Banco Macro SA (BMA) 2018 Q1 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 First Quarter 2018 Earnings Conference Call. We would like to inform you that first quarter 2018 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 (Operator Instructions)

It is now my pleasure to introduce our speakers. Joining us from Argentina are Mr. Jorge Pablo Brito, Vice Chairman; Mr. Gustavo Manriquez, CEO; Mr. Jorge Scarinci, CFO; and Mr. Nicolás Torres, IR; 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's 1Q '18 conference call. Any comment we 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. 1Q '18 press release was distributed yesterday and it's also available at our website. This is the first quarter we released under Communication “A” 6114 of the Central Bank of Argentina, convergence of accounting standards to IFRS. Tables from previous quarters may differ from the ones originally reported in order to make a comparison between periods possible.

I will now briefly comment on the bank's 1Q '18 financial results. Banco Macro's net profit -- net income for the quarter was ARS 3.6 billion or 17% higher than the ARS 3 billion earned in the previous quarter and 77% higher than the result posted a year ago, based on an increase in net financial income, net fee income and cost control. The bank's 1Q '18 accumulated ROE and ROA of 29.4% and 6.2%, respectively, remain healthy and showed the banks earning potential. The operating result for 1Q '18 was ARS 5.1 billion, increasing 11% or ARS 509 million quarter-on-quarter and 65% or ARS 2.1 billion year-on-year.

In the quarter, net financial income totaled ARS 7.3 billion, 6% higher than the ARS 6.9 billion registered in 4Q '17 and 56% higher than the result posted 1 year ago. This performance can be traced to a 55% year-on-year increase in financial income and a 50% year-on-year increase in financial expenses. In 1Q '18, interest on loans represented 75% of total financial income. On a yearly basis, interest on loans rose 46% or ARS 2.8 billion. Within financial income, interest on loans rose 10% quarter-on-quarter, due to the growth in the average volume of private loan portfolio. Compared to 1Q '17, net income from government and private securities increased 162% or ARS 1.4 billion. Net income from government and private securities decreased 1% or ARS 15 million quarter-on-quarter, mainly due to lower LEBAC volumes.

In Q1 '18 financial expenses totaled ARS 4.5 billion, an 11% or ARS 462 million increase compared with 4Q '17 and 50% or ARS 1.5 billion higher on a yearly basis. Within financial expenses, interest on deposits increased 11% or ARS 320 million quarter-on-quarter, mainly because of an increase in the average volume of time deposits and a slight increase in the average time deposit interest rate.

In 1Q '18, interest on deposits represented 66% of the bank's financial expenses, 1% lower than in 4Q '17. As of 1Q '18, the bank's net interest margin was 18.7%, higher than the 18.3% (sic) [17.7%] posted in 4Q '17 and the 18.3% posted in 1Q '17. Had income from government and private securities and warranted loans been excluded, the bank's net interest margin would have been 16.6% in 1Q '18, higher than the 16.1% in 4Q '17 and lower than the 17.5% posted a year ago.

On a yearly basis, net fee income increased 20% or ARS 321 million. In 1Q '18, net fee income totaled ARS 1.9 billion. Net fee income grew 3% quarter-on-quarter or ARS 48 million, with an 8% increase on fees charged on the deposit accounts. In 1Q '18, Banco Macro administrative expenses totaled ARS 3.6 billion and decreased 4% quarter-on-quarter. Personal expenses decreased 9% quarter-on-quarter and increased 17% compared to the previous year due to salary increases. Compared to 1Q '17, administrative expenses in the quarter were 25% higher.

As of March 2018, the efficiency ratio reached 38.8%, down from 43.3% posted in the previous quarter and 45.4% in 1Q '17. This was a result of a 4% decrease in administrative expenses, in line with the bank's focus of improving efficiency and a 6% increase in net financial and net fee income as a whole in 1Q '18.

Banco Macro continues to be the most efficient bank in Argentina. In 1Q '18, Banco Macro's effective income tax rate was 31.3% compared to 27.5% registered in 4Q '17 and 35.1% in 1Q '17. The statutory tax rate was cut in the latest tax reform bill and starting from January 2018, is 30%. And it will be further reduced in January 2020 to 25%.

In terms of loan growth, the bank finance into the private sector grew 10%, 52% year-on-year. It is important to mention that Banco Macro's market share over private sector loans as of March 2018 reached 8.1%, increasing 20 basis points from December 2017.

