Grupo Financiero Galicia SA (GGAL) 2017 Q4 法說會逐字稿

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

At this time, I'd like to turn the call over to Mr. 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 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 private estimates, the Argentine economy recorded a 3.4% year-on-year increase during the fourth quarter of 2017, a mild deceleration when compared to the 4.2% from the previous quarter and reaching 2.7% expansion during 2017.

During the fourth quarter, the primary deficit amounted to ARS 882 billion, accumulating ARS 404 billion in 2017 or 3.9% of GDP, overachieving the official target of 4.2%.

According to The National Institute of Statistics, the CPI accumulated a 6.1% hike during the fourth quarter, and so annual inflation for the whole year reached 24.8%.

On the monetary front, the Argentine Central Bank expanded the monetary base by ARS 833 billion in the quarter, growing 26.7% when compared to the same period of 2016.

Meanwhile, the exchange rate averaged ARS 17.73 per dollar in December, a 2.8% depreciation against the ARS 17.24 per dollar average for September last year. During 2017, the Argentine peso depreciated 18.4%.

In December 2017, the average rate on peso-denominated private sector time deposits for up to 59 days was 21.9%, 200 basis points above the average recorded at the end of the previous quarter. Private sector deposits in pesos at the end of the year amounted to almost ARS 1,450 billion, increasing 13.4% during the quarter and 26.3% in the last 12 months. Transactional deposits in pesos picked up 28.5% in the quarter while peso-denominated timed deposits rose 22.6%.

At the end of 2017, loans to the private sector in pesos amounted to ARS 1,328 billion, recording a 14.7% increase in the quarter and 45.2% during the year.

Turning now to Grupo Financiero Galicia. Net income for 2017 amounted to ARS 8.3 billion, mainly due to profits from Banco Galicia for ARS 6.9 billion, from Galicia Administradora de Fondos for ARS 428 million and from Sudamericana Holding for ARS 415 million.

Net income for the quarter amounted to ARS 2.7 billion, 51% higher year-over-year, mainly due to profits from Banco Galicia for ARS 1.8 billion, in Sudamericana Holding for ARS 138 million and in Galicia Administradora de Fondos for ARS 132 million. It also includes financial results for ARS 700 million related to the yield on the bonds held by Grupo during the fourth quarter.

The increase in the bank's net income from the year ago quarter was a consequence of the 29% year-over-year growth of net operating income, offset by the 28% increase in administrative expenses and a 12% increase in provision for loan losses.

Net financial income grew 38% mainly due to the increase in the portfolio of loans to private sector and a higher spread while net income from services grew 16% mainly due to fees related to regional credit cards and to deposit accounts.

Average interest-earning assets grew ARS 58 million year-over-year and its yield decreased 169 basis points mainly due to a decrease of 216 basis points in the interest rate on loans, partially offset by 115 basis point increase in interest rate on government securities.

Interest-bearing liabilities grew ARS 50 million during the same period and its cost decreased 207 basis points, primarily as a result of 56 basis point decrease in the average interest rate on time deposits.

Provision for loan losses for the quarter amounted to ARS 1.5 billion, ARS 157 million higher than in the same quarter of the prior year, mainly due to those related to the individual's portfolio and to an increase of regulatory provisions on loans in normal situations as a consequence of the growth in volume.

Administrative expenses were 28% higher year-over-year with personnel expenses growing 26% 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 30% mainly due to increases in maintenance, security services, cash transportation, electricity and communications and taxes.

The bank's credit exposure to private sector reached ARS 224 billion at the end of the quarter, up 43% in the last 12 months. And deposits reached ARS 204 billion, up 34% in the year as a consequence of the 32% increase of peso-denominated deposits and of 38% increase of dollar-denominated deposits.

The bank's estimated market share of loans to private sector was 10.1%, similar level as of the end of the year ago quarter. And the market share of deposits from the private sector was 10.3%, increasing 33 basis points in the same period.

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 3.36%, recording a 5 basis points increase as compared with the 3.31% of the fourth quarter of the prior year. The consolidated coverage of NPLs with allowances reached 97.3%, down from 100% from a year ago. Without considering figures from CFA due to its sale, these ratios would have been 2.9% and 103.8%, respectively.

