Grupo Supervielle S.A.

Good morning, and welcome to the Grupo Supervielle first quarter 2021 earnings call. A slide presentation will accompany today's webcast, which is available in the investor section of Grupo Supervielle's investor relations website at www.gruposupervielle.com. As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. As a reminder, today's conference call is being recorded. At this time, I would like to turn the call over to Ana Bartesaghi, Treasurer and IRO. Please go ahead.

Good morning, everyone, and welcome to the Grupo Supervielle first quarter 2021 earnings call. This is Ana Bartesaghi, Treasurer and IRO. 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's 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. Therefore, all results in this presentation are adjusted for inflation as of March 31st, 2021, unless otherwise noted. In addition, following the retrospective application of the Central Bank Communications Act 7211, Effective January 1, 2021, figures for all quarters of 2020 have been restated. For your convenience, our earnings report filed yesterday after market close also includes managerial results in nominal terms. 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's current expectations and beliefs and are subject to a number of risks and uncertainties, including as a result of the COVID-19 pandemic, and I refer you to the forward-looking statement 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 Change Events or Circumstances. Given this new strict lockdown in Argentina and to avoid connectivity issues, we have decided to revert to a conference call format only for this quarter. I would now like to turn the call over to our chairman, Patricio Supervielle.

Thank you, Ana. Good morning, everyone. Thank you for joining us today. Please turn to slide three, our earnings presentation. During the quarter, we moved into a second wave of COVID-19. While today we are better prepared to confront this with the many initiatives we have accelerated or put in place to serve our clients while securing the health and safety of our employees, the scenario in our market remains complex. During this period, we continued to exercise liquidity management to protect our financial margin and reinforce our strategy to protect our capital. In terms of our financial results, we reported net income of nearly 200 million pesos in the quarter, despite higher turnover taxes. The impact of the regulatory framework and continued weak demand in a recessionary economic environment. Return on average equity in real terms was 1.8% in the quarter and 4.5% when excluding the consumer lending business. As NIEM remained pressured from higher costs of funds resulting from the floor on time deposits or on interest rates and subsidized rates on loans while fees remain weak. Maintaining a prudent approach to risk management, we continue to increase our coverage ratio this quarter, which reached 205% from 192% last December. And we are closely monitoring our loan portfolio and risk model after the end of the central bank automatic loans deferral last March. Efficiency, excluding non-recurring severance and early retirement charges, increased 120 basis points to 66.3% impacted by lower revenues. By contrast, comparable personnel and administrative expenses excluding non-recurring charges in both periods declined 6% as we maintained strict cost controls while advancing on our transformation strategy. In this environment, we are focused on capital preservation and retaining strong liquidity. We have a solid capital base with a Tier 1 ratio of 13.8% and are deploying hedging strategies against inflation, which include real estate investment, mortgages, and sovereign bonds. Now turning to our strategic initiatives, with an unprecedented number of people going online and turning to self-service Transact during the pandemic and our belief that these habits will continue, we have accelerated the execution of our transformation strategy with the goal of driving sustainable growth as demand resumes while enhancing our current competitiveness. This includes assessing the future of our work model and real estate management, advancing our digital transformation, evolving our service model in our branch I will discuss the latter in more detail shortly. Please turn to the macro front on slide four. This year comes following the sharp economic contraction last year and favorable external conditions support our GDP rebound. However, economic activity still remains below In this context, the central bank is reversing the downtrend in international reserves, and Lowering the risk of a near-term peso devaluation. In addition, despite lowered and planned subsidy reductions, pensions and public salary adjustments, increased taxes and export duties are contributed to strengthen the fiscal balance. So, while the gap between the blue-chip rate and the official exchange has somewhat contracted, it still remains at high levels Interest rates remain unchanged with seven days report rates of 36.5%. For the year, we expect inflation approximately 47% and GDP growth at approximately 6%, with economic recovery also dependent on the rollout of the vaccination program. The resumption of IMF negotiations that are more likely Most likely to take place after the mid-term elections in October and business confidence. Let me now turn the call to Mariano Biglia, our CFO.

