Unifin Financiera SAB de CV

BMV:UNIFINA

Earnings Call Transcript 2021-Q2

[Operator]

Good afternoon, and welcome to UNIFIN's Second Quarter 2021 Conference Call. [Operator Instructions] If you have not yet received a copy of the earnings release, you can find it on UNIFIN's website at www.unifin.com.mx or please feel free to contact the Investor Relations team at [e-mail], and they will provide you with a copy immediately.

Forward-looking statements may be made during this conference call. These do not necessarily take into consideration changing economic circumstances, industry conditions, the company's performance or financial results. These forward-looking statements are based on several assumptions and factors that could change, causing actual results to differ from current expectations materially. Therefore, UNIFIN asks that you refer to the disclaimer located in the earnings release before making any investment decision.

At this time, I would like to introduce Mr. Sergio Camacho, Chief Executive Officer, who will discuss the second quarter 2021 results. Mr. Camacho, you may begin.

[Sergio Camacho Carmona, executive]

Thank you, and good morning, everyone. Today here with me are Sergio Cancino, our Chief Financial Officer; David Pernas, Head of Corporate Finance & Investor Relations; and Nayeli Robles, Head of Economic Analysis & Strategy. After our second quarter 2021 results discussions, we will open our usual Q&A session.

As you have seen in the second quarter of 2021, Mexico economy recovered in good part thanks to the progress of vaccination campaigns. Unemployment continue to improve and is now closer to the levels seen in 2019. Consumer confidence is up, also benefiting from the ongoing U.S. economic recovery and the surge in remittances boosted by their fiscal support programs. Let's not forget the economic context that Mexico and the global economy faced last year, which explains the optimism behind a better-than-expected recovery. Nonetheless, we are still facing economic challenges such as uncertainty around a resurgence of COVID-19 due to new virus strains and expected inflationary pressures.

However, the outlook is encouraging, with the consensus among analysts reflecting confidence in Mexico GDP, which is expected to grow approximately 6% in 2021. So this means significant growth. The country continues to be below pre-pandemic level in economic activity. We are pleased with the second quarter results, which validate the business decisions we have taken over the past year and the positive outlook the company faces.

We reported a substantial increase in operating profit as margin stabilized on the path to recovery. Our originations are picking up well, reflecting both the recovery and the attractiveness of our core product offering. Our digitalization process and technological innovation continues to move ahead at full speed. The company is well capitalized and more efficient. We believe the future for UNIFIN is bright.

Our recovery from the downturn caused by the pandemic was also aided by our incisive and strategic decisions to take advantage of the market opportunities. UNIFIN commercial strategy is focused on 3 main objectives. One, increase our number of clients and gain market share. Two, target our prospecting efforts on strategic economic sectors that have high growth potential. And third, develop new prospecting channels through strategic alliances to streamline the client acquisition process.

As mentioned in previous quarters, UNIFIN has initiated a strong digitalization journey to transform our business and position us as a disruptor in the financial sector in Mexico. This journey has allowed the company to obtain unique insights from our prospective clients and pave the way to deliver new services to fulfill clients' needs and become the ultimate financial services one-stop shop. Additionally, forming strategic digital alliances, setting new KPIs for all employees to target clients' Net Promoter Scores, consolidate our client-centric culture and enhance our effort in ESG are some of the strategies that we have put in place to ensure UNIFIN's sustainable success.

74% of our originations this quarter came from strategic sectors with high growth potential, compared to 72% in the first quarter of this year and 57% in the second quarter of last year. We have also focused on maintaining a high-quality portfolio by building our origination strategy on key sectors and regions that were not severely impacted by COVID-19. At the end of the second quarter, we reached more than 9,000 active clients, having increased our client base by about 500 during the quarter. This boosted origination and give us a diversified client base with 78% of clients being loan less than MXN 100 million. To strengthen our risk management approach, we continue to implement strict origination standards and re-evaluate our risk scorecard.

Uniclick continues to deliver solid results. From the previous quarter, the client base has increased by 60% to 833. Originations increased by 126% to MXN 377 million and Uniclick portfolio grew 82% to MXN 750 million. At UNIFIN, we have a strong digitalization strategy, which is transforming our business and position us as an innovator in the sector.

Uniclick continues to gain traction and present us with increasing cross-selling opportunities as we attract new clients to the UNIFIN family. Registers for Uniclick increased by 260% during the quarter, and we have had great client feedback from the service. Our new digital processes and the contribution of artificial intelligence are making the client acquisition process more efficient, helping us to measure and manage risk effectively and reduce our operating costs. We are committed to remaining at the forefront of digital innovation and provide the best and most advanced products and services to our clients as well as maintain exceptional levels of customer service.

