Grupo Financiero Galicia SA (GGAL) 2017 Q1 法說會逐字稿

Welcome to this Grupo Financiero Galicia first-quarter 2017 earnings release conference call. This call is being recorded.

At this time, I'd 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 risk and uncertainty that could cause actual results to differ materially from those expressed.

According to private estimates, the Argentine economy showed a 1.1% annual drop for the first quarter of 2017, which compares with a 2.6% annual drop in the previous quarter. In the first quarter, the primary deficit reached 0.4% of GDP, overachieving the official target of 0.6%. Considering the payment of interest, the global deficit represented a 0.7% of GDP. According to the National Institute of Statistics, consumer prices expanded 6.3% during the first three months of this year at -- although for private estimates, inflation was 6.6% during the period and accumulates 33.1% during the last 12 months.

On the monetary fund, the Argentine Central Bank contracted the monetary base by ARS67 billion in the quarter, still accumulating a 34.7% growth during the last 12 months. The monthly average of the foreign currency exchange rate appreciated 3% from ARS15.85 per $1 in December to ARS15.43 in March, while the annual depreciation reached 5.5%. In March 2017, the average rate on peso-denominated private sector time deposits for up to 59 days decreased to 18.29%, 171 basis points lower than the 20% of December 2016.

Private sector deposits in pesos at the end of the quarter amounted to ARS1,168 billion, growing 1.7% during the first quarter and 55.2% in the last 12 months. Transactional deposits in pesos decreased 5.3% during the first quarter, and peso-denominated time deposits increased 11.1%. At the end of March, loans to the private sector in pesos amounted to ARS958 billion, recording a 4.8% increase from December 2016 [and a] 25.1% annual increase.

Turning now to Grupo Financiero Galicia, net income for the quarter amounted to ARS1.6 billion, 19% higher year-over-year, mainly due to profits from Banco Galicia for ARS1.48 billion with a 29% increase as compared to the same quarter of fiscal year 2016. In Sudamericana Holding, for ARS98 million (sic - see press release, "93 million") with a 44% decrease. And in Galicia Administradora de Fondos for ARS85 million with a 183% increase.

The increase in the Bank's net income from the year-ago quarter was a consequence of the 41% year-over-year growth of net operating income, offset by a 35% increase in administrative expenses and an 87% increase in provision for loan losses.

Net financial income grew 34% mainly due to the increase in the portfolio of loans to private sector and a higher spread, while net income from services grew 51% mainly due to fees related to national and regional credit cards, to credit, and to deposit accounts.

Average interest earning assets grew ARS31 billion year-over-year and its yield decreased 144 basis points, explained by a 386 basis points decrease in interest rates on the portfolio of loans to the private sector. Interest-bearing liabilities grew ARS34 billion during the same period, and its costs decreased 611 basis points as a result of the lower average interest rate on all its components, mainly on time deposits and debt securities.

Provision for loan losses for the quarter amounted to ARS1.2 billion, ARS539 million higher than in the same quarter of the prior year, mainly due to those related to individuals loan portfolio and to an increase of regulatory provisions as a consequence of the increase in the loan portfolio.

Administrative expenses were 35% higher year-over-year, with personnel expenses growing 37% mainly as a consequence of salary increase agreements with the unions, a provision related to certain compensations, and to nonrecurring human resources expenses. The remaining administrative expenses grew 33%, mainly due to increases in cash transportation, electricity and communications, security services, maintenance, and taxes.

The Bank's credit exposure to the private sector reached ARS168 billion at the end of the quarter, up 38% in the last 12 months; and deposits reached ARS159 billion, up 47% in a year, as a consequence of the 23% increase of peso-denominated deposits and of the 156% increase of dollar-denominated deposits.

The Bank's estimated market share of loans to private sector was 10.33% and the market share of deposits from the private sector was 10.24%, increasing 60 basis points and 87 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%, recording a slight deceleration as compared with the 3.3% of the first quarter of the prior year. The consolidated coverage of NPLs with allowances reached 100%, down from 108% recorded a year ago.

As of March 31, 2017, the Bank's consolidated computable capital exceeded by ARS7 billion the ARS16 billion minimum capital requirement, or 43%. And the regulatory capital ratio reached 11.68%, growing 216 basis points from March of last year. The Bank's liquid assets at the end of the quarter represented 80% of the Bank's transactional deposits, and 47% of its total deposits compared to 92% and 42% ratios from a year before, respectively.

In summary, during the first quarter of 2017, Grupo Financiero Galicia subsidiaries had good operating results while Banco Galicia was able to gain market share, to keep its asset quality and liquidity metrics at reasonable levels, and improved its capital base.

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

(Operator Instructions). Nicolas Riva, Citi.

I have a question on IFRS, because I see in the press release in one of the last pages that you mentioned that next year you are going to be adopting IFRS financials. But starting this quarter, you already provide a note with the adjustment to book value. It looks like the adjustment is ARS2.9 million, which is about 13% of the current book value.

