Grupo Financiero Galicia SA (GGAL) 2017 Q2 法說會逐字稿

Welcome to the Grupo Financiero Galicia Second Quarter 2017 Earnings Release Conference Call. Today's call is being recorded.

At this time, I would like to turn the call over to Pablo Firvida. Please go ahead.

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 U.S. Federal Securities laws, and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed.

According to prior estimates, the Argentine economy showed a 4% annual growth for the second quarter of 2017, which compares with a 0.3% annual growth in the previous quarter.

In the second quarter, the primary deficit reached 1.1% of GDP and 1.5% of GDP in the first half of the year, overachieving the official target of 2% for the first half of 2017.

Considering the payment of interest, the global deficit represented 2% of GDP in the second quarter and 2.7% of GDP in the first half of the year.

According to the National Institute of Statistics, consumer prices expanded 5.4% during the second quarter and accumulated 21.9% during the last 12 months.

On the monetary front, the Argentine Central Bank expanded the monetary base by ARS 78 billion in the quarter, accumulating a 32% growth during the last 12 months.

The monthly average of the foreign currency exchange rate depreciated 3.9% from ARS 15.52 per dollar in March to ARS 16.12 in June, while the annual depreciation reached 14%.

In June 2017, the average rate on peso-denominated private sector time deposits for up to 59 days was 18.5%, the same rate of the previous quarter.

Private sector deposits in pesos at the end of the quarter amounted to ARS 1,262 billion, growing 7.7% during the second quarter and 25.7% in the last 12 months.

Transactional deposits in pesos increased 14.3% during the second quarter, and peso-denominated time deposits increased 0.5%.

At the end of March -- end of June, sorry, loans to private sector in pesos amounted to ARS 1 billion -- ARS 1,036 billion, recording an 8% increase from March 2017 and a 30.2% annual increase.

Turning now to Grupo Financiero Galicia. Net income for the quarter amounted to ARS 1,835 million, 33% higher year-over-year, mainly due to profits from Banco Galicia for ARS 1,664 million, with a 44% increase as compared to the same quarter of fiscal year 2016, in Sudamericana Holding for ARS 801 million with a 48% decrease and in Galicia Administradora de Fondos for ARS 98 million with a 188% increase.

The increase in advance net income from the year ago quarter was a consequence of the 51% year-over-year growth of net operating income offset by a 35% increase in administrative expenses and a 100% increase in provision for loan losses.

Net financial income grew 62%, mainly due to the increase in the portfolio of loans to private sector and a higher spread, while net income from services grew 38%, mainly due to fees related to regional credit cards, to deposit accounts and to credit.

Average interest earning assets grew ARS 48 billion year-over-year and its yield decreased 521 basis points, explained by a 461 basis points decrease in the average interest rates on the portfolio of loans to private sector and a 789 basis points decrease in the average interest rate on government securities.

Interest-bearing liabilities grew ARS 42 billion during the same period and its costs decreased 862 basis points, as a result of the lower average interest rate on all its components, mainly on time deposits, which decreased 961 basis points.

Provision for loan losses for the quarter amounted to ARS 1.4 billion, ARS 726 million higher than in the same quarter of the prior year, mainly due to those related to the individual's loan portfolio and to an increase of regulatory provisions as a consequence of the increase in the loan portfolio.

Administrative expenses were 36% higher year-over-year with personnel expenses growing 32%, mainly as a consequence of salary increase agreements with the unions, the provision related to certain compensations and to nonrecurring human resources expenses.

The remaining administrative expenses grew 46%, mainly due to increases in cash transportation, electricity and communications, security services, maintenance and taxes.

The bank's credit exposure to private sector reached ARS 882 billion at the end of the quarter, up 52% in the last 12 months and deposits reached ARS 859 billion, up 34% in a year as a consequence of the 14% increase of peso-denominated deposits and of a 127% increase of dollar-denominated deposits.

The bank's estimated market share of loans to private sector was 10.38%, increasing 85 basis points in the last 12 months and the market share of deposits from the private sector was 9.51%, decreasing 9 basis points in the same period.

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 3.59%, recording a 15 basis points deterioration as compared with the 3.44% of the second quarter of the prior year.

The consolidated coverage of NPLs with allowances reached a 100%, down from a 103% recorded a year ago.

As of June 30, 2017, the bank's consolidated computable capital exceeded by ARS 8 billion, the ARS 18 billion minimum capital requirement or 44%, and the regulatory capital ratio reached 11.8%, growing 82 basis points from June 2016.

