Gentera SAB de CV

BMV:GENTERA

Earnings Call Transcript 2020-Q2

[Operator]

I would like to turn the call over to Enrique Barrera, the Investor Relations Officer of the company. Please go ahead.

[Enrique Barrera, executive]

Thank you. 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 Enrique Majos, 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 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. If you are a member of the media, we ask you to contact us directly. Please note that in this presentation Gentera may make forward-looking statements. Please do not account for future results or forward-looking statements. Please do not account for economics, industry conditions, company performance or financial results.

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

[Enrique Majós Ramírez, executive]

Thank you, and good morning, everyone. Afternoon. It is nice to have you here with us today, and we hope that you are all healthy as well as relative, friends and colleagues. Let me tell you that our main purpose today in this call is to provide information about 3 important points.

The first one is that after more than 3 months of making tough decisions and preparing the company for a not easy and very long journey, we feel prepared to make it through the crisis. The second one, we have defined a clear strategy, and we have started to see some results. So we will show you during the call. And the third purpose is that we want to be very clear about what to expect for the rest of the year.

So let me start with our strategy. Our strategy has always been a long-term strategy, and we are taking all the actions to assure our performance and strength for the long run. As we defined since our last call, our strategy is based on addressing the following 5 points: the first one, we want our staff and clients to be protected and healthy. And with all the protocols and preventive measures, we are trying to protect customers as well as our staff to get infected.

Second, we redefined the way we operate under the new conditions. So Patricio will talk in detail about the products and the processes and how we have been redefining the way we operate.

The third point of our strategy is that we want to make sure that Gentera has the strong financial position needed to face the uncertain and challenging times that we are facing. And for the rest of the year the year until a vaccine is available.

The fourth point of our strategy is that we are going to capture the opportunities and efficiencies that the new context and challenges will reveal to us as part of the new way of operating.

And finally, the fifth point of our strategy is that we are intensifying our leadership and communication among our team and with our customers in a 2-way communication channel.

So let me give you some basic information about the status of our staff and clients regarding the COVID pandemic and the health issues. From our more than 22,000 staff members in the 3 countries in which we operate, we are sorry to inform that we have 9 colleagues that have died because of the COVID virus. 8 in Mexico and 1 in Guatemala.

On the other hand, we have 451 staff members infected at this point in time. But on the other hand, we have 547 colleagues that have been already recuperated from the virus.

As talking about clients, it is very difficult to have a precise number in terms of impacted people. But we estimate that we have 13,945 clients affected based on the official numbers for each country. But unfortunately, we know that 560 clients have died from COVID virus as of this week's report. 350 in Mexico, 203 in Peru and 7 in Guatemala.

We are aware this is an everyday evolving situation. However, we believe we have been managing the health crisis situation with effective control and protocols.

Talking about our operations, during these last months, we stood for our customers with flexible plans to help them maintain their loan and their business running. This includes extended tenures and grace periods. But Patricio will talk in detail about this, so I will let him to do it in the other segment.

I want to point out how our financial position looks. We closed the first half of the year in a very strong position. At the bank level, we have been able to increase our liquidity by more than 10x. Our capitalization index for Compartamos Banco remains close to 35%, even after 3 months of providing our clients flexibility under payment. We also increased the capital of Financiera Compartamos in Peru, reaching a capitalization index of 23%. One of the most solid capitalization level amongst the financial institutions in Peru.

We were also able to increase our provisions by more than 100%, and Mario will give you more detail about this. We also issued debt of MXN 1.8 billion in the Mexican local market just a few weeks ago. And finally, we have been able to improve our debt maturity profile with commercial and development banks, and our next long-term bond matures in the first quarter of 2022. Mario will provide more detailed information about this.

So let me now go to some corporate information that it is also interesting. On June 13, we closed the process to sell 100% of the shares of Pagos Intermex to plant network for MXN 241 million. Remember that we started this process in the second half of 2019. And despite the uncertain environment that we are living, everything was completed successfully. And regarding ConCredito, on June 15 Gentera converted the debt of MXN 656 million to obtain an additional 8.3% of the company's equity. So as of today, we own the 45% of ConCredito, and we are very close to obtain the 51% of the company equity during the following weeks.

So what can we expect for the rest of the year? Let me tell you that we are still forecasting based on different scenarios depending on 2 things: the first one, how the economy will reactivate, and it seems that it's going to be slowly. And the second one, how our customer responds to our credit plans that up to now, Patricio will tell you that, it seems very positive.

We believe a full recovery of the economy will take at least 18 months. So this means not only 2020, but also 2021. We estimate that Gentera's loan portfolio, including on-credit or consolidations, will remain flat in a year-to-year comparison and during this year, Banco Compartamos' portfolio would contract around 20% in a year-to-year basis. We understand that for the following months, our main focus has to be on 3 things. The first one, support our customers with the adequate loan amount to provide some liquidity without compromising their payment capacity. Second, we need to perform a very close and effective control of the quality of our portfolios. We feel comfortable since we know our microfinance operating team is the best-in-class. And third, since our portfolio will have a contraction, we will continue reducing our expenses to mitigate the impact in revenue, and we will continue improving our future efficiencies.