On the funding side, total deposits grew 4% quarter-on-quarter and 30% year-on-year. Private sector deposits grew 3% quarter-on-quarter and 33% compared to 1Q '17. Private sector deposits increased 7% quarter-on-quarter. As of March 2018, Banco Macro's transactional accounts represented approximately 47% of total deposits. Banco Macro's market share of [its] private deposits as of March 2018 totaled 7.7%, unchanged from December 2017.

In terms of asset quality, Banco Macro's nonperforming to total financial ratio reached 1.11% in the quarter. The coverage ratio reached 178%.

In terms of capitalization, Banco Macro accounted an excess capital of ARS 37.6 billion, which represented a total regulatory capital ratio of 27.3% and a Tier 1 ratio of 22.4%. The bank's aim is to make the best use of this excess capital. The bank's liquidity remained appropriate. Liquid assets to total deposit ratio reached 44.9%. And it is important to mention that under Communication “A” 6114 from the Central Bank of Argentina, REPOs are no longer part of the portfolio of government and private securities and are not included in liquid assets. Overall and once again, Banco Macro posted another positive quarter. We continued showing a solid financial position. Asset quality continues under control and closely monitored. We 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) Our first question today will come from the Ernesto Gabilondo of Bank of America Merrill Lynch.

When do you think we could start to see lower liquidity demand and asset quality deterioration from the recent peso depreciation and the sharp increase in interest rates? I know it's a difficult question to answer, but any color you can provide will be very helpful. Do you remember how much of your loan portfolio and funding are floating rates? Also if you can share with us, what could be the impact from the recent increase in interest rates on your securities position on LEBACs will be helpful. My second question is on asset quality, the cost of risk was 1.6% in the first quarter. I remember that in the last call, you mentioned that it will be, at most, up to these levels. So considering the recent macro environment, do you think you could still maintain the cost of risk at these levels?

This is Jorge Scarinci speaking. As you mentioned, it's a bit early to answer some of your questions because the effect on the increasing interest rates and the devaluation of the peso happened in the last 2 weeks. Yesterday, we have a better year for these variables, and also today, for what's going on, it's a condensed year. So honestly, it it's not very easy to understand. Of course, we are fine tuning our internal forecast. I would say that what we were forecasting for GDP growth, that was between 2.5% or 2.6% that we account for this year is going to be lower. Honestly, for the moment we don't know how much because we want to see a little bit how long this level of interest rate is being maintained by the Central Bank, similar [than] the level of the FX. Therefore, I would say that the loan growth that we were forecasting for this year that was between low to mid-40s is also going to be fine-tuned a little bit downwards. But again, it's a bit early to say how much. Going to the asset quality forecast, honestly, we are not seeing a big change in the asset quality behavior compared to what we have been seeing in the month of March and April. So -- also it's a bit early. But honestly, we are not seeing any dramatic or considerable changes so far in the -- in asset quality on nonperforming. So the idea for the moment is to maintain the level of cost to reach at 1.5%, 1.6%, 1.7% around this. There is not going to be dramatic change for the moment that is something that we are forecasting. And I couldn't get -- I think, the last part of your first question about loans and deposits composition, can you repeat me that please?

Exactly. Yes, if you can share how much is at floating rates in terms of loans and in terms of funding? And also on your securities position, how much do you have on LEBACs and what could be impact from these high interest rate environment?

Okay. According to loans, we have 92% of our loans at fixed rate. Also remember that a big portion of these fixed rate loans are in the consumer lending portfolio, which are yielding rates above or close to, let's say, 40% plus fees. But 92% is fixed rate. In terms of deposits, you know that 50% of our deposits are time deposits, 65% of our deposits are retail deposits. And therefore, the repricing that we are seeing there -- sorry, the average maturity in these time deposits is slightly below 60 days. And so today, we are -- the average rate at which we are renewing our time deposits is in the area of 24%. So it's well below the BADLAR rate. And in terms of the LEBAC portfolio, we are having close to 18% of total assets in LEBAC. And we are going to have, in the second quarter, good performance in trading basically because we have been investing that in higher interest rate because the LEBACs portfolio is very short term.

And our next question will come from Carlos Macedo of Goldman Sachs.

