Banco Macro SA (BMA) 2017 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 2017 Earnings Conference Call. We would like to inform you that the fourth quarter 2017 press release is available to download at the Investor Relations website of Banco Macro at www.ri-macro.com.ar. Also this event is being recorded. (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, Chief Executive Officer; Mr. Jorge Scarinci, Chief Financial Officer; and Mr. Nicolás Torres, Investor Relations; and other members of the bank's management team.

Now I will turn the conference over to Mr. Nicolás Torres. You may begin your conference.

Good morning, and welcome to Banco Macro 4Q 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. 4Q '17 press release was distributed on Monday and it's also available at our website.

I will now briefly comment on the bank's 4Q '17 financial results. Banco Macro's net income for the quarter was ARS 3.01 billion or 16% higher than the ARS 2.59 billion earned in the previous quarter and 78% higher than the result posted a year ago based on an increase in net financial income and an increase in net fee income. The bank's 4Q '17 accumulated ROAE and ROAA of 28.6% and 5.2%, respectively, remains healthy and show the bank's earning potential.

On a fiscal year basis, Banco Macro earned ARS 9.38 billion in fiscal year 2017, 44% higher than the ARS 6.54 billion earned in fiscal year 2016. The operating result for 4Q '17 was ARS 4.9 billion, increasing 13% or ARS 559 million quarter-over-quarter and 89% or ARS 2.2 billion year-on-year. In the quarter, net financial income totaled ARS 7 billion, 17% higher (inaudible) registered in 3Q '17 and 66% higher than the result posted 1 year ago. This performance can be traced to a 45% year-on-year increase in financial income and an 18% year-on-year increase (inaudible).

Within financial income, interest on loans rose 13% quarter-on-quarter and 38% year-on-year. The quarterly increase was due to an 11% increase (inaudible) 60 basis point increase in the average lending rate. In fiscal year 2017, interest on loans grew 27% due to a 51% increase in the average volume of private loans and (inaudible) basis points in the average private sector lending interest rates. In 4Q '17, interest on loans represented 73% of total financial income.

Net income from government and private securities increased (inaudible) or ARS 826 million year-on-year due to higher LEBACs volume and higher income from other government securities. Compared to 3Q '17, net income from government and private securities increased 35% or ARS 630 million.

In 4Q '17, financial expenses totaled ARS 3.9 billion, 18% higher or ARS 595 million compared with 4Q '16 (inaudible) ARS 376 million higher compared with 3Q '17. Within financial expenses, interest on deposits increased 11% or ARS 266 million quarter-on-quarter, mainly driven by a 6% increase (inaudible) time deposits and 80 basis point increase in the average time deposit interest rate.

Compared to 4Q '16, interest on deposits increased 7% or ARS 175 million. In 4Q '17, interest on (inaudible) 68% of the bank's financial expenses, 1% higher than in 3Q '17. In fiscal year 2017, interest on deposits decreased 10% compared to fiscal year 2016 (inaudible) average time deposit interest rate declined 554 basis points while average volume of time deposits increased 21%.

As of 4Q '17, the bank's accumulated net interest margin was 17.7%, higher than the 17.3% posted in 3Q '17 and lower than the 18.2% posted in 4Q '16. Had income from government and private securities and guaranteed loans, including CER adjustments, been excluded, the bank's accumulated net interest margin would have been 16.1% in 4Q '17, lower than the 16.2% posted in 3Q '17 but higher than the 15.3% posted a year ago.

In fiscal year 2017, net fee income totaled ARS 7.3 billion, 36% higher than the net fee income in fiscal year 2016 with a 29% increase in fees charged on checking and savings accounts and a 24% increase in fees from credit and debit cards. In 4Q '17, net fee income grew 5% or ARS 89 million compared to 3Q '17.

In fiscal year 2017, administrative expenses totaled ARS 12.9 billion, 29% higher than fiscal year 2016, mainly due to higher personnel expenses and other operating expenses. In 4Q '17, Banco Macro's administrative expenses totaled ARS 3.6 billion and rose 15% quarter-on-quarter. Personal expenses increased 13% quarter-on-quarter and 27% year-on-year due to salary increases and the backpay originated from 2017 inflation being higher than the salary increase agreed with the union at the beginning of the year.

