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Edited Transcript of CREAL*.MX earnings conference call or presentation 23-Apr-20 3:00pm GMT

Q1 2020 Credito Real SAB de CV SOFOM ENR Earnings Call

Mexico D.F. May 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Credito Real SAB de CV SOFOM ENR earnings conference call or presentation Thursday, April 23, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Angel Francisco Romanos Berrondo

Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Chairman & CEO

* Carlos Enrique Ochoa Valdes

Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO

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Conference Call Participants

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* Adrian Garcia;Invesco;Senior Credit Analyst

* Ernesto María Gabilondo Márquez

BofA Merrill Lynch, Research Division - Associate

* Gilberto Garcia

Barclays Bank PLC, Research Division - Assistant VP & Equity Research Analyst

* Henry Chu;Fidelity Investments;Research Analyst

* Marcelo Herz

INVEX Controladora, S.A.B. de C.V., Research Division - Research Analyst

* Natalia Corfield De Melo Monteiro

JP Morgan Chase & Co, Research Division - Head of Latin America Corporate Research

* Nicolas Alejandro Riva

BofA Merrill Lynch, Research Division - Research Analyst

* Nikolai Krassimirov Dimitrov

Morgan Stanley, Research Division - Research Analyst

* Roger Horn;SMBC Nikko Securities America, Inc.;Senior Emerging Markets Strategist

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Presentation

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Operator [1]

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Good morning and welcome, everyone, to Crédito Real's First Quarter 2020 Earnings Conference Call. Crédito Real issued its quarterly report on Wednesday, April 22, 2020. If you did not receive a copy via e-mail, please do not hesitate to contact us in Mexico City at +52 (55) 5228 9753.

It is important to note that the presentation and MP3 recordings 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 statements. With us this morning from Crédito Real, we have Mr. Angel Romanos, Executive Chairman and CEO; and Mr. Carlos Ochoa, Deputy CEO. They will discuss on the more important strategic financial and operating aspects of the first quarter 2020. I will now turn the call over to Mr. Romanos.

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Angel Francisco Romanos Berrondo, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Chairman & CEO [2]

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Thank you, operator. Good morning, everyone, and thanks for joining us. Drawing from its resilient model and comprehensive standards, Crédito Real was able to post double-digit growth rates at both its consolidated loan portfolio and credit origination, along with a record low NPL ratio of just 1.5%, driven by the incorporation of high-quality assets during the last 12 months, despite the challenging economic backdrop amid the COVID-19 outbreak.

Here, it is worth noting that the company before the pandemic outlined its priorities at the light of the situation being the main one to safeguard the health and welfare of its associates and stakeholders. Consequently, most of our associates have been working remotely since March 20th, in line with the timely execution of our business continuity and disaster recovery protocols that encompass a number of well-defined initiatives to operate under unstable environments. Additionally, we have implemented different measures to protect our liquidity, capitalization and asset quality to run a stable volume of transactions and preserve key operating measures.

Now breaking down results by business segment. In Mexico, especially noteworthy, was a portfolio growth achieved at SMEs, recording an annual growth rate of 74.8%, coupled with a 40 basis point improvement in delinquency. In addition, its origination increased 50.5%, but below than the average trend of previous quarters. As we pursued the execution of a planned deceleration that followed the implementation of stricter standards oriented to serve the asset quality.

On existing loans of this portfolio, we started approaching clients belonging to the industries at higher risks, such as restaurants and retailers to support them with suitable solutions to transit through this difficult period. Likewise, Payroll's origination followed the same deceleration trend than SMEs, and in the NPL-wise remained rock solid, recording a best-in-class ratio of 1.1%, outstanding its resiliency amidst the environment.

Here, it is important to note that we do not foresee that collection of this segment suffers any major downturn as savings measures taken by federal and state governments, where most of our clients belong are aimed towards upper ranks, not at the unionized level that we serve. Meanwhile, the origination drop at Used Cars Mexico is explained by softer dynamics, as a result of the temporary demand shift from durable to basic consumer goods.

We expect that this challenging backdrop will extend in the next 3 to 6 months, followed by a demand surge once the environment normalizes towards the second half of the year. All in all, our loan portfolio in Mexico totaled MXN 38 billion as of March 31, 2020, climbing in a double-digit growth rate. In relation to Crédito Real USA, the expansion of our product offering to the Hispanic market through our businesses in the United States, especially in the promotion of cross selling products, propelled a 165% annual increase at its total portfolio, which amounted to MXN 5.4 billion. Shedding some color on the U.S. environment, we foresee that the economic package of Trump's administration to face a COVID-19 crisis will contribute to offset negative impacts amongst our target market.

Last but not least, in Instacredit, the loan portfolio increased 33.5% to MXN 6 billion, explained by a more stable economic environment in the countries where we operate, which was translated into a 21.8% year-over-year hike in origination of new loans. It is relevant to underscore the Central Bank -- the Central American governments have been stricter to contain the pandemic adopting action that embraces borders and air traffic closures in addition to lockdown measures. In this context, as some of our branches have been closed in line with local authorities mandates, we have reached agreements with many markets and pharmacies to move forward with our collection processes, where we not foresee any major impact at the time being.

Wrapping up, our international business represents almost 25% of the total portfolio, allowing us to sustain a highly diversified operation. Before these developments and striving of further fortify our liquid assets and capitalization, we have opted to delay the dividend payment scheduled for the second quarter over the second half of the year and temporarily ceased the activities of the stock buyback program. These actions, together with our current cash balance of over MXN 1.9 billion and resilient cash flow generation will provide the strength required to face the economic slowdown and fully tap into the arising opportunities as soon as the environment normalizes.

Separately, it is important to bring forth into the analysis the protection provided by our hedging instruments, such as FX and interest rate swaps, which have resulted in a significant mark-to-market fair valuation gain against the revaluation of the foreign-denominated debt.

Additionally, we feel confident to successfully roll over the maturities scheduled for this year, encouraged by the positive feedback of both bondholders and credit trading agencies, which are positive on our asset quality and resilient operation, which is widely supported by solid guarantees and collaterals, coupled with an agile access to local and international markets that was clearly shown over the quarter with a subscription of a USD 110 million syndicated loan and MXN 1 billion rise in the credit line established with Banorte. Before ending my participation, in guidance wise we are closely monitoring the volume, the development of the contingency and its impact to our operations. Therefore, we are still complying all due elements to update our estimates. But as soon as we get a clear vision, we will let you know in a timely manner, our prospects for the rest of the year. Finally, I would like to express my gratitude to our customers, partners, associates and shareholders, whose invaluable support greatly courage us to overcome the headwinds.

With this now, I will hand the call over to Carlos. So he can explain the numbers in a more timely fashion. Thank you very much.

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [3]

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Thank you, Angel, and good morning, and thank you all. Kicking off with the P&L, interest income for the first quarter 2020 decreased 4.9% or MXN 138 million year-over-year to MXN 2.7 billion, largely attributed to a softer starting of the year in our Payroll business, a planned deceleration in the origination growth base in the SMEs and a more conservative approach on credit granting procedures to adequately overcome the arising challenge.

