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Good morning, everyone, and welcome to the Financiera Independencia's 2020 Third Quarter Results Conference Call. My name is Vicky, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded.
For opening remarks and introductions, I would now like to turn the call over to Mario Govea, Investor Relations Officer at Financiera Independencia. Mr. Govea, you may begin.
Thank you. Good morning, and thank you, everyone, for joining FINDEP's 2020 Third 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.
Thank you, Mario. Good morning, everyone. I trust you and your family are doing well in this situation. Today, I will provide insight of the company's performance during the third quarter and will refer to some strategic decisions that we have taken based on our course of action implemented to tackle the pandemic effect, in order to strengthen the business in these challenging times.
Enrique will go through the company's financials in the third quarter 2020 and after that, I will comment on the sale of Finsol Mexico's portfolio and other assets announced on October 9, which will focus in-depth in the individual loan market, where we have greater strength.
The company's performance during the third quarter was asymmetric among the subsidiary companies. In a context of high uncertainty and weak economic activity amidst the COVID-19 pandemic. Also, the company's performance is within the expected model scenarios and with a positive trend towards recovering profitability in the next quarters.
In this regard, we posted a consolidated net loss of MXN 29 million in the third quarter, which can be analyzed as follows: Independencia and AEF, our individual loan companies in Mexico, generated MXN 30 million net profit in the quarter. Finsol Brasil generated a MXN 5 million net profit, whereas Finsol Mexico posted a MXN 29 million net loss in the third quarter, and AFI, our California-based company, had a MXN 35 million net loss. If we exclude the loss in Finsol Mexico, the company would have been breakeven during the quarter on a pro forma basis.
Despite the asymmetric results, let me highlight that the company is in a financially good position, with an adequate liquidity buffer, reduced liabilities and high solvency ratio with access to various funding sources and enough prudential loan reserves. We're serving a client base of 447,000 people, 22% less with respect to third quarter '19.
In the third quarter of 2020, the consolidated loan portfolio decreased to 5% versus the previous quarter, reducing the 9% contraction observed between the second and the first quarter, showing a positive sign towards the portfolio stabilization. This portfolio contraction is derived from the strategies that we implemented to face the COVID-19 crisis, where we deliberately reduced origination to limit risk and boost liquidity. Since we have maintained a good level of collections, our portfolio began to reduce in the second quarter of 2020.
We have gradually increased the loan origination based in all of our subsidiaries under a disciplined but prudent approach, applying tighter risk policies to reach 88% of the level observed pre-COVID from 46% low in April. Overall, loan collections have behaved well. We observed a differentiated payment pattern amongst clients who were part of our relief program, where more than 55% of them are currently between 0 and 14 days past due after almost 3 months of the termination of the relief program.
It is worth remembering that we offered relief solutions on a case-by-case basis during the second quarter, representing 18% of the consolidated portfolio at the peak. By July 2020, less than 3% of our portfolio still had a relief program and by October 2020, none.
In general, people who did not sign to our relief programs have kept a good payment record for two reasons, we believe. First, we put significant resources and effort in keeping up the payments discipline in our clients and also because we have provided various non-branch payment alternatives, which have proven to be effective in a mobility-constrained environment. This is an example of our strengthened operating platform.
The consolidated NPL ratio in the third quarter 2020 was 7.2%, 160 basis points higher with respect to the 5.6% ratio reported in the second quarter and in the third quarter '19. It is important to observe the difference in NPLs between businesses lines and geography. The group loan NPL ratio was 4.9%, just below its 5% average since January 2017. Finsol Mexico ended the third quarter with an NPL of 6.6%, the same level that was observed in the second quarter of 2020, while Finsol Brasil reported an NPL of 1.7%, the lowest since January 2017 and significantly lower than the 4.7% reported in the second quarter 2020.
With respect to the individual loan business, we observed an NPL ratio of 7.5%, above the 5.6% reported in the second quarter 2020 and above its historic average of 5.9% during the last 45 months. This is the result of a risk of that is concentrated mostly in the group of clients who haven't received the benefit of the relief program in Independencia, AEF and AFI. These loans have been targeted and managed with specific actions so we expect a temporary onetime shock on NPLs without spillover effects to the rest of the portfolio.
As you may remember, we created potential reserves in the second quarter of 2020 for the portfolio that was part of the relief program. In September 2020, we began to adjust some of these reserves as we have seen accordingly to our strategy that it's very likely that the current reserves cover all of existing risks in this portfolio. We are prepared to adjust more potential reserves and reduce NPLs in the next few months, and we're confident that we will overcome the situation in the short-term as we have done in other episodes in the past. We expect to continue growing the loan portfolio in the last quarter of the year if the conditions allow us to.
Now we will share some highlights of each of our subsidiaries during the third quarter. Independencia serves over 239,000 lines, about 51% of the company's total, that is 63,000 fewer customers than in the third quarter '19. Its loan portfolio decreased to MXN 3.1 billion, a 12% contraction year-over-year. Payroll loans represent 29% of Independencia's portfolio and 12% of the company's total. Independencia's NPL ratio is 7.5%. Individual loans NPL is 9.9% and payroll loans NPLs are 1.8%. NPLs in Independencia are 100 basis points above the third quarter of 2019.
Independencia posted a net profit of MXN 32.6 million during the third quarter. Regarding Apoyo Economico Familiar, it serves over 95,000 clients, 21% of the company's total. That is 19,000 fewer customers than in the third quarter '19. Its loan portfolio is worth MXN 1.7 billion, just 3% smaller than a year ago. AEF's NPL ratio is 9.9%, 255 basis points above the second quarter 2020 and 182 basis points above the third quarter '19. AEF posted a net loss of MXN 2.7 million during the third quarter, the loss is driven by the relatively high reserve cost in the quarter, which we expect to reduce in the fourth quarter 2020 and a lower portfolio, which we have started to stabilize in September.