Looking more closely at UNIFIN core business, the total loan portfolio reached MXN 67 billion in the second quarter of this year, a 5% increase compared to the portfolio of MXN 64 billion reported in the second quarter of last year. Leasing remains our largest business line. We need to consider that pondering high origination levels from 2017 and '18, the legacy of portfolio originated in such period is now due. Therefore, our portfolio continues to be robust if we consider this effect. Factoring and auto loan business have also remained relatively stable compared to the previous quarter. The biggest increase was seen in the structured finance and working capital loans, which includes Uniclick. As you can see, we remain well diversified across economic sectors and by type of assets, with services and industrial supply chains leading the way, respectively.

In terms of asset quality, aging balances continue to behave positively, especially in the factoring and the structured finance lines where loans in each of the 31 to 60 days, 61 to 90 days, and our 90 days past due categories stuck at 2% or less of the total business line. Nonperforming loans fell by 30 basis points compared to the previous quarter to 4.6% of the total loan portfolio in the second quarter of this year.

During the quarter, we decided to write off MXN 460 million in assets, mainly related to factoring and leasing clients. We took this decision after having exercised recovery procedures in line with our internal compliance with IFRS. Despite these write-offs, we will continue to pursue full recovery of our accounts receivables through civil and mercantile claims on the companies and their respective collaterals.

As an update of our COVID-19 client support program, less than 2% of loans under such program have evolved into NPLs and are already accounted for in this metric. Collections from the period were up considerably, ending at MXN 6 billion, the highest nominal collection amount since the beginning of the pandemic and MXN 842 million compared to the first quarter of the year.

The NPL coverage ratio for the second quarter closed at 80%, in line with previous quarters and guidelines. And our loan loss reserve for the quarter ended at MXN 2.5 billion, a 33% increase versus last year. The split by business line, except for leasing, which has its own collateral, all NPLs are 100% covered.

For leasing, which is our main and largest business line, the coverage ratio is 76%. The reason for this is that accounting methodology also considers the recovery value of the asset. This expected recovery value has allowed the company to historically recover approximately 80% of the outstanding loan amount.

Our funding profile remains well diversified between international notes, revolving credit facilities, term loans and securitizations. The average maturity was 49 months and the total average rate was 10.8%. Financial liabilities at the end of the quarter were MXN 70 billion, a 6% decrease compared to MXN 74 billion at the end of the second quarter of last year, demonstrating our sound capital position.

Our fixed rate financial liabilities increased to 88% from 80% in the second quarter of last year, with floating rates falling to 12% from 20% in the same period of 2020. Unsecured loans stood at 75% and secured loans accounted for 25% of the total at the end of the quarter. UNIFIN financial liabilities are split between U.S. dollars and Mexican pesos, 74% and 26%, respectively. The hedging cost for all dollar-denominated debt as well as changes in the debt position related to maturity extension resulted in an increase in the weighted average interest cost.

We continue to exercise financial discipline, improving our capitalization ratio from 18% in the second quarter of 2020 to 20% for this quarter. The capitalization improved year-over-year due to 3 main factors: first, the MXN 2.5 billion capital increase in August of last year; second, the nominal decrease in financial debt due to the liability management exercise carried out over the recent months; and third, the FX revaluation of U.S. dollar-denominated debt. This explains the improvement in the financial leverage ratio to 4.6x, 4.2x excluding the cash balance, from 5.5x in the second quarter of last year. The improvement on both metrics reflects our continuous optimization of risk control procedures which seek to enhance our capital position.

Finally, as part of our financing target for this year, during the quarter, we raised syndicated loans for a total of $112 million and closed a private securitization of MXN 3 billion, reinforcing our continued ability to access diverse funding sources. Added to a strong first quarter in terms of funding, this helped us to reach almost 78% of our financing target for this year in the first half of the year. In conclusion, UNIFIN has emerged from the pandemic a better capitalized, more efficient and more technological and digitalized company. With a more attractive customer product offering, we are very, very excited about the future.

I would like now to move on to some of our financial results for the quarter. Interest income rose by 4% versus the second quarter of last year to MXN 3 billion, with growth driven by income from the Uniclick and the structured finance businesses. A significant part of this business later will transform into leasing. The portfolio yield stood at 17.6%, stable versus the previous quarter. This was mainly driven by lower interest income from the smaller leasing, factoring in our loan portfolio due to softer business dynamics in these business lines and was positively offset by higher interest income due to the increase of our working capital and structured finance portfolios.

We continue to forecast that as positive business dynamics continue, the yields of all of our business portfolios will improve versus current figures. And therefore, the total portfolio yield will improve. The financial margin for the second quarter of this year ended at MXN 969 million, a 9% decrease compared to the second quarter of last year. This is explained by a 10% increase in interest cost driven by a higher cash balance, which we are maintaining as a precautionary measure to preserve solid liquidity. The interest cost increase was also impacted by change in our debt position related to the maturity extensions and the hedging costs of U.S. dollar-denominated debt as well as the average cash balance of the treasury, which has remained at approximately MXN 4 billion over the past year.

