Grupo Financiero Galicia SA (GGAL) 2021 Q2 法說會逐字稿

Welcome to this Grupo Financiero Galicia First (sic) [Second] Quarter 2021 Earnings Release Conference Call. This call is being recorded.

At this time, I'd like to turn the conference over to Mr. Pablo Firvida. Please go ahead.

Thank you, Jennifer. 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 the monthly indicator for economic activity, MI, the Argentine economy recorded a 17.3% year-over-year expansion during the second quarter of 2021. And the primary deficit reached 0.32% of GDP, a 2.35 percentage points improvement compared to the second quarter's deficit of 2020.

The National Consumer Price Index recorded an 11% increase during the quarter and reached a 50.2% annual variation in June 2021.

On the monetary front, the Argentine Central Bank expanded the monetary base by ARS 303 billion in the quarter, recording a 26.4% increase in the last 12 months. Meanwhile, the exchange rate averaged ARS 95.3 per dollar in June, a 4.6% increase against the average for March. When compared to June 2020, the Argentine peso underwent a 37% devaluation.

In June, 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 March.

Private sector deposits in pesos amounted to ARS 6.3 trillion in June, increasing nominally by 12.5% during the quarter and 46.2% in the last 12 months. Time deposits in pesos rose nominally 9% during the quarter and 61.1% in the year and peso-denominated transactional deposits increased nominally 15.9% and 35.6%, respectively, in the same period.

Private sector dollar-denominated deposits amounted to $16.2 billion increasing 1.4% during the quarter and declining 3.8% in the last 12 months.

As of the end of June, peso-denominated loans to the private sector amounted to ARS 3.1 trillion, increasing nominally 7.2% in the quarter and 36.3% when compared to June 2020. While private sector dollar-denominated loans amounted to $5.4 billion, recording a 2.3% increase during the quarter and a 25% contraction when compared to June 2020.

Turning now to Grupo Financiero Galicia. Net income for the quarter amounted to ARS 8.9 billion growing 1% from the year ago quarter. This profit was mainly due to gains from Banco Galicia for ARS 6.7 billion; from Naranja X for ARS 1.6 billion; from Fondos Fima for ARS 399 million; and from Sudamericana Holding for ARS 312 million.

The annualized return on average assets was 2.7% and the return on average shareholders' equity 15.5%.

Banco Galicia's net income for the quarter decreased 12% from the ARS 7.6 billion of the year ago quarter, mainly due to a 14% lower net operating income and 133% higher loss from the net monetary position, offset by a 49% decrease of other operating expenses and 15% lower administrative expenses.

Net interest income decreased 62% as interest income was down 1%, and interest expenses were up 69%, while net income from financial instruments increased 25%.

Average interest earning assets decreased ARS 10 billion or 1% year-over-year, mainly due to decreases of 47% of dollar-denominated loans and of 13% of peso-denominated loans, partially offset by a 39% increase of government securities in pesos and a 30% increase of further operating other interest-earning assets in pesos. In the same period, its yield increased to 198 basis points, primarily due to higher yield on other interest earning assets in pesos.

Interest-bearing liabilities decreased ARS 11 billion from the second quarter of 2020 due to a 28% decrease in the average balance of other deposits in pesos, a 22% decrease of dollar-denominated time deposits and a 10% decrease of dollar-denominated saving accounts, offset by a 31% increase of peso-denominated time deposits.

During this period, its cost increased 879 basis points mainly as a result of 1,923 basis points increase in the average interest rate on other deposits in pesos and 924 basis points increase in the average interest rate on peso-denominated time deposits.

Net fee income decreased 3% from June 2020, mainly due to higher expenditures. Net income from financial instruments increased 25% due to a 17% increase in the results from Argentine Central Bank Securities and of a 34% government securities.

Gains from gold and foreign currency quotation differences were down 44% from the year ago quarter, reaching ARS 731 million including a ARS 386 million profit from foreign currency trading.

Provision for loan losses were 52% lower than in the same quarter of the prior year. And personnel expenses decreased 7% from the second quarter of 2020, mainly due to an 8% reduction in staff, while administrative expenses dropped 15% as compared to a year before, because of a 17% decrease in taxes and a 76% decline in fees and compensation for services.

Other operating expenses for the quarter decreased 49%, mainly due to lower charges for other provisions that decreased 86% as in the second quarter of 2020, additional charges were recorded in connection with the pandemic.

The bank's financing to the private sector reached ARS 497 billion at the end of the quarter, down 21% in the last 12 months mainly due to a 37% decrease of dollar-denominated loans and a 15% decline of loans in pesos.

Exposure to public sector increased 15% year-over-year. And excluding the Central Bank instruments, it represented 11% of total assets compared to 6% at the end of the second quarter of 2020.

Deposits reached ARS 747 billion, down 2% in a year with dollar deposits falling 9% and peso deposits growing 1%. The bank's estimated market share of loans to private sector was 11.9%, 102 basis points lower than at the end of the year ago quarter and the market share of deposits from the private sector was 10.3%, 14 basis points lower than in the same quarter of 2020.

