Grupo Supervielle S.A. Q1 FY2024 Earnings Call

Good morning, everyone, and welcome to the Grupo Supervielle First Quarter 2024 Earnings Call. This is Ana Ines Bartesaghi, Treasurer and IRO. Today's conference call is being recorded. Speaking during today's call will be Patricio Supervielle, our Chairman and CEO; and Mariano Biglia, our Chief Financial Officer. Also joining us is Alejandro Stengel, Vice Chairman of the Board and CEO, Banco Supervielle. All will be available for the Q&A session. As a reminder, today's call will contain forward-looking statements based on management's current expectations and beliefs and subject to several risks and uncertainties. I refer you to the forward-looking statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or same-event or circumstance. Patricio, please go ahead.

Thank you, Ana. Good morning, everyone, and thank you for joining us today. Starting with a discussion of the quarter results on Slide 3. We are pleased to have started the year delivering robust profitability and market share gains in loans. At the same time, we maintained healthy asset quality metrics and attractive capitalization to support growth initiatives. Profitability achieved another record high ROE of nearly 34% in real terms. This good performance was driven by an unusually high net interest margin of 62%, reflecting our effective asset and liability management and increased spreads. Our strong bottom line was also supported by sequentially improved efficiencies as we continue to improve the digital, virtual, and automated channels while transforming our branch network, establishing a solid base to drive higher productivity as growth resumes. In turn, our healthier loan mix, following the shift in loans towards middle market corporates and payroll customers where we have reciprocity with our transactional products, together with significantly lower exposure to consumer loans and tight credit scoring, contributed to the NPL ratio hitting another record low. So how have we been able to achieve our good results? Let me provide a brief overview of the progress we have made across our various strategic initiatives. Starting with SMEs and corporate, we are firmly committed to attracting new clients and expanding our share. To accomplish this, we are focused on enhancing the client experience, improving our Net Promoter Score, and driving operational efficiency. During the quarter, we successfully scaled our service model to capture the companies in the entrepreneurs and SME segment, which received gold recognition in the country's award for financial innovators in the Americas presented by Fintech Americas. On the back of improved dynamics, we are actively developing products that fit highly attractive export-oriented value chains, such as oil and gas, mining, and agribusiness while keeping a strong focus on selectively tapping regional economies with attractive prospects. On retail, our digital client base has expanded significantly, now comprising 64% of total clients, up 2 percentage points sequentially and 7 percentage points from a year ago, reflecting the strong adoption of our digital wallet. Although half of our retail transactions are not completed through our platform, a remarkable increase from just 37% a year ago. Moreover, our 24/7 version of the financial service continued to perform well, with customers up 28% sequentially. We are confident that our human banking retail relationship model will elevate customer satisfaction, enhance cross-selling opportunities, and further improve our NPS. Our online retail platform continues to excel, accounting for 20% of total fee income as it captures additional market share and further strengthens its leadership position. The new crypto offering introduced in January in collaboration with Rivio has been well received by existing customers, and while it is still in its early days, we are seeing consistent growth in both customers and transactions. Our efforts to drive higher operating efficiencies, while remaining close to our customers, continue to bear fruit with bank branches and headcount down year-on-year by 12% and 4%, respectively, while further improving NPS. Turning to Slide 4. President Mile remains fully committed to achieving fiscal surplus and implementing both structural reforms. While there's still much work to do, the policies implemented over the past 5 months are resulting in a gradual transition in Argentina to a more positive economic environment, conducive to a more sustainable, robust, and competitive financial system. To date, interest rates on time deposits have been lifted. The central bank has acquired ARS 17 billion in reserves while keeping our fiscal surplus since the beginning of the year. Measures were also taken to address the challenges related to importers, commercial data, and paid dividends, and we are pleased to see that inflation is decreasing faster than anticipated. Despite the recessionary environment, it is worth noting that social support remains strong. In this context, the financial industry is experiencing a gradual resurgence in loan demand. However, having the necessary reforms to Congress and the lifting of FX restrictions are crucial to resume sustainable growth and attracting investments. At Supervielle, we have a strong capital base and solid agile foundation that positions us well to resume growth as demand continues to recover. Now moving to Slide 5. Reflecting anticipated macro improvement, we are strategically diversifying our asset portfolio, gradually shifting towards a larger share of private sector loans and reducing our portfolio of central bank repos.