As of December 2017, the accumulated efficiency ratio reached 42.5%, down from 43.3% posted in the previous quarter and 47.5% in 4Q '16. This was a result of a 29% increase in administrative expenses in line with the bank's focus of improving efficiency and a 44% increase in net financial and net fee income in fiscal year 2017. Banco Macro continues to be the most efficient bank in Argentina.

Fiscal year 2017 effective income tax rate was 38.1% compared to 34.7% registered in fiscal year 2016. In terms of loan growth, the bank's financing to the private sector grew 10% quarter-on-quarter, 49% year-on-year, among which commercial loans for productive investments have been included. It is also important to mention that Banco Macro's market share over private sector loans as of December 2016 -- '17 reached 7.9%.

On the funding side, total deposits grew 6% quarter-on-quarter and 29% year-on-year. Private sector deposits grew 9% quarter-on-quarter and 28% compared to 4Q '16 while public sector deposits decreased 22% quarter-on-quarter. As of December 2017, Banco Macro's transactional accounts represented approximately 52% of total deposits. And therefore, the bank's average cost of funds was 7.4%. Banco Macro market share over private sector deposits as of December 2017 reached 6.7%.

In terms of asset quality, Banco Macro's nonperforming to total financial ratio reached 1.07%, improving from last year's level of 1.14%. The coverage ratio reached 183.14%. In terms of capitalization, Banco Macro accounted an excess capital of ARS 35.1 billion, which represented a total regulatory capital ratio of 28.1% and Tier 1 ratio of 23.1%. The bank's aim is to make the best use of this excess capital. The bank's liquidity remains healthy. Liquid assets to total deposit ratio reached 50.4%.

Overall, Banco Macro has accounted for another outstanding quarter, which continue to show in solid financial position. Asset quality continues under control and closely monitored. We'll keep on working to improve more our efficiency standards. And we have one of the cleanest balance sheets in Argentina'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) The first question comes from Ernesto Gabilondo with Bank of America Merrill Lynch.

Three questions from my side. The first one is if you can provide your expectations for loan growth in this year and the breakdown growth for each segment and also if you can share your expectations for net interest income growth. The second is in terms of asset quality, just if you can share with us your expectations for this year for NPLs and the cost of risk. And finally, if you can provide any information regarding if Brito could be implicated in this graft case. I don't know if there is a time frame we should follow to see if no charges will be against Brito. And also I would like to know if there is a time frame to look for an acquisition. If nothing happens with Patagonia, when will you like to approach to another bank? And what should be the characteristic and the size of this next bank?

Well, (inaudible) questions. So the goal from the very beginning, we're expecting loan growth for this fiscal year 2018 to be in the area of low 40s. This is nominal. And we are looking for deposit growth in the areas of the high 20s for 2018. In terms of asset quality, I would say that we are not seeing a dramatic change in the ratio of NPLs. We finished with a very good level in 2017. So we are forecasting something close to 1.3% by the end of 2018. And also the cost of risk could be slightly higher than the one that we saw in 2017 but close to 20 basis points higher, no more than that. That is something that we are forecasting for 2018. In terms of the acquisition issue that you mentioned, we continue with some conversations with people of Banco do Brasil, waiting for some news. And we have been always having a proactive attitude since we started with this processing in July last year. So we are going to continue with this as far as we can. However, and we have been commenting on this, looking forward and considering that the banking industry is going to have a good performance in coming years and loan penetration is going to increase in Argentina, we see more consolidation, more concentration on the banking sector. So there are going to be some other opportunities for M&A in the next 12 to 24 months. And of course, if something appears or a formal process is on the table, we are going to look at that. But for the moment, the only formal process that we have is Patagonia and we continue with negotiations. On your question about Mr. Brito, honestly, we do not have any timetable. And we do not have any news on this front. My personal opinion is that we might have some positive news but in the next maybe 60 or 90 days. But honestly for the moment, nothing real or formal from the justice or newspaper or whatever. So honestly, there's no more that we can comment on that. So I don't know if I covered all the questions that you asked.

Yes, this is very helpful. Just a question on your expectations for the net interest income growth this year.

