Grupo Supervielle SA (SUPV) 2020 Q2 法說會逐字稿

Good morning, and welcome to Grupo Supervielle Second Quarter 2020 Earnings Conference Call. A slide presentation will accompany today's webcast, which is available in the Investors section of Grupo Supervielle 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 Ms. Ana Bartesaghi, Treasurer and IRO. Please go ahead.

Thank you. Good afternoon. Good morning, everyone, and thank you for joining us today. Speaking during today's call will be Patricio Supervielle, our Chairman and CEO, who will discuss the overall macro environment; and Mariano Biglia, our Chief Financial Officer, who will review our results for the quarter. Also joining us Alejandro Stengel, Second Vice Chairman of the Board; and bank CEO, and Jorge Oscar Ramirez, First Vice Chairman of the Board. Alejandra Naughton, Board member of several of Grupo Supervielle subsidiaries will also be joining us for today's call. All will be available for a Q&A session.

Please note that starting first Q '20 as per central bank regulation, we have been reporting results applying hyperinflation accounting in accordance with IFRS Rule IAS 29. For ease of comparability, we have restated 2019 results quarterly. And for the year, applying IAS 29 to reflect the effect of inflation adjustment for each period. Therefore, all results in this presentation are presented adjusted for inflation as of June 30, 2020, unless otherwise noted.

For your convenience, we have also included in our earnings report, managerial results in nominal terms. This means we are including second Q '20 financial results ex IAS 29 isolating the IAS 29 impact for the quarter and also showing quarterly figures for 2019 in nominal terms as they were previously reported until December 31, 2019. You can find more details on hyperinflation accounting in our earnings report filed yesterday after the close of the market as well as in the investor education presentation, we have uploaded to our IR site last quarter, along with the earnings materials for first Q '20.

Before we proceed, I would like to make the following safe harbor statement. Today's call will contain forward-looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties, including as a result of the COVID-19 pandemic, 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 Chairman, Patricio Supervielle.

Thank you, Ana. Good morning, everyone. Thank you for joining us today. We hope you and your loved ones remain healthy and safe as we navigate this global pandemic. If you're following the presentation, please turn to Slide 2.

We took early and decisive action to mitigate the impact of the COVID-19 crisis. I'm very proud of my team for the hard work and commitment as we navigate this challenging time.

First, we acted rapidly to protect the well-being of our employees and our customers, establishing protocols to promote safe banking and ensure the continuity of our operations. Second, we are supporting our customers through government-sponsored lending programs and undertaking a number of initiatives to support the health and welfare needs of the communities where we operate. Third, in this low-touch economy, we are rapidly executing our strategy to transform our company into a cutting edge, cost-efficient and agile player with the ability to continuously serve the evolving needs and aspirations of our customers. And I will discuss in more detail shortly how we are leveraging accelerated digital adoption in this new normal.

Turning to our financial performance. We delivered higher profitability this quarter despite the unprecedented overall environment. We continued to improve operating efficiencies supported by the streamlining undertaken last year and strict cost controls, all while continuing to invest in our digital transformation. During the quarter, we further revised our expected loss models to adjust for the current economic outlook and made additional COVID-19 specific anticipatory provisions that have resulted in increased coverage. We have taken an even deeper look at our loan book by segment and industry sectors, and we'll continue to make adjustments as the situation evolves. Finally, strong level of liquidity and efficient operating structure is strengthening our capital base, allowing us to navigate this complex environment.

Please move to Slide 3. We maintain a strong commitment to our customers and the communities in which we operate. Starting with our customers. We are providing support to mitigate the impact of this crisis through the different lending programs within the scope of essential bank initiatives, assisting with the payroll and working capital needs of our SME and middle market clients, we have granted a total of ARS 7.1 billion in new loans at a preferential 24% interest rate. At quarter end, the balance of these loans accounted for 7% of our loan book. Loans to the smallest SMEs are guaranteed by FOGAR.

We have also disbursed a total of ARS 264 million in 0 interest rate loans to eligible customers. These loans granted through credit cards in 3 subsequent disbursements have a 12-month tenure and a 6-month grace period. They are fully guaranteed by FOGAR, while FONDEP also provides preannual nominal rate to financial institutions over the amount disbursed. This program was recently extended until the end of September. In addition, approximately ARS 4.5 billion in unpaid credit cards and loans -- I'm sorry, unpaid credit card balances and loans were automatically rescheduled in line with the deferral programs established by the Central Bank.

We are also undertaking several initiatives to assist the communities in our main markets of operations, mainly Buenos Aires and the provinces of Mendoza and San Luis in the fight against COVID-19. For example, we have taken extraordinary steps to ensure that the additional 136,000 people that are receiving the government COVID-19-related emergency social assistance can rely on the national ATM network. In addition, we have also made donations to social organizations dedicated to purchasing medical equipment and supplying food for the most vulnerable communities in our main markets.

