Financiera Independencia SAB de CV SOFOM ENR

BMV:FINDEP

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, everyone, and welcome to Financiera Independencia's First Quarter 2021 Results Conference Call. My name is Emma, and I will be your coordinator today. [Operator Instructions] As a reminder, this video conference is being recorded.

For opening remarks and introductions, I would now like to turn the call over to Mr. Iván Barona, Investor Relations Officer at Financiera Independencia. Mr. Barona, you may begin.

[Ivan Gonzalez, executive]

Good morning. Thank you for joining FINDEP's 2021 First Quarter Results Conference Call. With me today are Mr. Eduardo Messmacher, our Chief Executive Officer; and Mr. Enrique Brockmann, our Chief Financial Officer. We published our results press release yesterday, which is available in our Investor Relations web page at findep.mx.

Let me remind you that the content that we will share during this conference call may include forward-looking statements, and as such, are subject to assumptions, uncertainties, risks and other factors that could cause actual results to differ materially from those described, including risks that may be beyond the company's control.

Now I would like to turn the call over to Eduardo Messmacher.

[Eduardo Bernhart Messmacher Henríquez, executive]

Thank you, Iván. Good morning, everyone.

Let me begin by sharing that Finance Independencia started 2021 with extraordinary results, resuming growth with a strengthened business model based on our strategy to face the challenges related to the pandemic effects. So I will start by sharing the highlights of the company's performance during the first quarter 2021, while Enrique will go through the details of the financials.

The company kept up the active pace witnessed at the end of 2020. Just a couple of months after one of the most challenging [ downturns ] in over a century, Financiera Independencia holds a solid balance sheet, healthy asset quality, growing loan portfolio, improved efficiencies and posted its strongest profit for a single quarter in over a decade.

Net income was MXN 113 million, 63% higher year-over-year, leading to a return on equity of 11% and a return on tangible equity of 15% versus a 6.1% and 8% -- 8.7% during the first quarter 2020, respectively.

During the quarter, the sale of our payroll loans business has materialized after receiving the Mexican Antitrust Agency's approval, as expected. The decision to sell this business will strengthen, scale and increase even more, our competitive advantage and specialized knowledge.

The total loan portfolio closed the quarter with a MXN 6.35 billion balance, a 9.5% contraction with respect to the previous quarter, including the sale of Fisofo with a portfolio of MXN 863 million as of December 2020. If we take out the effect of the sale of Fisofo, the portfolio posted a 3.2% expansion in the first quarter of '21, following the stabilization trend that started in the third and fourth quarters of 2020.

The performance of our core remaining subsidiaries focused predominantly on unsecured individual loans, was strong in the first quarter '21 and shows the continued improvement that started in the third quarter 2020. The net result of the subsidiaries in first quarter '21 was MXN 120.5 million, delivering the second consecutive quarter of results above historical levels and close to double the net result of the first quarter 2020 when considering comparable operations.

In first quarter '21, we increased the loan origination pace of our 4 remaining subsidiaries to 107% of pre-COVID levels, of January to March 2020, which resulted in the growth of the performing loan portfolio of MXN 266 million or 4.6% in first quarter '21.

The consolidated NPL ratio in the first quarter '21 was 4.4%, 70 basis points below the 5.1% observed in the first -- fourth quarter, 150 basis points below the 5.9% reported 12 months ago. This NPL ratio really excludes our recently divested payroll business, thus showing the limited impact of this restructure in the overall quality of our portfolio.

The NPL ratio for the unsecured individual loans business in Mexico, conducted by FISA and AEF, was 5.2% in the first quarter '21, 150 basis points decrease with respect to the 6.7% observed in fourth quarter '20. The NPL ratio in our California-based company was 3.2% in the first quarter '21, a 100 basis point decrease with respect to the 4.2% reported in the fourth quarter '20. And finally, the NPL ratio of Finsol Brasil was 2.3% in the first quarter '21, an 80 basis points increase against the 1.5% reported in the fourth quarter '20.

At the close of the first quarter '21, we maintained a high coverage ratio of 216%, well above the 121% observed in the first quarter '20.

In the quarter, we continued to reduce liabilities and strengthen our financial positions. Year-on-year, we reduced 32% our long-term debt and 58% our bank loans. We maintained a solvency ratio of 42.4% in the first quarter '21, greater than the 33.7% observed 12 months ago, 12 months earlier, and the 38.1% of the fourth quarter 2020.

We ended the first quarter '21 with cash and cash equivalents of MXN 982 million, 23% greater than the MXN 799 million observed in the first quarter. This is explained by the proceeds from the sale of Finsol's portfolio, Fisofo, and by operating cash flow accumulation by keeping good collections, controlling the loan origination base and reducing costs.

Overall, the net resulted [ about historic ] levels 2 quarters in a row and the remarkable portfolio quality, particularly considering the considered impact of COVID in the economy, validates our strategy of focusing on core -- on our core strengths, on unsecured individual loans and adhering to disciplined [ list ] and collection management.

Now let me share some highlights of each of our subsidiaries in the first quarter. Independencia closed the quarter with a loan portfolio of roughly MXN 2.1 billion and a client base of over 188,000 people. Independencia's portfolio represented 34% of the total portfolio. The performing loans grew MXN 61 million or 3.1% in the quarter.

