Grupo Financiero Galicia SA (GGAL) 2021 Q1 法說會逐字稿

Welcome to this Grupo Financiero Galicia First Quarter 2021 Earnings Release Conference Call. This conference is being recorded. At this time, I would like to turn the call 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 risks 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 a 2.4% year-over-year expansion during the first quarter of 2021. And the primary deficit reached 0.16% of GDP, a 0.41% recovery compared to the first quarter deficit of 2020. The national consumer price index recorded a 13% increase during the quarter and reached a 42.6% annual variation in March 2021.

On the monetary front, the Argentine Central Bank contracted the monetary base by ARS 38 billion in the quarter, which recorded a 6.1% increase in the last 12 months. Meanwhile, the exchange rate averaged ARS 91.1 per dollar in March, a 9.2% depreciation against the average for December 2020.

When compared to March 2020, the Argentine peso recorded a 30.7% depreciation. In March, the average rate on peso-denominated private sector time deposits for up to 59 days was 34.6%, 0.14 percentage points below the average recorded last December.

Private sector deposits in pesos amounted to ARS 5.6 trillion, increasing 10.3% during the quarter and 62.8% in the last 12 months. Time deposits in pesos rose 19.7% during the quarter and 85.1% in the year and peso-denominated transactional deposits increased 2.8% and 51.1%, respectively, in the same periods.

Private sector deposits in dollars amounted to $11.7 billion, increasing 1.2% during the quarter, but declining 9.8% in the last 12 months. As of the end of March 2021, peso-denominated loans to private sector amounted to ARS 2.9 trillion, increasing 3.8% in the quarter and 45.8% when compared to March 2020. In turn, U.S. dollar-denominated loans amounted to $5.3 billion, recording a 1.1% decrease during the quarter and a 41.3% decrease in the year.

Turning now to Grupo Financiero Galicia. Net income for the quarter amounted to ARS 2.1 billion, down 81% from the year ago quarter. This profit was mainly due to gains from Banco Galicia for ARS 1.2 billion; from Tarjetas Regionales for ARS 592 million; from Galicia Administradora de Fondos for ARS 373 million; and from Sudamericana Holding for ARS 110 million. The annualized return on average assets was 0.7% and the return on average shareholders' equity, 4.2%. Banco Galicia's ARS 1.2 billion net income for the quarter decreased 87% from the ARS 9.3 billion of the year ago quarter mainly as a consequence of a 29% decrease in operating income and of a 91% higher loss from the net monetary position.

Net interest income decreased 37% as interest income was down 5%, and interest expenses were up 17%. The average interest earning assets increased ARS 74 billion or 12% year-over-year, mainly due to the 25% growth of peso-denominated loans and 94% of other interest earning assets in pesos, partially offset by a 56% decrease of dollar denominated loans. In the same period, its yield decreased 472 basis points, primarily due to lower yields on government securities in dollars and in pesos and on other interest earning assets in pesos.

Interest-bearing liabilities increased ARS 48 billion from the first quarter of 2020 due to a 30% increase in the average balance of peso-denominated time deposits and 43% of other deposits in pesos, offset by a 15% decrease in dollar-denominated saving accounts.

During this period, its costs increased 145 basis points mainly as a result of a higher average interest rate on other deposits in pesos, offset by lower average interest rate on peso-denominated time deposits. Net fee income decreased 6% in the last 12 months, mainly due to lower fees on mutual funds and on credit cards. Net income from financial instruments decreased 15% due to a 29% decrease in the results from Argentine Central Bank Securities, offset by an increase of the profits from other government securities.

Gains from gold and foreign currency quotation differences were down 6% from the year ago quarter, reaching ARS 1 billion, including a ARS 652 million of profit from foreign currency trading. Provision for loan losses were 82% lower than in the same quarter of the prior year.

Personnel expenses decreased 3% from the first quarter of 2020, mainly due to a 6% decrease in staff while administrative expenses decreased 6% as compared to the year before as a consequence of a decrease in publicity, promotion and research expenses and to lower fees and compensation for services.