Now turn to Slide 4 for an update on our digital transformation. The COVID-19 pandemic and measures established by the regulator and government to contain the spread of the virus, have accelerated the adoption of digitalization in a traditional cash oriented culture. As a reminder, branches reopened for specific customers on April 3, while financial services deemed essential on April 13. Since then, bank branches have been allowed to open gradually for specific transaction with prior appointment and complying with certain health and safety requirements. Although the banking activities are being performed through digital means.

Simultaneously in the current low-touch economy, we are rapidly executing on our digital transformation strategy and introducing new functionalities across our business segments while keeping best-in-class cybersecurity standards. This has driven strong growth in digital and automatic transaction across our company.

Starting with our banking operations, as you can see on the top of this slide, the share of home banking and mobile banking transactions saw sequential increases of over 50% and 70%, respectively. Automatic transactions, including ATM and cash dispensers, accounted for 61% of total transaction, keeping a sustained trend. We're currently conducting pilots at selected branches to fund self-service areas.

In total, 94% of transactions this quarter were conducted through our digital and automated channel. By contrast, transactions in our traditional tellers plummeted 68% sequentially, accounting for only 6% of total transactions in the quarter. At the same time, 70% of total time deposits in July were made through digital channels, up from just 47% in January. Among SMEs, an important customer segment for us, we are driving exponential growth in e-checks with the issuance of e-checks increasing rapidly to a total of ARS 4 billion in July. We are also pleased with the significant adoption observed in our e-factoring product. We are also seeing rapid adoption in our consumer finance business since we added new app functionalities beginning last February, both in terms of mobile payments and digital onboarding.

Finally, our online broker InvertirOnline experienced a spike in usage with new accounts increasing over 150% when comparing July with the levels observed in February, and transactions more than tripling during that period.

Please turn to Slide 5. You can see the use of digital channels has continued to accelerate significantly across customer segments between February and July. Growth rates are doubling to tripling in some channels and in some -- and in other channels, we are reporting even higher increases. For example, use of our dedicated senior citizens up with face recognition more than doubled as we have been actively promoting the accelerated adoption of digital channels among this group of customers. Also, personal mobile banking usage tripled. As these low-touch transaction continue to grow, we will continue to achieve greater operating efficiency across the business.

Please turn to Slide 6 for a brief overview of the macro environment. The Argentine economy appears to be rebounding somewhat following a sharp drop in industrial production recorded in March and April. Monthly industrial production advanced sequentially in the low teens in May and June, driven by the gradual relaxation of social distancing measures and other health care protocols, along with the combined effects of stimulatory fiscal, monetary and credit measures.

Other sectors like construction, cement and vehicle production also saw improved performance. However, the pace of the recovery remains uneven with economic sectors that are dependent on close contacts, particularly services continuing to struggle, with labor conditions -- with labor market conditions significantly deteriorated, consensus expectations and ours currently call for a contraction in GDP of 12.5% for 2020. These dynamics have put pressure on expected inflation, while monthly inflation remains at low levels in the quarter, kept in check by the lengthy lockdown. In this context, monetary policy interest rates have remained relatively stable throughout the quarter at 38% since dropping to 40% in March, down from 55% last December.

Finally, the Argentine government debt agreement with private creditors is a significant step. This clears the way to start negotiating with the IMF as a further step towards normalization of fiscal and monetary policies.

Now please turn to Slide 7 for a review of the financial sector trends. Note that in the next 2 slides, covering system loans and deposits, we are presenting figures as published by the Central Bank, which are in nominal terms. Industry loans to the private sector grew above inflation sequentially. Peso-denominated loans were up nearly 15% quarter-on-quarter, mainly driven by SME loans at preferential rates. In turn, U.S. dollar system loans in original currency maintained the trend observed over the past few quarters, declining nearly 20% sequentially. Our total loan book was up 8% sequentially, in line with the system growth before adjusting for inflation.

Moving, please turn to Slide 8. Moving on to system deposits, liquidity remains high, both in local currency as well as in U.S. dollar deposits. Argentine peso deposits increased above inflation on a sequential basis, up 25% while U.S.-denominated system deposits were down nearly 8% in original currency. In sum, total system deposits increased 19% quarter-on-quarter. In this context, our overall deposit base was up nearly 17% sequentially, following a sharp increase in the prior quarter, reflecting our asset and liability strategy. Our peso deposits rose nearly 22% sequentially, while U.S. dollar-denominated deposits in original currency declined 16%. In July, industry deposits were up 3.8% sequentially, with peso and U.S. dollar deposits up 3.8% and 1.2%, respectively, in original currency. Before turning the call over to Mariano Biglia, let me take this opportunity to welcome him to his first earnings call in his new role as Chief Financial Officer of our company since his appointment last June. Having joined in 2010 as Head of Reporting, Mariano has served as Head of Administration, tax and finance leading the financial reporting team for the company's IPOs and now a follow-on. Please, Mariano, go ahead.