Interest expense amounted to MXN 1 billion, increasing 1.3% year-over-year, including a nonrecurring charge of MXN 64 million, derived from a derivative unwinding of $110 million credit facility. Adjusting for these items, interest expense dropped 4.7%, mainly driven by a more supportive interest rate environment and additional debt arranged under more favorable terms since the second half of 2019. Therefore, financial margin stood at MXN 1.68 billion, decreasing 8.6% or MXN 152 million when compared to that of the first quarter of 2019.

Net provision for loan losses totaled MXN 460 million, increasing MXN 123 million or 36.4% year-over-year, primarily reflecting the additional allowances established in advance to the potential effects of COVID-19.

Consequently, the coverage ratio improved to 219.1% from 207.9% in the first quarter '19. Moreover, the cost of risk stood at 3.7% versus 3.5% in the first Q '19, reflecting an effective risk management and control practices. Administrative and promotion expenses dropped 9.6% or MXN 82 million on an annual basis to MXN 773 million, explained by higher savings achieved in Mexico and Central America plus lower expenses from divestitures of Resuelve. As part of our efforts oriented to preserve cash flow generation. All in all, net income reached MXN 305 million. On a normalized basis, net income registered MXN 350 million compared to the MXN 470 million in first Q '19. As over both periods, we recorded nonrecurring effects from derivatives unwinding from the settlement of our debt.

In this regard, our bottom line softly reflect the COVID-19 effect on the overall origination activity and risk related strategy to cope with the current global situation, coupled with a softer economic dynamism in Mexico, which was partially offset by lower financing costs and generation of further operational efficiencies. Return on average equity reached 6.9% as of quarter end and when excluding the perpetual notes premium, it attained 9.1% rate. Return on average assets stood at 1.8%. Capitalization ratio stood at 38.5% as of quarter end compared to 41.9% in the first quarter of '19, a clear illustration of the company's strong capitalization. Here, it is important to mention that in all the stress test run by different credit rating agencies, we remain in an adequate financial position before the cycle. In the same line, average cost of fund solidly improved to 9.4% when compared to this 13.7% registered in the same period last year, mostly driven by the reference rate cuts performed by central banks over the last 12 months, which are expected to continue in line with the prevailing monetary easing policies, which are oriented to maintain economic traction before the COVID-19. Therefore, we are anticipating a further favorable environment for the company's average cost of funding, coupled with the arise of new financing opportunities that could be instrumental to capitalize the economic recovery and demand surge towards the year end. Breaking down loans portfolio by business segments, consolidated loan portfolio expanded 29.7% to MXN 49.7 billion as of March 31, 2020. Following the growth achieved at all segment, especially noteworthy, SMEs and Payroll. Consolidated small and medium-sized enterprises portfolio posted an annual growth of 98.8% to reach MXN 10.5 billion. On Payroll, loan portfolio totaled MXN 28.4 billion, increasing 11.5% or MXN 2.9 billion, showing a firm resiliency.

In the operating metrics of this portfolio, we do not foresee -- we did not foresee a significant impact of the lowered economic activity as income streaming of most clients come pretty much from labeled budget of Federal and State Governments. Meanwhile, used cars in Mexico portfolio rose 22.3% on a year-over-year basis, amounting to MXN 1.5 billion as a result of an incremental demand for second hand cars over the last 12 months, despite a lower origination during the quarter. In this portfolio, origination is expected to resent affectations over the following months, expecting recovery towards year end. Moving to our international businesses. Our portfolio in the United States increased 165.2% year-on-year, reaching MXN 5.4 billion as our product offering expansion into our target market continues to fuel positive results. Furthermore, we anticipate NPL will remain contained, as significant portion of our clients in the USA are already receiving some kind of aid from the Federal Government.

Lastly, Instacredit's loan portfolio amounted to MXN 6 billion, an annual increase of 33.5% following the strategies deployed to build a wider and solid operation. In this segment, we anticipate a softened economic impact from the COVID-19, drawing upon the timely measures adopted by Central American countries to contain the outbreak. And our obtained learning from Nicaragua in 2018, which certainly provides valuable insights to operate before these conditions.

Wrapping up with the P&L, our consolidated nonperforming loan ratio decreased from 1.6% in the first quarter '19 to 1.5% in this quarter, derived from the continuous incorporation of high-quality assets, thus providing us firm grounds to support to weather the challenges. At the life of the providing backdrop, it is worth noting, according to our estimates for total loan portfolio, as long as our NPL ratio does not exceed the 5% mark, a level that we have not seen a long time ago, we will generate enough cash to continue to grow the portfolio.

Moving to the balance sheet. As of the end of the first quarter 2020, total assets attained MXN 73 billion, 43.5% or MXN 22 billion higher than that reported as of March 31, 2019, as a result of the achieved growth at the consolidated portfolio and the comprehensive execution of funding and hedging activities over the last 12 months.

Total debt increased 60% or MXN 19 billion year-over-year to MXN 50 billion -- MXN 51 billion, largely reflecting the depreciation of the Mexican peso against the U.S. dollar over the last 12 months and the placement of our senior notes due 2027 and other activities for financing conducted during 2019 alongside a subscription of $110 million indicated facility over the quarter. Here, it is important to mention that of the MXN 8 billion scheduled to be refinanced this year, we have achieved significant advances, while received wide support from our current base of debt holders to take additional positions, as they are pleased with the attractiveness of our securities risk adjusted returns, which are anchored to our solid underlying fundamentals, that Angel well described at its yesterday's letter to shareholders.

Likewise, it is important to restate that we count on solid guarantees and collaterals to -- as all our products and businesses segments and broad access to international market, coupled with adequate liquidity and capitalization levels. Finally, the stockholders' equity reached MXN 19.1 billion, climbing 19.3% or MXN 3.093 billion on an annual basis as a result of the already discussed factors. With this, I complete my remarks. And now let me turn back the call to the operator to open the line for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [2]

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Thanks for the opportunity. My first question is on your net interest income. We saw an important decline in the yield of all the segments of the portfolio, but particularly in the Payroll loans. So what should we expect for this segment and for the net interest income in the next quarters? And then for my second question. How should we think about provision charges and cost of risk in the next quarters? Are you going to provide a grace period to your clients, as some of the banks have been doing and what could be the segments that are under risk of the COVID-19. Would it be, SMEs, Used Cars loans? And my last question is on your capital ratio. We're looking equity to assets, it seems to be the same ratio. But when you are seeing these equity to total loans, it increase a little bit. So why -- what should be the ratio we should be looking at? And when do you expect to issue that in the market?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [3]

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Angel, would you like to address that? The first part of the question. And I address the second part.