Other operating expenses for the quarter increased 12%, mainly due to a 29% increase of the turnover tax. The bank financing to the private sector reached ARS 488 billion at the end of the quarter, down 10% in the last 12 months, mainly due to a 58% decrease of dollar-denominated loans partially offset by a 12% increase of loans in pesos. Exposure to the public sector increased 79% year-over-year, and excluding the lease, it represented 7% of total assets compared to 5% at the end of the first quarter of 2020.

Deposits reached ARS 747 billion, up 9% in a year, with peso-denominated deposits increasing 17% and dollar-denominated deposits falling 11%. The bank's estimated market share of loans to private sector was 12.5%, 16 basis points higher than at the end of the year ago quarter, and the market share of deposits from the private sector was 10.1%, 4 basis points higher than the same quarter of 2020.

As regards to asset quality, the ratio of nonperforming loans to total financing ended the quarter at 1.6%, recording 178 basis points improvement as compared with the 3.41% of the first quarter of the prior year. And the coverage with allowances reached 391% up from the 149% from a year ago.

As of the end of March 2021, the bank's consolidated computable capital exceeded by ARS 121 billion or 201%, the ARS 60 billion minimum capital requirement. And the total regulatory ratio reached 24.6%, increasing by 342 basis points from the end of the same quarter of 2020.

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

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

(Operator Instructions) Our first question comes from Ernesto Gabilondo, Bank of America.

Hi, Pablo, and good morning, everyone. Thanks for the opportunity. I know that it's very difficult to provide guidance for net income, especially with the Argentine conditions. However, after the first quarter net income do you think it's still reasonable to reach the consensus estimate of ARS 25.7 billion for the year or do you think it's a little high when compared to your expectations? And then my second question is on where do you see the ROE for this year and how do you see it evolving for the next 2 years?

Well, as you mentioned, it is hard to project net income, it's easier to project different variables, but the key variables that affect negatively affected this quarter were the higher inflation than forecasted, it was closer to 13%. I think the index was 12.95%. So that has a direct impact on the results from monetary position. And the other difficult line to estimate is the income tax charge because we have 2 different accounting. One is the tax accounting and the other, the financial accounting. And they have -- well, there are many technicalities between them and the difference is that basically, the deductions from 1 -- in one P&L and the other, are different. Mainly everything that has to do with loan loss provisions, some issues regarding government bonds and also the depreciation of fixed assets. The balance sheet in the tax accounting gets a little behind inflation, so the adjustment takes more time. So the depreciation is lower. So that's why the effective tax rate is high.

So we typically don't give guidance on net income because of these factors and also economy income tax and so on, but when we think in ROE, that takes net income and also the evolution of inflation that applies to our network and so on. We still believe that could be in the range of 10% for this year. This is the current number we are forecasting. And if we look at the second, third and fourth quarter, we are seeing sequentially growing net income or better results sequentially. Thinking longer term, will depend on many things going from the political landscape to the macroeconomic variables and IMF agreement, Paris Club agreement. So today, we don't have visibility to give some numbers about ROE.

Okay. Perfect, Pablo. We're looking and making some numbers, if we apply a net income of around ARS 19 billion that will let you with an ROE of 10% for this year. So when comparing that number to the consensus close to ARS 26 billion, it seems a little high, what you're seeing from consensus when compared to the 10% ROE that you can be doing that is more close to the [ARS 19.4 billion]? Is it right?

Well, it will depend on inflation. If inflation is higher, the net income could be higher. But yes, it's taking everything, let's say, or taking the assumptions you gave, you are right.

Our next question comes from Gabriel Nóbrega, Citigroup.

During the -- moving from the first quarter, we actually saw that the NPL ratio at the bank level started deteriorating. And while it actually improved at Naranja. And so I just wanted to understand from you few on where is the deterioration coming from? And are there any specific segments that are beginning to worry you now? And I'll make the second question afterwards.

