Unifin Financiera SAB de CV

BMV:UNIFINA

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, and welcome to UNIFIN's Third Quarter 2018 Conference Call [Operator Instructions] It is now my pleasure to turn today's call over to Sean Glickenhaus of i-advize Corporate Communications. Sean, you may begin.

[Sean Glickenhaus, executive]

Thank you, David. Good morning, everyone. I'm very pleased to welcome you to UNIFIN Financiera's Earnings Call. This morning, UNIFIN's new CEO will discuss the company's third quarter 2018 consolidated results for the press release distributed yesterday. If you have not yet received a copy of the earnings release, please contact the Investor Relations team at UNIFIN or i-advize in New York at [phone] to obtain a copy immediately.

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 now very pleased to have with us today, from UNIFIN, Mr. Sergio Camacho, Chief Executive Officer; Mr. Sergio Cancino, Chief Financial Officer; and Mr. David Pernas, Director of IR and Corporate Finance. Thank you for your attention.

And at this time, I would like to turn the call over to Mr. Sergio Camacho for his presentation. Please go ahead, Sergio.

[Sergio Camacho Carmona, executive]

Thank you very much. Good morning, everyone. Thank you for joining us today. Let me begin with today's discussion by addressing some of the recent change in our management structure. I will then discuss the business trends and tendencies that we are seeing as well as review the financial and operating metrics of the business for the quarter, and then provide an update on our share buyback program.

As you have seen in recent announcements, the company has entered a new phase in its life. As part of the succession process, the Board of Directors approved my appointment as UNIFIN new CEO, a challenge I am more than happy and very excited to take on.

Additionally, Sergio Cancino, who previously occupied the position of Corporate Controller, took over the CFO position, so that we can work together to reach the various objectives we have for the company. We've got also former CEO now assumes a new position as President of the Executive Committee, where he will focus, along with our Chairman of the Board and Founder, Rodrigo Lebois, on continuing a strategic plan development for UNIFIN. We expect that this change will not only enhance the corporate structure and drive institutionalization, these changes will also further generate value for our bond and shareholders.

As the new CEO, I have a clear mandate, to improve profitability of the business. In order to reach this goal, my mission is to lead and implement a strategic initiative that will enable us to more efficiently address the Mexican financial market by increasing our profit base and improving customer relationships. For this purpose, throughout 2018, we have built a strong business and innovation team that has begun to shape our business model into a client-centric platform.

This will allow us to satisfy the increased amounts of our clients. We have also invested in IT infrastructure, the implementation of a new portfolio management system and an enhanced CRM platform. And finally, we have begun the process of converting our promoters into advisers to be more a business partner than a sales promoter to the clients, so that we may offer them the financial advice they need in order to give their business the boost and support they need.

Regarding our business trends for the quarter, by the end of the quarter, we perceive a more dynamic period in terms of economic activity. The outcome of the Mexican election was positively perceived by local entrepreneurs, our target market, as they sense greater likelihood of a trade agreement with the U.S. and Canada being bridged. This translated into a quicker decision making process, and consequently, a pickup in the company operating metrics.

In the near future, we expect less volatility in the overall business trends now that the terms of the new agreement, the USMCA, have been announced and sentiment towards the agreement is considered positive. However, we need to wait and see market expectations once the new president takes office on December 1 and also see what is the outcome of the new airport consultation that will define perception by investors towards Mexico.

Our goal going forward is to sustain growth at a healthy pace without sacrificing the quality and financial health of our operations, but focusing more on the profitability of the business and investing intelligently to ensure long-term progress for the company.

Now let's take a look at the important change that took place in the third quarter, including some of the new metrics we are providing. Total revenues increased 34% for the first time to reach almost MXN 5 billion, of which 91% were related to the leasing business, an increase of 29% year-over-year. This growth was due to the company capabilities of repricing new originations, the recovery in the conversion process of our clients and the pickup in revenues from past originations carried out by the end of the previous quarter.

As I mentioned earlier, one of the main focus is improving the profitability of the company. For this purpose, we're including 2 new metrics in the financials that will allow the market to track our progress in achieving profitability: leasing yield and net interest margins or NIM. The leasing yield is calculated by dividing the last 12 months of the lease income by the average lease portfolio, while the NIM is a division of the last 12 months of financial margin and the average total portfolio.

The leasing yield in the third quarter ended at 37.4%. Over the past quarters, the deal has experienced a contraction, mainly explained by the extension of the average maturity of our leasing portfolio from 35 months in 2015 to 40 by the end of the quarter. By extending the maturity period, the rent amount to be received is divided into a higher number of payments, which seemed less profitable. Hence, the foreign contraction.

However, the company is expecting the yield to improve going forward over the next few quarters, starting with the third quarter 2018 when compared to the second quarter of this year when the deal reached 37.1%. It is important to consider that despite the repricing efforts in our new originations with a larger nominal base, the margins are less profitable vis-à-vis our cost of funding, even though the gap remains constant.

