Grupo Supervielle(SUPV) - 2018 Q4 - Annual Report

PART I Identity of Directors, Senior Management and Advisors The report indicates this section is not applicable - The report indicates this item is not applicable[46] Offer Statistics and Expected Timetable The report indicates this section is not applicable - The report indicates this item is not applicable[47] Key Information Selected Financial Data The company's 2018 and 2017 consolidated financial data, prepared under IFRS and restated for hyperinflation per IAS 29, shows a net loss of Ps. 3.06 billion in 2018 and Ps. 0.76 billion in 2017, with total assets growing to Ps. 141.7 billion - The company adopted IFRS for the first time for the year ended December 31, 2018, with a transition date of January 1, 2017[49] - Argentina's cumulative three-year inflation rate exceeding 100% as of July 1, 2018, led the company to apply IAS 29 for financial reporting in a hyperinflationary economy[52] Consolidated Income Statement Data (IFRS) | Indicator | 2018 (in thousands of Pesos) | 2017 (in thousands of Pesos) | | :--- | :--- | :--- | | Net interest income | 13,002,882 | 13,955,166 | | Net Financial Income | 20,439,958 | 17,893,925 | | Income / (loss) before taxes | (2,045,761) | 416,709 | | Net loss for the year | (3,056,649) | (755,260) | | Comprehensive Loss | (2,815,076) | (708,378) | Consolidated Statement of Financial Position Data (IFRS) | Indicator | As of Dec 31, 2018 (in thousands of Pesos) | As of Dec 31, 2017 (in thousands of Pesos) | | :--- | :--- | :--- | | TOTAL ASSETS | 141,733,996 | 135,230,150 | | TOTAL LIABILITIES | 124,765,922 | 114,938,382 | | SHAREHOLDERS' EQUITY | 16,968,074 | 20,291,768 | Selected Ratios | Ratio | 2018 | 2017 | | :--- | :--- | :--- | | Return on average equity | (14.6)% | (4.4)% | | Return on average assets | (1.8)% | (0.6)% | | Efficiency Ratio | 53.7% | 57.5% | | NPL as a percentage of Total Loans | 4.1% | 3.1% | | Coverage Ratio | 147.2% | 162.3% | Risk Factors The company faces significant risks from Argentina's volatile macroeconomic and political environment, the stability of its financial system, business-specific vulnerabilities like loan portfolio quality and cybersecurity, and potential limitations on shareholder rights and dividend repatriation - Risks Relating to Argentina: The company's financial condition is highly dependent on Argentina's historically volatile macroeconomic, regulatory, and political conditions, given its almost exclusive operations in the country[67][68] - Risks Relating to the Argentine Financial System: System stability is contingent on depositor confidence, which past crises have undermined, alongside risks from increased competition, high regulation, and potential class action lawsuits[144][153][163] - Risks Relating to Our Business: The loan portfolio's concentration in middle and lower-middle-income individuals and SMEs makes it vulnerable to economic downturns, compounded by market volatility, cybersecurity threats, and dependence on the ANSES agreement[180][183][200] - Risks Relating to Shares and ADSs: Dividend payments depend on subsidiary performance and regulatory approvals, while shareholders face risks from potential Argentine tax law changes, foreign exchange controls impacting repatriation, and differing shareholder rights[213][220][226] Information of the Company History and development of the Company Grupo Supervielle, originating in 1887, expanded significantly through strategic acquisitions like Banco Société Générale (2005) and Cordial Compañía Financiera (2010), culminating in its successful IPO on the NYSE and ByMA in May 2016 - The company's modern history accelerated in 2005 with Banco Banex S.A.'s acquisition of Banco Société Générale S.A., subsequently renamed Banco Supervielle S.A.[292] - Grupo Supervielle expanded through strategic acquisitions, including Cordial Compañía Financiera (2010), Supervielle Seguros (2013), Micro Lending S.A. (2018), and InvertirOnline (2018)[296][301][314][315] - The company completed its IPO on May 19, 2016, listing Class B shares on ByMA and ADSs on the NYSE under the ticker 'SUPV'[304] Business Overview Grupo Supervielle, a leading Argentine financial group, served 1.8 million customers with Ps. 141.7 billion in assets as of December 2018, operating across six segments with a strategy focused on customer segmentation, digital transformation, and conservative risk management - As of December 31, 2018, Grupo Supervielle served 1.8 million active customers with total assets of Ps. 141.7 billion, with Banco Supervielle accounting for 96.6% of total assets[321] Market Share (as of Dec 31, 2018) | Product/Segment | Market Share 2018 | Market Share 2017 | | :--- | :--- | :--- | | Personal loans (private system) | 7.3% | 6.9% | | Leasing (private banks) | 17.6% | 15.2% | | Factoring (private system) | 7.4% | 7.5% | | MasterCard credit cards issued | 8.6% | 9.8% | - The company operates through six main segments: Retail Banking, Corporate Banking, Treasury, Consumer Finance, Insurance, and Asset Management & Other Services[338] - The business strategy focuses on increasing market presence in attractive customer segments, leveraging its distribution network, capitalizing on cross-selling, and improving efficiency through innovation and technology[359][365][371][374] Organizational Structure The group's organizational structure positions Grupo Supervielle S.A. as the holding company, controlling various financial and non-financial subsidiaries including Banco Supervielle S.A., Cordial Compañía Financiera S.A., and InvertirOnline S.A.U. - The organizational structure is headed by the holding company, Grupo Supervielle S.A., which holds controlling interests in its various financial and non-financial service subsidiaries[1015] Main Subsidiaries | Subsidiary | Business | | :--- | :--- | | Banco Supervielle S.A. | Commercial Bank | | Cordial Compañía Financiera S.A. | Consumer Finance | | Tarjeta Automática S.A. | Consumer Finance | | Supervielle Seguros S.A. | Insurance | | Supervielle Asset Management S.A. | Asset Management | | Espacio Cordial de Servicios S.A. | Retail Services | | InvertirOnline S.A.U. | Online Broker | | Micro Lending S.A.U. | Car Financing | Property, Plants and Equipment The company owns limited office and branch properties, primarily leasing its administrative buildings, while this section also details extensive financial performance statistics including loan portfolios, deposits, and interest income/expense - The Bank owns 4,346 square meters of office space and 15,046 square meters for retail branch properties, while most other properties, including the headquarters, are leased[1018][1020] Loan Portfolio by Type (as of Dec 31) | Loan Type | 2018 (in thousands of Pesos) | 2017 (in thousands of Pesos) | | :--- | :--- | :--- | | Overdrafts | 4,740,509 | 5,340,109 | | Promissory notes | 15,671,116 | 22,877,163 | | Mortgage loans | 5,343,792 | 2,288,160 | | Personal loans | 19,024,837 | 24,743,905 | | Credit card loans | 9,210,204 | 11,761,502 | | Foreign trade loans and U.S. dollar loans | 18,896,869 | 16,559,563 | | Total loans and other financings (net) | 77,208,464 | 87,108,670 | - Past due loans (over 90 days) increased significantly to Ps. 4.5 billion in 2018 from Ps. 2.2 billion in 2017, primarily driven by personal loans, foreign trade loans, and overdrafts[1078] Composition of Deposits (as of Dec 31) | Deposit Type | 2018 (in thousands of Pesos) | 2017 (in thousands of Pesos) | | :--- | :--- | :--- | | Non-financial public sector | 11,105,477 | 9,112,185 | | Non-financial private sector and foreign residents | 83,775,301 | 74,149,615 | | Total | 94,906,014 | 83,284,983 | Operating and Financial Review and Prospects Operating Results The company reported a comprehensive loss of Ps. 2.8 billion in 2018, significantly higher than Ps. 707.5 million in 2017, primarily due to a Ps. 6.0 billion hyperinflation loss and increased loan loss provisions, partially offset by a 14.2% rise in Net Financial Income amid Argentina's challenging economic environment - The company's 2018 financial statements were restated under IAS 29 to reflect Argentina's hyperinflationary economy, resulting in a significant loss from changes in purchasing power[1121] Key Performance Indicators (2018 vs 2017) | Indicator | 2018 (in thousands of Pesos) | 2017 (in thousands of Pesos) | Change | | :--- | :--- | :--- | :--- | | Net Financial Income | 20,439,958 | 17,893,925 | 14.2% | | Result from exposure to changes in purchasing power | (6,015,001) | (2,591,255) | 132.1% | | Loan loss provisions | (5,179,033) | (4,033,187) | 28.4% | | Net loss for the year | (3,056,649) | (755,260) | 304.7% | | Comprehensive Loss | (2,815,076) | (708,378) | 297.4% | - Loan loss provisions increased by 28.4% to Ps. 5.2 billion in 2018, driven by a rise in the NPL ratio from 3.1% in 2017 to 4.1% in 2018, particularly in consumer finance and corporate banking[1241][1242] - Personnel and administration expenses grew by 5.3% to Ps. 14.4 billion in 2018, primarily due to higher professional fees and other operating costs[1257] Liquidity and Capital Resources The company's liquidity is primarily from deposits, with net cash from operating activities turning positive to Ps. 4.0 billion in 2018, while total deposits grew 14.0% to Ps. 94.9 billion, and the pro-forma Tier 1 capital ratio stood at 12.9% as of December 