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Good morning, everyone and welcome to Financiera Independencia's 2021 Fourth Quarter Results Conference Call. My name is Joe and I'll be your coordinator for today. [Operator Instructions]
For opening remarks and introductions, I would now like to turn the call over to Mr. Ivan Barona, Chief Financial Officer at Financiera Independencia. Mr. Barona, you may begin.
Good morning. Thank you for joining FINDEP's 2021 fourth quarter results conference call. With me today is Mr. Eduardo Messmacher, our Chief Executive Officer.
We published our results press release on Wednesday, which is available in our Investor Relations webpage at findep.mx. Let me remind you that the contents that we will show during this conference call may include forward-looking statements, and as such are subject to assumptions, uncertainties, risks and other factors that could cause actual results to differ materially from those described, including risks that may be beyond the company's control.
Now I would like to turn the call over to Eduardo Messmacher.
Thank you, Ivan. Good morning, everyone. Our execution and core long-term strategy paid off during 2021 delivering our strongest profits in over a decade as reported, but especially when considering the non-cash impact of the write-down of Finsol Brasil's [indiscernible]. We achieved ambitious goals while keeping balance our financial strength, asset quality and liquidity availability. Furthermore, along with our human talent our focus on digital improvements have turned into higher efficiencies and profitability.
Let me begin by sharing the highlights of the company's performance and extraordinary results during 2021, while Ivan will go through the financials that show our speeding growth and strengthened business model. Given the divestitures of Finsol Mexico, Fisofo, and Finsol Brasil's operations sales agreement, comparable figures will encompass Independencia, AEF and AFIs results, which we will refer to during this conference as comparable basis. As for Finsol Brasil it will be reported on discontinued operations as of fourth quarter '21.
Reported net profit for 2021 reached MXN 347 million, standing as the highest in over a decade despite posting a non-cash write-off of Finsol Brazil's Group. Furthermore, when the effect of this non-cash impact is removed, net profit reaches MXN 480 million. This outcome validates our strategy of focusing on recourse strength, in unsecured individual loans and adhering to disciplined risk collections management and digital transformation.
Regarding our balance sheet, it remains solid with high capitalization, cash at hand, reduced leverage and credit lines available to support growth. On a comparable basis, total loan portfolio increased 7.1% versus third quarter '21, and 32.5% year-over-year, reaching a reported level of MXN 7.7 billion. In fourth quarter '21 loan origination remained strong in our subsidiaries at close to MXN 2 billion, standing 32.5% above last year's on a comparable basis. The consolidated NPL ratio for fourth quarter '21 was 4.4%, 60 basis points above the 3.8% in the last quarter, and 140 basis points below the 5.8% from 12 months ago on a comparable basis. The reported NPL ratio stands at 150 basis points below the one reported in fourth quarter '19, pre-pandemic figures. This shows the strength of our portfolio despite the divestments of the low NPLs payroll loan portfolio.
On a comparable basis, the provision for loan losses was MXN 281 million in the fourth quarter '21, a 25% increase when compared to the MXN 225 million of the third quarter on '21. Provision for loan losses were at 43% lower than 2020. AFI was a subsidiary with the highest increase in PLL, and thus I will dive further in this particular operation. AFI had experienced abnormally low provision for loan losses during the first 3 quarters of the year with provision for loan losses to average portfolio balance of 4.6% versus the 7.3% in 2018 and 8.4% in 2019. This was due to a portfolio that experienced a positive bias in it's composition, on the back of limited origination of new clients during 2020. Growth during 2021 focused on acquiring new clients, whose risk is higher than renewal customers. As the portfolio grows and these loans to new clients mature, the reserves methodology requires the constitution of additional reserves, thus reverting the portfolio to PLL levels, more congruent with history. While fourth quarter '21 presented a higher level of PLL than historical average, annualized fourth quarter write-offs remained at a low level of around 4.2% of average performing loans.
Furthermore, considering 12-months 2021, PLL to average portfolio balance was 6.8% better than 2018 figure of 7.3%, and well below the 8.4% of 2019. As the portfolio matures, we expect, apart from extraordinary situations, that PLL to average portfolio balances -- stabilize between 7% and 8%. In this operation, it still makes sense to focus on growth, as the market opportunity exists and there are clear economies of scale to be achieved. We will balance this growth with prudent risk control, with the objective of maximizing long-term profitability.