Patricio will provide you the status of the business in Mexico, Peru and Guatemala. But before, let me just point out that in the last 4 months, we have been making some very tough decisions, maybe the most tough decisions in our careers. Some of them have had an impact in our short-term financial results. However, we are convinced that we have been doing the right things for our customers and for Gentera in the long run.

So having said that, I will turn now the call to Patricio and he will give you more detail about this. Thank you.

[Patricio De Bonilla Garcia Vallejo, executive]

Thank you, Enrique, and good day to everyone. As always, we appreciate your interest in Gentera. With no doubt, this quarter has been one of the most demanding in Gentera's history. And we are certain that there are still social and economic challenges ahead as a result of the pandemic. And therefore, we have been very cautious, and we have taken clear actions on the field with our clients and employees to overcome these difficult times.

As we communicated in our previous conference call, we designed a plan that is provided in different stages to deal with this pandemic. The first stage was started at the beginning of the second quarter and was defined with the objective of containing and maintaining our customer base. In late March, we launched the program that allowed customers to be further principal in interest payments, while the social distancing measures were deployed in Peru, Guatemala and Mexico.

As a result of the program, in the case of Mexico, 64% of the customers took the benefit during April and May. While 36% of our customers get staying normally. In the case of Peru, 90% of the customers took the benefit in Mexico on June 5.

We concluded the 10-week period that we gave to the customers and the collections were reactivated. In the case of Peru and Guatemala, the deferral process concluded at the end of the month and gave us the opportunity to start the second stage of the plan. The second stage is focused on restructuring our customers and give them some flexibility to build in a weaker economy. The alternatives that we are currently offering are; first, pay normally, as some customers can pay as they contracted their loans; second, to extend the tenure of loans to reduce the weekly, monthly or bi-weekly installments; and third, additional grace periods for those customers that cannot afford to make their payments.

The acceptance of these alternatives has been encouraging. In Mexico, at the end of May, we have 64% of the portfolio deferred. On June 12, one week after we concluded the deferral process, we had around MXN 9 billion of NPLs in the 80 to 90-day bucket. Today, we have MXN 2.9 billion in the 80 to 90-day bucket. This a 70% reduction in less than 2 months.

During this quarter, the restructuring process will continue. We are focused on diesel income portfolio, but we are certain that the contraction in the NPLs will continue during the third quarter, where we expect to have most of these customer restructured as we basically deepen in the common mix.

We must be close to our customers and given alternatives to maintain their credit on time. To do so, during the quarter, we plan to deploy further benefits to our customers to make sure that they can restart their payments and repay their loans.

Due to the short-term nature of the portfolio, we expect to finalize the restructuring of the process at the end of September, while we are doing this process on the ground we have also won different stress scenarios. And even if the cost of risk doubled from previous years, the capitalization index for the banks would be higher than 25%, which would keep Banco Compartamos as one of the best capitalized banks in the country. Furthermore, the provisioning show at the end of June has no regulatory benefit. As such, the reserves reported on the balance sheet are those required to absorb potential losses as the nonperforming portfolio ages. This is the reason why they spike in June.

The third stage will be to reactivate customers and try to gain new market share in the 2 countries. Given the fact that most of our competitors are creating operational and financial difficulties. In this stage, it is crucial to keep providing clients with credit in order to maintain their business running, which opens the door for further portfolio growth. The third which will be implemented in the last month of this year, and the first semester of 2021.

We are certain that we will capitalize the lessons learned during this challenging times and materialized in a factor aimed progress we've made to digitize our operation to recover faster and with a more efficient portfolio growth in the coming years.

We recognized that the economic ability will suffer during the following quarters as a consequence of the GDP contraction seen in the 3 countries where we operate. But we also know that the microentrepreneurs can adapt relatively fast to the new economic conditions. And this is what we have proven us in the past, is they sell basic goods, and they do not have it cost or large infrastructure besides their businesses.

We reinforce our commitment with our 3.6 million clients with our staff and stakeholders. We are sure that we need to our financial -- we are sure that the need for financial products and services will be preferred more than ever in the coming months. And we are assured that with our motivated and committed team and with our strong capital and liquidity position will be key in propelling our leadership position in providing financial opportunities to our current and future customers.

This is all for my remarks. I will now turn the call over to Mario Langarica to review Gentera's financials for the first half of the year. Once again, thank you all for your attention, and this is all for my remarks.

[Mario Langarica Ávila, executive]

Thank you very much, Enrique and Patricio, and good morning to everyone. I hope that you and your family are well and produce contingency.

At this time, I will address in my remarks, talk about accrual funding and allowance before presenting relevant consolidated balance sheet metrics for Gentera's second quarter '20 and first semester '20. [indiscernible]

As mentioned in our last conference call, one of the first actions that we took at our new subsidiary our levels of liquidity to allow cashbook to have sufficient cash flow capacity to implement the referral and the financial programs designed specifically for our clients and products in line with which countries regulator continues in measure.

