Grupo Supervielle S.A.

Good morning everyone and welcome to the Grupo Supervielle Third Quarter 2023 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 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 the Zoom platform. 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 in written form via the Q&A box in the Zoom platform anytime during the call. Speakers 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 of 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, 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 statements to reflect new or changed events or circumstances. Patricio Supervielle, our chairman and CEO, will start the call discussing the key highlights for the quarter and progress achieved to date on our strategic priorities for the year, as well as an update on macro views. 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. The momentum gain in the first half of the year carried on through the third quarter, allowing us to deliver ROE of 18% in real terms. This good performance was supported by effective asset Asset and liability management, which contributed to a high NIM, significant growth in fee income across our business, and a prudent approach to lending, leading to record lows and PLs. Efforts to streamline operations over the past years have also yielded improved efficiency, contributing to higher profitability. For the first nine months, increased to 13% from negative low single digits during the same period last year, reflecting the successful execution of our strategic plan amidst an increasingly challenging macro and political environment with very weak loan demand. Now, let me quickly recap on the progress achieved across our different strategic alternatives, starting with retail customers. We successfully innovated with a quick investment The number of retail clients investing through this platform increased by 10 times year on year, reaching 100,000 in October. In turn, assets under management also grew significantly, up six times in nominal terms. As we continue to prioritize growth in the corporate segment, we added new digital functions and completed our offering of working capital New corporate clients increased 6% year-on-year, while we gained market share in foreign trade, finance, and side deposit balances. Loans increased 4% sequentially, while gains in share of wallet contributed to a 120 basis points increase in the transactions ratio compared to December of last year. IOL, InvertiOnline, our online broker, continued to drive fee growth, demonstrating our ability to acquire and retain customers, achieving year-on-year increase across key KPIs. Monthly active users were up four times to 210,000 new accounts by over seven times. Notably, we are achieving these results through a much more efficient and agile franchise, serving more clients more efficiently while improving NPS across all segments. Now please turn to slide four. Foreign exchange reserves continue to decline further, impacted by the negative commercial balance. The 23% evaluation last August, The reference rate for the leaks increased from 118 in August to 125% in September and 133% in October in the context of accelerated inflation. Against this backdrop, credit to the private sector as a percentage of GDP dropped to an all-time low of nearly 7%, while deposit Lastly, the significant deterioration in the fiscal balance and price distortions and controls leading to the elections are putting additional pressure on inflation, with year-end consensus estimates expected at 185% for 2023 and 196% for the next 12 months. The fiscal balance dipped below 2022 levels in September and is deteriorating even further in the fourth quarter following the significant hiking of government spending and reductions in income and VAT taxes introduced by the government during the presidential election campaign, with the fiscal primary deficit expected to reach 2.6% exceeding the IMF original target of 1.9%. Turning to slide five, looking ahead. Looking ahead, President-elect Javier Millet is committed to introducing major reforms to reduce state interventionism and address the long-standing structural imbalances in our economy. Overall, he has stated there is no room for gradualism One of the first items on the agenda is to address the central bank's remunerated liabilities with a market-friendly approach and work towards eliminating the fiscal deficit. Plans also include deregulating capital flows and moving Argentina into an open market economy with a sustainable economic model. Importantly, he stated that his administration will strictly honor commitments. Plans also call for the privatization of state-owned companies and a deregulation agenda. This was a clear and straightforward signal. With the expected adjustment in relative price and peso devaluation, we foresee a difficult 6 to 12 months followed by a stabilization problem. The market response has been very positive and some of the uncertainty and questions around Millet are starting to be cleared away by these declarations. At Supervielle, we are prepared to navigate the near-term challenges and have hedged 100% of our capital against inflation. We look forward to leveraging our agility to rebound strongly With this, let me turn the call to Mariano. Please go ahead. Thank you, Patricio.