FINDEP's write-offs amounted MXN 231 million in the fourth quarter, standing 5% above those witnessed in third quarter '21, and 46% lower than the fourth quarter 2020 figure. We maintained a high coverage ratio of 194%, unchanged from the one recorded in the fourth quarter '20. In accordance with our main strategic priorities in the quarter, we maintained liabilities below historical levels, and a stronger financial position. In our reported balance sheet we reduced 2% of long-term debt year-over-year and 21% of bank loans. We maintained the solvency ratio of 42% in the fourth quarter '21, greater than the 38% third quarter '21. We ended the fourth quarter '21 with cash and cash equivalents of MXN 452 million. These figures represents roughly 4% of total assets. It is worth noting that as of fourth quarter '21, Finsol Brazil carries a MXN 151 million cash balance, which is no longer in our consolidated figures. Net debt declined 2% year-over-year from MXN 5.25 billion back in fourth quarter '20 to MXN 4.95 billion in fourth quarter '21.
In the quarter, the company posted a net profit before discontinued operations of MXN 124 million, a 2.6% quarter-on-quarter expansion over last year's. When considering discontinued operations, net profit for the quarter goes even high, pressured by MXN 133 million non-recurring effects related to Finsol Brazil. On a comparable basis during 2021, the company's return on equity ratio was 9.2% and return on assets ratio was 3.5%. When intangible items are excluded the tangible return on equity and return on assets for the fourth quarter are 14.5% and 4.1%, respectively.
Now, let me share some highlights of each of our subsidiaries during the fourth quarter. Operating NPL ratios were similar to fourth quarter '19 figures, thus comparing to pre-pandemic asset quality. Independencia closed the quarter with a loan portfolio of roughly MXN 2.5 billion and a client base of over 127,000 people. Independencia's represent 32% of the total portfolio. The performing loans grew MXN 62 million, or 3% in the quarter. NPL ratio of 5.4% compares favorably versus fourth quarter '19 levels of 9.5%.
Apoyo Economico Familiar closed the fourth quarter with a loan portfolio of MXN 1.9 billion and a client base of roughly 106,000 people. AEF's portfolio represents 24.4% of the company's total. The performing loans grew MXN 22 million or 1% in the quarter. NPL ratio of 7.6% is comparable to fourth quarter '19 level of 7.4%.
Apoyo Financiero, our California based company closed the quarter with a loan portfolio of MXN 3.4 billion and client base of over 31,000 people. AFI's loan portfolio represent 43.5% of the company's total. The performing loans grew MXN 362 million pesos or 12% in the quarter. During the quarter, AFI grew its loan origination pace 51% relative to pre-COVID levels for the first quarter of 2020. NPL ratio of 1.7% compares favorably with the fourth quarter '19 levels of 3.1%.
As a reminder, one of the company's priorities and strategy has been to maintain and strengthen the supplement through the pandemic, one of the reasons why the company accelerated digital transformation process with outstanding achievements. During 2021, fourth quarter '21 originations contributed same operations have grown 30% versus pre-pandemic levels over fourth quarter '19, with 21% of fewer employees, considering also the same operations. In particular origination in AFI have grown 51% versus pre-pandemic levels with 23% fewer employees. In Mexico 78% of clients come from digitally-enabled channels. And in the US in AFI, 83% of collections are done outside the [ progress ].
I will turn the call over to Ivan, so he can provide details of our fourth quarter financials. Go ahead, Ivan.
Thank you, Eduardo. Please note that the following results will provide a comparison of our performance, considering only the remaining subsidiaries in our operation.
Financial results. As a result of the corporate strategy in 4Q '21, interest income was MXN 1.13 billion, a 26% year-on-year expansion on a comparable basis. Interest income for the 12-month period of 2021 was MXN 4.05 billion, that's 4.9% higher than in the 12-month period of 2020 on a comparable basis. Net interest income of MXN 1 billion, that's 29% higher than 4Q '20's on a comparable basis. The net interest income for the 12-month period was MXN 3.56 billion, a 7.7% increase versus 2020 on a comparable basis. Net interest income after provisions for loan losses was MXN 723 million in 4Q '21, 2% above 3Q '21, and 16.8% larger than 4Q '20.
As for the whole year performance against 2020, we observed a 46.7% growth on a comparable basis. On a comparable basis non-interest expense in 4Q '21 came in 14.3% year-on-year higher, well below the 29% increase witnessed in net interest income, and well below the quarterly origination expansion of 32% year-on-year. Non-interest expense for the 12-month period was MXN 2.56 billion, which is 7% above the MXN 2.4 billion incurred during 2020. With all the above explained, the company highlights this is our stronger profit for the fourth quarter in a row, the best in the last 10 years.
