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BMV:GENTERA

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, and welcome to the First Quarter 2020 GENTERA's conference call. Now I would like to turn the conference over to Mr. Enrique Barrera, Investor Relations Officer of the company. Sir, you may begin.

[Enrique Barrera, executive]

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 for GENTERA for the first quarter period as per the report that was 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.

Please note that in this presentation, GENTERA may make forward-looking statements. These do not account for future economic circumstances, industry conditions, company performance or financial results. [Operator Instructions]

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

[Enrique Majós Ramírez, executive]

Thank you, Enrique, and thank you for being with us today. We hope you and your families are doing well, and keep safe please. As you know, we are living challenging and unprecedented times, so I can tell you that this will be an unusual report. We want to concentrate more in the present and in the future than in the last quarter. However, it is very important also to say that we had a very strong first quarter 2020, and I'm sure that Mario will provide us with the information to get in there. We have the results that show very strong, and we also prepared some provisioning that I believe will prepare us for the storm that we are facing. But anyway, Mario Langarica will tell us about that in detail.

So let me start with a really important subject before getting into the business, which is the health of our staff and clients. Regarding our staff, I can tell you that at this point, 98% of our staff in head offices are fully working at home and very efficiently, by the way. And over 80% to 90% of our staff in our branches are also working from home, and they are in constant contact with our clients through digital channels. So I think that we are also being very efficient there. Everyone has the tools they need to work, and they have been operating really efficiently during the last weeks.

From the 22,000 people that we have in GENTERA, today, we can report 20 people that had been confirmed of having COVID-19 virus: 16 in Mexico, 4 in Peru and 0 still in Guatemala. In any case, we are taking all the safety measures in our hands to maintain our staff really safe. We are providing, by the way, COVID health insurance and life insurance to all our staff members. And unfortunately, we can already tell you that we have one case of a loan officer, [ Enbrok Martinez ], who died 2 weeks ago into Ciudad Juárez from coronavirus. Ciudad Juárez is a small town in the border with the U.S. at the north of Mexico. We are very sorry for our loss, and we are providing [ Enbrok's ] family all the support for this difficult moment.

Regarding our clients, it is difficult to have a reliable information in general, and you know that. However, we have a weekly survey for our customers. And from that survey, we can tell you that less than 1% of the groups mentioned that a member of the group could be infected. That is -- this is not really reliable information because we don't have enough testing in Mexico, Peru and Guatemala, and we don't have the testing confirmation. But if each group has around 10 people in average, this could mean that less than 0.1% of our clients has been infected. We have to be very cautious with this statistic because we have very little testing, as I told.

Maybe the most relevant or hard information we have comes from the life and health insurance product that we have for our customers, which, by the way, also protect them from COVID. We have 2.7 million customers with this insurance product. And as of today -- as of yesterday, we had 10 cases of reported deaths from COVID, 8 of them in Mexico and 2 of them in Peru. And we are adding -- we add here pneumonia, which might be also COVID, we have a total of 53 cases. So this means that we have around 0.002% mortality rate, which is in line with statistics globally in all the countries that have more information around it. So -- but anyway, in any case, we will make everything in our hands to protect our staff and clients.

Now let me turn to the business side. Despite the challenging and unprecedented times, the first quarter 2020 results were really strong. Patricio, but especially Mario, will talk in detail about it. However, I know that the most important matter at this point is to talk about the present and the future challenges, so I will move on to that. Let me describe what we have been doing in the past couple of months.

By the end of February, we were communicating to the Board and to you in our previous conference call a very promising year ahead. Maybe at that point, we still didn't have a clear understanding of the impact of the COVID pandemic. We started to have a better understanding of the situation maybe during the week of March 9. And in the week of March 16, we started to implement immediate actions basically in 4 fronts. The first one, we took action to keep our staff and clients safe. The second one, we accelerate the implementation of digital tools to have more remote and constant contact with our clients. As you know, our business model is very human contact intensive, and we have to make sure that, that contact remains now with the digital means that we have in our hands or others that we have been implementing in these last weeks. The third action was, and this is a very important one, we offered all our customers an 8-week payments amnesty, and this was a tough one. But by the way, even if we allowed our customers, the 100% of our customers, not to pay for 8 weeks, and this is April and May, 39% of our customers are still paying us after four weeks. So this means that the businesses of our customers are still there, and the customers are willing to pay it. So this is good news. However, we are preparing because we know that we are just starting with this special situation that we are living.

Also, we continue disbursing our loans when members of the group and the loan officers agree on it. And that's also a very important thing to do because in this business, if you stop disbursing, the people maybe will not get to the other loan, and most of the motivation of the payment comes from getting the next loan. And also, we know that our clients in this situation will need our funding to start the recovery phase once the isolation period stops. So disbursing is something that we are also putting a lot of effort on. There's a challenge there because you have to maintain balance between disbursing and payments and take care and manage your liquidity. But Mario will talk a lot about that, and I believe that our liquidity is being faced, and we are strong financially to get to the other side even in terms of liquidity for the organization. We are making a lot of efforts, and we are taking actions to implement more credit lines, and we feel strong also on that.

As you can see, hard decisions, all of them, have been taken up to now. We have more decisions to make in a daily basis, maybe in the following weeks and months, but all of them are always supported by our core values. And at the end, we are doing what we believe is the right thing to do. We are putting humanity upfront. And at the same time, we have an intelligent business strategy, decision-making process and execution. So let me tell you a little bit more about our action plan.

As you know, our decision-making process has always been to start with a good diagnosis, then build a good action plan and then be very efficient in the execution. That's the way we have been facing the last challenges during the past years, and it's a very efficient and a very good formula to get through this kind of challenges. So our plan is based on 6 main priorities.

The first one is to protect our staff and clients from the risk of getting infected. The second priority is to redefine and implement new ways of operating, and that may be to get into new normals on the way we operate. The third priority is to make sure that we have the liquidity to go to this crisis. And as I told you, Mario will tell us more about this. The fourth priority is to reduce our expenses to be essential and redefine our resources to assure the business continuity. Five, to capture the opportunities that we will find the way because we believe that this situation will always bring us also good opportunities to be better as a company, to have better processes and to provide a better service to our clients. So this means, in other words, not only playing defense but playing offense in these times. And the sixth priority that we have is that we are getting high priority to the internal and external communication and leadership all across the country -- the company, sorry.

