Grupo Financiero Galicia SA (GGAL) 2018 Q1 法說會逐字稿

Good day, and welcome to the Grupo Financiero Galicia First Quarter 2018 Earnings Release Conference Call. This call is being recorded.

At this time, I would like to turn the conference call over to Mr. 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 private estimates, the Argentine economy recorded a 5% year-on-year increase during the first quarter of this year, a mild deceleration when compared with the 5.3% increase of the previous quarter. In 2017, the GDP ended the year with a 2.9% expansion.

During 2018's first quarter, the primary deficit amounted to 0.3% of GDP or ARS 31 billion, overachieving the official target of 0.6% of GDP for such period.

It is worth highlighting that the government has decided to strengthen this year's primary fiscal goal, which now stands at 2.7%. Previously, the target was 3.2%, entailing a 1.1% reduction in terms of GDP.

According to The National Institute of Statistics, the national consumer price index accumulated a 6.7% hike during the first quarter of the year. Annual inflation stood at 25.4% in March 2018.

On the monetary front, the Argentine Central Bank contracted the monetary base by ARS 5.6 billion in the quarter, a 29% growth in the last 12 months.

Meanwhile, the exchange rate averaged ARS 20.24 per dollar in March, a 14.2% depreciation against the average for December 2017. When compared to March 2017, the Argentine peso recorded a 30.4% depreciation.

In March, the average rate on peso-denominated private sector time deposits for up to 59 days was 21.8%, 10 basis points below the average recorded in last December.

Private sector deposits in pesos at the end of the quarter amounted to almost ARS 1,485 billion, increasing 2.4% during the quarter and 26.8% in the last 12 months. Transactional deposits in pesos fell 5% during the first quarter, while peso-denominated timed deposits rose 12.1%.

At the end of March, loans to the private sector in pesos amounted to ARS 1,431 billion, recording an 8.1% increase during the quarter and a 49.2% increase during the last 12 months.

Turning now to Grupo Financiero Galicia. In the first place, I would like to remind you that since January 1, 2018, figures are reported in accordance with IFRS and also that since that date, some changes in our organizational structure became effective. Being the most significant, that's 83% of Tarjetas Regionales is currently under the direct control of Grupo Financiero Galicia due to its spinoff from the bank and also after the acquisition of the 6% additional interest in said company. And the other important change was the sale of CFA.

Having said this, Grupo Financiero Galicia's net income for the quarter amounted to nearly ARS 3 billion, 109% higher year-over-year. This was mainly due to profits from Banco Galicia for ARS 2 billion; in Tarjetas Regionales for ARS 699 million; in Galicia Administradora de Fondos for ARS 159 million; and in Sudamericana Holding for ARS 146 million.

In addition, it includes net operating income of ARS 71 million, partially offset by administrative expenses of ARS 29 million.

Going to Banco Galicia, which accounted for 66% of Grupo's results from equity investments, the 50% increase in the net income from the year-ago quarter was a consequence of a 53% increase in net interest income, and a 70% increase in net fee income, offset by a 34% increase in personnel and administrative expenses.

The net operating income increased ARS 3 billion or 51%. The growth of net interest income was mainly due to the increase in the portfolio of loans to the private sector and higher spreads, and that of net fee income is mainly related to fees on deposit accounts.

Average interest selling assets grew ARS 62 billion year-over-year, and its yield increased 63 basis points, mainly due to a 570-basis-point increase in the yield on government securities.

Interest-bearing liabilities grew ARS 55 billion during the same period, and its cost decreased 83 basis points, primarily as a result of a better mix of deposits.

Provision for loan losses for the quarter amounted to ARS 963 million, ARS 432 million higher than in the same quarter of the prior year, mainly due to those related to the Individuals portfolio and to an increase of regulatory provisions on loans in normal situations as a consequence of the growth in volumes.

Personnel expenses increased 27% as compared to the year before, mainly as a consequence of salary increase agreements with the unions. And administrative expenses grew 43%, primarily due to increases in the level of activity and of expenses related to services provided to the bank.

