Grupo Supervielle S.A.

Good morning everyone and welcome to the Grupo Supervielle for Porter and ERN 2022 earnings call. This is Ana Bartesaghi, Pressure 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 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 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 your question. You can also send 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 at CIO, and Mariano Biglia, our chief financial officer. Also joining us is Alejandro Stankel, 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 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 governance release and recent filings with the SEC. assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. Patricio Supervielle, our chairman and CEO, will start the call discussing the key highlights of your report and progress on your information initiatives. 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. Now, please turn to slide three of our earnings presentation. 2022 was a transformational year for the company in which I'm pleased to report that we have achieved substantial advances in executing on our key strategic pillars, progressing on our return to profitability and building the bank of the future. With inflation, Your inflation peaked at 95%, the highest point since 1991. Pressuring costs and margins. We made significant headway to boost productivity throughout the year by rationalizing our operations while further enhancing the customer experience. Let me take you through how we accomplished this. By completing the integration of our consumer finance client base and back office into Banco Supervielle and full merging UDU into the bank on schedule, we are capturing a major source of efficiency in a sector that has suffered greatly from the challenging macro environment. With this, a total of 14 billion and nearly 200,000 clients were transferred to the bank while we reduced headcount at Udo by 96%. In turn, those customers now enjoy access to an extensive array of financial services and products through a seamless omnichannel experience. In line with our current focus on prioritizing cross-hailing and engagement among our customer base of acquisition. We recently terminated our agreement with Dorinca, which operates the Tango Plus retail chain. Second, we made significant progress in rightsizing and transforming our branch network as we pursue our vision of becoming the bank of the future. The dissent produced a total of 27 branches during the year, including 18 that serviced government employees in the province of San Luis and the closure of nine branches that were already approved by the regulator. We expect to receive authorization to close another 20 branches during the first half of this year. Today, we operate a modern and more efficient network with greater self-service space and virtual apps that allow us to expand our reach and productivity while offering a convenient banking experience. These two initiatives resulted in a 21% reduction in headcount, which we expect will contribute significantly to drive higher operating leverage this year. At the same time, we continue to expand our customer base and drive cross-selling opportunities to increase our share of ordered target customers. I will provide more color on this front shortly. Mariano will review our financial performance in more detail shortly. While we are taking the necessary steps to optimize operations and remain on track to achieve profitability by the close of the second Q23, overall weak industry loan demand together with one-time U2 rationalization charges resulted in a net loss of nearly 800 million pesos for the quarter. Excluding these one-time events, we delivered an adjusted pre-tax We close the year with a Tier 1 capital ratio of 13% as anticipated. As a reminder, our capital base is safeguarded against inflation and has sufficient liquidity to withstand the present macroeconomic challenges. As we look to the coming year, it is expected to be another challenging on the macro front for us. We continue to advance on executing on us are key strategic pillars and are prioritizing customer engagement, monetization, and cross-selling opportunities over customer acquisition to gain further share of wallet and profitability among our current customers. We also remain focused on protecting asset quality and improving funding while our lower cost structure is anticipated to drive higher operating leverage and significantly improve the financial performance in 2023. Thus, we remain on track to achieve profitability towards the close of second Q23 and positive inflation adjusted return on equity this year, assuming a macro environment in line with current market consensus. Now, please turn to page four. Our efforts to enhance the customer experience, drive customer acquisition, digital adoption and funding among our retail customers have yielded Great results. We expanded our retail plan base by 92,000 times, or nearly 7% year-on-year. This good performance reflects our success in digitization with digital retail customers now accounting for more than half of our total customers, up from 38% a year ago. The ease of use of our app, evidenced by our high ratings, 4.0 in the Play Store and 4.6 in the App Store are contributing factors to this growth, and we are proud of these high scores. We're also delighted to see increased customer engagement and cross-selling, with the penetration of digital and automatic personal loans increasing by 11 percentage points year-on-year at 34%. Similarly, the total of insurance policies sold rose 15% in the year. while the share of car insurance policies fall through our digital target channels reached 50%. Our personal finance management platform also continues to be in traction as we add new products and making money market investments available 24 per 7. Assets under management increased nearly 140% year on year with the number of retail customers in our BFM app by 59% contributing to improve customer visibility. Our goals for the year in terms of our retail customer base include gaining additional share of wallet while prioritizing profitable products. We also seek to increase profitability among existing customers through higher engagement and cross-sell. As shown on the first chart of page five, During the year, we expanded our SME and corporate customer by 13%, increasing our market share by 25 basis points to 5.31%, measured by the number of customers. This was achieved even as we reduced the branch network, which together with improving NPS across all segments, serving SMEs and corporates, further validates that customers are embracing our digital offering. Rationalization of the branch network is allowing us to optimize operation. Our efforts to capture share of wallets are also paying off as we increase cross-selling. Going forward, insurance is a significant growth opportunity. Number of insurance policies sold was up 50% year on year, with entrepreneurs and SME customers increasing their penetration by 40%. Bear in mind that penetration today stands at only 7%. We also expanded our sharing in payroll services by 15 basis points to 2.6% and in foreign trade by over 70 basis points to nearly 4%. In terms of funding, our emphasis on transactionality has enabled us to increase our market share in side deposits by 18 basis points to nearly 2%. Especially, the percentage of customers using transactional products rose to 95 nearly 95% by year end up from close to 52% in December of 2021. During the current year, we plan to continue working towards gaining share of wallet and driving cross-selling opportunities among current corporate and SME customers with the goal of becoming their principal bank further contributing to expanding sustainable funding. In sum, we focus on those areas which we can control and have positioned us stronger for the current year. With this, let me turn the call to Mariano. Please, Mariano, go ahead.

