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Grupo Supervielle (NYSE:SUPV)
Q2 2018 Earnings Conference Call
Aug. 24, 2018 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator 

Good morning and welcome to the Grupo Supervielle second-quarter 2018 earnings call. A slide presentation will accompany today's webcast, which is available in the Investors section of Grupo Supervielle's Investor Relations website,www.gruposupervielle.com. [Operator instructions] As a reminder, this conference is being recorded. At this time, I would like to turn the call over to Ana Bartesaghi, treasurer and IRO.

Please go ahead.

Ana Bartesaghi -- Treasurer and IRO

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, chief financial officer.

All will be available for the Q&A session. Before we proceed, I would like to make the following safe harbor statement. Today's call will contain forward-looking statements, and I refer you to our forward-looking statement section for 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 and CEO Patricio Supervielle.

Patricio Supervielle -- Chief Executive Officer and Chairman of the Board of Directors

Thank you, Ana. Good morning, everyone. Thank you for joining us today. If you're following the presentation, please turn to Slide 3.

This was a very difficult year-- quarter, and results were significantly impacted by the drastic and sudden changes in the macro environment, resulting in a sharp decline in attributable net income in this quarter and our expectations for the year. In this context, we'll-- we took decisive actions, including: first, we've further tightened credit standards throughout the company; second, we began to implement cost-cutting measures across the board; third, we decided to streamline and change the management of our consumer finance operation. As announced yesterday, effective today, the consumer finance units of Grupo Supervielle, which include, Cordial Compania Financiera, Espacio Cordial de Servicios, Tarjeta Automatica and the recently acquired car-lending business MILA, will be led by Mr. Juan Martin Monteverdi, current CEO of the Espacio Cordial de Servicios.

By combining the four companies under a unified leadership, we seek to drive increased operational efficiency, accelerate the offering of a wide range of consumer products, enhance customer experience, and increase cross-selling. Consequently, Mr. Carlos Depalo has stepped down from his role as CEO of Cordial Compania Financiera and Tarjeta Automatica, and leave the company. We'll remain fully focused on executing our strategy and closely monitoring economic dynamics in order to best execute our strategy with a rapidly changing environment.Despite the near-term challenges we are facing, our core business remains healthy with asset quality in SMEs and middle market at historically low levels.

Deposits performed well and continued to expand, exceeding the growth of our loan book. We are convinced of the resilience and strength of our franchise as well as our policies and practices, and believe the growth potential for the financial sector in Argentina remains unchanged. Turning to Slide 4, the macro was impacted by internal and external factors. The Argentine currency experienced a sharp devaluation of around 50%, with a spike in inflation and a steep and sustained increase in interest rates.

As shown on Slide 5, our macro assumptions for 2018 set at the beginning of the year were aligned with the market consensus and included a GDP growth of 3% with inflation continuing its declining trend reaching 19% for the year. The Badlar rate, which is the benchmark rate for the Argentine financial system, and the monetary policy rate were expected to follow inflation downward trend and foreign exchange was anticipated to reach 22 by year end. Following the significant changes in the macro backdrop experienced in the quarter, we have adjusted our assumptions for 2018. We now expect GDP to contract by 0.3% this year and inflation to increase to around 32%.

In this context, the Badlar and monetary policy rate are anticipated to be at 29% and 35%, respectively, at the year end with the FX rate of ARS 30 per dollar. While we have taken actions to adjust to this new macro environment, it was not enough to fully mitigate the initial impact on our results, which led to a performance well below our expectations. Moving on to the Argentine financial sector on Slide 6. In this context, the financial systems have proven the resiliency based on high liquidity levels and good capitalization.

Importantly, system deposits in the quarter expanded over 18% quarter on quarter above loan growth of 15%. We experienced a similar trend with deposits up 36% and loans increasing 44-- 14% sequentially. On an FX-neutral basis, our loan book rose 5% sequentially while deposits were up 24%.Turning to Slide 7. As we just explained the FX devaluation had an impact on the growth rate of the loan book resulting in a 14% sequential increase.

Peso-denominated loans rose 7% while U.S. dollar-denominated loans declined 3%. Of note, we further lowered our exposure to the consumer finance segment to 11% from 12% in the first quarter following the tightening of credit scoring standards in this segment starting early in the year. Let me also highlight the growth in share of retail loans that was partly driven by the growth of the mortgage loan portfolio.

