Grupo Supervielle S.A. (SUPV) Q2 2018 Earnings Report, Transcript and Summary

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 at www.gruposupervielle.com. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I would like to turn the call over to Ana Bartesaghi, Treasurer and IRO. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us today. Speaking during today's call will be Patricio Supervielle, our Chief Executive Officer and Chairman of the Board of Directors; and Jorge Ramirez, Vice Chairman of the Board. Also joining us is Alejandra Naughton, Chief Financial Officer. All would be available for the Q&A session. Before we proceed, I would like to make the following Safe Harbor statement. Today's call will contain forward-looking statements, and I refer you to the forward-looking statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. I would now like to turn the call over to our Chairman and CEO, Patricio Supervielle.

Thank you, Ana. Good morning, everyone, and thank you for joining us today. If you're following the presentation, please turn to Slide 3. 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 took decisive actions including; first, we further tightened credit standards for other 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 operations; I've announced yesterday effective today, the consumer finance units of Grupo Supervielle which include Cordial Compañía Financiera, Espacio Cordial de Servicios, Tarjeta Automática, and the recently acquired car lending business, MILA, will be led by Mr. Juan Martin Monteverdi, current CEO of Espacio Cordial de Servicios. By combining the four companies under our 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 Compañía Financiera and Tarjeta Automática and leave the company. We remain fully focused on executing our strategy and closely monitoring economic dynamics in order to best execute our strategy with a rapidly changing environment. Besides the near-term challenges we're facing, our core business remains healthy with active quality in SMEs and middle market, and is at historically low levels. Deposits performed well and continue to expand exceeding the growth of our loan book. We're convinced of the resilience [ph] 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 were impacted by internal and external factors. The Argentine currency experienced a sharp revaluation of around 50% with a strike in inflation on a steep [ph] and sustained increase in interest rates. As shown on Slide 5; our macro assumptions for 2018 set as the beginning of the year were aligned with a market consensus and included a GDP growth of 3% with inflation continuing it's 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 on downwards 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, not 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 year end to the FX rate of 30 pesos 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 onto 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%. The experience has seen the trend with deposits up 36% and loans increasing 14% sequentially. On a net financial [ph] basis our loan book grows 5% sequentially while deposits were up 24%. Turning to Slide 7; as we just explained the FX evaluation 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%. Off note, we further lowered our exposure to the consumer finance segments to 11% from 12% in the first quarter following the tightening of credit scoring standards in these segments starting early in the year. Let me also highlight the growth in share of retail loans that was partially driven by the growth of the mortgage loan portfolio. These were the mix of new loan origination and inflation adjustment methodology. Moving onto 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 we turn to Slide 9; this page demonstrates the quality of our loan portfolio in terms of economic activity, organization [ph] 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 activity involved in the business which remains my only business. I will continue working very closely with all that we have done in the past seven years and this includes meetings with investors and participated in conferences when appropriate. Jorge will now review our funding P&L, as well as guidance. Please Jorge, go ahead.