To give you more details on our second metric, the NIM, let's move to the financial margin results would reach MXN 1 billion, a 14% increase year-over-year. Financial margin as a percentage of total revenues improved versus the second quarter, however, a decline to 20.2% when compared to the third quarter of last year. The duration of the margin versus year ago was due to the decline of our leasing yield and higher interest expenses, which rose 46.6% during the third quarter. Only MXN 149 million of this higher expense were caused by increasing the cost of funding, whereas MXN 1.1 billion of this increase were related to the incremental debt.

If you recall, in the second quarter we considerably drew up existing credit facilities in anticipation of any potential credit crunch related to uncertainty of the Mexican election and then after negotiations. Although we already prepaid the credit line wherefore for this purpose, we still experienced some impact in the third quarter. As a result of the current cost of funding, the NIM contracted 60 basis points year-over-year ending at 8.1%. However, similar to the leasing yield, we are expecting a recovery in the margin going forward.

OpEx for the quarter was MXN 291 million. Recall that in the third quarter of 2017, expenses were partially offset by a nonrecurring reduction of MXN 63 million or MXN 44 million net income of tax. Therefore, using the adjusted 3 quarter OpEx as a base, OpEx as a percentage of revenues improved by 90 basis points year-over-year in the third quarter of 2018 due to a more efficient operation -- operating structure. As a result, operating income for the quarter reached MXN 660 million, a 12% increase compared to the MXN 589 million of recurring operating income in the third quarter of 2017.

Consolidated net income for the quarter reached MXN 545 million during the quarter, a 2.8% increase versus our recorded net income for the third quarter of last year. The company past due loans reached MXN 466 million, of which 2/3 were from the operating lease portfolio and the rest was related to the factoring and auto loans business.

The NPL ratio rose slightly quarter-over-quarter to 0.95% at the close of the third quarter from 0.84% at the end of the second quarter of this year. Another new metric we're using, the adjusted NPL ratio, considers the full amount of lease receivables. This figure improved to 2.7% versus 3.3% at the end of the second quarter of this year and from 3.2% at the end of the third quarter of last year.

The allowance for loan losses coverage for the company's NPLs was 107%. If you recall, last quarter, we announced the decision to further strengthen best practices and more closely adhere to relations of the Mexican Banking and Securities Commission, CNBV, by modifying the methodology for provisioning expected losses. This increased our allowance for NPL. It is important to highlight that UNIFIN maintains ownership of the assets clients lease, and both, book and recovery value are not considered implicitly in the allowance coverage.

As of September 30, total assets increased 25% mainly due to the growth of the total portfolio and net fixed assets during the quarter. When compared to the second quarter of this year, cash and total assets declined because the company ended up prepaying credit facilities throughout the third quarter of 2018.

Consequently, financial liabilities also decreased. The current cost of funding is 9.9% versus 9.6% at the close of the third quarter of last year. Notwithstanding that the reference rate increased by 75 basis points versus 6 basis points increase in our cost of funding, providing the importance of the conservative measures of the company to shield the balance sheet. UNIFIN average debt maturity profile is to that 53 months, vis-à-vis 38 months of the portfolio, and all of our U.S. dollar-denominated debt is fully hedged to maturity.

The stockholders' equity stood at MXN 2.1 billion in the third quarter, a 113% increase versus the third quarter of last year, explained by the capital infusion related to the perpetual notes which are classified and treated as equity. In addition to retained earnings, excluding the mark-to-market, UNIFIN capitalization ratio was 19.3%, up from 17.3% reported in the second quarter. A solid metric that we expect will allow the company to sustain growth going forward and improve its capital structure. We are confident that these results are both the first step toward achieving our primary goal of improving our profitability. And combined with the strategic plan we share at the beginning of the call, we will be able to further capitalize on our leadership in the Mexican financial market.

Now let me talk a little bit about financing. To achieve our strategic plan, we expect to require about $1 billion in financing for next year and to cover partial refinancing of current debt as well as working capital needs. Knowing how important it is to have an efficient capital structure and attractive funding, we will seek the best market alternatives and look to continue diversifying our funding sources.

At this point, I will also like to highlight that we have been focusing on identifying the most efficient capital allocation. Following this analysis, we made a decision to significantly increase our share repurchase activity. Therefore, during the quarter, we bought back almost 8 million shares. We aim to improve the liquidity of the stock. But most importantly, we believe that the stock price gets the best upside. Going forward, we will continue this activity as needed, as we believe that this is an effective way of returning value to our investors. Considering the number of shares outstanding, our trailing 12-month earnings per share is MXN 5.46 versus MXN 4.46 at the third quarter of last year, and the NOI EPS stands at MXN 6.23.

