Grupo Supervielle S.A. (SUPV) CEO Jorge Ramirez on Q1 2020 Results - Earnings Call Transcript

Grupo Supervielle S.A. (NYSE:SUPV) Q1 2020 Earnings Conference Call May 29, 2020 9:00 AM ET

Company Participants

Ana Bartesaghi - Treasurer & Investor Relations Officer

Patricio Supervielle - Chairman of the Board of Directors

Jorge Ramirez - Chief Executive Officer & Vice Chairman of the Board

Alejandra Naughton - Chief Financial Officer

Conference Call Participants

Ernesto Gabilondo - Bank of America

Jason Mollin - Scotiabank

Yuri Fernandes - JPMorgan

Operator

Good morning, and welcome to the Grupo Supervielle First Quarter 2020 Earnings Call. A slide presentation will accompany today's webcast, which is available in the Investors section of Grupo Supervielle's Investor Relations website, www.gruposupervielle.com. As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. As a reminder today's conference is being recorded.

At this time, I'll turn the call over to Ana Bartesaghi, Treasurer and IRO. Please go ahead.

Ana Bartesaghi

Thank you. Good morning, everyone and thank you for joining us today. Speaking during today's call will be Patricio Supervielle, our Chairman of the Board of Directors, who will discuss the overall macro environment; and Jorge Ramirez, our Chief Executive Officer and Vice Chairman of the Board, who will review our results for the quarter. Also joining us is Alejandra Naughton, Chief Financial Officer; and Alejandro Stengel, Chief Operating Officer of the bank. All will be available for the Q&A session.

Please note that starting this quarter as per Central Bank regulations we have begun reporting results applying hyperinflation accounting in accordance with IFRS rule IAS 29. For its comparability, we have restated 2019 results, quarterly and for the year applying IAS 29 to reflect the effects of inflation adjustment for each period. Therefore, all results in this presentation are presented adjusted for inflation as of March 31, 2020 unless otherwise noted.

For your convenience, we have also included in our earnings report managerial results in nominal terms. This means we are including first Q 2020 financial results ex-IAS 29, isolating the IAS 29 impact for the quarter and also showing quarterly figures for 2019 in nominal terms as they were previously reported until December 31, 2019. You can find more details on hyperinflation accounting in our earnings report filed yesterday after the close of the market, as well as in the investor education presentation we have uploaded to our IR site along with earnings materials for the quarter.

Before we proceed, I would like to make the following safe harbor statement. Today's call will contain forward-looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties, including as a result of the COVID-19 pandemic 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, Patricio Supervielle.

Patricio Supervielle

Thank you, Ana. Good morning, everyone. Thank you for joining us today. We hope you and your loved ones are healthy and safe in this challenging time.

If you're following the presentation please turn to slide 2. I'm very proud of how quickly our team responded to the first signs of the COVID-19 pandemic, implementing protocols to ensure the health and well-being of our employees and customers while also maintaining the continuity of our operations. Through prudent management, we enter this crisis with a high level of liquidity and comfortable capitalization levels fortifying the organization's long-term sustainability in this rapidly-changing environment.

Going into this unprecedented period, we have already began a transformational process spanning the organization. With a heightened need to support our customers in a low-touch environment, we have accelerated our digital transformation adding online functionalities and implemented significant redeployment of ATM infrastructure.

We also made requisite adjustments to our operations to promote safe banking across all our customer segments. Importantly, we also provided financial relief in areas that I will go on the next slide. We are supporting our communities through monetary donations and supplies in addition to organizing opportunities for giving by our employees and customers.

Turning to our financial performance, we delivered higher profitability this quarter despite the increasingly challenging macro environment. Efficiency ratio -- efficiency also improved reflecting the streamline undertaken last year and strict cost control.

We reported sequentially higher cost of risk and low loan provision reflecting the adoption of rule IFRS 9 resulting in increased coverage. Both coverage and the NPL ratio benefited from the regulatory easing on debtor classification.

Please turn to slide 3. On March 19, the government established a nationwide mandatory lockdown, which has been extended in several instances and remain currently in place. Bank branches opened for specific customers on April 3, with financial services deemed on essentials business starting April 13. Since then, branches have been allowed to open gradually for specific transaction with prior appointment and complying with certain health and safety requirements.

