Grupo Financiero Galicia SA (GGAL) 2022 Q3 法說會逐字稿

Good day, and welcome to today's third quarter 2022 earnings release conference call. This conference is being recorded.

At this time, I'd like to hand the call over to Pablo Firvida. Please go ahead, sir.

Thank you. Good morning, and welcome to this conference call. I will make a short introduction, and then we will take your questions.

Some of the statements made during this conference call will be forward-looking statements within the meaning of the safe harbor provisions of the U.S. federal securities laws and are subject to risks and uncertainty that could cause actual results to differ materially from those expressed.

According to the monthly indicator for economic activity, MI, the Argentine economy recorded a 6.4% year-over-year expansion during August. In year-to-date terms, the economic recovery reached 6.4%, and according to the Central Bank's market expectations survey done, the year 2022 will end with a 4.8% growth.

During the third quarter, the primary deficit reached 1% of GDP, accumulating deficit of 1.3% of GDP in the first 9 months of the year. The national consumer price index reported a 66.1% increase September year-to-date and reached an 83% annual variation, the highest inflation of the last 30 years.

On the monetary front, the Argentine Central Bank expanded the monetary base by ARS 28.4 billion in the third quarter and recorded a 42.7% increase in the last 12 months. Meanwhile, the exchange rate averaged ARS 143.6 per dollar in September, a 17% increase against the average for June 2022.

When compared to September 2021, the Argentine peso underwent a 31.6% devaluation. In September, the average rate on peso-denominated private sector time deposits for up to 59 days, was 66%, around 30 percentage points higher than the average recorded throughout all of 2021.

Private sector deposits in pesos amounted to ARS 12.3 trillion in September, increasing by 21.5% during the quarter and 82.3% in the last 12 months. Peso-denominated term deposits rose 25.6% during the quarter and 91.7% in the last 12 months, while transactional deposits increased nominally 17.9% and 74.1%, respectively, in the same period.

Private sector dollar-denominated deposits amounted to $14.9 billion, decreasing 4.7% during the quarter and 9.3% in the last 12 months. During September, peso-denominated loan to a private sector averaged ARS 5.8 trillion, increasing 13.9% in the quarter and 76.1% when compared to September 2021.

While private sector dollar-denominated loans amounted to $3.6 billion, recording a 6.6% contraction during the third quarter and 29.4% reduction when compared to September 2021.

Turning now to Grupo Financiero Galicia. Net income for the third quarter amounted to ARS 11.2 billion, down 35% from the year ago quarter. The result is mainly due to profits from Banco Galicia for ARS 9.5 billion from Galicia Asset Management for ARS 1.4 billion from Naranja X for ARS 934 million and from Galicia Seguros for ARS 452 million.

This profit represented a 1.7% annualized return on average assets and a 9% return on average shareholders' equity. Banco Galicia's net income for the quarter was 25% lower than in the year ago quarter, mainly due to 134% higher loss from net monetary position.

The net operating income increased 28%, mainly due to a 104% increase in net results from financial instruments, offset by 68% lower net interest income. Average interest earning assets were down 1%, reaching ARS 1.59 trillion, mainly due to a 71% decrease in the average volume of repurchase agreement transactions with the Argentine Central Bank offset by a 63% increase in the average volume of government securities.

In the same period, its yield increased almost 20 percentage points, reaching 55.3%. Interest-bearing liabilities decreased 7% from the third quarter of 2021, amounting to ARS 1.27 trillion. This decline was due to a 31% decrease in the average balance of dollar-denominated deposits.

During this period, its cost increased 17 percentage points to 38.2%. Net interest income for the quarter decreased 68% from the same quarter of 2021, with interest income growing 28% and interest expenses growing 71% in the same period.

Net fee income increased 1% from September 2021, mainly due to a 39% increase of fees on collections, offset by a 4% decrease of fees on credit cards. Net income from financial instruments increased 104% due to 124% higher results from securities issued by the Argentine Central Bank.