The bank's liquid assets at the end of the quarter represented a 58% of the bank's transactional deposits and 37% of its total deposits compared to 92% and 46% ratios from a year before, respectively.

In summary, during the second quarter of 2017, Grupo Financiero Galicia subsidiaries had good operating results. Banco Galicia, which accounted for 91% of Grupo's net income, was able to gain market share of loans to private sector to keep its asset quality, liquidity and profitability metrics at reasonable levels and improve its capital rates.

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

(Operator Instructions) We'll take the first question from Nicolas Riva with Citi.

So my question is going to be on the capital increase -- potential capital increase. So you recently called for a shareholders' meeting that's going to be August 15 to approve a primary equity offering of up to 150 million shares. So I wanted to know your thoughts in terms of when you could be launching the offering, especially given that we saw major reductions in Argentina in October and recently we have seen a pullback of installed prices from some Argentine banks.

The shareholder's meeting will be on August 15. As you mentioned, the proposal from the Board of Directors is approved that will allow the Board of Directors to conduct a capital issuance within 2-year period. So really, according to the market prices as you mentioned, the political expectations and so on could be launched anytime depending on these factors. Really this doesn't mean it will be launched tomorrow or after the shareholder's meeting. Sorry, I cannot be more precise on that front.

But, Pablo, would you be inclined to wait until after October 22, until after the mid-term elections to mainly do this? Or anything you can say there?

This could be either way, before, after or perhaps next year, really -- according to the reality of the market when we are ready with all the legal approvals.

Okay, and one more on these. If I look at your Tier 1 ratio right now, it's 9% in June and depending on the size of the offering, could increase up to around 450 basis points. So it could go up to around 13% after the offering. Any number that management has in mind as an optimal or as a target Tier 1 ratio?

Well, the numbers you mentioned are in line with our numbers. The things that we are seeing lots of opportunities going forward. So in more, I would say, this rate is our number for the total period for Tier 1, the ratio would be around 11%, 11.5%. So in the scenario you mentioned of growing to 13.5%, with the growth of loan book and perhaps other investment opportunities could go down to something around 11%, 11.5%.

We'll go next to Carlos Macedo with Goldman Sachs.

We did see this quarter a big increase or acceleration here in loan growth at corporate levels, what kind of drove the -- or moved the needle on loan growth there and led you all the way up to where you are now. Can you talk a little about the segment, what you're seeing there? And what do you think demand is? And what do you think the growth can be in that segment? The second question is kind of related to that, and to the prior question by Nicolas. What kind of -- so when you [raided] this capital, was it deployed in organic growth like this? Are you looking for acquisitions, or it's just organic, based on the opportunities that you're seeing?

The growth in loans to corporate -- to corporates was in different sectors of the economy. Actually, out of 12 sectors of the economy, according to the GDP calculation, 11 began to grow in the second quarter. If I had to mention some bigger agricultural sector, construction both in public and private, energy, oil and gas, mining and also renewable energies, also some car terminals, growing traders in different sectors. And part of that growth was due to the inflow of dollars we received with the tax amnesty plan. So you saw a much higher liquidity and high deposits in dollars in the previous 2 quarters basically that took time to allocate too long to big corporates. Going forward, we see growth in all the segments, both of the economy and by type of client.

Going to the second question. We want to have a stronger capital ratio in order to do or be prepared for both alternatives, not only organic growth but also inorganic if a good opportunity appears in the market.

Okay, just a follow-up then. When you talk about -- I remember at the beginning of the year, you were talking about maybe 10% to 15% real growth in loans for this year. You're above that right now. Is that 10% to 15% still a target? Do you think you're going to be able to deliver more? I mean, where do you stand at this point?

The initial target was, as you mentioned, around 35% nominal growth, with an expected inflation of 20%. Right now, inflation is going to be a little bit higher, but not above 22%, that is our expectation. It's likely that the nominal growth of loans booked would be above 35%. So the real growth would be above 15%, let's say, between 15% and 19%.

We'll go next to Gabriel [Nabrogo] with UBS.

My question is more on the asset quality. We saw the asset quality deteriorating and together with that cost of risk, I just wanted to get a sense of -- I wanted a bit more color on what you're expecting for the asset quality going forward? And should we work with the cost of risk around 3% for the end of the year? And my second question, it is about margins. Could you guys give us sort of a sensitivity on the NIMs? If the Central Bank cuts interest rates by 100 bps until the end of the year, how much do you guys see that could charge in the NIMs?