Thank you, Patricio. Good day, everyone.

Please turn to page five. Reflecting both over-week credit demands and our focus on product lending in this challenging environment, our loan book contracted nearly 6% sequentially. Thank you for your attention. These primarily included close to 10 billion pesos in SME loans at preferential rates, of which slightly over 4 billion pesos were in short-term factoring transactions. By contrast, we saw a sequential increase of nearly 12% in leasing transactions, which contributed to 2 percentage points in market share of close to 11%. U.S. dollar loans in original currency were up 5% sequentially, reflecting short-term financing to corporates.

Now, moving on to funding on slide 6.

Liquidity levels remain strong, both in pesos and dollars, with the loans-to-deposits ratio at a record low of 55%. In line, peso deposits were up 8% sequentially, driven by higher institutional funding following a strong reduction in this type of deposits in prior quarter as we delivered the balance sheet. Additionally, non-remunerated rates of deposits posted a quarter-on-quarter contraction in line with the industry and largely reflecting seasonal trends. Average balance of peso deposits increased nearly 29% year-over-year, and we are down 2% sequentially as we continue to exercise liquidity management to protect our financial margin. Dollar deposits in original currency rose up 2% during quarter accounting for 13% of total deposits following the industry outflow of foreign exchange deposits.

Turning to the P&L on slide 7.

Net financial income and margin remain pressured by overall industry lower loan demand, as well as lower holdings in the leaks and repos. Higher cost of funds from the regulatory floor on the rate of time deposit further reduces spread, while a lower yield on the investment portfolio also impacted NIMS. As a result, financial income was down 9% sequentially to 10 billion pesos and NIM contracted 90 basis points in the quarter to 19.3%. The latter was partly mitigated by a 40 basis point increase in low portfolio NIM, mainly reflecting higher margins in the dollar loan portfolio along with a lower weight of loans to SMEs at preferential rates. Moving on to asset quality on slide 8. Low-nose provisions were relatively stable sequentially at 1.4 billion pesos with cost of risk increasing to 5% but below historical levels. COVID-19 specific provisions remained unchanged sequentially at 2.8 billion pesos at quarter end. On the top right chart of this page, we show our total provisioning ratio which was 6.9% in March and a breakdown by key customer segments.

The NPL ratio improved sequentially by 30 basis points in the quarter down to 3.4%.

This was primarily due to an improvement in non-performing corporate loans while NPL in other products had variation in different directions that offset each other. We also continue to increase coverage in the quarters to 205% and 192% in the fourth quarter. Note that the coverage ratio is distorted by two factors. The loans and credit cards that have been automatically deferred until March 2021 and the addition of 60 days until last March to each debtor classification. Both effects also impacted our MDN ratio. Excluding regulatory easing, coverage was 173% in March compared with 184% in December, but about 86% in March of last year as we refined our model. We will continue to closely monitor events and make appropriate adjustments as required to our risk model. With regulatory easing ended, In the coming months, we expect the coverage ratio to decrease and it may also be impacted by some NPL creation if some clients that deferred their maturities along 2020 and 2021 do not resume payments. Moving on to risk management on slide 9.

The chart on the left

depicts the well-diversified industry exposure of our loan book. Industries that account for a large share of our portfolio, such as agribusiness, food and beverage, and wine, continue to perform well in this context. At the same time, we have further reduced our exposure to high-risk sectors, which accounted for less than 7% of our portfolio from 9% in the prior quarter. Moreover, loans in the highest risk sectors have guarantees exceeding 50%. In addition, over 41% of our commercial loan portfolio is collateralized. We also continue to increase collaterals on non-performing commercial loans, which reached 82% this quarter, up from 80% in 4Q20. Importantly as well, 71% of total loans to individuals at the bank are held by lower risk payroll and pension clients. Now let me turn the call back to Patricio for comments on our digital transformation strategy and some brief remarks on our perspectives for the rest of the year.

