Grupo Supervielle S.A.

Good morning, everyone. Welcome to the Grupo Supervielle Third Quarter 2022 earnings call. This is Ana Bartesaghi, Treasurer and IRO. A slide presentation will accompany today's webinar, which is available in the investor section of Grupo Supervielle's investor relations website. Today's conference call is being recorded. As a reminder, all participants will be in listening 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 answer questions if you are connected from a phone line. Also, please make sure your first and last name appear in the Zoom platform you are using. To ask a question by voice, please press the raise your hand button in the Zoom platform and raise your hand again to withdraw. You can also send questions in written form via the Q&A box in the Zoom platform anytime you wish. We will ask you to limit yourself to one question and a follow-up, and then you can raise your hand again. 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, first vice chairman of the board and CEO at Banco Supervielle. All will be available for the Q&A session. As a reminder, today's call will contain certain 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 statement section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statement to reflect new or changed events or situations. Patricio Supervielle, our chairman and CEO, will start the call discussing our key transformation initiatives and our past profitability. Afterwards, Mariano Biglia, our CFO, will take a deeper look at our performance and near-term perspectives. This will be followed by a Q&A session. Patricio, please go ahead.

Thank you, Ana. Good morning, everyone. Thank you for joining us today. Please turn. We continue to execute on the key strategic pillars of our strategy designed to improve return on equity while operating in an increasingly adverse macroeconomic environment with loan demand at all-time lows. Inflation hit its highest level in decades, climbing 22% in the third quarter, while interest rates hiked 23 percentage points. In this context, we are moving ahead with the right sizing of the business and the ongoing transformation of our branch network, driving efficiencies while enhancing the customer experience. Integrating our consumer finance, customer base and back office into Banco Supervielle is on track and we expect to complete this process in the fourth quarter of the year, along with seizing the majority of Udo's operational efficiencies We are offering this client segment a seamless, omnichannel experience through which they can access the buying, road, assortment of financial products and services. We also gain traction in transforming our branch network, driving increased productivity. We entirely transferred our financial agent business, including 18 low-performing branches that service the government of the province of San Luis while continuing to serve Our strong private client franchise in this region through a combination of private branches and virtual hubs. Seeking additional operational leverage, this month we filed a request with the regulator to close another 14 branches, reaching a total of 28. We expect to finalize the merger of these branches during the first quarter of next year. We continue to prioritize customer acquisition and cross-sell to gain share of target clients' wallets. And I will provide an update on this shortly. Improving asset quality and funding are two key pillars of our strategy, where we are also advancing despite the challenging context. With accelerating inflation and high market interest rates, while accelerating inflation and high market interest rates are weighing heavily on industry loan demand. A prudent approach to asset quality has allowed us to maintain stable low NPLs, net cost of risk dropping to a low of 2.8%. Mariano will discuss our financial performance in greater detail shortly, but overall profitability remains mainly impacted by weak loan demand, regulatory minimum interest rates for the central bank, and a lag in the repricing of Argentinean peso loans. And while we reported a consolidated debt loss for the quarter, our bank subsidiary on the standalone basis reported a 2.6% return on average equity in real terms, improving sequentially. We finalized the quarter with a Tier 1 capital ration of 14.2%. Our capital base is inflation hedge and offer enough liquidity to weather the current macro challenges, and we wait for more favorable economic and market circumstances. Now, please turn to page four. We have established a clear path to profitability towards the close of the second Q of 2023. Let me review the structural drivers underlying our pathway. First, the consumer finance business has been a dragging factor in our operations. Transferring you-do customers and back office to the bank will be a major source of efficiency in a sector that has suffered the most from the economic crisis and worsened macro. With inflation expected to remain in high levels next year, this initiative will allow us to serve this segment more efficiently. Second, 47 branches, including 14 in-process, have been consolidated and right-sized. Moreover, headcount has been reduced by 23% from 2020 levels. This includes an 88% reduction in headcount at UDO and 10% at the bank. Following the transfer of the financial agent business related to the province of San Luis, we are keeping a solid relationship with the private sector in this province, both corporates and individuals, through a more efficient model. These initiatives will allow us to drive us profitability, achieving a positive return on equity towards the end of the second quarter and many more. Beyond this, we remain focused on driving revenue growth. We added 100,000 new retail customers year-on-year, up 7%, and we are also encouraged by the growing number of digitally onboarded clients, up 2.7 times from September last year. Digital customers rose to 52% of total clients, up 30% from 34% a year ago. Corporate and SME customers in turn posted a strong 11% year-on-year increase with the addition of 3,300 times. As market conditions begin to improve, we expect to deliver long growth and customer acquisition with a more efficient structure, driving sustainable profitability. With this, let me turn the call to Mariano. Please, Mariano, go ahead.