The corporate strategy to grow our company to a strong financial position with a liquidity buffer that represents roughly 4.3% of total assets and has a high solvency ratio. During the quarter, our discipline to the strategy took us to give a sound balance sheet. Our liabilities of 4Q '21 reached MXN 6.1 billion, standing 6.6% below 4Q '20 reported levels. Our net debt measured as liabilities minus cash and cash equivalents reached MXN 4.95 billion at the end of the quarter. It posted a MXN 97 million year-on-year contraction, compared to a MXN 1.9 billion expansion in our loan portfolio, hinting sound cash generation. Overall, the company's financial health is good, and in a stronger position to keep both growth and facing the pandemic.
Now, I would like to open the call for questions.
[Operator Instructions] Our first question comes from the line of Nicolas Riva.
It's Nicolas Riva from Bank of America. Can you hear me well?
Yes.
Yes. Okay. Okay. So I have 2 questions. The first one, I saw that you burned $11 million of cash in the quarter and the cash position now stands at $22 million. Can you disclose the level of cash collections and loan originations that you had in pesos, in Mexican pesos in the quarter? I saw that you disclosed a table with collections as a percentage of the loan book, but, and again, I am sorry to keep on pushing on this, but I think it's very, very useful if you can disclose on a quarterly basis in the earnings report cash collections and loan origination in pesos, not as a percentage figure of the loan book.
And then the second question is, when looking at the debt schedule for this year, so you have -- and you disclosed in the notes to the financial statements, the credit lines that you have and the maturities of those. I see that you have $50 million of bank loans maturing in this year, but these are related to revolving credit lines. If you can discuss the willingness of the banks to roll over these lines and how the discussions with the banks are going regarding these after the default of Credito Real, and what's your plan to address the bank loan maturities this year?
Regarding the delta for cash on a reported basis, as we work with the consumers a change in reporting. As stated in my presentation, Finsol Brazil still carries a MXN 151 million cash balance, that is -- that has been removed from the reported balance sheet. This cash is still in the company, but as we move towards divesting this company and started reporting this in the fourth quarter on the discontinued operation basis, this cash is no longer consolidated in our figure. And that is the majority of the delta that you see in the reported figures. We know...
Eduardo, sorry to interrupt, sir. You are saying -- sorry, just to make sure I understand this. You are saying you moved cash of MXN 150 million, you said of Finsol Brazil because you already agreed to sell Finsol Brazil, but because the sales hasn't been completed yet, you moved a MXN 150 million pesos of cash of Finsol Brazil to discontinued ops, and that explains a good chunk of the decline in the cash position in the quarter?
So the whole operation, let's say, was removed from our reported statements. In the income statement it is reported as discontinued operations. So you're going to see impact in cash, you're going to see impact in the credit portfolio, in various lines of assets and liabilities. If required, we can schedule a call where accounting can walk you through the impact in the whole...
No, it's okay, but the impact on the cash position itself was MXN 150 million, you said because of Finsol Brazil...
Yes, MXN 151 million, that's right.
And then, besides that, if you can disclose the level of cash collections and loan originations you had in pesos in this quarter, and if you can disclose that going forward, I think that would be super useful really?
Hi, Nicolas. Just an additional point regarding the cash, we would like you to look at it as the changes in net debt, because basically we can increase our cash balance just by using a little bit more of our lines. We have been currently withdrawing and amortizing part of our lines with quite facility, but on a net to net, then you can see we are generating or not some of the cash. And we would gladly walk you through this further.
No, Ivan, in this quarter though I didn't see a change in gross debt in this quarter, right? And the debt position was basically unchanged at MXN 5.4 billion, correct?
Yes. We -- there was no major change.
So there was a decline in cash and therefore a decline in -- I mean, an increase in the net debt position as well. But okay, and then you are saying regarding cash collections and loan originations?
Regarding collections we are including base percentages of average outstanding portfolio. For the fourth quarter considering Independencia, AIF and AFE's operations, it was roughly MXN 2.18 billion for the fourth quarter. It's an increase against the MXN 2.05 billion witnessed throughout the third quarter of 2021.
So you are saying cash collections of, did you say MXN 2.2 billion, did you say?
Yes, roughly.
In the quarter. Okay. And on the level of loan originations as well, if you can disclose that?
Yes, loan originations for the quarter were MXN 1.99 billion considering Independencia, AIF and AFE's operations.
Okay. So you collected more than you originated. And again, going forward, I know that you disclosed a table with collections as a percentage of the loan book, if you can disclose that in -- because I'm sure it's even easier for you. You have that number in pesos. So if you can disclose that just in pesos going forward, collections in originations, I think that would be very useful. And some of your peers are already doing that. So I think that would be useful.
