Grupo Financiero Galicia SA (GGAL) 2020 Q1 法說會逐字稿

Welcome to the Grupo Financiero Galicia First Quarter 2020 Earnings Release Conference Call. This call is being recorded.

At this time, I'd like to turn the call over 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 uncertainty that could cause actual results to differ materially from those expressed.

According to private estimates, the Argentine economy recorded a 5.4% year-over-year contraction during the first quarter of 2020 from a 1.1% year-over-year contraction in the fourth quarter of 2019. March displayed a particularly steep contraction as a consequence of the COVID-19 pandemic and the implementation of mandatory social distancing in order to reduce the risk of contagion. In March, the economy fell 9.8%, and according to private estimates, activities plummeted 7.2% in April.

During the first quarter of 2020, the primary fiscal balance amounted to ARS 156 billion deficit, minus 0.5% of GDP. As of the end of April, the accumulated fiscal deficit of 2020 rose to 1.3% of GDP, resulting from increase in public spending and a contraction of fiscal revenues. The higher spending was a consequence of the implementation of a fiscal stimulus package, mainly consisting of direct transfers to unemployed, social plan beneficiaries and informal sector workers as well as of aid to companies in the form of labor tax reductions and partial payment of salaries. In the case of revenues, the reduction was caused by the economic paralysis during the month of social distancing measures.

According to the National Institute of Statistics, the consumer price index recorded a 7.8% increase during the first quarter of the year. On the monetary front, the Argentine Central Bank expanded the monetary base by ARS 396.7 billion in the first quarter, a 20.9% expansion against the fourth quarter of 2019. This trend then continued during April and May, during which the monetary base increased 33.1% and 57.1% in year-over-year terms, respectively. This was mainly prompted by the Central Bank transfers to the treasury for a total amount of ARS 740 billion between April and May in order to finance the fiscal stimulus package, partially compensated by operations with Leliq, the short-term bills issued by the Central Bank.

Meanwhile, the official exchange rate averaged ARS 63.12 in March, a 5.4% increase against the average for December 2019 and a 52.6% from March 2019. The average interest rate on peso-denominated private sector time deposits for up to 59 days was 29.3% for March, 11.8 percentage points below the average recorded last December. Private sector deposits in pesos amounted to ARS 3.5 trillion, increasing 25.2% during the first quarter and 57.3% when compared to March 2019. Transactional deposits in pesos rose 30.4% against December last year and increased 91% in the year, while peso-denominated time deposits increased 16.8% in the first quarter and 25.9% year-over-year. As of the end of March, peso-denominated loans to the private sector amounted to ARS 1.98 trillion, recording a 6.5% increase during the quarter and a 29.6% increase when compared to March 2019.

Turning now to Grupo Financiero Galicia. It is worth to mention that since the beginning of 2020, reported figures tend to be adjusted by inflation in accordance to IAS 29 for financial information in hyperinflationary economies, and the provisioning methodology changed the expected credit loss model according to Argentine Central Bank regulations and to IFRS 9. Taking this into consideration and going to the information for the first quarter, net income amounted to ARS 8.3 billion, down 22% from a year ago quarter. This profit was mainly due to gains from Banco Galicia for ARS 6.9 billion, from Tarjetas Regionales for ARS 1 billion, from Sudamericana Holding for ARS 274 million and from Galicia Administradora de Fondos for ARS 89 million.

The annualized return on average assets was 4.4% and the return on average shareholders' equity at 27.1%. Banco Galicia's net income for the quarter decreased 35% from the year ago quarter as a result of a 22% lower net operating income, mainly related to the decrease of net income from financial instruments and of other operating income, partially offset by the growth of net interest income. Interest income for the quarter increased 10% as compared to the same period of 2019, while interest expenses were down 26%. Average interest-earning assets were down ARS 59 billion or 11% year-over-year, mainly due to the decrease of dollar-denominated loans and of government securities, partially offset by the growth of the peso-denominated loans and of other interest-earning assets. In the same period, its yield decreased 65 basis points, mainly due to lower yields on other interest-earning assets in pesos and in dollars.

