Grupo Supervielle SA (SUPV) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Grupo Supervielle Second Quarter 2017 Earnings Conference Call. A slide presentation will accompany today's webcast, which is available in the Investors 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 Investor Relations Officer. 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 of Directors. 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 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, Ana. Good morning, everyone, and thank you for joining us today. If you're following the presentation, please turn to Slide #3.

We reported robust results which underscore our progress on driving profitable growth with comparable net income doubling year-on-year. NIM expansion and fee growth, along with efficiency gains, were the main drivers behind this good performance. Keeping our emphasis on profitability, we continue to expand high-margin loans while making inroads in developing an integral relationship with corporate customers with the goal of becoming the principal bank. We maintain a vigilant focus on credit risk while also attracting the low cost retail deposits. Based on our solid performance to date and our optimistic economic view of Argentina's economic recovery, which we expect will boost higher loan demand. We are increasing our loan growth and net income guidance for the year. I will discuss this in more detail shortly.

Turning to the macro environment on Slide #4. We are encouraged by the economic recovery underway in Argentina. We saw a strong pickup in economic activity in the quarter, while inflation is trending down from 41% last year to a market-consensus estimate of 22% for the year. Industrial activity as per the INDEC was up 6.6% year-on-year in June, marking the highest reading in almost 6 years on the back of growth in motorcycles, automobiles, construction as well as the metal, mechanical and cement sectors among others.

Consumer demand continues to lag behind showing a diverse behavior with motorcycles we had received in automobile growing a high double-digits ranging between 35% to 50%. By contrast, white goods increased only 13% while apparel, along with food and beverage, contracted 4%.

Moving on to the Argentine financial sector in Slide #5. System loans to the private sector rose almost 41% year-on-year and expanded 12% sequentially following the seasonal deceleration experienced in the first quarter. Quarter-on-quarter, industry growth was largely driven by corporate loans, up almost 16%. U.S. dollar-denominated system corporate loans were up 34%, while promissory notes rose 11%. Retail loans in turn expanded 9% sequentially. System deposits remained flat for the second consecutive quarter and were up 38% year-on-year. Growth was driven by Argentine peso savings account deposits which more than offset a 25% decline in U.S. dollar deposits, primarily due to lower U.S. deposit in the public sector.

Turning to Slide #6. Our focus on driving profitable growth resulted in year-on-year loan growth of 51%. Sequentially, loan growth showed a seasonal acceleration growing to 8% from 6% last quarter, and I will discuss this in more detail shortly. Aligned with our strategy of focusing on the dynamic SMEs and middle market, we continue to drive growth in these segments, which increased our share of the total loans to 65% from 59% in fourth quarter 2016.

Now turning to Slide #7. Growth this quarter was mainly driven by a solid performance in our corporate and retail portfolios. As anticipated in our previous call, corporate loan growth accelerated in this quarter by almost 10% sequentially and 78% year-on-year, mainly driven by the pickup in factory loans. This is our largest product in corporate loans and the second largest on our total loan book. Additionally, strong demand in foreign trade finance and U.S. dollar-denominated loans continue to support growth in our corporate loan book. We also delivered sustained growth in retail loans, up 8% sequentially and 32% year-on-year, underpinned by personal and credit card loans.

Let me also highlight the good performance in mortgage loans. Although coming from a very low base, mortgage almost doubled quarter-on-quarter, which we believe is a clear indication of consumers improving medium- and longer-term view on the economy. Consumer finance loan growth rates, however, decelerated to almost 3% from 19% in the previous quarter, but still expanded 60% year-on-year.

Weak consumer demand, which is still lagging the economic recovery, resulted in softer supermarket traffic as price-sensitive consumers are temporarily turning toward wholesalers. We expect this trend to reverse as consumer sentiment improves. Let me highlight the strong increase in gross intermediation margin for this segment, which was up 174% year-on-year and 8% quarter-on-quarter.

