Grupo Supervielle SA (SUPV) 2016 Q3 法說會逐字稿

Good morning. And welcome to the Grupo Supervielle third quarter nine months 2016 earnings call. A slide presentation will accompany today's webcast, which is available in the investor section of Grupo Supervielle's Investor Relations website, www.gruposupervielle.com.

(Operator Instructions). As a reminder, today's conference call is being recorded.

At this time, I would like to turn the call over to Ana Bartesaghi, Treasurer and IRO. Please go ahead.

Thank you. Good morning, everyone. And thank you for joining us today.

Speaking during today's call will be Patricio Supervielle, our Chief Executive Officer and Chairman of the Board of Directors; and Jorge Ramirez, Vice Chairman of the Board. Also joining us is Alejandra Naughton, Chief Financial Officer. All will be available for the Q&A session.

Before we proceed, I would like to make the following Safe Harbor statement. Today's call will contain forward-looking statements and I refer you to the forward-looking statements section of our earnings release and written filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances.

I would now like to turn the call over to our CEO, Patricio Supervielle.

Thank you, Ana. Hello, everyone. And thank you for joining us today. It's a pleasure to welcome you to Supervielle's third quarter earning conference call. If you're following the presentation, please turn to slide number 3.

Overall, we are pleased with the results for the quarter. We delivered strong profitable growth, reporting a 160% sequential increase in net income as we continued to successfully execute our growth strategy leveraging the capital raised in our IPO last May. This has driven above industry loan growth exceeding the rate of inflation.

With our strong focus on risk management, we've begun to reverse the asset quality deterioration experienced in the previous quarter following the contraction in consumers' disposable income in a more challenging than expected economic framework.

Results were underpinned by a resilient net interest margin, despite lower interest rates, and strong operating leverage as we continued to increase the number of loans per branch. Jorge will provide more color on this in a few minutes. But before that, I will discuss the overall economic environment financial system trends and our loan performance.

Turning to the macro on slide 4, I will provide a brief overview of where we are now and the outlook. 2016 remains a transition year. Inflation is trending down after reaching a monthly high of 6.5% last April. And we are now anticipating inflation of 1.5% by December, and 37% for the year.

The Lebac rates continued to decline following the same trend. According to the most recent market expectations survey, GDP is expected to contract by 2% this year. We remain optimistic that sustainable growth will resume during 2017 and expect GDP growth for next year of 3.2%, with inflation of 19%.

Now, let me review the financial sector in slide 5. Loans to the private sector were up 6% quarter on quarter, with corporate loan growth slowing down to 7% from 12% last quarter, while retained loans expanded by about 5%, similar to the prior quarter. Compared to the same quarter last year, system loans increased 31%.

Industry deposits, in turn, rose 6% quarter on quarter, and 37% year on year. However, loan and deposit growth remained below inflation.

The BADLAR rate, the Buenos Aires deposit of large amounts, continued its declining trend experienced since the end of June, dropping 440 basis points sequentially to 22.2% by the end of September, following the reduction in the Lebac rate. Although the current economic environment is still volatile, the outlook for 2017 calls for improvement, and we are well positioned for when this occurs.

Argentina is underbanked and underinsured, which provides an attractive growth opportunity for us. Additionally, new market friendly regulations and rational monetary policy all bode well for the sector.

Moving onto our performance on slide 6. We expanded our total loan book by 13% quarter over quarter, and above the rate of inflation. This is the second consecutive quarter we grew at double the industry pace, as we continue to leverage our higher capital base and attractive value proposition. Let me highlight that on-balance sheet loans rose almost 16% quarter on quarter as we continue to reduce loan securitization in line with our funding strategy.

Corporate loans remain the primary growth driver, representing 44% of our total loan portfolio, up from 41% in the previous quarter, and 35% in the first quarter of this year before our IPO. Note that higher margin SMEs and middle market represent about 63% of corporate loans. Consumer finance loans also performed well, maintaining their share of total loans.

Looking at our loan segments in more details on slide 7. Corporate loans were up 76% year on year. On a sequential basis, corporate loans increased an impressive 23%, more than triple market growth, largely driven by continued strong demand for trade finance and US dollar denominated loans. These loans represented 13% of the total portfolio, from 3% in the third quarter of last year.

Similar to the second quarter, growth was driven by our ability to leverage existing client relationships, coupled with an attractive value proposition to achieve our goals of increasing loan size per client. Our ability to offer clients a one-stop model where we service their financial needs with our growth product selection while, at the same time, attentive to their specific requirements, is contributing to our good performance.

Importantly, a key differentiation factor is our ability to provide flexibility and shorter time to cash. Retail loans were up 22% year on year, with sequential growth picking up 6% and continuing the improvement we started to see early July. Actually, retail loans almost doubled the sequential growth rate achieved in the previous quarter when senior citizens, which represent 58% of retail loans, were strongly affected by the sharp price increases in consumer goods, resulting in weaker loan demand.

