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Edited Transcript of GENTERA*.MX earnings conference call or presentation 24-Feb-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Gentera SAB de CV Earnings Call

Feb 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Gentera SAB de CV earnings conference call or presentation Friday, February 24, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Enrique Barrera Flores

Gentera SAB de CV - IR Officer

* Carlos Danel

Gentera SAB de CV - Chairman

* Fernando Alvarez

Gentera SAB de CV - CEO

* Patricio Diez de Bonilla

Gentera SAB de CV - CFO

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Conference Call Participants

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* Ernesto Gabilondo

Bank of America - Analyst

* Alonso Garcia

Credit Suisse - Analyst

* Tito Labarta

Deutsche Bank - Analyst

* Lillian Starke

Morgan Stanley - Analyst

* Gabriel Nobrega

UBS - Analyst

* Claudia Benavente

Santander - Analyst

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Presentation

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Operator [1]

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Excuse me, everyone. We now have our (technical difficulty) I would now like to turn the conference over to Mr. Enrique Barrera Flores, Investor Relations Officer of Gentera. Please go ahead, sir.

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Enrique Barrera Flores, Gentera SAB de CV - IR Officer [2]

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Thank you. Good morning, everyone. Thank you all for joining us and for your continued interest in Gentera. I'm Enrique Barrera, the Company's Investor Relations Officer. I'm very pleased to introduce our management team. With us today is Mr. Carlos Danel, Gentera's Chairman of the Board; Mr. Fernando Alvarez, Compartamos' Chief Executive Officer; and Mr. Patricio Diez de Bonilla, Gentera's Chief Financial Officer. They will review the results of Gentera for the fourth quarter period as well as the result achieved during 2016. Please note that during this presentation, Gentera may make forward-looking statements. These do not account for future economic circumstances, industry conditions, Company performance or financial results. Additional information on forward-looking statements can be found in the disclaimer located in our earnings release. I would now like to turn the call over to Mr. Carlos Danel for his presentation. Carlos, please go ahead.

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Carlos Danel, Gentera SAB de CV - Chairman [3]

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Thank you, Enrique and good morning to everyone. As always, we appreciate the time and interest on our conference call. Now 2016 has been, no doubt, an interesting year. It has been a year of challenges, volatility, and uncertainty for Mexico and the world markets in general. This has also brought and will bring tremendous opportunity. Gentera is committed to its sense of purpose to eradicate financial exclusion in a world where we see a tendency to exclude our role to offer opportunity and social value is as relevant as it has ever been.

Now, the potential fallout of the weaker economy, uncertain labor markets, and tighter immigration rules offers Gentera and Compartamos an opportunity to shine. We are ready to serve and years of transformation from a single-product single-country company to a multi-product multi-country company makes us stronger than ever. We feel optimistic about the future and our ability to seize the opportunity if it breaks. We're confident that the segment of the market that we serve will continue to show its resiliency in economic downturns as their independent businesses are highly flexible and their cost highly variable. This means they have much less negative impact from potential downturns in the labor market and slower growth of the overall economy.

It is in this context that Gentera was able to meet its target for portfolio growth for 2016. Year-on-year, portfolio growth remained at strong pace of 17% reaching MXN33.5 billion. Mexico is still the majority of our assets, but Peru and Guatemala continue their strong growth to comprise 25% of our portfolio by the fourth quarter of 2016. Growth of the portfolio in Peru reached 50% driven mostly by the consistent growth of Credito Mujer product, one that was non-existent a few years ago when we acquired Financiero Crear.

The inclusion of group lending in Peru has provided access and inclusion to financial services to many thousand clients who previously were excluded and it contributed to bring the total number of clients served by Gentera close to 3.4 million. The portfolio growth brought with it a year-on-year growth of 16% in interest income for a total of MXN20 billion. This income was partially offset by the increase in interest rates in Mexico and Peru and whilst growth in provisions as a consequence of the growth in the overall levels of NPL, which stood at 4.2% at the fourth quarter of 2016. This increase of NPLs is, as we have communicated in the past, expected and within our guided values of between 4% to 6%.

It is the product of both the change of the portfolio mix as well as of a more competitive environment. Nevertheless, as Fernando and Patricio will expand on, we expect group lending to show better NPL levels in the medium-term, which will help stabilize the overall rate well within our guided values. Early vintage analysis of the portfolio in 2017 already shows strong signs of this happening. This is why for us, credit quality is still not a major concern. As we have done in the past, we will diligently work to both grow as well as control the portfolio.

