Gentera SAB de CV

BMV:GENTERA

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, and welcome to the First Quarter 2018 Gentera Conference Call.

I would like to turn the conference over to Enrique Barrera, the Investor Relations Officer of the company.

[Enrique Barrera, executive]

Good morning. Thank you all for joining us and for your continued interest in Gentera. I'm Enrique Barrera, the company's Investor Relations Officer. I'm very pleased to introduce our management team. With us today are Mr. Enrique Majós, Gentera's Chief Executive Officer; Mr. Patricio Diez de Bonilla, Banco Compartamos' Chief Executive Officer and Mr. Mario Langarica, Gentera's Chief Financial Officer. They will review the results of Gentera for the first quarter period as per the report that we have issued yesterday.

If you did not receive a copy of the release or if you have any questions, please do not hesitate to contact our Investor Relations Department in Mexico City. If you are a member of the media, we ask you to contact us directly. Please note that during this presentation, Gentera may make forward-looking statements. These do not account for future economic circumstances, industry conditions, company performance or financial results. Additional information on forward-looking statements can be found in the disclaimer in our earnings release.

I would now like to turn the call over to Mr. Enrique Majós for his presentation. Enrique, please go ahead.

[Enrique Majós Ramírez, executive]

Good morning, everyone. We always appreciate your presence in our first quarter 2018 report.

During this call, we will talk around the 3 priorities that we presented during our last call. We will review the most relevant information and data that shows that our action plan and strategy is starting to pay off.

As you will see, we continue to have high confidence in our diagnosis, and more important, we are enthusiastic about the early results that we are starting to see.

Let me start by reminding our 3 priorities once again. First, we are rebuilding our operational capability and competitive advantages in order to improve our product offer and customer service.

Second, as a result from the previous point, we are concentrating on recovering customer growth with strong emphasis on quality control.

Third, based on a better process to design priorities, we are implementing actions to improve our efficiency and return to higher income increase versus expenses increase.

Patricio and Mario will go into the specifics. But let me mention some highlights for the quarter regarding Gentera's consolidated results.

When comparing with last quarter, we grew 1% in clients and still we decreased 1.5% in portfolio.

However, it is important to see an inflection point that took place during the quarter.

For the first time, after 13 months of decreasing in clients and in portfolio, we have had now 2 consecutive months of growth on both clients and portfolio.

On a monthly basis, Gentera grew 0.2% on clients and 1% on portfolio from January to February. And from February to March, we grew 0.8% on both clients and portfolio.

These results confirm what we said and -- at the beginning of this year.

In the first half of the year, we will stop the loss of clients and portfolio. And by the second half, we will recover our growth trends to move into 2019 with double-digit growth.

This quarter, we accomplished a relevant increase in our net income result compared with the fourth quarter of 2017.

Gentera's net income improved 93%, and Banco Compartamos improved by 134% in this indicator.

My colleagues will get you into more details on this. But clearly, this is a result from an important improvement of the cost of provisions during the quarter.

As we said, asset quality is a priority on our strategy.

Let me now give you a quick overview on the results of the business units. As I mentioned, Patricio, the CEO of Banco Compartamos, will fill you in with a deeper overview on our results in Mexico.

Compartamos Peru continues to reaffirm the strategy and the benefits of going into other latitudes and bringing the group lending methodology as an effective tool for financial inclusion.

Peru closed the quarter with 495,000 clients and MXN 9.2 billion in portfolio, which means 23% increase in clients and 20% increase in portfolio compared with the same quarter 2017.

In local currency, solid. And compared with last quarter, Peru grew in clients and in portfolio by 3.7% and 3.2%, respectively.

Compartamos Guatemala closed the quarter with 94,000 clients and MXN 0.5 billion in portfolio. Which means 11% increase in clients and 5% in portfolio, if we compare it with the same quarter 2017.

We are thrilled about the proximity to reach 2 major milestones in our international operations: 100,000 clients in Guatemala and 0.5 million clients in Peru.

ATERNA concluded the quarter with 5 million active life insurance policies, which represents a contraction of 3.8% compared with the first quarter of 2017. This result is explained by the contraction of Compartamos Credit customer base along the year.

YASTAS recorded, in the first quarter, more than 3.9 million transactions, 10% more than in the first quarter 2017. INTERMEX processes over MXN 5.4 billion in remittances payments, a 10% contraction compared with the first quarter 2017.

The main factor that originated this contraction was due to the variation in the exchange rate between pesos and dollars.

FIINLAB continues its work on disruptive innovation initiatives. And at the same time, it is supporting basic transformation initiatives that our business team in the bank is implementing this year.