Talking about leadership, our management team, we have to be very realistic and, at the same time, to be very energized -- to energize the organization with encouraging leaderships. The situation is not easy for anyone. We are living a process of disruptive change, but we are also living a process of disruptive opportunities. Patricio will get into more detail about how are we operating, but let me just tell you that after evaluating the situation, we know that our clients need GENTERA and Compartamos products more than ever. And we will -- definitely, we will be with them at this moment and this situation.

Let me add maybe 2 important considerations here or 3. Once the lockdown is over and the economy starts to roll again, we will be operating in our, let's say, "natural" element. GENTERA's mission DNA -- and DNA has always been to provide development opportunities to vulnerable people. That's the social impact that we had always looked to create. And especially today, this is more important than ever.

Also, customers' businesses supply these basic needs. The kind of businesses that our customers have are on very basic needs, and we believe that, that are the activities that will recover faster from this crisis. So being in the business of food or clothing is an advantage when we get to the recovery phase and we stop the lockdown. So I think that's something to consider. And also, GENTERA has always been financially strong, and we are confident that we'll be -- have the liquidity needed to make it through the social distancing weeks or maybe months. Bottom line, we are in a privileged situation to confront this crisis and to help our customers to get through it. I promise that we will get value from the situation, and we won't wait this crisis.

It is also important to mention that maybe not at the same scale, but we have been through different crises before in GENTERA and Compartamos. This is not the first crisis that we faced. During our 30 years history, we have gone through pandemics, economic crisis and even natural disasters. And let me tell you about some learnings from those experiences. One of them is that our clients are very resilient, flexible and strong. And what I mean flexible is flexible in terms that they can switch from one to another activity quite fast, and we have some examples of that. Maybe Patricio will tell us about that.

And the other thing about the strength of our clients is that NPLs, yes, they rise in the short term when we have this kind of situations, but then they return to normal in about 3 to 6 months period. At least that has been the experience that we have had in the past. Also, our target market will grow because if we know that with unemployment, self-employment becomes the best available option, and people will have the need for new loans.

The other thing that we also are looking at is that supply will be short term maybe and the demand will be higher when the shutdown period ends and the recovery phase starts. So we have an important role here at GENTERA and an important responsibility because we have to make sure that this industry has the power to supply the loans needed by our customers, and we are making sure that we will work for that.

So now I would like to be more specific about 3 main topics. The first one, our 2020 guidance that I think is an important topic that you would like to hear about. The second one is our ConCrédito partnership. And the third one, the INTERMEX transaction that is still in process. So let me get into the guidance 2020.

Given the current circumstances, guidance 2020, as you can imagine, is no longer valid. Even though it's hard to know how the following months are going to look like, we estimate that once operations get to the new normal, we will be able to provide a new guidance maybe, hopefully, in the next 1 to 2 quarters. I hope before that. However, as you know, GENTERA has always had a strong financial position with a strong capital structure, and we have not stopped looking for additional funding and services to maximize our liquidity levels. We can tell you that we have the liquidity to pay the following months until the economy starts opening again. We have pulled all our liquidity from credit lines, and we keep negotiations as we speak to acquire new lines.

Then talking about ConCrédito. ConCrédito, as well as GENTERA, is building its strategy on maintaining its service to clients as well as on its liquidity. Remember that ConCrédito has a very strong capital structure of more than 47%. We continue to be very bullish about ConCrédito's business model and the partnerships that we have with them. We are working together to privilege the liquidity needed and obtain new funding sources for both GENTERA and ConCrédito. We are in the process of redefining the best way to proceed about the acquisition transaction with our partners. And by the way, I want to thank our partners for the spirit of mutual support that they have shown through this difficult times that we are all facing.

And finally, talking about INTERMEX. Regarding the process of INTERMEX, we estimate closing the deal with TransNetwork by the end of the second quarter of the year. We are very pleased that TransNetwork has expressed its intention to continue with this transaction.

So bottom line, these are very uncertain and disruptive times. However, we really feel strong and motivated as a team. And as we see as well -- as we see the opportunities from this crisis, we will capture them, not only for the benefit of the company, but for the benefit of our clients that they need us more than ever. Challenges are big. However, I know that together, we will get to the other side.

Let me now pass the line to Patricio. He will provide us more specific information on the way we are operating and the action plan that we have. Hello, Patricio, and thank you for being here.

[Patricio De Bonilla Garcia Vallejo, executive]

Thank you, Enrique, and good day to everyone. First, I really hope that you are and remain safe, strong and healthy during this sanitary contingency that we are all living. As always, we appreciate your interest in GENTERA.

At the end of the quarter, we faced the beginning of government and social efforts to deal with the pandemic in Mexico, Peru and Guatemala. Even though we have dealt with different events over the course of our history, the depth and length of this contingency is different. However, customers and our employees have managed crisis such as earthquakes in 2017, climate change events such as El Niño or hurricanes every year, the H1N1 disease in 2009 and the financial crisis in 2008 successfully. To deal with these events, we modified our traditional business model to operate during such periods of time. As you all know, our operational model has always been heavy in human contact, using weekly visits in our customers' houses and businesses. This pandemic has given us the opportunity to accelerate in just this few weeks the implementation of the digital contact channels with nearly 100% of our customers and loan officers. Today, we have a daily remote contact with our 3.8 million customers and more than 22,000 employees. This way of communicating has been crucial to maintain the business running.

Before I go into the detail, it's important to read some context. What we have seen in the past in economic downturns, the informal economy usually grows in some employment crisis, and qualified people looks for financing for productive activity to make their living. Therefore, we are certain that our addressable market will definitely grow in the months to come.

