Grupo Financiero Galicia SA (GGAL) 2015 Q2 法說會逐字稿

Good day, everyone, and welcome to today's Grupo Financiero Galicia Second Quarter 2015 Earnings Release Conference. Just as a reminder, today's call is being recorded.

At this time I would like to turn call the over to your host for today, Mr. Pablo Firvida. Please go ahead, sir.

Thank you. Good morning and welcome to this conference call. I will make a short introduction, and then we will take your questions.

I need to say that some of the statements made during this conference call will be forward-looking statements within the meaning of the Safe Harbor provisions of the US Federal Securities Laws. These forward-looking statements are subject to risks and uncertainty that could cause actual results to differ materially from those expressed in the forward-looking statements.

According to private estimates, the Argentine economy showed a 0.4% annual growth for the second quarter, which compares with a 0.9% annual fall in the first quarter of this year. In the first two months of the second quarter, the primary deficit reached 0.3% of GDP, and after the payment of interest, the global balance represented 0.7% of GDP.

Consumer prices expanded 3.2% in the quarter, and 15% in the last 12 months, as mentioned by the official index. While for private estimates, figures were at 6.5% and 29% respectively.

On the monetary front, the Argentine Central Bank expanded the monetary base by Ps.42.4 billion in the second quarter, and by 33% during the last 12 months. And the monthly average of the foreign currency exchange rate increased from 8.78 to 9.02 pesos per dollar, representing a 3% depreciation.

In June, the average rate on peso-denominated private sector time deposits for up 59 days decreased slightly to 21.6% from 22% in March 2015.

Private sector deposits at the end of the quarter amounted to Ps.864 billion, growing 12.2% during the second quarter of the year. Transactional deposits increased 12.6% and time deposits increased 12.9%.

In the last 12 months deposits in pesos grew 39.4% and deposits in dollars expressed in pesos, 26%. At the end of June, total loans to private sector amounted to Ps.673 billion, recording an 8.2% increase from March 2015, and a 28.3% in their annual increase.

Turning now to Grupo Financiero Galicia, net income for the quarter amounted to Ps.949 million, 36.9% higher year over year, mainly due to profits from Banco Galicia for Ps.878 million, and Sudamericana Holding for Ps.67 million, and in Galicia Administradora de Fondos for Ps.23 million, partially offset by administrative and financial expenses for Ps.30 million.

The bank's net income, which accounted for 92.5% of Grupo's results, increased 30% from the year-ago quarter. The operating income increased 34% year over year, with net income from services increasing 38%, mainly due to fees related to national and regional credit cards, and to deposit accounts. And net financial income grew 20% in the same period, [a result] to the increase in the portfolio of loans to credit sector and of government securities offset by a contraction in the spread.

Average interest-earning assets grew Ps.22 billion year over year, and its yield decreased 308 basis points, while interest-bearing liabilities grew by Ps.11 billion during the same period, and its cost decreased 210 basis points. The decrease in the cost of funding was mainly due to the reduction of the average interest rate on time deposits.

Provisions for loan losses for the quarter amounted to Ps.484 million, 18% lower than the Ps.591 million recorded in the same quarter of the prior year. Reduction, which was mainly attributable to the consumer loan portfolio.

Administrative expenses were 34% higher year over year, with personnel expenses growing 30%, mainly due to salary increases agreements with the unions. The amortization of organization expenses for Ps.147 million increased 91%. As in December 2014 the bank began to amortize its investment in the SAP core banking system. The remaining administrative expenses grew 35%.

The bank's credit exposure to the private sector reached Ps.92 billion at the end of the quarter, up 32% in the last 12 months, and 10% in the quarter. And deposits reached nearly Ps.77 billion, up 31% in a year, and 13% in the quarter.

The bank's estimated market share of loans to private sector was 9.14%, and the market share of deposits from the private sector was 8.75%.

As regards to asset quality, the consolidated NPL ratio considering the loan book of the bank, the credit card subsidiaries and CFA, ended the quarter at 3.7%, compared with the 4% of the second quarter of the prior year. The consolidated coverage of NPLs with allowances reached 107%, above the 102% figure recorded a year ago.

As of June 30, 2015, the bank's consolidated computable capital exceeded by Ps.3.5 billion the Ps.8 billion minimum capital requirement, or 44.3%. And the total capital ratio reached 16%, increasing 864 basis points in the year.

The bank's liquid assets at the end of the quarter represented 77% of the bank's transactional deposits, and 37% of its total deposits, compared to 85% and 40% ratios from a year before, respectively.

In summary, during the second quarter of 2015 the bank had good operating results, with growth in both net interest income and net fee income, and improvement in its asset quality metrics from the levels of a year ago, has healthy lead indicators, and continued improving its capital ratio.

We are now ready to answer the question that you may have. Thank you.

