Grupo Supervielle Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 15, 2024

Key Takeaways

  • In Q2 2024, Lupo Supervielle’s early mover strategy drove 36% sequential loan growth in real terms, market share gains, a record low NPL ratio with coverage over 300%, and a core Tier 1 ratio of 21%.
  • Digital adoption reached 65% of customers, with 56% of transactions online (up from 42% YoY), reducing cost-to-serve and boosting fee income, notably from the YOL brokerage platform which doubled active customers to 566,000.
  • The bank is shifting its asset mix from central bank securities to private loans, raising its loan-to-deposit ratio to 59% (from 32% at YE 2023), with 65% of loans to SMEs and corporates in export-oriented industries and 35% to low-risk retail segments.
  • Management expects 2024 peso loan growth over 40% in real terms, deposit growth above inflation, a gradual normalization of the NPL ratio with stable cost of risk, and a full-year ROE of around 15%, despite near-term NIM headwinds.
  • Longer-term targets include returning to a 20% ROE by late 2025 and a year-end CET1 ratio of 17–20%, driven by continued loan portfolio expansion and operating efficiency gains.
AI Generated. May Contain Errors.
Earnings Conference Call
Grupo Supervielle Q2 2024
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good morning, everyone, and welcome to the Lupo Superviel Second Quarter 2024 Earnings Call. This is Ana Vizayi, Treasurer and IRO. Today's conference call is being recorded. As a reminder, all participants will be in listen only mode. If you want to ask questions at the end of our presentation, you need to be connected to a Zoom platform from any device.

Operator

We will not be able to answer questions if you are connected from a phone line. Also, please make sure your first and last name appear in the Zoom platform you are using. You will be able to ask a question by voice or send questions in written form via a Q and A box in the Zoom platform anytime during the call. Speaking during today's call will be Patricio Supervielle, our Chairman and CEO and Maria Novilla, our Chief Financial Officer. Also joining us is Alejandro Stenkel, First Vice Chairman of the Board and CEO of Banco Supervielle.

Operator

All will be available for the Q and A session. As a reminder, today's call will contain forward looking statements based on management's current expectations and beliefs and subject to several risks and uncertainties. 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. Patricio, please go ahead.

Speaker 1

Thank you, Anna. Good morning, everyone. Thank you for joining us today. Please turn to Slide 3 for an overview of the quarter results. Our strategic actions are driving the desired results.

Speaker 1

We deployed an early mover strategy that resulted in solid loan volume growth and market share gains. Asset quality remained healthy with a record low NPL ratio and a coverage ratio of over 300%. Robust capitalization with our core one ratio of 21% position us well to continue driving share gains. We reported return on equity of 10% for the quarter and 22% for the first half. As anticipated, NIM declined during the quarter, reflecting lower spreads following the sharp drop in interest rates earlier in the year.

Speaker 1

The growth in fee income across our banking asset management and our online brokerage operations also contributed to the quarter's solid performance. Furthermore, our efforts to enhance operating efficiencies and while staying closely connected to our customers continue to yield positive results. Let me spend a few minutes discussing the key drivers of our performance during the quarter. Digital adoption continues to play a key role among retail customers. Digital customers now make up 65% of our total customer base with 56% of transactions completed through our up from 42% a year ago indicating strong wallet adoption while lowering our cost to serve.

Speaker 1

We've also made significant strides in our corporate and middle market customer segments with the loan book growing sequentially by an impressive 42% in real terms as we focus on supported export oriented value chains. We closed the quarter with higher balances of site deposits among corporate clients leading to increased transactional volumes as we advance on becoming the primary bank. YOL, the leading online brokerage platform in Argentina contributed 19% of total fee income with all key metrics showing a strong performance. Active customers doubled year over year to a record high of 566,000 clients in July. Assets under management grew 23% sequentially in real terms, hitting the $1,000,000,000 milestone while sustaining solid transaction activity.

