X Financial (NYSE:XYF) reported a dramatically smaller lending platform on August 24. Second-quarter net revenue fell 56.3% year over year and 15.5% sequentially to RMB 993.6 million. The active-borrower count declined 74.8% from a year earlier to approximately 720,258, while the total loan amount facilitated and originated dropped 70.2% to RMB11.63 billion. Shares closed at $5.35 on August 24 following the results.
The question is whether the contraction represents a successful reset toward better borrowers or continuing erosion that improved credit metrics cannot offset. The latest quarter suggests credit performance is stabilizing faster than the business itself.
BULL CASE
The strongest argument for X Financial (NYSE:XYF) is that tighter underwriting appears to be improving recent loan performance. The company-reported 31- to 60-day delinquency rate declined to 1.73% from 2.61% at the end of the first quarter. Its 91- to 180-day rate eased to 9.09% from 9.95%. Management attributed the first sequential improvement in several quarters to stricter underwriting for newer loan vintages and additional collection resources.
The average loan amount per transaction increased 21.3% year over year to RMB12,712. Management linked the increase to a transaction mix weighted toward higher-quality borrowers and said newer vintages were performing better. That strategy sacrifices scale but could produce a healthier remaining portfolio if the improvement continues.
Cost reductions also supported sequential profitability. Total operating costs and expenses fell 22.9% from the first quarter, while operating income increased 38.6% to RMB194.9 million. Operating margin improved to 19.6% from 12.0%, although it remained below 29.7% a year earlier.
At June 30, X Financial (NYSE:XYF) held RMB1.13 billion of cash and cash equivalents. It separately reported RMB827.7 million of restricted cash, which is subject to use limitations, and RMB7.76 billion of total equity, equal to 64.1% of total assets.
BEAR CASE
The sequential credit improvement does not restore the prior-year picture. The 31- to 60-day delinquency rate remained above 1.16% a year earlier, while the 91- to 180-day rate was still more than three times the prior-year level of 2.91%. Management said older delinquent balances continuing to season through the portfolio contributed to the elevated longer-duration rate.
The operating contraction also continued sequentially. The active-borrower count fell another 24.7% from the first quarter, the total loan amount declined 20.5%, and revenue decreased 15.5%. Better credit metrics from a rapidly shrinking portfolio do not establish that X Financial (NYSE:XYF) can stabilize originations without loosening underwriting.
The margin recovery also relied on lower spending and provisions. The filing presented aggregate credit-related provisions of RMB183.1 million, down 35.3% sequentially and 36.4% year over year. This analytical sum is not a formal GAAP subtotal. It combines provisions for accounts receivable and contract assets, loans receivable, contingent guarantee liabilities, and credit losses for deposits and other financial assets.
Borrower acquisition and marketing expense fell 80.2% year over year. These reductions helped preserve profit, but operating income still declined 71.1%, while net income fell 91.1% to RMB47.0 million.
Regulation adds another constraint. X Financial (NYSE:XYF) warned that evolving Chinese internet-lending requirements could materially and adversely affect operating results and said it had limited visibility into implementation. Management provided no quantitative third-quarter guidance, citing uncertainty in the operating environment.
HEDGE FUND SENTIMENT
The filings available so far reflect positions held before XYF reported 2Q results. Insider Monkey’s database showed 3 hedge funds holding XYF at the end of 2Q2026, down from 4 funds three months earlier.
CONCLUSION
X Financial (NYSE:XYF) made real sequential progress on delinquencies and expenses, but its core activity continued to contract at an extraordinary rate. The cash position and tighter underwriting can protect the balance sheet. They do not solve the scale problem.
The stock remains difficult to underwrite until declines in the active-borrower count and total loan amount moderate without renewed credit deterioration. For now, credit performance is stabilizing faster than the underlying business.
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Disclosure: None. This article is originally published at Insider Monkey.
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