Grupo Financiero Galicia SA (GGAL) 2016 Q3 法說會逐字稿

Welcome to the Grupo Financiero Galicia third quarter 2016 earnings release conference call. This call is being recorded. At this time, I like to turn the conference 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 risks and uncertainty that could cause actual results to differ materially from those expressed. According to private estimates, the Argentine economy showed a 4.1% annual drop for the third quarter of 2016, which compares with a 3.9% annual drop in the previous quarter. In the third quarter, the primary deficit reached 1.4% of GDP and after the payment of interest and income from ANSES and from the Argentine Central Bank, the global deficit represented 0.7% of GDP.

According to the National Institute of Statistics, consumer prices expanded 3.4% during the three months ended on September. And for private estimates, inflation expanded 2.7% during the third quarter. On the monetary front, the Argentine Central Bank expanded the monetary base by ARS51.4 billion in the quarter accumulating a 28.8% growth during the last 12 months. The monthly average of the foreign currency exchange rate depreciated 6.8% from ARS14.14 per dollar in June to ARS15.10 per dollar in September. In September, the average rate from peso-denominated private sector time deposits for up to 59 days decreased to 23.1%, 580 basis points lower than the 28.9% of June 2016. Private sector deposits in pesos at the end of the quarter amounted to ARS1,044 billion growing 4.1% during the third quarter and 25.6% in the last 12 months.

Transactional deposits in pesos increased 2.9% and peso-denominated time deposits increased 4.8%. At the end of September, loans to the private sector in pesos amounted to ARS821 billion recording a 3.2% increase from June 2016 and a 19.5% annual increase. Turning now to Grupo Financiero Galicia. Net income for the quarter amounted to ARS1,523 million, 28% higher year-over-year mainly due to profit from Banco Galicia for ARS1,243 million, in Sudamericana Holding for ARS176 million, and in Galicia Administradora de Fondos for ARS57 million. The Bank's net income increased 12% from the year-ago quarter as a consequence of the 32% year-over-year growth of net operating income offset by the 37% increase in administrative expenses and a 97% increase in provision for loan losses.

Net financial income grew 28% mainly due to the increase in the portfolio of loans to the private sector and higher spread while net income from services grew 38% 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 118 basis points explained by a 241 basis points increase in interest rates on net position of government securities and 106 basis points higher accrued interest rate on the loan portfolio. Interest-bearing liabilities grew ARS36 billion during the same period and its cost decreased 8 basis points mainly as a result of the increase in the average balance of dollar-denominated saving accounts as the average interest rate on other liabilities increased.

Provision for loan losses for the quarter amounted to ARS881 million, 97% higher than the ARS448 million recorded in the same quarter of the prior year mainly due to the loans related to the individuals loan portfolio. Administrative expenses grew 37.6% year-over-year with personnel expenses growing 36% mainly as a consequence of salary increase agreements with the unions. The remaining administrative expenses grew 37% mainly due to increases in taxes, cash transportation, advertising and publicity, electricity, and communication expenses. The Bank's credit exposure to the private sector reached ARS136 billion at the end of the quarter, up 42% in the last 12 months and deposits reached ARS118 billion, up 43% in a year.

The Bank's estimated market share of loans to the private sector was 9.73% and the market share of deposits from the private sector was 9.25% increasing 63 basis points and 33 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 3.6% of the third quarter of the prior year. The consolidated coverage of NPLs with allowances reached 101%, down from 109% recorded a year ago. As of September 30, 2016 the Bank's consolidated computable capital exceeded by ARS7 billion the ARS13 billion minimum capital requirement or 52%. And the regulatory capital ratio reached 12.45% growing 147 basis points in the quarter and 94 basis points from September 2015.

It is worth to mention that during the quarter, the Bank issued a 10-year subordinated bond for $250 million and an 8.25% coupon, which is considered Tier 2 capital and the proceeds of which were used to repay on August 22 the outstanding subordinated negotiable obligations due in 2019. The Bank's liquid assets at the end of the quarter represented 78% of the Bank's transactional deposits and 41% of its total deposits compared to 75% and 37% ratios from a year before respectively. Despite the above mentioned drop in the economic activity during the third quarter of this year; the Bank had good operating results, gained market share, kept its asset quality metrics at reasonable levels, and improved its capital base. We are now ready to answer the questions that you may have. Thank you.

