Grupo Financiero Galicia SA (GGAL) 2024 Q4 法說會逐字稿

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

Some of these statements made during this conference call will be forward-looking statements within the meaning of the safe harbor provision of the US federal securities laws and the subject to risks and uncertainties that could cause actual results to differ maturely 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 maturely from those expressed in the respective forward-looking statements. Now, I'll turn the conference over to Mr. Pablo Firvida, Head of Investor Relations. You may begin your conference, sir.

Thank you. Good morning and welcome to this conference call. I'm here today with Gonzalo Fernández Covaro, the newly appointed CFO of Grupo Financiero Galicia and former CFO of HSBC Argentina. I will make a short introduction, and then we will take your questions.

According to the monthly economic activity indicator, MEAI, Argentina's economy recorded a year-over-year growth of 5.5% in December compared to December 2023. Meanwhile, the expansion during the fourth quarter reached 1.3% in seasonally adjusted terms. Latest MEAI figures indicate Argentina's economy contracted by 1.8% on average during 2024.

In the fourth quarter of 2024, the primary surplus to that 0.14% of GDP contrasting with the primary deficit of 1.49% in the fourth quarter of 2023. In 2024, the primary surplus to that 1.8% of GDP, and the overall fiscal surplus was of 0.3% of GDP.

This implied a significant improvement against the 2.9% primary deficit for 2023, result that was explained by a 206% increase in revenues year over year while primary spending rose by 134%. The National Consumer price index recorded an 8% increase during the fourth quarter of 2024, and reach 117.8% annual variation in 2024, down from 211.4% inflation in 2023.

Monthly inflation has been decelerating, declining from 25.5% in December 2023 to 2.2% in January 2025. The central bank devalued the exchange rate by 54.2% on December 13, 2023. After which, a 2% monthly crawling pay was maintained throughout 2024. In December 2024, the exchange rate averaged ARS1,020.7 per dollar, reflecting a 45.5% year-over-year devaluation.

As of February 1, 2025, the central bank reduced the exchange rate crawl to 1% per month. Since the administration took office, the central bank has reduced the policy interest rate 8 times from 133% to its current 29%. In December 2024, the average rate on peso denominated private sector time deposits for up to 59 days stood at 33%, 89 percentage points below the December 2023 average.

Private sector deposits in pesos averaged ARS74.3 trillion in December, increasing by 20.9% during the quarter, and 127.3% in the last 12 months. Time deposits rose 27% during the quarter and 176.2% in the year. Peso denominated transactional deposits increased 15.2% during the fourth quarter, and 93.3% in year-over-year terms.

Private sector dollar denominated deposits amounted to $31.8 billion in December 2024, increasing 35.6% during the quarter, and 119.7% in the last 12 months. Peso denominated loans to private sector average ARS50.6 trillion in December showing a 31% quarterly increase, and a 228.8% year-over-year rise. Private sector dollar denominated loans amounted to $9.9 billion, recording a 37.4% quarterly growth and a 186% annual increase.

Before going to the figures for the fourth quarter and for the fiscal year of 2024, it is worth to mention that on December 6, the closing of the acquisition of HSBC operations in Argentina took place, consolidating Grupo Financiero Galicia's position as the largest private sector financial group in Argentina.

As a result of this transaction, ARS724.5 billion gain was recorded, which corresponds to the difference between the fair value of the acquired companies and the amount paid. This result net of adjustments and provisions related to the transaction total ARS485 billion.

Turning now to Grupo Financiero Galicia, net income for 2024 amounted to ARS1.6 trillion, 121% higher than in the previous year, which represented a 7% return on average assets, and a 34% return on average shareholder's equity.

The result was mainly due to profits from Galicia for 1.3 trillion from Naranja X for ARS228 billion, and from Galicia asset management for ARS68 billion, partially offset by ARS8.1 billion loss from Galicia Seguros.

Going to the fourth quarter, net income attributable to Grupo Financiero Galicia amounted to ARS574 billion, 203% higher from the year ago quarter, mainly due to profits from Galicia for ARS527 billion from Naranja X for ARS23 billion from Galicia Asset Management for ARS19 billion, and ARS3.9 billion from Galicia Seguros. This profit represented a 7.9% annualized return on average assets, and a 45% return on average shareholder's equity.

Going to Banco Galicia, net income for the quarter was ARS550.27 billion profit, 311% higher than in the same quarter of 2023. As a ARS575 billion gain was recorded due to the acquisition of HSBC operations in Argentina. At the bank level, provisions for restructuring for almost ARS100 billion were reported.

The operating result decreased 83% from the year ago quarter, primarily due to a 58% lower net operating income, as net interest income decreased 56%, and results from gold and forensic currency quotation differences went down 97%.

Average selling assets reached ARS11.7 trillion, 7% higher than in the same quarter of 2023, primarily due to a 542% increase of the average portfolio of dollar denominated loans and of the 26% in loans in pesos partially offset by the 78% reduction in the average balance of other interest earning assets in pesos.