I wanted to know if this figure is adjusted for inflation, so if it incorporates the revaluation of the fixed assets to market prices? And also what other adjustments you have done to book value? And also, if there would be any changes to the accounting for earnings in income statement in IFRS? Thanks.

Hi, Nicolas. The main impact, it would be the revaluation of fixed assets. There is a long note in the financial statements, the note 24, that is around six pages long, with all the adjustments line by line. But basically the main impact will be a one-time effect due to the revaluation of the fixed assets of our real estate.

Then there are some [re-expressions] going forward. One, for example, is that the fees related to granting of corporate loans would be included, and we did in the financial income, and expressed in all the years of the loan. But really in terms of net income, there will be not, I would say, substantial changes.

Basically that is the main, I would say, addition or positive impact is that the fixed assets revaluation that is offset by the deferred income tax, basically. (multiple speakers)

Thanks, Pablo. Then just one more question. So far for this year, you are guiding for net income to grow more or less in line with inflation. And I think the expectations for inflation this year in Argentina are around 22%. The fact that the Central Bank increased the policy rate in April, which maybe at the beginning of the year we wouldn't have expected the Central Bank to be increasing rates this year. The fact that they did -- by 150 basis points -- does that change in any way your outlook and your guidance, both for net interest margins or the bottom line for this year? Thank you.

Well, no. We see this as a one-time move from the Central Bank because of the higher-than-expected inflation of the first quarter, mainly, I would say, March. But we still forecast 20% inflation for this year and similar levels of net interest margin and net income.

Thanks, Pablo. Thanks very much.

Alonso Garcia, Credit Suisse.

My first question is in regards to the performance of the insurance results. I just want to know if weakness was purely explained by the change in regulation in regards to the life insurance policies related to credit products, or whether there is something else as well? Also could you please comment on your efforts to replace the lost business with other sources of revenues of insurance? I also have one question after this. Thank you.

Okay. Well, basically the insurance business handled by Sudamericana Holding suffered from the lack, or the elimination I would say, of the ability to charge a life insurance on credit-related products. So it's not a seasonal effect; it's an ongoing effect. Basically the business changed. And that's why revenues, basically the premiums, dropped around 4% in the year, while administrative expenses kept on growing around inflation.

But you can see some effort there to develop other products, basically in life, saving, personal accidents, theft, home insurance; and for that they are hiring or increasing the salesforce. But the credit-related field life insurance increase in asset fee was the main negative impact on the insurance activity.

Perfect, thank you. And my second question is in regards to the -- could you please comment in regards to asset quality trends that [grow] the different segments? And also how do you expect cost of risk to evolve during the remainder of the year compared to the 3.2% this quarter? Thank you.

Yes. The cost of risk we are thinking that will be around those levels for all the year, between 3% and 3.3%, let's say. The fourth quarter last year was 4% and was, I would say, extraordinary. Again, we are seeing a recovery and an improvement towards the end of the year in asset quality, and we don't see this kind of previous cost of risk, going forward.

Very clear, thank you.

(Operator Instructions). Carlos Gomez, HSBC.

Going back to the changes in equity from IFRS, there's a difference between the equity at the Bank and the equity at the Group. The adjustment at the Group will be 2.9 (technical difficulty) if you could explain the difference between the two. Also, have you received any communication from the Central Bank as to how this capital will be treated for regulatory purposes? Thank you.

Okay. Hi, Carlos. The main reason is that the holding company was already computing the deferred tax on the credit card business, so now they have to correct that. In terms of regulatory capital, or not to correct -- if not, it would be counted twice. That's the difference, basically, the deferred income tax.

In terms of regulation on capital, so far the improvement should be tier 1 capital. And each quarter going forward, we will be disclosing in this note to the financial statements the impact on going towards IFRS.

So that means it will be tier 1 capital, and therefore we can do the calculation in that -- I don't know, 30 or 40 basis points I think you'll add to your capital base?

How many -- how much did you say?

(laughter) Actually I should have done numbers on that, but I haven't. How much do you estimate it will impact?

Well, roughly 140 basis points.

140 basis points.

Tier 1.

(Operator Instructions). Yuri Fernandes, JPMorgan.

I have just one question regarding credit cards. Actually, I would [like to listen] from you what can be the potential impact from the Central Bank changes in March for the -- not the merchant discount, but the interchange fee -- how this may affect you, and if you forecast any potential negative impact for fees for the next few quarters on this line? And that's it. Thank you.

Yes. Hi, Yuri. The gross merchant discount rate went down from beginning in April, so you are not seeing any impact on the first quarter, from 3% to 2.5% in credit cards. That will be a 2% interchange and 0.5% acquiring fee.

The impact on net income, we estimate that will be almost 0. Why? Because we want to -- we could have or take different actions, basically reduce discounts or promotions, change our internal loyalty plan, and/or increase what we charge to the cardholders.

Going forward for the following years, there is a timetable of further reduction on these fees. We will have to accommodate to that. And we also see that there will be incentives for volume growth that perhaps will be able to offset the reduction in these fees.

