Credito Real's net income for the 2Q 2014 increased 21.3%

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Jul 23, 2014, 08:42 ET

MEXICO CITY, July 23, 2014 /PRNewswire/ -- Credito Real, S.A.B. de C.V. SOFOM, E.R. ("Credito Real" or the "Company") (BMV: CREAL*) today announced its financial results for the second quarter of 2014. All figures presented throughout this document are expressed in nominal Mexican pesos (Ps.). All financial information has been prepared in accordance with the guidelines of the National Banking and Securities Commission ("CNBV") and the Mexican Stock Exchange ("BMV").

2Q14 Highlights

Net income increased 21.3% during the 2Q14 reaching Ps. 283.1 million, compared to Ps. 233.4 million during 2Q13.
Financial margin increased 17.1% to Ps. 533.7 million in 2Q14, compared to Ps. 455.9 million recorded during 2Q13.
2Q14 average cost of funds has been reduced to 8.6%, meaning a decrease of 74 bps when compared to 9.3% in 2Q13. On June 6^th, the Mexican central bank decreased the reference rate by 50 basis points, having a positive impact on the company's cost of funds.
Loan portfolio increased by 50.0% to reach Ps. 12,443.6 million at the end of 2Q14, compared to Ps. 8,298.4 million recorded at the end of 2Q13. The loan book expansion was mainly driven by payroll, small business and group loans; however we observed a strong expansion in all our products.
Allowances for loan losses increased 153.4% year over year. During this quarter, Credito Real completed the adoption of a reserve methodology based on expected losses in accordance with the changes published in the Mexican banking regulations regarding allowances for loan losses. As a consequence, we increased the allowance for loan losses by Ps. 239.1 million and reflected it in the shareholder's equity under retained earnings. This change strengthened the coverage ratio of allowances to non-performing loans to 218.8%, which is significantly higher than previous quarter.
The non-performing loan ratio decreased from 1.6% to 1.5% at the end of 2Q14 compared to the end of 2Q13.
The efficiency ratio improved from 27.7% to 26.1% year over year, showing the benefits of new strategic alliances added to Credito Real's distribution network.
During the quarter, Credito Real's shares became part of the MSCI Mexico Small-Cap Index according to the MSCI selection criteria which consider based on a float-adjusted market capitalization and annualized traded value ratio.

Message from the CEO

"Our commitment to provide financial solutions to our customers keeps generating outstanding results for our Company and our shareholders. Year over year our loan portfolio increased by 50% whereas our net income increased by 21% in the second quarter of this year when compared to the same period of last year. During the second quarter we balanced our growth with a diversified portfolio expansion of our five products. In fact, small business loans and used car loans origination now represents almost 30% of our total origination. Our credit platform continues to strengthen while improving returns, as highlighted by our 26% ROE.

Credito Real's distribution network continues to increase, as we have included a new used car loan distributor and our main group loan operator has increased its footprint. During this quarter we signed a new agreement with a recognized auto brand with national presence to offer used car loans. As for the group loan business, our main operators added 28 new branches to their existing network. We consider that our business model is enhanced by increasing our reach to customers, thus allowing Credito Real to increase credit penetration in underserved market segments and to foster growth for the years to come. Furthermore, we continue to explore new market opportunities closely. We have begun to explore offering used car loans, in the southern part of the United States, particularly in the states of Texas and Florida. Expanding our presence into new market opportunities, will enable Credito Real to make a first step into lending to the Hispanic market. Overall, we are always keen to support our loan portfolio expansion by enhancing our distribution network through new partnerships and alliances.

During the first half of 2014 we experienced a weak Mexican economy. Our payroll distributors proactively looked to diversify their customer base by reducing their portfolio exposure to some sectors and increasing their participation in new sectors; for example pensioners. Regarding the government-sponsored program by "Bansefi" to refinance SNTE teachers' loans, during the second quarter 435 loans were prepaid for a principal amount of Ps. 12 million pesos or approximately 0.1% of the Credito Real payroll loan portfolio. Overall, it is important to note that our payroll loan expansion will continue by reaching new agreements with government agencies, as well as, by identifying and exploiting new market opportunities.

In compliance with Mexican banking regulations, regarding allowance for loan losses, during this quarter Credito Real completed the adoption of a new methodology based on expected losses. Therefore, we have significantly increased allowances for loan losses. Based on banking rules, the initial recognition of the expected losses methodology should be reflected in our shareholders' equity. In summary, this change strengthened our coverage ratio of allowances to non-performing loans.