AFI serves over 25,000 clients in California, 6% of the company's total, that is 4% pure customer served in third quarter '19. AFI's loan portfolio is worth MXN 2.1 billion, it represents 27% of the company's total. AFI's NPLs increased to 5.5%, 256 basis points higher than in the second quarter of 2020.
AFI posted a net loss of MXN 34.9 million during the third quarter. The loss is driven by an increase in reserves in the third quarter 2020 and a smaller portfolio. We are growing originations strongly in AFI. In September, we reached our highest level of originations in the year, even compared with pre-COVID numbers. We stabilized our portfolio in September, and we expect to show portfolio growth in the fourth quarter 2020. We also plan to reduce potential reserves in AFI in the fourth quarter.
As of September 30, Finsol Mexico served over 67,000 clients, have a loan portfolio of MXN 588 million, 8% of the company's total. During the quarter, Finsol Mexico posted a net loss of MXN 39.1 million. The loss in the quarter was driven by a decrease in the portfolio, a high reserve cost in the quarter and nonrecurring costs related to the sale of the portfolio of [ brand ].
Finsol Brasil serves over 29,000 clients, with a loan portfolio of MXN 300 million, that represents 4% of the company's total. In the third quarter, Finsol Brasil posted a net profit of MXN 5 million and is leading the recovery to the new normal in the company.
Let me now provide an update of our digital transformation projects in the company as one of the key components for route of action. As I explained in the previous conference call, the COVID-19 scenario led us to foster initiatives that are transforming the way that we conduct our business. We are executing low renewables remotely without requiring our clients to move to a branch to deliver documents. We have successfully switched to channels that enable us to collect loan payments electronically in increasing proportions.
We also have a client [ type ] app, which provides branchless payment options. For example, in AFI, 56% of the payment volume is done through PayNearMe using the app. This month, we will start delivering loans under a soft service model in which clients will no longer receive a check from us. They will receive an electronic code to their mobile devices that will allow them to withdraw resources using the infrastructure of one banking institution at no cost, even if they do not have a bank account.
These are 2 examples of how our transformation to digital is helping us to reduce operating costs and deliver value to our customers. The use of digital services will enable us to create a distinctive value propositions for our clients, increase profitability to shareholders and continue growing and gaining market share. We are taking advantage of these challenging times to build the best company's capabilities and positions for the world after the pandemic.
I will now turn the call to Enrique, so he can provide details of our third quarter financials. Go ahead, Enrique.
Thank you, Eduardo. In 3Q '20, interest income was roughly MXN 1.2 billion. It decreased 15% year-on-year as a consequence of the reduced loan portfolio. Interest expense was MXN 167 million, a MXN 41 million decrease relative to third quarter '19 and a MXN 25 million decrease relative to second quarter '20. Net interest income was MXN 995 million, 14% lower than third quarter '19.
The provision for loan losses in third quarter '20 was MXN 383 million, that is 1% higher than third quarter '19 and 52% lower than second quarter '20. The coverage ratio of nonperforming loans is 184%. Net interest income after provision for loan losses was MXN 611 million, a 21% decrease with respect to third quarter '19.
Net operating revenue was MXN 702 million in third quarter '20, a 22% decrease versus third quarter '19, explained by a reduction 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 second and third quarters of this year. Net operating revenue includes MXN 11 million of market-related income obtained after reducing liabilities and balancing our foreign exchange hedging position.
Noninterest expense was MXN 740 million, that is a 6% reduction versus third quarter '19. Excluding nonrecurring items such as severances and FX in AFI's costs, expenses were down versus -- were down 9% versus third quarter '19. Fewer operating and personnel expenses have allowed us to adjust to a smaller loan portfolio.
With all the above explained, net income after tax was minus MXN 29 million in the third quarter, a decrease of MXN 105 million versus third quarter '19. The net income for the 9-month period is minus MXN 16.6 million. As to our financial position, cash and cash equivalents were MXN 724 million or 6% of total assets. Cash equivalents closed 34% above second quarter '20. The company's total loan portfolio was MXN 7.8 billion, an 11% decrease versus third quarter '19 and 5% below second quarter '20.
During the third quarter, our debt decreased MXN 250 million. The company also had positive operating cash flow in the quarter. We have 11 banking lines available, which are withdrawn at only 47%. The solvency ratio was 38%, that is 3.6 percentage points greater than third quarter '19. Bottom line, the company's financial health is good and within the strategy implemented to face the pandemic.
With that, I will turn back the call to Eduardo, so he can share some comments about the sale of Finsol Mexico.
Thank you, Enrique. I will now address the strategic decision to sell the loan portfolio and certain assets of Finsol Mexico. You recall Financiera Independencia acquired Finsol Mexico in 2010. For a decade, we granted crude loans reaching more than 1.5 million people, mostly women. Group loans are a good way to give access to financial services to vulnerable and underserved segments of the population, an opportunity for many of them to start building a credit history.
On one hand, the company is determined to advance its strength in the personal lending market. In recent years, the dynamics in the group lending market in Mexico became difficult for us with increasing competition from other intermediaries, many of them showing aggressive pricing practices. Additionally, we saw limited upside opportunities to implement digital transformation initiatives in the group lending market.
