Gentera SAB de CV

BMV:GENTERA

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, good morning, and welcome to the Third Quarter 2018 Gentera Conference Call.

I would like to turn the conference over to Mr. Enrique Barrera, the Investor Relations officer of the company. Please go ahead, sir.

[Enrique Barrera, executive]

Good morning. Thank you all for joining us and for your continued interest in Gentera. I'm Enrique Barrera Flores, the company's Investor Relations officer.

I'm very pleased to introduce our management team. With us today are Mr. Enrique Majós, Gentera's Chief Executive Officer; Mr. Patricio 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 third 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. If you are a member of the media, we ask you to contact us directly.

Please note that during this presentation, Gentera may make forward-looking statements. These do not account for future economic circumstances, industry conditions, company performance or financial results. Additional information on forward-looking statements can be found in the disclaimer located in our earnings release.

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

[Enrique Majós Ramírez, executive]

Thank you. Hello, everyone, thank you for attending our third quarter Gentera's report. I remember one year ago, when we had to report that we were facing a critical business situation in Gentera and specifically, in Banco Compartamos Mexico.

At that time, we explained we were going to spend the rest of 2017 and the first half of this year on 3 priorities. First, bringing back our traditional high levels of customer service; second, stopping the loss of clients; and third, improving and maintaining the quality of our portfolio.

We also said that we expected to start growing again by the second half of this year. We now feel proud to announce that our diagnosis and action plans worked as expected. We feel confident that we will close the year above our original guidance for 2018.

As you remember, our guidance of portfolio growth of the year was between 0% and 4%. However, as of today, we expect to close the year growing above 8% our portfolio.

We also originally guided net income between MXN 2,450 million and MXN 2,650 million. Now, we expect to end between MXN 2,650 million and MXN 2,800 million not considering nonrecurring income.

This implies an EPS between MXN 1.65 and MXN 1.75. Having said that, let me now give you some specifics on our third quarter results. As I mentioned, this quarter, we started growing again.

Just in the first quarter, Gentera grew 2.7% in client and 3% in portfolio. Banco Compartamos grew 1.7% in clients and 4.2% in portfolio. Peru grew 7.2% in clients and 0.7% in portfolio in pesos.

And Guatemala increased by 3.7% in clients, while portfolio decreased 1.6% in Mexican pesos.

It is important to mention that FX had a small negative impact when consolidating the results of Peru and Guatemala from local currencies to Mexican pesos. But in solids, portfolio in Peru grew 6.9%; and in Guatemala, portfolio in Quetzales grew 6.4%. As you can see, Peru continues adding value to Gentera with outstanding results, specifically in 2 lines: Group lending methodology growth and high-quality portfolio with risk management.

And regarding Guatemala, it is relevant to mention that we just reached our first 100,000 clients a few days ago.

Another key indicator is the quality of our portfolio across Gentera. Cost of reserves are consistently healthy and across our business units and products, and our most recent loan vintages are looking good.

And talking about efficiency, we also have had improvements along the year. We recognize we still have work to do to improve our income expense ratio and working on our expenses to lower them. However, we anticipate, this year, we have reduced significantly the growth rates of our expenses.

For the first time in our history, we estimate that 2018 expenses will grow below 10% in a yearly basis, and we are fully committed to maintain a single-digit expense growth for 2019.

As we have said, efficiency is a fundamental driver in our strategic plan for the future. And in 2019, income will grow at a higher rate than expenses for the first time in many years.

And by the way, a short note about this quarter results. I am sure that you noted that Gentera's net income for this quarter was around MXN 80 million below the second quarter of this year. Mario Langarica will provide more detailed information about it, but I just wanted to point out that the increase of net income in the second quarter followed by a decrease in the third quarter, was due to the effect of some nonrecurrent benefits registered and reported from the second quarter of the year. The decrease in the net income in the third quarter was not related to the performance of the business.

I am sure that, by now, you are interested in our guidance 2019. As we did last year, guidance for 2019 will be provided on our next conference call report.

However, I can share with you some 2019 expectations: First, we will maintain efforts on customer service as the main differentiator of Compartamos in the market; second, portfolio growth should be double-digit in the lower teens range; third, efficiencies and lower cost operations will continue to be our priority; and fourth, transformation and innovation of our business model will continue.