Now regarding overall operating costs, the whole year 2016 saw Gentera capitalizing on a few of the efficiencies, which we have been working for, for many years. However, the fourth quarter of 2016 registered a one-time expense related to the creation of a MXN165 million reserve for previous years' legal disputes of Compartamos, which might or might not materialize in the future. Similarly, and as anticipated in the third quarter of 2016, Gentera created a non-recurrent provision for MXN110 million related to loans granted to MIMONI, an online lending investment.

Even with these non-recurring items, net earnings growth for the whole year stood at a healthy 7.9% for 2016. If corrected only for negative and positive non-recurring items, net earnings growth for the year would be closer to 15% as guided for 2016. Return on equity for 2016 stood at 22.8%, still well above average of our peers and impressive for a challenging environment.

Our road to becoming a multi-product and multi-country company are stronger than ever. For 2016, ATERNA ended the year with more than 5.5 million active life insurance policies in the three countries. This meant growth of 13.6% to sales year-over-year and insurance now accounts for a significant part of our income.

YASTAS is now present in all 32 Mexican states, covering 98% of Compartamos service offices and in the fourth quarter executed 3.5 million transactions in which 1.7 million were financial transactions. Considering the full-year of 2016, YASTAS executed more than 5.6 million financial transactions, which were part of the 13 million transactions executed in the period. Also worth highlighting is that 2016 was the first year in which YASTAS is a profitable company. This not only contributes to consolidate bottom line, but it also means that we rely much less on third-party channels, goals we have worked hard to achieve.

Now, with regards to INTERMEX, this subsidiary executed 1.1 million transactions during the quarter, which gave the current FX -- result of MXN6 billion in remittances sent through the network. Full-year 2016, INTERMEX executed 4.4 million transactions represent more than MXN21 billion. We are confident that even in the challenging immigration context, [where businesses from Mexico from the US remained] strong and we are well positioned to seize the opportunity to grow.

And now, before I turn the call over to my colleagues and to end my remarks, I would like to confirm our commitment to growth guidance for 2017 published in December, which represents a portfolio growth of between 14% and 16% and an EPS between MXN2.39 and MXN2.46. I will now turn the call over to Fernando who will discuss with you the results of our financial services operations.

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Fernando Alvarez, Gentera SAB de CV - CEO [4]

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Thank you, Carlos. Thank you everyone for your interest in Gentera. I would like to take you through some of the Compartamos main business indicators during the fourth quarter of 2016. Loan portfolio for Compartamos operations considering the three countries in which we have presence, Mexico, Peru, and Guatemala reached an equivalent in each local currency of MXN33.5 billion ending the year growing at 17.6% compared to the fourth quarter of 2015 with Banco Compartamos in Mexico growing annually at 9.7%, Compartamos Financiera in Peru at 50.3%, and a growth of 40% for Compartamos in Guatemala. Mexico's operation share of total loan portfolio moved [from 75% from 80%] in the previous end of the year. This is an indication that geographic diversification process is accelerating its pace.

Now I'll talk growth experienced by product methodology. Group loans for the three operations grew 14% in the last 12 months, from an equivalent in each local currency of MXN17.8 billion to MXN20.3 billion. This growth was distributed as follows: 9.7% growth in Mexico, 143% growth in Peru, and 40% growth in Guatemala. NPLs in these three group loans operations posted ratios of 4.11% for Mexico, 0.70% for Peru, and 3.95% for Guatemala. Nonetheless, we were already expecting and we have been guiding for the last quarters that we were expecting to operate with higher levels of NPLs in group loans in Mexico because of the increased share of Credito Comerciante in the total loan portfolio as part of our own strategy.

We were not comfortable with the quality of origination that we started to see during the second half of 2016. Therefore, since December we decided to increase the energy and focus of our sales force on collection and prioritizing quality in the origination process rather than volume. This strategy charged a toll on loan growth in the fourth quarter of 2016. Nevertheless, we are already starting to see better quality indicators for more recent vintages that make us feel comfortable to return in the near future to increase the focus on our sales force on growth. Regarding group loans portfolios in Peru and Guatemala, current asset quality makes us feel comfortable to continue growing at current paces.