In our experience, the COVID-19 pandemic turned the group lending market even tighter in Mexico, putting pressure on the credit risk exposure of the portfolios and requiring a trust effective base in order to back up profitability. For this reason, we see the supply side of this market consolidating with more efficient companies, increasing market share and acquiring the portfolios of smaller participants.
As we mentioned earlier, Finsol Mexico reported a MXN 29 million loss in the third quarter with a cumulative net loss of MXN 77 million for the 9-month period of 2020. Based on the fundamentals of our general strategy, we made a careful assessment of the size of this business in our company, considering its performance, cost base, scale, growth and digital transformation potential, and concluded that it was a good opportunity to sell our group lending business and portfolio in Mexico and to focus even more on our competitive advantages and strengths that lie in our individual lending model.
We consider that the headwinds in the economy and business environment will demand more efficiency, productivity and stabilization companies like us, so we are focusing all of our expertise and resources on what we do best.
I want to thank investors, development banks and other banking institutions who helped us grow the group lending business during all these years. We will continue conducting business responsibly, focusing on our strength, guided by a long-term vision, strategic approach, conservative risk practices and innovation embedded in the operation.
Finally, I want to highlight that the sale of Finsol portfolio on certain assets was done at book value so we were able to maintain the company's tangible capital.
Let me now turn to Enrique, who will explain the financial impact of the sale of Finsol portfolio and other assets.
Thank you, Eduardo. I would like to clarify first that the effect of the sale of Finsol Mexico's portfolio will be reflected in our fourth quarter '20 results, as the operation was closed on October 9, 2020. As we disclosed in the press release for this transaction, we sold Finsol Mexico's loan portfolio with performing and pass-through loans up to 179 days. We transferred Finsol's branches and the buyer invited the branch personnel to work with them.
We also mentioned in the press release that the transaction did not affect Finsol's capital. That is we sold Finsol's assets at book value where we were able to maintain the company's tangible capital. The funds that we received from the sale were used to: number one, pay down liabilities, including bank, intercompany and other liabilities; and two, pay down expenses related to the transaction, including, among other items, accelerated depreciation of the assets in the business, severances of the employees that were not absorbed by the buyer, and the cancellation of some assets that we will not recover.
After the transaction, the balance sheet of Finsol Mexico will have, in the asset section, cash and cash equivalents, accounts receivable and deferred taxes. It will not have any liabilities, and it will have a capital practically at the same level as before the transaction.
Now going to the effect of the sale of the portfolio of Finsol Mexico in FINDEP's consolidated financial statements, we see the following items. FINDEP has close to MXN 450 million in intangible assets related to goodwill from Finsol's acquisition in 2010 and the Finsol brand. That will be canceled as part of this transaction. This cancellation will go through the P&L as an expense affecting shareholders' equity. Given this, our 4Q '20 results will see a negative impact of MXN 450 million related to these intangible assets.
I would like to highlight that FINDEP's tangible accounts will have a minor impact from the transaction. Given these tangible assets and tangible equity will not be affected by the sale of this portfolio.
Now I would like to open the call to questions. Operator, please do so.
[Operator Instructions] We will take our first question today from [ Alex Panton ] with Stifel.
A couple of questions. First, on the Finsol Mexico transaction. I mean, can you sort of give us a sense of how much cash proceeds you'll be getting from this? You mentioned that you're paying off bank liabilities and other liabilities, expenses and severances. So after all that, should we assume there to be a positive cash increase?
And the second question I have is with respect to some of the rating agencies. I think S&P has you at their adjusted NPL ratio of 28%. I think Fitch recently had it at 20%. If I look at the numbers, you -- so far over the first 9 months, you've written down assets at a rate of roughly 25% in terms of charge-offs.
So obviously, that's a dramatically larger number than the 7.2% that you reported, obviously, lower than that on average. So I was wondering if you could sort of discuss the discrepancies between that calculation and your calculation, and obviously, being reflected in a significant reduction of assets this year. And yes, that was my 2 questions.
So firstly, you're asking about the cash from Finsol's sale? Okay. So as I explained, we sold the assets close to book value. And that means that we basically will receive funds in that -- even more than that amount. So that was the cash portion.
But what is the book value? You mentioned is that -- so you mentioned the book value at the time of the transaction. And if I look at the Finsol breakdown, obviously, there's a positive book value. So should -- if I look at the June -- sorry, the September 30 figures, the book value they report at Finsol is roughly the cash proceeds that you'll be getting?
Yes. I believe that the book value of the portfolio in Finsol in September was close to MXN 500 million. So that's the range in which the transaction was closed. Okay? So...
Now regarding your second question, I think we have to distinguish between NPL ratio, which is a measure of stock and write-offs, which is a measure of loan. Adjusted NPL ratios try to consider both and I understand that it tries to approximate the risk of our portfolio.
The -- it's difficult to reconcile our stock and flow, right? At the end of the day, NPLs is depending on the company, whatever it is between 90 and 179 or 60 and 179 days, whereas write-offs is whatever has reached 180-plus days past due for us. We do have a very strict write-off policy of 180 days.
In our view, the [ yield ] relatively high-risk of our portfolio, yields an appropriate risk-adjusted revenue that through the various cycles, we have seen in excess of 40%, close to 50%, even in the more stressed part of the cycles. Of course, last quarter, we generated reserves above and beyond what the regular model would have generated. And therefore, our P&L impact was significantly higher.
Going forward, what we expect is to continue a very healthy risk-adjusted revenue. As I said, in -- with the combination of rates, the commissions and discounting the credit losses, and we will continue working on our efficiency, which has been, in our case, the main item that helped us in the last few years recover profitability, and will help you in the future, achieve proper levels of returns.
