Financiera Independencia SAB de CV SOFOM ENR
BMV:FINDEP
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Good morning, everyone, and welcome to Financiera Independencia's 2022 First Quarter Results Conference Call. My name is Sophia, and I will be your coordinator for 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. Ivan Barona, Chief Financial Officer at Financiera Independencia. Mr. Barona, you may begin.
Good morning, everyone. Thank you for joining FINDEP's 2022 First Quarter Results Conference Call. With me today is Mr. Eduardo Messmacher, our Chief Executive 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 contents 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.
Thank you, Ivan. Good morning, everyone. Our execution and strategy keeps paying off, yielding once again, our strongest profits for our first quarter in over a decade. We achieved improved levels of profitability while maintaining our financial strength, asset quality and liquidity availability. Let me begin by sharing the highlights of the company's performance and extraordinary results during the first quarter '22. Ivan will go through the financials that show our speeding growth with a strengthened business model. Given the divestiture of Fisofo and the sales agreement of Finsol Brazil's operations, comparable figures will encompass Independencia, AEF and AFI's results, which we will refer to during this conference as a comparable basis.
As for Finsol Brazil, it has been reported under the discontinued operations line since the fourth quarter '21. Furthermore, it is important to bear in mind that as of the first quarter '22, we adopted new accounting guidelines in line with CNBV with most of the impact showing the Loan Loss Reserves. I will start with the highlights of the company's performance. Reported net profit for the quarter reached MXN 147 million, standing at the highest in over a decade, 25% higher year-on-year on a comparable basis. This outcome validates our strategy of focusing on our core business that is unsecured individual loans and disciplined risk collection managements and digital transformation.
Regarding our balance sheet, it remains sound with high capitalization, cash at hand, reduced leverage and credit lines available to support growth. On a comparable basis, Total Loan Portfolio increased 28% year-on-year, reaching a reported level of MXN 7.7 billion. In the first quarter '22, loan origination remained strong in our subsidiaries at MXN 1.7 billion, 14% above last year's on a comparable basis.
As of the first quarter '22 and according to CNBV's methodology, we are disclosing our loan portfolio under 3 different stages. Our stage 1 loan portfolio amounted to 87.8% of the total, whereas stage 2 and stage 3 represented 7.1% and 5.1%, respectively. Under our legacy classification based on days past due, the consolidated NPL ratio in the first quarter '22 was 4.2%, 20 basis points below the 4.4% observed in the last quarter and 30 basis points below the 4.5% from 12 months ago on a comparable basis. The reported NPL ratio stands 170 basis points below the one reported in the fourth quarter '19 pre-pandemic figures. On a comparable basis, the Provision for Loan Losses was MXN 285 million in the first quarter of '22, a 1.3% increase when compared to MXN 281 million of fourth quarter '21. On a year-on-year comparison, we witnessed a 73% increase in this line on the back of a larger portfolio and abnormally low PLLs in the first quarter ‘21.
While PLL to average performing loans increased from 12% to 15% year-on-year, write offs decreased from 19% to 16% in the same period. FINDEP's write offs amounted to MXN 299 million in the first quarter, 29% above those witnessed during the fourth quarter of '21 and 5% higher than the first quarter '21 figure with a portfolio 28% higher year-on-year. Coverage ratio reached 245% measured as Allowance for Loan Losses over Performing Loans Stage 3. This figure reflects the higher levels of provisioning resulting from the adoption of CNBV's accounting guidelines. When considering non-performing loans previous classification, we observed a sequential increase from 194% to 299% in the coverage ratio. In accordance with our main strategic priorities in the quarter, we maintained prudent leverage levels. Our interest-bearing liabilities advanced 16% year-on-year on a comparable basis, well below the loan portfolio 28% expansion. We maintained a solvency ratio of 39% in the first quarter of '22 compared to the 42% observed 12 months earlier.
