Grupo Supervielle S.A.

Good morning everyone and welcome to the Grupo Supervielle first quarter 2023 earnings call. This is Ana Bartesaghi, fresher and IRO. A slide presentation will accompany today's webinar which is available in investor section of Grupo Supervielle's investor relations website. Today's conference call is being recorded. 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. You will be able to ask a question by voice or send questions 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 Patricio Supervielle, our chairman and chair. and 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. I will begin my presentation with slide three. We are pleased to have began the new year delivering ROE of 2% in real terms in the first quarter. We were able to achieve the positive ROE even as we continue to operate in macro and political environments that are volatile and challenging. The various initiatives that we have implemented since first Q22 to optimize operations and streamline our branch network. have allowed us to achieve significant operating leverage, contributing to bottom line profitability. Key among these were personal expenses, which declined nearly 12% year-on-year in real terms. We also benefited from our flexibility in managing assets and liabilities to optimize our financial margin in a context where we saw inflation increase to 22% for the quarter. Mariano will discuss our performance shortly. For the current year, with upcoming presidential elections, we expect to continue facing a volatile backdrop. As a result, our key priorities for 2023 include, first, we are advancing on executing on our key strategic pillars, prioritizing profitability over growth. We have a large and loyal customer base and we see the opportunity to deepen our relationship with them. Consequently, for the current year, we're focusing on customer engagement, monetization and cross-sell to gain additional share of their wallet. Specifically, we are aiming to cross-sell insurance, investment products, short-term loans, along with cash management services. Second, we have adopted an increasingly conservative risk profile. With accelerated inflation putting pressure on individuals' disposable income, we are prioritizing payroll customers while implementing stricter credit scoring overall. On the corporate front, we are focused on providing lending and transactional services to our key We are also managing our exposure to public sector bonds while our shareholder equity remains fully hedged against inflation. Now please turn to page 4. As shown clearly on this page, we are navigating a complex macroenvironment in Argentina. In foreign exchange, reserves have been further impacted by the severe drought that surpassed the worst-case scenario this year, with the value of the harvest falling by $20 billion year-on-year, negatively impacting levels of activity, price, and external accounts. At the same time, interest rates continued the upward trend on the back of accelerated inflation while the FX rate continues to lag. In turn, While fiscal spending has declined in real terms since the high levels observed in the first half of last year, the fiscal balance has deteriorated as revenues...

Sorry. Sorry. It's okay.

While fiscal spending has declined in real terms with the high levels observed in the first half of last year, the fiscal balance has deteriorated as revenues have been declining. The IMF original fiscal primary deficit target of 1.9% has been exceeded and is currently estimated to almost reach 3%. In this context, the financial system continues to experience weak credit demand with Peso loan down In the low teens year on year, we loaned to GDP at a historical low of 7% and presented significant long-term growth potential once the economy stabilizes. In turn, the system remains highly liquid with peso deposits growing above inflation and deposits to GDP standing at 18%. Turning to slide five, we share macro views for the remainder of 2023 as we head towards primary. In August and presidential elections in October. The drought has contracted exports and is further pressuring already low reserves. To avoid that evaluation, the current administration is limiting imports, dampening overall economic activity. Several analysts predict inflation for the year to continue increasing, and many others, driven by monetizing the fiscal deficit, tariff hikes and higher devaluation expectations. As I just noted, interest rates are likely to follow an upward trend. If the government succeeds in securing additional funding from the IMF, the major issue will be the conditions attached in the use of funds to anchor the exchange rate. Looking to 2024, Economists reckon that the new administration will have to implement swiftly a stabilisation programme on several fronts aimed at lowering the fiscal deficit and normalising relative prices, including tariffs and the foreign exchange rate. We expect a significant improvement in our commercial circuits, driven by the positive impact of El Niño on crops and therefore exports, and other projects that we support higher energy production. Wrapping up, we have a long and successful record of operating in volatile environments and are confident in our capability to weather these business conditions. Today, we are prioritizing profitability over growth, introducing even stricter credit scoring, shortening lending tenors while actively managing assets and our asset and liability structure. We also maintain high liquidity levels while our capital remains hedging against inflation, providing a solid foundation to resume growth as the economy recovers. With this, let me turn the call to Mariano.