Thank you, Patricio. Good day, everyone. Before starting, remember that in the first quarter of this year, we adopted rule IAS 29. And for ease of comparability, we have also restated 2019 figures to reflect this. Now turn to Slide 9. Total assets were up 9% sequentially. Driven by lower growth, along with higher holdings of Leliqs securities issued by the Central Bank. During the quarter, we also benefited from lower minimum cash reserve requirements following the Central Bank rule, allowing 100% of cash reserve requirements corresponding to time deposits to be covered by Leliqs.

Turning to our loan book on Slide 10. Total loans increased 3% quarter-on-quarter with peso loans up 7%

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Sorry for the inconvenience. So I continue on Slide 10. Okay. Hello again, and sorry for the inconvenience. So continuing on Slide 10, The ARS 7.1 billion of 24% rate loan granted to SMEs included ARS 5 billion in financial loans, of which 30% is covered by guarantees from FOGAR, mutual guaranteed assets or mortgages and ARS 2 billion in factoring transaction.

Now please turn to Slide 11. Total funding increased 9% sequentially, with total deposits expanding nearly 11% in the quarter, providing strong liquidity to navigate this complex environment. Total loan to deposits declined to 63% from 68% in the prior quarter and nearly 104% in 4Q '19. In addition, at the close of the quarter, the pro forma liquidity coverage ratio was 126% compared to 130% at the close of the first quarter still continuing to reflect high liquidity levels.

Taking a deeper look at our deposits on Slide 12. Peso deposits were up over 15% sequentially with core retail and corporate deposits up 8%. We also expanded institutional deposits by 27% to fund additional investments in Central Bank Leliqs. In turn, the peso loan-to-deposit ratio dropped to nearly 58% from 62% in the prior quarter. By contract, U.S. dollar deposits in original currency dropped 16% sequentially with a U.S. dollar loan-to-deposit ratio at 101% compared to 97% in the prior quarter. We closed the quarter with high liquidity ratio reaching 74.8% in dollars and 60.7% in pesos.

Now on to the P&L on Slide 13. We delivered a 16% sequential increase in net financial income, reaching ARS 9.1 billion, even with the sustained decline in market interest rates. The drop in the average yield of Central Bank Leliqs was more than offset by lower cost of funding following the continued decrease in market interest rates. At the same time, easing on minimum reserve requirements mitigated the impact of recent regulations, promoting financing for SMEs and individuals. In turn, interest on loans benefited from lagged repricing on personal loans, partially offset by a lower yield in commercial loans, given the increase in SME loans at preferential rates.

Total NIM expanded 70 basis points sequentially to 23.5%, mainly benefiting from increasing holdings in Central Bank Securities to take advantage of higher spreads, even the nearly 900 basis points decline in Argentine peso cost of funds.

Turning to Slide 14. Net service fee income remained weak this quarter, down 11% sequentially. Several factors contributed to this performance. First, we saw lower credit card usage amid the pandemic, which impaired fees -- which impacted fees. Second, Central Bank regulations introduced last quarter prohibit financial entities from charging ATM fees and repricing all other fees until early 2021. And finally, overall weaker loan demand also impacted fees. This was partially offset by higher revenues in our asset management business, the InvertirOnline brokerage business and nonfinancial services. By contrast, income from insurance activity was up 14% sequentially driven by lower claims paid, resulting from the annual rebalancing of the seasonal claims ratio curve, following incurred but not recorded expenses guidelines.

Moving on to asset quality on Slide 15. Keeping a prudent approach to risk management, during the quarter, we increased provisions by nearly 36% sequentially to ARS 2.3 billion as we continue to revise our expected loss models. As a reminder, last quarter, we adopted the expected losses model as per IFRS 9 as implemented by the Central Bank. Except for our consumer finance segment, which will begin progressive adoption starting 2021. During the second quarter, we enhanced our models and updated macro variables to contemplate the current outlook for GDP and economic activity. These adjustments capture our current assumptions of a worsening macroeconomic outlook resulting from the extended COVID-19 lockdown in Argentina as well as top-down analysis on certain industries that could highly be impacted by the pandemic.

As a result, we made ARS 560 million in COVID-19 specific anticipatory provisions this quarter. Cost of risk, in turn, increased to 9.8% from 7.1% in the first quarter. Note that the rate of total provisions to our total loan book increased by 270 basis points sequentially to 7.7% in June. In the chart of the top right side of this slide, we provide a breakdown of the evolution of the provisioning ratio by key customer segments. Looking at our NPL ratios, total NPLs declined 60 basis points sequentially to 6.1%, reflecting improvements across all segments. Corporate loans saw a 60 basis point decline in NPL ratios driven by lower nonperforming loans and low growth resulting from peso loans granted to SMEs at 24% interest rate.

