Grupo Financiero Galicia SA (GGAL) 2024 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Grupo Financiero Galicia third quarter 2024 earnings call. This conference is being recorded, and the replay will be available at the company's website at gfgsa.com. (Operator Instructions)

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

Investors should be aware of events related to the macroeconomic scenario, the financial industry and other factors that could cause results to differ materially from those expressed in the respective forward-looking statements.

Now I will turn the conference over to Mr. Pablo Firvida, Head of Investor Relations. You may begin your conference.

Thank you, Sofie. Good afternoon, and welcome to this conference call. According to the monthly economic activity indicator, Argentina's economy contracted by 3.8% year-over-year in August. On a year-to-date basis, the economic contraction reached 3.1%.

On the third quarter, the primary surplus stood at 0.5% of GDP compared to the 0.4% primary deficit in the third quarter of 2023. This result was driven by a 204.6% year-over-year increase in revenues, while primary spending rose 153.8%. The overall fiscal result was close to 0% of GDP.

The National Consumer Price Index reached 101.6% in the first nine months of 2024, while monthly inflation decelerated from 25.5% in December last year to 3.5% in September this year. The Central Bank devalued the exchange rates 54.2% on December 13, 2023, and since January of this year, a 2% monthly roll impact has been maintained to date. In September 2024, the exchange rate averaged ARS961.80 per dollar, recording a 63.3% year-over-year devaluation.

Throughout most of 2024, the overnight repo rate served as the benchmark monetary policy interest rate, having replaced the Leliq rates in December 2023 until July 22 on fiscal liquidity bills or LEFIs issued by the Treasury were introduced as new liquidity regulation tool. Since the change in administration, the Central Bank has reduced the monetary policy interest rate 7 times, from 133% to its current 35%.

In September 2024, the average interest rate on peso-denominated private sector time deposits of up to 59 days was 39.3%, 74.8 percentage points below the average rate in September 2023. Private sector deposits in pesos averaged ARS61.4 trillion in September, up 16.6% in the quarter and 125.4% year-over-year. Time deposits in pesos rose 23.7% over the quarter and 105.1% annually, while peso-denominated transactional deposits increased 11% in the third quarter and 146.5% in annual terms.

Private sector dollar-denominated deposits averaged $23.5 billion in September, reflecting a quarterly increase of 32.5% and a year-over-year rise of 56.1%. Peso-denominated loans to private sector average ARS38.6 trillion in September, increasing 50.4% quarterly and 229% year-over-year. Private sector dollar-denominated deposit loans amounted to $7.2 billion, recording a 13.1% quarterly growth and an 87.6% annual increase.

Turning now to the results for the quarter. Net income attributable to Grupo Financiero Galicia amounted to ARS168 billion, 0.5% higher from the year-ago quarter, mainly due to profits from Banco Galicia for ARS84 billion, from Naranja X for ARS69 billion and from Galicia Asset Management for ARS17 billion, offset by a ARS0.9 billion loss from Galicia Seguros. This profit represented a 3.14% annualized return on average assets and a 15.26% return on average shareholders' equity.

Going to Banco Galicia. Net income for the quarter was 47% lower than in the year ago quarter, primarily due to a 50% decrease of the operating income. Net operating income decreased 39%, primarily due to a 37% lower net interest income and an 84% decrease in the results from gold and foreign currency quotation differences, partially offset by a 47% increase in net results from financial instruments.

Average interest-earning assets reached ARS10.1 trillion, 15% lower than in the same quarter of 2023, primarily due to a 22% decrease of the portfolio of government securities in pesos and a 43% reduction in the average balance of other interest-earning assets in pesos. In the same period, its yield decreased 42 percentage points, reaching 45.92%.

Interest-bearing liabilities decreased 10% from September 2023, amounting to ARS8.6 trillion, primarily due to a 50% decrease in time deposits in pesos, offset by the increase of the average balance of saving accounts and other deposits in foreign currency. During this period, its cost decreased 47 percentage points to 21.35%.

Net interest income decreased 37% when compared to the third quarter of 2023. This was the result of a 60% decrease in interest income because of a 66% lower interest on government securities and a 41% lower interest on loans and other financing together with a 72% decrease in interest expenses due to a 79% lower interest on time deposits. Net fee income decreased 9% from September 2023 due to a 27% lower profit from fees on bundles of products and a 31% decrease in fees on utility bills collection services.