Meanwhile, all other banking activities are performed through digital means. To mitigate, the economic impact of this health crisis which resulted in a mandatory shelter-in-place and shutdown of nonessential businesses, the government and Central Bank adopted a series of social aid monetary and fiscal measures.

As you can see on the left side of this page, some of these measures include a freeze on inflation-adjusted mortgages on permanent residents and auto loan installments and suspension of mortgage foreclosures until the end of September, postponement of credit card loans maturing between March 19 and April 30 and personal loans due through the end of June with penalty interest on unpaid balances waived between April and the end of June.

Fees on ATM transactions are also waived until the end of June. Additional initiatives include several lending programs such as loans to SMEs at a 24% annual rate, zero interest rate financing to some eligible customers and automatic refinancing on unpaid credit card balances due before the end of April in several installments and with a three-month grace period.

Concurrently, the Central Bank also established measures aimed at encouraging bank lending. For example, lowered minimum reserve requirements for loans given to SMEs at preferential rates for salary and working capital needs; set limits on holdings of Central Bank notes or Leliqs to provide added liquidity for SME lending; and eased debtor classification and provisioning until the end of September, providing an additional 60-day grace period before a loan is classified as nonperforming. This applies to all commercial consumer and mortgage loans.

Finally, while all-time deposits carry a minimum interest rate of 26%, the Central Bank also introduced easing on minimum reserve requirement on time deposits. A detailed list of measures affecting our industry can be found on our press release.

Please turn to slide 4. Please review the recent actions we have taken to address this pandemic. We are rapidly advancing on three key pillars. First, ensuring the health of our people is our utmost priority. As I've noted earlier, over 95% of our known branch employees who are working from home in advance of the mandatory lockdown with some of our subsidiaries working 100% remotely, leveraging our IT resources.

In our branches, teams were divided in two groups that rotate every 15 days and stricter sanitation and health procedures to protect the employees and customers were also established. Secondly, we have made many operational adjustments to support our current and future customer needs including accelerated digitalizations and a series of measures to promote safe banking. We are recognized leaders in the senior citizen segment, which is an important part of our customer base.

Making special accommodation to help this vulnerable group, we added features on the mobile app to reduce the need for in-branch banking. We adapted and moved to our 24-hour lobbies, our existing biometric recognition technology to withdraw money from the ATMs without a debit card. Additionally, we enabled biometric pass code generation for cash withdrawals without a debit card in the national ATM network. To facilitate adoption among this group of clients, we are also -- we are encouraging the use of our digital channels across all communication platforms.

Another important group is the SME segment. Here, we are supporting the payroll and working capital needs through loans promoted by the government and have launched specific credit lines for SMEs in the health and transportation sector. We are also adding new digital functionalities across our other segments, maintaining our best-in-class cybersecurity standards.

Our third key pillar is ensuring long-term business continuity. Here, we are working on several fronts. We are continuing to proactively monitor our credit portfolio. And while result for the quarter showed no material impact from the COVID-19 pandemic on our P&L, we expect to make provisions in the near future, contingent upon the depth and a length of the quarantine and related government measures.

As always, we are maintaining our strong focus on cost control and efficiency while enhancing our differentiating strategy to capture growth opportunities and remain flexible. While our longer-range plans always considered a shift to a lower-touch environment, we are now rapidly adapting to the new normal customer behavior and continue to provide customized and elevated level of service that distinguishes Grupo Supervielle.

On Slide 5, you can see how the use of digital channels has consistently accelerated across our customer segments between April – between February and April. We are observing growth rates that range from the high 20s, in users to nearly double in some channels with consumer finance channels posting ever higher increases just to name a few.

Use of our recently launched groundbreaking senior citizens app with face recognitions increased over 60%. Personal mobile usage increased 84%. InvertirOnline, our online broker, saw an increase of over 85% in new account openings. Visits to our bank's institutional website increased 97%, reflecting higher traffic around customer transactions as well as new requirements in this low-touch environment such as online appointments to conduct branch transactions. Visits to the consumer finance website were up over 400% in the same period.

In addition, transactions grew our check deposit up increased 179%, while the number of customers using our app more than doubled during this period. We are even seeing much higher growth rates in our consumer finance digital channels, reflecting the successful migration of the call center operations to an automated chatbot and full automation of consumer finance banking transaction.

