Financiera Independencia SAB de CV SOFOM ENR

BMV:FINDEP

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, everyone and welcome to Financiera Independencia's 2023 Fourth 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.

Joining us today from Financiera Independencia is Mr. Eduardo Messmacher, Chief Executive Officer; and Mr. Jose Maria Cid, Chief Financial Officer. I would now like to turn the call over to Mr. Jose Maria Cid. Mr. Cid, you may begin.

[Jose Maria Cid Michavila, executive]

Good morning. Thank you for joining FINDEP's Fourth Quarter 2023 Results Conference Call. We published our fourth 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 call to Eduardo Messmacher.

[Eduardo Bernhart Messmacher Henríquez, executive]

Thank you, Jose Maria. Good morning, everyone. I will start with some highlights of our Fourth Quarter '23 operations. Reported net profit for the quarter reached MXN 215 million, marking another quarter of strong performance, 24% higher year-on-year and the best quarterly reported performance in the company's history.

This result includes positive net adjustment of MXN 19.5 million from amortizing loan origination costs, MXN 43.7 million from a COVID-related grant and tax credit in the U.S. and a negative net adjustment of MXN 33.6 million from credit reserves derived from the impact of hurricane Otis s in Acapulco.

Without these effects, Fourth Quarter '23 pro forma net profit would be MXN 185 million, 6% above fourth quarter '22 and still the best quarter in the past 10 years. The top line remained strong and operating expenses remained well controlled, with cost as a percentage of an average portfolio of 30% in the context of our decreasing portfolio balance, mostly due to our prudent approach to the U.S. economy and to FX effects.

Liquidity is strong with cash at MXN 735 million at quarter end, reflecting efforts taken to other short-term debt maturities during the quarter. Net debt decreased MXN 235 million from the prior quarter and 31% year-on-year.

As a brief reminder, on December 15, 2023, the company successfully completed the fully early amortization of its 8% senior notes that were scheduled to mature on July 19, 2024. This was supported by the new 3-year term line of credit with HSBC Mexico, which was separately announced on November 10, 2023. Our equity-to-asset ratio stands at 50% at the quarter end, 9.8 percentage points above the same time last year.

Our portfolio of MXN 7.6 billion decreased 11% year-on-year, including 13% appreciation of the Mexican peso. Under a constant FX rate, the consolidated group portfolio declined 6% year-on-year. Our portfolio based in Mexico posted a 1% year-on-year decline and our U.S. portfolio declined 12% year-on-year in dollar terms.

In the fourth quarter, '23, loan origination was MXN 1.1 billion. The figure stands 15% below last year's figure, 10% of the constant effects, reflecting a more prudent stance in originations due to the prevailing macroeconomic environment. Compared to the prior quarter, total loan originations decreased 3% and with originations in Mexico declining 11%, while those in the U.S. increased 13%.

The consolidated NPL ratio measured as the Stage 3 loan portfolio over the total portfolio stood at 6.3% in the fourth quarter '23, improving 20 basis points against the prior quarter and 40 basis points below the prior year. FINDEP's write-offs amounted to MXN 396 million in the fourth quarter, 3.5% higher than the prior quarter and 3% up from the prior year. Compared to the average portfolio, trailing 12 months' write-offs were at 20% versus 16% in the prior year.

NPLs plus trailing 12 months write-offs of the total loan portfolio, including trailing 12 months' write-offs, was 23% compared with 19% in the prior year.

Our digital transformation remains our top priority due to its benefits of amplifying our customer reach, strengthening our origination quality, expediting our process and improving our risk management.

Now I would like to delve into each of our subsidiaries' performance during the quarter. Independencia represents 33% of the total portfolio and experienced a contraction of 3% year-on-year. Net profit increased 7% year-on-year, with steady net revenues figure and a solid and continuous reduction in operational expenses.

Apoyo Económico Familiar represents 28% of total portfolio and experienced a growth of 2% year-on-year. Net profit declined 27% year-on-year, driven by additional reserves related to the Acapulco hurricane.

Finally, Apoyo Financiero represents 36% of our total portfolio and experienced a contraction of 24% year-on-year or 13%, excluding the impact of FX. Net profit increased MXN 51 million in the fourth quarter or MXN 68 million, excluding the impact of FX with a decline in interest income driven by contraction in loan portfolio, offset by declines in its provision for loan losses and operational expenses.