NPL ratios also fell by 10 basis points in the personal and business segment and 40 basis points in consumer finance. Overall, performance continued to benefit from Central Bank regulatory easing on debtor classification amid the pandemic. This consisted of a 60-day grace period before these loans are classified as nonperforming and the suspension of mandatory reclassification of customers that are not performing with other banks, but performing with Supervielle until September 30, 2020. NPLs for the quarter may have also benefited from the Central Bank release program that allows debtors to defer their loan payments original maturing between April 2020 and September 2020. In turn, coverage increased to 127.1% at the close of the quarter from 99.6% in the prior quarter, reflecting these anticipatory COVID-19 provisions as well as benefits from the Central Bank regulatory easing in place since first quarter 2020.

Excluding regulatory easing, coverage in June was 107%, increasing to 121% in July as we continued to refine our models and conduct top-down industry analysis as the lockdown was further extended. This is almost 40 percentage points increase since December 2019 level. Also excluding regulatory easing, the total NPL ratio would have been 7.2% in June, declining to 7% in July. We are closely monitoring our loan portfolio and risk models and will continue to make adjustments accordingly as we gain greater visibility into the depth and magnitude of the quarantine and related government measures.

Now turn to Slide 16. As we show on Slide 16, we have very little exposure to high-risk subsegments, such as tourism, entertainment and restaurants. At the same time, certain industries such as food and beverage and agribusiness performed better or were not affected very much. Overall, loan breakdown by industry segment has remained relatively stable over the last few months. Our exposure to high-risk factors accounts for 13% of our total loan book, mainly construction and to a lesser extent, in retail and transportation. Note that 55% of loans to these high risk sectors are guaranteed.

We are continuously reviewing our credit exposure to every sector and subsector in light of the dynamics of the COVID-19 crisis, particularly those that could be highly impacted. In addition to the specific set of measures established to manage and mitigate risk in the COVID-19 environment, our loan portfolio has resilience anchors built in. For example, our commercial loan portfolio is highly collateralized. At the end of June, 44% of total commercial loans were collateralized, while collaterals on nonperforming commercial loans reached 66%, up from 61% at the close of March and 20% a year ago. We also maintained anatomized corporate portfolio with the top 50 corporate customers accounting for 28% of our loan book.

In addition, a portion of our SME clients belong to value chains, led by robust industrial cap chains or to export chains. In commercial loans, we also keep a strong focus on factoring, which are self-liquidating facilities. At the same time, while at the start of the pandemic, we experienced maximum levels of 25% in bounced checks during the height of the lockdown. Bounced checks today have declined significantly to pre COVID levels of around 3%.

In terms of individual loans, note that loans to lower risk payroll and pension clients accounted for 72% of our total loan portfolio to individuals. Furthermore, senior citizens, which account for 13% of the loan book, do not carry unemployment risk. Mortgage loans, which account for 5% of our loan book originated during 2017 and 2018 were granted to high-income customers and have a loan-to-value below 70%. And finally, let me also highlight that our consumer loan franchise remains at historical minimum level.

Please turn to expenses on Slide 17. Our efficiency ratio improved to 130 basis points sequentially and 190 bps year-on-year, down to nearly 62% in second quarter 2020. Mainly driven by revenue growth, along with strict cost controls and benefited from the initiatives we have taken over the past year to streamline operations. This more than offset higher administrative expenses related to COVID-19. This resulted mainly from the implementation of state protocols across our branch network and higher armor transportation costs. During the quarter, we also incurred higher costs in connection with our efforts to set up digital transformation across the company.

Our total employee base remained relatively stable, showing a slight increase in our fast-growing online brokerage business, InvertirOnline, on our insurance broker operation. While over the last 12 months, we have reduced headcount at the bank over 3%. During the quarter, we also increased salaries in the bank in line with inflation following the collective bargaining agreement closed in June.

Moving on to the bottom line on Slide '18. We continue to deliver improved profitability this quarter. Pretax income increased 41% sequentially to nearly ARS 1.2 billion, up from ARS 840 million in the first quarter. Several factors benefited profitability.

First, we delivered increased net financial income resulting from higher investments in Central Bank's short-term notes and trading gains, while the cost of funding declined nearly 900 basis points.

Second, inflation for the quarter dropped to just over 5% from around 8% in the prior quarter. This resulted in a smaller inflation adjustment loss of ARS 552 million this quarter as per the adoption of IAS 29 compared to a ARS 916 million inflation adjustment loss in first quarter 2020.

And third, personnel expenses remained flat reflecting salary increases in line with inflation following the bargaining agreement between banks and unions for the quarter. This benefit more -- these benefits more than offset higher provisions in the quarter resulting from enhancing our expected loss models to capture a worsening macroeconomic scenario, lower net service fee income, as discussed earlier, together with higher administrative expenses related to the implementation of COVID-19 protocols to ensure continuity across our branches and to support the acceleration of our digital transformation process.

ROE improved both sequentially and year-on-year, reaching 14.4% in the second quarter, nearly doubling from 7.7% in the first quarter. And comparably to nearly 13% in the same quarter last year. Including other comprehensive income from financial instruments recorded as available for sale, ROE for the quarter was 18.7%. Excluding the impact of IAS 29 on all quarters, ROE would have been slightly over 32% in second quarter 2020 compared to 26.4% in the prior quarter.