As regards to asset quality, the ratio of nonperforming loans to total financing ended the quarter at 3.14%, recording a 60 basis points deterioration as compared with the 2.54% of the second quarter of the prior year, mainly due to the end of the regulation related to the flexibilization of the parameters for the classification of debtors established by the Argentine Central Bank.

At the same time, the coverage with allowances reached 219%, down from the 240% from a year ago.

As of the end of June 2021, the bank's consolidated computable capital exceeded by ARS 138 billion or 206%, the ARS 67 billion minimum capital requirement and the total regulatory capital ratio reached 25%, increasing 548 basis points from the end of the same quarter of the previous year.

The bank's liquid assets represented 143% of transactional deposits and 61% of total deposits, up from 85% and 52%, respectively, as of June 30, 2020.

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 good levels.

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

(Operator Instructions) And we'll go first to Gabriel Nóbrega with Citi.

When we're looking at your total financial margin, we actually saw that the results from financial instruments they contributed greatly increasing more than 30% in the quarter. So I just wanted to really understand what's going on here? I also wanted to know what's the recurrence of this line, given that I imagine you were increasing your liquidity?

And then as for my second question, we actually saw that the BCRA waivers, they ended this quarter. We also saw your NPL raising. So I just wanted to get a feel if you're comfortable with your current loan book? Is there any part that's starting to worry you? And then those are the 2 questions.

Gabriel. Well, what is going on, as you mentioned, basically deposits are growing much faster than loan demand, time deposits, but also transactional deposits. So with the money, the flow of funds that we are receiving and is not allocated to lending to the private sector, we there purchase Leliqs or repo transactions with the Central Bank. And particularly in the second quarter, we increased the exposure to the National Treasury, mainly in short-term paper indexed by CPI inflation.

We can -- I would say, adjust and take additional deposits, paying high interest rates, but we allocate that to this government paper or Central Bank paper. At the beginning of the year, we were envisioning a higher loan demand, basically we were expecting loans growing above inflation like 5 percentage points above inflation right now. We are thinking that for the full year, it's likely that loans in pesos will grow at inflation less 5 percentage points, mainly because of the agreement with the IMF took more time than was expected, some political noises also.

And not a minor reason as there is a lot of liquidity, some other competitors are offering lower interest rates for corporates. So there, we prefer not to be very active. But of course, this is very short term. So when we look at the total financial margin, we are seeing, I would say, a stable number, let's say, from 16.5% to 17%, this kind of levels of margin for Grupo Financiero Galicia as a whole.

And going to the asset quality, the second question. Yes, there was an increase in NPLs due to the end of the forbearance or the regulatory change in the case of the bank, NPLs jumped to from 2.5% to 3.14% basically in the last 12 months. We could see some further deterioration in the third quarter and then some improvement in the fourth quarter. This is the current vision we have.

The coverage should go down a little bit. But at year-end NPLs should be perhaps at around 4% at the bank level. We are comfortable with the dynamics of asset quality. And as I mentioned, sometime -- many times, perhaps in other calls, as many of those loans were granted in -- at low interest rates and actually negative in real terms, loans are not so difficult to be paid back, but we see the negative impact in the P&L through the monetary loss due to inflation.

We'll go next to Carlos Gomez with HSBC.

I would like to know if you could comment a little bit about the Naranja business. I mean we have so much improved profitability there? How is demand in that segment? What are your expectations for the next year or 2? And do you have any current plans for the company? It has its own license, we -- there have been discussions in the past about perhaps in corporate actions specifically to Naranja, where does the company stand today?

Carlos. Well, the numbers of Naranja, as you saw, improved significantly, mainly comparing second quarter to second quarter of the previous year. Last year, in the beginning or with the beginning of the pandemic, loan origination was almost stopped, limits were not increased. So the loan book contracted in real terms.

And we finished with many digital initiatives, rationalization, the end of the merger of the many different regional credit cards we used to have. So we are very comfortable with [Naranja X] now or Naranja X. We have all the businesses of Naranja under this new brand with new logo. And the idea is to be or to become each day more and more digital. And as we mentioned also in the past Naranja will be able to take deposits, having or being a financial entity. So this is to increase its business.

Right now, it's fully owned by Grupo Financiero Galicia in the past we had minority shareholders and going more time back in the past, it was controlled by the bank. Now it's an independent unit and fully owned by Grupo Financiero Galicia. But we are very happy with the business and the growth prospects and asset quality and margins and everything, all the metrics that we can look at.

Okay. And as you mentioned, it is now controlled by the group as opposed to the banks. Maybe a follow-up question, is that the bank keeps accumulating capital since it is constrained in terms of giving dividends? Any plans or anything you can do to reduce the level of excess capitalization of the bank if you consider it has too much?

Well, we don't have many alternatives in that respect. We depend from Central Bank regulations. At the beginning of the pandemic, 1 year and or I don't know, 16 months ago, the Central Bank was conservative and the idea was to strengthen the capital situation of the banks, and that's why they put this limitation to pay dividends.