The asset quality deterioration was something we were expecting, typically the first and second quarters are low in terms of seasonality, salary increases, typically all the negotiations finished around May or June. So typically, the third and fourth quarters are better for collections. People have a higher salary and the reason between the inflation and salary increases clearly is different. There is a lag. So going forward, we expect an improvement in NPLs.

Also considering that, it is likely that we will be deconsolidating -- if that's a word in English, the FAE once we get the approval from the Central Bank to sell it. The cost of which, going forward, should be more similar to the third quarter and also the fourth quarter of last year, closer to 3%, 3.2%, not the 3.7% loan loss provisions to average loans we've had in this second quarter. In terms of NIMs -- really the NIMs that we were forecasting to slightly compress are going in the opposite direction. Many changes are occurring in the market. So to give an idea, last year NIM was 12%. For this year, we were forecasting 11.5% and right now, we are around 12.5%. So it's hard to be so accurate on all these. But the compression in the Central Bank yields or the reduction in the Central Bank yields typically affects not only the rates we can charge to the private sector with our loans, but also the cost of funding. So many times it moves in parallel and doesn't affect that much the wholesale, I would say, or the full NIM. And so basically, we don't see many or -- in a rate and easy to calculate impact on this movement, on this variable.

All right. So should we work with the NIM ending the year 2017 around the same as last year around 12%?

Well, I'm sure if you asked that question to all the research analysts in line, everybody will have a different view. But we still think that there could be a compression of 50 basis points for the full year for 2017. So typically or clearly in the second half of the year, we should have some smaller NIMs, not dramatic as inflation, it's a little bit higher than forecasted at the beginning of the year, but if everything evolves as we think, there should be some compression in the third and fourth.

(Operator Instructions) We'll go next to Carlos Gomez with HSBC.

My question is about Prisma, the credit card company and that the banks have agreed to dispose of. Can you give us an update on the situation? And do you still expect that sale to happen before the end of the year?

Carlos, on Prisma, the last news we have is that the antitrust agency is analyzing the proposal issued or given by the 14 owners, the 14 bigger banks of the system. They are analyzing that. And perhaps as we are already nervous, it will be hard to get to the end of the year, but the process should be delaying, I don't know, 60 days. So perhaps it will -- it could occur in the first quarter of next year. We will keep you informed of any relevant news on that.

Would you [consider] a change of management at Prisma, would that affect the process?

There was a change in the Chairman, but really, in my opinion, will not affect even the operations or the decision or any impact. The Chairman had a long time being a Chairman in Prisma, in Visa Argentina in the past. But really, it was -- I don't know exactly the size, but he was very close to retirement. And the CEO is being the Chairman now in position.

Okay. And if I can ask one more. You have grown really a lot this quarter on a year-on-year basis. Should we understand that with the anticipation of a capital increase, you are now able to respond more powerfully to demand? Is this more demand-driven or have you been more willing to lend in the last couple of quarters?

Well, in my opinion, both things. We saw this inflow of dollar deposits, we wanted to allocate those deposits to launch through the private sector, mainly through exporters, but also we are seeing demand. So it's both, I would say, push and pull. And going forward, we think we must be prepared with our capital position in order to be able to face a growing demand, that is, in some cases could be even surprising the most optimistic people.

And would you say again, looking at the month-to-month figures that confirmed right now is for further acceleration or it has stabilized at the current levels?

Sorry, couldn't hear you, Carlos.

Yes. You've -- when you look at the weekly or monthly numbers, would you say that the trend at this point we'll see the aggregate French [rate] that you see at the bank level, would you say that your demand -- the demand that you find there and the lending that you're doing, is it accelerating or has it stabilized at this very level?

It's accelerating.

It's still accelerating? Okay, thank you very much.

We'll go next to Yuri Fernandes with JP Morgan.

Congrats on [great] results. I have just one question, a follow-up on margins. Actually, on the cost of funding, it has been declining more than the interest earning assets used, but specifically something that's caught our attention here is on savings accounts. It has gained a lot of share, it's growing much faster and this is a cheaper, [funny]. So if you can like provide more details, you should have to change your strategy, what's going on with the saving accounts? And if you believe this trend will continue, perhaps allowing more, I understood your message on margin's pressure, but maybe this can be something to help this pressure?

