Grupo Supervielle SA (SUPV) 2022 Q2 法說會逐字稿

Good morning, everyone, and welcome to Grupo Supervielle Second Quarter 2022 Earnings Call. This is Ana Ines Bender, Treasurer and IRO. A slide presentation will accompany today's webinar, which is available in the Investor section of Grupo Supervielle Investor Relations. Today's conference call is being recorded. (Operator Instructions)

Speaking during today's call will be Patricio Supervielle, our Chairman and CEO; and Mariano Biglia, our Chief Financial Officer. Also joining us is Alejandro Stengel, first Vice Chairman of the Board and CEO of Banco Supervielle. All will be available for the Q&A session.

As a reminder, 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 and provide any forward-looking statements to reflect new or changed events or circumstances.

Patricio Supervielle, our Chairman and CEO, will start the call discussing our key highlights for the quarter and update on our transformation initiatives. Afterwards, Mariano Biglia will take a deeper look at our performance and near-term perspectives. And after that, we will open the floor for questions.

Patricio, go ahead.

Thank you, Ana. Good morning, everyone. Thank you for joining us today.

Please turn to Slide 4, our earnings presentation. We are navigating an increasingly challenging economic environment in Argentina and worldwide. Accelerated inflation reaching 3 digits together with rising interest rates have driven long demand to historical lows, while the government's crowding out is in full force. We are taking immediate actions to adjust to these conflicts, implementing a major restructuring of IUDÚ, our consumer finance business, with the goal of running a more efficient operation, and I will discuss this in more detail shortly.

Simultaneously, we continue to make significant advances in our key strategic pillars: increasing customer acquisition and digital adoption, improving asset quality, and we are transforming our network and significantly rightsizing our bank and brokerage operations to drive efficiency while improving funding.

Our bottom line in this quarter was negatively impacted by headcount reductions, capital efficiencies at both IUDÚ and the bank as we prioritize long-term value creation of our short-term profitability. The sharp drop in the price of our government security holdings in June, together with significantly high inflation, low credit demand and increased regulatory flows on interest rates and time deposits also impacted results. As a result, we reported a loss of ARS 2 billion in the quarter. Excluding nonrecurring severance and early retirement charges, we would have reported a consolidated net loss of ARS 1.2 billion, while the banking business would have posted a net loss of ARS 160 million. Mariano will provide more color on our financial performance on this shortly.

While Argentina faces important fiscal, financial and monitoring challenges that have not yet been addressed, we remain fully committed on building a more efficient, profitable and scalable operation while monitoring market dynamics. Reflecting our conviction in the value of securities of Supervielle assets and the potential of our business, last July, the Board approved a share repurchase program for a total of ARS 2 billion for the lower amount equivalent to 10% of our capital stock through March 2023. This initiative is supported by a liquid and well-capitalized balance sheet.

Turning to Page 5. Let me now review the progress on the initiatives under each of the 6 strategic pillar designed to improve return on equity. Starting with customer experience and acquisition. This quarter, we added 89,000 new retail customers. Of these, 65% were onboarded digitally, while 30% are payroll customers. Note that 50% of these digitally onboarded retail customers took credit card loans. Corporate customers in turn increased nearly 1% sequentially and close to 7% year-on-year. We're also very pleased with the sustained progress in digital adoption with digital bank customers up 26% sequentially and 89% when compared to the same quarter of last year.

Equally encouraging is the 60% sequential increase in mobile app customers achieved this quarter. We saw good traction in senior citizens mobile app customers, which were also up 12% sequentially and 72% year-on-year. As a result, the share of mobile transactions doubled to 20% of total monetary transactions up from 10% in the same quarter of last year. Combined online and mobile channel accounted for 41% of total monetary transactions.

We remain focused on customer acquisition, digital onboarding and cross-selling as part of our initiatives to further enhance the customer experience and increase share of wallet. We have also taken meaningful steps this quarter with respect to our efficiency pillar. Several rightsizing initiatives across our operations have enabled us to reduce our headcount by 18% year-to-date. This was driven by workforce declines of 6% at the bank; 75%, IUDÚ and 29% at InvertirOnline.