Okay. Well, the NPL deterioration was, I would say, marginal. It was basically in the lower income segment, but also due to the lack of growth and the denominator. On the other hand, if you look at Naranja, you will see that the NPL improved, not only because the behavior of the nonperforming loans was very good and stable, but also because of the growth of the denominator in our -- in the case of the bank, in particular, it was the opposite. But really, we didn't see any change in -- or significant change in trends. And always, the worse segments are the lower income ones that suffer more the reduction in GDP, mainly coming from last year and also the pandemic measures and so on. And the second question, Gabriel?

Yes, sure. So interesting like you're talking about the (inaudible) growth at Naranja as well. So I just wanted to understand, during 2020, if I'm not mistaken, in the previous call, you said that you had been more conservative with the business units, but now we are seeing loans starting to accelerate even though the first quarter is a seasonally weaker quarter. So I just wanted to understand that, here, if the bank isn't changing, is the risk appetite here? Or is it really coming from higher demand from individuals?

Well, in the case of Naranja, it's the level of activity is tied to many variables. But basically, when we look at the last year, many merchants were closed due to the lockdown, and we were very conservative. And in an inflation environment, if you are conservative and if you don't update the amounts or limits in which clients can purchase either in 1 installment or in many installments, your loan book doesn't grow in real terms.

This year, we are seeing an improvement in consumption due to the improvement in the merchants. Many merchants now are open well particularly not these last days, but that's true for the first quarter. Also, we updated limits on Naranja, updated limits of purchasing and financing. And in the interior of Argentina where Naranja is very strong. All the agricultural sector activity, I think, has a -- or is a good explanation why the asset quality keeps improving.

So we think it's, of course, in very low levels, 1.2%, even considering any forbearance of the Central Bank. If we were to consider just the 90 days NPL from 1.2% could grow to around 1.8%, still very low compared to historic terms. But -- well, these are all the reasons we are less risk-averse. We increased the limit and the usage of credit cards due to the opening of many merchants increased. Not only the number of tickets per card, but also the number of statements per month. So many different reasons.

Our next question comes from Jason Mollin, Scotiabank.

My question, I mean, you gave some color on this just now more related to asset quality, but it was interesting to see the number of accounts increasing, number of credit cards increasing. Maybe you can give us some additional color on what's going on? Are these new entrants into the banking sector? Or are these taking share from other banks? Any kind of color on what's happening? And if you can talk maybe a little bit at the bank and at Naranja?

Jason. Well, the growth in all these metrics that you mentioned, number of clients, credit cards, accounts, it is very, I would say, slow and gaining market share. It takes time. It's kind of a vegetative kind of growth. When we think in loans is somewhat different. And there, with increased -- with the actions that I mentioned in the previous question or previous answer regarding Naranja, you could see the growth in lending. We are not seeing any big shift either between group of banks considering domestic banks or international banks or public sector banks.

Typically, the volume of deposits and loans are split almost equally in 3 parts, between these 3 groups of banks. So really changes take time. Of course, our objective is to keep growing in terms of clients, credit cards, digital clients, that also is a number we pay a lot of attention to, but there is not such an easy task in a very automized financial system. We have more than 60 banks. And also many times, it's, I would say, costly to change from one bank to other, costly meaning you have to begin from 0 in many cases with your credit track record. So there is certain, I would say, resilience or people try to avoid changing banks.

Maybe you could talk a little bit about some of the digital trends that you've seen, particularly given the context of the pandemic and the lockdowns, et cetera. How -- and I'm not sure if you have some kind of guidelines that you -- or objectives that you want to meet in terms of digital clients or reduced usage of the branch, the branches, et cetera?

Yes. We -- well, we have an indicator that is what percentage of digital clients we have that is around 62-point something, 62.5%, I think, is the last number I saw. That means the clients that made a digital transaction in the last 30 days, then we also have a metric that the percentage is around 20%. That are the clients that didn't go to a branch in the last more than 30 days. There is a little bit long now in the period before it was in the last month, now with all the limitations, people or clients are going less to branches.

