Grupo Financiero Galicia SA (GGAL) 2022 Q2 法說會逐字稿

Good day, and welcome to the Grupo Financiero Galicia Second Quarter 2020 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, Ali.

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, the Argentine economy recorded a 1.1% recovery during June, reaching a 6.3% growth when compared to the first half of 2021 and a 6.4% year-over-year expansion.

According to the market expectation survey of Argentine Central Bank, REM, in 2022, the economic recovery will be 3.4%.

During the second quarter, the primary deficit reached 1% of GDP. The consumer price index recorded a 17.3% increase during the quarter, accumulating 36.1% in 2022 and 64% during the 12 months ended in June 2022.

On the monetary front, the Central Bank expanded the monetary base by ARS 468 billion in the second quarter and recorded a 44.2% increase in the last 12 months. Meanwhile, the exchange rate averaged ARS 122.74 per dollar in June, a 12.1% increase against the average for March 2022. When compared to June 2021, the Argentine peso underwent a 22.4% devaluation.

In June, the average rate on peso-denominated private sector time deposits for up to 59 days was 49.6%, around 15 percentage points higher than the average recorded in 2021. As of the end of the quarter, minimum interest rate for time deposits below ARS 10 million was established at 61% and in Middle West was once again increased to 69.5%.

Private sector deposits in pesos amounted to ARS 10.2 trillion in June, increasing 19.9% during the quarter and 69.9% in the last 12 months in nominal terms.

Peso-denominated time deposits rose 21.2% during the quarter and 71.2% in the last 12 months, while transactional deposits increased nominally 18.9% and 69.7%, respectively, in the same period.

Private sector dollar-denominated deposits amounted to $15.6 billion increasing 2.2% during the quarter and decreasing 4% in the last 12 months.

During June, peso-denominated loans to private sector averaged ARS 5.1 trillion, increasing 17% in the quarter and 70.8% when compared to June 2021, while private sector dollar-denominated loans amounted to $3.8 billion, recording a 0.2% contraction during the second quarter and a 29.1% reduction when compared to the year before, all in nominal terms.

Turning now to Grupo Financiero Galicia. Net income for the second quarter amounted to ARS 5.1 billion, down 65% from the year ago quarter as most of the subsidiaries had lower results. The mentioned net income was mainly due to profits from Banco Galicia for ARS 3.7 billion from Galicia Asset Management for ARS 1.1 billion from Naranja X for ARS 191 million and from Galicia Seguros for ARS 188 million. This profit represented a 0.9% annualized return on average assets and a 5.1% return on average shareholders' equity.

Banco Galicia net income for the quarter was 66% lower than in the year ago quarter, mainly due to 73% higher loss from the net monetary position. The net operating income increased 7%, mainly due to a 66% increase in net interest income, offset by 9% lower result from financial instruments and a 14% lower other operating income.

Average interest-earning assets were down 3%, reaching ARS 1.2 trillion mainly due to a 58% decrease in the average volume of peso-denominated other interest-earning assets and a 41% decrease in the average volume of dollar-denominated loans.

In the same period, its yield increased 954 basis points, reaching 44.8%. Interest-bearing liabilities decreased 9% from the second quarter of 2021, amounting to ARS 1 trillion. This decline was due to a 22% decrease in the average balance of dollar-denominated saving accounts, a 5% decrease in the average balance of peso-denominated time deposits and a 30% decrease in the average balance of dollar-denominated time deposits.

During this period, its cost increased 739 basis points to 28.4%. Net interest income from -- for the quarter increased 66% from the same quarter of 2021 with interest income growing 32% and interest expenses growing 22% in the same period.

Net fee income decreased 5% from June 2021, mainly due to a 7% lower fees on credit cards. Net income from financial instruments decreased 9% due to lower results from related financial instruments.

Gains from gold and FX quotation differences were 97%, higher 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 10% higher than those recorded in the same quarter of 2021, reaching ARS 5.6 billion.

Personnel expenses were 9% higher than the second quarter primarily due to salary increase agreements with the union, while administrative expenses increased 7% and other operating expenses decreased 8% as compared to the year before. The income tax charge was significantly lower than in the second quarter of 2021. We have an accumulated effective tax rate of 25% during the first half of 2022.