This was a mix of new loan origination and inflation adjustment methodology. Moving on to Slide 8. Corporate and retail loans rose more than 13% sequentially while consumer finance loan growth posted a continued deceleration, up 3% in the quarter. If you turn to Slide 9, this page demonstrates the quality of our loan portfolio in terms of economic activity, atomization, and collateralization.

Our portfolio is well diversified across a broad range of economic sectors. Moreover, the top 10 and 20 borrowers account for 10% and 14%, respectively, of our loan portfolio. Also, 49% of our SMEs and middle-market portfolio is collateralized. Finally, over 67% of the retail portfolio is tied to payroll or pension plans.

Before handing the call over to Jorge Ramirez, I want to congratulate him on his new role as CEO effective September 1. As Chairman, I will still be actively involved in the business, which remains my only business. I will continue working very closely with Jorge as we have done in the past seven years, and this includes meetings with investors and participating in conferences when appropriate. Jorge will now review our funding, P&L as well as guidance.

Please, Jorge, go ahead.

Jorge Ramirez -- Vice Chairman of the Board

Thank you, Patricio. Good day, everyone. Moving on to funding on Slide 10, let me highlight the solid growth in our deposit base with double-digit growth in both retail and corporate deposits. Peso-denominated deposits increased 31% quarter on quarter while those denominated in U.S.

dollars were up 5%. A share of FX deposits remains below 30% of total deposits. The loans to deposits ratio was closer to 100% this quarter. Moving on to the P&L on Slide 12.

Net interest income plus net income from financial instruments and exchange rate differences were relatively flat sequentially and up 42% year on year. This was mainly due to the following factors, first, our banking business reported softer-than-expected margins from lagged loan repricing, given the sudden and sustained rise in interest rates. This is a temporary effect as we expect this business to deliver a good performance in the coming quarters as long as some assets are repriced to the new environment. These sharp hikes in interest rate took an even higher toll on our consumer finance business.

Lastly, our trading desk had a short position on FX at the onset of the Argentine currency devaluation in addition to lower-than-anticipated trading results, which impacted our bottom line this quarter. These factors brought about a 40-basis-point sequential decline in our net interest margin, slipping to 19.2% in the quarter. Net financial margin, which include the exchange rate differences and results from slower transactions declined to 150 basis points in the period to 17.4%. Please turn to Slide 12.

The tables on this page show the repricing dynamics of our assets and liabilities. Based on the repricing dynamics of our portfolio, our banking business anticipated to capture the increased interest revenues from rate hikes as rates further stabilizes. This is due to the average peso-denominated liabilities, which repriced in 45 days, while peso-denominated loans reprice in almost 240 days. Moving on to Slide 13.

Net service fee income continues to perform well, showing a sequential increase in the net service fee income ratio of 200 basis points. The acquisition of the online trading platform InvertirOnline last May complements the value proposition for our customers and has added new stream of revenues to our company. We plan to extend this platform to our investment services. Consistent with our digital transformation strategy, this acquisition clearly represents a qualitative leap in the value proposition for our customers and extends significant new opportunities to the InvertirOnline customers, who'll become part of the Supervielle platform.

In terms of asset quality, on Slide 14, an unfavorable macro environment continued to affect consumers' disposable income. As a result, the consumer finance book was the main contributor to the higher cost of risk and NPL creation reported in the quarter. While Retail and Corporate NPLs each rose 20 basis points sequentially, they still remain at historically low levels. Looking deeper at the Retail book, the 90 days plus delinquency ratio of the blended book stands 100 basis points below the NPL ratio.

This is explained by the 67.5% share of retail loans tied to payroll or pension customers, which is something [Inaudible] to remain in current with us despite being nonperforming with other institutions in the system. Looking at the consumer finance asset quality on Slide 15, delinquency analysis is showing an improvement in credit quality of new loans starting March of this year and the tightened credit scoring. Lagged delinquency for this segment also shows an improvement suggesting a change in trend since June. Consumer finance NPLs as of July remain flat compared to the prior month for the first time since February 2016.

These metrics are the result of the different measures taken over the past two quarters to manage credit quality. Now moving on to expenses on Slide 16. While expenses increased slightly above inflation, our efficiency ratio increased to 66% from 59% in the first quarter, impacted by flat operating revenues. We're implementing cost-cutting and containment measures, which we expect should result in a percentage increase in expenses of around mid- to high 20s this year, below expected inflation level.