Net income from financial instruments increased 47% due to higher results from government securities and derivative financial instruments, offset by lower results from private sector securities. Gains from gold and FX quotation differences were 84% lower from the year ago quarter, including the results from foreign currency trading. Other operating income decreased 52% in the quarter, while provisions for loan losses increased 77% because of the growth of the loan portfolio.

Personnel expenses were 6% lower than in the third quarter of 2023, while administrative expenses increased 14% due to higher expenses for fees and compensation for services, for maintenance and repairment of goods and IT and for higher administrative services. Other operating expenses decreased 39% due to a 63% lower turnover tax related to financial operations.

The bank's financing to the private sector reached ARS7.4 trillion at the end of the quarter, up 18% in the last 12 months with peso financing increasing 6% and dollar-denominated financing growing 104%, while by trade line, promissory notes increased 19% and personal loans, 52%.

Net exposure to the public sector decreased 39% year-over-year due to a reduction in exposure to the Central Bank, which at the end of the quarter was close to 0, partially offset by an increase of government securities in pesos at fair value. This exposure represented 24% of total assets as of the end of the quarter compared to 40% of the year before.

Deposits reached ARS13.2 trillion, 14% higher than a year before, mainly due to a 295% increase in saving accounts in foreign currency, partially offset by a 37% decrease in time deposits in pesos. The bank's estimated market share of loans to private sector was 11.09%, 40 basis points higher than at the end of the year ago quarter. And the market share of deposits from the private sector was 10%, 56 basis points higher than in the same quarter of 2023.

The bank's liquid assets represented 76.4% of transactional deposits and 55.5% of total deposits compared to 123.3% and 61.7%, respectively, from a year before. As regards asset quality, the ratio of nonperforming loans to total financing ended the quarter at 1.84%, recording a 62-basis point improvement as compared to the 2.46% of the third quarter of the prior year.

At the same time, the coverage with allowances reached 194.4% from the 133.7% recorded a year ago. As of the end of September 2024, the bank's total regulatory capital ratio reached 26.4%, increasing 135 basis points from the end of the same quarter of 2023.

In summary, in a challenging and volatile political and macro environment, Grupo Financiero Galicia was able to keep asset quality, liquidity, solvency and profitability metrics at very healthy levels. We are now ready to answer the questions that you may have. Thank you.

(Operator Instructions)

Ernesto Gabilondo, Bank of America.

Thank you. Hi, good afternoon, Pablo. Thanks for the opportunity to ask questions.

My first question will be on your expectations for loan growth for this and next year. And what would be the macro assumptions behind it in terms of GDP, inflation and interest rates? And then my second question will be on your HSBC acquisition. So from what I have been looking into your press releases, I think you can issue at most 162 million shares to acquire HSBC, which is roughly 11% of the total shares outstanding.

But how much net income would be -- would HSBC be adding to Galicia's operation? And when do you think you can communicate like some pro forma details on the transaction? Do you think this could be more known December or maybe until the next quarter? Any color on this will be very helpful.

And then my last question is on your ROE expectations. Just wondering if you continue to see ROE levels between 25%, 30% this year. And how much ROE can we expect for next year? And maybe adding to the second question is, if there is like kind of visibility on how much additional basis points could add the HSBC acquisition to the consolidated ROE of Galicia. Thank you.

Okay. Thank you, Ernesto. Well, first, going to the loan book evolution. You have seen an important real growth in the third quarter. And actually, if you consider the end of December last year and the end of September this year, the accumulated real growth was around 35%, so a significant growth. If the fourth quarter finishes as it is today, we could be ending the year with a loan growth of roughly 55% in real terms. So despite the macroeconomic situation, as you said, this year, GDP will be contracting.

In the first -- or in the previous quarter, we were forecasting a 3.8% GDP contraction. These days, most of the economists are saying that the contraction would be lower than that, so perhaps 3.4% or so. And most of the economists are forecasting a 5% GDP recovery for next year. So that gives us a good base to think that next year, loans would be growing in the area of 50% in real terms.