More so, due to the basic nature of the products and services that the customers sell, the demand tends to be relatively stable regardless of the economic cycle. It is clear that the economic activity will be affected since tourism, remittances and different sectors will be impacted directly. But the micro entrepreneurs can adapt fast to the new economic dynamics since they do not have any cost or infrastructure behind. As such, we not -- we know that our customers' businesses will recover faster than other business activities once the activation period starts.

Finally, we know that in troubled times, access to funding is challenging and the competitive landscape tends to get weaker, which opens the door for greater opportunities. Due to this dynamic, we understand that we go through 4 stages in the following quarters. We are now in the first stage. That is containing and maintaining our customer base. The second stage will be to restructure our customers and give them some flexibility to deal with a weaker economy. The third stage will be to reactivate and try to gain market share given the fact that most of our competitors are facing a strong operational and financial difficulties. And finally, we think that going forward, we will need to adapt and work in the new normal of the market where we do not want to lose the strong efforts we have made to digitize the operation.

Let me go through the last 6 weeks of this year. We have been focused on, first, the safety of our employees. We have implemented the home office for most of the company. We have kept the branches open to make sure that the customers can get their loans and make their payments in our infrastructure. In doing so, we provided our staff with the protection measures and tools to operate safely.

Second, we deployed benefits for our customers in the 3 countries. We deferred payments of their loans for up to 8 weeks to face the reduced economic activity and difficulty to make payments due to the restrictions in mobility. Despite this flexibility, during April, close to 39% of our customers remain recurring since customers were not as affected yet from the economic slowdown or needed additional resources, which encourage them to pay us back. We are also distributing loans to repeat customers and when the members of the group and the loan officers agree on it.

Third, we monitor and make sure that our branches, Yastás, correspondents and third-party channels are open, are available and available to our customers. As of today, we have close to 40,000 different channels that our customers can use who operate with us in the 3 countries.

Finally, we know that this is just the beginning and was only the first step to deal with this pandemic. For the second stage of restructuring, we are working on additional set of benefits to encourage payments from the customers, giving them additional resources, longer tenors to reduce the weekly payments, et cetera. Such mechanisms will allow us to keep a healthy portfolio with good asset quality and, more importantly, provide them with alternatives to keep their credit taxes and maintain their business running.

To this date, it's encouraging to us to see that the benefit now present in the market have been well received by the customers. And we see stories like [ Elisabeth Turdina ] in the state of Tamaulipas that she used to have a hand-crafted product store, and now she's making face masks and other materials highly demanded in this contingency; or [ Aurora Prado ] in Monterrey that used to produce and sell cleaning products is now producing sanitizing gel. Clients like [ Maria Elena Sotto ] in Mérida used to sell food in a physical marketplace. Now she shifted to sell via WhatsApp to regular customers and expanding their customer base by selling remotely. What is more impressive is the fact that they switch from one product to another within 1 week. These stories are multiplied by millions, not only in Mexico, but Peru and Guatemala. We reinforce our commitment with our staff and with our clients, and we are sure that altogether, we'll come out stronger from this contingency.

We believe that if we maintain the safety of our employees and providing with the correct incentives to the customers to maintain their credit relationship with Compartamos, we will be able to keep our leadership position in the market since the demand for credit will remain strong. It is important to note that we now serve close to 3.8 million customers, which is a 10% growth versus last year, the highest number in our history, make sure that we will be committed with all of them in this challenging time.

That is all for my remarks. I will now turn the call over to Mario Langarica to review GENTERA's financials for the quarter. Once again, thank you for your attention.

[Mario Langarica Ávila, executive]

Thank you, Enrique and Patricio, and good day to everyone. I hope that you and your families are well in this sanitary contingency. I will address my remarks, talking about the most relevant line of GENTERA's income statement and some financial metrics for first Q '20. That includes some of the [ precautionary ] provisions that we have already taken since March as a consequence of this contingency. I will describe the implications to the financial statements going forward in the context of the special actions and methodologies that the regulators have granted banks and financial institutions in the countries where we operate that apply to the programs that we have launched to support our clients, as Enrique and Patricio has described.

Following the actions allowed by regulators in Mexico, Peru and Guatemala, we took the decision to extend the great periods described before to our customers remaining the normal payments of their credit. Authorities allowed to keep the portfolio as current during this period. Given the fact that collections will be deferred but the portfolio will be kept current, we decided to take an initial and incremental provision of MXN 367 million in Mexico and equivalent to MXN 71 million in Peru for a total amount of MXN 438 million in GENTERA. So we should consider that affecting the results that I described below.

As you can see from our results published yesterday, GENTERA closed first Q '20 with solid dynamics, above of what we were originally expecting and again in line with the good results that we had been presenting in the past quarters. Excluding the [ precautionary ] provision, net income for this quarter would have been the second highest amount in pesos ever presented. These results leave us in a solid position to face the new challenges to come.

As mentioned before, our first Q '20 portfolio amounted to MXN 44.500 million, representing a 25% growth compared to first Q19. This solid growth generated MXN 5,960 million in interest income, representing an 8.9% increase compared to first Q '19, and this growth was mainly driven by a 4.7% increase in interest income in Mexico and a 25.5% growth in Peru. Interest expenses at GENTERA contracted 9% compared to first Q '19, which was a consequence of an active management of our liabilities and the reductions of the reference rates in Peru and Mexico. Therefore, net interest income resulted in a 10.8% increase compared to 1Q '19.

Provisions reached MXN 1,251 million during the quarter. This item increased by MXN 609 million or 94.9% when compared to first Q '19 following the [ precautionary ] provision described before of MXN 438 million and additional provisions related to the growth of the portfolio. These measures on provision and additional liquidity, which will also -- will also impact our margins or have also impacted our margins.

For this quarter, net interest margin after provisions amounted to 32.2%, which is below 39.5% obtained in first Q '19. The extra liquidity and the prudential provisions impacted this metric in approximately 5 percentage points. Also, the cost of risk for the quarter is to -- on the quarter was affected to amount 11.6%. Excluding this provision, cost of risk would have amounted to 7.5%, below the guided number for 2020 that we provided before.

