Grupo Supervielle SA (SUPV) 2017 Q1 法說會逐字稿

Good morning, and welcome to the Grupo Supervielle First Quarter 2017 Earnings Call. A slide presentation will accompany today's webcast, which is available in the investors section of Grupo Supervielle's 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 Jorge Ramirez, Vice Chairman of the Board of Directors. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us today. While this is a very difficult personal time, given the very recent loss of his beloved wife, our Chairman and CEO, Patricio Supervielle is also present with us today on this call. I know we all want to extend him and his family our condolences. We very much appreciate his unwavering commitment to the company and all of the stakeholders. Also joining us are Alejandra Naughton, Chief Financial Officer, and Ana Bartesaghi, Treasurer and Investor Relations 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 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.

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

Thank you, Jorge. Hello, everyone, and thank you for joining us today on Supervielle's first quarter earnings conference call.

If you're following the presentation please turn to Slide #3. We started the year on a strong note as we continue to execute on our profitable growth strategy. We delivered significant loan growth well above market levels as we continue to deploy the proceeds raised in the international equity offering and most recently those obtained through our inaugural [Argi] international bond offering successfully issued last February.

Our focus on profitable growth is underpinned by strong performance in net income, more than double year-on-year on a sequential basis. A onetime nonrecurring item in each fourth quarter '16 and first quarter '17, along with seasonality, impacted the comparability of results. Remember, seasonality means our results tend to be slower in the first half of the year and accelerate towards the second half.

We're also making progress on our strategic initiative, stepping up digital innovation and building out our core product leadership into integral customer relationship. We are proud of the recent launch of the first SME-dedicated Check Depositing and Discounting App in Argentina, which introduces a new cash management solution.

In April, we also introduced an exclusive Visa Distribution Vinos credit card for SMEs. This is another step towards developing our attractive value proposition in the dynamic winery industry in the province of Mendoza and renewing our leadership commitment in this province. In addition, we are pleased with the launch of an exclusive strategic alliance with a leading online real estate search portal in Argentina that we expect will help expand our reach in the mortgage segment.

Moving to Slide 4. Let me make a moment to reinforce our business strategy. Firstly, we'll continue to leverage our strong product leadership in factoring and leasing in middle markets line by developing an integral relationship with the goal of becoming their principal bank. We will accomplish this by providing excellent cash management service and larger loan sizes while seeking to obtain their payroll services.

We are carrying out this strategy across all the industries with a primary focus on agribusiness, construction and public infrastructures and energy. Our focus on SMEs will also drive future growth as the most dynamic sector of the economy, which we believe is still underserved. We are leveraging our shorter time to cash, credit scoring methodology, strong processes and customized value proposition versus specific subsegments, including transportation, real estate, education, professional services and franchises.

We're also utilizing the company's strong retail client base and strategically-located branch network to increase cross-selling to small business entrepreneurs. With corporates, we're maintaining a customized approach across the supplier value chain.

In terms of mortgage underwriting, we maintain a holistic approach with the goal of becoming one of the market leaders. This includes forging alliances with leading real estate developers, maintaining a competitive value proposition and exclusive agreement with an online real estate search platform. Finally, we are increasing penetration of Walmart customers while simultaneously forging new alliances with medium-sized merchants across the country.

Overall, we see numerous opportunities in the market where we are uniquely positioned to capture market share, serve new clients and expand our reach.

I will now hand the call to Jorge Ramirez, who will review the macro financial sector, loan growth and funding. Please, Jorge, go ahead.

Thank you, Patricio. Turning to the macro environment on Slide 5. We remain cautiously optimistic of an economic recovery in the country, and despite slightly higher-than-expected inflation in the first quarter of the year, we maintain our macro expectations for 2017, including GDP growth of 3% and inflation trending to 20% down from 41% in 2016.