Interest-bearing liabilities decreased ARS 113 billion or 21% from the first quarter of 2019, primarily due to lower balances of dollar-denominated liabilities and its cost decreased 126 basis points, mainly as a result of a lower average interest rate on other interest-bearing liabilities in pesos and on peso-denominated time deposits.

Net fee income decreased 26% in the last 12 months due to lower fees on deposit accounts. Net income from financial instruments decreased 43% as a consequence of lower holdings and yields on Argentine Center Bank paper. Profits from gold and foreign currency quotation differences amounted to ARS 756 million, out of which ARS 751 million were gained from foreign currency trading. Provisions for loan losses were 69% higher than in the same quarter of the prior year, mainly due to evolution of arrears in the consumer portfolio and to higher regulatory provisions as a consequence of the increase of the loan portfolio.

Personnel expenses decreased 2% as compared to the year before, mainly due to salary increase agreements with the union, which were slightly below inflation. In addition, administrative expenses grew 15%, mainly due to higher expenses related to maintenance and repairment of goods and IT.

The bank's financing to the private sector reached ARS 379 billion at the end of the quarter, down 14% in the last 12 months, mainly due to the decrease of dollar-denominated loans. Net exposure to the public sector decreased 43% year-over-year. And excluding Leliq, it represents 5% of total assets compared to 4% in the first quarter of 2019.

Deposits reached ARS 482 billion, down 21% this year, with dollar deposits falling 47% and peso-denominated deposits being relatively stable as a whole by improving the mix as current account grew 38% and saving accounts 23% while peso time deposits decreased 23%.

The bank's estimated market share of loans to the private sector was 12.4%, 151 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%, decreasing 138 basis points in the same period.

As regards to asset quality, the NPLs ended the quarter at 3.63%, recording a 32 basis point improvement as compared with 3.95% of the first quarter of the prior year, and the coverage of NPLs with allowances reached 117.8%, up from 81.8% from a year ago.

As of the end of March 2020, the bank's consolidated computable capital exceeded by ARS 63.8 billion (sic) [ARS 66.3 billion] or 159% the ARS 41.9 billion minimum capital recovery. And the total regulatory capital ratio reached 21.2%, increasing by 600 basis points from the end of the same quarter of fiscal year 2019.

In summary, during the first quarter, Grupo Financiero Galicia has shown good results in a very challenging and volatile macro environment, keeping liquidity, solvency and profitability metrics at high levels. It is also worth to mention that although during the quarter the COVID-19 has a limited impact on our business as the lockdown began on March 20, the Board of Directors continually analyzes the evolution of the situation and takes all measures within its reach to guarantee business continuity, preserving the health and safety of employees, customers and other stakeholders, striving also to reduce the impact on profitability and asset quality, of the lower level of activity and a higher level of unemployment.

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

(Operator Instructions) And our first question is from Gabriel Nóbrega with Citibank.

I'd actually like to make a first question on asset quality, and I'm looking more into your delinquency. Being that we are already in June, I imagine that since these results in March you already have a more clear overview of what has been happening with delinquencies, if you could maybe give us more color, how the vintages are progressing, how the companies and the individuals, they are paying their loans as well. And if you could talk a bit more specifically about your Tarjetas business, which could be a bit more riskier in this moment. And I'll make the second question afterwards.

Okay, Gabriel. Well, NPLs at the end of March, at the bank level, were at 3.63%. Without considering a change in regulation from the Central Bank, allowing to postpone the classification of nonperforming loans for 60 additional days, NPLs would have been around 4%. So still low. And we are expecting some deterioration. I think we are not seeing really that much in April and May, even without considering this change in regulations. So at the end of the year, our current expectation, considering the evolution -- the expected evolution of GDP and unemployment are the 2 main variables, tend us to estimate NPLs to be between 5% and 5.2% at year-end.