Higher self-management of banking transactions is also contributing to a higher efficiency operation. Between January and May, we drove self-service banking transactions to give customers new ways to interact with us. These reports – these efforts resulted in over – in an over 150% increase in loan origination across our non-branch channels. These type of transactions are helping us achieve greater efficiency across the business.

In this environment of accelerated digital adoption, we are rapidly advancing on our strategy of transforming our company into a cutting-edge, cost-efficient players having the evolving needs and aspirations of our customers.

Please turn to Slide 6. We are committed to assisting our communities in Buenos Aires Mendoza and San Luis in the fight against COVID-19. With this goal in mind, we have made donations to well-recognized social agencies purchasing medical equipment and supply and food for the most vulnerable communities in our key markets.

Please turn to Slide 7 to discuss the macro environment. Economic activity experienced a sharp contraction in March, down nearly 12% year-on-year. As we enter the third consecutive recessionary year, the impacts were deepened by the lockdown to contain the COVID-19 outbreak.

Increased government social assistance together with financial relief for some affected companies has significantly accelerated monetary expansion. In this context, monetary policy interest rate continued to decline following 38% at the close of the quarter, down from 55% at year-end.

Inflation dropped below expectations to 7.8% in the quarter and declining to 1.5% in April, kept in check by the recessionary environment. In the meantime, the gap between the blue chip rates and the official exchange rates continues to widen.

Now please turn to Slide 8. Note that in the next two slides covering financial system loans and deposit trends, we have presented figures that's published by the Central Bank, which are before adjusting for inflation. Starting with loans, system demand remained weak during the quarter with industry loans to the private sector growing below inflation both sequentially and year-on-year. Industry peso-denominated loans were up nearly 7% sequentially, mainly driven by commercial loans.

U.S. dollar system loans in original currency declined nearly 13% sequentially driven by lower commercial loans following the trend observed over the past two quarters. Our total loan book was unchanged sequentially before adjusting for inflation.

Turning to slide 9. System liquidity remained high both in local currency and in U.S. dollar deposits. On a sequential basis, Argentine peso deposits increased above inflation, while we saw a slowdown in the outflow of U.S.-denominated system deposits. Overall, total system deposits were up nearly 18% as a 25% increase in peso deposits more than offset the 7% decline in U.S. dollar-denominated deposits measured in original currency.

Our deposit base increased nearly 53% sequentially, reflecting our asset and liability strategy. Peso deposits were up 74% sequentially, while U.S. dollar-denominated deposits in original currency fell 13% slightly below the drop experienced in the fourth quarter. In April, industry deposits were up 5% sequentially with peso deposits up nearly 7% and U.S. dollar deposits down nearly 2% in original currency.

I will now turn over to Jorge, who will review our financial performance. Please Jorge, go ahead.

Jorge Ramirez

Thank you, Patricio. Good day, everyone. As Ana noted earlier, remember that this quarter we have adopted rule IAS 29. And for recent comparability, we have also restated 2019 figures to reflect this.

Now turn to slide 10. We decided to releverage our balance sheet this quarter taking advantage of higher spreads of the 7-day Leliq securities issued by the Central Bank. This drove a 22% sequential increase in total assets back to third Q 2019 levels. This brought the share of Leliq securities to 21% of total assets, up from nearly 5% in the prior quarter and 18% in the third Q 2019.

Turning to our loan book on slide 11. Total loans contracted 7% sequentially reflecting the economic contraction and overall uncertainty. We experienced high single-digit declines in both peso and U.S. dollar-denominated loans in original currency. Overall, we saw sequential declines in the range of 6% to 9% across our loan segments.

Note also that starting January 1 and to align our SME business to a heightened implementation of digitalization already in place among individual customers, we transferred our SME loan book from Corporate Banking to the Personal and Business Banking segment. This newly created segment includes; SME loans which this quarter accounted for 5% of total loans, plus our traditional retail banking operations. The corporate segment now includes middle-market companies with annual sales between AR$700 million and AR$2.5 billion and large corporates with annual sales over AR$2.5 billion.

On slide 12 in April, our total loan portfolio was up 3% sequentially. Growth was mainly driven by SME loans at a 24% interest rate reaching AR$5 billion and accounting for 5% of our loan portfolio at the end of April. Also 3% of total loans with maturities subject to regulatory refinancing requested stock debit in line with the Central Bank program to defer installments as Patricio explained earlier.

