Financiera Independencia SAB de CV SOFOM ENR
BMV:FINDEP
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Good morning, everyone, and welcome to the Financiera Independencia 2020 Second Quarter Results Conference Call. My name is Ashley and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference call is being recorded.
For opening remarks and introductions, I would now like to turn the call over to Mario Govea, Investor Relations Officer of Financiera Independencia. Mr. Govea, you may begin.
Thank you. Good morning. Thank you for joining FINDEP's 2020 Second 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 on Friday, 17, 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.
Thank you, Mario. Good morning, everyone. We [ are bigger ] started this year with a goal of growing our own portfolio in 2020. However, the [ company’s ] growth and the stability to the business environment and the well-shaped depth to our operations. Given this, we designed an action plan, which we have been executing during the last 4 months. I can tell you that we have been successful in preserving the quality of our loan portfolio and strengthening our financial position.
The challenging situation has also fueled innovation, spinning out the digital transformation of the company towards a business model in which operations can be done remotely, where branches changed their traditional role and the company provides more digital alternatives to its customers. We have strengthened our capability to process clients remotely using digital media. We're able to process loan renewals digitally without requiring physical presence of our clients in branches. And we're able to undertake loan collections electronically by using payment channels in service 24/7. In the short term, we will be able to disburse new loans and renewals using our electronic channels, which will round up our investment [ take by capping ] with remote service processes at 100%. This will be a complement to our current supply of payment methods and will allow us to redefine the concept of our brands.
Now let me highlight 3 relevant elements to the action plans that we contend have helped us maintain our strength in this complicated market time. The first one is to preserve liquidity. We strengthened collections, took a conservative approach to origination and kept very close communication with our funding sources. During the second quarter, we generated positive operating cash flow that allowed us to build and importantly increase the buffer and reduce our liability. We maintained all of our funding sources, enabling the use of our operating cash flow to strengthen our balance sheet.
The second element of our action plan was to support our clients who are managing their provisions to reflect the expected increase in risk to rise from the economic impact of the pandemic. During the second quarter, we offered [ various ] products to clients on a case-by-case basis, so they could get help and keep up their good low payment history with us. We provided support products to 18% of our portfolio in the second quarter of 2020. As of June 30, only 6% of our portfolio remained with an active support for us. As of [ July 16 ], we have less than 3% of our portfolio with active support products.
The company's NPL of 5.6% of the second quarter of 2020 is only 30 basis points higher than the ratio started in March. However, we decided to increase the level of provisions for loan losses, have already approved expected loss model to account for future economic impact of the pandemic. We created additional reserves of MXN 441.6 million, taking the allowance for loan losses to over MXN 1 billion, a 74% increase versus the first quarter of 2020. The rationale that we used to create these additional reserves was to position the portfolio as we receive support products via factors that we use to provision loan restructures.
The third element of our actual plan was to capture market opportunities to strengthen our balance sheet. With the cash flow generated during the quarter, we reduced our total liabilities by MXN 418 million and generated market related income of MXN 361 million. The effect of our voluntary increase of provisions for loan numbers, net of extraordinary market-related income, led to the company to post a MXN 56.7 million net loss in the second quarter and a cumulative MXN 12.5 million net profit for the first 6 months of 2020. We increased our capitalization ratio from 35.2% in the second quarter of '19 to 38.5%. With this solvency level, we're prepared to back up the financial health of our subsidiary company, should they require it.
Let me now provide some insights of our subsidiaries during the second quarter. Please remember that all of the market-related income is concentrated in Independencia, while the impact of the initial reserves is spread across the company.
Starting with Independencia. It now serves 240,000 clients, about half of the company's total. Its loan portfolio decreased to MXN 3.2 billion, a 6.6% contraction year-on-year. Payroll loans represent 29% of Independencia's portfolio and 11% of the company's total. Independencia's NPL ratio is 6.5%. Payroll loans NPLs are 2%, 70 basis points below the second quarter of '19. Independencia had a net income of MXN 179 million during the second quarter, it includes the MXN 361 million market-related income.
