Grupo Financiero Galicia SA (GGAL) 2015 Q3 法說會逐字稿

Good day, everyone, and welcome to this Grupo Financiero Galicia third quarter 2015 earnings release conference call. This call is being recorded.

At this time I would like to turn call over to Pablo Firvida, Head of Investor Relations. 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 risk 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 2.2% annual growth for the third quarter, which compares with the 1.5% annual growth in the second quarter of this year.

In the second quarter, the last information available, the primary deficit reached 0.3% of GDP. And after the payment of interest, the global deficit represented 1.1% of GDP.

Consumer prices expanded 3.7% in the third quarter and 14.4% in the last 12 months as measured by the official index, while for private estimates figures were 5.5% and 26% respectively.

On the monetary front, the Argentine Central Bank expanded the monetary base by ARS47.4 billion in the third quarter, accumulating a 34.8% growth during the last 12 months. The monthly average of the foreign currency exchange rate increased from ARS9.04 to ARS9.37 per dollar in the quarter, representing a 3.6% depreciation.

In September, the average rate on peso denominated private sector time deposits for up to 59 days increased to 22.57%, 94 basis points higher than the 21.63% in June 2015.

Private sector deposits at the end of the quarter amounted to ARS881 billion, growing 6.9% during the third quarter of the year. Transactional deposits in pesos increased 7%, and peso denominated time deposits increased 7.3%.

In the last 12 months, deposits in pesos grew nearly 40% and deposits in dollars expressed in pesos 32%.

At the end of September, total loans to private sector amounted to ARS708 billion, recording an 8% increase from June 2015 and 31% in their annual increase.

Turning now to Grupo Financiero Galicia, net income for the quarter amounted to ARS1.2 billion, 27.5% higher year-over-year, mainly due to profits from Banco Galicia for ARS1.1 billion, in Sudamericana Holding for ARS80 million, and Galicia Administradora de Fondos for ARS27 million, partially offset by administrative and financial expenses for ARS37 million.

The bank's net income, which accounted for 93.3% of Grupo's results, increased 26% from the year ago quarter. The operating income increased 25% year-over-year, with net income from services increasing 29%, mainly due to fees related to national and regional credit cards and to deposit accounts.

And net financial income grew 22% in the same period due both to the increase in the portfolio of loans to private sector and of government securities, offset by a contraction in the spread.

Average interest earning assets grew ARS27 billion year-over-year and its yield decreased 210 basis points, while interest-bearing liabilities grew by ARS15 billion during the same period and its cost increased 80 basis points, mainly due to higher average interest rate on time deposits.

Provision for loan losses for the quarter amounted to ARS448 million, or 2.1%, of average loans, 31% lower than the ARS646 million recorded in the same quarter of the prior year; reduction recorded in both the consumer and the commercial loan portfolios.

Administrative expenses were 41% higher year-over-year, with personnel expenses growing 35%, mainly due to salary increase agreements with the unions. The amortization of our organization expenses for ARS158 million increased 90%, as in December 2014 the bank began to amortize its investment in the sub-core banking system. The remaining administrative expenses grew 45%.

The bank's credit exposure to private sector reached ARS96 billion at the end of the quarter, up 32% in the last 12 months. And deposits reached nearly ARS83 billion, up 38% in a year.

The bank's estimated market share of loans to private sector was 9.11% and the market share of deposits from the private sector was 8.92%.

As regards asset quality, the consolidated NPL ratio, considering the loan book of the bank, the credit card subsidiaries, and CFA, ended the quarter at 3.6% compared with the 3.9% of the third quarter of the prior year. The consolidated coverage of NPLs with allowance reached 109%, above the 106% figure recorded a year ago.

As of September 30, 2015, the bank's consolidated computable capital exceeded by ARS3.9 billion the ARS8.8 billion minimum capital requirement, or 43.9%, and the total capital ratio reached 15.8%.