Apoyo Economico Familiar closed the first quarter with a loan portfolio of MXN 1.7 billion and a client base of over 93,000 people. AEF's loan portfolio represents 27% of the company's total. The performing loans grew MXN 42 million or 2.7% in the quarter.

Apoyo Financerio, a California-based company, closed the quarter with a loan portfolio of MXN 2.2 billion and a client base of over 24,000 people. AFI's loan portfolio represents 35% of the company's total. The performing loans grew MXN 185 million or 9.5% in the quarter. During the quarter, AFI grew its loan origination base 25% relative to pre-COVID levels, of the first quarter of 2020.

Finsol Brasil closed the first quarter of '21 with a loan portfolio of MXN 316 million and a client base of over 29,000 people. Finsol Brazil's loan portfolio represents 5% of the company's total.

With respect to the company's digital transformation process, we kicked off 2021 with several initiatives that include: A new model in AFI, our U.S.-based subsidiary, that allows us to grow our presence without expanding our branch network through digital origination, automated payments and remote collections; continued focus on origination in digital and alternative channels in Mexico, achieving around 30% of our new client acquisition; increased use of mobile devices in our sales force, collectors and our client base, reducing our dependence on physical branches; launch of an adaptive origination flow that leverages multiple risk-based decisions, models to determine the steps each individual client follows to complete the application; and flexible workforce through recomposition of origination processes using micro-tasks. These digital capabilities will enable us to reach a renewed service standard from which we will support the future growth.

I will turn the call over to Enrique so that he can provide details on our quarterly financials. Go ahead, Enrique.

[Enrique Brockmann del Valle, executive]

Thank you, Eduardo.

Please note that the results in the quarter do not include the businesses that we sold in the fourth quarter '20 and first quarter '21, so our comparables versus prior year and prior quarters are affected. In some lines, I will provide a comparison to our performance considering only the remaining subsidiaries in our operations.

In the first quarter '21, interest income was at MXN 1 million (sic) [ MXN 1 billion ]. It decreased 27% year-on-year as a consequence of the reduced loan portfolio, including the sale of Finsol Mexico's portfolio and Fisofo. Excluding Finsol and Fisofo, interest income decreased 14% year-on-year due to a smaller loan portfolio as a consequence of the strategy to face COVID-19 that we implemented in 2020, where we limited origination. Versus 4Q '20, interest income grew 1.1%. Interest expense was MXN 144 million, a 6% contraction relative to 4Q '20 and a 34% decrease versus first Q '20. Net interest income was MXN 862 million, 26% lower than first Q '20.

The provision for loan losses in first Q '21 was MXN 171 million, 5% lower than 4Q '20 and 52% below those of first Q '20. The coverage ratio of nonperforming loans stands at 216%. Excluding Finsol and Fisofo, the provision for loan losses decreased [ 60% ] versus first quarter '20 and increased 2% versus fourth quarter '20. Net interest income after provision for loan losses was MXN 691 million in first quarter '21, a 14% decrease with respect to first quarter '20. Excluding Finsol and Fisofo, net interest income after provision for loan losses was 3% larger than first Q '20, and it was flat versus 4Q '20.

Net operating revenue was MXN 821 million in first quarter '21, a 15% decrease versus first Q '20, explained by a market-related loss and lower operating income. Noninterest expense was MXN 667 million, posting a year-on-year decrease of 26%, driven by the sale of Finsol and also by reaping benefits of our continued focus on efficiencies. Excluding Finsol and Fisofo, costs decreased 3% versus fourth quarter '20 and 10% versus first quarter '20.

With all the above explained, we posted a net profit of MXN 113 million in the quarter, our best quarter in more than 10 years. Excluding Finsol and Fisofo, net profit grew 74% versus fourth quarter '20 and 97% versus first quarter '20.

The corporate strategy took our company to a strong financial position with a liquidity buffer that represents 10% of the total assets and a high solvency ratio. During the quarter, our strategy to keep reducing liabilities, at first quarter '20, they were MXN 5.7 billion, which represents a 39% decrease with respect to first quarter '20 levels, consistent with the loan portfolio results.

The solvency ratio is 42.4%, that is 8.7 percentage points greater than in first Q '20. The solvency ratio, excluding intangible items, is 34.6%, 9 percentage points greater than in first Q '20.

Overall, the company's financial health is good and in a stronger position to keep facing the pandemic.

Now I would like to open the call to questions. Operator, please do so.

[Operator]

[Operator Instructions] Our first question comes from the line of José Maria Silva.

[José Maria Correia da Silva, analyst]

It's José from BTG Pactual. Congratulations on the good results. It was a good surprise. I would like to know, out of your total portfolio, what's the percentage that you currently or still have under some kind of relief program? And how has been the performance of those reliefs? Are clients paying on time? Are there some delays? And what are the trends that you have seen in that regard as we go into 2021? And what are the trends that you are seeing on that front?

And related to this first question, as a second question, how are you currently seeing origination? Because as you guys mentioned, in 2020, not only due to the sale of the portfolio, but due to the lower origination, you had a big hit on your portfolio size. So how are you seeing origination going into 2021? Those are my questions.