We will check on it. We are willing to be more open on disclosure and that's why we have been adding some of the tables in our press release. Likewise, we made an effort to make a comparable basis for notwithstanding the recent divestitures and upcoming sale of Brazil in order to make it more clear for all our investors and stakeholders.
Great. And then the second question regarding the bank loans, if you can talk about the discussion with the banks, especially since the default of Credito Real to rollover the credit lines, and what's your plan to address the bank loan maturities this year, this MXN 1 billion or $50 million?
Yes. Actually throughout the year, we have been able to rollover our credit lines, and we are working on the extension of them, business as usual. And we would like to highlight that throughout -- during February, we actually got a new credit facility from Santander. That was a bank that we didn't have a line. So, I think that our funding sources are able to distinguish that our business is different from what's happening out there, and they are willing to partake on -- partake with us. And so we have not been witnessing any restrained from doing a renegotiation of our lines.
The line with Santander, can you disclose the size of that line and what would be the maturity of the line?
Yes, it was a -- it was announced on February 1. It's a MXN 200 million credit, and it has a 24-month maturity.
Our next question comes from the telephone line ending in 7609. [Operator Instructions]
This is Nick Dimitrov, Morgan Stanley, Investment Management. Before I ask my questions, I completely agree with Nick Riva that getting more disclosure on origination and collections in nominal amounts would be incredibly helpful. And I've asked about this myself previously. So going forward if you can provide those numbers, again it's going to be incredibly helpful for investors. Now, with regard to funding, I know that previously you stated that you could potentially consider securitization this year. We saw Vinacen tap the Saborest market yesterday, have you made any concrete plans about potentially exploring any of these options?
We are exploring various options in Mexico and the US -- both in Mexico and the US, variety of the options in securitization. But we have -- I mean we haven't reached a final conclusion, nor do we have anything already something not to share with you. We are considering all the options. And frankly, I think it was a good -- it was good to tap the Saborest market, and it shows us that there is appetite for this type of business.
Okay. And I think I've asked this before. So looking at the US part of the book, it's more than 40% -- 43.5%. Have you explored any options to fund, I know that currently the book has been funded by the US dollar bond, but if you have to get funding in the US, have you considered any options to raise funding locally? When I say locally, meaning in the US?
Yes, absolutely. And we're exploring options. Of course, dollar is short in pesos, so our, let's say, ideal situation is...
Yes.
Is our funding in pesos. But still where we see a real appetite to invest in the US, and definitely, we are considering options also in the US. We believe that the quality of the portfolio and the growth that we're achieving in the US makes it very attractive for getting funding in the US, either directly or through some sort of maybe private securitization. So there is always an option. We are working currently with our local funder, which is -- we're trying to expand the of funding that we get in the US, but that wouldn't be the final, let's say, the final strategy in the US. The final strategy would be to continue looking for other options that could entail a securitization.
Okay. Can you comment on the potential tax liability of MXN 220 million that you disclosed earlier? What I'm trying to figure out here, it's -- what is the timeline that you expect to -- I know that you're fighting that tax liability. But did you have any idea about the timeline?
Yes, frankly, we do not. We are working with our tax advisors to present the whole arguments. But a detail is that this, can take 2, 3, 4 years. Really, there is no guarantee of how long this will take. And as it was disclosed, it comes from historical operation, not from recent years, and we really have no control on how long the whole process is going to take.
Understood. Okay. So it's nothing imminent. My next question is, have you considered buying some of your bonds back, considering the levels that they're trading at?
So we do not have a buyback program. What we do is opportunistically as people offer us the bonds, what we can see on the terms, we execute. And given our ability to generate cash from the operation, and given the availability of funding lines, product pricing would be attractive for us. It's quite attractive at the levels they're in, when lower. And we will consider any offers that we get for buying back those bonds.
But you haven't bought any bonds back year-to-date, right?
We haven't [ bought bonds ]. I think we were in the prior period, until the disclosure of results in this quarter, and we can be active. Most [indiscernible]
Okay. But...
But year before the quite period, $700,000. So it's not quite significant.
$700,000. Okay. So that's relatively small.
Yes.
Okay. And one question about the introduction of IFRS 9. Can you talk about the impact of the introduction on your cost of risk and on your capital, respectively?
Yes, absolutely. Let me first state that we and neither the banking industry is going to IFRS 9, CNBB interpretation or the CNBB rules. We used to operate the company with a -- it's called an advanced model. That is an internal model for reserves. And in this change of regulation, we have the option of actually once again presenting an advanced model to be approved by the CNBB. We decided not to pursue that avenue, and we decided to actually go to CNBB model, which is not strictly IFRS 9. It is kind of in the spirit of IFRS 9, even though not strictly IFRS 9.