So basically you may be able to compensate internally and also externally, such as, I don't know, reviewing Prisma -- like the economics between you and the acquirers, basically? And also re-accommodate internally the revenues from the plans, so the net impact should be very close to zero. That's it.

Yes. And one thing that -- once Prisma is on sale, with the increase in the acquiring fee, we could be seeing a higher value for Prisma. This is something that the antitrust agency the requested the 14 owners -- the 14 banks, owners of Prisma -- to divest this company, with a higher revenue stream. Clearly the value of Prisma will be higher. And once the transaction is completed, we will receive a better price.

Okay. No, perfect. Thank you.

Jorge Echevarria, Morgan Stanley.

I just have a couple of questions. One, I want to go over -- if you could give us a little bit more detail on the decline on margins. Last call, you mentioned you expected a 50 basis point decline on the year. Just want to understand that a little bit better. Where do you see this going forward the next quarters?

And a follow-up question, I just wanted to understand a little bit more with [veto] what happened on other income. Last quarter, also, you mentioned there was an extraordinary item for the sale of a building. But, excluding this, I still see a big decline in other income. And just wanted to go over, if you have any other details on this. Thank you.

Hi, Jorge. The net interest margin compression, we are seeing it is 50 basis points, taking all the year 2016 to 2017, not on the quarter-on-quarter basis. And if you remember during 2016, there was a sequential growth of margin in second quarter, third quarter, and fourth quarter. So typically the first one is the lower in terms of seasonality.

We see that the margin was affected, or we can see that the margin was affected by still the high proportion of dollars in America deposits and dollar loans that have a lower margin or spread than the peso one. We see that evolving. We also made some asset and liability management transactions that will mean lower funding costs in dollars. So we still see this 50 basis point compression in margin for the full year.

In terms of the other income you mentioned, it's really the hardest line to estimate, because it's made by many income and expenses that typically are extraordinary or nonrecurring. The typical main components are punitive interest, recovered loans, claims from insurance, different provisions for commercial lawsuits or whatever.

As you mentioned, in the previous quarter, the number was higher due to the sale of one building we have here in downtown Buenos Aires. But if I had to guess, I would say that going forward we should see a slightly higher number. But again, it's the most difficult line to estimate and project.

Thank you, Pablo. And just a follow-up question in terms of asset quality. Did you see any particular deterioration in any sector that -- do you have any concerns in any particular sector?

Well, the deterioration was basically in individuals, not in corporates. And both at the Bank level and at the credit card companies and CFA. But again, the first quarter is the worst, I would say, in seasonal terms. Typically on the second quarter, we see all the union wage negotiations taking place, and there is a wealth effect, and typically the asset quality improves.

So, for year-end, we expect an improvement. It could be around 3.3% on a consolidated basis. If the Central Bank approves the sale of CFA before that moment, we could even see a more important improvement on the consolidated ratio, clearly.

Okay, perfect. Do you have any estimates for what would be being part of the sale of CFA on asset quality or not?

Well, CFA has 12% NPL ratio and the loans represent typically between 4% and 5% of the consolidated loan book, so it will mean something around 50 basis points on (multiple speakers).

Thank you, Pablo.

Alonso Aramburu, BTG.

Just a quick follow-up on expenses. How do you see expenses evolving this year? And do you think they can grow in line with inflation, with your 20% inflation estimate? Or do you see them growing above that?

Yes. Hi, Alonso. We are seeing expenses on a consolidated way growing slightly above 25%; so more than inflation, due to the roughly 24% increase in salaries we have in the banking union. But we are also opening branches and we are investing in digital. And also we saw increases in electricity, communications, and certain utility tariffs, plus cash transportation, with all of the [bills] we have in the Argentine financial system. So we see this kind of administrative expenses growth.

Thank you for that. How many branches do you expect to open this year?

Well, we have, I would say, an optimistic and aggressive plan: around 30 branches, some of them small, more, I would say, digital with a few people. Other, we call them advance in different -- in plant and in a client facility, near refinery, factory, and so on. So we're -- so some of them are very small. Mainly in the second half of the year, we are seeing this growth in branches. Last year we opened 19 branches in all the year. And also it was more in the second half of last year. For this year, we are forecasting something similar.

Great, thank you.

Carlos Gomez, HSBC.

I wonder if you could give us an update on Prisma. Remind us how much Galicia has in the company, and whether you have to completely divest, or you could maintain a position in it after [the sale]? Thank you.

Yes, we have 15.78% of the shares of Prisma. And the idea is that all the banks must sell the holdings, the 14 banks. I think many legal steps must be taken before the process begins. Basically all the -- that the revenue stream is clear; but also all the contracts, the approval of the antitrust agency. But the idea will be to sell everything.

And any gross timeframe? Are we talking about something to happen in the next few years, or the next few quarters?

If I had to say, it would be closer to the fourth quarter of this year.

Of this year, okay. Thank you very much.

(Operator Instructions). And I show we have no further questions.

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

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