Gains from gold and FX quotation differences were 334% higher from the year ago quarter, including the results from foreign currency trading. As regards provision for loan losses, the amount for the quarter was 89% higher than those recorded in the same quarter of 2021, reaching ARS 5.3 billion.

Personnel expenses were 9% higher than in the third quarter of 2021 primarily due to salary increase agreements with the union, while administrative expenses were 2% lower due to a 10% decrease of higher administrative services. The income tax charge was significantly lower than in the third quarter of 2021 with an accumulated effective tax rate of 18% during the first 9 months of 2022.

The bank's financing to the private sector reached ARS 902 billion at the end of the quarter, down 4% in the last 12 months, mainly due to a 3% decrease of peso-denominated loans and a 21% decrease of UVA adjusted loans.

Exposure to the public sector increased 10% year-over-year, excluding the exposure to Central Bank, net exposure represented 16% of total assets compared to 8% as of the end of the third quarter of 2021.

Deposits reached ARS 1.68 trillion, 2% lower than a year before, mainly due to a 29% decrease of dollar-denominated deposits. Peso-denominated deposits increased 5% with peso time deposits growing 19%.

The bank's estimated market share of loans to private sector was 11.5%, 25 basis points higher than at the end of the year ago quarter. And the market share of deposits from the private sector was 10.2%, 23 basis points lower than in the same quarter of 2021.

As regards to asset quality, the ratio of nonperforming loans to total financing ended the quarter at 2.05%, recording a 211 basis points improvement as compared to the 4.16% of the third quarter of the prior year. At the same time, the coverage with allowances reached 233.9%, up from the 171.8% recorded a year ago.

As of the end of September 2022, the bank's total regulatory capital ratio reached 25.8%, decreasing 112 basis points from the end of the same quarter of 2021. The bank's liquid assets represented 110% of transactional deposits and 53% of total deposits, down from 116% and 68%, 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 and to improve its profitability in spite of the significant impact of the very high inflation of the quarter.

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

(Operator Instructions) Your first question comes from Alonso Garcia from Credit Suisse.

My question is on your exposure to the public sector. I mean I understand this is basically an alternative in the current environment given the lack of [credit] demand. But just wanted to ask how comfortable you are with this exposure, especially the exposure that is not Central Bank, so the exposure that is to the National Treasury. How much an increase?

I mean again, I understand, because -- it is because of the lack of credit demand currently. But do you have an internal limit on how much you would like to be exposed to the public sector?

Alonso, well, as you said, the increase in the exposure to the public sector is due to the lack of [credit] demand. We are seeing deposits growing not only time deposits, also transactional deposits. Therefore, we need to allocate these funds. If we don't purchase these government bonds, they tied to inflation, basically, these are the ones we are purchasing, we lose money or we have a negative result because of the negative interest rate in real terms. While if we invest in this CPI adjusted bonds lesser, we cover the inflation and basically, the question or the doubt that we have to answer is what is better to hedge against inflation with a positive result, something that is real or some potential loss that could cause if these types of instruments are reprofiled or reprogrammed.

So something is a fact and other thing is a risk going to where we would like to have this exposure. Definitely, we would like to have lower interest rates so that credit demand comes back, and we transfer public sector risk to private sector risk.

But still if this moment comes, we are comfortable with the exposure to the public sector, similar to the market share we have when we look at loans or deposits, basically between 11%, 12% of our market share of exposure to public sector.

And all the instruments are very short term. And as I said, linked or tied to inflation in order to protect our liquid net worth against inflation.

Our next question comes from Ernesto Gabilondo from Bank of America.

My question would be on your expectations for loan growth next year. We're still seeing a high level of inflation. So just wondering what will be your expectations next year.

Secondly, will be related to NIM. How you see NIM next year? And when do you think interest rates should start trending down? And can you remind us what is the NIM sensitivity from an increase or a decrease in interest rates of 100 basis points? And then my last question is on profitability. What do you think about the ROE next year?