The bank's credit exposure to the private sector reached ARS 196 billion at the end of the quarter, up 50% in the last 12 months. And deposits reached ARS 198 billion, up 27% in the year. The bank's estimated market share of loans to the private sector was 9.54%, 26 basis points lower than at the end of the year-ago quarter. And the market share of deposits from the private sector was 9.67%, recording a 42-basis-point decrease in the same period.

As regards asset quality, the NPL ratio ended the quarter at 2.41%, recording a 66-basis-point increase as compared with the 1.75% of the first quarter of the prior year. And the coverage of NPLs with allowances reached 103.5%, down from 122.3% from a year ago.

As of December 31, 2017, the bank's consolidated computable capital -- sorry, as of March this year, the capital exceeded by ARS 20 billion, the ARS 26 billion minimum capital requirement or 77%, and the regulatory capital ratio reached 14.6%, increasing 289 basis points from the same quarter of fiscal year 2017.

The bank's liquid assets at the end of the quarter represented 64% of the bank's transactional deposits and 39% of its total deposits compared to 84% and 50% ratios from a year before, respectively.

Going now to Tarjetas Regionales, which accounted to 24% of Grupo results from equity investments, the 22% growth in the net income was due to a 35% increase in net interest income and a 16% increase in net fees and other operating income, partially offset by increases of personnel and administrative expenses by 23% and 34%, respectively.

Net loans and other financing grew 32%, while the NPL ratio reached 6.86%, improving 83 basis points during the last year. And the coverage provisions for loan losses was 108%, up from 99.7% as of the end of the first quarter of 2017.

In summary, during the first quarter, Grupo Financiero Galicia subsidiaries had good operating conditions, with strong loan growth, higher margins and improvement in efficiency. Asset quality slightly deteriorated and it is being closely monitored.

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

(Operator Instructions) We'll take our first question from Ernesto Gabilondo with Bank of America.

Three questions from my side. The first one is, if you can explain which were the key accounting changes from the implementation of IFRS? From what we noticed, a part of NII and fees was reclassified to market-related revenues and other income. But I don't know if there's something else that we're missing.

The second question is, given the peso depreciation, the slightly higher inflations levels and the high interest rate environment, when do you see we can start to see an impact in loan growth and asset quality if this lasts for more than this quarter? In this high interest rate environment, what could be the impact for your NIM? And how should we expect the correlation of NII with loan growth?

My last question is on asset quality. As you mentioned, we have higher NPLs and provision charges, and this happened before the peso depreciation and increase in interest rates. So how comfortable are you to improve these levels, which I think are above the guidance for the cost of risk between 2.6% and 2.8% of average loans?

Okay. The line is not the best, so I missed part of your comments. But going to IFRS, as you mentioned, the net financial income now has more detail between net interest income results from financial instruments and also gold and foreign currency quotation differences.

Fee income, there were some reclassifications, some items that used to be within net interest income and net fee income and also in other income or expenses are now in 2 new lines called other operating income, and also another line called other operating expenses.

Really, we kept in the press release this breakdown in order to be similar to the full financial statements that we published in the local SEC and at the SEC. But basically, within other operating income, you find many lines that used to be within fee income. The most important ones are many fees related to the business of credit cards. Also, the fees charged for bundles of products. And the other thing that I can remember is safe-deposit boxes-related fees.

Going forward, I would suggest that we ask the central bank to let us reclassify again those fees that are basically -- one of our main products in terms of fees under fees and not within other operating income.

You mentioned the context of higher inflation, a higher FX, so also higher interest rate. This will, of course, affect loan demand, while GDP first grows. And in terms of our impact on margins, volumes and asset quality, margin should be expanding.

We were in a trend -- we were envisioning a trend of interest rates going down and margin slightly compressing. This recent turmoil stopped the trend, and we are seeing NIMs expanding. Loan growth, perhaps growing at the same nominal growth rate that we were envisioning, but in real terms due to higher inflation, there will be some reduction.