And we also look at the usage of e-checks that is growing very fast. The percentage of time deposits that are rollover or originated digitally or the subscription of mutual funds, personal loans granted also digitally and the growth rates or breakdown between physical and digital are incredible. Right now, approximately 1% of time deposits are done in branches, I would say, close to 100% of the mutual fund activity is done digitally.

So this means that due to the digital investment and also to the pandemic, our clients and all the financial system clients, and I would say, also around the world, grew exponentially. And -- but we see branches as something complementary to the digital banking, let's say.

Of course, you don't need perhaps all of them or you don't need the same surface for each branch, but branches are less, I would say, operational and more a point of contact, a point of advice, a point-of-sale for perhaps more sophisticated products like, I don't know, specific insurance or to analyze what is better in terms of investments or certain -- the difference between certain loans, personal loans and so on.

So yes, all the digital efforts have been very successful. But again, we think branches are needed. And what could happen is that we could be reducing square meters, but not necessarily number of branches or perhaps the marginal reduction in branches, mainly in terms of merger of branches, 2 branches are one close to the other, that could be unified. And also, we are having a better use of branches because now you have to request an appointment to go to a branch, to avoid many people being together due to pandemic. So now the flow of clients to branches is much easier to manage. I don't know if that was complete, Jason.

Our next question comes from Alonso Garcia, Crédit Suisse.

My first question is on volumes. I mean, you already talked about the retail segment, especially in Naranja with higher risk appetite compared to last year, of course, but could you comment on the dynamics of the commercial portfolio, which was the main drag for loan growth this quarter? I mean, is it only seasonality? Is it uncertainty regarding the elections? What are you seeing in the commercial portfolio? And how do you expect to evolve from this year in coming quarters?

And my second question would be a clarification on taxes. I mean I know there is a discussion in Congress for potentially increasing tax rate for large companies to 35%. But leaving that aside and just based on the current effective tax rate -- sorry, factory tax rate for you of 30%. What would be like a ballpark figure for your effective tax rate this year and going forward? I know it's hard based on all the differences that you mentioned between accounting and tax accounting and tax reporting. But what will be a ballpark figure, I mean, should we expect the effective tax rate to remain in the 50% level, should we see that 40% back to 30%. Any comment on that would be highly appreciated.

Excellent. Thank you, Alonso. Well, volumes -- we still have the objective or guidance to grow our loan book in pesos, inflation plus around 5%. We didn't see it in the first quarter, mainly because of, as you mentioned, the reduction in commercial demand. Many companies, basically, the SMEs are taking advantage of subsidized lines and products. And big companies were the ones that reacted faster at the beginning and now that they are liquid and perhaps they don't have any use of those funds paid back their debt. But going forward for this year, we keep seeing loan demand growing, as I mentioned, inflation plus 4%, 5%, in pesos, of course.

Sometimes, when we look at the consolidated loan number, we have pesos and dollars. We don't see loans in dollars growing. Actually, they have been shrinking because of lack of demand and also because we are not originating on purpose loans in dollars. But looking at the peso bucket, we are seeing this type of dynamic in volumes. So commercial -- the commercial part should rebound. And the agricultural sector has been very active in lending. And also, as I mentioned, in the case of Naranja, we saw demand there.

In the case of taxes, yes, there is a project being discussed in Congress to raise the income tax to -- rate from 30% to 35%. That was the initial percentage when Macri took office. They -- his government reduced it. His government kept it at 30%, and now they are trying to increase it to 35%. That still is not a law. As you mentioned, it's discussing in Congress.

So of course, it will not be -- the effective tax rate will not be close to 30%. And if I had to say or give a range, I would say, between 40% and 45%. Why? Because of this lag between the tax accounting and financial accounting will be shrinking in the next quarters. But if we begin with 35% income tax rate, I would say, at least 5 percentage points higher than that, it should be the effective tax rate.