First question, just to be sure and very clear, the big impact or the big depreciation in the peso, I know that you said -- you show us that you have very small net exposure to FX. Just to be very clear, the impact has been -- is minimal from that exposure, just checking if that's right. Second, you have a bigger exposure to inflation with more loans than liabilities coming from there. If inflation does accelerate in the back of the devaluation of the currency, what do you think will be the impact on your margins and overall, on your bottom line?

Yes. You're right on the first question, in terms of FX exposure, we have a very little, short position there. So that is correct. And therefore, the impact is extremely minor. And also in terms of exposure to inflation, yes, we are long on inflation. I think that -- if there is an acceleration, of course, the net loan position and inflation is relatively small compared to our balance. I would say that the impact on the net interest margin that we are forecasting on an acceleration inflation is between 20 basis points to 30 basis points, no more than that.

Okay. And just one follow-up. You mentioned that your consumer book is all fixed or 95% is fixed. What are the -- what is the average duration of this? How quickly does it turn around?

Sorry, what was that? I couldn't get that?

The duration on the consumer book that's 90% fixed?

Yes. The duration of that portfolio?

Yes.

It's in the area of 20 months.

Our next question will come from [Nicolás Riva] of Bank of America.

I have a question on funding. I saw the deposits grew well below the pace of the growth of your credit book, 30% year-on-year, 4% quarter-on-quarter. So I wanted to ask if you are worried about that, if funding could be an issue that restricts credit growth this year? Also if you look at the loan-to-deposit ratio, which used to be well below 100% for the bank, now it's approaching 100%. So one of my question here is what's your plan to make sure that your funding keeps up the pace with your credit growth for this year, especially given that maybe credit markets are not as open [for even] companies right now. And also this is not in the data reported in the first quarter, but over the last few weeks, have you seen anything abnormal in terms of deposit outflows from clients.

Not yet. The point is that we issue local bonds that was replacing some funding. And the idea is that we are going to grow in the area between mid- to high 20s deposit this year. Fine-tuning the loan growth is going to be slightly below 40%, but again it is a bit early to fine-tune that. No. I mean, we are not concerned about funding. We think that we have everything to keep on growing in this levels. And yes, we are -- when you look out only to loan-to-deposit ratio, it's reaching close to 100% because we have other source of funds, the bonds that we issued recently and the other bonds that we have issued before. And depending on market conditions, we could be raising more funds locally or abroad, depending on the market. But honestly, we're not concerned in terms of funding that could prevent us to continue growing. No, that's not an issue for us for the moment. In terms of any data on deposit outflows in the last weeks, I would say no. Deposits keep on growing, both in pesos and dollars in Banco Macro, in the last weeks.

Our next question will come from Alonso Garcia of Crédit Suisse.

I just want to follow up. On the funding side, you mentioned that funding is not a concern to you as you are using other sources of funding besides deposits. But I just want to -- touch base on the deposit cost because this quarter, interest on deposits increased way above deposit growth. And I'm wondering what are you expecting in the coming months or actually in the current quarter, now that you have to compete for deposits versus a stronger or more attractive LEBAC deals? And my second question is just on the provision side. I just want to know if there was an impact on IFRS? And if so, how much was this impact because asset quite actually behaved pretty well during the quarter but provisions were up 30%. So I was just wondering if there was any effect on that front?

Alonso. In terms of funding, again, we are not concerned. We know that all the system is here growing at a lower pace than lending. But we continue to be the most liquid bank in the Argentine banking sector. So it's not a concern. And your second question, what we're going to see because of increasing rates is for the moment, we are seeing an increase in funding rate. But remember that because of geographic location of our branches and the profit of our clients, we have a relatively much lower cost of funds than our competitors or peers that are more based in [big cities] . So most of our clients are not thinking about investing in LEBACs. So that's why, as I commented on or in the former question I answered that the average cost of our time deposits are well below the BADLAR rate. So that is something to keep an eye. In terms of your second question, no impact in terms of IFRS on our provisioning. The increase was basically because of internal matters. But honestly, in terms of IFRS, there was no impact there.

Okay, so internal matter. If you -- sorry...

Sorry, there was some decline in the fourth quarter of '17. So that's why what you're seeing as -- is a bigger increase between 4Q '17 and 1Q '18.

Okay. But nothing -- as you mentioned before, nothing really concerning asset quality at this point?

No, no.

Your next question will come from Frederic De Mariz of UBS.