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

Thank you, Patricio. Good day, everyone. Moving on to funding on Slide 8. We continue to drive strong growth in our deposit base, up 55% year-on-year and 10% sequentially, well above market levels. Our loan-to-deposit ratio declined 360 basis points sequentially to 99%, driven by strong growth in checking and savings account balances.

Year-on-year, growth in US dollar-denominated deposits up (inaudible) reflects the success of the Tax Amnesty Program. As shown on Slide 9, our revised legal franchise continues to support quality funding with the greater share of low-cost retail deposits. Retail and senior citizen deposits represented 58% of a total deposit base at the end of the quarter, up over 200 basis points from last March. The share of non or low interest-bearing deposits increased to 64% from 56% in the first quarter. Our institutional deposits declined this year by 130 basis points to 24%, supporting cost of funding.

Turning to the P&L on Slide 10. Total NIM expanded 110 basis points sequentially to 19.8% in second quarter '17, despite the 20 basis points decline in the BADLAR rate in the period. The key drivers behind this were: first, a 50 basis points expansion in peso-denominated loan portfolio NIM to 23.9%, which represented over 80% of total loans; and second, an 840 basis points increase in investment portfolio NIM to 18.7%, driven by better returns and high volumes reflecting our increased liquidity position as discussed before.

Gross financial margins for the quarter was up 64% year-on-year and 11% sequentially. Other 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 decline in trends of the BADLAR rates. This good performance reflects the contribution from average interest-earning deposits -- average interest-earning assets, which grew 11% above the 8% increase in average interest-bearing liabilities, including low or noninterest-bearing deposits.

Organic interest-rate return on assets decreased 10 basis point. Gross financial margin benefited from a 80 basis points decline in rates of interest-bearing liabilities.

Moving on to Slide 11. Our net service fee income ratio improved sequentially by 30 basis points to about 31% in the quarter. Net fee income growth [attracted] to 14% quarter-on-quarter and 55% year-on-year. Repricing, along with robust dynamics in checking and savings accounts, credit and debit card loans following the elimination of regulatory restrictions on fees last September, along with a growth in noncredit-related insurance products, were the main drivers behind higher fees. Note that the mandatory reduction in merchandise discount rate effective last April resulted in a sequential decline in credit and debit card fees that was more than offset by noncredit insurance products. This good performance in noncredit insurance also dropped a 3% sequential increase in income from insurance activity, reversing the negative trend experienced over the past 2 quarters, while regulatory changes affected credit-related insurance.

Now moving on to asset quality on Slide 12. It is important to reiterate that we maintain a vigilant focus on asset quality, closely monitoring our business risk profile, even with segment seasonality we experienced. The year-on-year improvement in NPL ratios of our retail and corporate loans resulted in a 20 basis point decline in the total NPL ratio. These 2 business segments account for 87% of the total loan portfolio. Sequentially, the NPL ratio remained stable at 2.9% quarter-on-quarter, despite the seasonal deterioration in consumer finance loans. This segment accounts for 13% of total loans. In the banking terms, posted another sequential improvement in NPLs around 40 basis points, while corporate NPLs remained unchanged. Remember that asset quality in the consumer finance business tends to show high delinquency rates in the first half of the year and then adjust down as salary bargaining agreements for catch-up inflation, improving consumers' disposable income and their ability to repay these loans. In fact, 30-days lagged delinquency in personal loans, so it started to show some improvement in July.

Cost of risk declined from 5% in 2Q '16 to 4.2% this quarter, but increased from 3.9% in the first quarter this year. This resulted from higher nonperforming loans driven by the seasonal delinquency in consumer finance that I just mentioned, and 100 basis points increase in the coverage ratio to 88%. While cost of risk continue to reflect the seasonal factors, we are confident we are on track to meet our full year guidance.

Turning to expenses on Slide 13. The efficiency ratio improved to 65% in the quarter from pre-IPO levels of 73.8% in first quarter '16, and 67.5% in the first quarter this year. Administrative expenses were up 7% quarter-on-quarter, mainly reflecting: wage increases from the collective agreement implemented at our nonbanking subsidiaries since April; a 2% increase in our headcount in indirect commercial channels to support growth, particularly of our sales force; and a 15% increase in nonpersonal expenses, many reflecting the higher security services and maintenance expenses, along with higher lower advertising and marketing expenses.

