Grupo Financiero Galicia SA (GGAL) 2018 Q2 法說會逐字稿

Good day, and welcome to this Grupo Financiero Galicia Second Quarter 2018 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 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 recorded a 2.5% year-on-year contraction during the second quarter of 2018 from a 4.6% year-over-year expansion in the first quarter, accumulating a 0.9% year-over-year growth during the first half of this year, which compares to a 2.9% expansion in the same period of 2017.

The primary deficit for the 6 months of 2018 amounted to 0.8%, ARS 106 billion, overachieving the official target of 1.1%. It is worth highlighting that the government had decided to strengthen this year's primary fiscal goals, which now stand at 2.7%, the previous target was 3.2%, entailing a 1.1% reduction in terms of GDP compared to the 2017 result.

According to the National Institute of Statistics, the national consumer price index accumulated an 8.8% increase during the second quarter of the year, reaching an annual inflation of 29.5% in trailing 12 months.

On the monetary front, the Argentine Central Bank expanded the monetary base by ARS 48.2 billion in the second quarter of the year, reaching a 31% growth in the last 12 months.

Meanwhile, the exchange rate averaged ARS 26.61 per dollar in June, a 31.6% depreciation against the average of March 2018. When compared to June 2017, the Argentine peso recorded a 65.1% depreciation.

In June, the average rate on peso-denominated private sector time deposits for up to 59 days was 30.6%, 775 basis points above the average recorded in last March.

Private sector deposits in pesos at the end of June amounted to almost ARS 1,618 billion, increasing 8.9% during the quarter and 28.1% in the last 12 months.

Transactional deposits in pesos rose 12.1% during the quarter, while peso-denominated time deposits increased 5.6%.

At the end of June, peso-denominated loans to private sector amounted to ARS 1,538 billion, recording a 7.5% increase during the quarter and a 48.5% increase during the last 12 months.

Turning now Grupo Financiero Galicia. Net income for the quarter amounted to nearly ARS 2.8 billion, 25% higher year-over-year. This was mainly due to profits from Banco Galicia for ARS 2 billion; in Tarjetas Regionales for ARS 567 million; in Galicia Administradora de Fondos for ARS 121 million; and in Sudamericana Holding for ARS 120 million.

Going to Banco Galicia, which accounted for 70% of Grupo's results from equity investments. Net income for the quarter decreased 5% from the year-ago quarter, mainly as a consequence of the split up of Tarjetas Regionales. Excluding this effect, net income increased 18% in the last 12 months.

This was a result of 107% increase in provision for loan losses on a 41% increase in operating expenses, offset by a 43% higher net interest income, a 44% higher net income from financial instruments and a 34% increase in net fee income.

The growth of net interest income was mainly due to the 67% increase in the portfolio of loans of financing to a private sector, offset by lower spreads.

Average interest earning assets grew ARS 88 billion or 61% year-over-year, and its yield increased 97 basis points, mainly due to 195 basis point increase in the yield on loans, which was partially offset by a 111 basis point decrease in the yield of government securities primarily related to the decrease in the market price of the treasury bonds from the province of Buenos Aires.

Interest-bearing liabilities grew ARS 85 billion or 67% during the same period, and its cost increased 132 basis points, mainly as a result of a 215 basis point increase in the interest rate on time deposits and a 486 basis points increase on debt securities.

Provision for loan losses for the quarter amounted to ARS 1.5 billion, 107% 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 volume.

Personnel expenses increased 26% as compared to a year before, mainly as a consequence of salary increase agreements with the unions. And administrative expenses grew 41% due to increases of 61% of maintenance expenses and 163% in fees and compensation for services provided to the bank.

The bank's financing to the private sector reached to ARS 245 billion at the end of the quarter, up 67% in the last 12 months. And deposits reached ARS 261 billion, up 67% in the year. The bank's estimated market share of loans to private sector was 10%, 13 basis points higher than at the end of the year-ago quarter, and the market share of deposits from the private sector was 10.4%, recording 103 basis points increase in the same period.