Thank you, Patricio, and good day, everyone. Now let's turn our attention to Slide 7, which provides an overview of our performance for the quarter. Net income increased to nearly ARS 47 billion, with ROE in real terms at 34%, a significant increase from net income of ARS 34 billion, and an ROE of 27% in the fourth quarter last year. Starting with revenues, net financial income was up just over 2%, mainly supported by higher spreads and volumes on our investment portfolio, a drop of nearly 750 basis points in the cost of funds following the lifting of floors on time deposits and increases in interest rates. Net fee income, however, contracted 14% as fees increased below the 52% inflation for the period. Other net losses declined 15%, mainly reflecting valuation adjustments of real estate to market value in Q4 '23 and higher provisions for strategic initiatives. All this more than offset the 35% increase in inflation adjustment on higher monetary assets. As shown on the left chart of Slide 8, we have been diversifying our asset base, gradually shifting towards a larger share of private sector loans while significantly reducing our holdings in central bank securities. On the right, you can see the composition of our commercial and retail portfolios at quarter end, where we have gained share across most loan products. In corporate loans, promissory notes stand out, accounting for 52% of the corporate portfolio, as well as overdrafts at 26% and foreign trade at 15% of this book. With respect to retail, credit cards account for 33% of the book, followed closely by mortgages at 32%, personal loans at 24%, and car loans accounting for 9% of the total retail book. Moving on to Slide 9. Net financial income increased sequentially in the low single digits and nearly 140% year-on-year to ARS 299 billion, with NIM remaining practically stable sequentially at 2%. Following the lifting of floors on time deposits and decrease in interest rates, the cost of funds posted a sharp sequential growth of over 740 basis points. Turning to Slide 10. Our successful strategy execution has contributed to further improving the efficiency ratio, reaching 34%, down from 43% in the prior quarter and over 70% a year ago. Sequential improvement in efficiency was mainly driven by exceptionally high NIM driving revenue growth, while we also continue to reduce personnel and administrative expenses. Turning to Slide 11. Capitalization trended further in the quarter, with a Tier 1 ratio expanding 370 basis points sequentially to nearly 25% at the quarter end. The increase in capitalization reflects strong results along with inflation adjustment of capital and tax efficiencies from the merger to the bank, which more than offset growth in risk-weighted assets. Now moving on to our perspectives for 2024 on Slide 12. Considering the recent trends discussed, we have updated our perspective for the following items. While we continue to expect peso loans to grow above inflation, we now see credit demand recovering gradually starting in the second quarter as inflation eases. In terms of deposits, while expectation for peso deposits remain unchanged, growing slightly above inflation, total denominated deposits are now anticipated to increase in the original currency. With respect to fee income, the bulk of bank fees to individuals are expected to keep pace with inflation, while dollar-denominated commissions are anticipated to grow below inflation when translated to pesos. In terms of profitability, we are increasing our ROE expectations for the year to approximately 15%, up from the 10% discussed in our prior call. For the remainder of the year, we expect a softer second quarter, reflecting negative interest rates, while lower inflation and loan growth are expected to drive higher profitability in the second half of this year. Expectations for all other metrics remain unchanged, including closing the year with a Tier 1 capital ranging between 20% and 25%. Now we are ready to open the floor for questions.

Thank you, Mariano. Our first question comes from Ernesto Gabilondo with Bank of America.

My first question will be on your loan growth expectations. And what would be the macro assumptions that you're expecting for this and next year in terms of GDP, the level of inflation, the level of interest rates? I think those should be important to consider in order to think about the loan growth in this and next year. Well, we know that Argentina has a very low credit penetration. So considering all these assumptions, how would you see the loan growth for the second half of this year and next year?

