Financiera Independencia SAB de CV SOFOM ENR
BMV:FINDEP
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Earnings Call Analysis
Summary
Q3-2023
Financiera Independencia (FINDEP) observed a consistent rise in net profit by 7% year-on-year to MXN 163 million in Q3 2023. Operating expenses were effectively managed, at 32.5% of the average portfolio, amidst a declining balance. The loan portfolio shrank by 10%, or 5% under constant FX. The company exercised prudence amid macroeconomic uncertainties, cutting loan originations by 33% from last year but improving them by 3% quarter-on-quarter. Non-performing loan (NPL) ratio stood firm at 6.5%, and the coverage ratio remained strong at 204%. Net interest income dipped slightly by 3%, touching MXN 1.06 billion. A strategic focus on digital origination channels in Mexico and the US continues as the core strategy, with two-thirds of Mexico's and 35% of the US's new customers acquired digitally. With robust liquidity and declining net debt, FINDEP's financial position is solid with a solvency ratio at an improved 45%.
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Good morning, everyone, and welcome to Financiera Independencia's 2023 Third Quarter Results Conference Call. My name is Luke, and I will be your operator for today's call. [Operator Instructions] As a reminder, this video conference is being recorded. For opening remarks and introductions, I would now turn the call over to Mr. Jose Maria Cid Michavila, Financiera Independencia's Chief Financial Officer. Mr. Cid, you may begin.
Good morning. Thank you for joining FINDEP's Third Quarter 2023 Results Conference Call. With me today is Mr. Eduardo Messmacher, our Chief Executive Officer. We published our third quarter '23 results yesterday, which are available on our Investor Relations website, findep.mx.
I would like to remind you that the information shared 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 will turn the turnover to Eduardo Messmacher.
Thank you, Jose Maria. Good morning, everyone. We'll start with some highlights from our third quarter '23 operations. Reported net profit for the quarter reached MXN 163 million, marking another quarter of strong and consistent performance this year, 7% higher year-on-year. The top line remains strong and operating expenses remained well under control, with costs as percentage of our average portfolio at 32.5% in the context of a decreasing portfolio balance.
Liquidity is robust with cash at MXN 1.4 billion at quarter end, supporting a decrease of MXN 163 million in net debt from the prior quarter. Our equity-to-asset ratio is at 45% at quarter end, 610 basis points above the same time last year. Our loan portfolio of MXN 7.8 billion decreased 10% year-on-year, including 13% appreciation of the Mexican peso.
Under a constant FX rate, the consolidated group portfolio declined 5% year-on-year. Our portfolio base in Mexico posted a 2% year-on-year expansion, whereas our U.S. portfolio declined 13% in dollar terms.
In the third quarter '23, loan origination was MXN 1.13 billion. This figure stands 33% below last year's figure, 30% under constant FX, reflecting a more prudent stance favoring high-quality origination due to recent macroeconomic headwinds. Compared to the prior quarter, loan originations increased 3%, with originations in Mexico growing 8%, and those in the U.S. declining 8%. The consolidated NPL ratio measured as Stage 3 loan portfolio over total portfolio stood at 6.5% in the third quarter, unchanged against the last quarter and 50 basis points above the prior year.
The provision for loan losses was MXN 357 million in the third quarter, 6% up compared to the prior quarter, but 6% lower than the prior year. PLL to average loans was 18%, flat to the prior year.
FINDEP's write-offs amounted to MXN 382 million in the third quarter, 6% below the second quarter '23 and 22% up from the prior year. Compared to the average portfolio, trailing 12 months write-offs were 20% versus 14% in the prior year. NPLs plus trailing 12-month write-offs over the total loan portfolio, including trailing 12-month write-offs, was 23% compared with 17% in the prior year.
Our coverage ratio was 204% measured as allowance for loan losses of our Stage 3 loans compared with 202% in the prior quarter and 216% in the prior year. In line with our core strategic priorities, interest-bearing liabilities are down 21% year-on-year or 14% under constant FX, compared to a 10% decrease in the loan portfolio or 5% decrease under constant FX.
Compared to the prior quarter, interest-bearing liabilities have increased 12% as we work to structure the balance sheet to meet short-term maturities. Cash and cash equivalents reached MXN 1.4 billion, 34% above the prior year, representing 12% of total assets.
With this, net debt declined 32% from the prior year, MXN 5 billion in the third quarter '22 to MXN 3.4 billion in the third quarter '23 or a 25% decline under constant FX rate. Our solvency ratio, equity to total assets, of 45% in the third quarter '23 compares favorably to 39% in the prior year. The company's return on equity ratio through the first 9 months of the year was 13.4%, up 10 basis points from the same period in the prior year, and the return on assets ratio was 5.7%, up 30 basis points also compared to the same period in the prior year.