Of course, it's harder to grow this type of percentages after the rebound we saw, but we are comfortable that with the lower inflation and therefore lower interest rates and GDP recovering, loan demand will keep on growing at these very high levels. To give you an idea, with the monthly inflation of 3% in October or around, loans are growing in real terms almost 8%. So the growth is already in the system.

Next year inflation, I did mention, we are forecasting right now around 37%. That is a moving target, but luckily, it's going down. And also, interest rates are going down. The monetary policy rate was reduced last week, last Friday, from 40% to 35%. And therefore, all the interest rates in the system are going down, not only time deposits, but also the interest rates we charge on loans. There, there is a lag. So in terms of NIM, it's better for us. So we are more liability sensitive in that respect.

Perhaps we can jump to the third question, ROE, and then speak a little bit more about the HSBC. In the first nine months, the accumulated ROE stands at 30%. So with a good fourth quarter, that is likely to be better than the third one. We could be in the area that you mentioned, between 25% and 30% annual real ROE. And for next year, I would say without taking into consideration HSBC and also speaking about the fourth quarter, so Banco Galicia and Grupo Financiero Galicia standing alone without the effects of the acquisition, we could be thinking in a 15% to higher teens level.

Now we must go to the issue of HSBC. To make some history, we announced the deal, the agreement with HSBC back in April this year. We got the approval from the Central Bank in mid-September, and we think we are going to have the closing in early December this year. So there, we will see the effects in the accounting, all the numbers. There are many considerations.

First, the bank will be the one that will be purchasing 58% of the shares, while the Group, the holding company, will be purchasing 42%. Also, the Group will be buying a subordinated debt issued by HSBC Bank. And that is currently in the hands of [some vehicles] in UK. And therefore, for the Grupo Financiero Galicia portion, this 42% of the shares plus the subordinated debt, they are going to issue, or Grupo will be issuing shares in the order of 114 million shares. So 11.4 million ADRs.

And the shareholders' meeting approved up to 115 million. And then -- and that will take place also in early December. Once we do the closing, the HSBC will receive these ADRs. And the bank will pay in cash $275 million. That basically will be coming -- or the origin is the bond that we issued with Banco Galicia at the beginning of October. We issued $325 million.

Going to the accounting impacts, we need to see from a third-party independent consultant which is the fair value of what we purchased and compare it with the price, and therefore, we will have a one-off positive effect. We could also be having some, I would say two parts one-off. It sounds not very irrational, but perhaps part of the positive effect is also in the first quarter of next year as we are going to have some price adjustment, and we will -- that will happen in January or even February.

And we also have to see if we provision some expenses due to the restructuring process in terms of certain executives or also some gain of synergies with branches and so on. So still, we are not prepared to speak about the net-net accounting results. But remember that we paid 40% of book value. So definitely, it will be positive.

If we think in HSBC ROE, I would say that in the last couple of years, most of the banks are making high levels -- or high level of ROEs. And in absolute terms, HSBC is roughly 30% of the size of Banco Galicia, not Grupo, of the bank. So you can assume that net income of HSBC could be roughly 30% of the bank's net income. Then there will come the synergies.

That is something that we didn't include in the price we offered when we got the approval -- or the agreement more than the approval in April this year. So the fourth quarter numbers will show a lot of these impacts, and the next quarter results should be issued in late February or early March. So we still need three more months to see in more detail the positive impacts.

No. This is super, super helpful, very detailed. Just a follow-up in terms of the Galicia's ROE for next year. So you said it could be around 20%?

I said without considering any extraordinary effect from HSBC, around 15% would be high teens. So let's say between 15% and 18%.

Okay. And this is conservative considering that the loan book is taking off and you should also have lower losses in the net monetary position. So do you think this assumption could be kind of conservative?

Well, it could be seen as conservative because as you said, loan book is going to grow a lot. Any NIM compression, in my opinion, will be much softer than the one we saw in this third quarter. And also depending on some changes in regulation, we could be having additional income, for example, in what we call foreign trade, foreign -- sorry, foreign exchange, basically selling and purchasing dollars from our clients. Also, foreign trade due to more exports and imports.

But basically, other fee-related revenues or services. But again, as we are or we will be in the middle of adding and equity participation at lower price than the fair value and having extraordinary one-off gains and provisions and adding two different banks, it will be hard to really see if this will materialize. Now this is, again, standing alone.