As regards to asset quality, the NPL ratio ended the quarter at 2.25%, recording a 38 basis points deterioration as compared with the 1.87% of the second quarter of the prior year. And the coverage of NPLs with allowances reached 102.3%, down from 120.2% from a year ago.

As of June 30, 2018, the bank's consolidated computable capital exceeded by ARS 16 billion or 63%. The ARS 26 billion minimum capital requirement and the total regulatory capital ratio reached 13.39%, increasing 170 basis points from the same quarter of fiscal year 2017.

The bank's liquid assets at the end of the quarter represented 74% of the bank's transactional deposits and 48% of its total deposits compared to 60% and 38% ratios from a year before, respectively.

Going now to Tarjetas Regionales, which accounted for 20% of Grupo's results from equity investments. Net income grew 35% year-over-year due to a 42% increase in net interest income and a 19% increase in net fees. These increases were partially offset by a 61% increase in provision for loan losses, of 23% in personnel expenses and of 19% in administrative expenses.

Net loans and other financing grew 37% while the NPL ratio reached 6.44%, improving 182 basis points during the last year. And the coverage provisions for loan losses was 107%, up from 100% as of the end of the second quarter of last year.

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

(Operator Instructions) And our first question will come from Mario Pierry with Bank of America Merrill Lynch.

Let me ask you 2 questions, Pablo, please. First one, we saw this big increase in your provision charges this quarter. They almost doubled year-on-year. Can you talk about where you're seeing the stress in asset quality? You mentioned some consumer sectors. But I would like to understand better which products specifically. Also, when you look at your corporate portfolio, what concerns you the most? Second question is related also to your appetite for granting credit now. We saw that your SME portfolio only rose 3% year-on-year. I'd like to understand better what happened there. Also, when I look at your corporate loan book, you posted very strong growth. But I wanted to understand the growth that came from just the depreciation of the currency. And finally, your appetite for growing your individual loans.

Okay. The cost of risk increased both at the bank level and at the regional credit card companies. NPLs improved and coverage improved as a result of some sales of NPLs that were due more than a year. The cost of risk was affected mainly in the individual portfolio. The lower the income, the worse behavior in general. In terms of products, I would say except the mortgages that have no deterioration at all and it's a very new product, we can see some in personnel loans and some in credit card financing. Going forward, while -- and this also another factor for this quarter, increasing in the cost of risk or provisioning is that the devaluation meant that dollar-denominated loans expressed in pesos increased the size, and the loans that are in normal situation, we have to make a provision of 1% on that. So the growth in volume, both in pesos and in dollars plus the devaluation, makes that increase in the -- in this, I'd say, regulatory provision is higher. Going forward, we are forecasting a cost of risk at the bank level at around 2.6% for the next 2 quarters, basically, third and fourth. That could take NPLs at year-end at around 2.7%. In the case of Naranja regional credit card company, the last number of NPLs was 6.4%. We are expecting some deterioration towards 7.2% to 7.3% right now. In this quarter, there was a big impact on inflation. In June -- I would say May and June, monthly inflations were high. Actually, June was the highest of the year, around 3.7%. And the catchup with the salaries definitely has another speed. So going forward, we are not -- or we are expecting lower cost of risk. In terms of the appetite for credit. Yes, as you mentioned, the main driver of loan growth was big corporate. SMEs was a little bit more, I would say, conservative in loan demand. It's not a question of risk. Of course, we analyze the credit portfolio with a lot of attention. It's more a situation of this very high interest rate environment that makes the companies that can handle not to take debt to wait till interest rates go lower. In the case of corporates, also they have basically exporters, the ability to decide if they take dollars or pesos. And also, part of the increase in their corporate loan book is due to dollar loans. And to finish perhaps, what we saw in terms of products is the shortening of the duration of the loans. Instead of CapEx loans and mortgages, we are seeing more credit card personal loan type of loans for individuals and working capital lines for companies.

Okay. That's clear. Any sense that you can give us like which sectors are you most concerned about given all the uncertainty going on, this big devaluation, the higher interest rates. Are there is any sectors in particular that you're most concerned about?

