Financiera Independencia Reports 2Q10 Net Income up 4.9% to Ps.143.5 Million With Loan Portfolio Growth of 16.7%

MEXICO CITY, July 28 /PRNewswire-FirstCall/ --

• Net income up 4.9% for the quarter and 12.3% for the first half, year-on-year.
• Total loan portfolio growth of 16.7% YoY, driven by a 15.2% increase in client base, mainly from CrediPopular and Finsol.
• Finsol's total loans reached Ps.783.4 million in 2Q10, a 7.8% sequential growth from the Ps.726.7 million posted on 1Q10.
• Non-performing loans to total loans ratio improved to 11.2%, compared to 12.7% in 2Q09.
• NIM after provisions including fees of 42.6% in 2Q10 below the 48.9% in 2Q09, reflecting the effect of the surplus cash remaining from the US$200 million bond issue.  For the first half of the year this ratio stood at 50.8% compared to 49.2% in 1H09.
• Provisions for loan losses in 2Q10 represented 32.5% of financial margin, compared with 40.0% in 2Q09, and 31.4% in 1Q10.
• Efficiency ratio was 80.5% in 2Q10, the increase mostly due to the integration of Finsol and its related non-recurring expenses for the quarter of Ps. 41.7 million.  Excluding Finsol, the efficiency ratio improved to 71.9% in 2Q10 from 73.4% in 1Q10, and better than the 2009 quarterly average of 74.3%.  
• Equity to total assets increased to 34.1% from 29.7% in 2Q09, and 27.2% in 1Q10.
• ROE in 2Q10 down to 19.8% from 24.4% in 1Q10 and 33.7% in 2Q09, mainly due to the Ps.850 million capital increase undertaken during 1Q10 to fund Finsol's acquisition. For the first half of the year the ROE was 23.4%, compared to 32.7% in 1H09.

Financiera Independencia, S.A.B. de C.V., SOFOM, E.N.R. (BMV: FINDEP), (Independencia) a leading Mexican microfinance lender of personal loans to lower income segment individuals and working capital loans through group lending microfinance, today announced results for the three-month period ended June 30, 2010. Net income for 2Q10 increased 4.9% YoY to Ps.143.5 million.

Commenting on the results, Noel Gonzalez, Chief Executive Officer, said, "We are driving considerable growth in Finsol's loan portfolio and client base, reflecting not only the availability of funding that we have secured for the business, but also the increased sales and marketing support.  Also, we made progress on the operational efficiency side, reducing head count by 270 people, mainly in administrative positions, as we already consolidated our Human Resources and Finance organizations."  

"We are implementing additional actions to improve client retention and grow our core business, including the launching of a mass media campaign, and implementing further initiatives to facilitate access for our clients to make payments."

All financial figures discussed in this announcement are unaudited and are prepared in accordance with Mexican Banking Accounting Principles unless stated otherwise. Figures for 2009 and 2010 are expressed in nominal pesos. Tables state figures in millions of pesos, unless otherwise noted.

2Q10 CONSOLIDATED RESULTS

Unaudited results for 2Q10 include the effect of the consolidation of the acquisition of Financiera Finsol, S.A. de C.V., SOFOM, E.N.R., the second largest group lending microfinance institution in Mexico, and several related companies (collectively, "Finsol") on February 19, 2010.  

Financial Margin after Provision for Loan Losses

Financial margin after provision for loan losses for 2Q10 increased 26.6% year-on-year to Ps.512.3 million. This is principally explained by the following:

Interest Income

Interest income for the quarter increased 19.2% year-on-year to Ps. 901.4 million, principally as a result of the Ps.121.8 million, or 16.2%, increase in interest income on loans. The total loan portfolio increased 16.7% during the period, reflecting a 15.2% growth in the number of clients and a 1.3% increase in the average balance per client. The increase in the number of clients was driven by a 1.3% growth in Independencia's client base and 162,457 new clients as a result of Finsol's acquisition.

The average balance per client increased from Ps.3,957 in 2Q09 to Ps.4,008, mainly driven by the incorporation of Finsol, while the average lending rate(1) of the total loan portfolio remained flat at 66.8% compared to 2Q09.

