Grupo Financiero Galicia SA (GGAL) 2018 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Grupo Financiero Galicia Fourth Quarter 2018 Earnings Release Conference. Today's call is being recorded.

And now I'd like to turn the call off 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 6.2% year-over-year contraction during the fourth quarter of 2018, from a 3.3% year-over-year contraction in the third quarter. Therefore, according to private estimates, the economy accumulated a 2.6% year-over-year fall during 2018.

During the fourth quarter, the primary deficit amounted to ARP 186 billion, accumulating ARP 374 billion deficit in 2018 or 2.4% of GDP, overachieving the official target of 2.7% activity.

According to the National Institute of Statistics, the national consumer price index recorded an 11.5% increase during the fourth quarter of the year, reaching an annual inflation of 47.6% for 2018. On the monetary front, the Argentine Central Bank expanded the monetary base by ARP 159 billion in the fourth quarter, reaching a 41% growth in the year. Meanwhile, the exchange rate average ARP 37.8 per dollar in December, a 2.1% appreciation against the average for September last year.

When compared to December 2017, the Argentine peso recorded 113.4% depreciation. In December, the average rate on peso-denominated private sector time deposits for up to 59 days was 48.6%, 7 percentage points above the average recorded last September.

Private sector deposits in pesos amounted to ARP 2.1 trillion, increasing 18.8% during the quarter and 41.6% in the year. Transactional deposits in pesos rose 13.2% during fourth quarter and 33% in the year. On the other hand, peso-denominated term deposits increased 25.5% in the last quarter and increased 67.5% during last year. As of the end of December, peso-denominated loans to private sector amounted to ARP 1.5 trillion, recording a 2% decrease in the quarter and a 16.8% increase during the year.

Turning now to Grupo Financiero Galicia. Net income for 2018 amounted to ARP 14.4 billion, 67% higher than the previous year, mainly due to profits from Banco Galicia for ARP 11.5 billion from Tarjetas Regionales for ARP 1.8 billion from Sudamericana Holding for ARP 571 million and from the Galicia Administradora de Fondos for ARP 402 million.

Net income for the quarter amounted to ARP 4.4 billion, 55% higher year-over-year, mainly due to profits from Banco Galicia for ARP 4.2 billion, Sudamericana Holding for ARP 140 million and in Galicia Administradora de Fondos for ARP 44 million, which were partially offset by ARP 22 million loss from Tarjetas Regionales.

Going to Banco Galicia, net income for the quarter increased 120% from the year ago quarter, excluding the effect of this pick up of Tarjetas Regionales, net income increased 224% in the last 12 months. This was a result of 104% higher net operating income, mainly due to the 509% growth of the net results from financial instruments.

Net interest income for the quarter increased 29% as compared to the same period 2017, mainly due to 156% increase in interest on the portfolio of loans to private sector, offset by 284% increase in interest expenses. Average interest-earning assets grew ARP 107 billion or 59% year-over-year, and its yield increased 16.75 percentage point, mainly due to an increase in the yield on peso-denominated government securities. Interest-bearing liabilities grew ARP 296 billion or 89% during the same period, and it's cost increased 976 basis points, mainly as a result of the increase in the average interest rate on peso-denominated term deposits.

Provision for loan losses for the quarter amounted to ARP 2 billion, a 158% higher than the same quarter of the prior year, mainly due to the evolution of credits in arrears of the consumer portfolio and to a higher-regulatory provision on the portfolio in normal situation as a consequence of the increase in the volume of credit.

Personal expenses increased 45% as compared to a year before, mainly due to salary increase agreements with the union and administrative expenses grew 51% due to increases of 136% in maintenance expenses and 49% in taxes.

The bank's financing to the private sector reached ARP 288 billion at the end of the quarter, up 58% in the last 12 months, and deposits reached ARP 361 billion, up 80% in a year. The bank's estimated market share of loans to private sector was 10.5%, 87 basis points higher than at the end of the year ago quarter. And the market share of deposits from the private sector was 11.1%, recording an 88 basis points increase in the same period.