Net provisions amounted to MXN 224 million, which is a slight decrease of MXN 11 million or 4.7% versus first Q '19, but it is important to highlight that these provisions are coming now mostly from Yastás, ATERNA and Compartamos Financiera and will not include any more INTERMEX fees. So this slight decrease, in fact, is a very positive number because the provision from the other subsidiaries are a substitute, the INTERMEX fees that we are no longer booking.

Operational expenses for the quarter amounted to MXN 3,539 million, which is a 6.6% growth compared to first Q '19. This increase was again below the 8% that we guided at the beginning of the year, but it's important to note that the pace of growth of expenses will definitely be lower in the following quarters than the level originally planned due to the current and future situation that we are all living.

As mentioned before by Enrique and Patricio, in face of the contingency, we have implemented a deep review of all expenses to lead them to essential activities and to business continuity with explicit solutions for our clients and our sales force. We are aiming to reach a relevant reduction of the debt and expenses for the full year. We will provide more detail on the new expected number in the next quarter.

GENTERA net income ended the period at MXN 787 million, which represented a 6.5 -- 6.1% contraction compared to the MXN 838 million recorded in first Q '19. This contraction is explained by the MXN 438 million provision booked related to the sanitary contingency that we have described. This provision when presented at the net income level represents a MXN 308 million reduction. It's important to note that having this provision, GENTERA net income would have amounted to MXN 1,094 million, and it would have been our second best historic quarter in recent times.

ROE stood at 14.7%. It would have been 20.3% ex provision, and ROE amounted to 5.2% and -- or 7.1% ex provision. And it's important to note that the capitalization index for Banco Compartamos reached 35.5% levels. These numbers put us, again, in a good position and solid position to go forward and face the contingency.

Now let me take -- talk about some of the other decisions that we have made and explain some of the dynamics that we should expect going forward. One, we have made relevant decisions on liquidity, funding and use of capital. We have taken extraordinary liquidity in Mexico, more than MXN 6,500 million at the closing of March. And up to April, we have already obtained additional funding going forward. Peru, more than PEN 290 million, equivalent to more or less MXN 1,900 million. And in Guatemala, GTQ 15 million, which is more than MXN 35 million. We are also reviewing incremental funding options with new and traditional sources such as commercial banks, development banks, the big capital markets as well as with international development banks and with regulators under the new programs that are coming to the financial systems in the different countries for different alternatives applicable to this context.

For use of capital, as recently announced, our Board of Directors resolved to recommend to the Ordinary Annual Shareholders' Meeting that took place on April 17, do not decrease nor pay dividends for the 219 financial years as well as to suspend the use of our share buyback program until further decision. These measures will help GENTERA to further strengthen our liquidity and capitalization levels. Future investments that require use of capital are being reviewed in depth and closely analyzed.

Based on the special regulatory programs implemented in Mexico and Peru, as described before, we would expect to see the following trends in some of our key relevant indicators. In portfolio performance, given the criteria granted by regulators, GENTERA's loan portfolio will show the following dynamics. First, the portfolio presented in this first Q '20 should be considered as our base sales portfolio. This portfolio under the current regulatory programs will remain current in our books for the grace period and under the payment and all term reprogramming until the new flow of collections will start. During second Q, the new credits granted in the period will accumulate to the current portfolio. That includes the grace period presented in first Q '20. And because of this, we should expect some growth at the loan portfolio level. In 3Q, we expect to have more collections and lower renewals, implying reaching potentially a peak and then a potential reduction on the size of the portfolio depending on the programs that are implemented and taken by the clients. And in 4Q, we would expect and hope to see a return for more credit demand from our clients and hopefully a return of growth to our portfolio, always being very careful about asset quality. We would expect a return to more "historical" levels of growth until first Q '21. As you can see, this description follows the phases described before by Patricio. The timing of each one will probably depend on what we are seeing in the real economy as we move along. So we would expect that the performance or dynamics of the loan portfolio will have somehow like a mountain shape in the following months.

Regarding income, the interest income will also move up typically given the grace periods that we have extended to our clients and also on the reprogramming dynamics that we'll see in the second phase. So we would expect there to see a new type of form behavior, and we would expect to see probably the bottom in June, July, hopefully, of this year, expecting to see a return and acceleration in the last quarters of the year and potentially will get to more traditional dynamics by the end of the year.

In terms of provisions and NPLs, again, in line with the authorization granted by the regulators, provisions for loan losses and NPLs will also show some unusual dynamics during the year. Regarding NPLs, we would expect to see a peak in May, and we would expect improvements in the levels of NPL during the third quarter to see back again a return to more normal numbers on the 4Q. These movements, given the fact that NPLs are considered after 90 days of nonpayment, but the payments and the collections will be deferred in time. So that will also have an effect on what we would expect to see going forward.

To conclude my remarks, we would like to mention recent events starting by rating agencies in Mexico and Peru. On April 3, Fitch Ratings confirmed Banco Compartamos on its long and certain national scale ratings an AA+ mix and F1+ mix, changing the outlook to negative. And on April 21, Fitch changed Banco Compartamos global ratings Long-Term Issuer Default Ratings, IDRs, to BB+ from BBB-, and the rating outlook on the long-term IDRs remain negative. On April 14, S&P Global Ratings confirmed Banco Compartamos national and global scale long-term ratings at mex AA+ and a BBB-, respectively, in line with the actions in total we've taken on March 27. Outlook remain negative.

In the case of Compartamos Financiera Peru, in April 2020, Apoyo & Asociados rating agency and Class & Asociados rating agencies affirm the local investment-grade ratings for our subsidiaries in the country at in line with stable outlook. Most of these changes in ratings are aligned to what has been happening in the countries with sovereign and the financial system ratings.

Thank you for your attention. That is all for our presentation, and we can now move forward to the Q&A session.

[Operator]

[Operator Instructions] Our first question will come from Luis Yance, Compass.

