Fideicomiso Irrevocable F/2061 FHipo (FHIPO14) Earnings Call Transcript & Summary

Good morning. Thank you all for joining us today. Welcome to FHipo First Quarter 2020 Earnings Conference Call. FHipo released its earnings report on Thursday, April 30, after market close. If you did not receive a copy of the report, please contact FHipo directly. Today's call is being recorded. [Operator Instructions] We are joined by Daniel Braatz, Chief Executive Officer; Jesús Gómez, Chief Operating Officer; and Ignacio Gutiérrez, Chief Financial Officer. For opening remarks and introductions, I would like to turn the call over to Daniel Braatz. Daniel, please go ahead.

Good morning, everyone. And thank you for joining us today. First, I'd like to say that I hope all of our participants today and their loved ones are fine and healthy during these times. It's been difficult for many people as the contingency continues to create global economic hardships and affect the health of many persons. So it's important now more than ever for companies, individuals and governments around the world to take this pandemic seriously and adhere to practices recommended and encouraged by leading health organizations. On that note, I will begin talking about FHipo's first quarter of 2020 results. I would like to start with FHipo's performance and achievement during this quarter and then our response to the COVID-19 crisis to maintain our operations. We are pleased to announce the successful culmination of the internalization process of our Advisor and Manager, which we expect will optimize FHipo's return on equity and to continue adding value to our investors. To complete this process, FHipo executed a full payment to the selling holders who, in exchange, capitalized FHipo with a corresponding payment through the subscription of 50 million FHipo CBFIs. In order to take advantage of current market opportunities; minimize our exposure to interest rate risk; reinforce our value generation strategy for our investors and therefore, achieve a more stable return on equity during the upcoming quarters, FHipo Technical Committee approved a financial derivative policy. This policy keeps the objective that derivative financial transactions are exclusively for hedging and that FHipo will seek to maintain a stable level of debt exposure and floating rates of between 25% and 35% of the total debt on balance. Following the financial derivatives policy and taking advantage of the market conditions during the first Q '20, we did a partial amortization of MXN 1.2 billion of an interest rate SWAP and executed a restrike to the remaining balance, capturing a significant lower reference rate. Even though these adjustments represent an important expense in our P&L for the quarter, we believe it will allow us to take advantage of lower interest rates and capture additional value while stabilizing strategic financial margin in the coming quarters. The first quarter of 2020 brought on an unexpected level of economic uncertainty and volatility. In Mexico, the Central Bank, in response to the current situation, lowered interest rates to our current level of 6%, with more cuts to be expected in the future. Commercial banks in Mexico followed and -- by announcing flexible loan programs and policies to assist small and medium enterprises and individuals in early April. As expected, rating agencies have started to [ wave ] corporate and sovereign downgrades. Standard & Poor's and Fitch gave Mexico a credit rating of BBB, while Moody's issued a negative outlook. Oil price shocks played a role in these downgrades and also led to a spike in foreign exchange against the U.S. dollar, which is currently around MXN 24.5 per dollar in the case of Mexico. In response to the COVID-19 pandemic, since March 17, 2020, in FHipo, we implemented a home office policy that has not impacted the company's operations. We maintained close communication with our mortgage portfolio managers in order to analyze measures that could benefit borrowers and protect the portfolio's collection. Despite the ongoing crisis, FHipo's financial strength is backed by a strong cash position and unlimited corp leverage and adequate exposure to floating rates as well. In addition, there is no currency mismatch between assets and liabilities, which mitigate our risk to volatile exchange rates, as we have seen before. As part of our effort to support borrowers who are facing operations stoppages, and their employers, suffering a reduction or cutting salary or losing their jobs, we have adhered to Infonavit support measures, which were approved by its Board of Directors. These measures launched in April 15 and expected to be in place through June 2020. This includes the use of the Fondo Universal de Pérdida de Empleo or Universal Job Loss Fund, supporting borrowers by protecting and covering their loan payments for up to 6 months of the required mortgage payment with a 0% copayment. In addition, for those borrowers that are not eligible for this fund that works as an insurance, Infonavit will also execute the implementation of a payment tolerance to give borrowers a deferment of capital and interest payments for up to 3 months, which will not accrue interest and maintain a frozen balance without triggering any NPL. The aforementioned measures could be extended for 3 additional months. As for the benefits for borrowers who are facing operational stoppages at their employers, there will be a discount to the loans' monthly payment for a determined amount of time. Going forward, we will continue to remain cautious in response to the current crisis and protect our shareholders as well as our operations and portfolio quality through the continued implementation of risk mitigation measures. I'm convinced that our strategy and current positioning will place us to come out of this pandemic strong and ready for more positive growth. For the coming slides regarding our portfolio composition, I will hand over the call to our COO, Jesús Gómez. Jesús, please go ahead.