Now respecting individual loans, the total portfolio for Compartamos in Mexico and Peru reached an equivalent in each local currency of MXN13.2 billion, which represented a growth of 23.5% from MXN10.7 billion. If broken down by country, we have a MXN6.6 billion, that is a 9.8% growth in Mexico and MXN6.7 billion, which equals a 41% growth in Peru. In terms of NPLs, we see 5.57% and 3.86% ratios respectively in Mexico and Peru, which are very good performance and well within the ranges guided. We don't have that product in Guatemala.

Net interest margin after provisions for each year in each subsidiary stood as follows: 53.5% for Mexico, 19.5% for Peru, and 63.7% for Guatemala. Now, in regards of remittances. In the fourth quarter of 2016, INTERMEX executed more than 1.1 million remittances. The cumulative number of remittances during the full-year 2016 reached 4.4 million transactions, which were 11% above what INTERMEX reached during 2015, when it executed slightly below 4.0 million operations.

The volume of transactions executed by INTERMEX in the fourth quarter represented for Gentera a total of MXN51.6 million of fee income for the quarter, which was 32% higher than the fourth quarter of 2015. Considering the full-year 2016 fee income was MXN186 million compared to MXN144 million in the previous year, representing a growth in annual terms of 28.6%. Operations performance in general was positive, yes, with certain challenges like asset quality. However, we know that with the actions taken in the past months, we will see improvements soon.

The other metrics that we follow moved according to plan for 2016 in terms of customer retention and turnover rate in our employees. In terms of the development of new strategies, savings, we concluded the year with 500,000 active debit accounts. Savings and short-term deposits coming from these clients in aggregate now have an outstanding balance of MXN540 million, which is more than six times the amount that we have at the end of 2015 and is still growing at very rapid pace. The deposit solution is now available in 232 service offices and its covered by a network of 133 branches, this is Compartamos proprietary branches.

As you remember from the previous conferences, our deposits rollout is supported by the opening of proprietary branches and of our YASTAS correspondence network. All these combined network makes possible our savings operation, but also serves the credit operation to disburse and collect loans reducing the dependency on third parties. In the fourth quarter of 2016, our combined proprietary network, which includes 135 Compartamos branches and 2,719 YASTAS correspondence are executing more than 46% of all credit disbursements in Mexico and 37% of all loan repayments in Mexico as well, YASTAS being the Number 1 option preferred by our clients to repay their loans.

This network brings great benefits in convenience and service for our clients, but besides those benefits, there are others like a 6.1% contraction experienced during the year in commissions and fee expense line for all the transactions that we are no longer doing in third-parties branches. This is a key piece in our strategy of becoming a full-fledged bank by offering our clients more products and services in convenient locations and this way creating a deeper customer loyalty.

In terms of insurance, voluntary life insurance in Compartamos Mexico received MXN121 million as fee income for the fourth quarter of 2016. That is 59% a higher amount than MXN76 million that we received in the fourth quarter of 2015. Insurance fee income amount for the full-year 2016 was MXN384 million, that is 50% more than MXN256 million in the full-year 2015. As you can see, it is now a very important volume that we expect to keep on growing at a high pace in our three operations. Thanks for your attention. Now I would like to pass the call to Patricio Diez de Bonilla who will continue to review our results.

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Patricio Diez de Bonilla, Gentera SAB de CV - CFO [5]

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Thank you, Fernando and good morning to everyone. I will now review Gentera's full-year financials before we move to the Q&A session. Interest income grew by 15.9%, when compared with the same period of 2015, in line with the growth in the average portfolio during the year. Portfolio yield stood at 65.5%. In Mexico, interest rate moved from 3.25% in January to 5.75% in December. This represented a 76.9% hike in the interest rate at which we fund the business.

In addition, due to the growth in portfolio, our liabilities grew by 20% in 2016. However, despite such relevant increases both in cost and the size of the interest bearing liabilities, interest expenses grew by 33.2% in the year. We were able to lower the impact of the increase in costs due to an aggressive refinancing effort as well as taking part of our liabilities at fixed rates.

Net interest income grew by 14.9% in the year and NIM was 54.5% compared with the 56.3% in 2015. As we anticipated, as the portfolio mix changes, more provision for loan losses are required due to higher provisioning required by our most recent products. As a consequence, provisions grew by 46.8% in the year. Net interest margin after provisions for the year is stood at 45.1% compared with the 48.7% in 2015. It is clear that due to external factors, the cost of credit product has changed. Therefore, we started in the fourth quarter to reflecting the rates, the new cost of money in the market. We expect in 2017 an expansion of the active rate of at least 300 basis points to absorb the increase in funding costs.