Well, basically, the objective of the bank, in general, is to have, as much as possible deposits -- transactional deposits that have almost 0 cost, both saving accounts and checking accounts. The growth in saving accounts was both in pesos and in dollars. Typically, saving accounts are more tied to individuals, and a big portion of that is tied to agreements with companies to pay the salaries at our banks. So it's related to payroll, let's say, accounts. In the case of checking accounts, it's more tied to companies. So we invest a lot in transactional capabilities in order to have a good share of cheap deposits.

In the case of time deposits, many times, we prefer not to pay, let's say, a higher interest rate if we have enough liquidity. So basically what happened this quarter is as we kept our strategy of growing as much as possible transactional deposits, and we didn't accept to pay higher interest rates because we were fine with our liquidity. Typically, the time deposits we are not willing to pay are for the ones of wholesale investors or insurance companies or regional banks or these kind of clients. The retail business, of course, we satisfy it. So going forward, the evolution should be similar. Also, the wholesale time deposits are competing with Lebac. I mean, the wholesale investors are shifting from time deposits in banks to Lebacs issued by the Central Bank. That -- basically, that is the reason of why the weighted average cost of deposits came down.

Just a second question here, on the regional credit cards, we note like a decline quarter-over-quarter and year-over-year. And as you did, this is mostly related to the change in regulation of the interchange fees, right. So do you think this decline will continue in the same pace? Or the second quarter was the biggest, let's say, the biggest impact of the year and going on, you expect to start increasing, not giving as much discount as before and increasing the annual fees and things like that, so kind of strategies? Or may we see some still, I don't know, bigger impact on the regional credit cards?

Well, the impact on the regional credit cards shouldn't be that important because most of their -- the bank [asset] fees will come from the card holders. What impacted the bottom line of the credit cards was mainly the cost of risk -- the asset quality of the credit cards deteriorated from 6.5% to 8.2%, if I don't remember wrong. Going forward, we think it will improve both the asset quality, the cost of risk will go down and also the net income should be better. On addition, the increase in salaries that typically affects quicker the cost and the pass-through to revenues takes a little time. So the second half should be better than the first one.

Okay, but there was any major part of the interchange like regulation or no? It's more like the cost of risk and the higher salaries as I said?

In the credit card company, there was a marginal impact. The bigger impact was in the bank. If you look at one chart that we have, that is the detail or the breakdown of the fees, the different fees we have, you will see the national card's reduction in fees was much more important. Of course, part of that will be compensated through a bigger dividend from Prisma and also some or partially this reduction in fees of the cards issued by the bank will be compensated through lower promotional expenses. Again, that's (inaudible) time.

Just a final follow-up. What's your take on Prisma? It's around 15% right or so?

15.8%.

We'll go next to Alonso Aramburu with BTG.

Can you comment on expenses and everything growing in the mid-30s? How should we expect this to continue in the second half of the year? And looking into next year, with inflation coming down, how fast do you think they can continue to -- or they can decline? Or how long will they take to lag inflation basically?

Alonso, the expenses -- well, 54% of expenses are personnel expenses. This quarter, we had some extraordinary items due to restructuring expenses. But just basically there, there was a 24% increase in the banking union. At the bank level, we also increased the personnel like 600 or so employees are -- although the credit card companies declined, the personal banking union is more expensive than the commercial union. So, in total, there was an impact there due to decrease in the banking employees. Going forward, underwrite of the costs, they have a certain way -- a percentage increase related to the Union increase, while the increases in salaries of the different unions, we see it in security and very clearly in cleaning, maintenance and so on.

We also have very high expenses on cash transportation. We think that for the second half that the cost will improve dramatically. So adding all this, if we consider an inflation of 21%, 22% for this year, total administrative expenses will be growing roughly at 30%. Next year, depending on inflation, clearly, well, if it goes down from 21%, 22% to, let's say, 15%, expenses should grow something above that, perhaps 18%, 20%. Of course, we don't have yet, I would say, a fine or a detailed budget, but typically, as we are investing in digital and also expanding our branch network, it will be really hard to have expenses below inflation. But definitely, our objective is to have fees and financial income growing above inflation so that the efficiency ratio keeps growing.

And with no further questions in the queue, I'd like to turn the call back over to Pablo Firvida with any additional or closing remarks.

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

That does conclude today's conference. We thank you for your participation. You may now disconnect.