Grupo Financiero Galicia SA (GGAL) 2019 Q1 法說會逐字稿

Welcome to the Grupo Financiero Galicia First Quarter 2019 Earnings Release Conference Call. This call is being recorded. At this time, I would 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 risk and uncertainty that could cause actual results to differ materially from those expressed.

According to private estimates, the Argentine economy recorded a 5.5% year-over-year contraction during the first quarter of 2019, from a 6.2% year-over-year contraction in the fourth quarter of 2018.

During the first quarter, the primary fiscal balance amounted to ARP 10.3 billion surplus, which stood above the ARP 6 billion target for the first quarter of the year.

According to the National Institute of Statistics, the national consumer price index recorded an 11.8% increase during the first 3 months of the year. On the monetary front, the Argentine central bank contracted the monetary base by ARP 57.5 billion in the quarter, a 4.1% reduction. Meanwhile, the exchange rate averaged ARP 41.35 per dollar in March, a 9.4% increase against the average of -- for December 2018.

When compared to the same month of 2018, the FX rate increased 104.4%. In March, the average rate on peso-denominated private sector time deposits for up to 59 days was 40.26%, 6 percentage points below the average recorded last December.

Private sector deposits in pesos amounted to ARP 2.2 trillion, increasing 7.4% during the quarter and 47.9% in the year. Transactional deposits in pesos fell 0.8% during the first quarter, an increase 28.9% in the year. Peso-denominated time deposits increased 15.5% in the first quarter, an increase 70.9% year-over-year. As of the end of March, peso-denominated loans to private sector amounted to ARP 1.53 trillion, recording a 1.4% decrease during the quarter and a 6.6% increase when compared to March last year.

Turning now to Grupo Financiero Galicia. Net income attributable to Grupo Financiero Galicia for the first quarter of this year amounted to ARP 9 billion, 201% higher than the same quarter of the previous year mainly due to profits from Banco Galicia for ARP 7.8 billion; from Tarjetas

Regionales for ARP 867 million; from Sudamericana Holding for ARP 195 million; and from Galicia Administradora de Fondos for ARP 77 million.

Going to Banco Galicia, net income for the quarter increased 300% from the year-ago quarter. This was a result of a 104% higher net operating income mainly due to the growth of the net income from financial instruments and a further operating income partially offset by higher loan loss provisions. Excluding the effect of the sale of Prisma, net income increased 150% in the last 12 months.

Net interest income for the quarter decreased 56% as compared to the same period of 2018 primarily as a consequence of a 276% higher interest on time deposits. This decrease in net interest income was more than compensated with increase in the net income from financial instruments, which amounted to ARP 15 billion for the quarter, up ARP 13.6 billion from ARP 1.6 billion amounted -- recorded in the same quarter of last year, as a consequence of the increase in results related to higher holdings of Leliq. Net income from financial instruments also includes the result from the revaluation of the remaining bank's interest in Prisma.

In addition, other operating income recorded high growth levels too, as it includes the profits from the sale of 51% of the bank's interest in Prisma.

Provision for loan losses for the quarter amounted to ARP 6.1 billion, 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 higher regulatory provisions on the portfolio in normal situation as a consequence of the increase in the volume of credit, together with the regulatory provision equivalent to 100% of the finance portion of the sale -- of -- price of Prisma.

Personnel expenses increased 37% as compared to a year before mainly due to salary increase agreements with the union, and administrative expenses grew 42% mainly due to higher taxes and to growth of expenses related to higher services.

The bank's financing to a private sector reached ARP 309 billion at the end of the quarter, up 56% in the last 12 months, 19% growth for the peso financing and 18.8% for the financing in foreign exchange measure in dollars. And deposits reached ARP 410 billion, up 107% in a year; peso-denominated deposits grew 82%; and FX deposits measured in dollars, 15.5%.

The bank's estimated market share of loans to private sector was 10.9%, 141 basis points higher than at the end of the year-ago quarter. And the market share of the proceeds from the private sector was 11.5%, recording an 181 basis points increase in the same period.

As regards asset quality, the NPL ratio ended the quarter at 3.95%, recording a 164 basis points deterioration as compared with the 2.31% of the first quarter of the prior year. And the coverage of NPLs with allowances reached 104%, down from 106% from a year ago.

As of March 31, 2019, the bank's consolidated computable capital exceeded by ARP 26 billion or 85% to ARP 30 billion of minimum capital requirement. And the total regulatory capital ratio reached 15.2%, increasing 105 basis points from the same quarter of fiscal year 2018.

In summary, during the first quarter this year, Grupo Financiero Galicia had good results in a challenging macro environment. And its main asset, Banco Galicia, was able to gain market share of loans and deposits and to give liquidity, solvency and profitability metrics at high 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 under IFRS.