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Angel Francisco Romanos Berrondo, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Chairman & CEO [4]

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Yes, could you repeat the first part, please?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [5]

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Well, the first -- and let me answer that one, Ernesto. First, thank you for your question. Well, what we saw during the first quarter was the low origination, especially in the first couple of months in the Payroll business. This is explained by a couple of factors. One of them, as you look at the concentrations that we have with the teachers, I mean, that they barely amount something roughly something around 35% to 40%. If you think that they are on the Christmas break and the Christmas break last until the first couple of weeks of the -- first couple of weeks of the year. Well, that sets us in the -- that sets a seasonality, a negative seasonality, when it comes to the origination. If something similar happened, this year was different when the -- with another important segment of our business, which is the -- which are the pensioners, the origination has been rather low in the first couple of months. And that decline, especially for the last part of the quarter, that decline increased. So that led to a slight decline in the income generated by that business. We would expect that for the second quarter, I mean, as long as with the lockdown measures that we are seeing, the originations in all our lines of business will be declining. And that's what partially explains the decline in the income for the first quarter. And there was also a negative effect of an unhedged portion of our liability that roughly amount to MXN 200 million or something like that. So basically, the combination of all these effects was that affected the income generation for the first quarter. And when it comes to the -- what we expect for the second quarter and what we expect for the segment to be more affected by the crisis. Well, clearly, that has to be on the SMEs front. I mean, clearly, if that happens, it has to be on the SME front. What we did during the first quarter when the -- when this whole situation erupted. What we did is, we met our -- all our customers, and we -- and basically, we identified the different concentrations in the segments which are more exposed to the virus, mainly restaurants and also retailers, probably, and the other ones are something related to the tourism industry. And we believe that the exposure that we have in this segment amount to roughly 350s, 400, something in that range, it's something in that range. That's the amount of portfolio that we have exposed to these segments that I was mentioning. We are not, I mean, as a rule of thumb in Crédito Real, when it comes to answering or trying to answer your question about whether we are granting grace periods of renewed efforts of the time. What we are trying to do is to approach the customers on a customer-to-customer basis, meaning that we try to solve the situation, we try to find a solution, a particular solution for every single customer. I mean, that has proven to be efficient because what we believe is that the way we see things, I mean, for example, when you look at the banks, we do not necessarily agree with the strategy performed by some of the banks in which they grant all across the board grace period for all the customers. We do not necessarily agree with that one. Because we believe that you are generating a problem that you do not have and that every customer needs a particular solution. So basically, what I'm trying to say is that by defining a particular solution to customer-to-customer is definitely more efficient. And finally, when it comes to the capitalization. Everybody is well aware that P&Ls, all across the board are going to be affected by the crisis, due to the economic slowdown in Mexico that started last year and the crisis in this time, everybody acknowledged that the P&Ls are going to be affected. So probably, it's worth mentioning that it is the robustness of the balance sheet, which will -- which give us all the tools to cope with this situation. And in that regard, we -- that's what we -- one of the things that we decided to do for -- when this whole situation started, was to protect the capitalization. And those are the 2 reasons -- and that's the reason behind the decision of delaying the dividend payment and also that's the reason behind stopping the buyback program to protect the capitalization.

So that's basically what we are aiming to do. And in terms of capitalization, we feel comfortable with the level -- with the current level, but we are closely looking at the rating agencies, how -- where do the rating agency feel comfortable and so on. So basically, that's what we intend to do as long as the risk-adjusted capitalization is consistent with the rating agencies methodology. We are -- as long as we are within the boundaries of, let me put it differently, as long as we are not risking our ratings, I think that the capitalization should be okay.

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Angel Francisco Romanos Berrondo, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Chairman & CEO [6]

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Carlos, if you let me add something. We're doing exactly what we did in the 2008, 2009 crisis. That's what Carlos explained. We're going on a one by one basis in all of our businesses that are not Payroll. And we're finding specialized solutions for every customer, and that worked out to be our strength, and we came out of the crisis more stronger, much more stronger than most of our competitors, and we were able to surpass them both in portfolio and in good assets, as the crisis went on. We're following exactly the same steps as we did in that crisis. The only difference with this one is that people are working at their homes. And something that I'm very proud of our technology team is that they were able to put 100% of our people online, working, in less than 3 days.

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Operator [7]

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Next questioner. Your line is live, please announce yourself.

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Nicolas Alejandro Riva, BofA Merrill Lynch, Research Division - Research Analyst [8]

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Carlos and Angel, it's Nicolas from Bank of America as well. I have two questions. The first one, so we saw the announcement from Banxico from the Central Bank this week to inject liquid into the financial system. My understanding is that this directly impacts only banks, commercial banks and development banks, and that they can ask for loans from the Central Bank, et cetera. Do you expect some of this additional liquidity into the banks to filter down to you, for example, to the non-bank financials in the sense that you might be getting more credit from, let's say, NAFIN from the development banks, as they will have more sources of liquidity from the Central Banks. So that's my first question. And my second question, in terms of the bank financing. So you have about $290 million coming due this year. I understand that basically, bank loans, you mentioned in the press release that you continue to have good access to bank financing. You subscribed that bank loan for $110 million, increased the credit line with Banorte. Can you discuss, if you have seen the banks turning a bit more cautious, specifically in the last few weeks with the lockdown, with the economic crisis, if you are seeing them a bit more cautious to roll over bank loans?

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Angel Francisco Romanos Berrondo, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Chairman & CEO [9]

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Yes. To answer the first part of your question. We are working close together with the development banks. We got a 1000 -- MXN 1 billion increase in our NAFIN line, earlier this year. And we're working with -- on safety with ex BANSEFI, now Banco del Bienestar to get a loan, which we believe would be MXN 1.2 billion that should be coming in the next couple of weeks. So we believe that the segment we're in and what the actual government is worried about that they like our segment, and they're going to push for banks to help us. We have not seen any liquidity problem so far. But obviously, banks are being more cautious, banks are basing a lot of their decisions on what aged credit agencies have to say and how we see our balance sheet. But I think, we are in a good position to renew most of our credit lines with the banks, as they come to an end.

We're not seeing this as liquidity crisis like it was in 2008, we are at a different type of crisis so far.

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Operator [10]

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Next questioner, your line is live. Please announce yourself.

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Gilberto Garcia, Barclays Bank PLC, Research Division - Assistant VP & Equity Research Analyst [11]

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This is Gilberto Garcia from Barclays. I had a follow-up on the interest income in Mexico. I understand that the lower origination is a headwind, but we were surprised by the magnitude in the decline in yields. I don't know if you -- if there were any extraordinary items affecting that because even comparing on a sequential basis, where the mix was fairly similar and origination levels were not as lower. There was -- we saw a rather significant decrease in the interest income line, particularly in Mexico. So if you could provide any color, it would be much appreciated?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [12]

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Yes, definitely. I mean, it was a combination of 2 effects, as I mentioned earlier. If you look at the -- especially, if you look at the origination on the SMEs front, as of the end of the first Q, the origination totaled MXN 2.7 billion, when you compare that one to the MXN 4.1 billion that we originated on the SMEs business last quarter and the last quarter of '19. Well that explains -- partially that explains plans, partially the drop on the income line, as I was telling you now. That explains a big portion of that. When it comes to the Payroll business as well, if you look also, there's low origination, even that you did not receive payments from the government agencies you work with for the first 3 months, the provision -- the income provision that these generate was much lower. And basically, the combination of these 2 factors led to a big decline in the yield for the first quarter.

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Gilberto Garcia, Barclays Bank PLC, Research Division - Assistant VP & Equity Research Analyst [13]

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Okay. So there were no extraordinary items then?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [14]

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No. Well, there was also another thing on the unhedged portion of a liability that amounted something for, I don't know, probably MXN 300 million or something like that. So that's a combination of those 2 -- of all those factors.