[Eduardo Bernhart Messmacher Henríquez, executive]

So first of all, regarding COVID-related relief programs, we -- as a reminder, we have always said that we gave very short relief programs. And we didn't go through the second or third wave of relief programs that were offered by banks. So essentially, our relief programs, by July last year, were really neglectable. Of course, we still have some part of the portfolio that in the past, received some kind of COVID-related -- some kind of COVID-related relief. But today, there is no COVID-related relief.

I do want to stress out that as part of our ongoing business -- I mean, as part of the credit business, we offer the structures, we offer relief programs, but it's not COVID-related, and it's not at the size that was offered last year, and it was never at the size that we saw other competitors giving it.

So what we see is that the portfolio for which we offered in the [ past few weeks ] of COVID is actually performing quite well today. I guess by this time, given that we just gave one shot of relief, and we -- it was of short duration, the bank clients have also already been written out. We have actually renewed some of the clients that received, in the past, the COVID-related relief. So for us, it's already business as usual.

And I want to emphasize that the -- I mean, to give an example in one of our operations. To date, maybe a very small fraction of what we gave COVID relief is -- or has a past due of more than 14 days. And for those clients, we hold a special reserve that covers many, many times, the amount that is past due at this time. So really, by virtue of giving a very short duration of the COVID-related relief, by virtue of having the special reserves that we communicated in the past, we feel we are very well covered for any future losses of this portfolio.

[José Maria Correia da Silva, analyst]

And origination?

[Eduardo Bernhart Messmacher Henríquez, executive]

Okay Yes. Sorry, regarding the second question, one regarding origination. What we expect is our portfolio to continue growing as the trend has been in the fourth quarter and the first quarter. As we divested Fisofo, Fisofo was essentially an operation with lower interest rates and much higher quality. We're going to substitute that balance with the growth in the U.S., which we expect to continue growing at the same pace that has grown in these quarters for the remainder of the year.

We are seeing in the U.S. very good appetite and also remarkably good quality of customers that we are being able to originate. So we expect the portfolio of AFI, our U.S.-based subsidiary, to reach historically high levels by the end of the year.

Regarding our Mexico-based operation, FISA and AEF will continue growing. And we expect them, by the end of the year, to grow to levels that are comparable to pre-COVID levels.

The only subsidiary where we're not pursuing a more aggressive growth in Brazil. As you know, Brazil continues to be hit by waves of COVID. And even though they have been -- there have been numerous government programs to ensure that this does not impact the economy, we remain very cautious with Brazil, and that's the only subsidiary where we do not expect to see our originations growing for the remainder of the year.

[José Maria Correia da Silva, analyst]

That is very, very clear. If I may, and if it's not taking too much, regarding liability management and funding. How are you in terms of funding to fund that growth that you just mentioned in the U.S.? Do you need any more credit lines for this year? How are you addressing that?

And what are your plans in terms of refinancing? And what you intend to do with the outstanding bond? If there's something you can comment on that front, would be very helpful as well.

[Eduardo Bernhart Messmacher Henríquez, executive]

Absolutely. So we don't see any issue whatsoever now in financing the growth. Frankly, we have plenty of available lines with banks. And even if you would discount right now from our bank liabilities, the cash in hand, you would see that we -- I mean, we are in a very, very strong position in terms of liability management to fund the growth.

The -- in terms of specifically the U.S., remember that our main liability, which is our long-term liability with the bond, is in U.S. dollars. And as we start growing these -- continue growing this portfolio in the U.S., it's a natural hedge. So we don't see the need to look for more U.S.-based -- or U.S. currency-based lines of credit as we are actually long in U.S. dollars, which are properly covered by our derivatives position. So really, we do not see any issues.

Regarding refinancing. Well, we still have until 2024 to refinance the bond, and we'll see how the market behaves from now until 2024. But unless there is a very good, let's say, market condition that makes the premature refinancing of the bond something very attractive, we don't see it happening in the near future.

[Operator]

Our next question comes from Frank Lemon.

The question is, what's the cash level normalized for the operations? And why are you not selling the Brazil subsidiary?

[Eduardo Bernhart Messmacher Henríquez, executive]

So I'll start with the latter question regarding the strategy. Yes, Brazil is not something -- it's not an operation that we consider strategic. It is an operation that has a good management team that delivers stable results. Even within the COVID, it was rather a stable result. And we -- I mean, if an opportunity presents, we would divest.

Regarding the first question, I will ask Enrique to answer it.

[Enrique Brockmann del Valle, executive]

No, regarding the normalized cash level, we currently have a high level of cash. It would be substantially less than what we have to operate. I would say that a level of around MXN 500 million would be a more normalized level for our cash holdings.

[Operator]

And Frank has a follow-up question. He wants to know if you're expecting growth to come from existing operations or whether you're considering an M&A transaction.

[Eduardo Bernhart Messmacher Henríquez, executive]

So frankly, I mean, big M&A is nothing. I mean, if there's an opportunity of some bolt-on acquisition of a portfolio, but it would be something very small compared to our total portfolio.

Really, it's much more organic. What we have done in terms of strategy is actually to go back to where our core strength is, which is unsecured personal lending. We're focusing on unsecured personal lending.