Net commissions and fees increased by [56.7%] during 2016. These line item grew much faster than the portfolio due to the [sale] of the insurance products, the use of YASTAS correspondent network, fee generated by our remittance business, fee generated in Peru as well as fees for charge to delinquent customers. The fee expense decreased by 6% due to the greater usage for collections and disbursements of our own infrastructure rather than third-parties. Fee income represented 6.5% of total income for the Group in 2016.

Other operating losses reflect the non-recurrent event that we explained in the previous quarter. We rolled off the entire exposure we had in MIMONI, which translated in this loss. During 2017, we will try to recover part of this investment. We are currently evaluating different alternatives to minimize this loss.

Operating expenses grew by 10% in the year, a much smaller growth than portfolio, which reflects our commitment to have always a more efficient operation. Despite the lower growth, we were able to continue investing different projects required for the transformation. In Mexico, we have now 135 branches and over 2,700 YASTAS that are required to capture savings and give a better service to our customers.

We have stronger footprint also in Peru and Guatemala where we opened 20% and 45% more offices and hired 31% and 51% more personnel respectively to maintain the growth momentum we have seen in both countries. Despite this growth in Peru and Guatemala, employees in Gentera only grew by 5% in the year, which reflects the efforts we have made to streamline a still labor intensive business model. In this volatile environment, we have taken prudent measures to prevent potential impacts in the coming years. Not only we decided to reserve fully the MIMONI investment, but also this year, we were notified that one litigation with the [fiscal authorities is less likely to be won] even though we have still our litigation ongoing and there are two further instances to litigate the case, we decided to provision MXN165 million, which reflects 100% of the potential loss in this case. We will go through the order to legal stances during this 2017 and 2018, but we decided to provision it fully since according to our lawyers, the probability of winning this case is lower than it was in previous years.

To summarize, during 2016, we have different non-recurrent events, MIMONI with MXN211 million, the impact from the legal provision which I previously mentioned of MXN165 million, and the benefit coming from the tax shield related to cumulated fiscal losses from YASTAS in the first years of its operations of MXN144 million. The net effect for these events was a MXN232 million hit for the year. Efficiency ratio for the year was 69.4%, which is slightly above the [68.4%] reported in the previous year and it's higher than our expectations of the mid-60% range that we think we can achieve. The level of efficiency reached in 2016 was mainly impacted for the higher provisioning and cost of funds that impact before the repricing of the portfolio can be fully deployed.

For the full-year 2016, Gentera reported net income of MXN3.4 billion, an increase of 7.9% compared with MXN3.1 billion generated in the same period of last year. However, if we remove the non-recurrent impact and the benefits of the year, the net income would have been [MXN3.5 billion, which is 11.6% growth] in net income of the recurrent operations and in line with the guidance provided for the year. This is part of my presentation. Thank you all once again and could we move to the Q&A session please.

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Questions and Answers

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Operator [1]

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Thank you, sir. At this time, we will open the floor for questions. (Operator Instructions) Ernesto Gabilondo, Bank of America.

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Ernesto Gabilondo, Bank of America - Analyst [2]

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A couple of questions from my side. The first one, given a hike in monetary cycle in Mexico, how do you see the net interest margin in 2017? Can we expect a slight NIM pressure considering higher interest rates. I just wonder how much have you repriced loans and where do you see the cost of funding at the end of the year?

And for my second question is in terms of asset quality and cost of risk. We have seen that the loan mix has changed and that we are having high inflation levels, lower GDP growth and at some point, we will likely expect lower remittances. So I just wonder what are you expecting in terms of cost of risk for the year. Also, we have heard that a large bank in Mexico is likely to enter into the micro finance segment, particularly in group loans. I remember last time when Azteca entered the market that created relevant indebtedness in the market. So I will appreciate if you can share with us how are you preparing for new competition? Thank you.

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Patricio Diez de Bonilla, Gentera SAB de CV - CFO [3]

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Thank you, Ernesto. This is Patricio. In terms of cost of funds, as you know, we are a wholesale funded institution. The cost of our funds in Mexico is today at [period loss below 50 bps]. So there is little room for a squeeze even further the credit spread that we get from creditors. Therefore, if the rates go up by 200 bps, which is our expectation for the year, it's already in the guidance and we feel comfortable with the rate pricing structure that we have already going. However, if the rates move faster to higher levels, we need to reprice back again the products to reflect the actual cost of money in the market. Again, as you know, in Mexico, Banco Compartamos is still the lowest cost of funds for our customers. So there is still pricing benefit from our products to the competition in which we can navigate during these times. So again the hit of potential hikes in interest rate is 1 to 1. Our expectation for the year is 200 bps hike in 2017 and it's already in the guidance. So, it shouldn't be a further concern if it's within the ranges that I talked about.

