Grupo Supervielle S.A.

Good morning, everyone, and welcome to the Grupo Supervielle fourth quarter 2020 earnings call. This is Ana Bartesaghi, treasurer and IRO. A slight presentation will accompany today's webinar, which is available in the investor section of Grupo Supervielle's investor relations website, gruposupervielle.com. Today's conference call is being recorded. As a reminder, all participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. If you want to ask a question, you need to be connected to a Zoom platform from any device. We will not be able to take your questions if you are connected from a phone line. Also, please make sure your name and last name appear in the Zoom platform you are using. To ask a question by voice, please press the raise your hand button located in the Zoom platform. To withdraw your question, press raise your hand again. You can also send your questions in written form via the Q&A box in the Zoom platform anytime during the call. We will ask you to limit yourself to one question and a follow up, and then you can raise your hand again in another round. Speaking during today's call will be Patricio Supervielle, our chairman and CEO, and Mariano Biglia, our chief financial officer. Also joining us are Alejandro Stengel, second vice chairman of the board, and Bank CEO, and Jorge Ramirez, first vice chairman of the board. Alejandra Norton, board member of several of Grupo Supervielle subsidiaries, will also be joining us for today's call. All will be available for the Q&A session. Note that starting first Q20 as per central bank regulations, we began reporting results applying hyperinflation accounting in accordance with IFRS rule IAS 29. For ease of comparability, we have restated 2019 results to reflect the effects of inflation adjustment. Therefore, all results in this presentation are adjusted for inflation as of December 31st, 2020 and Les, otherwise noted. For your convenience, our earnings report filed yesterday after market close also includes managerial results in nominal terms as well as more details on hyperinflation accounting. Before we proceed, I would like to make the following safe harbor statement. Today's call will contain forward-looking statements which are based on management Thank you very much. I would now like to turn the call over to our chairman, Patricio Supervielle.

