Grupo Financiero Galicia SA (GGAL) 2022 Q1 法說會逐字稿

Good day, and welcome to the Grupo Financiero Galicia First Quarter 2022 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.

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 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 9.1% year-over-year expansion during February, even though the economic recovery reached 7% during the first 2 months of the year 2022, would then with figures closer to 3.5% according to the market expectation survey published by the Argentine Central Bank.

During the first quarter, the primary deficit reached 0.3% of GDP. And in 2021, the primary deficit has amounted to 2.1% of GDP, including revenues from the so-called millionaires' tax and the IMF' SDRs, without them, the primary deficit stood at 3.5% of GDP. The national consumer price index recorded a 16.1% increase in the first 3 months of the year and reached a 55.1% annual variation in March, the highest rate of the last 30 years.

On the monetary front, the Argentine Central Bank expanded the monetary rate by ARS 270 billion in the quarter recording a 45.2% increase in the last 12 months. Meanwhile, the exchange rate averaged ARS 109.46 per dollar in the quarter, increasing 7.4% against the average for December. When compared to March 2021, the Argentine peso underwent a 16.8% devaluation.

In terms of interest rates, during 2022, there were several increases. In March, the average rate on peso-denominated private sector time deposits for up to 59 days was 43.3%, around 6 percentage points higher than the average recorded throughout 2021.

Private sector deposits in pesos amounted to ARS 8.5 trillion in March, increasing 10% in nominal terms during the quarter and 57% in the last 12 months. Time deposits in pesos rose 19.3% during the quarter and 56% in the last 12 months and peso-denominated transactional deposits increased 2.3% and 58.5%, respectively, in the same period. Private sector dollar-denominated deposits amounted to ARS 15.3 billion, decreasing 0.3% during the quarter and 3.6% in the last 12 months.

During March, peso-denominated loans to private sector averaged ARS 4.4 trillion, increasing 9.3% in the quarter and 52.7% when compared to March 2021. While private sector dollar-denominated loans amounted to ARS 3.9 billion, recording a 6.7% contraction during the first quarter and a 24.7% reduction when compared to March 2021, all figures in nominal terms.

Turning now to Grupo Financiero Galicia. Net income for the first quarter amounted to ARS 5.2 billion, up 51% from the year ago quarter mainly due to profits from Banco Galicia for ARS 4.7 billion from Galicia Asset Management for ARS 776 million, from Galicia Seguros for ARS 235 million and from Naranja X for ARS 5 million. This profit represented a 1.1% annualized return on average assets and a 5.9% return on average shareholders' equity.

Banco Galicia's net income for the quarter was 153% higher than in the year ago quarter, mainly due to a 61% higher operating income, offset by a 56% higher loss from the net monetary position. The net operating income increased 23%, mainly due to a 49% increase in net results from financial instruments, offset by a 7% lower net interest income with interest income growing 4% year-over-year, while interest expenses increased 7%, mainly due to higher rates on time deposits.

Average interest ending assets were down 4%, reaching ARS 1 trillion, mainly due to a decrease in the average volume of loans. In the same period, its yield increased 750 basis points, reaching 40.5%. Interest-bearing liabilities decreased 2% from the first quarter of 2021, amounting to ARS 932 billion. This decline was due to a decrease in the average balance of dollar-denominated saving accounts, offset by an increase of peso-denominated other deposits.

During this period, its cost increased 191 basis points to 21.75%. Net fee income increased 12% from March 2021, mainly due to higher fees on deposit accounts, on credit cards, and on utility bills collection services. Net income from financial instruments increased 49% due to higher results from government securities and from private sector securities. The latter as a consequence of the sale of the remaining shares in Prisma.

Gains from gold and FX quotation differences were up 3% from the year ago quarter, including the results from foreign currency trading. As regards to provision for loan losses, the amount for the quarter was 62% higher than those reported in the same quarter of 2021, reaching ARS 2.2 billion.

Personnel expenses were 8% lower than in the first quarter of 2021, primarily due to a 6% decrease in staff, while administrative expenses increased 5% as compared to the year before, due to increases in higher administrative services in maintenance and retirement of goods and IT, and in publicity, promotion and research expenses.

Other operating expenses for the quarter totaled ARS 10.9 billion, 9% below the amount recorded in the year ago quarter. The income tax charge was 21% higher than in the first quarter of 2021 with the effective tax rate being 35%.

