Banco Macro SA (BMA) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's Fourth Quarter 2016 Earnings Conference Call. We would like to inform you that the 4Q 2016 press release is available to download at the Investor Relations website of Banco Macro, www.ri-macro.com.ar. Also, this event is being recorded and all participants will be in listen-only mode during the Company's presentation. After the Company's remarks are completed, there will be a question-and-answer session. At that time, further instructions will be given. (Operator Instructions)

It is now my pleasure to introduce our speakers, joining us from Argentina are Mr. Jorge Pablo Brito, Member of the Board of Directors; Mr. Gustavo Manriquez, General Manager; Mr. Jorge Scarinci, Finance and IR Manager; Ines Lanusse, Head of IR and other members of the bank's management team.

Now, I will turn the conference over to Mrs. Ines Lanusse, who is Head of IR. You may begin your conference.

Good morning and welcome to Banco Macro's fourth quarter 2016 conference call. Any comments we may make today may include forward-looking statements, which are subject to various conditions and these are outlined in our 20-F, which was filed to the SEC and is available at our website. Fourth quarter 2016 press release was distributed yesterday and is also available at our website.

Banco Macro is one of the leading private banks in Argentina with a strong presence in the interiors of the country and a branch network of 444 branches. Even though, we are a universal bank, we focus on low-to-middle income individuals and SMEs. Banco Macro is a financial agent of four provinces in Argentina; Salta, Jujuy, Misiones and Tucuman.

I will now briefly comment on the Bank's fourth quarter financial results.

Banco Macro's net income for the quarter was ARS1.7 billion or 4% higher than the ARS1.6 billion earned in the previous quarter based on an increase in net financial income. On [annual] basis net income was [14%] lower.

The Bank's accumulated fourth quarter 2016 ROE and ROA of 34.1% and 5.2%, respectively, remain healthy and shows the Bank's earning potential.

On a fiscal year basis, Banco Macro earned ARS6.5 billion in 2016 or 31% higher than the ARS5 billion earned in 2015.

I would like to spend some time commenting the difference between forecast fourth quarter 2015 and fourth quarter 2016. One, more income tax, in the fourth quarter of 2016 income tax reached 33% from 25% in the fourth quarter of 2015. Two, lower result from FX, in the fourth quarter of 2016, FX income was 77% lower than in the fourth quarter of 2015 based on the fourth quarter 2015 devaluation.

Third, lower income from the portfolio of local shares, which was 93% lower than in the fourth quarter of 2015. Four, lower return from bond, which was [52%] lower than in the fourth quarter of 2015. Fifth, on the funding side, a 210% increase on subordinated bonds interest was experienced year-over-year, it was mainly due to the Class A Subordinated Notes issued in November 2016. This particular last effect only happened in the fourth quarter of 2016, since between December 18, 2016 and February 1, 2017; we [cancelled] $256 million from the corporate bond, which will represent annually $24 million of lower interest impact going forward.

Now, let's continue with the analysis of the quarter. The operating results for the fourth quarter of 2016 was ARS2.6 billion, increasing 3% quarter-over-quarter. Had Income from government and private securities and income on guaranteed loans and in CER adjustments been excluded, operating result would have been 15% higher than the third quarter of 2016 result. In the quarter, net financial income totaled ARS4.2 billion or 14% higher than the ARS3.7 billion registered one year ago. This performance can be traced to a 19% year-over-year increase in financial income and at 27% year-over-year increase in financial expenses.

Within financial income, interest on loans rose 33% year-over-year due to a 36% growth in the average private loan portfolio and to a 70 basis point decrease in the average private sector lending interest rate. In the fourth quarter of 2016, interest on loans represented 77% of total financial income, increasing 4% compared to the third quarter of 2016. This effect was due to an 11% higher average volume of the loan portfolio, which was compensated by a decrease of 170 basis points in the average interest lending rate. Meanwhile, within financial expenses, interest on deposits grew 22% year-over-year due to a 53% increase in the average volume of interest bearing deposits and to a 500 basis point decrease in the average time deposit interest rate. In fourth quarter 2016, interest on deposit represented 74% of the Bank financial expenses, 9% lower than in the third quarter of 2016. This effect was mainly driven by a decrease of 330 basis points mainly driven by a decrease of 330 basis points in the average time deposit interest rate, which is partially compensated with a 7% increase in the average volume of time deposits.