And frankly, when you see other competitors around, we don't see very good operators. There could be people that decide to liquidate certain portfolios that could be attractive. But really, buying another competitor, we have not found a very good opportunity. We have not found operators that would complement our knowledge. Therefore, we do not see an acquisition in the future.

[Operator]

And our next question comes from [ Laura Aguirre ]. She would like to know the amount of loan originations and collections for the first quarter of 2021.

[Enrique Brockmann del Valle, executive]

We do not have specific figures at this point. But as Eduardo mentioned, our loan originations base in the first quarter was above pre-COVID levels of first quarter '20, around 7% above that. We expect to continue with that trend.

So first was -- the first question was origination. The second one was?

[Eduardo Bernhart Messmacher Henríquez, executive]

Collection.

[Enrique Brockmann del Valle, executive]

Collections. Collections are behaving well. And in terms of cash collected as a proportion of the portfolio, we're seeing a normalized behavior. For example, in FISA, in the first quarter, we were collecting around 12.5% of our portfolio, and that compares very well versus prior year and even versus in 2019. AEF had -- the other subsidiary in Mexico, also is increasing its cash collections as a percentage of its portfolio, and it's within historical levels. AFI is also behaving well within historical levels of cash collection as a percentage of portfolio. So we're doing fine on that front.

[Operator]

So our next question comes from the telephone line ending 609. [Operator Instructions]

[Nikolai Dimitrov, analyst]

Hello?

[Operator]

We can hear you.

[Nikolai Dimitrov, analyst]

Great. This is Nick Dimitrov of Morgan Stanley Investment Management. I have a couple of questions. So a really good quarter and actually much better than, honestly, what I expected to see. But what I'm trying to kind of figure out is the sustainability of these results. So when I look at your cost of risk, historically, prior to COVID-19, it's been, on average, 15%, 16%, 17%. And in this quarter, it declined to about 10%.

When I look at the charge-off rate, it's about 15.5% as per my calculations. So historically, cost of risk should track very closely the charge-off rate. So in this quarter, I kind of see a bit of a disconnect here, right? Cost of risk is very low at around 10%. The charge-off rate is around where it's been normally prior to COVID-19, which is in the 15%, 16%, 17% area.

If I have to argue here, we're going to probably see a normalization in the cost of risk in the coming quarters, which will probably impact the bottom line negatively. Do you agree with this statement? Or you believe that you're going to be able to maintain cost of risk at a lower level and respectively, we should see a lower charge-off rate as a result of some of the disposals that we've seen take place recently?

[Eduardo Bernhart Messmacher Henríquez, executive]

So thank you. Let me address it based on the disposals. Finsol Mexico was our group lending operation that we disposed of in the latter part of last year. And that company had a high level of write-offs. So that reduces a bit our write-offs. I see that the level of income statement risk that we're seeing in the first quarter, it's going to be difficult to repeat it in the coming quarters. What we expect is that our efforts on growing the portfolio will result in a higher level of income that would compensate a higher level of income sentiment based on what we are seeing now.

I would also like to point out that the level of balance sheet reserves that we have are way above any historical level that we have ever posted. What happened this quarter is the following. Remember that our reserve factors are calculated based on the size of each one of our buckets. The earlier buckets or even the current buckets have factors that are very, very small, whereas as the portfolio starts flowing through pockets, we start increasing the factor of reserves.

In the first quarter of this year, there were, I would say, a couple of things that aligned that ended up in a cost of risk at the P&L level that was very slow -- very low. First of all, low write-offs. The low write-offs are a product of almost close to a year where we have limited our new origination, which is the highest level of risk in our business, and also the fact that the worst clients, let's say, given the pandemic and given the economic crisis went faster to write-offs. So let's say, the write-offs in the quarter were lower.

And also, what we saw is that our collections were very effective and our, let's say, our buckets achieved a historically good level to just a comparison. If you count the current or less than 14 days past due, our total portfolio was close to 87% in less than 14 days past due. This compares very favorably with the history where, on average, only 81% -- or 82%, let's say, of our portfolio had less than 14 days past due.

So that means that in the model of reserves that we have, some business-as-usual reserves were released during this quarter, and that also contributes to the P&L low level of loss.

Now what do I see going forward? As we have strengthened our origination in the fourth quarter and in the first quarter of new business, our risk is going to grow. And as this release of business-as-usual reserves going forward, we're going to see our P&L level risk go back to essentially historical level with one big caveat, which is the subsidiary that is growing the fastest is the U.S. subsidiary, and that has the lowest level of write-offs and the lowest level of P&L level risk. So we're going to see it going towards historical levels with the caveat of the composition of the portfolio skewing more towards the U.S.

[Nikolai Dimitrov, analyst]

Okay. Okay. So when you say P&L will go back to historic levels, right, so let's exclude -- the period around COVID-19 or 2020. Your return on equity prior to 2020 was very steady, but was kind of fairly low, right? ROEs were always 6%, 7%, 6%, 7%. This quarter, you were able to report an ROE of 11%. And a lot of what you're telling me is that we're going to see a normalization. Does this mean that we're going to go back to the ROEs of 6%, 7% quarterly versus the current 11% or 10% area?