Again, I would say it's very difficult to reconcile a stock with a flow measure, both tell you different things.
Okay. I did have a further question, actually. I think if you remember on the last quarter, we had a little bit of a disagreement about the reporting of cash flow and provisions. Having said that, you have changed your methodology when I look at the cash flow statement.
So curious as to why you changed your reporting standards on the cash flow statement? And obviously, that makes it very hard for us to reconcile on a quarterly basis, given the cash flow statement is over 9 months. So just curious why you decided to make that change.
So after the last quarter calls, we have various interactions, which we explained the methodology and we reconstructed the cash flow. We also asked our internal audit team to review the methodology, review the reports, and there were no issues reported. We were diligent and we took your comments quite seriously. And I think we did went through our calculation.
The recommendation from our internal audit was to use the same methodology that we use in this call that we used to report to the stock exchange. And we made that change accordingly. At the end of the day, the calculation and the result is exactly the same. We just used exactly the same methodology that we use to report to the stock exchange to avoid any future issues.
I think what gives us a lot of peace of mind, and thank you for your comment last -- in the last presentation, is that we very diligently went through the calculation and could not find any mistake whatsoever.
So why did you change the methodology this quarter?
As I said, it was a recommendation from our internal audit to have a consistent methodology to what we report to the stock exchange.
And just to further clarify, [ Alexis ], we just adjusted the way we presented 2 accounts in the cash flow. So in general terms, the methodology is the same as before. We're just presenting it in a matter that is consistent with the way we report to the stock exchange and in a way in which we think it's easier to understand.
Right. But your financial statements were always the same as the ones to the stock exchange. There was no difference between your financials and your report on your website and with those 2 -- I've looked at both of them, they were identical.
Yes. Okay. At the end of the day, there's -- I mean, we can do the same exercise that we did last trimester. We offer you exactly the same. We'll sit down and go through the calculation step by step. But again, we find no issues in the -- in the cash flow statement. We think we're...
Okay. Yes, let's follow-up because I think I understand what you've done, but it'd be great to have a follow-up call.
Thank you.
Absolutely. We'll again put you in touch with our accountants and we'll again involve our internal audit. But we don't think there is any issue with the calculation of the cash flows.
We'll take the next question from Jonathan Szwarc with Debtwire.
I have 2 questions. One following up on [ Alexis ]. It's still not extremely clear to me how much proceeds you got from the Finsol. My understanding was book value of the equity, which is basically MXN 350 million. Is that what we should be thinking that you got?
Okay. Thanks for your question, Jonathan. So the way we did the transaction allows us to maintain the capital. So at the end of the transaction, the capital is the same as before. However, we -- in terms of the price that we received, we received above that. And as I explained, we used part of those funds to pay down liabilities and some expenses related to the transaction. So that the net effect of the transaction brings, let's say, a zero impact to capital, but the actual funds reserve will be above the value of the capital. I hope this clarifies your question.
Okay. Yes. And the second question is, so now your intangible/goodwill, it's around MXN 1.2 billion, if I did the math correctly, taking the MXN 450 million out. Can you give us a sense of how much that is allocated between the other subsidiaries?
I will give you an idea. I don't have the numbers just in front of me. But the rest of the goodwill is related to Apoyo Economico Familiar. The goodwill there would -- should be around MXN 900 million. I will, of course, confirm figures. And then the rest will be divided between AFI and Finsol Brazil. So more or less, those are the numbers.
Our next question comes from Alan Miranda with REDD Intelligence.
I would like to have more information on origination and collection during the quarter. Because I couldn't find like a comparable data with it. Could you tell us how much it was during the quarter?
Sorry, the question is how much origination did we have in Finsol in the quarter?
Yes. Origination and collection, and also why your provisions keep growing even though your loan portfolio has -- loan portfolio has decreased?
Okay. So questions are, how is our origination and how is our collections? And why are our collections growing even when our portfolio is declining? That -- I mean, did I understand correctly those are your questions? Okay...
Yes. The first 2, yes. The third question, the question was, why are provisions growing even though your loan portfolio decreased?
Okay. So provisions. Okay. So we will start with origination. So we -- when the COVID-19, pandemic started, we reduced originations in an important manner in April. And our lowest point in origination was April. Since April, we've been carefully accelerating our originations by, let's say, September of this year, we have reached an origination -- a level of origination, that is roughly 88% the origination level that we had in March. So that's where we currently stand. And we have so far seen -- or we have been very careful in opening this origination, and we have so far seen that we have originated with good quality.
So first question was origination. The second question was...
Yes -- I'm sorry, but I did see that number, but I was actually hoping that you would provide like numbers of origination and collection in actual Mexican pesos. Is that possible?
Okay. So I will give you an idea of the numbers in loan origination. So in September, we originated around MXN 750 million. The level of originations that we had in March of this year was MXN 856 million, and the low point of originations that we had in April was around MXN 400 million. So that is in terms of originations.
So the MXN 750 million was for this month September or for the whole quarter? Yes, can you actually provide the July numbers?
Okay. So that's just for one month. So the MXN 750 million is just for September. The numbers for August would be MXN 682 million, and the number for July would be MXN 677 million. So that would be our origination in the third quarter.
Now regarding the two other questions. Collections, I think -- I mean, there are many measures that we can take. But the one that we like to see the cash collected as a proportion of the loan portfolio. What we see is that in our unsecured individual loans, which would be [indiscernible] and AEF, essentially, [indiscernible] has returned to the levels that we are seeing prior to the pandemic, where we were collecting cash of around 12% of the loan amount -- or the loan portfolio. In AEF, prior to the pandemic, we were around 10%. Right now, we're around 9.5%. So it's a bit of a slower cash collection, but it's nothing dramatic.
