LatAm banking: Supervielle flying in Argentina

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By:
Rob Dwyer
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Bank maintaining momentum from its IPO and international bond; acquisitions not planned given size of organic opportunity.

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'No one envies' the economic challenges facing the Macri administration

Grupo Supervielle is set to continue its rapid, above-industry-average growth in 2017, according to Milton Migotti, head of international trade and financial institutions.

The banking group was the first Argentine financial institution to take advantage of improved investor sentiment about the country after Mauricio Macri became president.

In May 2016, Grupo Supervielle sold a $323 million IPO through a New York listing. The deal was three-times oversubscribed, with all but a handful of the 71 investors being based outside Argentina.

Supervielle followed up that equity transaction by raising $300 million-equivalent – denominated in Argentine pesos – in an international debt transaction in February.

Combined, the increased financing has enabled the bank to grow aggressively in its target segments.

“We grew our loan book by 50% last year, which was above the market,” says Migotti, who concedes that inflation of 30% puts the huge nominal growth into context. “We expect to grow at between 40% and 45% this year with inflation at about 25%.”

Supervielle actually accelerated growth at the end of last year while inflation was falling. In the fourth quarter, the bank increased its loan portfolio by 57.5% year-on-year and increased net income by 47.8% year-on-year (22% quarter-on-quarter) and hit a return on equity of 31.3%.

Migotti says the banking sector is finally getting some relief from the central bank’s policy of having positive interest rates – after years of having base rates lower than the inflation rate.

“That has been a positive factor for the savings rate at the banks,” he says.

SMEs

The bank focuses on the small and medium-sized enterprise (SME) sector and enjoys a market share of between 8% and 10% for financial services to those companies – compared with a 3% total market share.

“We intend to keep growing above the market in these sectors,” says Migotti. “We don’t expect to make any acquisitions – this will be all organic growth. We expect the credit market to grow quickly – it should double in size in the next couple of year – which will provide sufficient opportunity for organic growth.”

Statistics show the potential for catch-up growth: credit as a percentage of GDP is just 13.8% in Argentina – compared with 79.4% in Chile, 49.3% in Brazil, 47.8% in Colombia, 31.4% in Peru and 18.7% in Mexico. The system is well-capitalized – at around 11.2% – and has relatively low concentration.

The top five banks claim a combined market share of 51.3% in Argentina – compared with 86.5% in Peru, 74.1% in Brazil, 73.2% in Chile, 72.0% in Mexico and 63.4% in Colombia.

However, Migotti does expect consolidation, saying: “Some of the smaller international banks may leave Argentina, but I don’t think we will be interested in buying [those franchises].”

Migotti declines to name the international banks that he expects to sell in Argentina, but, based on size, it is logical to assume he considers the operations of Banco Itaú and HSBC as the most likely potential assets for sale. 


The delay to a return to growth is also causing some caution – we expected [GDP] growth in the second half of 2016, but we now think that will be this year 
 - Milton Migotti, Grupo Supervielle

Migotti also says the bank is seeing lots of interest in investing in SMEs in the country. He says the lower-than-projected levels of foreign direct investment (FDI) into the economy are due to three factors.

“First, it takes time to make these types of investments – it’s not as easy or as quick as buying financial investments,” he says. “The delay to a return to growth is also causing some caution – we expected [GDP] growth in the second half of 2016, but we now think that will be this year.

“Also, the FX as an entry point is an issue – we think investors aren’t willing to pull the trigger at the current FX rate [around 15.5 pesos to the dollar].”

The exchange rate is a growing issue for the Argentine government. Shallow capital markets have necessitated the government rely on the international markets for financing the fiscal deficit – but bringing billions of dollars into the economy has seen the peso strengthen despite still-strong inflation.

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Joaquin Cottani, S&P

Joaquin Cottani, managing director and chief Latin American economist at S&P Global Ratings, agrees that FX could be preventing stronger FDI flows. He says there is a consensus among the investors he speaks to that the FX rate will move closer to 18 pesos next year – although he says the reasons for this expectation is less clear.

“Maybe the market expects the FX movement to be caused by monetary policy – or maybe it is an expectation of a poor market reaction if Macri doesn’t add to his coalition in the October [2017] mid-term elections,” says Cottani.

Cottani adds that “no one envies” the economic challenges facing the Macri administration, but does say that the risks inherent in the current strategy of gradualism in cutting the fiscal deficits are growing.

“If the fiscal deficit doesn’t shrink soon then debt will continue to grow,” he says. “If it hits 50% of GDP, there could be a sudden stop and then we will see another currency crisis. We are forecasting 3% growth a year up to 2020, but there are large downside risks to that outlook.”

However, any attempts to speed up the fiscal consolidation will likely add to the popular protests growing in Buenos Aires and a general strike has been called for Thursday.

Investors will be carefully watching the effectiveness of the industrial action for signs of the size of the opposition to the government and the implications for future fiscal policy.