31, 2018 - The main source of liquidity is Banco Supervielle's deposit base, supplemented by loan portfolio securitization and debt security issuance in capital markets[1306] Consolidated Cash Flows Summary (in thousands of Pesos) | Cash Flow From | 2018 | 2017 | | :--- | :--- | :--- | | Operating Activities | 3,985,956 | (18,099,931) | | Investing Activities | (3,096,687) | (380,548) | | Financing Activities | (888,776) | 18,479,870 | | Net Increase in Cash | 15,343,440 | 14,032,182 | - Total deposits grew 14.0% in 2018 to Ps. 94.9 billion, with non-financial private sector deposits increasing by 13.0%[1316] - As of December 31, 2018, the Bank and CCF's consolidated pro-forma Tier 1 Capital ratio was 12.9%, and the pro-forma total capital ratio was 14.0%[1116][1117] Trend Information The company anticipates a challenging Argentine macroeconomic environment in early 2019 with gradual improvement, planning to maintain prudent risk management, grow targeted loan segments, expand consumer finance and asset management, and remain open to strategic acquisitions - Argentina's macroeconomic environment is expected to remain challenging in the first half of 2019, with recovery anticipated in late 2019 or early 2020, subject to political uncertainty from upcoming presidential elections[1342][1344] - The company will continue its strategy of prudent risk management while seeking to grow its loan portfolio by targeting specific segments like high net worth individuals, senior citizens, and SMEs[1346][1348] - Strategic focus includes streamlining consumer finance, growing assets under management through SAM and IOL, and exploring further acquisitions in banking and insurance[1349][1350][1351] Contractual Obligations As of December 31, 2018, total contractual obligations were Ps. 133.1 billion, with Ps. 115.3 billion due within one year, primarily deposits, alongside significant unsubordinated corporate bonds and lease commitments Contractual Obligations by Maturity (as of Dec 31, 2018) | Obligation Type | Less than 1 year | 1 - 3 years | 3 - 5 years | After 5 years | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Deposits | 96,801,718 | 131,515 | — | — | 96,933,233 | | Financing from financial institutions | 8,119,011 | 1,283,240 | 276,853 | — | 9,679,104 | | Unsubordinated corporate bonds | 4,907,434 | 12,245,676 | 2,128,544 | — | 19,281,654 | | Subordinated corporate bonds | 96,441 | 1,491,642 | — | — | 1,588,083 | | Total | 115,258,202 | 15,386,403 | 2,408,411 | — | 133,053,016 | - The company has lease commitments totaling Ps. 1.19 billion, with Ps. 446.4 million due within one year[1357] Directors, Senior Management and Employees The Board of Directors comprises eight members, supported by key committees, overseeing 5,307 employees as of December 31, 2018, with aggregate compensation for directors, senior management, and the Supervisory Committee totaling Ps. 165.9 million, Ps. 248.4 million, and Ps. 2.1 million respectively in 2018 - The Board of Directors consists of eight members, led by Chairman Julio Patricio Supervielle, with directors appointed for two-year terms[1359][1360][1364] - The company has several key committees, including an Audit Committee with three independent members, a Risk Management Committee, and an Ethics, Compliance and Corporate Governance Committee[1427][1438][1447] Compensation in 2018 (in millions of Pesos) | Group | Aggregate Compensation | | :--- | :--- | | Directors | 165.9 | | Senior Management | 248.4 | | Supervisory Committee | 2.1 | - As of December 31, 2018, Grupo Supervielle had 5,307 employees, with the majority at Banco Supervielle being members of the national banking union[1496][1497] Shareholders and Related Party Transactions Major Shareholders As of April 30, 2019, Julio Patricio Supervielle is the controlling shareholder, holding 35.4% of capital stock and 69.4% of total voting rights through Class A and Class B shares Major Shareholder Ownership (as of April 30, 2019) | Shareholder Name | Class A Shares (5 votes) | Class B Shares (1 vote) | % of Capital Stock | % of Votes | | :--- | :--- | :--- | :--- | :--- | | Julio Patricio Supervielle | 126,738,188 | 35,062,713 | 35.43% | 69.40% | | Other | — | 294,921,421 | 64.57% | 30.60% | Related Party Transactions The company engages in related party transactions, including providing management services to subsidiaries for Ps. 80.4 million in 2018, granting loans to directors totaling Ps. 783.2 million, and making irrevocable capital contributions to support subsidiary growth - Grupo Supervielle provides management, financial, and advisory services to its subsidiaries, receiving fees totaling Ps. 80.4 million in 2018[1518][1520] - The Bank