Again, thank you, Ana. Good morning, everyone. Thank you for joining us today. Starting with our financial performance on slide three on our earning presentations. In a complex scenario, we continue to balance risk and profitability by managing the credit cycle and excess liquidity through assets and liability management. We achieve... Low double-digit comprehensive return on average equity in real terms during the year, notwithstanding the many challenges posed by the pandemic, a recessionary macro that deepened during the year and a shifting regulatory framework. Return on average... Return on average equity reached 9.9% for the year and was lower at 7.4% in the quarter as pressure from higher cost of funds resulting from the floor on time deposits, interest rates and subsidized rates on loans resulted in a name contraction while regulatory controls continue to impact fees. Throughout the year, we consistently increase our coverage ratio. which reached 192% at year end from 83% in the prior year end quarter reflecting a conservative stance on risk management. We also continue to review our expected loss models and are closely monitoring our loan book and risk models to adjust accordingly as the situation evolves. Excluding one time charges related to some severance charges in the quarter, the efficiency ratio Thank you very much. Strong liquidity levels and a solid capital base with a tier one ratio of 13.8% positions as well to advance on our initiatives. Now turning to our strategic initiatives. In parallel, we have been executing our transformation strategy with the goal of driving sustainable growth as demand resumes while enhancing our current competitiveness. Specifically, this includes advancing on our digital transformation, evolving our service model in our branch network, and adding API capabilities to connect to third parties. I will discuss this in more detail shortly. As you can see on slide three, sustained digital adoption continues across our business. To give some color on the progress we are seeing, for example, Monetary transactions at non-automated banking tellers declined sequentially to a historical low of 5.5% from the 19% seen prior to the pandemic, while mobile more than doubled its share during the year accounting for 11% of transactions in the fourth quarter. Adoption of e-checks was up 44% sequentially while use of e-factoring continued to grow as SMEs continued to rapidly welcome digital banking. In consumer finance, new app functionalities added early in the year are being well received with mobile payments and digital onboarding expanding consistently throughout the year. Lastly, We continue to see good traction on our digital online broker, which saw a total of 134,000 new accounts opened during last year, more than doubling the number of accounts opened in the previous year. In turn, DART, that is daily average trading revenue, revenue trading, reached nearly 24,000 in the fourth quarter, up from less and 11,000 in the same quarter of the prior year. Now moving on to our branch transformation initiative on page four. We are very encouraged with the successful results from the service model pilots we have been carrying out since last August. This includes one pilot with a value proposition for SMEs in areas of our network where we see potential, Another pilot where we are expanding self-service areas targeted to senior citizens, building on our biometric technology, and a third one which is a 100% self-service model. These pilot programs are demonstrating significant improvements on several fronts. As shown on the top right chart, transactions through human cashiers are migrating at a much faster pace to the online and automatic channels in these free pilots, vis-à-vis our senior citizens' dedicated network. In just five months, the share of transactions at Human Tellers fell significantly from a range according to branch location between 14 to 28% in late August to a range between 5 to 6% in December. For the comparable network, In the same period, the share of transactions at human tailors declined from 23% to 17%. We achieved an average increase of 35 percentage points in the net promoter score in these three pilots, with one location posting an even higher improvement. Our newly expanded 24-hour service lobbies helped increase Self-service transactions. Importantly, we saw a drop in customers operating inside the branch lobby vis-a-vis the 24-hour lobbies, with more customers operating outside of branch service hours. We're also pleased to see that our strategy to broaden our service offerings to better reach SMEs resulted in early indication of higher performance for this cluster. Following these successful results, we plan to start scaling up these new formats across our branches during the year. This will include investment in construction works and IT with an expected payback period of between 30 to 36 months. Please turn to slide five. During 2020, we implemented agile at scale the operating model Consolidating Agile Methodologies and Processes At the same time, we deepened the customer-centric cultural transformation across the company. We have organized the company into individuals, corporates and SMEs and payments, with customer service and omnichannel cutting across end-to-end interactions or experiences. These sets of experiences are managed by empowered squads as part of a tribe that works to enhance the Supervielle customer experience. Agile transformation offices aims to guarantee the alignment to the bank's strategic objectives and to scale agility across our organization, ensuring the customer centricity at all times. This is supported by centers of excellence that Distribute talent, resources, and knowledge to each squad so that they can carry out their purpose based on the best practices of each discipline. Now, please turn to slide six for a quick overview of our business and IT capabilities, which is based on three pillars. The first one is strengthen and modernize our core banking system. The second pillar is to speed up deployment of our omnichannel strategy Modern IT Architecture, including APIs to accelerate transformation, connect to third parties and prepare for open banking. And lastly, our third pillar is be prepared for the future, including leveraging digital marketing and artificial intelligence capabilities, as well as cloud services. During 2021, we plan to make capital investments of Total 4.2 billion pesos, of which 3.1 billion will be applied to deploy a digital transformation strategy and 1.1 billion to start scaling up the service model pilots across the branch network. Our goal is to offer our customers a human banking experience that combines the use of technology with our staff assistance to provide our customers the best of both worlds. Please turn to the macro on slide 7. Following a macro contraction of 10% in 2020, we see the economy beginning to rebound, benefiting also from a statistical carryover of 6%. Favorable external conditions also offer some tailwinds for the year, particularly as higher prices for agricultural commodities continue strengthening The Trade Balance, where the government continues to show signs of fiscal restraint. These provide a solid foundation for real GDP to expand above 7% in 2021. The recovery, however, is still subject to advances in the vaccination program to contain the health crisis and the resumption of IMF negotiations. While inflation for 2020 dropped 17 points year on year to 36%, Month inflation has deteriorated since last August and we anticipate it will increase to approximately 48% this year. The gap between the blue chip rate and the official exchange has somewhat contracted, although it still remains at high levels, while interest rates remain unchanged with seven days repo rates at 36.5%. Let me now turn the call to Mariano Biglia, our CTO. Please, Mariano, go ahead.