As regards to asset quality, the NPL ratio ended the quarter at 2.88%, recording an 88 basis points deterioration as compared with a 2% of the fourth quarter of the prior year. And the coverage of NPLs with allowances reached 104%, down from 112% from a year ago.

As of December 31, 2018, the bank's consolidated computable capital exceeded by ARP 22.1 billion or 82%, the ARP 27 billion minimum capital requirement. And the total regulatory capital reached 15.1%, increasing 424 basis points from the same quarter of fiscal year 2017.

In summary, during the fourth quarter of 2019, Grupo Financiero Galicia had good operating results in a challenging macro environment, and its main asset, Banco Galicia, was able to gain market share of loans and deposits to keep its asset quality, liquidity and profitability metrics at reasonable levels.

In addition, it is worth to mention that due to Argentine Central Bank regulations until the end of fiscal year 2019, financial institutions are not allowed to make inflation accounting adjustments, as it would have been the case for fiscal year 2018 under IFRS.

Its application would have a significant effect on the financial statements, turning Grupo Financiero Galicia's ARP 14.4 billion nominal profit into a ARP 455 million loss, and its equity to [grow] from the reported fees of ARP 54.9 billion to ARP 63.5 billion, approximately.

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

(Operator Instructions) We'll turn first to Ernesto Gabilondo with Bank of America.

So I will only do one question, so I will allow them to rest of the questions. So when I look to this securities and FX gains in the P&L, they were like 3x higher than in the first quarter of '17. And the overall, I believe 40% of your total operating income. I understand the rationale to invest in securities under this challenging macro, but what do you need to see to start seeing like in higher credit demand? If you can give us some color and your expectations for the loan growth this year? It will be kindly appreciated.

Okay, Ernesto. Yes, I would say that since the beginning of May, last year basically, loan demand from the private sector decelerated and the growth in deposits also allocated to invest in central bank paper mainly. At the beginning, there was the Lebac stock then Leliq's with high yield. And yes, this source of revenues replaced the interest intermediation with the private sector. For this year, considering an inflation in our base case scenario, around 30%. We think loans can grow couple of percentage points close to inflation, could be 28% or 32%. Let's say, we give this range as some macroeconomic variables are not so easy to project these days. Some years ago, our guidance was a little bit more accurate. Right now, loan growth should grow in the area of inflation.

Okay, perfect. And any color between the segments, which one is growing higher than the other?

Well, in the loans to individuals, it has been growing with personal loans first then credit card financing like the below inflation. SME actually decreased in nominal terms. And the corporate grew when we look especially at dollar-denominated loans taking advantage of low interest rates in dollars, of course, these loans are granted to exporters or to suppliers of exporters.

So you think that for the 28%, 32% guidance, the same trends on the segments will be the same?

Yes. And what we need to recover positive loan growth in real terms, it's definitely a lower interest rate. The BADLAR interest rates one year ago, was around 22%, right now, it's closer to 37%.

So we are -- although we have been going down lately, we need a further reduction in interest rates, both in the BADLAR and that is the benchmark from which we lend to the private sector.

We'll turn next to Gabriel Nóbrega with Citi.

It actually got to my attention that during the quarter, Tarjetas actually saw a loss. And some -- what I understood here, it actually had to do with some higher provisions estimates there. So I just wanted to maybe get a sense from you, where is -- is this business is actually worrying you? And if the bank is implementing any strategies I mean, for Tarjetas during the year? And then I'll make the second question afterwards.

Hi, Gabriel. Actually, there's 3 reasons for the loss of Tarjeta or the Tarjetas Regionales in the fourth quarter. One, as you said, was increasing in provisions. Although, NPLs improved to levels of 6.8%. The second reason was the increase in the cost of funding with this level of a higher interest rate, Naranja needs to fund its lending in the market. So either it's relying on banks or with bonds issued locally, so there was an increase in the cost of funding. And the third one was the merger between Naranja and [Nuvala], that had certain, I would say, extraordinary expenses like certain severance payment and well -- the cost of the merger. Therefore, this year, we -- this quarter, we are forecasting positive results for Naranja. And one thing that we spoke, perhaps, some months ago that Naranja requested the Central Bank the authorization to take deposits. The authorization is still pending, they are to take advantage of their vast client base and get cheaper funding.