Okay. No, excellent. Thank you very much, Pablo.

You're welcome, Ernesto.

Brian Flores, Citi.

Hi, Pablo. Thank you for the opportunity.

I have two questions. The first one is on capital, right? You have been consuming capital very strongly. Also, funding is increasing, which in theory is helpful. But I know that the main driver of this growth is USD deposits, which are restricted, if I'm not mistaken. Maybe this has changed. And if it has, please let me know. I think the -- let's say the multiplier that is embedded on these deposits are USD denominated. It's not as large as peso-denominated ones.

And we also have, as you mentioned, the acquisition of HSBC. Naturally, this should bring also some capital, right, in the acquisition and the consolidation. But you're consuming capital very fast, right, because you're growing, let's say, very dense in terms of risk assets, right? You're growing in SME. You're growing in credit cards, which is obviously where you are very strong. So I think this is natural.

So just can you -- the first question is, can you guide us through capital consumption? If at any point in 2025, you're already thinking about maybe raising capital, how can we think about this? Because from what we can see, capital consumption is going to be very strong. And then I'll make my second question. Thank you.

Okay. Hi, Brian. Well, first, some comments on dollar-denominated deposits. We are about to finish a tax amnesty program organized by the government. It was due at the beginning -- at the end of September. Then it was postponed until the end of October, now till the end of this week.

You can see that back at the end of June, roughly our dollar-denominated deposits were $2.8 billion and at the end of September, around $6.5 billion. And so that growth was for all the system, but our market share in dollar-denominated deposits is even higher.

One thing that is important to have in mind is that this tax amnesty plan, main objective is to foster the economy. Basically, once people declare their dollars, they can or are able to purchase an apartment or a car or even a corporate bond. So the idea is not to increase tax revenues, but on the other hand, to move the economy, to foster the economy. So these deposits in dollars gradually will be converging to pesos in the economy, and the banks will be increasing this multiplier factor.

You are right that dollar-denominated deposits, if they stay in dollars, they can just be lent to exporters. We increased the loan book, too, but they are -- the NIMs are much lower. The cost is 0, but the yield we charge are -- the yields or interest rates we charge are also very low. And therefore, NIMs are low because loan-to-deposit ratio in dollars is about 20% -- 18%, 20%. So there is a lot of supply of dollars and lack of demand. That's one thing.

The other thing is the capital ratio. We grew significantly in the third quarter, but we also build capital with positive results. And the total capital ratio stands at 26.4% with the positive effects on -- due to the purchase of HSBC, this will increase. And with the assumption or what we think the loan book evolution will -- or how the loan book will evolve next year, we could be thinking in a capital ratio at the end of 2025 of 19% to 20%. This is the order of magnitude we are having today.

We are not at all thinking in any capital increase next year. And even if you ask me twice, I would say not even in 2026. But yes, definitely, as we are reducing our government bonds book and increasing the private sector lending, the capital ratio will be going down. But again, from very, very high levels to high levels.

Super clear, Pablo. So my other question was just confirming what you mentioned to Ernesto's question on loan growth, right? Because I understood that for this year -- sorry, 2025, you reiterated maybe 50%. But I didn't understand if 2024 was actually revised upwards. I think you were mentioning in the second-quarter conference call between 35 and 40 in real terms. Are you seeing a slight pickup for 2024?

Yes. Well, actually, what I said is that if you consider, of course, in homogeneous currency, the September -- the end of September loan book of the bank and the end of December last year, the growth was around 35%. So we could be ending this year with numbers between 50% and 55% real loan growth because in the fourth quarter of last year, there was a reduction in real terms of loans. So yes, 2024 would be growth -- or the final number would be higher than we expected three months ago.

Perfect. And Pablo, just a very final follow-up on what you mentioned on capital, right? I think the last time there was capital raises across Argentine banks was 2017, 2018. I don't know if you could just remind us. At what level did you decide in terms of core equity Tier 1 to raise capital to seize this beneficial market conditions back then?