Thank you, Patricio. Good day, everyone. Please turn to slide eight. Our loan book in the quarter contracted sequentially by nearly 4% on the back of sustained over-week demand while we maintained prudent lending and focused on profitability in this uncertain context. Peso loans were flat sequentially as growth in credit card loans were offset by lower corporate loans. Dollar-denominated loans in original currency contracted as some large corporates paid down their dollar loans in line with the over-industry trend. Government-sponsored loans at preferential rates remained unchanged sequentially at 10% of our loan portfolio at year-end. This includes nearly 11 billion pesos in SME loans at preferential rates, of which 4.5 billion pesos were in short-term factoring transactions that are fully guaranteed by Fogar. Now looking at funding on slide nine. We closed the year with strong liquidity levels, both in pesos and dollars. The loans to deposit ratio remains at historically low levels of 62%. Average balances of peso deposits increased nearly 78% year over year and nearly 1% sequentially. Total peso deposits at year end declined nearly 7%. While core deposits in pesos remained flat sequentially, we delivered the balance sheet by reducing institutional funding to preserve financial margin. Dollar deposits in original currency rose 3% during quarter, representing only 14% of total deposits in line with the outflow of dollar-denominated deposits observing the industry. Turning to the P&L on slide 10. Net financial income was down 15% sequentially to 9.3 billion pesos. We saw a sequential name compression of 170 basis points during the quarter to 19.5% as higher cost of funds from the floor on the rate of time deposits along with higher market interest rates reduced spreads. Increased volumes of loans granted to SMEs at preferential interest rates together with increased volumes on credit cards from government-sponsored programs also contributed to name compression. Now, moving on to asset quality on slide 11. Loan loss provisions amounted to 1 billion pesos in the quarter, down 67% sequentially. We continue to revise our expected loss models, including additional macro variables and updated top-down analysis of some industries that could be more susceptible to the pandemic. This re-evaluation did not lead to an increase in COVID-19 specific provisions in the quarter, which stood unchanged sequentially at 2.8 billion pesos at year end. The ratio of total provisions to total loans declined to 7% from just over 8% last September. A breakdown of this ratio by key customer segment is shown on the top right chart. The NPL ratio declined 80 basis points to 3.7% in the quarter, mainly due to the write-off of atomized consumer loans in the personal and business banking segment, reflecting our policy of writing off delinquent loans at 270 days. We also continue to increase coverage in the quarter, reaching nearly 192% in the fourth quarter from 183% in the prior quarter. MPLs and coverage ratios benefited from the relief programs established by the central bank, which allows debtors to reschedule their loan payments with grace period beginning to expire starting this coming April, and to a lesser extent from the regulatory easing on debtor classification during the pandemic. Excluding regulatory easing, coverage increased to 184% in December from 158% in September as we continue to refine our models and conduct top-down industry analysis. We will continue to closely monitor events and make appropriate adjustments as required to our risk models. As shown on slide 12, our loan book maintains a well-diversified industry exposure. Agribusiness and food beverage, which comprise a large share of our portfolio, continue to perform well in this environment. At the same time, we have further reduced our exposure to higher risk sectors, which accounted for less than 9% of our portfolio from 13% in the prior quarter. Moreover, loans to the highest risk sectors have guarantees exceeding 60%. At the same time, Over 40% of our commercial loan portfolio is collateralized, while collaterals on non-performing commercial loans increased to 80% from 78% in the prior quarter. Importantly, loans to lower risk payrolls and pension clients accounted for 72% of our total loans to individuals at the bank level. Now please turn to slide 13 for some brief remarks on our perspective for the year. While guidance remains suspended due to the limited visibility ahead, on this slide we share our overall views on the key business drivers for 2021. We expect to see loans and deposits growing above inflation. Loan growth will largely depend on the size and strength of the economic rebound, advancing the vaccination program along with consumer and investor confidence. We expect loan growth will come first from export-oriented industries, particularly agribusiness. This is supported by the world economic rebound, including Brazil, and increased commodity prices. Visibility, however, still remains low. Deposit growth, in turn, should be supported by foreign exchange market restrictions and the regulatory floor on interest rate pay-to-time deposits. In terms of asset quality, we could see a potential deterioration in MPLs during the second and third quarters of the year after grace periods from the rescheduled loans begin to expire in April. That moment will reflect more accurately the behavior of our clients in terms of their payment capacity. While we feel comfortable with the current level of provisions, these could be revised upwards if economic conditions were to worsen. This is mitigated by our present approach to lending and the strength of our portfolio. Cost of risk, in turn, is expected to be below 2020 levels. We expect NIM to remain pressured by higher costs of funds resulting from the floor on interest rates on time deposits and subsidized rates on loans. Also, we expect fees to grow in line with inflation. Despite regulations limiting repricing until March this year, and some regulatory caps in place for credit card commissions and ATM fees for 2021, the bulk of our fees to individuals, mainly bundles of banking services, are not affected by regulations. Fees on loans will depend on the overall economic context. In terms of expenses, salaries are anticipated to grow with inflation and we will continue to exercise strict control on requiring costs. While investments in accelerating our digital transformation strategy and the revamping of some branches will result in some temporary increases in costs, this will contribute to enhanced efficiency in the longer term. Higher turnover tax rates, along with a recent extension of the turnover tax to LELICs and REPOs in the city of Buenos Aires, should also affect expenses. To conclude, We expect capital and liquidity to remain at adequate levels underscoring long-term sustainability. Now we are ready to open the call for questions. Ana, please go ahead.

