Grupo Financiero Galicia SA (GGAL) 2021 Q4 法說會逐字稿

Good day, and welcome to the Grupo Financiero Galicia Fourth Quarter 2021 Earnings Release. Today's conference 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 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 for its initials in Spanish, the Argentine economy recorded a 9.3% year-over-year expansion during November and the economic recovery for 2021 would have ended with an increase of around 10.3%. Excluding the tax on [Big Fortunes] and the IMF, SDRs, special drawing rights, the primary fiscal deficit for the fourth quarter reached 1.8% of GDP, accumulating 3.6% of GDP in 2021. When considering the above mentioned extraordinary sources of revenues, the primary fiscal deficit for 2021 totaled 2.1% of GDP. The national consumer price index recorded a 10.2% increase during the fourth quarter and reached 50.9% in 2021, up from 36.1% recorded in 2020. On the monetary front, the Argentine Central Bank expanded the monetary base by ARS 714 billion in the quarter and by ARS 1.18 trillion throughout the year, recording a 47.9% increase in the 12 months ended in December 2021. Meanwhile, the exchange rate averaged ARS 101.9 per dollar in December, a 3.7% increase against the average for September. When compared to December 2020, the Argentine peso underwent an [18.8%] devaluation.

In December, the average rate on peso-denominated private sector time deposits for up to 59 days was 34.6%, similar level to the average recorded throughout 2021. Private sector deposits in pesos amounted to ARS 7.73 trillion in December, increasing 14.5% during the quarter and 58.9% in the last 12 months. Time deposits in pesos rose 5.5% during the quarter and 58% in the year, and peso-denominated transactional deposits increased 22.9% and [60.6%], respectively, in the same period, all measured in nominal terms. Private sector dollar-denominated deposits amounted to $15.3 billion, decreasing 6.6% during the quarter, but increasing 1.1% in the last 12 months. During December, peso-denominated loans to private sector averaged ARS 4 trillion, increasing 20.9% in the quarter, and 47.9% when compared to December 2020. Also in nominal terms, while private sector dollar-denominated loans amounted to $4.1 billion, recording an 18.8% contraction during the fourth quarter and 22.9% decrease when compared to December 2020.

Turning now to Grupo Financiero Galicia. Net income for 2021 amounted to ARS 32.9 billion, 15% lower than in the previous year, which represented a 2% return on average assets and an 11.6% return on average shareholders' equity. The result was mainly due to profits from Banco Galicia for ARS 24.7 billion, from Naranja X for ARS 6.2 billion, from Galicia Asset Management for ARS 2.1 billion and from Galicia Seguros for ARS 1 billion. Going to the fourth quarter, net income amounted to ARS 9 billion, up 86% from the year ago quarter, mainly due to profits from Banco Galicia for ARS 7.5 billion, from Naranja X for ARS 1.5 billion, from Galicia Asset Management for ARS 673 million and from Galicia Seguros for ARS 247 million. This profit represented a 2.2% annualized return on average assets and a 12% return on average shareholders' equity. Banco Galicia net income for the quarter was 76% higher than in the year ago quarter, mainly due to a 35% higher net operating income offset by a higher loss from other operating expenses and a 13% increase of the results from the net monetary position. Net interest income increased 26% with interest income growing 21% year-over-year, mainly due to the growth of interest on repurchase agreement transactions and on public sector securities. And interest expenses grew 17% due to a 15% higher interest on time deposits. Average interest-earning assets grew 2%, reaching ARS 970 billion, mainly due to an increase in the average volume of other interest-earning assets in pesos, offset by the decrease of the average volume of loans. In the same period, its yield increased 378 basis points, reaching 36.25%. Interest-bearing liabilities increased 2% from the fourth quarter of 2020, amounting to ARS 802 billion. This growth was due to an increase in the average balance of peso-denominated time deposits and other deposits, offset by the decrease of dollar-denominated time deposits and debt securities. During this period, its cost increased 277 basis points to 20.94%.