At second quarter '20, we have multiplied our cash position almost 3x to amount MXN 23,798 million in Gentera compared to second Q '19. More than 3x in both Banco Compartamos and Compartamos Financiera. As second Q '20, we have a very strong liquidity position to face further challenges and for -- to support additional or complementary problem for our clients and at the focused time, we issue and restart growth.

Permanent focus to our cash flows and portfolio collections and withholdment, liability payments and operational expenses has been to ensure strong levels of liquidity. Access to funding has been key to provide our security decide the board to describe the growth.

During this complex period, we have been able to increase deposits 52%, to dispose and maintain open lines of credit, commercial and development banks increasing that line to 102% and also flat to the debt capital markets in an increase in long-term debt of 5.5%. We have also made special inventories for financing our debt term profile in '19.

In June, we refinance our maturing Compartamos 15 bond with final amortization of MXN 1,000 million in this August, with a new 5-year situate bond amounting to MXN 1,960 million. Our next amortization of our long-term bond will happen until March 2022. And that would be up around MXN 1,250 million. Regarding commercial and development and liability we have less than MXN 3,000 million maturing today and December 2021, out of which 1/3, MXN 950 million, are in short-term commercial banking loans having our next long-term relevant maturity until September 2021 of MXN 700 million. It's important to note that these clients are revolving both the banking and the development banks to mature, and we expect to renew them as they mature -- as each disposal matures. Access to funding remains open, and we have also been exploring additional new sources of funding to be used in a profit. Allowing for loan losses, as we explained in our last conference call, and using the [indiscernible] available units [indiscernible] amounts to MXN 4,500 million in the second quarter '20, representing 88.8% increase to the levels of the second quarter in 2019.

Last quarter, we explained that in Mexico we created contractor provisions to apply to past dues at the first credit deferral line finished. As explained by Patricio, the total deferral period finished in Mexico in early June. And by the end of the month, we have calculated the reserve reducing the normal regular appointment technology required for the 75% current portfolio and the 25% refinancing portions on the portfolio as described above.

For Peru, we still have incremental allowances as of second quarter '20 of MXN 279 million. The coverage ratio of Gentera amounted to 291.2% as of second quarter '20. While the loan portfolio grew 10.5% in second Q compared -- this year compared to last year. The Mexican loan portfolio had a 5.8% contraction.

Looking at the income statement for the first semester of the year, interest income decreased 6.4%, mainly driven by the reduction in the Mexican loan portfolio and the first referral programs in the 2 countries. Interest expense grew 2.1%, mainly driven by the improved liquid described above. Provision for loan losses improved 112%, and operational expenses decreased 3.8%. All of this resulted in a net income of MXN 57 million as of June 2020 compared to MXN 1,558 million in the same period last year. In second Q, the company posted a MXN 730 million loss compared to MXN 720 million profit reached in 2019 -- to second quarter 2019.

This is our first loss ever reported in a quarter, and it relates to the impacts generated by the current contingency, mainly at the interest income level and provision, as also described above by breakdown of colleagues.

Finally, regarding capitalization levels, as of second Q '20, Gentera has a very strong capital position with more than MXN 21 billion. And that inflated the capital with total assets of 30%. Banco Compartamos Mexico has a PCA ratio of 35.8% and Compartamos Financiera, in Peru, a capitalization index of 22%. This strong capital position has allowed us to keep a solid operation even in these volatile and uncertain times. It's important to note that on May 25, Gentera made an initial capitalization to Peru in the amount of MXN 720 million. As sustainable in the scenario where we reach a loan portfolio for Gentera similar to the closing of 2019. We doubled the cost as we had guided at the beginning of the year and with approaching expenses growing below inflation. We would expect that our internal capitalization limit of 25% in Mexico and 17% in Peru, will remain above this limit, covering even for potential losses by the end of the year.

We are focusing our loan loss percents to generate final of the portfolio [indiscernible] might be potential losses as explained by Patricio and Enrique.

We are sure that with the plan describable and supported by our strong capital and regrouping positions, we will navigate these volatile and uncertain times, returning in the future to the broadened profit levels that we were moving towards for the pandemic start.

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

[Operator]

[Operator Instructions] We have our first question.

[Unknown Analyst]

Patricio, Enrique, Mario, so now the that the Peruvian operations have become more relevant. And I think that now they make up for like 4.1% of your loan portfolio. And you have increased capitalization in that business. So with that in mind, can you provide us with some color on how the operations are doing there? And remind us what portion of clients have applied for the grace periods? How is the payment behavior from the clients evolving in that subsidiary? And also, I would like to know whether the grace periods are any different from what was offered in Mexico?

[Enrique Majós Ramírez, executive]

Thank you. I couldn't hear your second question. Could you repeat it back, please?

[Unknown Analyst]

Yes, of course. So what I was asking was, first, if you can provide more color on how the operations in Peru are doing?

[Enrique Majós Ramírez, executive]

Yes, the Peru one...

[Unknown Analyst]

What portion of the clients apply for grace periods? And how is the payment behavior from the clients evolving there? And if the grace periods offer in Peru are any different from what was offered in Mexico?