And with that, I will bring my remarks to a close. And we'll now take questions. Operator, we're ready for the Q&A.

[Operator]

[Operator Instructions] And we'll take our first question from Alonso Garcia with Crédit Suisse.

[Alonso Garcia, analyst]

My question is on the margin side, trying to get a bit more clue on the outlook for the coming quarters and in 2019. As we did see a rebound, but not able to fully revert the decline in the second quarter, despite a likely pickup in down payment due to higher originations on the leasing portfolio. And also, if you could provide more detail on the interest expense side which increased by 12% in the quarter despite a decline of 10% in financial liabilities.

[Sergio Manuel Rodriguez, executive]

Alonso, related to the NIM, well, as you know, we're in the -- I would say turning point in which the company will start materializing going forward the potential of a NIM recovery, of a yield recovery in the leasing portfolio. You have to take into consideration that there was a -- as previously said throughout the call, there was a slowdown in the originations overall in the year. And the pickup started happening -- the pickup in the originations started happening towards the end of this third -- past third quarter. The reason why because, I mean, there was still a lot of noise related to the economic outlook, NAFTA, and additionally, people were coming back from summer holidays. So in reality, most of the conversion in our pipeline happened towards the end of the quarter. We're yet to see part of the lag on, let's say, on revenue accrual happening towards the end of the -- or towards the beginning of the fourth quarter, and we do continue expecting that the trends over new originations and conversion progress will get better as the time goes by. So that will definitely contribute a little bit more with that. Also, we're not expecting our demands on the type of the clients to keep it, let's say, increasing the tenure of the leasing contracts. So with this consideration, we're also not expecting a duration from this point going forward. And lastly, to talk about the interest expense, as you say -- as we said throughout the speech, basically, we have around 4 to -- roughly 4 months of definitely higher interest expense related to the pickup in the -- or the withdrawal from current facilities. We started paying those facilities, I would say, a few weeks after the results of the election or once we saw that the result of the election was showing that everyone -- everything was going to be stable. And so that's when we took a decision to start prepaying, but that significantly did impact the interest expense. Now that we have prepaid that, going forward, the expectation is for interest expense to normalize, and hence, the stability on the NIM should be happening going forward.

[Alonso Garcia, analyst]

Do you have a -- I think, last quarter, you mentioned 120 bps negative impact on the margin side from the liquidity. Do you have a sense on what was the impact in the margin this quarter?

[Sergio Manuel Rodriguez, executive]

For the -- yes, for the -- let's say, 9 months of 2018, the impact overall on the increase in the cost of funding was around only 6 basis points or MXN 150 million, okay. Whereas, the rest of the increase, around MXN 1.1 billion, was coming in the amount of the excess withdrawals that we took up on the credit facilities.

[Alonso Garcia, analyst]

And finally, do you have a sense on the margin performance either leasing yield or NIM considering, I mean, adjusted for the down payments which, of course, are -- can result in a more volatile behavior of the NIM due to the higher or lower originations per quarter?

[Sergio Manuel Rodriguez, executive]

Not an opportunity per se. No, not at this point, sorry.

[Operator]

And we'll take our next question from Carlos Rivera with Barclays.

[Carlos Rivera Zermeno, analyst]

Congratulations on the new appointments. My first question is regarding the refinancing needs. I just wanted to get a little more color about what are the implications of that in terms of issuing or retiring instruments. Is the purpose of this to reduce the bank debt? How should we think that MXN 1 billion financing needs for next year that you mentioned are going to be met? That will be my first question. And I'll have the second one after.

[Sergio Camacho Carmona, executive]

Carlos, yes, I mean, we are providing that number to provide some color for next year. As you're aware, we are highly sensitive to the cost of funding since it's our source of growth. On a regular year, our funding, it's basically 40% comes from market securitization, 40% from international notes and 20% of banking facilities. We have this flexibility to move through the year on -- depending either market conditions or the cost of funding on each different instruments. At this point, we know how much we need to raise in order to pay some of the maturities that we have next year and also for funding of our expected growth. However, I cannot provide you with any color of how it's going to be, the breakdown, because as I said, it's going to depend on what will be the best and more efficient way of funding the company for next year.

[Carlos Rivera Zermeno, analyst]

Okay. But just to have a broad sense, do you have any particular targets? I mean, banks loans are the most expensive one and securitizations are the cheaper one. You would like to have some diversified mix, of course, to improve your rating. How should we think about these, long term, that you want to achieve in an environment that rates are going higher but you want to achieve some savings from your financing costs?

[Sergio Camacho Carmona, executive]

Yes. Sure. I mean, for sure, we're going to be accessing the local markets in the near future. We have been in local markets in -- through this year just because of the volatility that we have seen in the local markets. As we seek -- however, for sure, we're going to be accessing, again, the market securitization market. And also, I -- we're analyzing for issuing some international notes in the second or in the third quarter of next year.