Well, more than the devaluation in this last month, I would say is all the scandals on the public works, so we are monitoring closely all the construction companies. Regarding the devaluation, the private sector in Argentina is typically long in dollars. So devaluation means a wealth effect and they are, in general, not pure importers. It's a mix of imports and exports. And generally, exporters are doing better -- are going to be better. There is some lag. You'll see the increase in exports weekly as the stop of imports. So really, more than the devaluation, the other sector is the one that we are monitoring closely.

Our next question will come from Nicolas Riva with Bank of America.

Two questions. And the first one is maybe a follow-up on Mario's question on loan growth. Actually, I'm a bit surprised about these high levels of loan growth. There's a bit of an effect of devaluation as you said. But still, even in pesos, in local currency, you're growing the loan book more than 50%. And it's not just you. I mean, we saw very high growth for the banking system in June. I was expecting to see in June some effect from recent economic crisis. We didn't see that in terms of credit growth. So maybe if you can explain, what's driving this such a fast pace of credit growth when actually the economy is slowing down? And we are concerned about asset quality deteriorating in the coming quarters. And then second question on the reserve requirements. Central bank announced yesterday it's increasing reserve requirements. We know it's negative for you even though they are now going to be remunerated. But any thoughts in terms of how do you assess really the impact of this in your net profits? And what can you do to maybe mitigate the impact of this?

Yes. As you said, both in pesos and in dollars converted to pesos, adding both the loan growth in the last 12 months, was significant, 67% as a whole, and 55% in pesos. We are seeing, as I said, a demand for personal loans, credit card for individuals and working capital lines for companies. There should be some deceleration in the second half. But if the loans grow just as the expected inflation, we could be ending up at around -- something around 45% total loan growth. So yes, definitely the loan growth will be high in nominal terms in pesos and in dollars, but with some deceleration in the second quarter. The agriculture sector could be a good sector for the second half of the year and also for next year without the drought. All the projections are that it's going to be a very good year for the agriculture sector and its chain value. And also, the PPP program on the 6 corridors. It could be also a driver of growth. And that has a spill effect on many SMEs. In terms of reserve requirements, yes, in the last 2 months, the central bank increased the reserve requirements by 11 percentage points, 5 percentage points remunerated. We purchased around ARS 4 billion of bonds that yields 26%. It's about 2020. The other 6% to tranches of 3% are not remunerated. And that means that it's an opportunity cost instead of investing this 6% in loans or in Leliqs or Lebacs. Definitely, it's at 0. So the impact instantly would be an increase in the cost of funding. That is how we see we it and we try to mitigate it, increasing the interest rate we charge on loans. But the medium-term impact in my opinion is good in terms that the central bank will be able to reduce the stock of Lebacs. Actually, the objective is to eliminate Lebacs for investors with the exception of banks. So there could be a short-term pain that we are trying to mitigate. But in the medium term, it's something better for the system.

Pablo, maybe just one follow-up on the second question. I don't know if you have actually assessed the impact or if you did the numbers. But I was doing the numbers. And just on the measure from yesterday from the central bank on increasing the reserve requirements, assuming that these are held at the current level for the next 12 months, I was getting an impact of at least 10% in nonprofits. And again, it's not just you, it's just for all the big banks. Are those numbers in line with your own projections in terms of the impact of this?

Well, in our case, the easy calculation if we do nothing, if we don't try to mitigate the measure. You can take roughly ARS 160 billion. And the difference would be between, let's say, 45% and 0. Again, that would be for a year. And if we take no action in terms of increase in the interest rate, we charge. And also to complete the answer, the expectation is that reserve requirements will gradually return to the previous levels. Gradually. I'm not saying in the next couple of months. But it's not going to last forever. That's the idea.

(Operator Instructions) Our next question comes from Frederic De Mariz from UBS.

Two questions on my side. I was curious to hear your latest thoughts on OpEx growth especially with the high inflation and the high rates, what you're seeing for the next 3 quarters? And if you're changing your strategy for branch openings, for the cost controls or anything else you would like to mention. And then second question. Could you please give us an update on Prisma and what we should expect for the next few months?