The bank's financing to the private sector reached ARS 845 billion at the end of the quarter, up 4% in the last 12 months, mainly due to a 9% increase of loans in pesos. Exposure to the solid sector increased 3% year-over-year. Excluding the exposure to Central Bank, net exposure represented 13% of total assets compared to 11% as of the end of the second quarter of 2021.

Deposits reached ARS 1.4 trillion, 3% lower than the year before, mainly due to a 21% decrease of dollar-denominated saving accounts and a 10% decrease of peso-denominated current accounts, offset by a 4% increase of peso-denominated time deposits.

The bank's estimated market share of loans to the private sector was 12.1%, 13 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%, 16 basis points lower than in the same quarter of 2021.

As regards asset quality, the ratio of nonperforming loans to total financing ended the quarter at 2.16%, recording a 98 basis point improvement as compared to 3.14% of the second quarter of the prior year. At the same time, the coverage with allowances reached 218.5%, similar level than a year ago.

As of the end of June 2022, the bank's regulatory capital ratio reached 24.1% decreasing 96 basis points from the end of the same quarter of 2021. The bank's liquid assets represented 114% of transactional deposits and 62% of total deposits, up from 107% and 61%, 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.

I have a quick question from my side. The first one is on the political outlook I understand we're still far from the elections, but it seems there's a lot of division among the political forces. I think there's still no preference for a candidate. So how are you seeing the political outlook ahead of the elections? Then my second question is on loan growth. We continue to see credit penetration at historical lows. I think it's around 10% of GDP. But considering this scenario, high inflation, high rates, we think they are preventing this normalization to start thinking about loan growth. So when do you expect to start seeing double-digit real loan growth in Argentina?

And then my last question is on asset quality. As you mentioned in your presentation, there were some charges in the loan portfolio. So can you elaborate if they were related to corporate and which type of sectors? And how should we think about the NPLs and the cost of risk in the next quarters?

Ernesto, well, first, the political outlook, as you mentioned, is uncertain. We are about to allow 1 year far from the primary. I think the division that you can see both in the current government party and in the opposition will mean that they will -- many forces or people will compete in the primaries.

Once the result of the primary side are known, my guess or my idea and many of the political analysts agree on that. I agree with them is that everybody will be aligned below the one that gets more votes within each party. Currently, when you look at the government names, most of them have a very high negative image not only Alberto Fernandez, Cristina Kirchner, (inaudible), Maximo Kirchner, they have like 30% good image and 70% bad. So it's hard for them. And we don't know who will be competing in that respect and the [termism] will be together or there will be different factions. Sergio Massa also has more negative image than positive.

In the opposition, something similar happens many names, but with better positive image, there you could have Mauricio Macri, (inaudible), Facundo Manes from the Radicalism, but then there are also speculations about who will be candidates for President, for mayor of the city of Buenos Aires, for the province of Buenos Aires. And again, once the primary take place, it's likely that the opposition will be unified.

Another important thing to look at is that some provinces could be moving forward their elections, basically to split the -- or not to be together with the national elections to avoid or some governors would like to avoid to lose if they think that they are -- the current government will lose. They want to split the election.

In terms of loan growth, well, definitely, the loan-to-GDP ratio is very low. And as you mentioned, historically low at around 10%. We don't see really in the short term, this ratio growing because inflation is key to have even a positive 1-digit real growth, the high inflation is an obstacle for that. And to reduce inflation, any government will need more than short term. What we are hearing from Massa is that the statements are in the right direction to reduce fiscal deficit in order to reduce money printing, so there will be less pressure on inflation. But definitely, we need to see a much lower inflation in order to have a positive loan growth.

In terms of asset quality, well, the metrics are very healthy, not only when we look at nonperforming loans ratio, coverage or cost of risk. And basically, that is on the other side of the coin is because inflation is high. So you see the negative impact in the P&L basically when we adjust by inflation because many of the loans were granted at negative real interest rates. So it's easy for the clients to repay. So instead of seeing the loan loss provisions growing significantly. You see when we adjust the inflation, right, in the results from the net monetary position.

Particularly in the quarter, there was some movement and change of certain parameters in terms of expected losses, the Markov model. There was a usage of some [acquisition] that was built during the pandemic due to the COVID-19. But going forward, we see very healthy trends in all the aspects of asset quality.