NIM stood at 5.8% at the end of the quarter. This represents a 20 basis point contraction versus the previous quarter and is also explained by the increase in the interest cost. The fact that we decided to maintain a solid cash balance, in addition to lower origination activity, has momentarily put pressure on margins. However, as our business dynamics pick up and business confidence is clearer, we believe that margin profitability will accompany the cash deployment.

OpEx as a percentage of sales improved by 50 basis points to 12.8% versus 13.3% in the second quarter of last year due to our strict expense control measures, which reflects our operating efficiency during the quarter and the past year. Return on assets remained stable versus the first quarter, which is explained by lower interest income and a higher interest cost, as previously explained. However, the return on assets decreased slightly compared to the second quarter of 2020.

Return on equity improved by 20 basis points versus the first quarter of this year, mainly driven by a 29% increase in net income due to higher interest income and lower provisions during the quarter. However, versus the second quarter of last year, the return on equity decreased to 10.1% from 15.4%. Again, the return on asset was impacted by the maintenance of a solid cash balance and lower originations but we retain our guidance for the year-end profitability considering our deployment expectations.

Net income from the quarter increased by 28.9% versus the same quarter in 2020 to MXN 336 million, reflecting the success of our new digital business and our successful management of the pandemic. We expect to see further recovery in profitability as our business dynamics continue to improve.

We'd also like to inform you that as agreed at the Extraordinary General Meeting of UNIFIN shareholders held yesterday, an amendment to UNIFIN bylaws was approved. This amendment enables the company's corporate purpose to be modified to comply with the recent federal labor law reform related to outsourcing matters. Since we have historically kept a policy of paying our employees a bonus equivalent to profit sharing compensation, our results will not be affected by this reform.

We continue to focus on generating long-term value for our shareholders. We are confident that we can emerge from this challenging period as a more resilient and efficient company and remain committed to serving Mexican SMEs. Thank you for listening. We will now like to begin our Q&A session.

[Operator]

[Operator Instructions] Our first question is from Nicolas Riva of Bank of America.

[Nicolas Riva, analyst]

So most of my questions are related to the write-offs, the MXN 460 million that you wrote off in the quarter. I wanted to ask you if you can give us some color about the monetization of the assets related to these leasing contracts. If you are already able to monetize on those assets in the second quarter or if you still have those assets in your balance sheet and expect to monetize in coming quarters?

Also, what's your policy for write-offs? I mean, when do you actually write off your loans? Is it when they are overdue at 180 days or do you have more flexibility when you choose to write off? And my final question on the write-offs is, I was looking at the loans under relief, the outstanding balance. And it looks like it declined MXN 270 million in the quarter, but the write-off of these loans was higher than that, MXN 460 million. So my question is, were those loans included in the relief programs or did the balance of the loans under relief declined only MXN 270 million because you provided new loans to those clients under relief? And then I have a separate question.

[David Sánchez, executive]

Nicolas, I hope everything is well. So as to some of your or all of your questions, but I'll try to remember, I'll try to remember them. Let me give you some context. The NPLs related to the write-offs were, like mentioned, mostly related to factoring and leasing accounts. In reality, what we're meaning with this is, they're mostly related with factoring typically by the company because in the case of leasing, we have the asset-backed security in a way or the collateral, in this case. So basically, the accounts related to factoring were wrote off at 100% of the NPL value at that point. In the case of leasing, what we have done so far is we wrote off the accounts related to that. And we are in the process, as mentioned, to perform the collection procedures and exercise the recoveries of the assets. These procedures are still pending at this point, and we are hopefully going to collect in the short term. That's the company's expectation. So that's yet to materialize in the numbers.

Typically speaking, like you know, the breakeven value in order to recognize an additional impairment is approximately 40% of the asset's realization. In this case, historical value has been 80%. And we believe that the recovery, the expected recovery that we're going to be doing from the related leasing accounts is definitely going to be close to historical values. The rationale behind writing off is because these accounts, and with this, I believe that I, if I understood correctly, I will also answer as to the relief programs. These were accounts receivable that they were originated some time ago, over 180 days in the case of leasing. And we proactively decided to basically do the write-offs per se for these particular accounts.

As to the policy, the policy basically for the company is to treat any financial service as the standard in the market. So basically writing off anything that would be over 180 days. In the context, though, of leasing, since we have the recovery value of the asset and additional collaterals, the procedures are a little different. First, you basically have to exhaust different collection processes in order for you to or in order for, in this case, the company to determine to either perform a write-off or first try to claim and repossess. That would be more or less the methodology. And sorry, I'll make a pause there and see if there's any other questions.

[Nicolas Riva, analyst]

No. David, very clear. So one question about the outstanding balance under relief. Is it then correct to say that, that balance, the MXN 3 billion right now, that balance just amortizes over time? You are not providing any, of course, you're not giving any relief to new clients, but also to the existing clients that you gave in the past the relief program for, you're just collecting from them, you're not providing new loans to them. So that balance, is that amortized over time?