A couple of follow-ups and a question. On the follow-up, I was wondering whether you would have an estimate of what this -- how your LEBAC means for your margins for this year? So if we estimate that the LEBACs is at 40% or close to that level for the next few months until inflation normalizes, which seems to be the consensus, what does it mean for your net interest margins for the full year? And I'm also curious to see what does it mean for your lending spreads? Do you expect to reprice your credit portfolio based on that LEBAC? Or do you think there is a -- there is no direct connection between the asset rates on the LEBACs and your loans? Second question on asset quality, I think you made it very clear that there is no impact for now. I'm curious to hear, are you following the secondary impact of the FX. And by this I mean, your clients, are they exposed to the FX, could they suffer from the FX depreciation? Is it something that you're tracking internally? And then last question on the capital strategy, you announced a buyback, just wanted to get an update from you in terms of capital usage in the next few quarters?

Well, in terms of your first question, yes, we are having higher rates on the LEBAC that we are investing. We have to see, again, how long this scenario is going to be maintained. But let's assume if the scenario continues for the rest of the year, that I think is not probable the impact on the NIM would be between 100 and 150 basis points wider. But we think that this is not going to be maintained. We are going to see, maybe, lower rates in the second part of the year. So I would assume between 75 to 100 increase or widening of the net interest margin on the back of the LEBACs interest rate increase. Lending, of course, it's -- we price according to the secondary market LEBACs interest rates, and of course, other source of excess liquidity that is not invested in LEBACs is repriced there, plus consumer loans were also repriced according to that LEBACs, therefore, consumer lending was increased between 300 and 400 basis points. Asset quality, for the moment, as I mentioned before, we are not seeing any dramatic or big change in the behavior of the NPL portfolio. We are not seeing big impact in terms of the FX depreciation. Once again, remember that the amount of loans in dollars are very small compared to the peso loan portfolio. And I would say that, by the way, on the regional economies, the depreciation is positive for those economies and positive for exports. So the impact there should be positive. In terms of NPLs, no negative impact for the moment. Finally, on the buyback program, basically, the decision of the board was made in -- 1 week ago, more than 1-week ago in a very weak or gray day for the markets. And the idea is basically to send an important message to the investor community, similar to the one that we sent in 2009, where we were the first Argentinian company to put a buyback program in process, is that we want to support the long-term shareholders of Banco Macro and to say that part of the liquidity that we have is going to be used there in the case of the price goes below the one set by the board. That was a -- the important message that the board wanted to send to the market.

Our next question will come from Yuri Fernandes of JPMorgan.

I have a question on loan growth. Just to be sure, if you continue to have 40% loan growth for this year, you are tracking above that now, but as you have mentioned, there should be some deceleration going on. So just to be sure, if you believe that year-end book should grow above 40% as you were thinking before? And my second question is related to your agribusiness portfolio. Just to be sure, I got your point that asset qualities behaved. But just to be sure is the agribusiness portfolio is doing okay, given all the weather impacts you had in Argentina in the last months?

Again, I think it's a bit early to make any fine-tune on loan growth or estimates for this year. I would assume that it is going to be slightly below 40% this year. But again, we want to see how long this level of interest rate is being maintained. But if you want to fine-tune your model, I would fine-tune a little bit below 40% nominal this year loan growth. For the moment, that is all what we can say. In terms of asset quality, no, basically no impact in terms of what's going on in the agribusiness sector. We have very few, few clients, I would say, we can count them with the fingers of the 2 hands that come to the bank to see any kind of refinancing. But once again, I would say that the agribusiness sector here is a very profitable and liquid sector. Therefore, we are not seeing any impact in terms of the drought that we've seen here in Argentina. So once again, asset quality there is pretty under control.

Our next question will come from Henrik Milton of Coeli.

Thank you very much, very good report. I'm wondering if you can say anything about how the sales of mortgage loans is going and what the prospects are for those?

I would say that the mortgages demand cooled down a little bit on the back of the increase in the effects in the last 5 months and also on the back -- on the interest rate increases by the bank. Therefore, the demand is a bit more sluggish. I would say that once inflation cools down below 20%, we're going to see a kind of rebound of the demand. But for the moment, it's a little bit smaller, shorter or sluggish compared to what we were accustomed to see at the end of 2017.

Okay. Second question and that is you were trying to buy Patagonia Bank, have you made any progress regarding that M&A activity?

