Financiera Independencia S.A.B. de C.V. SOFOM E.N.R. (FINDEP) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Financiera Independencia's 2024 Third Quarter Results Conference Call. My name is Lamila, and I will be your operator for today's call. [Operator Instructions] As a reminder, this video conference is being recorded. Joining us today from Financiera Independencia is Mr. Eduardo Messmacher, Chief Executive Officer; and Mr. Jose Maria Cid, Chief Financial Officer. I would now like to turn the call over to Mr. Jose Maria Cid. Mr. Cid, you may begin.

Good morning. Thank you for joining FINDEP's third quarter results 2024 conference call. We published these results yesterday, which are available on our Investor Relations website, findep.mx. I would like to remind you that the information shared during this conference call may include forward-looking statements and, as such, are subject to assumptions, uncertainties, risks and other factors that could cause actual results to differ materially from those described, including risks that may be beyond the company's control. Now I will turn the call over to Eduardo Messmacher.

Thank you, Jose Maria. Good morning, everyone. I will start with some highlights from our third quarter '24 operations. Reported net profit for the quarter reached MXN 198 million, another quarter of strong results, 21% higher year-on-year and the highest third quarter in the company's history. The top line is strong with interest income up 6% from prior year and operating expenses well controlled. Costs as a percentage of average portfolio improved to 31%, and the quarter ending portfolio balance increased 7% versus the prior year and 2% under constant FX. Liquidity is strong with cash at MXN 821 million and net debt decreasing 11% year-on-year. Additionally, 2 weeks ago, the company announced that it expanded its credit line with Nacional Financiera development banking institution from MXN 750 million to MXN 1.05 billion and also increased the credit line to Apoyo Economico Familiar from MXN 500 million to MXN 800 million. This increase in lines reflects the productivity and strength of the company's strategy as well as the confidence of the company's lenders, despite market challenges. Our equity-to-asset ratio increased to 52% at the quarter and 7.1 percentage points above the same time last year. Our portfolio base in Mexico grew approximately 5% year-on-year and our U.S. portfolio declined 2% year-on-year in dollar terms. In the third quarter '24, loan origination was MXN 1.3 billion, an increase of 11% compared with the last year or an increase of 6% under constant FX. Compared to the prior quarter, total loan originations decreased 3%, with originations in Mexico decreasing 3% and those in the U.S. decreasing 11% in dollar terms. The change in each of the portfolio origination activities in the quarter reflects our responsiveness to prevailing market and macroeconomic conditions. The consolidated NPL ratio measured as Stage 3 loan portfolio over the total portfolio was 5.8% in the third quarter of '24 versus 5.7% in the prior quarter and improving 70 basis points against the prior year. FINDEP's write-offs amounted to MXN 349 million in the quarter, increasing 10% from the prior quarter, but declining 9% from the prior year. Compared to the average portfolio, trailing 12 months write-offs decreased from 20% to 18% year-on-year. NPLs plus trailing 12 month write-offs of the total loan portfolio, including trailing 12-month write-offs was 20% compared with 22% in the prior year. Now I would like to share some performance highlights from each of our businesses during the quarter. Independencia represents 35% of the total portfolio, and its portfolio grew 3% year-on-year with net interest income also increasing 3%. Apoyo Economico Familiar represents 27% of the total portfolio and experienced a growth of 7% year-on-year, with net interest income growing 5% versus the prior year. Apoyo Financiero represents 38% of the total portfolio, increasing 10% year-on-year in pesos, down 2% in dollars. Net interest income increased 3% in dollars versus the prior year. We are pleased with this quarter's strong results, underpinned by consistent execution of our strategy. Our strong and consistent operational efficiency continues to be led by our focus on digital transformation priorities across processes and work streams. This focus continues to drive both the quality of the service we can provide to our customers and our results. I will now hand over the discussion to Jose Maria, who will provide additional details of our results.