In the same period, its yield decreased 52% points, reaching 39.95%. Interest bearing liabilities increased 47% from December 2023, amounting to ARS11.9 trillion, primarily due to the increase of deposits in dollars.

During this period it cost decreased 58% points to 15.4%. Net interest income decreased 56% when compared to the fourth quarter of 2023, this was the result of a 63% decrease in interest income because of lower interest on government securities on repo transactions, and on loans to the private sector, together with the 69% decrease in interest expenses, mainly due to lower interest on time deposits.

Net fee income increased 10% from December 2023 due to increases in most of the products and services. Net income from financial instruments increased 234%, due to higher results from government securities. Gains from gold and effects quotation differences were 97% lower from the year ago quarter, including the results from foreign currency trading.

Other operating income decreased 30% in the quarter while provision for loan losses increased 80% because of the growth of the financing portfolio. Personal expenses were 20% higher than in the fourth quarter of 2023, primarily due to the recording of a ARS100 billion provision for restructuring expenses.

Admit of the expenses increased 15% due to higher expenses for maintenance, and repairment of goods and IT which were up 33% to a 34% growth of fees and compensation for services and to a 13% increase of higher administrative services.

Other operating expenses decrease 36% due to a 52% lower turnover tax related to financial operations. The bank's financing to the private sector reached ARS10.5 trillion at the end of the quarter, up 76% in the last 12 months with dollar denominated financing growing 157% and peso financing increasing 56%. By credit line, promissory notes increased 119%, personal loans 159%, and credit card financing 31%.

Net exposure to public sector decreased 40% year-over-year due to the reduction of re transactions and of government securities in pesos. This exposure represented 22% of total assets as of the end of the quarter compared to 41% of the year before. Deposits reached ARS14.3 trillion, 18% higher than a year before, mainly due to a 66% increase in dollar deposits partially upset by a 5% decrease in deposits in pesos.

The bank's estimated market share of loans to the private sector was 12.8%, 189 basic points higher than at the end of a year ago quarter, and the market share of deposit from the private sector was 13.8%, 396 basic points higher than in the same quarter of 2023.

The bank's liquid assets represented 63.6% of transactional deposits, and 44.5% of total deposits compared to 96.9% and 67.7% respectively from a year before. As regards asset quality, the ratio of non-performing loans to total financing ended the quarter at 1.85%, recording a 49 basic points improvement as compared to the 2.34% of the fourth quarter of the prior year.

At the same time, the coverage with allowances reached 186.3%, up 44.6% points from the 141.6% recorded a year ago. As of the end of December 2024, the bank's total regulatory capital ratio reached 18.5%, decreasing 626 basic points from the end of the same quarter of 2023, mainly due to the deduction of the equity participation in Galicia Más.

This ratio consolidated in accordance with the rules established by the central bank amounted to 21.6%. In summary, 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.

Thank you. (Operator Instructions)

Okay, from Brian Flores, the first question, right?

Brian Flores, Citi.

Thank you, Tim. Good morning for the opportunity to ask questions. I have two questions. The first one is on your projections for ROE of this year. I know conditions have been changing a lot, so I just wanted to hear, how should we think in terms of growth and ROE for this year. And then if I may, a second question on capital. We saw a very strong consumption of Tier 1 ratio from quarter to quarter.

So if you could help us, think about how are you going to fund the growth in the coming quarters if, would you raise capital or dollars, for example, now that it can be used on the asset side. Would you be open to make a follow on or are you all, considering that it's going to be all organic funding just because the level of capital seems a bit tighter now to fund growth. So I just wanted to hear your thoughts on both of these? Thank you very much.

Okay. Hello, Brian. Well, first, regarding the growth, we are, seeing so far in January and February, a better growth rates in loans than expected. So I would say that at least loans would be growing from December to December, not on average around 50%. Deposits would be growing something below perhaps 35%. But of course, beginning from different starting points, different stocks between deposits and loans.

ROE, well, you saw that 2024 was some kind of extraordinary due to the first half in which we were benefited by increases in government, in the prices of government securities plus the acquisition of HSBC, so we ended with around 34% real ROE, in 2025, we will not have these two extraordinary items, and also we will be -- I would say focusing on merging the operations of Galicia and HSBC, so there will be some extraordinary expenses although we provision part of that in the fourth quarter, but we are forecasting that we, the ROE will be in the area of 15% in real terms.

With the idea that beginning in 2026, we should be getting or trying to have KPIs on ROEs in the area of between I would say 15% and 20% again in real terms. So 2025 will be a year of transition, and then ROEs should be rebounding.

In terms of capital, there is a little bit or some technical issues, let me explain. The total capital ratio on a stand-alone basis for Banco Galicia was 18.5, that includes the, how do you say that? The deduction, thank you, of the equity participation of Galicia Más. If we consolidate that, we will get to 21.6%. And also in the capital, to take into account or to make the calculation of the capital ratio due to central bank rules, we are not taking today 100% of the result of the fourth quarter.