Apoyo Economico Familiar now serves 100,000 clients, 31% of the company's total. Its loan portfolio remained at MXN 1.7 billion, a similar amount observed a year ago. AEF's NPL ratio is 7.3%, 80 basis points above the first quarter of 2020 and 100 basis points below the second quarter of '19. AEF posted a net loss of MXN 99 million during the second quarter, a cumulative MXN 68 million loss in the 6-month period. The loss is driven by the creation of additional reserves with a P&L impact of MXN 86 million.
Finsol serves nearly 108,000 clients: 79,000 in Mexico and 29,000 in Brazil, providing group lending products. Finsol Mexico decreased its loan portfolio 17% year-on-year to MXN 659 million, whilst Finsol Brazil reduced its portfolio 32% to MXN 283 million. They represent jointly 8% of the company's total portfolio. Finsol NPLs are 6%, 50 basis points above the second quarter of '19. Finsol Mexico posted a net loss of MXN 99 million during the second quarter and with solvency and net loss of MXN 11 million. The loss is driven by the creation of additional reserves with a P&L impact of close to MXN 65 million.
Our California-based subsidiary, AFI, now serves over 27,000 clients, 6% of the company's total. AFI's loan portfolios is worth $100 million, which represents 28% of the company's total. AFI's NPLs are 3% and have remained there for the past 6 months. AFI posted a net loss of MXN 76 million during the second quarter. The loss is driven by the creation of additional reserves with a P&L impact of MXN 142 million.
I will turn the call over to Enrique, so he can provide details of our second quarter financials. Go ahead, Enrique.
Thank you, Eduardo. The strategy that Eduardo just explained, allowed the company to successfully face the challenging environment brought by the COVID-19 pandemic. I will now discuss our consolidated results for the quarter that derived from the implementation of our corporate action plan.
In 2Q '20, interest income decreased 4% year-on-year to over MXN 1.2 billion. This reflects the slowdown in the company's loan origination pays and the related decrease in loan portfolio balances. It also reflects, to a minor extent, the effect of providing temporary relief products to our clients on a case-by-case basis. Interest expense was MXN 193 million, a MXN 4 million increase relative to 2Q '19 and a MXN 25 million increase relative to 1Q '20. The net interest income for the 6-month period of the year is MXN 2.2 billion, 0.9% lower than the amount reported for the equivalent period since 2019. The provision for loan losses in 2Q '20 was MXN 799 million, 144% higher than second quarter '19 and 125% higher than first quarter '20. The provision for loan losses includes MXN 442 million of voluntary prudential provisions above the company's approved expected loss model. With this, the coverage ratio of nonperforming loans increased from 121% in 1Q '20 to 218% in 2Q '20.
Net interest income after provision for loan losses were MXN 264 million, a 67% decrease with respect to 2Q '19 and roughly over MXN 1 billion for the first 6 months of the year. Net operating revenue was MXN 675 million in 2Q '20, a 26% decrease versus 2Q '19, explained by the decrease in commissions and fees collected and fewer revenues from insurance policy financing and mobile phone financing due to the planned loan origination slowdown in the quarter. Net operating revenue includes MXN 362 million of market-related income obtained after reducing liabilities and balancing our foreign exchange hedging position. Noninterest expense was MXN 714 million, an 11% reduction versus second quarter '19 and a 21% reduction versus first quarter '20. This reduction is part of our liquidity strategy where we reduce expenses to boost our operational cash flow. In second quarter '20, we were able to reduce operating expenses by MXN 41 million or 7.9%. We have also reduced personnel expenses by MXN 27 million or 22.5 % during the first months of this year versus 2019. With all the above explained, net income after tax was minus MXN 56.7 million in the second quarter, a decrease of MXN 145 million versus second quarter '19. The net income for the 6 months period is MXN 12.5 million.
Now I would like to open the call to questions. Operator, please do so.
[Operator Instructions] We will now take our first question from Nicolas Riva of Bank of America.
I have one question on your cash position. There was a decline in the second quarter, and I wanted to ask you what was the driver for that? Of course, we did report a net loss will determine the quarter because of obvious reasons. But the net loss was mainly driven by higher provisions for loan losses, which is noncash. So if you could explain what drove the returning cash position in second quarter?
