The following table shows the interest income components in the years indicated.
At the end of December 2014, a total interest income of Ps.3,327.1 million was reached, which represents an increase of Ps.602.6 million or 22.1% compared with the amount of Ps.2,724.5 million achieved at the end of December 2013. The interest income generated by the payroll discount, small business and used car loan portfolios increased by 23.6%, 763.3% and 93%, respectively, whereas the interest generated by group loan and durable goods loan portfolios decreased by 60.8% and 0.8%, respectively.
This was due to the diversification strategy followed by the Company, as well as the change in the strategy of the group loans business, which was changed from an own-branch operation to a scheme of strategic alliances with associated companies. This change resulted in the decrease of funding income but reflected a profit in the Participation in the Results of Associates caption.
The Company attributes the decrease in income from durable goods loans to the weak consumption levels in Mexico, as well as to the reduction of distributors in its network.
The average balance of the loan portfolio at year-end December 31, 2014, was Ps.12,688.1 million, an increase of Ps. 3,927.4 million or 44.8% compared to the Ps. 8,760.7 million that was the average balance of the loan portfolio at year-end December 31, 2013. The growth in the payroll discount, group loan, durable goods, small business and used car loan portfolios was Ps. 2,531.5 million, Ps. 83.2 million, Ps. 14.3 million, Ps. 452.7 million and Ps. 299.7 million, respectively, between December 31, 2013, and December 31, 2014.
The increase in interest income has been mainly driven by the growth in the payroll discount, small business and used car loan portfolios. This reflects the Company’s strategy to diversify its portfolios, as well as the change in the operation in the group loans business, as already mentioned. Beginning November 2014, the Company consolidated in its financial statements the results of Directodo, one of its main payroll discount loan distributors, in which it had previously held 49% equity. Due to the consolidation of Directodo, in the last two months, the Company recognized Directodo’s income in 2014 in its own.
The total interest expense, which consists mainly of the payment of interest accrued by liabilities subject interest payments, increased by Ps. 159.1 million, equivalent to 22.0%, by increasing from Ps. 723.1 million at December 31, 2013, to Ps. 882.3 million at December 31, 2014. The average amount of the Company’s debt used to fund the loan portfolio originated by the Distributors, increased by Ps. 8,328.4 million during 2013 to Ps. 11,817.0 million for the year ended December 31, 2014, which represents an increase of the Ps. 3,488.5 million or 41.9%. This shows an improvement in the average cost of debt from 8.7% in 2013 to 7.5% in 2014, which can be explained by better credit conditions, mainly in the Senior Notes 2019 with a 7.5% coupon, compared to the Senior Notes 2015, with a 10.25% coupon, as well as the recognition of the valuation of hedging derivative instruments in the debt.
The financial margin increased by Ps. 443.5 million, equivalent to 22.2%, increasing from Ps. 2,001.4 million at December 31, 2013 to Ps. 2,444.8 million in the same period of 2014.
The average interest rate obtained on assets that generate interest, which include the loan portfolio, as well as investments in securities, during the year ended December 31, 2014, was 23.7% and the average rate of interest paid on liabilities that accrue interest in the same period was 7.5%, to result in a net interest margin of 16.2%. In comparison, the average interest rate obtained on assets that generated interest in 2013 was 29.6% and the average rate of interest paid on liabilities that accrue interest in the same period was 8.7%, to result in a net interest margin of 20.9%.
Allowance for loan losses
The allowance for loan losses, registered in the income statement, includes the increases in the reserves to cover possible losses resulting from uncollectible loans, decreased by Ps. 139.9 million, equivalent to 34.6%, by decreasing from Ps. 404.5 million at December 31, 2013 to Ps. 264.5 million at December 31, 2014. This decrease shows the control maintained by the Company of the quality of its loan portfolio, as well as improved collections in 2014.
At December 31, 2014, the balance of the allowance for loan losses amounted to Ps. 420.1 million, equivalent to 161.2% of the Ps. 260.6 million reported as past-due portfolio in the balance sheet at said date. At December 31, 2013, the balance of the allowance for loan losses amounted to Ps. 203.2 million, equivalent to 128.2% of the Ps. 158.8 million reported a non-performing loan in the balance sheet at said date. In accordance with the changes in the Mexican banking regulations with regard to preventive estimates for doubtful accounts, in June 2014, Crédito Real fully adopted the methodology based on expected losses, which was reflected in an increase of said estimate in the balance sheet. Also in accordance with the regulations, the initial recognition of expected losses was reflected in Stockholders’ Equity. This change in methodology strengthened the hedging ratio a as a percentage of the non-performing loans from 195% at the end of 2013 to 304% at the end of 2014.
Commissions and fees Paid
The following table shows the components of the commissions and fees paid in the years indicated.
The total of the commissions and fees paid increased by Ps. 29.3 million, which is equivalent to a 42.1% rise from Ps. 69.7 million, recognized at December 31, 2013, to Ps. 99.0 million at December 31, 2014. This increase is the result of higher commissions related to debt generation during fiscal year 2014, compared to the average debt growth, mainly due to the issue of the Senior Notes 2019 in March 2014.
The Commissions and fees paid to Distributors refers to the commission granted to certain Distributors, mainly for loans for durable goods, based on the volume of loans placed and the conditions of said loans, such as term and rate, in accordance with the contracts signed with the distributors.
Administration and Promotion Expenses
Administration and promotion expenses, which are represented mainly by employment compensations and benefits, including salary, end-of-year bonus and vacation premium expenses, the IT system expenses and office leasing expenses, increased by Ps. 145.5 million to reach Ps. 629.6 million at December 31, 2014, compared to the amount of Ps. 484.1 million at December 31, 2013. This variation is mainly due to the recognition of the administrative expense of Directodo from November 2014.