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Operator [15]

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Next participant, your line is live, and please announce yourself.

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Marcelo Herz, INVEX Controladora, S.A.B. de C.V., Research Division - Research Analyst [16]

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Couple of questions. Marcelo Herz from INVEX. The first question is regarding, obviously, what we're seeing here in the U.S., and what's the major job losses here. We also have seen a major decline in remittances to Latin America. Your customers in Crédito Real USA are mainly are Hispanics. And I would imagine that at least a part of them tend to send remittances to Central America. So given these factors, if you can give us some color in terms of what do you expect the impact of job losses that we're seeing in the U.S. would be on NPLs, both for Crédito Real USA and Instacredit? I mean, any color you can give us? I mean, are you expecting a spike in NPLs in Instacredit and Crédito Real USA?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [17]

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Look, hard to say at this point. I mean, it's hard to estimate how the NPLs or the performance of the book is going to be affected altogether. What we believe is that, given the massive support that the U.S. economy is getting either from the federal government, from the Trump administration and from the fed itself. We -- what we believe is that these crisis is going to be V-shaped in the U.S. and that's not something that we would expect in Mexico. And it is probably similar, you know that V-Shape crisis is what we would expect in Central America as well. I mean, the Central American governments were very pragmatic from the beginning of the crisis in terms of lockdowns and in terms of closing their borders and so on and so forth. And I think that they will be -- they are well prepared to deal with these crisis. Hard to assess how it's going to be the effect -- how -- what's going to be the effect on the different lines of businesses, but I think, what we could speculate on is how long it's going to take to recover in the different places. If you look at the effects that we saw in the U.S. business, even in the -- for example, in the -- we have several different lines of business over there. For example, in the case of the Used Cars business, we feel comfortable with the way that the portfolio is performing. And it's also similar to what we are seeing in the Texas-based business. I mean, it has been rather stable so far. Where we have been hit the most, and that explains the decline in the net income, in the consolidated net income in the United States as we disclosed it yesterday. And as you see that we posted a lot in the United States of MXN 9 million, altogether. It was basically attributed to our SMEs business in California. Those are the segments that have been affected the most. Then on the bright side of the story is that some of those customers are already getting some federal government benefits. So I don't know. I still -- it's hard to say how are going to be affected, the different lines of businesses. We are treating them, as I mentioned earlier, on a customer-to-customer basis. And let's see how things evolve. When it comes to the remittances, first, in Mexico, if you look at our customer base, none of them rely -- or particularly none of them rely on the remittances because you have the Payroll business and there, we have the SMEs, which are more larger. So we wouldn't be expecting a big change in the performance of the book due to a smaller amount of remittances and that's something similar to what we are expecting in Central America.

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Marcelo Herz, INVEX Controladora, S.A.B. de C.V., Research Division - Research Analyst [18]

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Okay. Another question, and this is regarding origination. You've said that most of the employees are working from home now. And the question is how -- what's the process of origination now? Because I would have thought that people -- this is a person-to-person type of activity to originate new loans? I mean, how is the process different now? How are you doing it?

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Angel Francisco Romanos Berrondo, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Chairman & CEO [19]

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Look, we are doing most of our origination from a call center for the Payroll business. And it's working quite good. It's obviously going to be down from the last quarters origination wise. But it's not as low as we thought it would be. So we're doing fine on that one.

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Marcelo Herz, INVEX Controladora, S.A.B. de C.V., Research Division - Research Analyst [20]

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And what about in Central America? How does that work out?

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Angel Francisco Romanos Berrondo, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Chairman & CEO [21]

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That, we're slowing a bit on origination, and we're collecting through agents like pharmacies and drug stores and people we have agreements with to collect our payments. So things are going to normalize there much faster than in Mexico because of the measures they took.

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Operator [22]

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Our next question is live, please announce yourself.

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Unidentified Analyst, [23]

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Can you hear me?

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Angel Francisco Romanos Berrondo, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Chairman & CEO [24]

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Yes.

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Unidentified Analyst, [25]

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Sorry, I wasn't sure, I was on. My name is [Juan Husant], calling from Banco Finantia. I just have a couple of questions. First one is on the new origination throughout the rest of the year. Can you give us a bit more detail, obviously, we understand you are more cautious now and more conservative on origination and volumes will decrease. But in terms of the origination mix. Do you still have a target throughout the year?

What should we expect throughout the remainder of the year? The second question I have is with regards to provision. Obviously, your coverage ratio now is about 200%. My question is, once the nonperforming loans start to -- once loans actually materialize into nonperforming loans, what should we expect in terms of coverage ratio throughout the second half of the year, are we going to see mid-100s, low-100s? Are you comfortable with below a 100%? If you can give us a bit more color on that would be very appreciated.

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [26]

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Angel, do you want to address the origination part?

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Angel Francisco Romanos Berrondo, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Chairman & CEO [27]

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Yes. We are concentrating our efforts on originating the most we can, on the more countercyclical businesses we're in, and that's mainly Payroll. So we're working on how to originate more through the call center. As I said before, we still have a bunch of sellers on the streets, but they're having a rough time finding people, obviously. We're keeping our origination in line, and we want to concentrate during the crisis on that. And the other businesses we're being very cautious. As we did in the past crisis. So we're concentrating our efforts in lending to people that are already our customers and that are finishing paying a loan and they need a new one, but we know how they behave. We really don't need a lot of credit analysis just to see if something material has changed on them. But we're being -- will be very cautious on origination.

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Unidentified Analyst, [28]

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So could we expect, for instance, Payroll origination to be more than 50% of new origination for the rest of the year?

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Angel Francisco Romanos Berrondo, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Chairman & CEO [29]

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We don't have a number yet because this is pretty new to all of us, and it's just starting to go on, but that's how it behaved in 2008 and '09, almost 50% or more of our origination went to Payroll. And we would like to see that again because that's a super countercyclical business. We feel very comfortable originating there and the collection process is fine.

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [30]

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Now let me address your second question. I mean, when you ask about the coverage ratios, specifically. I mean, for starters, it's worth mentioning that the way we provision for the NPLs is based on expected losses, consistent to what the CNBV the Mexican regulator requires us. So in that regard, if at some point, it stands at 219 as it does at the end of this quarter, well that is basically an input for us. I mean because it is based on expected losses. Now when it moves from the -- above the 2% -- 200% excuse me. When it moves above the 200%, it's mostly explained because of the asset quality improved somehow, meaning that it is stayed at the 1.5% or something within that range. So as long as the -- my guess at this point is that as long as the NPL remained under the 2%, probably the coverage ratio keep should be staying at the -- at now in the 200% range. In any case we feel comfortable, given the current circumstances, we feel comfortable with our current coverage ratio.

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Unidentified Analyst, [31]

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But if NPLs go above let's say, 3%. And you're starting to see the recovery, you would be comfortable with a lower coverage ratio, right?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [32]

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Yes. But then again, it's -- I mean it's hard to speculate on that one because as I mentioned, it's a methodology. Because it's going to depend on, which lines of business are affected the most. And that is when you have the effect on the provisioning. So I mean, what I'm trying to say is that we don't have many choices in that regard.