As of December 31, 2017, the bank's consolidated computable capital exceeded by ARS 7 billion, the ARS 22 billion minimum capital requirement or 31% and the regulatory ratio reached 10.7%. It is worth to mention that according to regulations, capital contributions made in kind can be computed only after being approved by the Argentine Central Bank, approval that was granted in January 2018. If this capital contribution had been taken into account as of the end of this fiscal year 2017, the regulatory capital ratio would have reached 14.32%.

The bank's liquid assets at the end of the quarter represented 67% of the bank's transactional deposits and 44% of its total deposits compared to 72% and 47% ratios from a year before, respectively.

In summary, during 2017, Grupo Financiero Galicia subsidiaries had good operating results. Banco Galicia, which accounted for 83% of Grupo's net income was able to substantially increase its loan book and deposit base in real terms, keeping its asset quality, liquidity and profitability metrics at reasonable levels.

In addition, I'd like to mention that the changes announced during the last months in connection with the capital contribution to Banco Galicia, the merger of Tarjeta Naranja and Tarjetas Cuyanas, the acquisition of a 6% additional interest in Tarjetas Regionales, the spin-off after which this company will be directed under the control of Grupo Financiero Galicia on the sale of CFA are taking place during the first months of 2018 as well as the implementation of IFRS.

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

(Operator Instructions) We'll take our first question from Gabriel Nóbrega from UBS.

During this quarter, we saw an increase in your provisions. And I just wanted to understand where cost of risk should go in 2018 as we also take into account the approval of CFA. And moreover, if you were seeing any asset quality concerns. And I'll make my second question afterwards.

Okay. Without CFA, the cost of risk should go down. Our estimate for 2017 -- 2018 sorry, considering the bank and the credit card companies merge now will be between 2.6% and 2.8%. And asset quality in -- for -- in terms of NPLs will also go down. The NPL ratio due to the deconsolidation of CFA actually from 3.36%, we estimate that we could go to 2.9%. It's a pro forma without CFA. And we don't see any deterioration or dramatic improvement. Basically, our guidance would be flattish consolidated NPL ratio.

All right, that's very clear. And also during the quarter, we saw that the OpEx grew around 30% year-over-year and that's all above inflation. I just want to get a bit more color on what happened, and moreover, as possible salary readjustments begin to happen where should we see OpEx growing this year?

Yes. In the fourth quarter, we saw extraordinary -- an extraordinary expense, roughly ARS 240 million, due to restructuring of the payroll, basically agreements like severance payments that will not be recurrent. We are estimating for next year an inflation slightly above the objective of the Central Bank, the objective of the Central Bank is 15%. We think it could be closer to 18%. And our OpEx should be something above this 18%. Of course, that depends on what will be the final outcome of negotiation with the union. But we are also in the process of opening branches. As you saw, we opened 19 branches in the fourth quarter and it's likely that in the next year we could be opening between 25 and 30, so that put some slight pressure. It's not a dramatic increase, so basically considering all these, OpEx should be something around 20-plus.

(Operator Instructions) We'll move on to our next question from Mario Pierry from Bank of America Merrill Lynch.

Two questions from my side. First one is related to the credit lending in Argentina. We did see an acceleration in lending to large corporates. However, we saw a deceleration in lending to SMEs while loans to individuals the growth rate remained elevated, but it remained stable. So I guess, part of that reflects a weaker economy, but I wanted to get your perspective then for growth in 2018 and which segments should be driving that growth. And then I'll ask my second question.

Sure. Mario, we are seeing a high nominal growth rate in loan growth, around 20%. We saw that for last year, 2017, and we are also expecting around 20% real growth in loans. Loans to large corporates could be the main driver, but we also see substantial positive growth rates in real terms for SMEs and individuals. Individuals, perhaps not so much as in the past, credit card financing that is more tied to the inflation and the evolution of prices in the economy. But the mortgages are clearly one product that has been growing dramatically and we foresee that, the growth, also for next year. But all in all, we are forecasting something around 40% nominal growth for 2018.

Okay, that's clear. And then second question is related to your fee income. Clearly, growing slightly below inflation, as you've seen pressure here on your cards from changes in regulation. Do you think then, in 2018, we could see growth above inflation? Or do you expect, first, to continue to see pressure especially on the card businesses?