And good day, everyone. Please refer to slide six for an overview of our performance for the nine-month period ended September 2023. Importantly, throughout the year, We are pleased that, in line with our timing expectations, our ROE for the nine months swung to a positive when compared with the same period of the prior year. More specifically, net income increased to P19 billion, with ROE at nearly 13%, improving from a net loss of P7 billion. The revenue front net financial income increased 16%, or over 27 billion pesos, mainly reflecting higher spreads and volume on our investment portfolio. This good trend in margin continued into October and November. Net fees were up 9%, or over 3 billion pesos, mainly on the back of solid performance at YOL and our asset management business. In terms of costs, Resulted in an 8% decline in personal expenses equivalent to 6.5 billion pesos in savings. Moreover, lower costs from streamlining operations including selective branches closings and lower customer acquisition promotions contributed to a 6% reduction in administrative expenses and DNA equivalent to savings of 3.5 billion pesos. In turn, and many more. The growth in consumer finance coupled with growth in corporate loans and tight credit scoring contributed to a 21% decline in loan loss provisions, equivalent to 3.5 billion pesos. Other income and losses declined 6% or 1.6 billion pesos, reflecting lower credit card promotions together with a reduction in turnover and taxes paid on the leaks and repos despite higher average volumes. Lastly, higher tax revenue income led to a higher income tax charge in 2020. Now looking at our performance for the third quarter, starting with slide seven. Total assets grew below inflation in the quarter in an environment of overall weak retail credit demand and accelerated inflation, which reached 35%. and the share of government securities to 6% this quarter from nearly 8% in the second quarter. Deposits also increased below inflation sequentially, reflecting lower time and many others. In turn, average asset volumes were up 3% sequentially as the average balance of the investment portfolio rose 12% as we maximized NIM and profitability, while the average Moving on to slide 8. While total loan growth for the portal was below inflation, we outperformed the industry trend on a sequential basis, with loans in real terms declining 3% vis-à-vis a drop of 7% for the system. During the first half of the year, our focus was on achieving The proportion of consumer finance in our total loans has continued to decrease. As shown on slide 9, the total NPL ratio improved further, reaching a historic low of 1.7% in September, a healthier loan mix and the impact of tightening credit scoring. Finally, delinquency continued to improve sequentially. Lastly, the sale of some delinquent open market retail loans and former consumer finance loans contributed to bringing the coverage rate ratio to nearly 183%, up from 148% in the second quarter. Turning to slide 10. Net financial margin increased nearly 17% sequentially to over 76 billion pesos in the quarter. Higher investment portfolio volumes and yields more than offset lower loan portfolio NIM and contributed to an overall high NIM of 29% in the quarter. Net service fee income stood out this quarter, increasing 14% sequentially and 30% year-on-year. As Patricia noted earlier, this increase was supported by a good performance across the business, with particular emphasis at the oil and our asset management business. Now please turn to slide 12. On a sequential basis, this good performance was driven by revenue growth of 17% and reduction in expenses of close to 7%. For the nine-month period, expenses declined nearly 7%, while revenues increased 17%. Moving on to capitalization on slide 13. We further strengthened our capital base, increasing our tier one ratio by 120 basis points sequentially to 16.9% at quarter end. Proof results and inflation adjustment of capital mainly drove the increase in the capital ratio and more than offset higher risk with assets and deductions. Before opening for Q&A, please turn to slide 14 Considering the recent macro trends discussed by Patricio, we have updated our perspective on the following line items. With respect to asset quality, given the recent performance, we now expect to close the year with an NBL of rate ratio of between 1.5 to 2%, a slight improvement from our prior expectation of 2.5 to 3%. Given the solid NIM performance of 25% year-to-date, we anticipate NIM for the year to remain slightly higher than the level reported in the first nine months, up from approximately 24% expected in our prior call. With respect to fees, we now expect the brokerage and the asset management business to maintain the solid performance observed in the quarter. In terms of profitability, we now anticipate ROE to be in the range of 10-12% up from levels of close to 10% observed in the first half of the year. But below the 9-month ROE, as inflation is expected to be higher in the last month of the year when the EFX increases and inflation-adjusted bonds reprice with a lag of 60 days. and many more. Beyond these changes, note that our 2023 expectations for loans and deposits remain unchanged from our prior quarter views. Looking at 2024, with inflation expected to remain at high levels, we expect loans to continue growing below inflation during the first half of the next year, showing signs of recovery starting in the second half of We expect to discuss our views for 2024 in more detail in our year-end call as we have more visibility on the economic plan for a year ahead. 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 to the Our first questions come from Ernesto Gabilondo at Bank of America. Please, Ernesto, you can go ahead.