Our capitalization ratio and debt to equity ratio show a more efficient use of capital. The capitalization ratio came down to 38% from 48%; and our debt to equity ratio increased to 2.3 times from 1.9 times reported last year. Our Return on Average Equity reached 26% confirming a positive trend.

During June, the Mexican central bank announced a decrease to the reference rate of 50 basis points. Such decrease had a positive impact on our earnings. At the end of the quarter approximately 85% of our debt was based on a floating rate. From time to time, our Credit, Risk & Treasury Committee evaluates the debt portfolio exposure to interest rate fluctuations.

As previously announced, our guidance contemplates a 16% to 18% net income growth year over year. This second quarter our net income increased 21%, which indicates another strong step towards reaching the 2014 guidance. When we review the continuous portfolio growth and our more diversified origination, we can confirm our confidence in delivering the expected results. Overall, the Credito Real business model consistently continues to support the loan portfolio expansion and diversification while keeping our focus on customers traditionally underserved by other financial institutions."

Results of Operation

Interest Income during the 2Q14 reached Ps. 772.8 million, an increase of 22.6% from the Ps. 630.2 million registered in the 2Q13. The change was mainly due to the growth observed in the loan portfolio. Year-to-date (YTD) June interest income reached Ps. 1,572.2 million in 2014, increasing 26.5% when compared to Ps. 1,243.1 million of the same period of 2013.

Interest expense increased Ps. 64.8 million during 2Q14 to reach Ps. 239.0 million, compared to Ps. 174.2 million posted during 2Q13. YTD June interest expense reached Ps. 444.8 million in 2014, an increase of 29.4% when compared to the Ps. 343.7 million of 2013.

Financial margin increased 17.1% during 2Q14, reaching Ps. 533.7 million, from Ps. 455.9 million posted during 2Q13, mainly driven by growth in interest income offset partially by higher interest expense growth. Similarly, YTD June financial margin rose to Ps. 1,127.4 million in 2014 compared to Ps. 899.4 million posted in 2013, reaching a 25.3% growth.

Provisions for loan losses reached Ps. 49.9 million during 2Q14, 53.5% lower than the Ps. 107.2 million recorded during 2Q13, mainly driven by effective collections during the quarter. Allowances for loan losses increased Ps. 239.1 million or 153.4%. The allowances for loan losses represented 218.8% of non-performing loans, much higher than the 115.0% reported at the end of 2Q13. As described in this report, during the quarter, Credito Real completed the adoption of a new methodology based on expected losses as required by the Mexican banking regulations.

Administrative expenses reached Ps. 132.2 million during 2Q14, showing an increase of 9.1% when compared to the Ps. 121.2 million recorded during 2Q13. Year-to-date administrative expenses increased 7.2% reaching Ps. 257.9 in 2014. The increase show tight controls on expenditures while we continue to expand our loan portfolio and develop growth initiatives such as pursuing a banking license and brand recognition thru marketing efforts.

Participation in results of associates reached Ps. 24.5 million during the quarter; compared to Ps. 61.0 million recorded during 2Q13. The decrease is explained by lower than expected results of the three main payroll distributors.

Net income increased 21.3% year over year, reaching Ps. 283.1 million during the quarter, compared to Ps. 233.4 million posted during 2Q13. Year-to-date June net income increased 31.8%, reaching Ps. 597.1 million in 2014.

Balance Sheet

Total assets accounted for Ps. 16,699.8 million at the end of 2Q14, an increase of 35.2% over the Ps. 12,354.8 million registered at the end of 2Q13. The increase was driven mainly by loan portfolio growth and an increase in investments in securities. The growth shown on the investments in securities reflects a higher daily cash balance as the proceeds received during March from the 2019 Senior Notes issuance continue to be deployed.

Total loan portfolio reached Ps. 12,443.6 million at the end of 2Q14, an increase of 50% compared to Ps. 8,298.4 million at the end of 2Q13. All of Credito Real's products reached double-digit growth and in the case of auto loans and small business loans, even higher growth. The origination efforts carried out by our payroll distributors, our group loan partners, durable goods retailers, used cars distributors and our small business loans distributor "Fondo H" continue to deliver loan portfolio growth.

Non-performing loan portfolio as a percentage of the portfolio was 1.5% as of 2Q14, equivalent to Ps. 180.6 million, compared to 1.6% ratio or Ps. 135.5 million as of 2Q13. The company consistently applies its credit standards and collection procedures, to maintain its non-performing loans ratio at acceptable levels. Our long term objective is to keep our NPL ratio between 2% and 3%.