Thank you, Mariano. As you can see on slide 10, we continued making consistent progress on the execution of our digital transformation strategy. For example, monetary transactions that non-automated banking tellers stood at 4%, down from 17% prior to the pandemic. The share of mobile transactions adjusted down to 8% after reaching a high of 10% in the fourth quarter, but remained above the 6% pre-pandemic level. E-checks continued to post exponential growth, up 36% sequentially, reaching 30 billion pesos. We're also very pleased with the sustained growth in digital customers at the bank, which increased 54% over the past 12 months. At YouDo, our consumer finance subsidiary, new app functionalities added early last year have been well received with the two new digital customers expanding consistently. We expect to launch new features to the app, which will continue to drive new users. Finally, at Invertir Online, our online broker, active customers have increased consistently, expanding 88% during the past 12 months. At the same time, DART daily average revenue trading, I'm sorry, daily average revenue trades which showed a seasonal sequential decline, but nearly double last year levels. Before moving on to our views for the year, let me note that this quarter we have launched a more comprehensive set of KPIs to monitor progress on our digital transformation strategy, which can be found in the exhibits of our first Q21 earnings goal presentation. While guidance, please turn to slide five, slide 11. While guidance remains suspended to the continued limited visibility ahead, we share our views on the main drivers of our business throughout the rest of the year. As we navigate a more challenging environment, including the second COVID-19 wave, we now expect a delay in the rebound in credit demand vis-à-vis our expectations on our previous earning calls. We currently anticipate loans to grow in line with inflation in 2021. In terms of deposits, FX market restrictions and the regulatory floor on interest rates Thank you very much. Thank you. and it's too early to have a complete assessment. At this time, we remain comfortable with the current level of provisions. In addition, we expect the cost of risk to be below 2020 figures but above our historical average levels. In terms of margins, we expect NIEM to remain pressured by low credit demand along with high cost of funds derived from the flow Thank you very much. In terms of expenses, we expect banking salaries to grow with inflation. Higher turnover tax rates, along with a recent extension of the turnover tax to LELIC repos in the city of Buenos Aires, is anticipated to affect expenses. And while we continue to keep tight control on the current expenses, we expect to see a temporary increase in costs. as we further accelerate our digital transformation agenda and rebound some branches, which will contribute to enhance efficiency in the medium term. Lastly, we expect capital and liquidity to remain at adequate levels, underscoring long-term sustainability. Now we're ready to open the call for questions. Operator, please go ahead.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please limit to one question and one follow-up question. Our first question is from Ernesto Gabilondo with Bank of America. Please proceed with your question.

Good morning, Patricio, Mariano, and good morning to all your team. Thanks for taking my call. My first question is on inflation. We go and see April's inflation is already at 46%, so a little bit higher when compared to March, and I think that you're expecting 47 for the year. So do you expect it could be higher in the second quarter and then normalizing for the rest of the year? I just want to know how would it be impacting the results of the net monetary position? And also, if you can share with us how are you seeing interest rates and the effective tax rate in the commerce quarters, I think it would be very helpful. Thank you.

All right. Let me first give you a little bit of what we see in terms of interest rates. Inflation is high, yes, and we expect that inflation will continue to be high, and we expect that the scenario of interest rates will remain low. I mean, the government is trying to muddle through the election, and so, therefore, basically, they have decelerated also The devaluation of the peso and on the monetary front basically they want to instill more confidence and so FX is moving below inflation and so we can expect this until at least the elections and in terms of inflation we are 100% hedged against inflation but mostly to UVA and share assets and real estate and other non-monetary assets. Basically, maybe, Mariano, do you want to add on this?

Sure, Patricio. Hello, Ernesto.

Thank you for your question. Let me ask how this impacts our income statement, as Patricio said. We are hedged against inflation through a variety of asset classes. First, we have real estate and other non-monetary assets, so that reduces the impact of inflation in our net monetary position line item in the P&L. And then, as long as we keep having high inflation levels, The net monetary loss of the monetary position is offset by the repricing of UVA loans and bonds that are charged by inflation. There may be a lag between one to two months until inflation impacts in full in the UVA, but at the end of the day, we will see a repricing that is and income in the financial margin line item.