[Carlos Rivera Zermeno, analyst]

Okay. That's very helpful. And my second question is more regarding to the implications of -- to expenses from your strategy of shifting more towards an advisory role. Is there any higher run cost that we should expect going forward? I mean, UNIFIN has been able to achieve a lot of operating leverage and grow revenue significantly higher than expenses. Is there a new OpEx that we should expect recurring as a result of this advisory strategy?

[Sergio Camacho Carmona, executive]

No, not necessarily. Some of the investments that I mentioned in the call have been carried out in the first 9 months of the year. So in the event that we will need to invest a little further, it will be marginal.

[Operator]

And we'll take our next question from Jason Mollin with Scotiabank.

[Jason Mollin, analyst]

I wanted to see if you can provide an update on the growth prospects for the core leasing business, talk about pipeline and where you see it, conversion and where you think that can go from here? We've seen growth in the portfolio slow down in the third quarter for reasons that you've been discussing. If you can talk about the demand for your leasing product and what are the dynamics in the market that's driving the slowdown?

[Sergio Camacho Carmona, executive]

Well, the dynamic that grows that -- the slowdown have already been discussed. I mean, if we analyze the full year in Mexico, we experienced 2 major issues. One with the Mexican presidential election and the other with the uncertainty about NAFTA. As I said, I mean, the election has already been defined with Andrés Manuel López Obrador being now the president -- the elected president, and he's going to be taking office on December 1. However, there are still some signs out there in the environment that post a little bit of uncertainty regarding how this government is going to behave. We are positive that if AMLO and Morena, let's say, fulfill the expectation on growth and supporting the middle class, it's going to be very beneficial for the company since it's our target. Those -- the SME sector, as you know, it's our main target, so that will be a very good news and very positive for the company. However, for example, being now discussing and taking into consultation the newer proposal. A lot of uncertainty for some of the larger investments that the company is expecting to receive and that, of course, provides with some uncertainty. So getting to this point on how do we see the fourth quarter, we see it a strong quarter. As I said, the main focus of, let's say, this new administration is going to be focusing on profitability. And that, of course, put some more restraint on growth. But we believe that with all these initiatives that we're going to be putting in place on the commercial side are going to be more than enough to offset, let's say, these incremental requirements on the credit analysis and on the profitability side. So we expect a strong quarter, and that's the only thing that I can give you.

[Jason Mollin, analyst]

What about the pipeline now? What about can you give us a comment on where you see the pipeline now and how you see conversion of that pipeline going forward, maybe not for the fourth quarter but just in a longer-term perspective.

[Sergio Camacho Carmona, executive]

In a longer-term perspective, we continue to see a very strong backlog. The numbers that we have disclosed in the past are around MXN 50 billion to MXN 60 billion, and those continue to be there. The conversion rate on that should continue being on a 45% to 50%, as we have done in the past. And the challenge right now is to increase that conversion rate in the long term.

[Jason Mollin, analyst]

Can you give us a sense of how has that pipeline -- has it remained stable? Because I think the last number you talked about with us was around MXN 60 billion, but I don't think we've heard -- MXN 50 billion, I don't think we've heard an update on that. Is it increasing? Is it decreasing? We can't calculate the conversion if we don't have that pipeline of backlog?

[Sergio Camacho Carmona, executive]

Yes. But if I give you that pipeline, I will implicitly give you guidance for the year.

[Jason Mollin, analyst]

Okay. Okay. Any -- but is it increasing, decreasing, any kind of color you can provide will be helpful.

[Sergio Camacho Carmona, executive]

I think I will say that it is stable, but we are targeting on a better way, let me put it that way.

[Operator]

We'll take our next question from John Haugh with Morgan Stanley.

[John Haugh, analyst]

My question has been asked already.

[Operator]

We'll take our next question from Chelsea Colón with Aegon.

[Chelsea Colón, analyst]

I was just looking for a little more color on the financial need for next year. It seems, if I'm looking at this correctly, your short-term debt is only about MXN 200 million so -- and the incremental MXN 800 million then for growth is pretty significant. I'm wondering if that's coming from something else more than just portfolio growth, like are you investing in additional IT or something, to that effect, to improve efficiency? If you could just provide a little more color around the financial need, that would be helpful.

[Sergio Manuel Rodriguez, executive]

Sure, Chelsea. No, I mean -- I guess, to a point, you're right on the maturities that we're seeing in the financial liabilities. The thing is that a few of our securitizations in the local markets are not due in the immediate short term, but the amortizing period of these structures is starting to happen. So it means that we are out of the revolver period in which we can take the excess cash from those securitizations. So in reality, what we're facing now with this is basically a negative carry on the proceeds that are being collected month-to-month on these securitizations. Ideally, what we're looking for is to refinance these securitizations in the local markets with new securitizations and with either public or private here in Mexico. And the rest of the financing that we'll require for 2019 will come in the means of either issuing internationally or basically secure some lending from banks and additional considerations. I don't know if this answers your question.