Its application would have a significant effect on the financial statements turning Grupo Financiero Galicia ARP 9 billion nominal profit for the quarter into a ARP 4 billion profit, and its equity to grow from the reported figure of ARP 63.7 billion to ARP 75.1 billion approximately as of March 2019.

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 Credit Suisse.

My first -- my question is regarding asset quality. I mean will it serve sharp deterioration with the correct indicators, both at the bank level and at the credit card subsidiaries. So my question is how much can these ratios -- how high can these ratios go in the coming quarters? Do you think this is the peak of deterioration in asset quality, or do you believe that there is still room for further deterioration down the road?

Okay. Good morning, Alonso. In the bank's NPL ratio, there was a sharp increase from 2.88% to 3.95% mainly due to 1 specific corporate case. Everybody knows, it's in the media, Molino Cañuelas. Without that, I would say, particular case, NPLs would have grown to levels of 3.2%, in line with the slight deterioration we have been seeing and even forecasting. And having said that, we think we are, I would say, close to the peak in terms of NPLs.

In the first quarter, we have inflation much higher than expected, and still, the wage negotiations are not closed. So it's the worst situation in terms of purchasing power. Going forward, we think NPLs could be stabilizing or even improving toward the end of the year. Also, that is -- NPLs considering the numerator, the denominator is not growing. When we look at, for example, at Naranja's NPL that grew from 6.8% to 11.55%, we can see that loans even decreased in real terms. If they have grown with inflation, the number would have been closer to 10%, again due to the economic conditions of the country and this lag between inflation and salary increases.

And also particularly, in the case of Naranja, the credit card product is much better than personal loans, but many clients of Naranja have worked in a nonperforming situation with other financial companies. And in the case of Naranja, they have to equalize the classification, so despite being in normal situation in Naranja, they are classified as nonperforming due to the nonperforming in other companies. So having said all this, we think the numbers should be gradually improving.

And just a brief follow up. Do you have an estimate of your cost of risk for -- either for the bank or for the entire group for the full year 2019?

Well, in other thing, not only in the loan loss provision of this quarter. There was an extraordinary effect on -- in -- due to Molino Cañuelas in order to get to a -- to 100% coverage. Also, we have a regulatory provision related with the sale of Prisma that was financed. So we take out these 2 reasons or 2 items, the cost of risk, in the case of the bank, should go down from roughly 7% to 3.5%. On a consolidated basis for the full year, the -- it could be around 4%, 4.2%.

We'll take our next question from Ernesto Gabilondo with Bank Of America Merrill Lynch.

My question is on your strategy for next quarters. Given that there has been practically no lending demand in the industry, is the strategy will be to continue building a higher deposit base and invest it at the Leliq market rates? And then for my second question, can you share with us your thoughts on the presidential elections, who is leading the polls and the scenarios that could be presenting this month by knowing the potential candidates? And finally, just 1 last questions. How much additional provisions from Molino Cañuelas were created during the quarter, and how is now the coverage related to Molino Cañuelas or did you provision 100% this quarter?

Yes. Hi, Ernesto. Well, first question about strategy. We are navigating a scenario of volatility political uncertainty that is tied to your second question. We are seeing deposits grow, even above inflation for pesos still now. Also deposits in dollars, very healthy. Loan demand is not growing in part because of uncertainty, but also because of economic activity levels and the interest rate level. So the funding we are getting, all the deposits, all this liquidity is investing -- invested in a big proportion in Central Bank paper. That is from a pure asset liability management perspective.

When we look at the different operations, we keep on with our strategy of being a great bank, a bank of experience, growing our fee base, our client base in all our products. And we are not expanding the branch network. We are continuing with our digitalist -- digital transformation and being prepared for the moment in which interest rates begin to go down and loan demand picks up. So this is the first question.

The second question about presidential elections. It's really hard to say at this time of the year because many different thresholds of moment or moments from now till the end of the year are going to take place. First, who are going to be the candidates? Because at the end of June, the list of candidates must be submitted, then the primary elections, then the first round and then the second round. And till now the usual, I would say, suspects are Cambiemos, in the [case] of Macri; Cristina Kirchner. Again, she is not still a candidate; and someone in the middle, coming from the alternative Peronism that could be either Lavagna or Masa. We just need to know what happens there if -- again, who are the candidates, what will happen in the primaries, perhaps that will bring forward the potential polarization. Definitely, the scenario is open. Well, I have my own guess -- educated guess, but I'll try to be very impartial and try -- and make a more accurate guess closer to the elections.

Perfect. And about the additional provisions of Molino Cañuelas?

Yes. And about Molino Cañuelas. The Molino Cañuelas exposure was about ARP 1.8 billion. It was a normal situation in December with a 25% provision. In the first quarter, it was classified as nonperforming loan, and we have 104% coverage. So Molino Cañuelas could be considered as 100%.