Speaker 1

Lastly, we are advancing in driving digital adoption and penetration in our insurance and asset management businesses. We've broadened our digital insurance offering for both customers and retail customers resulting in a strong more than 25 year to date growth in car insurance. In asset management, our focus effort has helped us increase our market share to 2.5%. Enhancing the customer experience is a key factor behind our products and service initiatives and we are very pleased that we continue to achieve increases in our NPS across all segments. Turning to Slide 4.

Speaker 1

Key economic highlights for the quarter include the approval and regulation of the late buses along with ongoing deregulation efforts achieving a fiscal surplus of plus 0.4% as of June and inflation easing faster than expected with 2024 projections now at 127%, down from January's 227%. The Central Bank with deregulation efforts are further enhancing the business environment. While the overall macroeconomic environment is improving, some areas still require attention including ensuring the sustainability of the Central Bank's $17,000,000,000 reserve increase and maintaining public support for ongoing reforms. Under this new environment, the financial industry is seeing early improving signs of recovery as loan demand growth return. To ensure sustainable growth, the next milestone is lifting of the foreign exchange restrictions.

Speaker 1

Our financial results today reflect the actions we have taken over the past few years, including new product offerings and efficiency measures together with policies established under the Malay government. As a result, we have a solid foundation in place and are well positioned to benefit as demand continues to recover. Now moving to Slide 5. We have been transitioning our asset base away from Central Bank Securities towards private sector loans. This is reflected in the increasing loan to deposit ratio which stood at 59% at quarter end up from 32% at year end 2023.

Speaker 1

This reflects a drop in the share of Central Bank Securities over total assets to 28% or 40% at year end 2023, while loans increased our share by 12% points to 37% at the end of June. This trend is expected to continue during the second half of the year. In this context, we expect teams to normalize to historical levels and NFI to grow over time even with lower yields as demand credit demand strengthens. As shown on Slide 6, our strategic move towards capturing loan demand early in the recovery allow us to expand our loan portfolio by 36% sequentially in real terms. This resulted in total market share gains 30 basis points sequentially and 70 basis points year to date.

Speaker 1

Importantly, we gained share across all products. As of June, SMEs and corporate loans accounted for 65% of our total loan portfolio, while retail loans accounted for the remaining 35%. In corporate loans, we remain focused in servicing high potential export value export oriented by the chains as we leverage our exposure to high potential industries including mining, agribusiness and oil and gas. In retail loans, we are strategically focused on lowest risk segments, including mortgages, car loans, payroll loans and credit cards to existing customers. Looking ahead, we expect to continue scaling our mortgage loan product introduced earlier next year in the year.

Speaker 1

We also plan to continue scaling personal loans as well as car loans leveraging our number 2 position in auto loan originations. In summary, we're well positioned in sectors that are leading the recovery. We are focusing on originating short term loans to corporates and as back loans to individuals together with stringent credit policies, including portfolio limits according to the health of each industry to ensure an atomized loan book across industries and customers. This coupled with a strong capitalization position us well to continue to drive significant growth as demand continues to recover. Now let me turn the call to Mariano.

Speaker 1

Please go ahead.

Speaker 2

Thank you, Patricio, and good day, everyone. Now let's direct our attention to Slide 7 to take a deeper look at our performance for the first half of the year. Net income increased to over ARS 72,000,000,000, achieving a 22% ROE in real terms, up significantly from ARS26 billion and a real ROE of 10% in the first half of the year, driven primarily by an increase in net financial income. Starting with revenues. Net financial income increased 69%, driven by a higher yield on our investment portfolio and a reduction of 140 basis points in the cost of funds.

Speaker 2

Recall that interest rates increased significantly in the second half of last year and declined sharply following the removal of floors on interest rates in March. Net fee income, however, declined 7% as fees increased below the 2 72% accumulated inflation. Structural cost efficiencies contributed to a 9% year on year decline in costs, as I will explain in more detail shortly. Furthermore, the strategic shift in loaner allocation towards middle market corporate and payroll customers led to a 3% reduction in net loan loss provisions. These positive impacts quarter offset the 255% increase in inflation adjustments on higher net monetary assets and inflation during the period, alongside the 83% increase in other net losses attributable to higher turnover tax and provisions created for strategic initiatives.