We ended the first quarter '22 with Cash and Cash Equivalents of MXN 920 million. These figures stood 7% above last year’s on a comparable basis and represents roughly 8% of Total Assets. This level of liquidity was due to a cleanup from our HSBC lines in order to access our new facilities signed on April 5. As such, on a comparable basis, net debt grew 17% year-on-year from MXN 4 billion back in the first quarter '21 to MXN 4.7 billion in the first quarter ’22. On a comparable basis, the Company's Return on Equity Ratio improved from 12.8% to 13.4% year-on-year, and the Return on Assets Ratio grew from 4.9% to 5.4% year-on-year. When considering Tangible Equity, the Return on Equity grew from 17% to 18% on a comparable basis. Now let me share some highlights of each of the subsidiaries during this quarter. To compare the NPL ratios, we would use fourth quarter '19 figures, thus comparing to pre-pandemic asset qualities. Independencia that closed the quarter with a loan portfolio of roughly MXN 2.5 billion and a client base of over 184,000 people. Independencia’s portfolio represents 33% of the total.
The performing loans grew MXN 45 million or 2% in the quarter. NPL ratio of 5.1% compares favorably versus fourth quarter '19 levels of 9.5%. Apoyo Economico Familiar closed the first quarter with a loan portfolio of MXN 1.9 billion and a client base of roughly 102,000 people. IF's loan portfolio represents 24% of the company's total. The performing loans grew MXN 7 million or 0.4% in the quarter. NPL ratio of 6.7% versus fourth quarter '19 levels of 7.4%. Apoyo Financiero, our California-based company, closed the quarter with a loan portfolio of MXN 3.3 billion and a client base of over 32,000 people. AFI's loan portfolio represents 43% of the company's total. The performing loans grew USD 3 million or 2% in the quarter. NPL ratio of 2.1% compares favorably versus fourth quarter '19 levels of 3.1%. One of the company's priorities is to accelerate its digital transformation.
During the first quarter '22, originations considering the same operations have grown 14% versus prepandemic levels of the fourth quarter '19 with 21% fewer employees, considering also the same operations. In particular, originations in AFI grown 27% versus prepandemic levels with 18% fewer employees. In Mexico, 76% of new clients come from digital-enabled channels. In AFI, 48% of the clients come from digital-enabled channels and 78% of collections are done outside our branches. I will turn the call over to Ivan, so he can provide details of our first quarter financials. Go ahead, Ivan.
Thank you, Eduardo. Please note that the following results will provide a comparison of our performance considering only the remaining subsidiaries in our operation. Financial results. As a result of the corporate strategy, in first Q '22, interest income was MXN 1.11 billion, a 22% year-on-year expansion on a comparable basis. Net interest income of MXN 977 million stands 25% higher than those witnessed during the first quarter of '21 on a comparable basis. The Provision for Loan Losses was MXN 285 million in the first quarter of '22, 73% higher when compared to the first quarter of '21. It is important to note that this performance is not quite comparable given the recent shift in loan loss reserves methodology.
On a comparable basis, non-interest expense in the first quarter of '22 came in 11% higher year-on-year, below the 25% increase in Net Interest Income and below the loan origination expansion of 14% year-on-year. With all the above explained, the company highlights this as our strongest profit for the fifth quarter in a row, the best in the last 10 years. Financial position. The corporate strategy took our company to a strong financial position with a liquidity buffer that represents barely 8% of the total assets and a high solvency ratio. During the quarter, our discipline to the strategy took us to keep a sound balance sheet.
Our net debt measured as interest-bearing liabilities minus cash and cash equivalents reached MXN 4.73 billion at the end of the quarter. It posted a MXN 704 million year-on-year expansion compared to a MXN 1.67 billion expansion in our loan portfolio, handing cash generation. Overall, the company's financial health is good and in a stronger position to keep both growing and facing the pandemic. During the quarter, we announced the signing of a MXN 200 million credit with Santander Mexico on February 1. Likewise, on April 5 we formalized a credit line contract with HSBC Mexico for up to MXN 1.2 billion maturing on April 2024.
Now I would like to open the call to questions. Operator, please do so.
[Operator Instructions] Our first question comes from the line of Nick Dimitrov. Please state your name and company name and ask your question.
Nick Dimitrov from Morgan Stanley Investment Management. Eduardo, Ivan, I have a few questions. So you adopted IFRS 9. Now we have stage 2, stage 3 loans. Can you give us a definition of stage 2 and stage 3? I just want to make sure that I understand what really goes in these buckets because I was looking at your aging balances table, and it seems like the numbers that I come up with are slightly different than the ones that you've reported. So I just want to make sure that I get this correctly. So this is the first question. If you can ask, that would be great before we move on to the other questions.