[Enrique Majós Ramírez, executive]

Okay. In the case of Peru. Peru has social distancing measures until June 30, right? So during the mid-March until that date, the customers were put on hold. 90% of the customers asked for the referral of payments, right? So at the beginning of this month, July, we started the restructuring process. As you know, in Peru, 80% of the portfolio is individual lending. Also in Peru, different from Mexico, the restructuring class is something that is part of the business operation based on its -- throughout their history. So this is something that they know to do well. So in July and also during the third quarter, they will be knocking, and they are starting knocking on every customer's business to try to restart their credit. And that's the process that they are going on as we speak.

Of course, as the individual lending is devoted for a more established kind of businesses, we expect that some 80% of the portfolio that represents that product, it will come down to close to 70% during the coming months. The portfolio will be shift from individual to group lending. As you know, a group lending methodology has been very well accepted in the Peruvian market. We opened, in the last 12 months, offices to serve customers in this product. The demand and growth in trade [indiscernible] have been exponential in the last 3 years, and we expect to continue growing this piece of the portfolio in the second half of the year. So just to answer shortly, the mix will change. It will reduce the piece of individual lending more towards group lending and to control asset quality. The restructuring process is going on. And also the same measures that we took in Mexico with taking those in Peru, excess provisioning, excess liquidity, a strong capitalization. And that's the 10 points for the Peruvian business to deal with the restructuring profits. So we feel confident that also in Peru, that it will be doing well. However, again, as it happened in Mexico, provisioning will continue to be shy at the high level for the coming quarters, but again, we also, in Peru, see an opportunity to serve customers and as we deploy both individual and group lending and the market gets weaker, I'm talking about the rest of the competitors.

[Operator]

Next question.

[Ernesto María Gabilondo Márquez, analyst]

Enrique, Patricio, Mario. My first question is on the macro side. Economies are expecting GDP contraction of around 10% a year and only a recovery of around 2% next year. As such, you think the economic recovery will be more visible until 2022? And my second question is in the new origination side of business has been only reviewing new ones to your own client base, they are pretty small origination and new clients. So to what extent should we think the new origination of loans would be possible starting next quarter? Or do you think it is uncertain given the complexibility of the economy reopening and the shape of the recovery for Mexico? And then my last question is on when do you expect to have the business provision challenges? Or do you think it's still difficult to know until we have more visibility as -- and in the reprofiling and the restructuring of the portfolio?

[Patricio De Bonilla Garcia Vallejo, executive]

Thank you, Ernesto. This is Patricio. The first question now, the GDP contraction, it will be double digit, is expected to be double digit, not only in Mexico but Peru and Guatemala. And of course, the economic conditions are sluggish for the coming quarters. However, as we said in the past, despite such impact on the macro level, the type of businesses that our customers have are very basic in nature. Also, they can adapt and they have adapted already to the economic circumstances. So they are flexible enough to shift from one type of business to another, depending on the economic cycle. Therefore, we think that the -- I mean they do use their business to make their leading right? So they would demand credit. They will also be willing to take more as they see that the economic activity increases. And more so the addressable market has increased as a form of jobs get up as has happened during the first semester, even from the formal role to the informal world and as for working capital loans, right? So the addressable market is bigger already. The competitive landscape is weaker. So we do see an opportunity where more customers will be remain working capital loans for basic activities, and that's the market opportunity that we see for the end of the year and most notably during the entire 2021, right? So we expect to come back after this dynamic with the growth momentum for -- starting in the fourth quarter and during the entire 2021 year and not only in Mexico, again in Guatemala and Peru. So the opportunity is large enough. And during these economic circumstances, get larger, and this is why we are taking every measure to protect our financial strength to be able to deal with such market opportunity.

[Mario Langarica Ávila, executive]

Regarding the refinancing of the loan portfolio and the provisions, basically as Patricio mentioned before, in the case of Mexico as of June, we're already using the normal methodology to calculate our allowances and solutions. Based on the nonperforming loans that we're seeing under different buckets.

For the next month, obviously, as Patricio mentioned, we are going to be very trying to refinance as much as post of the portfolio as we can with all the programs that we have proposed to the clients. And the NPL formation in Mexico, we'll continue at the levels that the methodology required. In the case of Peru and Guatemala as we have just started the second phase, we will start also using this regulatory methodologies to calculate that. We expect still to have more promotion on the next 2 quarters. But we're going to be very focused on minimizing that. So that will be our answer to you.

[Operator]

Next question.

[Enrique Barrera, executive]

Operator, can you provide us the name of the person who is asking, please, that would be very useful. Thanks.

[Operator]

We now have a question from Luis Yance, Compass.

[Luis Yance;Compass Group;Chief Investment Officer, analyst]

I hope you're doing well. Just 2 questions on my side. And the first one on the provisions, I'm probably building on what was asked before. You mentioned, Mario, you already booked MXN 4.5 billion on allowances so far. Do you get a feeling that's enough based on your expectations going forward? Or how should we think about provisions for this year. You mentioned a couple of times that under your stress scenarios, if the cost of risk goes up twice, your capitalization stays healthy. I was wondering if 2x the provisions you booked last year, it's a good reference. That's been so far the first half or you feel you've booked enough provisions at this point? So just to get a -- I understand it's hard to forecast at this point, but just to get a sense of where preventions might go and whether the extra provisions will go on into 2021 as well. That will be my first question.