Very fair. And on my second question, I actually wanted to understand a bit more of your asset quality. Thing that we saw a deterioration and delinquency given that -- the NPL ratio for Tarjeta is actually decreased, but for the bank increased at around 50 bps here. I wanted to maybe get a sense on when should we expect NPL ratios to peak? And if there are any segments that are currently worrying you?

Well, the first quarter of this year, we'll be comparing with the first quarter of '18, that was a very good quarter. So perhaps, the worst in quarter-over-quarter comparison -- year-over-year, basically, will be at the end of the first quarter of this year. Then we see stabilization of the cost of risk. In the case of the bank, the cost of risk in the fourth quarter was around 3.5% within the good stabilize at this level. In the case of Naranja, it was a little bit higher in the fourth quarter, we think it will go down for the full year. The segments, there are more, I would say, subject to deterioration. Our -- when we look at individuals, the lower the income, and when we look at companies, the lower, I would say, the size. So micro SMEs on lower income segments are the ones that have been deteriorating more than the rest of the client base. But again, at levels of -- on a consolidated basis, the NPL ratio is at 3.5%. So really not -- I would say, high compared to even other financial markets or our own history.

All right. And if you just allow me a follow-up here. What are you expecting for consolidated cost of risk by the end of the year?

Consolidated around 4%.

(Operator Instructions) Next we'll turn to Yuri Fernandes with JPMorgan.

I had a question on efficiency ratio, if you can provide some color on how you see G&A evolving in [ADT] and also fees? I know that fees initiations that have a fear. You had some MDR regulation pressure on fees, but should we expect a better momentum for fees going on, like maybe fees going more in line with relation? And also the same about the insurance revenue. So first if you can comment on these on cost to income, how you are seeing those things? And my second question is regarding Prisma. If you can make like a follow-up. I know that you comment in the release that you already see around $60 million from the sale. How -- at what value these was booked? How -- basically, how much capital gains should we see in the first quarter because of the Prisma sale? And if the impact on the act income should be material for you?

Okay. Yuri, well, when we look at efficiency, the fourth quarter numbers for the bank, they were very good, mainly because they -- I would say, significant increase in financial income coming from the Leliq, coming from FX results and also from interest. And the cost, it follow a slower pace as inflation ended at 47.6%, but the average inflation was closer to 35 -- around 35%. So this year, you saw a significant increase in -- improvement in efficiency ratio. It should go the other way, I would say, this year -- and efficiency should get back to levels around 50%. When we look at the bank's figures. Insurance, definitely have a lot of potential for growth due to a fiscal incentives for saving a product. The reduction in the MDR is very small for this year. So it will be more than compensated with volume and to give an idea of the interchange, if we will go down from 1.85% to 1.65%. And the rest of the fees we charge will be in line with inflation. Fees in Argentina typically are a function of inflation and not a function of a loan evolution.

Regarding Prisma, we've sold 51% of our holding. We used to have 15.1% of the shares of Prisma. We were #2 shareholders in terms of a size. We sold 7.7%, and we keep 7.4%, and we have 2 -- 3 years to sell this 7.4%.

The price for our 51% of the share was $106 million. We see 60% of that in cash, 40% will be finance in 5 years, 70% in dollars and 30% in pesos with different interest rates.

In our books, the 100% of our holding in Prisma was at the end of year '18 at around $5.5 million. So it's a significant gain. Of course, it's subject to the 30% income tax, and we are going to show the gain in the first quarter, considering the price it will receive in cash. We will have to make provisions for the 40%, and we will be showing the gradually that gain, once we received the different installments.

Quickly, just coming back to the first point. So it's fair to assume that expenses should grow above inflation rate? Like -- as I said, like the trend is of worsening cost to income ratio for '19?