Thank you. (Operator Instructions) Domingos Falavina, JP Morgan.

My question is regarding your expectations more into 2017, specifically what do you have in mind for loan book growth and what's the forecast for inflation for next year?

For next year our Chief Economist is forecasting an inflation of 20%, little bit higher than the rate that the Central Bank is talking about between 12% and 17%. And considering that 20% inflation from our estimates, our loan book would be growing above 30%, between 30% and 33%.

And primarily driven by which segment?

We think all the segments will grow, but corporates and SMEs could be demanding a little bit more loans as during the last I would say decade, the CapEx was not very active in Argentina. So both consumers and companies, but a little bit more biased towards companies.

(Operator Instructions) Frederic de Mariz, UBS.

The first one more of a follow-up on Domingos' question. On the loan growth, what you reported in 3Q was in line with inflation close to low 40%s. I wanted to hear from you any insights into what sectors are already picking up or in what sectors in the economy you're seeing a higher demand for loans and which ones are slightly weaker on a comparative basis. And then my second question has to do with OpEx growth, which was quite high in the quarter when we look year-over-year and obviously we're all expecting, the market is expecting some deceleration, some decrease in inflation. So, I wanted to get a sense from you whether we should expect that OpEx growth to decelerate as fast or maybe even faster than inflation for next year. Thank you.

The loan book grew at around 40% year-over-year mainly because of the growth in loans in dollars and that's why you can see that big corporates grew like above 80% from 3Q last year to this quarter taking advantage of the important position of deposits in dollars banks are receiving and we have to allocate those deposits in dollars to loans mainly to exporters or for suppliers of exporters. So, that's why the big corporates grew in terms of the share in our loan book. The rest of the segments are growing I would say nominally or in line with the current inflation.

Taking the monthly or annualizing the monthly inflation, right now we are around 20%; but the last 12 months inflation runs at around 37%. So, these are the changes or the reasons of the growth in loans. In terms of OpEx, they are related to the salary increases with the unions; the banking union, the commercial union, and also other unions of providers of service to the Bank. Going forward thinking in 2017 with inflation of 20%, clearly the growth in OpEx will be more in line with this 20% inflation. Perhaps little bit above, but depending on how successful or not are the unions trying to get a higher salary increase than inflation basically.

If I may just follow-up on those two questions. For the loan growth, you mentioned exporters as a sector that's doing well. Any other sector that you would think of?

We are seeing I would say across different economic activities and size of clients also in SMEs and agriculture sector, manufacturing. In different segments, we are seeing already some green shoots.

Okay. And then on the OpEx growth, you're talking about the annual wage renegotiation so we really have to wait until next March I believe or the first quarter of next year to see if the wage renegotiation will come down. Is that the right thinking?

Yes. But let's say inflation for this year will end up at 38%, salary agreements were 33%. If next year inflation is 20%, the unions I guess will try to get or to compensate part of that, 5 percentage points and also we have to see what is the outcome of those negotiations, but we are not thinking in the 40% or 38% level clearly.

And that would be when approximately that you have the negotiation?

You mean [when] increase?

For the wage renegotiation, when would that be?

When, typically it's in April or May.

(Operator Instructions) Alejandra Aranda, Itau.

Could you give us a little bit more (technical difficulty) growth of deposits and also on the growth in the number of deposits account, which has been pretty strong this year and I would like know how do you see this evolving in the future? And my second question is related to fees, which increased quite significantly and they are now above inflation. If you could comment a bit on how much of this increase was actually due to the increasing fees this last September because to me it looks more of an indication of growth in activity.