Perfect. And how do you see the effective tax rate in the coming quarters?

I can comment on that. For the upcoming quarter or for the full year, we see the effective tax rate Closer to the statutory rate of 30% and maybe a little bit lower because we have some special deductions on certain SMEs financing which lower our tax rate particularly in the first quarter. So as long as we see our profit before taxes increasing that effect will be partly diluted So we'll have a positive effective tax rate, maybe below 30%, but closer to that statutory tax rate.

Perfect. And then just for my last question, how has been your alliance with Rappi? How many clients do you have? And I don't know if you can share if you have some specific targets for the following years.

I can help you with that, Ernesto. This is Alejandro Stengel, CEO of Banco Supervielle. We are discussing the opportunities with Rappi. At this point, I am unable to comment further. But this, together with other alliances, is part of our acquisition strategy, and we have very... Thank you.

As a reminder, please limit to one question and one follow-up question. You may return to the queue for further questions. Our next question comes from Gabriel Nombrega with Citi. Please proceed with your question.

Hi everyone, good morning, and thank you for the opportunity. So, just firstly looking at asset quality, we actually saw some opposing trends as to your peers which already reported results. We saw NPO decreasing, wire provisions increasing, and so I just wanted to maybe get a feel from you. If there are any segments at the moment that are starting to worry you, And also, as there's still a lot of uncertainty surrounding Argentina, maybe you can have more necessity of provisions down the road. So maybe just picking your brains, how you're looking at quality. And I'll make a second question afterwards. Thank you.

So, first of all, let me tell you that We are following very carefully credit quality and we do a top-down analysis and we follow... We have basically a discipline of portfolio limits that we follow where we have, let's say, high risk... I mean, where we... stipulate which industries are high risk, very high risk, or medium risk, or low risk. And so this is being followed very carefully. But maybe I would like to have Alejandro, and if you can, Alejandro and Mariano, can you give some more color on the question that Gabriel made?

Yes, let me comment, Patricio, on loan loss provisions, Gabriela.

Although we reduced our MPLs in the first quarter, automatic deferral continued until March, we still have loan loss provisions. They were higher than previous quarter, but mainly because In the fourth quarter, the cost of risk was very low. We didn't have almost new MPLs that automatic deferrals continue, and we revised our model, and in some industries, or also in the forward-looking macro variable projections, we were less pessimistic than we were in previous quarters, so the fourth quarter has really a very low level of Loan Loss Provision. So when compared to that, you see an increase of 20%, but it's still a low level of cost of risk. And we also need to make provisions to continue having our coverage because although the loan portfolio decreased in real term, you have some increase in nominal terms. And when you increase 5% to 6%, You need to still make loan loss provisions because the stock of loan loss reserves is not adjusted for inflation. You need to book new charges in order to keep having the same coverage.

All right.

That's very clear. Thanks so much. And then as for my second question, looking on your digital strategy, we do see that you're adding more and more clients. More and more downloads. But I wanted to understand here, do you believe that these new clients, they're already starting to generate more revenues for you? Or do you still believe that you are maybe spending more on these client acquisition costs before these clients are already becoming profitable for the bank?

You're talking of digital clients at the bank level. Can you be more specific or I didn't hear the question?

Sure. So it's more on your digital clients. We see here that you already reached 4.4 thousand clients, if I'm not mistaken here. And so I just wanted to understand if There's some growth in the clients. They're already starting to be profitable for you, or are you still spending more to acquire these new clients?

Okay.

All right.

Alejandro, I think this is a question for you. Thank you. Sure.

Good morning, Gabriel. We have been very successful in the digital onboarding of digital native customers so far and we will continue in that trend. These digital customers, as you know, have a cycle in which they turn profitable. You have a proportion of those that basically leave you some balance in the accounts and this helps in building up core deposits. and a portion of them goes on to become through the scoring we have developed into credit clients and they contribute to our net interest income. So far we see this to be evolving as we had planned and we will continue to increase and accelerate on our digital acquisition which is turning out to be

Very much in line with our objectives. That's very clear. Thank you everyone for the responses.