Thank you, Patricio, and good day, everyone. Let's turn to slide six. Results for the quarter were impacted by one-time items in connection with the merger of U2, as Patricio mentioned earlier. When looking at our results on a sequential basis, The main factors behind this sequential performance include First, net financial income declined 7% for 2 billion pesos, reflecting the full impact of cost of funds from the increase in market rates in the prior quarter, together with a lower return on inflation-adjusted instruments. Recall that this quarter compares against a strong third quarter, which benefited from higher market rates on our investment portfolio versus a weaker second quarter. Second, loan loss provisions increased 23% by 600 million with asset quality across all segments in line with third quarter levels, except for consumer finance, A 4% increase in personal expenses for 500 million pesos reflecting additional one-time severance charges at the bank and UDU from the health care reduction. And fourth, a 9% increase in administrative expenses for 900 million pesos as cost savings achieved in the quarter were more than offset by the impairment of UDU's goodwill and fixed assets. On December 14 of last year, We announced our intention to merge UDU with the bank. Although this decision needs to be approved by UDU's shareholders meeting to be held this coming April, we have already successfully transferred all of UDU's loan portfolio and clients to the bank. We also shut down UDU's retail savings account digital app and are now offering clients an account through the bank. By completing this process, as per IFRS, we did recognize and wrote off UDU's At the same time, the merger of UDU into the bank will allow the bank to use tax-loss carry-forwards originated by UDU, which couldn't be used by this company on a stand-alone basis. By recognizing this tax asset, we reported a tax gain of 3.1 billion pesos in the fourth quarter. In sum, we're excluding one-time We delivered an adjusted pre-tax profit of nearly 150 million pesos. Turning to slide 7. Our loan portfolio grew below inflation as increasingly higher nominal interest rates following the rising inflation dampened overall credit demand across all business segments. Overall loan growth was fairly in line with the industry trend sequentially. As shown on the chart to the right, the loan composition remains fairly unchanged sequentially. Total Argentine peso deposits increased below inflation but outperforming the industry average. Core deposits posted a seasonal sequential increase but declined against year-end 2021 levels

Turn to slide nine. Net financial income for the quarter remained unchanged year on year and was down nearly 7%

were mainly driven by interest rate hikes throughout the year following higher inflation levels. In terms of volumes, interest earning assets for the year were 6%, with a lower share of loans reflecting over weak demand, partially offsetting a higher weight of the investment portfolio. and many others. We have been progressively tightening credit standards in this segment and remain attentive to protect and many more. In the last two years, we have seen a significant increase in the number of low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost low-cost As shown on the right side of the slide, we reduced health count by 21% during the year, mainly at U2, as well as the bank account in 2009. As a result, when expenses for the quarter were up in the high single digits, wages declined both year-on-year and sequentially. Now moving on to capitalization. As shown on slide 12, We close the year with a Tier 1 ratio of 13% in the middle of our expected range of 12.5% and 13.5% for 2022. Consequential basis, our Tier 1 ratio contracted 120 basis points, mainly reflected. Impairment of accelerated amortization of reduced non-financial assets related to the merge of UDO with an impact of 40 basis points and many more. We increased deductions by tax loss reform bills, recognized from the merger of UDU, which reduced net loss for the quarter, but were deducted from tier one capital. Deductions also increased for higher investments in digital transformation initiatives, which were executed as there. During the quarter, we also continued executing our share buyback program. To date, we completed 86 Lastly, an increase in risk with assets more than offset by inflation adjustments of capital.