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Fernando Alvarez, Gentera SAB de CV - CEO [4]

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And regarding your second question, Ernesto, this is Fernando. Well, regarding new competitors and competitive landscape, we think that the current external context that is going on, interest rates going up, potentially Mexican economy decelerating and all that will present a challenge for current competitors. So in that sense, we see this scenario that is playing out as mainly an opportunity for Compartamos to strengthen our position in the market and our relation with our current clients.

Nevertheless, there is always a risk of new players, not like what you just mentioned, probably larger banks with better funding sources, with better capabilities. We are always very keen and alert on looking at the market and seeing what's going on. For now and at this current moment, we are not seeing any real commercial offerings coming from these type of players for now. This doesn't mean that it won't happen in the near future. We will be very close to that strategy and we will react if it's necessary. We are confident on our brand, the loyalty that we have built with our clients and for now, we are not planning to change.

About asset quality, we have been talking about in the recent past and probably not that recent that we were already expecting that our risk profile will be changing gradually. From the previous quarter, we have been guiding that our NPLs should grow gradually and that's what we were expecting and what we are expecting. In this current moment, there are some levels of NPLs that are probably a little bit higher than what we would like to see and we are taking action against that. We expect and we are already seeing some signs that the NPLs are coming back to better levels, both investors and analysts shouldn't expect that our risk profile will go back to what it was three years ago.

Cost of risk cost as you pointed Ernesto, we are expecting a higher cost of risk for 2017 compared to what we saw in 2016 and that's already considered in the guidance that we provided in December. The signs that we are seeing right now of improvement makes us comfortable that cost of risk is not going to be an element that takes us out of guidance and yes, that's how we see it.

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Ernesto Gabilondo, Bank of America - Analyst [5]

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Thank you, Fernando. Can we expect a cost of risk of 12.5% or it should be lower?

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Fernando Alvarez, Gentera SAB de CV - CEO [6]

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No. For 2017, we are actually expecting somewhere around 13%.

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Operator [7]

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Alonso Garcia, Credit Suisse.

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Alonso Garcia, Credit Suisse - Analyst [8]

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In regards to the NII, I would like to ask, if given the [decreased] market volatility year-to-date, if you have considered already to return to the previous liquidity policy of holding cash needs only for the following 30 days. And second, on asset quality again, I would just like to hear or if you could provide further color in regards to the nature of the increased competition that you observed in certain regions of Mexico, basically if you have seen that competition already this year and if you expect that competition to ease in the short-term? Thank you.

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Patricio Diez de Bonilla, Gentera SAB de CV - CFO [9]

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Thank you, Alonso. As you mentioned, as part of the prudent measures that we took during the fourth quarter was to increase the size of the liquidity that we have in our balance sheet. We ended up the year with a very strong cash position because we were not certain about the financing market in Mexico and elsewhere. So we decided to take this prudent position and we are holding today -- or we hold at that time, 60 days in advance of our funding needs. Today as the volatility in the market has reduced somehow, we have, in February decided to return to the previous 30 day policy that is required by Basel III. So as such, we won't hold so much cash in our balance sheet because not only we have very small maturities this year, but we don't need such amount of money to fund the business in this 2017. So yes, we will go back to 30 days, you should see that in the CNBVs numbers of February that will be posted early April.

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Fernando Alvarez, Gentera SAB de CV - CEO [10]

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Alonso, this is Fernando. Regarding your second question about competition, we are not only not seeing increase in competition particularly in any region of Mexico, we are seeing some signs of some competitors having some trouble to get funding to grow. So we are definitely taking advantage of that. Our clients know that with Compartamos their next loan is there -- is going to be there. So this strengthens a lot our position in the market. So the competitive landscape for us in this current situation we think is going to be very favorable. And also, we could see some consolidation of small competitors, but again, we are expecting our position to be stronger in the current situation.

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Operator [11]

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Tito Labarta, Deutsche Bank.