Well, the merchant discount rate was reduced in year 2017. It went down from, I remember, beginning April and so it was an agreement began in April 1 last year, the merchant discount rate went down from 3% to 2.5%. And also out of that 2.5%, 2% was for the issuer, for the banks, and 0.52% to Prisma, right? This year, there is a further reduction, but less important. Basically from 2.5%, it goes down to 2.35%. So the reduction will be less, and we hope that with an increase in volume, we could be offsetting that. And out of that 2.35%, Prisma will keep on getting 0.5% and the banks 1.85%. We also are reducing gradually expenses related to credit cards, mainly discounts and promotions, but this reduction has a lag and we are in a very competitive environment. But on the other hand, we have more flexibility to raise prices and/or volume in other products or bundles of products. So we are expecting a fee growth something above inflation for next -- for this year.

Our next question comes from Nicolas Riva from Citi.

My first question is on your deposits. We continue to see the deposits in foreign currency, in dollars, growing at a very fast pace, right now they are more than 1/3 of your total deposits. So my question here is what's driving this fast growth in U.S. dollar deposits? If this is still money coming from the tax amnesty program, making its way back to the banking system? And if you are worried about this in terms of the outlook for net interest margins for this year, given that you make lower spreads on your U.S. dollar loans. Then I'm going to make my second question.

Okay. Well, part of the growth in the dollar-denominated deposits is the valuation. These are expressed in pesos. So in dollar terms, the increase was not that important, first comment. We don't see deposits in dollar growing at a faster pace than deposits in pesos for this year. We have a close position there in foreign currency. Of course, it affects NIM, but putting all the variables together, we are forecasting some slight conversion of NIM for this year, around 50, 60 basis points. We were already forecasting that for 2017 and it didn't happen, it occurred the opposite, NIM went up 100 basis points. But for this year, we are forecasting this type of compression.

Right. So you said the compression in NIMs this year between 50 and up to -- you said 70 or 100 basis points this year compression in NIMs?

No, 2017 was a 100 basis points increase. For 2018, compression between 50 and 60.

Between 50 and 60 for this year, okay. And then my second question is on your coverage ratio. If I look at the coverage of reserves to NPLs, it's fallen below 100%. And I know that you have a different loan mix than some of your peers. You had a bit of rescaled loan portfolio in a way with the credit card business. I noticed -- now you have sold -- up until now you had CFA, the consumer finance business. Do you feel comfortable with this level of coverage ratio? Should we expect to see an increase in the coverage this year maybe as you take the opportunity to book higher provisions given that you expect to have strong results?

Well, the consolidated coverage, as you said, it was 97%, but without CFA. But with -- and the credit card business was 104%. So once we sell CFA, this type of levels of coverage will be resumed, I would say, between 100 -- around 105 and 110. That is the typical level of coverage we feel comfortable with and also due to the regulations in place.

We'll take our next question from Domingos Falavina from JPMorgan.

My question is more like on the bank's view sort of 2018. We've been noticing the Argentine peso a little bit softer, the Central Bank cut rates adding some pressure also on the currency, stocks have been on the lighter side. So my question is basically what kind of real rates do you see for the average of 2018 or for the year-end? You see the Central Bank cutting rates to which extent and inflation at which point? And how comfortable are you with those levels of real rates around currency? What's your expectation for currency? And then I'll ask the second question.

Okay. Our expectation is that the BADLAR rate it shouldn't vary too much through the year, around the 22%, 23% level as we are forecasting inflation around 18%. The real interest rate on [wholesale] time deposits will be around 5 percentage points. We are forecasting that the yield on the [banks] will be going down through the year and it's likely that they will be kind of converging towards the second half of the year. And our expectation for exchange rate at the end of this year, the last number I saw from our research department was a ARS 21.5, ARS 21.6 per dollar.

And in this outlook, just -- I'm not sure if I missed the presentation, I didn't see in the website, but like your expectation for -- at your system or for your own loan book growth this year and for margins so that we check our models.

Yes, for this year, we are forecasting 40% loan growth, nominal, but roughly -- or about 20% in real terms. And margins with some slight compression, between 50 and 60 basis points.

Okay. No major change. All right.

Our next question comes from Marcelo Telles from Crédit Suisse.

Marcelo Telles, Crédit Suisse. A couple of questions. Can you comment on what is the level of Tier 1 ratio that you are comfortable, you see as sustainable for you? And my other question, if you can give us an update on the potential sale of Prisma.