Please turn to Slide 17 to review profitability. Attributable comprehensive income for the quarter declined 11% year on year and 36% sequentially. As we just explained, this was due to, in the first place, the increase in cost of funds in consumer finance and high loans loss provisions in this segment. Second, lagged repricing in NII in our banking business, which is a temporary effect.

And finally, the impact from the poor position on FX at the onset of the Argentine peso devaluation along with lower-than-anticipated trading results. Return on average assets declined to 1.8% from 3.3% in the first quarter while return on average equity fell to 12.6% from 20.6% in the first Q '18.Turning to capitalization on Slide 18. We reported a consolidated pro forma Tier 1 capital ratio of 13.1% at the close of the quarter, compared with 15.8% in March. During the quarter, we made a capital injection of ARS 861 million at Banco Supervielle and acquired MILA and InvertirOnline.

Funds from the holding company amounted to ARS 2 billion available for future capital injections. Moving to guidance on Slide 19. Based on the challenging macro dynamics, which has significantly changed the macro assumptions for the year and impacted the results for the quarter, we are resetting our guidance for 2018. We took several corrective actions already discussed in this presentation regarding cost-cutting measures, even more stringent credit standards and streamlining of the consumer finance operations.

The latter is expected to result in a go-forward annualized savings of between ARS 100 million to ARS 150 million, with a negative impact of between ARS 30 million to ARS 50 million in 2018 as a result of reorganization charges. And while our repricing dynamics of portfolio is anticipated to capture increased interest revenue rate hikes, we believe this will be insufficient to offset the weak results of the second quarter and the impact of higher cost of funds and lower loan growth in consumer finance. In this context, our new guidance is as follows: we now expect the loan growth to range from 40% to 50%, compared to original guidance of 45% to 50% expansion. Cost of risk is anticipated to range between 4.6% to 5.1% from 4.1% to 4.5% before.

NIM guidance remains unchanged at 18% to 20%. While we anticipate expenses for the full year to grow below inflation, we're now expecting the efficiency ratio to range from 59% to 63% from 55% to 59%. A result of these factors will lower the attributable comprehensive income guidance to a range of ARS 2.9 billion to ARS 3.3 billion from the original guidance of ARS 4 billion to ARS 4.3 billion.Finally, also reflecting the capital allocated to the two recent acquisitions, which was not included in our original guidance, the Tier 1 ratio is now expected to be between 12% to 13% from our earlier range of 14% to 15%. In short, we have to navigate through very difficult events this quarter and we expect a softer economic environment for the rest of the year.

However, we remain optimistic regarding the long-term prospects for Argentina and for our industry. We have a stronger resilient franchise that we believe has been even further strengthened with our recent acquisitions and are well-positioned to capture high [Inaudible] as the economy normalizes. I would like to take this opportunity on behalf of the board and the entire executive management team to thank our shareholders for their continued support. We're now ready to take questions.

Operator, please open the line for questions. 

Questions and Answers:

Operator

Thank you. [Operator instructions] Our first question comes from the line of Yuri Fernandes with JP Morgan. Please proceed with your question.

Yuri Fernandes -- J.P. Morgan -- Analyst

Thank you, gentlemen. I have a question on your commercial asset quality. It had been behaved. It had been running at 0.5 NPLs.

But my point here is how worse this can get? And if your cost of risk guidance contemplates that and notably when you look to the new NPL formation of the commercial loans, they are increasing about seven times versus last year and like your cost of risk guidance from 4.6% to 5.1% is below what you had in the first-- on the second quarter. So my question is, doesn't it look to you that it's a bit optimistic, the cost of risk guidance? And I have a second question on your margins at loans. I know that margins remained somewhat behaved, but when you look to some products, we see personal loans and credit card loans having loan decline in this quarter. And that was a surprise to me because like given the higher rates, I was expecting the lines to have a higher loan yields.

Can you explain what's happening here? How you are seeing the repricing of loans? How long it may take for that to put through the margins?

Jorge Ramirez -- Vice Chairman of the Board

OK. Regarding the first part of the question, the commercial of-- the increase in the cost of risk guidance that we provided includes a margin of further deterioration in our commercial portfolio. The bad loan formation-- I mean, we're coming from such low levels of delinquency rate that any jump in it-- I mean, even if it's a 2 basis point-- 20-basis-point increase, which in our world is not that significant in terms of bad loan formation, it's a doubling of the bad loan formation. So it's-- I think it's a matter of the level from which we're starting and where we're going.