As of the fourth quarter of 2016, the Bank's accumulated net interest margin was 18.2%, slightly lower than the 18.5% posted in the third quarter of 2016 and wider than 17.9% posted in the fourth quarter of 2015. Had income from government and private securities and guaranteed loans been excluded, the Bank's accumulated net interest margin would have been 15.3% in the fourth quarter of 2016 wider than the 15.2% in the third quarter of 2015 and slightly lower than the 15.6% posted in the fourth quarter of last year.

Year-over-year, the Bank's net fee income grew [23%] with a 33% increase on debit and credit card fees and 31% increase on fee charged on the profit account. On a quarterly basis, net fee income increased 10%. Administrative expenses rose 40% year-over-year, mainly due to an increase in personnel expenses primarily higher salaries and higher other operating expenses.

In the fourth quarter of 2016, Banco Macro's administrative expenses reached ARS2.8 billion , 8% higher than the previous quarter, mainly due to higher personnel expenses and other operating expenses. Personnel expenses increased 41% year-over-year and grew 4% quarter-over-quarter, basically due to bonuses and other personnel benefits. The increase in personnel expenses can be traced to the salary increase agreement with a [new union] back in June, 2016.

The accumulated efficiency ratio reached 47.5% from 46.1% posted one year ago, as a result of a 38% increase on administrative expenses and a 34% increase on net financial income and net fee income [up above in 2016]. 2016 Banco Macro's effective income tax rate was 34.7% compared to the 33.2% registered in 2015.

In terms of loan growth, the Bank's financing to the private sector grew 14% quarter-over-quarter. On a yearly basis, the Bank's financing to the private sector grew 38% among which commercial loans for productive investments have been included. It is important to mention that Banco Macro's market share over private sector loans as of December 2016 reached 8.1%, increasing 50 basis points from December 2015.

On the funding side, total deposit grew 10% quarter-over-quarter and 46% year-over-year. Private sector deposits grew 17% on a quarterly basis while public sector deposits decreased 34%. As of December 2016, Banco Macro's transactional account represent approximately 45% of the total deposits and there of the Bank's average cost of funds was 9.2%.

Banco Macro's market share over private deposit [as of] December 2016 reached 6.8% increasing 40 basis points from December 2015.

In terms of asset quality, Banco Macro's non-performing to total financing ratio reached 1.14%, improving from last year's level of 1.52%. The coverage ratio reached 176.51%.

In terms of capitalization, Banco Macro accounted an excess capital of ARS17.5 billion, which represented a capitalization ratio of 22.1%. The Bank's aim is to make the best use of this excess capital. The Bank's liquidity remain appropriate. Liquid assets to total deposit ratio reached 47.6%. Overall, we've accounted for another good quarter, we continue showing a solid financial position. Asset quality continues under control and closely monitored.

[We will be] working to improve more efficiency standards. We have one of the cleanest balance sheets in Argentine's banking sector, and we keep a well-optimized deposit base. At this time, we would like to take the questions you may have.

(Operator Instructions) Domingos Falavina, JPMorgan.

My question is more on -- actually I have two questions, first one is more on the topline, we noticed some deceleration clearly impacted by the lower LEBAC impacting a bit on NII. So my question is what do you have for expectations for 2017 in terms of NII growth and how should LEBAC impact your topline? The second question was on fee expenses. We also saw little bit lighter net fee growth because of some pressure from credit and debit-related expenses. I understand there are couple of projects to potentially change the [MBR] in Argentina. So, if you could explain a little bit, also what should we expect in terms of overall expenses related to card and how should net fee grow, assuming no regulatory changes and your view on regulatory changes?

Hi, Domingos, this is Jorge Scarinci. On your first question, let's assume that we are thinking to grow our loan book by approx of 35% in 2017 and we are expecting margins to remain pretty stable maybe contracting by 50 basis points on average 2017 compared to the average of 2016. So, that might help you in order to see what will -- might be happening in the net interest income for 2017. In terms of your second question about our net fee income, I think that, yes, we didn't show a very attractive net fee income growth on annual basis. I think that partially that was affected by the legislation that was passed by the former administration putting a cap on the fee increases that was removed by September 2016.