Our next question comes from Yuri Fernandes, JPMorgan.

First one regarding fees. It was a bit like luster this quarter. I guess, especially credit cards, right? And I guess, there is seasonality, still a lack of activity. But I guess maybe regulation here, right? I guess this was the final year of the interchange regulation taking place. So what you expect for fees? Why it was so weak? This quarter was interchange on the credit card was -- are you still limited to increased fees? What should we expect for like for the fee income line?

And my second question is regarding NII. What you're expecting margins, right? It's the second Q, we are seeing huge pressure in margins, I guess, funding side, the minimum remuneration of funding kind of explain a lot of that, but what else? Like what should we see? Are we approaching like more normalized levels for margins or no? Do we still expect some pressure? What is the message for NIMs?

Well, regarding fees, our expectation for the year will be that we'll grow around 5 percentage points below inflation. The same target we have for administrative expenses, inflation less 5%. Mainly because of the credit card fees that you mentioned. There we have 2 explanations. One is the reduction in the merchant discount rate that if you remember, some, I think, 3 or 4 years ago, it began at 3%. Last year, it was 1.95%, and this year is 1.8%. This is the last reduction. So it will be kept in these levels of 1.8%. And also, there was a reduction in volumes. Typically, there is some seasonality. So we think that going forward, the reduction shouldn't be that dramatic, but adding all the products that have -- in which we charge fees, we are forecasting this real reduction of 5%.

Going to net interest income and margins. There was a reduction in the quarter. Also many different explanations. One would be the new turnover tax applied by the city of Buenos Aires to the Leliq -- to the Leliq's interest or the interest we earn on the Leliq's. That to give you an idea, means that instead of having a 38% interest rate, roughly speaking, we get 36.5%. Then there was an increase in other -- in the interest rate on other deposits like remunerated accounts to certain funds, mainly. And also there was some impact on dollar-linked bonds that we had.

So the reduction of compression margin was higher than expected. So from levels of 17% to 14.5% was much higher than expected. Going forward, we see the margin rebounding gradually to the 17% level. Of course, this is without considering any potential new regulation or mandatory lending. But with the information we have today, we see this 14% margin level at the bank as a kind of floor for the coming quarters.

Super clear, Pablo. If I may add third and final, just a follow-up in the digital clients and growth in that regard. Can you provide a brief explanation on how easy is that penetration in Argentina? I guess the point is my perception is that Argentina is more financial system, but on the level, right on the financial deepening. Many people, they have a financial account, right, like the penetration in the other population of banking accounts is not that low. So do you see an opportunity to grow in like new customers? Or is more -- you're gaining market share from other banks, taking clients for probably, I don't know, like taking people that are already banking and moving through to Naranja X or moving to Galicia?

Well, I would say digitalization is a need not only in order to grow and get non-bank clients or more, I would say, younger people that perhaps are not willing to go to the traditional branches, but also it's the need to improve efficiency. And it's something that you have to have in order to compete. Some digital banks tried to grow, but it's hard in an environment in which you need to gain clients. In many cases from 0 and you need capital. So far, I would say, fewer digital banks were not, I would say, successful and mainly thinking in profitability.

I always say that Mercado Pago is another animal. They have been very aggressive and successful mainly because they have the clients already that's also some competitive advantage we have with Naranja X, and we have many clients that are gradually turning digital.

And one last, I would say, comment regarding banking penetration or usage of accounts is that in Argentina, still, there is a big proportion of informal economy. So many people have accounts, many companies have accounts. But part of their economic activity, it doesn't go through the banking system, in many cases, or I would say, the main reason for that is the high tax burden we have, not only dividend credit, but also VAT, sales tax, income tax and all the taxes you can think of. So that was the last comment. I don't know if you have any follow-up question or doubt?

No. Super helpful, Pablo. Thank you.

(Operator Instructions) And we have no further questions at this time. I would now like to turn the call back to our speakers for any closing or additional remarks.

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

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for your attendance and participation. You may now disconnect.