We don't believe that these figures are optimistic. I mean, based on these current macro assumptions that we have, if the recession worsens, then we may be having a different type of conversation. But given our current macroeconomic assumptions, which are in line with the market consensus, we believe that the cost of risk guidance that we have provided should be enough to cover and we don't believe it's too optimistic. The other thing you have to remember are essentially two things.

Number one is, we work a lot in terms of operational cash flow financing. And our past experience in other crisis is that these are portfolios that tend to behave significantly better than other-- than other types of loans to companies. The second thing you have to bear in mind is that 49% of our SMEs and middle-market portfolio is collateralized. So that also gives us sufficient protection in case of a worsening.

Regarding the margins decline, you asked the-- I mean, the increase in the nonperforming loan portfolio in essence plays a role here because that's the portfolio that stopped using their refinancing that also come at lower interest rates. That also has an impact on this. So, I think those are the things that explain the lower margins that you saw.

Yuri Fernandes -- J.P. Morgan -- Analyst

OK. Thank you.

Jorge Ramirez -- Vice Chairman of the Board

Pleasure.

Operator 

Thank you. Our next question comes from the line of Gabriel Nobrega with Citibank.

Gabriel Nobrega -- Citi -- Analyst

Hi, everyone, and thank you for the opportunity. In the press release you have stated that you will become more selective in your origination process and you have only revised your loan growth guidance to 40%. And I just want to understand since you are becoming maybe more selective in your origination, could there maybe be a downside risk to your loan growth guidance? And I'll make a second question afterwards. Thank you.

Jorge Ramirez -- Vice Chairman of the Board

OK. You have to bear in mind that guidance is in peso and the devaluation plays a role here. So-- because we have approximately 25% of our loan portfolio is in U.S. dollars, so that plays a role. Second, we are already-- we have already accrued very high growth rate year on year, so that also plays a role.

Finally, remember that we have a very high factoring-- very high share in the factoring business, and factoring tends to pick up substantially by the end of the year as a result of year-end sales from the holidays. So, I think the combination of those two things make us believe that the 40% to 50% range is adequate. In any event, again, as I explained in my-- the answer to the prior question of your colleague from JP Morgan, this is based on the current macroeconomic assumptions. If the recession worsens, then we might have to review this.

I think we're in a situation in which we'll have to continue looking at the evolution of things quarter by quarter because the situation remains very fluid and dynamic.

Gabriel Nobrega -- Citi -- Analyst

All right. And as for my second question, I remember that on previous calls, you have said that you had a plan of reaching a coverage ratio around 100% by 2020. And I just want to understand if that is still the plan or maybe do you want to reach a coverage ratio close to those levels sooner? Thank you.

Jorge Ramirez -- Vice Chairman of the Board

That's a permanent discussion we have, and clearly-I mean, we still maintain our guidance in terms of that we're going to reach coverage by the end of next year. But we-- but if we can anticipate that, we'll definitely try to do that.

Gabriel Nobrega -- Citi -- Analyst

All right. That's very clear. Thank you.

Operator

Thank you. Our next question comes from the line of Fernando Suarez with AR Partners. Please proceed with your question.

Fernando Suarez -- AR Partners -- Analyst

Hey, thanks for taking my question. I was just thinking on the cost of risk that you posted this quarter, and I think this should be declining deeply for the third quarter and the fourth quarter in order to meet the new guidance. And then I'll hold my second question.

Jorge Ramirez -- Vice Chairman of the Board

Yes, Fernando, good morning. One of things you have to bear in mind is that-- I mean, we hit the brakes on the consumer finance business end of the first Q. And you-- and part of that is already showing in terms of the growth of that portfolio and how that portfolio is diluting itself as a percentage of total-- of our total loan book. We expect that trend to continue going forward.

So the NPL ratio and the cost of risk at the end of the day is a blend. These portfolios tend to go sour pretty quickly. So, as we tightened credit standards, the new loans are behaving or the new loans being originated are behaving substantially better than the prior portfolio. So, as we move toward the end of the year, that should play a role.

When you look at the delinquency rates of the bank, they are substantially lower than our overall NPLs. So, the combination of all these factors, and as you-- I explained also in the presentation, in July, for the first time since February 2016, we saw about the peso amount of NPLs in the consumer finance portfolio flat compared to the prior month. So, while we are still monitoring the situation and still it's too early to say that the worse is over and we believe those measures we've taken combined with the changes and the streamlining we're doing on this business are going to help us to bring asset quality even more under control going forward. And again, we expect that the combination of all these factors should be enough for us to reach the cost of risk guidance that we're providing.