We are seeing some early signs of recovery, which support our positive view of the economic environment. For example, cement sales grew double-digits in both March and April, with construction picking up to high single-digits. Industrial liquidity increased slightly in March following 2 months of contraction, along with a strong pickup in consumer confidence in April. However, these positive signs are not yet translating into high consumer demand, which remains sluggish.

So let's start in January 1 of this year. The Central Bank is using the 7-day repo rate as one of their policy instruments. Since then the repo rate increased 15 basis points, reaching 26.3% at the end of March and remaining stable today. The BADLAR rate continued a downward trend that began mid-2016, falling 80 basis points sequentially to 19.1% by the end of March.

Moving on to the Argentine financial sector in Slide 6. System loans with private sector was 36% year-on-year, still above inflation, and showed a seasonal deceleration in the first quarter rising 6%. Sequentially, growth this quarter was largely driven by retail loans, with personal loans and credit cards up 13% and 3%, respectively, along with 9% growth in mortgages and 3% in corporate loans.

System deposits were up 38% year-on-year, and remained relatively flat sequentially, reflecting a high deposit base in the fourth quarter of last year resulting from a Tax Amnesty Program which encouraged the declaration of cash holdings.

Please turn to Slide 7 for a review of our loan performance. We delivered robust loan growth this quarter, up 63% year-on-year exceeding system growth as we continue to execute on our capital deployment strategy. On-balance sheet loans rose 71% in the same period as we continued to review securitized loans. Sequentially, loan growth decelerated to 6%, reflecting seasonality, and I will discuss that in more detail shortly. Then we have an increase in the share of SMEs and middle market loans over total corporate loans to 64% from 59% in the prior quarter, aligned with our strategy of focusing on these dynamic market segments.

Turning to Slide 8. We delivered solid growth across all segments, with corporate loans up 124% year-on-year and 5% sequentially, almost doubling market growth despite the seasonal behaviour of our factoring business, which typically decreases in the first quarter. This is our largest growth in corporate loans and the single largest on our total loan book following personal loans.

Strong demand for foreign trade finance and U.S. dollar-denominated loans continues to be one of the main drivers of corporate loan growth. Retail loans were up 26% year-on-year and 30% quarter-on-quarter, posting continued growth in personal loans and credit cards, along with sequential improvement in NPLs.

Consumer finance loans increased 71% year-on-year and 19% quarter-on-quarter. NPLs presented a slight deterioration this quarter, reflecting the seasonality in consumers' disposable income and the delay in the recovery of consumer demand. Most importantly, the (inaudible) of these loans is [primarily] to their spread, which resulted in higher gross intermediation margin for this segment, up 144% year-on-year and 27% quarter-on-quarter.

Turning to funding on Slide 9. We continue to drive strong growth in our deposit base while further diversifying funding and maintaining our maturities through the issuance of our peso-denominated MTNs, equivalent to USD 300 million, $20 million international markets. As a result, the balance of MTNs rose by 33% sequentially, while deposits were 8% higher over the period. Year-on-year, total deposits rose 60%, significantly exceeding the 38% system growth.

Loan-to-deposit ratio declined 150 basis points sequentially to 102.5%, reflecting increased liquidity from the recent MTN issuance and higher special checking account balances following the decision by the Central Bank to authorize remuneration of these deposits. The temporary excess liquidity was invested in Central Bank notes and repo transactions, which have lower spreads than loans, which we expect to deploy in the coming months as we expand the loan portfolio.

As you can see on Slide 10, our retail network franchise continues to support an atomized and highly stable deposit base, with retail and senior citizen deposits representing 56% of our total deposit base. Following the Central Bank's authorization in January to remunerate checking account deposits, our balances of special checking account deposits increased 39%, mainly reflecting growth from institutional investors. This resulted in a 600 basis points sequential increase in the share of wholesale deposits, reaching 25%.

I will now hand off the call to Alejandra Naughton, who will review our P&L. Please, Alejandra, go ahead.

Thank you, Jorge. Good morning, everyone. Moving on to Slide 11. Total NIM contracted to 18.7% in the first quarter of 2017, impacted sequentially by 3 key factors.