Thank you, Patricio, and good day, everyone. Please turn to slide five. We reported a net loss of 560 million pesos, a reduction from the 2.1 million pesos lost in the second quarter. The mainline items and drivers contributing to this sequential improvement included, first, a 7% increase in net financial income. Equivalent to 1.7 billion pesos, mainly reflecting higher market rates. Second, a decline of 11% in personal expenses, or 1.3 billion pesos, as increases in wages were not enough to anticipate accelerated inflation in the quarter, reducing salaries in real terms. Efficiencies from headcount reductions, as Patricio discussed, also contributed to lower costs. And third, A 34% drop in loan loss provisions, equal to 1.2 billion pesos, had mainly reflected healthy asset quality. These benefits were partially offset by a sequential increase in income tax of 1.6 billion pesos, reflecting a higher taxable income base at subsidiaries and higher inflation negatively impacting Yudu's tax loss carry forward. Turning to slide 6. Total loans for the quarter increased below inflation, reflecting the impact of accelerated inflation and the consequent weak credit demand across segments. Our overall loan performance was in line with the industry trend when excluding the financial agent business that served the government of the province of St. Louis. Notably, total loans at UDO contracted 16% sequentially, as we continue to slow down origination in an increasingly inflationary context resulting nearly a percentage point sequential decline in the weighting of consumer loans over our total loan book. Moving on to funding on slide seven. Total Argentine peso deposit in real terms declined in the high teens sequentially as we managed liquidity reducing institutional funding. In addition, core deposits were seasonally lower, while also impacted by the transfer of the financial agent business in the province of San Luis. Average peso deposits were down nearly 9% quarter on quarter, while average peso core deposits were down 3.8%. Year on year, we gained market share inside deposits, reflecting our sustained focus on strengthening our low-cost funding base. The key pillar of our strategy. As shown on slide 8, net financial income increased over 7% quarter of quarter to 24.6 billion pesos. In turn, total net interest margin was up 320 basis points sequentially to 22%. Neem expansion was mainly driven by higher interest rates and lower volumes of elites. This more than offset a 920 basis points increase in peso cost of funds driven by regulatory minimum interest rates ruled by the central bank and the lag in the repricing of peso loans combined with a low single-digit decline in average volume from weak credit demand. Moving on to page nine. Our focus on protecting asset quality by increasingly atomizing exposure and reducing our risk appetite allowed us to report a total MPA ratio of 3.7% sequentially stable. Total net loan loss provisions were down 55% quarter on quarter, with the net cost of risk dropping to a low of 2.8%. In addition to healthy asset quality, lower cost of risk Reflexa releasing provisions following the transfer of loans granted under the financial agency agreement in the province of San Luis. We also contracted a new credit-related insurance policy, which contributed to reducing provisions for our senior citizens' loan. In a context of accelerated inflation, we also lowered loan origination at UDU and began to transfer customers and loans to the bank. The total coverage ratio stood at nearly 142%, stable against the restated ratio for second quarter 22 when considering the adoption of expected credit loss accounting at UDO. I will explain this in more detail shortly. Finally, at the bank, the NPL ratio stood at 2.7%, while UDO consumer loans posted a 190 basis points decline in the NPL ratio Down to 15.4% driven by a reduction in its non-performing loan portfolio of around in the high 20s. Now please turn to slide 10. Together with the transferring UDO customers and loans to the bank, this quarter we also adopted the IFRS 9 impairment model at UDO which requires loan loss reserves to be recognized based on expected loss models for financial instruments. As a result, UDO loans have the same loan loss reserve when they migrate to the bank and do not produce loan loss provisions related to a changing an accounting standard. Expected credit losses accounting was adopted retrospectively to January 1st, 2021 to the UDO loan. allocating results to the quarter where the loans were produced, thus allowing the comparison of results and balances at different dates with the same accounting standard. As a result, reported figures and ratios for all quarters of 2021, full year 2021, and the first and second quarters of this year have been restated. Under the expected grade loss model, loan loss reserves increased by 3 billion pesos where the coverage ratio rose 34 percentage points to 142%. Shareholder's equity decreased by 3 