Grupo Supervielle SA (SUPV) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Grupo Supervielle Fourth Quarter 2017 Earnings Conference Call. A slide presentation will accompany today's webcast, which is available in the Investor Relations section of the 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'd 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, CFO. 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.

Fourth quarter '17 was another good year for us. Key highlights include improved efficiency ratios; strong deposit growth, along with solid, profitable loan growth. Our business continues to benefit from the strength of our franchise, along with improved economic conditions in Argentina, which is driving strong demand in corporate loans. Persistent inflation, however, is impacting the consumer finance business, although this higher risk is fully priced in. Overall, a solid quarter, and we are encouraged with the opportunities we see ahead of us.

Turning to the macro environment on Slide 4. We continue to see broad-based improvements in economic activities in Argentina. Construction, up almost 10% annually, continues to lead growth, mainly fueled by public sector infrastructure works followed by wholesale and retail sales, along with agriculture and other primary activities.

Consumer demand, however, continues to lag affected by persistent inflation and a soft job market. While inflation continues to slowly trend down, it has proven more persistent than originally targeted by the monetary authority. The Central Bank originally raised the monetary policy rate by 150 basis points to 27.8% in October and another 100 basis points to 28.8% in November. Month inflation increased sharply to 3.3% in December from 1.3% in November, reflecting higher utility tariffs. With annual inflation declining from -- to 24.8% from 41.2% in 2016 but still far from the 5% target for 2019, at year-end, the government and the Central Bank postponed reaching the 5% inflation target by 2020, thus, moderating the pace in the reduction of inflation. As a result of this realignment, the policy rate was later cut by 150 basis points to 27.25% in January and remains unchanged.

Moving on to the Argentine financial sector on Slide 5. System loans to the private sector expanded by 52% year-on-year and 14% sequentially above inflation. The latter was mainly driven by retail loans, up 16% with growth in mortgages, accelerating to an impressive 34%, reflecting healthier economic conditions. Actually, inflation-adjusted mortgages, which were launched in the fourth quarter of 2016, have shown impressive growth in recent month, reaching 42% of total mortgages at year-end.

System corporate loans continue to post solid growth, up 12% quarter-on-quarter. System deposits, in turn, were up 27% year-on-year and 12% sequentially, lagging behind loan growth rates. U.S. dollar-denominated system deposits rose 10% sequentially, while peso-denominated deposits were up 13%. Overall, we are pleased with our performance with year-on-year loan growth beating both the system as well as our guidance target, while Supervielle's deposit growth more than doubled industry growth.

Turning to Slide 6. Our business growth continues to reflect a recovering economy. Additionally, we have been deploying the funds from our latest equity offering. As a result of these events, we delivered robust loan growth expanding our loan book up 56% year-on-year. Sequentially, we posted loan growth of 13% following the third quarter expansion of 20%. Net growth in the quarter amounted to ARS 7 billion.

As you know, an important element of our strategy is to develop closer relationships with our corporate customers so that we become their principal bank. Our strategy is paying off as we are seeing strong growth. Importantly, corporate loans are gaining share of our total loans, up 200 basis points from the prior quarter and now account for 51%. Less than 2 years ago, corporate loans represented only 35% of our portfolio. SMEs and middle market keep pace, representing a stable 65% share of our corporate loan book.

As we continue to expand our customer base and build long-term client relationships with a focus on high-margin SMEs, this quarter, we launched a new customized value proposition focused on serving the specific needs of transportation companies. During the quarter, we also opened 2 new branches in the city of Buenos Aires, in areas with large concentrations of SMEs as we deepen our focus on this attractive segment.

Moving on to Slide 7. We delivered strong growth across all segments of our loan portfolio, posting double-digit sequential growth in corporate and retail, further supported by consumer finance. Our corporate loans remains the strongest growing segment, up 17% sequentially and 63% year-over-year. Growth was mainly driven by factoring, our largest corporate loan product and the second-largest overall.

