Unifin Financiera SAB de CV
BMV:UNIFINA
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Unifin Financiera SAB de CV
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Good morning and welcome to UNIFIN's Second Quarter 2019 Conference Call. [Operator Instructions]
For opening remarks and introductions, I would like to turn the call over to Mr. David Pernas, Head of Corporate Finance and Investor Relations at UNIFIN. Sir, you may begin.
Thank you. Good morning, everyone. Thanks for joining us today to discuss UNIFIN's second quarter 2019 earnings.
This morning, UNIFIN's senior management team will discuss the company's second quarter 2019 consolidated results per the press release distributed yesterday. If you have not received a copy of the earnings release, please contact Investor Relations team to receive a copy.
Prior to introducing management, I would like to remind you that forward-looking statements may be made during this conference call. These do not account for economic circumstances, industry conditions, the company's performance or financial results. As such, these forward-looking statements are based on several assumptions and factors that could change, causing actual results to materially differ from current expectations. Therefore, we ask that you refer to the disclaimer located in the earnings release prior to making any investment decision.
We are pleased to announce Mr. Sergio Camacho, Chief Executive Officer; and Sergio Cancino, Chief Financial Officer.
At this time, I would like to turn over the call to Sergio Camacho for his presentation. Please go ahead, Sergio.
Thank you, David. Good morning, everyone. Thank you for joining us today.
Despite the challenging macroeconomic environment in Mexico, we were capable of reporting solid results supported by the strength of our business model. During the second quarter of the year, global growth expectations continued to deteriorate, in part due to rising commercial tensions between the U.S. and those of its key trading partners, mainly China. In response to a less favorable economic scenario, the principal central banks of developed countries signaled more accommodative monetary policy going forward in order to support growth and boost low levels of inflation. The expectation of a greater monetary stimulus has led to a reduction in the interest rates of sovereign bonds, an appreciation of most currencies against the dollar as well as a boost in global stock indices.
In Mexico, despite economic and political uncertainty, financial assets showed similar dynamics to those observed in international markets. Rates for local bonds dropped and the Mexican peso appreciated against the U.S. dollar. Although the Mexican Stock Exchange Index registered a decline in the coming months, the probable ratification of the NAFTA 2 will likely provide a boost to the local economy and generate greater certainty for investors. Furthermore, the Central Bank is expected to ease monetary policy by the end of the year and government spending on social programs and infrastructure projects will start to take effect, and this should provide an additional stimulus to the economy.
Economic uncertainty during the quarter translated into a slower decision-making process for some of our clients, resulting in lower originations in the leasing business as observed in the first semester of the year, contrary to the resilience observed in financial factoring and auto loans, which grew during the quarter 16.5% and 153.9%, respectively. The company fundamentals have remained solid and we closed the quarter with growth in interest income, financial margin and net income compared to the second quarter of last year. Our interest income increased by 23.8% to MXN 2.6 billion in the second quarter compared to MXN 2.1 billion in the second quarter of 2018 when the financial margin and net income grew 24.4% and 13.9%, respectively. As of June 30, our net loan portfolio reached MXN 49.4 billion, an increase of 21.4%. And our total assets increased by 12.1% year-over-year at the end of the second quarter reaching MXN 66.7 billion. For the second half of the year, we continue to expect similar market trends, with the expectation that our backlog reflects better performance from materialization of our countercyclical efforts in our strategy.
In this sense, I'm happy to announce that UNIFIN now has its prospecting center up and running. We are confident that this business model will help strengthen UNIFIN's brand and product offering within the SME sector. This prospecting center has a proprietary methodology that leads the market in both quantity and quality of client interactions. Today, more than 100 daily appointments per month are validated one by one by the commercial team. This is, of course, in addition to their own prospecting efforts. We are convinced that the prospecting center will be an ally on the road to success.
Also, taking advantage of market conditions, UNIFIN continued with its financing budget for the year. We carried out a private offering of senior notes in international markets for an aggregate principal amount of $450 million at an annual interest rate of 8.375% and maturity date on January 2028. The offering was oversubscribed almost 3x based on the strong fundamentals of the company. The proceeds will be used for general corporate purposes and in order to avoid negative carry, refinance of short-term credit facility.