We are also proud of the results and achievements of our foundation, Fundacion Gentera. Among other regular activities, during this quarter, we kept working on the economic recovery of the regions affected by the earthquakes that took place in Mexico last year.

We are committed to the well-being of these clients and communities, which represent more than 40,000 people.

Another positive note is the second place award we received yesterday from the Best Place To Work Institute. This is the 12th year we are recognized as one of the best places to work in Mexico in the category of more than 5,000 employees.

We really thank our staff for their shared purpose and passion on eradicating financial inclusion (sic) [ exclusion ].

Before moving to Banco Compartamos more specific results, let me just update you about our investment process in ConCredito and the results of our shareholders' meeting that took place last week.

Regarding ConCredito, as you know, we are in the process of getting the formal approval from the Mexican Antitrust Commission. And everything looks good. If everything stays on track, our expectation is to get the formal approval by midyear and then move forward with the transaction.

Regarding the shareholders meeting, I am glad you -- to inform you that every proposal we made and that made the board for them was approved with vast majority support.

Our stock buyback program was authorized and was increased by 100% from MXN 700 million to MXN 1.4 billion.

Also, a dividend payment of MXN 1,084 million was approved. The dividend will be paid in 2 exhibitions. 50% will be paid in June and the remaining 50% will be paid in November, 2018.

Finally, let me also comment about our guidance for the year. At this point, and considering the early positive trends and results we have accomplished, we are maintaining our guidance for the year. However, we will continue to monitor our performance during the second quarter, and if we see the need to update our guidance, we will let you know at our next conference call.

I will finish by saying that, as we recognized before, 2017 results were unacceptable. We are aware that we still have a lot of work to do and better results to deliver. However, we feel confident that our strategy is paying off and that we will continue delivering the results we have promised. And we have -- as we have said, by the second semester of the year, we will show solid growth trends.

In 2019, we'll show a double-digit growth as a result of concentrating our efforts on improving and transforming our business model based on the use of more and better digital technology.

Let me now turn the call to Patricio, who will take you through, in more detail, about Banco Compartamos' first quarter results.

[Patricio Vallejo, executive]

Thank you, Enrique and thanks to our audience for your interest in Banco Compartamos.

I would like to take you through some details of the main business indicators, and the progress experienced in the past months. Firstly, as previously signaled in the previous conference calls, after the deep analysis that we performed in the second semester of 2017, we detected many challenges that have to be addressed immediately.

After the careful analysis, during the first quarter, we released many of these actions and improvements nationwide.

These were; first, reviewing the sales force. Secondly, retrain the personnel. Third, redesign the sales force incentives, four, redesign the marketing efforts, five, simplify the product offering, six, prioritize the initiatives that we set on the ground, seven, control the worst-performing offices in Credito Comerciante, and finally, restructure the collection network.

Consequently, during the first quarter, we started to see progress in those initiatives and we managed to stabilize some business indicators. Let me highlight some of them.

First, number of customers grew in March versus February this year for the first time in 16 months. Despite this amount of small growth, in the first quarter of 2018, Banco Compartamos lost 19,000 clients versus the fourth quarter of 2017.

This is a much lower drop than those we experienced in the previous 4 quarters, in which we were losing between 60,000 and 125,000 clients per quarter.

Second, at the end of this quarter, we experienced a 9.9% contraction in the loan portfolio, a moderate contraction if you compare it with the 12.6% contraction presented in the previous quarter.

Despite this contraction, net interest margin after provisions grew versus the first quarter of 2017, which reinforces our focus on growing with quality.

Third, as you know, with the objective of improving customer experience, we decided to hire new personnel to be closer to the client base to better serve their needs.

At the end of the first quarter of 2018, we hired 750 additional loan officers, with a clear objective of returning to the high levels of service that our customers deserve.

With a stronger sales force, we have assured that weekly visits are managed by our personnel with a clear improvement in asset quality. Short-term NPL is at its lower level in more than 24 months. We feel comfortable with the quality that our current portfolio has. And we will continue working hard to maintain stable levels of asset quality.

As we mentioned in this October, growth in this first half of the year will be moderate, since we still need to adjust the way we serve and interact with our clients, as the full ramp-up of the 8 initiatives take time to be fully implemented due to the duration of the portfolio.

Growth in the portfolio and customers should accelerate in the second part of the year, when the demand for credit is more robust. And by that time, we will be fully organized to follow such demand.

In order [ to ] strategic efforts and at the end of this quarter, we have more than 1.6 million accounts with approximately MXN 2 billion in deposits, grown twofold compared with the MXN 855 million reached at the end of the first quarter of 2017.