[Chelsea Colón, analyst]

Okay. So is there any way you can quantify the amount of securitizations that have this negative carry versus how much of the funding need is related to portfolio growth?

[Sergio Manuel Rodriguez, executive]

I would say that 45% of the net we're looking to raise for next year, around 45% is refinanced. And again, those securitizations can amortize individually. It's not that UNIFIN needs to put cash in it, but we'd rather extend the revolving period through issuing a new securitization and basically take out the portfolio, put it in the new trust and then start benefiting again from the cash withdrawal, from the securitization, as a cash flow measure.

[Chelsea Colón, analyst]

Sorry, you said 45% of that is related to securitization?

[Sergio Manuel Rodriguez, executive]

Yes.

[Chelsea Colón, analyst]

Okay. Got it. And then just one other question. I'm wondering what is the reason for the extension in terms of the lease portfolio? Is that a request from clients? Is that a result of the new customers you're seeing...

[Sergio Manuel Rodriguez, executive]

It's driven by the demand of our clients, mostly because it makes a lot more sense for clients to lease on a long-term basis when they're leasing assets that the useful life is significantly larger than the ones in the lease contract, so it's better to match basically the depreciation with the life of the asset per se. So if they're using a production line or an asset that has an extended maturity, it makes more sense to have -- on a cash flow perspective, it makes more sense to have a lower, let's say, payment on a monthly basis and match it properly with the depreciation of the asset.

[Chelsea Colón, analyst]

Just one last question, if I may, kind of related to that. What do you see in terms of the competitive environment, especially from the larger banks? Like I know Santander was interested in expanding in leasing, for instance. Are you seeing any change in the competitive dynamics that might impact your ability to pass through the higher funding costs to your lease rates?

[Sergio Camacho Carmona, executive]

No, no. We are expecting or anticipating any major shift on that. However, as I said during the call, we are anticipating to some, let's say, increased competition out there. And that's why we are making all these initiatives in our sales force to be more efficient, more strong and more customer driven.

[Operator]

We'll take our next question from Carlos Flores with Santander.

[Carlos Batista Flores, analyst]

Just a follow-up question on the expansion of the maturity of the leasing loans. Could you please give some color of what percentage of lease loans are being restructured? I mean, how much of the current portfolio have you given the option to extend the duration of the already given leases?

[Sergio Camacho Carmona, executive]

No, no, no. The duration of the lease is settled on the -- when it's the -- when we signed the contract, it's not that we are refinancing or restructuring the lease to a larger maturity. The demand that we -- most of the demand that we receive right now has to do with 48 months for the lease, and that's the reason why they -- we make the comparison vis-à-vis 2015 in which we were working more on a 36-month leases.

[Carlos Batista Flores, analyst]

Okay. So this extended duration is for new loans, right?

[Sergio Camacho Carmona, executive]

That's correct. That's correct.

[Operator]

We'll take our next question from Gilberto Garcia with Barclays.

[Gilberto Garcia, analyst]

So talking a little bit about the -- what the incoming administration has said and understanding, obviously, that there is still quite a bit of uncertainty, but they have talked about boosting the participation of smaller companies in infrastructure projects. Is that something that you believe will be -- could be a driver for you? And if so, would that require you potentially to increase your footprint, particularly in the south of Mexico?

[Sergio Camacho Carmona, executive]

Yes. Thank you for the question. Yes, we are considering that. And of that, I mean, we are strengthening, for example, our Cancún and Medida offices, and we're going to be very, very close to the market needs. And yes, if that happens, I mean, if that materialize, we're going to be there for supporting that growth, that investment in infrastructure. And if we are on the need to open an additional offices there, we -- for sure, we can do that. In that sense, one of the characteristics of UNIFIN is that we are very fast to make decisions and very fast to respond to whatever the market needs.

[Operator]

[Operator Instructions] We'll take our next question from Scott Thomas with Wasatch Advisors.

[Scott Thomas, analyst]

Specifically on the leasing yield, I mean, 2 of the main headwinds in maturity extension seems to have run its course and then the origination is improving as well, so we no longer have these headwinds. Can you give us a sense -- and I know you're loath to provide any forward guidance, but just a sense as to the magnitude of improvement. Just how to think about it over the next year or 2. Anything that could help would be great.

[Sergio Camacho Carmona, executive]

Yes. We're going to be working very hard to achieve that. And what I can tell you is that we are setting ourselves a target for, I would say, the next 12 months perhaps to increase or to improve that on 100 to 150 bps.

[Operator]

We'll take our next question from Natalia Corfield with JPMorgan.