Thank you, Daniel, and good morning, everyone. I would like to continue the call with Slide 7 and discuss the breakdown of our mortgage portfolio for the first quarter of 2020. FHipo's consolidated portfolio reached 21.9 -- MXN 29.1 billion, amounting to a total of 102,000 loans, a decrease of 7% compared to the first quarter of 2019, mainly due to the natural amortization of the portfolio and the sale of rights on a -- of a portfolio during the fourth quarter of 2019. These loans come from our partnerships with multiple origination programs such as Infonavit Total, Infonavit Más Crédito, Fovissste and Smart Lending's collection rights. The average loan-to-value stood at 77.6%. The payment-to-income ratio for the quarter remained stable at 24%. And as for the first quarter of 2020, 97.19% of our portfolio remains current, thus having an NPL ratio of 2.8%. Moving on to Slide 8, we can see how FHipo's portfolio continues to remain diversified geographically across all 32 Mexican states. Regarding our partnerships and origination programs, our portfolio is divided in the following way: First, Infonavit Total VSM, with minimum wage indexed loans, represents 20% of the total portfolio. Infonavit Total peso products represent 20.5%. Infonavit Más Crédito represents almost half of our portfolio at 48.4%, the most of any other program and our current origination program going on. The Fovissste portfolio amounts to 9.4% of the total portfolio, while the Smart Lending portfolio represents 1.1%. In peso terms, the total portfolio of MXN 29.1 billion is broken down as follows: MXN 11.9 billion belongs to Infonavit Total, MXN 14.1 billion to the Infonavit Más Crédito program, MXN 2.7 billion to Fovissste and MXN 329 million to Smart Lending. I would like to reiterate that we will continue to monitor closely the effects of this pandemic -- the effects that this pandemic may have on our portfolio. We'll explore all different scenarios we projected of protecting the performance of the portfolio while supporting in the best possible way our growth. With that, I will now hand over the call to our CFO, Ignacio Gutiérrez, to discuss the financials for the quarter.

Thank you, Jesús, and again, good morning, everyone. I would like to continue the presentation by going through our diversified sources of funding on Slide 11. As you can see, FHipo maintains a conservative leverage strategy through multiple sources of funding, including securitizations, long-term covered bonds, short-term unsecured bonds and warehousing facilities. As of the end of the first quarter, our consolidated debt-to-equity ratio stood stable at 2.2x, and our on-balance debt-to-equity ratio decreased to 1.6x. Looking at Slide 13. I will go through the asset quality of our portfolio loans and our expected loss coverage. FHipo's NPL portfolio in consolidated terms continued to demonstrate a stable behavior. Nevertheless, we maintain adequate levels of allowance for loan losses with our expected loss coverage ratio of 1.79x and our NPL coverage ratio at 0.9x. As Jesús already mentioned, our NPL ratio represents 2.81% of FHipo's consolidated portfolio, an increase of 113 basis points compared to the same period of previous year. We believe that our strategy to remain diversified among several origination programs and geographies could be a driver in supporting the portfolio quality and performance during these unprecedented times helping limit extended losses. Moving on to Slide 16. I will go through the financial results and key metrics -- through the main financial results and key metrics for the quarter. Total interest income from mortgage loans amounted to MXN 645 million, an increase of 2.7% compared to the same quarter of last year. This increase was in part driven by our current origination of mortgage loans at a higher interest rate of 11.9% during the previous quarters. Interest from investing also increased to MXN 34 million compared to MXN 31 million over the first quarter of 2019, reflecting the interest of a slightly higher cash and equivalent balance. The interest expense for the quarter was MXN 637 million, a MXN 230 million increase from last year. This increase, as Daniel mentioned, includes the expenses related to the amortization and restriking made to the interest rate coverage SWAP. The allowance for loan losses, which reflects the performance and status of the portfolio, had a positive effect for the quarter of MXN 190 million. The valuation of receivable benefits from securitization transactions, mainly reflecting the net income of our position in off-balance transactions resulted in MXN 56 million, and the operating expenses for the quarter, which include management and servicing fees, decreased to MXN 85.9 million from MXN 124 million registered in the same quarter of last year. This decrease in operating expenses comes mainly from the savings in management fees as a result of the internalization process. The net result, which was adjusted by excluding the nonrecurring expenses that you can see there of MXN 456 million related to the culmination of the internalization process and -- was adjusted, and therefore, the normalized net income for the quarter resulted in MXN 201.7 million, just below the MXN 211.5 million reported during the first quarter of 2019. With this, and considering the outstanding CBFIs as of the date of this report, the normalized net income per CBFI or normalized earnings per share for the quarter were $0.484. This concludes the financial results, and I will now pass the call back to our CEO, Daniel Braatz, for closing remarks and before the Q&A session.

Thank you, Ignacio. As I mentioned before, I think it is crucial going forward that companies and individuals facing the COVID-19 pandemic adhere to health practices in order to cut short the [ contagion ] base. We're constantly analyzing the situation to better adapt our business model and decision-making with these real-time events. And I want to also mention that the measures taken by Infonavit to protect borrowers should help ease the financial obligation that individuals and the small and medium enterprises face for the upcoming months. This will also put into safeguard our portfolio quality and performance. So with these final remarks, we would like to finish our presentation and start the Q&A session.

[Operator Instructions] There are no questions at this time.

Thank you, moderator. If there's no any questions at this time, we would like to end the conference call. So I will thank you all for joining us today. Please don't hesitate to reach out to us if you have any more questions or concerns. We appreciate your interest in FHipo and look forward to speaking with you soon.

Thank you. This does conclude today's call. You may now disconnect.