Excellent. Thanks, Nick. Well, basically, adopting this CNBV’s methodology gives us a hard time making a comparable since some external factors are considered when putting the loan portfolio under these stages. So -- well, a simplistic way to look at it, which it is not fair enough, is considered they past due in 3 different buckets: between 0 and 29 days, between 30 and 59 days; and about 60 days. So that's why under our balance sheet, we are using this configuration for reporting our first quarter balance sheet. And going back, we are still using our previous methodology in order to post our loan portfolio between NPLs and performing.
There are a couple of nuances now that make this classification a little bit less straightforward than just today's [indiscernible]. So for example, when the loan is restructured, it will not leave the stage it is in until you have actually sustained payments for a certain number of periods. So we're following the rules of the CNBV. Not necessarily the total equivalent to IFRS 9 in every sense. Actually, the CNBV’s prescriptive on the reserves factors rather than allowing a calculation based on experience. And therefore, it's not a strictly IFRS 9, but it's closer to IFRS 9 that while existed before. And the classification in stages, as Ivan mentioned, starts from the day’s past due, but it has a few nuances that wouldn't make the reconstruction of stages from this day’s past due straightforward.
So roughly, the stage 3 loans are 60-day past due or 90-day plus past due?
90.
90, right? Okay. So that's in line with IFRS 9. And then stage 3 is 30 to 90?
Stage 2 is 30 to 90 roughly.
Okay.
So for example, if you have a stage 3 loan that you restructure, it wouldn't leave stage 3 until you actually have sustained payment, even though the restructured loans may be 0 days past due. And that's one of the examples that make the comparison not that equivalent.
Okay. Okay. Understood. And then -- so under IFRS 9, I guess, the cost of risk that I calculated is 14.8%. I don't know whether you agree with this number, but I was wondering if you can give us some guidance in terms of where you see kind of the longer-term cost of risk now that you've adopted IFRS 9.
So as I mentioned, this is not IFRS 9. It is roughly similar. So it has 2 effects. First of all, the one of. The one of happens when we, let's say, change the methodology and therefore, we take additional reserves in the balance sheet, which, let's say, we took it with the numbers of the 31st of December 2021. Let's say, one-off impact that is actually applied directly to results of previous periods and therefore, directly to capital. So that's a one-off.
Is that one-off, I apologize for interrupting you because you're kind of answering one of my questions. Is that amount roughly MXN 300 million because I was trying to reconcile your current allowance for loan losses with the beginning one at the beginning of the quarter, and I came up missing MXN 300 million, and I assume that you -- that was the effect of adopting these elements of IFRS and it's a charge against equity. Am I right here or...
In the line of EPRC of the balance sheet, the effect is MXN 307 million. That is the difference between the previous methodology and the new methodology.
Yes. That's great. It's exactly a number that I come up with.
Exactly.
Perfect.
There are other effects, specifically in taxes, that make that impact smaller in the capital. But that impact went from the balance sheet, let's say, from the asset lines as a negative in the asset lines to the capital without going through the P&L because it is a change of methodology and therefore, the regulation allowed us to do this directly to capital.
Got it. So going back to kind of the original question, let's say, cost of risk, 15% in Q1 2022. Do you think that this is kind of around the long-term average below or above? And where do you see the long-term average? We have no idea at this point.
Really, this is a very new methodology for us. It has a few elements that we do not control internally. Specifically, one of the elements is the behavior of customers with other lenders that is in their bureau. And that is an element that we really do not control. Traditionally, we're better at collecting than our competitors. But really, we do not know how this is going to affect. Overall, we believe that since the P&L figure is delta reserves plus write-offs, minus recoveries, we believe that shouldn't change dramatically against history, but we're really just starting to deeply understand the effects of the methodology. One effect that we're actually seeing is that the reserve factors for the CNBV are very high starting from one day past due. Therefore, anything that is not in 0 days past due has a higher reserves factor than what we had in our legacy methodology. And that could bring us a little bit of noise between a few of the months or a few of the quarters. But overall, I mean long term, if you proxy the, let's say, the cost of risk with write-offs, there shouldn't be a huge change.
