Grupo Financiero Galicia SA (GGAL) 2018 Q3 法說會逐字稿

Welcome to this Grupo Financiero Galicia Third Quarter 2018 Earnings Release Conference Call. This call is being recorded.

At this time, I turn the conference over to your host 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 risks and uncertainties that could cause actual results to differ materially from those expressed.

According to private estimates, the Argentine economy recorded a 3% year-over-year contraction during the third quarter of this year from a 2.7% year-over-year decrease in the second quarter. Therefore, the economy accumulates a 0.6% year-over-year fall during the first 9 months of this year, which compares to a 3.4% expansion in the same period of 2017.

The primary deficit for the first 9 months of this year amounted to 1.3% of GDP, ARP 181 billion, overachieving the official target of 1.9%. It is worth highlighting that the government has decided to strengthen this year's primary fiscal goal, which now stands 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 displayed a 14.1% increase during the third quarter of the year and accumulated a 39.5% rise in the first 10 months of this year, reaching an annual inflation of 49 -- 45.9% in October.

On the monetary front, the Argentine Central Bank expanded the monetary base by ARP 206 billion in the third quarter, reaching a 44% growth in the last 12 months.

Meanwhile, the exchange rate averaged ARS 38.63 per dollar in September, a 45.1% depreciation against the average of June 2018. When compared to September 2017, the Argentine peso recorded a 124% depreciation.

In September, the average rate on peso-denominated private sector time deposits for up to 59 days was 41.9%, 11 percentage points above the average recorded last June.

Private sector deposits in pesos amounted to ARP 1,728 billion, increasing 6.9% during the quarter and 35.1% in the last 12 months.

Transactional deposits in pesos rose 2.2% during the third quarter, while peso-denominated time deposits increased 12.9%.

At the end of September, peso-denominated loans to private sector amounted to ARS 1,578 billion, recording a 2.7% increase in the quarter and a 36.5% increase during the last 12 months.

Turning now to Grupo Financiero Galicia. Net income for the quarter amounted to ARS 4.2 billion, 98% higher year-over-year. This was mainly due to profits from Banco Galicia for ARS 3.4 billion; in Tarjetas Regionales for ARS 524 million; in Sudamericana Holding for ARS 166 million; and in Galicia Administradora de Fondos for ARS 78 million.

Going to Banco Galicia, which accounted for 81% of Grupo's results from equity investments, net income for the quarter increased 78% from the year-ago quarter.

Excluding the effect of the split up of Tarjetas Regionales, net income increased 159% in the last 12 months. This was a result of a 73% higher net operating income, mainly due to 236% growth of the net income from financial instruments.

Net interest income for the quarter increased 76% as compared to the same period of 2017, mainly due to the 135% increase in interest on the portfolio of loans and financing to the private sector.

Average interest earning assets grew ARS 110 billion or 70% year-over-year, and its yield increased 820 basis points, mainly due to an increase of 1,958 basis points in the interest rates on other interest earning assets, and of 1,729 basis points in the yield on government securities.

Interest-bearing liabilities grew ARS 126 billion or 91% during the same period, and its cost increased 514 basis points, mainly as a result of a 1,517 basis point increase in the average interest rate on peso-denominated time deposits and of 1,078 basis points on debt securities.

Provision for loan losses for the quarter amounted to ARS 2 billion, 266% higher than 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 35% as compared to a year before, mainly due to salary increase agreements with the unions, and administrative expenses grew 51% due to increases of 326% in fees and compensation for service provided to the bank and of 96% in maintenance expense.

The bank financing to a private sector reached ARS 299 billion at the end of the quarter, up 87% in the last 12 months; and deposits reached ARS 320 billion, up 97% in a year. The bank's estimated market share of loans to a private sector was 10.6%, 127 basis points higher than at the end of the year-ago quarter. And the market share of deposits from the private sector was 11%, recording 162 basis points increase in the same period.

As regards to asset quality, the NPL ratio ended the quarter at 2.37%, recording a 55 basis points deterioration as compared with a 1.82% of the second -- of the third quarter, sorry, of the prior year. And the coverage of NPLs with allowances reached 103%, down from 120.5% from a year ago.

As of September 30, 2018, the bank's consolidated computable capital exceeded by ARS 19.7 billion or 67%. The ARS 29 billion minimum capital requirement and the total regulatory capital ratio reached 14%, increasing 234 basis points from the same quarter of the previous year.

