Financiera Independencia SAB de CV SOFOM ENR

BMV:FINDEP

Q2-2025 Earnings Call

[Operator]

Good morning, and welcome to Financiera Independencia's 2025 Second Quarter Results Conference Call. My name is Daniela, 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 this 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. 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.

[Jose Maria Cid Michavila, executive]

Good morning. Thank you for joining FINDEP's Second Quarter Results 2025 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.

[Eduardo Bernhart Messmacher Henríquez, executive]

Thank you, Jose Maria. Good morning, everyone. We're pleased to report consistent second quarter results that reflect the continued momentum across our businesses. Our solid earnings performance demonstrates the resilience of our core operations, the strategic impact of our sustained investments in technology and the effectiveness of our proactive liquidity management. These results reinforce our commitment to long-term value creation. I will share performance highlights of our second quarter '25 operations.

Reported net profit for the quarter reached MXN 146 million, marking another period of strong and consistent performance. This result shows a 25% decrease or MXN 48 million compared to the same period last year. It is important to note that second quarter '25 showed an FX negative impact of MXN 12 million compared to a gain of MXN 30 million in second quarter '24. Thus, there is a negative impact of MXN 43 million in second quarter '25 when compared to second quarter '24. This impact is related to exchange rate variation on our dollar-denominated liabilities.

The top line remains strong, with interest income up 5% from prior year and operating expenses to average portfolio at 32% in the quarter. The average portfolio increased 5% versus the prior year in reported terms and 4% under constant FX. Liquidity is strong with cash at MXN 1.2 billion. Three important actions were announced during the second quarter to further strengthen liquidity and support growth.

On April 29, as we had updated during the first quarter earnings call, the payment of a cash dividend in the total amount of MXN 1.25 billion was approved at the Annual Ordinary Shareholders' Meeting. The dividend was paid on May 12 in a single installment from the balance of the company's net taxable income account corresponding to the accumulated results through fiscal year 2024.

On May 20, the company announced that it had issued $25 million senior unsecured notes at a coupon rate of 9.25% due on May 20, 2028, with a semiannual interest payment schedule. This transaction marks the first issuance under the company's euro short-term note program, which allows for the issuance of up to $100 million in debt instruments.

On June 20, Fitch Ratings announced it had upgraded the company's long-term local and foreign currency issuer default ratings IDRs, to BB from BB- and noted the outlook of the long-term ratings is stable. Our equity-to-asset ratio was 45% at the quarter end, 5.8 percentage points below the second quarter last year. Despite the macroeconomic challenges in Mexico, with much less public investment after the 2024 election year, less foreign direct investment and a higher fiscal deficit, our Mexico portfolio saw a marginal year-over-year contraction of 0.1%.

In the U.S., the inflation is still not showing a strong signal of midterm improvement. Our U.S. portfolio declined modestly by 1.4% in dollar terms, and we do see a steady improvement in our risk quality metrics.

In the second quarter '25, loan origination was MXN 1.2 billion, 10% lower than last year and 12% under a constant FX. Compared to the prior quarter, total loan originations increased 9%, with originations in Mexico increasing 2% and those in the U.S. increasing 30% in dollar terms. Origination activity across the portfolio during the quarter underscores our disciplined approach and continued responsiveness to prevailing market conditions and broader macroeconomic trends.

The consolidated NPL ratio measured at Stage 3 loan portfolio over the total portfolio was 5.9% in the second quarter '25, increasing 20 basis points from the prior quarter and prior year. FINDEP's write-offs amounted to MXN 403 million in the quarter, decreasing 1% from the prior quarter, but up 27% from the prior year. Compared to the average portfolio, trailing 12 months write-offs were 20% compared to 19% in the prior year. NPLs plus trailing 12 months write-offs over total loan portfolio, including trailing 12 months write-offs was 21% 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 34% of the total portfolio and its portfolio declined 3% year-on-year, with net interest income increasing 1%. Apoyo Economico Familiar represents 28% of the total portfolio and experienced growth of 4% year-on-year with net interest income growing 7% versus the prior year. Apoyo Financiero represents 37% of the total portfolio, increasing 1% year-on-year in pesos, decreasing 1% in dollar terms. Net interest income was up 16% versus the prior year.