And finally, with regards to the use of Gentera's combined profit-sharing network, including the vast correspondent and Banco Compartamos branches, 77% disbursement transactions and 42% of the collection operations of Banco Compartamos were executed in Gentera's channels at the end of the quarter, compared with 81% and 47% in the previous quarter.

We expect that this participation in Gentera's channels will change in the coming quarters as we're deciding to give additional flexibility to Banco Compartamos customers to execute those disbursements and payments in different channels, that may result more convenient for them.

The early indicators allow us to see that the client is progressing in a good manner. We recognize that there are still things that can be improved, but we also know that the big market understandability that we have will help us to return to the high levels of service that our customers demand.

Again, thank you for your interest in Banco Compartamos. Let me now turn the call over to Mario Langarica who will review Gentera's financial figures.

[Mario Langarica, executive]

Thank you, Patricio, and good day to everyone.

In Gentera's first quarter, interest income amounted to MXN 5 billion, representing a 2.4 reduction compared to the same period of 2017.

This result is mainly driven by the contractions period in Banco Compartamo's own portfolio in [ 2007 ].

Interest expense decreased 6.7% compared to the same period in 2017.

This result is explained by the following reasons; 1, a reduction in the loan portfolio implying a reduction in banking market -- in banking and market funding in Mexico, a combination of fixed and floating instruments, and 3, re-growing our client deposit base in Mexico, and 4, their cost of funding [indiscernible].

As a consequence, net interest income showed a slight 2% contraction compared to first Q 2017. But net interest margin remained at the same level of 51.1%.

Net interest margin showed a 3 percentage points reduction to the 54 point level reached in 4Q '17. This reduction is explained as follows; 1, smaller average loan portfolio implying lower interest income, 2, an increasing interest expenses, driven by increasing the reference rate in Mexico, and 3, a slight decrease in Banco Compartamos yield.

As a recap of what Patricio already mentioned, asset quality is improving. Provisions went down 24.4% compared to first Q '17 and 32.2% compared to 4Q '17.

Therefore, net interest margin, after provisions, improved to 43.8%. This result is driven mainly by a better performance in early NPLs.

The cost of risk for this quarter amounted to 8.3%, which is below our full year guidance around 10.5%. It is very important to say that while we are seeing positive trends, we want to be prudent and maintain our guidance until we have more evidence of a permanent performance.

Fee expenses contracted 13.1% compared to first Q '17 due to the incremental use of our proprietary network versus third parties infrastructure.

As Patricio mentioned before, as the number of transactions in Gentera's network probably changes in the coming quarters, further reduction in this expense line may be limited.

Net fee income contracted 1.8% compared to first Q '17, as a result of lower commission and fee income.

Operating expenses grew 16.3% compared to first Q '17. As we -- as explained in previous conference, this is explained by, one, the opening of new service offices and bank branches in 2017, which today in aggregate represent a network of 890 points of service, 2, hiring loan officers and back office employees related to this infrastructure expansion, and 3, strategic and marketing initiatives, such as our loyalty program in Mexico, which, in this quarter, represented MXN 139 million.

The efficiency ratio for the quarter increased to 71 -- 75.1% compared to 1st Q 17, 66%.

[ These values ] are in line with our full year guidance, [ but scalable ] our mid 60s medium term objectives.

Gentera's reported net income of MXN 726 million, which represents a 93.6% growth compared to MXN 375 million reached in 4Q '17 and a 28.6% contraction compared to a -- the MXN 1,070 million reached in first Q, '17.

In terms of profitability, return on average equity and return on average assets stood at 17.1% and 6.8%, respectively, for this quarter.

I would like to finish my remarks reinforcing our commitment to our different stakeholders: our clients, our community, our employees, our shareholders and our society, with a very clear objective of generating shared value.

Thank you for attention. And please, operator, could we move on to the Q&A session?

[Operator]

[Operator Instructions] Our first question will come from Ernesto Gabilondo, Bank of America Merrill Lynch.

[Ernesto María Gabilondo Márquez, analyst]

Enrique, Patricio and Mario. 3 questions from my side. My first question is on your NIM, that experienced a reduction. You think this should continue given the high interest rate environment? Or are you thinking to continue repricing the loan portfolio? Secondly, we noticed that provision charges were particularly low during the quarter, and the cost of risk improved to 8.3 of average loans. I noticed a good behavior in almost all segments except Credito Comerciante. So should we think this is the new level for the [ cost of REITs ]? Or it should be trending up to your guidance of 10% to 11%? And which would be the segment pressuring this ratio? Finally, my last question is in terms of competition. Recently, [ the Gremos ] reached an agreement to acquire [ Cami ]. So this means a consolidation of 2 big players in the micro finance segment. It was interesting to see that we can have access to the press releases of both companies. And it surprised me that both have strong loan growth and very good profitability levels. So do you think both competitors take out market share from Gentera? If yes, what are your plans to recover part of that market share?