Operating income increased by Ps. 422.2 million, equivalent to 40.1%, reaching Ps. 1,475.4 million at December 31, 2014, compared to Ps. 1,053.3 million at December 31, 2013. This increase was mainly due to the increase in the financial margin and the saving in the allowance for loan losses, partially reduced by the increase in administration and promotion expenses.
The following table shows the components of the income tax paid in the years indicated.
Income taxes increased by Ps. 93.2 million, going from Ps. 241.6 million at December 31, 2013, to Ps. 334.8 million at December 31, 2014.
The increase in current income tax for Ps. 20.1 million in fiscal year 2014 compared with 2013 is attributable to the Directodo transaction in November and December 2014 and recognized due to the consolidation in the Company’s financial statements.
The increase in deferred income tax in the amount of Ps. 73.1 million in fiscal year 2014 compared to 2013 is mainly attributed to the accounting and fiscal differences in the allowance for loan losses, advanced payments and the interest accrued during the initial period of the portfolio.
Share in the Results of Associates
The share in the results of associates is the product of a minority investment of 49% equity on Publiseg and Crédito Maestro in 2014, the ten months’ recognition of the shareholding in Directodo, as well as minority investments in the group credit businesses and used car loans. The total effect of these participations generated profits of Ps. 84.1 million at December 31, 2014, observing a decrease of Ps. 107.8 million compared to the amount of Ps. 191.9 million generated at December 31, 2013. This can be explained mainly by the lower level of origination of the main payroll distributors.
Net income increased by Ps. 221.2 million, equivalent to 22.0%, by increasing from Ps. 1,003.6 million at December 31, 2013 to Ps. 1,224.8 million at December 31, 2014.
Total assets at the end of fiscal year 2014 amounted to Ps. 19,915.5 million, which compared with the amount of Ps. 15,100 million in 2013, show a growth of 31.9%. The increase in total assets results mainly from the growth in the loan portfolio.
TOTAL LOAN PORTFOLIO
The total loan portfolio in fiscal year 2014 amounted Ps. 13,804.9 million, a figure 32.4% higher than the Ps. 10,423.5 million recorded in fiscal year 2013. This increase results from the double-digit growth in the Payroll, the Small Business and Group Loan products, and the triple-digit increase in Car Loans. Our distributors made great efforts in the placement of the payroll product, as well as the alliances in Group Loans, the association completed with Drive and Cash and the consolidation of our presence in Small Business loans through Fondo H contributed to this growth.
Crédito Real has a diversified product platform, as well as a geographical diversification that covers all the states of the Mexican Republic.
The non-performing loans as a percentage of the total loan portfolio at year end 2014 was 1.9% or Ps. 260.6 million compared to 2013 of 1.5% or Ps. 158.5 million.
The default ratios compare favorably with the average of the Mexican financial system and are the result of the high standards of credit and collection implemented.
Allowance for loan losses
At year-end 2014, this caption amounted to Ps. 420.1 million, thus reflecting an increase of 106.74% compared to 2013. The complete adoption of the methodology based on expected losses explains to a great extent the increase in the allowance for loan losses.
Hedging as a percentage of the past-due portfolio in fiscal year 2014 was 161.2%, figure greater than the 128.2% observed in 2013.
OTHER ACCOUNTS RECEIVABLE
Accounts receivable in fiscal year 2014 amounted to Ps. 1,156.2 million, 51.6% lower than the Ps. 2,390.4 million observed in 2013. This can be explained by the effect of the consolidation of Kondinero, in which the account receivable that included the proportion of the distribution made in advance to Kondinero was eliminated.
Total liabilities at year-end 2014 amounted to Ps. 14,558.3 million, thus reflecting an increase of 35.5% over 2013 as a result of the funding requirements to support the growth of the loan portfolio.
LIABILITIES WITH COST
Liabilities with cost amounted to Ps. 13,393.9 million in fiscal year 2014, the figure 34.6% greater than that observed in 2013 of Ps. 9,952.2 million, amounts that represent 92% and 92.6% of the total liabilities, respectively. In terms of its composition regarding the total liabilities with cost in 2014, stock market liabilities represent 67.1% and the remainder, 32.9%, which is composed of bank credits.
Crédito Real has diverse sources of financing to support its growth in a sound and profitable manner by having different banking lines arranged with Mexican, international and development banks, as well as having stock market certificate programs and access to debt on the international stock market.
At December 31, 2014, the stockholders’ equity amounted to $5,357.2 million, a figure that, when compared with the $ 4,352.9,1 million in 2013, represents a growth of 23.1%. Principally, the growth in profitability explains the growth in stockholders’ equity.
Our Shareholders’ Meeting approved a dividends policy consisting of distributing up to 20% of the previous year’s net income, provided that this is approved by the Meeting, and that the debt/equity ratio is lower than 4.0 times and the capitalization index is over 20%.
On December 8, 2014, a payment of dividends in kind and in cash to our Company’s shareholders was approved. The historic dividends paid are shown as follows:
The Return on Average Assets (“ROAA)” was 6.9% at December 31, 2014, thus reflecting a decrease compared against fiscal year 2013, which was 7.7%, whereas the Return on Average Equity was 24.7% in 2014, similar to the 24.5% observed in 2013. Both indicators reflect the diversification in the composition of the loan portfolio and the effect of a greater balance in investments in securities.
The efficiency ratio increased to 26.8% in 2014 compared with the 25.1% seen in 2013, reflecting the consolidation of Kondinero.
The capitalization ratio reduced to 38.8% in 2014 from the 41.8% reported in 2013, thereby reflecting the more efficient use of capital.
Stock Market Performance
In 2014, our stock had an approximate return of 60%.