Speaker 2

Moving next to Slide 8 for the discussion of our loan portfolio. As Patricia noted, we have continued to gradually shift our asset base towards a larger mix of private sector loans, and you can see this evolution in the bar charts. At the same time, we have gained share across most loan products in both our commercial and retail portfolios. With respect to mix by portfolio type, as shown on the pie charts, Corporate loans account for approximately 2 thirds of our total loan portfolio. With this portfolio, short term promissory notes stand out, increasing their share of the total corporate book by 2 percentage points to 54%, followed by overdrafts at 22% and foreign trade loans at 18% of this book.

Speaker 2

Within retail loans, credit cards accounted for 32% of the book, followed by mortgages and personal loans at 27% each and car loans at 14% of the total retail book, where we ranked 2nd in car loan origination. As shown on Slide 9, our total deposit base remained stable sequentially in real terms, although the mix changed slightly. Foreign exchange deposits increased 4% above industry trends, with the foreign exchange share over total deposits increasing 1 percentage points. As shown on the chart to the right, peso deposits posted a slight sequential decline, but with a greater mix of lower cost savings and checking account deposits. Wholesale funded declined, reflecting asset and liability management following the sharp drop in the monetary policy interest rate.

Speaker 2

Moving next to Slide 10. As anticipated in our prior call, lower inflation and yields on peso denominated government securities and loans in a context of lower policy rates and industry loan penetration still at historical lows resulted in a 43% sequential decline in net financial income to MXN203 billion. The sharp decrease in policy interest rates and lower volumes of interest bearing liabilities drove a 30 percentage point reduction quarter on quarter in cost of funds in the quarter. Also recall that in 1st Q24, higher yield on inflation linked government securities benefited from peak inflation rates of December January. Moving on to Slide 11.

Speaker 2

Expenses declined 15% year on year and 8% sequentially, primarily due to the efficiencies in personnel, DNA and administrative costs as we further advance on reducing our costs to serve. The sequential performance was partly offset by increasing increased promotional activity to strengthen our position in a more dynamic environment. Efficiency improved to just below 51% from almost 63% a year ago. A sequential basis, however, the efficiency ratio increased from 34% in the Q1, which benefited from a non recurring gain in peso bonds that resulted in an exceptionally high NIM. Turning to Slide 12.

Speaker 2

We closed the quarter with a CET1 ratio of slightly over 21%, declining 3.90 basis points sequentially. This performance reflects growth in risk weighted assets, reflecting strong loan growth in the quarter, together with a MXN20 billion dividend payment made in April and the MXN8 billion shares repurchased during the quarter. This was partially compensated by capital creation in 2nd Q 'twenty four. Moving on to Slide 13. In the current context, we are adjusting our perspectives for 2024 as follows.

Speaker 2

As credit demand continues to recover, we now expect peso loans growth to step up above 40% in real terms, with retail loans increasing their share of total loans. Peso deposits are expected to continue growing above inflation, although at a faster pace with dollar denominated deposits expected to gain share of total funding. The NPL ratio is anticipated to converge to levels in line with higher credit demand, up from the historical low reported this quarter, with the net cost of risk remaining at 2023 levels. With inflation proceeding, we now expect expenses to decline in real terms as we continue to see the benefit from efficiencies and headcount in headcount and branches. We maintain our ROE expectation for the year at approximately 15%.

Speaker 2

During this transition, as we continue to shift to private sector loans from public securities, we expect to see a lower NIM pressure in ROE in the 3rd quarter. Lastly, as loan growth accelerates, we anticipate closing the year with a CET1 ratio between 17% to 20% compared to our previous expectations of 20% to 25%. This ends our prepared remarks. We are ready to open the floor for questions. Anna, please go ahead.