Right now, I think it's more a regulation to avoid international banks and local banks with ADRs to [send] dollars abroad it's an FX issue. Of course, the capital situation should change if the loan demand picks up. But really, what we are seeing is that we have been accumulating cash at the bank level, and Naranja, the insurance business, the asset management businesses are the ones that are providing dividends to Grupo Financiero Galicia in order to -- for the holding company to be able to pay dividends to the shareholders.

We'll go next to Ernesto Gabilo with Bank of America.

Pablo. Thanks for the opportunity. My first question is on how are you seeing the macro outlook in terms of inflation and interest rates? And how could that be impacting loan growth and the results related to the net monetary position?

And then my second question is on your net interest income. We saw an important contraction quarter-over-quarter and year-over-year. So what should we expect for the second half of the year?

Ernesto. Well, on inflation, we are expecting to be around 48%. This is, I would say, moving target from most of the economies. Each monthly reading makes the different economies that give their projections to the Central Bank to move from 47%, 48%, 49%. This is a range of inflation we are seeing for this year.

For next year, I would say that most of the economies are forecasting around 40%, some reduction, but definitely nothing significant. Of course, the current number is far from the budget from the national budget. And basically, this high inflation impacts on the net monetary position, know the effects of inflation on our figures. The higher the inflation, the higher the negative impact on our P&L.

Interest rates are -- considering these inflation numbers are negative in most of the loan lines and also thinking in the minimum interest rate we paid for 10 deposits, both for the 34% or 37% depending on the amount. And also on the average rate we made on our loans that in the second quarter was 37%.

So and the interest rates are in some way regulated or not only the term deposits, but also other type of a subsidized rates. So we don't see much changes in the short term.

Loan demand as I mentioned, is running behind the growth of deposits, and we are forecasting inflation plus 5% -- sorry, less 5% now for loan growth in pesos for the full year. So if inflation is, let's say, [48] growing 43% loans in pesos.

And going to the net interest income. We look at the net interest income together with the net results from financial instruments because basically, we are taking part of the deposits and allocate with -- those funds with Leliqs or repo transactions with the Central Bank or other short-term government paper. So part of those deposits are funding that.

We are seeing some slight reduction in real terms, but really, it's volatile and depending on the yield on bonds, the breakdown of deposits, breakdown of currency definitely what we target is to have a more peso intermediation and more transactional deposits in the mix compared to time deposits with costs. I don't know if that was enough and clear, Ernesto.

Yes. Perfect. Pablo. So at the end, the net interest margin will continue to be -- from the loan side, not contributing so much and should be more related to investment in securities that should remain to be stable, but at the end, looking only on a credit basis, net interest income should continue to be low, right?

Yes, basically because part of the funding is allocated to government paper and Central Bank paper and not to lending. If we were to take out part of the funding to the loans or allocate just the deposits to the loan volume margin is, I would say, high and particularly in pesos.

(Operator Instructions) We'll go next to the Yuri Fernandes with JPMorgan.

On elections, what is your base case? Should we expect any material policy change after the elections, like how the list is in the November elections?

Yuri, well, we have 2 elections this year, one in September 12 that are primaries. And I would say for the first time in many years, there will be actual primaries because in other elections, each party had just one list, and the primary elections were like a big poll. This year in many provinces and cities, there are many lists from the same party. So they will be important.

But the midterm elections will take place in November 24, I think, is the day. And pollsters are pointing that the government, it could be losing voting power for many different reasons. Many people voted for Alberto Fernández thinking that he was going to be more independent than the Kirchnerism. Also at the beginning of his mandate, his image was very high, mainly when the pandemic began, but after the long quarantine and the negative effects both in the economy and with the health situation, his image went down very sharply.

And there are many, I would say, indicators that measure the mood of the population that make linear regressions that points to voting of around 38%, coming down from 48% in 2019.

But having said that, we all know that pollsters were not very accurate in their estimates not only in the last elections here but around the world.

And many times, it has to be with the tools they use, if they use a fixed phone or cellular phone or if they go face to face. But if you look at -- or if we analyze different factors, purchasing power, the mood, the health, some scandals in the President's residents the government should suffer some loss. Again, some people are saying from 48% to 38%.

The opposition in the midterm elections, typically, is not so polarized. So new parties appear and typically, people tend to vote for the ones they like. So some liberal parties are rising, and they are -- in polls say they have like 10%, 12%. Also some leftist parties with 4%, 5% typically in Presidential elections, there is more polarization. So the, let's say, the Macri party, it can be Mercado Único de Cambios, not necessarily will get all these [bodes] from people that got disappointed.

And sorry, if the answer was too long, we don't foresee really any material change in the number of seats, both in the Senate and in the lower chamber.

And it's a question mark or a big doubt we have, what will be the reaction of the government if they lose a voting power, they will become I would say, more rational or more willing to speak and negotiate or angry with the result and saying we were not strong enough in our measures. But of course, this is a -- really nobody knows what will be the impact because really nobody knows the actual numbers.

And at this time, there are no further questions.

Okay. So thank you all for attending this call. If you have any further questions, please do not hesitate to contact us. Have a nice day and have a nice weekend. Goodbye.

This does concludes today's conference. We thank you for your participation.