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 Fourth Quarter Results Conference Call. My name is Andrea, and I will be your operator for today's call. [Operator Instructions] FINDEP released its earnings report on Thursday, February 20, after the market closed. If you did not receive the report, please contact FINDEP's IR department directly, and they will e-mail it to you. Please note that this call is for investors and analysts only. Questions from the media will not be taken nor should the call be reported on. 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 Fourth Quarter Results 2024 Conference Call. We published these results yesterday, which are available on our Investors 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. We are pleased with this quarter's strong results, driven by the consistent execution of our strategy. We remain focused on our investment in technology to fuel our growth. Over the year, we have continued to successfully implement agile technological development that translates into tangible business impact. Our platform supports continuous testing and learning with our fully amortized investment in a scalable and flexible platform, we have navigated the complexities of system implementation, setting the stage for future business benefits as we unlock the platform's full potential. Furthermore, our advancements in technological transformation continue to unlock further efficiencies significantly supporting our results. Let me now provide some performance highlights for our fourth quarter '24 operations. Reported net profit for the quarter reached MXN 234 million, another quarter of strong results, 9% higher year-on-year and the highest quarter in the company's history. The top line is strong with interest income up 5% from prior year and operating expense is well controlled. Costs as a percentage of average portfolio improved to 30%, with the average portfolio increasing 9% versus the prior year and 1% under constant FX. Liquidity is strong with cash at MXN 1.1 billion, with net debt decreasing 7% year-on-year. Our equity-to-asset ratio improved to 54% at quarter end, 3.3 percentage points above the same time last year. Our portfolio based in Mexico grew approximately 4% year-on-year, and our U.S. portfolio was flat year-on-year in dollar terms. In the fourth quarter of '24, loan origination was MXN 1.2 billion, an increase of 5% compared with last year, but a decrease of 3% under constant FX. Compared to the prior quarter, total loan originations decreased 8% with originations in Mexico, decreasing 16% and those in the U.S. decreasing 6% in dollar terms. The change in each of the portfolio's origination activities in the quarter continue to reflect our responsiveness to prevailing market and macroeconomic conditions. The consolidated NPL ratio measured as Stage 3 loan portfolio of the total portfolio was 5.9% in the fourth quarter of 24% versus 5.8% in the prior quarter and improving 40 basis points against the prior year. FINDEP's write-offs amounted to MXN 394 million in the quarter, increasing 13% from the prior quarter and declining 0.5% from the prior year. Compared to the average portfolio, trailing 12 months write-offs were 18%, improving from 20% in the prior year. NPLs plus trailing 12 months write-offs of the total loan portfolio, including trailing 12-month write-offs, was 20% compared with [ 23% ] in the prior year. Now I would like to share some performance highlights from each of our subsidiaries during the quarter. Independencia represents 33% of the total portfolio and its portfolio grew 2% year-on-year with net interest income also increasing 5%. Apoyo Economico Familiar represents 26% of the total portfolio and experienced a growth of 6% year-on-year with net interest income growing 6% versus the prior year. Apoyo Financiero represents 40% of the total portfolio, increasing 23% year-on-year in pesos, marginally down 0.1% in dollar terms. Net interest income increased 3% in dollars versus the prior year. Our focus on the company's technological transformation continues to enhance both the quality of service we provide to our customers and the results we have achieved. We are thrilled to have delivered another solid quarter and a year of strong performance remaining committed to the execution of our strategy. I'll now hand over the discussion to Jose Maria, who will provide additional details of our results.