Now with stronger steps after a year of challenges and a lot of learning. Automation and digitalization of business processes, projects in our innovation lab, FIINLAB, and other transformation initiatives will continue to be top priority for us.

Let me now give you some information regarding our business units. Gentera's subsidiaries continue with solid performance during this quarter. ATERNA concluded the third quarter with 5.1 million active life insurance policies. YASTAS recorded 1.5 million financial transactions to over 2,800 affiliates. INTERMEX processed over MXN 6,200 million in remittances. FIINLAB, our innovation lab, continues building alliances with innovation hubs and startups. And Fundación Gentera provided support to over 11,000 people through our partnership with multiple organization and to our own staff from Gentera's different business units.

And let me just finish by updating you about ConCrédito. As you know, we are in the process of understanding each other's operation for future synergies. As we explained before, Gentera's management team is not involved in ConCrédito's operation. Since ConCrédito have a strong ongoing operation and has Gentera's team is concentrated on taking care of this year's challenges. Yet we are actively participating on ConCrédito's board, looking forward for future synergies.

As we said last quarter, ConCrédito will contribute to Gentera's 2018 results with around MXN 70 million in net income.

Let me now turn the call to Patricio De Bonilla, our CEO for Banco Compartamos, who will provide you some interesting information about Banco Compartamos in Mexico. Please, Patricio, go ahead.

[Patricio De Bonilla Garcia Vallejo, executive]

Thank you, Enrique. I will mention during last year's third [ this ] quarter conference call, the recovery plan was expected to show positive trends until the third quarter 2018.

After both decisions that we've made during the year, I'm pleased to highlight some of the improvements in performance metrics that we achieved during this quarter.

After more than 20 months of losing customers, during this quarter, we grew over 41,000 customers compared with the second quarter of 2018. These are relevant figures for us, because it reflects that the customers are coming back to the bank due to the perceived benefits of the financial products and services that we have improved during the year.

Customer retention rates have improved, and we are now moving at 86% compared with a low 80s one year ago.

Growth can be seen in every product, and we expect that the fourth quarter of this year, the growth momentum remains to finalize the year in a better position than the previous year.

On the portfolio side, demand for credit was solid in the quarter. We grew 4.2% compared to the previous quarter, and we now deliver a 1.8% growth if you compare the portfolio versus December 2017.

The result obtained is a reflection of the operational adjustments and commercial decisions that we have made in the past, which are now gaining traction.

Let me recap some of them. A strong focus on enhancing our product offering, improving our credit origination process and monitoring activities. The latter related to weekly or biweekly visits to the clients' board meetings. Changes in the incentives of the sales force to be focused on service and asset quality, prioritize strategic price of projects to deliver better and faster results, and finally, a strong commercial proposition that will allow us to grow the customer base in a more solid way. Implementation of all these initiatives having focus and effective. Another highlight for the year have been asset quality, due to stricter origination processes in Credito Comerciante and Credito Individual. Write-offs in 2018 have decreased 34% and NPL is now below 2.5%. This is the best ratio we've had in the last 35 months.

Finally, employee turnover also showed positive trends. We expect to finalize the year in 27%, a figure that has never been seen in 28 years of history in the company. These reflect a positive work environment for our more than 18,000 employees in Mexico. In addition, due to the lower turnaround of employees, we can be more effective on the service side with customers as we have more experienced personnel in front of them and should reflect in customer retention.

All in all, after more than 12 months of facing different challenges, now operational dynamics and financial metrics are improving, and we expect to finalize 2018 with better trends in most metrics and with stronger credit demand, which will be also supported by seasonal effects, given that the fourth quarter is normally strong in product demand.

As you can see, there are many reasons why we expect to finalize this year in a strong mood, which will be a solid starting point to enter 2019 in a better position to maintain our effort for financial inclusion.

Thank you for your attention. I will now turn the call over to Mario Langarica to review Gentera's financials for the quarter.

[Mario Langarica Ávila, executive]

Thank you, Patricio, and thank you, Enrique, and good day to everyone.