[Patricio Vallejo, executive]

Ernesto, this is Patricio. Let me jump to the competition question. As we talked in the past, competition in Mexico is very dynamic. We compete with hundreds of smaller competitors per region per state. And as any other industry where a competition flourish, there is a process of consolidation. Now we bought ConCredito, [ the Gremos ] is buying [ Cami ] and it's not surprising to anybody that years down the road, more opportunities such as those will be present in the marketplace. So we really think that going forward, regulated, efficient, transparent players will hold most of the financial assets for customers in the low income segment. So again, this is why we need to, again, reinforce service, our processes, our employees to give better services to our customer and be the preferred option of this segment in not only Mexico, I would say, also in Guatemala and Peru, in which we also compete with larger players in that country as well. So what we'll do in order to win share that we might have, I mean that we might lose last year, again, have to do with the initiatives that we put in front of the customer this quarter, right? We need to reinforce the service. We need to prioritize better the products. We need to really find the processes that we are -- in which we already make, not only loans, but also saving accounts and some other products. So once you have a better service with a much broader product offering at a good price, of course, we think that, that's a very good proposition for this customer segment. So again, it has to do pretty much with service, with everything what I said during my presentation. But again, in the second part of this year, as we ramp up back again with the marketing efforts for the second half of the year, we want to continue growing and gaining share that we have might lost in the last 12 months. Regarding your question on NIM. Our expectation for the year end is to be around 52% into 54% and the impact that we had in the first quarter was mostly related to the average loan portfolio, and as a lower yield in Banco Compartamos during the quarter. We expect to increase this NIM to reach our guidance and most of that change will come with our expectations to grow the loan portfolio during the year. And your final question have to do with provisions. And I would talk about, as we've always said, growing with quality is our biggest priority. So we've focused ourself on controlling asset quality. Again, the short-term vintages are at 24-month low. So we feel very comfortable that the provisions are something that will be maintained for the coming quarter. But again, we need to be on top of the asset quality in order to avoid the provisioning level to move back up as it happened in 2016 and 2017.

[Operator]

Our next question will come from Jason Mollin, Scotiabank.

[Jason Mollin, analyst]

My question is about growing with these clients. And look, the clients that you've seen, this improvement in March, are these clients new to Compartamos? Are they -- obviously, they're probably -- I'm imagining, they're probably using the services of competitors. Are you looking -- are you changing the product to offer larger loans at the start? Is it just the service component? How would you define the strategy to grow in terms of the product and service? And what's going to drive this growth in the second half of the year? Have you adjusted your product to the demands of the clients, would be one question. And my second question is just on ConCredito. We know it's under consideration to be approved. If you can talk about thoughts on how you would finance that purchase if approved?

[Patricio Vallejo, executive]

Okay. Thank you, Jason. In terms of growing, for the second half of the year, I mean we've always -- we have always been the best option in the low-income segment. Not only in service, but also in terms and conditions. We lost that last year. Now we originated loans with more hassle. We deteriorate service. And this is something that we are improving in this first quarter. So first, service. It's something that we are on top of. Service is provided by the loan officers. We are now with a full sales force that we require for this -- for the growth that we expect for this year. And the strategies for growth for the year and first have to do with retain our best customers. Now the best customers for Banco Compartamos are not only the best. They, I mean, they've been with us for a longer period of time. And they have the higher loans outstanding. So we want to protect them from any other competitor. Secondly, we lost market share certainly to some other competitors. We want to become, back again, the best alternative. Not only in service, but in terms and conditions. So gaining share wallet of existing customer is the second avenue of growth for the second part of the year. And finally, once we have better service, better terms and conditions as the ones we have available today, for the second part of the year, we want to attract new customers, not only from the competitive market, but some customers that might not be today with some other competitor. So those are the 3 biggest avenues for growth for the year end of 2018.