Net fee income increased 8% from December 2020, mainly due to higher fees for deposit accounts and utility bills collection services, offset by lower credit card fees. Net income from financial instruments decreased 8% and gains from gold and FX quotation difference were down 66% from the year ago quarter, mainly due to the reduction in the volume of foreign currency trading. Provision for loan losses was 68% lower than those recorded in the same quarter of 2020, during which they were affected by the COVID-19 context. Personnel expenses were 3% higher than in the fourth quarter of 2020, while administrative expenses increased 20% as compared to the year before due to an increase in fees and compensation for services and in expenses related to maintenance and repairment of goods and IT. Other operating expenses for the quarter totaled ARS 8.1 billion compared to the ARS 1.5 billion profit recorded in the year ago quarter. It is worth to remember that in the fourth quarter of 2020, beside included an ARS 8 billion gain from the reversal of COVID-19-related provision, which were initially recorded in this item, and then reclassified as provision for loan losses. Without considering this effect, the increase was mainly related to an 87% higher term over tax.

The income tax charge was 40% lower than in the fourth quarter of 2020 with effective tax rate being 30%. The bank's financing to the private sector reached ARS 633 billion at the end of the quarter, down 14% in the last 12 months, mainly due to a 9% decrease of loans in pesos and a 46% decrease of dollar-denominated loans. Exposure to public sector increased 50% 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 11% of total assets compared to 5% as of the end of the fourth quarter of 2020. Deposits reached ARS 1 trillion, 2% higher than the year before with dollar deposits falling 21% and peso deposits growing 9%. The bank's estimated market share of loans to private sector was 12.2%, 85 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%, 20 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 3.37%, recording a 210 basis points deterioration as compared to the 1.27% of the fourth 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 with allowances reached 177%, down from the 501% from a year ago, which was also influenced by the additional provisions recorded in connection with the COVID-19. As of December 2021, the bank's total regulatory capital ratio reached 24%, increasing 120 basis points from the end of the same quarter of 2020. The bank's liquid assets represented 123% of transactional deposits and [60%] of total deposits, down from 159% and 68%, respectively, from a year before.

In summary, in a very challenging and volatile macro environment, Grupo Financiero Galicia was able to sustain 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)

Our first question comes from Ernesto Gabilondo with Bank of America.

So my first question is on the implications of the IMF agreement. How do you see this will translate in terms of loan and deposit growth this year? And what are the challenges for this year because we continue to see high rates, high inflation levels that could put some pressure for real loan growth and in the results of the net monetary position. And also related to this, do you think that the IMF agreement will be helping the banks to get rid of the cap rates in credit cards, the subsidized loans and floors on deposits, so meaning like a lighter regulation for the banks? And then my second question is on your net interest income growth. As you mentioned, one of the key drivers was a repurchase agreement with the Central Bank. So I just wanted to understand if this is something that we should continue to expect for this year? And then my last question is on how will be your expectations for the ROE for this year?

I took down notes. I hope I don't forget anything. Well, regarding the IMF, the government and IMF announced a pre-agreement that basically established some improvement path in terms of fiscal deficits and the financing of that deficit. Now they are discussing the details, the small letter. And then the agreement must be submitted to the Congress and later, it must be approved by the Board of the IMF. So we don't have too much details. Of course, it's, as we always say, a condition necessary to have an agreement with the IMF to clear the horizon of the financial needs and due date. But of course, we need more reforms. There is nothing yet written in terms of effects -- controls or the level of the effects, but definitely thinking in lower fiscal deficit, it will mean lower inflation that, of course, will improve things. For this year, we really don't see too many changes in terms of growth in loans and deposits in pesos. We are forecasting slightly higher inflation for this year, last year ended at 50.9%. The average of the estimates of the economy in Argentina that submit their expectations to the Central Bank stands at 55% inflation.

So with those or with this projected inflation, we are forecasting similar nominal growth, both in deposits and loans. Perhaps, a couple of percentage points above in loans, but nothing really material. And of course, with a higher inflation index, the negative result that comes from the exposition to inflation is higher. So the net monetary position result should be higher, higher netted, right? And well, I don't know if you read that the Central Bank issued a regulation, allowing banks to pay dividends, considering the accumulated results of 2021 up to 20% of that amount payable in 12 months installment. So that will help to reduce slightly the network in order to reduce the net monetary position result.