[Natalia De Melo Corfield, analyst]

I have like 2 questions. I think very simple one on collections. If you could provide how much you have collected year-to-date and also you have -- your expectations for 2019? And my other question is on your share buybacks, and apologies because I don't know -- I don't have all the details on it. But you said that you have been having these maturities from the securitization that you have to meet and you placed a perpetual note this year in order to boost your capitalization. So I'm wondering what's the rationale behind this share buyback right now? Those are my 2 questions.

[Sergio Camacho Carmona, executive]

Yes. The rationale on the share buyback is that we did a capital allocation analysis and we decided it was the best way to allocate some of the capital. Of course, when you see the numbers that we show on how many shares we bought and the amount related to that, it's not significant in the sense of deteriorating the capital structure. The other thing is that the company perceives that the current valuation of the talk is low, so we're going to be there for supporting the top price and also buying shares because we consider that to be a very good investment. Going forward, it will depend on the market condition of how the stock is trading and, of course, the outlook that we may have for the growth of the company. The first question was related to the collection? Is this -- I am right or -- what was the question, sorry?

[Natalia De Melo Corfield, analyst]

Yes. How much you have collected? If you don't have the entire number, you can provide for leasing, that would be very helpful.

[Sergio Manuel Rodriguez, executive]

But -- can you, I guess, clarify a little bit what you mean, Natalia, please, in terms of collections. I mean, do you mean accruals of the portfolio or...

[Natalia De Melo Corfield, analyst]

Yes. How much did you get from your portfolio this year? And how much do you expect to get next year?

[Sergio Manuel Rodriguez, executive]

So again, I would say, to understand properly, you mean accruals, how much of the portfolio has become throughout the year? Or do you mean new originations?

[Natalia De Melo Corfield, analyst]

No. Like how much was your cash flow from your leasing portfolio this year? How much do you collect?

[Sergio Manuel Rodriguez, executive]

So the cash flow of the leasing portfolio is around MXN 1 billion -- MXN 1.1 billion on a monthly basis.

[Natalia De Melo Corfield, analyst]

And this should be a number that we can consider a number that's like, for 2019, you probably will continue to have MXN 1.1 billion per month?

[Sergio Camacho Carmona, executive]

Higher.

[Sergio Manuel Rodriguez, executive]

It should increase as we have more portfolio originations. But at least, MXN 1.1 billion, yes. Going forward, at least MXN 1.1 billion, yes.

[Operator]

We'll take our next question from Jonathan Szwarc with Debtwire.

[Jonathan Szwarc, analyst]

Thank you very much for providing the adjusted NPL. I mean, it's something that's very helpful. Can you share how much it was for 4Q '17 and 1Q '18? And then I have another question.

[Sergio Manuel Rodriguez, executive]

Jonathan, I don't -- let me look for the number. If I don't have it with me right now, I will share with you -- okay, I have it for the full year of 2017. It's in the press release, and it was 3.3%. And then historically, basically, for 2016, it was 3.3%. It doesn't shift that much. I would say it generally stands at 3%, 3.5%, but I'll follow-up with the number directly.

[Jonathan Szwarc, analyst]

It's mundane, don't worry. And the second question is do you have -- I mean, even if you have the asset, we know that this is not the real loss. The loss is lower than this 2.7%. Do you have an estimate of how much this assets cover the expected losses, historical average or something.

[Sergio Camacho Carmona, executive]

Let me put it that way. If we were on a stress analysis and all of our NPLs, let's say, materialize and we will need to sell the assets, the breakeven for that will be 50% for the commercial value.

[Operator]

We'll take our next question with Justin Ziegler from Eaton Vance Management.

[Justin Ziegler, analyst]

Just sort of following up on next year's funding considerations. As you think about it and as you think about whether it's happening local or international markets, how are you considering like the target leverage for this kind of business going forward? Because you see the equity growing, and it's nice to see, sort of, debt to equities have come down, but as you think you're growing the business through unsecured funding or secured funding, like where do you want to be, is it going to be 3x debt to equity or 5x debt to equity? And then on top of that, as you think about the mix of funding, do you want to be more secured funding, like I think I saw 60% secured right now versus unsecured. Where do you want to go in terms of that metric?

[Sergio Manuel Rodriguez, executive]

The mix should continue to grow at similarly posted before. In terms of leverage, we're targeting to virtually maintain the same amount of leverage that you see or the same metric of leverage that you see today, somewhere along the line of 3 to 3.5x at the most. In terms of the secured versus unsecured, like we said earlier, the idea is to -- on an optimal basis, the idea is to use 40% of secured funding then 40% of international or unsecured, and then 20% of banking facilities which, in the end, most end up being additional secured funding as you -- the rollover to, first, you use them as warehouse and then once you issue, you prepay the banking facility, and it's a cycle. So going forward, the expectation is to remain within the same in all considerations. On a quarterly basis, you pickup some partial offset because of how market conditions are or because you're issuing a securitization or a particular transaction. But on a 12-month basis or an annualized basis, you maintain the same basically funding structure going forward.

