Credito Real SAB de CV SOFOM ENR

BMV:CREAL

Earnings Call Transcript

[Operator]

Good morning, and welcome, everyone, to Crédito Real Fourth Quarter 2017 Earnings Conference Call.

Crédito Real issued its quarterly report on Wednesday, February 24 (sic) [ February 21 ], 2018. If you did not receive a copy via e-mail, please do not hesitate to contact us in Mexico City at [phone]. It is important to note that the presentation and the MP3 recording referred to this call will be available at www.creal.mx.

Before we begin the call today, I would like to remind you that the information discussed in today's call may include forward-looking statements on Crédito Real's future financial performance and prospects, which are subject to risks and uncertainties. Actual results may differ materially, and the company cautions not to rely unduly on these forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statement.

With us this morning from Crédito Real, we have Mr. Ángel Romanos, CEO; and Mr. Carlos Ochoa, Deputy CEO. They will discuss on the more important strategic financial and operating aspects of the fourth quarter 2017.

I will now turn the call over to Mr. Romanos. You may begin.

[Ángel Berrondo, executive]

Thank you, operator. Good morning, everyone, and thank you for the participation in our conference call for the fourth quarter 2017.

We are glad to inform you that Crédito Real's results for the fourth quarter ended the year on a positive note as we beat our 2017 guidance. Thus, consolidating dynamism sustained throughout the year despite the challenging environment. Fourth quarter '17 income amounted to MXN 439 million, growing 27.1% versus fourth quarter in '16, as interest income recorded a substantial rise of 30% that follows an intentional origination activity and the higher financial margin. Meanwhile, the funding cost recorded an increase that was mostly in line with the interest reference rate in Mexico.

As the underlying fundamentals of our solid performance in both the fourth quarter and the full year 2017, we find first our orderly operation and strict and origination control, which is clearly reflected in our best-in-class NPL of just 2.1%. And second, the success achieved in the addition of high-quality assets that allow us to grow stability and profitability.

Looking at the [ interim ] results by business segment, we saw an outstanding performance of Payroll during the quarter and full year, delivering a strong double-digit growth rates in its origination, which went up from MXN 1.2 billion in fourth quarter '16 to MXN 1.8 billion this last quarter, an annual increase of 48.3%. At the end of 2017, payroll loans held a 66.5% share of our total consolidated credit portfolio.

Regarding Instacredit, our second biggest business line, it showed a credit origination of MXN 760 million, a bit lower than the MXN 857 million originated in the fourth quarter of '16. At the end of the quarter, Instacredit accounted for 16% of the total consolidated credit portfolio.

Next in order, Used Cars increased by 12.9% in its credit origination due to a challenging situation that the automotive sector is going through in the United States, where car sales have shown clear signs of deceleration. Another factor to consider was the ongoing pressure exercised by the Trump administration among the Hispanic community, although the arising discussion in immigration policies seems promising as it could imply the legalization with over 1 million Mexicans and around 400,000 additional working visas. Overall, our consolidated credit portfolio is about to surpass MXN 30 billion, a significant milestone in the history of our company, after recording a significant annual increase of 21% above this quarter.

Elaborating on the recent developments, we continue enhancing our funding sources by tapping into our agility to access of our company in the domestic and international markets. Outstanding this quarter, first, the placement of $230 million in perpetual notes due 2022. Second, a successful closing of a CHF 170 million bond offering in the Swiss market. And third, the first issuance on the MXN 1 billion portfolio securitization program for MXN 800 million. The execution of this important transaction allows us to have an enhanced credit profile and financial structure as our liabilities are now better aligned to our operating cash flows within a more flexible schedule of maturities. And at the same time, we conducted timely amortizations of short- and long-term local notes.