Yes. Yes. That's kind of the rationale that I mean seems good. And then you didn't mention in your statement that you purchased some of your outstanding bonds. You didn't specify an amount as per my calculations, it looks like you bought back roughly $15 million. Would you agree with that number?
No, it sounds very high. Let me get Ivan to answer.
Nick, actually, the amount was $5.3 million.
It's much lower than that. Interesting. Okay. There must be an FX effect there. And so that was in Q1. Then what about in April? Because your bonds fell off and there was a good opportunity to buy. Have you bought any bonds additionally or...
So we essentially have been in a quiet period for a while now, and we have not made transactions therefore. As we go out of the quiet period. Just as a reminder, we do not have a bonds buyback program, but rather we do it opportunistically. So it depends on the opportunities showing up.
Makes sense. And then with regard to loan growth, so it seems like on a quarter-over-quarter basis, loan growth stalled, including in the U.S., which has been the fast-growing part of your business. And I also noticed that there was an uptick in NPLs in the U.S. So I was wondering, was that -- what's driving this temporary stalling in loan growth and particularly in the U.S.?
Absolutely. So back in November last year, there was a change in regulation in the U.S. that changed the rules for contacting customers for collections. We -- I mean, again, this was a totally new regulation that limited the number of times you could actually contact the customer and the types of interactions you could have with them. So we, in a prudent manner, before continuing our steady growth in the U.S. that we had been experiencing last year, we decided to understand what was going to be the effect of this new regulation in the risk of our workflow. The increase in NPLs, I see it more as a natural effect of the aging of the new loans that we granted last year.
Remember that 2021 is a particularly disfavorable comparison point as we were exiting the pandemic, where essentially our portfolios got, if you want to call it, this way part of bad customers and also our portfolios that we have a significant origination of new businesses during 2020. So 2021 is a bit of a normally low as a comparison point, given these 2 effects. The level of NPLs did increase during the first quarter. And I do want to remind you that during the first quarter, we had the spike of Omicron in January, which had an effect both on originations and on collections. We are seeing these levels or the levels in origination and collections come a normal level as the quarter advanced, but the impact of January was quite significant. So again, in the U.S., a few impacts, the change of regulation that made us a bit more prudent until we actually understood what was going to be the effect on asset quality and secondly, Omicron.
Okay. Makes sense. And last question for me. In terms of funding, what's left for the year, considering the fact that you signed 2 credit lines, one with Santander Mexico and more recently one with HSBC Mexico. So what's left on your books for the rest of the year?
So I think one of the elements to consider there is that we are -- we have ongoing the process to divest Brazil, and that would have some impact in our needs for funding for the rest of the year, depending on the update that, that transaction goes through. And given that, Ivan, I do think we have any significant refinancing...
No. Actually, our debt profile seems really comfortable for the time being. We have enough room in current lines and the new lines to fund any growth for the rest of the year. And as Eduardo mentioned, we would be probably getting some funds from here to year-end. So that's -- we're basically covered in order to retake even if we post larger growth than the one witnessed to the last quarter.
Our next question comes from the line of [ Frank Lehman ].
I hope I can be heard. I'm calling you from Berlin, Germany, our company's [ Taylor ] Asset Management. First of all, thank you very much for the presentation. Ivan and Eduardo. Congratulations to a rather good and progressing quarter. Nick asked a question about the buybacks. Can you share with us what's now outstanding of the bonds? That would be my first question. What's the nominal that's still there in the market?
Yes. Frank, it's USD 171 million outstanding.
Okay. 171 million. Okay, just for the border call here. My main question is around AFI, how you call them? AFI. So it's now 45% of the total portfolio. It's -- the assets are all dollar denominated. The performance is quite good. And if I look at the margins, you can earn, of course, they are lower than what you are, maybe in Mexico, but the quality is quite convincing, I think. Any thoughts on what you could do with that assets in the market about maybe raising capital or using it as a financing vehicle or can you just share some thoughts on that? Or are you already using it in the U.S. and funding the U.S. with the local assets? That's something I would be interested in. Thank you.