Thank you, Eduardo. In fourth quarter '24, interest income was MXN 1.3 billion, an increase of 5% year-over-year with an 11% increase in the loan portfolio or 2% under constant FX. Interest expense of MXN 154 million decreased 8% year-over-year, reflecting the continued and proactive management of debt and maturities. Net interest income of MXN 1.12 billion increased 7% year-over-year. The provision for loan losses or PLL was MXN 364 million in the fourth quarter 7% lower compared to the prior quarter and 5% lower versus the prior year. PLL to average loans was at 17%, an improvement of 180 basis points from the prior quarter and 250 basis points from the prior year. Noninterest expenses were MXN 637 million in fourth quarter '24 increasing 0.5% from prior quarter and up 30% as a percentage of the average portfolio compared with 31% in prior quarter and 30% in prior year reflecting continued discipline and control in managing the expense base. Interest-bearing liabilities increased 4% year-over-year, but were down 4% under constant FX compared to an 11% increase in the loan portfolio or 2% under constant FX. Compared to the prior quarter, interest-bearing liabilities have increased 5%, 3% under constant FX. The company maintains a strong financial position with cash and cash equivalents at MXN 1.1 billion or 9% of total assets and a solvency ratio equity to total assets of 54%, improving 1.4 percentage points from the prior quarter and 3.3 percentage points higher than the prior year. Net debt measured as interest-bearing liabilities, minus cash and cash equivalents, of MXN 2.9 billion at the end of the quarter was down MXN 220 million or 7% 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 73 million. Our operating cash flow during fourth quarter '24 was MXN 718 million. The company's coverage ratio was 221%, measured as allowances for loan losses or Stage 3 loans, decreasing from 229% in the prior quarter and increasing from 217% in the prior year. The company's return on equity ratio for the quarter was 15.4%, decreasing 110 basis points from the prior year, and our return on assets ratio was 8.1%, increasing 20 basis points from the prior year. When considering tangible equity for the quarter, it decreased to 19.6% versus 21.4% in the prior year. Overall, the company again delivered strong and consistent results in the quarter and a full year. Operator, we'd like to open the call for questions at this time.

Thank you. [Operator Instructions] Our first question comes from the line of Nick Dimitrov. Please say your company name and ask your question.

Nick Dimitrov from Morgan Stanley, Investment Management. I have a few questions. Could you first provide like a high-level guidance for 2025?

Basically, 2025, we still -- but we think that in Mexico, we can see, I would say, have single digits, mid-single-digit growth in Mexico. And relatively, in the U.S., we're still looking at some constraints in the origination in the U.S. So potentially, the U.S. is going to be in the low single digits for next year. That's how we see the portfolio for next year. So mid-single digits in total.

Okay. Related to this, there is a new administration in the White House. And I was just wondering whether some of the recent developments have changed your view of the U.S. operations? And maybe related to this question, there's obviously kind of the issue of the deportations that are taking place almost on a daily basis here. And I was wondering whether there could be a negative impact as a result of this on your operations in the U.S. specifically.

So what we're observing in the U.S. and our main, let's say, source of focus right now is, first of all, inflation is started to rise again, and that is particularly important for our segment. And the second dynamic that we see is relatively shy debt levels in credit cards and cars. And we do see a deterioration in credit card quality and our loan quality. So those are really our immediate concerns. We haven't seen more of a change. But obviously, we are, as everybody else, we're waiting and seeing how things are going to change.

And shifting back to Mexico. Hypothetically, if we have tariffs, 25% tariffs in Mexico, do you see any sectors, whether formal or informal being impacted? And obviously, that having implications for the asset quality of the Mexican operations?

So I think we have the luxury of operating in a segment that is a bit far away from the macro trends, right? In terms of the segment that we operate, yes, there could be some impact in terms of employment, there could be some impact in terms of inflation in Mexico. But overall, we have gone through ups and downs of the economy. And what we have proven is that our portfolio and our client base actually is quite [indiscernible], no. So we don't see a major concern. We also see that even with this level of tariffs and given the adjustments in exchange rate, really the cost of producing in Mexico is not much different than what it was a few months ago or a year ago. So frankly, we do not see a major change in the dynamics of the economy. We still have the luxury of being very close to the U.S. and logistically being very attractive and still a very good option to continue manufacturing in Mexico. So yes, there will be some impact, but we don't see any major shift in the trends we have seen in recent years.

And regarding your cash position, so last year around the same time, it dipped on the repayment of FINDEP24, and you've been rebuilding it nicely. Can you just remind us, on average, what kind of cash position do you want to maintain so that you feel comfortable?

I think you touched a very important point. For us, I mean the idea is as small as possible. For us the cash position that we have given that we have leverage is inefficient. And also our capital levels right now at a level which are inefficient to the equity holders. So what we are preparing right now is really to understand if there's a possibility of paying eventually a dividend to the equity holders and reducing the cash position and also the capital position to a level that is more efficient.

I was just about to ask about dividends, right? Because you haven't paid dividends, I think, correct me if I'm wrong here, ever in your history. And given the current leverage and capital position, I suspect that you might start thinking about paying dividends. So can you like give us an idea in terms of like the dividend payout ratio and how you think about dividends longer term?

So right now, I wouldn't be able to give you a dividend payout ratio. But we do believe that -- you mentioned ever, we did pay dividends in the history of the company. But over the last maybe 10 years, we have not paid dividends. And we need to again go back to the equity holders and make sure that they are getting properly rewarded for their investment, no. So I wouldn't be able to give you a payout ratio. But yes, we're considering paying -- starting a period of paying dividends.