[Enrique Majós Ramírez, executive]

And this is Enrique. Just to put this also in perspective regarding our strategy for 2018. As you can see, what Patricio is explaining is what we have been saying. And I believe that the growth that we are having in March has to do with the first part of the solution, which is fixing the customer service problems that we have. So that was going to give us a stop in the losses that we were experiencing during last year. Loss in clients, I mean. And the second part of the strategy has to do with improving our product offer, which is what is going to give us the results in the recovery of the growth for the second semester or the second half of this year. So this is in line with what we have been telling you. And March growth is really marginal. But it has a lot to do with the first part of the strategy, which is fixing the service that we were providing to our customers.

[Patricio Vallejo, executive]

Regarding ConCredito, as Enrique mentioned, we are waiting to have the approvals of the authorities and we expect that to happen in the next quarter. And we are planning to finance that, as we have explained previously, with a combination of different actions. One, we have MXN 300 million in Gentera's accounts already. Then we also plan to raise a dividend from the bank to Gentera of MXN 1,450 million. And the rest, which is an amount of MXN 550 million, we are going to fund it with bank loans. And it will probably be a combination of a couple of commercial banks that have showed interested in funding our holding company and probably also a component from the loan extended from our bank to the holding company.

[Operator]

Our next question will come from Claudia Benavente, Santander.

[Claudia Benavente, analyst]

I have one, and it's kind of a follow-up. If the net interest margin drop was explained by providing smaller [ RSG gets ], I guess, it's because these are relatively new loans. Than the cost of risk could have dropped on the back of still not having evidence of future performance of [ things off ] these new vintages. And regarding the more mature portfolio, we have seen the NPL ratio just spike again. That said, how much of the portfolio could we expect to be written off in the coming quarters? Or when can we have evidence of the more mature portfolio have been already cleaned up?

[Patricio Vallejo, executive]

Okay, in terms of the vintages, again, as I said before, the short-term vintages for every product in Mexico, it's performing at the best level in 24 months. So this is why we are confident that asset quality will continue to come down, as we write off the vintages that haven't matured to the 180 days, that will happen in the second quarter. So we expect a better asset quality, or NPL, over 90 days by June, July. As we mentioned, since October, this is a normal process in which you re-originate loans. The originations -- the new originations are doing well, as I said, with the short-term vintages. And the existing loans that were originated in 2017 will be written off during the first half of this year. So again, Claudia, we the -- NIM also dropped, as you said, because since we are not gaining as many new customers, we are keeping the best customers with higher volumes and better terms and conditions. As you know, once you mature as customer of Banco Compartamos, you reach to higher loans at a cheaper rate. But you also perform very well once you are in that bucket. So it's a lower NIM, but a strong NIM after provision that should be considered. And this is why -- what you saw in the quarter, the portfolio contracted 10% and we managed to grow the NIM in comparison with the first quarter of 2017.

[Claudia Benavente, analyst]

And just to follow up on -- and why did the NPL grew so much on a Q-on-Q basis?

[Patricio Vallejo, executive]

Sorry?

[Claudia Benavente, analyst]

Why did the NPL ratio expanded so much on a Q-on-Q basis?

[Patricio Vallejo, executive]

Again, I mean it have to do -- as you remember, the first quarter -- in the last quarter, the fourth quarter of 2017, we had an extraordinary charge-off for Credito Comerciante. So that brought the NPL down due to that extraordinary charge-off of Credito Comerciante bad loans that were originated in 2017. Once we roll off those, the vintages that were over 90 up to 170, 90 days are the ones that are picking up the NPL. But again, we -- we're not concerned about the asset quality as these [cleansing] process will happen in the second quarter of 2018.

[Operator]

Our next question will come from Frederic De Mariz, UBS.

[Frederic De Mariz, analyst]

I have a couple of follow-ups. The first one on the Credito Comerciante. We saw a large write-off in the fourth quarter, But in the first quarter, the NPL is back around 8%. Is it a level that you're happy with? Is it a sustainable level? Do you think we could have another write off? You mentioned that 2017, weak loans will be written off in the first semester of 2018. So is that a line that we should follow for the second quarter? And then my second question is on the distribution. So you're mentioning you're doing a lot of efforts on the sales people, rehiring, retraining, retaining. And I'm curious to see, how do you track this on your side internally? Do you have indicators of client satisfaction? Of turnover of loan officers? How does it work pragmatically on your side?

