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 Fourth Quarter 2025 Results Conference Call. My name is Gabriel, and I will be your operator for today's call. [Operator Instructions] FINDEP released its earnings report yesterday 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. As a reminder, this video conference is being recorded. Joining us today from Financiera Independencia is Mr. Eduardo Messmacher, Chief Executive Officer; and Mr. José María Cid, Chief Financial Officer. I would now like to turn the call over to Mr. José María Cid. Mr. Cid, you may begin.

Good morning. Thank you for joining FINDEP's Fourth Quarter 2025 Results 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, José María. Good morning, everyone. Financiera Independencia reported fourth quarter '25 results consistent with current portfolio and origination dynamics. Earnings were affected by nonoperational exchange rate movements. Excluding which, underlying performance was stable quarter-over-quarter, supported by continued credit and liquidity discipline and contributions from efficiency initiatives. We remain focused on asset quality, capital efficiency and maintaining financial flexibility while navigating current market conditions. I will share performance highlights from our fourth quarter '25 operations. Reported net profit for the quarter reached MXN 149 million. This shows a 36% decrease compared to the same period last year. Key drivers underlying this change are as follows: Similar to the prior 2 quarters, the fourth quarter includes a pretax FX-related loss of MXN 2.4 million compared to a gain of MXN 25 million in the prior year. This year-on-year difference is related to exchange rate variation on our dollar-denominated liabilities and not the operation. Interest income was down 3.6% from prior year, resulting from a 5.4% decline in our Mexico loan portfolio. Noninterest expenses increased 4.5% year-over-year, primarily reflecting inflation and provision-related impacts in 2024. The average portfolio decreased 5% versus the prior year in reported terms but held flat under constant FX. Noninterest expenses to the average portfolio remained controlled at 33.6% in the quarter. Liquidity is strong with cash at MXN 1.3 billion. On December 18, 2025, Fitch Ratings modified its outlook on the company, rating as an ABS Primary Administrator to Positive from stable and affirmed the rating at AAFC3+(mex). Our equity to asset ratio was 48% at the quarter end, 5.6 percentage points below the fourth quarter last year, reflecting the dividend paid in 2025. During the quarter, Mexico's economic growth moderated with private consumption remaining resilient but increasingly consistent with a restrictive monetary environment. External activity softened amid weaker global demand, while fiscal conditions reflected a deficit of approximately 4.3% and lower public investment levels. In this environment, we remain selective in our origination and underwriting, which contributed to a 5% year-over-year contraction in our Mexico portfolio and reflected our focus on preserving credit quality and liquidity. In the United States, inflationary pressures moderated during the quarter, while private domestic demand remained resilient throughout 2025. Consistent with this environment, our U.S. portfolio grew 5% in dollar terms alongside continued improvement in key asset quality metrics. In the fourth quarter '25, loan originations totaled MXN 1.1 billion, down 6% year-over-year, but remained flat on a constant FX basis. Sequentially, originations declined 11%, reflecting a 23% decrease in Mexico, partially offset by 10% growth in the U.S. in dollar terms. Origination activity during the quarter remained disciplined and adapted to prevailing market conditions and macroeconomic trends. The consolidated NPL ratio measured as Stage 3 loan portfolio over the total portfolio was 5.9% in the fourth quarter '25, decreasing 30 basis points from the prior quarter and flat to the prior year. The company's write-offs amounted to MXN 446 million in the quarter, roughly flat to the prior quarter and increasing 13% from the prior year. Compared to the average portfolio, trailing 12 months write-offs were 21% compared with 18% in the prior year. NPLs plus trailing 12 months write-offs of the total loan portfolio, including trailing 12 months write-offs, was 23% compared with 20% in the prior year. Now I would like to share some performance highlights from each of our businesses during the quarter. Independencia represents 33% of the total portfolio and its portfolio declined 7% year-on-year with net interest income decreasing 10%. Apoyo Económico Familiar represents 28% of the total portfolio, which declined 3% year-on-year with net interest income growing 3% versus the prior year. Apoyo Financiero represents 39% of the total portfolio, decreasing 9% year-on-year in pesos but up 5% in dollar terms. Net interest income was up 10% versus the prior year, also in dollar terms. Fourth quarter results reflect ongoing operating controls with continued progress in core capabilities, including targeted technology initiatives. The company continues to focus on execution, financial discipline and long-term value creation. I will now hand over the discussion to José María, who will provide additional details of our results.