Okay.
So we will change -- we will make these this change. The numbers of the first quarter of 2022 will be reported with these new reserves methodology. There will be -- we did a disclose, if I recall correctly, on the level of impact that this would have, and it would go directly to previous periods profits, that is directly to capital, wouldn't flow.
Okay.
Now that's a one-off impact. And thereafter, the number that's going to flow through the P&L, as you know is delta reserves, loss, write-offs minus recoveries. So the delta reserves will be affected. Frankly, we're quite new in this methodology. But we do not foresee a major impact. The methodology to share something that is new for us which is the performance of customers with us and the performance of customers in the market. So that's an element where we do not have control, and that will have most uncertainty in what's coming forward. But as far as we have been following right now the numbers, it shouldn't have a significant impact on the delta reserves, that month-over-month through the P&L. Now, it also doesn't have any impact on the virus, and definitely not on the recoveries. The...
So more or less -- sorry, go ahead.
Yes. What it will have an impact is on the reporting of our past due loans. You may recall that this methodology considers 3 stages of loans.
Yes.
Instead of past due loans, we will report Stage 3.
Yes.
It will have a very slight benefit on the reporting of our nonperforming loans, especially since we've reported portfolio in pesos was nonperforming at 60 days past due. And now the Stage 3, maybe a little bit less stringent, and it will have a marginal impact on our non-performing loan ratio.
But that should be beneficial impact, right?
Marginally...
90 days.
Yes, yes.
Okay.
Marginally.
Okay. So the bottom line is, there going to be a one-time hit from the adoption, and that hit is going to fall directly to capital, and your cost of risk, which on average is 15%, 16% will not be impacted, right. That's kind of the conclusion.
That's right. And the -- I mean, on the long-term, write-offs and these methodologies should converge. I mean they don't converge in the same month, but long term, they should represent exactly the same, close to the same risk.
The same thing, yes.
And therefore, as long as write-offs are not affected, we should converge to something close to what we have. The effect that we estimate for capital is also not quite significant on the change of methodology. We have made release earlier with certain assumptions. We believe that given also the tax implications and the implications on deferred taxes, it may be even lower than what we have previously discussed. And really, we're going to disclosing in the first quarter of -- for the first quarter. Actually, in the reports that we sent to the market, we are updating the figure, so -- to an overall effect on liquidity of around MXN 233 million. This will not happen...
Okay.
On operating cash flow. It will be reflected on the report of the first quarter '22, and also for comparable purposes, the same way that we did last time, there was some change reserves. We will do we pro forma fourth quarter '21 balance sheet to be able to make appropriate comparisons.
Understood. And one last question from me, I think I know the answer, but nonetheless. Your origination is done entirely in-house, correct? Origination and collections are done in-house.
No, not entirely. I mean, we have obviously digital origination where we use external marketing agencies that help us with the digital marketing. We do -- we have certain programs where we use external referrals of prospects. But the whole decision is internal. But we do not have third party people taking risk decisions for us. Now, in terms of connections, most of the early tenure collections is done in-house, although we do use third-party call centers. And late collections, we do use external agencies, and especially in written-off portfolio, we use external agencies.
Okay. Understood. What percentage of your book is originated in-house versus through third parties?
So credit decisioning, 100% is in-house.
Yes.
And referrals, I would have to get back to you. But I would say referrals are in the order of 10% to 15% of monthly originations. But I would have to get back to with...
Okay. So it's relatively small. Okay.
Yes.
I mean, hypothetically if you have to go down origination, you're not going to be in conflict with your distributors in a way that Credito Real was....
Not at all. We do not have any -- I mean the distributors are, at the end of the day, here in Mexico, called Commissionistas, that is people that work for agency. We do not have long-term contracts with them. We do not have any commitment to levels of origination. There are mainly individual, let's say contracts with companies with some kind of minimum level of origination. If we have to reduce our origination, we can reduce it from one day to the next.
Right.
We have no problem with that.
We will pause once more for any further questions. [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 Ivan Barona for some closing remarks.
Thank you very much for your time and interest in this information that proves the strength and market leadership of Financiera Independencia. If you have any further questions, please don't hesitate to contact me. My contact information is in our web page at findep.mx.
And as always, we remain committed to transparency, and any information you may want, any integrations that you may need, anything, we are just want one phone call away and committed to transparency on the Management's side. Thank you very much.