Grupo Supervielle S.A.

Good morning everyone and welcome to the Grupo Supervielle second quarter 2024 earnings call. This is Ana Bartesaghi, Treasurer and IRO. Today's conference call is being recorded. As a reminder, all participants will be in this and only mode. If you want to ask questions at the end of our presentation, you need to be connected to a Zoom platform from any device. 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 a Q&A box in the Zoom platform anytime during the call. 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, 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 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 situations.

Thank you, Ana. Good morning, everyone. Thank you for joining us today. Please turn to slide three for an overview of the quarter results. Our strategic actions are driving the desired results. We deployed an early mover strategy that resulted in solid loan volume growth and market share gains. Asset quality remained healthy with a record low NPL We reported return on equity of 10% for the quarter and 22% for the first half. As anticipated, neem declined during the quarter, reflecting lower spreads following the sharp and our online brokerage operations also contributed to the quarter's solid performance. Furthermore, our efforts to enhance operating efficiencies while staying closely connected to our customers continue to yield positive results. Let me spend a few minutes discussing the key drivers of our performance during the quarter. Digital adoption continues to play a key role among retail customers. Digital customers now make up 65% of our total customer base, with 56% of transactions completed through our app up from 42% a year ago, indicating strong wallet adoption while lowering our cost to serve. We've also made significant strides in our corporate and middle market customer segments, with the loan book growing sequentially by an impressive 42% in real terms as we focus on supported export-oriented value chains. We closed the quarter with higher balances of side deposits among corporate clients, leading to increased transactional volumes as we advance The leading online brokerage platform in Argentina contributed 19% of total fee income, with all key metrics showing a strong performance. Active customers doubled year-over-year, to a record high of 5%. and many more. We have 566,000 clients in July. Assets under management grew 23% sequentially in real terms, hitting the $1 billion milestone while sustaining solid transaction activity. Lastly, we are advancing in driving digital adoption and penetration in our insurance and asset management businesses. We have broadened our digital Thank you very much. Key economic highlights for the quarter include the approval and regulation of the lay the buses along with ongoing deregulation efforts achieving a fiscal surplus of plus 0.4% as of June and inflation easing faster than expected. The central bank deregulation efforts are further enhancing the business environment. While the overall macroeconomic environment is improving, some areas still require attention, including ensuring the sustainability of the central bank's 17 billion reserve increase and maintaining The international industry is seeing early improving signs of recovery as loan demand growth returns. To ensure sustainable growth, the next milestone is the lifting of the foreign exchange restrictions. Our financial results to date reflect the actions we have taken over the past few years, including new product offerings and efficiency measures together with policies established under the Malay government. As a result, we have a solid foundation in place and are well positioned to benefit as demand continues to recover. Now moving to slide five. We have been transitioning our asset base away from central bank securities to a private sector loan. This is reflected in the increasing loan to deposit ratio, which stood at 59% at quarter end, up from 32% at year end 2023. This reflects a drop in the share of central bank securities over total assets to 28% for 40% at year-end 2023, while loans increased their share by 12% points to 37% at the end of June. This trend is expected to continue during the second half of the year. In this context, we expect NIMS to normalize to historical levels and NFI to grow Over time, even with lower yields as the credit demand strengthens. As shown on slide six, our strategic move towards capturing loan demand early in the recovery allow us to expand our loan portfolio by 36% sequentially in real terms. This resulted in total market surrogate 30 basis funds sequentially and 70 basis funds year to date and, most importantly, we gained share across all products. As of June, SMEs and corporate loans accounted for 65% of our total loan portfolio, while retail loans accounted for the remaining 35%. In corporate loans, we remained focused in service in high-potential, export-oriented value chains as we leveraged our exposure to high-potential industries, including mining, agribusiness and oil and gas. We are well positioned in sectors that are leading the recovery. We are focusing on originating short-term loans to corporates and asset-backed loans to individuals together with stringent credit policies including portfolio limits according to the health of each industry to ensure an atomized loan book across industries and customers. This coupled with a strong capitalization position as well to continue to drive significant growth as demand continues to recover. No, let me turn the call to Mariano. Please go ahead.