Okay. In terms of OpEx, we are forgetting now with the higher expected inflation that our administrative expenses could be in line with inflation. Basically, similar percentage increase. And yes, we decided to slow down our expansion program. It wasn't that, I would say, aggressive, but we diminished the rhythm of the branch openings. And so OpEx should be aligned with inflation. Also, if I may add, our fee income is likely to be some percentage points above inflation. With this change in expected inflation, our estimates definitely are changing. In the case of Prisma, the 14 banks, owners of Prisma told the government and the head of the central bank, the antitrust agency and other authorities that we are going to postpone the sale. They understood the situation in the agreement with the government, there was a MAC clause. So we have no deadline, no schedule. The idea is to keep it on sale but with no certain date.

Next, we'd take a question from Otávio Tanganelli with Crédit Suisse.

I have 2 questions actually. The first one is, we saw that the margins have slightly compressed this quarter. I'd like to understand what you think is going to be the outlook for the second half of the year. And my second question is regarding inflation accounting. We have been receiving from -- we have been talking with investors that they believe that inflation accounting could be implemented in Argentina in the short to medium term. I'd like to know if you have a view on that or not?

Yes. Well, margins were impacted -- financial margin, that's net interest margin, was impacted by mark-to-market of this province of Buenos Aires bonds. If the yield on our security portfolio have been the same of the previous quarter, the net financial margin would have been roughly 200 basis points higher. Going forward, we see many variables moving. One is this increase in reserve requirements. That, of course, we will try to mitigate that. But we have to see the velocity and the degree of mitigation. We are seeing also an increase in the spread in our dollar position. Basically, we are having a lower funding cost in dollars and higher interest in loans in dollars we grant. We are seeing also some change in the breakdown of deposits with a higher growth in time deposits. And of course, we are having higher yields on our Leliqs, Lebacs portfolio. So going forward, of course, it's, I would say, impossible to project mark-to-market effects. But considering all of these measures or variables, we could think in something flattish from the second quarter levels. At the beginning, we were forgetting some increase in margin due to the increase in interest rates. With these increasing reserve requirements that will offset our previous expectation. In terms of inflation accounting, IFRS, it says that if you have 3 years of accumulated inflation higher than 100%, you have to make the adjustment. On the other hand, our authority or regulators are the central bank and the local Comisión Nacional de Valores or local SEC plus there is -- or additionally, there is a degree from the executive power from year 2003 that prohibits inflation adjustment. So we depend on that. That is the last news we have. Theoretically, what we have within inflation accounting is that you have a monetary asset. Subject to inflation, you lose money. If you have a monetary liability subject to inflation, you make money. You have to look at the net position. And also, we should have a need to know the procedures to calculate the effect in terms of the series of indices if it's wholesale or CPI. Well, there are many uncertainties in order to calculate that. Clearly, the higher the inflation, the higher the impact. And to finish with this long answer, perhaps the regulators as they are thinking that inflation is going to be lower in the coming years. They would prefer it to postpone the decision or not to take it. But that's a personal opinion.

Our next question comes from Alejandra Aranda from Itaú.

Most of my questions have been answered. But could you give us a little bit of guidance in terms of what to expect for efficiency on the second half?

Yes. We keep with our objective of improving efficiency around the 100 basis points this year. The revenue line has been volatile due to this mark-to-market changes in the reserve requirements. Or more than that -- more than speaking about the past, are going to be volatile due to the reserve requirement. But we are keeping that objective of improving efficiency.

(Operator Instructions) We do have a question from Santiago Petri from Templeton.

Can you remind us what is the sovereign asset restriction on the balance sheet, the regulatory cap, the financial [institution] and everything that can hold on sovereign assets?

Yes. Let me see. One moment. Hold on. Sorry, Santiago. I'm looking at -- looking for the regulations. In the meantime, in our case, it was close to 8% of total assets. At the end of June, roughly half were central bank paper. The other were different instruments. A big portion of that was about 2020 that is used as a liquidity requirement. The limits are related to the regulatory capital. And they make different limits between national government exposure and the rest of the sub-sovereign. I don't want to tell you a wrong number. Someone is looking here. Okay. Sorry for that.

No problem. I can call you later.

Our next question will come from Alonso Aramburú from BTG.