Thank you, Ana. Hi, good morning, Patricio, Mariano, Ana. Thanks for taking my call. My first question will be on the political outlook for Argentina. You have shown a couple of slides on this, but what do you think could be the key execution risks for the new administration? How do you see the possibility to implement structural reforms with a And also, I think it will be interesting to hear your view if Millet starts to cut jobs in the current government administration, if you see if there could be a risk for social unrest. Then my second question is on your LELICS exposure. When looking to your balance sheet, it seems that half of the securities are LELICS and is roughly 26% of your total assets. So I wanted to hear your view on what are you expecting to do with the LELICs. Yesterday we heard Banco Macro trying to get rid of the LELICs by year end. So I wanted to hear from you, is that something that you are also targeting or that will be more gradual? And for my last question is on your ROE. So for this year, you have been guiding 10 to 12. As you pointed out, it will be lower than the first nine months, considering that in December we can have higher effects depreciation and higher inflation. But just thinking on what should we think about next year, we think this ROE could be relatively stable, a little bit higher, lower. Some hint on that would be also very helpful. Thank you.

Thank you, Ernesto. I will start by your first question, which is the execution risk of a melee program. First of all, we can see that Millet has shown to be a pragmatist. And this is interesting because in the way he's handling the organization of the different working teams, and also in the way he's dealing with potential international relations. In terms of the agenda, the reform agenda, I think that the first step will be the approval, get the approval of the national budget. And we have discussed this in our team and we believe that it will be sweet The President-elect has said that he wants to to give to the Congress a jumbo law including probably, we don't know yet, but probably will include an agenda of deregulation and how to tackle the financial deficit. So this probably... and probably there will be a second generation laws concerning privatizations that will happen in the second half of the year of 2024. Another thing which is quite important also is that the people that are economic advisors at this stage have told us that The economic authorities of Milan have told us that they want to implement a fiscal-financial equilibrium or fiscal-financial balance from day one, which implies reducing 5% of GDP, and that this eventually they can do without the need of Congress' approval. Of course, there are various ways, and it's not easy, but we have discussed that to achieve this 5% of reduction in GDP, they would have to tackle the reduction of public works, certain reduction of public works, some transfers to provinces, some We believe that certain subsidies also could be tackled with the change of relative prices and also there will be a swing in the revenues from taxes from last year so that will help improve their fiscal situation. And concerning the social unrest that you mentioned, yes, it is possible that there will be some social unrest, but we believe with our team that it will be confined to the Grand Buenos Aires and the Grand Rosario and the rest of the country. There was a clear mandate for a change of government. We believe that the people will continue working and do their day jobs every day and there will not be any meaningful social unrest. A very important element also is about the Supreme Court. We believe that Millet will propose the fifth to strengthen the independence of the judiciary. So that's concerning your first question. And the second question is... Lelique exposure. Lelique exposure. Yeah. Okay. All right. Yes. The Lelique's exposure is... We have been... We had a substantial... This has been reduced significantly over this quarter, at this moment. Not only the leaks but also reports. We believe that, I mean, Having heard what was conveyed by the economic advisors, that they want to go for a market-friendly solution, that there will be no surprises, that there will be no harm to the bank networks, I think we all went more at ease. But having said that, we have decided to, as I We will see what the measures they want to take in the future. But simply let me point out that the reason we have this in the past was completely linked to the fact that the government imposed a regulation to A floor in time deposits, in the rates of time deposits, that the only way to compensate that was investing in the leaks. But we believe that this will be removed. I mean, these punitive regulations will be removed swiftly, and that there will be also free rates, both for liabilities In the next year. So I don't know if you want to add something upon the leaks.