[Patricio De Bonilla Garcia Vallejo, executive]

This is Patricio. Let me try to adjust -- let me complement what Mario said. As you know, as portfolio ages in days of arrears, we need to provision more every time. So current portfolio has the less provision that 180 days portfolio of delinquent customers. Therefore, the goal today is to keep this 80 to 90-day bucket, as I said during my remarks. We start in Mexico, MXN 2.9 billion in portfolio in that bucket. As that bucket ages towards the 90 or 120, 180 days, we will need to provision more towards that amount of money, right? So it will depend on how successful are we in the restructuring process during the third quarter so this is why we think that the peak of provisioning could come in the coming -- in this third and fourth quarter. But again, right, just to put in the size of the effort, it's towards that MXN 2.9 billion delinquent portfolio, which was deferred and today needs to be restructured. If we're successful during the third quarter, we expect that the provisioning of those MXN 2.9 billion, it's the lowest amount of money. But again, as we said during our remarks, even if we provision 100% of it, the capital utilization for the design, we'll never go below 25%.

[Luis Yance;Compass Group;Chief Investment Officer, analyst]

Great, Patricio. And I guess a related question to that. I mean, you mentioned that 64% of your portfolio in Mexico was deferred back in April, and you're in the process of restructuring. I understand you're early in that process. But if you could share with us what you've been able to restructure so far how does it look right. You've given a couple of options, are people taking more the pay normally kind of options? What percentage of people are thinking that versus what percentage of people are actually asking for additional grace experience?

[Patricio De Bonilla Garcia Vallejo, executive]

Right. So the -- we released on June 5, we stopped the deferral process, right? On June 12, the very next week after we concluded that deferral. We had MXN 9.5 billion of nonperforming loans, MXN 9.5 billion. In 7 weeks, and I'm talking numbers of today, we have MXN 2.9 billion of the delinquent portfolio in Mexico. So the reduction from MXN 9.5 billion to MXN 2.9 billion has been close to 70% in less than 2 months. So given the fact that our portfolio is very short-term in nature. So this is why we think that June, July, August and September, it's good enough in order to restructure 100% of the customers overnight, right?

So the third quarter will be critical to that, but to send a clear message, we've been mainly 10 weeks to reduce the nonperforming loans by 20% after the deferral, and this is something that we will continue as we start typically difficult customers from August till September.

[Operator]

Next question comes from [indiscernible], UBS.

[Unknown Analyst]

Yes. Patricio and Mario, I just wanted to understand the NPL dynamic going forward. Because one of the tradable Mexican banks just released its guidance for this year, along with deep earnings results for this Q, showing some trends for NPLs provision, operating expenses, loans, among others. So I just wanted to hear from you all the expectation for this year in terms at least for the NPL trend? Because in this quarter, even you've been considering the [ instantaneous ] and the credit relief program of the bank, the delinquency deteriorated. So please, any color on the asset quality of the banking going forward would be great. And especially if you could share with us what are the expectations for more normalized level for ROEs going forward?

[Enrique Majós Ramírez, executive]

Thank you very much. What I would tell you is that Patricio has described we wouldn't expect in the worst-case more than double cost of. So that's more or less what we're expecting. In terms of -- I follow you, I understand that we lost all profitability going forward. Obviously, as we can mention at the beginning, our medium and long-term target has not changed. We believe that we have very, very strong opportunity to pick up in 2021 and going forward. And go back to the levels of growth and performance that we were showing past 2019 and early this year. If we haven't had this contingency, the first quarter we had been our second best ever. So obviously, our target is to go back to those levels as soon as possible. But now all be the focus on what we have described before.

[Unknown Analyst]

Okay. Okay. So if you allow me the second question. It's more related on the credit relief program of the bank. I couldn't find any information related to how much of the bank's credit portfolio was renegotiated or deferred. So could you please share with us the percentage of the total loans that were renegotiated, so I mean there were enrolled in the credit relief program of the bank?

[Enrique Majós Ramírez, executive]

Yes. Again, as we took the benefit -- the regulatory benefits during March, April and May. During that period, again, 64% of the customers decided to defer their payments on June 5 the -- we stepped out of the regulatory benefit. And now we are trying to offer alternatives through our customer base in order to maintain their credit on time. Again, as I said, more than 75% today of the portfolio is covered, and we expect to increase that in the coming quarters, but the financial numbers that you saw as of June they do not have any regulatory benefit at all, right?

So the provisioning and the portfolio, everything is reported as per the banking regulations without any benefit. And simply, we already are in the new process of restructuring. And as I said, this is something that will happen during the third quarter of 2020.

[Operator]

The next question comes from Alonso Garcia, Crédit Suisse.