Thank you, Mariano. At this time, we will be conducting the question and answer session. As a reminder, to ask a question, you need to be connected to the Zoom platform. We will not be able to take your questions if you are connected from a phone line. To ask a question by voice, please press the Raise Your Hand button and press it again to withdraw your question. You can also send your questions in written form via the Q&A box. We will ask you to limit yourself to one question and a follow-up and then you can raise your hand again in another round. One moment while we poll for questions. The first question comes from Gabriel Nobrega de Siti.

Yes, hi everyone. Good morning and thank you for the opportunity to ask questions. During the quarter, we actually saw that you reversed some provisions from your corporate loan book. And so I was wondering, are there any other parts of your book which may have been more conservative than the results are actually coming in? Do you expect that there could be Thank you. Can you please, Mariano, can you...

Thank you.

Sure, Patricio. Thank you. Hello, Gabriel. During the fourth quarter, as we do in every quarter, we revised our expected loss models, updated macroeconomic variables, revising, making a top-down industry analysis, and revising all the high-risk and very high-risk sectors of every industry. In this context, we made a mix in our provisions, reducing provisions in corporate loans as we received some collections, particularly in the construction sector where, as you could see in the presentation, we reduced exposure. So reducing exposure to a high-risk industry also reduces the need for provisions. Then also we were expected a higher devaluation of the peso as we expect now. So that also contributed to revise downwards the provisions of US dollars loans. But on the other hand, we increased provisions particularly in loans to individuals and SMEs and also credit cards that had been deferred within the central bank In this context, although it is an option for debtors and they could take it and they pay, if it's a loan, pay the deferred loan as an additional installment at the end of the loan or for credit cards, they are deferred in 12 installments or nine installments after three months period grades. So they are not past due, but we increase coverage in those cases because we will have to expect a few months later to see, starting in April, how is the behavior of these debtors. So all in all, we maintain almost the same level of COVID-19 specific provisions. Well, we increased coverage because we made some write-off, particularly in the retail segment, and thus reducing NPLs and increasing coverage.

All right, that's perfect. And as for my second question, during this quarter, we saw that you increased your investments into digital transformation, and I'm just wondering if If you expect to keep the pace of investments in your digital platform throughout 2021 or should we start seeing this decreasing? Thank you.

Let me take first this and then I pass to Alejandro. But basically the digital transformation that we started In 2019 and scaled in 2020, we'll continue going forward over the next few years. This is one structural decision we've made in order to modernize our bank. And then also there's a second transformation which concerns the future of Thank you Patricio. Yes, we are

We are planning at least to sustain these levels of investments into 2022. As Patricio mentioned, we're working on two fronts. One is the branch network transformation into an omni-channel that will allow us to have the best customer experience. There we worked on three formats to enhance this customer experience. Thank you very much. We have also another format focused on offering SME value propositions in areas of the network where we see potential and we see early indication that this is actually going to do better than what originally expected. And in the third case, we are scaling up a fully automated format this year and next year which allow us in the three cases to increase our efficiency quite considerably. On the IT business fronts, we have increased all the digital transformation initiatives. Currently we have 50 squads working with agile methodologies to make sure that end to end customer experiences and customer journeys are digitalized. We've seen an increase in In NPS, particularly in the case of the branch network pilots, and we're working to enhance the full digital capabilities of onboarding for individuals, corporations, as well as cross-sell and cash management services. We are very enthusiastic about this, and we definitely see it going forward until the end of 2022.

Perfect. Thank you, everyone, for your answers.

Thank you, Gabriel. Our next question comes from Ernesto Gavilondo from Bank of America. Ernesto, go ahead. Ernesto, I think you're on mute, maybe.

Can you hear me now?

Yes, perfect. Thank you, Ernesto.

Thank you, Ana. Hi, good morning, Patricio. Good morning to all your team and good morning, everyone. My question is on asset quality and the deferred portfolio. In your press release, you mentioned that around 10% of the loan portfolio is deferred and that you have already created extra provisioning of around 2.8 billion pesos as of December related to COVID-19. So considering that the central bank is adding 60 days more of grace period, how should we think of the NPL ratio in the third quarter after ending this grace period? What could be the level of the peak? And if you have any expectations on the payment behavior of the deferred portfolio? Thank you.