Please turn to Slide 15 to review profitability. We're pleased that net income for the quarter more than doubled to ARS 580 million year-on-year and rose 52% quarter-over-quarter as we continue to successfully execute in our strategy. Excluding 3 nonrecurring items that benefited comps, our bottom line increased 202% year-on-year and 22% quarter-on-quarter. Results for the quarter benefited from a one-time gain of ARS 73 million from the sale of 2 noncore assets, a property and the subsidiary. Sequential growth was also benefited as first quarter '17 was penalized by ARS 50 million foreign exchange loss in connection with the medium term note issuance that quarter. As anticipated, we achieved an increase in return on average equity up to 31.2% in the quarter from 21.8% in first quarter '17. Remember that net income is seasonally weaker in the first half of the year and improves in the second half.

In terms of capital inflation, as shown on Slide 15, the consolidated pro forma Tier 1 capital ratio adjusted to 11.6% from 12% in 1Q '17 as we continue to drive loan growth. Funds at the holdco available for further capital injections, subsidiaries reached ARS 805 million at the end of June. These funds were invested in low-risk, short-term financial instruments, which posted 21% annualized return in the quarter. These also allows us to take advantage of tax losses carryforward at the holding-company level.

I would now like to turn the floor over to Patricio to discuss guidance, and then we'll open the floor for questions. Thank you.

Thank you, Jorge. Moving on to our outlook on Slide 16. Based on the solid fundamentals we've seen to date, we are optimistic in Argentina's economic recovery, which we expect will boost higher loan growth demand. These, along with our solid performance to date and the seasonality of our business results accelerate towards the second half of the year, we are increasing our guidance for loan growth and net income for 2017. We now expect loans to expand in the range of 43% to 50% from our previous target of 38% to 45%. Our net income guidance is now ARS 2.2 billion to ARS 2.4 billion from our previous ARS 2.1 billion to ARS 2.3 billion expected range, which calls for an implicit return on average equity ranging from -- between 28% and 30%. Our cost of risk, mean efficiency and Tier 1 ratios remains unchanged.

We are now ready to take questions, please. Operator, please open the line for questions.

(Operator Instructions) Our first question is from Frederic De Mariz of UBS.

I have a couple of questions. The first on the capital base. We saw your plan to raise more shares in the future. I wanted to get a sense from you in terms of timing? What are you looking at in terms of triggers to launch the capital rates? And also, I understand that the amount that is approved is quite high, so I wanted to understand if you're considering doing only a partial capital raise? Or you looking at the full amount? In other words, I'd love to know what you think would be a comfortable Tier 1 ratio going forward? So that's on the capital. The second question I have is on asset quality. We saw an increase in a cost of risk. You commented a little bit on asset quality and on growth. I just wanted to understand from you, what are you seeing -- what are you hearing from your clients, be it individuals or companies? And is there any sector or any region that's concerning you? I just wanted to understand that increase in provisions.

Okay. Frederic, thank you for your questions. Regarding the first question, at this time, there's a market conditions that when we see our new strategy for the next year, so our intention is not to raise the full amount that we filed. The reason that we filed a larger amount is because we are not yet a [1 million share issuer] for SEC, so that requires us to make a filing that could cover 2 to 3 year period. And remember that, that filing also includes potential debt issuance, it's not just equity. So at this stage, we are definitely not thinking in terms of raising the full amount of capital that we have to require for regulatory legal reasons asked for approval. But definitely, it's not what we have in mind. In terms of the timing or monitoring the markets, I think that the markets might have entered into a wait-and-see mode regarding the election outcome. So we can't do more during that. We also hope that all these things that are happening within U.S. and North Korea might play -- I mean, they're clouding out a little bit the horizon. So again, since we don't need the money, we don't need the money definitely to achieve the outlook for this year. We have good timing in terms of -- or good leeway in terms of deciding when to go to the market.