The loan breakdown by industry remained stable over the last few months. Coverage increased slightly close to 110% in April with a total NPL ratio down 30 basis points to 6.4%. Excluding the regulatory franchise, coverage was 94% and the total NPL ratio stood at 7.5%. However, I do want to reiterate what Patricio touched on earlier with regards to provisions.

While we do not show material impacts this quarter as a result of COVID-19 and have not observed any significant changes in asset quality to-date, we are reviewing our predictive models and expect to take additional provisions in the near future once we have greater visibility into the unfolding depth and magnitude of our quarantine and related government measures.

Turning to funding on slide 13. Core retail and corporate peso deposits remained strong, up close to 15% quarter-on-quarter. This quarter, we also more than tripled institutional deposits to fund investments in Central Bank's seven-day high-yield Leliqs. Remember that at year-end, we had sharply reduced institutional funding, deleveraging the balance sheet.

As a result, total deposits in the first quarter expanded sequentially by nearly 42%, with the peso loan-to-deposit ratio dropping to 62% from 108% in the 4Q, 2019. At the same time, U.S. dollar deposits in original currency declined 8% sequentially, with the U.S. dollar loan-to-deposit ratio reaching 97% compared to 92% in the prior quarter. The liquid assets-to-deposit ratio stood at 60% in pesos and 61% in dollars.

Now on to the P&L on slide 14. Comparable net financial income increased nearly 1% to AR$7.4 billion sequentially, despite the sharp decline in market interest rates. Remember, 4Q 2019 benefited from AR$1.3 billion non-recurring gain from price improvements in holdings of reprofiled treasury notes.

The sharp decline in the average yield of Central Bank Leliqs was slightly more than offset by lower cost of funding, following the continued decrease in market interest rates, while interest on loans benefited from lagged repricing. In turn, loan portfolio NIM expanded 220 basis points sequentially to 23.9%. Comparable total net interest margin, however, was down 118 basis points to 22.8%, reflecting a strong increase in assets, principally higher spread Leliqs funding through wholesale deposits.

Turning to slide 15. Net service fee income was up 15% sequentially, driven by higher deposit account fees, resulting from the reprising of bundled products above inflation and higher asset management revenues. Income from insurance activities was down in the low-teens sequentially, driven by declines in both written premiums and claims.

Moving on to asset quality on slide 16. Note in the first quarter, we began progressive adoption of expected losses as per rule IFRS9 issued by the Central Bank, which became effective starting January 1, except for smaller entities, including our Consumer Finance segment.

While IFRS9 takes into account the forecast of certain macroeconomic variables, such as wages, GDP and inflation, the loan-only provisions and non-material amount in connection with the potential impact of a COVID-19-type economic disruption and related regulatory measures as of the end of the first Q. Reflecting IFRS9, cost of risk increased sequentially by 180 basis points to 6.8%, with loan loss provisions up 32% in the quarter to AR$1.6 billion.

The total NPL ratio was down 70 basis points sequentially to 6.7%, driven by declines of 80 basis points in Personal and Business segment NPLs and 720 basis points in Consumer Finance NPLs. This performance benefited from a Central Bank regulatory easing on debtor classification amid the pandemic, which consisted of 60-day grace period before these loans are classified as non-performing and the suspension of the reclassification of customers that are non-performing with other banks, but performing at Supervielle.

While the corporate segment NPL ratio was not impacted by these easing measures, level remain unchanged Q-on-Q at 9.8%. Collateralization increased to 61% of total loans at quarter end, up from 58% at year-end and 20% at the end of June of last year. We closed the quarter with a coverage ratio of nearly 100%, up from 83% in the prior quarter, driven by the higher loan loss provisions and benefiting from the regulatory easing on debtor classification Patricio mentioned earlier.

Excluding the easing and Central Bank regulations in terms of debtors, the NPL ratio would have been 7.7% and the coverage ratio 88%. Again, as a reminder, while we do not show material impacts this quarter as a result of COVID-19, we are reviewing our predictive models and expect to take additional provisions in the near future, as we gain greater visibility into the depth and magnitude of our quarantine and related government measures.

Moving on to expenses on slide 17. We delivered improved operating efficiency in the quarter, with the ratio at just over 60%, down from a comparable level of nearly 67% in the prior quarter, when excluding extraordinary severance and early retirement charges in the 4Q, 2019.