Operator

Thank you, Mariano. At this time, we will be conducting the question and answer session. As a reminder, to ask a question you need to be connected to a Zoom platform. You can also send your questions in written form Our first questions come from Brian Flores with Citi.

Speaker 3

Hi, Tim. Good morning. Thank you for the opportunity to ask questions here. I have a question on your turnover tax situation, right, because you made a provision there. I think it's BRL33 1,000,000,000.

Speaker 3

I wanted to ask you, how should I mean, obviously, you're not expecting to be paying going forward taxes. I just wanted to know when would you have the final decision on this? And if the provision needs to be adjusted by inflation going forward and this will be updated sequentially on your income statements and balance sheets, how should we think about this going forward? Thank you.

Speaker 1

Mariano, please.

Speaker 2

Yes. Hello, Brayan. Thank you for your question. Regarding this provision, it's correctly the amount of ARS33 1,000,000,000. We think we're conservative on that provision, but we prefer to maintain.

Speaker 2

We call that this is the turnover tax that the city first, the city of Buenos Aires imposed on revenues deriving from Central Bank Securities, the leads on the 1st place, but also Central Bank repos and then also the province of Mendoza and other provinces, but the main ones being City of Buenos Aires and Mendoza and then this year, the province of Buenos Aires. It's important to highlight also that now as the Central Bank stopped issuing the leaks and then stopped giving ripples and now we migrated that securities portfolio to the treasury notes, short term treasury notes. We are not agreeing in any tax because treasury notes are no doubt, they are exempt from this tax. So there's no new taxes on these short term securities. Now with regards to the Central Bank security revenues during last year and the 1st month of this year, We made a claim with the Supreme Court of Justice.

Speaker 2

This was also made by the other banks within the Bank Association. And also, there was a demand from the Central Bank with the Supreme Court of Justice because these tax affects the monetary policy of the Central Bank and provinces cannot interfere in the monetary policy. So the process can be very long because the Supreme Court hasn't made any pronouncement yet. And we know these processes take a long term to be defined. This is also related to the dispute between the City of Buenos Aires and the national government because of funds from taxes that the City of Buenos Aires received in the co participation with the other provinces and prior government took from reduced the share that the city of Buenos Aires received.

Speaker 2

That's when prior major of the city of Buenos Aires imposed its tax. So when the Supreme Court makes a decision on that matter, maybe then they will make a decision on these 2. So we are positive on the outlook of this of the result of this dispute. Although we have this provision just to be conservative. But it can take several years.

Speaker 2

And then the last part of your question, it is adjusted by inflation. It's not directly linked to inflation, but the provinces taken an interest rate. So if we had to pay the tax, the liability would include the interest rate.

Speaker 3

Perfect. Super clear. If I may, just a quick follow-up on capital, right? Because we have data as of May with the Central Bank. And if I'm doing the calculation here, June was negative, right, in terms of net income or close to being negative.

Speaker 3

I wanted to ask you on capital because quarter over quarter, you're consuming quite some bps, right? I think over 300 bps. Now your guidance suggests another consumption because as you mentioned, you're increasing risk weighted assets. Just wanted to maybe open this question in 2 parts. First, should we expect the Q3 to be maybe negative in terms of net income contribution?

Speaker 3

And then the second one is, in terms of growth in risk weighted assets, what type of loans are you thinking on expanding? Is it a bit more on the heavy part, which is higher risk weight or a bit more balanced between, I don't know, mortgages and consumer? Just to think about this going forward. Thank you.

Speaker 2

Okay. Yes. First, the profit capitalization is always positive for the CET1 ratio as we had a 10% positive borrowing in the quarter. We added capital, but as with a quarter where the loan portfolio grew 40% or 36% in real terms in just one quarter. Of course, in that case, increasing risk weighted assets is higher than the capital we have with results.