[Patricio Vallejo, executive]

Okay, perfect. In terms of Credito Comerciante, as we said since October, this was a product that need to be redesigned. The focus of all of us have been how to keep asset quality in control. In Credito Comerciante, as you remember, we said that 4% to 7%, it's asset quality, adequate asset quality for smaller group sizes. We are not confident, I mean we are not comfortable to fill with a level of NPL that we have in that product. So it -- you shouldn't be worried if the portfolio of Credito Comerciante shrinks this year but improves in asset quality. So as the volume decreases, you might see still pressure in the NPL, not necessarily because the short-term vintages are doing worse. Simply because the volume of portfolio and the efforts that we put in this -- in the growth of this piece of business, it's not our top priority for this year, but controlling the NPLs. So again, for the coming quarters, what you should expect is smaller volumes in this product specifically, but with better asset quality. And that's something that you should focus on for the coming -- I mean, not for the monthly figures of the CMBD. In terms of distribution, again, now we hired personnel. And how we are incentivize these personnel have to do with the service that we provided. First, how many loans you disburse on time, right? We lost traction of this figure and it came down to very low points. Today, we are disbursing on time over 80% of our loans. Now that was a huge improvement, because last year, in some months, we touched like 30%. That's first thing. Secondly, how many visits -- are you on time on your weekly visits. And that's something that we also incentivize to the sales force. We need to assure that the loan officer is present, making sure that everyone within the group is performing well. We lost traction, again, in that indicator. And now it's over 60% for -- in April. Finally, I mean, as you know, the group need to pay on time and in case one single person with the group is not paying, the rest of the group has to be, I mean, there is a solidarity obligation. So we are making sure that the installment, it's complete during the group's meeting. And that's also an indicator that we are making sure that the loan officers have an incentive. With that, we are sure that the loan officers are present, that are disbursing the loans on time and making sure that the group dynamic is doing well, and those are the three things that have improved service and have improved also asset quality.

[Frederic De Mariz, analyst]

That's great. And this is something that you track on a daily, weekly, monthly basis?

[Patricio Vallejo, executive]

I mean, the incentive is monthly. But we have indicators on a daily basis.

[Frederic De Mariz, analyst]

That's great. And does it change their remuneration or how is the incentive linked to their reality?

[Patricio Vallejo, executive]

Sorry?

[Frederic De Mariz, analyst]

When you talk about those incentives, what part of the remuneration of the loan officer is linked to those 3 indicators, for example, how relevant is it for them?

[Patricio Vallejo, executive]

No, I mean it's relevant. Again, in last year, just to make it clear, last year the incentives were linked to savings, were linked to remittances, to insurance, to credit. And to be honest, whereas not 100% clear how you earn your bonus, today, it's much clearer for them. All those indicators are linked to growth. How many customers you have and the asset quality of course of your portfolio is the focus of everyone in the sales force. Those indicators, again, are -- I mean they are on top of NPL but if they reinforce -- if you do those three indicators, it's for certain that you have good asset quality.

[Enrique Majós Ramírez, executive]

Yes. And those who, Patricio and the team in the bank made these changes since the beginning of the year. It was in January. So when I speak about fixing the problems that we had in customer service, this is specifically what I'm referring to. So those kind of actions within our action plan were put in place since January and the results we are showing now are consequence of that actions that Patricio is just explaining.

[Operator]

[Operator Instructions] Our next question will come from Carlos Macedo, Goldman Sachs.

[Carlos Macedo, analyst]

A couple of questions. First, I think, Patricio, you said that the loans -- that your loan officers are now at capacity, at the right size that you need to grow. At what capacity are they operating? Are they operating at 60% capacity, 70% capacity? Just to try to get an idea, how much growth can you put into the system without having to expand your expenses, given they're such a big part of the drain on your profitability? Second question. On Peru, a lot of growth there, it keeps coming, doing a great job on the individual side, on the group side. But we know this is a cyclical business. Is there any sign that there could be a cycle coming, is the penetration so low that you can still keep going at this pace for a while without having to worry about that? How should we think about that business in Peru?

[Patricio Vallejo, executive]

Okay. In terms of productivity on how we measure this, our loan officers today handle around 340 customers per loan officer. The historic high of Banco Compartamos has been around 390. So there is a close to 15% improvement in productivity that we want to tap on in order to grow this year without having to increase the sales force much more than the sales force that we had at the end of the quarter.

[Enrique Majós Ramírez, executive]

And Carlos, regarding Peru, we are really happy with the performance that our Peru businesses is having. And yes, I can tell you that not only in terms of the growth in customers specifically in the group lending authority, but also in terms of the quality of the assets that they are acquiring, I feel comfortable that we can maintain at least for the rest of the year a very similar growth rate that we are having now. So even within the total, we are growing around 20%. I can tell you that the group lending methodology is growing over 30%. And that's because the demand and the [ answered ] population that we have in Peru that are really valuing the product offer that the group lending methodology provides.

[Operator]

Our next question will come from Carlos Rivera, Citi.