Individual loans to the informal sector increased 5.0% year-on-year, driven by growth of the CrediPopular product, which more than offset the decline in CrediConstruye product. As a percentage of the total loan portfolio, individual loans to the informal sector declined to 29.9% in 2Q10 from 33.2% in 2Q09, due to the inclusion of Finsol loans. CrediPopular loans accounted for 22.9% of total loans in the quarter reaching 332,425 clients, up by 38,432 clients, or 13.1%, year-on-year. On a sequential basis, individual loans to the informal sector declined 2.8%, reflecting the increase in the rejection rate from 48% in 4Q09 to 59% in 2Q10 following the increase in the cut off points of our credit scoring model which took place in December 2009.

The CrediInmediato loan product, a revolving line of credit that targets the formal sector, accounted for 55.6% of total loans in 2Q10 down from 66.8% in 2Q09 and 55.9% in 1Q10.  The number of CrediInmediato clients in 2Q10 grew by 2.5% year-on-year, while the total loan portfolio of this product decreased to Ps. 2,993.5 million or 2.9% year-on-year. However, consumer loans provided by the Mexican banking system fell by 11.3% during the same period. The average balance per contract for CrediInmediato was Ps. 4,281 on 1Q10, down 5.3% year-on-year, with the draw down rate decreasing from 74.7% to 73.0%.  On a sequential basis the number of CrediInmediato clients declined 0.6%, while the loan portfolio fell 0.9%.

Finsol's total loans reached Ps. 783.4 million in 2Q10, a 7.8% growth compared to the Ps. 726.7 million recorded in 1Q10. This increase was driven by growth in both the Mexican and Brazilian operations. During 2Q10, loan origination in Finsol Mexico was Ps. 691.5 million, while Finsol Brazil origination was Ps. 192.4 million. The growth in loan origination is a consequence of the adequate funding that Independencia is providing Finsol.

---------------------------

(1) Average lending rate: interest income / average balance of the total loan portfolio.

Interest Expense

Interest expense during 2Q10 increased by Ps.61.5 million, or 75.8%, to Ps.142.8 million from Ps.81.3 million on 2Q09, reflecting the US$200 million 144A / Reg S senior guaranteed notes issued on March 23, 2010. Debt increased by Ps.1,872.1 million or 65.5% year-on-year. A portion of the proceeds of this issuance was used during the quarter to reduce the amount of outstanding debt under Independencia's revolving credit lines.

The average interest rate paid(2) increased to 10.69% in 2Q10 from the 9.22% observed in 2Q09, also as a result of the bond issuance mentioned above. The average TIIE stood at 4.94% in 2Q10 compared with 5.91% in 2Q09.

---------------------------

(2) average interest rate paid = interest expense / daily average balance of interest bearing liabilities for the period.

Provision for Loan Losses

Provisions for loan losses declined year-on-year by 8.8%, or Ps. 23.7 million, to Ps. 246.3 million in 2Q10, reflecting an improving trend in the default probabilities of the loan portfolio. Write-offs rose 25.7%, or by Ps. 53.9 million, to Ps. 263.6 million in 2Q10.  Excluding Finsol, write offs increased to Ps.247.7 million in 2Q10 from Ps.209.6 million in 2Q09.  Total non-performing loans reached Ps.605.6 million, up 3.0% from Ps.588.2 million at June 30, 2009.  Excluding Finsol total non-performing loans remained flat year-on-year.

Quarter-on-quarter, provisions for loan losses increased by 2.3%, or Ps.5.6 million, from Ps.240.7 million in 1Q10 to Ps. 246.3 million in 2Q10, due to the inclusion of Finsol, since 1Q10 report includes only six weeks of Finsol's results.  Excluding Finsol, provisions for loan losses declined 0.7% to Ps. 234.1 million.  Also, on a sequential basis, write offs decreased from Ps. 283.5 million in 1Q10 to Ps. 263.6 million.

Market Related Income

As a result of Independencia's recent US dollar bond issue and its internal policy of hedging such exposure, the Company's Risk Management Committee approved a hedging strategy composed of the following two derivative transactions:

1. An interest rate swap to exchange the 10% fixed coupon payments computed on the US.200 million principal amount to a floating rate (TIIE + 393 bps) computed on a notional amount of Ps.2,511 million.  With this instrument the Company is hedging the exchange rate exposure of the coupons for the entire life of the bond.
2. A rolling forward to hedge the principal amount of the bond.  This strategy will be continuously rolled over during the entire life of the bond.  At inception, Independencia entered into a six-month forward for a notional amount of US.200 million at an exchange rate of 12.8355 pesos per US dollar. The expiration date of this contract is September 30, 2010.