In summary, I am very pleased to see a stable and stronger operation as our internal generation of cash and easiness to abreast the financial markets that follow a robust credit profile and financial position, provide us to drive power required to grow, while the further consolidation of our business segments into a more efficient platform continues. With this drive and with a healthy tailwind, we feel certain that we can grow our credit portfolio between 15% and 20% in 2018.

Finally, aside of the good numbers, it is important to highlight the achievements reported in corporate governance and social responsibility, as Crédito Real constantly strives to perform as a strong and committed social responsible company.

With this, I want to thank you again and leave you with Carlos Ochoa.

[Carlos Ochoa Valdés, executive]

Thank you, Ángel. Good morning, and thank you all for taking part in Crédito Real's quarterly conference call.

Regarding the interest income during this quarter, we reached interest income of MXN 22.4 billion, increasing 30% compared to 4Q '16. This variation was mainly driven by the combined effect of the growth observed in the consolidated loan portfolio, largely supported by the Payroll business and the effect of the repricing of loans granted.

Regarding expenses, the average cost of funds increased to 11.7%, an increase of over 200 bps when compared to 9.7% in 4Q '16, mostly attributed to higher cost of funds, explained by the increases in the reference rate we received 2017 here in Mexico. The financial margin increased to 31% to MXN 1.6 billion, driven by interest income growth, though our international businesses contributed 40% to the consolidated financial margin.

Provisions for loans losses reached MXN 391 million during this quarter, representing 1.4% of the consolidated loan portfolio. The roughly MXN 100 million increase compared to 4Q '16 was primarily attributed to MXN 53 million increase due to deterioration in the Used Cars portfolio in Instacredit; a MXN 41 million increase due to the registered payroll loan portfolio under securitization program; a MXN 23 million increase for the SMEs business, given that in 4Q '16, SMEs provisions were unusually low; and finally, a MXN 22 million increase in the Payroll business by -- explained by the loan portfolio expansion; and the MXN 14 million increase in the others lines, but all these figures were partially offset by the MXN 53 million decrease related to the Used Cars business in the States.

The cost of risk in this quarter was 5.4% compared to 4.9% in 4Q '16, as a result of the increasing the provisions for loan losses line. However, due to the recovery of the charge-off account, with total MXN 70 million, the provision line would have decreased to MXN 324 million, therefore, the cost of risk would be 4.5% consistent with our expectations.

Commissions and fees collected increased 55% during the 4Q to MXN 227 million compared to the 4Q '16, integrated by MXN 135 million and MXN 92 million commissions collected from Resuelve and Instacredit, respectively.

Administrative expenses reached MXN 998 million during the 4Q '17, showing a 24% increase when compared to the MXN 807 million in the 4Q '16. This MXN 198 million (sic) [ MXN 191.3 million ] increase was driven by a rise in the United States administrative expenses of MXN 95 million, driven by the Mexican peso depreciation and the recognitions of the expenses from our insurance companies; an increase of MXN 59 million in the Payroll business for higher origination expenses; and finally, a MXN 30 million increase in Central America for the regular portfolio expansion expenses.

This quarter, net income reached MXN 439 million, showing an increase of 27% year-over-year.

When you come to the key financial ratios, ROE was 4.5% during the quarter, with ROA skewed at 4.5%, excluding the perpetual notes, which principal has equity treatment and its register is in the company's equity, ROE would have reached 17.9%. The quarter efficiency ratio increased to 52% compared to the 51% in 4Q '16. Since last year, efficiency ratio calculation excludes Resuelve, given that the business does not involve credit risk. This quarter, the capitalization ratio reached 51% compared to 39% in 4Q '16. However, excluding the subordinated perpetual notes, the capitalization ratio reached 36.4% in the 4Q.

Regarding our loan portfolio, it increased by 21% to MXN 29 billion at the end of the fourth quarter '17, driven by the double-digit growth in the Payroll and the SME. It is worth noting that notwithstanding the current environment of high inflation and rising interest rate, our loan origination was higher this quarter compared to 3Q '17 and 4Q '16.