[And] also because there were some fees that were not charged in different products even though that, which have been working since December of 2016 and in order to review all the product that are not getting a fee charged here. And we are -- again, we are doing a total review on those products and also we are also considering our fee increase that will impact in March of 2017 in all the products. So, I think that in 2017, we are going to show a better performance on our fees generation going forward. In terms of the fee expenses on credit cards and what might be happening on the [law] project that these are the Congress, honestly, we do not have a clear idea what may be happening there. We understand that this is an election year, so anything can happen. I would say that probabilities of that law to be passed with some modifications are 50-50, but honestly, it's hard to answer that.

Perfect. The fee revenue growth was actually pretty good, the fee expense growth was a bit stronger, is there any like detail you can provide, is that discounts that are given to clients?

Yes, basically that was because of the insurance fees that we were also charging to the customers, we cannot continue to charge [them] and of course we have to pay for those fees on insurance fees and that's why the line of other fee expenses increased as much and you do not see the impact there on the income fee side.

Carlos Macedo, Goldman Sachs.

One question really on asset quality. I know you mentioned that you saw a significant improvement on the corporate side, not matched by cost of risk that was up, could you give us a little bit of guidance to 2017, loan growth of 35%, should we expect that you'll be able to keep even if it's only from a dinominator effect if you'd be able to keep the NPL ratio as low as it ended up being in the fourth quarter. And what does that translate when you talk, when we think about cost of risk. Do you think you can keep the same level as you did in 2016 or do you think there is room for improvement? Thanks.

Yes. I think that's. First of all, in terms of asset quality, what happened in fourth quarter, I think that was historically low. I mean the 1.1% with a projected inflation of [20%-22%] sounds pretty low. I think that with inflation being in the area of 20% in 2017 and loan growth being, as I mentioned before in the area of [35%], we might see the NPL ratio maybe climbing a little bit. So was 1.3%, 1.5% back to what we had one year ago. Maybe, the coverage ratio that [these are the level] of about 170% may go slightly lower to 150% or 140%. And in terms of cost to risk, we have in mind, in 2017 that, that could be reaching 1.5%, 1.6%, slightly lower than the average of last year.

Nicolas Riva, Citi.

I have two questions. The first one on your capital position, which continues to be very, very strong $1.1 billion in excess capital after you issued the step back in November. So my question is what's your plan really to deploy these excess capital. For example, we saw that you sold your portfolio of local shares in [January of] this year. How do we read that? Are you preparing then for stronger loan growth, this year. And also on the potential sale Patagonia, it's tough to talk about this topic, but can you at least describe what would be if you have to compare the level of interest you had in Citibank's consumer portfolio versus Patagonia, your interest would be higher or lower in Patagonia versus Citibank and how good of a [state] would be for your franchise Patagonia? And then the second one, very quickly on credit quality, you mentioned the improvement in the NPL ratio and specifically in corporates. Did you though charge-off some specific loans in the corporate portfolio and that's why your NPL ratio came down 40 basis points quarter-on-quarter? Thank you.

How are you? Let me start with your first question, in terms of our capital position. Yes, it is the strongest among Argentine banks, I think that that is one of the quality of Banco Macro. And as we always said, we want to make the best use of this excess capital. Going forward, we see Argentina's inflation in a downward trend and of course the GDP going up. In terms of banking penetration, we are seeing that the bank industry is going to have a very good momentum in this process and that's why we want to be very aggressive in growth. That could be organic, as we were commenting that we grew our market share by 50 basis points in one year in our loan book. And in the case that there is an opportunity, we might be thinking on in an inorganic way of growth, and this is engaging with your, the second [part or] first question about, Patagonia. Of course, we are going to look at Patagonia, I think that if you want to measure the interest between Patagonia and Citi, of course we are a bit more interested in Patagonia, because this is a complete franchise.

