Grupo Financiero Galicia SA (GGAL) 2021 Q3 法說會逐字稿

Good day, and welcome to the Grupo Financiero Galicia Third Quarter 2021 Earnings Release. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Pablo Firvida. Please go ahead, sir.

Thank you, Nick. Good morning, and welcome to this conference call. I will make a short introduction, and then we'll 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 the monthly indicator for economic activity, MI, the Argentine economy recorded an 11.6% year-over-year expansion during September and shows a 10.9% growth for the first 9 months. The primary deficit for the first 9 months of 2021 reached only 0.3% of GDP, but it is worth mentioning that without the onetime extraordinary revenue from the wealth tax and the SDRs from the IMF that figure would have been 1.8% of GDP.

The National Consumer Price Index recorded a 9.3% increase during the third quarter and reached a 52.5% annual variation in September 2021.

On the monetary front, the Argentine Central Bank expanded the monetary base by ARS 205 billion in the third quarter, recording a 26.4% increase in the last 12 months. Meanwhile, the exchange rate averaged ARS 98.3 per dollar in September, a 3.2% increase against the average for June. When compared to September 2020, the Argentine peso underwent a 23% devaluation.

In September, the average rate on peso-denominated private sector time deposits for up to 59 days was 34.6%, similar level to the average recorded in June. Private sector deposits in pesos amounted to ARS 6.8 trillion in September, increasing 12.8% nominally during the quarter and 49.3% in the last 12 months. Time deposits in pesos rose 12% in nominal terms during the quarter and 51.1% in the year and peso-denominated transactional deposits 14.1% and 48.4%, respectively, in the same period.

Private sector dollar-denominated deposits amounted to $16.4 billion, increasing 0.9% during the quarter and decreasing 4.3% in the last 12 months. As of the end of September, peso-denominated loans to the private sector amounted to ARS 3.3 trillion, increasing in nominal in terms, 10.5% in the quarter and 35.9% when compared to September 2020. While private sector dollar-denominated loans amounted to $5.1 billion, recording a 6.1% decrease during the quarter and a 16.7% contraction year-over-year.

Turning now to Grupo Financiero Galicia. Net income for the quarter amounted to ARS 9.4 billion, growing 24% in real terms from the same year ago quarter. This profit was mainly due to gains from Banco Galicia for ARS 6.9 billion; from Naranja X for ARS 2.2 billion; from Galicia Asset Management for ARS 437 million; and from Galicia Seguros for ARS 248 million. The annualized return on average assets was 2.6% and the return on average shareholders' equity, 14.2%.

Banco Galicia's net income for the quarter increased 14% in real terms from the same year ago quarter, mainly due to a 6% higher net operating income and 18% lower personnel expenses and 61% decrease of income tax, offset by a 48% higher loss from the monetary position and a 28% increase of other operating expenses. Net interest income increased 13% in real terms, with interest income growing 23% year-over-year and interest expenses 29%.

Average interest earning assets decreased 6% in the same period, mainly due to decreases of 38% of dollar-denominated loans, 26% of peso-denominated loans and 15% of government securities in pesos, partially offset by 169% increase of other interest-earning assets in pesos. In the same period, its yield increased 550 basis points, primarily due to higher yield on other interest-earning assets in pesos, mainly repurchase agreement transactions with the Argentine Central Bank.

Interest-bearing liabilities decreased 8% from the third quarter of 2020 due to a 28% decrease in the average balance of other deposits in pesos, a 27% decrease of dollar-denominated time deposits and a 12% decrease of dollar-denominated saving accounts, offset by a 9% increase of peso-denominated time deposits. During this period, its cost increased 586 basis points, mainly as a result of a 517 basis points increase in the average interest rate of peso-denominated time deposits.

Net fee income increased 4% from September 2020, mainly due to higher fees on deposit accounts, 24% and on utility bills collection services, 43%, partially offset by lower trade-related fees, 8%.

Net income from financial instruments decreased 11%, mainly due to a 15% decrease in the results of Argentine Central Bank securities due to lower holdings. Gains from gold and FX quotation differences were down 82% from the year ago quarter, reaching ARS 616 million, including ARS 261 million profit from foreign currency trading.