Additionally, on July 3, we concluded a syndicated unsecured loan for the principal amount of $220 million due 2022, whereby Bladex and Nomura acted as joint lead arrangers and joint book runners. The loan proceeds will be used to refinance the company's existing debt in an amount of approximately $114 million and the remaining will be used for working capital. Due to the relevance of these 2 issues, we consider it is important to mention them, although they are not part of the second quarter result.
Although we anticipate that the second half of 2019 will continue to be challenging, we are convinced that UNIFIN business fundamentals are solid and we are prepared for whatever is to come. We will be prudent in the decisions we take, always keeping a conservative risk management approach. We remain confident in Mexico's long-term outlook and its strong fundamentals and assure our commitment with our stakeholders in continuing our efforts to improve the profitability of the company while always pursuing a responsible financial strategy.
Regarding our business trends for the quarter. As you know, the company started reported its accounting under the International Financial Reporting Standards, IFRS, in the first quarter of this year. Overall, the change to IFRS provides better, clearer, more transparent and more comparable financial information to the market, particularly driven by better disclosure of the overall business. As part of the transition process and considering it was an initial adoption, certain reclassifications were made by our external auditors to our financial statements which have been previously disclosed by the company. Throughout 2019, we will provide comparable information for 2018 to facilitate understanding.
Moving on to the financials. UNIFIN adapted to the complex economic environment and closed the quarter with a growth in interest income of 23.8% versus the same period of the previous year. Interest expense increased by 32.8% to MXN 1.7 billion due to the incremental financial cost given the drawing on financial facilities throughout the quarter and the financing of the company's operation.
During the second quarter of this year, the weighted average funding cost was 10.1% compared to 9.97% in the second quarter of last year. Only an 8 bps increase in the funding cost was caused by an increase in the overall cost of funding, the remaining 5 bps are related to the incremental debt. Pro forma, including both financing in July and considering its hedging cost to the Mexican peso, the weighted average funding cost is 10.7%.
This resulted in a financial margin for the quarter of MXN 872 million, an increase of 24.4% compared to the second quarter of 2018. The improvement is related to the repricing efforts of our increase in yields, which the company start to implement since last year. As a result, the NIM for the quarter remained stable at a solid 7.8% versus the second quarter of last year.
The financing result, which consist of bank commissions and fees, in addition to gains related to our foreign currency cash assets and liabilities, ended with an income of MXN 34 million during the period. The administrative expenses consist of investments in marketing and promotion administrative services and legal and professional fees among other administrative expenses, like the rentals of our offices, resulted in MXN 352 million, a 26.1% increase when compared to the second quarter of last year. This is explained by the increase in marketing expenses in relation to our marketing and promotional campaign, Receive the call, and a higher payroll of 653 employees in the second quarter of this year versus 565 employees in the second quarter of last year. Even so, the OpEx as a percentage of sales remain at an efficient 13.5%.
Our operating income reached MXN 538 million in the second quarter, a 17.2% growth from the MXN 459 million reported during the second quarter of last year. As a result, the consolidated net income for the quarter grew 13.9%, reached MXN 453 million during the second quarter from MXN 397 million posted in the second quarter of last year. With the growth in total originations in the past 12 months, the net loan portfolio increased 21.4% compared to the second quarter, reaching MXN 49.4 billion.
NPLs, which consider the total loan portfolio of our 3 businesses ended at 3.8% in the second quarter. The allowance for loan portfolio for the 6 months increased 21.5% to MXN 962 million compared to MXN 792 million in the first semester of 2018, of which leasing stood at MXN 752 million, factoring MXN 122 million and auto and other loans at MXN 78 million. The allowance created over the second quarter was MXN 30 million. These allowances are created accordingly to our reserve for loan losses policy attached to the guidelines defined by IFRS. The methodology is based on an expected loss basis. Furthermore, the expected loss provision of the leasing portfolio is determined on the historic payment behavior, current environment and a reasonable provision for future payments.
