Quarterly Report GFINBURSA Market Outperformer 2016e Price Target P$39.0 Price 31.16 12M Price Range 27.82 / 42.48 Shares Outstanding (Mill) 6,667 Market Cap (Mill) 207,745 Float 33.6% Deposits (Mill) 217,864 Stockholder Equity 108,287 Total Loan Portfolio 259,504 2015 TTM 2016e 2017e Interest Income 39,169 43,700 47,100 56,187 Financial Margin 17,997 20,772 22,123 26,323 Net Income 11,727 7,341 14,633 16,690 NPL 3.1% 2.6% 3.3% 3.5% EPS 1.8 1.1 2.2 2.5 P/E 17.7 28.3 14.2 12.4 P/BV 2.0 1.9 1.8 1.8 ROAE 11.5% 7.0% 13.4% 14.5% Lilian Ochoa lochoa@gbm.com.mx +52(81) 8152 4000 ext. 4014 Jorge Benítez jjbenitez@gbm.com.mx +52(81) 8152 4000 ext. 4015 GFINBUR: Strong operating results hidden by non-cash losses. 2Q16 figures significantly affected by GFINBUR s derivatives and equity positions. Although the 1H16 still faced a tough comparison in non-interest income due to the high amount of reserves released last year, coupled with the negative impact of lower long-term interest rates in both MXN and USD, which affected the mark-to-market of the long-term fixed rate funding positions and unfavorable stock valuation of its financial assets, we believe 2Q16 operating figures reaffirm the success of GFINBUR s growth strategy and strong competitive advantages, which are reflected in the following positives: Financial margin increased 31.9% YOY, surpassing the industry s growth rates. NIM expanded 130 bps YOY to 6.3%, reaching a record high and standing above the average of our banking sample. The cost of risk stood at 1.3%, below the Mexican banking system s 3.4% weighted average, while the NPL ratio ended at 2.6% its lowest level since early 2011. Despite the 87.0% YOY decline in non-interest income, and the 31.2% YOY expansion in operating expenses due to a larger branch network, GFINBUR managed to deliver an efficiency ratio of 43.5% still below the Mexican banking system s average of 51.7%. Capitalization ratio stood at 18.2%, above our traditional banking sample and Basel III requirements. Thus, at current valuations, does GFINBUR deserve a discount related to its hedge and investment positions? We should mention that most of the mark-to-market losses during the quarter were related to long term interest rates to cover its funding positions and do not represent a cash outflow. Besides, its equity position includes its stake in YPF, which was acquired as a loan recovery; hence, at any YPF price, this stake represent an additional gain. GBM view: GFINBUR does not have any incentive to close its current market positions; therefore, we should focus on its operating results, which once again outweighed the Mexican financial system. P/E FWD 12M PRICE PERFORMANCE VS. IPC P/BV 40.0 35.0 15.0% 10.0% 5.0% 2.9 2.7 30.0 25.0 0.0% -5.0% -10.0% 2.5 2.3 20.0-15.0% 2.1 15.0-20.0% -25.0% 1.9 10.0 07/15 08/15 09/15 09/15 10/15 11/15 11/15 12/15 01/16 02/16 02/16 03/16 04/16 04/16 05/16 06/16 06/16 07/16 07/15 08/15 09/15 10/15 11/15 12/15 01/16 02/16 03/16 04/16 05/16 06/16 1.7 07/15 08/15 09/15 10/15 11/15 12/15 01/16 02/16 03/16 04/16 05/16 06/16 07/16 GFINBUR IPC GBM Grupo Bursatil Mexicano, S.A. de C.V., Casa de Bolsa ( GBM ), and its affiliates, may carry out and seek to do business with companies covered in its research reports. Investors should not consider this report as a single factor in making their investment decisions. These materials do not constitute an offer to buy or sell any security or participate in any trading strategy.