Turning to capitalization on Slide '19. We closed the second quarter with a Tier 1 capital ratio of 13.4%, up 10 basis points sequentially. The ratio benefited by 120 basis points from the regulatory easing on provisions in the context of the pandemic. As a reminder, since the first quarter, the Central Bank allows banks to consider a Tier 1 common equity, the difference between provisions recorded under the expected losses model according to IFRS 9 and provisions recorded under the previous accounting framework. In addition, the inflation adjustment on nonmonetary assets contributed with 90 basis points in capital creation, while results added 40 basis points to capital. This was partly offset by a 140 basis points increase in risk-weighted assets and 100 bps resulting from dividend payments in the quarter and deductions on deferred income tax. Integrated capital at quarter end reached ARS 20.8 billion, exceeding total capital requirements by ARS 8.5 billion.

Now let me turn the call back to Patricio for some brief remarks on our views for the remainder of the year. Please go ahead.

Thank you, Mariano. While our guidance remains suspended given the limited visibility ahead, we believe it's important to give you some color behind some of the key drivers to help you understand how we are running our business, particularly as we navigate these unprecedented global health crisis.

For the remainder of the year, we expect to continue supporting our SME customers, although we anticipate total loans to grow below inflation. At the same time, sustained FX market restrictions on the floor on interest rates paid to time deposits are expected to support deposit growth above inflation. In terms of asset quality, we are likely to see further deterioration during the second half of the year as our expected loss models continue to capture the challenging macro environment resulting from the extended COVID-19 lockdown and to a lesser extent, top-down analysis on certain economic activities. Mitigating factors include our prudent approach and the measures implemented to manage and mitigate risk along with the resilient anchors built in our loan book, which Mariano just discussed.

During this challenging economic context, net interest margin is more likely to remain supported by high interest spreads, increased assets and lower nonremunerated reserve requirements. In terms of operating expenses, salaries are likely to grow at or below inflation, while we expect to incur additional expenses as we continue to accelerate our digital transformation strategy to leverage the current rapid adoption. By contrast, current regulations prohibiting further repricing until January 2021, along with a challenging economic environment, limit fee income.

Finally, capital and liquidity to remain at appropriate level, supporting long-term sustainability. Beyond 2020, the recent positive sovereign debt restructuring paves the way for new sustainable monetary and fiscal policy. The trajectory of the recovery will depend upon the enforcement of sound fiscal and monetary policies, together with the depth and direction of this pandemic. Despite this difficult environment, I'm confident that we have a solid foundation in place with a highly agile and experienced management team to navigate through this crisis and strong liquidity and capitalization. We remain committed to prioritizing the digital transformation of our company, ensuring the long-term sustainability of our business.

Before opening the call to Q&A, I would like to thank Jorge Ramirez for his significant contribution as CEO of Grupo Supervielle over the past 2 years. I look forward to continuing to work closely with him in his ongoing role as Vice Chairman of the Board and Chair of the Risk Management Committee. Additionally, I would also like to thank Alejandra Naughton, who has been appointed as Board member of several of our subsidiaries to lend her extraordinary expertise in strengthening oversight of regulatory-related matters and consequently, stepped down as CFO. Finally, I would like to congratulate Alejandro Stengel for his very well-deserved appointment as CEO of Banco Supervielle. This concludes our prepared remarks. Operator, please now turn for questions.

(Operator Instructions) Our first question comes from the line of Juan Recalde with Scotiabank.

I have 2 questions. The first 1 is related to the macroeconomic expectations. You show that there seems to be a slight improvement in economic activity. And we've seen that inflation has been rather low in the first half of 2020. So with that in mind, what is your expectation for the rest of the year in terms of activity, inflation and interest rates? And how do you expect that to impact on Supervielle's profitability? And the second question is related to the levels of activity and delinquency in different areas of Argentina. Can you talk a little bit about the differences that you have seen in terms of the lockdowns and levels of activity and delinquency in Buenos Aires compared to the interior of the country, more specifically in San Luis and Mendoza, given your important presence there?

Okay. Thank you for your question. In terms of inflation expectations. First of all, you see that as of today, inflation, we follow the consensus, and we -- there is -- the consensus for the year is 40% at this moment. Inflation is contained at this moment due to complete lack of demand of the population, but we believe that inflation will start -- there is -- there will be an upward trend in inflation by the end of the year. The way we manage in this type of situation is we -- first of all, with -- in high inflations, if there is -- if there would be a high inflation, we would manage basically short-term tenures. And we would -- there would be a constraint in consumer finance. And -- but basically, we would focus -- the focus of the bank will be on funding. On the funding, we would, let's say, we would focus on funding, and that means we would focus on consolidating CASA deposits in order to preserve margins. I would like to turn now the question to our CFO to talk about delinquency. You mentioned Mendoza and San Luis, particularly.