[Justin Ziegler, analyst]

Okay. And kind of following up on that, as you think about why you're approaching the international markets, is it because you're up against capacity considerations in the local markets? Or is it purely the interest rate arbitrage or...

[Sergio Manuel Rodriguez, executive]

No. In reality, it's more because we're looking to have an extended tenure on the liabilities which is hard to get in the local markets. So partially, it's because of that. We're also -- when we approach the market, we're very keen on analyzing potential arbitrage between the cost of funding and the swapping curves and so on. So at this point, it has worked for the company and we will try to do the best going forward in this terms also.

[Justin Ziegler, analyst]

And one last question, going back to what Natalia asked about earlier in terms of collections and really in terms of how you recognize that cash flow from lease payments. What kind of protections or controls do you have in terms of getting that cash into your coffers from your lessees and how does that sort of dynamic work?

[Sergio Camacho Carmona, executive]

I mean, many of -- most of our customers, we have what we say the mitigation of the -- on the accounts. So we charge them on a monthly basis, the rent and for their checking accounts. And let's say that's the way that we operate, there is no like protection on that, and that's why we have a very robust collection department. For those who delayed 1 or 2 days on their payment, we start calling them and asking what's going on or whatever, but that's the way that we operate.

[Justin Ziegler, analyst]

And start calling them with some sort of type of like a lien on the customer, right? Like you had recourse to their assets, like legally?

[Sergio Manuel Rodriguez, executive]

Hold on one second. Okay. Sorry, Justin. Can you repeat -- we're just trying to figure out again your question properly.

[Justin Ziegler, analyst]

It really is quite simple. I think if I recall, when we spoke once, there was some legal mechanism where there is some lien against the...

[Sergio Manuel Rodriguez, executive]

You mean about the legal deposit, right?

[Justin Ziegler, analyst]

Right, right. Correct.

[Sergio Manuel Rodriguez, executive]

Yes, yes. So the legal deposits are a figure, yes. It's at -- I would say, it's a personal guarantee you get from either the owner or the major holder of the company and so on, who signs on a personal basis in a figure similar to what would be a custodian of the asset. So they become liable or responsible of having to return the assets if they, let's say, do not comply with their contractual obligations. And in this case, we can go to a public notary and notify them and eventually to a judge and ask for the asset back. And if not, it becomes a criminal offense.

[Justin Ziegler, analyst]

Okay. And that process usually takes how long? Just out of curiosity.

[Sergio Manuel Rodriguez, executive]

I mean, it's variable. Because, for instance, for transportation equipment and for cars and vehicles and so on, it might be fairly expedited. For other processes, it can take a little bit longer. But I would say, overall, around 3, 6 months in some cases, and then in the most complex we've taken a year at the most.

[Operator]

[Operator Instructions] We'll take our next question from Michel Gálvez with GBM.

[Michel Gálvez Bautista, analyst]

Could you please give us some color on the capitalization, sorry, for the future? You have -- now you have plenty of space of traditions of subordinated notes, but could you tell us what happened with the negotiations with third parties or what are you expecting for the future?

[Sergio Camacho Carmona, executive]

Yes. What we're expecting, at least on the upcoming 2 to 3 years, is that we're not going to need any capital injection. The current level of capitalization, as we said, is close to 20%. But if we see on the downside, the covenants that we had on that number are that the capitalization ratio not be less than 10%, so we still have a lot of room to continue growing without jeopardizing the strength, the capital structure of the company. And that's what I'm very confident to say that in the next 2 to 3 years, we're not going to need any capital injection. And negotiation with third parties are -- there are none, as we speak, so we are okay the way that we're operating right now.

[Michel Gálvez Bautista, analyst]

And what about rating agencies? Like rating agencies consider only 50% of the subordinated note of capital -- of equity. Some investors, we do the same. So like what's like the driver for them?

[Sergio Camacho Carmona, executive]

Yes. On that number, the capitalization ratio is 16.5% on the rating agencies methodology. And of course, we also track that number because we are -- actually, we're pushing to have an improvement of our ratings, so we are very close to that ratio. And if needed, we are going to do whatever we need to do to improve that.

[Operator]

We'll take our next question from Guillermo Diego with Santander.

[Guillermo Diego Delgadillo, analyst]

Nice to know the uncertainty is decreasing. The run rate for the end of the quarter is accelerating and maybe the positive view on the fourth quarter. Also, thank you for the data that, on a stress basis, I think you could liquidate, at 50% of the portfolio and breakeven. I was just wondering if you could tell us maybe what percentage of the portfolio is guaranteed by additional guarantees beside the assets?