And of course, some people took the advantage of postponing payments of their personal loans or credit cards, mainly in April, in May, part of them decided to pay personal loans and credit cards. The interest rate on credit cards is at 43% and personal loans, the contractual rate, let's say, around 50%. So -- and companies are doing well. Let's keep in mind also that loans to GDP is very, very low. Last year, there was a contraction in real terms in that ratio. So of course, it's our focus to keep and monitor asset quality. But these are the kind of deterioration we are seeing.

In case of Tarjeta Naranja, despite the segment is a more fragile or sensitive to economic crisis, in many cases, the Naranja card is the only source of financing. And so they must keep it alive. And actually, we saw some improvement in March, a slight deterioration in April and an improvement in May. So of course, depending on the length of the pandemic and the GDP evolution, we will see some further deterioration that, if in the case of the bank, it was around 1 percentage point. In the case of Naranja, it could be around 2 percentage points deterioration. This is the type of information or guidance we can speak of with the current estimates, of course.

All right. Thank you for this color, it's been very helpful. And this actually leads into my second question. They really got my attention here, saying that you are actually seeing some improvements already in the May rate. So what could this mean for your provisions? Being that the asset quality, as you already said, is actually behaving better than expected, do you believe that the provisioning level, also taking into consideration that you're already in the expected loss model, do you think that it could maintain decent levels of maybe around ARS 5 billion for the remainder of the year? Or are you expecting a pickup maybe towards the end of the year after these postponements from the waiver of 60 days that the Central Bank is giving for the classification of these vendors?

Well, first, one comment is that in the first quarter, the expected loss model meant that we have around ARS 1.3 billion additional provisioning. And despite this improvement, as I said, in May compared to April, is marginal and not really relevant. And in June, it's likely that all the variables that we use to calculate the expected losses and the forward-looking will be changed. So we are seeing a similar, I would say, increase in the cost of risk as the increase we are expecting in NPLs. So if -- from, let's say, 4% NPL today without this regulatory change or regulatory forbearance, we are expecting something around 5% towards the end of the year. In the case of cost of risk, we could be thinking around 1 percentage point increase.

(Operator Instructions) And we have a question from Carlos Gomez with HSBC.

And apologies if you have already told this. Can you remind us of what your assumptions are for loan growth and for returns for this year?

Yes, Carlos. For loans, we are, of course, having an estimate based on the estimated inflation. So we are thinking in inflation plus 5%, slightly below the deposit, the estimate that is inflation plus 10%. In the case of profitability, it's hard to make -- or to give guidance. Second quarter, we think will be decent, perhaps in line with the first quarter. The third and fourth quarter, we will have to see when the economic activity begins to rebound, what will be the impact on real wages, unemployment. The peak of NPLs should be at the end of the third quarter or beginning of fourth. That, of course, our objective and what we think will happen is that we will have a positive real return on equity. Now of course, we are just showing real numbers, so a positive ROE.

And again, your inflation expectation was how much?

The inflation expectation is a moving target. The -- as monthly -- the last monthly readings were low. The poll called REM that around 50 economists answered to the Central Bank, show you that we expect inflation to be 43.7% for this year. We are a little bit higher, around 48%. So that is our current estimate for inflation.

And so let me insist, but, I mean, 5% real from where we start seems like a very big recovery. And do you see any evidence that activities indeed starting to recover? Again, it seems like a bit of an optimistic assumption.

You mean recovery in different sectors of the economy?

Yes, in activity and eventually in loan demand.

Well, loan demand was mainly due to the corporate sector. At the beginning, big corporates assuring liquidity, then SMEs. In the case of individuals, demand is very soft. Personal loans, of course, we originate every month. And even we originate more personal loans than our competitors, but not really important numbers. In the case of credit cards, consumption in real terms when it's coming down, not significantly, but it's less than the previous month.

Of course, there are sectors that are doing well, like the typical Argentine agricultural sector, food and beverage, supermarkets in general or food merchants, and cleaning, pharmacies. Of course, all these sectors are doing well. It's easy to understand that tourism, hotels, restaurants are not doing well, although there are protocols in certain provinces for restaurants to be reopening. And construction is also down. There are many provinces that began already opening many other activities. But I would say that July and August will be still a tough months as here is the peak of the [COVID] due to winter months.