Okay. I will start, and then Mariano will further expand. After the extraordinarily high NIMs that we saw in Q4 2023 and in Q1 2024, we anticipate the decline in NIMs alongside inflation. Inflation figures could decline from 50% in Q1 to 20% in Q2. A decline in interest rates has several effects. First, in March, we saw already a surge in demand for loans from the SMEs and the corporate segment, both in pesos and dollars as well as in the retail sector, positively impacting our market share. For the remainder of the year, with declining inflation, we expect the loan book to grow in real terms as inflation starts to decline this quarter. Second, we also foresee a shift from repos to loans to better preserve our financial margin. Mariano, do you want to expand on that?

Thank you for your questions. Regarding our projections for loan growth, we anticipate that loans will begin to grow in real terms in the second quarter, with an acceleration in growth during the second half of the year. For the entire year, it's still uncertain, but as inflation continues to rise more quickly than initially projected, we expect to see loan growth at a real rate in the double digits, likely between 10% and 20%. Growth next year could be significantly higher, especially from such a low base of less than 7% of loans to GDP; growth could be rapid. Given that low starting point for next year, if inflation decreases, it’s challenging to provide a specific number, but we foresee a very high rate of growth in 2025.

And just a follow-up on these macro assumptions. So you were also saying, Patricio was saying, inflation declining from 50% to 20% levels in the second half. But can you provide us this number also in annual terms? How do you see inflation for this year, inflation for next year, and also your expectations for the interest rates?

Sure. Yes, inflation for this year, we expect it to be in the range of 160%. And for next year, we expect it to keep decreasing and it can get as low as 60%. We know there are some variations in these projections; some economies expect inflation to decrease at a higher pace, but our projections are in the range of 60%. As for interest rates, we believe that with the sharp decrease the central bank is undergoing during the first 5 months of the year, for the following months, it will keep the interest rates at the existing levels. The implicit interest rate in the last auction of treasury bonds shows that market expectations are for interest rates decreases to stop in the following months. But of course, for next year with decreasing inflation, interest rates will also keep going down.

Excellent. And then just a second question. This will be on your ROE expectations for the second quarter. In your press release, you mentioned you have a record high ROE of 34% in this quarter. But at the same time, you are guiding for the full year to have an ROE of around 15%. So just wanted to understand how will this evolution of the ROE throughout the year. I think that the second quarter will be the most challenging one, given that you will start to accelerate the loan book. But at the same time, you will have the impact of lower rates. So just wanted to understand how should we think about the ROE evolution through the year?

Sure. Yes, you explained it very well. The second quarter would be the most challenging probably of the year because our loan growth is just starting. We expect to see the ROE for the second quarter in single digits, maybe ranging from 5% to 10% and then the evolution of the ROE will be increasing during the third and fourth quarters as we continue to grow our loan book and replace central bank and treasury bonds with loans, leading to a total ROE for the year of 15%, which was our guidance.

Maybe I want to start with a more strategic question on your consumer franchise. You have mentioned in the presentation that a lot of the digital efforts are already evolving. More of your transactions are already happening with your apps, you're deploying these digital efforts. I just want to maybe get your ideas here on how you are thinking about the digital competition. Because for the consumer franchises, we have a lot of competition, maybe Mercado Pago. I just want to maybe ask you strategically how you think on this competition and how are you preparing yourselves to compete against them, especially as you mentioned in your guidance that we should expect loan growth to become more and more relevant in the strategy?

Thank you, Brian, and good morning. We have, as you probably know, been focused on developing our digital wallets and making that a unique experience. That is one of our key initiatives, and it's rated very high and comparable to many other digital wallets developed by fintechs. This is precisely part of the recognition we got with the Fintechs America award. In this regard, what we see is that we are also making a significant effort that we've been recognized by the mobile platform, and we see there too that we are very well positioned among the institutions with the greatest use and higher stickiness of clients using this model platform as a strategic response to the competition for loans. Much of the answer to your question depends on what the regulator will do moving forward. As you know, the central bank has ruled that it has to be interoperable for QR codes and there has been a little bit of wrestling with Mercado Libre around that point. And so far, while progress is made in that direction, we see a huge opportunity to leverage all the investments and the capabilities we've developed in our digital wallet. We also see big opportunities in the digitalization of insurance products as well as mortgages and car loans, which have been our initial focus for growth. So we are very confident that these capabilities, together with our new operating model, are positioning us well in this new digital competitive area.