Perfect. Super helpful. Just 1 last question. When look into what Galicia delivered in ROE in the first half, how should we think about the ROE for this year?

Well, we are seeing a better third quarter. And according to our estimates, projections and the different variables will measure a much better fourth quarter. So we are keeping our guidance of high 1 digit -- high 1 digit ROE. Let's say, in the last quarter, I think I mentioned between 8 and 10, it could be in the same level.

And we'll go ahead and move on to our next question from Alonso Garcia with Credit Suisse.

My question is on credit card segment. I just wanted to ask about the difference between the performance that we see at the bank and Naranja X. In the quarter, credit cards at the banks of CRE grew almost 4% sequentially. But in Tarjeta Naranja, we saw a 1% decline, just wanted to check with you why the difference in performance, if you think it's something related to demand or supply? And any color you can provide on that sense would be helpful.

Alonso. Well, in the case -- in both cases, I would say, the credit card business has been having significant changes, not only when we look at the evolution of the merchant discount rate that was -- has been going down by regulation in an agreement that banks had with the Central Bank and the antitrust agency back in, I think it was 2017. Also, many expenses related to credit cards were changed, all alliances with different airlines and in many cases, our loyalty programs, so in many cases, the difference -- it depends on savings of expenses related to credit cards, more than the growth or not in volume or in purchases.

In the case of the bank, we have a much higher income bracket type of individual clients. And sometimes there is more volatility when there are, I don't know, for example, the Mother's Day or the Father's Day or holidays. In the case of Naranja tends to be more stable and the average ticket is smaller and the number of tickets per statement is smaller. But thinking in a medium-term view, we see both businesses, specifically the credit card business very healthy and recovering profitability with this savings, we have -- we are taking with expenses related to credit cards.

Thank you and in the previous question, you mentioned that you were feeling comfortable with the asset quality trends across the world. Is this the same case for Naranja X?

In terms of asset quality, yes. And also in the case of Naranja, the losses or negative results perhaps are seen more with the adjustment by inflation more than the loan loss provisions.

And we'll go ahead and move on to our next question from Walter Chiarvesio with Santander.

I was checking the numbers in the results from securities. I found it surprisingly low compared to other quarters. And given the increasing size of securities that the bank has in the balance sheet. So I was wondering if there was some mark-to-market loss, given the volatility that may won't suffer during the second quarter. You had some mark-to-market loss that you recorded in your balance sheet in the second quarter?

Walter, well, that's an accounting, I don't know, if the word would be trick. It's how accounts show the results from securities. Within net interest income, there is a breakdown on Page 15 of the press release. You see the interest income and the interest expenses. And within interest income, there is a line that says public sector securities that has been growing significantly. So you have to look at both lines. This line within net interest income on the other line that you were mentioning that are the net results from financial instruments. And basically, within net interest income, what we include is what the results of the bonds that are at amortized cost or cost plus yield that basically are the (inaudible), the other ones we have as part of our reserve requirements and the lesser CPI adjusted bonds that basically are used to hedge partially, not fully against inflation. That's come on -- in the other line in the results from financial instruments, you have the Leliqs and bonds mark-to-market. I don't know if I was clear.

(Operator Instructions) And we'll go ahead and move on to our next question from Carlos Gomez with HSBC.

Two of them. The first one is we have seen among 1 of your competitors, a large adjustment on the tax line because of deferred tax assets. Does Grupo Galicia have anything like that now or in the future that we should take into consideration? Would you need to have an adjustment with a positive or negative to the tax rate. Second, we see that you have increased your exposure to the public sector and now 13% of assets ex the Central Bank, is there any concern at some point the government as part of the new economic plan might restructure some of its assets, whether treasury or Central Bank, and that could affect your results?

Carlos, regarding the tax adjustment of other competitors, well, actually 2 -- as far as I know, 2 banks showed a positive -- a significant positive result in the second quarter. In our case, in other competitors, we did something similar gradually beginning last year. So basically, there was no big jump, and we are not foreseeing any jump and positive results for the future.