Regarding your second question, no one -- I mean, there are a couple of things to be considered here. First of all, clearly, the economy is on a rebalancing mode. I think it's -- I mean, you have sectors that are heavily -- rebounded very heavily like -- and the good thing is that it's not just sectors that have to do with medium- and high-income level economic segments of the population, but also from people from low-mid income levels. In terms of the growth that we saw in sales of motorcycles, these are not the large BMW's motorcycles that a high-income person would buy. These are 250cc or below that motorcycles, so that goes to the medium-low income segment. And that rebound that grew by 50% first half of this year compared to last year. So it's a pretty impressive rebound, or seeing lagging in terms of economic activity during the first half is essentially stable, like beverages, food, that kind of things, clothing and those of drinks. But as inflation comes down and disposable income improves, definitely we expect a much, much better second half of the year for those economic segments compared to what the performance was in the first half. So all those things considered, our drivers are optimism regarding performance of NPLs for the second half of the year, while we're reaffirming our full year guidance in terms of cost of risk. So we expect things to continue to improve. And if you cook that with the seasonality that the consumer finance portfolio has, it should call for a much better second half in terms of NPLs.

The next question is from [Ernesto Valé Lando] of Bank of America Merrill Lynch.

Three questions from my side. The first one is in terms of NIMs. I just want to know how do you see them evolving? How much NIM pressure are you expecting from lower interest rates? On my second question is related to expenses. As you mentioned, the increase was mainly due to the wage increases with the collective agreements, but where do you see these lines growing in the next quarters? And what should we expect for the rest of the year? I don't know if it should be more in line with inflation. And finally, a question on the political side. I will appreciate to hear your view on what's your perception on next elections?

Okay. You want me to take...

[Ernesto], Alejandra speaking, I will start with your question regarding expenses. Yes, as you mentioned, the evolution of our expenses are expected to be above inflation, because of all the initiatives that we have connected with the deployment of our strategy. We are focusing on launching initiatives that always are connected with generation of earnings. So even though you will see administrative expenses growing above inflation, they will also come along with increasing earnings. So looking forward for this year, you will see administrative expenses (inaudible) above inflation.

Okay. Regarding your question about NIMs. I mean, where I'm seeing them -- we will be seeing that for some time pressure on NIMs. One of other things that we have is that we have a mix that protects us better from NIM pressure, essentially because approximately 50% of our total loan portfolio comes from loans to individuals. And within that, the bulk of our needs comes from personal loans as opposed to credit cards. So those are high-yield loans and long-term, fixed-rate in pesos. So at any event, despite any pressure on NIMs, our expectation going forward is that volume growth in Argentina should more than compensate any drop in NIMs or any pressure on the NIMs. Because again, it's -- I think about -- holding (inaudible) and operational -- operating leverage play here in the sense that size of balance sheet is quite low in relative terms to the size of the economy. So it's a multiplied for a couple of magnitudes, orders of magnitudes in terms of the increase it should have going forward. So again, I think it's a trade-off between absolute spread and size of volume, and our expectation and going forward is that the volumes are going to more than compensate and it will...

Yes, Jorge, I would like to add on the way to -- this is Patricio, the way also to defend NIMs is to continue our strategy of trying to become principal bank of our clients, and which -- corporate clients, which will allow us to increase the -- continue increasing the low cost of checking account funding. And so I think this is also important, but please, Jorge, you want to ask the answer...

No, no, on the political side.

The political side, yes.