Let me add to Alejandro's answer. Last year, at the beginning of the year, we launched a new service and investment proposal for individuals called Industria Rapida, which basically allows individuals with idle funds to invest in a money market fund. We believe that we are still the only bank providing this service, which is available 24/7. So at any time during the week, even nights and weekends, clients can dispose of their funds for use. People are investing, so this is a way to accommodate their needs. Interestingly enough, although we lost some deposits in zero percent deposit funds on savings accounts, overall, our profitability from financial revenues has increased significantly. The adoption rate has been fantastic because we have seen adoption grow tenfold or even more. This is a way that we believe we can compete with fintechs, and it is surprising that we are the only bank to do this yet.

Perfect. It's very helpful. And maybe just a quick follow-up on Ernesto's question. Are you going to prioritize a specific segment? Because as you mentioned, we might see 10% to 20% growth this year in real terms, but 0.5% of your loan portfolio is corporate, and you have a big consumer franchise. So are you going to prioritize one more than the other? And if you could just remind us on how quickly you can reprice in terms of duration for each of the segments.

We have initially focused on SMEs. As you know, SMEs have a very low leverage as a starting point and are reacting quickly to the changes related to inflation, particularly in export-oriented value chains. As mentioned by Patricio before, we have been more cautious on the retail side, but we see increasing demand there too, particularly focused on payroll clients, pensioners, and asset-backed loans like car loans and mortgages moving forward. We think that this approach will put us on a solid footing for where we expect the retail business to take off during the second half of this year.

And congratulations on the results. So the banking business in Argentina for the remainder of the year should look quite different since the central bank has been lowering rates and inflation has been coming down. So what do you expect? What do you ambition for the remainder of the year and 2025?

Yes, we are, Marina. As inflation decreases and interest rates fall, the composition of the balance sheet will be changing and transitioning as it already has during the first quarter when we transitioned from a very low weight of our loan book in total assets or a low loans to deposit ratio to higher rates of loan growth. At some point, we expect to converge to historical levels. This will be achieved by replacing the weight that central bank securities or short-term treasury notes currently have in our balance sheet.

So I'm looking at Slide 8 in your presentation. We see the big decline in central bank exposure. How do you expect this to evolve for the rest of the year? Will you continue to decrease your exposure to central bank and treasury securities? And traditionally, banks have been reluctant to take on treasury securities. We understand that maybe that is changing; is there a limit as to how much exposure to the treasury you are willing to take?

Yes. Carlos, thank you for your question. Yes, as you said, we plan to continue decreasing our exposure to central bank securities and treasury in our balance sheet as we present loans, and we increased our loan-to-deposit ratio. Recently, during this month, the central bank allowed us to replace short-term treasury notes instead of one-day repos. The change that the central bank made is that for the amount we decreased in repos, we can increase short-term treasury notes without exceeding the limit of exposure to the public sector.

So this is a transition; we are in a transition year. However, we expect that the business we are in is providing loans to the private sector. But this is definitely a transition year.

And regarding limits, yes, there are limits. Although the waiver mentioned for the central bank to increase our exposure allows us to do so, we can increase it up to the amount that we decrease central bank exposure. Then we have the regulatory limit on exposure to the public sector along with our own quality restrictions.

But again, from what you described, it seems that the central bank allows you to increase your treasury exposure without it counting as increased exposure to the public sector. I imagine you don't want to do that indefinitely, right?

Definitely not. As I said, it is a transition, and we have our own limits. Essentially, when you deal with the central bank or the government, it is a different situation.

