Fixed Income Analysis /
Mexico

Credito Real: Strong results but expensive; reiterate Hold

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    31 July 2019
    Published by

    We reiterate our Hold recommendation on Crédito Real (CREAL) despite the company’s strong Q2 performance, positive business outlook and high-quality customer base. However, its bonds are trading close to their highest levels and are the most expensive among the universe of Mexican non-bank financial institutions (NBFIs; see our report on UNIFIN for a comparable). Although the company is doing very well, we see limited upside for bondholders at current levels.

    Against the backdrop of the decelerating Mexican economy, CREAL still managed to increase its consolidated loan portfolio by 22.1% (in MXN terms) to MXN41.085bn in Q2 19. In US$ terms, the increase was 27.2% to US$2.15bn from US$1.69bn in Q2 18.

    The financial margin in Q2 19 was US$92.40mn, 3.2% higher than the US$89.51mn reported in Q2 18. Net income in the period was US$25.84mn, 9.3% higher than the US$23.65mn in Q2 18. For the 12 months to end-Q2 19 (LTM), the financial margin was US$378.59mn, compared with the US$367.67mn reported at end-18, while net income reached US$113.69mn during the LTM, from US$101.55mn at end-18.

    On the flip side, CREAL’s average cost of funds in Q2 19 rose to 13.22%, compared with 11.4% in Q2 18. However, provisions for loan losses decreased to US$17.60mn in Q2 19, from US$23.42mn during the same period a year ago, reflecting the higher quality of the loan portfolio.

    In terms of performance ratios, we saw a slight weakness on a yoy basis during Q2 19. CREAL’s yield was 28.8% in the quarter, compared with 31.9% in Q2 18; similarly, the net interest margin dropped to 17.7% from 21.4% during the same period. ROAA was 5.0% in Q2 19, compared with 5.6% in Q2 18. In contrast and on a positive note, the efficiency ratio improved to 41.9% in Q2 19 from 44.6% a year ago.

    Also positive was the evolution of non-performing loans, which decreased to 1.5% in Q2 19 from 1.9% in Q2 18.

    The company attributed the mixed results to “the economic backdrop marked by low growth” but highlighted the “solid macroeconomic fundamentals”. We believe the latter holds true, but still expect a steeper deceleration of the Mexican economy through the rest of 2019.