I mean, but the essentials in which we are working is that Cristina Fernández de Kirchner will be elected to the Senate. I think that the question remains whether or not -- what's the percentage that she is going to get in these elections. And whether or not the government will win the election this Sunday, and most importantly, in October. The -- I don't think we should be worrying these following elections in terms of the national scope and the problems of Buenos Aires in itself. At a national level, we don't have any doubts at all that the government is going to perform very, very well and win the election, and when you add all the votes from the different provinces, they are going to have a very, very good election, and they are going to outpace their followers or the next candidate from the opposition for probably -- for a double-digit difference. On a local level, one possible scenario -- it's a very tight race, and it's still -- all the polls that -- all the credible polls that you can see fall within the marginal statistics of error, so it -- they're showing a tie, so it could go either way, but it could be -- in our expectation, it should be a tight difference. Even for the likelihood -- even if the government loses the -- or loses for a couple of points the election next Sunday, which is a primary and it's mandatory, we're still confident that they might revert that situation for the October national elections, because of the level of rejection that Cristina Fernández de Kirchner is still generating in the bulk of the populations. She have approximately between 60% to 70% negative perception. What does this mean for -- Christina being in the center, what does this mean for politics going forward? We don't believe that that's per se a negative thing. In a sense, Cristina in Senate is a divisive period for the opposition, so it's preventing the Peronist parties to come together around one candidate. So probably, what this would mean for the government is that they will be able to continue reaching agreements with our governors of the -- governors of different provinces. I mean, they don't say this publicly, but governors in the provinces, in private, they would like the government to win against Cristina for a small difference. Because they will rule out Cristina as a potential -- for a future candidate for national elections with winning power, but will still give them the ability to be able to bargain with the government and negotiate that. So we understand that there is some nervousness in terms of what is Cristina doing here again, but I think we should focus in the fact that this is a midterm election, and the votes that Cristina might get in this -- at Sunday elections are probably all the votes she is ever going to get going forward. Unless the government really performs very poorly in the next 2 years, which are not -- which is not our scenario.

The next question is from Jorge Kuri of Morgan Stanley.

Wanted to get your impression on the competitive environment for credit pricing. We've seen now all of the publicly-traded banks report very strong credit growth numbers, most north of 20% growth in real terms, which is certainly a lot, and I do understand that the penetration of credit is very low. But just wanted to hear, what are you seeing in terms of price competition? Are you bumping against your competitors? Or are you still a pretty close environment, where you're working with your current clients and don't really have to go outside to get growth?

Jorge, thank you. I mean, we're still competing -- let us define it a little bit. We never cease to compete against our competitors. This was always a highly competitive environment, even though it was a close market. And the other reason for this was that in the past, we had -- I mean, competition was for all the fishes swimming in a smaller pond. I think the name of the game now is, we're starting to swim in a larger lake, and we still see good opportunities for us to continue growing with our existing customer base. Again, as you mentioned yourself, leverage in Argentina is pretty slow -- pretty low, both at the corporate level and at household levels. I read a report on -- I don't think it was one of your reports, Jorge, but the average debt in households in Argentina is $1,800. For a country with $15,000 of GDP per capita, that's in existence. So its -- so we still have plenty of room to continue growing. Again, we're going to see spreads coming down and interest rates coming down as inflation comes around, which is a logical process. But if you look at past history in Argentina, deposits -- every time we had deposits -- interest rates for deposits in real terms positive, domestic savings started to grow and in hand with that, credits started to grow. So again, it is a highly competitive environment, but it's still a competitive environment in which we're not -- we have not yield yet with a growth wall in which the growth is no longer profitable. I mean -- and we'll put a lot of focus on profitable growth, as this past quarter, we continue doing that, and we will increase this huge potential for future growth. I mean, look at investment levels, look at mortgages. I mean, mortgages are practically inexistent in Argentina. The level of investments in the past decade or so by companies has been also particularly inexistent. So all this is starting to happen, and will continue happening in the next 2 to 3 years. So I think in summary, my bottom line message is, despite the increased competition, we look pretty, pretty confident that all the growth, and not just ours, but in general, the financial industry is going to be able to deliver, it's going to be a very profitable growth.

(Operator Instructions) Okay. It appears we have no further questions at this time. I would like to turn the conference back over to Ms. Bartesaghi for closing comments.

Thank you for joining us today, and we appreciate your interest in our company. We look forward to meeting more of you during the coming months and providing financial and business update 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. Good bye.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.