Well, if we consider the -- let's say, the 30% December-to-December estimated inflation, yes. If we consider the average inflation, that will be higher. We will be growing expenses in line with that average inflation. But yes, the full year efficiency ratios should have some deterioration compared to the 40% levels we saw last year.

Next, we'll move to Carlos Gomez with HSBC.

I have 3 technical questions. The first one refers to your inflation adjustment. The one that you disclose in your press release, is it exactly the same that you will have in the 20-F? Or it may look different when you report to the SEC?

Well…

Yes, go ahead.

Sorry.

No…

Go ahead with the [sequence]. All right, Carlos. Go ahead.

Yes, okay.

We have a delay. Well, let me answer the first one. Under IF -- or for the SEC, we will be full IFRS. So we will show all the numbers adjusted by inflation, and I would say, the bottom line and the adjusted net worth will be the same. With -- the difference is that, in 20-F, we will have all the detail information.

All right. Not the normal particular difference in terms of the inflation, I guess, there was some. Okay. And the second one referring to Prisma. So if I understand correctly, you will only record the gains for the 60% that you sell in cash right now and the other 40%, you will share and accrue over time. What happens to the remaining 49% in your books? Do you have to increase its value to the one in the transaction? Or do retain [it remains] at the original book value?

Well, you know we have IFRS, but this interbank has certain, I would say, preparatory adjustments. So we -- following IFRS, we should have to book them at fair value, but once we get to the point of updating, let's say, or revaluing our holding of the remaining shares in Prisma, we will have to get the approval from the Central Bank. My feeling is, that should be close, if not the same, of the price we obtained, but we have to see it. Definitely, not a very low book value that we have today, as I said, 15% of the shares were worth $5.5 million or $6 million.

And then you -- will you write this up to the value approved by the central bank? Is that recorded as a gain or recorded directly against equity until you sell it? How are you [keep account]?

Through equity.

(Operator Instructions) Next we'll move to Alonso Garcia with Credit Suisse.

My question is, if you could provide some guidance on margin evolution for this year? And exactly what lines you are considering for this margin? And considering -- I mean, what is your assumption in terms of Central Bank rates for that guidance? And also what are you assuming in terms of which are requirements by Central Bank? I mean, do we expect them to remain at current levels? Do you see a room for potential increases -- I mean, increased volatility, do you think they will be lowered? Any color in that regard will be appreciated?

Okay. Alonso. Our net financial margin is made up by the net interest income, net results from financial instruments and the gold and foreign currency potential differences. Actually, we are taking deposits, which costs growth within net interest income, and part of that is allocated to Leliq that have the yield in the net results from financial instruments.

Considering all these aligns, we are expecting some margin expansion. Considering the 2018 full number, that was around 15% -- 14.7%. Actually 14.7% was the fourth quarter. For the full year, it was 13.7%. We think it can go at around 14%. So some, let's say, 50 basis points expansion for the full year, something lower than the fourth quarter and little bit higher than the full year margin. Regarding reserve requirements, we don't have any, I would say, opinion. We think it should make sense to -- that for the Central Bank to reduce it. But we don't have any idea about -- I would say, timing or what type of reserve requirement if remunerated or non-remunerated will be decided to reduce. In our estimates, we are not making any assumptions and changes in the reserve requirement.

Perfect. And in terms of interest rate by year-end, do you have any expectation defined these guidance?

Yes, we are considering that the -- about lower rate will gradually go down to levels around 30% at year-end and the yield on Leliq around 37 -- from 37 to 39 at year-end.

And at this point, there are no other questions in the queue. (Operator Instructions) And Mr. Firvida, no one else has signaled. I'll turn the conference back to you for any additional or closing remarks.

Okay. Thank you, Lara. Well, thank you for -- regarding for attending this call. If you have any questions, please do not hesitate to contact us. Good morning. Thank you.

And with that, we'll conclude today's conference. Thank you, everyone, for your participation. You may now disconnect.