So it is definitely one of our most successful strategic positions, the one in the U.S. By the very compelling product market fit, we have seen incredible growth. I mean you have to remember that we started with just one branch when we purchased that operation. It was one branch with $2 million. And we expect the company to continue growing. Now as it continues growing, we are seeing various alternatives in financing using more, let's say, asset-backed structures in the U.S. Right now, we don't have anything imminent for the near future. But we do see more financing coming directly from the U.S. operation in the future.
It is, as you said, a lower margin risk-adjusted. It is lower than Mexico. However, we are finding a way of operating that operation, let's say, leveraging the costs of back offices in Mexico, while continuing to harvest the good quality of the portfolio in the U.S. So we believe that as the company grows, we're going to see an improvement in its efficiency measure, if you want to call it that way, as costs as non-interest expense divided by the size of the portfolio. That should give us very, very attractive economics in spite of lower margins when compared 2 months ago.
Eduardo, do you have a -- let me put it something like a 2- or 3-year— I don't want to call it a target. Do you have a vision where this business could be in 2 to 3 years? If I listen to you, I hear it's going to be definitely bigger. Maybe you also go into another one of the states in the U.S. But on the other hand, it's 45% of the total portfolio already. So is there something you want to share with us on that?
So we're a bit hesitant on giving, let's say, precise guidance on that operation. We are growing it aggressively. And we have started operations in Arizona, and we are, right now, starting to get into now the risk in the area, understanding the types of clients, understanding where they are in California. So it's a little bit early to tell or to give you any news about geographic expansion. What we do see in the company is that as we progress in our digital transformation, and as we progress in actually being able to sell outside of California without having to establish a large branch network, we will see a much more efficient company. And we see in the future a company that has its largest operation in the U.S. and actually mostly of its operation in the U.S. If this continues to prove as successful it has proven so far in terms of broad market fit.
And regarding the value run, the treasury, the hedges against that U.S. operation, of course, these U.S. assets do not require any hedging. They can be matched with the dollar bond. And -- is that right? What I'm thinking about that the larger the share of the U.S. operation gets, the less hedges are required for a shrinking outstanding notional of your you bond?
That is absolutely right. And what -- the way we have been handling the -- our assets and liabilities is to consider the portfolio in the U.S. as a natural hedge. Therefore, more growth, the more we unwind the hedge position on our peso as we have assets and liabilities in the same currency. So yes, you're looking it totally right. And that also lowers the cost of the ease in international markets, and that's very good. AFI has been posting very good results. And we believe that as it goes forward and we can actually position it much more as an independent or media operation in the U.S., its cost of funding should go lower, and this should contribute also to an increased return on capital in that operation.
And my last question because you mentioned that there those are significant efficiencies when you run the operation out of Mexico and the clients are based in the U.S. and dollars, et cetera, et cetera. When I look at the separate numbers for AFI in the back of your -- one of your statements, do I see the full costs there? Or do you cross-charge them for the cost from Mexico into the AFI operation? Is there...
Yes.
That’s okay.
Yes. We have an audited transference price policy.
Okay. Transference pricing. Yes. Okay. Fine.
All of the operations have to carry their own weight. Nothing we did do an investment — an important investment in increasing the capabilities of the company to ensure that we could accommodate the growth that was coming. And what we see forward is that we should start seeing increases in their portfolio that are not accompanied by increases in costs, therefore, achieving much higher efficiencies than what we see today.
Our next question comes from the line of Nicolas Riva.
Can you hear me?
Yes, perfectly.
Okay. Great. Nicolas Riva for Bank of America. And by the way, unfortunately, I missed most of the earnings of the call, so perhaps some of the questions that I'm going to do were already done by Nick Dimitrov before, so apologies in the past for that. The first one, if you can tell us the amount of cash collections in the quarter in pesos. I know that you are disclosing the percentage of the loan book for each of the subsidiaries. But if you can tell us cash collections in pesos?
And then the second question, now you are providing a breakout of the loan book in stages 1, 2 and 3, which is very useful. One thing, my understanding was that stage 2 loans were loans delinquent between 30 and 90 days. stage 2 and stage 3 was the equivalent of the own NPLs, so delinquent over 90 days. That was my understanding. And for example, by Norte, that's what I understood what they said about last Friday in their earnings call. But in your case in the earnings report, you are saying that actually, that the definition of stages 2 and 3 is not dependent upon the number of delinquency days. So if you could clarify how are you define it stages 2 and 3?