Slide 13. Before opening to Q&A, please turn to slide 13 to review our perspectives for 2023, which include returning to profitability by the close of second Q23 and reaching positive inflation-adjusted ROV for the full year 2023. Let me start with the bigger macro picture first. With the market consensus for annual inflation increasing to nearly 100% from prior estimates of 96%, and GDP expected to remain flat compared to 0.9% growth before, as per the Central Bank survey published this month, we have adjusted our views on loan and deposit growth. We now expect our loan book to grow in line for slightly below inflation. Well before, we expected to see growth in line with inflation. In terms of deposits, we now expect peso deposits to increase in line with inflation, while earlier we were seeing a pickup in deposit growth expanding above inflation.

Beyond these two changes, 2023 expectations for all other metrics remain unchanged from our prior quarter views. Let me do a quick recap on that. With respect to asset quality, We anticipate loan loss provisions and net cost of risk for 2023 to remain stable versus last year, with the NPL ratio increasing in the first quarter but relatively unchanged by year-end. We have observed higher delinquency in retail customers system-wide since year-end, which has continued into January and February. While this could result in higher NPL ratios in the coming quarters, at the moment, we maintain our view that we will close E.R. with NPL ratios in line with ERN 2022 levels. MIM is expected to remain at 2022 levels. Our views regarding fee income calls for the bulk of bank fees from individuals anticipated to reprice in line with inflation, while insurance income is expected to increase in real terms as premiums recover from the shortfall during 2020 through 2022. Operating expenses are expected to increase significantly below inflation, reflecting the rate-sizing initiatives implemented and operating leverage we have built into the company over the past couple of years. Overall, during 2023, we expect to achieve total cost savings of 5.3 billion pesos in purchasing power, reflecting initiatives introduced over the past two years. This mainly includes In terms of IT investments related to our digital transformation these costs are expected to grow below inflation. We expect to close the year with a Tier 1 ratio at adequate levels ranging between 12.5% and 13.5% by year-end 2023. Recall that 100% of our capital remains hedged against inflation. Now we're ready to open the floor 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 a Zoom platform. You 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. You can also send your questions in written form via the Q&A box. We'll 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 vote for questions. Okay, our first question comes from Ernesto Gavilondo with Bank of America. Please, Ernesto, go ahead.

Thank you, Ana. Hi, good morning, Patricio, Mariano, and to all your team. Thank you for your presentation. My first question will be on how do you see the potential normalization of the Argentine economy? How fast do you think we can see the normalization? And how would you compare it against the Macri's administration, considering that today Argentina faces higher inflation, higher interest rates, and a lower level of reserves?

Thank you, Ernesto. I will try to answer this question today on the dis-normalization has to take into consideration, as you mentioned, that in Argentina we are suffering the highest inflation since 1991, as well as our much more stricter foreign exchange control that we went through in 2015. If you look on the international side also, the fact that there are interest rates, nominal interest rates much higher to have for many years, This is more challenging for a country such as Argentina. The war in Ukraine, as well as the spike in world inflation, commodity prices that are high, but unfortunately with the drought, It's more complicated for Argentina. So this is quite a challenging scenario. So regarding the changes we expect, first of all, we believe that there will be more consensus. There is more political consensus to apply a shock therapy rather than a gradual approach. That means that the It is to be expected that the changes will include not only measures and signals on the monetary and fiscal front, but also, for instance, on labor reforms, which are absolutely necessary. Having said that, you have to expect probably that to exit the foreign exchange control will take time. And that part, I guess, or we guess with the team, that's going to be quite gradual. And with that, with the deregulation and liberalization of foreign exchange control, then the regulatory changes will come in sync, synchronized with all the changes In the business outlook, the normalization of fiscal policies and so on. So it's going to be synchronized. It's not going to be sudden. I hope I answered your question.

Yes, perfect. Thank you very much. And just a second question related to your market-related revenues position. I'm just wondering, how would you position Supervielle's balance sheet this year, considering that inflation and rates will continue at high level? So should we continue to see strong market-related revenues? And again, will you position them in the leagues, in FX, in dual bonds? Anything you can share on that will be very helpful.

Yes. As Mariano pointed out, in terms of what we see in terms of guidance, we see that deposits will grow in line with inflation. Loans was probably a little bit below inflation and We also think that So in a very difficult context, we plan as a result to hit somewhere in the mid-range of the 12.5 to 13.5 capitalization, around 13% of capital, which is where we stand right now. I don't know if I addressed your question, Ernesto. If not, please let me know.