The financial liabilities at the end of June 2019 were MXN 53 billion, an increase of 16.3% versus the second quarter of last year. Attributed mainly to the growth of the portfolio, the weighted average term of liabilities in the quarter was 42 months versus 35 months of the total portfolio. With the 2 recent financing obtained in July, the weighted average term of the liabilities goes up to 56 months. Additionally, in the second quarter of this year, the fixed rate debt accounted for 78.1% of the total debt. Again, with the 2 recent financing, the fixed rate goes to 94%, in line with our prudent strategy.
Stockholders' equity decreased to MXN 9.7 billion, a reduction of 5% compared with the MXN 10.3 billion in the second quarter. The variation in the shareholders' equity is explained by the gain of the mark-to-market valuation of our hedging financial derivatives which had a negative impact of MXN 857 million during the second quarter. Compared to the first quarter, the stockholders' equity presented a 4.4% growth.
With these remarks, we would like to finish our presentation and start our Q&A session.
[Operator Instructions] Our first question comes from Nicolas Riva, Bank of America.
My first one is on funding. So you closed the syndicated loan for a bit around $200 million. You issued the '28, $450 million. Are you already covered in terms of your funding needs for the rest of this year? Then second question on capital. So you did slow down a bit the pace of growth of your leasing portfolio to the low 20s, but equity to asset still remains lower than peers, 15% equity to assets. If I took out the perpetual, 28%. So what's your view in terms of capital and if you have a target for the equity to assets. And then the last one on asset quality. You had an increase of 20 basis points quarter-on-quarter in the NPL ratio. But if I look at your loan loss provisions in the income statement, you actually decreased the loan loss provisions, which to me is a bit counterintuitive. What was the reason for that? And if you have a target for the coverage ratio.
This is David. Okay. Let me start first if you want with the provision question, then I'll follow-up with the financing budget and then we'll address the rest of the questions. In terms of the allowance, yes, we created an allowance of MXN 30 million over the quarter, which compares to MXN 90 million from the previous quarter of last year. As you know, the methodology and the allowance creation is a result of a methodology that is for impairment cases. It's not something that we determine specifically or discretionally. Given the rating of the portfolio and the reviewing of the risk and so on, there's an additional allowance that needs to be created and is a result of a particular methodology. It's not necessarily countercyclical. If you actually look at the balance of allowances, they're in line with the growth of the portfolio and they're in line with the behavior of the overall NPL.
As to the financing budget for the year, Okay. So far, we've basically raised $712 million, some of which has been done in pesos, some of which has been done in U.S. dollars. Specifically, transactions related to the Bladex and Nomura financing and the bond consist of the U.S. financing. And then there's private securitizations that we have and private lines of credit we've closed in Mexican pesos, locally speaking. So we're $300 million shy of our $1 billion budget, out of which -- I mean, we're still more or less halfway through the year so we have time to prepare for that. We are in the plans of finalizing some transactions and some alternatives of financing that we have in the desk, in the means of term sheet, in the means of different considerations. Also, we'll end up, I think, approaching the budget more and more over the third to fourth quarter of the year.
And that, let me add to that, that when we announced our budget of $1 billion, and with this, let's say, window for issuing debt, we are doing some liability management, extending the curve of our liabilities. Therefore, that does not mean that all the money that we are raising is new money, let me put it that way. So we're also working to make more efficient on both our risk profile, but also the maturity on our liability.
Okay. One follow-up on the first question on loan reserves. Do you have an actual target for the coverage ratio? I understand that you own the leased assets. And therefore, the coverage is going to be below 100%, but you have an actual target for that coverage which right now is about 50%.
The target depends on the business line. As we put in the press release, of course, leasing is a different thing because we actually have the ownership of the asset and the repossession of the asset and then the realization on the secondary market determine partially how we are provisioning the nonperforming loans. When it comes to factoring and auto loans and others, we're basically speaking about trying to -- given the methodology, pursue 100% coverage for those, okay? But when it comes to leasing, it depends on basically the secondary market or the commercial value of the asset itself.
Okay. And on capital, is there a target for equity to assets and what's the plan really to build up the capital level?