The effect of the transactions mentioned above had a net impact of Ps. 118.8 million, recorded as Market Related Income in the Income Statement.  The breakdown of this effect is: a foreign exchange loss of Ps. 100.2 million due to the valorization of US dollar denominated debt, a Ps. 180.7 million gain on the value of the Swap, and a Ps. 38.4 million gain from the Company's position in the Forwards. These impacts were computed using the fair value methodology under banking criteria.

Net Operating Revenue

Net operating revenue increased year-on-year by Ps.224.7 million, or 37.7%, to Ps.821.6 million in 2Q10 due to the reasons stated above and the increase in other income (expense) of operations. During the quarter, the Company reported other income from operations of Ps.14.2 million, including Ps. 6.2 million from written off loans that were sold, and Ps. 8.0 million from restructured loans. On a sequential comparison, net operating revenue increased 12.4% from Ps. 731.2 million in 1Q10.

Net Operating Income

Net operating income for 2Q10 decreased year-on-year by Ps.18.9 million, or 10.5%, to Ps.160.6 million. On a sequential comparison net operating income declined 3.3% from Ps.166.1 million in 1Q10.

Total non-interest expense increased year-on-year by Ps.243.7 million, or 58.4%, to Ps.661.0 million in 2Q10 from Ps.417.3 million in 2Q09.  Excluding Finsol, total non-interest expense rose 22.2% YoY, mainly driven by an increase in head count in the collection force. For 2Q10 Finsol's non-interest expense was Ps. 151.2 million, including Ps. 41.7 million in non-recurring expenses mainly related to severance payments from a reduction in head count of 270 people, and the accelerated depreciation of installation expenses incurred from their former offices. On a sequential basis, total non-interest expenses excluding Finsol rose by 1.5%.

During the last twelve months, the Company added a total of 175 branches to its network, of which 163 resulted from the Finsol acquisition, bringing the total network to 369 units at the end of the quarter.

Net Income

As a result of the factors discussed above, and after other income and expenses, and income tax, net income for 2Q10 increased year-on-year by Ps.6.6 million, or 4.9%, to Ps.143.5 million.

Earnings per share (EPS) for the quarter were Ps.0.2004 compared with Ps.0.2172 for the same period of last year.

Finsol Contribution

During 2Q10 Finsol generated Financial Margin after Provisions of Ps. 107.8 million, or 21% of consolidated results, and Net Operating Revenue of Ps. 112.4 million, or 13.7% of consolidated results.   Additionally, Finsol contributed with Ps. 151.2 million of Non-Interest Expense, or 22.9% of consolidated results.  However, these include Ps. 41.7 million of non-recurring expenses mentioned previously.  We expect significant savings for the balance of the year, from the actions taken during the quarter.  For 2Q10, Finsol's average monthly loan origination increased by 44% compared to 1Q10.

FINANCIAL POSITION

Total Loan Portfolio

The total loan portfolio rose year-on-year by 16.7% to Ps.5,386.8 million, reflecting a 15.2% increase in the number of clients during the period, and a 1.3% increase in the average outstanding balance. During this period, Independencia added 14,862 new clients, while Finsol contributed with 162,457 clients. As of June 30, 2010 Independencia had 1,343,900 clients.

The total loan portfolio represented 61.2% of Independencia's total assets as of June 30, 2010, compared with 80.4% of total assets on June 30, 2009. Cash and Investments represented 17.3% of total assets for 2Q10 compared with 7.0% in 2Q09, reflecting proceeds from the US$200 million five-year senior notes issued on March 23, 2010. A considerable part of the cash has already been deployed to reduce the usage of the lines of credit outstanding.

Non-Performing Loan Portfolio

Total non-performing loans reached Ps.605.6 million, up 4.6% on a sequential basis from Ps.578.8 million at March 31, 2010 and up 3.0% from June 30, 2009. The NPL ratio declined to 11.2% in 2Q10, from 12.7% in 2Q09 and rose from 10.7% in 1Q10. Excluding Finsol, total non-performing loans reached Ps.586.8 million down 0.2% year-on-year.

The NPL ratio in the CrediInmediato product in 2Q10 was 13.0%, compared with 13.9% in 2Q09. The NPL ratio for the individual informal segment decreased to 12.3% in 2Q10, from 13.4% in 1Q10 but still higher compared to the 10.3% in 2Q09. In the group lending segment (Finsol), the NPL ratio was 1.8% in Mexico and 3.8% in Brazil during 2Q10, down from 2.4% and 5.4% respectively, in 1Q10.