First, deposits grew also or similarly to loans in a very significant way due to the dollar practice. Deposits in dollars grew both I would say in real terms in dollars more than doubled in the last 12 months, but also due to the 60% devaluation that accumulated in that period. But in terms of number of accounts, the growth was roughly 17% basically in saving accounts both in pesos, in dollars, and also at our subsidiary level CFA. The tax amnesty created some accounts, but really it's not very relevant. It was as of September like 2,000 accounts and at the end of October when it was the deadline, 24,000.

So when we are speaking about millions of the accounts, really it's not relevant. Going to the fees, the limitations to increase prices on fees was for products for individuals still September. But certainly in the third quarter, we didn't increase the fees so the growth due to price increases will be shown in the fourth quarter. Prices were increased roughly 30% for companies for commercial clients and in July we adjusted 20% some prices on certain products on individuals. But again completely situation of freedom to increase prices will be shown in the fourth quarter, of course it will be affected or restricted by the competitive environment clearly.

Carlos Gomez, HSBC.

My first question is on capital on page 13. The regulatory ratio you show there 12.45%, that already includes presumably the issuance of subordinated debt. We would like to know if you have any other capital measures that you are contemplating in the medium to long term in order to have more capacity for growth? My second question refers to your Tarjetas, the credit card business. On page 16 we see a significant decline in the profitability of this segment at least this quarter so we wanted to know if there's anything that made it so and what do you expect for next year? Thank you.

As you mentioned, the regulatory capital ratio at 12.45% as of the end of September includes the issuance of the subordinated bond. Going forward there will be one regulatory change that is that banks will be fully IFRS in 2018 that will allow us to re-express or mark to market our fixed assets that will have some additional capital. Also with our organic growth and net income origination, we are I would say comfortable in the medium term unless there is an M&A operation that we allow us to match the growing loan demand. So, these are I would say the short-term measures that will improve our capital ratio. The credit card companies I would say suffer a little bit more than the Bank and also than CFA the economic situation and you can see that provisions grew I would say heavily more than 25% quarter-over-quarter and almost double or multiplied by three in the 3Q last year to this one. There are some pressures on fees, but are not reflected there. So, basically it's I would the deterioration of the loan book.

As a follow-up on the capital, is there any news from the Central Bank as to how they will treat the possible revaluation of fixed assets and whether that will go in Tier 1 or Tier 2?

No. But if I have to think, it should be Tier 1. But no news, no comments so we have to wait.

Alan Trovato, PUENTE.

I have two questions regarding the bill that was passed in the Senate aimed at regulating credit under the current fees. The first question is what percentage of Grupo Financiero Galicia's fixed income is represented by this fees? And the second question is I would like to know if you have already assessed the potential impact of the reduction in the fees. Thank you.

Basically what we say is that when there is a measure or a new regulation, we can calculate the theoretical impact I would say instantly. But what happens in reality is we try to offset that regulation trying to maintain profitability. You can see that in the recent past when there were caps on interest rates on personal loans or minimum interest rates on certain time deposits or caps on fees for individuals. So really if let's say we are in the worst case scenario and this law is passed and the Senate approve it, what will happen is that most of the banks or even all the credit card companies will react reducing discounts, promotions, instalments with no interest, perhaps the fees charged to the cardholders could be increased, or interest rates on financing, also the consumption culture or profile of our clients could change so it perhaps will generate more personal loans. So, all the business should be I would say reformulated.

In the press release we have a chart that has the fees related to the national credit cards and to the regional credit cards. In the case of the regional credit cards, roughly one-third of that number is related to the merchant discount rate. The others are charged to cardholders in the case of the Bank is closer to [70%]. But the fee expenses that you can see also in that chart are more than 60% related to all these promotions and discounts. So if you were to make a quick calculation, it could be even offset. Now going to the most likely scenario or the current scenario is that an alternative project could be approved in the lower [chamber] that could reduce both the credit card and the debit card discount rate gradually and to higher numbers on the already approved project and perhaps also considering different percentages for different sizes of merchants. So, it's something that will be evolving and we'll have news in the coming months.

And I show we have no further questions in queue at this time.

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

And that does conclude today's conference and we thank you for your participation. You may now disconnect.