Thank you, Patricio, and good day, everyone. Now, let's direct our attention to slide seven to take a deeper look at our performance for the first half of the year. Net income increased to over 70%, Thank you very much. as fees increased below the 272% accumulated inflation. Structural cost efficiencies contributed to a 9% year-on-year decline in costs. As I will explain in more detail and many more. Moving next to slide 8 for the discussion of our loan portfolio. As Patricio noted, we have continued to gradually shift our asset base towards a larger At the same time, we have gained share across most loan products in both our commercial and retail portfolios. With respect to mixed by portfolio type, as shown on the pie charts, corporate loans account for approximately two-thirds of our total loan portfolio. With this portfolio, short-term promissory notes stand out, increasing their share Within retail loans, credit cards accounted for 32% of the book, followed by mortgages and personal loans at 27% each, and car loans at 14% of the total retail book, where we rank second in car loan origination. As shown on slide 9, our total deposit base remained stable sequentially in real terms, although the mix changed slightly. Foreign exchange deposits increased 4% above industry trends, with the foreign exchange share over total deposits increasing 1 percentage point. As anticipated in our prior call, lower inflation and yields on peso-denominated government securities The sharp decrease in policy interest rates and lower volumes of interest-bearing liabilities drove a 30 percentage point reduction quarter-on-quarter in the host of funds in the quarter. Moving on to slide 11. Expenses declined 15% year-on-year and 8% sequentially, primarily due to the efficiencies in personal, DNA, and administrative costs On a sequential basis, however, the efficiency ratio increased from 34% in the first quarter, which benefited from a non-recurring gain in peso bonds that resulted in an exceptionally high NIP. Turning to slide 12, we closed the quarter with a CET1 ratio of slightly over 21%, declining 390 basis points sequentially. and many more. Moving on to slide 13, in the current context we are adjusting our prospects and many more. We now expect expenses to decline in We maintain our ROE expectation for the year at approximately 15%. During this transition, as we continue to shift to private sector loans from public securities, we expect to see a lower need pressure in ROE in the third quarter. Lastly, as loan growth accelerates, we anticipate closing the year with a CET1 ratio This ends our prepared remarks. 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 Zoom platform. To ask a question, please press the raise your hand button and press it again to withdraw it. 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're called for questions. Our first questions come from Brian Flores, Good morning, Brian. Please go ahead.

Hi, Tim. Good morning. Thank you for the opportunity to ask questions here. I have a question on your turnover tax situation, right? Because you made a provision there. I think it's $33 billion. I wanted to ask you, how should... I mean, obviously, you're not expecting to be paying going forward taxes. I just wanted to know when would you have the final decision on this? and if the provision needs to be adjusted by inflation going forward and this will be updated sequentially on your income statements and balance sheets, how should we think about this going forward? Thank you.

Adriano, please. Yes, hello, Brian. Thank you for your question. Regarding this provision, it's correctly the amount of 33 billion pesos. We think our conservative We call that this is the turnover tax that the city first, the city of Buenos Aires imposed on revenues derived from central bank securities, the leaks on the first place, but also central bank repos, and then also the province of Mendoza and The promise of Buenos Aires. It's important to highlight also that now as the central bank stopped issuing the leaks and then stopped giving repos and now we migrated that securities portfolio to the treasury notes, short-term treasury notes, we are not agreeing They are exempt from this tax. So there's no new taxes on these short-term securities. Now, with regards to the central bank security revenues during last year and the first months of this year, we made a claim with the Supreme Court of Justice There was a demand from the central bank with the Supreme Court of Justice because this tax affects the monetary policy of the central bank and provinces cannot interfere in the monetary policy. So the process can be very long because the Supreme Court hasn't made any pronouncement yet. This is also related to the dispute between the city of Buenos Aires and the national government because of funds from taxes that and a major of the City of Buenos Aires imposed this tax. So when the Supreme Court makes a decision on that matter, maybe then it will make a decision on these two. So we are positive on the outlook of the result of this dispute, although we have this provision just to be conservative. So if we had to pay the tax, the liability would include the interest rates. Perfect. Super clear. If I may, just a quick follow up on capital, right? Because