Yes. In our comfortable level with a Tier 1 ratio is around 11%. And you saw in the press release that pro forma, the total capital ratio was 14.3% and Tier 1 was 11.8% and then we will see some increases due to IFRS and other restructuring like the sale of CFA. So we are comfortable with the capital ratio. In the case of Prisma, in the last information we have is that in the next 2 weeks, an information memorandum could be available and finished once all the contracts in terms of noncompete, exclusivity and so on are being signed at these dates. And the idea is to have the sale of at least 51% of the shares of Prisma completed by the end of September this year.

And one additional question, if I may. It would take a little bit more long term, what do you think it's going to be, your ROE down the road like 3, 4 years down the road, what do you think ROE can be versus let's say the underlying inflation?

Well, my first reaction would be the highest, the better. Then typically, what we are seeing is an increase in the gap between the nominal ROE and inflation. And thinking long term, I think that this Argentine financial system should be comparable to other Latin markets. If we achieve this 5% inflation the Central Bank is forecasting for 2020, perhaps nominal ROE could be closer to 20%, 20%-plus or around 20%, similar to other LatAm countries, but this will be a gradual trend definitely.

We will take our next question from Alessandro Arlant from Bank of America Merrill Lynch.

Two questions for my side, if I may. The first one is picking up on the capitalization issue. I mean, there has been the capital contribution that increased a lot, the capitalization of the bank in the fourth quarter. And according to our estimate here, the additional sale of stake of CFA and IFRS is going to probably increase the capitalization another 150 basis points. So basically, you're taking your Tier 1 to north of 13%. And in addition to what you just mentioned with the Prisma sale and obviously with the level of profitability that we're forecasting for 2018, it's a very comfortable Tier 1 ratio. So basically, my question is strategically thinking for the next couple of years, I mean, what will be the use of this capital buffer that you have, right? Is it going to be able to grow organically? Are you thinking about paying a dividend, I'm talking about the bank specifically to the holdco? Are you thinking about any strategic acquisitions? So if you could give us some clarity on that, it would be greatly appreciated.

Yes. I think, well, the 3 possibilities you mentioned, growing organically, we are always open to potential acquisitions. And after many years of the shareholders not receiving a decent dividend, there is alternative to increase the payout ratio, but that's not to be defined in a couple of months. But on the other hand, the organic growth we are seeing is relevant. So this is something that is permanently being analyzed and balanced.

In the...

Sorry. One more thing, sorry. And if there is be a nice opportunity to acquire a bigger bank, we don't discard going back to the markets, but this is not the best case scenario. The best case scenario is growing organically.

Okay, great. Is there any idea in terms of dividend payout? Is it going to resemble your peers in Latin America because I know you had a restriction for dividends and that is lifted. And so now as you think about potential dividend policies, is there a range, I mean, closer to, let's say, 25%, closer to 50%? Or how is that set?

Well, it's not yet set. The holding company receives dividends from the insurance company and from the asset manager. It will begin receiving dividends from the credit -- regional credit card company. And luckily, from the bank, it still is very early to set a number, but definitely, I don't see something above 20%.

(Operator Instructions) We'll go ahead with our next question from Ernesto Gabilondo from Bank of America Merrill Lynch.

A couple of questions from my side. First, when looking to the insurance revenue, we saw -- it has been showing year-over-year contractions in the last quarters. So any outlook that you can provide for this line will be much appreciated. And for my second question, it's regarding your effective tax rate. Is it reasonable to expect 36% this year? I don't know if the tax reform actually we can expect a lower tax rate at some point.

Yes. The insurance business, they are held by Sudamericana Holding, suffered a decrease in its revenues due to the prohibition from the Central Bank to -- for banks to charge a fee on life insurance with credit-related products. So that was a big -- I would say the main source of revenues for Sudamericana Holding. Gradually, it changed the mix of its premiums and that's why also the operating costs are growing because we are developing new products, new sales force in order to sell other products. Definitely, we are very optimistic with the insurance business growth because it has new products like retirement products or life products, thinking in a longer-term type of product. So definitely, from these levels, we see upside, not downside. In terms of the effective tax rate, the law changed the rate on the income tax from 35% to 30%. So generally speaking, the effective tax rate should be decreasing around 5 percentage points for this year, 2018.

(Operator Instructions) It appears that we have no further questions at this time. I'll turn it back over to you.

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

This concludes today's call. Thank you for your participation. You may now disconnect.