[Luis Yance;Compass;Analyst, analyst]

I hope you guys are staying healthy. Two questions from my side, and I appreciate the level of detail you guys gave on your prepared remarks. But on the provision side, the fact that -- could you talk a little bit more about how we should expect provisions to evolve going forward given that you overprovision a bit more in the first quarter. Is this 11% to 12% cost of risk that we saw in the first quarter sort of a level we could see in the next couple of quarters and then eventually coming down? Or do you expect to see some sort of a higher level in the second and third quarter?

And then also on NPLs, you mentioned perhaps we'll see the peak in the third quarter, and I know it's very hard to forecast what sort of peak we will see. But any color you could give in terms of -- right now you're at 3.3%, how much higher do you expect it to be? So that's my first question on provisions and NPLs.

And then the second one, on the loan book, you mentioned that almost 40% of your clients are still current and paying despite the fact that you offered them an 8-week deferral. I was wondering if you could comment how that percentage has evolved over the past few weeks, whether you started with 80% of clients paying and now it's 40% or whether it has remained around 40% all the time, and whether you are considering further deferrals beyond the 8-week program that you just announced.

[Mario Langarica Ávila, executive]

Sorry for the delay. We are just figuring out the mute and off here with our phones. Sorry. Yes, regarding provisions, again, given the fact that we are facing a new normal, and we are going to be needing to see what really happens with the behavior of our problems with the clients, we will -- we have decided to take this precautionary provision. We would expect to have additional provisions going forward as we can really see how we materializes.

The provision that we took got based on some -- of the provisions that we already expected from the behavior of the past performance of the portfolio, but also was based on some the experiences that we have had in previous crises, as described before.

So given the fact that we are not going to start seeing really collections of the deferred portfolios and of the newer programming, we would expect to see lower levels of NPLs and provisions in the following quarters [ if we lift ] just regulatory measures to show in the balance. But therefore, we will be complementing it with a provision that we can foresee with the real behavior that we would be expecting.

[Patricio De Bonilla Garcia Vallejo, executive]

Luis, this is Patricio. In terms of the deferral facility that the customers have, we started in March 30. And since then -- I mean, as you know, we have weekly visits. Those customers that are in -- at the end of their loans are more keen to retail back to get more money, right? So as the weeks pass by, we started with 24% of the credit being deferred. Now we have more than 50-something, 53%. And we expect that number to continue to increase in the months to come.

As you know, also May, the customers will have this -- I mean, this facility, if you will, the benefit. And that will give you -- as Mario just said, as the customers defer their payment, they maintain themselves current, right? So what you'll see is that the loan book increases, and the NPL remains low.

But of course, the next phase that I was talking during my remarks of the third -- I mean, the next phase for restructuring, we need to be simple and fast in order to get all the customers, again, back into our new terms and conditions to maintain the NPLs as low as possible.

So again, and I'm trying to deal with your 2 questions, not only loan books but NPLs. The next 4 and up to 6 months, the next 2 quarters, we have the regulatory facility to maintain the customers with this deferred payment capacity. So in those 6 months, we need to defer their payments, and then restructure them as fast as possible in order to maintain the customers' current and reduce their -- I mean, alleviate a little bit their payment capacity with longer tenors. And with all those actions, keeping as low as possible the NPLs for the months to come.

Again, how hard the economy will be hit for how long? It's still yet to be seen. And this is why we will -- I mean, we report every month the financials of Banco Compartamos. And -- but just -- I wanted to give you just the 2-step process that we will go through in the next 2 quarters.

[Luis Yance;Compass;Analyst, analyst]

That's very helpful, Patricio and Mario. And then just a follow up on that. On the OpEx side, Mario, you mentioned that you're doing a deep review and aiming to reach a meaningful reduction there, and you'll communicate that later on. But if you could talk a little bit about what measures you're taking there, especially on the employee front, which is a big chunk of your OpEx expenses? And whether it is possible to think that OpEx perhaps even declines this year relative to last year?

[Mario Langarica Ávila, executive]

Yes, of course. Well, basically, what we did was to do a big reduction of all the projects that we have that we already have defined as the plan for the next years, and we decided just to focus now on what was needed in order to deal with business continuity and whether all of the measures that we could take to make sure that our clients -- that we're going to get -- we'll be able to get to the clients the deferrals and the new programs that we are designing. So most of the projects were aligned to that and postponed.

We also did an important reduction in some of the personnel expenses. We decided to freeze all hiring, given the fact that we would expect different dynamics in the tables. Also, incentives were reviewed. We have also made a review in marketing. We also needed a freeze all the events that we needed to do. We reduced, importantly, our payments to consultants, et cetera. So yes, we will provide probably more detail in the next quarter of the amounts, but we would expect to have such a significant performance in operation expenses as we did last year.

We still are working out on many other items, so we can give you a more precised number, but, obviously, expenses would show a significant reduction versus our guided number at the beginning of the year.

[Luis Yance;Compass;Analyst, analyst]

Okay. Great. And my last question is on Peru. Is it fair to assume that, given that Peru took measures earlier in terms of social distancing and restrictions, and it's supposed to come out of this earlier and start opening the economy earlier than Mexico, you will see a recovery earlier in Peru and Mexico? What could you tell us about the fact that Peru is ahead of Mexico? What are you seeing so far in Peru that could be transferable to what we may see here in Mexico, with a delay of a couple of weeks?

[Mario Langarica Ávila, executive]

Yes, Luis. And yes, Luis, Peru and Guatemala, actually, they are ahead of ours, like a couple of weeks, a little bit more than that. As you said, no, the Peruvian government has been very strict in their social distancing measures. They have, I mean, lockdown -- strict lockdown measures for the entire country, and basically, the month of April, they basically stopped originations and collections for a couple of weeks, and the disbursements of loans and the collections of such reduced dramatically during the month of April. They extended their lockdown until mid-May, and this is something that we expect in Mexico.