I have a follow-up on loan growth. We saw very nice growth at the bank, but in Tarjetas Regionales, the growth was below the growth of the banks. So just wondering what your expectations for growth in Tarjetas is? And whether that can grow out of inflation?

Yes. The growth in the loan book of Tarjetas Regionales is always more in line with the inflation that is related to consumption basically. So they are -- our expectations on real loan growth is small. And the growth, without say more, vegetative with the number of clients and statements and not so much in real terms. That's, I would say, the characteristic of the business.

Okay. And maybe just a follow-up. When you put all your lines together and you look at the profitability of the bank, I mean, what are your expectations in terms of ROE for this year, assuming, I guess, rates remain relatively stable at least for the next few months?

Yes. For the full year, we are forecasting a high 20s for Grupo Financiero Galicia.

Next, we'll take a question from Gabriel Nóbrega from Citi.

I have a follow-up. I know that there are a lot of moving parts for your margins. But could you just maybe give a sensitivity like how much could 100 bps expansion in the reference rate impact your NIMs? And I have a second question. Could you maybe talk more about your digital strategy? And if you believe that by implementing it and are moving forward with it, you would be able to better service your clients even though you are beginning to reduce the pace of your branch expansion.

Yes. You said 100 basis points NIM compression in the reference rates, right?

Yes. What I want to understand is for every 100 bps expansion in the reference rate, how much is translated into your NIMs?

Okay, expansion. Well, let me make a quick calculation. Roughly 40 basis points, take it as a quick, and I would say, even an educated guess. I don't have it calculated like that. Going to the digital issue, well, we have been investing a lot in digitalization, both, as the experts say, the front end and the back end. And the branch expansion go in parallel with the investment in digital because what we see is that clients, individuals and also SMEs or the agricultural sector prefer to have a multichannel approach. So they want to for certain transactions or operations or requests, they like to have a phase, a human in front, although the transactions are done 90% electronically. We already have many digital, I would say, releases. For example, our segments, even we have Galicia MOVE, that is a segment in which you can open an account completely and digitally synched without the need to go to any branch. It was basically at the beginning launch for university students. Now it's a full product or segment for any client. We have a very good cell phone application voted by customers. And also very good online banking and office banking, as we call it, for companies. So the investment is, I would say, a permanent digitalizing the processes, basically. So that all the operations become digital. I have the information. Sorry. For Santiago on the limits on the exposure to the government. The maximum exposure to the national government is 50% of the regulatory capital and 75% on the regulatory capital is adding the provinces or other public sector entities. So 50% on the regulatory capital, we adjust the national government. 75% with the provinces.

(Operator Instructions) And we have a question from Rob Skepper from Ashmore.

I just wanted to come back on inflation and efficiency. What -- currently for your forecast, what do you assume for inflation for the rest of the year? And when do you expect it to peak in Argentina from a macroeconomic perspective? And then if we look at your costs at the bank, when do you expect the highest inflation in your cost line should appear? Is it some time later this year? Or is it kind of early next year?

Yes. Well, from a monthly inflation point of view, perhaps June was the highest month. And now we could see some -- well, for example, July was 3.1. And depending on certain tariffs, increases on utilities, mainly, natural gas, electricity or transportation. We could have some lower monthly inflation, 1 month, and perhaps some increase in the next one. So for the rest of the year, we are forecasting, our chief economist is forecasting, that the annual inflation will be close to -- or let's say the range between 30% and 32%. And for next year, the government is forecasting a reduction in inflation. Our chief economist also. And I think the objective of the government is closer to 17. In our opinion will be something above 20. We have to, of course, all these projections on macroeconomic variables are really moving targets. If we were to discuss what we were thinking at the begin of the year in terms of GDP, deficit, exchange rate and inflation, all the numbers now are very different. So with the information we have today, these are the expectations. And for this year, our administrative expenses should be in line with inflation. For next year, with a lower inflation, in nominal terms, should also be, I would say, more in line with that lower inflation. Of course, in this high-inflation environment, you will not see a reduction in administrative expenses. So we must measure it comparing it to inflation.