Thinking in regulation, in terms of floors, caps in credit cards and the productive line, the Central Bank recently issued a communication that changed a little bit some of these rates, increasing the floors for time deposits, but also increasing the interest rates we can charge on credit card financing in the productive line and in other different small loans, changing also some additional requirements franchise, so -- and also the yield on Leliq. The net effect we are estimating will be higher, net income or net financial income of around ARS 1 billion. So -- although we have a higher cost of funding, we can also pass through the increase in the cost of funding to the rates we charge. So the net interest income for next year should be higher. Of course, already adjusted the inflation, around 3% order of magnitude. And the ROE would be in the area of 10%, something lower than this year. Basically, for the higher inflation, we are estimating and also the effective tax rate could be something higher than the current year. I think I answered all the questions, Ernesto.

Yes, Pablo. This is super helpful detail. It helps a lot. Just a follow-up in the net interest income growth expectations, and that you provided like the net impact from regulation will be an extra ARS 1 billion. But considering that this year or this last quarter, driver was the repurchase agreement. Just wondering if that strategy will continue in this year?

Well, the excess liquidity we have been receiving when deposits were growing faster than loan demand was allocated to Central Bank, and the Central Bank has basically to instrument Leliq and the repos. For Leliq, we had limits. So for some months, the exposure to the Leliq was rather flattish, and we saw the repo transactions growing. Recently, there was another change in regulation that allow banks to increase their exposure to Leliq before there was a formula that took as base the stock of the Leliq asset demand, now it's -- you can invest the equivalent of your peso-denominated time deposits. So we can invest more in Leliq and less in repurchase agreements. And Leliq interest rate is higher. So the exposure to Central Bank perhaps will be the same, let's say, in percentage terms, but with a higher yield due to the change in mix.

Our next question comes from Juan Recalde with Scotiabank.

So the first one is related to the macro environment. What are the main macro assumptions used in your base case? And then second question would be related to the dividends. So that 20% is -- that you mentioned that the Central Bank authorized, is it 20% of 2021 earnings? Or does it also include 2020 earnings? And if -- and then related to that, do you have the amount defined to be paid in monthly installments in 2022 that's related to dividends?

Juan, first, in terms of macro assumptions, a good source is the REM, in Spanish is (foreign language), or market expectation is all that is submitted by -- I don't know exactly today, but in the past, it was made up by the opinion of around 50 economists and consultants. And the numbers are, I would say, there is not a big range between the different opinions. Everybody is foreseeing a higher inflation. The average is 55%. Again, coming up from 50.9% of 2021. This 2021 GDP will grow around 10.3%, recurring from the big drop of 2020. So due to the imbalances, most of the economists are forecasting 3% GDP growth for 2022. The FX stands at ARS 160 per dollar at year-end. Of course, this is the official one. And well, then the commercial (inaudible) between exports and imports around $11.5 billion or so. And while interest rates a little bit higher with the BADLAR at 40%, this is more or less the same expectations or variables we are considering in our scenario. And in terms of dividends, the Central Bank approved that we banks can pay the accumulated results considering December 2021. And -- but then the Central Bank has to authorize this payment. And one thing we have to consider is that Banco Galicia will be paying monthly installments to Grupo Financiero Galicia. Grupo Financiero Galicia could be paying in different installments, but definitely not monthly to the shareholders. The current base scenario could be that Grupo Financiero Galicia could be paying something like ARS 3.5 billion in May after the Annual Shareholders Meeting of April, and then perhaps, another payment in September of something like ARS 4 billion to ARS 5 billion. This is, again, estimated and considering the authorization of the central bank.

Our next question comes from Alonso Garcia with Crédit Suisse.

So my first question is on volume growth. I mean you mentioned loans to grow in line this year with inflation slightly ahead of that probably. So I just wanted to ask, which segments or products you think would be leading growth in 2022? And in the fourth quarter, we saw a very strong growth coming from the commercial side, less so in individual, despite the very strong growth in Tarjeta Naranja. So I wanted to hear your thoughts on the composition of loan growth this year?