Yes. Thank you, Patricio. Hello Juan, yes. First, regarding your first question of impact of our macro expectation or the impact of economic variables such as inflation activity and interest rates on our net income and on our balance sheet. Interest rates, we see that inflation puts some pressure for higher interest rates. So that could increase our net interest margin, although inflation is never good news for the industry because it discourages credit demand. Then our net equity is hedged with inflations with different asset classes. So we might see higher loss in the net monetary position, but offset with higher margins. And then about delinquency, we haven't seen delinquency increasing so far and in that sense, there hasn't been a big difference between the Buenos Aires area and the provinces where we have more presence that is San Luis and Mendoza, as you mentioned.

Right now, in part of the Central Bank release, mainly to individuals and SMEs, our NPLs have been stable and even declining. So we build up anticipatory provisions based mainly on macroeconomic scenarios forecast and also in an industry by industry sector. So we are more focused on the industries rather than the provinces or the regions within Argentina.

Our next question comes from the line of Gabriel Nóbrega with Citigroup.

I also have a question on asset quality and specifically provisions. As we are seeing that the NPR ratio could start picking up in the second half of this year due to the macro, but also because of -- as this flexibilization of investors actually comes to an end. Do you believe that the second quarter was the peak for provisions? Or are you seeing that you should need to make more additional provisions further down the road? And as for my second question, thank you very much for the detailed presentation, specifically on the digital front, but I just wanted to understand, if you are thinking about the new strategies? Are you even maybe thinking about launching a new digital bank? And also, when should you begin to collect efficiency from your investments in '19?

All right. Thank you for your question. In terms of asset quality, I would try to repeat because maybe we didn't hear well, but it was about if we have enough provisions or expected provisions for -- in terms of asset quality. And if we believe that second Q was a peak we'll need more provisions. So I would like to ask Alejandro Stengel, our CEO of the banks, to answer this question. And then we turn to -- then we will continue with your -- the idea of the digitization. Please, Alejandro.

Yes. Good morning, everyone. Hello, Gabriel. We think that in the rest of this year and probably the beginning of next year, we will see a peak of NPLs. As stated previously, our NPLs are at around 6.1%. And we think that a challenging macroeconomic environment and the lengthening of the lockdown will affect several of our -- of the industries in Argentina and some of our clients. So we continue to monitor this very closely. We think that situation will probably continue to deteriorate so we expect things actually getting a bit worse before they get better towards the end of this year and the beginning of next year, hoping that by the first half of 2021 we will have enough visibility to determine the payment capacity of our customers and our corporate clients and therefore, determine how quickly we will be able to take advantage of an increase in economic activity. So that's our take on NPLs and asset quality for the next 6 to 9 months. If you want, Patricio, I can take the digital front question of Gabriel?

Yes, go ahead.

Okay. Basically, in terms of the digital front for the bank, we see several opportunities. As mentioned during the presentation, there was a significant increase in the use of digital channels, namely mobile and home banking. And we already had a significant increase prior to that in automated channels, namely ATMs and cash dispensers. By end of the second quarter, we only had 6% of transactions going through cashiers, and that was a significant decrease from previous levels. These trends were obviously already in place, in motion before the pandemic, but they were clearly accelerated by the pandemic. And this is actually, as you suggest in your question, having us adopt new strategies to take advantage of this, like, for example, increasing the self-service areas in our branches. So that we can have a greater degree of self-service and increasing, at the same time, the customer experience in the process. So we think that the increased usage of digital and automated channels is a huge opportunity to increase efficiencies and at the same time, improve customer experience.

Related to efficiencies on the IT front, if I got your question correctly, we are implementing an IT transformation plan, which basically -- the key guidelines is the migration to the cloud, which, as you know, brings down maintenance costs significantly, increasing automation and efficiencies around the automation of processes, bringing in data analytic capabilities to enhance the engagement, the cross-sell and the loyalties with our customers, making sure that this remains an omnichannel strategy. And at the same time, moving our architecture, our IT architecture to appifying services to make sure that these services can be served regardless of the channel that they have approached from our clients. I hope this addresses your questions on the digital front of the bank. I don't know if Patricio wants any further comments on the digital front for the group.

Yes. Yes. Well, Gabriel, basically, the idea is that all our -- the different franchises, we have we want to basically transform them into digital attackers. So this is the strategy that is also being applied to the consumer finance division. Whereby we are implementing a new core system that will allow us to capture also retail deposits. And so -- and the first step of this strategy is already we have -- we are doing digital -- full digital onboarding for credit cards and personal loans. And this -- then we will roll other products and services, such as, as I said, savings accounts. And we will turn it into a digital attacker. Then also InvertirOnline is another example of a digital attacker. And by the way, it's basically the way we envision this digital online, this broker online is basically to protect the savings of Argentines and so there is a lot of scope for that. And we've had a lot of success in terms of account openings and in terms of increase of brokerage fees particularly over the last few months.