Our Payroll portfolio increased by 33% to MXN 19 billion, supported by the pensioners' segment growth, which represent 41% of the total payroll origination during the quarter. Almost 83% of the payroll loans originated during the quarter derived from our 3 main distributors in which we own the equity. In addition, the NPL decreased to 1.3% in 2Q '17 from 2% in 2Q '16. Our SMEs portfolio increased 28% year-over-year, totaling MXN 1.7 billion at 4Q '17. Our Used Cars portfolio decreased 2% year-over-year, reaching MXN 2.7 billion at the end of 4Q '17, while the origination amounted MXN 463 million in the quarter. The NPL decreased from 3.3% in 4Q '16 to 1.1% in 4Q '17.

Instacredit loan portfolio reached, in pesos, MXN 4.6 billion, showing an increase of 5% year-over-year and representing close to 16% of the total loan portfolio, with an NPL of 5.2%.

The line others is integrated by the Durable Goods and Group Loan businesses, which both registered a loan portfolio of MXN 635 million during the quarter, decreasing 26%, driven by the divestment in Durable Goods, and moreover, the origination reached MXN 1.3 million, increasing 10% year-over-year, driven by the Group Loan businesses.

This quarter, the consolidated nonperforming loan portfolio was 2.1% compared to 2.2% last year. The NPL decreased mainly in the Used Cars and Payroll businesses.

With this, I conclude my remarks, and now let me turn back the call to the operator to open the line for Q&A.

[Operator]

[Operator Instructions] Our first question will come from Ernesto Gabilondo, Bank of America Merrill Lynch.

[Ernesto María Gabilondo Márquez, analyst]

Two questions from my side. The first one, you were able to deliver double-digit net earnings growth in 2017, so how do you perceive this overreaction on your stock price in the last 6 months due to NAFTA negotiations and presidential elections? You think border uncertainties could imply structural risks on your business? You think this could be more related to the stocks liquidity? We have seen other Mexican financials practically not having the same pressure in this regard, so just want to know if you are evaluating to increase the buyback programs to protect the price on the volatility periods? Or what should be the strategy going forward? Secondly, can you provide more guidance regarding net interest income growth, fees, OpEx growth, capital risk, net earnings growth and ROE?

[Ángel Berrondo, executive]

Ernesto, this is Ángel. I'll answer the first part of your question. We really don't know what the pressure on the stock was. I mean, you see the P/E multiple, which were trailing and price book, it's really ridiculous. We have been using the buyback program that we have available since last year. And we really see as a buying opportunity, we believe that no matter what's going on the political landscape, we have been able to deliver the numbers and we've been growing soundly, not for 1, not for 2, not for 3 years, but for 25 years in a row. So we believe our history proves that the stock deserves another type of valuation, we believe in that. We really don't worry on a day-to-day basis of the stock price. We'll deliver -- we'll continue to generate overall value of the company and for the future. Eventually, the stock market will recognize that and will come to a good price, it means multiple on the stock. And for the second part, I'll let Carlos answer your question.

[Carlos Ochoa Valdés, executive]

Ernesto, well, basically, in terms of guidance, what we are doing this year is just guiding the -- what we expect the book is going to grow, 15% to 20%. And as for the rest, I mean, we let you guys to do all the math, and we expect them to be consistent with what we've shown over the past years.

[Ernesto María Gabilondo Márquez, analyst]

Okay. Fair enough. So just a follow-up on this guidance. Because the risk was higher at the end of 2017, but you highlight in the report that it could be normalizing to levels of 4.5%. Is this a trend we should see in 2018?

[Ángel Berrondo, executive]

That's correct.

[Operator]

Our next question will come from Adrian Garcia, Invesco.

