inputs, or recent quoted market prices. Valuation service providers typically gather, analyze and interpret information related to market transactions and other key valuation model inputs from multiple sources, and through the use of widely accepted internal valuation models, provide a theoretical quote on various securities. For Level 3 financial instruments, fair value is determined using valuation methodologies such as discounted cash flow models and other similar techniques. One of significant inputs used in these valuation techniques is generally unobservable. The following table sets forth the financial instruments recorded at fair value by level of the fair value hierarchy:
As of December 31, 2021 |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
Unlisted Securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asset management plans |  |  | — |  |  |  | 7,802,270 |  |  |  | 505,503 |  |  |  | 8,307,773 |
Trust plans |  |  | — |  |  |  | 2,448,373 |  |  |  | 603,716 |  |  |  | 3,052,089 |
Private fund and other equity investments |  |  | — |  |  |  | 2,765,016 |  |  |  | — |  |  |  | 2,765,016 |
Mutual funds |  |  | 2,486,541 |  |  |  | — |  |  |  | — |  |  |  | 2,486,541 |
Corporate bonds |  |  | — |  |  |  | 3,017,849 |  |  |  | 47,023 |  |  |  | 3,064,872 |
Bank wealth management products |  |  | — |  |  |  | 4,589,101 |  |  |  | — |  |  |  | 4,589,101 |
Structured deposits |  |  | — |  |  |  | 6,640,977 |  |  |  | — |  |  |  | 6,640,977 |
Others debt investments |  |  | — |  |  |  | — |  |  |  | 108,991 |  |  |  | 108,991 |
Listed Securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Stock |  |  | 7,851 |  |  |  | — |  |  |  | — |  |  |  | 7,851 |
Derivative instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap |  |  | — |  |  |  | 38,403 |  |  |  | — |  |  |  | 38,403 |
Foreign currency swap |  |  | — |  |  |  | (25,772 | ) |  |  | — |  |  |  | (25,772 | )
Total |  |  | 2,494,392 |  |  |  | 27,276,217 |  |  |  | 1,265,233 |  |  |  | 31,035,842 |
As of December 31, 2022 |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
Unlisted Securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asset management plans |  |  | — |  |  |  | 4,667,559 |  |  |  | 342,154 |  |  |  | 5,009,713 |
Trust plans |  |  | — |  |  |  | 3,268,709 |  |  |  | 621,840 |  |  |  | 3,890,549 |
Private fund and other equity investments |  |  | — |  |  |  | 1,603,219 |  |  |  | 440,832 |  |  |  | 2,044,051 |
Mutual funds |  |  | 7,125,498 |  |  |  | — |  |  |  | — |  |  |  | 7,125,498 |
Corporate bonds |  |  | — |  |  |  | — |  |  |  | 46,435 |  |  |  | 46,435 |
Bank wealth management products |  |  | — |  |  |  | 7,563,450 |  |  |  | — |  |  |  | 7,563,450 |
Structured deposits |  |  | — |  |  |  | 2,406,785 |  |  |  | — |  |  |  | 2,406,785 |
Others debt investments |  |  | — |  |  |  | — |  |  |  | 1,002,966 |  |  |  | 1,002,966 |
Derivative instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap |  |  | — |  |  |  | 222,086 |  |  |  | — |  |  |  | 222,086 |
Foreign currency swap |  |  | — |  |  |  | 225,357 |  |  |  | — |  |  |  | 225,357 |
Total |  |  | 7,125,498 |  |  |  | 19,957,165 |  |  |  | 2,454,227 |  |  |  | 29,536,890 |
There were no changes in valuation techniques during the period. The following table presents the changes in level 3 instruments for the years ended December 31, 2020, 2021 and 2022:
|  | Year ended December 31, |
|  | 2020 |  |  | 2021 |  |  | 2022 |
|  | Financial assets at fair value through profit or loss |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
As of beginning of the year |  |  | 2,842,839 |  |  |  | 1,266,495 |  |  |  | 1,265,233 |
Additions |  |  | — |  |  |  | 131,829 |  |  |  | 1,548,065 |
Disposal |  |  | (1,266,827 | ) |  |  | (29,664 | ) |  |  | (300,136 | )
Transfer into level 3 |  |  | — |  |  |  | 1,035,642 |  |  |  | — |
Transfer out of level 3 |  |  | — |  |  |  | (3,047 | ) |  |  | — |
Gains or losses recognized in profit or loss |  |  | (309,517 | ) |  |  | (1,136,022 | ) |  |  | (58,935 | )
As of end of the year |  |  | 1,266,495 |  |  |  | 1,265,233 |  |  |  | 2,454,227 |
For the year ended December 31, 2021, RMB1,035.6 million investment in certain wealth management products was transferred from Level 2 to Level 3 as significant unobservable inputs were applied in valuation method. All of the unrealised gains or losses of level 3 instruments for the period are recognized in investment income (refer to Note 9). Fair value measurements using significant unobservable input: The level of fair value measurement is determined by the lowest level input with material significance in the overall calculation. As such, the significance of the input should be considered from an overall perspective in the estimation of fair value. As of December 31, 2020, 2021 and 2022, the level 3 instruments were mainly unlisted securities at fair value through profit or loss. As the unlisted securities are not traded in an active market, their fair values have been determined using the discounted cash flow method whereby the discount rate adjustment technique is applied. The discount rate used to determine the present value was a rate that reflects current market assessments of the time value of money and the risks specific to the assets as at each reporting date. The determination of discount rate involved critical estimates and judgments by the management. As of December 31, 2020, 2021 and 2022, the discount rates used to determine fair value of level 3 instruments ranged from 6.8% to 9.5%. The table below illustrates the impact to profit/(loss) before income tax for the years ended December 31, 2020, 2021 and 2022, if the risk-adjusted discount rate had increased/decreased by 100 basis points with all other variables held constant.
|  | As of December 31, |
|  | 2020 |  |  | 2021 |  |  | 2022 |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
Expected changes in profit/(loss) before income tax |  |  |  |  |  |  |  |  |  |  |  |
+100 basis points |  |  | (28,078 | ) |  |  | (42,509 | ) |  |  | (42,824 | )
-100 basis points |  |  | 29,023 |  |  |  | 45,553 |  |  |  | 45,826 |

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