I can only add to your comments. Hi, Ernesto. Thank you for your question. I only add that, as Patricio said, we have significantly reduced the exposure to the leaks during October and November. We only have the leaks that we use Remember that part, about 5% of the new cash reserves, we can integrate with Felix, so the opportunity cost to be in cash instead of Felix is very high there. But that is only a minor amount. As of today, it's only 50 billion pesos, which is And also, we reduced the overall exposure to the central bank, not only going from the leaks to repos, which that's a first step because repos are only one day, so that's very short term. But we are also reducing by half. We now have half the exposure to the central bank instruments as compared to September 30. So that's also a major reduction. We are reducing And then regarding ROE, I think your third question was regarding ROE in 2024. But of course, it's still very hard to predict because we don't know all the measures that the government will take. But what we can imagine, as Patricio said, is that punitive regulations will be removed from day one. So that's positive for ROE. But on the other hand, we want to be at least in the first month of the government, where we see that it's going to be a period of very high inflation and volatility. We want to be also more conservative. As we mentioned, we are reducing exposure to the central bank. We have increased something in treasury bonds as the perspective can be better if the fiscal deficit problem is addressed. But with a more conservative stance, our ROE can be in the range of 5 to 10%. Again, it's very early to predict. We may adjust this when we report the full year results, but that's our current estimate.

Now, thank you very much for all your answers, very detailed. Thank you very much.

Thank you, Ernesto. There is a question from Carlos Gomez at HFDC. Hello, Carlos.

Hello, Ana. Thank you for the call, and thank you for taking my question. First, actually, congratulations on the recall, because the last report has been quite different from before. Now, the question is, This seems to be related to your position in government, sorry, in securities and the fact that you are reducing your position. Is there going to be a correlation there? Do you expect, I mean, from what I understand, I think the answer is yes. Do you expect that your profitability will be at a different level if you reduce the position significantly into next year? And second, you seem to have taken a more Good morning Carlos and thank you for your question. In terms of

Our exposure to government securities and the fact that we would see less profitability going forward, it's difficult to establish correlations with the levels of uncertainty we see going forward and with lack of information as to exactly what the package that will be sent to Congress contains. We think that... will be significant deregulation in the financial sector. And that actually is an opportunity and generally will allow us to, for example, go away or move away from something that was very exceptional in terms of policy, like having flow rates, which being deregulate, will allow us to price deposits to market levels In terms of lending we will continue Thank you very much. Okay.

Carlos, let me add something to what Alejandro said concerning the loans. If you look back to our history, we had always high needs due to a good share in personal loans. And that was mainly due to the segment of senior citizens. However, in the last few years, there was a problem Argenta that provided very much subsidized loans to the retirees. This will be removed and this will help us again regain much better needs for personal loans in the future.

That's an important consideration. And would you have a target as to, you know, how much of that you can do?

Well, we have around, at this stage, around between We expect that it will go.

That's clear. Thank you so much.

Thank you, Carlos. We have another question coming from Brian Flores at Citibank. Hello, good morning, Brian. Please go ahead.

Hi, Tim. Good morning. Can you hear me well? Yes. Perfect. Thank you. And as Carlos did, congratulations on the results. I think they were very, very strong. I think maybe the sector has played defense extraordinarily, you know, given the context. And now I think we perhaps we might be moving to offense, right? And I have a question that is related to what Carlos asked, which is, There might be a period, probably the first half of next year, where inflation is high, maybe credit demand is still, you know, starting to come, but still not there. I'm just wondering if you're budgeting maybe or slight chances that you see of seeing a low single-digit ROEs in the first half and then Maybe a strong expansion in the second half. Or how are you thinking about PATH? Because I think midterm is constructive and I think I agree with all the visions you've shared. But maybe in the first part of the next year we might see some difficulties still. Do you think this is correct or do you think I am being a bit more pessimistic? Should I be a bit more optimistic? Anything is appreciated. Thank you.