Thank you, Patricio, and good day, everyone. Please turn to slide six. To begin, The main drivers behind this year-on-year improved performance include First A 12% decline in personal expenses, or nearly 2 billion pesos, reflecting cost savings obtained from the successful implementation of our rightsizing and operating efficiency initiatives, as we have been discussing over the past quarters. Second, loan loss provisions declined nearly 26%, or over 800 million pesos, as a result of declines in both the balance and in early delinquency of the consumer finance portfolio. Third, a 2% decline in administrative expenses or close to 200 million pesos reflecting cost savings achieved in the quarter. And fourth, net fee income was up 1% or slightly over 80 million pesos resulting from Thank you for joining us. Additionally, annual and quarterly inflation of 104% and nearly 22% respectively negatively impacted loan demand. On the deposit front, institutional funding declined sequentially, reflecting assets and liability management, while lower side deposits from corporates and individuals were seasonally lower, compounded by customers' behavior in highly inflationary environments. Moving on to slide eight. The growth of our loan portfolio trailed behind inflation, reflecting focus on profitability along with credit demand following the hikes in nominal interest rates. Also recall that first quarter loans are seasonally lower. As a result, our loan book declined nearly 13% sequentially compared to a low single digit decline Consequently, we are prioritizing cross-selling of our existing client portfolio, particularly insurance, investment products, and personal loans to payroll customers. On the corporate front, we are focused on lending and transactional services to our key target segments that include SMEs and middle market companies. At the same time, we will remain very active in providing SMEs with access to the local capital markets where we hold the leading position as coordinators and placement agents of bonds in this market segment. Moving on to page 9. The total NPL ratio increased 60 basis points sequentially to 4.1%. Nearly 70% of this increase resulted from the decline in real terms of the loan portfolio. The remaining 30% was driven by higher 90 days delinquency levels in both open market and former consumer finance customers impacted by high inflation. We have been consistently tightening our underwriting policies in this customer segment to protect asset quality. By April, the NPL ratio had declined to 3.9%. Net loan loss provisions were 34% lower sequentially, reflecting declines in early delinquency and independence of the consumer finance portfolio. Net cost of risk, in turn, declined 140 basis points to 3.8%. Year on year, net loan loss provisions were down 26% with a stable cost of risk. As shown on the chart on the right, Consumer finance loan loss provisions declined 75% and accounted for 16% of total provisions, down from 43% in the prior quarter. Note also that consumer finance gross loan book declined 27% in real terms.

Turning to slide 11. and many more. Now please turn to page 12. Our effort to right-size operations and drive higher operating leverage, implemented since 2Q22 to regain profitability, contributed to improved efficiency this quarter. We are encouraged, with a 230 basis point year-on-year decline,

As shown on slide 13, we ended the quarter with a tier one ratio of 14.7% compared to year end 2022, our tier one ratio Before opening for Q&A, please turn to slide 14 to review our perspectives for the full year 2023. Considering that the market consensus for the yearly inflation We now see peso loans growing below inflation, while before we anticipated loans to grow in line or slightly below inflation. Likewise, we now expect Well before we saw personal deposits increasing in line with inflation. With respect to asset quality, as noted in our prior earnings call, the higher delinquency rates in retail customers that we have observed since year-end have continued. With steep inflation, eroding lower-income individuals' disposable income, in particular our former Yudu customer base, and impacting loan demand, we now anticipate net cost of risk for 2023 Additionally, we now expect the NBL ratio at year-end to range between 4Q2022 and 1Q2023 levels, well before we anticipated to close the year with NBLs in line with year-end 2022 levels. By contrast, in a higher interest rate environment, we now anticipate NIM above 2022 levels, above our prior expectation of a stable NIM year-end. We are also increasing our tier 1 ratio to range between 13 to 14 by year end from up from 12.5% and 13.5% before. As a reminder, 100% of our capital remains hedged against inflation. Beyond these changes, our 2023 expectations for all other metrics remain unchanged from our prior quarter views. And lastly, while we maintain our views of delivering positive ROE, there's greater uncertainty on the macro-political and regulatory front. Now, we are 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 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 for another round. One moment when we call for questions. The first questions come from Ernesto Gabilondo at Bank of America.

Thank you, Ana. Good morning, everyone. Good morning, Patricio, Mariano, and to all your team. Congrats that your earnings have reached an inflection point. So good. I just have a couple of questions. The first one is on your ROE. We saw it was 2% in real terms in the quarter. But how should we think about the ROE for the year considering this complex macro outlook? And then the second one is on your effective tax rate. I think it was kind of high during the quarter. So can you elaborate what was the reason behind it and how should we expect the effective tax rate for the full year? Thank you.

