Q1 2023 Grupo Supervielle SA Earnings Call

Speaker 1: the fiscal balance has deteriorated as revenues

Speaker 1: Sorry. Sorry. It's okay. The – while fiscal spending has declined in real terms with the high levels observed in the first half of that year, fiscal balance has deteriorated as revenues have been declining. The IMF original fiscal primary deficit target of 1.9% has been exceeded and is currently estimated to almost reach 3%. In this context the financial systems continue to experience weak credit demand with peso loans down in the low teens year on year with loans to GDP at a historical low of 7% and presenting significant long-term growth potential once the economy stabilizes. In turn the system remains highly liquid with peso deposit.

Speaker 2: the effective tax rate for the full year. Thank you.

Speaker 1: Thank you, Mariano. Mariano, can you – Yes. I'm sorry, Patricio. Hello, Arnaldo. Thank you for your question. First, regarding ROE, as you said, we achieved 2 percent positive ROE in real terms for the quarter. For the rest of the year, for the complete year, we are maintaining our expectations of achieving a positive ROE as we projected in prior quarters. These projections are based mainly in cost reductions derived from the UDO business margin with the bank, also with the transfer of the service financial agency agreement to Banco Nación, which allowed us to reduce costs, mainly of branches and personnel, and the rest of the efficiencies achieved through last year. Those things were in place. They were executed in 2022. Now, we are seeing the results. So, they allowed us to reduce the cost of the service.

Speaker 1: to think that we will achieve also the positive of hourly for the year. But having said that, as we commented during the presentation, the macro fraud has worsened the

Speaker 1: I would say that now after one quarter of the year we have more uncertainty than we had three months ago. Why? Because inflation has risen.

Speaker 1: 22 percent in the quarter and for the year the last

Speaker 1: economic consensus of the survey from the central bank which 126 percent and that was before the data of April so most probably those projections are being revised upwards. So this is much higher than the 100 percent that we had in our projections.

Speaker 1: Also the GDP, we now believe that it will be decreasing probably more than 3%. So that will also have its own economic activity and we will be also monitoring credit particularly on the...

Speaker 1: So with all these factors considered we think there's a greater certainty we are still positive for the ROE or for the ER but always a confusion on this.

Speaker 1: this factor, particularly the micro and the regulatory problems.

Speaker 1: And then regarding the effective flux rate.

Speaker 1: According to IFRS, we need to record in the income tax line item.

Speaker 1: the impact of inflation on certain tax credits. So that's part of the result of the monetary position that is recorded in the income tax line item. So that creates a larger charge and a higher effecting tax rate.

Speaker 1: If we adjust by that, that's about 700 million pesos for the border. If we adjust that and reduce the...

Speaker 1: the profit before taxes and reducing the contact charges that would give us an effective rate of approximately 40%.

Speaker 1: which is still a bit higher from 35% but the difference clearly shorter. There are still some differences because there are some permanent differences regarding non-deductible costs for the income tax return. So all these differences also when the result is low.

Speaker 1: have a greater impact and they may produce a higher exposure. So that's why you see that.

Speaker 1: high tax rate.

Speaker 2: Thank you, Maria. Just a follow-up in these two ones. So in the ROE you mentioned we just expect positive earnings, positive ROE in the next quarters. And I don't know if we can expect something around mid single-digit ROE for the full year.

Speaker 2: And in your second one, if we normalize the effects, the tax rate should be around 40%. So am I right on those ideas?

Speaker 1: For the first one, uh...

Speaker 1: It's still hard to breathe.

Speaker 1: I would probably be more conservative and say in the low-singer pitches, maybe similar to what we see in the first quarter.

Speaker 1: But there are still many moving parts because remember that with so much higher inflation and higher interest rates that is positive for our margin but higher inflation can be negative for our costs and also can be negative for low-dose provisions. So this effect. hackays more on success rates mount and

Speaker 1: may upset each other, but we do have to see which impact is higher, is it positive or margin or negative on the cost side.

Speaker 1: So I would say in the ROE, in the Los Angeles digits, as we know this.

Speaker 1: part of those to be considered.

Speaker 1: then regarding the effective tax rate for this it would be 40% if we wouldn't make these adjustments required by FRA which is...

Speaker 1: an adjustment only for the presentation of the income statements but we will still have to do it. So if there are we...

Speaker 1: is closer to zero, the distortion that is attachment producing is higher so maybe you will still see a high effecting income tax rate.