And then you also saw a decline in the balance of the 2024 U.S. dollar bond at the quarter, and the decline was about $50 million in the quarter, the closing balance of about $190 million. Did you buy some of your bonds in the open market? And maybe it sounds like it's counterintuitive you did so that you would do that in this environment where all companies are trying to reserve cash and liquidity position. If you can explain to us what was the driver there? And also, maybe what was the driver for the market-related income which was very strong this quarter? The current MXN 16 million in this quarter. I'm not sure that was related as well to buying back some of your bond in local markets.
So let me start by saying that most of your questions are related. Enrique will explain in more detail, but the decrease in cash position is mainly due to a reduction in liabilities. And part of it is that, while we do not have any repurchasing program for the bond, we have been offered and we took advantage of those offers of -- to buy back, at a discount, a fraction of our bundle outstanding.
Thank you, Eduardo. So as Eduardo explained, when we closed last quarter, we enabled a plan to face the COVID-19 pandemic. So there were 2 points related to protecting our employees and giving support to our clients and there was a third point relating to our liquidity. So we basically took a focus on our liquidity position in order to preserve it. So we did several items there. The first 1 was to reduce our origination pace. And secondly, we reduced our expenses. By doing that, we generated a positive cash flow position. With that positive cash flow, we were able to purchase some of our long-term liabilities and reduce our long-term position there. The second part is that we have close contact with all of our funding sources. And we make sure that our operation with them continue normally. And taking into consideration this relationship with our funding sources and the liquidity that we generated, we basically took -- look at the price of our long-term liability and decided to purchase some of them given the price that they have in the market.
You mentioned why this makes strategic sense. As Enrique mentioned, we took our most expensive liability, and we had the opportunity of reducing it. And through the process of reducing it, we created -- or we generated market income. Given that we were able to repurchase it at a discount. In the current environment, where we are very prudent with originations. And given the fees, leads to the contraction of our portfolio, this make sense. And we continue to have nonbank lines to ensure that we have a strong position as soon as we decide to grow back our portfolio.
And then on my last question, on that Market Related Income, the MXN 360 million, so I think you said that many of my questions are related. I'm not sure if that was related also to buying back.
The opportunities of buying back the bonds that we took advantage of were at discount, and therefore, that generated market-related income. Additionally, remember that we have been very prudent, hedging our U.S. dollar liability with a full cross currency swap. Obviously, there's part of it that we used to fund in the U.S., which is not covered. But the part of it that is from Mexico is covered by a full cross-currency swap. And with the valuation of the peso relative to the dollar. And the only one of product risk coverage, given the buybacks that we were able to do, we also generated multiple EBIT income.
Okay. So on the Market Related Income, you improved the gain on buying back on the bonds on the 70 [ versus ], did you book that gain in Market Related Income [ numbers ]?
That is for exact plus the unwind of the coverage that we have.
We will now take our next question from Nik Dimitrov of Morgan Stanley Investment Management.
Good afternoon. If I could -- hello?
Yes. Go ahead.
Oh, okay. Great. I have a few questions. The first one is sort of related to Nick's question. Can you quantify for us exactly how many bonds of the FINDEP 24s you purchased back? And what is the plan for those bonds? Are you going to cancel them? Or you're going to kind of keep them on the balance sheet for a while, then possibly resell them on the secondary market? And considering the fact that the 24s are still trading at a fairly steep discount, do you believe that you're going to engage into additional purchases?
So let me first clarify that the company does not have a bond repurchase program. We have made purchases from time to time over the 24 -- over a 24-month period since August 2018, always from an opportunistic standpoint to optimize our cost of funds. We will maintain that spend in the future. Now how much we have repurchased, Enrique, if you can?
Around $50 million in the quarter, and we have canceled that debt.
Okay. Excellent. And what point you were thinking you're talking about funding? And apart from the decline in the long-term funding, I also noticed that your bank and other loans declined by about 22% quarter-over-quarter. If you can kind of give us any color in terms of like what's happening there.
Sorry, so I didn't hear the question well, sorry. Can you repeat?
Sure. I noticed that the bank and other loans line declined as well on a quarter-over-quarter basis, about 22%, which leads me to imply that you probably paid off some of your bank loans. Can you give us some color in terms of what kind of made you do that?