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Unidentified Analyst, [33]

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And on this ratio -- on the loans, do you have covenants? And can you remind us what the covenant is, the covenant level?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [34]

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The -- on which loans, on which facilities you...

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Unidentified Analyst, [35]

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On the syndicated term loans, for instance.

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [36]

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Yes. I mean, in those cases, you have like, I think it's a 4% NPL ratio or 5%, something within that range. We are well under that one.

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Operator [37]

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Next participant, your line is live, and please announce yourself.

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Adrian Garcia;Invesco;Senior Credit Analyst, [38]

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This is Adrian Garcia from Invesco. I have 2 questions. One is regarding the amount of your portfolio that is due this year. Can you let us know how much is maturing this year of your total portfolio? And if you have any sensitivities out of that amount, how much do you expect to maybe not be able to collect due to the crisis? And the second one is on the new origination, are you -- what sort of rates are you originating at? Are you seeing -- in order to incentivize more, are you originating at lower rates? And I guess my question is, what is the average yield of your portfolio and if it will be affected this year?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [39]

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Well, I mean -- let me see if I understood your second question, you were asking the rates, the interest rates that we are charging? What was the second question?

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Adrian Garcia;Invesco;Senior Credit Analyst, [40]

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Correct. When you provide a loan, you charge x amount of rate, right? So my question is, you're seeing pressure to originate at a lower rate to attract more customers, right? So if you can show -- like could you give us an indication as to what is your rate of return on your loans right now?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [41]

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Look, I mean definitely, if you look at our cost of fund -- if you look at our cost of funds, which is considerably higher, for example, compared to whatever the banks may have, we cannot compete with the rates that they charge, right? We cannot complete by rate. That's what I'm saying. So for example, if you think about how do we compete in the case of the Payroll business, I mean, in the case of the Payroll business, you do not compete by charging a lower rate. The way you compete in that business is by having a largest sales force. So basically, that's normally -- I mean, if you look in all the lines of business, what all they -- what all our customers they have in common is that they value the service the most, and that's the way we compete and not by lowering rate. And that's how it works in all the -- in all our lines of business. So we wouldn't be expecting to lower rates in order to gain a share of the market. And we haven't done that in the past, and we won't be doing it -- definitely we won't be doing it this time.

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Adrian Garcia;Invesco;Senior Credit Analyst, [42]

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Okay. And then on my first question.

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [43]

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Sorry, I forgot about the first question. What was that? Could you repeat that one again? Sorry.

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Adrian Garcia;Invesco;Senior Credit Analyst, [44]

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Yes. Can you -- yes, no problem. The amount of your portfolio -- of your loan portfolio that is coming due this year?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [45]

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Let me see, I mean -- I don't think I have that 2 years here with me. But I could definitely provide it to you. I have all the -- in terms of amortizations and things like that. But I could provide it to you later.

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Adrian Garcia;Invesco;Senior Credit Analyst, [46]

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Sure. Thank you.

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [47]

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In any case, I mean, but in any case, probably the way to address that question is it if you look at the duration, the average duration of all our lines of business, for example, in the case of the Payroll, I mean, it's 44 months on the average. For this year, you should be collecting, I don't know, 25% of the book or something like that. And that duration is similar to what you -- similar to what we have on the SMEs front and so on and so forth. But the exact figure, I don't have it here with me, but I could definitely provide it to you.

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Operator [48]

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Next participant, your line is live, and please announce yourself.

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [49]

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This is Nik Dimitrov calling from Morgan Stanley Investment Management. A couple of questions. You did mention the global financial prices in '08, '09, and that you kind of using that same approach at work back then. And I was wondering whether you can kind of -- could refresh our minds in terms of how your book performed in '08, '09, in terms of how high did NPLs go? And if you have to compare with what's happening right now, do you think that we're going to see NPLs go above the level of '08, '09? So that's my first question.

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Angel Francisco Romanos Berrondo, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Chairman & CEO [50]

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Go ahead Carlos.

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [51]

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Yes. Well, I mean, as I have mentioned at some point, I mean, we are -- when it comes to the collection and managing the book in general terms, we are performing the same things that we did in those years. The big difference between now and then is that we didn't have the SMEs book at the time. And what we did have at the time, which was more affected by the crisis, were the personal unsecured loans in -- here in Mexico. So it's hard to compare it. But if you focus on the Payroll segment exclusively, the asset performed just as well. The asset performed just as well. And I think -- and it's hard to speculate about what -- how our things will evolve here because the difference between the 2 crises is that this one was created by -- it started as a health crisis that derives into a financial crisis. But other than that, I mean, when it comes to managing the book, that's what we are trying to do at this point. I don't know if you want to add something on that one, Angel.

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Angel Francisco Romanos Berrondo, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Chairman & CEO [52]

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No. I think that's clear. We're really taking care of the assets, and we believe we can maintain the same levels we did in the 2008, 2009 crisis. We're very careful with what we originate, how we originate it. And I think we're good at that. We've proven it in the past crisis. And we don't expect the NPLs to go way higher than they were on -- at that time.

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [53]

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Got it. Looking at the SME book, which is kind of your new business and that's where growth has been. What percentage -- and I don't know whether you have this number yet, but in terms of what percentage of the borrowers have already approached you or you've approached them for potential renegotiation?

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Angel Francisco Romanos Berrondo, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Chairman & CEO [54]

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We have approached 100% of our customers in SMEs, and we have negotiations with 90%, 95% of them and about 75% as of today will keep paying as they were.

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [55]

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Okay. Okay. These are very important numbers. And you did say that you go on a case-by-case basis. But in general, like if you can kind of give us an idea about the actual renegotiation. Do you kind of extend the terms and continue to accrue interest? Or there is a grace period during which you do not accrue interest? I'm just kind of curious how -- or maybe in certain cases, you have to repossess the asset. But then considering that the whole country has been in lockdown, I don't know whether you can do anything in terms of you repossess the asset, but you can re-lease it on the other side, right?

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Angel Francisco Romanos Berrondo, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Chairman & CEO [56]

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We avoid recovering assets. I think that's the worst we can try or will do now. We prefer to get to an arrangement with the customer to make them, I don't know, for 3 months pay only interest and then go on paying capital and interest and make them do 3 more payments at the end, things like that. We don't want to repossess anything unless we really have to.

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [57]

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Got it. Got it. Okay.

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Angel Francisco Romanos Berrondo, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Chairman & CEO [58]

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We prefer to get to arrangements.

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [59]

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Yes. I mean, it makes sense. It makes sense. Completely agree with you. One question on the NPL coverage ratio. I know that it came up earlier. But when I was looking at your Q1 earnings, obviously, provision expenses increased. And the explanation there is preparation for the impact of COVID-19. But then I look at your NPL coverage ratio as of Q1, I compared it to Q4. So it's exactly the same, like 220%. And I kind of assume that with the increasing provision and expectation of more losses going forward because of COVID-19 is that the coverage ratio has strengthened, and that's not exactly what happened. So I don't know whether you can explain this.