I think that Patagonia, [cannot to] Banco Macro's strategies, first of all to doubling the number of branches in metropolitan area of Buenos Aires and the province of Buenos Aires, also complementing the business strategies in Patagonia could be adding more mid to high-income clients, we are very strong on low to middle-income customers. So, those two elements are very important for us in our strategy. I think that Patagonia owns those two elements, so we will be actively involved in the process of Patagonia. In terms of your question about credit quality. Yes, we did charge-off in the quarter and the number is approximately 0.4%, in terms of charge-offs of total loans.

Okay. Thanks, Jorge. Maybe one follow-up on loan growth. (Inaudible) activities of the Bank, in terms of the [credit] demand you are getting from both corporates and consumers, are you seeing signs of higher [credit] demand and Argentina getting (inaudible) recession?

Well, according to local economies and when you look at tax collection behavior, what we've seen is that in between November and December there were some signs of recovery and also in January. Of course, January and February are two seasonally slow months because it's a holiday season in Argentina, but there are some signs of recovery, some signs of more or relatively more demand for loans, we'll continue to see consumer lending also strong. And there are more companies in terms of -- not small company, but medium-size companies trying to figure out what will be if they demand for two or three years. So we are starting to see some questions about companies demanding for more medium-term demand that happened in last year.

Alonso Garcia, Credit Suisse.

In terms of OpEx growth, could you share some color in regards to what kind of growth do you expect for this year and what will be the drivers for these? And could you also touch base on efficiency, do you think this 47.5% is a level that can be sustained going forward or do you think you can go back to the 46% or even lower -- that you posted in 2015. Thank you.

Hi. Let me start with your second question about efficiency. Yes, even though there was a slight deterioration in efficiency as a consequence of a high growth in expenses than in revenues, I think that we continue to be one or the most efficient or one of the most efficient banks in Argentina. If you look deep in the numbers, we are working what with 110 people less than one year ago, even though we have five more branches. So we are trying to be more efficient, maybe in the short run, you have a negative impact on that strategy, but in the [medium] long run, the impact will be positive. So the idea is to go and trying to get in the low 40s, if it is possible between -- at the end of 2017 and mid-2018. So that's the idea. Your first question, sorry I couldn't get exactly what you were asking?

Yes, thank you. OpEx growth for this year, considering the inflation and the salary negotiations?

Yes. Expenses grow, we are considering salaries to grow in the area of [24%], inflation is in the area of [20%-21%]. So, we are working with a budget of 23.5% growth in expenses.

Russell Abrams, Titan Capital Group.

Good morning. I was curious if you could expand on just more of a longer-term growth plan because as you mentioned, you increased your number of branches by five, basically 1%, but you're generating a tremendous amount of money that's not being deployed in terms of loans and so the question is, do you see a certain types of economies of scale you could benefit from the number of branches you need to have, to really have that matched out? As well as, what is holding you back from doing more private loans?

Hi, how are you. We are growing as much as we can, of course, balancing loan growth and asset quality, the number of branches is basically, we do not have for the moment a very aggressive expansion plan in term of branches because as I mentioned before, we are now starting to be involved in the Patagonia process, and Patagonia could be [adding] those branches that will be specifically in the area of Buenos Aires where we have a lower standing. So the idea is to go [or] for Patagonia and if it is not possible to start with an aggressive or expansion plan in terms branches. Going forward, we think that Banco Macro will continue gaining market share, that's the strategy of the Bank. We want to have a bigger slice on a larger pie that's the [teacher] or the movie that we are seeing. So in the next five to seven years, we are seeing Banco Macro having more than 10% market share in financial sector that could be two size or double the size that its having right now. So the strategy in the medium long run is to continue growing as much as we can, and again, balancing asset quality, profitability and loan growth.

Do you see your excess capital coming down then?

Yes, of course [Multiple Speakers]. Yes, we do not want to have this excess capital forever. So, the idea is to either use part of this excess for an inorganic growth or to use it for organic growth, for sure, yes.

Walter Chiarvesio, Santander Bank.

My question is on the cash position, it has increased significantly in the fourth quarter, part of that due to the reduction in [LEVAX]. And I wanted to ask you if the tax amnesty had an impact on dollar deposit for your Bank and if according to my understanding, the banking system or many banks in Argentine system are suffering the increasing holdings of cash, physical cash in the treasuries that may be affecting profitability, and the Central Bank is not willing to accept this cash as regulatory reserves. Is that happening with Banco Macro as well? Could you please comment on that. Thank you very much.