Our next question comes from the line of Rodrigo Nistor with AR Partners.

So [you] just briefly commented about this. But if I may, I would like to understand better where you're expecting in terms of loan demand for the second half of the year, particularly if you see any segment or industry picking up? And also, if I may follow up on that one, if we assume that the GDP will rebound in 2021, what do you think loan demand could come from?

Yes, I would like to ask -- well, first of all, today -- I mean, loan demand is very subdued and we are living at an extraordinary juncture. But I will turn to Mariano to -- our CFO, to answer this question. And thank you.

Thank you, Patricio. Hello, Rodrigo. Yes. Well, credit demand has been coming during the last quarter, what we see for -- also for the next quarter mainly through the SMEs sector and with a 24% interest rate lines. We already disbursed ARS 7.1 billion to SMEs and the lower rung of our middle market corporate segment. Industry sectors have been showing, as we mentioned during the presentation, different levels of resilience to the pandemic, this will probably continue to be the same sectors that will rebound faster with, of course, tourism, restaurant and entertainment being left behind maybe for some time? And other sectors developing more rapidly. So -- but maybe Alejandro can -- I think can give a better outlook for the bank sector?

Yes, Mariano, of course. Rodrigo, loan demand, as pointed out previously, is growing below inflation, and we expect that to be the situation during the rest of the year. How much below inflation, we don't know. It could be as low as 10% below inflation. Let us remind you that the consensus forecast right now says that inflation would be around 40% for -- by year-end. So we see basically loans growing below that level for the year and for the rest of this year, too. In terms of the kind of situation we foresee in terms of loan demand when the GDP rebounds, which is the second part of your question, is basically, you're seeing that most sectors are starting from very low utilization levels. Some have opened shops and having their capacity increased only for 1 turn of employees and you typically work on 3 turns of employees.

So you would typically see that as this ramps up, a greater demand for working capital given that as the inventories get depleted because of growing demand, they will have to replenish it and also an increase in trade finance, particularly for those sectors that have been favored by the degree of devaluation and better terms of exchange. Some of our clients in [Cujo] particularly could take advantage of that situation, not exclusively as well as all our clients in the agribusiness sector, which is a significant portion of our portfolio. I hope we've addressed your question.

Our next question comes from the line of Carlos Gomez with HSBC.

First of all, congratulations once more for the quality of the presentation and for giving us quarterly information, which is essential to be able to project your numbers. We really appreciate what Supervielle does in that area. I have 2 questions. The first 1 refers to your chart on Page 9. Where you see the total assets evolution. And again, this is a very good chart. You can see how your liquid assets shrank a lot at the end of last year, and then they have expanded again. We wanted to understand what happened at the end of 2019. Was this because you voluntarily wanted to reduce your exposure to particular assets that could be impaired in the future? Or was this because liquidity was very tight and you were responding to those conditions. And now they have changed. The second question is a very easy one. We want to know what you've seen the foreign exchange is going to be by the end of the year and more seriously, how do you expect your dollar balance sheet, your assets and your liabilities to continue to evolve? Do you expect to see loans and deposit in dollars continue to decline?

Okay. Thank you, Carlos. Please. I would like to have Mariano answer this question. Thank you.

Yes. Thank you, Patricio. So on your first question regarding total assets, as you could see on Slide 9, as you mentioned, and you're totally right, at the end of the fourth quarter of 2019, we decreased our total assets and that was mainly a decrease in the Leliq stock. As we had a change of government, we wanted to have less exposure to all type of government exposure, including Central Bank. And now we've taken, again, that position in Leliq as we are very liquid in particular, since the start of the pandemic, and deposits have been -- peso deposits have been steadily increasing. So that's what you can see on our balance sheet.

And then on your second question regarding our foreign exchange exposure. Dollar-denominated loans have been -- its demand has been decreasing. In fact, these loans also denominated in the original currency have been decreasing quarter -- each quarter. And deposits have also been decreasing, although not that fast. But all in all, we have a balanced position between assets and liabilities in U.S. dollars. You know that as per Central Bank rules, we can't be in a loan position in dollars at the bank, which exceeds 4% of our net equity. So we are quite balanced on assets and liabilities denominated in dollars or other foreign currencies. And we expect that to remain stable during the follow on quarters because we definitely don't want to be short -- have a short position in foreign exchange, but we can't, per central bank rules, have a very large loan position. So that's our outlook for the next quarters.

Okay, to follow-up on that. So again, you expect your dollar business to continue to gain, as you said, your dollar loans -- the demand for other loans has been decreasing, you expect that trend to continue. In the future, you do not see an increase for dollar loans or for dollar deposits in the coming quarters?

No. We don't expect an increase for U.S. dollar loan demand. What we may see is dollar-linked loans. We have seen in the market many companies issuing dollar-linked bonds, which follow the value -- the exchange rate of the dollar, but they are paid in pesos. So we may see at some point this type of dollar-linked loans but not foreign exchange dollar only for export financing, export and import financing.