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [60]

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No. I mean, as I mentioned earlier, when it comes to the provisioning, I mean, given that is the methodology that is in line with the CNBV, the Mexican regulator methodology, it's basically an input. That's what I'm trying to say. Yes, you have to be more cautious. I mean, and -- but definitely, what I'm trying to say is that, I guess, that the real effect of this one, especially if you look at the collection, probably the best way to see it is that if you look at the collections for the first quarter, it was -- it increased compared to the first quarter of last year by 20% or something within that range. So the collection as of this first quarter was -- still was solid. And let's see what happens in the second quarter. But yes, I don't know. It's going to depend -- again, it's going to depend more on the NPL ratios than on the -- our efforts are focusing on the performance of the book rather than on the levels of provisions, right?

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [61]

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Right. Right. And last question. Those SME exposures that you renegotiate, and you did say that you approached pretty much all of them, but only kind of roughly 25% of them have agreed to a renegotiation. When you do that, do you have to set aside additional provisions or not necessarily?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [62]

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Yes, we do have. Yes, we do have to. Whenever you have restructure or rescheduling or something like that, you have to provision for those loans?

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [63]

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Okay. Okay. Good. I just want to make sure that in certain countries, there is forbearance going on where they do not have to satisfy conditional provisions. That's why I just want to make sure that this is the case.

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Operator [64]

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(Operator Instructions) Next participant, your line is live.

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Henry Chu;Fidelity Investments;Research Analyst, [65]

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This is Henry calling from Fidelity. My main question is still around why is the Payroll interest down quarter-on-quarter by over 30%? Just now you mentioned there is -- origination is one thing, but origination is -- it's just a couple of percentage of your back book. That's one thing. And the second thing is there is -- I think I've heard a seasonality, but I haven't seen such seasonality in the past. So that's what's confusing me a lot. So I would appreciate you walking me through why it's down so much quarter-on-quarter on the Payroll interest income?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [66]

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Yes. Look, when it comes to the seasonality, let's address the seasonality part first. I mean, if you -- we haven't had that seasonality before in the last 3 years, we haven't had a seasonality in the last 3 or 4 years. Due to the pensioners. Did you recall -- if you recall, I mean we started to view about the pensioners book 4, 5 years ago. And the thing about the pensioners is that you can reach for them all year long, right? You can reach for them. You can reach for those customers all year long. So basically, what I'm trying to say is that -- let me compare that, for example, with the teachers. In the case of the teachers, that's the extreme, the opposite. That would be kind of the opposite. In the case of the teachers, when we had a major concentration with the teachers, and that was before the pensioners, I mean what happened in December. During December, for the Christmas break, I mean, normally, the teachers -- the schools over here in Mexico place, they go on Christmas holidays, let's say, mid-December. And normally, they last until the first week or the second week of January. What's happened at the time and that what explains the seasonality, what happened at the time was that the -- that you have a disbandment of the sales forces, right? Meaning that you have a huge sales forces with a concentration for selling loans to teachers, and they cannot reach them because the teachers, normally the way that we work is that they'll go to the schools into their workplace there. So basically, there was a disbandment. There used to be a disbandment of the sales forces, and that normally lasted until January, to start gathering all the sales force again. And that led to be seasonality around the company. What's happened this year is that first you have the seasonality with the teachers that I just mentioned. And then the origination for the pensioner was much, much lower. So basically, that's what led the lower origination. I'm not sure if I'm being clear, Henry.

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Henry Chu;Fidelity Investments;Research Analyst, [67]

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So what you mean is, let's say, if it's seasonality. So what do you miss this quarter? You -- we would expect to see a massive jump in the next quarter. Is that understanding correct?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [68]

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No, not really, unsure for the second quarter because normally, the origination is during the first -- normally, the originations evens out. This quarter is going to be different. This quarter is going to be difficult as well due to the lockdown, right? I mean because as Angel mentioned at some point, having people on the streets right now is not so easy and for them to find customers is not so easy either. So I wouldn't be expecting a jump over here, but let's see. I mean, it's hard to speculate about that one at this point, right?

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Henry Chu;Fidelity Investments;Research Analyst, [69]

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I see. But -- so lockdown is more a Q2 thing, right? Q1, there shouldn't have been a lockdown yet. And so a large part of this would then be...

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [70]

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Yes. That's right. But January wasn't exactly the last month for the -- actually, it was in the first quarter for the year for the Payroll business was in -- if you look at the origination, I mean for the Payroll business was softer this year due probably to the economic slowdown or things like that, but the origination for the Payroll business as a whole was low. And also, there were also associated to the new administration, some of the renegotiations with the government agencies and things like that. That affected the origination as well as for the Payroll business when it occurred during the first quarter.

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Henry Chu;Fidelity Investments;Research Analyst, [71]

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I see. And the payroll book is flat Q-on-Q. So does it mean that all the new loans that replaced the old loans are of much lower rate? Is it okay (inaudible).

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [72]

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No. I mean, over here, you are not going to see the lower rate. I mean, over her, you don't see the lower rate, what you are seeing are the -- is the principle so now the lower rate, you do not get to see it over here. Actually, it's -- given that the pensioners -- that the portion of the customers in the pension segment is smaller. It's the opposite because the rest of the customer -- the pensioners are the ones who are charged the lowest rate in the Payroll business.

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Henry Chu;Fidelity Investments;Research Analyst, [73]

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Yes. Yes. So you're saying the new loans that replaced the ones that rolled over are the same pricing? Similar pricing. You don't see a dramatic drop in the rates on the new dispersed loans, new originations?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [74]

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No. That's right. That's right.

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Operator [75]

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Next participant your line is live, and please announce yourself.

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Unidentified Analyst, [76]

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I've got just a quick question on -- regarding the exposure in the Payroll loans to public employees and regarding the credit lines that the government has developed or is developing for SMEs. Are you in the process? Will you be involved in the workings of supporting the SMEs? Will you be working with the government or is that an entirely separate program that doesn't involve any player in the sector?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [77]

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Yes. I mean, for starters, I mean, just to remember you that we -- on the Payroll business, we just have public severance, right? I mean, we only -- we exclusively work with unionized government employees and nothing more. Unionized government employees. So basically, we have nothing on the private sector. So I don't know if that was your first question -- that answers your first question.

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Unidentified Analyst, [78]

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Yes, it does.

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [79]

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Yes. And when it comes to the other one, I mean, what we have been doing and we -- and that -- actually, that was something that we intended to do since the end of last year was to approach the development agency. And in that regard, what we've been doing over the past 4 months -- 3, 4 months is that we got USD 50 million from the IDB, and we also increased, as Angel mentioned, at some point, we also increased addition -- we got additional funds from NAFIN, the development agency over here, for MXN 1.5 billion, and that's entirely to support our SMEs business. So yes, we are trying to approach different players and especially development agencies. And let's see how that evolves. But what we are doing specifically with the government agencies is with NAFIN, which we already got additional MXN 1.5 billion. And on the other hand, we are still working with Banco del Bienestar, the state-owned bank here to see if we can get another line to support our businesses, but that's basically what we've been doing.

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Operator [80]

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Next participant, your line is live, and please announce yourself.