[Eduardo Bernhart Messmacher Henríquez, executive]

So let me talk about return on tangible equity, which was 15% this quarter. What we expect is that the return on tangible equity would remain in the 10% to 15% range. And as I said, there are a couple of effects going here where the P&L level risk is going to go up, yes. What we expect is that with the growth of the portfolio, the income is going to go up. The cost of funding given the divestment of Finsol and Más Nómina should go down because our capitalization has gone up. So these couple of effects, the fact that income is going to go up and that cost of funding is going to go down, will, in our view, compensate in part at least the fact that the P&L level line of risk is going to go up.

[Nikolai Dimitrov, analyst]

Okay. Okay. What I'm struggling a little bit is you disposed of some businesses that were incredibly inefficient and possibly loss-making, right? Finsol Mexico is a perfect example. And the payroll business is obviously a different animal. And I kind of expected to see more of a structural improvement of FINDEP to kind of generate profits starting off of a very low level. But it doesn't seem like we're going to see a dramatic improvement and these quarterly results are more of a one-off than anything else. Would you agree to that? Or you're going to push back in the statement?

[Eduardo Bernhart Messmacher Henríquez, executive]

I will push back as if you actually analyze the fourth quarter results and you normalize those results, removing the write-off of the goodwill that was we saw at Finsol Mexico, it was already a very good quarter. Yes, a quarter of 115 -- close to MXN 115 million as this quarter is remarkable. But without the effects of the sale of Finsol Mexico, although the fourth quarter of last year was -- if I recall correctly, was around MXN 80 million, which is already a very good quarter for us.

So we have 2 very good quarters, and we all expect the second quarter to be good. Not as remarkable as the first one, but we will continue this trend of going up. And what you will see in the future is grow the portfolio within a very controlled cost base. As we're growing within the remaining companies, that's going to bring efficiencies. You're going to see the cost of funds -- cost of funding going down as we have a higher capitalization rate. And you're going to see income going up because we increase the portfolios. Those effects should normalize our quarters. Yes, this is a remarkable quarter, but this is the second very good quarter in a row.

[Nikolai Dimitrov, analyst]

Yes. And you mentioned cost of funds will go down. I kind of struggle to see how that's going to happen because your international bond is the one that dominates your funding, right? You have a little bit of bank loans, and you actually paid down on those quite aggressively quarter-over-quarter. So where is that improvement going to come from?

[Enrique Brockmann del Valle, executive]

We were referring to cost of funds in comparison to prior periods. Of course, when -- if we grow our portfolio, we may need to increase the usage of our credit lines. So the actual cost of funds for the following quarters may increase, but we were referring to our comparison versus prior year.

[Eduardo Bernhart Messmacher Henríquez, executive]

And do remember that the outstanding balance of the international bond is lower than...

[Nikolai Dimitrov, analyst]

Yes. Yes. Yes. So you're talking more about drawing down on your current credit lines and the improvement will come from there more so than anywhere else?

[Eduardo Bernhart Messmacher Henríquez, executive]

Yes.

[Nikolai Dimitrov, analyst]

Okay. Are you still at 50% in terms of capacity? Or -- I think that's where you were last year -- I'm sorry, at year-end 2020.

[Eduardo Bernhart Messmacher Henríquez, executive]

In terms of banking -- bank lines?

[Nikolai Dimitrov, analyst]

Correct. Yes.

[Enrique Brockmann del Valle, executive]

No. Our usage of bank lines is actually low. Let me do a quick calculation. Yes. Around 30%.

[Eduardo Bernhart Messmacher Henríquez, executive]

Around 30%.

[Nikolai Dimitrov, analyst]

Around 30% now. Okay. Okay. And one question about NPLs...

[Eduardo Bernhart Messmacher Henríquez, executive]

If you net down that from the EBIT cash, it would be even lower.

[Enrique Brockmann del Valle, executive]

Yes.

[Nikolai Dimitrov, analyst]

Okay. Okay. Got it. Got it. And one question about NPLs. And NPLs are obviously a derivative in terms of how aggressively you write off bad loans. But I know that in the past, you were saying that you expect NPLs to be -- when I say in the past, that goes back prior to COVID-19, right, that NPLs are going to be -- or you want to keep them below the 7% area.

And then COVID-19 took place, you did dispose of some businesses, your NPLs are now down to 4.4%. And kind of when you think about the business, and I know that previously, you've said that a lot of this is logical, obviously, that the disposal of the payroll business will ultimately result in an uptick of your NPLs. So when you think about your business, where do you see NPLs kind of going into the coming quarters? So how do you want to manage them? Because, again, they are more or less a reflection of how aggressive do you write off your bad loads?

[Eduardo Bernhart Messmacher Henríquez, executive]

Absolutely. So first, on regarding write-offs, up to now, we have a very strict 180 days write-off. We haven't had any special write-off programs or anything. I think when you compare our NPLs to, for example, banks with the available information, we are way below where banks are right now with rates, especially in Mexico, they are higher than what banks offer. So we have made a very good -- we have managed very well the crisis. And the fact is that offering short-term relief programs actually made the bad loans be written off faster just by many of them reaching 180 days faster.