The bank's liquid assets at the end of the quarter represented 76% of the bank's transactional deposits and 49% of its total deposits compared to 62% and 39% ratios from a year before, respectively.

Going now to Tarjetas Regionales, which accounted for 9.5% of Grupo's results from equity investments. The net income decreased 20% year-over-year due to a 23% increase in net interest income and 26% increase in net fees, which were offset -- or more than offset by an 81% increase in provision for loan losses, of 17% in personnel expenses and of 78% in administrative expenses.

Net loans and other financing grew 43%, while the NPL ratio reached 7.17%, 5 basis points above the figure of September 2017. And the coverage with provision for loan losses was 99.5%, down from 105% as of the end of the third quarter of the previous year.

In summary, during the third quarter of this year, Grupo Financiero Galicia subsidiaries had a strong operating result in a challenging macro environment, and its main asset, Banco Galicia, was able to gain market share of loans and deposits and to keep its asset quality, liquidity and profitability metrics at reasonable levels.

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

(Operator Instructions) We'll take our first question from Alonso Garcia with Crédit Suisse.

Could you please comment on asset quality performance so far in half of the year? Specifically, could you comment if the performance you have seen so far has been in line with your expectations? Or if it has been slightly worse or better? And finally, considering the asset quality performance, if you believe that in addition to constraints coming from the demand side and [entirely detailed] requirements, we should expect, or not, a reduction in risk appetite from your side? I mean, should a more cautious approach from Galicia have a marginal impact on rate growth in coming quarters?

I'm sorry, Alonso, I cannot -- I have a very bad line with you. I understood the first part about NPLs. The second part was about what, sorry?

Yes. Considering that outlook for NPLs in the coming quarters, if you believe that the bank is -- or should we expect the bank to take a more cautious approach regarding risk appetite that causes further pressure on rate growth in the coming quarters?

Okay, thank you. Well, as you saw, asset quality has been deteriorating, NPLs ended -- of the bank ended the third quarter at 2.37%. Cost of risk was 3.45%, something higher than what we were seeing in previous quarters. We are forecasting a 3.2% cost of risk for the first quarter -- for the fourth quarter. And so far, about 3.7% for the full next year, because we are seeing that although GDP will be -- will begin to grow on a sequential basis beginning in the second quarter of next year, the full year will not be bright in terms of growth. Having said this, we are, I would say, not changing that much our always conservative approach in terms of granting loans. Yes, you can see already that the weight on our loan book with guarantees has been increasing slightly, but we -- basically, we are not changing, dramatic, our approach.

(Operator Instructions) We'll move on to our next question from Carlos Gomez-Lopez with HSBC.

So I was wondering -- I have 2 questions. The first one is what your expectation is for growth next year in terms of inflation, also in terms of loans? Second, if you could advance us a little bit about what you expect your inflation adjusted returns to be when you report in 2019 for the SEC? And finally, are you comfortable with the current capital position of the bank? We see 10.1%. We know it's going to improve because the currency has appreciated. But at what level would you consider that the bank needs to -- perhaps you can raise more capital, or grow more, grow less?

Okay. Carlos, in terms of growth, we are seeing a flattish growth of loans in real terms. So if we are assuming an inflation of 25%, our expectation for next year of growth in our loan book is around the same percentage. So flat in real -- or 0 in real terms. That is basically in the environment of GDP contraction between 0.5% and 1%. There is a negative carryover from this year. Regarding inflation adjustment, there are still many regulatory decisions or regulation that must be changed from the central bank and from the local SEC. The last information I can tell you is that in notes to the financial statements of the fourth quarter, we'll be informing the potential impact of this inflation adjustment. Of course, the inflation adjustment is directly proportional to the level of inflation. If next year, inflation is 25%, the adjustment will be much less. But still, many -- not only regulations, but also technicalities in terms of ratios and other variables to calculate must be determined. Going to the third part of your question, in terms of capital, the total capital ratio of the bank as of September was 14%. Going forward, with the capital creation we are having with our results, plus some good surprises like the sale of Prisma, the potential sale of Prisma in the first quarter of the next year, could have strengthened even further our capital situation. So really, raising capital in the market is not in the medium-term at all.

Okay, that's very clear. If I can follow up on the inflation adjustment, have you decided whether you will use IFRS or U.S. GAAP reconciliation? Or that is one of the things that is just still pending?