Starting with IUDÚ. Last year, when we launched the IUDÚ fully digital financial services platform aimed at attracting low cost deposits and scaling the business with the goal of reversing the negative impact this operation has had on return on equity over the past years. Unfortunately, annual inflation levels accelerating to nearly 100% had made the consumer finance business extremely challenging, and therefore, we decided to rapidly change course. In this context, we are integrating the entire IUDÚ customer base to Banco Supervielle drastically reducing the operational cost. At the same time, we have slowed loan -- slowdowned loan origination, focusing on improving asset quality. While this is resulting in higher severance charges this year, it is a significant step in running a more efficient operation.

At IOL invertironline, our fintech subsidiary, we recently appointed a new CEO. The difficult context faced today by fintechs worldwide, together with the highly restrictive regulations in Argentina have negatively impacted trading volumes and fees. To mitigate this, we are currently reevaluating unit economics in this new environment and streamlining this operation, including the headcount reduction implemented this month.

Now moving to efficiencies on the back. As discussed during our prior earnings call following the termination of the financial agency agreement with the government of the Province of San Luis, this month we transferred the business to the designated bank. This included transferring and/or closing 18 branches, their related employees in respective global portfolios. These 18 branches accounted for 10% of the total bank branches of our network and 4% of our employees but only represented 2.5% of bank revenues, 2.4% of total loan book and 3.1% of total deposits.

Note, we continue to serve over 106,000 private sector customers in the Province of San Luis leveraging the strong franchise we have built in the past 25 years when we will continue to serve. Beyond San Luis, we have also merged 15 low-performing branches into other locations and are awaiting final Central Bank approval to fully close them. The transformation of our network is an ongoing process, and we are accelerating this trend, leveraging on our virtual hubs to support our anytime and anywhere, banking strategy while further enhancing customer satisfaction.

On Slide 6, you can see how the transfer of the low-performing branches in San Luis together with the merger of 15 branches in other locations are allowing us to significantly improve branch productivity. As shown on the 2 charts on the left, average loans per branch will improve by 19%, excluding these 23 low-performing branches. Similarly, customers branch would increase 15%.

Turning to Slide 7. We have also made progress on our funding pillar. During this year, we are focused on increasing corporate site deposits, driving growth in transactional products and increasing share of wallet. These initiatives have enabled us to expand the share of corporate checking accounts by 13 basis points year-to-date. Likewise, the share of retail savings account for was up 31 basis points year-on-year, contributing to improve our funding mix. Public sector deposits beyond San Luis are also performing well, reflecting our focus on building the finance agent business servicing municipalities.

Lastly, in terms of our 6 pillar related to maintaining healthy asset quality, focused on establishing portfolio limits and further atomizing exposure to economic sectors and top customers allow us to reduce our NPL ratio to 3.8% on a consolidated basis, having down to 2.6% at the bank level, reaching a historical low. More details on our key digital and operational KPIs can be found in the exhibits of this presentation.

With this, let me turn the call to Mariano. Mariano, please go ahead.

Thank you, Patricio. Please turn to Slide 8. Our loan book stabilized this quarter and was relatively unchanged sequentially, following the low double-digit sequential contraction in the first quarter.

Personal loans increased 1.5% sequentially to just over [ARS 180 million]. This was mainly driven by loans to SMEs and short-term financing to corporates together with an increase in our retail customers' credit card portfolio, reflecting our customer acquisition strategy. Partially offset by a 12% sequential contraction of total loans at Q2. This led to a 2 percentage point decline in the weighting of consumer finance loans over our total loan book regional historical low. Note that U.S. dollar denominated loans continue to decline, accounting for slightly over 80% of total loans.

Turning to funding on Slide 9. Total ARS deposits were up 7% sequentially with core ARS deposits increasing 6% in the period. Institutional deposits, in turn, were up 7%, contribute support financial income. Liquidity levels remains healthy in local currency as well as in U.S. dollars with a total loan-to-deposit ratio at 46%, reflecting historical low credit penetration.

Please turn to Slide 10. Total net interest margin stood at 18.8% in the quarter. NIM, in turn, declined 30 basis points sequentially to 19% and was up by similar amounts year-on-year. Couple of factors contributed to the sequential performance. But peso cost of funds increased 540 basis points, driven by regulator increases in NIM interest rate on time deposits as described in more detail in our earnings report.