Thank you, Eduardo. In fourth quarter '25, interest income was MXN 1.2 billion, a decline of 4% year-over-year with a 5% decrease in the average loan portfolio but holding flat under constant FX. Interest expense of MXN 145 million decreased 6% year-over-year, reflecting the continued and proactive management of debt and maturities. Net interest income of MXN 1.1 billion decreased 3% year-over-year. The provision for loan losses or PLL, was MXN 370 million in fourth quarter '25, 12% lower compared to the prior quarter and 2% higher versus the prior year. PLL to average loans was 19%, decreasing 240 basis points from the prior quarter and increasing 130 basis points from the prior year. Noninterest expenses were MXN 665 million in fourth quarter '25, increasing 3.7% from the prior quarter and 4.5% from the prior year. Noninterest expenses as a percentage of average portfolio were 33.6% compared to 32.2% in the prior quarter and 30.4% in the prior year, maintaining disciplined control over the expense base. Interest-bearing liabilities increased 15% year-over-year and 25% under constant FX. Compared to the prior quarter, interest-bearing liabilities have declined 3% or a decrease of 2% under constant FX. These changes are reflective of the proactive liquidity management actions taken over the course of the last 2 years. The company maintains a strong financial position with cash and cash equivalents at MXN 1.3 billion or 12% of total assets and solvency ratio equity to total assets of 48% compared to 46% in the prior quarter and 54% in the prior year. Net debt measured as interest-bearing liabilities minus cash and cash equivalents of MXN 3.3 billion at the end of the quarter increased MXN 377 million or 13% from the prior year, 26% under constant FX rate and decreased 5% compared to the prior quarter, reflective of the prudent portfolio and debt management actions taken. Our operating cash flow during fourth quarter '25 was MXN 612 million. The company's coverage ratio was 220% measured as allowances for loan losses over Stage 3 loans compared to 219% in the prior quarter and 221% in the prior year. The company's return on equity ratio for the quarter was 11.1%, decreasing 430 basis points from the prior year. And the return on assets ratio was 5.2%, decreasing 290 basis points from the prior year. Return on tangible equity was 13.6% in the quarter compared to 13.5% in the prior quarter and 18.5% in the prior year. In summary, the company once again demonstrated its ability to generate disciplined and reliable results through the prudent management in the quarter. Operator, we'd like to open the call for questions at this time.

[Operator Instructions] Our first question comes from the line of Nik Dimitrov.

This is Nik Dimitrov of Morgan Stanley Investment Management. A few questions for me. I guess the first one is, what are your plans for the $35 million 10% FINDEP international bonds that are callable on March 1, 2026?

This is José María. As we have said in the past, we are planning to call $35 million. Not sure when yet, but most likely before the step-up coming next March.

Okay. Okay. Got it. Regarding the outlook for 2026, can you share your expectations in terms of how the year is going to shake out?

So we see more favorable economic conditions in the U.S. for growth. So we're going to be focusing more on growth in the U.S. In Mexico, our expectation is to continue with our prudent originations, especially in the microbusinesses segment where we have seen an uptick in risk. So essentially, continued focus on growth in the United States while keeping our portfolio in Mexico in line with prior years and with the prudent originations we have been experiencing in the last couple of quarters.

Okay. One question. Since we are back to growing in the U.S., partly at the expense of Mexico, historically, the profitability of the U.S. business has been substantially lower than one of the Mexico operations. And I was wondering whether you have any expectations specifically for the U.S. operations in terms of improving profitability.

So part of the, let's say, what we have to do in the U.S. is continue increasing our efficiency. When we reached the peak of portfolio around 2022, 2023, and our efficiency measured as costs divided by total portfolio was a couple of percentage points lower than what it is today. So we still see a play of efficiency through scale in the U.S. In that regard, we plan to once again have a focus on growing beyond California, specifically in Texas. We believe the market conditions are more favorable this time to have -- to be successful with that initiative. And we also believe that when we look at our competitors, specifically, for example, OneMain, there is still plenty of room in our efficiency to make that operation more profitable. So essentially, it would be growth while focusing on efficiency. We have less opportunities, obviously, in the U.S. with top line given that rates are regulated.

Right. And in terms of -- maybe you can give us a number, the return on capital or return on equity, like what is the target you're looking to get to there?

So we believe that in the U.S., a mid-teens return on equity is something achievable and reasonable.

Okay. Mid-teens. Got you. In terms of asset quality, and you mentioned that in the presentation, when I look at the write-off rate over the last several years, in my head, it's always been around 18% plus or minus. And in the most recent quarter, it surpassed 21%. I was also looking because there's a correlation between the write-off rate and the cost of risk, and there's been a bit of a deviation there. So how should we interpret kind of the increase in the write-offs? Is that basically kind of addressing some legacy issues that have accumulated over the year and are reflective of your caution, specifically with regard to Mexico? Or you expect to see the write-off rate kind of remain at these elevated levels in the foreseeable future?