billion pesos, but importantly, Tier 1 capital was not affected as under IFRS 9, no-loss reserves which exceed minimum central bank reserves are added back to Tier 1 capital. The restated net loss for the first half of 2022 improved Over by 460 million pesos compared to the reported net loss before adopting IFRS 9 at UQ. Slightly higher loan loss provisions were more than offset by a lower inflation adjustment loss as higher loan loss reserves at the beginning of the year reduced the net monetary position. Now turning to page 11. The efficiency ratio improved to just over 73% this quarter, down 180 basis points year-on-year and 8 percentage points sequentially. This sequential improvement was mainly driven by a 6% increase in revenues, as the prior quarter had been negatively impacted by a sharp drop in the prices of our government security holdings. Expenses, in turn, declined nearly 5% in the period. When excluding severance and early retirement charges in both quarters resulting from the implementation of our transformation and efficiency programs at the Bank and UDU, the efficiency ratio will have declined to 67.8% this quarter from 75.8% in the second quarter this year. This improvement in efficiency reflects a 12% sequential drop in comparable personal expenses and many others, driven by a 7% decline in headcount, together with the benefit from union salary increases that lacked inflation and contributed to lower costs in real terms. This is the opposite effect we experienced in the second quarter when salary increases anticipated inflation, increasing costs in real terms. This was partially offset by increased administrative expenses related to customer acquisition costs, and the ongoing execution of projects supporting our digital transformation. As I noted earlier, starting this quarter, costs also include a new life insurance policy contracted by the bank to cover risk within the senior citizens segment, which contributes to lower loan loss provisions for this segment. On slide 12, We share our views on the main drivers of our business for the full year and introduce our perspectives for 2020. In terms of deposits, we now expect to end 2022 with levels below inflation before we were expecting to grow in line with inflation. During 2023, we expect to see a big up in the proceeds growth, expanding above inflation as we continue to grow our customer base and gain additional share in checking accounts. Finally, the tier one ratio is expected to remain at adequate levels ranging between 12.5% and 13.5% by year end 2022 and 2023. This is a 50 BBS increase in both the high and low end of the range. Recall that 100% of our capital remains hedged against inflation. Beyond these, 2022 expectations for all metrics remain unchanged from our prior quarter views. And let me do a quick recap on that and elaborate our views for next year. Starting with loans, in this challenging context, we continue to expect our loan book to grow below inflation in 2022. For 2023, we see loans growing in line with inflation. Note that for 2023, market consensus calls for annual inflation of 96% As per the Central Bank survey, with respect to asset quality, we continue to anticipate cost of risk for the year at similar levels to those reported year-to-date, with the MPL ratio relatively unchanged, as loan growth has slowed versus last year. Maintaining our focus on asset quality, we also expect loan loss provisions and net cost of risk for 2023 to remain stable. NIM for 2022 and 2023 is expected to remain in line with the level reported for the first nine months of the year. We also expect net financial income to increase in real terms in 2023. Our views regarding fee income remain unchanged, with the bulk of bank fees from individuals are anticipated to reprice in line with inflation, while insurance income is expected to increase in real terms as premiums recovered from the shortfall of 2020 and 2021. We also maintain our expectations of operating expenses, with costs increasing slightly above inflation, reflecting additional costs from implementation of our digital transformation strategy, continual headcount efficiencies, and customer acquisition costs. In addition, IT investment related to Slide 13. Before opening for Q&A, please turn to slide 13 to take a deeper look at our cost-cutting initiatives driving improved operating efficiency. As shown on this slide, in 2023 we expect to achieve savings totaling 5.3 billion pesos derived from the main cost reductions initiatives and their implementation over the past two years. This includes anticipated savings of 3.7 billion pesos from the transfer of the UDU loan group and client base to the bank, which also includes the reduction in headcount during 2022. 1 billion pesos reflecting headcount reduction at the bank over the past two years, including the closure of 28 bank branches that are being merged are anticipated to result in savings of 1 billion pesos. Thank you to Mariano at this time.