Second, the yield on peso investments declined following the sharp drop in the price of our government bond holdings. This movement was partially mitigated by loan repricing, a 680 basis point increase in the average yield of Central Bank securities and repo transactions, coupled with a 39% increase in the volumes of those instruments. When excluding the impact of the decline in the price of government securities in June, NIM would have been 19.6%, 80 basis points above the reported NIM for the quarter.

Now please turn to Slide 11. Our total NPL ratio declined 50 basis points to 3.8% sequentially with coverage stable at slightly over 180%. At the bank, the NPL ratio remain unchanged at the low of 2.6%. Coverage stood at 142%, while net cost of risk of 4.2% compared with 1.3% in the prior quarter, which benefited from the reversal of provisions from reduction in loan book. Asset quality levels remain comfortable with the bank's NPL ratio in July stable at 2.6%. In turn, Q2 NPL ratio 310 basis points sequentially. As anticipated in the prior call, this quarter, we wrote out delinquent loans that have been automatically deferred by the Central Bank during the pandemic. This improvement was limited by the 12% contraction of the loan book.

Moving on to Page 12. The efficiency ratio this quarter was slightly over 81%, impacted by several factors. First, the expenses were up just over 5% sequentially, mainly driven by significant severance and early retirement charges together with salary increased and anticipated inflation plus increasing costs in real terms. To a lesser extent, higher costs also reflect the implementation of our initiatives to drive customer acquisition and advance in on our digital and operational transformation. The rightsizing initiatives at the bank and IUDÚ that Patricio discussed earlier, resulted in sequential headcount reduction about nearly 6%. The severance and other retirement charges contributed with 550 basis points increase in efficiency ratio. In addition, the sharp drop in the prices of our government security holdings in June negatively impacted efficiency by another 300 basis points.

Turning to capitalization on Slide 13. We closed the quarter with a Tier 1 capital ratio of 13% -- 13.6%, a 20 basis point sequential decline. This is mainly explained by loan portfolio growth above inflation, together with the impact of net results.

Now moving on to our views for the main drivers of our business for the full year from Page 14. Starting with loans. We now expect our portfolio to grow below inflation in 2022 vis-a-vis our projections for a stable loan in real terms as discussed in our prior call. Those will be revised inflation expectations to 90%, up from 65% anticipated earlier. Our current view also takes into account the transfer of the loan book related to the financial agency agreement with the government of San Luis, which accounted to 2.4% of total loans. And finally, weaker loan performance in Q2 given the more challenging macro platform.

Our expectations for deposits remain unchanged, growing in line with inflation, given FX restrictions and interest rate floors on time deposits. In terms of Asset Quality. With loan growth slowing down, we now anticipate lower loss provisions slightly below 2021 levels below our prior expectations. In turn, net cost of risk is anticipated to remain unchanged at similar levels of last year while we have improved our NPL expectations to remain relatively in line with today's level.

Expectations from our other metrics remained unchanged from our first quarter '22 views. And let me do a brief recap on that. NIM is expected to remain slightly above 2021 levels with a margin up in real terms benefiting from a sustained improvement in the pricing mix, the impact of higher inflation on inflation-adjusted assets, including government bonds and mortgages, and sustained net positive effect from the increase in interest rates passed by the Central Bank.

In terms of Fee Income, our fees from individuals are expected to follow inflation, while insurance income is anticipated to increase in real terms as premiums recover from the shortfall over the past 2 years. By contrast, brokerage fees are anticipated to remain soft. Operating expenses are expected to increase slightly above inflation, reflecting additional costs from the implementation of our digital transformation strategy, continued headcount efficiencies and customer execution costs. Finally, the Tier 1 ratio is expected to remain at adequate levels in the 12% or 13% range by year-end. Remember that 100% of our capital remains hedged against inflation.

Now we are ready to open the floor for questions. Ana, please go ahead.

Thank you, Mariano. (Operator Instructions) Our first question comes from Ernesto Gabilondo with Bank of America.

My first question is on the political outlook. I understand we are still far from the elections. But there's a lot of divisions among political forces and it seems there's still no preference for a candidate, right? So how are you seeing the political outlook ahead of the elections?

Alejandro, you want to answer that?