Provision for loan losses were 80% lower than in the same quarter of the prior year, and personnel expenses decreased 18% from the third quarter of 2020, mainly due to a 7% reduction in staff. While administrative expenses increased 5% as compared to the year before because of a 33% increase in taxes, partially offset by a 50% decline in fees and compensation for services.

Other operating expenses for the quarter increased 28%, mainly due to a 29% higher turnover tax and a 37% increase of other provisions compared with the same period of the previous year. The bank's financing to the private sector reached ARS 512 billion at the end of the quarter, down 25% in the last 12 months, mainly due to a 19% decrease of loans in pesos and a 41% decrease of dollar-denominated loans. Exposure to the public sector increased 36% year-over-year primarily due to the growth of repurchase agreement transactions with the Argentine Central Bank. Excluding these repos and Central Bank instruments, net exposure represented 8% of total assets compared to 7% as of the end of the third quarter of 2020.

Deposits reached ARS 935 billion, similar level from a year before with total deposits falling 10% and peso deposits growing 2%. The bank's estimated market share of loans to private sector was 11.3%, a 145 basis points lower than at the end of the year ago quarter. And the market share of deposits from the private sector was 10.5%, 30 basis points higher than in the same quarter of 2020.

As regards asset quality, the ratio of nonperforming loans to total financing ended the quarter at 4.16%, recording 196 basis points deterioration as compared with the 200 -- 2.20% of the third quarter of the prior year, mainly due to the end of the regulatory waivers for the classification of the loan portfolio established by the Argentine Central Bank during the 2020 lockdown. At the same time, the coverage ratio was 172%, down from 302% from a year ago.

As of the end of September 2021, the bank's total regulatory capital ratio reached 27%, increasing 386 basis points from the end of the same quarter of 2020. The bank's liquid assets represented 159% of transactional deposits and 68% of total deposits, up from 81% and 46%, respectively, from a year ago -- from a year before.

In summary, in a very challenging and volatile macro environment, Grupo Financiero Galicia was able to improve profitability and to keep asset quality, liquidity and solvency metrics at very healthy levels.

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

(Operator Instructions) And our first question comes from Ernesto Gabilondo with Bank of America.

Pablo, thanks for your presentation and for the opportunity to ask questions. I have a couple of questions from my side. The first one is on the economic political outlook. After the midterm elections, what you think are the key challenges ahead? And what are the key dates that you recommend us to follow? And how do you see interest rates, inflation and FX?

And my second question is on your net interest income. We saw an important growth during the quarter, but also we noticed that it benefited from repos with the Central Bank. So I wanted to understand how sustainable do you think you can maintain these repos with the Central Bank? And what would be the strategy for the NIMs in the next quarters?

Okay, Ernesto. Well, first, going to the political and macroeconomic environment. As you mentioned, last November 14, we had the midterm elections. The main opposition party got roughly 42% of the votes and the government 33%. So basically, what the media saying is that 2/3 of the population or the voters didn't vote for the government. This means that the Congress will change and the government will not have the quorum and also will have to negotiate to pass different laws. So I think that's a good news.

Going forward, we see as key the agreement with the IMF. Everybody keeps saying that we need to reach an agreement. Even this week, the minister of economy said that he would like to get the agreement between -- before, sorry, year-end. Some other economies are saying that it will be most likely that will occur sometime before the end of March when Argentina has to pay a big installment if there is no agreement.

So that is the base case scenario. What we need to see is what covenants or what will be the 2-year plan that the President mentioned that they will have to approve and agree, I would say, with the IMF.

In our base case scenario, we are not seeing any significant change in terms of inflation and interest rates, inflation for this year will be around 50%, and our Chief Economist is forecasting similar levels. The FX situation is that we have many different exchange rates. Most of the analysts say that there should be some kind of devaluation in the official exchange rate. But we need -- that should come after the agreement with the IMF. What is good news regarding the macro is the rebound in GDP. Last year, Argentina's GDP contracted 9.9%. And the last numbers point that this year, the GDP will grow 9.7%. So there will be almost full recovery. Of course, there is about 1% less to get to a pre or to the end of the 2019 level.