Speaker 2

And so that's why we you can see the consumption of 3.90 basis points in the CET1 ratio. And looking forward, as we continue to see growth in real terms, we will start also to use that capital. Now we are in the middle of the transition where our ROE will tend to a 15% this year, but coming from higher ROE in the Q1. So that most of the capital addition coming from the ROE, we have it already in our capital numbers. And then you will start to see APRs, risk weighted assets growing.

Speaker 2

The pace of the growth for the next quarter maybe will be lower in the second quarter. It was extremely high because the declining interest rate was very sharp. But we will continue to see growth in real terms in the 3rd Q4. That's why now we expect the capital ratio to range between 17% 20%, which is a lower level where we now are. And regarding the type of loans where we are planning to expand.

Speaker 2

Let me take on that one.

Speaker 1

The strong growth we saw in the Q2 was primarily from corporates and the loan demand from particularly from the value chain of dynamic export oriented dynamic industries such as oil and gas and mining and agribusiness. And there was also a rebound in terms of individual loans from car loans, particularly car loans and personal loans for retirees and payroll loans. However, we believe that 2 thirds of the loan book is today corporate and 1 third is individual loans. So this means that with the change of monetary policy and the decrease in interest rates, the NIMs came down very strong in the second quarter and we believe it's going to continue. However, the mix of loans will start to change.

Speaker 1

And by the end of the year, we expect that individuals they will start there will be a pickup of loan demand. And therefore, there will be a balance between corporate loans and individual loans around 50% each. And this will help us to achieve a historical NIM level of 20 percent. So this is the way looking forward to 2025, how it's going to our balance sheet is going to be much stronger in terms of revenue generation.

Speaker 3

Perfect, team. Super clear. Thank you very much.

Operator

Thank you, Ryan. Our next questions come from Ernesto Gabilondo with Bofa. Good morning, Ernesto.

Speaker 4

Please go ahead. Good morning. Good morning. Thank you, Ana. Hi, good morning, Patricio, Mariano and Alejandro.

Speaker 4

My first question is, if you can elaborate a little bit more on the undoing positions that the banks executed with the Central Bank related to the puts? And what are the implications into the P and L and the balance sheet? And also on the other hand, I think there's some proposition of the Central Bank to do something with repos. So I will also want to hear from you the timeline and the implications from those repos.

Speaker 2

Ernesto, thank you for your question. Regarding the put options we had on part of our treasury notes portfolio, we had as of June 30, we had around ARS 300,000,000,000 in inflation linked bonds from the government. Out of those ARS 300,000,000,000 bonds, maybe between 15% 50% 60%. We have put options. Remember that these put options didn't guarantee a price.

Speaker 2

They only guarantee liquidity. And as you know, the Central Bank proposed to buy back those put options paying a price. And we, as most of the bank did, we agreed sell those put options to the Central Banks. Out of this portfolio, maturities of these bonds were between the end of this year and up to the end of 2027, but most concentration was in 2025 and 2026. But also these bonds are part of our hedge with inflations and we are holding them until maturity.

Speaker 2

That's why it's part of our investment portfolio. So that's why we agreed to sell the goods because it wasn't a portfolio that we were willing to sell in the short term.

Speaker 1

Let me add on that. We also believe that the BNA government has a strong focus in fiscal consolidation. And therefore holding these treasury securities with these policies are it's I think it's we are at ease and we are comfortable and we believe that in the end this is going to be reflected in the prices of government securities.

Speaker 4

And in terms yes, sorry.

Speaker 2

No, I'm sorry, because you asked also for reposts.

Speaker 4

Exactly.

Speaker 2

With what Patricio said, the government is passing the debt from the Central Bank to the Treasury where they want to achieve a fiscal surplus or at least fiscal balance, including interest. So that is a greater responsibility and shows a greater compromise for the government to be accountable to make the treasury accountable for the interest of its own debt and not being paid by the Central Bank creating a quasi fiscal deficit. So in this context and with this government, we think the risk from repos of the Central Bank and the new late fees, which are these short term notes issued by the Treasury, we think the risk is very similar. And also liquidity is always guaranteed by the Central Bank. So it's basically a very similar instrument for us.