As we mentioned in our remarks, in Mexico, we are still collecting some customers. Some customers are paying us back. But we expect that, during May, more and more customers decide to take the deferral in their payments. So what Peru show us is that, for example, during May, the disbursements of the loans and also collections of loans will be lower than they have been during the month of April. And we're expecting, by the end of May, that the Peruvian economy starts to go back -- to lift a little bit their restrictions. Their government has been more aggressive in the support of their economy. So we think that, by June, we also -- we can go through our restructuring process also in Peru, but we expect that to be happening during the May -- during the months of June or July, in which we need to go back with our customers, and understand what their payment capacity under the new normal.

And those experiences, we are taking them back to Mexico. This is why, for example, all the measures that you saw at the end of this quarter, all the provisioning, all the liquidity, all of those initiatives were also taken earlier in Peru and we decided to do them in Mexico, even though they were not 100% necessarily at that time, right?

So again, what I want to tell you is that today, in Mexico, the ease of restrictions of the Phase 3 is at the end of May. What we've seen in some other countries is that this starting date moves a little bit, so we expect the recovery in Mexico during the later June or July. And Peru is again a couple of weeks ahead of us.

[Operator]

Our next question will come from Adriana Lozada, Scotiabank.

[Adriana De Lozada, analyst]

I just wanted to know whether you ran any stress tests that you can talk to us about? Or on the other hand, if you can talk to us about the dynamic that you see in Peru of group lending? As we had discussed on a previous call, group lending is or can be less flexible than individual lending when it comes to switching business models during a crisis?

[Mario Langarica Ávila, executive]

Okay. Thank you. The first one relating to the -- you asked stress test, right?

[Adriana De Lozada, analyst]

Yes, correct.

[Mario Langarica Ávila, executive]

Yes. Yes. We run stress tests taking into account different factors. A very important factor was the first, how much -- how many months we could or would give on the grace period first phase process? As you have seen, we decided to take 2 months or 16 weeks, and that was mainly driven by the fact that our group lending methodology has a shorter tenor than most of what the other banks or financial institution has.

So we first did some exercise with what would be the appropriate -- the current period term. And then we also have been doing exercises with how long would we do this reprogramming or restructuring of the payments. As Patricio was describing before, we would be extending the periods for 1.5x or 2x when we [ regard ] reducing the payments of the clients.

We did different exercises and different scenarios. Obviously, the longer we did grace periods and the longer we extend the tenors of the reprogramming and restructuring, the higher liquidity we would be requiring. So we developed those scenarios. And the scenario that we have now, which is the action that we are taking, we believe that it's something that makes sense at this point, and that it's calibrated to [ save ] the [indiscernible]. But we also have a more challenging scenarios, where probably more flexibility of the clients would be needed. And obviously, we have plans to address those more stressful scenarios.

Maybe, I don't know if Patricio, if you want to talk a little bit about group and [indiscernible].

[Patricio De Bonilla Garcia Vallejo, executive]

Yes. Adriana, after all the stress tests that we've done, the reality is, as Mario said, this is liquidity-fixed price. So those institutions that are capitalized, well provisioned and have liquidity sources available will be able to provide the terms and conditions that the market requires. And therefore, the -- as we said during our remarks, the market demand will be there. The credit is needed in not only in Mexico and Peru and Guatemala as well, and to reignite the economy locally, regionally, and nationally, you will need to provide funding in order to micro entrepreneurs try to adapt to the new reality. And this is why, again, we are taking every step to reinforce our liquidity position. And we think that with the measures we've taken, and those strategies that Mario have for the coming months, we will be strong enough to absorb the process of containing the customers and then restructuring them, regardless of the needed scale in each of the markets.

And in terms of Peru, we were talking about the group lending methodologies. And even though there are similarities in the products, of course, in Peru, the product is not as mature as it is in Mexico, right? So even though there are some similarities in the behavior and such, they have other features which make even easier now, for example, they use the electronic payment capacity that we have locally, the electronic wallet, to collect the money. So this is a seamless, much easier way to transact even with social distancing measures.

And in Mexico, of course, we have a stronger presence. We have more channels to disperse and collect. So again, the message that I want to get through here is that if we are close to the customers, if we understand their needs and we provide them with flexibility, the need for credit will be strong in the 3 countries. And this is why, even though there might be millions of stress tests, the reality is that the stronger-capitalized institutions have a good access to liquidity are the ones that will prevail going forward.

[Operator]

Our next question will come from [ Ricardo ] [indiscernible], BTG Pactual.

[Unknown Analyst]

I want to ask if how are you guys feeling the competition ever since the crisis? And if you believe that GENTERA's strong balance sheet has put it in an advantage towards our competitors, today and the future, when the crisis is over?

[Patricio De Bonilla Garcia Vallejo, executive]

In terms of competition, I mean, in downturns, the competitive landscape tends to get weaker. As we mentioned during the remarks, access to funding [indiscernible]. And if customers perceive that you will not renew the loan in the next cycle, they stop paying you back. So that deteriorates very fast the balance sheet of smaller players.

So what we've seen in the first months of this year, and actually, we saw that since 2019 due to the economic slowdown that we lived also in that year, is that the competitive landscape started to get weaker. So we think that with a higher number of people in the informal sector, and with weaker competitors in the months to come, that opens up for an opportunity later this year that we will be keen to tackle.

So again though, the following 2 quarters will be challenging for everyone in the 3 countries. But we believe that after the ease of restrictions, and really the numbers starting to play in, we see that, later this year and 2021 could be a year of opportunities in the 3 countries in which we operate.

[Mario Langarica Ávila, executive]

Yes. Ricardo, just adding to what Patricio just mentioned. What he is saying at the end is that we believe that for the next months, and for probably the whole year, supply is going to shrink, and the demand is going to grow. And we believe that not everyone will make it through. So this is something that we believe we have the responsibility, first of all, to protect GENTERA because we want to be there, and we will be there for our customers, and we want to help them through this. But then we have to also try to protect the industry.

I think that micro finance industry is something that has been built for decades now. It has provided opportunities for many people. And I think that we will have to deal with this shrinking of the supply and growing of the demand, and that's how we see the future in the following months or maybe years.

[Operator]

Our next question will come from HSBC. Would you announce your name, please?