Thank you for your question. In terms of the NPL, we believe that, I think Mariano mentioned, it will peak in the second queue or third queue once the federal program ends. And maybe then afterwards in the second half of the year, We believe that there might be a decrease in NPS. But please, Mariano, do you want to complement?

Yes. Hello, Ernesto. Regarding the behavioral respect from debtors who took the option to defer a loan installment or credit card balances, In general, we don't expect a different behavior that they would have in normal situations except for higher risk industries where, as I mentioned, we have some additional provisions because those are debtors that could face higher challenges to repay all their loans that all the installments that have been deferred. And then we also differentiate Thank you very much. Thank you. And we also monitor whether if these debtors, particularly when they are individuals, if they have a credit card and a loan and whether they have deferred both or only one. If they deferred only one, what's their behavior in the other financing? So we take all these considerations and make additional provisions where we think that they are necessary.

Thank you, Patricio and Mariano. And for my second question, can you give us an update of the last regulatory framework? Anything related to floors on deposits, the subsidiaries that you mentioned, the caps on credit cards, the freeze on fees?

I would like to compliment on Mariano's answer. Also, I think it regards what happened also in 4Q There was, I mean, there was a decrease in exposition of high or very high risk industries in terms of credit exposure. And also we have all our non-performing loans are very well collateralized. 80% is very well collateralized. So regarding to finalize your question, I think that we are well positioned for what we expect for 2021.

You can ask it again if you want, Ernesto.

Yes, thank you. So my second question is if you can give us an update of the last regulatory framework regarding floors on deposits, the subsidizing some interest loans, the caps on credit cards, the freezing fees. What else I am missing or what else are you hearing that could be on the regulatory front this year?

I think we lost you, Ernesto. I think you were asking in terms of an update on regulation. Isn't it floors and interest rates and fees and all that?

Correct, correct. Thank you.

Okay, thanks.

Okay, I will pass to Mariano. But regarding fees, there are certain regulations on ATM fees. But the bulk of fees, we believe they are non-regulated. So more or less 90% of the fees, which is the bundle banking products, which represent 90% of our fees, they are non-regulated and they will come along with inflation. Mariano, do you want to compliment on the rest of regulations?

Yes, sure. Let me follow up with regulations on interest rates. Right now, we have on the liability side, we have floor on time deposit interest rates. We have two floors, one for deposit of less than 1 million pesos and another floor, which is a little bit higher for deposits of more than 1 million pesos. In this case, the floor is set as a reference to the interest rate. So if the central bank happens to increase or decrease interest rates, the floors will also be moving in the same direction. Then on the asset side, we have the central bank The subsidized lines at different interest rates. We have loans at 24% interest rate, 30 or 35, depending on whether they are for working capital or for investment. And those lines are offered principally to SMEs and to the lower end of our middle and bigger corporate clients. And then of course we have all the central bank instruments which are not regulated itself but they are nonetheless set of course by the central bank. So we have still in place a lot of regulations both on the asset and liability side and also on fees as Patricio mentioned although fees had a much higher impact in 2020 where we were limited to increase all types of fees And now in 2021, this affects only a smaller part of all our fees.

Thank you.

And is there any regulation on the provinces that is correlated to your business or related to your business?

In provinces, the regulations come from the taxes side. There are no different rules from the central bank based on the province, but they tax provincial taxes, which is mainly the main tax is the turnover tax. That tax has a different rate depending on the province. And on that side, the most important issue that started affecting us in January this year, is that the Autonomous City of Buenos Aires, which for this matter acts as a province, expanded the reach of the turnover tax to LELICs and RIPOs with the central bank that were previously exempt. So now we have that tax which has on average It had an average rate between 7% and 8%, but now it reaches also LELICs and RIPOs in the city of Buenos Aires. And also on top of that, the city of Buenos Aires increased the turnovers tax rate to 9%. And that also was made by other provinces such as Córdoba and Tucumán.

Very helpful. Thank you so much.

Thank you.

Thank you, Ernesto. Our next question comes from Yuri Fernandez from JP Morgan. Yuri, you can ask your question now.