We have data as of May with the central bank. And if I'm doing the calculation here, June was negative, right? In terms of net income or close to being negative. I wanted to ask you on capital because... Supervielle S.A., Ana Ines Bartesaghi Bender, Julio Patricio Supervielle, Leonardo Rodolfo Maglia, Matias Gonzalez Carrara Should we expect the third quarter to be maybe negative in terms of net income contribution? And then the second one is, in terms of growth in risk-weighted assets, what type of loans are you thinking on expanding? Is it a bit more on the heavy part, which is higher risk weight, or a bit more balance between, I don't know, mortgages and consumer? Just to think about this going forward. Thank you.

Okay. Thank you very much. Our ROE will tend to a 15% this year, but coming from higher ROE in the first quarter, so most of the capital addition coming from the ROE, we have it already in our capital numbers, and then you will start to see APR's risk-weight assets growing. The pace of the growth, But we will continue to see growth in real terms in the third and fourth quarter. That's why now we expect the capital ratio to range between 17 and 20%, which is a lower level where we now are. And regarding the type of loans where we are planning to expand,

Let me take on that one. The strong role we saw in the second quarter was primarily from corporates and the loan demand, particularly from the value chain of dynamic export-oriented and Agribusiness. And there was also a rebound in terms of individual loans from car loans, particularly car loans and personal loans for retirees and payroll loans. However, we believe that two thirds of the loan book is today corporate and one third is individual. So this means that with the change of monetary policy and the decrease in interest rates, the NIMS came down very strong in the second quarter, and we believe it's going to continue. However, the mix of loans will start to change, and by the end of the year, we expect and therefore there will be a balance between corporate loans and individual loans around 50% each and this will help us to achieve an historical mean level of 20% so this is the way looking forward to 2025 how it's going to our balance is going to be much stronger in terms of Revenue Generation.

Perfect team. Super clear. Thank you very much.

Thank you, Brian. Our next questions come from Ernesto Gavilondo with BOFA. Good morning, Ernesto. Good morning.

Good morning. Thank you, Ana. Hi, good morning, Patricio, Mariano, and Alejandro. My first question is if you can elaborate a little bit more on the undoing positions that the banks executed with the central bank related to the puts and what are the implications into the P&L and the balance sheet. And also on the other hand, I think there's a Some proposition of the central bank to do something with repos. So I will also want to hear from you the timeline and the implications from those repos.

Hi, Ernesto. Thank you for your question. Regarding the put options, We had 300 billion pesos in inflation-linked bonds from the government. Out of those 300 billion peso bonds, maybe between 50% and 60%, we had put options. Remember that these put options didn't guarantee a price, they only guaranteed liquidity. We agreed to sell those put options to the central banks. Out of this portfolio, maturities of these bonds were between the end of this year and up to the end of 2020.

Let me add on that, we also believe that the V&A government has a strong focus in fiscal consolidation and therefore holding these treasury securities We are at ease and we are comfortable and we believe that in the end this is going to be reflected in the prices of government securities.

Yes, sorry.

No, I'm sorry because you asked also for repos. Exactly. With what Patricio said, the government is dispensing the debt from the central bank to the Treasury where they want to achieve a fiscal surplus or at least fiscal balance including interest. So that is a greater responsibility and shows a greater compromise for the government to be accountable, to make the Treasury accountable Thank you so much. And then,

I would like to add a second question. This one is in terms of the loan demand, which seems to be finally materializing because of lower inflation, lower rates. So can you elaborate on which are the industries that you are starting to see this higher demand? And then just a follow up in terms of your ROE guidance of 15% for this year. So if making the numbers, This would imply average ROEs below the 10% in the second half. Is that correct? And I think Patricio said that you want to have a sustainable ROE in the medium term of around 20%. So I just wanted to double check those figures.