In addition, there was an increase in other operating income of MXN 67 million year-on-year or MXN 65 million, excluding the impact of FX, reflecting the recording of grant income from the community development financial institutions, Equitable Recovery Program grant of MXN 44 million and a COVID-related payroll tax credit for MXN 21 million.

This quarter's performance set a new record for our company with solid results and positive expected trends across each one of the businesses. These results once again confirm the success of our strategy of focusing on our core businesses in our strategic markets, leveraging our expertise in credit analysis and loan origination and prudently managing liquidity and debt. Disciplined execution of our strategy has helped us to deliver record results this quarter and for the year.

I will now hand over the discussion to Jose Maria, so he can provide additional details of our fourth quarter results.

[Jose Maria Cid Michavila, executive]

Thank you, Eduardo. In fourth quarter '23, interest income was MXN 1.2 billion, a decrease of 4% year-over-year despite an 11% decrease in the loan portfolio or 6% under constant FX rate. Interest expense of MXN 167 million increased 4% year over year as we continue to proactively manage outstanding indebtedness.

Net interest income of MXN 1.05 billion declined 5% year-over-year. The provision for loan losses, PLL was MXN 384 million in fourth quarter '23, 7% up compared to the prior quarter but 5% lower than prior year. PLL to average loans was 18%, flat to prior quarter and versus 16% in the prior year in the context of a 10% decline in average loan.

Noninterest expenses were MXN 577 million in fourth quarter '23 or 30% as a percentage of average portfolio, highlighting the discipline and control we've put in place to manage the expense base in the context of a decreasing portfolio balance.

In line with our core strategic priorities, interest-bearing liabilities are down 31% year-over-year or 28% under constant FX compared to 11% decrease in the loan portfolio, 6% decrease under constant FX. Compared to the prior quarter, interest-bearing liabilities have increased 18% as we successfully completed the full early amortization of the 8% senior notes that were scheduled to mature on July 19, 2024.

The company maintains a strong financial position with cash and cash equivalents at MXN 735 million or 7% of total assets and solvency ratio equity to total assets of 50%. Net debt measured as interest-bearing liabilities, minus cash and cash equivalents of MXN 3.1 billion at the end of the quarter was down MXN 1.4 billion or 31% from the prior year, a 25% decline under a constant FX rate. As we exited prudent portfolio and debt management on a sequential basis, net debt decreased MXN 235 million.

Our operating cash flow during the fourth quarter '23 was MXN 724 million. The company's coverage ratio was 217%, measured as allowances for loan losses over Stage 3 loans, compared with 204% in the prior quarter and 202% prior year.

Our solvency ratio of 50% in fourth quarter '23 compares favorably to 41% in prior year. The company's return on equity ratio for the year was 14.1%, up 50 basis points from the same period prior year. And the return on assets ratio was 6.4% versus 5.6% in the prior year. When considering tangible equity, it improved to 18% versus 17% in the prior quarter.

Overall, the company delivered record results in the quarter and the year with disciplined execution of our key priorities. Operator, we'd like to open the call for questions at this time.

[Operator]

[Operator Instructions] The first question comes from the line of Nicolas Riva.

[Nicolas Riva, analyst]

This is Nicolas Riva from Bank of America. So my first question is, I know that in the quarter, you prepaid the $57 million outstanding on the [ '24 ]. My understanding is you use some of your cash position and also the new -- the expanded credit line with HSBC Mexico. I wanted to ask, out of the $57 million that you prepared of the [ '24 ], how much of that was paid using your existing cash position? And how much are you seeing the expanded new credit line with HSBC Mexico. That's the first question.

Second question related to the use of the credit line with HSBC Mexico, I wanted to ask how much do you have in available bank credit lines, including this new line with HSBC Mexico now?

Third, if you can discuss your bank debt maturities in 2024, Essentially, right now, your debt would be the $83 million outstanding on the [ '28 ], the new bullet bond and the remainder would be bank debt. If you can discuss your bank debt maturities this year.

And then finally, if you can provide guidance for 2024, I'm particularly interested in your guidance for loan growth and your guidance for the NPL ratio by the end of the year.