Investment thesis Attractive valuations and balance between profitability and risk support our investment thesis. Although the 1H16 still faced a tough comparison in non-interest income due to the high amount of reserves released last year, coupled with the current strong volatility related to the mark-to-market positions, we believe operating performance reaffirms the success of GFINBUR s growth strategy. We think so as, during 1H16, its financial margin increased 31.9% YOY, surpassing the industry s growth rates, while the cost of risk remains significantly below the Mexican banking system. Hence, our investment thesis remains unchanged, based on the following: GFINBUR s new growth strategy is basically oriented to the retail market. This strategy has started to bring greater margins to the company, supported by both a more profitable asset mix and lower funding costs, as the company should widen its deposit base thanks to the robust branch network. Accurate risk management. Even though GFINBUR is targeting a riskier market, the company has managed to deliver the lowest NPL ratio since 2011, while the consolidated cost of credit risk annualized started to normalize. One of the strongest capitalization levels, keeping the bank well covered for unexpected losses related to the loan portfolio s credit quality. Moreover, GFINBUR remains as a well-timed investment opportunity, benefited by the new regulation in the Mexican insurance market, which could lead to the release of around P$11.0 billion in provisions in the following 12M. All in all, we are reiterating our 2016e price target of P$39.0 with a Market Outperformer recommendation. Estimates vs. Official Results GBM's Official estimates * results ** Interest Income 25.1% 23.1% Interest Expenditure 23.9% 10.6% Financial margin 26.6% 38.1% Provisions for Loan Losses 141.1% 74.4% Non-interest income -46.3% -87.0% Non-interest expenses 15.5% 31.2% Net Income -15.9% -53.1% EPS 0.60 0.34 NPL Ratio 2.9% 2.6% NIM 5.6% 6.3% ROAE 8.5% 7.0% Coverage ratio 149.0% 153.1% Loan portfolio 11.3% 11.2% Source: * GBM; **BMV. Moving on to 2Q16 operating results Interest income expansion reflects the success of GFINBUR s growth strategy. Interest income climbed 25.3% YOY, mainly thanks to the strong credit origination, in addition to a more profitable asset mix, as the retail market continues to gain share within consolidated figures. Moreover, the Insurance and Annuities units also contributed to the top-line expansion, posting an 11.3% YOY hike in net premiums written. The latter benefited from the Solvencia II regulation, which impacted the life insurance business as, starting in January 2016, the premiums and all the other lines of the life business are now accounted on the day they are written rather than in monthly installments. Moving on, interest expenses posted a 10.6% YOY increase, affected by a 43.7% YOY hike in interest on deposits & funding. The latter more than offset the company s efforts to improve its funding base, a lower increase in reserves
for unearned premiums, and a 5.4% YOY reduction in cost of claims and contractual obligations. Thereby, net interest income expanded 38.1% YOY to P$6.0 billion. A more profitable asset mix boosted NIM. GFINBUR s NIM expanded 130 bps YOY to 6.3%, still standing at recordhigh levels, bolstered by a 23.0% YOY expansion in TTM net interest income, which in turn reflected a more profitable asset mix, as the bank continued to target the retail market, combined with the positive effect of Banxico s restrictive monetary policy over the average active rate. The latter more than offset the 7.1% YOY expansion in the average yielding assets. Financial and operating summary (GFINBUR) Figures in millions of nominal pesos 2Q15 3Q15 4Q15 1Q16 2Q16 QOQ% YOY% Interest Income 9,506 9,707 10,741 11,548 11,704 1.3% 23.1% Interest Expenditure 5,175 5,160 6,002 6,045 5,721-5.4% 10.6% Financial Margin 4,331 4,547 4,740 5,503 5,983 8.7% 38.1% Provision for Loan Losses 452 998 1,412 1,792 789-56.0% 74.4% Non-Interest Income 4,499-2,473 1,713 533 585 9.6% -87.0% Non-Interest expense 1,950 1,919 2,311 2,248 2,559 13.8% 31.2% Net Income 4,786 294 2,693 2,106 2,247 6.7% -53.1% EPS 0.72 0.04 0.40 0.32 0.34 NPL 3.2% 3.3% 3.1% 3.1% 2.6% -50 bps -57 bps AUM 653,530 559,338 390,503 440,283 414,334-5.9% -36.6% Branches 384 528 543 671 874 203 490 ATMs 756 762 762 805 3385 2,580 2,629 *Data on Branches and ATMs in units, including the changes. Consumer lending remained as the main growth driver. Even though GFINBUR