The exact opposite effect is AFI, where we used to collect around 9%, a little bit less than 9% of the portfolio is loans, and now we're collecting around 9.3% in the third quarter. So it really depends...
Can you provide Mexican peso figures for collection as well, please?
Figures in Mexican pesos I wouldn't have right now, but we can follow-up with you on the amounts.
I'm sorry I didn't see in your...
Right now, we can follow-up with you and give you an exact peso or dollar amounts for the quarter.
Now you mentioned why our -- I imagine that what you're referring is the growth in our EPRC in the balance, right, quarter-to-quarter?
Yes...
Increased quarter-to-quarter.
Yes, but around [indiscernible]?
So you're going to see 2 big increases or one big increase there. Between the first quarter and the second quarter, you're going to see that account almost doubling. And that is true with the potential reserves that we created for the portfolio.
You have to remember that we, as mandated by the local accounting rules, we use an expected loss model. The expected loss model was used in the -- up to the first quarter of 2020, totally as it was behind. We decided in the second quarter of 2020 to increase our reserves significantly to face the possible effects of COVID.
Now decrease between second quarter and third quarter of 2020 is quite small. It's around MXN 30 million. And it is derived from the application of the expected loss methodologies, together with the prudential reserves, that is we have not made any significant releases of the prudential reserves and as the account starts flowing in the buckets, the bad accounts start flowing in the buckets, we create additional reserves. And that is what have increased our reserves.
Frankly, the number is not very significant. It's MXN 30 million on a basis of MXN 1 billion.
We'll take the next question from Rafael Elias with Stone X.
Sorry for this question, but we -- I was just at the conference call with [indiscernible], which I understand perfectly, it's a completely different business than you, but also, we have been getting guidance from other non-bank financial institutions in Mexico. And all of them or at least most of them are showing sequential improvement second quarter to third quarter.
So what would explain the fact that you seem to be the only one that saw deterioration overall when in theory, you know what the other companies are saying is that the economy has picked up a little bit in Mexico that people are -- that were part of the relief program are already starting to pay back their loans and overall, they are having much better results sequentially, while you are showing quite a bit of worsening. How -- what would explain this, please?
So as we explained in our results, we're seeing 2 different, let's say, groups of companies within our portfolio. We see the individual loans in Mexico and the group loans in Brazil, showing a sequential improvement from the second quarter. And what we see is the group loans in Mexico and our subsidiary in the United States, still not showing the increase.
So let me take out the subsidiary in the U.S., as it wouldn't be comparable to the base that you are comparing us to. I think we did a couple of things differently from some other people in the market. First of all, our relief programs were less generalized and generally shorter than competition. So as we said, only 3% of our portfolio by July have some form of relief program. So what we decided is to take the hit sooner, whatever was passed within the people that need a relief, we're taking the hit to our P&L sooner, and we will just explain part of the difference.
The second part of the difference is the group lending business. I believe in the second quarter call, one of the questions somebody asked us what was the business that most worried us. And it was actually the group business because the terms of the loans are very, very short. And therefore, all of the economic fluctuations affected businesses much faster than businesses that may have a longer range, more secure portfolio.
So I believe those 2 things, first, the accounting of our relief portfolio. And secondly, the fact that most of our losses in the third quarter come from our Mexico Group business, could explain some of the difference that you are seeing.
Just want to highlight one -- a couple of things on your comment. Actually, our performance in the third quarter in terms of net profit is better than the one that we had in the second quarter. Our second quarter, we reported a loss of MXN 57 million. This quarter, we reported a loss of MXN 29 million. So there's a different trend in those shots. And as Eduardo explained, we had an important effect from the business we sold. So that business lost MXN 29 million in the quarter. So our result would have been close to 0 if you discount that -- the effect of that business.
We'll now go to Nik Dimitrov with Morgan Stanley.
Apologies. I was on another conference call as well. So I might have missed this, but I just want to confirm a couple of things.
So the Finsol Mexico sale, that included parts and branches and operations and everything, but it sounds like there was cherry picking in terms of what loans were transferred to the new buyer, right? In other words, the entire book, good loans and bad loans were sold, right?
Yes. Anything below 180 days past due, that is performing and nonperforming. There was no cherry picking.
Okay. No cherry picking. Excellent. If I look at the 7.2% NPL number, do you know off the top of your head, what portion of those NPLs is really Finsol Mexico loans?
So Finsol -- okay. So Finsol Mexico had a lower number than the 7.2%. So it would actually benefit the weighted average, no?
Yes. Finsol was -- had a lower NPL than our individual loan businesses.
It is around 6.6%. It's not significantly lower, but it did contribute to make that number a little bit smaller.
Yes.
Now in terms of the -- no, in terms of proportion in pesos, I wouldn't have that on the top of my head, but I can...
8% of [indiscernible] Finsol Mexico.
But let's call it around 8% of our nonperforming loans, something around that would have come from Finsol Mexico.
Okay. Okay. I don't know why I was under the impression that the NPL number for Finsol Mexico was higher. And my next question would have been, what's going to happen with the charge-off ratio on a quarterly basis going forward? Which currently is anywhere between 16%, 17%. But clearly, the transactions those are affected, right? It seems like this is the case considering the fact that the NPLs for the Finsol Mexico are low in general.