The target for equity to assets -- so today, the current equity or capitalization ratio stands at 19.7%. We consider this metric to be sufficient or this nominal capital base to be sufficient for the next couple of years considering the current rate of growth of the company. In addition to that, if there's anything, we might start analyzing something on a passive basis because we don't want to reach the moment in which we actually need to raise some equity without having analyzed yet several alternatives, but nothing that will require at this point.
Okay. Because I guess my problem is your leasing book up until the prior quarter was growing in the high 20s, in the first quarter, 26% year-on-year, but your ROE is in the low 20s. So therefore, I mean, the trend is for the equity to asset to come down unless we actually see a slowdown in the pace of growth of your leasing book, which we did see, I mean, in the second quarter. So that's why I was asking your thoughts on capital.
Yes, no, definitely. Of course, this scenario is a little bit particular because we're not originating as much as we'd like to. Definitely, we're below the original expectations of the company. Hence, we have less interest income to report and less profitability. That means that if we get to reprice more and originations get to increase further, of course, this will mean that the leasing yields that we're putting on new originations make up for better profitability than the vintages that were originated on previous years, offsetting a lot basically the negative carry on profitability, on the ROE. That's why we think that the equity is sufficient for the course of the next 2 years. And in addition to that, of course, the growth year-over-year on asset is not going to be within the same level as time goes on because the current pace of assets grows larger every time. So replicating the same rate of growth is not something that we're anticipating.
Our next question comes from Carlos Rivera, Barclays Bank.
Following up on a little bit on the leverage question. I understand the ratio 19.7% is the one that is specified on the covenants. But my question is regarding your conversations with the rating agencies. I think they tend to look at debt to tangible equity or other measures. And I wanted to know if you had any conversations with them, especially after the IFRS accounting change because equity was, of course, reduced with this change. So that will be my first question. And the second question is regarding the funding. You, of course, raised the funding for the next several quarters. What is your expectation of that to have an impact in the next quarters as you have some excess funding for a few quarters and how does that translate into the margin? We're seeing the NIM 7.8% for the first half of last year, a similar level to this year. Do you see room for the NIM to start improving by the end of the year despite having a higher funding, a more liquid position at this point?
Carlos, in relation to the follow-up on the NIM, first. So of course, the efforts are going to be measured consistently over the course of the second half of the year. One important thing to consider is that, again, year-over-year originations have been slower. So it's becoming hard to -- not to reprice the new originations but to reprice the full portfolio because the rate of growth is lower than anticipated. To avoid any negative carry and some impact on the NIM, we will definitely approach liability management and will pay very short-term debt from the proceeds of the 2 financings that we raised and what's left of refinancing for the course of the year. But it's likely that the company will present some continuous lag on the repricing efforts. We hope that the NIM will remain relatively stable over the course of the year. And if the originations do start to pick up, then there's definitely room for additional margin expansion. If not, we would like to remain relatively confident that, to say the least, it's something that we're thinking also. Can you repeat the first question again, please?
Sure. Just wanted to get your comments on potential conversations you may have had with the agencies especially after IFRS adoption.
On leverage and capitalization, of course, I mean, we have the same discussion with both rating agencies. They do have 2 different methodologies, proprietary methodologies in the way they analyze it. One looks more as to capitalization, similar to, for instance, Basel methodology for banks. The other one is more in terms of leverage. We've disclosed both metric with both rating agencies and we've shown them pro forma and of course, models for projections over the course of the next years. In terms of leverage, the company has an outlook of basically becoming more cash flow neutral over the course of the next couple of years, meaning that the leverage will tend to or is likely to decrease. When it comes to capitalization, it's a little bit different, but profitability will make up for a stable capitalization ratio. Both have been discussed with rating agencies. And at this point, they both feel comfortable with the current equity position of the company and with the outlook of how it will behave over the course of the next few years.
Okay. Just to make sure I understood correctly. So they feel comfortable with the trends, but when we look at those leverage ratios, they will continue to deteriorate for the next 2 years. Did I understand correctly?
No, no, no. In terms of leverage, it will improve. In terms of capitalization, it's likely to remain stable.
Our next question is from Alonso Garcia, Crédit Suisse.