In this third quarter, interest income stood at MXN 5.28 billion, representing a slight 0.2 contraction compared to 3Q of '17. These results were mainly driven by a smaller average loan portfolio in 3Q '18 compared to 3Q '17 and a larger participation of Compartamos Financiera in Gentera's consolidated portfolio, representing 31% at the end of 3Q '18 compared to 25.7% in 3Q '17, where Peru have a lower margin compared to Mexico.

Interest expenses grew 19.9% compared to 3Q '17. This increase is mainly explained by: one, the increase in the interest reference rate in Mexico; two, the extra increases that Banco Compartamos took at the end of 2Q '18 to mitigate potential market volatility; and three, the 33% increase in liabilities in Compartamos Financiera to fund the solid growth of the portfolio in Peru, which as you know, now below 29% on a year-to-year basis.

As a consequence of these dynamics, net interest income showed a slight 1.7% contraction compared to 3Q '17. Net interest margin stood at 49.3%, representing a contraction compared to the 55% achieved in 3Q '17.

It is important to mention that our conservative decision to increase our cash position in Banco Compartamos in this year to cover for 2018 use of fund affected this ratio.

This extra liquidity was diminished during 3Q '18. If Gentera hadn't had this additional liquidity, then the provisions for 3Q 2018 should have stood around 551.4 and NIM after provisions should have stood at 44.6.

As we already mentioned, asset quality is improving, with provision liquidity at 25% compared to 2Q '17. Net interest margin after provisions stood at 42.7%, a similar level to 43.2% which is 2Q '18 and below the 45% ratio obtained in 3Q '17.

This ratio was also affected by this year's extra liquidity. The cost of goods for this quarter stood at 7.9%, which continued to be below our original expectations and was one of the key drivers that supports our decision, as Enrique already signaled, to move upwards our net income EPS guidance for this year.

Fee expenses increased 8% compared to 3Q '17, mainly due to the flexibility that we are now giving to our clients to use third-party infrastructure or own infrastructure at their convenience.

Net provisions showed a 4.1 contraction compared to the previous reached at the end of 3Q '17. Operating expenses grew 7.4% compared to 3Q '17. As explained in previous calls, this increase is mainly driven by: one, employees' compensation; Two, the success of this year's incentive programs for the sales force; three, marketing and other strategic initiatives to reward good customer performance; and four, infrastructure expenses.

Our objective for 2018 is to have operations expenses low in the single-digit, around 8%, as Enrique already mentioned, and efficiency ratio for the quarter stood at 66.8% compared to 74.5% in 3Q '17. For the 9-month period, the efficiency ratio stood at 76.1%, which, as we have mentioned in other calls and as stated previously by my colleague, is still above our midterm objective but in line with our projections for the year.

Gentera's reported net income of MXN 735 million for the quarter represented a 15% growth compared to the recurrent net income, which, in the previous quarter, of MXN 65 million and as Enrique mentioned above and as explained last quarter, in 2Q '18 we have 2 nonrecurring events for a net amount of around MXN 186 million.

Gentera's 3Q net income was 2% lower than 3Q '17. For the 9-month period, return on equity and return on assets stood at 7.7% and 6.6%, respectively.

Finally, in other remarks, we wanted to mention a -- as you probably already know, that on September 17, Banco Compartamos returned to the market -- to the debt capital markets, issuing long-term debt for an amount of MXN 2,500 million with a term of 4 years and a floating rate of [ tier ] plus a spread of 42% -- sorry, 42 basis points.

The demand was for more than MXN 5,300 million. In Peru, Compartamos Financiera was rated in financial strength rating from B+ to A-. We have stable outlook by Class & Asociados Rating Agency. While Apoyo & Asociados Rating Agency improved the outlook from stable to positive.

And last, we also want to mention that for the first time, Gentera, the holding company, obtained a direct loan of MXN 200 million for 2 years from a Mexican bank.

This is all from my side. Thank you very much, and please presentation operator, can we move now to the Q&A session?

[Operator]

[Operator Instructions] And our first question comes from Carlos Gomez with HSBC in New York.