So that 180 days policy is still with us. So we roll off the banks. What's going to happen with the NPL, it's going to go up as we start origination -- originating new mix more aggressively from going with the increase in P&L credit costs. And we do believe that the range of -- that we communicated before, it's a range that is quite efficient given that the rates that we were able to charge for our loans, especially in Mexico.

What's kind of low in the NPLs from the historic levels is, again, the composition of the portfolio in the balance between Mexico and the U.S. where the U.S. NPLs are usually lower. And there, we also have 180 days write-off policy. So they're lower because the risk is lower.

So I still believe that our company in the range that we used to manage is where it's most efficient. And we were able to take risk and grow more aggressively. And remember that if you see our P&L, the biggest line item is not the cost of risk. The biggest line item is our operating costs. And the more we can grow the portfolio without growing our operating costs, the more -- the better the returns to the shareholders. So we are -- I am willing to take more risks because I'm able to extract more efficiency from the operation.

[Nikolai Dimitrov, analyst]

Talking about the efficiency ratio, and I know that in the past, you said that it's very difficult to kind of scale up this business in digital and stuff. I mean that was like a few years ago. But I was wondering, when I look at your cost-to-income ratio, right, it's either in the mid-70s or the high 60s. Do you believe the disposals, specifically from Finsol Mexico, which, again, has been an incredibly and efficient business, and your efforts to digitize as much as you can, you're going to be able to kind of bring those efficiency ratios to a more normal level that ultimately will result in better profitability? And if you believe that there is such a level, like what are you guys kind of targeting internally?

[Eduardo Bernhart Messmacher Henríquez, executive]

So definitely. And the purpose of our strategy of actually concentrating in those businesses that are more similar among themselves is actually a drive for efficiency. Now the level in terms of cost to income, as you were saying, historically, 65% to 70%, we believe we can take it somewhere around somewhere around 60% to 65%.

Now there is one thing that I do want to point out about cost to income. So there's an element of costs and there's an element of income. The more we focus on lower-risk segments like the U.S., the lower rate that we can take. So cost to income is harder to reduce when part of the strategy is also focusing on lower-risk segment where the top line rate is lower. But we are seeing or we are targeting an improvement in cost to income, but it's not going to be in the tens of percentage points. It's going to be in the around 5 percentage points, which is already very good. I mean...

[Nikolai Dimitrov, analyst]

It makes sense. It makes sense. I know that this business is very difficult to digitize fully and scale up. It's very granular. In terms of expenses, it's very intensive. So I didn't expect you to tell me 50%, but 60% would be fantastic if you can bring it down.

And one last question. I'm sure that you've seen the news around AlphaCredit. When I look at your balance sheet, you do have chunky assets such as other accounts receivable. You have a chunky DTA, deferred tax assets. You still have a very large goodwill. How comfortable do you feel with the valuation of those assets? I mean we are just past the fourth quarter when these things get audited and potentially tested for impairment. But in light of what's happening with AlphaCredit, do you feel comfortable with your current exposures there?

[Eduardo Bernhart Messmacher Henríquez, executive]

Yes. I mean the solvency is, yes, we feel comfortable with our accounting, and we keep a very, very strict 3 lines of defense control in -- within the company, and we're very comfortable with it.

Now other things, specifically the AlphaCredit issue, I have no further knowledge than what is public information. We see from the comparison of the balance sheet, it's one order of magnitude now at least difference. The ratio of any of these assets to our total portfolio is totally different than what I saw in the public information that is available for anyone.

[Nikolai Dimitrov, analyst]

Agreed. Agreed. It's smaller, but it's still very material that's why I was asking. Specific in the case...

[Eduardo Bernhart Messmacher Henríquez, executive]

Let me...

[Nikolai Dimitrov, analyst]

Go ahead. Sorry.

[Eduardo Bernhart Messmacher Henríquez, executive]

So in terms of goodwill, I mean we have to go through the exercise of supporting the goodwill every year. So far, we haven't had any issue with -- that would lead us to impairment of goodwill.

[Nikolai Dimitrov, analyst]

What is that goodwill related to?

[Eduardo Bernhart Messmacher Henríquez, executive]

The acquisition -- essentially, right now, I mean we rolled off the acquisition of Finsol Mexico. And essentially, it's the acquisition of Apoyo Económico Familiar. In a much smaller scale, the acquisition of Apoyo Financiero and the remaining part is the acquisition of Finsol Brazil, and that's what the goodwill is related to.

[Enrique Brockmann del Valle, executive]

Yes. And just to provide more information on the levels. The other assets account, we have around MXN 1.4 billion. The goodwill represents around MXN 1.2 billion of that. So no more than 80% of what we have there is goodwill. Most of the goodwill, as Eduardo explained, is related to the acquisition of Apoyo Económico, that has around MXN 900 million; and the acquisition of AFI is around MXN 100 million; and the acquisition of Finsol Brazil is around MXN 175 million.

So more or less, that's what we have in the other assets line in the portion of goodwill.

[Nikolai Dimitrov, analyst]

And what is in accounts receivables? Are these the commissions that you give to your agents that go and originate the loans? Or...

[Enrique Brockmann del Valle, executive]

No. We do not capitalize loan origination expenses. To be honest, we only capitalize loan origination expenses with Fisofo and that I mean has been sold. The rest of the company, we take the origination cost directly to our P&L.