granted loans to directors and related parties in the ordinary course of business, with an aggregate financial exposure of Ps. 783.2 million as of December 31, 2018[1523][1527] - Numerous irrevocable capital contributions were made to subsidiaries, including the Bank, CCF, and Tarjeta, during 2017 and 2018 to fund their operations and growth[1530][1531][1532][1533] Financial Information Consolidated Statements and Other Financial Information This section references the full audited consolidated financial statements, discusses legal proceedings not expected to have a material adverse effect, and outlines the dividend policy, which is contingent on distributable net income, legal reserve requirements, and Central Bank approvals - The company and its subsidiaries are party to various legal proceedings, including class action lawsuits common to the Argentine financial industry, but do not anticipate a material adverse effect[1543][1545] - Dividends are paid from distributable net income, subject to a legal reserve requirement of 5% of yearly income until the reserve equals 20% of adjusted capital stock[1553] - As a holding company, dividend payments depend on cash flow from subsidiaries, particularly the Bank, and are subject to Central Bank regulations that can restrict distributions[1554][1556] - The Board of Directors proposed a cash dividend of Ps. 303 million for the 2018 fiscal year, approved by shareholders on April 26, 2019[1560] The Offer and Listing Markets The company's American Depositary Shares (ADSs) trade on the NYSE under 'SUPV', while its underlying Class B shares are listed on ByMA and MAE in Argentina, also under 'SUPV' - The company's ADSs are listed on the NYSE under the ticker 'SUPV'[1564] - The company's Class B shares are listed on the ByMA and MAE in Argentina under the ticker 'SUPV'[1564] Additional Information Memorandum and articles of association The company's corporate purpose is financial activities, with capital stock comprising Class A (five votes) and Class B (one vote) shares, outlining voting requirements for major actions, preemptive and appraisal rights, and Argentina's tender offer regime - The company's capital is divided into Class A shares with five votes each and Class B shares with one vote each, with Class A shares holding special voting power for key decisions like mergers or dissolution[1570][1573] - Shareholders have preemptive rights to subscribe to new shares in proportion to their holdings during a capital increase, exercisable within a specific timeframe[1580][1582] - Argentine law provides appraisal rights, allowing dissenting shareholders to withdraw and receive payment for shares under specific corporate actions like mergers, delisting, or fundamental changes in corporate purpose[1584] - The Argentine Capital Markets Law mandates a tender offer (OPA) for all shares when a controlling interest is achieved or when the company voluntarily withdraws from public listing[1600][1605] Exchange Controls Argentina significantly eased foreign exchange controls since late 2015, eliminating mandatory deposits and stay periods for foreign debt, granting residents free access to the foreign exchange market, and repealing exporter repatriation requirements - The mandatory deposit on certain foreign currency inflows was reduced to 0%, and the mandatory stay period for new foreign debt was eliminated[1620] - Effective July 1, 2017, a new foreign exchange regimen significantly eased access to the MLC, allowing residents to freely purchase foreign currency[1621] - The requirement for Argentine exporters to repatriate and settle foreign currency proceeds through the MLC has been eliminated[1623] Taxation This section details Argentine and U.S. federal income tax consequences for Class B shares/ADSs, including Argentine withholding tax on dividends (7-13%), capital gains exemptions for non-residents, personal assets tax, and for U.S. holders, foreign-source dividend income and PFIC considerations - Argentine Taxation on Dividends: Dividends from profits accrued from FY2018 onwards are subject to a withholding tax for individuals and foreign beneficiaries, at a rate of 7% for FY2018-2019 and 13% for FY2020 onwards[1634][1636] - Argentine Taxation on Capital Gains: Capital gains from publicly traded shares or ADSs are generally exempt for non-resident beneficiaries from cooperative jurisdictions; otherwise, a 15% tax on net gain or 13.5% on gross price applies[1646][1647][1649] - Personal Assets Tax: The company pays personal assets tax (0.25% rate) on behalf of individual and foreign entity shareholders based on proportional net worth, with entitlement to seek reimbursement[1652] - U.S. Federal