Hi, Ana. Hi, Patricio. Thank you. Thank you very much for the opportunity of asking questions. I have a first one regarding your consumer finance, regarding Udo. We see results improving, but still are printing some loss there. So my question is, when do we expect Udo to break even? I am a bit concerned on the amount of loans deferral there. I guess this was... A portion of the previous question, but how do you see those loans behaving? Because if I read correctly in the release, I guess 39% of the loans you do, they are being deferred today. So two questions, right? Like how you see business evolving? Maybe you can comment a little bit on your KPIs. I guess you have an impression. Thank you.

Okay, thank you for your question. First of all, the strategy of UDO and the consumer finance unit, one key part will be the opening of offering digital accounts for individuals in order to capture retail deposits. This is a structural move That will pay off this year, we hope, and in the following years. And it will reduce the cost of funding we have in this business. And therefore, it will have a very important swing factor in the profitability of the entire group. UDO will act as a digital attacker. We hope to attract segments of people that prefer to work with digital platforms. There's another factor that affects the profitability of UDO. During the pandemic, you do had, let's say, less sales of insurances and less sales of non-financial services, which are an important equation in the profitability. This is already changing. Now we see that there is movement in terms of sales, much better sales, In insurance and non-financial services. And these are services that are not, it's not just one-off sale, but it's something that you build once you get a client, then this client keeps, there's a life cycle of maybe a couple of years or two, three years of, let's say, fees that are coming into the platform. Regarding margins, We have, well, first of all, we have very good, we think that we have a very disciplined score methodologies in terms when we assess and discriminate a good credit from a bad credit. And we believe that rates, it's important in consumer finance what happened with rates. And in 2021, we believe that rates Interest rates will be stable because even though inflation is high and that's a risk, the central bank does not have incentives to move rates. So rates, we believe that they will be quite stable during the year. And so therefore margins, financial margins for consumer finance, we believe that they will be strong. Finally, we believe that profitability will start to improve in 2021-2022 and it will become a very important part of our platform. I hope I have answered your question.

No, thank you, Patricio. Just a quick follow-up on Udo. We saw the number of clients growing, right? Like 40,000 to 410, so something like that, right? So the idea is to keep growing at that pace, accelerate that pace. Do you have a target of clients by your end? Because I think there are other players doing similar strategies, so it would be nice just to have some KPI on your view for Udo. All right.

Mariano, do you have some figures on that? I don't think I can give you specific targets. We are quite aggressive in terms of growth, but at the same time, very cautious approach in terms of who takes credit. I mean, exposure of credit and credit cards. I think another important feature that I want to mention is that Walmart is leaving the country and we have a contract that is renewed until August 2021. The partners, the new players replacing Walmart will be Dana Rice. We've been working with the Dana Rice group for the last few years as they were clients with their retail operations in Argentina. Although they were out of the supermarket business for many years in Argentina, they are in the supermarket business in other countries, for instance, Uruguay. And so these guys are knowledgeable in retail. And we believe that we are very happy to work with them. And we believe the business practices might be even better than the ones we had with Walmart. And for instance, just to give you one idea is that Walmart is not used to have loyalty cards, whereas probably they will incorporate the loyalty cards as a core program. And this gives you a huge opportunity to expand the business. in terms of the traffic coming into Walmart.

Perfect, Patricio. Thank you very much.

And let me add also that it's important to highlight that we are turning Udo also into a digital bank. So it's not only the quantity of clients, but that we aim to get digital clients, which will increase also the funding and deposits base of Udo. That will be something new compared to the old business model where it was only an underwriting of loans and only worked with retail customers on the asset side. Now it will work both on the assets and liabilities side with retail customers and turning into digital. Then I think there was a second question regarding time deposits. Was it?

Yeah, I was asking more because I know it's a regulatory issue, right? But today, the numbers in the fourth queue, they kind of reflect how the time deposits will behave in the future, right? So my question was, What is your outlook for margins? Should margins be stable? I guess Patricio kind of addressed that, but I don't know, Mariano, if you want to add. Basically, what's the outlook for margins in 2021? In a short way to ask, what's the outlook for NIMS?