Retail loans also performed well, increasing 11% sequentially and 14% year-on-year. Personal loans maintained the solid dynamics seen in previous quarters, while credit cards showed a seasonal pickup, in line with industry trends. Mortgage loans, in turn, posted an impressive performance, up 132% sequentially as we continue to build this business with the goal of becoming one of the market leaders in the new -- in this new market for Argentina. Based on our internal estimates, we rank among the top 5 players with a 10% share within private sector banks. We are very optimistic about the growth potential of this product driving loyalty and cross-selling.

Consumer finance loans were up 8% sequentially, mainly driven by personal loans while credit cards remained soft. Taking into account the sale of ARS 571 million performing personal loan portfolios in fourth quarter '17 as part of the funding strategy, consumer finance loans would have increased 17% sequentially. Profitability in this segment almost tripled to ARS 180 million in 2017 from ARS 68 million in 2016 as the higher risk we are seeing in consumer loans is priced in.

I will now hand off the call to Jorge Ramirez, who will review our funding and profit and loss. And afterwards, I will discuss guidance. Please, Jorge, go ahead.

Thank you, Patricio. Good day, everyone.

Moving on to funding on Slide 8. Growth in deposit accelerated to 20% sequentially and 57% year-on-year, almost doubling industry growth rates. Our loan-to-deposit ratio, in turn, declined to 104%, returning to levels prior to the equity follow-on, reflecting the significant growth in deposit balances. In 3Q '17, this ratio had increased to 109% as we began to apply the proceeds from the follow-on to fund loan growth.

Please turn to Slide 9. Our sizable retail franchise supports a highly atomized deposit base with

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Ladies and gentlemen, thank you for standing by. The conference will resume momentarily. Again, thank you for standing by. The conference will resume momentarily.

Slide 9, okay. Our sizeable retail franchise supports a highly atomized deposit base, with 54% of deposits coming from individuals. This, along with the focus on driving transactionality with the goal of becoming our clients' primary bank, results in 55% of the total deposits, bearing either 0 or low interest rates. Funding is further supported through wholesale special checking account deposits.

Our diversified and competitive retail-based deposits franchise has proved to be one of our key competitive advantages and a key element supporting our strategy going forward.

Moving on to the P&L on Slide 10. Gross financial margin for the quarter was up 23% sequentially and 50% year-on-year. Total NIM increased 90 basis points sequentially to 19.4%, driven by a combination of factors: repricing of Argentine pesos denominated loans reflecting the higher interest rates environment; lower cost of funds despite the 170 basis points increase in the BADLAR rates, supported by the accelerated growth in retail deposits and funds from the follow-on, which reviews the need to take additional interest-bearing deposits; and higher investment portfolio NIM, reflecting the largest share of Argentine peso denominated loans. For full year, NIM reached 19.1% in the mid-range of our 18% to 20% target guidance.

Moving on to Slide 11. We saw a pickup in net service fee income growth rates in the quarter, up 33% year-on-year, 830 basis points above inflation. The main drivers behind this growth were fee repricing; the good performance in bundled products as we continue to drive higher transactionality, along with higher sales of nonfinancial services. Positive business dynamics in checking accounts as well as debit and credit cards, also contributed to this good performance.

Income from insurance activity accelerated, increasing 37% sequentially as we continue to see good traction in gross written premiums of voluntary insurance products, up 43% quarter-on-quarter and more than doubling year-on-year, more than offsetting the 27% decline in credit-related premiums.

In terms of asset quality on Slide 12, while total NPLs remained stable at 2.8%, cost of risk increased 10 basis points sequentially to 4.5% in the quarter. As our consumer finance segment, which represents around 12% of the loan book, revenue is impacted by persistent inflation and soft job recovery, in line with what we are observing for this segment industry-wide.

On the 2 charts on the right-hand side of the slide, we saw how lagged delinquency in our consumer finance business continues to follow more or less the same trend of previous years but at higher levels than last year. Note, this higher risk is fully priced-in in interest rates we charge in this segment. Also note that the personal loans NPL ratio was negatively impacted by the sale of our performing portfolio that Patricio mentioned earlier.