So what we foresee is that during the quarter, the write-offs will increase. However, I do want to point out that we have created the additional reserves during the second quarter, which we believe to cover that -- those -- that increase in write-offs.
I think, overall, in the industry, given that write-offs are a delayed indicator of reduced economic activity, you don't see an increased level of write-offs, and we will not be an exception. The good thing that we did was to create the additional reserves during the second quarter.
Right. And actually, that leads me to the next question. So after taking that punitive charge-off or provisioning expense in Q2, your provisioning expense in Q3 kind of normalized, right? MXN 383 million, which is kind of on average what you took in Q1 and Q3 of 2019.
I was wondering whether, as you said, it's all based on expected losses, right? Do you feel comfortable that the charge you took in 2002 is sufficient to kind of account for the impact of the pandemic and going forward, we should see a normalization or that normalization being sustained? Or you think that we still don't know what's going to happen and cost of risk will remain volatile?
So bottom line, we expect the reserves that we created in the second quarter to cover for what we're seeing right now. They're sufficient even a little bit excessive, but they should be sufficient.
Now let me distinguish between the EPRC line of the balance sheet and the EPRC line of the results, now the income statement. And I will focus on the income statement. EPRC in the income statement is calculated as a delta of reserves plus write-offs, minus recoveries.
So again, delta reserves was write-offs minus recoveries. What happens with the written-off portfolio of loans that received the COVID support programs is that the reserves have been increased beyond what history would have told us that we needed for that portfolio. So when you get to the write-off of that portfolio, what's going to happen is that in the formula, it's going to add write-offs. But it will release the reserves that we have created for those -- for that portfolio.
So net-net, we expect the income statement EPRC number to stabilize. It could fluctuate. And again, there's a lot of assumptions there that the economy will continue recovering, that we will continue with the efficiency of collections that we're seeing right now. But all things being equal, we do expect our EPRC in the income statement to stabilize.
Now in the balance sheet, what you're going to see is the EPRC account being reduced as we start writing off the portfolio for which we created those reserves and we start, therefore, releasing those reserves and taking the hit as a write-off instead of as a reserve.
All right. Makes sense. So then the accounts ratio, eventually, will kind of decline to the lower hundreds with only being...
Exactly. I wouldn't be able to tell you an exact level, but it will decline in the balance sheet.
Right. Yes. Yes. Yes. Okay. What is the -- I know that you've sold Finsol Mexico. What is the long-term strategy for Finsol Brasil? I know that it's been kind of a bit of an issue in the past. Are you committed to that business longer-term? Or you think that, eventually, it's going to be a good strategy to exit that market?
So we're not the best owners of a business in Brazil. No, there's some inefficiencies in the funding from peso dollars to reals that don't make the best owner of that business.
Now having said that, we believe we have a great team down there. I mean, you can see the recovery from these prices. And of course, you can argue that the Brazilian government have been much more proactive than the Mexican government in supporting the population. But still, I think the operation of our Brazilian subsidiary has been spectacular. And the team that we have there is very good. So we do not consider a business that we are growing, but it is something that we are not in any hurry of divesting or anything, as the operation is good.
We have been exploring a couple of individual loan segments, where we believe there is space in the Brazilian market for certain segments in the individual loans, particularly to small and medium companies, particularly small companies. Small enterprises, entrepreneurs that do not want to have a group loan, but are not qualified for a bank loan. And we have been testing that segment. And that segment has been successful, we represent something around 8% of the portfolio.
So we see an avenue of growth within the individual segment, we will grow, still always recognizing that we're not the best owners of a business in Brazil.
Got it. Got it. Can you give us an update on the 2 HSBC loans that mature, I think, either November or December?
HSBC loans.
HSBC loans, okay. So the plan and the conversations that we have had with HSBC so far is that we will renew the loans that we currently have, thus the working assumption that we have with HSBC, and that's the expectation with which we're working.
And the cost of those loans, obviously, will probably go up, right? I mean...
Yes. We're expecting it to increase a little bit, not reflecting the changing conditions in which we operate right now.
Okay. Okay. And one last question on the U.S. operations. The book has been shrinking there in the last couple of quarters, for obvious reasons. You did say that September turned out to be a good month with demand coming back. When you look at the asset quality of that portfolio, how is that performing versus your initial expectations? Because the book day is very unseasoned, right, which has a bit of a concern.
Absolutely. So whenever you receive a shock in a portfolio, the first couple of months, the data is quite difficult to read. So what has happened in the U.S. is that as time passes, what we're seeing is a separation in the portfolio, a very clear and distinct separation of the portfolio with one bubble that is obviously advancing in the past few buckets. But with the rest of the portfolio, behaving very, very well.
And we -- frankly, when I see a portfolio separating in that sense is when I'm much more at ease because you have a base that is performing very well. And you do have a bad portfolio that is going to flow through the buckets eventually to write-offs. And there's very little in this situation that you can do about it.
It's a very good situation to see the portfolio splitting in a very distinct 2 segments. We're actually reviewing our provision policy in U.S. GAAP, which is not what we're reporting here. So that we actually take these 2 segments and make one type of provisions models for the bad portfolio and one provision model for the good portfolio. So I see the part that is performance, which is the lion's share of the portfolio behaving as well or even better than before the crisis.
Now in terms of originations, as we said, we saw -- we were very prudent with our originations, particularly in the U.S. with the crisis. There have been a couple of shocks in the U.S. first, the crisis, then the lack of agreement of renewal of a support program for the people.
So we were very prudent in understanding how the risk of new customers or renewal customers would be. But we have been very positively surprised that was -- that has given us hope and actually the ability to start growing the portfolio or at least reducing the contraction lately.