Allowance for loan losses as of 2Q14 was Ps. 395.0 million equivalent to 218.8% coverage of past-due loans compared to Ps. 155.9 million equivalent to 115.0% coverage of past-due loans reported in 2Q13. As previously mentioned, according to the changes in the Mexican banking regulations regarding the allowances for loan losses, during this quarter Credito Real completed the adoption of a new methodology based on expected losses, consequently increasing by Ps. 239.1 million its allowances. According to banking rules, the initial recognition of expected losses should be reflected in shareholders' equity. Overall, this change in the methodology strengthened the coverage ratio of allowances to non-performing loans from 115.0% at the end of 2Q13 to 218.8% at the end of 2Q14.

Other accounts receivable decreased to Ps. 1,933.9 million as of 2Q14, which compares to Ps. 2,413.0 million posted as of 2Q13. This account includes a portion of income paid in advance to payroll distributors in accordance with their agreements.

Total liabilities reached Ps. 11,942.1 million, a 42.8% increase from the Ps. 8,360.7 million posted in 2Q13.

Market Debt issued in domestic and international markets reached Ps. 7,262.9 million as of 2Q14, representing an increase of 40.5% compared to Ps. 5,169.7 recorded at the end of 2Q13.
Bank Debt as of 2Q14 reached Ps. 3,760.3 million, an increase of 46.9% compared to Ps. 2,558.9 million recorded as of 2Q13.

Stockholders' Equity increased Ps. 763.7 million when compared to 2Q13, and totaled Ps. 4,757.8 million at the end of 2Q14, a 19.1% increase year over year. The growth in both retained earnings during 2013 and in net income achieved during the first half of 2014 off set by the increase in allowance for loan losses registered in earned capital are the main drivers for the described increase in Stockholders´ Equity for 2Q14. As discussed above, the increase in the allowances for loan losses under the new methodology was recognized as a decrease to retained earnings. As of the end of 2Q14 the company has repurchased 2,485,195 shares that represent an investment of Ps. 54.5 millions.

Financial ratios

Efficiency improved to 26.1% during 2Q14 compared to the 27.7% ratio obtained during the same quarter of 2013, reflecting an increase in the financial margin while maintaining a lower growth in administrative expenses.

During 2Q14, Credito Real experienced a Return on Average Assets ("ROAA") of 6.7%, compared to 7.8% of 2Q13, reflecting the effect of a higher investment in securities balance.

Return on Average Equity was 24.1% during 2Q14, which is the same ratio obtained in 2Q13.

Capitalization index decreased to 38.2% as of 2Q14, against 48.1% observed at 2Q13. The capitalization index trend highlight's that the IPO resources are continuing to be deployed.

Credito Real Payroll Loans portfolio rose to Ps. 9,683.8 million, an increase of 37.4% compared to Ps. 7,048.5 million recorded at the end of 2Q13. Nearly 82.3% of payroll loans originated during 2Q14 came from the three main distributors in which we own 49% of their equity. The loan portfolio shows an important expansion; nonetheless the origination is slightly lower in 2Q14 when compared to 2Q13 due to weak economic activity. In order to get a more diversified portfolio and reach new market opportunities Credito Real is approaching new sectors, such as developing a plan to serve pensioners. Such efforts should pay-off during the following quarters.

During the quarter significant collection efforts were made which in turn led to a recovery of past-due payroll loans. We continued to observe a healthy payroll loan portfolio. The growth in our loan portfolio observed during 2Q14 and the better than expected collection drove non-performing loans down to 1.5% of the portfolio. The following charts show a breakdown by sector and region of Credito Real payroll loan portfolio.

Credito Real Durable Goods Loans portfolio reached Ps. 1,188.4 million, a growth of 14.1% over the Ps. 1,041.5 million recorded at the end of 2Q13. The increase is a result of larger participation in credit sales with existing distributors. As of today, the Company has established 43 contracts with specialized retail chains. Non-performing loans were 2.0% of the total portfolio, lower than the 2.4% experienced in the same quarter of the previous year. During 2Q14 loan origination reached Ps. 343.5 million, also showing a slight decrease against last year.

Credito Real Small Business Loans portfolio totaled Ps. 1,123.0 million at the end of 2Q14, which represents a 15.7% increase over 1Q14. Small business loan portfolio experienced significant growth from our recently signed exclusivity alliance with Fondo H and our in-house brand. During the quarter, our in-house brand increased its sales force. Origination during 2Q14 reached Ps. 494.1 million, while the non-performing loans ratio at the end of 2Q14 reached 0.9%.