And the asset quality will be -- some variables we'll have to monitor. The first one is salaries increases compared to inflation. Many wage negotiations from different unions agreed a 15% salary increase. Some of those unions or negotiations have clauses that allow for reopenings of negotiations, so perhaps at before year-end, there will be some additional salary increases, so there will not be such a loss in purchasing power. But that is key in order to think in NPLs.

We are running different scenarios and models, and the NPL for the bank as of March was 2.4%. At the beginning of the year, we were forecasting some flattish number. Perhaps, right now the most likely scenario could be a 30-basis-point deterioration. So to 2.7% at the end of the year. But again, these are all very new developments, and we are recalculating many of our estimates.

And in terms of the cost of risk, are you expecting a higher number from what we used to have?

In terms of the cost of risk, we are also forecasting something like 20- to 30-basis-points' increase compared to the cost of risk of this first quarter.

And we'll take our next question from Alonso Garcia with Crédit Suisse.

My first question will be just to clarify what levels of Lebac and BADLAR rates you are considering for year-end? I mean behind this outlook for NIM expansion and a similar loan growth in nominal terms. That will be my first question.

Sorry, Alonso. Could you repeat the questions and a little bit louder? I have problems with the connection.

Sure. My question is, first, what levels of Lebac and BADLAR rates you are considering for year-end behind these expectations of loan growth in nominal terms in similar levels that you have mentioned before? And also behind this expectation of NIM expansion for the year?

Right now, Lebac are yielding around 40% and Lebac's -- the BADLAR rate is 28.5% to 29%. We think that gradually, Lebac yields should be going down and getting similar to the BADLAR right now. So yields on Lebac should end the year at around 30%, and BADLAR closer to 24, 25. That is our base case scenario for today. And with this, we are estimating this 40% nominal loan growth.

Okay. And just lastly, on asset quality, a couple questions here. First, what are the main segments of your portfolio that caused this deterioration of asset quality, was it mainly consumer? Or did you see some impact from the agricultural sector given the drought at the beginning of the year?

And also my last question here is, at what levels of coverage do you see going forward? I am calculating at the consolidated level something around 105%, which compares to 107 in fourth quarter and 110 a year ago.

Well, the deterioration or the potential deterioration should be individuals and mainly the lower income segments, and this is what has been going on recently. But also as the nominal loan portfolio grew 50% in the last 12 months, there is a 1% provisioning on that volume, that is regulatory for loans that are in good conditions. So it's not everything related to nonperforming loans. The coverage -- our guidance is that it will be between 100% and 110%.

(Operator Instructions) We'll take our next question from Gabriel da Nóbrega with UBS.

During this quarter, we saw that due to the IFRS reclassification, your Tier 1 ratio actually climbed up some 12%, which is well above levels that the bank had presented in the past few years. Could you just remind us what is the comfortable level for the bank? And if it would make sense to make an acquisition or -- and possibly even increase your own payout?

The 14.6% total capital ratio was due to 2 things: first, the capitalization of the bank; we did a follow-on in September last year. We kept most of the funds at the holding company level until December 27. And due to the timing of the approval of the central bank, that took place in mid-January, the regulatory ratio was -- or didn't contemplate the ARS 10 billion capitalization we did from the holding company to the bank in December -- at the end of December last year.

So I would say that the main impact was that capitalization and then the second would be the revaluation of our fixed assets due to IFRS.

The Tier 1 ratio stands today at 12.2%. We are comfortable with 11%. We are comfortable with these levels. We are thinking in the loan growth we are seeing. If we were to purchase any bank, I think that we are always open to and analyzing any opportunity; depending on the size, we could go to the markets or not. But from, I would say, a pure organically -- organic growth, we are comfortable with the levels we have today.

(Operator Instructions) We'll take our next question from Jorge Kuri with Morgan Stanley. Hearing no response, we'll take our next question from Yuri Fernandes with JPMorgan.

I have a question on Prisma, if you can provide an update on how the sale is doing, like the information and what are the last updates on Prisma?

And my second question is regarding deposits. This has been a trend for the other banks, but your deposits base grew about 27% well below the loans. So are you concerned with liquidity going on? Are you trying to make any campaign to boost the growth from deposits? What are your view on deposits going forward?