This was mainly driven by the ongoing benefits of actions taken in 2019, to streamline operations and strict cost controls, while revenues were flat. In terms of personnel expenses, note that this quarter, we have increased salaries by fixed amounts that on average have followed inflation, while we maintain ongoing conversations with the labor unions.

Looking at the bottom line, on slide 18, profitability improved significantly this quarter. Pre-tax income reached nearly AR$800 million. Several factors contributed to this good performance. First, lower expenses following the cost control measures implemented, over the past year.

Second, volatility arising from inflation, as for the adoption of IAS 29 we reported a small inflation and adjusted loss of AR$869 million, reflecting lower inflation this quarter of 7.8%. This compares to AR$1.9 billion inflation-adjusted loss in the 4Q, 2019 when inflation peaked at 11.7%. And third, results also benefited from higher net fee income this quarter.

This was partially offset by lower net financial income as 4Q, 2019 results penetrated from price improvements in government short-term treasury notes that have been re-profiled, in the 3Q, 2019 and higher loan loss provisions this quarter, arising from the adoption of expected losses as per rule IFRS 9, as I just discussed.

As a result, return-on-average equity, improved both sequentially and year-on-year to nearly 8% this quarter, from negative 13% in 4Q, 2019 and negative 20% in the year ago quarter. Excluding the impact of IAS 29 on all quarters, ROE would have been nearly 26% in the 4Q, 2020 compared to close to 28% in the 4Q, 2019 and 15.6% in the 1Q, 2019.

Please turn to capitalization on slide 19. The Tier one capital ratio increased 200 basis points to 13.3% in the first quarter. The ratio benefited from the initial recognition of the IAS 29 adjustment of non-monetary assets, which contributed with 110 basis points in capital creation and an inflation adjustment in this -- in the first quarter which added another 90 basis points.

In addition, the regulatory easing on provisions of this pandemic contributed with 50 basis points in capital. As mentioned earlier, the Central Bank now allows banks to consider as Tier 1 common equity, the difference between the provisions recorded. And the expected losses modelled according to IFRS 9 and provisions secured at November 30th 2019, under the previous accounting framework.

This was slightly offset by the increase in risk-weighted assets, which includes the impact of the currency devaluation. At quarter end, the bank's consolidated financial position, showed the solvency level, with an integrated capital of AR$18.6 million exceeding total capital requirements by AR$7.5 million.

Looking ahead on slide 20, there is little visibility at this time, on when the inflection point for the economic recovery will take place, as it is dependent on number of complex factors including, the depth and duration of the global health pandemic, the government's measures to contain the outbreak, actions to mitigate the economic impact and the outcome of the Argentine sovereign debt restructuring.

However, I am confident that we have a sound foundation in place to navigate through this crisis, as we did during prior periods. We continue to develop new products and businesses, as we expand our franchise. A few of the areas we are currently seeing opportunities to strengthen our competitive positions, include the value chains of larger global corporate names, operating in Argentina.

We are also focused on cross-selling non-credit products, among our customer base. The adoption of digital is increasing across our customers. And we rapidly roll out new functionalities, on our websites and through our apps. We will look to continue to invest in these important initiatives as part of our overall digital transformation process, which is also resulting in our ability to continue to enhance operating efficiency.

Finally, as a result of improved management culture, we have strong liquidity and capitalization levels. This coupled with a highly experienced and agile management team focused on anticipating the current and future needs of our customers, will ensure the long-term sustainability of our business.

This concludes our prepared remarks. Operator, now please open the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Thank you. And our first question is from Ernesto Gabilondo with Bank of America.

Ernesto Gabilondo

Hi, good morning, Patricio, Jorge, Alejandra and Alejandra Naughton. Thanks for the opportunity to take questions. My first question is on loan growth. Just want to know how are you perceiving the demand for corporate loans. Are you seeing companies withdrawing credit lines to improve liquidity? And are you implementing structure lending to privileged asset quality over loan growth? And how should we think about the loan growth for the year or if we can have a trend for the rest of the year?

Jorge Ramirez

Good morning, Ernesto. Thank you for your question. I hope you and your loved one are safe. We wish for the rest of the people who are listening in today. And we have seen in a couple of things throughout -- since the whole pandemic crisis started and throughout April and May.