So we see different effects in our different companies. And of course, this is keeping the U.S. separate where write-offs have been pretty much steady in the last few years. In Mexico, we see an increase in write-offs, specifically focused on our AEF portfolio and our Apoyo Económico Familiar portfolio. That's where the majority of the increase or where the largest increase has happened. Remember that Apoyo Económico is roughly half formal and half informal portfolio. What we have seen in Mexico is that the informal segment, particularly the microbusinesses segment, has been having a higher impact on the economic headwinds. And that has affected AEF specifically. We see a couple of more months of high write-offs in AEF followed by a lower level in the rest of the year, starting from the, say, second quarter, middle of the second quarter. FISA is more focused on the formal segment. While we have seen an increase in risk, it has not been as pronounced as it has been in AEF, yet the write-offs have increased, and we have had particular months where the write-offs have increased. In this sense, our strategy has been to follow the book that we have followed in other situations where we restrict origination to the best segments, and we focused on efficiencies to ensure that we can keep the profitability of the businesses. So even in spite of those increases in risk costs, there has been an increase in rather a reasonable level of returns in these companies, granted lower than last year, lower than 2024, but still, well into the good profitability numbers. Now in terms of your question on the deviation between write-offs and, let's say, the P&L cost and risk. Remember, the P&L cost of risk is calculated as delta reserves plus write-offs minus recoveries. So there are more elements than just the write-offs in what is reflected in the P&L. In that sense, you should remember also that we have adopted the CNBV standard methodology for reserves, which means that credits are reserved actually from day 1 from the moment of origination in spite of having 0 days past due, they have a reserve. In this situation, first of all, most of the write-offs are reserved not to 100% according to the CNBV methodology. And on the other hand, as you start decreasing the portfolio, there is a release of reserves in the earlier [indiscernible]. So there is an effect of release of reserves. And additionally, of course, and this is a play we always follow, we continue focusing on increasing our recoveries, which is in itself one of our good income streams. So they're not totally correlated. And over time, they could converge, but still, within the quarter or within certain months, there are more elements to consider when comparing write-offs to the cost reflected in the P&L.

That's very clear. Just to confirm, when you said we use CNBV's reserving practices, CNBV's reserving practices are basically under IFRS, right, which is what you mentioned because it's proactive versus reactive reserving.

That is correct. In Mexico, we use very similar to IFRS 9, but CNBV has special rules. Now when we consolidate the U.S., in the U.S. for U.S. GAAP, we use CECL, which is also expected loss. When we consolidate the U.S. to Mexico, there are certain considerations that we have to do to try to adapt the methodology to CNBV. It is not 100%, let's say, pure as the CNBV methodology requires certain reports from the credit bureau that are not produced by the credit bureaus in the U.S., which consider the behavior of clients of us. So we have agreed with our auditors on certain methodology for consolidating the U.S., which is as good or as close as we can get to the CNBV methodology.

Okay. Okay. That makes a lot of sense. And finally, on efficiency. And I think I know what the answer is here. But when I mentioned efficiency, I mean, cost-to-income ratio, right, the cost divided by the revenues. And in the case of FINDEP over the last couple of quarters, revenues have been weaker, right? And that reflects your caution regarding origination. But at the same time, costs have been trending upwards. And respectively, there's been a squeeze, respectively, deterioration in the efficiency. And when I look at the efficiency ratio, it's kind of as per my calculations, 54%, 55%. Now if I have to kind of put it in perspective, right, a few years ago, before we did the restructuring, FINDEP's efficiency was 70-something percent, I mean, incredibly weak, right? And then you got rid of all the unprofitable businesses, kept the core Mexican operations and your efficiency kind of improved to 40-something percent. When you think longer term, right -- and I understand that right now, the efficiency suffers as a result of the weaker top line. When you think about efficiency in the longer term, what kind of ratio do you have in mind? Should we be around 50%, inside of 50%? Any color here would be appreciated.

So there is an element there that you have to consider, which is the top line of the U.S. is much lower than the top line of Mexico. Of course, if you take it with a traditional metric of cost to revenue, let's say, the right number should be the ones you're mentioning. To consider the differences in top line, we also view our efficiency as total cost over the portfolio divided by the portfolio. And there, the U.S. actually is much more efficient than Mexico. So we look at both metrics. As the U.S. starts to grow, we need to find much more efficiency in terms of cost to total portfolio to ensure that our cost of revenue remains within the ranges that you mentioned. And as you said, even with this increase in risk costs, what has kept our company profitable is our focus on efficiency and costs.

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

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