Just first a follow-up on asset quality. I just want to hear from you what are the main sector that are driving the deterioration? And what are you expecting for the remainder of the year? And also in asset quality, if you report some more charge-offs or anything you can share on that front would be highly appreciated. And my second question is just on ROE level. Do you have a sense on what your sustainable ROE target is in a long-term basis compared to the 19% level currently?
Hi, Alonso. Regarding which sectors are the ones that are, let's say, lagging a little bit on the collections. It's not a particular sector. I think it has to do more with all the clients that somehow have some relationship with government directly or government-related entities that, as you know, has been very slow, let's say, within their payments or within their economic activity as a whole. Therefore, those are like the clients in which we have seen some slowdown in the collection process. Nothing to be alarmed, but of course, we are very close to those clients and taking the necessary measures to have an efficient collection with them.
The second question, okay, on the ROE. I think that the long term or our plan calls for, let's say, mid-20s. That's a good number to be consistent and to have that as a, let's say, long-term measure. However, and depending on whatever we do on our capital is going to have an impact. And that's somehow related to the previous question on capitalization. At the moment, we do not foresee any need to do something in the equity side. However, if we continue with the growth, eventually, we're going to need to take a look and do something. And that, of course, will have a negative impact immediately on the return on equity. However, the mid-20s, as I said, will be a very good number to forecast.
And do you share somewhere in your reports to the stock exchange or so the level of charge-offs each quarter or not?
No. I don't think we have any specific disclosure on charge-offs. If you see that press release over the course of the last 2 quarters, we've been posting like the breakeven of the allowances on the portfolio. And so far, given the fact that we don't have any -- or the allowance has been created in terms of repossessing assets and realizing them at least at a significant recovery value which is over book value, we, generally speaking, don't need to post any write-offs. Having said that, this particular quarter, the allowance for factoring decreased just as the factoring nonperforming loan decreased because we actually did charge off or write off one particular exposure which had been outstanding over the past, I think, few months. So we decided to take a decision in terms of writing off that amount, which was close to MXN 80 million, 8-0.
8-0. Got you. And just lastly a follow-up on asset quality, if I may, do you have -- can you share with us your exposure to the Pemex supply chain?
On the Pemex supply chain, it's very little. I would say less than 2% on our overall portfolio. I think that my answer on the first question was with the overall government-related, not Pemex particularly.
Our next question comes from Jason Mollin, Scotiabank.
My question is on kind of the process of thinking about the listing, public listing your stock. You were thinking of doing an equity offering in, I guess it was November of 2017. The stock was over MXN 60. The stock last week was below MXN 40. We saw it pop. There were some questions about whether there might be interest in buying, delisting, making a tender offer. If you can talk about what decision-making process would go into that. How would you think about that? At these valuations, I mean, you're buying back shares, would you buy back more? Would you even buy back everything? If you can help us understand that question.
Yes. Sure. Would say the strategic thinking on that, of course, we are not comfortable with the current valuation. However, when we compare ourselves with the rest of our peers or the rest of the market has been a good rating overall. And that's a market condition. In our current plan, there is no plan for delisting the company as we have said in some other forum. So that's what I can say for now. I mean of course, once again, we're not happy. We continue buying shares because somehow we believe it's the right thing to invest in at the current level. On the other side, we are very cautious on the capital structure of the company and that will mean somehow maintain a balance between share buybacks and the capital structure because getting back to the previous comment that we have done in this conference call, both the capitalization and our ratings are primarily focused on for UNIFIN. So we do not want to jeopardize that. But in the meantime, I mean, everything that we can get on the market at this valuation, we're going to be thinking and doing it.
[Operator Instructions] Our next question is from Martín Lara, Miranda Global Research.
I only have one question. Where do you see the performance of the leasing portfolio and NPL ratio during the rest of the year?