Sure, thank you for your question. You're quite right. At this point, it's very difficult to tell what the exact shape of the different political alternatives will be. We see that, at least on the incumbent, on the current administration coalition, there's a lot of strain and it is isn't clear candidate would emerge from there. Clearly, we see that the current -- the recent appointment of the current Minister of Finance is trying to bolster politically the possibilities of Mr. Massa. But that, of course, will depend strongly on how the economy performs after the measures he intend to take.

On the opposition side, we've recently seen a lot of fractionalism going on and a lot of divisions, but there seems to be some consensus around at least 3 possibilities. One around what would be the sort of hard liners of the opposition around Ms. Patricia Ulrich. Then you have somewhere sort of -- on a broader mainstream perspective of who the current mayor of the city of Buenos Aires, which is Horacio Rodríguez Larreta. And then we expect a radical candidate to also become available unless some other coalitions form within that apposition.

And at this point, it's very difficult to tell which of these will emerge as the stronger candidates. What we do know is the current polls show that there's a lot of voter insatisfaction regarding the current administration.

Perfect. And just a second question on your buyback program. We have been getting questions from investors asking if this is the best use of capital considering the challenging macro outlook for Argentina. As you have mentioned in your presentation, inflation could be up to 90% and rates are still moving up to maximum level. So it seems it will be difficult to normalize those levels in the short term. And this within the context of risk of an important depreciation of the Argentine peso. On the other hand, when looking to Supervielle's balance sheet, it seems has lower strength when compared to the large cap banks. The recent coverage ratio is at 108%; Tier 1 ratio, as you mentioned, could be around 13%. But when looking to the large-cap banks, they have coverage ratios of 170% and common equity Tier 1 above the 25%.

I understand all the internal initiatives and what you mentioned about the 6 pillars initiatives to improve profitability. But considering the external risks and a challenging outlook in Argentina. I would like to hear your thoughts about this buyback program.

Mariano, you want to?

Yes, sure. Currently, we feel comfortable with our capital levels with our Tier ratio of 13%. Although it is lower than our peers, we know there were limitations in place in the past years on the payment of dividends. Now they have been partially released. So if we focus on the current capital ratio and the outlook for the future, we feel it's an adequate level. The impact of this buyback in the capital ratio will be also limited because it's ARS 2 billion maximum level program. So as of June 30 all the product has been executed. It will have an impact of 0.6% in the Tier 1 capital ratio. It should be lower in the future as this amount is fixed in pesos, is being diluted over time.

And also, it has a cost for us and for our shareholders to have this excess capital because it does its value with inflation impacting our P&L. And the way to protect the inflation, the liquidity -- the way to protect the liquidity at the whole new level remember this is liquidity that we have at the holding company received from dividends, from subsidiaries that have positive results as Supervielle (inaudible) and Supervielle's asset management.

So in order to keep the value of the equity in real terms, we have a few options. The main option is treasury bonds, which has also it's risks as we saw in this quarter. So this decision allows us to remaining at, in another way, capital levels and reduced our treasury bonds portfolio and reduce the impact of inflation. At the same time, we are buying shares that we did -- do not reflect the actual value or the value based on the fundamentals of this. So this is first for us also an appropriate decision.

Ernesto, I would like to complement on what Mariano just said. The buyback program is basically, for us, is a signal that we believe in what we are doing in terms of transformation. Grupo Supervielle, we believe, has the most ambitious transformation program in the financial system. Looking at what you see in terms of, for instance, consolidation of branches that we are pursuing since last year, which is also is in the hands of Central Bank already. But already, even though we are expecting the let's say, the authorization to close branches, but we have already operated a drastic diminution of operating cost at all the branches that we want to close.

Also, as you see, for instance, the transformation that -- sorry, the transfer of 18 branches are to -- in Province of San Luis, which were inefficient branches. And what we continue, we'll continue to do in the future in terms of, for instance, in closing more inefficient branches, but also particularly putting in place and the new, let's say, digital technologies, the virtual hubs that allow us to do anywhere banking and anytime banking in the country. This is a strong belief that the company, Banco Supervielle will be a very competitive company.

So we are -- we want to sacrifice. We are willing to sacrifice short-term profits in order to reap the rewards in the near future. We have been executing efficiencies in 2019 -- sorry, 2021 and 2022 at the bank level. Now you see a major transformation that we are doing in IUDÚ, which is the consumer finance operation by basically executing a very, very drastic employee reduction. And also, we are -- we will be transferring all clients from IUDÚ into the bank in order to operate it in a single platform in the bank.