Yes, well, regarding regulation, and I know we're talking about all the group and mainly the bank for that matter. We expect, of course, for some time deposits to be in place. They are now in place during the first quarter. So as they were in place, as you said, fully in the fourth quarter, the level of NIMH that we saw in the fourth quarter is likely to stabilize during a few months, particularly in this first quarter. And until we start to offset that, growing in more profitable loans. So in that way, we will be able to increase NIM Alejandro Stengel, If the central bank continues to buy dollar reserves and inflation continues to show signs of going down, as we've seen

A more equilibrated fiscal situation in the first queue. It is more likely that they will review their policy on the floor of rates and for time deposits and probably consider bringing it down. I think these are two things that we might look at and that would have, as you can imagine, a considerable impact very quickly on margin and therefore on overall profitability. I think that's something you might want to look out for.

That's interesting. So I guess the message is, again, there are a lot of uncertainties, so it's hard to write this down. But basically, stable margins, it's kind of the worst case scenario. In your view, maybe continue for the next quarter. And you have two avenues of increasing the margins. The first one is through low mix. So basically growing in higher risk, higher profitability loans in the second half. And another way is basically a review of those regulations and putting like a lower floor for time deposits. So that's kind of the message, right?

I would sort of adjust a bit to the first part of the message, Yuri. It's not that we're going to go for higher risk We see a tremendous potential within our franchise and sort of sectors like agribusiness, the winery, the citric industries, which we've served for many years, and that have really depleted their inventories. And they will have a strong need for working capital. And these are very good risks, value chains that are led by strong industry captains that have very good distribution, and Supplier Networks. So there is, to your side of the argument, there is an opportunity basically to compensate by scale these narrow margins. And then yes, probably maybe as of the third quarter, we'll see a possibility of the central bank reviewing the minimum rate or the minimum floor that they put on time deposits. That's the way I would frame the answer.

Thank you very much, Alejandro, Patricio and Mariano.

Thank you, Yuri. So our next question comes from Alejandra Aranda from Itaú. Alejandra, go ahead, please.

Hi, good morning and thank you for taking my question. I was wondering, you know, it's so difficult to think of Argentina on a six-month period. I was wondering if you could give us a little bit of a spoiler and share with us what has been happening on the last two months in terms of dynamics for your loans, how you're seeing that demand coming through and the names there. If you could give us some indication of the first two months of the year.

Yes, Alejandra, thank you. Let me start, first of all, with what happened last year. In second Q and third Q, we had very high NIMs that allow us to build very good provisions. Then in fourth Q, there was a little bit of NIM compression due to the flows introduced in interest rates for deposits. and also more competition on the institutional funding side. So that drove a little bit of NIEM compression. Looking forward, we believe that in the first, maybe first half of the year, NIEMs will basically remain stable. And what will happen, what will be very important is that Well, regarding NIMS, we believe that loan demand will start to pick up in the second half of 2021 in the avenues that Alejandro just explained. But these avenues of growth will allow us to replace the leaks and reports with high NIMS loans. And it's interesting to observe that What would happen maybe in other bank franchises, they will also do, if we expect loan demand resumes, other banks, what they will do is they will replace these LILICs and repos with low NIM loans. So because historically we have high NIM loans compared to the rest of the industry. And then I think, I don't know if I have answered your question, Alejandra. Do you want some more color?

Well, I do understand the concept of loans probably picking up on the second half and that with stable rates on the deposit side. And we're all believing that they're going to keep those floors there. You can replace that and have a pickup on Nims on the second half, but I'm a little bit skeptical on the first half. I'm not seeing where that loan demand on the first half is coming from. and basically even with rates being stable on the deposit side, you're going to get a compression as you were pointing before on one of your slides. Deposits are going to keep on coming because people can't buy dollars and loan demand is just not there.

This is true. We have lived a terrible credit crunch in 2020 and 19 and 2019 and 2020. I mean, three years in a row of credit crunch. So today, credit penetration is 11% of GDP. So you can imagine we have almost, it's a very, very low credit penetration. And to have a loan demand pickup, you need, of course, you need business confidence But still, having said that, in an electoral year, I believe that there will be some demand on personal loans, for instance, on consumption. And as Alejandro explained, maybe you're right that there are uncertainties. And there are uncertainties, but at the same time, there is a scenario of world demand. The world is picking up. The world is rebounding. So this is helping Argentina in terms of agricultural exports. And we have commodity prices that are in average 30% above last year. This is also supporting the export industries. And so I believe that there will be some pickup of loans in particular in these sectors. The uncertainty, the thing to watch in the first queue and second queue is the behavior of payment of the deferred loans. That's the thing to watch. We are confident that our coverage is okay, but the thing to watch is that, of course, and this is starting due in April.