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

I -- my question is more just trying to see the exact impact of Prisma sale. I was tracking a little bit, finding the line. So I -- my understanding is that these impacted other operating income at the bank level, so this was printed ARP 5.892 billion. My question is each -- how much did it impact each line? So how much did it impact other operating income? How much did it impact provision, and what kind of tax bracket did you use -- did you say you'll pay? And just so that we'd understand exactly what would have been the clean income statement.

Okay. Hi, Domingos. The sale of Prisma was a complex transaction in terms of accounting because it was sold 51% of the shares; 60% cash, 40% finance. And the remaining 49% was revalued and that revaluation also including -- included a provision requested by the Central Bank. The net effect, even including income tax, was ARP 2.9 billion. The detail is in results from financial instrument. It includes ARP 2.2 billion that is due to the revaluation of our 49% of the shares that were not sold, net of the provision.

In other operating income, there is a ARP 3.8 billion that is the result of the sale of Prisma, of our 51%, monetized at 60%. And in the cost of risk, it's about ARP 1.7 billion, that is the provision for the 40% that was financed of the sold portion. Then, we have some sales tax and income tax for about ARP 1.4 billion. The net effect, again, is ARP 2.9 billion.

(Operator Instructions) Our next question comes from Gabriel Nóbrega with Citi.

I actually have 2 questions. The first one is on regulations. We have seen over the past 2 or 3 months, the Central Bank passing a lot of regulations for the banks. And in my view, the most impactful is on the reduction of the credit card settlements from 19 days to 10 days. Could you maybe share with us if you have made any calculations on how much this could impact your net income for 2019, and I'll make a second question afterwards.

Okay. Hi, Gabriel. Well, my first comment would be that a new regulation could be -- or the impact of a new regulation could be calculated. Looking at the past results, what usually happens is that when a new regulation appears, we do something to try to offset that. I remember in the past when the previous Central Bank administration, meaning the previous government, launched different measures in order to put caps on interest rates or minimum interest rates or even complications to raise fees, we did other -- or we took different actions in order to offset those problems.

And in this particular case of reducing the rates of payment with the credit cards from 19 to 10 days, we also have to make or to take certain assumptions. For example, what would be the yield on which these funds are invested, so many other implications appears. So just thinking in the 8 months, and again, if we do not -- if we do nothing, it will be roughly ARP 1 billion net of income tax. Of course, we -- again, for the 8 months, that is if we do not do anything with the tenor or days in which we lend to our clients. And also, if we can reduce promotions or discounts or even eliminate free interest financing. So the head of the product credit cards, of course, will try to keep his budget at the same level. So this again, has a theoretical impact, and then we do things in order to offset that.

All right. That's very clear. And as for my second question. During the quarter, we saw one of your peers fully writing off the exposure that they had to [Amoca]. Being that you already mentioned having 100% coverage for this corporate, why not write off this loan?

Well, we think we will recover a big percentage of that. If I had to give a big -- give big name out of my head, I would say, roughly 50-plus percent. So we are going to keep it. And negotiations are -- and even drafting of documents is being advanced, so we think we will recover this kind of portion. And also the company is operating its -- it has many factories, around 20 factories, good brands. So they are in -- not in normal situation, but operating normally, I would say.

All right. And just a follow up here. From your cost of risk guidance of around 4% to 4.2%, are you taking into consideration the reversal of this 50%?

No. No, we don't considering that.

And we will take our next question from Carlos Gomez with HSBC.

Pablo, 2 questions. One on the credit card legislation. Can you confirm that it will or will not apply to Tarjeta Naranja? I ask it because you are in the process of making it to financial institutions, so maybe in that case, it might apply. So will we get a chance [to go that]? And second, can you give us an estimate for loan growth for this year and next year in pesos?

I couldn't listen to you. The second question, Carlos, sorry.

Loan growth for this year and next year.

Okay. Perfect. In the case of Tarjeta Naranja, this shortening of period of payment is not mandatory so it's not for them basically because the regulation is applicable to financial institutions. Naranja, through Tarjetas Regionales, not through Naranja directly, will get a license from the Central Bank in order to take deposits, but it will not apply to the Naranja company as it is today. The other exception is our rural card, Tarjeta Galicia Rural, that doesn't apply. So it's for basically individual clients, and again, it's the sites I mentioned.

For loan growth, we have to speak about nominal growth rates and real. For this year, we have been revisioning upwards the inflation estimate. 4 months ago, we were forecasting 30% -- 28% to 30% inflation. Right now we are closer to 40%. In that -- having that in mind, our loans could be growing around 30% on -- for the system, perhaps a little bit lower, 27%, something like that. For next year, depending on the inflation, and if the scenario of monthly inflation going down takes place, interest rate also should go down and loan demand should recover, so we could see some positive loan growth in real terms. But again, we are still far from that situation of interest rates really going down to a level that will or could improve our loan demand.

And there are no further questions at this time. I'd like to turn the conference back to Mr. Firvida for any additional or closing remarks.

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