Thank you. Mariano, can you?

Yes. Hello, Ernesto. Thank you for your questions. First, regarding ROE, as you said, we achieved 2% positive ROE in real terms for the quarter. For the rest of the year, for the complete year, We are maintaining our expectations of achieving a positive ROE as we projected in prior quarters. These projections are based mainly in cost reductions derived from the U2 business merging with the bank, also with the transfer of the Salvis Financial Agency Agreement. Cost, mainly of branches and personnel. And third, the rest of the efficiencies achieved during last year. Those things were in place. They were executed in 2022. Now we are seeing the results. So they allow us to think that we will achieve also the positive for the year. But having said that, as we commented during the presentation, the macro front has worsened significantly. And I would say that now, after one quarter, Why? Because inflation has risen to 22% in the quarter and for the whole year the last economic consensus of the survey from the central bank reached 126% and that was before the data of April. So most probably those projections are being revised upwards. So this is much higher And also the GDP, we now believe that it will be decreasing, probably more than 3%. So that will also have a toll on economic activity and we will be also monitoring credit risk, particularly on the individual side. So with all these We think there's a greater uncertainty. We're still positive for the ROE or the ER, but always contingent on this factor, particularly the macro and the regulatory front. And then regarding the effective tax rate, according to IFRS, we need to record in the income tax line item The impact of inflation on certain tax credits. So that's part of the result of So all these differences also, when the result is low, have a great impact and they produce a higher distortion. So that's why you see such a high effective tax rate.

Thank you, Mariano. Just a follow up in these two ones. So in the ROE, You mentioned we should expect positive earnings, positive ROE in the next quarters. And I don't know if we can expect like something around mid single digit ROE for the full year. And in your second one, if we normalize the effects, the tax rate should be around 40%. So am I right on those ideas?

Well, for the first one, I would probably be more conservative and say in the low single digits, maybe similar to what we see in the first quarter. But there are still and also can be negative for low-in-loss provisions. So these effects may upset each other, but we still have to see which impact is higher, the positive on margins or the negative on the cost side. So I would say in the ROE, in the low-in-loss, It would be 40% if we wouldn't make this adjustment required by FRS, which is an adjustment only for the presentation of income statements. But we will still have to do it. So if the ROE is closer to zero, the distortion that this adjustment produces is higher. So maybe you will still see a high effective income tax rate. I don't know if I was clear.

Oh, yes, super helpful. Thank you very much.

You're welcome.

Thank you, Ernesto. Our next question comes from Rodrigo Nistor from Latin Securities.

Hi, good morning, everyone. Appreciate the opportunity to ask questions. First, I would like to address the topic of inflation and interest rates. I mean, in the current economic climate, it seems that Interest rates adjustments alone may not be sufficient to control inflation. So given this, how do you anticipate interest rates to evolve in the short term? Is there a possibility that with my experience, more negative real rates if inflation continues to escalate? And what's your funding strategy allocation given your view on interest rates? Thank you.

Well, we expect, I mean, as we have seen already in the past quarters, there has been increases in interest rates and we continue to see this looking forward when there is a mark of inflation and increase in interest rate. However, the view is The central bank is behind the curve and we're not seeing, let's say, rates that anticipate expected inflation. So in this sense, this is what we see. But anyway, the way we We are basically the way we structure our assets and abilities. Every time there is a hike in interest rates, it is positive for our financial markets. I don't know if you want to add something, Mariano, on the answer.

Yes. As Patricio mentioned, inflation continues. Thank you very much. Thank you very much. We would expect that the monthly inflation would not go much higher than what we have seen in April and what is expected for May.

Okay, thank you. A follow up, if I may, and maybe looking further into the future. So, Argentina will be welcoming a new government and also a new central bank administration next year. So, could you share your thoughts on what potential policy changes you anticipate or you think and how you are preparing the bank for this new environment in 2024? Thank you.