[Neha Agarwala, analyst]

This is Neha Agarwala from HSBC. Could you provide us with a little bit more color on the ConCrédito transaction? What are the plans for it? And how do you start to consolidate it? And how is the business doing in the current environment?

My second question is on Peru. You've explained how the individual loans are performing, but we think that, that portfolio is probably more risky than the group lending methodology, which is predominant in Mexico. So any indication on how the individual loans in Peru have performed and could you see an increase in NPLs much higher than in Mexico would be very helpful.

[Enrique Majós Ramírez, executive]

Sure. Thank you for the question. And I will start with the ConCrédito question. Yes, we have been in touch, and we are working very close with our partners in ConCrédito. And I believe that they are making very clever actions, they are putting very clever actions to support their clients and to make sure that they will have the capacity to stay with their clients through this. Mainly what they are doing is that they are balancing through the distribution network that they have, which are with their entrepreneurs and [indiscernible]. And they are the ones who are really having this sensibility, this -- of how is the demand now, and the real demand for working capital loan.

So they have reduced the amount because they believe, and we all believe, that the economic activity has been slowing down dramatically. So they are doing that. But they are using that distribution network, which is a very, very savvy distribution network, because it's people from their own communities to really [ bends ] the balance and managed in the best way possible the supply and demand of credit. So they are doing well. I think that they have a specific plan as well. And as I told you, we are now talking with them to see what are we going to do through the first semester in terms of the transaction. So I think, as I was saying, we feel very comfortable and very supported, and we believe we are doing very good team work with them.

[Patricio De Bonilla Garcia Vallejo, executive]

And in terms of Peru, of course, the individual lending, we have 200,000 customers in Peru with individual products. As you said, there are more established kinds of micro entrepreneurs than the rural piece of that business. What we are doing is basically, we will not grow at all in the individual lending, what we want to keep is our customer base. We will focus our sales force in restructuring them.

Again, as I said, the customers will require credit. So what we will need to do is ease a little bit the terms and conditions to alleviate their payment capacity to the new reality, because Peru is expected to shrink close to 8%, 9% for the year. So that's an important hit for the economy.

So some sectors, most sectors will be affected. So the picture is -- we are 100% focusing in maintaining the customer base, restructuring them and try to alleviate through new terms and conditions to understand really their payment capacity to keep those customers current for the coming years, actually. But again, it's something that we need to go through in Peru as well as Mexico. We offer them some sort of deferral of their payments, so today, we keep -- we've kept the customers as they are, but we need to closely monitor how they became and get impacted by the economic contraction.

[Neha Agarwala, analyst]

If I can add another question. In terms of asset quality, we saw some increase in the NPL ratio in the first quarter. We believe that, that is not from the current pandemic. Could you shed some light on what led to the asset quality deterioration in this quarter?

[Patricio De Bonilla Garcia Vallejo, executive]

Yes. The asset quality, do you remember last year, we grew very fast the number of customers, not only in Mexico, but as well as Peru. New customers tend to have higher risk than existing or recurrent ones. So as you bring new customers now to the customer base, those are [ weaker ] customers. And we started in the fourth quarter to see a hike in their NPLs, not only in Mexico as well as in Peru. As you saw in Peru, in Peru with group lending, we've been growing very fast. And after a fast growth phase, also, always, NPL it [ seeps ] a little bit, and we consolidate.

That is something that, as you said, we saw at the end of the fourth quarter, starting during the first quarter. So this is not necessarily something related to the COVID pandemic, but to the economic slowdown that happened in Mexico and Peru in last year and what's present during this year as well.

This is why, again -- I mean, we know that the customers' payment capacity will be affected, and this is why, in Mexico, in Peru, we're taking additional provisioning. Because as you saw, due to the regulatory flexibility, most of the customers that have deferred remained current, but we need to work with them to see and understand and assess what their real payment capacity in the following quarters, right?

So again, it's history that is being written every day, and we will provide with every detail that we have as the story unfolds.

[Operator]

[Operator Instructions] Our next question will come from Claudia Benavente.

[Claudia Benavente, analyst]

Sorry I've been having some trouble with my connection, so I apologize if the question has already been repeated. I was wondering if you can provide us a little bit more color about what to expect regarding the additional provision. If I take a look to the coverage ratio, it remains fairly unchanged to the figure reported in the fourth quarter 2019. So basically, the additional provisions are not seen here. It's like they have completely netted with the deterioration of the NPL formation ratio. I understand that you grew more rapidly, and that explains the deterioration. But still, the coverage ratio remains unchanged figure. So how should we read the additional provisions that you could create ahead?

[Patricio De Bonilla Garcia Vallejo, executive]

Yes. Thanks, Claudia. As mentioned before, what we have been doing was building the rationale for the increasing the provisions. We were taking some of the measures and the calculations that we have for the provisions going forward. And we also took an incremental decision on what we have been expecting and are experiencing in the last quarters. So that was the base of the provisioning.

And I'm not sure if that was what you were asking?

[Mario Langarica Ávila, executive]

Claudia, just to be very clear, we provision as much as we could during March. Basically, the net income for the bank was 0, because we provision everything due to the -- what we expect going forward.

With that decision, we protected the capital base, and we were as aggressive as we could with the information that we have. Going forward, what we expect is to continue to be as aggressive on the provisioning side because, again, the depth and length of the contraction is yet to be seen. And we will take every prudent and conservative measure to be able to elevate somehow the financial pressure that we expect to see in the following quarters.

[Enrique Majós Ramírez, executive]

Yes, Claudia. It's nice to hear from you. This is Enrique. I think that, in one line, the rationale of the provisions is that we are preparing for the storm. So I think that's what Patricio and just Mario explained.

[Operator]

Our next question will come from Ernesto Gabilondo, Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

Can you share with us if you have run a stress test scenario for the cost of this? And how would you identify the potential product clients? The big impact is probably being seen during the last quarter. And I would like to know if you are taking additional measures when you are originating new loans? I think that most of the clients will probably say that it's for working capital loans. However, don't you think there could be some indebtedness in the sector, given the weaker economic activity in the formal and informal sectors in SMEs, the lower remittances in the country? As you mentioned, this sector is defensive and usually lives in a daily basis. But just wondering if you are having some concerns in your originations, because the client will leave the loan for another reason?