Speaker 2: I don't know if I will see you. Oh yes, super helpful. Thank you very much.

Speaker 3: You're welcome.

Speaker 4: Our next question comes from Rodrigo Nistor from Latin Securities.

Speaker 5: Good morning, everyone.

Speaker 6: Appreciate the opportunity to ask questions.

Speaker 7: First, I would like to address the topic of inflation and interest rates. I mean, in the current economic climate, it seems that...

Speaker 8: Interest rates adjustments alone may not be sufficient to control inflation. So given this, how do you anticipate interest rates to evolve in the short term? Is there a possibility that with my experience more negative real rates if inflation continues to escalate?

Speaker 9: And what's your funding strategy allocation given your view on interest rates? Thank you.

Speaker 10: Well, we expect, I mean, as we have seen already in the past quarters, there have been increases in interest rates and we continue to see this looking forward when there is a mark of inflation and increasing interest rates.

Speaker 11: However, the view is that we have this sensation that the central bank is behind the curve and we're not seeing rates that anticipate expected inflation.

Speaker 12: In this sense, this is what we see. But anyway, the way we structure our assets and abilities, every time there is a hike in the streets.

Speaker 13: interested we follow behind but without going to an important positive.

Speaker 14: field because inflation is always the interest rate follow a lag in inflation and not anticipated.

Speaker 15: So that's what we are expecting.

Speaker 16: Although it is positive for our financial margin, we would expect that the monthly inflation would not go much higher than what we have seen.

Speaker 17: I don't know what you expect from it. Okay, thank you. A follow-up, if I may, and maybe looking farther into the future. So Argentina will be welcoming a new government and also a new central bank administration next year. So –

Speaker 18: Could you share your thoughts on what potential policy changes you anticipate or you think and how you are preparing the bank for this new environment in 2024? Dr.

Speaker 19: Well, first let's start with the situation today. As of today, Argentina is facing the worst drought we have seen in terms of with a big drop in drought.

Speaker 20: or shortfall in revenues for the central bank and with very low reserves and severe limitations implemented to restrict imports and affecting the economic activity there is a sense of fatigue in the sense that there seems to be a political consensus for

Speaker 21: for that next government needs to make broad changes in monetary fiscal policies, but also on other fronts such as maybe labour reforms.

Speaker 22: And so...

Speaker 23: So it would be like a short therapy probably. So having said that, next government we believe that the regulatory changes will come. They will have a positive impact of course in a repeat time period.

Speaker 24: in the banking industry because we've been suffering some punitive revelations that affected our profitability, particularly cuts on interest rates, goes on interest rates for time deposits, certain also regulations on commissions.

Speaker 25: But at the same time, all these positive regulatory changes, we believe that they will come synchronized with the implementation of the monetary and fiscal policies.

Speaker 26: and probably regarding the FX-EFX, we don't believe at this stage that it will be

Speaker 27: feasible and complete deregulation from day one. So it might take time to do this.

Speaker 28: effects deregulation and it will come gradually. That is our thought at this point. We expect that for us it will anyway, I mean it is positive because what we need the financial industry in Argentina is completely

Speaker 29: transactional and is suffering because of high inflation, because we don't know, and basically savings, they go away to protect against the erosion of purchasing power. And with low inflation, there is a huge potential for the financial industry to deal with the long term.

Speaker 30: 7% of GDP. But of course this will depend and we hope that it will depend on the on a swift implementation of the normalization of fiscal and monetary policies. And we expect that still 2024 will be a relatively difficult year, sort of a transition year.

Speaker 31: where all this will be implemented and maybe with a pickup of loans in the second part of the year.

Speaker 32: will be implemented and maybe with a pickup of loans in the second part of the year. I don't know if I answered your question.

Speaker 17: Yeah, that was really helpful and insightful too. Thank you.

Speaker 4: Thank you, Rodrigo. Our next question comes from Yulifat Mendez at J.D. Morgan.

Speaker 21: Hello everybody and congrats for the first profits in a while. I have a question regarding devaluation and your FX exposure. We saw you increase a lot your global net position on that. So my question is if there is a big devaluation on the official FX, what is the moving parts? How will this affect you?

Speaker 21: I have a second question regarding deposits, especially on transactional deposits, on demand deposits and savings. We are seeing a big decrease to quarter over quarter and we also saw that when other banks reported in Argentina.

Speaker 21: higher rates, high inflation, maybe investors are getting more smarter on deposits. But is this only a rate thing or are the banks losing market share to wallets in Argentina like Mallee, you know, like all those guys maybe.