Okay. And just to make sure, that's going to be for the profit generated in 2024 or you're thinking about paying dividends going forward starting in 2025?

Right now, we don't have the details of the program, but we do have enough accumulated retained earnings and enough fiscal -- let's say fiscal profit to be able to pay -- to pay a significant proportion for capital [indiscernible]. However, we are not going to doing to do that. We still need keep proper capitalization ratios and thinking upon level as mentioned relative to recent and past profitability and to whole level of capitalization of [indiscernible].

Our next question comes from the line of [ Frank Lehman ]. Please state your company name and ask your question.

[ Frank Lehman ] from Germany. My company that I work for is [ Taylor Capital ]. We have an emerging market investment arm. Eduardo, it's years ago that I spoke to you or the CFO at the time, and I did mention dividends. And I had it on my list and Nick kind of front run me with the question. So I tick that off, and I understand that it's about time probably and fair enough, the equity holder who hasn't seen a dividend for many, many years. Now the key question for me to understand is what would you view as an adequate equity ratio? Because currently, you're at 53% equity portion of your balance sheet. What's the fair portion? Is it 40%, 35%? Can you say something about that. Also in the light of the macro risks maybe have gone up or have gone down, however you look at them?

Absolutely. I think -- obviously, the dividend depends on the availability of credit lines for one and on the other hand, on the expectation of growth. With expectation of growth like what [indiscernible] mentioned just a couple of questions ago, it's a mild expectation of growth. And currently, we do have availability of credit lines. So I mean to make the balance sheet really efficient, you can consider that capitalization ratios of 20%, 25% would be ideal and that was what we used to have back in 2015. But we don't know it from one day to the next. We have to do it through a period of time. So don't expect a major change in a short period of time. But over the course of the operation of the company that was more congruent with other NBFIs in Mexico and other similar companies would be what would make our return on equity rather much more efficient and our return on equity much more attractive.

Right. I understand that. And I also understand that the history of FINDEP has been to be significantly less financially aggressive than all those in the NBFI sector that are no longer there, right, where you can find the remnants and the ruins of companies that borrowed and had an equity ratio of 10%, 15%, 20% and were basically wiped out in connection with bad management and COVID. So is it still your philosophy? Maybe that's the best word for that, is still your business philosophy to be a little bit more on the conservative side and the whole stable of NBFIs?

Absolutely. I mean we have seen over -- our history of more than 30 years, we have seen a lot of NBFIs come and go. And we have learned our lessons that we need to be prudent both in the balance sheet management and in the risk and origination/protection and management of the company. So what you can expect from us is to be always on the conservative side of the management of the business.

Okay. May I add 1 thing. I always used to ask even in the past about the AFI. Now the one thing that always struck me is the AFI home market must be probably more than 1 million potential clients you could have there and AFI could basically be as big as FINDEP is today and a multiple of that, if you kind of have a more aggressive go at it. It seems with about -- around about 30,000 clients. You really are super tiny. Is the 30,000 clients cap or the 40% cap in your balance sheet, is this just driven by your portfolio thinking of the way you look at these 3 businesses you just walked us through? Or is it that you really see in the U.S. out of all the opportunities you have, maybe it's 1 million, maybe it's 2 million, maybe it's 500,000 of potential clients that there's a lot moving against you in the solvency and the viability of those clients?

The main issue right now in the U.S. for growth is the fact that we're still funding the operation mainly through capital and intercompany loan. For growth to happen, AFI has to be independent in their funding. And we are working on that objective. We have not been able still to make it independent in terms of funding. But that's what would trigger the ability to continue growing the operation well beyond what the size that it is today. It is not really the market potential. It is more risk appetite/availability of funding that limits our growth in the U.S. Of course, the recent years with very high inflation for -- historical inflation today in the U.S. have also increased our perception of the level of credit risk, but that's still not [indiscernible] the limitation. The limitation is mostly the independence of funding of the operation.

Well, thank you, Eduardo. Thank you very much. Also thanks to the whole team. Great presentation, great numbers. Wishing you all the best for Q1 2025 maybe we meet at one of those conferences and best of luck also approaching the refinancing which I've read somewhere in the documents that you might be potentially considering that or whatever. So good luck with that and speak soon. Thank you very much.

Thank you very much.

We have not received any further questions at this point. So that concludes your question-and-answer session. Thank you. I would now like to hand the call back over to Mr. Cid for some closing remarks.

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