First, the cash inflows from the recent MTN issuance and the significant growth in interest-bearing special checking accounts, resulted in a temporary increase in the worth of the investment portfolio and repo transactions over total losses, which as you know, yields lower NIM.

Second, continuing the trend of service since 2016, reflecting higher confidence in the new Argentine environment and particularly with the interest from the Tax Amnesty Program, reflected a higher share of U.S.-denominated assets and deposits that yields lower spread than the [present] portfolio.

And finally, some decline in interest rates on peso-denominated short-term loans to corporate customers following the 74 basis points sequential reduction in the [dollar rate].

Let me highlight that NIM of our peso-denominated loan portfolio, excluding foreign trade and U.S.-dominated loans, which represents 85% of our total portfolio, expanded 240 basis points to 23.4%. Gross financial margin for the quarter was up 74%, year-on-year, but fell 1% sequentially. Average interest-bearing liabilities, driven by significant growth in special checking accounts rose above average interest-earning assets, while average interest rates earned fell following the declining trend in the BADLAR rate.

The sequential comparison also reflects a onetime ARS 128.1 million gain from the termination of a real estate trust, as disclosed last quarter, that benefited fourth quarter 2016 results and a nonrecurring ARS 50 million foreign exchange loss this quarter in connection with our recent MTN issuance, reflecting the application of the domestic currency between the pricing and the settlement dates in excess of our currency hedge.

Moving on to Slide 12. Net service fee income was up 41% year-over-year above inflation and up 6% quarter-on-quarter. Our pricing, along with higher volumes in checking and saving accounts and credit and debit card loans following the elimination of the overall [regular] restrictions and fees last December, remain the main drivers behind this performance.

The net service fee income ratio improved sequentially by 70 basis points to 31% in the quarter. Lower income from insurance activities resulting from regulatory changes in connection with credit-related insurance more than offset growth in noncredit-related insurance products.

Now moving on the asset quality on Slide 13. We maintain a vigilant focus on asset quality, closely monitoring the macro environment, our business risk profile and segment seasonality. The NPL ratio increased slightly to 2.9% this quarter from 2.8% in the fourth quarter of 2016, reflecting a deterioration in consumer finance, while retail banking showed sequential improvement and corporate NPLs remained stable.

In our experience, asset quality in the consumer finance business tends to present higher delinquency rates in the first half of the year and later falls as salary bargaining agreements catch up with inflation, improving consumer and total income and their ability to grow these loans. The coverage ratio remained stable quarter-on-quarter at 87%. Loan loss provisions rose 8% quarter-on-quarter, while cost of risk was unchanged sequentially at 3.9% this quarter.

These variations are explained by regulatory provisions on new loans at inception and higher nonperforming loans, driven by the seasonal increase in consumer finance loans. While the cost of risk this quarter reflects the seasonal factor which I've mentioned, we are on track to meet our full year guidance.

Moving on to expenses on Slide 14. The efficiency ratio improved to 67.5% in the quarter from pre-IPO levels of 73.8% in the first quarter 2016, but was higher than the 64.5% deposit in the fourth quarter of last year. While the efficiency ratio for the quarter was slightly above the high end of our full year guidance range, we remain on track to meet our guidance as this ratio is affected by the seasonality of our business as revenues grow cumulatively on a monthly basis throughout the year on the loan portfolio system.

Administrative expenses were up 5% quarter-on-quarter, mainly reflecting: wage increases from the collective agreement in February, which is based on forward-looking inflation of 19.5%; an additional 4% salary increase as a recognition for past inflation; and a 1.3% increase in our headcount to support growth. These were partially offset by 6% decrease in nonpersonal expenses, reflecting lower advertising and marketing expenses.

Please turn to Slide 15 to review profitability. Net income for the quarter -- for the first -- net income for the quarter more than doubled to ARS 381 million year-on-year as we continue to execute the next strategy. Sequentially, however, net income fell 28%, mainly reflecting 2 onetime nonrecurring items.

