Grupo Financiero Galicia SA (GGAL) 2016 Q2 法說會逐字稿

Good day and welcome to the Grupo Financiero Galicia Second Quarter 2016 Earnings Release Conference Call. This call is being recorded. At this time, I would like to turn the call over to 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. 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, and are subject to risk and uncertainty that could cause actual results to differ materially from those expressed.

According to private estimates, the Argentine economy showed a 2.9% annual drop for the second quarter of 2016 which compares with a 0.9% annual growth in the previous quarter. In the second quarter, the primary deficit reached 1.1% of GDP and after the payment of interest and income from ANSES and from the Argentine Central Bank, the global deficit represented 1.5% of GDP.

Although the National Institute of Statistics has published a new consumer price index, the first monthly data was for May and therefore, there is no information for the full quarter. For private estimates, consumer prices have expanded 13.6% during the three months ended on June 30, 2016.

On the monetary front, the Argentine Central Bank expanded the monetary base by ARS58.2 billion in the quarter, accumulating a 30.8% growth during the last 12 months. The monthly average of the foreign currency exchange rate appreciated 5.5% from ARS14.96 per dollar in March to ARS14.14 per dollar in June.

In June, the average rate from peso denominated private sector time deposits for up to 59 days decreased to 28.2%, 80 basis points lower than the 29% of March, 2016. Private sector deposits in pesos at the end of the quarter, amounted to ARS1,003 billion, growing 7.6% during the second quarter and 26.5% in the last 12 months.

Transactional deposit is pesos increased 10.8% and peso-denominated time deposits increased 4.3%. At the end of June, loans to the private sector in pesos amounted to ARS795 billion, recording a 3.9% increase from March 2016 and a 25.8% annual increase.

Turning now to Grupo Financiero Galicia, net income for the quarter amounted to ARS1,375 million, 45% higher year-over-year, mainly due to profits from Banco Galicia for ARS1,153 million in Sudamericana Holding for ARS193 million and in Galicia Administradora de Fondos for ARS34 million. The Bank's net income increased 31% from the year ago quarter, as a consequence of the 35% year-over-year growth of net operating income.

Net financial income grew 42%, mainly due to the increase in the portfolio of loan to the private sector and higher spread. While net income from services grew 30% mainly due to fees related to national and regional credit cards, to deposit accounts, and to foreign trade. Average interest earning assets grew ARS34 billion year-over-year and its yield increased 364 basis points, explained by a 1,099 basis points increase in interest rates on the net position of government securities and 166 basis points higher accrued interest rate on the loan portfolio.

Interest bearing liabilities grew ARS32 million during the same period, and its cost increased 313 basis points, mainly as a result of the increase in the average interest rate on time deposits for 561 basis points.

Provision for loan losses for the quarter amounted to ARS723 million, 49% higher than the ARS484 million recorded in the same quarter of the prior year, mainly due to those related to the individuals' loan portfolio.

Administrative expenses were 37.6% higher year over year with personnel expenses growing 37%, mainly as a consequence of salary increase agreements with the unions. The remaining administrative expenses grew 38%, mainly due to increases in taxes, advertising and publicity, cash transportation, maintenance, electricity, and communication expenses.

The Bank's credit exposure to the private sector reached ARS127 billion at the end of the quarter, up 38% in the last 12 months and deposits reached ARS118 billion, up 53% in the year. The Bank's estimated market share of loans to private sector was 9.52% and the market share of deposits from the private sector was 9.61%, increasing 37 basis points and 88 basis points in the last 12 months respectively.

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 3.4% compared with the 3.7% of the second quarter of the prior year. The consolidated coverage of NPLs with allowances reached 103%, down from 107% recorded a year ago. As of June 30, 2016, the Bank's consolidated computable capital exceeded by ARS4 billion, the ARS12 billion minimum capital requirement or 34% and the regulatory capital ratio reached 11%, growing 146 basis points in the quarter.

It is worth to mention that after the end of the quarter, the bank issued a 10-year subordinated bond for $250 million on a 8.25% coupon, which will be considered Tier 2 capital beginning in the third quarter. The proceeds will be used to repay on August 22 the outstanding subordinated negotiable obligations due in January 2019, which bear a 16% interest rate.

The Bank's liquid assets at the end of the quarter represented 92% of the Bank's transactional deposits and 46% of its total deposits compared to 77% and 37% ratios from a year before respectively. Despite the above mentioned drop in the economic activity during the second quarter of 2016, the Bank had good operating results, gained market share, kept its asset quality metrics at reasonable levels and begun to improve its capital base.

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

(Operator Instructions) Santiago Ruiz, TPCG.

Hi, Pablo. I wanted to get your thoughts on your recently issued 8.25% Tier II bond. Even though, they won't start to lose regulatory capital treatment after five years and you're going to quit after year five. Should we be thinking all these as effectively an 8.25% bond that matures in five years?

Hi, Santiago. Well, in five years, we will see how the conditions of basically the yields on our bonds are, the yields on Argentine papers. The call will be just one day, so it could be considered that it matures in five year, but perhaps in five years from now yields are different and we will keep for other five years. It's hard to say today. Again, the difference with the current subordinated bonds is that the call is just one day.