Okay, Ernesto. Well, first, we are seeing similar inflation for next year than the one-off this year, basically the market expectation of economists that submit their numbers to the Central Bank say that this -- or expect that this year inflation will end up at around 98%.

Our chief economist is in line with that number. And most of the economists are saying that it's likely that next year inflation will be in the same level. So let's say, 100% inflation. Therefore, we don't see real growth in loans. For this year, it's likely that we end up with minus 5% loan growth in real terms in pesos.

And so therefore, for next year, it's likely that we will see something similar. Definitely, we need -- we see the recovery of [credit] demand not only when we see lower interest rates that in turn go down with inflation or when inflation goes down, but also with the change of expectations.

Right now, there is a lot of uncertainty regarding next year politics, elections and also the related economic decision. So basically, due to both FX, political macro and psychological, I would say, and also interest rates, we are not seeing loan demand recovering.

In terms of net interest margin, it has been growing, and I would say, resilient and mainly due to the yield not only on loans but also on the [leaks] and government paper, levels of around 21% at the bank level. If it goes down or up 100 basis points, we need to increase our -- or decrease the yield on our -- sorry, the volume of our interest earning assets around 4%. That is the sensitivity analysis.

And regarding ROE for this year, we keep on with our guidance of around 9% ROE for the full year 2022, meaning or the -- the consequence of that is we are seeing a better fourth quarter, taking into consideration the first 3 quarters.

And for next year, we are in the process of finishing the budget, but it should be also similar. We don't see many different variables going forward for next year, really.

Our next question comes from Alejandra Aranda from Itau.

Most of my questions have been answered, but looking at the system and what's going on with a lot of banks really struggling in terms of profitability. I was wondering how are you guys viewing the current situation for the system and what do you think it would be a way forward for the Argentine financial system and how that Galicia see itself in that process? Are you viewing a scenario with a possible consolidation going forward? Or would you discard that option?

Alejandra. Well, many things come to my mind right now in terms of consolidation. First, I would say that we are always open to grow, of course, depending on the price and the possibility to monetize synergies, basically, if we have the ability to merge or close branches and also if we have freedom to reduce headcount if needed, depending, of course, on the size of the potential bank.

And also in this more digital times, also the question comes if what would be better to purchase something brick-and-mortar and old traditional bank or some digital bank or player. As you said, we are seeing some basically small banks with small market shares, having negative results. They have so far big capital ratios, that could change if the regulator changes some -- I'd say, negative regulations that affect profitability in terms of interest rates for time deposits, loans and so on or fees or give more freedom to manage any bank.

Having said that, if a bank has problems, typically what the Central Bank does is they split the balance sheet of banks in trouble between the good bank and the bad bank and transfer deposits, loans, branches and employees to a bank that bid for that bank with problems. So that should be the procedure if, again, some banks gets in trouble. And in this scenario, yes, depending on the conditions, we would be willing to participate.

Okay. Thank you, Pablo. Do you think that the regulator is starting to view this carefully and with the attention if demands or it still out of their view?

You mean the profitability of smaller banks?

The whole problem that system is having at the moment with the lack of demand, excessive exposure to the treasury and the fact that everyone looks well capitalized because all of that government paper that is not reflected on that risk equation as it should be.

Yes, I think the -- or let's say, part of the Central Bank that is, I would say, dedicated to a supervision of banks, yes, they are fully aware of the situation of every single bank now, so each bank has one supervisor.

So yes, they are aware. And in the past, when some -- even bigger banks were having smaller ROEs than the current ones. They changed certain regulations in order to improve the equation in terms of margins basically and fees, and they gave some sweeteners in order to improve the profitability. So yes, I think they are aware.

On the other hand, the other half of the Central Bank is more dedicated, I would say, to inflation effects, foreign trade and this kind of more macro issues.