The coverage ratio for 2Q10 was 68.9%, compared with 75.1% in 1Q10 and 65.7% in 2Q09. The QoQ decrease in the coverage ratio reflects a lower probability of default in our loan portfolio.

Liabilities

As of June 30, 2010 total liabilities were Ps.5,799.4 million, a 43.7% increase from Ps.4,037.2 million on June 30, 2009. Of these, Ps.2,511.0 million reflect the US$200 million bond issue. On a sequential comparison, total liabilities decreased 22.0% from Ps.7,433.0 million in March 31, 2010, reflecting a reduction in the use of our credit lines.

At the end of 2Q10, Independencia's debt consisted of Ps.2,511.0 million (US$200 million) of senior guaranteed notes as described above (due March 2015), Ps.784.7 million in medium-term notes "Certificados Bursatiles" (due June 2011) as well as Ps. 2,218.2 million of bank and other entities loans. Independencia's total available lines of credit amount to Ps.4,200 million.

Of the total lines of credit, Ps.700 million are due in March 2011, Ps.1,250 million in December 2012, Ps.1,250 million in December 2013, and the remaining Ps.1,000 million have an evergreen feature. Additionally, Finsol's total available lines of credit with third parties amount to Ps.1,153.7 million plus a US$4.0 million line of credit of Finsol Brazil.

On February 24, 2010 the Company's Board of Directors approved a Ps. 500.0 million line of credit for Finsol's entities. As of June 30, 2010 Finsol has used Ps. 489.3 million of this facility.  On July 27, 2010 the Board of Directors approved an increase of this facility to Ps. 1,000 million.

During 3Q09 Independencia purchased an interest rate cap to hedge the risk of a significant increase in interest rates in Mexico.  The TIIE cap is set at 7.0% for a notional amount of Ps. 3,600 million, and termination date of October 7, 2010.  In June, the Company purchased another cap to hedge for a period of twelve months starting October 8, 2010 for any increase in TIIE beyond 7.0% for a notional amount of Ps. 5,500 million.

Stockholders' Equity

As of June 30, 2010 stockholder's equity was Ps.3,006.0 million, a 76.6% increase from Ps.1,702.3 million on June 30, 2009. This increase principally reflects the 85,000,000 share capital increase completed on February 5, 2010. All shares were subscribed at the issue price of Ps.10.00 per share. Proceeds of Ps.850 million from the capital increase were used to finance the Ps.530 million acquisition of Finsol, as announced on November 30, 2009. Proceeds were also used to strengthen the balance sheets of the companies acquired by Ps.310 million. This was undertaken during the last week of February.

The year-on-year increase in stockholders' equity is also attributable to net income generated during the period.

Finsol's Contribution

Finsol's Ps.783.4 million loan portfolio accounted for 14.5% of the Company's consolidated loan portfolio. Finsol's total non-performing loans amounted to Ps.18.8 million, equivalent to an NPL ratio of 2.4%. As of June 30, 2010 Finsol reported total liabilities of Ps.1,410.2 million, representing 24.3% of consolidated total liabilities, of which Ps.599.2 million were bank and other entities' loans.

PROFITABILITY AND EFFICIENCY RATIOS

ROAE/ROAA

ROAE for 2Q10 was 19.8% compared with 33.7% in 2Q09 and 24.4% in 1Q10. ROAE for 2Q10 reflects the Ps.850 million capital increase described above. For the first half of the year the ROE was 23.4%, compared to 32.7% in 1H09.

ROAA for 2Q10 was 6.0% compared with 9.8% in 2Q09 and 7.0% in 1Q10 and reflects the high level of cash as of 2Q10 as a consequence of the US$ bond issue.

Efficiency Ratio & Operating Efficiency

From 2Q09 to 2Q10 Independencia increased the size of its loan portfolio by 16.7% and the number of clients by 15.2%. The Company also added a net of 175 offices and increased its total labor force by 19.6% to 11,133 people.  However, compared to 1Q10 the labor force was reduced by 327 people, mainly due to the integration process implemented by the Company as a result of the acquisition of Finsol.