Yes. Basically in terms for your modeling, we are forecasting some slight decrease in the net interest margin, maybe 50 basis points average in (inaudible) compared to the average that we had in 2017.

And in terms of growth?

That is net interest margin. In terms of growth, (inaudible).

Sorry, I couldn't hear it.

In terms of growth, loans were -- I mentioned that we're expecting low 40s for 2018 and in terms of deposits (inaudible) 20s.

Yes. And in terms of the net interest income growth?

Well, you have do your own math there according to a 50% compression in margins and the growth that I have been commenting long-term deposits (inaudible) in the area of low to mid-30s at least.

The next question comes from Gabriel Nóbrega with UBS.

I actually want to make a follow-up. You're saying that deposits are going to grow close to 20%. Why is it not closer to your loan growth? And could you also talk about the competitive environment among the banks, whether you're seeing, maybe this 20%, it might be affected by this competition? And I'll make my second question afterwards.

Well, basically, we -- what we saw in 2017, we are seeing loans growing faster than deposits. And of course, in the case of Banco Macro, we continue to be the most liquid bank in Argentina. So the idea is to maybe slightly trim down a little bit the excess liquidity. But also remember that we have ability to do some other -- or to get some other way of getting funds, like issuing a local bond or a foreign bond. So that's another alternative that we could be thinking, depending on loan demand for the second half of the year. So that's basically our scenario for 2018 in terms of the difference between loans and deposit growth rates.

But then what about the competitive environment as well?

Yes, there is some competition in terms of deposits. Most of that competition has been happening in basically Buenos Aires area, mostly [ABC 1] segment. We are not seeing that competition happening in the interior of the country and in smaller cities, where we have larger presence.

All right. That's been very clear. And my second question, during 2017, we saw OpEx growing more than inflation. Could you just give us a bit more of color on what happened? And also as discussions with the banking union are underway, what do you expect for OpEx growth this year?

Yes, basically, of course, in terms of expenses, they were slightly above inflation. Of course, we are finishing with the construction of the Corporate Tower that is taking almost 2 or 2.5 years. So that is something that is pushing a little bit the expenses. Also the number of employees slightly increased in the last year. But basically, the idea for 2018 is to have an increasing expenses as close as possible to inflation. But the other thing that is important to mention is that we continue to dilute the cost-to-income ratio, being the most efficient bank in Argentina. So we are reaching the low 40s or 40% in that sense. And that is something that you cannot see in other banks in Argentina. So the idea is also to keep on working on expenses but also keeping an eye on the income side.

The next question comes from Frederic De Mariz with UBS.

Most of the questions have been asked obviously by the first speaker. But let me follow up, please, on two questions. OpEx, actually could you share with us a little bit your strategy for digital banking? How much -- what percentage of your transactions already are done digitally and what you're thinking in terms of branch openings? Just wanted to get a sense from a strategic standpoint how you think of the different channels. And then the second question, you mentioned your guidance for loan growth. Could you go into a bit more detail by sector, if you see some sector that's very strong, whether corporate, SME, consumer and any type of industry segmentation? And conversely, if you see any sector that you're not keen in being more present.

In terms of digital, basically we are seeing very timid increase in terms of digital transactions done through Internet and mobile. We have been commenting about this that we need -- we at Argentina, we need more investment coming on cable companies in term to have more penetration of Internet basically in the interior of the country, also the improvement on the speed on the Internet connection, also more investment coming from the telcos in order to improve the mobile net along the -- throughout the country. But also what we need to see is the change of the people's mentality, mostly in the interior of the country, that they continue to attempt the branch in order to do any type of transaction. So that is something that we are seeing that might be happening in Argentina but in the long run, I mean, more than 5 years from now. So that is something that is going to take a bit of time. So that's why we continue to see the opening of branches or the acquisition of branches as a way of gaining market share for the moment in Argentina. Your second question about more detail on loan growth. Basically, we'll continue to see consumer and commercial lending to be pushing. In relative terms, we are seeing a bit more demand coming from commercial lending than consumer lending for 2018. However, seen from an absolute point of view, we are more inclined on consumer than commercial. The absolute numbers are going to continue to be higher in consumer than commercial. And the demand that we are expecting for 2018 is basically across the board, it's construction, services, infrastructure, energy, so many sectors are going to be demanding for 2018.