When considering tangible equity, our return on equity was consistent with the prior quarter at 17%.
Our digital transformation remains our top priority due to its benefits of amplifying our customer reach, strengthening our origination quality, expediting our processes and improving our risk management. In Mexico, roughly 2/3 of new originations in the third quarter of '23 came from digitally-enabled channels. And in the U.S., 35% of new customers came through our digital channels.
Now I would like to dwell into each of our subsidiaries performance during the quarter. Independencia currently represents 36% of the total portfolio at MXN 2.8 billion with a client base of 166,000. Performing loans decreased MXN 19 million year-on-year. The Stage 3 loan ratio was 5.9% for the current quarter versus 6.4% in the prior quarter. Apoyo Economico Familiar's loan portfolio was MXN 2.1 billion, representing 27% of the company's total and serving a client base of 97,000.
Performing loans grew MXN 73 million year-on-year. The Stage 3 loan ratio was 7.6% in the current quarter versus 7.9% in the prior quarter.
Finally, the loan portfolio of our U.S.-based company, Apoyo Financiero stood at MXN 2.9 billion, a $165 million, with a client base of over 33,000. AFI's loan portfolio represents 37% of the company's total. The Stage 3 loan ratio was 6.2% versus 5.7% in the prior quarter. AFI continues to drive efficiencies in its operating expenses with the ratio of noninterest expense to the average loan portfolio at 13% in this quarter versus 15% for the same period prior year. This partially offsets the increased credit costs related to continued pressures from the macroeconomic environment.
We are confident this expense discipline will support the business through economic cycles. The overall performance in the quarter once again confirms the success of our strategy of focusing on our core business in our strategic markets while leveraging our expertise in credit analysis and loan origination. Disciplined execution of our strategy has helped us deliver consistent results this quarter and through the first 9 months of the year. I will now hand over the discussion to Jose Maria, so he can provide additional details of our third quarter results.
Thank you, Eduardo. In third quarter '23, interest income was MXN 1.2 billion, a decrease of 3.1% year-over-year despite a 10% decrease in the loan portfolio or 5% under the constant FX rate. Interest expense of MXN 141 million decreased 7% year-over-year as we proactively manage outstanding indebtedness in the context of constraints in the portfolio growth and consider renewal options to manage short-term maturities.
Net interest income of MXN 1.06 billion declined 3% year-over-year. The provision for loan losses was MXN 357 million in third quarter of '23, 6% lower compared with prior year. Noninterest expenses were MXN 631 million in third quarter '23 or 32.5% as a percentage of average portfolio, highlighting the discipline and control we put in place to manage expense base in the context of a decreasing portfolio balance.
The company maintains a strong financial position in cash and cash equivalents at MXN 1.4 billion or 12% total assets in solvency ratio of 45%. Net debt measured as interest-bearing liabilities minus cash and cash equivalents of MXN 3.4 billion at the end of the quarter, was down MXN 1.6 billion from the prior year as we execute prudent portfolio management.
On a sequential basis, net debt decreased MXN 163 million. Our operating cash flow during third quarter '23 reached MXN 621 million. The company's coverage ratio was 204% measured as allowances for loan losses over Stage 3 loans compared to 216% prior year. Overall, the company delivered a solid and consistent results in the quarter and through the first 9 months of the year with disciplined execution of our key priorities. Operator, we'd like to open the call to questions at this time.
We will now conduct a Q&A session. [Operator Instructions] Our first question comes from the line of Nicolas Riva. [Operator Instructions].
This is Nicolas Riva from Bank of America. So I have a few questions. First one, if you can address a bit the debt maturities next year. So you have the [indiscernible] outstanding on the 2024 due in July. I remember from the last quarter that you also had the bank loan with HSBC [ MXN 1.1 billion ] due in April. If you can discuss a bit at this point, your plan after refinancing these maturities next year.
And especially in light of the fact that we have seen earlier this year a downgrade from Fitch to B+ with a negative watch. Moody's as well to B2 with negative outlook. And both rating agencies did mention increased refinancing and liquidity risk ahead of their maturities next year, so if you can discuss a bit on your plans for next year.
And also in this quarter, we did see an increase in the cash position, which was positive $279 million. It seems that it was largely driven by an increase in bank debt, if you can also provide some color on this additional bank debt during the quarter.
Thank you for the question. So regarding the 2024 maturities both of the [indiscernible] and of HSBC, in the case of HSBC, in very advanced stages of negotiations. So we expect that to be solved by the end of the year. We expect that to be solved. And also our intention in terms of [ FINDEP '24 ], as always, is that our debt holders collect in full. And we expect that also to be solved within the next few months with a lot of cushion to the July '24 maturity.
So we expect to give you very good news in the next few months, and that should be solved. Once those 2 maturities are solved and given what we are currently hearing from different banks, we expect the maturities to be a nonissue for a few years after we have sold those 2. So my message here is expect good news in those 2 fronts.