Thank you, Eduardo. In third quarter '24, interest income was MXN 1.3 billion, an increase of 6% year-over-year with a 7% increase in the loan portfolio or 2% under constant FX. Interest expense of MXN 152 million increased 8% year-over-year, supporting portfolio growth as we continue to proactively manage outstanding indebtedness. Net interest income of MXN 1.12 billion increased 6% year-over-year. The provision for loan losses, or PLL, was MXN 389 million in third quarter '24, 16% higher compared to the prior quarter and 9% higher versus the prior year. PLL to average loans was 19%, an improvement of 180 basis points from the prior quarter and 80 basis points from the prior year. Noninterest expenses were MXN 633 million in third quarter '24, 2% down from the prior quarter and 31% as a percentage of average portfolio, reflecting continued discipline and controlling managing the expense base. Interest-bearing liabilities are down 20% year-over-year or 23% under constant FX compared to a 7% increase in the loan portfolio or 2% under constant FX. Compared to prior quarter, interest-bearing liabilities have decreased 3% or 6% under constant FX. The company maintains a strong financial position with cash and cash equivalents at MXN 821 million or 7% of total assets and a solvency ratio equity to total assets of 52%, improving 7.1 percentage points from the prior year and 1 percentage point higher than the prior quarter. Net debt measured as interest-bearing liabilities minus cash and cash equivalents of MXN 3 billion at the end of the quarter was down MXN 383 million or 11% from the prior year, a 16% decline under a constant FX rate, reflecting prudent portfolio and debt management. On a sequential basis, net debt decreased MXN 111 million. Our operating cash flow during third quarter '24 was MXN 711 million. The company's coverage ratio was 229%, measured as allowances for loan losses over Stage 3 loans, flat to prior quarter and 204% in the prior year. The company's return on equity ratio for the quarter was 13.7%, increasing 70 basis points from the prior year, and our return on assets ratio was 7.1%, increasing 110 basis points from the prior year. When considering tangible equity for the quarter, it marginally increased to 17.6% versus 17% in the prior year. Overall, the company again delivered strong and consistent results in the quarter and prudently managed changes in the portfolio. Operator, we'd like to open the call for questions at this time.

[Operator Instructions] Our first question comes from Nicolas Riva.

It's Nicolas Riva from Bank of America. I have a few questions. The first one, if you can comment on your 2028 bond, which has a step-up in the coupon to 12% in early 2026. I believe you can call this one at par any time now, and it's trading around par. So if you can discuss your expectations for liability management on this one, again, given that it has the step-up in the coupon. And if you would consider a new issue in the dollar market, again, given that the '28 are trading at par now. That's my first question. Second question, if you can discuss your expectations for loan growth and asset quality in Mexico and the U.S. in 2025. And then the third question, I'm just passing along a question from an investor actually here. If you can give us an update on the refinancing of the credit line with HSBC Mexico, which I believe matures November this year for about MXN 1 billion. If you can discuss an update on the refinancing of that line.

So first, regarding the FINDEP '28, we do not have currently any plans for liability management. They do have the step-up, but we still have time to consider actions from here until that point. And regarding initiatives in international market, we would be delighted to be reenter the international market. Yet, I think there are still things happening with other MBFIs in Mexico, and we'll have to wait until those are resolved and there is more appetite for MBFIs in Mexico. Regarding growth expectations, I guess, we're currently into very uncertain period in Mexico and in the U.S. We have a new government in Mexico. And there is, especially, regionally, some changes in the level of investments that, particularly in the Southeast of Mexico, is receiving. So we are kind of in a cautious pause in terms of growth, understanding what's going to be new policies, how that's going to affect our segment. And obviously, the U.S., there's the elections, and we are also in kind of cautious pause at the moment. We do see very positive trends in the U.S. economy. Yet, the positive trends are a decrease in inflation, but some of the prices in some of the basic groups have remained high, and that in itself affects our segment. And in terms of the maturity, Chairman, do you want to comment?

Yes, yes. Sure. The line with HSBC was signed in November '23 for MXN 1.4 billion and is coming due on November '26. It was a 3-year line -- or is a 3-year line. And basically, we have a date -- we speak daily with the bank. So it's not the moment to renew that line yet. We have a very good relationship with them, and I haven't seen any problems renewing that in the future.

One follow-up, for Eduardo, on his comments regarding expectations for the U.S. and Mexican business. Any actual -- any guidance you can provide in terms of actual loan growth you would expect for both geographies or even direction in terms of asset quality for next year?

I think we have been saying this. As Eduardo said, we see some signals of recovery in the U.S. market. I think we can see the low single digits for the portfolio for the U.S. in the near future.

High single digits would be what we expect.

[Operator Instructions] We have not received any further questions at this time, so I will send the call over to Mr. Cid for some closing remarks.

Thank you. Thank you very much for your time and interest on Financiera Independencia. As you know, my contact information is available on our website at findep.mx if you have any further questions. Have a great day.

That concludes today's call. You may now disconnect.