Excluding this, personal loan's NPL ratio would have been 18.8% instead of the reported 21.4%; and total NPL for consumer finance would have been 14.3%, similar to the level posted as of September 2017. By contrast, NPL ratios improved in retail banking and remain stable at low levels in corporate loans. As anticipated, coverage increased to 91.8% from 88.9% in the previous quarter. For fiscal year 2017, cost of risk reached 4.2%, up 20 basis points from 2016 levels and in the high end of our guidance for the year.

Now moving on to expenses on Slide 13. We continue to benefit from operating leverage as the business grows. As a result, the efficiency ratio improved by 170 basis points sequentially and 430 basis points year-on-year to 60.2% in the quarter. This higher efficiency was achieved despite the 16% sequential increase in the administrative expenses that resulted from wage increases to catch up with higher inflation; a 7% increase in our headcount, mainly sales force and indirect commercial channels to drive growth; and the 19% increase in nonpersonnel expenses, reflecting higher turnover tax, advertising and publicity expenses. For the full year, the efficiency ratio stood at 63.3% in the low end of our target range of between 63% to 66%.

Please turn to Slide 14 to review profitability. For almost 2 years since we first began holding these quarterly calls and discussing our strategy, we have been successfully executing on what we laid out. Our last quarter was no exception. Our net income increased 60% year-on-year and 36% sequentially. On a comparable basis, when excluding the nonrecurring gain from the sale of our real estate trust in the 4Q '16, net income almost doubled. Return on average assets was up 60 basis points quarter-on-quarter and 4.1% -- to 4.1%, while return on average equity was impacted by the temporary dilution resulting from the recent equity offering, which increased equity by almost 70%. Note that 3Q '17 include 15 days of dilution, while the 4Q '17 was fully impacted by a higher capital base.

Moving on to capitalization on Slide 15. Our consolidated pro forma Tier 1 capital ratio declined to 18.4% at year-end from 19.5% at the close of 3Q '17, which reflected proceeds of $342 million from the September 2017 equity follow-on. Funds from the holding company level reached ARS 4.3 billion and are available for further capital injections in subsidiaries. These funds are currently invested in low-risk mutual funds and Central Bank notes and also allow us to take advantage of tax losses carried forward at the holdco. In the fourth quarter, we made capital injections for ARS 2.6 billion in Banco Supervielle and CCF, our consumer finance company.

Turning to Slide 16. Summing up, we're very pleased to have delivered another good year of financial results that met or exceeded our 2017 guidance. Our similar focus and objective is to create and enhance the value of our company for the benefit of shareholders. We achieved significant results on a number of fronts in 2017 and are encouraged by the attractive opportunities we see ahead for us.

Now let me turn the call back to Patricio, who will go over our guidance for 2018, and then we'll open the call for questions. Thank you.

Thank you, Jorge. Let me now share with you our guidance for 2018 and some of the underlying assumptions, which you can see on Slide 17.

The market expectation on us is for GDP to grow by 3% this year, with annual inflation trending down to 19.4% and the average BADLAR reaching an average of 21% in December. Based on these macro assumptions and our focus on executing on our growth strategy, we anticipate sustained loan growth in the range of 45% to 50%.

In addition to organic growth, we're always assessing attractive inorganic opportunities to complement our product offering, geographic coverage or our digitization strategy as we -- and we will continue to do so in the future. Our view is that this administration would succeed in further bringing down inflation over the next 2 years. This presents an opportunity to position ourselves ahead of a stabilized macroeconomic environment and capture market share.

In the near term, the consumer finance segment remains affected by persistent inflation and soft job recovery, resulting in higher cost of risk, which is fully priced in. At the same time, we expect asset quality indicators to remain stable across our other business segments as we closely monitor our portfolio to assure healthy loan growth. The combinations of these factors alone -- along with our goal of progressively increasing coverage, is expected to result in a cost of risk of between 4.1% to 4.5% in 2018.