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Natalia Corfield De Melo Monteiro, JP Morgan Chase & Co, Research Division - Head of Latin America Corporate Research [81]

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Natalia Corfield from JP Morgan. I have basically 3 questions. My first one is still related to the drop in interest income in this quarter. I understood that, one, there was a decline in origination of SMEs. Secondly, there was also seasonality related to pensioners. And you mentioned something related to not receiving Payroll payments for 3 months. I don't understand if this is related to the seasonality on -- that you mentioned on the pensions. Or this is something else? And -- go ahead.

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [82]

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No, no, no. It's basically those 3 months, it's normally the time. That's normally the time it takes and you -- that's normally the time it takes when you disburse the loan and you get to collect the first payment, right? So normally, on the average, and that has always existed, normally that last for 3 months. That period when the -- normally how it works is that every single government agency we work with in the Payroll business, they have a particular calendar whenever you disburse and whenever you're going to collect the first payment. That's normally how it works. And normally, this period lasts for 3 months on the average. So in order of not affecting the yield dramatically, what you do is that you generate a provision, an income provision that amounts for roughly that -- those 3 months, right? And basically, when you have a smaller -- when you have a low origination that affects clearly, that affects the income as well. I don't know if that answers your question, Natalia.

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Natalia Corfield De Melo Monteiro, JP Morgan Chase & Co, Research Division - Head of Latin America Corporate Research [83]

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Okay. No. It does. So I understand now the -- what you mentioned about not getting the money for 3 months. And then on the seasonality, I still did not understand why wouldn't this -- if it was seasonally, why wouldn't you see a rebound in the second quarter? It's not clear for me how the lockdown will impact you there. And also with regards to that, in the interest rate, that you charged. The average interest rate that you charged in the first quarter, how does that compare to the average interest rates that you charged in 4Q '19, for instance?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [84]

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Yes. Look, what I meant, and we don't expect to bounce back in the second quarter, it's due to the situation that we are living today, to the pandemia, basically, to the pandemic. So basically, that's how -- it's hard to assess, how it's going to bounce back that. When you have the lockdown for -- that's going to last at least until May. So I wouldn't expect the bounce back in the second quarter. This is the abnormal situation that we are living. However, you are right. Normally how it works in a normal situation, for example, if you look at the previous year, yes, it used to bounce back in the second -- for the second quarter, but we wouldn't expect it for this year for the unusual situation that we are to currently living. Basically, that's it.

And when it comes to the rates, the rates that we are charging, I mean the difference that you see between the years, the 2018 and 2019 in terms of rates, those are basically associated to the concentration with the pensioners. You know at some point, if you recall, the pensioners are the best asset and at some point, they amounted for up to 40% of our book. And when -- and that led to a pressure on the yield of the Payroll book altogether. Now that it has leveled with the other lines of business, for example, now that the pensioners amount for 30% or something like that, the yield, the consolidated yield for the Payroll business increases a little bit. That it is not -- what I'm trying to say is that we are not lowering interest rates for -- in many of our lines of businesses.

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Natalia Corfield De Melo Monteiro, JP Morgan Chase & Co, Research Division - Head of Latin America Corporate Research [85]

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Okay. Now going back to the seasonality, the seasonality is impacting the pensioners. Am I correct on that?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [86]

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The seasonality affects the teachers, especially in January. For the first quarter, affects the teachers and the things that basically everybody over here have Christmas break, that affects the origination. However, this year was unusual in the sense that the origination for the pensioners at the beginning of the year was lower, was much softer at the beginning of the year. And also the combination of another factor. I mean the renegotiation with some of the government agencies we work. So basically, those are the different factors that affected the seasonality for this first quarter.

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Natalia Corfield De Melo Monteiro, JP Morgan Chase & Co, Research Division - Head of Latin America Corporate Research [87]

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Okay. And then 2 more questions. One in -- about your collections. I found a number in your annual statement of MXN 32.5 billion expected collections for 2020? Is this number more or less what you're expecting?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [88]

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Yes. I mean, actually, if you think in terms of collection, what we got for the first quarter, what we collected for the first quarter, it's roughly MXN 8.2 billion for this quarter, only exclusively for this quarter. If you compare that one to the first quarter last year, in the first quarter was under MXN 7 billion, MXN 6.8 billion or something like that. So it was an -- there was an improvement this quarter of about roughly 20% in terms of collection this quarter.

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Natalia Corfield De Melo Monteiro, JP Morgan Chase & Co, Research Division - Head of Latin America Corporate Research [89]

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Okay. And lastly, you had your covenants related to NPLs, and I am sure now if it's NPL above 4%. But can you remind me if you reach these covenants, what happens?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [90]

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Look, we just have that covenant for the syndicated facilities. Because if you look at the other -- if you look at all the seniors and so on and so forth, we don't have a performance of the book for covenant. So this is only for the syndicated facilities that at this point are worth -- the 2 of them are worth, I don't know, MXN 210 million. And that's basically -- I don't recall about what's happened and what happens if you reach that one because we are way, way lower than that one. So in worst-case scenario, as you can imagine, well that definitely calls a loan, right?

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Natalia Corfield De Melo Monteiro, JP Morgan Chase & Co, Research Division - Head of Latin America Corporate Research [91]

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Right. So this is just to this new loan that you're talking about. Didn't you have that for your Credit Suisse facilities in the past? Or to the existing one?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [92]

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Yes. Yes. Yes, sorry, the -- that covenant I was mentioning. We just have the CS facilities. When it comes to syndicated facilities, they are all the CS facilities.

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Natalia Corfield De Melo Monteiro, JP Morgan Chase & Co, Research Division - Head of Latin America Corporate Research [93]

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Right. Well, if you could find out what exactly are the consequences, that would be great.

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [94]

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Yes, I'll tell [Renata] to contact you and to see what's happened, to send you that information.

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Operator [95]

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Next questioner, your line is live, and please announce yourself.

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [96]

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This is Nik Dimitrov again. Just 2 follow-ups. The first one is, what is your strategy about Instacredit? In terms of are you going to give borrowers ability to defer payments or restructure, negotiate, whatever you call it? And my second question is going to be, obviously, the dollar price of your outstanding debt has declined quite dramatically. And I was wondering whether you've considered possibly doing some liability management? Or is it all about liquidity at this point?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [97]

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Nick, it's been a while. What we are doing basically in the case of Instacredit, what has proven to be very, very useful at this point was the experience we had in Nicaragua a couple of years ago, given the crisis in Nicaragua. So basically, what we are doing over here in the whole region is we are acting exactly as we did during that time, meaning that the most important thing that we do at this time, even if at some point, you have a spike in the NPL is to be close to the customer and to receive money from the customer. You are not collecting the full payment or you are not collecting the full installment, but at least you get money in order to know how things are working. In every aspect, it has to be impacted with the situation that the customers they are living, and we have to be more lenient in that regard. But what we aim to do in every case, is to collect, to try to collect a -- try to collect at least a small fraction of the payment or the installment. That's how we normally proceed, right? Even if at some point, you have a spike in the NPL, but you get to know who your customer is, so to speak.

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [98]

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Right.

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [99]

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In addressing to your second question, well, right now, it's hard to look in terms of growth. It's hard to think in terms of liability management exercises and so on and so forth. So basically, we're focusing on the liquidity, and we are taking good care of the liquidity.