Thank you. Our next question is from Carlos Gomez with HSBC. Please proceed with your question.

Hello and good morning. I would like to know if you could comment on the latest regulation from the central bank allowing the banks to use treasury bonds Thank you, Carlos, for the question. This is very new.

We typically discuss this. We have a specific asset and liability committee where we discuss these issues. But let me give you my first stomach response. I don't think we should use these government bonds as reserve requirements. But this is my stomach response. I personally don't like this regulation. I don't know if someone else wants to add on that, maybe Alejandro or Mariano. What do you think?

Hello, Carlos. I think this is an option given by the central bank. Right now, we have our minimum cash reserves fully integrated with the LELICs, which are central bank instruments. So immediately we want to take that option. We have the central bank instruments, but it's important to know that we can subscribe new treasury bonds also to use in the remunerated cash reserve. So we'll consider. It's not something that we will do at least in the immediate term.

And again, to clarify, at this point, this is an option. You could use them, but you don't have to. Could in the future?

Yes, exactly. It's important to highlight that because it's an option given by the central bank. Of course, the central bank aims to foster the issue of bonds by the treasury, but it's an option for banks. So we could... We could subscribe new treasury bonds in order to use them as part of our remunerated cash reserves, or we can keep having the leaks as we do now.

And could this, my question is, could this become an obligation? Could you be obliged to subscribe to your bonds? And if that would you have any legal avenues to try to avoid?

No, I don't think it will be. I mean, this is, of course, we cannot know, but I don't think it would be an obligation to do that. I mean, it would be a very bad signal, frankly, and I don't think it makes really sense, and I don't think they will do that. This is my opinion.

That's very clear.

Thank you so much.

Thank you. Our next question comes from Alejandra Aranda with ETAL. Please proceed with your question.

Hi, good morning. Thank you for the question. Basically, I wanted to get a sense of what you're thinking about on the funding side, the liability management. If you could comment a little bit on that, especially because we saw a big jump on deposits for this quarter, but that must have been towards the end because the average amount remained pretty stable sequentially. If you could comment a little bit.

Okay, I mean, liquidity management since the beginning of last year has been a feature that we constantly use in order to preserve high margins, high financial margins. And particularly in a scenario where there is, we have lived through a credit crunch, three continuous years of credit crunch, We use liquidity management to preserve these margins, and we have highly seasoned management teams to do that. This will continue until credit demand resumes. Maybe, Mariano, do you want to add on that, please? Yes, hello, Alejandra.

It's correct what you observed. We had higher deposit at the quarter end, although the average balance during the quarter was in line either slightly lower than previous quarter. So this has to do mainly with institutional funding where we can increase or decrease The deposits used mainly in short-term securities of central banks, which is part of our liquidity management. So, looking forward, maybe the increase as of quarter end will be at the starting point of the second quarter, so we can see a higher average in the second quarter. But again, it's part of our management, so we'll manage that the way we think it's more profitable and more prudent.

Okay, but would it be correct to assume that with that strategy we could see further margin compression?

Sorry.

Go ahead, Mariano. Go ahead. Sorry.

Yeah, we saw a margin compression in the first quarter, mainly due to the floor on rates of time deposits, and also because in the mix of deposits, we saw a higher increase in remunerated deposits and a lower increase in site deposits. So that put further pressure on margin and we see that the same point continues in the second quarter so we expect maybe a slightly higher margin in pesos in the line of the P&L but as a percentage of NIMH it would be similar to the first quarter. and increasing in the second half of the year.

Okay, thank you very much. Just to complement, full year, we believe that the name could be similar to the 4Q20, which is around 20%.

Okay, that's very helpful. Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Please limit to one question and one follow-up question. You may return to the queue for further questions.

One moment, please, while we poll for questions.

Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Ana Bartesaghi for closing remarks.

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 returning to our video conference format. In the interim, we remain available to answer any questions that you may have. Thank you and stay safe and healthy. Have a great day.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation. Have a great day.