s Commercial & Corporate segment grew 4.5% YOY, now representing almost 70% of the total loan portfolio, aided by the sound 18.0% YOY hike in infrastructure lending, the consumer loan book grabbed the spotlight as it stood as the company s main growth propeller since it increased 24.8% YOY, strongly benefited by GFINBUR s aggressive efforts to serving the retail market, and also by the Banco Walmart acquisition. Delving into the retail market s main trends: Personal loans became the main propeller as they advanced 35.4% YOY, strongly aided by the incorporation of 156.3 thousand clients in the last 12M, representing the 27.8% of the retail loan portfolio. The credit card business rose 43.6% YOY, mainly benefited by the 69.1% YOY hike in the Banco Walmart division, as it added more than 400 thousand clients in the last 12M. Additionally, Inbursa s credit card product also increased 17.1% YOY, reflecting a higher average balance per client. The automotive segment grew 8.3% YOY, mostly attributed to retail sales. GFINBUR has managed to overcome tighter competition, mostly from car manufacturers financial units, felt throughout the system. Mortgage loans regained strength as they linked their seventh consecutive quarter with yearly expansions, advancing 87.9% YOY to P$5.5 billion. The SME segment was again the worst performer for the retail business division, since it contracted 3.8% YOY. On the other hand, the government loan portfolio skyrocketed 72.8% QOQ and 31.4% YOY, which raises concerns about loan book volatility as it could imply a strong credit concentration in a few organisms given its abrupt hike. Also, the Financial Institution s market advanced 16.7% YOY.
Performing loans Figures in millions of nominal pesos 2Q16 % total QOQ Change YOY Change NPL NPL QOQ bps NPL YOY bps Consumer 41,350 16.4% 5.1% 23.5% 5.8% 92.5 93.6 Mortgages 5,187 2.1% 13.0% 93.7% 5.1% 7.7-102.1 Commercial 171,286 67.8% 1.9% 5.6% 2.3% -80.5-104.2 Goverment 24,655 9.8% 72.8% 31.4% 0.0% 0.0 0.0 Financial Institutions 10,210 4.0% 7.8% 16.7% 0.0% 0.2 0.3 Total Performing 252,687 7.1% 11.9% Retail segment Figures in millions of nominal pesos 2Q15 Weight% 1Q16 Weight% 2Q16 Weight% QOQ% YOY% Automotive 21,523 42% 23,219 39% 23,304 37% 0.4% 8.3% SME 5,890 12% 5,718 9% 5,668 9% -0.9% -3.8% Mortgage 2,936 6% 4,891 8% 5,516 9% 12.8% 87.9% Personal 12,994 25% 16,299 27% 17,596 28% 8.0% 35.4% Credit Card 7,748 15% 10,095 17% 11,123 18% 10.2% 43.6% Inbursa 3,804 7% 4,330 7% 4,454 7% 2.9% 17.1% Walmart 3,944 8% 5,765 10% 6,669 11% 15.7% 69.1% Total Retail Credits 51,091 60,222 63,207 5.0% 23.7% Total Retail Credits w/o Walmart 47,147 54,457 56,538 3.8% 19.9% Provisions for loan losses faced a tough comparison. Provisions for loan losses increased 74.4% YOY to P$788.7 billion in response to the organic loan portfolio growth and the greater share of the retail segment, which charges a higher allowance for loan loss requirements. Additionally, this account faces a tough comparable effect as the company showed an extraordinary low cost of credit risk in 2Q15, resulting from reserve releases and accounting changes. Indeed, the consolidated cost of credit risk stood at 1.3% in 2Q16, below the Mexican banking system s 3.4% weighted average. We should mention that going forward, we expect a slight increase in the cost of risk due to the company s strategy to expand further into the retail segment. GFINBUR s NPL level benefited by higher credit recoveries and restructures. GFINBUR s NPL ratio showed a sound 50bp QOQ improvement to 2.6%, which was mainly caused by P$1.8 billion in loans that were recovered or restructured during the quarter, as well as P$1.0 billion write-offs. We should mention that GFINBUR s NPL ratio reached the lowest level since early 2011, with a more profitable and risky portfolio mix. Going into NPL ratio specifics: The Commercial & Corporate NPL ratio improved 80 bps to 2.3%, which is mainly attributed to greater restructures and recoveries carried out during the quarter. The Consumer NPL ratio was the worst performer, as it deteriorated by 90bps sequentially to 5.8%. This could be explained by a greater exposure to credit card and personal lending. The Mortgage NPL ratio also deteriorated 10bps QOQ to 5.1%; yet, it remains at record-low levels. The Government and Financial Institutions loan portfolios maintained their 0.0% NPL ratio. However, we must mention that the Financial Institutions past due loans showed a 64.5% sequential hike, following the entire industry s performance.