Yes. In 2017, we raised $630 million. And at that moment, the capital ratio was around -- sorry, if I'm not very precise in this number, it was around 12.5% or so, and we were seeing a strong loan demand. And at that time, I remember that all our peers with listed shares also raised capital. And then -- well, in 2018, the macroeconomic conditions changed, and then the political scenario changed.

So there was no need for this capital or -- and actually then the Central Bank didn't allow banks to pay dividends, and that's why we build most of the banks this high capital ratios. But that was the order of capital ratio back in September 2017.

Super clear. Thank you.

You're welcome.

Yuri Fernandes, JPMorgan.

Thank you and good afternoon. I would like to explore a little bit the loan yields. When we go to your margins, it has been coming down. And again, I guess there is no surprise. But when we go to the interest income coming from loans, we see some decrease. So Pablo, if you can explain what should expect. You mentioned in a previous answer saying something like this could be the weakest quarter. Maybe the loan yields may recover. So whatever you can provide on different product dynamics, how to think about the yields.

And on deposits, just a follow-up on the previous questions from Brian. Your deposits are growing fine, right, like 40% quarter-over-quarter. This is above loans. But as Brian said, this is mostly coming from foreign deposits, right? The local peso-denominated deposits are up 6% quarter-over-quarter. So how to attract deposits because capital is part of the equation, but liability is also necessary. So how to bring more deposits for the bank? Thank you.

Okay, Yuri. Well, first, on yields. It's, of course, very different, the interest rate we have in pesos and in dollars and therefore the NIMs. If you look at one specific chart in our press release, let me go over it very quickly, you will see that. In the third quarter, the yield -- average yield on loans was -- in pesos was 48.5%, while in dollars was 6%. And the same happens with the interest-bearing liabilities. And therefore, if you look at the NIM in pesos, it's around 31%, in dollars around 4%.

We -- I'm speaking just about the bank, not including Naranja. We can comment something about Naranja later. We saw in November or early November a reduction in interest rates, the monetary policy rate from 40% to 35%. That helps us at the beginning at least in the sense that the liabilities go lower quicker than the assets. So for NIMs, it's good. Also, as interest rates go down, and that is mainly because the Central Bank sees demand inflation going down. Also, many government bonds are -- or have been raising their prices. So it's good for our results.

So we are seeing yields for the fourth quarter in pesos. In dollars, there is less upside in that respect because of the such big amount of dollar-denominated deposits. And of course, we want to foster or have more intermediation in pesos than in dollars. As I said, part of these dollars will be in some way converting to pesos once the economy begins to grow. Actually, it has already begun to grow.

And we not only depend on deposits in order to satisfy the loan demand. We also are reducing short-term government bonds in order to satisfy that. And one more idea. In order to have more deposits and mainly transactional deposits, you have to have many clients and very good payment and collection capabilities. So we are very good at that. And I think that the economy of scale with HSBC will also help to have more deposits and more raw material to grow.

Super clear, Pablo. I remember in the past, you mentioned NIM expectations going to mid-20s, like 25. Is this still a good proxy for the near term? Anything you can share on total NIMs?

Considering pesos --

Pesos and dollars.

We have to see how this breakdown between pesos and dollars gradually change because, in my opinion, this third quarter is the peak between peso and dollars, meaning that dollars, and mainly looking at deposits, are like 50-50. And it used to be 80-20 not many quarters ago.

So I think dollars should be converting to pesos in a way. Also, some dollars are going back to the typical saving account in dollars, not the -- because for this tax amnesty plan, the clients have to open a new special account. What we are seeing is some kind of move from these special accounts to the typical saving accounts, and also some people are taking out some dollars in order to sell them and spend the money in pesos.

So we think that will gradually change. But 25% could be a good midterm point. And if inflation keeps on going down, perhaps we can get to 20% level in, I don't know, 1.5 years or so. Many times, if we look at the 2017 or '18 numbers, could be where we could be getting in a couple of years. This is a kind of a pendulum.

Also when we look at the breakdown of assets and liabilities, if we look at the 2017 or '18 numbers, we can have a kind of idea where the trends could be going. Basically, when we look at loans to total assets, it used to be 65% to 70%. Right now, we are below 40%. So that would -- but much higher than the previous quarter. So this should be the type of numbers we will see in the coming quarters.

Thank you very much, Pablo.

You're welcome, Yuri.

Walter Chiarvesio, Santander.