Speaker 4

Okay. Perfect. Understood. Thank you so much. And then I would like to add a second question.

Speaker 4

This one is in terms of the loan demand, which seems to be finally materializing because of lower inflation, lower rates. So can you elaborate in which are the industries that you are starting to see this higher demand? And then just a follow-up in terms of your ROE guidance of 15% for this year. So if making the numbers, this would imply average ROEs below the 10% in the second half. Is that correct?

Speaker 4

And I think, Patricio said that you want to have a sustainable ROE in the medium term of around 20%. So I just wanted to double check those figures.

Speaker 1

You want to ask the second part and then I can go back to the

Speaker 2

first one. Okay. Let me answer first your question regarding ROE. If it's correct, we expect a longer term ROE of 20%. But now we are we will be in the middle of a transition to that ROE.

Speaker 2

Your calculations are completely right. We are expecting a more challenging 3rd and 4th quarter just because we are in these transitions where interest rates have dropped significantly. NIMs are reducing. We still have high inflation. It's, of course, being reduced very fast, but we still have high inflation.

Speaker 2

And the loan demand has risen sharply from historical lows. We are still at a very low demand measured as those to GDP. So the next two quarters will be very challenging with ROEs probably below 10%. That's why we expect 15% for the AEN when we have 22% ROE in the first half of the year. So when that transition from assets of Central Bank and Treasury Securities to loans and within the loan growth, we also grow not only in short term loans to corporate, but also on the individual portfolio.

Speaker 2

We are growing very well in personal loans, car loans, which car which have higher needs. And we focus on growing on higher needs products. We'll start to recover that ROE return to an ROE of 15% and then increasing it in the longer term when consumption returns and also we can grow profitably across all segments, not only in specific segments. Do you want to continue, Alejandro?

Speaker 5

Sean? Agamemto, good morning. Industries that are leading the credit amount, as you know, our oil and gas, mining and agribusiness. But more recently, we've seen also an increase in durables and more consistently in construction. Consumption is trailing at lagging these leaders, but is also going to pick up as soon as we consolidate the purchasing power and salaries start going a little bit above inflation.

Speaker 5

It's interesting to note that because in many of these industries, the utilization levels were very low, the reaction is very quick because it has to do with more working capital. It does not require major investments in fixed assets. So this is why the reaction has been very quickly and is picking up consistently. And at the same time, on the funding side, what we see is that site deposits have been going up because the activity level is greater. And typically site deposits are a function of the working capital and the level of activity.

Speaker 5

And because inflation has been going down, then you have greater levels of site deposits, which will help even further in moving forward in the cost of funding.

Speaker 4

Perfect. Thank you so much, Patricio, Mariano and Alejandro.

Speaker 2

Thank you, Ernesto.

Operator

Thank you, Ernesto. Our next question comes now from Carlos Gomez Lopez with HSBC.

Speaker 6

Congratulations on your loan growth. You promised that you will be replacing some of these programs and you are doing it. So I have a couple of questions. The first one, can you confirm that the treasury securities that you have now have zero risk weighting, right? So you've been substituting Central Bank Securities for treasuries.

Speaker 6

That remains the same, right? So you have not consumed any capital, although obviously, you're taking a bit more risk by having the government than they have in the Central Bank. And second, can you tell us how the mortgage operation is working? Because I know initially there were some problems. Is it okay now?

Speaker 6

And can you originate with normality? Thank you.

Speaker 2

Carlos, thank you for your questions. Regarding central banks and treasury notes, they have no credit risk weighted assets. They have operational and market risk weighted assets. Remember that credit risk weighted assets account for approximately 7% of our total risk weighted assets. So in general terms, it's correct.

Speaker 2

They don't have any capital requirements or they contribute also to this 30% of operational market capital

Speaker 5

requirements.

Speaker 2

Then regarding mortgages

Speaker 6

Sorry about that. I mean that is correct, but the market risk and operational risk that also applied to the Central Bank Securities, right? So that hasn't changed.