We made some analysis, and on average, SMEs revenues went down like 20% in real terms. Of course, there, you have some SME sector that they had their revenues growing and some of them perhaps saw the revenues plummeting like 70%. But this is the kind of sector-by-sector analysis. We expect that oil and gas will recover. That was affected not only by the lockdown but also by international prices. I don't know if that's enough, Carlos. Hello?

Sorry, I was muted. Yes, thank you much. Very clear.

Okay.

And our next question is Santiago Petri with Franklin Resources.

Pablo, the question is related to the position in Leliqs. How do you see the unwinding of this position in the second half of the year?

Well, in...

Or do you expect that to happen?

Yes. Well, really, Leliqs have been going down in most of the assets of the banks. And actually, the Central Bank issued different regulation so that banks reduce their exposure in Leliqs in order to lend to SMEs, individuals and so on. And if companies lend to SMEs at an interest rate of 24%, you are allowed to have more access to Leliq. And also, when they raised the minimum interest rate that banks have to pay for time deposits to 79% of the Leliq rate, now at 30%, they also allowed you to invest in Leliq.

I don't know really if the reduction in Leliqs will take less take place in the second part of this year. The good thing is that the mandatory -- or not mandatory, but this, I would say, direct lending at 24% or even some lending to monotributistas, self-employed people at a 15% interest rate caused a reduction in reserve requirements, and we are allowed to invest in Leliqs.

So the objective of the Central Bank so far has been to decrease the interest rate for the private sector clients and allowing banks to invest in Leliq. Sometime in the future, perhaps a short-term future, medium term, I would say, the loan demand from the private sector will be coming or satisfied from money coming from Leliqs, basically banks selling Leliqs or not renewing their Leliq position and lending to the private sector.

The stock of Leliqs of any bank is -- can be built or reduced very quickly. There are twice a month of this issuance of Leliqs. As of March, our position was around ARS 81 billion, roughly ARS 60 billion were, let's say, free Leliqs. The other were remunerated Leliqs from the reserve requirements. But they can go from -- grow from 1 week to the other, like ARS 30 billion. And so it's not something we see going down in the short term.

Can you repeat me what was a portion of remunerated and nonremunerated Leliqs? What was the breakdown?

Really, the Leliqs are remunerated. What I said is that out of the ARS 81 billion, roughly ARS 22 billion were part of the reserve requirement integrated with Leliqs. And the other, like ARS 60 billion, were Leliqs that we purchased, let's say, freely or not allocated to reserve requirements.

Okay. Excellent. Thanks.

You're welcome. Of course, this amount of Leliqs that are used for the integration of reserve requirements changes as the stock of deposit changes. Perhaps, today, instead of being ARS 22 billion, it would go to levels of ARS 30 billion.

And our next question comes from Nicolas Riva with Bank of America.

Pablo, I have 2 questions. The first one on this announcement from the Central Bank that companies must use dollar assets held abroad before they go to a Central Bank to buy dollars to pay debt in foreign currency. Does this restriction apply to banks as well? And do you see basically any trouble having access to the Central Bank to buy dollars in order to pay, for example, your 2026 -- the coupon on your 2026 bond? So that's my first question.

And then my second question, on this news about the government planning to nationalize the company, Vicentin, does this announcement make things easier for you as a creditor to deal directly with the federal government? And yes, so what are your thoughts there? And also, if you can remind us your exposure to Vicentin, and how much you have provisioned for this exposure?

Okay, Nicolas. Well, I will begin with the second question that is very easy. We have 0 exposure to Vicentin. So we have no problems there in terms of asset quality. It's, I would say, a bad signal for the market in general. Today -- well, yesterday and today, there were demonstrations, particularly in the province of Santa Fe. The government says that it's an, I would say, isolated case. And they are, let's say, angry because Vicentin got a big loan from Banco Nacion, the largest state-owned bank, back in December. So they have a suspicious of corruption and they want to recover that. They will have to pass a law in Congress. We have to see if that is obtained or not. But clearly, it's not a good signal.