It's somehow hard to tell because when we analyze this on a macroeconomic perspective and we see, for example, at the beginning of the sexenio of AMLO, the GDP projections were around 2% or even higher than 2% and now we're less than 1% now. So it's been a significant deterioration overall in the expectations for the economy on Mexico. However, and as we have said, we started early this year or basically late last year some measures that somehow were designed to do a countercyclical effect on this slowdown that somehow we anticipated because it was a change of government. We do not anticipate it's going to be so deep, but we anticipate it. I mean if you analyze Mexico's history, every 6 years when there is a change in the sexenio, there's a slowdown. This one has been more highlighted because it's a change on the regime of the government. So once we forecast that, we start with all these strategies with all these marketing and advertising campaigns, Receive the call, and all these business intelligence effort that we have implemented in the company in order to, as I said, countercyclical effort.
So getting back to the point and answering the question. We expect somehow a slightly better second half of the year in terms of originations. And that will lead us to continue posting, let's say, double-digit growth in top line and high single or low double-digit growth at the bottom line, let's say, net income.
On the NPLs, we have strengthened and we started strengthening at the end of last year all of our, both collections and legal department. And we are, I will say, we're on track to whatever risk we find within our clients. We are more close to them. And that somehow has allowed us to maintain what we consider to be a very healthy 3.8% of NPLs. Once again, it will depend also on macroeconomic and how this, let's say, start-up of this new administration in economic terms start. Once again, we're very close as we have done in the past and since this company started, all the legal and necessary measures to collect on an efficient way.
Our next question is from Gilberto Garcia, Barclays Bank.
My question is on the slowdown in origination. While this is, of course, consistent with the muted growth reported by most lenders overall, we have seen significant variations in the performance of the small- and medium-sized enterprises segment, in particular. Can you comment on what you are seeing in terms of competitive dynamics?
Yes. Of course, I mean, the slowdown that we had seen on origination has allowed a lot to do to link to competition. I would say it's much more on the rationale of the process thinking of our clients. We need to remember that leasing, particularly leasing to the SME, it's basically CapEx. And when you see across the board all the CapEx for large corporates or small and medium enterprises has been reduced significantly across the board. Therefore, the rationale for accessing leasing vis-à-vis a commercial credit is different. And that's when you may see some differences. However, as I said, we are doing everything on our hands to somehow pursue new clients, find new necessities from our clients and try to somehow offset this slowdown on the demand for leasing.
Our next question is from Natalia Corfield, JPMorgan.
My question is about the maturity profile of your loan portfolio and also liabilities. Before, you used to have this information in your presentation. But I think that since you moved to IFRS, this hasn't been there. So I'm wondering if you have it and you can pass to us.
Hi, Natalia. You just have it on the press release sent out yesterday. It's on Page -- give me one second and I'll -- it's on page -- sorry. Okay. It's on the -- hold on. Sorry about that. So it's on, sorry, Page 10 over the explanation of financial liabilities. It's also on the presentation. So as of the quarter, the weighted average term of liabilities was 42 months vis-à-vis 35 months over the total portfolio. Pro forma, right after the issuance of the 2 or the raising of the 2 financing that were mentioned previously, both the bond, the $450 million bond and the $220 million facility from Bladex and Nomura, the pro forma was 56 months in liabilities vis-à-vis the 34 -- 35, sorry, over the total portfolio.
That's helpful.
On the presentation, sorry for that, just to clarify, it's on Page 12.
It's 12. But I think before you had it a little bit more granular. For instance, you have like 0 to 12 months, how much you had in loans, how much you had in liabilities.
You do have it on the presentation. Again, on Page 12, there's a chart that is called maturity profile and it basically says how much. For instance, from 0 to 12 months on the asset side is 40%. From 13 to 24 months, it's 31%. From 25 to 36 months, it's 18%. That's on the asset side. And on the liabilities, over the course of the next 12 months, for instance, 21% of maturities; 9% from here to 24 -- sorry, from 13 to 24 months and so on. But we'll make sure to follow up on that specifically with you and we'll definitely include it over the press release in the next quarter. Thank you for the clarification.
We have reached the end of the question-and-answer session. And I will now turn the call back over to Sergio Camacho for closing remarks.
Well, thank you all of you for joining us today and for your interest in UNIFIN. Please do not hesitate to contact us with any questions you may have. We look forward to speaking with you again soon. Have a good day.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.