The bank's liquid assets at the end of the quarter represented 75% of the bank's transactional deposits and 37% of its total deposits, compared to 79% and 39% ratios from a year before respectively.

In summary, during the third quarter of 2015 and despite the increasing administrative expenses, the bank had good operating results with growth in both net interest income and net fee income, improved its asset quality metrics, and kept healthy liquidity indicators.

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

Thank you. (Operator instructions.) Carlos Gomez, HSBC.

Hello, Pablo. Good morning.

Hi, Carlos.

We realize that you are a few weeks before the second round of the presidential elections, but could you share with us what you expect for the next one or two years in terms of macro expectations, GDP growth, the exchange rate? And what is the scenario the bank is bracing for, a contraction, continuation of policy as usual? What should we expect? Thank you.

Hi, Carlos. Well, it's a difficult moment to say or to make assumptions on macroeconomic variables or scenarios, as the elections will be a key point.

In our opinion, both candidates' economic teams have a similar diagnosis of the problems like the hold-outs issue, inflation, fiscal deficit, tariffs, subsidies, the need to reinsert Argentina in the world, but they have different approaches in terms of the timing. They keep speaking about gradualism vis-a-vis a shock.

So, the key thing must be who wins. After the first round, it appears that, according to the polls, that Macri today has more -- or higher probability than before the first round. But, we have to wait for the elections.

Clearly there must -- there should be a timing of adjustment of relative prices. The official exchange rate should grow towards the blue chip swap. That could cause some spiking inflation, but many economists think that prices already reflect this blue chip swap foreign exchange.

In terms of the bank, we think that with inflation, let's say, at around 30%, it could be that in the first half of the year it will be higher and in the second half of 2016 will be lower. Monetary aggregates will be growing at around the same levels. And we don't feel that there will be any drastic change in NPLs or margins during 2016.

Our chief economist is projecting something like 1% GDP growth for next year, again probably first half of the year being a little bit worse than the second half. But, again, we should wait for the second round because it's really not just the end of a four year term, but the end of 12 years of a mold of governing the Ministry of Economy, basically.

Okay. Thank you very much. And if I could follow up, on the expenses side, this 40% rate of growth, should we consider that ordinary or this is a high level compared to what would be normal for you?

It's high. 55% of our administrative expenses are personnel. That grew 35%. And there we are tied to the unions and negotiations.

The rest had some, I would say, extraordinary increases. One of them was fees for different consultants. This is a kind of investment for today in order to have a more efficient bank in the future. Other items were some increases in the transportation of cash, in security, maintenance, cleaning.

Many of the other increases were tied to other unions' negotiations. But, if next year's inflation is 30%, administrative expenses will be around that level, perhaps a little bit higher but not around 40%.

Thank you very much.

Okay.

Boris Molina, Santander.

Yes. Pablo, good morning. Thanks for taking my questions. I had a question regarding the rate of growth of your revenues, because it appears to us that, if we try to kind of normalize your net interest income from what was, say, probably the capital gains, we detect a slowdown in revenue growth associated with the combination of loan growth kind of lagging inflation and then some margin pressures, and then some rates in some of your products are actually declining. And I think probably it's related to kind of -- the badlar.

But, how would you tell us what we could expect for the evolution of revenues going forward? Do you expect that loan growth will keep up with inflation? There are -- some corporate loan lines were declining. Some are performing well. And what could we expect in terms of margins, I guess, for us to get an idea of how the net interest income line will perform towards the end of the year, beginning of next year?

Okay. Hey, hi, Boris. The net financial income basically was affected by a compression in spreads. The volume was good, in our opinion, and was above inflation if we look at the last 12 months. And going forward, we are forecasting growth rates of loans in all the segments at a rate above inflation.

Depending on the evolution of the badlar rate and inflation and all the macroeconomic variables' evolution, perhaps we could even see a growth in our net interest margin. But to be, I would say, not too bullish or optimistic and conservative, I think the 12.5% net interest margin we are seeing today could be sustained.