That's great, very interesting for the color. And may I ask also terms of dollar exposure for the loans? Did you see any changes or if you're willing to take more U.S. exposure?

Yes. In terms of loans, we have a 9% of our loans are in U.S. dollars, 91% in pesos. In terms of deposits, we have 13% of deposits in dollars, 87% in pesos.

But I meant do you think that should change? Do you see more demand in dollar loans, for example? Or do you think that's pretty much where you should be on a sustainable basis?

For this year, we are seeing no big changes. There could be, in terms of loans, 90-10. But it's not going to dramatically change compared to the numbers I gave you.

The next question comes from Alonso Garcia with Crédit Suisse.

My first question is if you could provide some color or guidance in terms of fee growth or fee income growth for this year. And my second question is if you could share your view on what the sustainable ROE for Banco Macro could be in the coming years with a single-digit inflation in Argentina.

In terms of net fee income growth, we are seeing for this year close to 25% increase, so above inflation. Inflation, we're expecting that to be in the area of 19%. Once again, of course, we do not calculate inflation. We are taking the consensus of the market. In terms of the second question, in the long run, ROE of Banco Macro with single-digit inflation figure is not an easy question to answer. But I would answer that, that should be in the area of ranging between low to mid-20s.

The next question comes from Rafael Frade with Bradesco.

I have two questions. First one is related to the performance in the quarter in terms of credit growth and deposits. The bank is very well capitalized, so we would expect you guys to be outpacing the market. I would like to understand why you believe that you'll lose market share in the quarter in both credits and deposits. And the second question is related -- a follow-up from a comment that you made on the stronger competition in the Buenos Aires area. You have been saying that in the past that really you would like to increase your footprint in Buenos Aires. But given that's exactly the area that there is more competition at this point, would not make sense to try to accelerate even more outside Buenos Aires and not necessarily go to Buenos Aires. How do you see this?

In terms of loans and deposits, honestly we decided to always look not only (inaudible) but also at profitability. And that is pretty clear in the numbers that we released, showing the excellent level of profitability, being the most profitable bank in Argentina, the most efficient bank in Argentina (inaudible) liquid. So we not only look at market share. What we saw basically at the end of 2017, there were some other banks that were more looking to market share (inaudible) some loans at a lower rate in order to finish with a good level of market share by the end of 2017. So that is not our main goal, only looking at market share. So we look at profitability. We're a private local bank and the board is extremely concentrated on that. So in terms of your second question, the point is that in Buenos Aires, there is more competition, of course. Maybe margins are slightly narrower than in the interior. So this is something that we have been commenting for a long time. We have our consolidated franchise in the interior of the country. (inaudible) franchise as Banco Macro in the interior of the country, not even Banco Nación, that is the largest bank in Argentina. So now we are -- we have the idea to increase our share in the area of Buenos Aires because in the area of Buenos Aires, including the metropolitan area and also the province of Buenos Aires, you find almost 45% of the population of Argentina, almost 50% of the GDP of Argentina. So Banco Macro wants to be the leading bank in Argentina, wants to be the reference bank in Argentina. So the local saying here is, "God is everywhere in Argentina, but he asked to be born in Buenos Aires." So if you want to be the leading bank, you need more physical presence in Buenos Aires. So the idea is that. And that's why we have been keeping this long negotiation with Patagonia. Basically, the number of branches of Patagonia is going to give us a good increase in our standing in this area.

The next question comes from Nicolas Riva with Citi.

Jorge, just a follow-up on your comment on the prior question. You mentioned -- because we saw that in the fourth quarter, as you said, you actually lost some market share. Your loan book grew 10% quarter-on-quarter, and especially your commercial book was quite weak in the quarter, only 1% quarter-on-quarter growth. So you mentioned that some banks tried to gain market share in the fourth quarter, giving loans at lower interest rates. In your outlook for the net interest margin this year, which I believe you said you expect a compression, if I remember correctly, about 50 basis points, are you including in that outlook more competition from some of these large banks, which are trying to gain market share? Or what are your thoughts in terms of competition in terms of spreads within the banking system?