Well, that is something that will be decided once we have all the information. On the 20th, it could be IFRS or U.S. GAAP reconciliation, as it was in the past many years ago. It's not only our decision, regulators, auditors and so on.

(Operator Instructions) We do have a question from Emily Fletcher from BlackRock.

Would it be possible for you to talk to us through in a little bit more detail what you have in the trading income line? So how it breaks down. And help us to understand how it was you generated that line. It's obviously much higher than people are expecting. And the extent to which the income you have there is occurring?

Yes. Emily, net results from financial instruments includes basically the interest we collect on government bonds, both central bank paper and national government bonds. Also, the results from the forwards of effects we have to hedge our dollar position. And in the third place, the results from corporate bonds. To give you an idea of the weight, the results from government bonds represent 55% of that, and the forward results, roughly 40%. So 5% are the private sector or corporate bonds. And within the government bonds result, that again represents 55% of that line, roughly 60% comes from the central bank and 40% from the rest of the government bonds, letters in pesos, in dollars and other different bonds. Actually, there are like 7 pages of detail in an annex to the financial statement of the different holdings of government paper.

Okay. I'm sorry, I haven't seen that annex. And just help me understand why you classify bonds, some of the income there versus classifying it as interest income. How is it split?

Yes. Most of the interest coming from Lebacs, Leliqs and the rest of the bonds come under this line, net results from financial instruments. Within the interest income, the only result that comes from a bond is the one that is held at a cost plus yield, that is both the 2020 that is used to fulfill reserve requirements. This is how the central bank tell us to account these things. I agree that it's not very clear.

And in terms of the FX hedging that you have. Can you tell us the size of the open position that you're running?

Well, in -- as of the end of September, it's in our press release. It was something like ARS 900 million long through forward contracts. The spot position was like $40 million short, with forwards will go long. And this is not really a speculative situation. It's more an arbitrage of interest rates. We analyzed the trading desk basically, analyzed if it's better to pay this forward contract, let's say, at the 40% implicit interest rate and having liquidity invested in Leliqs at 60-plus. So it's not -- by definition and by internal policies, the position is to be hedged in dollars, so you have to -- or we have to look at the spot result of being short, plus the results from these forward contracts. And that was something like ARS 400 million positive for the quarter.

We'll move on to Alonso Aramburú with BTG.

A couple of questions, Pablo. Can you comment on operating expenses? How should we think about that, given salary negotiations and the opening of branches for 2019? And also similar question in terms of margins. How -- what evolution should we expect over the next couple of quarters, given reserve requirements and the movement of rates in Argentina?

For administrative expenses, we saw in the last 12 months the opening of 34 branches, and that also meant roughly 300 more employees. Salaries have been -- just to speak about, increasing in quantity. In terms of price of those employees, salaries have been increasing gradually. What the bank association and the union agreed at the beginning of the year was to have salaries matching inflation. So there were different monthly increases of salaries. The last one was in October. That meant that the October salary was 40% higher than the last December salary. So if we consider, let's say another -- an additional 5% in November or December, the average increase in salaries would be something around 23%, 24%. So this has been increasing in different months, but not for the full year. What happened also with the rest of administrative expenses is that roughly 15% of administrative expenses are in dollars, so the devaluation has a negative impact on that when we measure it into pesos. That is basically fees to certain international consultants, the rating agencies, IT licenses, the rental of some of our branches. Going forward for next year, we are not expecting to open branches, perhaps a capital but nothing really material. So expenses must be in line or a couple of percentage points above inflation.

Great. And in terms of margins as well?

Yes. In margins, well, when we look at the financial margin, including the yield on our bonds, Lebacs, Leliqs and so on, we saw a big increase in the quarter. We think it could be resilient for the first quarter, perhaps some minor compression, but really not going back to the second quarter levels. And for the full -- next year, we are forecasting some expansion of margins considering the intermediation with the private sector, the gap between our cost of funding and the lending rates. Of course, when we look at the yield on government bonds, it's hard to project. But going forward, we think we can increase a little bit the margins. So having a 0 real growth in loans will mean that the net interest income would be growing above inflation.

Okay. Great. And it is assuming that reserve requirements stay where they are today.

Yes.

(Operator Instructions) And it appears we have no further questions at this time.

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

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.