(Operator Instructions) Our next question comes from the line of Yuri Fernandes with JPMorgan.

And similar to Carlos, I would like to congratulate you, Patricio and team for the very comprehensive disclosure. You have, I would say, maybe the best disclosure in Argentina for banks. Regarding the questions, I would like to have a follow-up on provisions and cost of risk and asset quality. Because it was not clear for me if this is going to be the peak, like the 10% cost of risk is the peak? Or if we should see more provisions ahead?

I understood from previous questions that the peak of NPL would to take place later this year or beginning of the next year, but it's not clear for me, the provisions. I understand that you have IFRS 9 for the bank, and you are provisioning for expected losses and you build this ARS 560 million for additional provisions this quarter. But I don't know if you need to do more. So if you can help me hear what is the macro assumptions, which you are forecasting, I don't know, GDP decreasing 11% and this ARS 560 million kind of incorporates your expected losses. Or if we should see more provision ahead, if this should be an ongoing trend?

And my second question is regarding your mortgage portfolio. It has been very behaved, right? Most of your losses have been driven by corporate and SMEs. And in the past by consumer finance, but consumer funds is more, you work -- you did a good job in controlling the delinquency there. But my concern on mortgage is that given higher unemployment. And given this is an inflation-linked portfolio, if we do see inflation accelerating maybe the NPLs in this portfolio may be much higher. So I would like to ask your opinion here, how you are seeing -- I got this overall a high income kind of product. But if maybe this could be a risk segment in the future.

Okay. Let's -- first of all, I will address the -- Yuri, thank you for your questions. First of all, you talk about provisions and cost of risk. And if -- what we see more ahead. I will first tell you about regarding cost of risk, we are extremely cautious on the credit side. And we are constantly monitoring the situation and constantly updating our expected losses, and this is the reason why we increased -- we continue to increase coverage in July. And also, we pay a lot of attention to the collateralization of our loans. I would like to ask Mariano to give you some more color in terms of basically also the cost of risk going ahead.

Sure. Patricio. Hello, Yuri. Let me give some more details in order to answer your question regarding cost of risk and provisions. And as you mentioned, for the bank, which is 94% of our loan portfolio, we apply IFRS 9 and the expected loss model for the impairment of financial instruments. Following this rule, we have our expected loss models, which are reviewed periodically. And during the second quarter, we enhanced our models adding new economic variables that better predict consumer and corporate behavior and the probability of default. We added, for example, the economic activity in the indicator, the EMAA. So this requires, for us, higher provision, which is what you see in our increased coverage ratio in our increased total provisions to total loan book of 7.7% and these ARS 560 million provisions that were mentioned earlier.

We also updated our macroeconomic scenarios, and we expect to do that continuously, or with continuously reviewing our macro assumptions in our forecast. And for instance, GDP growth in the first quarter, we had a negative 3% in our base scenario and a negative 60% with a pessimistic scenario. Now we updated those values to negative 6% -- negative 11% in our basic scenario. And negative almost 15% in a pessimistic scenario. So we weigh those scenarios based on the probability of occurrence. And of course, they give us a higher probability of default for certain customers and increased provisions. So now we are comfortable with the levels of provisions we have as of June 30 as we took a careful look on our expected models, as I said before. And we also carried out a top-down analysis by industry sectors. So we are awaiting differently each sector based on the exposure, which we believe is high or very high to COVID and related measures.

It's important also to bear in mind the collateral of our portfolio, which, of course, the impact in the level of provisions required by IFRS 9. So for example, 44% of our commercial loans are collateralized, while 66% of the NPLs in the commercial loans portfolio collateralized. So it -- this continues to be very dynamic. We continue to review our models or forecasts and we'll continue also to build up provisions during the third quarter. And that's what we did, for example, in July, where we increased also our coverage ratio, even when our NPLs are still stable or even declining. So you may see our cost of risk peaking maybe in the next quarter or during the second half of the year, until we reach a point where we start to use those provisions instead of creating more coverage. But this is still very dynamic.

Okay. Let me take back the -- your question about mortgages. Basically, first of all, in terms of -- I understand you have certain concerns about rising inflation next year. Consensus in terms of inflation for next year is going up from 40% this year to 47%. This is what is consensus. Based on that consensus, we are not worried about the quality of our mortgages. Because basically we -- these mortgages were given in 2017 and 2018 with a loan-to-value below 70%, and they were given to high-income people. So we are comfortable that it's -- we have a good portfolio in terms of mortgages. I hope I'm answering your question.

No. You are. No. Thank you. Both explanations are very good. And congratulations in navigating this stop environment. It has been -- I think we're -- have been doing a good job.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn this call back over to Ms. Ana Bartesaghi for closing remarks.

Thank you for joining us today. We appreciate your interest in our company. We look forward to meeting more of you over the coming months and providing financial and business updates next quarter. In the interim, we remain available to answer any questions that you may have. Thank you, and stay safe and healthy.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.