First, a 20 -- a ARS 92 million gain from the termination of a real estate trust, as disclosed last quarter, that benefited fourth quarter of 2016 results. And second, ARS 33 million foreign exchange loss this quarter in connections with the recent MTN issuance.

Excluding these 2 nonrecurring items, net income would have declined by only 5.8% sequentially, reflecting the seasonality of our business as we explained earlier. ROE fell to 21.8% in the quarter. We anticipate this to be the lowest level for the year as our full year guidance calls for an implicit ROE ranging between 27% and 29%.

In terms of capitalization, as shown on the Slide 15, the consolidated pro forma Tier 1 capital ratio adjusted to 12% from 12.3% in the fourth quarter as we continue to drive loan growth in the quarter. After paying down ARS 130 million in debt during the quarter, funds at the holding level at the end of March reached ARS 665 million. There were investors that had invested in low-risk, short-term financial instruments, which posted a 24% annualized write-down in the quarter. These also allow us to take advantage of tax losses carryforwards at the holdco.

I will now turn the call back to Patricio.

Thank you, Alejandra. Moving on to our outlook on Slide 16. As we said earlier we remain cautiously optimistic on Argentina's economic recovery despite slightly higher-than-expected inflation in the first quarter, and maintain our guidance for 2017. We're confident in our ability to deliver on our quality growth strategy as we continue to maximize opportunities we see in our core businesses, SMEs, middle market, retail and consumer [country] -- consumer finance, while leveraging on our underutilized infrastructure.

As a final statement, I'd like to tell you that we are very confident that our franchise will continue to support net revenue growth above the industry for years to come.

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

(Operator Instructions) Our first question comes from the line of Frederic De Mariz with UBS.

I have a couple of questions, actually 3 questions. The first one has to do with your growth and, in particular, from the angle of OpEx and costs. I was wondering if you could give some details about your plan for branch openings and what it means in terms of OpEx growth for this year. I mean, we saw the guidance but I wanted to get a bit more details about how you think about the growth from a geographic standpoint?

The second question has to do with NPL and asset quality. We saw the guidance, also again this is very specific. This is great. In terms of cost of risk, the guidance suggests that you're quite confident that the NPL, the asset quality is not going to deteriorate too much. But I wanted to hear from you, you mentioned that Consumer was still a bit sluggish. I wanted to hear if there are some sectors, some regions, some places that are a bit more concerning to you in terms of asset quality.

And then third final question, a quick one, technical one. Do you have any thoughts on the IFRS adjustments? What do you expect for next year when the equity base changes and what it means for your Tier 1?

Frederic, I will take some part of your questions and I defer to Alejandra in terms of the OpEx questions. In terms of our branches opening, as we have explained in previous calls and previous meetings, we only are expecting marginal openings of branches throughout the years. We're still debating if we will be opening 5 or 6 branches. And they will be primarily and mostly in the city of Buenos Aires or surrounding area.

We're still debating whether or not we will open [1 in the 3] other countries. And we expect those openings to be between the second and the fourth quarter of the year. Okay.

In terms of the question regarding asset quality, remember that we have some seasonality in our consumer finance [system] and we're in the high peak of the season. We're not seeing anything extraordinary in the sense that certain geographic areas or certain -- I don't know, certain [deficiencies], in particular, [at inception] of the consumer finance business, which [seem to have] seasonality. They are all behaving according to this pattern and we expect to have -- to fully meet our cost of risk guidance on a full year nonconsolidated basis, so no particular reasons for us to be concerned on that area. I forgot your second question. Can you [repeat it] (multiple speakers) (inaudible). Alejandra will...

Frederic, as we disclosed in our financial [risk] statement, on our press release, the impact on our tariff obligation is [continuing total assessment] declining 1.9% of our network. This is mainly the result of a combined adjusted assessment between the effect of the [offsets] coming from fixed assets, but also -- they are also offsets because of some [regulation] provisions and a special termination agreement that we have with our personnel.