[David Sánchez, executive]

That is correct. So basically, what's happening today is, so if you recall, the original outstanding balance for the relief program was approximately MXN 5.8 billion, then that declined importantly over the entire year. And then basically, we're reaching a MXN 3 billion portfolio now. This is because of natural accruals of the new calendarization of these contract or the resumed calendarization of the original contracts. And that's basically the explanation. It's not additional relief or additional extensions really. The clients are compliant in their payments. The ones that are not are reflected in the NPL. But just for the matter of transparency, we provided the specific NPL as to the clients that are subject to the relief program, which today accounts for 2.2% of the relief program portfolio or MXN 65 million. The metric for the previous quarter was, I think, 1.5% or something like this. So there was a very, very small increase in the NPL nominally speaking, basically MXN 15 million, but nothing that would worry us or anything at any point.

[Nicolas Riva, analyst]

Perfect. And then regarding the write-offs, then from what you said, I interpret most of that was related to factoring contracts. And in those cases, there is a write-off policy which is 180 days overdue. For leasing, it's a bit different given that you need to exhaust the collection process for the collateral or the assets?

[David Sánchez, executive]

That is exactly correct, Nicolas. And in the case of factoring, as you know, and we have been, I think, mentioning over past conversations. Well, last year, we took approximately 220 or 230. I cannot recall the exact amount of factoring accounts. So it's more natural for you to identify this in the factoring performance over time.

[Nicolas Riva, analyst]

Perfect. One last question. The change to the company's social object that you discussed in the shareholders' meeting, you said it's related to this outsourcing law. Can you explain to us how that change helps you as a company with that outsourcing law. What is changing really?

[David Sánchez, executive]

One second, please.

[Sergio Camacho Carmona, executive]

Nicolas, this is Sergio Camacho. What we did was basically comply with the law. Even though we have within our structure some entities, we have allocated all of our employees depending on the nature of their respective job description. What we are doing is like incorporating and changing the bylaws to fully comply with the law. And basically, what we did is we amend the bylaws of the legal entities of the group to limit their primary economic activities and business purpose of each legal entity. And that's basically the main purpose of changing those bylaws. As I said, despite this change, we're not going to have any economic impact because we have this policy to pay a bonus equivalent to the employee profit sharing every year. So for us, it's neutral in that regard.

[Operator]

Our next question is from Alexis Panton of Stifel.

[Alexis Panton;Analyst;Stifel, analyst]

I have a couple of questions. First is kind of a big-picture question. Obviously a lot of noise in the non-bank financial sector at the moment without going into names, specifically. To me, you have the opportunity now to differentiate yourself, put some liquidity onto your balance sheet, slow down origination, focus on collections. Your cash only went up 10% -- sorry, $10 million this quarter. You have a $1.4 billion short-term loan portfolio. You should be able to generate, therefore, I would think, more than $100 million on average per month.

So just slowing down would send a really good sign to the market, to the rating agencies, et cetera, yet you don't do that. Your borrowing in dollars is close to 10%. Seems to me that the best way to create value here is to slow down growth for a period, focus on liquidity and get the market to react positively. And obviously, just from a peso-dollar perspective, lowering your interest costs, lowering your borrowing costs would have a positive impact. So that's more of a statement. I was wondering if you could sort of address that. And then I'll get to my second question after that, if I may.

[Sergio Camacho Carmona, executive]

Alexis, I mean, you're absolutely correct in that analysis. The issue that we face here is that the maturity and the duration of local instruments for funding ourselves are not as long as we can find in the international markets. And we prefer, to some extent, to sacrifice, if I can use that word, this extra profitability for having a much, much more conservative gap between our liabilities and our portfolio. And that's the only reason why we do that because we found 8 years, 7 years of maturity in the international markets that we do not have here locally.

[Alexis Panton;Analyst;Stifel, analyst]

No, no, my question is different. I'm talking about risk perception. You have an opportunity, one would think, to slow down origination, put some cash onto your balance sheet, the markets might react, differentiate yourself from the rest of the sector, show that you have strong liquidity. You have $240 million. You have $3.5 billion of debt. Your tangible equity is pretty low. So it's a confidence game. Your raw material is other people's money. It seems to me that the priority should be focusing on the perception of risk. If you were to need to do a 10-year dollar bond right now, it would cost you, it would be extremely expensive. And therefore, to me, the priority should be in a way to the credit market rather than growth market.

But that aside, my second question is this, on the cash flow statement. Your loan book grew by about MXN 1.7 billion so far this year in the first 6 months. If I look at the cash flow statement, there's a near MXN 5 billion outflow. So there's a huge hole in the balance sheet implied by that. It looks like write-downs are close to over 10% of total loans when you do that math. The difference is something like MXN 3.2 billion for 6 months, I think like MXN 6.4 billion if you annualize that. So I was curious as to why there's such a big disparity between the balance sheet and the cash flow statement.