Despite declining inflation, we anticipate NIM to remain in the 18% to 20% range for this year. Our guidance also calls for additional operating leverage with the efficiency ratio reaching levels of between 55% to 59% for the full year.

As we continue to deliver on our profitable loan growth strategy, we expect net income to increase between 64% to 76%, reaching between ARS 4 billion to ARS 4.3 billion in 2018. This will present an implicit return on average equity of between 25% and 27%. Our Tier 1 ratio is anticipated to range between 14% and 15% at year-end as we continue to deploy the capital from the recent follow-on, equity follow-on, increasing our risk weight assets. This includes the 120 basis point decrease in the Tier 1 ratio, reflecting the impact on equity following the adoption of IFRS.

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

(Operator Instructions) Our first question is from Mario Pierry from Bank of America Merrill Lynch.

I have a question related to your loan growth guidance for '18. It represents a modest slowdown from where you delivered in '17, so I was wondering here if the slowdown is because you're seeing slower growth in the industry. Or are you, on purpose, going to turn a little bit more cautious as inflation has remained high? Also, if you could provide us with a breakdown of your expectations for loan growth in terms of the corporate, consumer finance and retail segments. And then I'll ask a second question later.

Mario, no, I don't think -- I mean I think you have to focus on it in terms of real-term growth. I real-term growth is more or less the same or even slightly above that. So again, as inflation continues to come down, nominal growth rates will also tend to come down, but I would focus more on the...

Real.

On the real growth rate that we're guiding. Second question?

No, breakdown. Breakdown.

Mario, if you will start, yes?

Yes. So no, the second part of the question was related to the growth that you expect for the industry. So are you gaining market share? Or do you expect to maintain market share in '18? And if you can break down the growth between what are you expecting for the corporate segment, consumer finance and retail segment.

In terms of market share, we expect to continue gaining market share. We are expecting that this growth -- that our growth will continue to be above industry growth, or more in the line between 40% to 45% for the industry and for the year. So we're expecting to grow above that. In breakdown, we're not giving -- yes, we're more or less maintaining the breakdown that we currently have.

Okay. And then on your release, you mentioned that you had 10% market share of all mortgages originated by the private sector. Can you just give us a little bit more details on what kind of interest rates and loan to value that you are offering?

In terms of loan to value, we are giving between 70% to 75%; average is around 70%. In terms of interest rates, we're currently charging closer to 7% above UEA.

7% above inflation?

Yes, above that. I mean that's where people who get their payroll with us.

Our next question is from Nicolas Riva from Citi.

My first question is on taxes. You had a quite low effective income tax rate this quarter. You mentioned in the press release that you used some tax loss carryforwards at the holding company. My question is if you expect to use more of these tax loss carryforwards this year. And what's your outlook for the effective income tax rate this year considering the tax reform? And then I will have a second question.

Yes, Alejandra speaking. Yes, as we mentioned, the temporary investments of the proceeds from the equity offerings allowed us to accelerate the use of our tax loss carryforward; and as a consequence, we were able to post a decline of income effective tax. That loss carryforward are about to expire during 2018. So as a combination of this situation, plus the decline of the corporate tax coming from the last reform, our effective tax for the current year is expected to be still slightly below 30%.

Okay. Slightly below 30%. Okay. Great. And then my second question is on the net interest margins. If I look at your guidance, the upper part of the guidance, that implies an expansion in the net interest margin of about 90 basis points this year. So my question there is, what makes you think that margins could widen this year despite the scenario of lower interest rates? And if you can discuss a bit competition among banks in terms of spreads, really, for this year.

It's a combination of things. It's Jorge speaking. It's a combination of things. One is we're expecting a lowering in the interest rate for funding for the second half of the year as inflation continues to come down. Remember that one thing that differentiates us from the bulk of our publicly-leased competitors is the proportion of personal loans that we have on our balance sheet, and those are long-term fixed rate. So repricing of funding has a very big impact for us in NIM, okay? So as that comes down, that helps. The other thing is, again, the impact of the proceeds of the follow-on that provides funding at zero interest rate essentially, okay? So all those impacts combined explain this implicit expansion.