During 2Q10 the Company's efficiency ratio (including provisions) was 80.5%, compared with 69.9% in 2Q09 and 77.3% in 1Q10. The year-on-year increase is principally the result of the Finsol acquisition, which includes Ps. 41.7 million in non-recurring expenses for the quarter as explained previously.  Excluding Finsol the efficiency ratio was 71.9% in 2Q10. Operating efficiency was 27.8% in 2Q10, down 2.1 pp on a year-on-year basis, and 0.2 pp quarter-on-quarter.  Excluding Finsol the operating efficiency in 2Q10 was 25.5%.

DISTRIBUTION NETWORK

At the end of the quarter, Independencia operated 369 offices in Mexico and Brazil. This includes 353 offices in Mexico of which 206 operated under the Financiera Independencia brand name and 147 offices under the Finsol brand name. The Company also operated 16 branches in Brazil under the Finsol Brazil brand name.

The Company's total loan portfolio is well diversified and no federal entity represents more than 10.3% of the total loan portfolio. The three federal entities with the highest loan portfolio concentration are Veracruz, Tamaulipas and Jalisco, with a 10.3%, 8.4%, and 6.9% share of the total portfolio, respectively.

KEY EVENTS

Financiera Independencia Announces Results of Rights Offering

On May 21, 2010 Financiera Independencia announced that on May 20, 2010 it had completed the rights offering process of the 55,000,000 share capital increase approved at the Shareholders' Meeting on April 27, 2010.  A total of 884,712 shares were subscribed at the issue Price of Ps.13.50 per share. The remaining 54,115,288 shares that were not subscribed have been retained by the Board of Directors.  The Board determined that 45,000,000 shares will be kept in the Company's treasury to be subscribed by Eton Park in the event it exercises its subscription right. As announced on December 18, 2009 as part of its investment in Financiera Independencia, Eton Park received the right to subscribe an additional 45 million shares, 20 million shares at a price of Ps.13.50 per share and 25 million shares at a price of Ps.14.00 per share. In the event that Eton Park exercises in full this right, the Company would receive Ps.620 million in additional capital and Eton Park would increase its share interest from 9.3% to approximately 14.7%.  In addition, the remaining 9,115,228 shares that were not subscribed were cancelled as determined by the Board.  As a result of the Rights Offering Process the number of shares outstanding is 715,884,712 shares.

Financiera Independencia Names Chief Financial Officer

On June 22, 2010 Financiera Independencia announced that Mr. Luis Miguel Diaz-Llaneza Langenscheidt will join Financiera Independencia as CFO as of July 1, 2010.  Mr. Diaz-Llaneza is an accomplished executive with extensive experience in the financial and tourism industries, holding senior positions as CEO of Globo Go (Grupo Posadas and Mexicana de Aviacion joint-venture) and at the same time as CEO and founder of Ampersand Soluciones de Lealtad (also a Grupo Posadas company), and formerly as Regional Vice President Latin America and the Caribbean and General Manager in Mexico for American Express Establishment Services.

Mr. Diaz-Llaneza holds a Master's degree in Business Administration from Georgetown University and a BA degree in Business Administration from Trinity University.

About Financiera Independencia:

Financiera Independencia, S.A.B. de C.V., SOFOM, E.N.R. (Independencia), is a Mexican microfinance lender of personal loans to individuals and working capital loans through group lending microfinance. Independencia provides microcredit loans on an unsecured basis to individuals in the low-income segments in Mexico in urban areas of both the formal and informal economy. As of June 30, 2010, Independencia had a total outstanding loan balance of Ps.5,386.7 million, operated 369 offices in Mexico and Brazil and had a total labor force of 11,133 people. The Company listed on the Mexican Stock Exchange on November 1, 2007, where it trades under the symbol "FINDEP". On November 30, 2009 Independencia launched a sponsored Level I American Depositary Receipt (ADR) program in the United States. Each ADR represents 15 shares of Independencia common stock and trades over-the-counter (OTC). More information can be found at www.independencia.com.mx

Some of the statements contained in this press release discuss future expectations or state other forward-looking information. Those statements are subject to risks identified in this press release and in Financiera Independencia's filings with the Mexican Stock Exchange. Actual developments could differ significantly from those contemplated in these forward-looking statements. The forward-looking information is based on various factors and was derived using numerous assumptions. Our forward-looking statements speak only as of the date they are made and, except as may be required by applicable law, we do not have an obligation to update or revise them, whether as a result of new information, future or otherwise.

SOURCE Financiera Independencia, S.A.B. de C.V., SOFOM, E.N.R.