Yes, for this very short-term adjustment only. It’s not for any other treasury positions we may hold. So for this time, we wait for the loan book demand to accelerate.

So that's only for the repo amounts in the short term?

Yes, exactly.

And only for the amount you have in repos as of May 15, I think it was the date when this cutoff was made.

Also, these notes are very short term. Although they are treasury securities, they have a lower risk than longer-term bonds.

This is a transition, as Patricio mentioned.

And then I want to go back to the loan situation, which is the essential point in this conversation. We are all excited about the new UVA loan mortgages, and you have been at the forefront of making an offer. I just wanted to know if we have already seen any of these loans granted or if there have been inquiries or petitions. When do you expect to actually lend that? And what is a realistic prospect as to what amount you could lend this year or next year?

That's a tough question. We already know that there have been mortgages that have already been granted.

We should be having more from our side as well. But we know one loan at least, as we saw yesterday was granted by one institution.

Definitely, there is huge demand and expectation. I would say that most of the Argentine population is looking for mortgages. The potential demand is absolutely outstanding and reflects the situation in the last few years when no one knew whether people were forced to stay in rented apartments or similar situations and now they want to move on.

But we understand there are operational problems. There are some definitions that have to be made before you can actually start lending in large amounts, is that correct?

Yes, some measures are not favorable for the final purchase and sale of houses, which is something we understand will be addressed soon.

Some of these issues are starting to be addressed, like for example, the regulation required when you purchase local dollars.

And the limit for ARS 200 million daily.

These changes will help tremendously to increase demand and expedite processes. As soon as these regulations start working out, it will be very important in driving demand quickly.

We have a new question from Ernesto Gabilondo with Bank of America.

Just a couple of questions. The first one is on your loan-to-deposit ratio. Considering this excess cash that you have in securities and that you will use them to expand the loan book. How should we think about the loan-to-deposit ratio evolving in the next years? And my second question is on regulation. Do you think that the tough regulation is already lifted, or do you think there are still some things that can be removed or lifted? If that is the case, do you have an estimate on how this removal of tough regulation can help your business?

Yes, and I would take the first part of your question regarding the loans to deposit ratio. We can, over 33% as of December last year, are now over 40%. By the end of the year, we can be close to 50%, as we increase loans faster than we increase deposits. Over the coming years, we should reach levels similar to those in the past, for instance, around 90%. Remember also that right now, we don't have other sources of funding because we don't need them. However, in the past, we relied on capital market instruments to manage liquidity.

Concerning your second question, I'll try to make an answer, and maybe Alejandro can help me also. First of all, I think that the main regulation that is restricting the entire economy and the financial system is the foreign exchange restrictions. This is critically important that they are lifted as soon as possible because it will instill new investments, bring confidence to the market, and hopefully promote growth, helping us out of recession. For us, in terms of overall balance, it is important because lifting foreign exchange restrictions will help all industries, especially the export-oriented sectors. When foreign exchange restrictions are lifted, there are individuals and clients who will want to save in dollars. Therefore, it presents an interesting opportunity for us to generate commissions, which were traditional sources of revenue for the banking system before these restrictions came into place.

You are quite right, Patricio. It is overarching, and there are many other aspects. For example, the increase in gross income tax that we are required to pay in different jurisdictions, which is also making the lending process far more expensive than it used to be. This is something that should be lowered to expedite improvements and make credit more accessible to the public. Moreover, regarding products like mortgages, we would like to grow and expand in this area. There should be some reasoning around the conditions for securitization, which would allow banks to originate mortgages and through some securitization lead to the creation of investment funds. There are huge opportunities when we look at all these different regulatory changes, which could help raise credit levels in the private sector from the current 4% to something closer to 20% or 25% over the next four years.

Thank you all. Ladies and gentlemen, we have reached the end of today's Q&A session. Thank you for joining us today and for the questions. We appreciate your interest in our company. We look forward to meeting more of you over the coming months and providing financial and business updates next quarter. In the interim, we remain available to answer any questions that you may have. So have a good day.