The bank's financing to the private sector reached ARS 678 billion at the end of the quarter, down 10% in the last 12 months, mainly due to a 5% decrease of loans in pesos and a 43% decrease of dollar-denominated loans. Exposure to the public sector increased 23% year-over-year. Excluding the exposure to the Central Bank, net exposure represented 19% of total assets compared to 7% as of the end of the first quarter of 2021.

Deposits reached ARS 1.1 trillion, 2% lower than a year before with dollar deposits falling 24% and peso deposits growing 5%. The bank's estimated market share of loans to private sector was 12.1%, 61 basis points lower than at the end of the year ago quarter, and the market share of deposits from the private sector was 10.2%, 32 basis points higher than in the same quarter of 2021.

As regards asset quality, the ratio of nonperforming loans to total financing ending the quarter at 3.11%, recording 148 basis points deterioration as compared to the 1.63% of the first quarter of the prior year. At the same time, the coverage with allowances reached 180%, down from the 391% from a year ago. As of the end of March 2022, the bank's total regulatory capital ratio reached 24%, decreasing 52 basis points from the end of the same quarter of 2021. The bank's liquid assets represented 113% of transactional deposits and 63% of total deposits, up from 105% and 58%, respectively, from a year before.

In summary, in a very challenging and volatile macro environment, Grupo Financiero Galicia was able to keep asset quality, liquidity and solvency metrics at very healthy levels, while profitability was negatively affected by the very high inflation of the quarter.

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

(Operator Instructions) And we'll go ahead and take our first question from Ernesto Gabilondo with Bank of America.

Pablo, thank you for your presentation. I have three questions from my side. The first one is on the political outlook. Can you share with us what are the latest political events, potential regulation that could be impacting the banking sector. And then you can mention those positive and negative if it is the case? And also, I believe still soon, but I would appreciate your thoughts on who are you seeing as a potential presidential forces? So that's my first question.

And then my second question is on your expectations on loan and deposit growth considering your expectations for inflation and interest rates?

And then my last question is on Prisma. I would like to hear from you how much did you benefit from the nonrecurring gains from Prisma and how much do you expect to receive in the next quarter?

Okay. Thank you, Ernesto. Well, first, the political outlook is kind of difficult to predict. The main opposition, I would say, is within the government coalition right now between the President -- and the Vice President, there are many fights and accusations and actually, in some Congress decision some initiatives sent by the President were approved by the real opposition and some members of the Congress of the current government deal and approve it, like the IMF deal, for example.

And this current government coalition is losing on a monthly basis, I would say, support and approval. This week, there was some calls saying that 20% of the population approves the Alberto Fernandez' government and also that the image of (inaudible) is at the lowest level since many years at 25% of positive image.

In the opposition, I would say, Cambiemos, the Macri and the radicals and other smaller parties coalition. There are also some discussions. What most of the political analysts say is that they are I would say, competing for the next year primaries. But once there is a winner, everybody will be together.

And the last comment on the political, I would say, environment is that the appearance of Javier Milei and economist, I would say, liberal paradox economies -- orthodox economies or sorry, economies that is having a lot of support, not only in center right and a higher income people, but also in the lower part of the population, lower income part of the population. And basically, he has a speech against the political (inaudible) as he says. He says that the Congress is too expensive, that all the politicians are worried about raising taxes and not fostering economic growth. Some analysts are saying that the appearance of Milei is the result of the population being tired of the old politicians.

Next year, there will be presidential elections in October. We will have primaries in August, but many provinces will begin having their elections in March. So we will have a full next year of elections, and there we will see clear who will be the candidates for each party. Sorry, it was a long political outlook.

In terms of regulation, the Central Bank already is, I would say, reach in terms of regulation. We have minimum rates, caps on other rates, regulation on dividends and certain fees. And we don't foresee any further regulation. Well, the last regulation, the launch was the prohibition on banks to sell cryptocurrencies. Banco Galicia was the first bank to launch that alternative for their clients. And later that week, the Central Bank said that it wasn't allowed for banks.

And we're going to the second question, loans and deposits. Our expectation on inflation is a moving target, 3 months ago our chief economist was forecasting 55% annual inflation with the last 2 months readings. Right now, most of the economies are forecasting 65% inflation. The higher inflation, it's harder to grow in real terms. Right now, our expectation for deposits growth is around 60% to 63% growth, so some percentage points below inflation and loans is from 62% to 65%. So I would say, equal to inflation or slightly below inflation. So basically following the nominality or the working capital and the consumption follow the inflation.