And then in addition to that, related to that, if I look at the bottom of the cash flow statement, this is the new thing over the last couple of quarters, and I don't understand this, you're adding back your interest income. The cash flow statement starts from the net income line, which obviously derives from interest income, yet at the bottom of your cash sheet, you're adding back the interest income, intereses recibidos. I don't understand that. So I was wondering if you could explain that, please.

[David Sánchez, executive]

Alexis, I mean, let me, I think, complement a little what you're or try to address a little your big-picture question, if I may. So the company's view has always been somewhat of a countercyclical type of approach in the market. We want to take advantage to a point to the fact that there's very few institutions in the market that are willing to basically attend or address the SME market in Mexico. We believe that we want to, in a way, we want to balance priorities between, of course, our creditors and our shareholders. And in that context, this is why we have, in a way, delevered or capitalized the business to a point where we see that there's much value to be created. But in a way, we're also looking for that growth opportunity.

And on the other context, of course, this gap, this liquidity has always been in favor of trying to be conservative in the way we manage our balance sheet and the overall risk associated with liquidity, among other things. So in our view, we believe that with the efforts that the company has been taking in terms of modifying even its culture and modifying the approach to the market and the tools that we're developing to create value will render higher profitability and over time have the expectation to delever the business because of this same expected profitability.

Of course, this is going to be a long-term cycle view. This is not short-term measures by any means. We want to avoid being, say, myopic about a quarter's earnings quarter-on-quarter because we definitely could be originating much more if that were the case, if we wanted to compromise margins more or if we wanted just to increase substantially the market exposure that UNIFIN has today. But we know that, that comes at a price. So we're trying to balance those effects out, and we're trying to basically focus on or try to balance out both the returns and the cash flows, uncertainty over time.

In relation to, sorry, in relation to your cash flow questions, I'm not sure I actually understood them correctly. And either, I mean, we can go over them again. Or if not, I can actually offer you a follow-up call. Sorry for that, but can you remind me of the question, please?

[Alexis Panton;Analyst;Stifel, analyst]

Yes, happy to. Although just to your first point, I mean, we're at peak credit here, right? I mean, cost of borrowing is lower than it's ever been. You're a high-yield company, and your raw material is other people's money. It seems to me that the priority should be reducing risk perception above anything else. And if you have the ability to do so then why are you not doing so.

But anyway, the question was, if I look at your cash flow statement for the first 6 months, you have a MXN 4.9 billion outflow towards the loan book. The loan book only grew MXN 1.7 billion. So there's a MXN 3.2 billion hole somewhere. And then in addition to that, at the bottom of the cash flow statement, there are a couple of new line items that didn't appear last year, where you have added back interest income to the cash flow statement. So it's a huge making up for that deficit, if you like, but I intuitively don't understand why interest income appears on the cash flow statement.

[David Sánchez, executive]

No. Yes. Okay. I do apologize for that. I don't have the analysis. I will follow up with you and with the rest of investors and come back with an appropriate answer for that.

[Operator]

Our next question is from Nik Dimitrov of Morgan Stanley.

[Nikolai Dimitrov;Analyst;Morgan Stanley, analyst]

Sergio, David, I have a couple of questions. So I was looking at your structured finance and other credit, in other words, structured finance and working capital. Now you provide the breakdown between the 2. But when I look at the NPLs in nominal terms on a sequential basis quarter-over-quarter, right, the NPLs in structured finance and other credit were MXN 90 million, and they tripled to almost MXN 300 million in the second quarter. Again, this is on a quarter-over-quarter basis. And then I look at your NPLs, your NPLs did decline, but that's because of the write-off. If I add back the write-offs, your NPLs are really 7.4%.

So I was wondering, when I look at cost of risk, cost of risk declined to 0.94 as per my calculations, significantly lower than in the previous quarters. And if I go back to the period prior to the pandemic, cost of risk was in the range of 50 basis points to 1.5%. So in other words, cost of risk has declined to a pre-pandemic level. I was wondering how you can reconcile the very low cost of risk, the fact that you are growing in a new business that is unsecured, will probably come with high NPLs and high charge-offs. And where do you see the cost of risk going forward considering the fact that the asset mix of the book is shifting gradually more in favor of that unsecured type of lending, which is structured finance and working capital?

[David Sánchez, executive]

Yes, well, of course, you have to consider or take into consideration that IFRS methodology weighs in payment behavior of the client. There has only been one recent quarter of change, like you basically mentioned between the deterioration of working capital loans vis-a-vis previous dynamics. So under that context, cost of risk is not implying at this point because of the overall analysis, a substantial deterioration on these accounts. Remember that in the first stages of past due, meaning 31 to 60 days and 61 to 90 almost, before reaching an NPL, there's a high rollover in these accounts. Meaning that they might be past due a few days, but eventually, they get back on track. So that's also something that the methodology definitely weighs in.