(Operator Instructions) [Caterina Araya], JPMorgan

Hi. Yes. Thanks for taking my question. I have two questions. First it's regarding the measures implemented by the Central Bank in Late July, which require banks to pay higher interest rates, higher rates on local deposits to incentivize people to save in pesos.

So what percentage of your deposits are affected by this new regulation? And what would be the impact on funding cost in the second half of the year? And by how much percentage points do you expect NIM to compress given those measures?

And then my second question is regarding expense growth. We've seen expenses growing for two consecutive quarters, tracking above inflation. So I just want to know. What are your expectations going into the second half of the year? Do you expect these to come down, to grow around, less than 30%, or you still expect them to track above inflation? Thank you.

Okay. Hi. Well the first question, the new regulation regarding term deposits, one year ago roughly, the regulation, it put some minimum interest rate on time deposits for individuals for amounts below Ps.350,000. Now as you mentioned in July, the Central Bank has made an addendum of this regulation and requested banks to pay a little bit more for all time deposits, including the ones from individuals and companies for amounts up to Ps.1 million.

Time deposits are roughly 50% of our total deposits. And time deposits below Ps.1 million are roughly 40% of our time deposits. The impact is theoretical. Because you can estimate it instantly. But what really happens is that the different commercial areas tend to increase their interest rates on the active products, on the loans to the different clients and segments.

To give you an idea, this instant and theoretical impact after income tax could go at around, let's say, Ps.80 million, something like that. But again, it's theoretical and the idea is to pass through the increase in the funding cost to the active interest rate.

The second question regarding expenses, 55% of the administrative expenses are personnel expenses, and there we closed, all the banks in Argentina closed an agreement with the banking union that was impacted at around 30% the increase. Because there were some percentage of like 27.8% for all the salaries. But for the lower salaries, some fixed amounts, and also some variable compensation in total something about 30%.

The rest of the administrative expenses follow in certain ways the inflation. We have seen some higher increases in certain payments to some consultants that we hired, also in taxes, and on the transportation of cash. Because we have very low denomination bills.

But for all 2015 we are focused in something around 35%, so something above the projected inflation by the private consultants. Okay?

Okay. Yes. Thanks. Can you just repeat the percentages of the deposits? I don't think I got all of them.

Yes.

So it's 50%, yeah?

50% of total deposits are time deposits. The other 50% are current accounts and savings accounts, with zero cost. And within the time deposits, 40% are smaller than Ps.1 million. That is the universe that could be or is affected by the regulation that depending on the tenor of these time deposits, the rate increases like 1%. And this is what implies the Ps.80 million after tax that I estimated, again being a theoretical calculation.

Okay. But so you expect that most of the increase in rates to be offset in like by the fourth quarter? So the increasing rates in deposits you think by the fourth quarter will be offset by an increase in [loaned] rates?

It could happen, at least gradually. And of course we have some caps on some loans, some personal loans for example, and credit card financing. But wherever we don't have any caps, the trend is to raise interest rates. But also we have competition.

So I cannot assure you that in the fourth quarter it will be offset. But the trend would be to reduce that theoretical impact.

Okay. Thank you.

Alejandra Aranda, Bank Itau

Hi. Good morning, Pablo. Congratulations on the results. Three questions if I might. Could you comment a little bit on what we should expect in terms of net interest margins? I've seen a slight compression, it's a little bigger than what I was expecting for the results. And we've seen banks performing worse than you guys. So I was wondering what we could anticipate for the second half of the year.

My second question would be on NPLs. You had a really good performance, slightly edging downwards. But on the rest of the system we've seen NPLs going up. And I was especially concerned about the spike we've not only in consumer on the financial system in general, but also on the commercial side. I was wondering what you guys are seeing for the second half of the year, and what could we expect.

My third and last question is regarding CFA. I was wondering where you are on the restructuring process of the business. Thank you.

Okay. Hi, Alejandra. Well in terms of net interest margin, we saw a compression. Part of that is due to the lower yield on government bonds, and reduction in prices. When we look at the intermediation with the private sector with our clients. Although there are pressures on the rates and minimum rates for time deposits, as I discussed earlier, we are not seeing yet really an important compression.

So for the year we are-- we think it will increase from this current level of 11.5% to around 12%, and not reaching the levels we saw one year ago, closer to 13.5% or 14%. But higher than the levels we saw this second quarter.

In terms of NPLs, the reason because they have a good performance, is mainly many reasons, but one particularly for individuals is that many union agreements were closed. So people received salary increases between 25% and 30%, depending on the union. So there was a richness effect and they could afford the past-due loans.

And also loans to [GP] are always very low, so really it's not an issue for many families and companies. When we look at the second half of the year, we think there could be some improvement in the third quarter, and perhaps a slight iteration in the fourth one. But we'll continue with our impression that for this year the consolidated NPL ratio will be something flat from January to December.