In case of Prisma, we finished with the sale of our holding in that company. We used to have 15% of the company. We sold 3 years ago, 7.6%, in February 7.4%. So you will not see any further results in the P&L. We informed that the impact was positive in this first quarter of ARS 2.7 billion.

This is super, super helpful, Pablo. And please let me make you another question on dividends. I just want to double check if they have been approved by the shareholders and when do you expect to start doing the first payment?

Yes. The shareholders approved in the end of April shareholders' meeting, the payment of up to ARS 19 billion. We already paid ARS 11 billion. The ex-dividend date in NASDAQ was last Friday 13, and most of the brokers and banks already paid to the [ADR] holders or are in the process of paying the idea is to pay ARS 4 billion in September additionally, and other ARS 4 billion in January next year.

And we'll go ahead and take our next question from Jason Mollin with ScotiaBank.

These are challenging times in lots of places, but in particular, in Argentina, and we appreciate Galicia's commitment to communicating with the market and taking our questions.

My first question, I guess, would be on competition and how you're seeing, I mean, the traditional incumbents competing, is there pressure on pricing? Or in this environment, it really is about service and maybe you can comment on the new entrants and the banks the neo banks or banks that don't have branches?

And secondly, maybe in these tough times, it would be interesting to hear with Galicia is thinking about a positive outlook or what is the positive scenario? Like how can we lay out a path to getting inflation down and moving towards real growth and especially for the banking system, like what are the positive factors if we wanted to highlight on what could go right and make things good for the banking system in Galicia, in particular?

Okay. Jason. Well, in terms of competition, incumbent banks are, I would say, very strong, and they represent most of the volume and market share. There are some small pure digital banks that really are very, very small. In this context of a lack of capital for many of these new companies that bet on growth and didn't use to pay much more attention on profitability I think, will help balance. The only big competitor is Mercado Pago. But I would say that they reached some part of the population that used to -- not to be so bancarized mainly some smaller merchants. So they helped to increase the bancarization.

In the case of 1 of the digital banks, small digital banks was purchased by Ualá that was a Wilobank bank. The other small digital bank is Brubank but really, they are not big or they are not a threat right now, and in my opinion, not in the medium term. Many of these new companies, not only in the fintech environment are thinking in and growing even some of them becoming a regional player and then exiting with the upside now. So the incumbent banks are very strong in the marketplace.

In terms of the positive outlook, and I think right now, not only the macro-economy is a challenge but it's very related to the political uncertainty and the disputes within the government and what will happen next year. Most of the political analysts tend to say that there will be a change in the color, but we need to see how this provincial elections take place and who are the candidates and how the polls evolve.

In my opinion, the political uncertainty caused lack of confidence. So there are many investment decisions are postponed and there is like vegetative growth and diverse in different sectors of the economy.

To have a positive outlook, in my opinion, we need a change in the confidence to have more certainty from a political standpoint. And going to the economic variables, I think inflation is key in order to reduce inflation, you need to have lower government expenses or, I would say, not a fiscal deficit. And I said, lower expenses because taxes are already high. But in many times, Argentina is, I would say, surprised everybody with the quick changes for good and for bad. So if there are good signals in the political environment, I think the macro changes could be faster than what we could imagine. And the financial system is key to allow the economy to grow.

In the last 2 years, the loans to GDP have been -- the ratio has been going down and all banks are liquid and strong solvency terms and with good asset quality. So we would be also very well prepared to a rebound in the loan demand.

That's helpful. Is there any comments on how to address this inflation? I mean, is it the traditional hiking rates even more or there needs to be a change in the structure in general -- I mean like a big, big change for Argentina or is it just traditional going back to a change in the model? Or is it we need to see rates. I mean they're already high, of course, but in real terms, maybe much more negative or positive, excuse me, if they really raise them well above where inflation is. Is that the path to get Argentina's inflation under control?

Well, under -- with the current government, they tend to raise rates, the (inaudible) rates, the productive line rates, the credit cards, all the time deposit rates. But once we have the high inflation readings of demand. So they are running from behind, I would say. And they are also trying to get agreement, price agreements and some caps on certain products and it's really a recipe that many times failed in the past. But when you speak with most of the economies, 1/3 of economists, they tend to say that this is an issue of a fiscal deficit. So I think there is an agreement there, but we will need to see a change in government, in my opinion, to see this kind of into public policy.