Income Tax: For U.S. holders, dividends are treated as foreign-source income, and the company does not believe it was a PFIC for the most recent taxable year, with FATCA reporting requirements also discussed[1678][1683][1702] Quantitative and Qualitative Disclosures about Market Risk The company manages market risk, including interest rate and foreign exchange risk, through a risk map with VaR limits (average Ps. 323.9 million in 2018), and manages liquidity risk via LCR and NSFR, alongside a comprehensive operational risk framework - Market risk is managed using a risk map defining authorized trades, position limits, stop-loss levels, and Value at Risk (VaR) limits, with daily monitoring by the Financial Risk Department[1712] Five-day 99% VaR for Combined Trading Portfolios (in thousands of Pesos) | VaR | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Minimum | 499,968 | 33,561 | 36,590 | | Maximum | 206,802 | 128,835 | 111,622 | | Average | 323,948 | 72,739 | 72,961 | - Liquidity risk is managed through control of the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) to ensure sufficient liquid assets to meet obligations, especially in stress scenarios[1736] - As of December 31, 2018, the Bank's consolidated total net asset foreign currency position subject to risk was Ps. 393.0 million, generating a VaR of Ps. 32.8 million[1732] Description of Securities Other Than Equity Securities American Depositary Shares This section outlines fees payable by ADR holders to the depositary, The Bank of New York Mellon, for services including ADS issuance/cancellation (up to $5.00 per 100 ADSs), cash distributions (up to $0.05 per ADS), and annual depositary services (up to $0.05 per ADS) Depositary Fees for ADS Holders | Fee | For | | :--- | :--- | | Up to $5.00 per 100 ADSs | Issuance or cancellation of ADSs | | Up to $0.05 per ADS | Any cash distribution | | Up to $0.05 per ADS per year | Depositary services | - The depositary for the ADRs is The Bank of New York Mellon, which reimbursed the company for expenses amounting to U.S.$53,291.21 in 2018[1750] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018, a conclusion attested to by Price Waterhouse & Co. S.R.L., with no material changes reported during the fiscal year - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the annual report[1756] - Based on an assessment using the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2018[1759] - The independent registered public accounting firm, Price Waterhouse & Co. S.R.L., issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2018[1760][1806] Audit Committee Financial Expert Audit Committee Financial Expert Ricardo Enrique De Lellis has been identified as the audit committee's financial expert and is an independent member as defined under Rule 10A-3 of the Exchange Act - Ricardo Enrique De Lellis serves as the audit committee's financial expert and is an independent member[1763] Code of Ethics The company adopted a code of ethics for senior financial officers and key personnel, publicly available on its website, with no modifications or waivers granted during the fiscal year ended December 31, 2018 - A code of ethics has been adopted for senior financial officers and is publicly available on the company's website[1765] - No waivers were granted from the code of ethics during the fiscal year 2018[1765] Principal Accountant Fees and Services The company paid Price Waterhouse & Co. S.R.L. Ps. 54.0 million in 2018 and Ps. 73.4 million in 2017 for audit, audit-related, tax, and other services, all pre-approved by the audit committee Accountant Fees (in thousands of Pesos) | Fee Type | 2018 | 2017 | | :--- | :--- | :--- | | Audit Fees | 34,925 | 43,029 | | Audit Related Fees | 11,981 | 26,275 | | Tax Fees | 486 | 2,500 | | All Other Fees | 6,562 | 1,588 | | Total | 53,954 | 73,392 | - All audit and non-audit services provided by the principal accountant are pre-approved by the Audit Committee[1772] Corporate Governance As a foreign private issuer, the company follows Argentine corporate governance practices, which differ from NYSE standards, notably regarding the absence of a majority of independent directors and specific nominating or compensation committees - The company is a foreign private issuer and follows Argentine corporate governance practices, which differ from NYSE standards for U.S. companies[1776] - Unlike NYSE rules for domestic issuers, Argentine law does not require a majority of independent directors on the board[1777] - The company is not required to have nominating or compensation committees; director nominations are by shareholders, and a Human Resources committee advises on senior officer compensation[1782]