In the first place we saw very large corporate increasing loan demand for liquidity purposes and we were able to lend to some of these companies and being very selective in terms of the credit quality, and both of the company in itself by their own merits, but also in terms of the sectors that we are supporting.

Most results in some increases in value chains related to agricultural production and food production mostly, which is something that we believe is a pretty safe in this whole pandemic crisis.

The second thing that we saw in terms of loan demand is increases in demand by SMEs following these programs at the Central Bank and the government have put in place 24% credit lines -- 24% annual rate credit lines. And a substantial portion of them carry a guarantee from FOGAR, which is a fund, which is administered by BSE, which is a public-owned bank or state-owned bank. And we continue to be very selective in terms of credit quality, and to which companies we do help and assist in this crisis.

In terms of the second part of your question of looking ahead, it's very difficult to say our loan growth will be for the rest of the year. I think it's going to be highly dependent on when restrictions of the mandatory shelter-in-place and lockdown of the economy are lifted and how gradually or how fast the economy starts to reopen.

We are coming from two years of a pretty deep recession. So one of the things that I think makes the whole situation for Argentina different to some other parts of the world in terms of the unwinding that you saw is that the companies had already deleveraged a lot in the past two years mostly because of the very high interest rates we had since 2018 and most importantly in 2019.

So we have a pretty unleveraged market. The total size of the Argentine market as a percentage of GDP is closer to 9% of the GDP so it's a pretty small impact. So how fast this will recover and the percentage of growth for the year, it's clearly very difficult for me to tell you at this point because again it's going to depend on factors, which are very difficult to predict accurately at this stage.

Ernesto Gabilondo

Thank you, Jorge. And my second question is in asset quality. We noticed you have created additional provisions based on expected losses except for the consumer portfolio. So, I just want to know, which are the macro assumptions that you are considering to build your respective loss model. And when do you expect the peak in provision charges just considering how the relief program is structured? Probably you will not see defaults from some clients in some quarters. So I'm just wondering when do you see the peak in provision charges. And within your portfolio, which are the industries that you think would be suffering the most?

Alejandra Naughton

Thank you, Ernesto. Alejandra speaking. Yes as you mentioned, we are from this quarter apply in IFRS 9. And you know that IFRS 9 make us calculate the segment inflation expected losses considering the past behaviors of our customers and we're still looking forward with favors. So it's pretty difficult to assess as of March the adjustment. As you may have read we didn't enjoy use of much higher provisions connected specifically with COVID-19. And it has to do with the past. Did not teach us a lot about which could be the effects on COVID, because COVID is a very, very new situation happening all across the world. And looking forward, again, it's difficult to assess because in looking-forward assumptions, what we have done is slightly adjustment to the assumptions that we have already put in place as of December adding additional impact on GDP.

Let's say a decline of GDP by 5% in real terms. However, to be completely sincere, this is a continuing update, because the longer the lockdown, the higher the impact on GDP on economic activity. So up to now, I will say that, we didn't change dramatically our assumptions, because of lack of visibility. But however what is clear is that along the math, we will be updating that model and we did not discard it to observe higher provisions.

Regarding activities one thing that makes us think that we are of okay as of March again it has to do with the – that we do not have exposures on those economic activities that are then identified the most affected because of the pandemia like the airlines, the entertainment or tourism. So all-in-all what we are doing is concentrating our commercial efforts on those activities that we consider to be less impacted like for example agrobusiness activities that has had a good dynamic during April and May for example. So, I think that – I don't know if it's – if I answer your question. But this is all in all – all the pieces moving behind the calculation of expected losses, we will be monitoring. And of course, it's clear that the economic activity will be worsening along the month, so we will be taking actions in terms of position our balance and be prudent regarding the building of our loan loss provisions.

Ernesto Gabilondo

Thank you very much, Alejandra.

Alejandra Naughton

You are welcome Ernest.

Operator

Thank you. Our next question is from the line of Jason Mollin with Scotiabank. Please proceed with your question.