Speaker 2

Yes, correct. Yes. In terms of capital requirements, there are no significant differences between Central Bank and Treasury Securities, at least for the short term.

Speaker 6

Okay. All right. So you would agree that, I mean, by going from one to the other, I mean, I know you are saying that the government is the same at the Central Bank, but actually historically it has been quite different. You are taking some more risk. I mean which is fine, you are putting your capital to work, but you are taking some more risk by being in government securities.

Speaker 2

Well, the risk from the treasury isn't always the same as the Central Bank. Although as I said before, in the current context, we think that difference is very low. In the past, we always consider significant differences, and we were very cautious to go from the Central Bank to the Treasury in the current context and also with the liquidity guarantee because remember that although the lefties are treasury notes, there's a liquidity guarantee from the Central Bank. So it doesn't mix both ways there.

Speaker 1

But also Carlos said there's also something to take in context. Remember that we are still even though inflation is going down, we're still in the high inflation country. And hopefully, it's going to go down still. But so we hold these treasuries as a hedge with a hedge purpose of our capital to make sure that they are hedging its inflation.

Speaker 5

Okay. Carlos, good morning. Regarding your question on mortgages, we are originating very well. There's a huge repressed demand, as you know, and Supervielle was the 1st private bank to come out with a product offering on mortgages. Just to give you a little bit of color there, right now, our average ticket size is around 80,000 official dollars and it's growing very consistently.

Speaker 5

Key to sustain this growth on a longer term is regulation regarding securitization, which is still pending. And that's one of the things that we're working on to be able to make sure that we continue to grow and also manage the exposure to mortgages and the consumption of capital that they will require.

Speaker 6

Thank you, Alejandro. And again, these are all loans in August, the inflation adjusted unit. You said your average is 50,000. So how much just a quick one idea, how much are you originating per month or per week at this point in time?

Speaker 5

At this point, levels are very low because we have a huge pipeline and there are many bureaucratic steps that have to take place. You have to have notary publics, you have to have also the right valuation. And this is a machine that had stopped for around 4 years and it's starting to move again. But right now, we are converting these initial requests for information And we are growing at a rate of roughly more recently at a rate of roughly 50 mortgages per month, but this should be going up pretty soon.

Speaker 6

Okay. So at this point, my point is I mean, it's immaterial to your balances, but it's starting to move.

Speaker 5

It's starting to move. But remember, we carry mortgages from the previous period. That's why when you look at our asset composition, the representation of mortgages is higher. But you're right about the vintage, the new vintage of mortgages is right now very small. That is correct.

Speaker 6

And if I can add one last question. I know that you're of the view that the current economic policy is sustainable. But I imagine you also do a lot of testing. What would happen if there has to be another large devaluation, let's say, 30% or 40% in the currency?

Speaker 2

As

Speaker 5

you pointed out Carlos, that's not the direction that the Ministry of Economy or the Central Bank is steering the economy. But in that hypothetical case that, that devaluation will take place, you would see a significant pass through of that devaluation into inflation. You would probably have and that would create a series of adjustments in relative prices. So you would probably also see an increase in rates following suit and that will have an impact on the activity level. But as I said, the Central Bank and the Ministry of Economy are trying to do everything to avoid that situation.

Speaker 6

And you expect interest rates to remain at the level they are today or to go to real rates in the second half?

Speaker 5

My view is that there are several pressures

Speaker 2

in

Speaker 5

credit demand that are pressing for rates to go up. At the same time, you've seen a crowding in effect as the Argentine state withdraws demand from the financial sector. So it's going to be a combination between this pressure because of tighter monetary policy and the crowding in effect as the Argentine state creates less demand for credit in the market.

Speaker 6

But again, do you spend rates to go up from the current levels or to stay where they are?

Speaker 5

I would expect and it's a bit of a guess right now that they will go up on the second half in real

Speaker 6

terms.