I would say that in addition to that, of course, the write-offs take an important part of the variation in cost of risk vis-a-vis previous levels. But still, I mean, over this quarter and having a stable NPL, in our view and consistent with the methodology, we still created an additional provision of MXN 155 million over the quarter, so basically just reflecting a stabilization on overall performance of the portfolio. There was a substantial exposure to factoring that in a way, of course, required cost of risk in the recent quarters to be higher than in normal levels. And then we also saw an improvement in structured finance and in auto loans portfolio quarter-on-quarter consecutively. So I mean, there's plenty of factors that you have to weigh in for this. It's not only the working capital loan that changes. But I mean, I hope I'm clear with that.

[Nikolai Dimitrov;Analyst;Morgan Stanley, analyst]

Yes. No, I mean, it does make some sense. Let me ask you something different. When you look at the yield that this new business generates, right, working capital, structured finance, and you risk adjusted for the losses you expect to be taking. How does it compare to your core leasing business? What I'm trying to figure out here, is it more profitable or risk adjusted, it provides you the same profitability or it's lower? Hopefully, that's not the case.

[Sergio Camacho Carmona, executive]

This is Sergio Camacho. On the working capital facilities and particularly our digital platform, Uniclick, it's, I would say, along with the insurance business is our most profitable business. The structured finance, it's a different thing because a significant portion of that is going to convert into leasing. So we decided to create this business line to basically acquire these clients that had an asset that it's in process of being built and we start like funding for the cash payments for the building of the asset. And once that the asset is built, it will transform into a normal leasing. So it is also a very profitable business, but it's more on a strategic part to get more clients.

[Nikolai Dimitrov;Analyst;Morgan Stanley, analyst]

Okay. So you kind of subsidize a little bit structured finance in order to be able to convert it into leasing. And then working capital is working capital, that one should be more lucrative. That's kind of the art.

[Sergio Camacho Carmona, executive]

Absolutely. Yes. And that's it. And you can see, for example, that on the rates that we put on Uniclick. The average rate on that business is 35%.

[Operator]

Our next question is from Rodrigo Sanhueza of PineBridge Investments.

[Unknown]

So I have a follow-up question actually on Nicolas' questions on the repossessed assets. So part of your business is, of course, that you own the assets, right? So what Nicolas was asking was, I think, how long should we expect those assets, and with those assets, meaning the roughly MXN 2.5 billion leasing NPL, MXN 1.7 billion in noncurrent assets held for sale to be monetized? How will that process develop?

[David Sánchez, executive]

That is typically, I mean, it depends on the asset. In general context, for instance, when it comes to transportation equipment or accounts that are related to that type of equipment, the process of recovery is fairly, I would say, expedite, meaning up to 180 days, in some cases, even faster. When it comes to other type of assets, more sophisticated type of assets or other type of equipment, machinery, et cetera, it can take a little longer. We have seen historically that more or less those claims or those recoveries could take up to a year in a way. And that's more or less the process that we're undergoing today. Up to a year would be more or less the maximum time we take to repossess.

[Unknown]

So that would be the expectations for the MXN 2.5 billion in leasing, plus the MXN 1.7 billion in noncurrent assets held for sale, right?

[David Sánchez, executive]

Well, in the case of the noncurrent assets held for sale, that's not necessarily the case because those are not accounts receivable anymore. That's basically the repossessed assets that we are either keeping in inventory or are claimed assets basically from additional collaterals, meaning not necessarily the original leased asset that we gave to the client.

[Unknown]

Perfect. Yes. No, that makes sense. I have second question actually. It's regarding your concentration of clients. So again, without mentioning the other non-bank financial company, so I was wondering if you could provide any measure of the dispersion, for example, maybe how much your top 10 clients represent in your loan book. I understand also that you do cross-sells of products, right? So maybe a client with a structured finance product could be also a client of working capital loans. So I'm thinking on how has that number changed during the pandemic?

[David Sánchez, executive]

Yes. So more or less, what we have had historically, and this is a trend that has relatively maintained over time is that top 20 exposures represent approximately 17% or 18% of the total loan book. But below from that, there's a vast diversification. In fact, we were just mentioning a metric in the call before. But on the way that, I mean, if you analyze the average ticket per client, considering all products and services, we're basically speaking about MXN 7 million average ticket, which would be roughly $350,000 per client. So we have a segmentation in our portfolio which is related to the amount of sales that our clients have.