Yes, hi. Thank you for answering the question. I -- most of the questions that I have, been already answered. But I would like to ask you two questions. One is related to the inflation adjusted lost that as a percentage of the operating result was quite higher than the previous quarter despite that inflation was actually lower. So is there a way that you can think that we should use to estimate that looking forward or why that happened in this quarter? That is one question.

And secondly, the book value of Grupo increased quite more than what the result of the quarter suggests even despite that you distributed some dividend during the quarter. And I don't find the reason for that within some other assets and liability. If you could give a hint or any idea of why the equity of Grupo increased more than the -- what the results suggest during the quarter. Those are my two questions. Thank you.

Okay. Hi, Walter. Well, the first one is hard to project. It's something that -- it depends on the -- not only on the quarter inflation but how it plays each month and also what is the, what we call the liquid network. But what is definitely better for any balance sheet is the lower the inflation, the lower this monetary loss. But in order to project it, I share with you the difficulty, and it's a result we get each quarter. Unluckily, I cannot help you much with that.

Regarding the increase in Grupo's book value, I think it's the result of the other -- of the [Lecaps] basically, the bonds that are -- or the results that are within other comprehensive income more than the pure net income. And as you said, there were payments of dividends, but they were mostly in the second quarter. We can see perhaps in detail later if you want to specifically send me the numbers if this answer doesn't match your numbers.

Yes, I would appreciate that. So you think it comes from some accounting related to the bonds, the reason why the equity increased more than what the results have suggested. Is that right?

Yes.

All right. Okay. Thank you very much, Pablo.

You're welcome.

Marina Mertens, Latin Securities.

Hi, good afternoon. I have a question about the securities portfolio composition. So how do you see it evolving moving forward? And also, with the recent rally in Lecaps, do you expect this to be a relevant contributor to the fourth quarter results?

Hi, Marina. Well, the securities portfolio is very dynamic. Typically, we have a portion that is at fair value or mark-to-market. Then we have another portion or percentage that is at cost plus yield. That basically in the past was made by all the CPI linkers, the bonds that adjust by inflation that were in our books in order to hedge against inflation. That portfolio should gradually change because we are now in a scenario of positive interest rates in real terms.

In the past, when we had negative interest rates in real terms, we have to protect our -- basically our net worth or liquid net worth. And then we have Lecaps, very short-term instrument for our liquidity. And yes, there was a rally. And well, we should wait until the end of December to see if the prices stay at this level. But if I had to say today, yes, definitely, it will -- they will have or they have a positive impact.

Okay. Thank you.

You're welcome, Marina.

Nicolas Riva, Bank of America.

Thanks very much Paulo for the chance to ask questions. You mentioned that after the end of the quarter, you issued the 2028, the senior bond dollars to be used to pay for the acquisition of HSBC Argentina. But you also have the 2026 Tier 2s. And I know that you didn't exercise the call option back in 2021, I don't think you would be able to fully redeem at par now those bonds.

But given they only count $50 million of Tier 2 capital, then my question would be if there's any restrictions for you to do a tender offer on these bonds and at the same time, to issue new Tier 2s so as to use the dollars raised with the new Tier 2s to do the tender offer on the 2026. Thanks.

Hi, Nicolas. Well, if you ask me what is in our minds today, it's to wait till July 2026 and pay back the bond, the $250 million subordinated bond, once they come due. The call was just one day, as you said, in '21, and we didn't exercise it. At that moment, the bond has had a full capacity in terms of Tier 2. Now it's a 20% portion. So it's not very relevant.

And we are not really considering issuing another Tier 2 bond. So after the issuance of the senior bond, the $325 million, really, we don't see the need to raise more money. And this bond really is yielding very -- the yield is very low. So really replacing it with another bond, perhaps it doesn't make sense. So no, really, the answer would be no. And it's -- the most likely scenario will be to pay it in July 2026.

Okay. Thank you very much, Pablo.

You're welcome. Well, I don't see anybody else on the queue. If that is all, well, I will close, of course, saying thank you all for attending this call. And of course, if you have any further questions, please do not hesitate to contact us. Good afternoon. Thank you.

Grupo Financiero Galicia conference is now closed. We thank you for your participation and wish you a nice day.