Yes. Well, basically, during the -- when we finished the last quarter, we draw up a little bit the lines that we have. And throughout the quarter, we -- as I said, we operated normally with our banking sources. So some amortizations came along the quarter, and we basically did those amortizations, and we didn't draw up the line again because the function with our funding resources was working correctly. That was mainly the reason. The other was that we think that the cash position that we currently have is the correct one for the company. We didn't see a need to maintain a higher cash position.
Understood. And one question regarding the loans that benefited from the relief program. You said that it was about -- was it 18% currently as of Q2 12% of the borrowers have already reached the end of that grace period? And the number has declined further to probably about 3% of the loans are benefiting from the relief program. What is your experience regarding going back to the original payment schedule and potentially default?
Okay. So first of all, 18% 1-8 that received resolutions. And we currently, as of July 15, have 3%, now as you mentioned. It is a bit too soon to tell. I think the situation that we're facing is uncertain for everyone. And we decided, in spite of regulatory facilities in terms of reserve generation, we decided to reserve these loans based on our experience before the prices with restructured loans, and we use those factors to reserve.
We need to simply tell you, frankly, what we are very excited about is that 82% of our portfolio did not receive any support. And we are still in very early stages of going back to normal payment schedules to be able to give you any insightful comment on those loans. We do expect to see higher delinquencies on those loans. We do expect, as this pandemic is prolonging to see more economic pressure on these loans. That is why we generated the additional reserves that we are reporting this quarter.
Okay. So is it fair -- so maybe you can -- I can ask the question in a different way. Considering the correct provisioning that you did in the quarter, what do you think is going to happen to cost of risk, right? I calculate cost of risk at around 37% in Q2 versus a long-term average for you, anyway in the 15% to 17% area. Do you believe that cost of risk will remain elevated in the coming quarters? Or because you already see that proactive provisioning, we're going to see cost of risk moderate to the 16%, 17% kind of long-term range?
To my best understanding that the next quarter are not going to be business as usual. So cost of risk is going to increase. However, the increase that we saw in second quarter has to be understood as an aggressive position from our side to generate the reserves promptly. We want to keep confidence to our -- to our funders that we are taking proactive actions. And we don't expect this level of risk that you are calculating to remain at that very high level.
As mentioned, now 82% of our portfolio continues to pay in the same fashion or way that they were paying before the pandemic, and that gives us a positive outlook. At the same time, I do want to say that we have never seen this type of crisis, where the markets are corrugated and the effect on the economy is prolonged. And at the same time, we also have experience in other crises, we will see an increase in the risk and through our more disciplined origination and a more effective collections, we can go back to the 15% to 20% losses that you were mentioning. So there's a lot of uncertainty in my comments. And please do understand that we are all facing a lot of uncertainty. But we do expect to see higher delinquency costs in the next quarter, but we also do expect the market to come back to something more normal as [ economy come back ].
That's very good color. More questions regarding your expense structure. And I've asked this question before, considering that your cost structure is very heavy, and the business has to be relative inefficient with efficiency ratios of 65-plus. You did an amazing job in terms of cutting costs by about 20% quarter-over-quarter. You overshot your kind of target at 16%. We did talk about some of the origination migrating to the digital channel. What extent do you think that we can see your cost going forward, remain at that lower level, where the efficiency ratio is going to be 50% or below 50%, obviously, dramatically improved from the like 65-plus area, previously?
So as I mentioned in the presentation, our goal is to come out of this crisis with a faster pace of transformation towards a business model more like what you described. I wouldn't say a strict target, as mentioned, we are operating in very uncertain times. But we do see doing -- our commitment is to grow or to grow back the portfolio in a more efficient way. And I think this crisis is fueling innovation, and that's going to help us. We are increasing the level of adoption of digital tools in our sales force and in our client base. And we see that helping us in the future with costs.
We are doing a very, very strong cost reduction effort, as we committed in the last call, and I still want to clear with you that we made this commitment that we -- I think we overdelivered in the commitment that we made with you. And this is once again our effort to give you confidence that we are taking the right actions to deal with this situation that none of us would have chosen. But we do know what we can in terms of reserves, in terms of taking advantage of the market opportunities and also of addressing our cost base to ensure that we deliver a strong company within the limitations of the uncertainty of the situation.