Speaker 21: As they are paying for deposits, are you using market share or is it just people in Argentina using less? Thanks for the deposit. Thank you.

Speaker 1: Please, Maria, now can you answer the first part of the question? Yes, hello, Yuri, thank you for your question. Regarding the valuation,

Speaker 1: If the evaluation, if you hide the evaluation what will happen, in real terms that is the evaluation much higher than the expectation for the period.

Speaker 1: We can be loaned in US dollars up to 5% of our tier one of our capital at the bank.

Speaker 1: through total instruments or NDS.

Speaker 1: And on top of that we also can have, and we do have, a position in dual bonds of the government.

Speaker 1: This bonds pay the higher of inflation or the valuation. So right now we are accruing inflation which is at very high levels and the valuation is going behind although the government is accelerating the damn spool is going behind inflation.

Speaker 1: The one way to what will happen, those bonds would pay the one wage for rate.

Speaker 1: So that's how we are we Already mentioned we are 100 head second inflation, but also we have a small low position in US dollars.

Speaker 1: which can be also larger if we account for these dual worms.

Speaker 16: So the first impact would be again mainly on this long position in foreign currency, accounting for the dual bonds.

Speaker 1: then most probably the valuation will translate into higher inflation. So also there we would increase our margin to offset the higher inflation. And that would translate...

Speaker 1: in the short term or the middle term into higher costs. So that's what I would expect to be the moving part. Then regarding our loan portfolio right now, the way of the foreign currency, the loan portfolio denominator in foreign currency is much lower.

Speaker 1: than several years ago, so it has a very low weight.

Speaker 1: So, the risk-weight assets would increase because of the devaluation, because we measured them in pesos translated to the official exchange rate. But the impact on the risk-weight assets would be limited. I would say probably the gain on the North position in US dollars would be more than upset.

Speaker 16: that increase in risk-based assets when we look at the Tier 1 ratio.

Speaker 1: And then regarding deposits, as we mentioned in the presentation, we have this flexibility in our balance sheet to increase or decrease deposits and in turn increase or decrease positions mainly in central bank instruments. So what we have seen during the presentation is that the

Speaker 16: This first quarter is a decrease mainly in the deposits. We applied to REEFLS with the central bank on the list which is something we managed according to the opportunities received. You may see this deposit increasing over the quarter. You may see this Phone Judge Kay Per donated about 6 and a half times Snapchat users. You will see a sample of Reel

Speaker 1: And then also, as you said, with higher inflation, individuals and companies try to reduce as much as they can their balances in savings accounts or current accounts to be less impacted by inflation. So they go to...

Speaker 1: mainly money market funds or time deposits, we have a minimum interest rate.

Speaker 1: So that's what we are seeing, that the balances of savings accounts and current accounts, they don't grow at the same pace of inflation. In turn, we can see or we could see.

Speaker 1: higher growth in time deposits but at the same time we don't want to grow that much on deposits with a minimum interest rate because we don't have any spread with particularly with the individuals deposits which have a higher minimum interest rate

Speaker 1: and we pay taxes on that. So that's why we are not growing in real terms, of course we are growing in nominal terms, but not at the base of 22% inflation in this court.

Speaker 24: Yes, adding to that what Mariano said, you mentioned the competitive situation for the pauses.

Speaker 24: I think it's interesting to mention that with high inflation there is an erosion of purchasing power in the Argentine currency. So many individuals they have what they do to basically to preserve their brethren him wouldn't be scarred by the because the after

Speaker 24: their purchasing power, they...

Speaker 24: They make transfers from banks to certain finters, particularly to Markelo Pago, because it compensates for inflation in money markets. This is a pattern that…

Speaker 24: we have seen and so we have decided and in fact we have implemented a very interesting tool for customers not to do that and to maintain the money with us. Basically we have implemented as of a few weeks ago a way basically a money market investment at Parthisia in Lyric within the last five years nearly a half a thousand, hopefully 30,000, the other half, that was $8.80, more than 10,000.

Speaker 24: for the day the same standards that Macau paddles. So we believe that this is a competitive reaction, very strong from our part. We are the first bank by the way to do this and we are very happy.

Speaker 24: standards that Macau borrow. So we believe that this is a competitive reaction very strong from our part. We are the first bank by the way to do this and we are very happy with that.

Speaker 4: No, thank you Patricia Mariano, that was very clear. Thank you Luis. 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.

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