And my second question would be on the competitive landscape in Argentina, both considering the incumbent banks, but also the incoming players such as fintechs, right? So I just wanted to hear your thoughts on what are the implications of these new incoming players in the system in terms of growth, not only in loans, but especially in terms of deposit accounts.

Well, yes, as you said, in the fourth quarter, the main driver for loan growth were the commercial side and specifically, the big companies. There is certain seasonality in the loan book around the year. From now till the end of June, the agricultural sector is a big client as a sector in terms of loan demand, but we are also seeing a recovery in credit card, financing and also in personal loans. And actually, certain months promotions, so we are pushing some personal loans. So if we look at December 2021 and December 2022, really, we don't see any material change in the breakdown of our loan book. Yes, we see even more pesos and less dollars, the breakdown between currencies because all the dollar bucket in terms of both loans and deposits is shrinking gradually, very marginally, but it's a leakage while the peso bucket is growing.

In terms of the competitive environment, there are many small players, mainly means of payments of prepaid cards. The only big player is Mercado Pago and that is basically tackling nonbanca segments, small merchants, but it's more means of payments, not really deposits. And there are new regulations that affect these digital wallets and basically, the money we have from digital wallets in bank must be or must have 100% reserve requirement. And also, there are increasing regulations that try to make the competition equal basically in terms of knowing your clients or anti-money laundering rules. So again, many small fintech like (inaudible), a part of the payment industry, but not really big players competing with the incumbent banks. Of course, this is dynamic, but today, we are not really seeing any big player. And as I always say, sorry, all the banks are digital. So in many cases, there is no need to change or to open an account in a pure digital bank because you can do it already with your bank.

Our next question comes from Carlos Gomez with HSBC.

Follow-up on things you've already said. First, with the agreement with the IMF, there is the idea that we will have real interest rates, despite the regulations and the limit that is minimum on deposit payments. Shouldn't that, in principle, improve your margin going forward?

The second is, you said that you expect the tax rate to go up slightly. We wanted to understand exactly why? Is there any changes that we should be aware of?

And the third, the rule on dividends, is this (inaudible) because not really (inaudible) very hard to execute for many banks. In your case, you can send the dividends to the group and you can handle it, but I can imagine that other listed banks would find it a little bit of nightmare to operate like this. Could they still review the rule? And again, as you said, the rule is that they can distribute the accumulated up to December '21. Does that mean accumulated earnings up to December '21 and that would be the previous 3 years without dividends or just the earnings for calendar year 2021? That wasn't clear.

Well, there are many discussions in the newspapers regarding the real interest rate issue that the IMF would be recommending that in the beginning of January, the Central Bank raised the interest rates for Leliq, time deposits, productive line, the credit card financing, and also in the papers, there were news that with high monthly inflation reading of last month that was 3.9%, the Central Bank would be evaluating increasing the interest rate. So it's likely that we will perhaps close the gap or have less negative interest rate. And in this scenario, yes, definitely, the margin should improve. And that's why we also are not very bullish in terms of volume recovery. The tax rate, if you remember, the 2020 year, it was about 40%. 2021 was around 30%, depending if we look at the Banco of Grupo, let's say, 40-plus at the bank and 30% at the bank '20 and 2021. Perhaps, this year goes to 34%, 35%. It's -- I would say, some -- there is some technicality with a lag in repricing of fixed assets and other assets and the way they calculate and make the payments. The tax rate is 35%, but it had this movement of volatility, and we estimate that this year will be similar to the nominal one, the 35%.

And in terms of dividend, it's the time we closed a fiscal year. We say, what percentage of the results goes to different reserves and the -- what the Central Bank authorized is accumulated in reserves available for payment for dividend distribution as of the end of 2021. And this is something that someone asked why we are issuing or why we issued the results earlier than other banks or earlier than other peers because we want to begin the process of requesting authorization for the payment of dividends sooner rather than later. So yes, it will be complicated for someone that wants to send abroad every month the dividends in the 12-month installments. That's why, at Grupo, we would be thinking some, I would say, quarterly or something like that payments. One in April, one in September and then perhaps the rest for 2023. The first payment in May would be, in theory, coming from dividends from the other subsidiaries and the second payment would be coming from dividends from the bank. This monthly installment from the bank, again, once and if the Central Bank authorizes the amount requested.