Finally, consumer finance loans were up 13% quarter on quarter. And we're starting to see early signs of a reversal in the asset quality deterioration experienced in the prior quarter affected by a contraction in consumers' disposable income.

While growth over the recent two quarters has been largely driven by loans to larger corporations as the economy recovers and we execute on our strategy in 2017, we expect to drive growth in our higher margin clients, such as SMEs, middle market, as well as retail and consumer finance. We will be leveraging our higher capital base to maximize the opportunity we see in these markets.

I will now hand over the call to Jorge Ramirez, who will review our funding, P&L and guidance. Please, Jorge, go ahead.

Thank you, Patricio. Good day, everyone.

Moving onto funding on slide 8. We drove above industry growth of our deposit base posting a 10% sequential increase, up 47% year on year. The yearly growth was mainly driven by savings accounts which were up 75%, and term deposits that grew 36%. We saw a similar trend quarter on quarter.

Low cost demand deposits represented 56% of our total deposit base; 40% in savings accounts and 16% in checking accounts at the close of September. This is 3 percentage points down from seasonally high second quarter levels, which benefited from the 13th salary.

Retail deposits at 54% continued to represent the high share of total deposits, reflecting the importance of our low cost deposit network franchise. Note that the 104% net loan to deposit ratio this quarter reflects our strategy to primarily fund loan growth by reducing our holding in Central Bank notes, or Lebac's, given the declining interest rate before starting to take higher cost institutional deposits.

Turning now to slide 9; gross financial margin. It was up 20% sequentially, exceeding the 13% sequential loan growth in the quarter. This good performance reflects the contribution from our net interest earning assets which grew 17% above the 10% increase in average interest bearing liabilities.

At the same time, the average rate on personal loans, which rose 495 basis points, partially offset the lower average interest rate on corporate loans. By contrast, interest rates and average liabilities declined faster than those on average loans.

Note that gross margin benefited from a 270 basis points reduction in the average interest rate paid on liabilities following the decline in the BADLAR rate. Importantly, the higher margin was achieved despite the increase in the regulatory reserve requirements, which rose 3% for time deposits, and 5% for current accounts.

Moving onto slide 10. Net service fee income was up 14% quarter on quarter, a pickup from the 3% sequential increase reported in the previous quarter. Higher volume in checking and savings accounts, coupled with the elimination of regulatory restrictions on re-pricing last September, together with higher fees from debit and credit cards, were the main drivers behind this performance.

Note that in September, we finalized negotiations with the Province of San Luis following their request to modify certain terms and conditions under the Financial Agency Agreement of 1996. We signed an amendment to the agreement confirming our commitment to the development of the Province of San Luis.

As part of this amendment, Banco Supervielle relinquished its right to receive an agency fee from the Province of San Luis for any services rendered as financial agent of the Province starting July 1, 2016. As a result, financial agent fees charged to the Province fell to ARS4 million this quarter, from ARS25 million in the prior quarter.

Income from insurance activities were up 18% quarter on quarter, as Supervielle Seguros continues to post rapid growth. Starting last September, Banco Supervielle and Cordial Compania Financiera started to self-insure and, therefore, no longer contracted life insurance coverage for new flow of loans and credit cards.

Now turn to slide 11 as we review asset quality. We're seeing some early signs of reversal in asset quality deterioration after a spike experienced in the previous quarter when the consumer finance segment was impacted by the challenging and volatile economy, which significantly contracted consumers' disposable income. As a result, loan loss provisions declined 12% quarter over quarter to ARS261 million, with a cost of risk decreasing to 3.7% this quarter from 5% in the second quarter of 2016.

We remain committed to continue implementing additional collection and preventive actions to mitigate further asset quality duration, while maintaining our strict credit policies.

Moving onto expenses on slide 12, we achieved a significant improvement of 960 basis points in the efficiency ratio, bringing it down to 62.5% in the quarter, as we continued to drive loan growth, leveraging our operating base, or reducing cost of funding.

The 41% year-on-year growth in administrative expenses was largely driven by the salary increases from collective bargaining agreements implemented in the second quarter of 2016. Higher non-personnel expenses, including advertising and publicity to support our loan growth, as well as leases, security services expenses, maintenance and taxes among others, also contributed to the increase.

Sequentially, expenses were up 3% or ARS38 million, as higher personnel expenses, including severance payments incurred in line with ordinary course of business, advertising and other expenses, more than offset the ARS29 million sequential decline in taxes. On a quarterly basis, the employee base remained unchanged.

Now turning to profitability on slide 13. Net income rose 126% year on year, and 160% compared to the second quarter of the year, as we continued to execute our profitable growth strategy.