No. That deal is completely dead. So done deal.

Okay. Any other M&As coming on?

Nothing on the formal side. Honestly, we don't have any formal mandate on the table. So we are keeping an eye on any potential transaction going on, but for the moment, no.

Our next question will come from Jorg Friedemann of Citibank.

I saw, of course, the release and compared that to previous release figures. But just wondering if you could guide us through the main relevant reclassifications under the new accounting criteria since you still don't have, I know, the reallocations? And also I noted that your balance sheet was also affected by that, with, I think, equity increasing by about 8%. Just wondering if that was the fact of the revaluation of the real estate assets? And whether and when you're going to implement IFRS 9?

This afternoon, you are going to have a complete balance sheet, income statement, according to IFRS that will be filed this afternoon. Yes, the impact that we have in terms of equity, an increase of 8% because of IFRS is something that we have been mentioning in the last year, that was going to be the impact. And in terms of IFRS 9 that is -- we're going to start reporting that next year, 2019.

Our next question will come from Natalia Corfield with JPMorgan.

I have two main questions. One is in your funding. Do you have a breakdown of your loan deposits in dollars and in pesos? And the other one is a clarification with regards to what you said, with regards to margins. I understood that because of the LEBACs, there would be 100 bps increase in your margins, I don't know if it's just related to LEBACs or this is an increase in the overall margin of Banco Macro. If you could touch base on that again, I would appreciate it.

No. Yes. Basically what we were saying is that in the combination of increase in rates that we have in the last weeks, mainly on the LEBACs, to a lesser extent in our deposit base, we are forecasting a widening on our net interest margin between 75 and 100 basis points. However, we have to say that since this is a dynamic process, we have to see how interest rates evolve in the coming weeks. But for the moment, that is the [effect] that we are forecasting in terms of net interest margin.

Okay. And then these constraints, looking at the composition of your loan, you have 92% fixed and it's 20 months. So imagine that it would be hard to reprice those loans. So basically the increase in the LEBACs would offset the fact that you won't be able to reprice your loans at a very quick pace and you had an increase in BADLAR, which wasn't as big as in the LEBACs, but nevertheless, was an increase. So is that the case? So the LEBACs would compensate for a possible squeeze in margins related to your loans?

Yes. That is right.

Okay. And the loan-to-deposit in dollars and in pesos?

Mostly loans and deposits in pesos. In dollars, of course, margins are narrower, even those have been increasing some deposit rates in dollars, also there was a translation to increasing in dollar loans. But of course, the amount there of dollar loans and deposits are much narrower than the peso balance. And therefore, margins are narrower. So the big impact is on the peso side.

(Operator Instructions) Our next question will come from Gabriel da Nóbrega with UBS.

My question is more on the FX side. We saw that was controlled during the quarter. Could you just remind us how the negotiations with the banking union played out? And should we expect more pressure on personnel cost throughout the year or do you believe you will be able to have more efficiency gains?

Yes. The agreement that was reached with the union was a 15% increase in the salaries. Of course, if inflation is above that, there should be another set of discussions between the unions and the chambers. We think that it is going to be above 15% because we are forecasting, according to the consensus, the inflation above 20%. Therefore, we are forecasting expenses to be growing this year in the area of 23%, 24%, even though that, I think, that we're going to be able to maintain cost to income ratios in the low 40s, keeping -- being the best or the most efficient bank in Argentina.

And our next question will come from Carlos Gomez-Lopez of HSBC, New York.

Two strategic questions. First on mortgages and funding for the mortgages, how much are you paying for UVA deposits at present and how much are you charging for the mortgages, and do you think that the mortgage pricing is now at a level where it is economical? Second, do you have any plans for organic expansion in the Buenos Aires metropolitan area, since you are no longer considering the acquisition of Patagonia?

We are charging for UVA loan, UVA under spread is 8.5%. And for deposit, we are paying UVA plus 4%, that is the rate that we are paying for the moment. Second question, we are not expecting an aggressive expansion plan organically speaking, in the sense to open a set of many branches here. So we are not planning that in the area of Buenos Aires. We continue growing through alliances with different companies. We continue to believe that the opportunity to make a onetime growth in this area is through an acquisition. And therefore, that's why we are keeping a close eye to any potential opportunity that would appear in the market.

And ladies and gentlemen, as I am showing no further questions, at this time, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Nicolás Torres for his 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 your lines.