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Nikolai Krassimirov Dimitrov, Morgan Stanley, Research Division - Research Analyst [100]

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Okay. Okay. And just on Instacredit. I assume that you're basically waiting to be approached, considering how granular the business is rather than approach borrowers proactively the way you did in the case of SMEs. You're basically waiting for the borrowers to become delinquent and then you kind of start addressing the issue.

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [101]

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No. We approach the customers proactively.

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Angel Francisco Romanos Berrondo, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Chairman & CEO [102]

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Not really. Exactly. We do it proactively.

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Operator [103]

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Next questioner, your line is live.

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Unidentified Analyst, [104]

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This is [Maria]. Can you hear me?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [105]

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Yes.

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Unidentified Analyst, [106]

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Okay. Yes, I have some questions. This is [Teresa] from Seminarium Peru. I wondered that (inaudible). So the financial regulator, the CNBV, has given flexibility to (inaudible) stability. Particularly, I want to know how will be the accounting for the provision?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [107]

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Yes, do you hear me?

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Unidentified Analyst, [108]

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Yes. Yes.

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [109]

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Yes. Basically, we haven't changed the way we provision. We haven't changed the way we deliver the provision. And normally the changes that the CNBV has -- normally the changes, if any, that the CNBV has announced lately, they're more -- those changes involve the banks. But in any case, we haven't changed the way we provision.

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Unidentified Analyst, [110]

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Okay. So you do not apply for that, right?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [111]

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No. Correct.

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Unidentified Analyst, [112]

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Okay. So maybe if I could also be given by e-mail the information about the -- how much do you expect to collect this year? And that would be very helpful.

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [113]

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Definitely, if you could send us an e-mail because we don't have your phone number, we just have Maria over here. So shoot us an e-mail, and we will provide you with that information.

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Operator [114]

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Next participant, your line is live, and please announce yourself.

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Unidentified Analyst, [115]

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This is (inaudible). 2 quick questions. You talked a bit about working with your customers in SMEs. How do you work with your customers in a Payroll lending segment where you already have access to the cash from the Payroll? And what kind of things do you look to do there? And number two, kind of related to that, as you look at origination for 2020, and you said you're focusing really on your existing customers. How much of this is really just sort of re-upping into a new loan for existing customers in Payroll versus growing the pot of Payroll available? I mean, it's kind of a growth driven model, but it's hard to see as you're focused on your existing customer base, how growth will be that much more dramatic or to keep up to boost the yield you need to keep going.

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [116]

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Okay. When it comes to the -- the big difference between the SMEs and the Payroll business, I mean, in the case of SME, the customer pays. I mean, you are following -- let me put it differently. I mean, in the case of the Payroll business, the collection process hasn't changed, and we are not required to approach the customers -- all the customers because we collect when it comes to the collection. We collect directly from the employer, and that hasn't changed, right? I don't know if I'm being clear. So the big difference is that in the case of the SMEs, there has to exist a willingness to repay. And that situation doesn't exist in the case of the Payroll business because we collect and get the money straight from the employer. So basically, we are approaching the SMEs, the customers. We are approaching the used car business, all the other lines of businesses, except for the Payroll business where we collect the straight from the employer. So basically, that's a big difference. I don't know if it answers your first question.

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Unidentified Analyst, [117]

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It does, but is there any sort of back and forth of request for renegotiation from those customers? And how do you deal with that?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [118]

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It's similar to what I described in the case, for example, in the case of Instacredit or something like that. In first that you -- first, we focused on the segments in the -- speaking about the SMEs businesses, specifically. We are focusing there. First, what we believe in first was to focus on the segments more -- of the segments of our portfolio most exposed to the pandemia, right? So the investments and things like that and try to figure out a way to solve the situation. I think I mentioned at some point. Yes, in the worst-case scenario, what we do is we repossess the asset because we have collateral, so we are the owners, so whatever we want in that regard. But before getting into that, we try to find a solution. But in any case, normally, it's a different solution for every customer. But what we intend to do on every case is to collect some money from the customers in order to know the prevailing situation of the business. That's for the SMEs, right?

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Operator [119]

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(Operator Instructions) Next participant, your line is live in the conference.

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Roger Horn;SMBC Nikko Securities America, Inc.;Senior Emerging Markets Strategist, [120]

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This is Roger Horn from SMBC Securities in New York. I'm still having a hard time understanding the 800 basis point drop in yields. Can you help me see if I understand it, is a large portion of that due to your proactive risk management by going to SMEs and other clients and saying, okay, I understand you will not have revenues for the next 3 months so let me give you this new loan that defers payments and dramatically reduces the coupon for a short time, that you can still manage and see, as you said, the credit quality, their ability to pay something?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [121]

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No, it's -- we are not granting new loans. I mean we have 2 situations in that regard. I mean, the new loans that we are granting are not restructures or are not to repay existing loans. That's on the one hand. And when we have a situation where we had a problem with a particular customer that -- with a loan that we already disbursed, is when we try to find a solution for them that in every case involves payments from the side of the customer. I don't know if I...

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Roger Horn;SMBC Nikko Securities America, Inc.;Senior Emerging Markets Strategist, [122]

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Yes, so it's okay. So then that's really the same question. So you're changing the terms of the loan to lower the interest rate for a short time, but still make sure that the company -- the SME or whoever pays you something, so that you can see their ongoing credit quality. Is that right?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [123]

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Yes. It's right, but not necessarily lowering the interest rate. And quite frankly, we do not lower the interest rate. What we lower is the amount that they pay and it's either -- let me put it differently. I mean, we could extend the duration and charge them I don't know, for example, 6% for extending the duration of an existing loan. I don't know if I'm being clear. So it's basically -- it's something in terms of they have to pay something. We have to receive some money, but we are not lowering the interest rate that they pay at the origin, at the beginning.

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Roger Horn;SMBC Nikko Securities America, Inc.;Senior Emerging Markets Strategist, [124]

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To me, the yield is -- the yield to me is interest received during the quarter divided by average portfolio, right?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [125]

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That is correct. That is correct. That is correct.

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Roger Horn;SMBC Nikko Securities America, Inc.;Senior Emerging Markets Strategist, [126]

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You're getting what I'm saying?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [127]

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Yes. In that regard, yes, you are lowering the yield. But you are not lowering the interest rate paid by the customer. You're lowering the yield in the sense that you are not receiving the full payment. But the customer -- you are not lowering the interest rate that the customer pays -- originally accepted, right?

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Roger Horn;SMBC Nikko Securities America, Inc.;Senior Emerging Markets Strategist, [128]

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So they'll eventually pay you that interest at a later date?

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [129]

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Yes.

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Operator [130]

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At this time, we have no further questions in queue, and I would like to turn it back over to today's speakers.

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [131]

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Thank you, operator.

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Angel Francisco Romanos Berrondo, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Chairman & CEO [132]

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Thank you. Go ahead, Carlos.

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Carlos Enrique Ochoa Valdes, Crédito Real, S.A.B. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada - Deputy Director General & CFO [133]

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Thank you, operator, and thank you all for participating in this call.

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Operator [134]

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Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.