Thank you, Patricio. Good day, everyone. Moving on to funding on Slide 10. Let me highlight the solid growth in our deposit base. The double-digit growth in both retail and corporate deposits. Peso denominated deposits increased 31% quarter-on-quarter. While those denominated in U.S. dollars around 5%. The share of this effects and projects remains at over 30% of total deposits. The loans to deposit 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 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 lag longing pricing [ph] in the sudden and sustained rise in interest rates. This is a temporary effect as we expect this business to deliver in good performance in the coming quarters, as well with some assets are repriced to the new environment. These showed highest interest rates, took an even higher toll on our consumer finance business. Lastly, our trading desk had a short position on effect 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 points sequential decline in our net interest margin sliding [ph] to 19.2% in the quarter. Net financial margin would include the exchange rate differences and results from slower transactions declining 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. This and the repricing dynamics of our portfolio of banking business anticipated to capture increased interest revenues from wage hikes as wage further stabilizes. With review to leverage peso denominated liabilities would repriced in 45 days when peso denominated loans repriced in normally 240 days. Moving onto 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. Yet the season of the online trading platform in the 2009 [ph] last May developed a position for our customers and has added new revenues to our company. We plan to extend this platform to other investment services consistent with our digital transformation strategy, these acquisitions clearly represents a qualitative lead in the value proposition for customers and extends significant new opportunities to the online customers who become part of the Supervielle platform. In terms of asset quality, on Slide 14; a non-favorable macro environment continue to affect consumers total income. As a result, the consumer finance book was the main contributor to the higher consumers and NPL ratio reported in the quarter. While we've done a corporate NPLs, each rose 20 basis points sequentially but still remain at historically low levels. Let me reiterate our wage book. The 90 days [indiscernible] stands 100 basis points below the NPL ratio. The new experiment by the 67.5% share of either loans tied to payroll or pension customers would start to decline and mainly despite being non-performing with other institutions in the system. Looking at the consumer finance asset quality on Slide 15; the vintage analysis is showing an improvement in credit quality of new loans starting March in this year and the tightened credit scoring. Like delinquency based segment also shows an improvement suggesting a change in trend since June. Consumer finance NPLs as of July is mainly trust converted 12 months for the first time since February 2016. These metrics have resulted in different measures taken on the past two quarters to manage credit quality. Now moving onto 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 earnings. We're implementing cost cutting and containment measures which we expect should result in a percentage increase in expenses or our own mid to high 20s this year with our 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 is a view [ph]. In the first place, the increase in cost of funds in consumer finance and high loans, loss provisions in this segment. Second, loan repricing in NII in our banking business which is a temporary effect. And finally, the impact from the short position on effect at the onset of the asset penetration [ph] evaluation 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 totaled 4.6% from 20.6% in the 1Q of '18. Turning to capitalization on Slide 18. We reported a consolidated performance here on capital ratio of 13.1% at the close of the quarter compared with 2Q on 8% in March. During the quarter we made capital injection of 861 million pesos in Bank of Supervielle and [indiscernible]. Financing the holding company amounted 2 billion pesos available from future capital injections. Moving to Slide 19; based on the challenging macro dynamics resulting in significant change in macro assumptions for year has impacted results for the quarter we are rescheduling our guidance for 2018. Due to several corrective actions we've discussed in this presentation regarding cost cutting measures, even more stringent, [indiscernible] and streamlining of the consumer finance operations. The latter is expected to result in go-forward annualized savings of between a 100 million pesos to 150 million pesos with a net impact of between 30 million pesos to 50 million pesos in 2018 as a result of the organization charges. However, our dynamics in portfolio is anticipated to capture increases resulting from rate hikes. We believe this will be in succession to offset the weak results in the second quarter and the impact of higher cost of funds and lower loan growth in consumer finance. In this context, our new line [ph] business follows; we now expect loan growth of a range from 40% to 50% compared to original guidance of 45% to 50% expansion. Cost of risk is anticipated to 4.6% to 5.1% from 4.1% to 4.5% before. Meanwhile, it changed adding 2% to 20%. While we anticipate expansions for full year to grow in our inflation, we're now expecting the attrition duration to range from 59% to 63% from 55% to 59%. As a result of these factors, with attributable comprehensive income guidance to a range of 2.9 million pesos to 3.3 million pesos from our original guidance of 4 million pesos to 4.3 million pesos. 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 turn, we have to navigate some 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 strong region franchise but we believe has been even further strengthened with our recent acquisitions and our position to capture high profits since the economy normalizes. I will 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.

[Operator Instructions] Our first question comes from the line of Erie Fernandez [ph] with JP Morgan.

I had a question on your commercial asset quality, it has been running at 0.5 unit [ph] but my question here is how worse this can get? And if your cost of guidance contemplates that notably when you look to the new information of the commercial loans, they are increasing about 7x versus last year. And like your cost of risk guidance from 4.6 to 5.1 is below what you had on the second quarter. So my question is, doesn't look to you that it's a bit optimistic the cost of risk guidance? And I had a second question on your margins at loss; I know that margins remained somewhat behaved but when you look to some product, we see personal loans and credit card loans having a long decline this quarter and that was a surprise for 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're seeing the repricing of loans? How long it may take for that future the margins? Thank you.

Regarding the first part of the question; the commercial -- the increase in the cost of risk guidance as we provided includes a margin of private federation in our commercial portfolio. And the bad loan formation, I mean, were coming from such low levels of delinquency rate that any jump in -- I mean, even if it's a 2 basis points increase which overall is not that significant in terms of our loan formation, it's a doubling of the amount formation. So it's -- I think it's a matter of a 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 recession worsens then we might be having a different type of conversation but given our current market economic assumptions which are in line with our market consensus, we believe that the conservative 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 essentially two things. Number one is, 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 our long time loans to companies. The second thing you have to bear in mind is that 49% of our SMEs in loan market portfolio is collateralized, so that also gives us sufficient protection in terms of worsening. Regarding the margins decline, you asked the -- I mean, the increasing in the non-portfolio of -- in essence plays a role here because that's a portfolio that's [indiscernible] the refinancing that also come at lower interest rate, that also has an impact of this. So I think that those are things that explain the lower margins that you saw.