For instance, basically 5% of the loan book, this is calculated by number of clients, not by the outstanding value. 5% of the clients have sales in an amount above MXN 500 million, okay? Then from MXN 200 million to MXN 500 million, we have approximately 7% of our total client base. Then from MXN 100 million to MXN 200 million, we have 10% of the total clients. And then 78% are clients that have revenues in or below MXN 100 million, hence, explaining the vast diversification that I'm saying about the approximately MXN 7 million exposure per client, in average.

[Unknown]

Okay. Understood. Not sure if you can maybe share the top 10 clients, I think it's a bit of, I know that your size is maybe smaller than mainstream banks, right? So I guess it would be higher than mainstream banks but top 10 number.

[David Sánchez, executive]

I said top 20 represents 17%. I'm not sure about the top 10. I'll do the calculation and I'll follow-up.

[Operator]

Our next question is from Natalia Corfield with JPMorgan.

[Natalia De Melo Corfield, analyst]

I will actually go back a little bit to asset quality again. I'm looking at your early delinquency indicator. And what I mean, in this case, I'm looking at 31 to 60, 61 to 90 days. And I see a deterioration. If I calculate the ratio, it gets me to 14.7% versus something around 13% in the first quarter. And most of this is in the leasing portfolio. So I'm kind of wondering if you could give us some color on what exactly is this? If this is going to continue? And why this is happening in the leasing portfolio? And also, in terms of NIM, there was an improvement in the quarter. But we just had this surprise rate hike in Mexico. And I think high rates is not favorable for your business. So I'm wondering how do you think this is going to impact your margins for the rest of the year and next year as well. And if I have time, I'll ask a third question.

[Sergio Camacho Carmona, executive]

Natalia, answering the second question first, we are expecting 3 more increases in the next 6 months. I mean, based on what we are seeing on inflation pressures that we are seeing here in Mexico and also in the U.S., this is an inflation pressure that came from the supply, not from the demand, so it's going to be tougher to control that in some extent. As I said, we are expecting 3 more increases for the rest of the year. However, as you can see on our results and in our presentation, most of our funding costs are fixed rate. So we are not going to see any negative impact on that. What may happen is that we are going to have more room based on the competition because if they have more pressure, they're going to need to raise their interest rates to their customers, we're going to have more room to increase our own. And if not, I mean, we're going to be capable on, sorry, on offer a better product offering to the clients.

[David Sánchez, executive]

Sorry, as to the first question, Natalia, so in terms of aging balances, what's typically happening in the context of the first, like I said, first stages of the portfolio is clients, in a way, are at a point still levering up a little their cash flows. We believe that. And this has been, in a way, this doesn't mark a tendency. Quarter-over-quarter, yes, we saw a slight deterioration between the aging balances, specifically for leasing vis-a-vis the first quarter of the year. But if you analyze the previous, exactly the previous quarter 2, there was a slight recovery and so on. So yes, it's trailing upwards a little and it has been over the course of the last year, 1.5 years. We believe it's mostly contained. And like we said, we are hoping for turnover to continue happening specifically in this product line.

The reason also why we believe the aging balances are increasing in this particular segment is because it's the largest segment of the portfolio, of course. And in a way, when it comes to structured finance and working capital, which are more recent, we have been able to reassess the way we view risk and the exposures. This has been, of course, also done into leasing. But that's more or less the effect that we're seeing that perhaps previous years in originations, and that's also why we decided to take the write-off of accounts that were basically past due over time, over an extended period of time were showing, let's say, the vintage was showing a worse performance than recent vintages. That's more or less, I would say, the explanation. And just to clarify on the top, sorry, 10 exposures, trying to follow up, top 10 exposures represent 11% of the total loan book.

[Natalia De Melo Corfield, analyst]

Thank you, Dave. So on the leasing, so are you saying that we are still going to see volatility in the next quarters on that?

[David Sánchez, executive]

No. I mean, volatility, meaning that there might be a turnover, yes. But we don't expect that these accounts that are today, the 12% that are currently, for instance, past due between 31 to 60 days, we don't anticipate that those will reach an NPL of over 90 days.

[Natalia De Melo Corfield, analyst]

Okay. And then just going back to the first question on NIM. Yes, most of your funding is fixed, but you have the revolving credit lines that are variable. But the conclusion at the end is you expect some pressure because you're going to see some of your peers that might compete in price. Is that the conclusion?

[Sergio Camacho Carmona, executive]

The conclusion is that we are, if that occurs, we are going to have, I will say, a competitive advantage related to our competition because we can hold a little bit more, even though we have these revolving facilities, we can hold a little bit more on maintaining our own rates to the clients and with no pressure to have a need to increase them. So if we are competing for a new client, let's say, with another competitor that has that pressure, we're going to be in a better position for acquiring that as a new client for us.

[Operator]

Our next question is from Justin Ziegler of Eaton Vance.