And then last question -- go ahead.
So the direction will be the one that you described. I cannot give you any sense of exact numbers given the uncertainty of the situation.
Understood. Understood. And one last question. Last time we talked, you said that the collections were running, on average, at 80% of the kind of the usual rate. I think about MXN 1 billion [ efforts ] monthly. What is the latest on that front? Can you kind of give us an update?
So there you have to consider that our portfolio has contracted, and therefore, cash collected contract proportionally. On average, the April to June, given the contraction and also the relief programs, would be around 20% lower with those observed in the second quarter of 2019 as we pointed out in the last call. As we are seeing the loans coming back to normal, we're seeing a smaller gap, let's say, with the relief what we needed. But I think it is too soon to put a proper forecast for this number.
In the different months of the quarter, we saw an impact of between 11% and 22% of reduction in cash for an average of 20%. And we expect that gap to start decreasing. Yet the comparison with last year will be difficult, given the progression of the portfolio.
We will now take our next question from Alexis Panton of Stifel.
I had a question on your provisions. Describing as noncash and tax is usually the way we look banking provisions. But when I look deeper into your financial statements, I see the same number 3x. This suggests it's actually a cash provision or a cash charge-off. You have the deduction on your P&L, you have the noncash add back on top of your cash flow statement. And then I look at the difference between the cash flow you're receiving from the change in your origination and the actual change in origination and get the exact same number. So for me, your charge-offs are actually cash, which means you're only receiving about 35% of the revenue you are reporting. That also sort of makes sense if you look at how fixed looks in your loan book. On the last review, they mentioned 19.5% adjusted NPL ratio. We can use the same methodology, [ that is today ] on us today, the NPL ratio goes up to 38%. That would make sense that you're only receiving a small portion of your revenues. It also makes sense that if you provision to cash, then you would -- sorry, if your provisions were actually noncash, you'd have a much higher cash position. It looks to me as though you've been selling down your derivative book, that fell by 30% in the quarter, while the [ cost ] actually, gained only 3%. And you also obviously taken some collections there.
So when I open these up together, there's a problem, a big problem. And in fact you would, I mean, if it wasn't for the derivative reduction and some of the loans we're able to liquidate, we would have had no cash at the end of the quarter, and it would have been very hard to pay the coupon today. So only if you could address those issues.
So I'll let Enrique go through the details. But please remember that the cash outflow, in any credit business on a cash basis, cash outflow is registered in our books when the loan is granted. Cash inflow for when it's collected. Reserves are a noncash item. They're just, let's say, an accounting way of representing the expected loss, but they are definitely noncash items. They're estimates of possible future nonrecoveries of loans and the way to impact the real measure.
We are quite confident of the way that we are estimating our cash, and we'd be very happy to follow-up on that question with you and go number by number. Let's go ahead and look if you want to go in sometime.
I agree with Eduardo. The other comment that I have is the way we present our cash flow in the reports is we constructed from our net result, and then we add back the cash effects -- so the noncash effect, sorry. And by doing that, we take back again the cost of the incremental reserves or the credit losses. That's how we calculate the cash flow.
As Eduardo said, we're happy to follow-up any questions you have. But that's -- I mean the credit losses are a noncash item, and we treat it as such. The other thing that I want...
Sorry, it's on your cash flow statement. So it's a charge on your P&L, which is fine. It's a rebalance and add back, a noncash add back in the cash flow statement. Then the exact same number, I think a quarter or a period, and because this quarter is extreme, which hopefully had a big cash charge. And the other way of looking at it, is that the MXN 799 million or which equates about $34 million, if that has been actually a noncash item, we'd have $34 million of cash. And it's impossible to find a reason why you don't have that $34 million in cash. It would be like EBITDA and depreciation.
Well, I mean, the way we do it is we have the net result, then we add back the credit losses. We have to add depreciation and amortization and the deferred taxes. Then we subtract the -- or adjust for the change in the portfolio, and we add or subtract the -- our -- the change in our liabilities. And then we also have an effect from the derivatives.