Our next question is from Frederic De Mariz from UBS.

I have a couple of questions. The first one is -- also has to do with the loan growth, but I wanted to focus more on the liabilities side. You mentioned that you're expecting a Tier 1 ratio around 14%, 15% for the end of this year, 14%, 15%. So I wanted to get your latest thoughts on what would be a comfortable level of capital and at what level you would be expecting to come back to the market. We saw that the depletion in capital is obviously quite fast considering the good growth that you have been posting.

And together with this, not so much on the capital but on the funding side, what are you seeing in terms of market dynamics? Are you sensing more competition for deposits from the peers, from the other banks? Are you seeing any pressure for the time deposits? I wanted to get your thoughts or some flavor on the local market for the funding side. And then I'll get back with my second question.

Okay. Regarding capitalization, our comfort levels are between 11% to 12% for Tier 1 capital. We are not expecting to have to raise capital again or go back to the market unless we do a sizable acquisition -- we always say that -- or if we are growing at a much faster rate than we had originally projected. Those are always the 2 underlying reasons at which we would consider going back to the market. And we believe if that's the case, we will go back to the market for the right reasons, and we expect a warm welcome from our investors as -- it has been the case in the past follow-on.

In terms of funding, what we're starting to see with this change and realignment of the Central Bank's monetary policy is that the interest rates for LEBAC is starting to converge towards the BADLAR rate. So we have not seen a significant drop within the BADLAR rate. It has remained more or less stable, where the LEBAC rate has been slowly coming down, so compressing the spread there. So in terms of competition, we're not seeing a wide competition for funding, as we thought we commented in the script. And so we doubled our growth rate in deposits compared to the rest of the market.

So for us, our funding base, especially having such a diversified retail deposit base at very low cost, we believe it's one of our key competitive advantages as a bank and enables us to compete against the larger banks despite being smaller in size. But we're not yet seeing a high pressure on competition for funding. In any way, one of the things that we are always considering is funding ourselves in the international capital markets, so that's always another possibility that will complement our funding strategy.

That's great. That's very good, Jorge. And let me follow up with the asset quality as well. You mentioned the guidance for this -- for cost of risk at 4.1% to 4.5%. I was more curious to hear your thoughts in the long term when you think of the profile, the risk profile and the appetite that you have for growth and considering your type of client base. Where do you think a fair cost of risk would be? And what kind of appetite for risk do you have?

I mean in the long term, one of the things that we expect is that cost of risk for the consumer finance segment should tend to stabilize, especially as disposable income comes up, interest rates will come down, so the (inaudible) should restart in an expanded loan growth, plus a much more stable lower income.

The other thing is, remember, that we're still below 100% in coverage. So for the next 2 years until we reach a 100% coverage, we will increase in coverage, and that also has an impact on our guidance of cost of risk. You can say, no, to do that, we need to increase provisions, okay? So going forward, it should be -- I mean, it should stabilize around the 4% mark and probably between -- ranging between the 3.5% to 4% mark.

Our next question is from Ernesto Gabilondo from Bank of America Merrill Lynch.

Three questions from my side. (inaudible) strong loan growth between 45%, 50%, but how should we think about the net interest income growth? Secondly, net fees expanded nicely, 42% in 2017. So what are you expecting for this line in 2018? And finally, in insurance activities, we noticed they fell in 2017 due to the new regulation. What are you expecting for this line into 2018?

Ernesto, Alejandra speaking. The growth in margin, as you know, we have a (inaudible) played that imply important, relevant increases in margins well above of the increases in administrative expenses, and it is shown clearly in our guidance of efficiency. Sorry?

Sorry to interrupt you, Alejandra. Just in terms of the correlation that we should expect about the loan growth and the net interest income growth, not really talking about the margins but the net interest income growth, how should we think about it?

Yes, what I was hearing, I think your point regarding that our net income is expected to grow significantly in similar patterns that the one that you observed during 2017. Even though I cannot give you guidance regarding margin income, what I give you is efficiency is a good proxy to imagine that our margins will be growing between high 50% to 60%. In terms of fees, the answer is similar. We are expecting to post increasing fees by low 30s.