As anticipated, return on average equity began to normalize this quarter, reaching 28.6%, after the temporary dilution experienced in the second quarter of 2016, resulting from capital raised in the IPO.

Let me also highlight the improvement in return on average assets, which more than doubled sequentially, reaching 4% in this quarter.

In terms of capitalization, as shown on slide 14, we were paid ARS123 million of high cost holding company debt in the quarter, and expect to continue redeeming existing notes of maturity. Remaining funds of the holding company today, of around ARS900 million, are invested in low risk short-term local mutual funds, which posted a 29.4% annualized return in the quarter, thus taking advantage of tax losses carried forward in this Company.

After paying down debt, we expect to maintain excess liquidity of ARS620 million to fund growth.

The consolidated pro-forma Tier 1 ratio adjusted from 13.5% in the second quarter of 2016 to 12.6% at the close of September, given the significant loan growth delivered in the quarter.

Please bear in mind that this ratio only includes 50% of the Central Bank regulated subsidiaries' third quarter profits, which will be 100% computed as Tier 1 capital as of October 31, 2016. Normalizing 100% of those profits as of third quarter 2016, this ratio would have reached 13%.

Also note that as the loan portfolio continues to build up [in seasons], and we continue to gain operational leverage, we expect accrued net income to increase the Tier 1 capital base to support future growth.

Moving onto guidance. As you can see on slide 15, we reaffirm the guidance provided in our second quarter 2016 earnings call, the first as a publicly listed company.

This includes total loan growth for the year ranging between 47% to 57%; an NPL ratio between 3% to 3.2%; NIM ranging between 17% to 20%; an efficiency ratio of 66% to 71%; with net income between ARS1.2 billion to ARS1.4 billion; and the Tier 1 ratio at a range between 11.5% and 12.5% by year end.

Looking into 2017, we expect a decline in the inflation rate, and a positive impact on economic activity as a result of the inflation targeting monetary policy announcement by the Central Bank, together with market funding regulations.

The market expectation on ours is for GDP in 2017 to grow by 3.2%, with inflation of approximately 19% for the year. While we are in the process on working on a budget for next year, I will be providing guidance for 2017 in our fourth quarter 2016 earnings call.

Let me share with you some high level insights as to how we see 2017 at this time, given the current circumstances.

Based on these macroeconomic assumptions, and the continued implementation of our growth strategy, we expect to see a pick-up in loan demand. We anticipate loan growth in real terms to be above 2016 levels, both for the industry and for ourselves. We also expect lower NIMs for the industry next year, in line with the drop in the inflation rate. Given our portfolio mix, we believe we are in a good position to defend our NIM levels.

Finally, while we're in the process of reviewing our selective investment plan for 2017, we expect to continue leveraging our operational base.

We are now ready to take questions please. Operator, go ahead.

(Operator Instructions). Carlos Gomez, HSBC.

A couple of questions. First, although you are not giving precise guidance, you said that you expect real loan growth next year for the system and again, maybe not for you, but what do you expect for the system as a whole?

And my second question refers to your agreement with the Province of San Luis. If I understand correctly, you are now receiving a monthly payment for the services provided. I imagine that there are other terms in the agreement. Can you give us an idea about what else you have agreed with the Province? Thank you.

Regarding your first question, we're still working on the figures for next year, but definitely we expect, as opposed to what happened this year, loan growth to be above inflation rate for the overall industry. And, in our particular case, we're expecting that growth to be, in real terms, higher to the growth in 2016, and still to be above what the industry has. We will provide more guidance when we have the fourth quarter earnings call.

Regarding your question about the agreement with the Province of San Luis, essentially, the other things that we have included in the agreement have been; we have agreed to expand our presence in the Province; we have agreed to grant a line in favorable conditions to small and medium-sized companies in the Province; and we have agreed to grant a line for deleveraging current, or some of the public employees of the Province. That has been essentially the bottom line of the agreement.

Can you lend directly to the Province?

Actually, no; lend directly, no. A couple of considerations here. In the first place, San Luis is a cash-rich company, and has been traditionally a cash-rich company for the past 20 years. And they have a lot of money to be collected from the government as a result of a lawsuit they won in the Supreme Court. So it's not a Province that has been traditionally requiring loans from banks, as opposed to many other provinces in Argentina.

Second, Banco Supervielle highly restricts loans to Provinces. So Provinces can fund themselves primarily through the capital markets, essentially. That's the way they finance.

Thank you very much.

(Operator Instructions). Carlos Gomez, HSBC.

I would like to follow up with a question on your capital level. You have a guidance of 11.5% to 12.5%. You expect to grow in [real time] next year, which suggests probably more than 20%. So there could be some capital consumption next year. I understand you haven't run the numbers.