Yes. Basically, we see more competition. But taking into consideration that our competitors are very few, we have Galicia at some point, Santander, Francés, a little bit. So there are no many competitors that we have. But we see little more competition. But also we are forecasting some decline in local rates along the year, more in the second half than in the first half. So basically this is including all that scenario, including competition, (inaudible) the decline in domestic rates also.

Okay. And Jorge, and you said (inaudible) you're expecting a compression of was it 50 basis points in the margin this year?

Yes, 50 basis points on the average of 2018 compared to the average of 2017.

The next question comes from [Max Figueroa] with Galeno Capital. The next question is from Domingos Falavina with JPMorgan.

Congrats on the quarterly release, but what caught my attention was the very good job on the funding side. Basically, your cost of deposits were very low or pretty much didn't grow despite inflation, which brought me back to the attention that we had when we saw the filing for the follow-on and also in conversations with you, where we learned about 40% of your deposits, if I'm not mistaken, come from either municipalities or (inaudible) on the municipalities, and if I'm not mistaken, around 10% to 15% from the municipalities themselves and the cost of funds on those being very close to 0. My question is I know it's not all for renewal now. I know it's only in 2019. But what's your expected cost of funds on those deposits once they start being renewed? And the reason I ask is because we used to have similar situation for some of the banks in Brazil, but the government, seeking money, started demanding better returns. I wouldn't expect something similar to happen in Argentina. So my question is with LEBAC running at 20%, what kind of cost of fund would you expect from these funds that are coming from the municipalities?

No, I mean, you have to consider also that in the provinces where we are the financial agent, we are the bank that manages those funds for the provinces. So even though we have been paying slightly below-average interest rates, the idea is to continue with this trend. And of course, the trend that we are seeing going forward is a declining trend in rate. So I would say that, as a way of forecasting the cost of funds, not only for these public sector deposits but also for private sector deposits, is a declining one. But also take into consideration that almost 50% of our deposits are transactional deposits, where we pay 0% interest. So the impact on the declining rate is going to be half on the average cost of funds of the bank.

Okay. But when we think as -- if we think of the public deposits as a percentage of the LEBAC or the reference rates in Argentina, I understand that the LEBAC is coming down. But wouldn't -- isn't it reasonable to assume the percentage of the LEBAC on those funds is going up as the government seeks more revenues? Or no, you don't have any pressure like that?

No, we do not have any pressure, of course. And what we are seeing is the declining trend in the rates of LEBAC and also on the BADLAR, that is the deposit reference rate.

The next question comes from Fernando Suarez with AR Partners.

Going back to your commercial performance during the quarter, I would like to get more color of the 20% decrease in overdraft. Is it related to an increase in competition? Or am I missing something?

No, basically at the end of the year, we were seeing that some rates in these overdrafts is basically the short-term loans that you give to basically AAA companies. The rate there was slightly below the LEBAC interest rate. So we decided to decrease our share in that portion of the balance sheet and increase the LEBAC exposure in order to focus on profitability, as I was commenting in another question that I was asked in this call. So that basically is related to the interest rate that was happening at that time of the year.

(Operator Instructions) The next question comes from Carlos Gomez with HSBC.

Carlos Gomez from HSBC. I wanted you to comment on the renewal of your financial agency agreements. From the table you published, we should have a fresh one, Misiones is coming up for a renewal this year. Can you tell us the timing about the possible expiration and what competition you expect to meet? And also whether you are -- we have seen in the past, you are not interested in going for other provinces. Have you changed that stance? Could you be interested in competing for other provinces that may come up for renewal?

No. In terms of the agreements with the provinces, the next one that is going to view is in 2018, the province of Misiones. We already started the conversation to renew that. So we aren't seeing any problem having here in order to renew that. For the moment, in the second question, looking for an opportunity for another type of agreement or another agreement like this one, no for the moment. There's nothing on the horizon that we should consider. But of course, if something appears, we are going to look at that, yes.

And the timing of the Misiones contract, when that should expire exactly?

Next year. I can give you the exact month afterwards. But in 2019, I think that it's midyear.

(Operator Instructions) There are no further questions at this time. This concludes the question-and-answer session. I will now turn the call back over to Mr. Nicolás Torres for final considerations.

Thank you all for your interest in Banco Macro. We appreciate your time and look forward to speaking with you again. Good day.

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