[Alonso Garcia;Credit Suisse;Analyst, analyst]

My first question would be regarding Peru. I mean in the case of Mexico, you already kind of provided some your worst-case scenario, which would be to provision the full amount of the MXN 2.9 million you have in early delinquency. In the case of Peru, do you have what could be a best-case and a worst-case scenario. I know it's kind of more difficult in case of Peru as it takes longer for you to gather the information given the installments are due monthly as opposed to weekly, but I don't know if you have kind of sense on that. And just quickly, my second question would be, [Technical Difficulty] around [Technical Difficulty] discounts continued pain or if you also provide a discount to the client that took the grace period.

[Patricio De Bonilla Garcia Vallejo, executive]

Sorry, Alonso, so this is Patricio. I will jump in to the Peruvian One, but I couldn't hear your second question.

[Alonso Garcia;Credit Suisse;Analyst, analyst]

Sure. My second question was regarding the big decline in your loan yield from around 57% in the first quarter to 36%, 38%, sort of, in the second quarter. So I just wanted to understand the nature of that decline and the timing for the recovery of that long, you wanted to understand, if you want provide discounts to the clients that continue paying or if you also provided discounts to the claims that the grace period?

[Patricio De Bonilla Garcia Vallejo, executive]

So I want to open. In the case of Peru, as I mentioned before, and also the restructuring process it's something that is part of the Peruvian micro finance industry for so many years, right? So Compartamos Financiera, their loan officers and their customers are well used to pre-programming loans has been saying in certain difficulties, right? So in the given piece of the portfolio, it's something that we are doing as we speak. As I said, 90% of the customers deferred their loans in Compartamos Financiera. We started in July in order to get those loans back or 2-week program doses. But again, today, it's early to tell what we close from that 90% of the customers, 30% today -- as of the end of June, 30% have started to repay their loans.

And this is something that will continue to ramp up as we deploy those benefits in the coming weeks or months. Of course, the provisioning is something that put pressure in NIMs for the Peruvian business. We don't foresee a scenario where the capitalization that we currently have get affected. The Peruvian business will keep their above-average capitalization at the end of 2020.

As you know, Compartamos Financiera today 23% is one of the best capitalized institutions in the Peruvian market. And the minimum threshold there that we had is around 19%. So that's kind of the base for the Peruvian business at the end of 2020. So we, again, will protect the individual fees so much, we will be more careful in asset quality rather than growth for that piece of the business. And this is why, the mix of the portfolio in Peru will be instead of 80-20 in the group lending, it will move to 70-30 at the end of this week -- of this year, sorry. So this is a little bit of the dynamics of the Peruvian business. And again, as I said before, a liquidity, provisioning and capitalization is something that we also reinforced in the Peruvian business. And they are very well prepared to do the restructuring process in the second half of 2020. Are you -- sorry, yes.

[Mario Langarica Ávila, executive]

So regarding the yield, the most relevant impact to the yield was the reduction in interest income as we explained before. And it was, yes, a combination of the reduction in the prices in order to senile centimes to stay proven. But that was not -- that was about 10% reduction in Mexico. Most of the reduction came from the Gentera profits itself and also for the reduction of the leverage on portfolio.

So we expect that will come back after when we start recovering normal operations, probably next year. And we don't expect that the cost of risk in Peru, as Patricio [indiscernible] on that. So we do consider that in the expected results in the Peruvian subsidiary.

[Alonso Garcia;Credit Suisse;Analyst, analyst]

Just to clarify, you mentioned that the effect the portfolio also affected the loan yield. But just to be clear, is the accrual of the interest, right, or not?

[Mario Langarica Ávila, executive]

Yes, but interim generated growth.

[Operator]

Our next question comes from Yuri, JPMorgan.

[Yuri Fernandes, analyst]

I have actually 2 follow-ups because things are a bit confusing here for me. The first one is a follow-up in a loss on the pre-provision operating profit. Again, this was a big drop this quarter. And I guess it was clear for me that you explained this was mainly because of the deferral programs. But what you expect for the coming quarters? It's not clear for me because I still see a lot of headwinds on margins like in Peru, we [indiscernible] that should be a headwind the increase on NPL should apply more nonaccrual loans per unit.

So the balance should continue to be weak. So the point is like we actually continue to see NII dropping 25% year-over-year for the full year and just normalizing for the next year. So the first question is how you think about pre-provision operating profit for inter.

And my second question is a follow-up on asset quality. I think like the collection level of Compartamos today is around 75% of the loans so you still have like 25% of the portfolio that you are working. I think this number is related to the MXN 9.5 billion in June, you mentioned that was able to somewhat improve. And that now you have like MXN 3 billion in problematic assets that is more concerning to you. So my question is, how do you think of cost of risk, I understand that you mentioned that cost of risk mid-double but in Mexico, what should we expect? Like the -- I guess the trend is negative wise, like cost of risk will be high in the second half of the year. But how much higher of the total entity combined should be the cost of risk?

[Mario Langarica Ávila, executive]

Okay. Well, again, for provisions, we expect them still to grow and then the loan portfolio act starts to change. The combination of both the Mexican production and the combination of production in Peru is that what gives us for that 25% of the portfolio that is being refined here and what we expect to be financing Peru, that combination gives us a level of cost of risk of double.