Okay. Really the connection is not the best. The first question was regarding Prisma?

Yes, that's it, on Prisma.

Yes. On Prisma, the current situation is that -- well, a confidential number of nonbinding offers were received. And most of them went to the second stage, meaning there will be submitting binding offers in mid-June, and the deal will be to close the deal before September this year. The rumors are that the offers were very good, and so we need to wait. The process is within the time framework. The government was happy.

The other question in terms of deposits. We, many times, do not take wholesale time deposits [co-validating] high interest rates if we have enough liquidity. So many times, the picture at the end of the quarter is not really representative of the deposit growth, but basically we are -- or the objective is to cover the demand of loans from our clients. So if we need to get more deposits, we can play with that. Really, it's a question of liquidity and cost.

In April, before the turmoil, we issued through bonds ARS 6.2 billion in the local market. So really, we are not concerned at all about liquidity.

(Operator Instructions) We'll take our next question from Frederic De Mariz with UBS.

I just wanted to get back to the theme of efficiency, and in particular, on OpEx growth. You did a great job on the personnel expense side. Admin expenses grew way faster than inflation. So I just want to understand not so much what happened last year but what you -- how you're thinking about the next quarters. And if you could comment a little bit about your digital strategy as well. So overall, what you expect for OpEx growth efficiency, but also what you think for digital trends in the country and for Galicia?

Okay. In expenses -- well, personnel expenses, of course, are tied to negotiations between the union and the banking association. We are increasing around 200 employees this year in order to follow or related to the branch expansion we have. We plan to open around 20 more branches in the next 12 months.

The rest of our administrative expenses are related to other unions' agreements, but there were some specific things that made the growth in administrative expenses grow more than inflation. And that will be the case for the next quarters. Let me put some examples.

Some technology licenses are in dollars, clearly, are affected by devaluations. Cash transportation increased a lot due to the increase in the number of bills, both pesos and dollar bills transported, and that is actually causing some banks to purchase some trucks in order to transport cash and not depending on some suppliers.

Also, due to IFRS, we -- any expense we have on technology for new projects must go through the P&L. In the past, we used to capitalize those expenses and began amortizing those projects once they were in -- they were initiated -- they were operational. Now all the expenses are -- they go in through the P&L.

And in terms of digitalization and technology, we are also investing in that with many different projects with different processes and products. We hired an international consultant, that is also a dollar-denominated contract.

And I would say that for Argentine standards, we are one of the leaders in digital products and in contact with banks, not only with the online banking or home -- office banking in the case of companies, but also the cell phone. And right now 90% of transactions are done with electronic means, and each, I would say, month, the number of sales of different products is increasing with digital means.

Personal loans, or credit cards or additional cards are different even for companies, if they also -- the sale of products is increasing with the electronic means or with digital channels. And to finish the comment, due to these things that I mentioned, these items that have been growing plus the expansion in our -- of our network of branches' expenses, it should grow above inflation, perhaps like 5 percentage points above inflation.

And we'll take our last question from Santiago Petri with Franklin.

Very briefly, could you tell us the level of increase in interest rates in [other graph], SMEs? I mean, I don't know if you can give us some color on how much interest rates have been increasing since the stress moment of hikes in rates by central bank?

Yes. Clearly, there was a pass-through of increases in interest rates due to the increase of the central bank -- or the increase in the Lebac's yield. But the Lebac's, for example, went up from the 26 to 40, while the BADLAR went up from 22 to 29, let's say, so half of the percentage points.

In the case of the loans, depending on the product and the segment, we made that pass-through. I would say that, on average, we can speak of roughly 500 basis points, but it's really an average, because we have from credit cards to personal loans, mortgages, SMEs, agricultural sector, big corporates, 1 day, 1 week, 1 month, 6 months, 10 or so really; it's a wide universe. But on average, we could say that, that was the kind of pass-through that we had.

And it appears there are no further questions at this time. I'd like to turn the conference back over to Pablo for any additional or closing comments.

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

And once again, that concludes today's call. We thank you all for your participation, and you may now disconnect.