Jason Mollin

Hi. Thank you for the detailed presentation and Q&A session. My question is based on what you described or describing the Central Bank and government measures freezing mortgage and auto loan payments, postponing credit card payments, the loan support programs for SMEs at 24% annual interest rate. Can you talk about the operating cash flow implications of this? So, I mean, I imagine this means that you're not collecting any payments on these products for the next months. You did talk about your liquidity metrics, which sounds positive. But how are you managing the bank in terms of cash flow in this construct? And maybe you can give us some sense of the size. You showed the growth in SME loans, I presume at a 24% interest rate. But if you can just talk us through about operating a bank in this environment, thank you – in terms of cash flow?

Jorge Ramirez

Good morning, Jason. Thank you. I mean, yes you're right in terms of the impact that that has in terms of extension of installments. In the case of the inflation adjusted mortgages, what essentially is happening is that the adjustment that occurs in the period in which this is frozen has to be collected in three consecutive installments starting October this year. So they're being added up it's – I mean, you're still collecting, but you're not collecting the adjustment, okay? The way we're managing mostly the cash flow is we keep a very close eye to liquidity. The Central Bank simultaneously with these easing measures for debtors has also released a lot of liquidity into the market. So the liquidity at the customer of the bank has not been heavily impacted. And I must say not just for us, but in general for the banking system has not been heavily impacted by this deferment of collections. And actually we have increased our liquidity levels since the whole crisis started. On the first hand as a precautionary measure. On the second hand also because of the Central Bank measures in terms of injecting more liquidity into the market.

So my take on that is, they're reasonable -- those are reasonable measures that the Central Bank has taken because I think they're understanding what the challenges are. And if you're asking the whole population to stay at home for a prolonged period of time, it is only logical that you try to provide some relief.

Regarding the question about the SMEs, we have increased more or less by around AR$ 5 million our portfolio by the end of April. Current project stands at around slightly above that. It's probably around AR$ 6 million, the amount outstanding under those programs. It is more or less 6% of our total portfolio.

So it's -- I mean the effective interest rate that we get out of those loans because of reliefs we get in terms of minimum cash reserve requirements is closer to a 30% mark -- 32% mark. And it's also enabling us to get other ancillary businesses from these companies. So all in all, we believe it's a reasonable size compared to the overall size of our portfolio. And I think we're handling it okay.

Jason Mollin

So these loans that have been rescheduled, if you want to call it that or postponed payments the interest is being accrued but without penalties, or how is that being reflected in the financial statements?

Jorge Ramírez

Yes that's correct. I mean the contractual interest -- I mean you have two different situations. If it's a loan you continue accruing the contractual interest rate. If it's a credit card loan the Central Bank has imposed the cap on interest rates on credit cards which stand at a 43% per annum. Originally, they were 49% and they lowered it to 43%. And they're accruing that contractual interest rate. There is no penalty interest rate.

Jason Mollin

Okay. A separate question related to what you show on chart -- on Slide 7, where you show the gap between the blue chip swap rate and the official exchange rate at 77%. How do you expect that to proceed or be worked out? And what are the implications for the economy and your bank?

Jorge Ramírez

That's a million-dollar question. I mean, if you look at past history normally what tends to happen is that at some point in time both rates tend to converge. And what past history in Argentina shows is that normally the one that is below that goes up; another one that is above that comes down.

However we could -- it's very difficult to establish the timing on this situation because it depends on the level of reserves that the Central Bank has. And I think that in this particular situation it will depend a lot in terms of the agreement or not Argentina makes in terms of restructuring its foreign debt -- foreign sovereign debt.

So, we might see large gaps within the official exchange rate and the blue chip swap rate for a prolonged period of time. That's probably one situation. Secondly the Central Bank has been taking a lot of measures in terms of trying to put this under control.

Yesterday night, the Central Bank issued a new regulation stating that, if you -- if a company or a person has assets abroad or has dollars in cash in Argentina not deposited in a bank account, they cannot access the official exchange market, okay? So all of these measures are put at or are taking in terms of the Central Bank trying to make the gap converge and reserves increase by year, by increasing the bank deposits through this measure, if you want to access the official exchange rate market or by preventing people from getting reserves on the Central Bank to make foreign payments, if they do have U.S. dollar liquidity available mostly outside of Argentina or in cash within Argentina.

So, we're seeing these measures practically every single week. I mean if you look at when this whole lockdown started back in March 19, we've had in 70 days, which is 10 weeks, 97 Central Bank regulations. So that's partly an average of 10 regulations per week. So -- and we believe that this might continue for a while until the situation starts normalizing.