Okay. Okay. Thank you so much.

Thank you, Alejandra. Now, we have a question from Carlos Gomez, Lopez from HSBC. Hello, Carlos, and you can ask your question now.

Hello, can you hear me now?

Yes, sure.

Thank you very much. So two questions. First, in terms of loan growth, you ended up the year negative and I was going back over your previous presentations. In the third quarter, you still expected a positive outcome. What happened exactly in the fourth quarter? Did you see less demand than you expected or is it simply that inflation was much higher than you expected? And then also on inflation, given that you expect a higher inflation in 2021, should we expect therefore also a higher monetary correction and therefore a lower return at the end of the year?

Alejandro, in terms of loan growth, do you want to what happened in fourth Q or why there was less demand? I think I would start my answer for FortQ. I think that there is, I mean, there was uncertainty. I mean, the pandemic, there was uncertainty and also a very cautious approach. Still, the market is not, it was not requesting loans. And so again, we had three years in a row of credit crunch. We believe that there will be a turning point. And for the reasons I just mentioned, the world economic rebound, the agricultural exports, maybe an electoral year where consumption will have some rebound. But this is looking forward. What happened particularly in fourth Q, I cannot explain, except that there was lack of confidence and people... did not want to request loans. Alejandro, do you want someone, maybe Mariano, do you want to compliment on that?

Yes, thank you, Patricio. Hello, Carlos. Yes, what we've seen during the fourth queue, as Patricio mentioned, was still a very weak demand, and we saw a mild rebound in In the demand for personal loans and then some growth in credit card loans or credit card financing overall. And on the commercial side, the demand for credit is still very low and only growing in the subsidized lines of 24, 30 and 35% interest rates. So we are still also cautious on growth, particularly, as I mentioned, when I talked about asset quality, we are very cautious in the industries that we consider to be with a high risk or very high risk due to the pandemic. So for instance, in that sense, we received collections Carlos, this is Alejandro. Just to complement what Mariano is saying, when you look at what we were doing on the third quarter,

That has a bearing on how it compares on the fourth quarter. There was a significant increase in the mandatory 24% lines, which are subsidized credit lines. And we focused on short-term working capital, not long-term. And that, of course, has a bearing on the level of growth that you have from one quarter to the other. The other thing I think you should be aware of or follow up on is that there was a significant reduction in dollar-denominated credit lines. So the combination of both things is having an effect on the result at the fourth quarter that you are correctly pointing out. I would highlight the reduction of dollars, dollar-denominated credit lines, and the fact that we did not want to become exposed in long-term Thank you very much.

And about inflation for this year?

Yes, for this year, we are expecting inflation to be clearly higher than 2020. In 2020, In line with market expectations, we were expecting inflation to be in the high 40s, closer to 50%. But of course, it's still soon to tell because there's a lot of variability. We are seeing some good signs on the fiscal deficit side. But it's still too soon to predict a lower forecast, a much lower forecast of inflation.

We understand that. I guess our question is with higher inflation, I mean, do you think that the way the business looks now, you would need a nominal return of 50% to have a real earnings? Is that realistic or should we expect lower real returns this year than we saw last year?

Well, inflation, of course, is never good for the financial industry. It's not good for great demand. But beside that, we are on the first place. We are hedged against inflation through different asset classes. So those assets should give us first the profitability in nominal terms to match inflation. and on top of that, deliver positive results in real terms. Our hedge with inflation is based in non-monetary assets that include real estate and also about 50% of our equity. We have loans that are just by UVA and bonds, treasury bonds that are just by CERN. are inflation indexes. So if inflation happens to increase, we will see an increase in those non-monetary assets and thus that will increase our shareholders' equity. And then we will see a higher return and higher revenues from UVA loans and from SIR bonds. I'm not sure if that answered your question.

Yes, thank you very much.

Yes, it's complementing what Mariano said. We also have a 14% equity exposed into dollars, dollar-linked bonds, which are also correlated to inflation. That completes the overall picture. Thank you so much.

Thank you, Carlos. I think if there is some more questions, we are not seeing any new ones. So I think this ends today's question and answer session. Thank you for joining us today. 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. Thank you and stay safe and healthy. This concludes today's conference. You may disconnect your lines at this time. Thank you again.