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Tito Labarta, Deutsche Bank - Analyst [12]

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Couple of questions also. First question on your loan growth guidance. I know you reiterated the 14% to 16% for the year. Just want to get a little bit more of your thoughts behind it. How confident you are with that just given you do have rising rates, asset quality has deteriorated a bit in the past. When you see some deterioration in asset quality, you tend to cutback lending and you have all the uncertainty towards Mexico from the US. So just want to get a sense of what gives you the comfort that you can reach that guidance for the year? And my second question I guess in terms of fee income continues to be very healthy. What kind of growth can we expect for fees going forward? Thanks.

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Fernando Alvarez, Gentera SAB de CV - CEO [13]

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Thanks, Tito. This is Fernando. Well, what we have guided 14% to 16% growth in total loan portfolio for Gentera, you should always remember that we are guiding what we are expecting on the three operations consolidated. That's the kind of growth that we feel comfortable to commit and to pursue in current situation even considering some scenarios of slowdown and higher funding rates et cetera. So we feel comfortable to that guidance. Even the current or the recent spike on NPLs that made us feel a little bit uncomfortable is right now not making us think that we will not reach that growth because we are already seeing signs of improvement. So right now, I mean we are comfortable to 14% to 16% growth for this 2017.

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Patricio Diez de Bonilla, Gentera SAB de CV - CFO [14]

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And in terms of fees Tito, also as part of the multi-product strategy that we followed in the last 36 months or so, we have been developing new products not only in the insurance side, also remittances, YASTAS, so there are many things that we have today that add up to the income of the Group. And going forward, we expect this momentum to continue because not only the fee revenues coming from these different products, but also the usage of third-party which represented in the past an important fee expense. We'll continue to review as we deploy the saving -- the branches for the year. So the net effect, will continue to outpace the portfolio growth in this 2017 and we expect to continue making this revenue to represent even further of the total income for the Group.

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Fernando Alvarez, Gentera SAB de CV - CEO [15]

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And if I can add up a little bit on that, just to give you a quick example of what we are doing in that line. As I just talked about during my presentation about insurance. As you can see, insurance is growing at a significantly higher pace than the total portfolio, but to give you an example of something that we want to do this year 2017, we are having changes on the product that we are offering to our Credito Mujer clients. The product that we are currently offering is just a life insurance coverage, the new products that we already tested in the market, its double the coverage of life insurance and besides that, it's a hospital cash coverage.

So if the client goes to the hospital for any reason, except pregnancy, but almost any reason, we and the insurance company will reimburse MXN200 for each day that they are at the hospital. In the test that we did, the demand and the satisfaction that this product created was very, very important. So nevertheless, that it's double the amount of coverage and because of that, it's double the fee that the client is going to pay, we didn't saw any decline in demand and most of the insurance that we sell is for Credito Mujer clients. So to give you, I mean, it's just an example that if we're able to sustain the volume of insurance that we are selling in Credito Mujer but at double the policy, this will also accelerate the amount of income that we are expecting. So it was just a quick example of what we are planning to do in this line item.

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Tito Labarta, Deutsche Bank - Analyst [16]

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Great, thank you, that's very helpful. Maybe just one follow-up on the loan growth. Do you have a breakdown maybe between the different countries like what kind of loan growth expect in Mexico, how much in Peru, and how much in Guatemala?

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Fernando Alvarez, Gentera SAB de CV - CEO [17]

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Well, yes, we're expecting a double-digit growth in Mexico and current growth paces that we are seeing in each country, it's something more or less what we are expecting. You should also consider that broke down by product.

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Patricio Diez de Bonilla, Gentera SAB de CV - CFO [18]

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But again Peru will continue with its growth momentum, the acceptance of Credito Mujer product locally has been very good. So we really think that this is a product that will continue with this fast growth base as well as Guatemala saw and what Fernando mentioned, this is what make us think that the loan portfolio growth for the year is doable and more so where in Mexico, as Fernando said, the competition is getting troubles not only to finance their growth, but also to operational issues with higher delinquency.

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Operator [19]

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(Operator Instructions) Lillian Starke, Morgan Stanley.

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Lillian Starke, Morgan Stanley - Analyst [20]

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The first one is regarding the strategic and marketing expenses. How do you expect those to play out going into 2017 especially on the marketing, if there is any sort of recurrent into what we saw throughout 2016 going into 2017? And then my second question was regarding the NPL, especially in Credito Mujer and Comerciante, if you can provide a bit more color of what triggered it. If you saw something more -- I mean in a certain specific region or it was more throughout the whole geographic footprint that you have?