[Adrian Garcia, analyst]

I wanted to -- you alluded that part of the reason that your expenses went up was due to the increase in the funding. Can you comment perhaps on what is your fixed versus variable mix in the funding right now, particularly given that the interest rates are have been continuing to go up and the reference rate in Mexico is expected to perhaps increase? So I wanted to see what is your view and how are you positioned for that? And separately, a second question is, has there been any rhetoric from the presidential candidates of a potential deregulation of the payroll deduction business?

[Carlos Ochoa Valdés, executive]

When it comes to the cost of funds and the funding overall, as of today, 50% -- about 52% of the consolidated liabilities are fixed to some level. However, we will expect -- I don't know they -- if you look at the inflation periods that -- just as close this morning, the inflation is trending downwards and is stabilizing a bit. So we don't expect much more than 50 basis increase over the next -- over the remaining of the year. So we feel comfortable the way it is as we are right now. And addressing your second question, I'm not aware of some specific remarks from any of the candidates targeting the payroll business in particular in general, and we will need the -- we are addressing the need out there and this should continue no matter who gets elected in July.

[Operator]

[Operator Instructions] Our next question will come from Tito Labarta, Deutsche Bank.

[Tito Labarta, analyst]

Couple of questions. First on your loan growth guidance. I understand the 15%, 20% loan growth, but as we look it by segment, we saw very good growth in the Payroll business last year, whereas Instacredit only grew about 5%. So I just wanted to get a sense, with the different segments, what kind of growth you would expect? And also, I guess, how comfortable you're growing payroll loans over 30% in Mexico, just given the uncertainty and we're seeing like system -- banking system growing closer to 10% and some peers are even losing loans that are falling? So just wanted to get a sense of why are you so comfortable growing so quickly in the payroll loans? And also, why Instacredit is not growing as much? And I'll ask another question after that.

[Ángel Berrondo, executive]

Tito, this is Ángel. We have a very nice tailwind for the Payroll business, which is growing. January proved to be very good, February has been very good and we expect that to continue throughout the year. Instacredit will grow more than it's grown last year. And in the U.S., due to the market conditions, we stopped growing on purpose last year in the second half of the year, but we're starting to grow again. So we believe that overall, we will accomplish 15% to 20% overall.

[Tito Labarta, analyst]

Okay. And -- but do you have any -- what kind of growth would you expect in the 3 segments? Do you think they'll be more similar this year, like all of them growing on a 15%, 20%? Will one grow more than the other?

[Ángel Berrondo, executive]

We'd hopefully see it in -- around the 3 segments.

[Tito Labarta, analyst]

Okay. Great. And then second question, in margins, we've seen margins begin to pick up over the last few quarters. Do you think that trend is sustainable? You mentioned you expect maybe a few more interest-rate hikes this year. But can your margins also pick up this year again?

[Carlos Ochoa Valdés, executive]

I think our view on the margins are -- it will depend as well on the reference rates, what happens with the reference rate here in Mexico. However, we would expect that the -- in order to continue with a narrow way above the 17% level, if they are -- if the NIM remains above the 23%, I think that's very doable. So basically, our view is that the NIM should remain above the 23%.

[Tito Labarta, analyst]

Okay. So at least stable going forward?

[Carlos Ochoa Valdés, executive]

That's right. That's right. Given all the variables involving the -- during the year, yes, we believe that, that should remain stable in that level, the 23%. It's also worth noting, as we mentioned during the call, is that our reporting businesses provides us with 40% of the financial margin. So as long as we see an expansion in Instacredit, which we've given this year, that probably will improve to the 23.5% or something, but above the 23%.

[Tito Labarta, analyst]

Okay. That's helpful. And if I could ask one more if you don't mind. On your expense growth, we did see a bit of a pickup in the quarter, I think, partially due to loan origination. How should we think about expense growth? Like -- is it closely tied to your loan growth? So with loan growing 15% to 20%, should we expect some slightly less but somewhat similar growth in expenses? Is that fair?