[Carlos Rivera Zermeno, analyst]

My first question is regarding your strategy. The way you put it in 2 phases. Just trying to get a little bit more color there. So on the fixing things part of that, just the agents and all of that, has this been deployed in all locations? Or what percentage of them are already there? Just trying to think, how much upside from just these easier low-hanging fruits is there? And on the other part of the strategy improving actually the product offering, have you starting testing that already in any location and what will be the timeline of deploying that to national scale? That would be my first question and my second question is regarding REIT regulatory framework or the outlook in general. In case of [indiscernible], do you see any changes to regulation, any caps on interest rates? What would need to happen with [indiscernible] distribution and directly of the [ personnel ] through the minister -- ministries? Anything else need to happen or any other risks in that scenario?

[Patricio Vallejo, executive]

Thank you, Carlos. This is Patricio. In terms of the strategies, we took the position -- we understood that we have actually 3 phases. The first phase that happened in the -- actually in the fourth quarter of 2017, was to design the solutions that we thought were necessary to turn around the business, right? So it was work that we did during the fourth quarter. Again, working on the incentives and the training and marketing efforts and everything what I said during my presentation. Once I had all of those improvements during the first quarter, we launched in -- again incentives. We launched the marketing campaigns, and we are ramping up the improvements in the product offering, not only in Credito Comerciante but Mujer and the individual products as well. As you know, the improvements that we've done in the product offering take like 4 months in order to be fully deployed, due to the duration of our portfolio, you renew loans under the new conditions and we are doing so as we speak. And this is something that will go through the entire second quarter of 2018. And this is why we said, ok, the first phase was designing, the second phase was implementing nationwide improvement and once you have all those improvements in front of the customer, you can go to the third phase, which will be the second half of this year in which we will be focused on growth. And this is a little bit the game plan for the year.

[Enrique Majós Ramírez, executive]

And Carlos, let me talk a little bit about the context. We believe that it is still not clear who of the candidate is going to win, so -- but anyway what we know that Mexico needs is, to maintain the economic discipline, to have a strong rule of law and to have a strong education system. And that's what we believe any candidate will have to bring to the context in Mexico. On our side, and talking about the [indiscernible] in our business, we believe that we're having -- this 2018, we will have a bumpy year. Actually, we are having a bumpy year. But we need to do what we need to do and what we need to do has to do with our clients, it has to do with our product offer, it has to do with being the best offer in the market. So we will keep on working on that. We will keep on working -- very important -- on efficiency because we believe that efficiencies will also bring better and cheaper products to our flow of customers. And having good product and cheap product with the lowest interest rate possible with the model, we believe we are strong enough to welcome any candidate that will be our next President.

[Carlos Rivera Zermeno, analyst]

Okay. Just to follow up there, so I'm not saying who will win for now, but it is now [ agna ] tradition to set caps on the rate, is this not a tradition of the ministry of finance? Is that an [ anlanhico ] what need to happen for any changes in this from -- to happen.

[Patricio Vallejo, executive]

Actually, today the central bank has the authority to set caps in not only rates but fees, commissions, for the entire system. As you've seen, Mexico has followed the free market tax and with the institutions that we have, the central bank which they have authority, we think that we will follow this path in the coming years. Again, if it happens, let's say capping rates in the Mexican market, Compartamos is the best-positioned institution due to the size, due to the cost of funding, due to the efficiencies that we have. So of course depending on the regulation and the size of it, but we really think that as Enrique said that we should be focused on executing right our strategy and again, be close to the regulators as we normally are, not only regulators, but the media, academics and all the opinion leaders in order to see the benefits of the free market for these segments.

[Operator]

Our next question will come from Yuri Fernandes, JPMorgan.

[Yuri Fernandes, analyst]

I have a question also on your strategy and notably on your distribution channels. I noted the year that you closed some branches this quarter and that also included the usage of third-party channels. So just would like to know if this is a trend and how this fits on your strategy because I would say this was an issue for some clients, the lack of flexibility on distribution. So that's my first question. And the second one is about your recovery profitability. With those lower margins that you believe it should go up, I think, as volumes restabilize and lower cost of risk. How are you seeing your sustainable ROE for the year? Are you still targeting the 50% ROE guidance for the year? How are you seeing the profitability level for Gentera?