Regarding the, yes, the OpEx and context relating to our expansion in our network footprint, as we reported in the last -- as of December, we are committing ARS 400 million in a broad range of initiatives between them, the increasing network. In that case we are opening -- we are planning to open (technical difficulty) [5] bank branches that represent approximately ARS 100 million [a year].

Sorry. I didn't get that. So ARS 400 million is for new initiatives of which ARS 100 million is for the branches? Is that what you said?

Exactly. Exactly ARS 100 million out of those ARS 400 million are focusing on opening branches.

(Operator Instructions) Our next question comes from the line of Alejandra Aranda with Itau.

If I may, 2 questions regarding how you're seeing the dynamics so far in the second Q, first on loans? And then also if you may comment a little bit on the dynamics of deposits going forward, given the change that we saw in the first Q on your strategy.

In terms of the dynamics, we see everything proceeding according to plan. We don't see any extraordinary things. In terms of deposits, our expectations -- I mean, we have a very stable basis of deposits and a highly atomized basis coming from our repo portfolio -- or repo business.

From a sector perspective, we -- what we expect is as inflation comes down and interest rates become positive that, that will continue to strengthen as people is -- if people have more disposable income and, therefore, more savings capacity. We still have a highly untapped opportunity in terms of growing deposits with wholesale.

We've actually mentioned in several calls in the past, we tended to cancel them because they were too expensive and we preferred always [to review notes for the same] equivalent cost, we were able extend tenors and have a much more stable source of funding on that end. But in general, we're growing at very good rates, well above the industry and well above inflation, year-on-year in deposits. So the dynamics still continue to be quite strong.

Okay. But basically, you don't see any more room for time deposits to remain flattish, on the next quarters and swapping them into -- for current account deposits. We should start to see that picking up?

Okay. [The answer to your question] I mean, that is a dynamic that will depend on the level of interest rates. As you know, part of the mutual fund industry as a result of these new regulations at the Central Bank changed long-term deposits to checking accounts, which are remunerated checking accounts. And we saw -- we took very good advantage of that, especially at the beginning of -- in January and February. [And funny that we could see] other banks started to enter in competing arena and take -- taking a portion of that.

I think that going forward, the outlook will depend in terms of the way interest rates behave. I mean, we're quite active in that market. As I said, we were very quick to react and we took very good advantage of that and made very, very healthy profits from that business. And we see it more as an opportunistic business rather than as a more structural -- structural business.

Okay. Perfect. And one more question. I think you touched upon this point on the previous question, but I couldn't hear very well. In terms of personnel and hiring, how should we think of it in the coming months?

Well. As you know, part of the ARS 400 million that Alejandra mentioned, of the investments, part of it had to do with -- part of it were investments, part of them were OpEx, and even within the OpEx was the hiring of staff. Part of the hiring occurred in the first half, but we [will see] a part of it to come in the following quarters.

Okay. Should we see that as growing in a [particular] manner during this Q around 1.5%?

Alejandra, Alejandra speaking. You will see higher levels than that percentage because seasonality affects everything. And the very first months of the year are more difficult to hire people. As we announced, we are strengthening our [embedded] commercial channel. And on that topic, we are making the selection of people. So you will see an increasing percentage of that.

But bottom line, regarding sale forces and our commercial -- and for the commercial channels, we are planning to increase our headcount by around 70 to 100 people. Bottom line that money is about -- around ARS 130 million additional on our administrative expenses [basis]. This is included within those ARS 400 million announced last year.

[indiscernible] to reach our guidance for the year.

Thank you. (Operator Instructions) I'm showing no further questions. That does conclude our question-and-answer session. I will now turn the call back over to Jorge Ramirez for closing remarks.

Thank you for joining us today, and we appreciate your interest in our company. We look forward to meeting more of you in 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 conference. Thank you for your participation. You may disconnect your lines at this time.