You want to ask?

Let me answer first the question regarding ROE. It's correct. We expect a longer-term ROE of 20%, but now we will be in the middle of a transition to that ROE. Your calculations are completely right. We are expecting a more challenging The next two quarters will be very challenging with ROEs probably below 10%. That's why we expect a 15% growth. When that transition from assets of the central bank and treasury securities to loans and within the loan growth, we also grow not only in short-term loans to corporate, but also on the individual portfolio, we are growing very well in personal loans, car loans, which have higher needs, and we focus and grow on and many more. Do you want to continue, Alejandro? Sure. Good morning. Industries that are leading

and many more. We are leading the credit amount, as you know, our oil and gas mining and agribusiness. But more recently, we've seen also an increase in durables and more consistently in construction. It's interesting to note that because in many of these industries the utilization levels were very low, the reaction is very quick because it has to do with more working capital. It does not require major investments in fixed assets. So this is why the reaction has been very quickly and is picking up consistently. And at the same time, On the funding side, what we see is that site deposits have been going up because the activity level is greater. Typically, site deposits are a function of the working capital and the level of activity. And because inflation has been going down, then you have greater levels of site deposits, which will help even further in moving forward in the cost of funding.

Perfect. Thank you so much, Patricio, Mariano, and Alejandro.

Thank you, Ernesto. Thank you, Ernesto. Our next question comes now from Carlos Gomez-Lopez with HSBC. Hello. Good morning, Carlos.

Hello and good morning. Can you hear me? Yeah. Thank you. Congratulations on your long road. You promised that you would be replacing some of these problems and you are doing it. So I had a couple of questions. The first one, can you confirm that the treasury securities that you have now have zero risk weighting, right? So you've been substituting central bank securities for treasuries. That remains the same, right? So you have not consumed any capital, although obviously you're taking a bit more risk by having the government than they have in the central bank. And second, can you tell us how the mortgage operation is working? Because I know initially there were some problems. Is it okay now? And can you originate with normality?

Thank you. Carlos, thank you for your questions. Regarding central banks and treasury notes, Then regarding mortgages...

Sorry about that. I mean, that is correct, but the market risk and operational risk, that also applied to the central bank securities, right? So that hasn't changed. Yes, correct.

Yes. In terms of capital requirements,

Okay, all right. So you would agree that, I mean, by going from one to the other, I mean, I know you are saying that the government is the same at the central bank, but actually, historically, it has been quite different. You are taking some more risk. I mean, which is fine. You are putting your capital to work, but you are taking some more risk by being in government securities.

Well, the risk from the treasury... In the past, we always considered significant differences and we were very cautious to go from the central bank to the treasury in the current context and also with the liquidity guarantee because and all the central banks. So there's a mix of risks there.

But also, Carlos, it is also something to take into context. Remember that we are still, even though inflation is going down, we're still in a high inflation country and hopefully it's going to go down still. So we hold these treasuries as a hedge, with a hedge purpose of our capital to make sure that

Carlos, good morning.

Regarding your question on mortgages, we are originating very well. There's a huge repressed demand, as you know, and Supervielle was the first private bank to come out with a product offering on mortgages. Just to give you a little bit of color there, right now, our average ticket size To sustain this growth on a longer term is regulation regarding securitization, which is still pending. And that's one of the things that we're working on to be able to make sure that we continue to grow and also manage the exposure to mortgages and the consumption of capital that they will require.

Thank you, Alejandro. And again, these are all loans in UBAS, the Inflation Adjusted Unit. You said your average is 50,000. So how much, just to have an idea, how much are you originating per month or per week at this point in time?