Going to the net interest income and margins, we see kind of flat margins as always, many moving parts. But we have a part of our loans at fixed interest rates even subsidized or determined by the Central Bank, the same for time deposits, the breakdown of time deposits and transactional deposits and also the breakdown of loans is not changing dramatically. And going specific to the repo situation, it's an instrument the bank uses to invest for 7 days, it's liquidity when deposits grow and loan demand doesn't follow the same rhythm. The good news is that for the fourth quarter, we are seeing a significant loan demand in the order of 6% to 7% nominal growth per month in October and so far November. So part of that liquidity invested in the Central Bank should go to the private sector.

And our next question comes from Rodrigo Nistor with AP Partners (sic) [AR Partners].

So over the last few quarters, Naranja X became increasingly relevant in earnings contribution to the consolidated result. So what should we expect going forward for this business? Is it fair to think that Naranja X could be 20%, 25% of the consolidated net income?

And then a follow-up on the same topic, if you could share with us some extra color on the business performance, why is it doing much better than the bank? Is it just a matter of regulation or there are other things that explain the good metrics?

Rodrigo, well, we are comparing Naranja X numbers with the previous year that was, I would say, extraordinary low. Last year, the government -- the company in Naranja X was finishing many projects, mergered some, I would say, extraordinary expenses due to digitalization. And now we are seeing the more, I would say, usual type of profitability.

When you look at the numbers, there was a significant growth in net financial income due to both an expansion in margins and in loans. Last year, origination was almost frozen due to our own decision of the company. But if you look at the loan evolution, it was like 55% growth, September '21 compared to September 2020. And what is also good news is the good level of asset quality or NPLs. So going forward, we expect to go on seeing this kind of 20% level ROEs. And it's likely that the -- it will represent between, let's say, 20% and 25% of Grupo's consolidated net income.

And our next question comes from Jason Mollin with Scotiabank.

My question is on the digitalization initiatives and you just mentioned expenses related to that. If you can talk a little bit more about what Galicia is doing there and if we should be expecting expenses related to that to increase going forward? And maybe on that note, give us an update on the competitive environment for these digital channels.

Jason, well, we -- internally, we tend to say that we no longer speak about digital transformation. It was a project like 4 years ago. Now we are -- we say we are digital. It's no longer a transformation. But of course, there is an ongoing investment in different initiatives to increase and have new releases. When you look at our apps and home banking and office banking, you can do anything there, and you don't need to go to branches. And actually, if you look at the number of branches, there was a reduction in this -- in the third quarter from 327 to 318. And it's likely that by year-end, we will see 315.

And now there is a new regulation from the Central Bank that in order to close or merge branches, you need to have the authorization from the Central Bank. So it's likely that we will request some authorization there. In the previous ones, we announced the merger of those branches before this new regulation. When we look at some numbers, we have 2, I would say, main indicators. One is digital clients, defined as clients with at least one log-in during the last 30 days compared with the total active clients, and that number is 63%.

And another metric we use is the full digital clients. These are clients that didn't use any physical channels during the last 30 days. That number is around 20%. And when we look at also sales of products or opening of new accounts or deposit of checks, everything that has to be with the digital channels grew dramatically. For example, eChecks, we launched them back, I would say, 1 year ago, and now they represent 24% of the deposited checks and branches now represent 10%. But 1 year ago, they represented 40%. So definitely, all the investment in digitalization is seeing its positive fruits or effects.

When we see -- also Naranja is a digital company. Naranja X will have or is in the process of having just one app because in the past, we had Naranja X, a new product launched, I would say, 2 or 3 years ago. And the old company Naranja, with its own app now it's everything in one. And again, you can do anything with that app. When -- and also the banks launched a model, it was an initiative by the main 4 private sector banks, Galicia, Santander, BBVA and Macro in a way to allow P2P transfer of money payment with QR to have -- to choose the credit card of different banks to make payments. And in a way, model is competing with Mercado Pago and other much smaller fintechs that appear in the market. When we look at fewer digital banks, they are too small. And in my opinion, the challenge for them will be to have enough capital to grow because many times, the value proposal is not to charge anything in order to get clients, but that has a limit.