Non-performing loan ratio 3.4% Breakdown of NPLs (GFINBURSA). 16.0% 3.3% 3.3% 14.0% 12.0% 3.2% 3.1% 3.2% 3.3% 3.1% 10.0% 8.0% 6.0% 3.0% 3.1% 4.0% 2.9% 2.0% 0.0% 2.8% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 NLP ratio Automotive Payroll Comercial & Corporate Credit Card Mortgages Non-interest income decreased 87.0% YOY, reflecting the following dynamics: An 81.2% YOY slump in net fees and commissions, reflecting higher acquisition costs within the Insurance unit to comply with the Solvencia II requirements. This more than offset the higher dynamism related to the growth in retail customers transactions. A P$151.4 million market-related loss (vs. a P$2.6 billion gain in 2Q15) resulted from lower long-term interest rates in both MXN and USD, which affected the mark-to-market of the long-term fixed rate funding positions and unfavorable stock valuation of its financial assets. A 49.3% YOY contraction in other income due to a tough comparison, as 2Q15 benefited from the release of allowances for loan losses. The efficiency ratio deteriorated from 26.6% in 2Q15 to 43.5%. Despite the strong financial margin expansion, the efficiency levels were affected by the lower non-interest expenses explained above and the 31.2% YOY increase in operating expenses due to a larger branch network. However, we should mention that GFINBUR managed to keep its efficiency levels significantly below the Mexican banking system s average. Net Interest Margin-Efficiency ratio (GFINBUR) 6.4% 6.3% 40.0% 6.2% 36.0% 38.0% 37.4% 36.0% 6.0% 33.2% 34.0% 5.8% 5.9% 32.0% 5.6% 30.0% 5.3% 5.3% 5.4% 28.0% 5.2% 5.0% 26.0% 5.0% 27.1% 24.0% 4.8% 22.0% 22.5% 4.6% 20.0% 2Q15 3Q15 4Q15 1Q16 2Q16 Coverage & Reserves ratio (GFINBUR) 200.0% 5.2% 190.0% 180.0% 170.0% 160.0% 153.1% 150.0% 161.9% 4.5% 4.5% 4.4% 140.0% 147.4% 138.0% 140.5% 130.0% 4.0% 120.0% 110.0% 2Q15 3Q15 4Q15 1Q16 2Q16 5.3% 5.1% 4.9% 4.7% 4.5% 4.3% 4.1% 3.9% Net Interest Margin Efficiency ratio 12M Coverage ratio Reserves/Gross Loans Disadvantageous mark-to-market losses overshadowed GFINBUR s strong operating performance. Consolidated net income decreased 52.2% YOY to P$2.3 billion, mainly affected by a tough comparable effect, as long-term interest rates collapsed in the last 10 days of the quarter, in turn, dragging down the trading account to
P$151.4 million loss (vs. last year s P$2.9 billion gain). Therefore, after excluding the trading account and reserves releases, bottom line would have expanded 26.4% YOY, mainly aided by the sound financial margin that resulted from its successful growth strategy focused on the retail segment. Moving on to the subsidiaries details, we have decided to sort them according to their contribution during the quarter: GFINBUR s banking unit posted a P$2.3 billion net income (-45.8% YOY), mainly affected by lower longterm interest rates in both MXN and USD, which in turn dragged down mark-to-market positions. The annuities unit showed a P$155.0 million net loss, mainly caused by lower premiums written and less financial income derived from disadvantageous investments revaluation. The brokerage division s net income slumped 71.0%, due to lower earnings from services and less unrealized gains on portfolio valuation. The Insurance division posted a 54.8% YOY contraction in net income to P$68.8 million, entirely affected by a 85.5% YOY decline in net financial income due to P$436.3 million losses from portfolio revaluations. Following the same trend, the bonding subsidiary posted a 13.1% YOY drop in net income, largely explained by a P$16.5 million loss