The key thing to understand in my opinion, is that the effective tax rate is a result of financial accounting and tax accounting when the accountant calculate the income tax, they have 35% on pretax tax accounting. Then when we look at the effective tax rate, the tax rate is strange animal. That's why I mentioned that we are seeing an effective tax rate of 25% in the first half of the year. And it's likely that for the second half, we will have another 25% effective tax rate. But again, its something that comes from tax accounting and the other that is financial accounting.

In terms of public sector exposure, basically, we increased in this share of CPI or inflation-adjusted bonds called lesser in order to try to protect against inflation. I mentioned a couple of times before that the hedge is not perfect because there is a lag since you begin accruing a higher inflation with the bonds mainly compared with the adjustment we made in the monetary loss adjustment that is instant in the accounting, but with these 2 months' lag, we tend to cover a part of that position of -- or to protect against inflation basically.

Of course, government bonds are risky assets. The numbers we see on a monthly basis in the asset and liability management committee are within the appetite, are within the market share of our exposure. Basically, if we have 12% market share of loans, our market share of exposure to certain bonds or Leliq is similar. And one thing that the Central Bank issued one month ago, I think, is the possibility to purchase put options in which banks once they purchase this pot can sell the bonds issued by the government to the Central Bank. So basically, it's a kind of liquidity window. And also you change the one that pays instead of being the government, the central bank would pay or purchase those bonds, but that's what I have to answer to that, Carlos.

And we'll go ahead and move on to our next question from Yuri Fernandes with JPMorgan.

Pablo, just a follow-up regarding the profitability in the second half. I guess you mentioned you're expecting some improvement here. But how to consolidate this inflation, right? Because I guess, you have tariff period adjustments, inflation in July was super high. I guess it will remain running at those 6%, 7% on a monthly basis. So we had higher inflation the net-to-net position should be a headwind. So how -- what are you seeing to say that we will improve just to help us understand here? That's the first one.

And I have a second one regarding -- it's very related to this one, but regarding Naranja, result improved a lot, although inflation was slightly higher in the second Q, and we are seeing other consumer finance companies that they have less fixed assets to adjust for inflation and kind of hedge a little bit from the net monetary gains, suffering much more than Naranja, so what is driving the better results in the Naranja, given inflation was higher this quarter than the first 2? And you had a very close to 0 earnings in the first quarter.

Yuri, well, definitely, inflation is the key variable that influence negatively or positively the results. For our chief economist or our economic department, we are seeing some slight reduction in monthly raisings of inflation in the second half. But more important than that is that there were many changes in the interest rates we have in the market. Lately, the Central Bank increased the interest rate we received from Leliq, from repos, also from productive line or the lines or interest rates we can charge off on credit cards. It's true that they also raised the minimum interest rate. We have to pay for time deposits, but as a whole, the situation improved. So from that side, we are seeing a better result.

Also, -- we are -- we have been making some efforts in terms of certain reduction in expenses. Only -- also personnel expenses are going down. This particular second quarter, we couldn't see it because of the salary increase we had in April that was around 18%. But in terms of number of people, you can see that it's going down like 5% to 6% or 7% per year. And also, this lower effective tax rate we are seeing, so having all this part, you will see -- or this is our expectation that the third quarter will be a little bit better and the fourth quarter much better. And also the lag I mentioned in terms of the bonds tied to inflation. And so you will see the impact when inflation goes a little bit down, and you are accruing previous high inflation, you will see an expansion in the margin.

And regarding Naranja, the results have been, in my opinion, a little volatile. The company is growing, is investing. It's developing different businesses. So when you look at the -- in this case, in the second quarter, the ARS 491 million. It's a mixture of the old and typical pure credit card business that is doing very well plus the financial company, Naranja that is investing and also the acquiring system that is investing and all that has to do with ecosystem. So it's really a mixture of investment of new companies and products and the very good performance of the old company.

That's super clear. Pablo, so basically, (inaudible). You also have some hedge on the inflation cost to income, like you'll be more vocal on costs and lower taxes, and that was super clear.

We'll take our next question from Nicolas Riva with Bank of America.

I got a few questions on the 2026 bond. So the first one is you're paying roughly $20 million a year in coupon payments. And my question is, if you are buying the dollars from the Central Bank to make these payments or if you are using dollars offshore, and if you are using dollars offshore, if you do need to get approval from the Central Bank for that? That was my first question.