Okay, first of all, I would like to state that we have been preparing for the last three years for this change of profound structural changes that are occurring in the country. And we have an aggressive growth plan, particularly in corporates, that we started already in the third quarter. We have gained, we have a model which is a product-oriented model and we have achieved significant operational efficiencies simply to state, and this is related to your question because the bank has, over the last three years, we have 800 employees less The group level, we have 2,000 employees less. We have close 50 branches. We have terminated a consumer finance business that was lost making business. And we are positioned, as Alejandro mentioned earlier, that we are positioned to provide loans in companies that belong to value chains of export-led industries. However, as you well said, with high inflation, demand is very low at this stage. But consistent with what we believe will be the economic plan to tackle the leaks, there will be the regulation of rates. That means that we will be able to Mariano Biglia, Mariano Biglia, Mariano Biglia, Mariano Biglia, Mariano Biglia We believe that, yes, for a certain period of time, it will be more difficult to give loans, as you said. But after the, let's say, the change in relative prices and implementation of the initial steps of the program, we expect that after a period of high inflation, there will be The people will have an expectation of lower inflation, then they will start to have more demand of loans in the second half of the year. So, I don't know if you want to add?

Brian, this is Alejandro. Two or three notes to your question. One is, our business, as is also the economy of the country, and the second half. Of course, on top of this, in the first half of 24, you will have a lot of fiscal adjustments and the increase of inflation after some kind of adjustment to the exchange rate. However, a couple of things for you to look at as we go through the first half. One is you will have a much better energy balance In the last quarter during the third quarter of this year, you had the connection of ducts that will allow you to be in the condition of exporting energy. And second, there was a The Trout that we see now moving clearly away because the Nino is consolidated too. So those two factors will actually help you deal with what would otherwise be a very recessionary context, particularly for consumption. But companies or enterprises linked to these value chains will probably continue to experience growth. and will drive or help drive exports and the economy moving forward.

Well, that is super helpful. Thank you very much.

Thank you, Brian. I think we have a follow up from Carlos Gomez. I don't know, Carlos, if this is correct or only that you forget to withdraw your hand.

No, no, it's actually correct. So my question is about your hedging strategy. As you mentioned, you have 100% of the capital hedge. Can you remind us, is this purely through the securities portfolio, the dual bonds, or do you use real estate more actively now, or are there any other elements in your hedging strategy that are not those two? Thank you.

Okay, thank you. We have a substantial position in mortgages which we built during the Macri period and which represent today around 22% of our net worth. So it's on the private sector. Then the rest is, yes, the rest is buildings and real estate and public treasury,

Yes, those are the main three different asset classes, real estate, mortgages, and treasury bonds, where we have dual bonds, which, as you know, they are just by inflation or devaluation, the higher, or servos, which are just by inflation.

Yes, actually, that was my follow-up. So the hedge is versus inflation, right? And then the US dollar position, I believe that your maximum is 5% of net worth, or as a financial group, you can perhaps go a bit further on that.

Yes, our spot position can only be balanced or short. But the spot position, we are balanced. Then we can go up to 5% of Tier 1. We derive Could you give us an idea about the current level of your long position in U.S. dollars? Now we are approximately at 125% of our fair equity. So we have 100% inflation plus 25% in 12 months. That's very clear.

Thank you so much.

Thank you, Carlos. I think we have reached the end of the Q&A session. So thank you for joining us today. We appreciate your interest in our company. We look forward to meeting more of you over the coming weeks or months and providing financial and business updates next quarter. In the interim, we'll remain available to answer any questions that you may have. Thank you and have a good day.