(Operator Instruction) Tunde Ojo, Harding Loevner.

Thank you, Pablo. Just a follow-up to the last question on the tier II capital that you raised. Given that you are planning to use that to pay off the more expensive one, can you help me understand what the net impact is going to be on your cost of funding as well as on your capital adequacy ratio?

Hi, Tunde. We have outstanding $218 million of phase or nominal value of the 2019 bonds. But in terms of capital, we can just use 24% of that, so it's roughly $50 million. The new issuance is $250 million and we will use the 100%.

So the net effect in terms of tier II capital will be roughly $200 million, actually its $197 million or something, around that number. So for the net effect on the capital ratio will be roughly two percentage points improvement and in the case of the saving, will be roughly $20 million per year.

On the interest expense?

Exactly, because 16% less 8.25%, that will be roughly 8% on $250 million, so it will be roughly $20 million.

Okay. And when would this conversion be done, the repayment and that you expected --

The call on the outstanding old 2019s will be on August 22.

August 22? Okay, perfect. Thank you. The other question I have is on the regional credit card companies. When I look at their standalone performance, it looked particularly poor in this second quarter. And me looking at it, I figured it was due to increase in provisions, and also fee not really growing quarter on quarter. Can you tell me exactly what happened this quarter? Just to understand what happened and what you expect going forward for this particular business?

Yes, the second quarter was, I would say, soft in terms of growth, and also there was some asset quality deterioration you can see there that the NPLs, deteriorating slightly from 6.1% to 6.4%. So the provision or the cost of risk increased. Also, the administrative expense is mainly due to the salary increases.

These companies have the Commerce Union that had a 20% increase and will have a 10% increase in September or in the fourth quarter. But we think that there will be a rebound. We don't know exactly if it's in the third quarter or in the fourth quarter, but clearly many bad variables aligned together in this quarter.

Okay, so just to draw a little bit more on this asset quality, right. So given that these are more informal, (inaudible) deals, but these are more low income deal, what have caused this deterioration in your view. Is it more, is it job losses, is it more just the economic environment being less discretionary spending. Did you have a sense of any broad reason for the deterioration?

Well first, typically on the second quarter, they are all the union agreements and negotiations took. So typically many people still have, let's say, the old salary. And typically, on the third quarter, with the new salary after the salary has been increased, let's say, by 33% this year, people have a wealth effect, and there the NPL ratio improves.

So basically the second quarter is the worst in terms of seasonality because of the purchasing power has been going down through the year, and the deterioration was really, I would say, marginal, nothing very relevant.

Okay. And on the fee income side as well, is that same reason why you were flattish quarter-on-quarter or is there a change in the fee structure at the original credit card level?

Well, in part, it's related to volume, but also the credit card companies are not or it's something that changes and they cannot have a markup on the credit related insurance fees, both impacts were there on fees.

So I have two more questions, do you mind if I keep going or do you want to get back on the line.

I have no problem.

The next question I have is on the -- if you can give me your net FX position as at end of June, it wasn't disclosed in the press release. I wanted to know what it is at the end of June and what it was at the end of March. Just to see the move that you had in terms of your balance sheet position on the FX?

Yes, you can see it in one of the charts on our press release. But basically there we show assets in dollars, liabilities in dollars and forward position. So as of June, we were roughly ARS1 billion short in the spot position, but we were [2.8] long through forward contracts. So in total, we were long -- the net position was long roughly ARS1.7 billion, $110 million to be (multiple speakers). You can see there are also the numbers in March. In March we were slightly short in the net position.

You were slightly short in the net position?

In March, and in June, this about $110 million long in June.

Okay, so you move from short to long.

Well, basically that was the case from the end of March to the end of June, but it has daily volatility, let's say fluctuation exactly.

And the last one from me, this is on, so the ARS1.6 billion income from government and private securities that you disclosed for the quarter, how much of that is trading gains and how much of that is interest income from those securities like netback and the others. Just want to get a sense of trading and the more, the current interest income.

Most of that -- the yield on netbacks is not trading gains. Roughly, I would say 85% is interest, 15% trading gains.

Alonso Aramburu, BTG.

Hi, good morning and thank you for the call. I will just ask one question on loan growth, you mentioned that the softening of growth in the first half of the year. Are you still expecting loan growth for the second half to pick up on potentially be in line with inflation for the year or do you expect now to be below inflation?

Hi Alonso, we think the loan growth will pick up, but will remain below inflation. Actually our current estimate is at for the full year. The loan growth will be around the low 20s. That's our current estimate. At the beginning of the year, we were a little bit more, perhaps optimistic in this percentage. But due to the high interest rates and the economic slowdown, the loan demand has been not very strong.

And this is, mainly you think demand issue or you, is it bank being more cautious as well in some of the lending policies because of the economic slowdown?

Yes, it's more a demand issue and related to high interest rates still in the system.

And there are no other questions at this time.

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

That will conclude today's conference. Thank you for your participation.