Okay. That is clear, but still, again, you can distribute your distributable reserves, so how -- I'm not sure if this is in your balance sheet, what is the size of those distributable reserves right now? And they would not correspond to the earnings of 2021. Does this mean that they are bigger than that?

It's a fixed figure, it's not 20% of 32%, and I'm not sure if you are going to reach exactly the 20%, but the number is not yet defined, but if I have to give you a number, I would say, between ARS 15 billion and ARS 19 billion, the requested amount.

So the requested amount would be ARS 15 billion to ARS 19 billion. The base will be higher than possibly between ARS 15 billion and ARS 19 billion.

Again, take it as an estimated number. It's not yet defined.

(Operator Instructions)

Our next question comes from Rodrigo Nistor with AR Partners.

So my questions are related to the regulatory environment. Which are the principal regulations affecting your profitability right now? How do you reduce your negative impact? And if you expect any kind of relaxation of these regulations this year? And then with the agreement with the IMF, IMF including a significant decline in financial assistance from the Central Bank to the National Treasury. If you expect any regulations that would have large banks to increase their exposure to the treasury?

Well, some of the regulation that began in 2020 with the COVID-19 and the lockdown finished and even some of the rates were increased, the credit card or the financing with credit cards grew from 43% to 49%. The yield on Leliq also increased. It's true that the cost of time deposits increased, but as I mentioned, the net effect of all these rate -- interest rate increases would be positive at around ARS 1 billion for Banco Galicia. One regulation that definitely is not good for banks, thinking in an environment of high inflation, is a limitation on the payment of dividends. This regulation that appeared is better than nothing that we would prefer to have more freedom in order to do that. We don't see really changes in regulation in terms of -- that would allow increases in exposure to the public sector, particularly, we Banco Galicia, increased the exposure to the public sector, not considering Leliq and repo transactions with the Central Bank, mainly those were CPI-adjusted bonds in order to cover from inflation. But it's a hedging measure and not something that we see as permanent or that we think that the government is going to increase. And also the productive line is something that we don't prefer to have, but also the interest rate was increased from 35% to 41%. So it's a better situation and many times, we say that we take advantage of that obligation to offer some SMEs part of their funding needs with a productive line and the rest of market rate. So it's kind of a marketing tool or selling tool. So it's not that bad. So really the regulation -- regulatory environment, in my opinion, improved, and I would say, since the second quarter of 2021.

(Operator Instructions)

Our next question comes from Carlos Gomez with HSBC.

Could you follow up -- perhaps could I have a follow-up. Any comments on Naranja X and any possible ideas to -- for separate listings or another way to unlock value in the subsidiary? Or is it too early days?

Carlos, that was an idea. I think 10 years ago, we were thinking or analyzing an IPO of Tarjeta Naranja when it was just a credit card because at that moment, we -- well, the bank was the owner of the controlling shareholding of Naranja and is needed to strengthen the capital ratio. And we also saw that there was a hidden value in Naranja. Many things happened in the meantime, and today, we have a very healthy capital ratio. Naranja converted or is converting themselves and where this umbrella of Naranja X into a fintech digital wallet, big player in payment with merchants and acquirers and also beginning soon to pay deposits. So if we revisit that idea, I think it will be not in the short term. I think that Naranja show more track record of their new strategy. Definitely, when we look at the old business is doing great, and the fintech business is still in an investment mode. So out of the ARS 6.2 billion net income of 2021, ARS 9 billion profit was from the old credit card business and ARS 3 billion loss was the new business. So really, it's something for the middle term if it is.

Okay. And now that you mentioned capital, and it is true that traditionally, Galicia did not have a very, very strong capital raise. Now you do -- ideally, where would you like your capital ratio to be in a more stable scenario?

Well, when we raised capital back in September 2017, our objective was 11.5% to 12%. Now we have doubled. So I would say that we still prefer to have something closer to 12%. The ratio grew due to the lack of the not possibility to pay dividend. So that 12% range will make much more sense.

And we have no further phone questions at this time.

Okay. Thank you, Lauren. 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.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.