Okay. Perfect. And how about insurance activities?

Insurance activities will imply the number that I mentioned regarding fees.

Loan size also?

I am sure if it's going to be...

If those were 2 -- if those 2 were combined, fee income plus income from insurance activities. Because despite the fact of the regulation, the fade-off of the credit-related portfolio ends in 2018, early 2019, okay? And so you're still going to see some impact in terms of some revenue being lost from that part of our business, which will be more than compensated by the growth in the voluntary insurance business.

Our next question is from Rafael Frade from Bradesco.

It's just a follow-up from previous questions regarding your funding strategy. As you showed, you did very well in terms of funding, especially compared with the industry in the quarter. I would like to understand why you securitize part of your portfolio, again, given that you are doing so well in terms of funding. What's the strategy going forward? And how easy is to eventually securitize other portfolios if you have some pressure in terms of funding?

Rafael, no, the securitization has to do with the fact that -- remember that we operate our consumer finance business through a separate legal entity that does not raise retail deposits. So securitization is a way for us to secure a funding for that part of the business. And that is something that we are always measuring whether we do it if it's more convenient from a cost of funding perspective as opposed to issuing medium-term note or taking deposits from institutional investors.

(Operator Instructions) And our next question is from Yuri Fernandes from JPMorgan.

My first question is regarding IFRS. Can you explain what's the main difference between the 4Q estimates impact versus the previous one? Just to put some numbers here, I guess now you are anticipating kind of 5% impact share equity. This was kind of 2% in the third quarter. So what has changed here?

And my second question is regarding M&A. You just commented like on M&A potentially driving further capital increase. I guess that was just a comment. But are you seeing any potential target in Argentina for sale? Is that something that Supervielle is interested on doing like growing not organically but through M&A? And that's it.

Okay. I go with the IFRS question. Yes, as we mentioned, the numbers of IFRS, as I showed, our shareholder equity by December is a 4.9%. It's above the one that where we see maintenance of September. We're reporting every single quarter during the year the assessment, and as a consequence of the activity that the company have, the adjustment has changed.

In this particular case, the increase quarter-over-quarter has to do with, firstly, higher termination benefits on human resources; so some retirement plans and we recorded during the last quarter, and we didn't have as of the third quarter of 2017. Plus, the deferral of income from the sales of financial losses we've record that we mentioned when we commented on consumer finance. So these 2 elements increased the effects on the equity regarding IFRS.

On the other hand, the positive assessments that could have increased, could have compensate at some point this higher decrease, had to do with the sale of real estate property. The point here is as of September, we have properties that we assume to update at market value in our shareholder equity. But during the last quarter, we sold those properties. So we don't have any more those properties to consider because of the profit of that sale is implied in the income of the fourth quarter.

So I will say that these 2 elements are the ones that are being -- they were here to change the landscape between one quarter or the other quarter. Anyway, I would like to highlight that all the guidance provided for 2018 have already incorporated all the changes in the accounting policies and adoption of IFRS.

And regarding M&A?

Yes, this is Patricio. Regarding M&A, well, basically, we view ourselves as consolidators. And in terms of inorganic opportunities, I mean the core of our strategy, we stated that it is organic growth. And we continue to believe that it will be -- it will continue to be organic growth because of such a low penetration of the credit in the economy.

However, we're always looking to opportunities to complement, let's say, for instance, our product offerings, or let's say complements the value chain that we have in our franchise or maybe expanding to new geographic areas. So this is something that we look into it, and we always do. And it might be possible that at one point, there will be an acquisition.

(Operator Instructions) And if there are no further questions, I'd like to turn the floor back over to Ms. Bartesaghi.

Thank you for joining us today, and we appreciate your interest in our company. We look forward to meeting some of you next month at the Investor Day that will be held in New York City and simultaneously in Buenos Aires. In the interim, we remain available to answer any questions that you may have. Thank you, and enjoy the rest of your day.

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