And then my second question is, you had the call option on the 2026 last year. Of course, you didn't exercise that, and the one was callable only 1 subpar, I believe, last year. However, can you do a tender offer on this bond at any point? Do you need regulatory approval from the central bank to do this? And my guess is you wouldn't at this point, be thinking of that? And probably, most likely, you wouldn't get approval perhaps to get the dollars to buy back the bond. But if you can give us any thoughts on that, that would be very helpful.

And then finally, besides the bonds issued at Banco Galicia, do you have any other near-term dollar maturities at other subsidiaries of the HoldCo and IC a bond that Tarjeta Naranja due in April next year, $8.5 million, if you can discuss where you plan to get the dollars to make that payment, I guess, probably local peso-linked bond issued, but if you can talk about that, that would be helpful.

Nicolas, well, regarding that bond, as you mentioned, a subordinated one $250 million maturing in July 2026, the coupon is around 8%, so definitely $20 million per year. We have access to the market, and we can and we have been paying all the -- in the interest rate, the interest. Yes, we have that call option last year. The thing is that at this cost of -- or the interest rates, we could be getting now are much higher. So it had no sense. And in my opinion, we would have need approval from the Central Bank. I don't believe we are thinking in any tender offer and even to repurchase some bonds in the market, perhaps you also would have to request permission from the Central Bank because it's considered tier 2 capital. It's true that this tier 2 capability goes down 20% each year. But nevertheless, I think we should be needing approval.

So in my opinion, the most likely scenario is that in 2026, we could be repaying it even perhaps issuing a non-subordinated bond that is very, very long term. Actually, it will be close to the end -- to the middle of the next presidential -- or close to the third year of the next president.

In the case of Naranja, some months ago, they had to pay in dollars and an amortization of local bonds or with local law, the Central Bank allowed a certain percentage of the amortization or the installment to the access at the market, the risk you had to restructure. So instead of doing that, what Naranja did they issue that amount and basically with local private banks or private banking, actually, most of the participants in that issuance of dollar bond were Banco Galicia's private banking clients. So it was to avoid a restructuring and to pay the amortization or the installment that was due and that the Central Bank then allow us to get 100% of that.

Pablo. Just 1 quick follow-up. For example, for the last coupon payment on the '26, which must have been in July, and I know it was in the large amount, it was $10 million. But for that, did you get the dollars from the Central Bank? Or did you use dollars your onshore or offshore?

It's from the Center Bank.

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

My question is regarding the current interest rate environment. If you think that after the recent hikes rates are on appropriate level considering the expected inflation? And then a second question regarding your portfolio investment approach, if it has changed at all after the selloff in the peso sovereign bonds maybe if you're using this put option or by the Central Bank or not?

Rodrigo, well, the Central Bank has been increasing the different interest rates many times, as you remember exactly how many times -- about many, I would say, March, April, May, almost once a month. And typically, they do it when they see the inflation monthly reading is going forward, inflation goes down, perhaps there will be no further increases. But as I mentioned in the previous answer, the last movement improved as a whole than our net financial income.

The selloff in some peso bonds, it took place at the end of June when Guzman resigned and with (inaudible). And all that -- those price reductions now are recovered. Actually, we speak about the shallow and shallow meaning the difference between the good value of certain bonds that are at cost plus yield compared to the market value, you can see that even out in our financial statements. And at the end of June, that shallow was around minus ARS 5 billion. And today, that shallow is positive ARS 2 billion. So it was a short period of time in which we saw many high decrease and volatility, and then there was a recovery.

And as I mentioned, our change in terms of increasing the exposure to public sector is tied to in the selloff bonds in order to hedge against inflation. It's not that we changed other aspects of public sector also just because we need to cover the increase of inflation, and there are not many instruments available to do that. And you asked me something else, Rodrigo, or...?

I mentioned about the good option if you are (inaudible)

Yes. Well, we purchased small amounts in order to see how the system works to just to be prepared is we sometimes decide to purchase a bigger option. So yes, we tried and it was okay, nothing significant in terms of amounts.

We have no further questions. I would now like to turn the call back over to Pablo for any additional closing remarks.

Okay. Thank you, Ali.

Thank you all for attending this call. If you have any further questions, please do not hesitate to contact us. Thank you again, and have a good afternoon. Bye-bye.

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