[Jose Maria Cid Michavila, executive]

Basically, the first question is, if you see the balance sheet, you can see that we have the reduction of the [indiscernible] of almost MXN 1 billion. And in reality, we only increased almost MXN 200 million in the bank debt. So we did use a lot of our cash to repay the [ '24 ] at the end of the year. So that's the first question, right?

So in the next one that you've made is basically what we have is the debt maturities for '24, they look really, really stable, very low maturities in '24. Since we renewed the line with HSBC, this line is for 3 years, okay? So I can give you the full detail on the maturities if you want on our follow-up call. But it looks very well for '24.

[Eduardo Bernhart Messmacher Henríquez, executive]

You remember that [indiscernible]. So maturity in any of our large credit lines, which is [indiscernible] during 2024. So on the small maturities.

[Nicolas Riva, analyst]

Sorry to interrupt. Just to make sure I understood it. So for the first question, what you said, Jose Maria, is that roughly you paid a bit more than $10 million you've seen the credit line with HSBC Mexico and the rest was paid in cash. So like roughly $40-something million was paid with our existing cash position out of the -- or the prepayment, I mean of the [ '24 ]?

[Jose Maria Cid Michavila, executive]

Yes. That's correct. We raised some cash, we had some cash on hand at the end of third quarter, so that [indiscernible].

[Nicolas Riva, analyst]

Okay. And then I guess we would be missing -- you said, well, bank debt maturities for this year are low and well, the available bank credit lines and then the 2024 guidance, particularly for loan growth and the NPL ratio by the end of the year?

[Jose Maria Cid Michavila, executive]

Yes. We have a bit more than MXN 5 billion in credit lines. So it's -- I think it is pretty good as well. And the next question, sorry, Nicolas...

[Nicolas Riva, analyst]

Yes. And well, the MXN 5 million in credit lines that would include -- that would be not the available portion, that would also include the amount that you already used, right? What I'm seeing in...

[Jose Maria Cid Michavila, executive]

Yes.

[Nicolas Riva, analyst]

Okay. And then the final question was just a 2024 guidance, particularly for loan growth and NPLs.

[Eduardo Bernhart Messmacher Henríquez, executive]

So we do believe that this year, we're going to be able to grow the portfolio in the high single digits. And we do not expect our NPLs to vary significantly to what we have reported this quarter.

[Jose Maria Cid Michavila, executive]

And just to [indiscernible] credit lines, [ 3.2 ] is available...

[Nicolas Riva, analyst]

[ 3.2 ] the available ones. Okay.

[Operator]

Our next question comes from the line of [ Alejandra Rodriguez ].

[Unknown Analyst]

I'm [ Alejandra Rodriguez ]. I'm from [indiscernible] Tradings. My question is regarding what are the business plans for AFI in particular? In 2023, you have plans for growth in Texas and Arizona. Is this still a main objective for the business? Or are you more focused on the Mexican market?

[Eduardo Bernhart Messmacher Henríquez, executive]

From what we can see in the market and actually the quality of customers coming through the door, we have seen a degradation of quality in Texas and Arizona. And therefore, we have deprioritized the growth in these 2 states during the [indiscernible] period.

By the way, we also see a degradation of asset quality in some of our competitors also in California. So we continue to be prudent with the growth of AFI. Our portfolio is performing well, and the [indiscernible] is higher than we have historically been experiencing. So we have a prudent stance on the growth of the U.S.

[Unknown Analyst]

Okay. And just one more question. Is this still the business model focus on digital origination?

[Eduardo Bernhart Messmacher Henríquez, executive]

So yes, the origin of -- or the first contact with the majority of our customers is strategical needs, but we do believe that the combination of our digital presence and our branches gives us a much better balance of cost of risk than [indiscernible] digital. We are seeing, particularly in Mexico, many of the fintechs that were 100% digital suffering with credit losses. And therefore, we continue to need balance between digital and the physical infrastructure, gives us the best balance of cost and risk.

[Operator]

We have not had any more questions at this time, so I will now pass the call over to Mr. Jose Maria Cid for his closing remarks.

[Jose Maria Cid Michavila, executive]

Thank you very much for your time and interest of Financiera Independencia. My contact information is available on our website, findep.mx, if you have any further questions. Have a great day.