And then one question about the coverage. So if I look at the coverage of stage 3 loans, it's very high, right? It's well over 200%. But if I look at the coverage of stages 2 and 3 loans combined, it's much closer to 100%, so to be 103%. So you as management, are you targeting a specific number for coverage of stages 2 and 3 loans combined? Or how are you thinking now about coverage, another that we have been this disclosure of the stage 2 loans? And then bank lending, if you can discuss a bit of the facilities this year plans to roll over? And finally, how much do you buy back of the 2024 bond in the first quarter?
Thank you. Let me see if I remember all of the questions. So let me start by stages. Yes, stages are roughly equivalent to days past due in the way that you described. But there are a couple of rules, let's say, for stages that do not apply to days past due. And specifically, they have to do with restructures. I think that's the main issue. So again, if you were to restructure a stage 2 loan, it may end up being 0 days past due, but actually classified as a stage 3, or it may end up being 0 days past due, but classified as a stage 2. So it's roughly equivalent, but the bases are days past due, but there are other considerations, and the main one is sustained payments of restructured loans. That is the main difference. And that's why you will not reconcile one-to-one, they fast due to stages.
So just to make sure I got this. So at least stage 2 should be equivalent to the loans delinquent between 30 and 90 days plus some cases of restructured loans, which are not delinquent on the basis of the new loan, but if I restructured — the same thing for stage 3. So stage 3 will be 90-plus delinquent days plus some of these cases are restructured loans. Right?
That is correct, yes.
Okay. Okay. All right. And on the recovery…
Sorry, on those restructured loans can actually change stage once they have their sustained payments.
Right.
So second, the coverage ratio. We don't have a specific target for coverage ratio. We believe that with our with our legacy consideration and with the new classification, it's higher than anything that we have ever had in our history. So it's quite high. And regarding stage 2, you got to remember that the CNBV methodology has expected losses at every moment and depending on days past due of the loan. So actually, the methodology starts building reserves as a loan advances in delinquency. So really not -- I still have to think what stage 2 and stage 3 coverage would mean. But in my mind, the methodology already considers the expected losses as it starts building reserves. I think on repurchases, you can take that question, Ivan, please.
Nicolas, basically, during the quarter, we bought back around $5.35 million worth of our ‘24 bond. Currently, the outstanding amount reached $171 million.
Okay. And then, so Ivan -- okay, so $5 million you bought back in the first quarter. And then so going forward, I guess the idea would just be to just do opportunistic, small transactions in the open market of that 2024 buyback? Small size.
That’s totally right. It really depends. We do not have a buyback program. What we have is -- we respond to opportunities.
Okay. All right. And then -- and I think that I got the last part when you were answering Nick's question about some of the bank lending facilities, but if you can repeat that some of the lending facilities coming to this year, expectations to roll them over, under?
So we renewed our largest facility that is with HSBC. And frankly, the remaining ones are not that significant. We also reported opening a new line with Santander. But all of the risks are really smaller lines that shouldn’t be any major news.
Okay. And then the last question is the amount of cash collections in the quarter in pesos. And also, if you can, and again, I know you have the table where you disclosed cash collection percentage of the loan book. But if you could do that taking to about pesos, so cash collections in Mexican peso, so we can compare that with the amount of originations in the quarter that will be very useful.
Okay. Explicitly. Then the collections for the quarter were MXN 2.9 billion. It was up from MXN 2.80 million from the last quarter.
And maybe just on the funding a reminder that we just mentioned in the last question, that we're still in the process of divestiture of our Brazilian operation, and we should get roughly MXN 230 million back when we closed that deal. So there's very little concern with funding for the rest of the year in my mind.
[Operator Instructions] We have not received any further questions at this point. So that concludes our question-and-answer session. I would now like to hand the call back to Ivan Barona for some closing remarks.
Thank you very much for your time and interest in this information that proves the strength and market leadership of Financiera Independencia. If you have any further questions, please don't hesitate to contact me. My contact information is in our web page at findep.mx. Have a great day.
This concludes today's call. You may now disconnect.