[Patricio Vallejo, executive]

Okay. In terms of infrastructure, as you saw, last year we were very aggressive on the development of our branch network. Now we moved from 135 branches to 270 branches that were required to deploy the savings product. On top of the savings product, we required our customers to use our network in order to have that experience in their process as we move along through that [ path ]. Of course, channeling our customers to our own infrastructure in some cases were not -- I mean our network was not the most convenient point of entry for the customer. And that generated some friction. So since January, the use of the network -- not only our proprietary network, which is branches and [guest pass] is no longer mandatory. If you want to use another point of entry, which is more convenient to you, that's good for us in order to have an improvement in the customer satisfaction for the end user. So what you will have -- I mean, what you'll see today is now we have these hybrid network that we think is necessary, not only for disbursing loans but for collecting loans, but also very necessary for our branches and correspondent in order to maintain the business -- the saving business as we move along. So again, the only change that you should expect is that it's no longer mandatory for our customers to use our proprietary network. So this is why you might see some movement to other channels, which will make increase the fee expense that we have in the P&L for this coming year. On ROE, as you well described, our first quarter result is about our full year guidance. But at this point and as we mentioned in our remarks, we think that we should still be prudent and keep our guidance. We need to recover growth. Again, we have good signals of clients in the portfolio in this month. But we need to make sure that we restore growth as expected and mostly in the second semester and we also need to make sure that we have stable evidence that the [indiscernible] that we have experienced and that has been described by Patricio is sustainable. So we think that we will keep our guidance at this point and that we need to be observing that very closely.

[Yuri Fernandes, analyst]

Just a follow-up, so on your guidance. I ask this because your margins, they were pretty low this quarter but you were able to compensate for these with lower cost of rates so your rescheduled margin, they were likely higher than last quarter. If you were to have higher cost of fees do you think you would be able to increase your pricing, whatever just to compensate the effect so your risk-adjusted margin would be stable or slightly higher?

[Patricio Vallejo, executive]

The [ pitch ] going forward, it's not necessarily to increase rates. Actually, the trend is downwards. As you decrease your NIM, of course you need to offset that decrease by increasing volume and customers. And that's what will affect these trends.

[Operator]

Our last question will come from Carlos Gomez, HSBC, New York.

[Carlos Gomez-Lopez, analyst]

So the last 2 questions. Can you give us an estimate [indiscernible] about your market share in Mexico? And how it has evolved? And second, can you give us an update on ConCredito. You gave us a few numbers when you announced the acquisition in December. We are now at the end of March. Surely you have more updated information, can you tell us how they are doing in terms of growth, profitability, book value?

[Patricio Vallejo, executive]

In terms of market share, I mean if you compare Banco Compartamos with the rest of the micro financing institutions that compete in the low income segment, we hold like 40% of this segment. Of course, we share part of those customers with some other institutions. But 40% of the customers served in this low income segment are customers of Banco Compartamos.

[Enrique Majós Ramírez, executive]

And in terms of ConCredito, as we said, we are in the process of getting the formal approvals from the Mexican Antitrust Commission and everything looks good. We believe we shouldn't and we cannot provide further information until the transaction is closed.

[Carlos Gomez-Lopez, analyst]

All right. And the 40% that you mentioned earlier, is that for the formal banking system or bank [indiscernible] or an estimate including informal lenders?

[Patricio Vallejo, executive]

I mean, it's for those that report to the [ prodess arroyo ] network, which include formal and informal. Again, the difficulty of having a clear number is that some of the players are not regulated and they don't report figures to any board or institution.

[Carlos Gomez-Lopez, analyst]

And that is 40% [indiscernible] in the year ago [indiscernible]?

[Patricio Vallejo, executive]

Same. Like 42% or something like that.

[Operator]

Our next question will come from Gabriel Nóbrega, UBS.

[Gabriel da Nóbrega, analyst]

During the quarter we saw that fee income actually contracted despite a strong contraction in your fee expenses. Could you just give us more color on what happened on the income side, if this was a seasonal trend or should we continue to see more pressure to your fee income throughout the year?

[Patricio Vallejo, executive]

What we expect for the full year is that the net fee income will remain flat. We are having as you mentioned some effects on fee generation, which mostly was affected this quarter by late payment fees. And on the other side, as we explained in our remarks, on fee expenses we don't expect further reduction. But our objective for the full year is to get -- keep net fees at the same level of 2017.

[Enrique Majós Ramírez, executive]

Okay. Well, once again, we thank you for your time and interest in this call. Your support during good times as well as difficult times is very important for us. And believe that we will continue being full concentrated on the [indiscernible] priorities we described and we feel really optimistic about the opportunities that the present challenges will bring to us. So thank you very much, and have a nice day.

[Operator]

Thank you very much. Ladies and gentlemen, at this time, this conference has now concluded. You may disconnect your phone lines, and have a great rest of the week. Thank you.