What would be your tolerance? What is the minimum level of capital that you would like to operate with? And would you contemplate subordinated debt or other mechanisms to reinforce your capitalization?

Our long-term target for Tier 1 capital is 10% and total capital a 12% ratio. And given our current projections, we do not expect to require any further capitalization, essentially because as we start deploying our capital, we start growing our portfolio and we start (inaudible) our operational leverage, the profitability will generate. It's going to be enough to support our growth of our capital base. So we're fairly confident and fairly comfortable with our level of capitalization.

Clearly, if the growth rate both in the industry and our loan growth rate starts to grow at a much faster pace than what we are currently expecting, then we might have to look for other alternatives. But there are plenty available. We could issue subordinated debt. We could start securitizing part of our portfolio. Or we can go back to the market. We're pretty open to all of those alternatives.

Just to clarify those 10% and 12%, those are ratios for the Bank or at the consolidated level for the Group?

Those are on a consolidated level for the Group.

For the Group, okay. Thank you very much. By the way, does that include the payment of dividends or you are not contemplating dividends at this point?

We're not contemplating dividend payments at the point, essentially because we're planning on keep on growing by reinvesting profits.

Thank you so much.

Alejandra Aranda, Itau.

I was wondering if you could give me more color on the corporate sector, on the growth dynamics, where you're seeing more interest and more demand. And specifically, what type of products are your clients demanding on that sector?

And then on the retail side, do you think we're going to see a pickup on this segment in the next few quarters? Basically that would be it.

Regarding your first question, we're seeing present dynamic in terms of public works, construction, agribusiness and logistics. These are essentially sectors with which we have a very good presence through different types of products.

When it comes on to logistics or even construction, remember that we're one of the leaders in the market; we're the largest leasing portfolio in the Argentine market. So these are companies that demand lots of leasing.

In any event, so far, the bulk of the growth in the corporate portfolio, as it has happened in the industry, has come from dollar denominated loans. A substantial portion of it has to do with trade finance loans. We're still seeing some demand there.

And going forward, with the public works and construction and lots of infrastructure investment that we're seeing starting to pick up substantially in this second half of the year and we expect that to continue during 2017. Financing of those public works, which is something that we have traditionally done, is along the lines of revenue growth that we're expecting.

Regarding your second question in terms of growth loans in the retail sector, clearly with high inflation rates and the impact that that had on disposable income, we saw some sluggish demand, particularly in the first half of the year. It started to pick up during the third quarter. And with inflation coming down and the interest rates starting to come down, this is a sector that we expect that loan demand is going to return to much more -- to higher levels than what we have seen this year and next year.

The other thing you have to take into consideration is that, particularly in the case of our customer base, both in the consumer finance company and in the Bank, this is a sector that is very -- it's much more focused in the level of the instalment; the relationship in instalment -- the monthly instalment that they have to pay on the loan in relative terms to their monthly revenues or their monthly income.

So if interest rates come down, you can maintain the same level of relationship in the monthly loan payment that they have to meet compared to their monthly salary or monthly income. You can lend more money to the same customer base. That's another part of the growth that we're expecting.

Okay. Thank you very much. That was helpful.

(Operator Instructions). Jorge Kuri, Morgan Stanley.

Congratulations on the results. I have one question on asset quality; clearly a big improvement versus the second quarter. Can you give us a bit more color on how things are progressing on that front so far in the fourth quarter? Thanks.

What we're seeing in the fourth quarter so far, Jorge, is more or less the same trends that we saw in the third quarter. It's stabilizing. Like delinquency] it has stabilized, putting the consumer finance company at a higher level than what we had prior.

But if you compute everything together; the interest rates you are charging on those loans; the cost of funding that has come down substantially; and the impact of the asset quality, it's a much more profitable spread and it's a much more profitable loan portfolio than what it was in the first half of the year.

So we believe that the trend that we have been seeing in terms of stabilization and reduction in terms of the cost of risk for the fourth quarter will stay on course.

Thanks. If I may add something along those lines. Your coverage ratio allowances over NPLs is roughly in the 85% to 90% level. Is there an internal interest from you guys to have that at or above 100%, as most of your peers do, or are you comfortable with that level? If so, at what point do you think you're going to be able to bulk up those reserves?

As we have discussed before, Jorge, our long-term goal is to reach 100% coverage for the Group, but in the next two to three years. Probably for the rest of the year, we expect the coverage to be in the high 80%s. We will go gradually there, as we continue to improve our operational leverage and profit.

All right. Thank you, Jorge, and congrats again.

(Operator Instructions). There appears to be no further questions at this time. I'll now hand the call back over to Ana Bartesaghi for closing comments.

Thank you, all of you, for joining us today and 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, the team remains available to answer any questions that you may have. Thank you, and enjoy the rest of your day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.