And our next question comes from Carlos Gomez with HSBC.

Pablo, also I wanted to ask about the outlook, and we know it is very difficult. But if you could repeat again, do you think that you will end up growing or not growing the loan portfolio in real terms this year? And what about next year?

And the second question is that you have been accumulating a significant amount of capital. We know that there has been limitations on the part of Central Bank for distribution by banks. Do you have any indication that those could come to an end with the end of the year? Have you initiated discussions with the Central Bank? What do you think will happen to capital distribution for you and for the other entities in the system?

Carlos, In terms of loans to the private sector, so far, they are growing below inflation. I mentioned that fourth quarter -- in the fourth quarter, we are seeing positive and significant real growth. It's likely that for full 2021, the loan book will grow inflation less 10%. So its inflation is 50%, 40% or so or 51%, 41%. For next year, we are forecasting right now that inflation will be 52% and loans in pesos will grow the same percentage. So nominally -- equals inflation. So no real growth. That's for the system. We are forecasting some additional percentage points growth for us so that to recover part of the market share in loans that we lost this year. Part of this loss was something that we manage.

Basically, we didn't want to consolidate very low interest rates for loans to big corporates. Some of our competitors were very aggressive and the reduction in our loan book was basically concentrated in large corporates.

And in terms of capital, yes, as you said, as we are not able to pay dividends at the bank level, we are accumulating capital. Total capital ratio stands at 27%. Yes, we requested the Central Bank to allow banks to pay dividends because the higher your net worth, the higher negative impact due to inflation. I really don't know if the Central Bank will listen to the bank's request or not. But yes, we requested through the Bank's Association basically.

Okay. So the banking association has requested authorization for dividend payments. Do you expect to receive an answer in the coming few weeks or is that something for next year? Or is it part of the negotiation with the IMF? And any guidance in that regard?

Well, the timing is really unpredictable. And really, I don't know if the agreement with the -- or I guess, the agreement with the IMF will not include this topic really. So it's more a Central Bank issue. I guess, it would be something more of the first quarter if we will get -- first quarter of next year if we get an answer. But this is a guess.

And one final question. There are restrictions for the dividends, but to the best of our knowledge, banks can do buybacks. Is that also an option that the group has considered as a possibility to utilize the capital?

Well, any listed company can do that. The thing is that the listed entity is Grupo Financiero Galicia the holding and the holding needs the liquidity from the bank. Actually, also in order to pay dividends, Grupo needs as we cannot receive dividends from the bank. The holding company depends on dividends from Naranja, the insurance company, the asset management company. So yes, we analyze it that the ideal thing would be that the bank would be the listed entity because this is the one with the liquidity. So -- and for that, well, it would be similar to have authorization to pay dividends.

So in principle, the bank cannot buy shares of the holding company?

Exactly. It will need authorization from the Central Bank because it would be seen as payment of dividends and also there are limitations of --on related party transactions and how much exposure you can have intracompany. So it's also -- or it has legal implications that doesn't make it easy to do it. But of course, we analyze all these alternatives.

(Operator Instructions) We'll take our next question from Paula La Greca with TPCG.

I would like to know which were the main drivers of the decrease in other interest earning assets in Banco Galicia.

Yes. Within other operating assets, the main item are the repo transactions with the Central Bank. And these are this 7-day exposure. The interest rate is 36.5%. And you can see that the stock grew a lot. So that is the explanation for that interest results.

And that concludes today's question-and-answer session. Mr. Firvida, at this time, I'll turn the conference back to you for any additional or closing remarks.

Thank you, Nick. Well, thank you all for attending this call. If you have any questions, please do not hesitate to contact us. Good morning, and happy Thanksgiving. Bye-bye.

And this concludes today's call. Thank you all for your participation. You may now disconnect.