[Sergio Camacho Carmona, executive]

I will estimate from, likely, I will say for 40% to 50% of the portfolio has additional guarantees.

[Operator]

And next we'll take a follow-up question from Chelsea Colón with Aegon.

[Chelsea Colón, analyst]

Just a question on the NPL ratio. I know that it remains fairly low based on the way that you calculate it, but it has been slowly trending upwards. So I'm just wondering where you expect that to peak and where the inflection point may be, I guess, and just what you're seeing there?

[Sergio Camacho Carmona, executive]

Chelsea, yes, that's -- for sure, you can count on that we are providing or we're tracking that number on a daily basis. We have a strengthening our collections department to improve that. However, sometimes it's the market condition, but our target is to be below 1%. So that -- the number, even though it has increased a little bit, continues to be within our internal metrics on performance. But of course, we are -- we're working very hard to reduce that.

[Chelsea Colón, analyst]

What do you attribute the recent performance to? Is it mostly the uncertainty or are there certain sectors that have given you more trouble than others?

[Sergio Camacho Carmona, executive]

It has also, for example, a seasonality effect. In the summer, a lot of the decision-making guys that, basically, are the guys who signed some of the banking accounts or these types of things. I mean, we need to put on perspective who -- our customers are not at the office and that sometimes delays the payment. Also, you need to consider that we start recording NPLs after 30 days of not receiving that payment. And that also is a very straight measure when compared to the traditional bank that starts to consider data after 90 days of nonpayment. So that also has a seasonality effect.

[Chelsea Colón, analyst]

So even the new metric that you're providing, is that based on 30 days as well or is that 90 days?

[Sergio Camacho Carmona, executive]

No. The new metric is on 90 days to make that comparable to the rest of the banks and financial institutions.

[Sergio Manuel Rodriguez, executive]

But Chelsea, just also as a means of giving some color on the industry, if you look at the whole financial sector in Mexico, the adjusted NPL or the method of this -- current methodology, the average for the industry would be over 5%. So it's still on a sweet spot on a conservative analysis when it comes to its NPLs.

[Operator]

[Operator Instructions] And we'll take another follow-up from Michel Gálvez with GBM.

[Michel Gálvez Bautista, analyst]

Sorry, just a follow-up on the NPL ratio. I'm looking at the third quarter press release and you are reporting now an NPL-adjusted level in a graph of 2.7%. How are you calculating that level? What is it considering?

[Sergio Manuel Rodriguez, executive]

It's basically the full outstanding amount of the accruals that have been done also of the total loan portfolio in addition to the principal of the remainder of the leasing contract. So basically, it's exactly the same as any other bank would do.

[Sergio Camacho Carmona, executive]

And not consider the...

[Michel Gálvez Bautista, analyst]

So that's the one that we usually ask you, right?

[Sergio Manuel Rodriguez, executive]

That's the one -- yes. That's the one you usually ask. And again, just to be more clear, Michel, this metric does not consider either recovery value or book value of the asset, which is also very important to take into consideration.

[Operator]

And we'll take our next question, another follow-up, from Scott Thomas with Wasatch Advisors.

[Scott Thomas, analyst]

Just a quick follow-up on that. I mean, if you were to say -- if you take your leasing portfolio, given the structure of contracts, I've heard you say the number in the past, but your loss given default or the amount you've ever written off is something like MXN 10 million, is that right? I mean, given where your coverage is at and just the bilateral nature of these contracts and the fact that you own the assets, I assume the amount written off is almost de minimis.

[Sergio Camacho Carmona, executive]

Yes. You're correct, Scott. That's the amount that we have had over the last 3 to 5 years, roughly. And that, of course, it's a consequence of how robust our operations in terms of the guarantees and everything that we put on them. And most of the cases, we're able to collect 100% of the lease.

[Operator]

Our next question comes from another follow-up from Guillermo Diego with Santander.

[Guillermo Diego Delgadillo, analyst]

Maybe just wondering why do you have such a strict guide on the NPL that you mentioned close to 1% if you are a leasing company and you are -- you have the collateral of the value of the asset and on 40% of the portfolio you have additional guarantees, why such a strict NPL and why the focus on NPL at all?

[Sergio Camacho Carmona, executive]

Because -- thank you, again, for the question, because that's part of our mojo, of our philosophy of doing business. We have been so successful and being very, very efficient in our operations because we are -- we put a lot of strict internal controls to continue operating at this very sound financial health.

[Operator]

And there are no further questions on the line at this time. I'll return the call to our speakers.

[Sergio Camacho Carmona, executive]

Well, thank you very much for joining us today. As we said, we're going to be focusing on profitability going forward and of course, our growth. Thank you very much. And if you have any further questions, you have David's team at your disposition. Thank you.

[Operator]

This does conclude today's program. Thank you for your participation, and you may disconnect at any time.