(Operator Instructions) Our next question comes from Yuri Fernandes from JPMorgan.

I have one question regarding the FX gains. If you can explain what happened there? Like looking to the assets there was a small decrease on your [FX, your security,] but you had like a big gain on a quarter-over-quarter. So what you [hold] on those gains.

And I have a second one regarding expenses. Like personnel expenses, they were very good quarter-over-quarter decreasing like 7%, 8%. I know it's not that easy in Argentina to cut costs. So what it is? Like what can you do on costs to continue to keep in this line under control.

And if I may, a third and final one, can you explain the difference between your shareholders' equity and your capital ratios? Because when we look here the equity of the bank, it grew 2% quarter-over-quarter, so -- some, I don't know, ARS 11 billion.

But when we look to the capital of the bank, it increased 25%, 26% quarter-over-quarter. I know inflation plays a big role there, but still the delta between like the nominal increase on your Tier 1 capital and your shareholders that seems too high. And also if you can explain me why capital is benefiting much more than your shareholders (inaudible) I would appreciate.

Yes, perfect. The first question was regarding FX, right, result?

Yes. What drove the FX mix?

Yes. Well, we had a longer position in dollars. You can see that in the balance sheet of the bank. Part of that is because of some instruments called Leliq that were purchased with the funds that banks received from clients which sold soy at a higher FX.

That's why if you look at the net global position in dollars, it's much higher than it used to be, and that is reflected. Part of that is due to this effect, other is the increase on purchases and sales to our clients. In terms of...

Basically, it's spread with clients, it's mostly spread with clients buying dollars basically. Is that right?

Sorry, I cannot hear you very properly or clearly.

So this gain on FX is mostly driven by spreads with clients, right? Clients buying dollars and you are making spread over that.

No. Basically, the -- what I mentioned about these clients are agricultural producers that were allowed to sell soy at the higher FX or exchange rate and they had to deposit this money in the banks.

And the other side of the balance sheet those who are deposits, the other side of the balance sheet were some instruments called Leliq that the banks purchased and they had a yield in dollars. That's why you see a higher FX result.

The deposits were converted to pesos. So it's a cost in pesos and a yield in dollars. It's, I would say, some extraordinary -- not result but situation of this quarter. The rest is the typical way in which we operate with our clients, selling and purchasing dollar for mainly FX, foreign trade or [ComEx] activities. Was it clear?

Yes. It was clear, Pablo.

Then in terms of expenses, we are trying to become, I would say, leaner or not so heavy, and we are reducing wherever we can different expenses from transportation of money in trucks from -- for the branches. From a commercial standpoint and in the branch network, we are slightly reducing the headcount and the square meters of the branches emerging.

When you look at the total number of staff perhaps, you don't see that we are hiring some personnel that used to be a third-party consultants, mainly in technology as it is cheaper to have them in the bank and not paying a third-party supplier.

But basically, this -- well, and also we are reducing cost in publicity and what electricity, all the utilities as the usage of headquarters is not so important as it used to be after the pandemic (inaudible) Wherever we can, we are reducing also some consultants, the strategic consultants. So as the result is so, I would say, negatively affected by the high inflation environment, we put focus on the variables we can manage.

And the third question was regarding the different numbers between the capitalization chart and our evolution of net worth. In the capitalization chart, basically, we -- and due to regulation, we showed the historical number. It's not adjusted by inflation. So when you calculate the total capital ratio, we have the third quarter numbers in pesos of September. But when you look at the third quarter numbers of the prior year, the year in pesos of last year, so it's a 80% or so difference if we were to adjust or with the numbers of the second quarter, it's a 22% difference. That was the inflation of the quarter. That's why in the capitalization chart that takes historical numbers and not adjusted numbers. You see different increases or variations against the balance sheet in which they are adjusted by inflation.

And as there are no further questions in the queue, that will conclude today's Q&A session. And now I'd like to hand the call back over to Firvida for closing remarks. Over to you, sir.

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