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Fernando Alvarez, Gentera SAB de CV - CEO [21]

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Thank you. Yes, well, Credito Comerciante as you probably remember, its let's say a easier to get version of Credito Mujer. We asked the clients to -- they don't have to form so larger groups, right, smaller groups that we allow in this product, men are allowed on groups. We don't ask them to have a bank account in that group. That group answered to a period where we faced very strong competition from several players. So we designed this version of Credito Mujer in order to remain competitive in the market and that's why this portfolio is growing at a higher rate than Credito Mujer. The other side of the coin is that this product comes at a higher risk profile.

What we are seeing -- what we saw second half of last year, it was a higher than what we desired NPLs in that particular product. We are aware that that product should come at a higher cost of provisions than Credito Mujer, but not as high as what we were seeing. It was somewhere focalized in some parts of Mexico, but generally the trends that we were seeing, we didn't like that. So we are -- part of the measures that we are taking is making some changes for that product that's in the current competitive landscape, we could be a little more restrictive on that and that's going to help us have a better NPL and we are actually already seeing signs of improvement regarding Credito Comerciante, but analysts and investors shouldn't expect Credito Comerciante NPLs to look never like Credito Mujer.

Regarding marketing efforts and its related to asset quality as well because it's one of the measures that we are using to incentivize the client to have a good credit behavior. The only difference that you should see for our loyalty program that is a very important or probably the most important marketing effort that we are making, the only change is that the loyalty program is going to be deployed and it's already being deployed for the 12 months of the year and it's a problem that we are expecting to leave there and for our clients to always know that they will have a reward if their credit behavior remains good or if they continue to consume their loans with us. So the only change is that you should expect our loyalty program instead of only being in the market for eight months or nine months as it was in 2016 to be 12 months of 2017. So that's the only difference that you should expect.

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Lillian Starke, Morgan Stanley - Analyst [22]

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And if may follow up on the NPL question, in Credito Mujer as well, you could provide a bit of color because there was a bit of an increase as well quarter-on-quarter on the NPL just short of 2.5% this quarter.

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Fernando Alvarez, Gentera SAB de CV - CEO [23]

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Yes, Credito Mujer as well is showing higher levels that we would like and some of the measure we are taking also in Credito Mujer, but we feel comfortable to what we are seeing.

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Patricio Diez de Bonilla, Gentera SAB de CV - CFO [24]

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And as you remember, Lillian, we guided 2% to 3% range as adequate asset quality for Credito Mujer. We are within that range. So even though despite a little [bit NPL] with loyalty program also focused on asset quality in Credito Mujer customers, we feel comfortable that it will remain within that range.

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Operator [25]

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Gabriel Nobrega, UBS.

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Gabriel Nobrega, UBS - Analyst [26]

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So we saw your costs increasing significantly in the quarter and I understand part of that is for the one-off, but I just want to understand what costs should we expect in 2017 and if you have any plans on containing those costs? Thank you.

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Patricio Diez de Bonilla, Gentera SAB de CV - CFO [27]

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Okay, in terms of cost, yes, as you saw, there was a hike in cost mainly as you said for the provision that we made for the litigation that we have going, right. So if you exclude this MXN165 million, the growth in the operating expenses is adequate. For the year, we grew operating expenses by 10%, which is the lower growth we've seen in 26 years of history in Gentera. So we feel comfortable with the control that we have on our expenses and going forward, again even though this year again we are a little bit above the mid-60% range for efficiencies, the aim of everyone here is to operate within that range. So you should expect our efforts to be focused on bringing that number down to the mid-60% range for the 2017 and try to maintain it going forward.

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Operator [28]

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(Operator Instructions) Claudia Benavente, Santander.

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Claudia Benavente, Santander - Analyst [29]

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I have three questions. I was wondering regarding the branch network expansion, I understand that you're supposed to finish it in Mexico this year. So I was wondering when should we expect Gentera to stop relying on these other channels of other banks? The second question is, have you had any progress with Peru's regulator on relaxing group lending provisioning requirement? And my third question is, when should we see NPLs returning to its prior to fourth quarter 2016 level? Thank you.

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Patricio Diez de Bonilla, Gentera SAB de CV - CFO [30]

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Could you repeat the third question, Claudia please?

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Claudia Benavente, Santander - Analyst [31]

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When should we see NPLs returning to its prior to this last quarter level because the spike was in the fourth quarter. When should we see the NPL returning to the prior average, not last three years, but before 4Q?