The company's solid second quarter performance reflects continued operational discipline and a clear focus on our core strengths. This momentum, combined with important steps taken earlier in the quarter to enhance our liquidity position, underscores our commitment to prudent financial management, strategic execution and the creation of long-term shareholder value.

I'll now hand over the discussion to Jose Maria, who will provide additional details of our results.

[Jose Maria Cid Michavila, executive]

Thank you, Eduardo. In second quarter '25, interest income was MXN 1.3 billion, an increase of 5% year-over-year, with a 5% increase in the average loan portfolio or 4% under constant FX. Interest expense of MXN 152 million increased 2% year-over-year, reflecting the continued and proactive management of debt and maturities. Net interest income of MXN 1.1 billion increased 6% year-over-year. The provision for loan losses or PLL was MXN 379 million in second quarter '25, 16% higher compared to the prior quarter and 13% higher versus the prior year. PLL to average loans was 19%, increasing 310 basis points from the prior quarter and 140 basis points from the prior year.

Noninterest expenses were MXN 654 million in second quarter '25, decreasing 2% from the prior quarter and up 0.9% from the prior year, representing 32% as a percentage of average portfolio, compared with 33% in the prior quarter and 34% in the prior year, continuing to reflect disciplined management of the expense base. Interest-bearing liabilities increased 20% year-over-year and 19% under constant FX, reflective of proactive liquidity management actions taken during the quarter. Compared to the prior quarter, interest-bearing liabilities have declined 7% or 3% under constant FX.

The company maintains a strong financial position with cash and cash equivalents at MXN 1.2 billion or 11% of total assets and a solvency ratio, equity to total assets of 45% compared to 50% in the prior quarter and 51% in the prior year.

Net debt measured as interest-bearing liabilities minus cash and cash equivalents of MXN 3.5 billion at the end of the quarter, increased MXN 429 million or 14% from the prior year and 12% under a constant FX rate, reflective of the prudent portfolio and debt management actions taken. On a sequential basis, net debt increased MXN 810 million.

Our operating cash flow during the second quarter '25 was MXN 630 million. The company's coverage ratio was 228%, measured as allowances for loan losses over Stage 3 loans compared to 226% in the prior quarter and 229% in the prior year. The company's return on equity ratio for the quarter was 10%, decreasing 400 basis points from the prior year, and the return on assets ratio was 4.8%, decreasing 240 basis points from the prior year.

When considering return on tangible equity, it was 12.1% in the quarter compared with 13.1% in the prior quarter and 17.2% in the prior year. Overall, the company again delivered strong and consistent results for the second quarter of 2025.

Operator, we'd like to open the call for questions at this time.

[Operator]

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

[Nicolas Riva, analyst]

This is Nicolas Riva from Bank of America. I have a question. Jose Maria and Eduardo, I have a question regarding the recent 2028 new issue, I think $25 million, I think. And I wanted to ask you about that if there are any differences in seniority between this issue and the previously outstanding '28s, which were the result of the exchange for the 2024 bond? If there are differences also in the investor base?

And I guess, on a broad level, my question would be, why would you have 2 like very small issues with a very similar maturity, very similar coupon instead of tapping the previously outstanding '28s?

[Jose Maria Cid Michavila, executive]

This is Jose Maria. Basically, these are 2 different issues. So basically, the bond, the '28 remains exactly the same, and this is a totally new issue. We announced there's going to be a $100 million program in smaller tranches. So the first tranche was $25 million in May at 9.25%. This is basically, we see an opportunity in the market now to reduce our financial costs.

So even though the maturity is about the same that the '28 so along the same year, basically, different months but the same year. The idea is, as you know, we have the step-up of the '28s next year. So basically, the idea is to better manage our cost of funds.

[Operator]

Our next question comes from Nick Dimitrov.