In terms of limitations to access the dollar market, this is something that -- or this regulation is part of a problem. International reserves were coming down, and the government through the Central Bank, in general, issued regulation to avoid individuals and companies to access the FX market. In the case of debt, if it is for a payment of either coupons of capital, there is no problem. Of course, we wouldn't be able to repurchase in advance a bond. That -- let's say, with a contractual cash flow, there are no problems. And as you said, it's -- if a company has no dollars outside, they will be able to access the FX market, for example, for imports. It's one, let's say, additional regulation, trying to stop the leakage of international reserves and the leakage of deposits in dollars in financial systems.

(Operator Instructions) Our next question is Ernesto Gabilondo with Bank of America.

My question is a follow-up in the SMEs credit lines with interest rates at 24%. How much do they represent of your loan book? And what could be the implications for NIMs? And then my second question is, if you're already seeing troubled companies in Argentina or under Chapter 11, I heard you before about the potential risky sectors, but just wondering if there's already one under Chapter 11. And then my last question is on regulation. So I don't know if there are any updates in the interest rate cuts in credit cuts and the implications for your business?

Okay, Ernesto. Well, first, on the loans at 24% to SMEs. As of March, the stock was very low, was around ARS 3 billion. So -- but because, as I said, the lockdown began on March 20, and at that moment, began this kind of stimulus package. Till yesterday, the amount was around ARS 39 billion, roughly 9% of our total loan book.

In terms of NIMs, we don't see this as a 24% loan. Why? Because we have forbearance in terms of reserve requirements, so for equal to 40% of the amount lent. And so, let's say, ARS 60 were lent and 40% were recovered, let's say, from the Central Bank that were yielding 0. So that ARS 40 are reinvested at a higher rate. So really the effective, let's say, interest rate on these loans is something around 37%, 38%.

In terms of margins, all these, let's say, changes in different loans, interest rates or time deposit interest rate have some forbearance in terms of reserve requirements, so really the effective yield tends to be constant. So really, in terms of NIMs, we are not seeing a change, perhaps a marginal thing, but also as the dollar bucket is shrinking and the peso bucket is growing, that will also help margins. And also the funding base is improving with more transactional accounts and less time deposits. So the impact on NIMs so far and perhaps in the second quarter will be minimum. Then we will have to see, of course, the asset quality tied to these loans. But companies are receiving or paying interest rates that are negative in real terms. So really, it's -- we think it will not be that hard to repay.

And one more comment on that. This ARS 39 billion, as of yesterday, lend to a 24% interest rate was -- or were lent to roughly 22,000 SMEs, clients of the bank. These 22,000 were, let's say, picked. We have like 82,000 SMEs. So we -- and part of these loans also have a guarantee from a public sector trust called FoGar. So really, they are not that bad. And even as it occurred in the past, like 5 years ago when we had a mandatory lending line, the executives that can have the relationship with SMEs say that this kind of a product makes -- or helps to improve the relationship, and we get cross-selling opportunities. This is in terms of the 24% line.

In terms of Chapter 11, we have 2 big companies in -- with problems in the past. One is Molino Cañuelas, or MOLCA, that was fully provisioned and is off balance sheet right now. Other is Garbarino, that is a white product line retailer, we also have fully provisioned. Then I'm not familiar with any big case that it could be client of the bank with any, I would say, relevant exposure.

And regarding your fourth question regarding regulations, the interest rate on credit card stands at 43%. Then other regulation on credit card -- on interest rate is this minimum interest rate for time deposits at 79% of the interest rate on Leliqs, now at 30%. And then you have the 24% that is really something that you grant, taking advantage of the reduction in the reserve requirement, and using that money to reinvest at a higher yield. These are the -- let's say, the regulation on interest rate so far.

There are no further questions at this time.

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

This concludes today's call. Thank you for your participation. You may now disconnect.