[Patricio De Bonilla Garcia Vallejo, executive]

This is Patricio. In terms of the loan origination, as you know, our customers historically adequate to the economic activity that they see in their local community. So what we saw during the last days of March and during April is that the renewals come with a lower amount. On average, 7%. But what we decided is to be stricter on the origination side. The amount of money that you can borrow in the net loans have been reduced 10%. And additional product, the Crédito Crece y Mejora, which provides you with some sort of liquidity within the 16 weeks have been canceled.

So again, with those restrictions, what we want to do is to, again, have credits available for productive activities, right? And that's something that we're doing in Peru, Mexico and Guatemala. And this is something that, again, reflects the reality of the macro financials in the 3 countries, but also provide us with certain versions to face the liquidity as well.

[Mario Langarica Ávila, executive]

Regarding cost of risk, as you can see, and taking into account the provision that we took, cost of risk has increased to 11.6% versus the 7.5% that would have been without the provision.

Now going forward, what we need to be looking at is how we take decisions on additional provisioning or not, depending on what we are seeing. With the provision that we took and with the effects of the portfolio being current, you want -- by the regulation methodologies that have been approved, we could expect some diminishing trend in provisions. But again, we will be very, very careful about putting the right level of what we would be seeing in the field.

And the other aspect is that we would expect probably lower portfolio other than just in the last 2 quarters. So that combination would probably have an effective cost of risk that we still are not providing guidance yet. We need to see more of the behavior and of the programs that we've put in place to have a more specific projections to provide further detail on that ratio.

[Operator]

[Operator Instructions] Our next question will come from Alonso Garcia, Crédit Suisse.

[Ricardo Garcia, analyst]

My question is on the liquidity side. I just wanted to ask, I mean, what -- first, what's the level of usage of your credit lines with development banks at this point after having that MXN 5.5 billion of additional liquidity in the quarter? And for how long will this additional liquidity be enough? Is it for the next quarter, the next 2 or for how long? And what are the assumptions, especially on the collection side, behind this expectation?

[Mario Langarica Ávila, executive]

Okay. Okay. We have so far used an important part of the credit facilities that were approved before the contingency with the development banks. But we are in a very, very advanced process of expanding those facilities. We are also taking into account some of the new Banks of Mexico methodologies. They will have not come out yet, but we have been in conversation with Banks of Mexico and the development banks, particularly. So we expect that addition of facilities will be approved very, very soon.

Regarding your question on how long the liquidity would last, I would turn that question around. We have an amount of liquidity today, and we have very, very important plans and conversations, not only with development bank, but with commercial banks and with the capital markets, et cetera.

So -- but the plans that we are doing are based on a liquidity that we currently have. So we are being very, very conservative on the use of that liquidity. And that liquidity, it's an amount that exists, but it also depends on one, what are the reprogramming that we launched to the market? And that we will give further detail as we go into Phase 2. And that Phase 2 will redefine what would be the collection calendar going forward. And that collection calendar, going forward, we need to be very sure that it is as true and real as possible. We're able to do that, and then get the collections as expected, then we would have a good balance of liquidity. So it's not that we are continuing with disbursements and collections without taking care of the liquidity. It's the other way. It's with the liquidity and the plans that we have, what are the best options to our clients?

So it is key that we monitor that without even considering that we are very close to their incremental facility very soon. And we are looking to alternative sources of funding that are in a real advanced process.

[Operator]

Ladies and gentlemen, thank you very much. At this time, with no questions in the queue, the question-and-answer session has concluded. I will now hand the call over to Enrique Majós for any final remarks.

[Enrique Majós Ramírez, executive]

Thank you, Shantel. Just a final and short message. I would like to tell you that we are sure we are going to get through this. We have our customers, and our customers have a lot of courage, resilience, hard work, and they have proven that they can go through crises several times. So I believe that one of our strengths is, in fact, our own customers.

The other thing that we have is that we have a great team, and I want to congratulate and thank all the management team, but also all the task members, all our colleagues in GENTERA, because we have been doing a really, really professional work. And I think that we are very mission-driven, which is a very powerful fuel.

We have been very agile in the last weeks. We are being reacting at a very unexpected speed, and that's a very good thing. And despite we know we are living uncertainty -- very uncertain times, that we might not know exactly what's going to happen, I believe we have a plan. And we know what to do, at least, for the next 1 to 3 months, which, at this time, may be the better definition of long term. So thank you to all our team. I think I have a great team, and I thank them for the work they have been doing.

And also, I want to thank the extraordinary Board of Directors that we have. We have been getting a lot of support from them, a lot of orientation. And that's another pillar that will make -- that is making us strong to go through this crisis.

As management team, it is very important to maintain strong, and I think that this is one of our priorities, to maintain ourselves strong and healthy and motivated. And maybe that motivation comes basically in better strengths from 2 things. First of all, the balance of life. We have to maintain ourselves physically, mentally, spiritually strong with family support. And I think that we are managing it. And the second thing for our motivation and strength is that we know we have our purpose. The old team of motivation is the purpose of GENTERA, which is to provide people with the tools to get through this kind of contingencies.

In that sense, I can tell you that we really believe we have the best job. I think that we all are wondering what can we do to help people that are not that privileged and they are suffering out in the street. And I think that, that's what we have been doing for years in GENTERA.

So we have our job and at the same time, is that kind of work that we want to do socially now. That's the better time we can spend or invest nowadays. And we are making sure that our clients will have the resources to make it through it. So that's the best contribution as a company, but also as individuals. So this which will soon pass too, and we are sure about that. We will be there for our customers to make it together to the other side.

So just with those messages, I would like to tell you, please keep safe. Again, we hope you and your family are doing well. And thank you for listening to our report today. Have a nice day.

[Operator]

Thank you very much. Ladies and gentlemen, this now concludes today's conference. You may disconnect your phone lines, and have a great rest of the week. Thank you.