Operator

We have another new question from Marina Martens with Latin Security. Please go ahead. Hi. Good morning.

Speaker 1

Marina, we cannot hear you.

Operator

I'm sorry. We lost you. I'm sorry. We could not hear you. Can you hear me now?

Operator

Yes, it was our problem.

Speaker 7

Thank you. So in the second quarter, we observed a significant loan growth with flat deposits, which led to an increase in the loan to deposit ratio. How do you expect deposits to evolve in the second half of the year? And what factors do you see as the main drivers for growth? Thank you.

Speaker 2

Yes. Hi, Marina. Thank you for your question. For the upcoming quarters, we see deposits growing in real terms. Although we see loans growing at a faster pace.

Speaker 2

So that will make the loan to deposit ratio to increase, but with both sides of the equation growing. Regarding the sources of this growth, we expect it to come growth from both from individuals and corporations. Also as activity rebounds across all sectors, remember now that we are seeing a small recovery in activity, but it's very different across sectors. Transactionality will increase and that will also increase funding from current accounts and savings accounts. And we are also working on several strategic initiatives to foster deposits growth.

Speaker 1

Yes. I would say that adding on that, it's going to be a strong focus in fixed term deposits or time deposits basically where we expect that we will be able to attract time deposits because when inflation comes down naturally, savings starts to grow in the country, both in current accounts, savings accounts and time deposits. So we are pretty we are focusing on that. It's a very healthy period, I'd say.

Speaker 7

Great. Thank you very much.

Operator

Our next question comes from Marlon Medina with JPMorgan.

Speaker 8

I So I think most of my questions have been asked for perhaps a quick follow-up on asset quality. Today, you have very strong coverage, I think, around or above 200%. So as the environment normalizes, what would be a regional level for coverage to converge to? And also, what would be like a reasonable NPL level to assume going forward? I know today is very behaved, but as you scale the portfolio, where do you expect it to trend?

Speaker 1

Adriano, do you want to answer that?

Speaker 2

Sure. Thank you, Malo, for your question. Regarding coverage, it's true that now it is very high. It's about 300%. This is in part because the NPL ratio is very low.

Speaker 2

So when you have such low NPLs, the provisions you have on the performing portfolio because with expected loss models, of course, we have a small provision on the performing portfolio. That creates a very high coverage, the score portion of NPLs. So when NPLs return to normal because now we are growing mainly in corporates. We have lower NPLs. Also, the pace of the growth in nominal terms and in real terms, also that dilutes NPLs.

Speaker 2

So when they return to normal, let's say, 2%, it will depend on the mix of the portfolio. But if NPLs return to 2%, then that coverage will go down. Maybe I can give you a very wide range, but just have an idea between 100% and 200%. We shouldn't be we shouldn't continue to see such high levels of coverage like above 300%.

Speaker 8

Very clear. Thank you.

Operator

Thank you, Marlon. I'm sorry. We have, I think, a new question coming from Brian Flores. This is correct, Brian?

Speaker 3

Yes, yes. I just wanted to make a follow-up. You made a comment, a very interesting one, right? Maybe the second half of the year will have an ROE that is 10% or lower, right? Then you said middle term, it should go back to 15% and then eventually all the way to 20%.

Speaker 3

I know this is a difficult question, but do you have like an expected timeline or maybe a desired timeline as to when and how should this happen? Just to grab our heads around this. Thank you.

Speaker 2

Yes, Brian. Let me review our expectations. And of course, within the context of the visibility, we can have now with all the changes also in the market environment and regulations. We expect ROE to go below 10% in the next two quarters, then pick up gradually to have a 15% for the year 'twenty 5. But with an increase in trend and reaching maybe that run rate of 20% ROE for the second half of the last quarter of 2025 and therefore for the year 2026.

Speaker 2

That will be our timeline.

Speaker 3

No, I know it's a difficult question, but I really appreciate helping us here. Thank you.

Operator

You're welcome, Brian. Okay, ladies and gentlemen, we have reached the end of today's Q and 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

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