We believe that all these will turn into return on equity and creation of capital when the micro changes in Argentina, when it becomes more rational, all these measures we're taking today will allow us to grow again in a healthy way and a much more efficient way. So this is why we are implementing this, in addition to what Mariano said, which is basically holding government securities basically that have other risk.

The following questions come from Yuri Fernandes of JPMorgan.

I had a question regarding the profitability outlook. I understand that the change in the macro political environment is key here. But you have been doing a lot on the cost side. And we are still not seeing like better bottom line, right? So my question is, when should we start to see better trades here. I guess you had some trading losses this quarter. So I guess a question I have is, how are you seeing those losses in July, August? Like are fees improving? And regarding IUDÚ, I guess, the business is getting much smaller, you are reducing headcount. So given like the size of the severance payments over last quarters, like should we see earnings improving from here? Like what is the outlook in a more short midterm for you?

Alejandro, do you want to answer this question?

Yes, of course. Thank you for your question. What we have been doing is basically very much trying to take advantage of a series of restructuring that needed to be done in a context which isn't really favoring a growth of the financial system. You know that the macroeconomic and the regulatory conditions right now drive the financial sector to lend to the Central Bank or to the government treasure. Also, the increase in inflation deteriorates, financial intermediation so commercial banks that are positioned to service the private sector in this context, suffer more than others.

And as mentioned before, we worked hard on improving efficiencies in '21 and '22. And we also invested in a client acquisition as part of our digital transformation strategy. And this has had an impact, as you pointed out, in our ROE. The drop in the bonds we saw in the month of June we think was a reflection of a onetime effect and that the Central Bank trying to correct quickly that situation after. Basically, we have very clear policies on stock loss, and that was executed promptly. And therefore, that was the loss that was taken. But at the same time, part of these losses were recovered with a subsequent evolution.

And customer acquisition also, as mentioned before, has an impact on ROE in the short term because you have a combination of caps on the credit card lending. And also you have these floors on rates for time deposits, which affects the short-term ROE of this acquisition process. But again, here, we are taking a long-term view in which the customer acquisition process, the product development process, the enhancement of the customer experience and increased digital adoption will help us. In the short term, this is 18% reduction of headcount and restructuring of IUDÚ and bringing them into the bank platform will take a toll, but we see that probably in the second half of next year, depending on macroeconomic conditions and much of this hard work that is being going on will render its fruits.

No, that's pretty clear. So second half of the next year is kind of our best -- assuming, again, really depending on the economy, on inflation, but given what you're seeing, second half is the best guess. Okay.

As you can imagine, Yuri, you cannot do this without the amount side. Now if the credit demand and macroeconomic conditions to enhance, this will continue to be challenging.

No, that's clear. And I have a second question regarding exactly that point, like you have been more vocal on retail. I remember in the (inaudible). I know you're seeing auto loans growing nicely. But when you consider the total retail, like the total loans individually, they have been flattish to slightly down. So my question is, is this you becoming a little bit more restrictive given like higher inflation in Argentina? Or is it a demand issue for -- like is there a strategy changing because of the inflation? I guess, that's the kind of question I want to ask for retail loans.

Yes. During these periods, we typically become more sensitive to asset quality. And we have been very careful, and you see this in the strengths of our portfolio. When you go into this kind of macroeconomic context, which are difficult and changing and volatile, you want to be sure that the asset quality is protected. And this, for example, in the case of consumer lending, has had a very clear impact and we have become more restrictive in our lending policy in that segment in particular. We have also bolstered and improved growth in segments that we (inaudible) what you mentioned, which is the car loan segment and the cases of loans backed by assets that customers will defend.

So all in all, what we are doing is basically panels a more uncertain macroeconomic outlook where we see that some of the segments that we cater to, that we serve have been losing purchasing power and disposable income. Case in point is not only consumer segments, but also engineers, as you probably know. And at the same time, trying to increase the portion of middle- to high-income customers and asset-backed loans, which are helping us to balance this equation a bit better.

Perfect.

Thank you, Yuri. So I think there are no more questions today. So ladies and gentlemen, we have reached the end of today's Q&A session. 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 update next quarter. In the interim, we'll remain available to answer any questions that you may have.