Our next question comes from the line of Gabriel Nobrega [ph] with Citibank.

In the press release, you have stated that you will become more selective in your origination process and you have only revised during 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 will make the second question afterwards. Thank you.

You have to remind that the guidance is in pesos and the evaluation plays a role here. So because we have purposefully 25% of our loan portfolio is in U.S. dollars, so that plays a role. Second, we are already -- we have already approved very high growth rates year-on-year, so that also plays a role. Finally, remember that we have a very high factor input -- 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 holidays. So I think the combination of those two things make us believe that the 40% to 50% range is outright. In any event, again, as I explained in my answer to the prior question, your colleague from JP Morgan; this is based on a current macroeconomic consumption. If the recession worsens then we might have to review this. I think we're in a situation in which we will have to continue looking at the evolution of things quarter-by-quarter because the situation remains very fluid than dynamic.

And then for my second question; I remember that in the previous calls you had said that you had AM plan of reaching AM coverage ratio around 100% by 2020. And I just want to understand if that is still the plan or maybe do you want some rich AM coverage ratio close to those levels sooner? Thank you.

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

Our next question comes from the line of Fernando Suarez with AR Partners.

I was just thinking on the cost of risk that you posted this quarter. And I see that this should be declining deeply for the third quarter and the fourth quarter in order to meet the new guidance? And then I do my second question.

One thing you have to bear in mind is that -- I mean, we hit the brakes on the consumer finance business end of the first year. 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 loan book. We expect that trend to continue going forward; so the NPL ratio and the cost of rates that [indiscernible]; these portfolios tend to go sour pretty quickly, so as we tighten -- it creates standards, the new loans are behaving -- or the new loans being originated are behaving substantially better than the prior portfolio. So as we move towards the end of the year that should play a role. And when you look at the conservative of the bank, they are substantially lower than our overall NPL. So the combination of all these factors and as I explained in the presentation, in July for the first time since February 2016 we sold off -- the peso amount of NPLs in the consumer finance portfolio is flat compared to the prior month. So while we're still monitoring this space [ph] and still it's too early to say that the worst is over and we will be on the measures we're taking 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 we expect that the combination of all these factors should be enough for us to reach the conserved risk guidance that we're providing.

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

My question is about the macro environment and what your expectations are for growth and for the exchange rate and for the next two or three years? And I realized it is difficult but I wanted to know what do you think are traditional scenarios are at this point? Thank you.

I mean, it's not an easy question to answer, we're having a couple of discussions with several economic advisors. I think that the other consensus and the -- what we're working is that it's going to look like a V-shape recovery but a V-shape that will remind you of a night logo rather a victory V, okay. So it's going to -- it's a sharp downturn, the one that we're having now, and we 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, we've had estimations from certain economies that are seeing that; the globe [ph] costed us this year $8 million in illness exports from the RV [ph] sector, and there are some estimations that these things are being minus $8 million this year should be plus $11 million next year. So still 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 and we're still seeing how that evolves going forward. But again, as we said, we remain optimistic and believe in the long-term in terms of the growth prospect for Argentina and especially for our industry.

Our next question comes from the line of Erie Fernandez [ph] with JP Morgan.

I had just a question on export [ph] here and I understand that the level for this should be under pressure -- like I guess, the both of your guidance implying about 21% to refer to coming quarters, the higher end pricing 25% ROE. And this is well below the loan growth pace growing at 40% to 50%. So for the next years it's also hard to see ROE moving close to the pace of the loan growth; so you should continue to consuming capital. So my question is, how are you seeing like capital for the coming years? And when do you anticipate meeting capital or you see, maybe ROEs or maybe the pace of loss kind of converging -- was it shorter because today it's 13% to Q1 duration [ph]. Your explanation is good first of all, but I'm not totally sure if this will be the case in the coming two, three years. So if you can add some points on that, it would be helpful. Thank you.

I mean, we always said that our 11.5% will be the point at which we go back to the market to try to raise capital. We still have other options prior to going to the market which is issuance subordinating debt as a way of raising Q2. 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 adds to a capital base going forward compared to the year-end net worth and is ROE an average calculation and while profit addition to net worth is probably a better way of looking at this. And if you look at original guidance probably for this year, we were thinking in terms of bubbling [ph] our growth -- we now went to talking off a growth of around between 45% to 60% compared to last year. So that is more in line with the growth we're having in terms of grade [ph] 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 as position [ph] normalizes that should be the case. And we're going to gain -- by means of gaining efficiency, we should gain profitability, and that also is going to impact our ROE and our returns levels higher.

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

Thank you for joining us today, and we appreciate your interest in our company. We look forward to meeting more of you by 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.

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