Credito Real Group Loans portfolio totaled Ps. 307.7 million at the end of 2Q14, an increase of 154.7% compared to Ps. 120.8 million recorded at the end of 2Q13, while origination reached Ps. 488.7 million showing a significant 97.4% year over year increase. Non-performing loans were 0.2% in 2Q14, compared to a 2.6% NPL ratio for the same period in 2013. During the quarter, operations were mainly handled through two partnerships that increased our group loan presence. It is worth noting that despite the difficult operating environment, the company distributors have been able to expand their loan portfolio after successfully implementing certain measures, including mechanisms to retain group promoters and implementing tight controls for non-performing loans. We have also strengthened our loan origination and increased our branches to 102, thus achieving a 38% growth with 28 new branches. As of 2Q14, our group loan network extends to over 500 promoters and 80,000 customers.

Credito Real Used Car Loans portfolio totaled Ps. 140.7 million at the end of 2Q14, which represents a 38% increase over 1Q14, while the non-performing loan ratio reached 1.6%. The portfolio increases as a result of a larger participation in credit sales within existing distributors and an expansion of the distribution network. During the quarter, an agreement with a recognized auto brand with national presence and more than 100 branches was signed. Regarding our partnership, eight branches of Drive & Cash were opened during the quarter. The new branches are located in Mexico City, Xalapa, Campeche and other mid-size cities, located in several states in the south part of the country. The increase in customer reach is reflected in loan originations experienced in the quarter for a total of Ps. 53.2 million, a year over year growth of 390.5%. As we continue this growth pattern we are confident to reach a Ps. 1,000 million used car portfolio loan in the near future.

Credito Real is building a larger distribution network for used cars loans to ensure loan portfolio expansion in the long run as we continue to explore new market opportunities. We have begun to explore offering used car loans in the southern part of the United States, particularly in the states of Texas and Florida. This will allow Credito Real to make a first step into lending to the Hispanic market. Overall, we are always keen to support our loan portfolio expansion by enhancing our distribution network through new partnerships and alliances.

Analyst Coverage

Actinver Casa de Bolsa S.A. de C.V. (Fixed Income)
Barclays Capital Casa de Bolsa, S.A. de C.V., Grupo Financiero Barclays México
BBVA Bancomer, S.A. Institucion de Banca Multiple
Ve por mas Casa de Bolsa, S.A. de C.V.
Deutsche Securities, S.A. de C.V., Casa de Bolsa
IXE Casa de Bolsa S.A. de C.V, Grupo Financiero Banorte
J.P. Morgan Securities, LLC

About Credito Real

Credito Real is a leading financial institution in Mexico, with a focus on consumer lending with a diversified and scalable business platform focused primarily on the following types of loans: payroll loans, durable goods loans, small business loans, group loans and used car loans. Credito Real offers products mainly to the low and middle income segments of the population, which historically have been underserved by other financial institutions.

Credito Real shares are listed on the Mexican Stock Exchange under the ticker symbol and Series "CREAL*". (Bloomberg identification number is CREAL* MM)

This document may contain certain forward-looking statements. These statements are non-historical facts, and they are based on the current vision of the Management of Credito Real, S.A.B. de C.V., SOFOM, E.N.R. for future economic circumstances, the conditions of the industry, the performance of the Company and its financial results. The terms "anticipated", "believe", "estimate", "expect", "plan" and other similar terms related to the Company, are solely intended to identify estimates or predictions. The statements relating to the declaration or the payment of dividends, the implementation of the main operational and financial strategies and plans of investment of equity, the direction of future operations and the factors or trends that affect the financial condition, the liquidity or the operating results of the Company are examples of such statements. Such statements reflect the current expectations of the management and are subject to various risks and uncertainties. There is no guarantee that the expected events, trends or results will occur. The statements are based on several suppositions and factors, including economic general conditions and market conditions, industry conditions and various factors of operation. Any change in such suppositions or factors may cause the actual results to differ from expectations.

Investor Relations contact

Phones:         +52 (55) 53405200, +52 (55) 52289753
E-mail:           [email protected]
                      Jonathan Rangel (IRO) [email protected]
                      Israel Becerril (IR) [email protected]
Web Page:     www.creal.mx
Address:         Insurgentes Sur No. 664, 3rd. Floor, Col. del Valle, Mexico City, 03100