So we see, again, difficult months in terms of write-offs, but we see a base portfolio that is performing the way that we would expect it to perform. And therefore, this continues our commitment to growing our U.S. business and considering it one of our strategic initiatives.
Okay. Perfect. And just one comment. Clearly, a lot of the investors want to see -- to be able to see your origination collection. So it might be really helpful if you start including those numbers in your earnings release?
Yes, we can -- in the next report, we can start going. Originations is easier. Collections, I mean, we can give you a couple of metrics, but it's difficult to compare between portfolios given the duration. If you would see the collections of, say, a group business, you will see collections of 30%, 40% of the loans. If you see a much longer 10-year portfolio, maybe you'll see 8%, 9% of the balance. And both are correct. And I think we can start reporting them.
Yes. I think in nominal amounts would be very helpful, a way we can see the amount of cash that is coming in and going out.
Absolutely. Thank you.
And our next question will come from Nicolas Riva with Bank of America.
And I joined the call late. So therefore, I apologize in advance if some of these questions were asked.
The first question is about the debt relief program. It seems -- what I understand in the press release is that you no longer have any relief programs, which makes our analysis a bit easier and a bit more realistic. But at the same time, I see that the NPL ratio increased quite a bit in the third quarter. And you also say that 45% of the customers that had a relief program are not paying right now. That's what I understand.
So therefore, it seems that you ended the relief programs, but not because you felt comfortable about the payment capabilities of clients. So I want to -- so basically, my question is, why did you decide to end these relief programs, even though it seems that a significant amount of your clients still were having trouble today?
I understand that, of course, in your kind of business, you couldn't maybe sustain these kind of programs for a very long time. And also confirm that right now, you don't have any relief programs at all.
And then the second question about the sale of Finsol Mexico. So you mentioned there is a noncash impairment charge of MXN 450 million. That's going to be booked in the fourth quarter, I believe, because the sale happened in October. And you mentioned there is no impact on your solvency ratio.
One question there. I guess you are going to book this charge of MXN 450 million, again, to equity or in the income statement, but it is going to have an impact on your equity? I mean -- and that's 10% of your equity, the impact. I guess, that will have an impact on your tangible equity. That's perhaps what you are trying to say, but I wanted to confirm that.
And also, if you can explain to us why do the [indiscernible] here? I understand this is group lending business. If you can maybe explain to us why you don't feel comfortable so much with the group lending business as compared to the individual lending business right now. If it has got to do basically with the fact that you are a smaller player in group lending? And what was behind that decision to sell it?
Sorry, there were many questions. So maybe we will miss some, and please remind us if we miss any.
So let me start with relief programs. We did things differently from some other competitors in the market. First of all, it was on a case-by-case basis. It was not a blended program. The customer had to apply, and we have to actually approve it. And relief programs is a double-edged sword. Obviously, on a P&L basis, it looks much better to have a relief program. Your non-performings could be reduced, everything looks better.
But the fact is that we were very prudent, and we decided to give a relief program to people that actually need it. And as long as they proved that they could eventually repay the loan, we actually see the numbers that we presented on relief programs as very positive. 55% of the people that received a relief program are within our lowest risk buckets, less than 14% past due -- 14 days past due, that is pretty much current, considering that there are always a couple of days in the end of the month where people may pay a little bit late and they're accounted as a few days past due. We see it as very good reason now that 55% of the customers are -- have returned to normalcy after they received a relief.
Now why didn't we give more relief programs to the other 45% of the customers? Because at the end of the day, you have to assume the losses. Eventually, the relief programs is a way of delaying the impact of those losses in your P&L. And we would rather show you a worse P&L number that show you the reality of the portfolio and -- as it is.
So we didn't believe that giving more relief programs was going to change the underlying issue with the customers that was, that they simply have lost their income, their income was reduced significantly. And frankly, in the long term, it would have been very difficult for them to pay.
Remember that our loans have average durations of around a year. So it's very different than if these were mortgages with tenures of 20 years or 50 years. Here, we have to assume the losses with much more currency. So I think that is about the business.
Now let me address your question about the attractiveness of group loans. Most definitely, group loans are an attractive business in Mexico. Now the the structure of the business used to be one very big player with many comparable-sized players that we're competing for, let's say, growing within this segment.
In this business, we see much less ability from our side to actually transform the business using our digital capabilities. It is a very traditional business based on weekly meetings with the customers, based on a lot of face-to-face interactions.
So first and foremost, we see a business that is going to be more difficult to transform digitally. And secondly, in a business where the margins have already been pressured by, first of all, new entrants that were enrolling the top line. And by the risk situation that is eroding the bottom line. The -- one of the key ways of competing is efficiency. And definitely, in a face-to-face business, one of the elements for achieving efficiency is scale. What we see the dynamics of the market right now is a few of the players consolidating the smaller players to achieve that scale and achieve efficiency.
So we pretty much have the 2 options, either we participated in the consolidation, which would have required capital, which would have required distracting from what we believe is a business where we have the most capability to actually grow and be successful, which is individual loans, and distracting that capital in a business that is consolidating.
So in a business that is -- in an industry that is consolidating, we decided that the best use of our time, of our capital, of our resources, was to actually exit that business, allow the consolidators to capture the benefits of the economies of scale, and for us to focus on the business that we believe are -- where we have more probability or more capabilities to be successful, which is individual loans. Other people are finding this business super attractive and they continue growing. And we believe it is the right thing for them to do.
Regarding capital, I think we did mention that the transaction will not have an effect on tangible equity.