In particular, in this quarter, we had a positive effect from the, a credit loss that we took of MXN 799 million, we had a reduction or a cash effect from the change in the loan portfolio of close to MXN 500 million. And we have a reduction of long-term liabilities of around MXN 1.3 billion. And around MXN 650 million reduction from our bank loans which have a positive effect from derivatives of around MXN 280 million. So the net between our operating flows and our financing flows is around a negative MXN 350 million. More or less that's how we see the -- how I see the cash flow.
Well, I mean, let's look at it another way, right? If you look in dollar terms, just over the first 6 months, your loan book is your main asset, obviously, has fallen by the equivalent of $120 million. You should have an absolute ton of cash from that. I know some of that is given as allowances. And also that's sort of placed the other line items, your tax book, your accounts receivable. I mean all these things add up to quite a lot of cash. But if I look at the cash flow statement, where I see them coming onto the balance sheet is simply not happening because the allowances and the provisions are simply, they're a cash charge. So I honestly think while looking at it deeply, but the revenues aren't exactly the revenue. And that would make sense in a very difficult environment such as this.
When I look on your website, and I borrow MXN 10,000 and I pay a 16% commission, and I have to pay it back over MXN 20,000 in less than a year, that's probably going to be something very difficult for -- in challenging circumstances. So it's almost counterintuitive that your NPL ratio would be 5.6% and when I see the same adjustment, [ that Fitch does ], when I look at your annualized charge-off, it's over to 40%, which actually makes sense with everything I've been saying about the cash portion of the provisioning.
Sorry, I -- we will be very happy to schedule a very long discussion on the accounting, and we will make our accountants available, yes, and we will also make any auditors available if you would want to go to the questions. So if possibly you could follow up with -- the question for our investor relationship, we can schedule a long conversation and a detailed conversation then.
We will now take our next question from [ Frank Lehman of Pero ].
Three questions. The first one, I would like to start, how did you calculate the external provision, the MXN 440 million? Because you did say that's outside of your current model, but there must be an intellectual approach you might have used to derive from that MXN 440 million. That's the first one.
The second one, if you just allow me was -- I couldn't quite understand what the buyback was. Was it USD 15 million, 1-5, or USD 50 million?
And the third question would be a bit -- a little bit relating to the U.S. business. Is your U.S. business potentially eligible to get a loan under the CARES Act? That's a U.S. program, a U.S. law where companies like yours might get loans and these loans are at quite favorable conditions.
The -- so the rationale for the loan loss provisions was to look at our past and get a sense of -- I don't know if you could call it a worst-case or a stress scenario of what could happen with the loans that received the relief programs. I do want to comment that this is above what the regulatory facilities for accounting for these relief programs with [ Giro ], which wouldn't require additional reserve.
So what we do -- what we did, being prudent, was to go back and see how our restructures in the past have behaved. And by looking at the expected losses of our restructures in Mexico, and also expected loss in the U.S. of restructured loans, we came up with a total additional reserves. Particularly in Mexico, we reserved the loans that received a relief program with a factor of 28%. And that was looking at the expected loss of restructured loans, net of recoveries in the past. And that's how we derive it. Given the pockets that the loans were in, the factors based on our approved expected loss models would have been much smaller than that 28%. But we decided to use a higher factor to account for the uncertainty of the time.
Your third question was if we took any -- or we would we be eligible for CARES loan. So frankly, our position in dollars right now is long. We actually have the largest proportion of our liabilities is our market traded funds, and that is in dollars. We are not looking for further funding in dollars right now. And if there is some uncertainty, we would qualify or not, I do want to clarify that in the U.S., AFI is a CDFI, which is a community development financial institution, that is our certification from the Treasury Department that we are something that actually cares about the community and gives good conditions to our customers. And that would enable us to active -- I don't know specifically CARES, but other forms of funding. However, right now, we are long in dollars. So we're not looking for further funding in dollars.
And I can't remember your...
The other question was regarding how much was our bond repurchased. So the figure is around $50 million, 5-0.
And that is nominal. We pay it at a discount.
It is correct.
And there are no further questions at this time. I'd like to hand the call back to you.
Okay. 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, everyone. Thank you.
That now concludes our call. Thank you all for your participation. You may now disconnect.