from investments revaluation and lower income from investments. All in all, TTM EPS moved from P$3.0 in 2Q15 to P$1.1. Net Income breakdown 2Q15 % total 2Q16 % total YOY % Banco Inbursa 4,157 86.9% 2,254 100.2% -45.8% Brokerage 138 2.9% 40 1.8% -71.0% Insurance 152 3.2% 69 3.1% -54.8% Annuities 177 3.7% -155-6.9% -187.5% Bonding 92 1.9% 80 3.5% -13.1% Mutual funds 48 1.0% 47 2.1% -1.9% Others 22 0.5% -86-3.8% -485.7% AFORE* 112 2.3% 94 4.2% -16.4% Profitability of each subsidiary (ROAE) 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% -10.00% Net Income 4,786 2,248-53.0% *Note: AFORE is consolidated in Banco Inbursa; we include it for visualization purposes only. Net income does not exclude minority participation. Quaterly ROAE 2Q16 Quaterly ROAE 2Q15 Non-cash operations dragged down profitability indicators. GFINBUR s ROAE plunged from 20.9% in 2Q15 to 7.0% this quarter due to the 62.9% YOY contraction in TTM net income, given the disadvantageous effect of extraordinary reserve releases carried out last year, as well as tighter mark-to-market losses derived from lower longterm interest rates. Likewise, ROAA contracted by 330 bps to 1.9%, affected by the strong dynamics shown in the total loan portfolio and a bottom-line decrease. After only considering operating performance, where we eliminate extraordinary reserve releases and non-cash transactions, ROAE would stand at 10.9% (80bp YOY improvement). In terms of capitalization, the Tier I ratio strengthened from the 17.0% reported in 2Q15 to 18.2%, still remaining as one of the highest ratios among the financial system. Going forward, we are expecting profitability improvements for the financial group due to the success of its growth strategy focused on a more profitable segment, its adequate risk management, and the recovery of its mark-to-market positions.
Profitability Indicators Figures in millions of nominal pesos 2Q15 3Q15 4Q15 1Q16 2Q16 Net Income 4,785.6 294.4 2,693.3 2,106.0 2,246.8 ROAE 20.9% 14.3% 11.6% 9.4% 7.0% ROAA 4.9% 3.5% 2.9% 2.3% 1.6% BV per Share 15.4 15.5 15.9 16.3 16.2 TTM EPS 3.0 2.1 1.8 1.5 1.1 P/E 12.0 16.6 17.6 23.3 28.3 P/BV 2.3 2.2 2.0 2.1 1.9 Capitalization Index 17.0% 16.9% 18.9% 17.7% 18.2% Deposits/Gross loans 0.8x 0.8x 0.8x 0.9x 0.8x Source: Company data. Note: P/BV and P/E ratio use the share price at the end of the quarter and today s price for 2Q16. Investment Risks In addition to the risks related to macroeconomic aspects, we believe the most relevant risk in the Mexican market is: during the last couple of years, there has been a significant flow of global funds into the Mexican market in search of new investment opportunities. There is no guarantee that, going forward, these flows will remain at current levels. Some other risks pertaining to GFINBUR include, but are not limited to: 1) Changes in banking regulation, restrictions on credit card issuing, interest rates, and fees charged; 2`) Interest Rate Fluctuations; 3) Higher competition constituted by banks, credit institutions, and multi-purpose finance companies (SOFOMs); 4) Further deterioration in the non-performing loans; 5) Clients are partially concentrated in the north of the country; high commercial/corporate loan share in Monterrey and Mexico City; 6) further economic deterioration. 45.0 40.0 Stock Price Performance vs Analyst Estimates 28/07/2015 42.00 M arket Outperformer 29/01/2016 39.00 M arket Outperformer 35.0 30.0 25.0 20.0 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Price Price Target
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