Well, first let's start with the situation today. As of today, Argentina is facing the worst drought we have seen in terms of and with a big drop in or shortfall in revenues for the central bank and with very low reserves and severe limitations Thank you very much. Thank you very much. So having said that, next government, we believe that the regulatory changes will come. They will have a positive impact, of course, in the banking industry because we've been suffering some punitive regulations that affected our Let's say profitability, particularly caps on interest rates, draws on interest rates for time deposits, certain also regulations on commissions. But at the same time, all these positive regulatory changes, they might We believe that it will come synchronized with the implementation of the monetary and fiscal policies. And probably regarding the FX, we don't believe at this stage that it will be feasible and complete deregulation from day one. So it might take time to do this. Thanks to the regulation and it will come gradually. That is our thought at this point. We expect that for us it will anyway. I mean, it is positive because what we need, the financial industry in Argentina is completely transactional and is suffering because of high inflation. Because we don't have basic savings, they go away to protect against the erosion of purchasing power. And with low inflation, there is a huge potential for the financial industry. Today, the loans are 7% of GDP. But of course, this will depend, and we hope that it will depend on a swift implementation of of the normalization of fiscal and monetary policies. And we expect that still 2024 will be a relatively difficult year, sort of a transition year where all this will be implemented and maybe with a pickup of loans in the second part of the year. I don't know if I answered your question.

Yeah, that was really helpful and insightful too. Thank you.

Thank you Rodrigo. Our next question comes from Yuri Fernandez at JP Morgan.

Hello everybody and congrats for the first profits in a while. I have a question regarding the valuation and your FX exposure. We saw you increase a lot your global net position on that. So my question is, if there is a big devaluation on the official effects, what is the moving parts? How does this affect you, the bank? And I have a second question regarding deposits, especially on transactional deposits, on demand deposits and savings. We are seeing, you know, a big decrease, quarter over quarter, and we also saw that when other banks reported in Argentina. Higher rates, high inflation, maybe investors are getting smarter on deposits. But is this only a rate thing, or are the banks losing market share to wallets in Argentina? Like Melly, like all those guys, maybe as they are paying for deposits, are you losing market share, or is just people in Argentina using less banks to keep deposits? Thank you.

Please, Mariano, can you answer the first part of the question? Yes. Hello, Yuri. Thank you for your questions. Regarding devaluation, if a devaluation, if a hike in devaluation were to happen, in real terms, that is devaluation much higher than inflation for the period, we can be long in US dollars. At the bank through total instruments or NDFs and on top of that we also can have and we do have a position in dual bonds from the government. These bonds pay the higher of inflation or the valuation so right now and many more. Thank you very much. Most probably the valuation would translate into higher inflation. So also there we would increase our margins to offset the higher inflation. And that would translate in the short term or the middle term into higher costs. So that's what I would expect to be the moving parts. Then regarding our loan portfolio right now, The weight of the foreign currency, the loan portfolio denominated in foreign currency, is much lower than several years ago, so it has a very low weight. So the risk weight assets would increase because of the devaluation, because we measured them in pesos, translated to the official exchange rate, but the impact and many more. And then regarding deposits, as we mentioned during the presentation, we have this flexibility in our balance sheets to increase or decrease So what we've seen during this first quarter is a decrease mainly in the deposits. We applied to repos with the central bank or the Lease, which is something we manage according to the opportunities we see. So you may see these deposits increasing or decreasing quarter over quarter. And then also, as you said, with higher inflation, individuals and companies and many more. So we try to reduce as much as they can their balances in savings accounts or current account to be less impacted by inflation. So they go to mainly money market funds or time deposit with other minimum interest rates. So that's what we are seeing, that the balances of savings account and current account, they don't grow at the same Thank you very much. Thank you very much. We are not growing in real terms. Of course, we are growing in nominal terms, but not at the pace of 22% inflation in this quarter.

Yes, adding to that what Mariano said, you mentioned the competitive situation for deposits. I think it's interesting to mention that with high inflation, there is an erosion of purchasing power So many individuals, what they do to preserve their purchasing power, they make transfers from banks to certain fintechs. It compensates for inflation in money markets. This is a pattern that we have seen. And so we have decided and in fact we have implemented a very interesting tool for customers not to do that and to maintain the money with us. And basically we have implemented as of a few weeks ago The way basically a money market investment that they can invest 24 hours a day, five days a week and keep and they make the investments and they take them out instantly. And this will be seven days a week in a few weeks time and for 24 hours a day, the same standards that Macau battle. So we believe that this is a competitive reaction very strong from our part. We are the first bank, by the way, to do this, and we are very happy with that.

Thank you, Patricio and Mariano. That was very clear.

Thank you, Yuri. Okay, ladies and gentlemen, we have reached 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 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 have a good day.