[Carlos Gomez-Lopez, analyst]

I imagine there will be a lot of questions about growth and expenses. I wanted to focus a bit on international operations. It was doing well. Guatemala has broken into a new level with 100,000. Can you tell me what your long-term expectations are for those 2 markets? How much bigger can Peru become? How much bigger can Guatemala become? And whether you might start any other de novo operations in any other country in the next year or 2 years?

[Enrique Majós Ramírez, executive]

Carlos, thank you for your question. This is Enrique Majós. Let me tell you a little bit more about Peru, and Patricio will talk a little bit more about Guatemala since he is in charge directly of that business unit. Our expectation in Peru is very good. As you have seen, our expectation and our strategic reason why we went into Peru was because we wanted to prove that the group lending methodology could work there and could go to people that was not included in the financial service industry. Group lending methodology has grown a lot. Now we have around 350,000 clients in the group lending methodology. You know all this. Our trends of growing the portfolio in business methodology is very good. And Peru still -- even it has challenges in the political context, it's still a country, which has a lot of potential in terms of economic development. And we believe that we are an important part of that development through working capital loans to this segment in the individual lending and the group lending. So for the following year, we believe that in Peru, we will still be growing in a double-digit rate. And I think this is going to be the trend for at least the following 2 years.

[Patricio De Bonilla Garcia Vallejo, executive]

And in terms of Guatemala, Carlos, the reality is the efforts for financial inclusion in that country are huge. There's a relevant market opportunity. There are not so many players in the market. Today, as Enrique said, Guatemala surpassed the 100,000 customer base, and we are growing at a pace of 15% this year. So this is a growth that we think that we can maintain following years while maintaining asset quality. Therefore, I mean, in 5 years' time, Guatemala could be double the size that it is today.

[Operator]

[Operator Instructions] Our next question comes from Claudia Benavente with Santander.

[Claudia Benavente, analyst]

I have a follow-up question on what you just said that -- you mentioned about doubling the size in Peru, but in what time frame? And talking about Peru again, I was wondering if you could give like a little bit of details regarding may be the method follow -- versus Mexico in terms of the flexibility. And I don't know if -- a third question would be, if you can give any color on the cost of risk, which was very low, so I was wondering how sustainable is that ratio?

[Patricio De Bonilla Garcia Vallejo, executive]

Claudia, just one clarification. When I talked about doubling the size of the operation, I was talking about Guatemala, not Peru.

[Claudia Benavente, analyst]

Perfect. Thank you.

[Enrique Majós Ramírez, executive]

And I got the third question about the cost of risk, but I lost the first question, Claudia. Can you repeat it?

[Claudia Benavente, analyst]

Yes. I was wondering about -- I know that you're focusing very heavily on growing group loans in Peru because, of course, they are more profitable. So I was wondering like a little bit how strategy followed in -- on group methodology in Peru versus Mexico, considering all what you have learned in Mexico, because of being relatively more inflexible? So I was wondering, if you're following like a pattern similar to the past? Or applying more what you have learned in Mexico in the past few years?

[Enrique Barrera, executive]

Okay. Got it, thank you. Let me start by talking about in Peru. And yes, as you know and as you are saying, our experiences in the group lending methodology in Mexico give us competitive advantage there. And on the other hand, we are the first -- the leaders and the first players there with this methodology at this scale. And I can tell you that our -- in our experience for the last year, group lending methodology has been developed basically in the same way it developed in Mexico in the first year. There are some cultural differences that we have to address and that we have been trying to manage there. But I think that in general, we are -- we have been able to capitalize the experience that we have here in Mexico there. And what we are looking now is to the future and how can we build more automated and more efficient ways to provide the group lending methodology in both countries. And there are some tools that are being developed faster in Peru and some of them are being developed faster here in Mexico. So I think that the cost utilization of the experiences towards the transformation of the group lending methodology is one of our benefits of having operations at this scale in both countries.

[Patricio De Bonilla Garcia Vallejo, executive]

Regarding cost of risk, Claudia, as you have already mentioned, our guidance for the year was around 10.5%. But we expect that this year, we will go between 8% and 8.5%. And we have described in different conferences, we have had a very good impact on just returning to do our methodology and making sure that we take control of NPLs. So we think that the level that we have been seeing now are very good and probably, we have reached a bottom line, somehow a new one. So probably for next year, we would expect levels around 9% more or less.