Great. And just on staff cost and wages. Have you already had to give pay raises? Or is there a date already set for the kind of next pay raise or negotiations? How is it working?

Yes. We have agreed -- with the, I mean, the banks, with the banking union, at the beginning of the year, I would say, April, I think, it was the month, 15% increase. It was a 10% increase for the first 4 months of the year, then an additional 5% in the month of May. So -- but the 5% was considering as base the December salary. So it was not capitalized. It was 15% at the end of May. In July, we received another 5%. So the accumulated number is 20% in July. And it's likely that the union will request another increase towards, I would say, the fourth quarter in order to reduce the gap with this expected inflation. This partial increases are not retroactive for the full year. It's likely that the cost or the wages will increase around, let's say, 19%, 20%. This will be -- or should be the number. We must add then the increase in personnel so to get to the cost of personnel that on a, I would say, on a per capita basis, this should be the percentage increase.

Our next question will come from Alain Nicolau from Bradesco.

I would like to get a little more details on the duration, particularly on your FX-denominated loans. And secondly, if you can talk a little bit more on capital, I mean, Tier 1 dropping to 10%? And if you are growing, what you said you are growing in terms of loans and the return you're targeting, I mean, your Tier 1 could get really narrow versus the requirement. So just want to hear a little bit more about this topic, if you may.

Yes. Well, the duration of our loans as a whole is close to 7 months. And 75% of our total loans mature within 1 year. This is as of June. In dollars, it's very similar right now. With the devaluation -- the devaluation was one of the reasons why the capital ratio went down because in peso terms, we increase our risk-weighted assets more. So as of June, as you said, the Tier 1 ratio was 10.3. The total capital ratio was 13.4. We expect that this ratio should be improving gradually towards the end of the year. Either not increasing that much our loan book or taking other actions, we are forecasting good results. So the expectation is for an improvement in the Tier 1 ratio.

(Operator Instructions) Our next question will come from Tunde Ojo with Harding Loevner.

I just want to follow up on the answer you gave on the asset quality earlier. You gave an indication of cost of risk for the bank to be about 2.6% for the next 2 quarters. But what about the regional credit card company because I think that's even more at risk. What is your expectation for cost of risk evolution over there given what's happening in the macroeconomic environment?

Yes. Well, in the fourth quarter -- in the second quarter, sorry, the cost of risk of the credit card business increased to levels of 9.8%. And we are forgetting some reduction in that cost of risk. But to levels of the 7.6% to 8% level, we were seeing in previous quarters. That segment was particularly affected by this gap between inflation and salary agreements with different unions in different parts of Argentina. The credit card companies also are, I would say, suffering from some, I would say, deceleration in the economy in view of Argentina due to the drought, but we are gradually seeing some improvements. And in July -- yes, the end of June, we have a half salary, an additional half salary. This is an Argentine law. So typically, July is better for collection. So these are the types of cost of risk we are seeing.

Okay. The follow-up question I have is more sort of a high-level question to you. What are your biggest worries as a bank now as you navigate through this tough macroeconomic conditions and sort of things changing every day and the central bank sort of making all these pronouncements? Are there things you could point out to me as the biggest risk or concern to you managing the bank?

Well, I think the main concerns are the stabilization of the macroeconomy. We think that the government is very focused in reducing the fiscal deficit. The previous, I would say, model was to gradually reduce the fiscal deficit, the financing the gap within the international capital markets. Now the international capital markets are kind of shut, this reduction in fiscal deficit must be done quicker. And the main objective of the central bank is to stabilize defects at these levels. The current account deficit should be improving, definitely. But in order to stabilize the FX, the central bank raised interest rates significantly. So the expectation, what we need to see is that the central bank will be able to gradually begin reducing the interest rate, so that loan demand returns to previous level in which it was growing very fast and with longer-term products and with lower margins. Now we are making money with a different mix, higher margins when we're speaking of interest we make but with lower real loan growth. To monitor for the economy, I think, would say that each quarter, the national government is able to show an overachievement of fiscal deficit. It's great news and also the reduction in inflation.

(Operator Instructions) And I show we have no further questions in the queue at this time.

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

Once again, that does conclude our conference for today. Thank you for your participation.