Hi, Walter. In terms of the cash, basically, no we are not suffering that much as other banks in the system like Frances, Santander and Galicia partially because those three banks are more collecting banks than what we are. So we do not have that effect in our loan book -- in our balance. So in that sense, the impact in Banco Macro is slightly or much, much less than the impact that we are seeing in those other banks.

In terms of the tax amnesty and the impact on the dollar-denominated deposits, yes, we grew our dollar-denominated deposit by $350 million because of this tax amnesty. And going forward, we are contacting those clients in order trying retain those deposit in -- at the bank. I think that since this is tax amnesty most of those deposits should be retained at the banking sector. Not only at Banco Macro, I think that in the whole banking sector most of the deposit are going to kept in bank's accounts.

Carlos Gomez, HSBC.

Two questions. The first one, if you can discuss your contracts with different provinces where you operate. If you expect any changes, you actually tell us when they expire and whether you are bidding for other provinces where you might also become a financial agent? And the second is more a macro question, where do you expect inflation and interest rates to be three to five years from now? Thank you.

Hi, Carlos, according to the contract that we have with the provinces, well you know that these are 10-year contract and we have been renewing them. The next one that this is going to do is the province of Misiones in 2019. And no, for the moment, we are not bidding for other contracts in other provinces, honestly. We have fair enough with the four provinces where we are the financial agents. On your second question, not easy to answer, but I think that four, five years from now, we might be seeing inflation below 10%, and at some point, I think that interest rate should be positive in real terms reaching one and two percentage points. That is the scenario that we have for the next three, four, five years.

Frederic De Mariz, UBS.

Good afternoon everyone, thank you for the call. I have a follow-up and a question. On the follow-up, can you repeat the number for the write-offs and would you consider publishing those write-offs in your press release like the other banks? And then the question is on the IFRS, can you just share Jorge your thoughts on the IFRS adjustments, how much you think it could be next year and what the impact would be for the equity base? Thank you.

Hi. The write-off was 0.4% on total loans, that was the write-off on the quarter. In terms of IFRS, I mean the Central Bank still has not defined the revaluation on the fixed assets, but according to some internal calculations that we've done as of June 2016, the equity should be going up or should be increased by approximately 11% at Banco Macro. If that is complied by the Central Bank, but again, it's still not be defined yet.

(Operator Instructions) Alejandra Aranda, Itau.

Hi, good morning. Congratulations on the results. I would like to know how you are perceiving competition at the start of the year, especially after some banks have made comments on becoming more aggressive in terms of consumer lending rates and particularly on mortgages on some cases?

We have not seen big changes in the behavior of our competitors that of course are the two Spanish branch and Galicia mainly. They continue to be aggressive and competitive in consumer, in corporates. I think that we're in a process of Argentina maybe taking off in terms of economic activity. And as I mentioned before with the financial sector being one of the sector that will be benefited by these economic growth. And I think that the four private large banks in Argentina are going to gain market share. For the moment, I'am not seen these banks including us, starting an interest rate war either in loans or deposits. I think that we can compete without that aggressive attitude. And I think, that in terms of mortgages it is a bit early to start seeing a pickup in mortgages, even though all the [banking] mortgage credit lines for customers, but since we need the inflation to be below 10% in order to see a jump in mortgages among our balances.

So I think that the behavior has not changed that much and we will continue gaining market share and being profitable. So, I'm seeing that the scenario going forward.

Tunde Ojo, Harding.

Just one question from me. I notice your net FX position widened significantly in Q4. Can you maybe provide a bit of color on why you did that? I mean are you expecting devaluation of the currencies that why you took that position or something else?

Basically, that was a position that we increased in the fourth quarter, we were a bit long in dollars as a consequence of the appreciation of the FX here, that position was reversed in January, but that was a short-term trading call on the FX, basically. If you look at the FX now, it is more appreciated than the level that was in December. And again that position was reversed in January. So again, that was a short-term trading position, we have sold that position.

This concludes the question-and-answer session. I will now turn it over to Mrs. Ines Lanusse for final considerations.

Okay. Thank you very much for your time, please contact us if you have any further question. Have a good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.