At this point, levels are very low because we have a huge pipeline and there are many bureaucratic steps that have to take place. You have to have notary publics, you have to have also The right valuation, and this is a machine that had stopped for around four years, and it's starting to move again. But right now, we are converting these initial requests for information, and we are growing at a rate of roughly, more recently, at a rate of roughly 50 mortgages per month. But this should be going up pretty soon.

Okay, so at this point, my point is, I mean, it's immaterial to your balances, but this is starting to move.

It is starting to move, but remember, we carry mortgages from the previous period. That's why when you look at our asset composition, the representation of mortgages is higher. But you're right about the vintage. The new vintage of mortgages is right now very small. That is correct.

Thank you. And if I can add one last question, I know that you're of the view that the current economic policy is sustainable, but I imagine you also do a lot of testing. What would happen if there has to be another large devaluation, let's say 30 or 40% in the currency?

As you pointed out, Carlos, Thank you. Thank you very much. Minister of Economy and trying to do everything to avoid that situation.

And you expect interest rates to remain at the level they are today or to go to real rates in the second half?

My view is that there are several pressures So it's going to be a combination between this pressure because of tighter monetary policy and the crowding in effect as the Argentine state creates less demand for credit in the market.

But again, do you expect rates to go up from the current levels or to stay where they are?

I would expect, and it's a bit of a guess right now, that they will go up on the second half in real terms.

That's clear. Thank you so much.

Thank you, Carlos. We have another new question from Marina Mertens with Latin Security. Good morning, Marina. Please go ahead.

Hi, good morning.

Marina, we can't hear you.

I'm sorry, we lost you.

Hi, can you hear me now?

Yes, it was our problem.

Thank you. So in the second quarter, we observed significant loan growth with flat deposits, which led to an increase in the loan-to-deposit ratio. How do you expect deposits to evolve in the second half of the year? And what factors do you see as the main drivers for growth? Thank you.

Hi, Marina. Thank you for your question. For the upcoming quarters, we see deposits growing in real terms, although we see loans growing at a faster pace. So that will make the loan to deposit ratio to increase, but with both sides of the equation growing. Regarding the sources, We expect it to come both from individuals and corporations. Also as activity rebounds across all sectors. Remember now that we are seeing a small recovery in activity, but it's very different across sectors. Transactionality will increase and that will also increase

I would say that it's going to be a strong focus in fixed-term deposits or time deposits, basically, where we expect that we will be able to attract time deposits. Because when inflation comes down, naturally, savings starts to grow in the country, both in current accounts, savings accounts,

Thank you very much.

Thank you, Marina. Our next question comes from Marlon Medina with JP Morgan. Hello, good morning, Marlon.

Hello, good morning, everyone. Yeah, so I think most of my questions have been asked for perhaps a quick follow-up on asset quality. Today you have very strong coverage, I think, around or above 200%. So as the environment normalizes, what would be a reasonable level for coverage to converge to? And also, what would be like a reasonable NPL level to assume going forward? I know today is very behaved, but as you scale the portfolio, where do you expect it to trend?

Daniel, and you want to answer that. Sure. Thank you, Marlon, for your question. Regarding coverage, it's true that now it is very high. It's about Ines Bartesaghi Bender Thank you very much.

Thank you, Marlon. I'm sorry. We have, I think, a new question coming from Brian Flores. This is correct, Brian?

Yes, yes. I just wanted to make a follow-up. You made a comment, a very interesting one, right? Maybe the second half of the year we'll have an ROE that is 10% or lower, right? Then you said middle term it should go back to 15% and then eventually all the way to 20%. I know this is a difficult question, but do you have an expected timeline or maybe a desired timeline as to when and how should this happen? Just to grab our heads around this. Thank you. Yes, Brian. Let me review our expectations.

And of course, within the context of the visibility we can have now, with all the changes also in the macro environments and regulations, we expect ROE Welcome, Brian.

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. Good morning and have a good day.