So okay, that implies that we will have still some incremental provisions at those countries. On the NII, again, we -- the NII is affected first by the level of interest income. But as we mentioned, again, based on the expectations for growth in Mexico and for Gentera in general. And as we -- the scenario that we are -- we really basically believe that Gentera would export at the same level of portfolio compared to the closing of 2019, and that probably would represent a reduction in Mexico loan portfolio or more strong all that cost an in NII. And obviously, again, at the level of at provisions we will have the impact of the provisioning for the rest of the year. Again, all of these impacts, we will impact the net income of the company. And probably, we will [indiscernible] before, we are very comfortable tattoo capitalization that we have [indiscernible] of 25% in Mexico and 70% in Peru.

[Yuri Fernandes, analyst]

No...

[Patricio De Bonilla Garcia Vallejo, executive]

Just to jump on the asset quality side. As I said, on the 80 day the result of the pandemic was related in today MXN 0.9 billion in the income portfolio in the 80 and 90-day pocket, right? If we are successful in restructuring such fee because the rest of the portfolio is current that is doing as we always have. So the focus is on those MXN 2.9 billion. If we're successful, the impact would be less than that. And part of that provisioning is already on the balance sheet. But let's say that we need to provision 100% of it as Mario said, the cost of risk, of course, could double what the capitalization ratio for the NAND would never go below 25%. More importantly, again, this is the result of economic conditions that were prevalent during the social distancing period, right? So the new origination is doing a rollout, it's done during 30 years. And even if we, as Ernesto asked before, the provisioning -- we need provision of 100% of the delinquent loans by the end of this year, right? So if we are or not successful in restructuring that fee, 100% of the impact of the COVID-19 pandemic will be impacted in the 2020 results.

For the coming year, the new origination, the new price point, the new -- should look more with what we've seen throughout the history of Compartamos, right? This is a specific impact of that amount of money for the social distancing measures that we're taking mostly in Mexico, and that affected the business of our customers during the last 3 to 4 months, right? So just to give a little bit of dimension of what you should expect and what would be the worst-case scenario if the metrics could not be as successful as we expect them to be.

[Yuri Fernandes, analyst]

Super clear. Just to see if I got it, the double of cost of risk and cost of risk was 16% this quarter to like so doubly like on the 30% level, that is basically the worst case. If the MXN 9.5 billion of problematic loans you saw during the pendant provision for all of it, right, just to see if I got it properly.

[Mario Langarica Ávila, executive]

The loan provision for Gentera would be around 18% to 19% and what we would double was based on the guidance that we gave at the beginning of the year.

[Yuri Fernandes, analyst]

Got it. I was concerned because for the current part we see a lot of provisions?

[Mario Langarica Ávila, executive]

No, no double to the guidance that we lift.

Yes, between 18% and 19% -- between 19% and 20%, not depending on the situation [indiscernible].

[Operator]

Our next question comes from Neha Agarwala, HSBC.

[Neha Agarwala, analyst]

This is Neha Agarwala from HSBC. Just to clarify on the delinquent portfolio that you mentioned between 80 to 90 days. This is MXN 2.9 billion in Mexico only, right, not for the entire business?

[Patricio De Bonilla Garcia Vallejo, executive]

Yes. This is Mexico, again, the thing is that in Guatemala and Peru, the deferral process started on July so by the end of this month, we could analyze and tell effects -- strengths of how the portfolio is performing. As I said, more -- every time more customers in the Peruvian business are repaying their loans. But yes, the amount of money that I talked about is what we've seen in Mexico so far since we started earlier than Peru and Guatemala.

[Neha Agarwala, analyst]

Okay. So the cost of [indiscernible] that you're mentioning, 18% to 20% positive for the year, this is considering the stress scenario considering the MXN 2.9 billion, which is only Mexico?

[Patricio De Bonilla Garcia Vallejo, executive]

Correct.

[Neha Agarwala, analyst]

It does not even a part of your portfolio, which is Peru and Guatemala. So once you have more information on those, is it reasonable to expect that the -- in a very bad scenario, this cost of risk could be even higher than 18% and 20% because this does not include Peru and Guatemala today?

[Mario Langarica Ávila, executive]

Let me answer that. It includes somehow -- remember, what we were doing in Mexico was creating additional reserves while you according problems were in place. So what is good news is that the reason that we use creating reserves in March, April and May, when we ran the portfolio, the existing portfolio, as of June 30, using the regulatory tool we have we served basically the same levels each month. So at this point, we already have the right levels of return for Mexico. In Peru, we also have been having additional reserves complementing the regulatory methodology. And as I mentioned, still in the numbers of June, we have MXN 279 million of that additional reserve. So once this month is finished with the encouraging results that we're seeing so far we believe that the numbers that have come out, losing the regulatory methodology will be in line what the current level of allow asset will come in the balance. So we think that we have covered that so far.