[Carlos Ochoa Valdés, executive]

Yes. If you look at the trend that we saw during the last 3 quarters, I mean, especially if you look at the third quarter -- I mean, for the fourth quarter, there was a one-off, which was the consolidated of the insurance business that provides the [ wholesale ] income in the U.S., so that was a one-off. What we would expect and what we intend to do is that the -- in order to -- we're going to be very aggressive when it comes to the efficient integration in terms of expense control, so I would say that this should normalize between the MXN 800 million per quarter and MXN 850 million per quarter, within -- with no major changes on the FX, and that's how we're viewing that one.

[Operator]

[Operator Instructions] Our next question will come from Natalia Corfield, JPMorgan.

[Natalia Corfield, analyst]

I have 2 questions. One with regards Instacredit. We saw deterioration in asset quality during the -- in Instacredit. So if you could give us some color on that, that would be great. What to expect in 2018? And also, a quick question on your perps, because I have the impression that the perps, they -- the way that you would take coupons would be through earnings and not -- and it would not be an interest expense in your income statement. Nevertheless, reading your press release last night, I got a little bit confused on that, so if you could confirm from where the payments of coupons will come from? That would be helpful as well.

[Carlos Ochoa Valdés, executive]

Regarding the asset quality in Instacredit, let me disclose there was an issue. I mean, over the -- the deterioration that we saw on the book was mostly explained by a particular problem, which were the Used Cars business over there -- actually we became very restrictive over the last couple of quarters, during the 3Q and 4Q, and you get to see the improvements already in terms of the asset quality trending downwards and we believe that the problem has been contained. So this should be -- we believe that in terms of the book performance that we are seeing, it is already stable in that sense. Regarding your second question, I'm not sure I understood it right. Could you repeat it?

[Natalia Corfield, analyst]

Yes. The coupons of your perpetual notes, are they going to be part of interest expenses and will show in your income statement? Or are they going to...

[Carlos Ochoa Valdés, executive]

That is correct.

[Natalia Corfield, analyst]

That's correct. So they're not going to be changed as [indiscernible] again?

[Carlos Ochoa Valdés, executive]

That is correct. Yes, they are included in the cost of funds.

[Natalia Corfield, analyst]

All right. Okay. So they are going to impact your NIMs?

[Carlos Ochoa Valdés, executive]

Yes. Definitely. They are going to solve the interest expense, they impact the NIM, and definitely, they are going to expand in that same sense, the net income as well at some point.

[Operator]

[Operator Instructions] Our next question will come from Jonathan Szwarc, Debtwire.

[Jonathan Szwarc, analyst]

I mean -- I think that Natalia question counts, because [indiscernible] they are going to treat the interest expense as an equity dividend. So we are both the [indiscernible] kind of confused why you choose to go to impact the P&L and they don't. If you could -- I mean, could you share with us -- I mean -- or an even something which is the law on the IFRS that -- because you helped to account it, because it would help us have better understanding. And also, how is the FX treatment of this perpetual note? Did you book at some exchange rate? And if it fluctuates, it stays the same or it would move?

[Carlos Ochoa Valdés, executive]

No. I mean, in terms of the FX, given that it is -- especially for -- when it comes for the principal, when it comes to the -- the FX has no effect. I mean, changes in the FX has no effect, given that it's equity, the day that we receive the proceeds of that -- of the issuance. And when it comes to the -- I mean, I can talk about Crédito Real and not about any other company, and that's the way we are treated, and -- that's the way we are treating interest expenses and that's already validated with the agility [ person ] this side.

[Operator]

Ladies and gentlemen, with no questions in the queue, the question-and-answer session has concluded. I would now like to turn this conference back over to the Crédito Real team for closing remarks.

[Carlos Ochoa Valdés, executive]

No, we have nothing left. And thank you, everyone, for attending this conference call.

[Operator]

Thank you very much. Ladies and gentlemen, this conference has now concluded. You may disconnect your phone lines and have a great rest of the week. Thank you.