And we'll go ahead and take our next question from Carlos Gomez with HSBC.

Two questions. The first one on Prisma, you said there was a ARS 2.7 billion impact. Could you clarify that this free tax or after tax, we may have said it before, but here.

Second, is there a noncompete agreement with Prisma? And after it expires is the bank willing to reenter the market? What are your plans currently?

And finally, what would you say the chances are that inflation is not only higher, but we actually run into hyperinflation, 100%, 200%, 300%. What is the probability? And what would the bank do to protect itself? Easy questions.

Carlos. Well, the ARS 2.7 billion result from Prisma is after tax, because they were -- in the accounting, they were in different lines, the different effects, and we had not only income tax but also sales tax. So to have it simply or simpler, we said ARS 2.7 million, but yes, it's after tax. We, right now, Prisma a supplier and it's not really in the medium-term plans to enter into that market. We have other, I would say, priorities going forward.

In terms of inflation, not -- I didn't see any single economies speaking about such high or bad scenario in terms of, I would say, 3 digits inflation. The median of the market is at 65, some analysts are saying 60.73. These are the range -- this is the range. And the next months -- most of the -- the economist are seeing a decline in inflation from 6.7% to 6% to 5.2% and going back to the 4% or 3.9% level. I think the (inaudible) of economy understands the issue. He had many critics from the government coalition, but the President is supporting him or backing him. So we don't see that bad scenario.

And what are we doing to protect, sorry? -- you can see that our exposure to the public sector has been increasing. The increase is basically in CPI bonds or share adjusted bonds so that we -- with rising inflation, we have a higher interest income. The thing is that there is -- this is a technicality. There is a 2-month's lag since you adjust by inflation in the accounting and when you begin accruing the inflation with your bonds. So the March figures, you adjust with the March CPI, but you have a 2 months lag to receive this high inflation readings in your bonds. That's why the coverage wasn't seen in the first quarter is likely to be seen in the second one. So that the monetary loss should be smaller.

Okay. We'll take our next question from Rodrigo Ezequiel with AR Partners.

So we have inflation in the first quarter around 16%, which or impacted the group and sector profitability and with a similar scenario ambition for this quarter, what should we expect from your different subsidiaries? I mean what can or should be different to see a different picture in the following quarters? And if you could comment in particular on the business dynamics for Naranja X, which seemed to have suffered the most?

Rodrigo. Well, a way to protect against this inflation is to purchase public sector bonds tied to CPI. The problem is this months lag between you have to adjust by inflation in your numbers and you begin accruing the same high inflation. So the 6.7% inflation we saw on March will be accruing in our bonds beginning in May. So these 2 months. That is what we have been doing.

The other thing that will help to reduce the negative result due to inflation is to reduce the network with the payment of dividends that helps.

And in the case of Naranja X. Naranja X had a traditional company. Actually, the credit card company had a positive net income of roughly ARS 1.2 billion, the ARS 5 million was due to the other subsidiaries that basically is tied to the fact that the acquiring business purchases the POS and they give it for free to the merchants.

So it's kind of part of the investment period of that business. For this year, we are foreseeing a positive result of all the Naranja X companies, perhaps not at the same level of the previous year but definitely positively. I have to give you a number, perhaps closer to 10% ROE.

(Operator Instructions) And we'll go ahead and take another question from Carlos Gomez.

Yes, Pablo, a follow-up on the inflation-linked bonds since you mentioned that, that is the reason why the investment cap so high this quarter. Could you perhaps quantify the impact of that? I mean, had the bonds being -- had the impact in the same months, what would the inflation adjustment has been? Just to have a sense about where we would be on a more normalized basis?

I'll give you a quick bulk figure instead of being in the order of ARS 30 billion the net monetary position result, it could have been around ARS 24 billion. The thing is that many things change. So I don't know if it's completely true for the second quarter. But this is to give you a big number.

Okay. And on the other hand, you have the ARS 2.7 million positive from Prisma, which is obviously is not going to recur.

It appears we have no further questions. And I would like to now turn the call back over to Pablo.

Okay. Thank you for attending this call. If you have any further questions, please do not hesitate to contact them. Good morning. Bye-bye.

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.