[Nikolai Dimitrov, analyst]

Okay. Okay. So what is in accounts receivable then?

[Enrique Brockmann del Valle, executive]

Yes. So in -- let's say, in the MXN 400 million of other accounts receivable, we have basically a participating advance, around 38%, a VAT receivable around 42%, and we also have around 12% of insurance that we sell that we need to collect. So those are the main components of these other accounts receivables.

[Nikolai Dimitrov, analyst]

I didn't get the first -- what was the first one that you mentioned, the one that is 38%?

[Enrique Brockmann del Valle, executive]

So it's basically taxes...

[Eduardo Bernhart Messmacher Henríquez, executive]

In Spanish, the line is called [Foreign Language], which is the payment that you do of your taxes in advance that eventually, at the end of the year, you take against the annual estimation of taxes.

And [Foreign Language], we operate public, which is the VAT that we pay, things that we pay VAT.

[Nikolai Dimitrov, analyst]

Yes. Okay. Okay.

[Eduardo Bernhart Messmacher Henríquez, executive]

It's the rents of our branches and some acquisition of computing equipment, that's the VAT. I mean the lion's share of that line is tax related both in terms of taxes and profits and VAT.

[Nikolai Dimitrov, analyst]

Okay. Okay. And the DTA, do you think you're going to be able to realize it? I mean it needs to be tested for impairment as well, right?

[Eduardo Bernhart Messmacher Henríquez, executive]

Yes. The deferred tax assets, we also test it every year. Actually, that is, in fact, have been reduced. Now remember that deferred taxes will always be a significant line in our balance sheet. There's a difference between our P&L accounting and our tax accounting. For a tax accounting, there's a 360-day rule for the nonperforming or nonpaid loans to be taken against taxes. So there will be a line. And there's also a line, historical losses, particularly concentrated in our Financiera Independencia subsidiary that have been used more as we have been generating more profit. And frankly, derivatives in our balance sheet are not very large. Yes, the balance was around MXN 300 million at the close of the quarter.

[Nikolai Dimitrov, analyst]

Okay. Okay. Great. Great. Appreciate it. And congratulations on the good results again.

[Eduardo Bernhart Messmacher Henríquez, executive]

If everybody requires the detail, I mean we're quite willing to make it available through our investor relationship, we're very willing to make it available and we understand your concern. We believe we are a very different animal in terms of balance sheet composition than AlphaCredit.

[Operator]

So our next question comes from [ Maria Cruz ], and she would like to know what your expectations of portfolio book growth is for this year?

[Eduardo Bernhart Messmacher Henríquez, executive]

Portfolio growth.

[Enrique Brockmann del Valle, executive]

Yes.

[Eduardo Bernhart Messmacher Henríquez, executive]

Give us a second.

[Enrique Brockmann del Valle, executive]

So essentially, the growth year-over-year will be around 5%. And the biggest growth we're going to see is going to be in AFI. And we expect AFI by the end of the year to be above the $120 million, which has been their -- historically their historical peak. The growth of the rest of the portfolios in Mexico will really depend on how the economic plays out. And that's why we're concentrating our growth in the U.S. because we see a vibrant economy and very healthy demand of credit.

At the end of the day, the growth of the portfolio will -- as I said in the beginning, the subsidiary that we're going to grow the least is Brazil where we are still watching the situation unfold as everybody is with the recent new peaks of COVID.

[Operator]

So our next question comes from the telephone line ending 006. [Operator Instructions]

Okay. We'll come back to the -- oh, yes, we can hear you now.

[Alexander Thompson, analyst]

Sorry, I was a bit -- I was struggling with the mute button there. I have a couple of sort of more sort of qualitative questions. First one relates -- well, the balancing away first thing relates to the situation with respect to Alpha. You've come out today with your best quarter from a bottom line perspective anyway, I think you said 10 years. Sort of maybe not a coincidence, this is the first quarter in a long time where you haven't had payroll lending. Obviously, Alpha is very predominantly payroll lending. Obviously, Crédito Real, another issuer has had a very big slump in their payroll division in 2020.

I was curious, given those sort of seemingly not coincidences, you could sort of describe some of the issues that you were seeing more qualitatively with respect to that segment. I know you're no longer in it, but it is -- it may be not a surprise that you get rid of it and some of your numbers get better for what is supposed to be a pretty secure, high-margin or at least high-yielding business.

And the second question with respect to auditors, we're getting a lot of questions on the auditor situation. Again, relating to AlphaCredit, I know you have the same auditors as they do. Curious how long you've had the auditor. I think SEC recommends, in certain cases, changing auditors every few years. I'm just curious how long you've had the same auditor and whether you would consider as a sort of a sign of or a signal to the market of goodwill that you might even consider changing auditors at some point in the near future.

[Eduardo Bernhart Messmacher Henríquez, executive]

So to answer first your first question, we have been audited by Deloitte since 2012. We have changed partners and every -- I mean periodically, we change partners. Our Audit and Statutory Practices Committee decides on the auditor. It's not my decision. And our Head Auditor doesn't report to me. But this would be a decision that has to be taken by the committee.

We are looking into all of the possibilities. but maybe sometime in the future, Deloitte will make a statement regarding AlphaCredit. And as probably you are, we are also waiting for their official position.