[Nikolai Dimitrov, analyst]

A couple of questions from me. Regarding the dividend that you took out of FINDEP, so that was a one-off special dividend. How should we think about your dividend policy going forward? In other words, do you intend to set up a permanent dividend on a recurring basis? Or the dividend that we saw back in May is a one-off thing? And related to that, how do you think about leverage going forward? I think you mentioned equity to total assets, 45%. Just related to the dividend payment, how do you want to manage leverage going forward?

[Eduardo Bernhart Messmacher Henríquez, executive]

Thank you for your question. We do not have a set dividend policy. That is we issue dividends depending on how we see the operation, the appetite of funders. So really, there is not a set dividend policy that we have published nor do we plan to publish it in the near future. We have not paid a dividend since 2010, if I recall correctly. And this was the first dividend. It was a quite significant dividend. Really, our dividends will depend on the appetite of our funders and the condition of the operation.

Now, the way we see our new issuance, it is very -- it is very good news that the international markets are opening little by little again to Mexican NBFIs, at least to us. And that gives us a different perspective on how do we think about leverage in the future. In the last few years, it has been a very, very prudent approach, and we keep that prudent approach in the near future, we will keep it. And it will depend on the development of the international debt markets.

[Jose Maria Cid Michavila, executive]

Just to add to your question there, basically for the capitalization index. Now it stands at that 45%, as you know, it has been a very efficient way of managing the capitalization index, meaning that we have been really highly capitalized versus the market. So our expectation is to see this index around the 40s percent maybe, between 40% and 45%. So you will see that going forward.

[Nikolai Dimitrov, analyst]

Okay. Okay. That makes sense. So just to kind of confirm that I understood it correctly. When it comes down to the dividend, it's going to be more of an ad hoc type of solution, similar to what we just saw and leverage as measured by equity to total assets will be in the 40% to 45% range. Okay.

Maybe just one question, if you don't mind. So I hear that there is new entrants in the market, primarily fintechs that are getting banking licenses. One name that comes to mind is Banco Plata. And just from a pure cost of funding point of view, right? And I know this is something we've discussed in the past, getting a banking license comes with more regulation, but obviously, it has a huge impact on your cost of funding.

So I was wondering, do you see any of these new entrants in your space or kind of competing with you directly? Or do you think that the market is large enough and fragmented enough where you don't feel any threat from these new entrants yet?

[Eduardo Bernhart Messmacher Henríquez, executive]

So I'll take that one. So let me answer first, the cost of funds part and then the more strategic question. What we're seeing with new entrants, and you can see this in various sizes of new entrants from the humongous new bank to other entrants, smaller, is that they're actually playing in the term deposit market. And they have grown significantly, but their funding cost does not have a significant advantage to our funding cost. Yes, it could be a couple of percentage points, but it's not a huge one.

The ones that have a significant advantage are those that actually compete in the demand deposit market. And most banks that compete in the demand deposit market have significant branch network presence that you may end up kind of thinking about. Also a cost of actually capturing these demand deposits. So to set up an operation for term deposits, we wouldn't have a significant funding advantage. And a demand deposit operation, well, it does have an associated cost at least for the time being of the branch network.

I wouldn't be surprised if one of these new entrants shows us that they can compete in the demand deposit arena without a branch network. But we remain vigilant to see if there's a business model that actually succeeds in that regard.

Now in terms of becoming a bank, well, I don't think right now, it's a very good time to become a small Mexican bank. There is a lot of pressure in terms of regulation and a lot of pressure from the relationship with the U.S. that I think we're better off not being a bank right now, especially a small bank. So we believe that currently is not the right moment to become a bank. There's no significant advantages.

In terms of credit, frankly, the impact of new entrants has been mostly in the credit card market. Personal loans, they have not been super active. There has not been a significant presence in personal loans. And if you intersect personal loans with a second that we serve, there has not been a significant disruption of the market from any of the new entrants. So it has been mostly in the credit card market where we do not play.

[Operator]

[Operator Instructions] 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 Mr. Cid for some closing remarks.

[Jose Maria Cid Michavila, executive]

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, just let me know. Thank you.

[Operator]

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