[Neha Agarwala, analyst]

Okay. And if -- just talking about trends, it appears that the current and the fourth quarter are going to see similar levels of impact on the NII and provisions. The provisions are going to remain high, and interest income is going to be impacted because of this great period. And probably first quarter of next year, we can see some improvement. But growth in portfolio and reduction in provisions will only happen in 2Q '21. And we are -- after that, we can see improvement in business activity. Does that make sense?

[Patricio De Bonilla Garcia Vallejo, executive]

Yes, yes.

[Mario Langarica Ávila, executive]

Yes, the impact, again, as the portfolio contract because we could write-off loans delinquent loan during the pandemic in 2020. For 2021, we need to continue growing as the market opportunity is present. And yes, this is basically a 2-year impact in order to come back to where we were -- I'm talking about Mexico, right?

[Neha Agarwala, analyst]

Yes. So -- but in 2021, we should expect the provision level to come down to say, deposits could be 10% to 12%. Does that sound reasonable or do you see more impact?

[Mario Langarica Ávila, executive]

Actually, no. The provisioning for the delinquent loans cost by this pandemic should be 100% generating during this 2020 fiscal year. Because we write-off loans. We do 180 days of arrears, right? So as to do so, we need to be 100% covered of such delinquent portfolio. So we expect the full impact of the COVID-19 on the provisioning side for 2020. Therefore, the provisioning level for new originated loans in the 2021 fiscal year should not be as high as we see in this year.

[Neha Agarwala, analyst]

And how about NII?

[Mario Langarica Ávila, executive]

Or you want -- or you want it should be normalized? As you net that this is the only impact that we have. When we [indiscernible] refinancing efforts. And once that refinance portfolio including routes under normal conditions, then we would expect to come back to -- and that's what we were saying to similar levels to what we have seen in the past. But obviously, we still have to go through this process. That we'll start will just in. And NII should be the same. When you start removing and going back to the normal methodology and growing the portfolio back then we would start again speaking up on NII -- number one, NII levels should start growing because of interest income [indiscernible] interest expenses. At some point, we will see in the future what levels of improvement revenue required. As you have seen, we have an increase in interest expenses because of the liquidity we gather. But we can, obviously, at some point have a more optimal level of interest expenses and provision would be normalized. So all of that should make that margin improve and come back to the normal level that we were seeing in the last year and first quarter for the provisions.

[Neha Agarwala, analyst]

Understood. And then lastly on NPL ratios. Should we -- will we see right off -- aggressive write-offs in the fourth quarter, which will bring down the NPL ratio? Or when do you think the NPL ratio will peak?

[Mario Langarica Ávila, executive]

So it will come up by the end of the year. Again, the NPLs have been affected by the pros. And since all of the referral periods, all of the NPLs were -- all of the portfolio was prudent then the impact starts aging as is was describing. So the key thing is to make sure that this 80% to 90% nonperforming loans are contained more then become NPL over 90 days. But we still took that we expect that, that NPL will grow -- the way we put it all together is with the cost of risk that we are providing.

[Operator]

Next question comes from Thomas [indiscernible].

[Unknown Analyst]

The opportunity the questions. And I just wanted to follow-up.

[Enrique Majós Ramírez, executive]

Yes, Thomas, we lost you?

[Operator]

Hello, Thomas, are you there?

Okay. We have no further questions in the queue at this time.

[Enrique Majós Ramírez, executive]

Okay. Let me just take this opportunity to wrap up the Q&A session with 3 things that I think are important. As you can see, for the following months, our focus has to be on restructuring and the quality of the portfolio. And I think -- we believe we are financially strong to face this following months. And on the other hand, as Patricio has explained, we have a future unity starting in 2020 and because we believe the market share we have challenged treat because of the unemployment that will move to self employment, and that's something that in our business has proven to happen every time.

And also because competition is struggling in terms of liquidity. So we believe that we can capture this market. So in general, I believe that, that's what we are talking about. And of course, our priority in the following weeks and months is restructuring and portfolio control.

I don't know if Thomas is there now.

[Operator]

He's not.

[Enrique Majós Ramírez, executive]

Okay. Do you have any other questions?

[Operator]

[Operator Instructions] There are no questions in the queue.

[Enrique Majós Ramírez, executive]

Okay. So let me just close with some points here that I believe are important.

As you can see, the months to come will be full of challenges in a still very uncertain environment. However, we really feel strong in 2 main things. The first one, we have a clear strategy and action plan in place. And the second one is that we have the best management and operational team to execute the plan. So I feel really proud of how our team has responded to this crisis. I feel also very supported by them and by our Board members, they have been constantly present and supported at every step of the journey. I also want to thank to all our business partners and suppliers for your support. And of course, thank you to all our investors and shareholders for the trust that you have shown in our clients, in our business and in our management team.

So let me just finish by saying that our commitment as management is based on 2 things. The first one, we will do everything that is needed to be side-by-side with our customers during these difficult times. And the second one, we will make the best from this global crisis, learning and becoming a better company once we get together to the other side of the storm. So thank you so much for your attention, and have a nice day. I hope we can talk in the next quarter.

[Operator]

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.