What we are comfortable with is the way that we manage risk within the organization. We have a very strict 3 lines of defense organization where we -- I mean we have the first line where our accounting team, among other things, should have detailed integration and controls of each one of our main accounts. Our second line of defense is our internal risk area detects risk in our operations and detects -- and assesses the compensatory controls.

And then the third line is done by our internal auditor. Congruent with good corporate governance practices, they do not report to me. As the same as compliance, they do not report to me. They report directly to our Board. And we believe we have a very strong internal control framework implemented. At the end of the day, the external auditors will have the final word, but we do have very strict internal procedures.

In terms of the payroll business, I do want to say that our strategy for the last couple of years has been to concentrate in our unsecured personal lending business where we believe the structure of the market and our knowledge of the market is much better. We always thought that for the payroll business, there were already champions. I mean at the end of the day, Crédito Real was considered a champion in that or is considered a champion in that area. And it would have been very, very difficult for us to become the champion. Whereas in unsecured personal lending, we do have the space and we believe we are the best operators.

There is one type of risk in the payroll business. Obviously, the credit risk is much lower. But the counterpart risk is something that we are not an expert in managing and there are companies that are much better at managing them. And we believe that business and the people in that business had a much brighter future with someone that was specialized in the payroll business than with us.

The payroll business never contributed a lot to our bottom line results. And therefore, there is not a -- where we believe that no positive, no negative in the first quarter results from the divestment of this business.

[Alexander Thompson, analyst]

I mean, sorry, just a final -- sort of a final follow-up on that. You distinguish there between credit risk and counterparty risk. Can you give us a little bit more details on what you mean by counterparty risk?

[Eduardo Bernhart Messmacher Henríquez, executive]

So in our individual loans business, you collect directly from the final client, and it's very pulverized, it's very fragmented, and each client represents a tiny fraction of your total portfolio.

In terms of the payroll business, the collections or the money flows actually from the employers of your final clients. And therefore, the concentration of risk in each individual employer is much higher than what we are used to managing. So we are not very good at -- we're not expert at managing that type of risk, that's a counterparty risk that we're not experts. And we felt that there are much better people in the market being able to manage that risk. And they apparently make a good business. I don't know. I have no other information from Alpha other than what they released in their statement saying that the risk came from the derivatives, the derivative position rather than from their payroll operations.

[Operator]

We didn't catch your name or your company name.

[Alexander Thompson, analyst]

Sorry, it's Alex Thompson at Stifel.

[Operator]

And the next question we're having is again around Alpha. It's from Tolu Alamatu -- Alamutu, sorry. And she says, they say, I'm sorry I have to ask about the elephant in the room. Since the AlphaCredit -- since the Alpha Holding announcement, what discussions have you had with your bankers and other stakeholders? And has anything changed this week?

[Eduardo Bernhart Messmacher Henríquez, executive]

No. We haven't had any discussions with bankers. We haven't had any discussions with anyone, regulators or -- I mean we believe as the situation unfolds, maybe there will be some questions. But frankly, we have always managed the business as a totally transparent and open book. And with our creditors, we have the utmost respect because we believe that our mere existence depends on the good relationship with our creditors. So it's always totally transparent and totally open book.

[Operator]

And just one final question, as we're running out of time, from Tolu. They say, besides the Brazil business and the impact of COVID-19, what do you think are the key risks for your business this year?

[Eduardo Bernhart Messmacher Henríquez, executive]

So I mean definitely, the situation of COVID in Mexico is not totally under control. I mean the vaccination is going slow, and there's always a risk of a next wave, of the need of further closing down the economy. And we believe we have shown -- so when we had the strategy conversations around our business, we always said that in the past, we had observed that our business had a much higher base level of risk but a much lower volatility than, for example, banks. And I think this crisis has shown again that, that holds true, that the base level of risk, of credit risk of our portfolio is higher but the volatility was much lower. We believe we're very good operators of this type of business, and that's why we can actually achieve this lower level of volatility. So even in a situation where Mexico enters another wave of COVID, another wave of economic restrictions, we believe we're very well placed to handle it.

So Brazil is a question mark. Again, the economy in Brazil has been going well based on very aggressive stimulus that the government has given in particular to the segment that we serve. And there's always a question mark that what's going to happen afterwards, but Brazil only represents 5% of our portfolio.

The crisis that we face has a very particular issue, which was in correlation of our markets. The crisis hit us hard in the U.S., in Mexico and in Brazil at the same time. So the hedging that we had based on geographic diversification didn't work this time. But we believe that within 2021, the situation of the U.S., the situation of Mexico and the situation of Brazil are going to be much less correlated. And our biggest bet is that the economy of the U.S. is really bouncing back with really -- I mean it's shining right now. So we believe we can always compensate any issue within the other 2 markets with concentrating even more in our U.S. operation.

[Operator]

That concludes our question-and-answer session.

I would now like to hand the call back over to Iván Barona for some closing remarks.

[Iván Barona González, executive]

Thank you very much for your time and interest in Financiera Independencia. If you have any further questions, please don't hesitate to contact me. My contact information is in our web page, findep.mx. Have a good day.

[Operator]

Thank you. That concludes today's call. You may now disconnect.