In terms of CFA, when you mentioned the restructuring, basically that means that the Company is trying to have, I would say, longer term relationships with the clients. In the past granting just personal loans many times meant that the clients requested the loan, and after one year typically they were no longer clients. Now the Company is issuing credit cards, gradually, small amounts in order to have a longer term relationship, also trying to cross-sell, like insurance products. And also these clients to go on making certain purchases during the month. So we are gradually doing that because of different IT, I would say delays, with these kind of things. In term of personnel, no restructuring to put it clear.

No, no. I expect my question was only-- it was mainly on the new focus that you were giving to that segment. So we should expect better results from CFA on the second half, or these delays are going to take us more into next year?

I think they should improve a little bit and gradually. The origination has been poor in this first half of the year. In the second half it should grow a little bit. Perhaps the improvement will be in the next 12 months more than in the second half. Gradually the trend should be for an improvement in net income. They are making money, but not as much as much they (inaudible).

Okay. Thank you, Pablo.

(Operator Instructions) From Puente, Juan Vazquez.

Yes. Hello, Pablo. Well, all my main questions were already answered. But I'd like to know if you expect the slowdown on fee income growth on the back of the Central Bank resolution that put a cap on fee income going forward.

Hi. Fee income must be approved by the Central Bank or the price increases for individuals. Actually we got the approval for the different products between 17% and 20%. And it will apply since the second half of the year. So there will be more growth in fees in the second half.

The fees related to companies are not regulated. And I also would like to mention that an important portion of our fees are related to the merchant discount rate that we have on credit card transactions. So if purchases of our clients and the plans of (inaudible) go up because of more consumption because of inflation, we have a percentage on that.

So that percentage, the maximum is 3%, depending on the breakdown of the purchases, it typically goes to 2.7%. But it's a percentage that follows the consumption. So for this whole year--

Okay. So--

Yes? Sorry. Go ahead. Yes, for this year we have--

So you pretty much expect the operation-- sorry. I'll go ahead. So you pretty much expect the efficiency ratios to remain stable throughout the year? Because you know, this last quarter we saw a 4% increase on quarter over quarter, right, on fee income? Whereas administrative expenses grew by 11%. So that created sort of a worse efficiency ratio. So you expect that all that you're saying is going to offset this factor and efficiency ratios are going to be stable throughout the year?

Yes. Basically, yes. That fees, the growth in fees for the year could be around 35%, closer to the increase administrative expenses, and efficiency ratio being pretty stable, around [60].

Okay. Great. Thanks.

Federico Rey, Raymond James

Hi, Pablo. Good morning. Thank you for the call. I have a follow-up question on net interest margin. During the quarter we saw not only an increase in funding rates, but also a decline in lending rates. Could you explain that process is based-- competition if the [deducted] lending, this cap on consumer rates, and if you expect better lending rates during the rest of the year, or will you expect an additional decline? Thank you.

Hi, Federico. It's a mix of all the things that you mentioned, no? the increase in the minimum interest rates on CDs, on time deposits, the productive line, and also the cap on personal loans, on the interest rate on personal loans, and also on the credit card financing.

But we don't see something material moving forward in terms of a compression. We are already seeing the results of these different measures that have begun, I think, mid-2012 with the first productive line.

As I mentioned, the different areas what they'll try to do is to keep their budgets in line. And when they see this pressure on their funding cost to try to pass through to their loans, this increase. So the margin, we're thinking this intermediation with the private sectors should remain at around those levels.

In terms of the average interest rates on loans, it will depend also on the breakdown of our loan book. If we have more credit card financing, more CFA, perhaps it will go a little bit higher. But the current level shouldn't change that much in the short term.

Okay. Thank you.

(Operator Instructions) Walter Chiarvesio, Santander Bank

Hi. Good afternoon, Pablo. Thank you for the call. My question is related to the holdings of Central Bank [deals]. Could you let me know what the banks or what do you expect about the evolution of these holdings. It has been increasing in the system quite a lot, on the back of the Central Bank's monitor policy, I think.

And my question is specifically do you see any risk-- I think it's a tough question, but I think it is important. Do you think that there is any risk that this could be a change for some treasury bond in the future or something that could affect the value on these holdings? (Inaudible) that banks have any plan reducing? Are you comfortable with these holdings? What is your view about it? Thank you.

Hi, Walter. Clearly as you mentioned, the holding of [levas] has been increasing in all the financial systems, even more in the public sector banks. For us, it's a way to locate liquidity. We clearly prefer to lend to thousands or millions of clients, instead of to just one client, as in this case is the Central Bank. So if the loan demand picks up, as we think it should happen, these holdings should go down.

In terms of risks of the Central Bank doing this kind of a paradox measures, hard to answer. I hope not, clearly.

Okay. Well, thank you very much.

And it appears we have no further questions at this time.

Okay. Thank you very much for attending this call. If you have any further questions, please do not hesitate to contact us. Thank you. Good morning.

Thank you. And again that does conclude today's conference. We thank you all for joining.