Oh, yes. Thank you very much, Alejandro.

Thank you, Ernesto. So our second question comes from Carlos Gómez-López with ATLC. Hi, Carlos. Please go ahead.

Hello, good morning. Can you hear me?

Yes, Carlos. We can hear you.

Very good. Thank you very much for the presentation, the detailed presentation, and for taking our questions. My question is also about the prospects for the future, but when I look back at the last two years of results, probably because of the very high inflation, you have had two years of losses at the comprehensive income level. Now you are gearing for a possible change. At some point, we know that the month will come back. Your capital ratio is adequate, but one has the feeling that you would be doing better if you had more capital in the bank. Would you consider perhaps doing some pre-emptive recapitalization to prevent any possible problem in the future and to be in a better position to be ready to grow when the demand comes back? Would you consider injecting more capital in the bank at this point?

I understand your question relates to capacity of growing with our capital levels. We believe that, first of all, all the changes we've been conducting over the past couple of years, and particularly last year, major transformation in the year that allow us to make significant headway in reducing on the cost side, the 21% reduction in headcount The 27 branches that were either transferred or closed and merged. And in addition, we are also expecting an additional 20 branches that we expect to close by the first half of this year. All this is a major swing in cost and is a way of capital creation. On the revenue side, We believe that it depends on demand, loan demand. And loan demand will come when the consumer confidence improves. We don't believe this will happen this year. We believe that it might happen maybe by the second half of 2024. It's also going to be a difficult year probably in 2024. But we believe that, to answer your question, that when demand picks up, we have sufficient capital to compete and to provide to our customers because we are working at the bank in a transformation that is going along all the strategic pillars. So not only working on cost, working on also on the cost of funding, improving the cost of funding, working on efficiency, working on maintaining the credit quality, working in digital adoption. All this is allowing us, will allow us, we expect to be able to compete with our capital and grow when things arise, when there is a change in expectation. I hope I answered your question.

No, you have answered my question. But again, the fact is that the capital ratios are adequate. But we know that when Argentina turns around, the demand is not for 10% growth. It's for 100% growth. And at that point, you will need the capital. And also, the fact that you don't have a lot of fixed assets right now is also affecting the way that the result is coming out with inflation. Again, I'm just suggesting that perhaps You know, recapitulation in anticipation of that demand coming through might be something that you might want to consider. But it's very clear. Thank you very much.

Okay, Carlos, thank you. So we have a question in the Q&A box. I will read it. It comes from Alejandra Aranda with Itaú. I will read two questions. One, maybe we answer that one and then the second one. and what was not recurring in 2022 to understand how you will get to positive return on average equity in 2022.

Mariano, do you want to answer this question?

Yes.

Thank you, Patricio. Hello, Alejandra and everyone. Regarding costs and capex that were recurring and not recurring last year

We incurred in severance costs in 2022 with a total amount of 7.5 billion pesos. That in a year where we reduced 21% the headcount In 2022, UDO has already been made, but also at the bank, we expect to lower severance costs. So there's a big and important savings opportunity on that front. And also in the UDO business unit, where we look at the whole segment of UDO financial services, in 2022, UDO got So again, this segment, which has already been reduced in share of our loan book, and of course, all the operational costs have been dramatically reduced with the merge to the bank while keeping the customers. This is still a segment that will be challenged next year, so maybe doses will not drop to zero, A very important opportunity of reducing those costs. And I would say that that's one of the major shifts of avoiding non-recurrent costs that were non-recurrent in 2022, but they weren't incurred last year and we won't have to incur in 2023. And that's allowing us to return to a positive ROE together with all other initiatives Thank you very much.

and P.L. during 2023.

Yes, well, regarding the digital bank has already been merged with the bank for those certain formal processes remain the operational size where we have the bulk of the cost savings has already taken place. and we've also stopped the origination at the retail stores since the end of February but keep the customers that we transfer from UDU to the bank active offering the full On the cost of risk side this is a segment that clearly suffered more than others in 2022 and will also be challenged in 2023 but first it has a lower weight in our balance sheet than it used to have now it's around six percent of our loan portfolio and second by stopping the new origin They started typically with a credit card and then after a certain period we could proceed with personal loans or insurance. So we've had in this context, in this particular context, a longer repayment.

So by stopping the originating, keeping the clients where we know their behavior, we expect to

Hey, Carlos, we can still see your hand raised. I don't know if this comes from your previous OK. So I think we are right to the end of the call, which is then the end of today's Q&A session. Thank you for joining us today. We appreciate your interest in our company. We look forward to meeting more of you In the interim we remain available to answer any questions.