And another important component of our revenues are fees that are growing at roughly 30%, despite certain caps on the fees we are charging to individuals. So, again, under a new administration perhaps certain regulatory caps or restrictions could be changed. And we are optimistic in the sense of also growth in fees.

Wonderful. Thank you so much, Pablo.

You're welcome, Boris.

Arthur Byrnes, Deltec.

Thanks for the call. I'd like to ask a question that's a little less rigorous in terms of numbers and so on. Given what's going on in Argentina, and we hope it changes, how would you grade yourselves on running a bank with the high inflation and the mandatory loans to different industries and so on? Under the circumstances, are -- you feel like you're running the bank as well as you can, or are there issues that were harder to deal with than you expected? Just an overall feel on, year-to-date, how you think you've managed the bank and what the real problems are.

Could you hold on just one second?

Sure.

Yes, sorry. We were discussing one number internally.

Well, basically if you look at the recent results, I would say the last three years our profitability has been growing. We have, I would say, for the last, again, three years a return on equity above 33%.

In an inflationary context and also with increasing regulations, if things change, as you said, and we hope so and we expect also that, we are in a great situation to improve and manage this better scenario.

I don't know if your question was also going into where we are compared with other banks. In that sense, for example the mandatory lending for us is something that is not difficult to achieve because we have thousands of clients. In the case of other banks perhaps they suffer it more.

Clearly it's not something we like and we have a cost there, because we could have been charging more for those funds. But, we are in a great situation in a [better] cycle that we hope will begin next year.

And if the currency in fact is adjusted relative to the dollar or any other outside currency, are you prepared as well as you can be for that?

Well, we have restrictions in terms of how long we can be in dollars. We can hedge ourselves roughly up to 20% of our regulatory capital.

We have, I would say, roughly one-third of our total assets that are fixed assets and other intangibles that are not affected by inflation. And they are not, I would say, mark-to-market in our loan book -- in our books because inflation adjustment is not allowed in Argentina since March 2003. That's in terms of the balance sheet.

In terms of how it would impact our clients, most companies and individuals are really long in dollars even outside of Argentina or under the mattress or in safe deposit boxes, so a devaluation could create a wealth effect. And also, as loans to GDP is very in Argentina, it shouldn't affect NPLs.

Clearly, a devaluation will improve the situation of many exporters. And some importers are already using a blue chip swap exchange rate. So, I think it will be something needed. And in general terms, it will improve the situation of all the economy.

Excellent. I appreciate it. Thank you.

You're welcome.

(Operator instructions.) Federico Rey, Raymond James.

Hi, Pablo. How are you? I have two questions. The first one is related to net interest margin. I would like to know what's the impact of the recent increase in [LEVAC] rates by 300 basis points.

And the second question is regarding the recent pick up in non-labor costs that we saw during the quarter. Thank you.

Yes. Hi, Federico. Well, I don't know if you saw that our holdings of LEVAC decreased a little bit from second quarter to third quarter, from roughly 11% of total assets to 8% of total assets.

[LEVAXAR] is short term, and many times we prefer -- or most of the time, I would say we prefer to lend to private sector clients. In my opinion, it doesn't have an important effect in margins going forward, the LEVAC.

And the second one, you mentioned the personnel expenses evolution.

No, no, no, the increase in non-labor costs.

Okay, sorry. Well, I mentioned before the 41% growth is more extraordinary than recurring.

Basically we had some big increases on maintenance expenses, fees for consultants, typically consultants that help us to make more efficient certain processes in the operations of the bank, and also some one-time increase in -- for example in cash transportation and in security and cleaning of branches.

But, again, if inflation next year, for example, is something around 30%, non-labor expense should grow something above that number, but not at 40%.

Okay. Thank you, Pablo.

You're welcome.

And sir, it does appear there are no further questions at this time.

Okay. Thank you for attending this call. If you have any questions, please do not hesitate to contact us. Good morning. Bye-bye.

That does conclude today's teleconference. Thank you all for your participation.