[Justin Ziegler;Analyst;Eaton Vance, analyst]

Just a couple of clarifying things. First of all, you talked about how structured financing usually or typically converts to a lease. So could you just kind of clarify the structure within these kind of deals and how it plays out over time? And then just a couple of other quick things on NPLs and collections is, just understanding in terms of with working capital and structured, what are the vintage of the current NPLs in those books? Are they pretty new? Are they older? How aged are those beyond 90 days? And then lastly, in terms of recording write-offs like you did this quarter, what's the time to collection after you recorded the write-off? So when do you recognize that 80% on that asset after you've accounted for it?

[David Sánchez, executive]

Yes. So the vintages for structured finance that we have, I mean, we have seen an entire cycle or a couple of cycles in this segment or in this business line. We started doing structured finance basically in 2018. So we have a history behind that product. And it has behaved relatively well. When it comes to working capital loans, we also have an important amount of data tracking down to what would be working capital related to the cross-default product that we have for leasing products and factoring which is, let's say, the largest and most traditional exposures that we have had. This accounts for an important part of the working capital loan book in addition to, of course, the bridge facilities that formalize into leasing. And history has shown good vintages and good performance overall in these segments, in these business lines.

The one that would be more recent, to make a fair assessment out of it, is definitely Uniclick, which was launched late 2019 in reality, but then put a halt in originations by March last year, by April last year because of the overall situation and the pandemic. And we're now basically picking up on originations again. Today, we have a less 2% NPL in the book.

[Sergio Camacho Carmona, executive]

The vintage from this, from Uniclick on our digital platform from the originations that were carried out this year is less than 0.5%. So it's showing that our credit scorecard that we apply on the digital platform are playing well. At the top of the pandemic within the Uniclick platform, the NPLs rise to 8% somehow. We also managed to have a, it was a very small amount, of course, but we also manage a COVID plan for these clients. And the way that these clients have behaved after getting back into business has been very, very, very good. We are around 98% of collections on those.

[Justin Ziegler;Analyst;Eaton Vance, analyst]

So just to clarify, so it seems like the vintages are, that we thought tails back to when you started, 2018 for structured finance and Uniclick early 2020. And the behavior seems to be good. So just so I understand, like in terms of structured financing, you're really kind of talking about bridging clients to the lease or other particular needs and kind of catch-all in some ways of unsecured lending to your client. Would that be appropriate to say?

[David Sánchez, executive]

No. I mean, yes, in terms of, partly, not necessarily. It's not necessarily unsecured lending. Yes, these are bridge facilities to convert into leasing. The rationale behind this business is basically the fact that in some cases, specialized equipment or assets are either in the process of being imported to Mexico or even manufactured in a way. And in some cases, the manufacturing process or the import process into Mexico can take, I don't know, up to a year. So the bridge facilities are basically a means to facilitate the acquisition of that specific type of asset or machinery to the client without having basically to put a significant amount of their cash requirements on CapEx that will only run their cash flow in an extended period of time. So that's more or less.

But the way we structure these type of bridge facilities is basically, and this is part of the reason why the structured finance team in UNIFIN is the one behind all the analysis among this is establish sort of like a project finance type of a deal. There's trusts related to the waterfall of payments and there's definitely a project behind all of the procedures. So in terms of manufacturing of an asset that is in a manufacturing process, there's stages of disbursements and so on that match along the process to the end customer. That would be more or less what we can say about the structured finance business, the bridge facilities business.

[Justin Ziegler;Analyst;Eaton Vance, analyst]

Okay. That clarifies it. And lastly, just on the time to collection from when you record a write-off to when you're collecting that.

[David Sánchez, executive]

I mean, like we said, it's variable. When it comes to leasing, it's between 180 and up to a year. In the context of factoring, I would say, up to a year again for those specific accounts, that's more or less what we do. For auto loans, it's more expedited again. Transportation equipment is easier. And there's, I would say, more aligned incentives into basically giving back the car than going into a civil issue or a mercantile issue. So yes, that's more or less the timing.

[Operator]

Our next question is from Gilberto Garcia of Barclays.

[Gilberto Garcia, analyst]

I had a question on provisions for working capital segment. From your presentation, there seems to be a bit high early delinquencies. You mentioned that, that's the sort of thing that happens. People fall behind but eventually catch up, but your reserves only covered the 90-day plus NPLs. So how comfortable are you with your level of reserve for this segment?

[David Sánchez, executive]

I mean, in line with IFRS, what's required for the methodology and the criteria, I mean, we're confident that the reserves are sufficient for this portfolio and the others. And in line with other accounts receivable, similar to factoring, I mean, if you compare factoring from previous quarters, there was also some delinquency, pre-stage delinquency and the reserves were sufficient at a point and so on. So we believe that we're covered on that front.

[Operator]

We have reached the end of the question-and-answer session. I will now turn the call back over to management for closing remarks.

[Sergio Camacho Carmona, executive]

Well, thank you very much for being here with us in the second quarter results call. Once again, David's team is going to be available for any further or following questions. Thank you very much.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.