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Fernando Alvarez, Gentera SAB de CV - CEO [32]

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Yes, I understand. Thank you, Claudia. Our branch network as you just pointed out, we are expecting to -- we are already having 135 branches. We are to open around 150 during 2017. We expect to end that program around the third quarter and it's a very exciting strategy because it gives us several strengths. One is now we are in charge on how our clients are treated in those branches. So quality of service, it's in our hands and we can design all that experience by ourselves.

Second -- so client satisfaction should increase. Second, it allow us to deploy our savings product because we know that all the technology and the digital capabilities that now the world has makes cash less and less needed, but right now, the reality of the segment that we serve is that they transact and rely a lot in cash. So for now, in the short to medium-term, cash-in and cash-out points are very needed. So this is the second benefit, the possibility to launch our savings program. And third is that we are going to be able to do this without damaging our margins. We are substituting the fees that we are paying to third-parties for the investment that we are doing for these branches and for now, even when our branches are still not in a mature mode, we are already seeing very beneficial cost of transactions and you are seeing right now how our operational expenses are not growing rapidly, Patricio just said that 10% is the lowest number that we have ever posted in our history even considering that we have been opening these branches that were not in our operations two years ago and at the same time, we are being able to reduce our fee expense in around 6% per year. So being able to gain these capabilities by not only probably not damaging our margins but potentially even improving them. It's a great news for our clients, for investors, and for ourselves.

So talking about dependency on third parties and when would we be stop being dependent on third-parties, I would tell you that we are already not depending on third-parties. Any third-party that would increases fees in exaggerated manner or any third-parties that could threaten to put in jeopardy our operation, we could get rid of that -- I mean I would not say that very easily, but will not put in risk our operations. So dependency on third-parties is no longer a risk for Gentera.

Regarding Peru's regulators, we are very advanced in talks with Peru's regulators. There is already -- well something that you as an analyst or investor should consider is that all the disclosures that we provide to investors for Peru and Guatemala accounting is done on Mexican GAAP. So the provisioning levels that you are seeing right now in our numbers is using the Mexican CNBV rules, but within the local rules and in terms of usage of capitals locally, we had to look at the local rules, the level of provisioning for group loans is very high or is higher than it should be. So talks with the regulator are very advanced. There is already a new regulation in place that we are only expecting it to -- I mean to become operational in order for us to adopt that regulation. That will release a lot of provisions in local GAAP, in Peruvian GAAP will release a lot of provisioning and strengthen our capital, but besides that regulation, we think that that's not going to be enough. We need even a better regulation, so talks are very advanced. The new government is very -- what we think is that they are very open to talk about this. I mean they are very impressed on what Compartamos is doing through both in terms of financial inclusion of now having more than 200,000 individuals that were out of the system and now they are in our group loans. So they are open to help us to continue to grow in this portfolio. Right now, there's nothing, let's say, official, but talks are very advanced. We expect to have a, let's say a better way to provision our group loans operations in Peru probably in the next 18 to 24 months, it's not going to be fast, but we are working that fast.

And the third question was about NPLs and we expect to have a better NPLs or NPLs that we were expecting. The measures that we are taking right now makes us think that towards the second semester of this year, we could see the levels of NPLs that we feel comfortable with, but you should consider that there are external factors that are playing out that we don't know. It's potentially impacting Compartamos. We know that in previous downturn scenarios Compartamos has performed well, but there's always a risk for this new downturn or potential downturn to be different, but second semester is when we expect to show better rates of NPLs.

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Claudia Benavente, Santander - Analyst [33]

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And just a follow-up question, what do you think about the growth of the number of clients in Peru? Should we continue seeing current pace [of 80%] or we should start seeing kind of the slowdown there?

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Fernando Alvarez, Gentera SAB de CV - CEO [34]

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I mean we are expecting a similar growth in terms of loans because we also want to put some energy on average ticket per client which we think that in Peru we are underserving our clients on what they are needing and demanding in terms of average loans. So number of clients could decelerate a little bit, but we're still pursuing a high rate of growth. And loan growth we expect similar rates for next quarters definitely, probably in the medium-term because of the size that could decelerate.

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Operator [35]

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(Operator Instructions) With no questions in the queue, we will conclude the question-and-answer session. I would now like to turn the call back over to management for closing remarks.

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Fernando Alvarez, Gentera SAB de CV - CEO [36]

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Thanks. Well, just again thanks. I would like to thank everybody that joined our conference and review of our results. We appreciate all the interest in our Company and we expect to see you or hear from you on our next call. Thank you very much.

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Operator [37]

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Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.