Operator

Thank you. Our next question comes from the line of Yuri Fernandes with JPMorgan. Please proceed with your question.

Yuri Fernandes

Thank you, Patricio, Jorge, Alejandra. Hope you are all well. My first question is regarding margins as a follow-up in the previous one. So if I understood correctly, we should not see a pressure on NII in the second Q. The bank will continue to recognize the interest on those renegotiated loans. My question is what you expect in the future, right? Because many of those loans at some point they may be default. And those NII accrued, they may never be real, right? So how to think about that? Should we see impairments in the future? This will come through higher provisions? How should we read this?

And my second question regarding margins. We saw some changes on deposits that now banks they need to offer inflation-linked deposits to choose small amounts. And I know that the spread banks they make on deposit, they are pretty important for your NII. So my question is how should we see margins behaving? And we have this positive new regulation in addition to the credit card cap, the 55% that as you said today, it's 43% given like it's a mandatory renegotiation for credit cards. So how do you think margins in this kind of environment? Like how big they will be able to make money in this kind of scenario?

And my third question is regarding expected losses. I got you're not getting big anticipating provisions for COVID, but do you plan to build in the second Q or like something ahead of the losses? Thank you.

Jorge Ramírez

Good morning, Yuri. Okay. Your -- regarding your first question is in our consumer finance company one of the things that we're doing is, despite the Central Bank grace extended of 60 days extension, we are continuing to provisioning following the prior rules. So we're not -- we're taking advantage of this situation to increase coverage as a way of not getting a bad surprise in terms of once we go back to normal in terms of how many of these loans actually we ended up rescheduling bad loans rather than good debtors, okay? So we're taking that as a precautionary measure.

And more or less, let me tie this answer to your last question regarding expected losses is, as we mentioned during the presentation, we are reviewing the month to try to reflect within the month expected income -- expected impact of COVID-19. The problem you have with the expected losses loans is that they're based on statistical experience that you get from the past. And there is nothing we can resort to that is comparable to what's happening worldwide with this COVID pandemic. So in many ways when you are -- or the way the COVID pandemic has been part of the expected losses that has been implemented in Argentina is that you need to review them all so you got to be able to expand your coverage.

And we definitely are trying to do that, because we wanted to increase our coverage levels during the second Q to reflect -- in order to reflect this whole potential impact on our balance sheet. And clearly, if -- I mean we've just mentioned also that we give you some highlights in terms of our April numbers. And if you look at April numbers and compare them to the prior rule, is our coverage stands now at 94% and we ended last year with a coverage of 55%. So we -- even with the prior rules, we have increased our total coverage by nine percentage points. And we are planning on continue increasing this in order to be able to support any impact that comes from the COVID-19 pandemic.

And this also is more or less indirectly related to your margin question. I think that there is a -- probably a different answer or not necessarily a different answer, but some shades of the difference in the answer that will apply to Banco Supervielle and that might apply to other banks in the system. And that has to do with the fact that, we have always traditionally had because of our loan portfolio and our business segments higher margins than the rest of the market, okay?

And even though our margins in the first Q show a 180 basis points drop, they're still very high at 22.8%. So, for us, the drop in interest rates has been quite beneficial in terms of the capture that we've done of these margins. Probably for other banks in the system that may not be exactly the same case because they were -- they replaced low-margin lines with high-margin Leliq investments. And when the whole margin or Leliqs come down, they would go back to more reduced margin level. So, you might find a different situation in other banks compared to us.

When you look at the mandatory lines of -- or mandatory deposits, time deposits adjusted by inflation, there's still a very small percentage not just for us, but for the whole industry. So, we don't expect much pressure on that because the other thing that has happened is that simultaneous to this, the Central Bank has either provided relief on minimum cash reserve requirements or on top of that, they have increased the percentage of excess Leliq positions that banks can have, so if we're able to compensate some of these increased interest rates by means of being able to invest or have a large investment in Leliq, so many of these measures have been neutral or marginally positive for our bank.

Operator

[Operator Instructions] Thank you. At this time, we've come to the end of our Q&A session. And I will turn the call back to Ana Bartesaghi for closing comments.

Ana Bartesaghi

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 updates next quarter. In the interim, we remain available to answer any questions that you may have. Thank you and stay safe and healthy.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.