[Operator]

Our next question comes from Shamiega Isaacs with Old Mutual.

[Shamiega Isaacs, analyst]

Firstly, well done on the results. I've got 2 questions and they are both related to Banco Compartamos. So the first one is just, if I look at the NIMs, we've seen them come down. So I think year-on-year, I mean, it comes from 68% to 60% and even on a risk-adjusted basis, because you guys have been doing really well on asset quality. But even on an risk-adjusted basis, that NIM's come down from 56% to 52%. So I'm just interested in what's been causing the decline in the NIM? And is it just as a result of the new initiatives that you've been rolling out in order to grow the loan portfolio? And then, what does that mean for a sustainable NIM going forward?

[Mario Langarica Ávila, executive]

Okay, perfect. So there are some things to consider regarding NIM. Number one, we have a smaller average loan portfolio in most of the year compared to the third -- 3Q as compared to -- we have a smaller average loan portfolio. The second, as we have explained, we maintained from really the second quarter of the year and for part of the third quarter of the year. That affected the NIM mathematically. The third, there is also smaller participation of Banco Compartamos in the consolidated portfolio, representing 67.1% at the end of 3Q compared to 72.7% in 2Q. And given this dynamic, we have a smaller interest income. The extra liquidity increased the level of productive assets, and as a consequence, the NIM was impacted. Excluding those effects, NIM after provisions for the quarter that was 42 -- we are talking about Banco Compartamos, right?

[Shamiega Isaacs, analyst]

Yes, we are.

[Mario Langarica Ávila, executive]

Yes. For Banco Compartamos, the level was 53.2% by excluding -- sorry, 52.3% and excluding the liquidity effect, it should have been around 55.8%.

[Shamiega Isaacs, analyst]

Okay. And how does that compare to where we were a year ago?

[Mario Langarica Ávila, executive]

One year ago, the level was 54.1% in 2017, NIM after provisions; and for the first quarter was 56.6%. The first quarter, we didn't have the liquidity effect. And in second quarter, the amount that you see in the income statement that you extract from our numbers, was 53.2%. But again, including back -- or taking out the liquidity, it should have been around 66.9%.

[Shamiega Isaacs, analyst]

Okay. Perfect. So if I try and just make it a bit simpler, what was the yield on Banco Compartamos specifically in the third quarter 2017 versus the third quarter of 2018?

[Mario Langarica Ávila, executive]

Yes. The yield was 78.3% for Banco Compartamos, 77.5% in second quarter, 60 -- 76.4% in the first quarter. For 2017, 75.8%.

[Shamiega Isaacs, analyst]

Okay. Perfect. And then the second question is just on the interest expense, and it actually ties into what I just asked. And you've spoken about the extra liquidity, which has brought down the NIM. But if I look at it, so if I compared, I mean, to the second quarter's result. So the cash balance has actually come down quite significantly. It came down by around 48%. And yet the interest expense on a quarter-on-quarter basis, went up 28%. So what am I missing there? What else has been driving the interest expense up?

[Mario Langarica Ávila, executive]

It was all driven by the extra liquidity that we have in the last month of the second quarter and for more or less 1.5 months of the third quarter.

[Shamiega Isaacs, analyst]

Okay. But then why didn't we see the same effect on the interest expense in the second quarter?

[Mario Langarica Ávila, executive]

Yes. It was related to the reference rate in Mexico.

[Operator]

[Operator Instructions] With no further questions in queue, the question-and-answer session will conclude. I will now hand the call over to Mr. Enrique Majós.

[Enrique Majós Ramírez, executive]

Thank you. Thank you all for attending this call. As you can see, third quarter gave us the opportunity to confirm that our diagnosis and business plan is right on track. We still have big challenges moving forward. However, we feel confident and motivated to keep working for our clients and the transformation of the financial inclusion industry. 2019 looks like a very good year for us, and we are preparing for it. And I think that our experience of this year was a very solid way to put the foundations for the future. Thank you all for your attention, and we hope to have you with us on our fourth quarter 2018 report and have a good day.

[Operator]

Ladies and gentlemen, thank you all for being in today's conference call. Now you may disconnect.