Fernando Suarez -- AR Partners -- Analyst

Great.

Operator

Thank you. Our next question comes from the line of Carlos Gomez with HSBC Global Asset Management. Please proceed with your question.

Carlos Gomez -- HSBC Securities -- Analyst

Hi. This is Carlos Gomez from HSBC. My question is about the macro environment and what your expectations are for growth and for the exchange rate for the next two or three years? And I realize it it's difficult, but I wanted to know what do you think are reasonable scenarios at this point. Thank you.

Jorge Ramirez -- Vice Chairman of the Board

That's a great question, and it's-- I mean, it's not an easy question to answer. We were having a couple of discussions with several economic advisors. The-- I think that the average consensus that we're working on is that it's going to look like a V-shaped recovery, but a V shape that will remind you of the Nike logo rather than a victory V. OK? So it's going to-- it's a sharp downturn, the one that we're having now.

It's going to start to recover and-- going forward. I mean, just by the impact of a better climate, the impact of the harvest should have a very important influence in the growth indicator next year. I mean, with current estimations from some economies that saying that if the growth costed us this year ARS 8 billion in less exports from the RV sectors and there are some estimations that these figures being minus ARS 8 billion this year should be plus ARS 11 billion next year. OK? So clearly, there are things that we still don't know how they're going to turn out.

All these questions regarding construction as a result of the recent judiciary scandals is still to be seen how that evolves going forward. But again, as we said, we remain optimistic in the medium and long term in terms of the growth prospects for Argentina and especially for our industry.

Operator

Thank you. Our next question comes from the line of Yuri Fernandes with JP Morgan. Please proceed with your question.

Yuri Fernandes -- J.P. Morgan -- Analyst

Thank you, gentlemen, for taking again another question from me. I had just a question on capital here, and I understand that the level for which should be under pressure like, I guess, the bottom of your guidance implying about 20%, 21% ROE for the coming quarters, the higher end implies a 25% ROE, and this is well below the loan growth base like growing at 40%, 50%. But for the next years, it's also hard to see ROE moving close to the pace of loan growth, so you should continue consuming capital. So my question is, how are you seeing, like capital for the coming years? And when do you anticipate needing capital or you see maybe ROEs or maybe the pace of loans kind of converging? Was it shorter because today it's 13% Tier 1 ratio? Your situation is comfortable, but I'm not totally sure if this will be the case in the coming two or three years.

So, if you can add some points on that would be very helpful.

Jorge Ramirez -- Vice Chairman of the Board

I mean, we always said that around 11.5%, that would be-- the point at which we would go back to the market in order to try to raise more capital. We still have other options prior to going to the market, which is issuing subordinated debt as a way of raising Tier 2. So-- and on the other hand, more than ROE, I think that what you should look at is how much the net profit that we make as to our capital base going forward compared to the year-end net worth and-- because ROE is an average calculation and while profit addition to net worth is probably a better way of looking at this. And if you look at our original guidance for this year, we're thinking in terms of doubling our growth and now we're talking of a growth of around 45% to-- between 45% to 60% compared to last year.

So, that is more in line with the growth we're having in terms of credit growth. So going forward, it will depend on if we are able to continue delivering the operational leverage that we had been delivering in the past quarters. And we believe if the situation normalizes, that should be the case. And we're going to gain-- our means of gaining efficiency, we should gain profitability that also it's going to impact our ROE and our returns levels higher.

Yuri Fernandes -- J.P. Morgan -- Analyst

OK. Thanks and best of luck for the coming quarters. OK? Thank you.

Jorge Ramirez -- Vice Chairman of the Board

Yes, thank you.

Operator

Thank you. [Operator instructions] There are no further questions at this time. I would like to turn the call back over to Ms. Bartesaghi for any closing remarks.

Ana Bartesaghi -- Treasurer and IRO

Thank you for joining us today and 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 enjoy the rest of your day.

Operator

[Operator signoff]

Duration: 36 minutes

Call Participants:

Ana Bartesaghi -- Treasurer and IRO

Patricio Supervielle -- Chief Executive Officer and Chairman of the Board of Directors

Jorge Ramirez -- Vice Chairman of the Board

Yuri Fernandes -- J.P. Morgan -- Analyst

Gabriel Nobrega -- Citi -- Analyst

Fernando Suarez -- AR Partners -- Analyst

Carlos Gomez -- HSBC Securities -- Analyst

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