Regarding the cash position, we exactly build the cash position to be able to refinance both of the -- or rather refinance the [ HSBC ] maturity and to repay the FINDEP '24 as we have already indicated, Now, that is our attention. So...
If I can do a follow-up. So with respect to the 2024 bound, what you are saying is that we should presumably expect our prepayment at par in the next few months or even before the July maturity? As much as you can see at this point, of course, but...
So the short answer is we expect our debt holders to collect in full. I cannot give you an exact date, but we will do it as soon as we can. And of course, as soon as we can actually give me those good news, we would have sold our 2 big maturity concerns, and therefore, we would give very good news to every investor.
Okay. Understood.
Our expectation is that everybody that has trusted us could extend full.
And then as far as the increase in the cash balance in the quarter, of course, you did have collections in the loan book being 2x the level of loan originations, but there was also an increase in bank debt. If you can discuss a bit further that.
Finance, particularly with banks, we have to do cleanups, and we are preparing that cash position to do a cleanup showing strength and capability of times with other lenders. And I think it's part of the plan for now hopefully to the end of this year to have solved all of our short-term maturities.
And Eduardo the last one from me. The increase in bank debt that we saw in the third quarter, was that basically secured lending?
It is secured, yes. It is -- we registered loans in the National Registry for, let's say, securing those lines. It is not in any shape or form an asset-backed security now.
[Operator Instructions] We have not received any further questions at this point. And so that concludes our question-and-answer session. I would now like to hand the call back over to Jose Maria Cid Michavila for his closing remarks.
Thank you very much for your time and interest in Financiera Independencia. My contact information is available on our website at Financiera Independencia, findep.mx. If you have any further questions, please let us have I think there's another question, if I look mistaken.
Can you hear me?
Yes. We can.
It's Frank Lehmann from Berlin calling in my questions have pretty much been answered by Nicolas Riva asking them and all about the refinancing. But what I'm kind of struggling is a little bit is what's the role going to be of the U.S. operation, for a while I was thinking that that's going to be the dominant factor in your business lineup.
And now I'm seeing that this might have relative to the others still back a little bit. There's, of course, the FX side in the business, but there's also the origination. Why is that? Is the competition too strong? The U.S. economy is running at a positive GDP right now, interest rates going up. Can you just put that a little bit in perspective?
Is this about the balance of the 3 different businesses we're going to see in the future. And in particular, the U.S. business has always been at times of stress in the Mexican peso being kind of a source of a natural dollar hedge, which we as bondholders have, of course, profited from. Yes, that was my question to Eduardo. Thank you very much.
So on the long run, we continue believing that the U.S. is one of our most valuable strategic positions. You see a very large underserved market. Actually, if you were to take the lapping population of the U.S. and [indiscernible] as a single country, it would probably be the largest economy in the world. And we still believe it is one of our most important strategic investments.
On the short run, we are seeing effects of inflation, where particularly the inflation on food and transportation has had an effect on the segment that we serve. So we do see an increase in risk. And in the short term, we have decided to reduce our originations to readapt to the new risk environment in the U.S. And we are already seeing good, let's say, trends in our portfolio.
And I guess as soon as the whole situation of inflation plus potential recession in the U.S. is solved we will resume growth. Additionally, during this whole period, we have been trying to give the certainty to our debt holders in terms of being very prudent in terms of growth, while we are addressing our whole maturities situation.
So both explain that the market is experiencing for once inflation and also the risk of recession, and we want to be very prudent and also be very prudent in terms of growth to add our maturities. I don't know there's anything further you would like me to address.
Sorry, I'm back. if the U.S. -- Eduardo runs strongly with a positive GDP and yes, there's inflation. Is it your particular client segment that suffers more under the inflation than the average American population? Is there an aspect of that, that you're concerned about?
So definitely, the near-prime segment that serve has had a, let's say, a different experience than what the general economic indicators show. And we do believe there is more risk building up. For example, if you see the balances of credit card [indiscernible] way above any historical peak and given the [ liquidity ] of credit cards and especially of our loans going up. So we believe that the retail segment is showing more risk than what aggregate global economic indicators would show.
And that's why we're being more prudent. It is already a large operation for us, and we need to manage it with the same level of discipline that we do in every other portfolio. The effect of inflation was stronger in the beginning of the year, until a little bit has diminished, not because prices have come down, but it's a little bit of people getting used to the new price levels. But it is a pressure on the available disposable income of our segment.
Thank you very much and best of luck for Q4. Thanks for the explanation. I've always wondered about that U.S. aspect.
[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 over to Jose Maria Cid Michavila for his closing remarks.
Thank you for it. Thank you all for your interest and time today on today's call. Again, we are available for any further questions that you may have. Have a great day.