Correct. The effect of the transaction in tangible equity will be very small, but we will pass through the P&L, MXN 450 million cost related to the cancellation of the intangibles to -- of this transaction. And yes, that MXN 450 million charge is roughly 10% of our equity. But it's not -- it's just on the tangible part the effect will be close to 0.
And we have to remember that this cancellation of the goodwill is a non-cash item.
Yes. Yes.
All of the metrics that you see in terms of capitalization, in terms of tangible assets to tangible equity, the cash, either not affected or benefited, no?
Correct.
Perfect. And then one follow-up question on the -- on my first question about these -- about the debt relief program.
So then -- so for us to be aware of what might be the impact of ending the relief program in the fourth quarter numbers. So as of October, you didn't have any claims under the relief program, but around [indiscernible] exited the relief program without making their payments. So therefore, in the core -- and I guess already went to NPLs in the third quarter.
In the fourth quarter then, we should expect you to be writing off a lot of these clients that exited the relief program and are not paying actually these loans?
So let me first start, you mentioned 45% of the clients have not paid. That's not totally accurate. That would mean that 45% are straight runners. They're not. Some of them have made some of the payments. Some of them may be 30 days past due or 15 days back due, some of them may have made some of the payments. So it is not that they have not made any payment whatsoever. It is that they're not between 0 and 14 days past due at the moment that we took the picture that we're discussing here. Some of these customers will be written off.
Now we -- 18% of our portfolio received some form of support. Now remember that the business that -- where we had more of this support programs was actually the group business that we sold. So those are not going to be written off because they're not in our portfolio anymore.
Why was the group business so affected or so important in the relief programs? Because remember that the biggest competitor in that business announced a blanket relief program, essentially applying to, if I were correct, it's something like 70% of the portfolio. So within the competitive dynamics of the market, we have to follow with very aggressive relief programs to match what the competition was doing and what the main competitor was doing. So we have to take a part, the part of the portfolio from Finsol that received our relief program, that will not go through write-offs by the fourth quarter.
I don't have the numbers off the top of my head, but that would reduce the number. And also, we will continue our collection activities. Many of these people, which are today past due, may recover their jobs, may recover their means of payment and we will continue collecting from them. So the ones that actually go to write-offs, we already have the prudency reserves that we made in the second quarter of 2020 to compensate for that effect.
[Operator Instructions] And we'll take a follow-up question from [ Alexis Panton ] with Stifel.
Sorry. Just a quick follow-up question, sort of accounting thing again. With respect to your liabilities, obviously, you've purchased a significant number of your bonds in the secondary market, I think, during the second quarter. When I look at your liabilities, you're reporting roughly the equivalent of $190 million of long-term debt corresponding to the 2024 bonds.
It seems to me on Bloomberg, you haven't canceled those bonds, so they're still outstanding. Are you, therefore, just subtracting your holding? And obviously, there's 2 ways of doing it, you report the assets and then you report a whole $250 million on the liability side. But if you're just writing down the liability, shouldn't it be by a lower amount than the total $60 million given the effect you have an asset against it as well?
Could you sort of explain that accounting? It seems like liabilities are somewhat understated by that.
What we're reflecting in the long-term liabilities is the outstanding value of the bond. That's what we reflect in that account.
Right. But it's $190 million. There's a bucket.
Yes. More or less, yes.
Yes. Right. But you have an asset as well against it, right? So the net amount should be smaller than the $60 million delta, right?
If you just -- if you consolidated your asset and the $60 million liability, it would be a smaller number than the total $60 million. It should be $0.70 of $60 million should be, given that the market price is [ bonded ].
I'm not following -- I'm frankly not following. The -- what we have in our balance sheet is the outstanding [ FINDEP 24 ] and then what we have in the assets are the derivatives, no, that the full cost currency swap for the portion that is not naturally hedged with the U.S. portfolio, no?
Correct.
Right. Yes, I understand that, but you have bought bonds back right? When I look at the -- you have -- when I look at the dollar amount, it equates to $190 million. Obviously, the full amount of the bond is $250 million, correct? So the $60 million missing on the liability side, now I know you've bought bonds back, but you haven't canceled them. So I'm curious as to how you're reflecting your holdings of those bonds given the fact you haven't canceled.
If it's the net amount, then it shouldn't be $60 million, it should be a difference between your asset and your liability, which is $0.30, sorry, of $60 million. So roughly $18 million.
No, we have canceled what we have repurchased.
Yes. What we're showing in our loan book -- yes. So that [indiscernible], it's $184 million. And then the natural amount of cross-currency swaps are $126 million. And there's a natural hedge of...
And you said the gain in the second quarter, right?
Sorry?
I think I understand. So you took -- because you took that gain in the second quarter, that reflects the cancellation, right? You took the gain you had on the market-to-market from buying the bonds at a discount reflected in the second quarter nonrecurring gain and then you canceled the bond. So the -- so it is $190 million.
That's correct. And whenever we made -- I mean, we don't have a repurchase program, but whenever we have the opportunity, frankly, at a discount, it makes sense for us. So we continue doing this. And during this quarter, the amounts were smaller, but there was still some cancellation, very small compared to what we did in the second quarter.
And what we usually do is when we cancel the note, we also won the swaps, and we have a very positive position in the swap.
That's correct.
And there are no other questions. So I'd like to turn it back for any additional or closing remarks.
Go ahead, please.
Yes. Thank you very much for your time and interest in Financiera Independencia. If you have any other 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.
Thank you very much. That does conclude our conference for today. I'd like to thank everyone for your participation, and you may now disconnect.
Thank you very much.