So that will be taken in at the end of February or beginning in March. So, if we were adjusting that capital ratio for that two months lag, the capital ratio would be in the order of 24%.

According to our estimates, we will not be needing any capital increase, not in '25, '26, and even '27. When and if the need appears, we would be willing to raise capital. But again, with this -- with the assumptions we have in our forecast, we are okay.

Attach to that in the Galicia Más, which is the former HSBC has a very strong capital ratio so we consolidate both ratios. We go up to [24]. Here you see [18] because of what, already Pablo mentioned that as a technicality they need to deduct the participation in HLBC or Galicia Más.

But after June when this is consolidated, our capital ratio will go up, and we expect to end the year with between 19% and 20%. So no need for capital for this year. And also according to projection next year also, we shouldn't need capital.

Perfect. And just last follow up here. So in terms of dividends, do you think maybe 2025, as you were mentioning, transitioning lower ROE, should we also expect maybe a lower dividend distribution in 2025?

Well, we are going to pay a dividends in May after the shareholders meeting. The proposal is subject to the approval of the central bank so far, they didn't update the regulation. In the case of Grupo Financiero Galicia, we depend from dividends from the different subsidiaries.

We want to pay ARS88 billion coming from Naranja X, the insurance, business asset management, and so on. And we are forecasting ARS400 billion coming from the bank to Grupo Financiero Galicia, but subject to the regulation of the central bank.

It's the same amount in dollars and prior year, but a lower proportion of retained earnings, let's say, but in dollars to be similar to what we pay last year considering a very high result that we are having this year, know.

Perfect. Very clear. Thank you.

You're welcome, Brian.

Carlos Lopez, HSBC.

Yes, thank you very much. So, two questions. First, this is the dividends, do you need to pay a dividend? I mean, you, I mean you are projecting high growth. Yes, you can pay it from the subsidiaries. You can take some from the bank, but if you are thinking that by 2027, you might already get into the need for capital for growth, why do you need to pay a dividend at this point.

My second question refers to inflation adjustments, as we go into a lower inflation phase, when do you think that you could contemplate, what the regulation could contemplate moving out of inflation accounting? What year would that be, would that be announced and what, yeah, would that be effective? Thank you so much.

On the first part of dividends, I mean, according to our estimations, we shouldn't need capital for including 2027. So '25, '26, and '27, we don't need capital until the end of '28. We need to see how it continues, but for the next three years, including this, we are not needing capital.

Our strategy is to continue to pay a standardized level of dividends to our shareholders just a practice we are trying to get to a common or a standardized level of dividends, considering the high profits that we are reporting and in reality again.

We are not needing capital for 2027 according to our projections, so it's three year times, and we'll see in 2028, but it's not for sure that we need to go raise capital, and we need to see how the variables evolve, but the idea was to continue paying like a standardized dividends.

And so, if I can inquire there, so that standard is the same amount in dollars, the same amount in (multiple speakers)

Now we sustain amount in dollar this year we are trying to get to a percentage on the results. We are not ready to provide a guidance on that, but we want us Argentina stabilized, we are able to predict better the future. We plan to get to a standardized event and to provide the guidance. We are not ready to do that so. But, that's why we didn't want to say well we are not paying anything with them, no, as you were saying before.

Regarding the -- how the -- when the inflation accounting will stop you need to have a -- it's like --

Three years of accumulated inflation. (multiple speakers) When actually we began adjusted by inflation when for three years, the accumulated inflation came above 100% in order to eliminate that, we need three years of accumulated inflation below 100%. So, if this year is, let's say 23%, 25%, and the two following years are in the same level. In 2028, we could be having our numbers not adjusted by inflation.

And that's something it's not defined by the entity, of course, it's defined by the group of international auditors that qualifies the country. So after you have that inflation accumulative below 100%.

Projections should be that you will continue to do that, and then this task force that meets, I think regularly can decide if Argentina can get out. It's not something that we can decide unilaterally, but after having these three years below 100%, we are in conditions to apply for that, know.

It is a calendar, yes, right? So it will be '25, '26, '27, and then they would design '28 and it might apply already in '28 or already in '29?

I mean, it's the end of the month, but it's again, it's three full calendar years of lower than 100%. And then country is available for this task force to decide that the country can move up from that list. In theory, in the next three years, we should be able, if this continues to move that so it's '25, '26, '27, maybe in '28, but again, it's something that it's not that easy to predict.

Thank you. And if I can follow up, I don't think you have mentioned what your expectations are for inflation and exchange rate for this year and next?

Yes. Our chief economist is forecasting, well, in general, a very good year with a 5.5% GDP growth. Inflation in the range of 23% and 25%. And the evaluation of the official exchange rate is similar to the estimated inflation.

The question there is when the effects (inaudible) -- as we call it, all these restrictions on the effects will be lifted and if that will imply some kind of jump or intervention from the central bank, but in the best case scenario, this is -- these are -- these estimates.

Yeah. Thank you so much.

You're welcome, Carlos.

Pedro Offenhenden, Latin Securities.

Hi, Paulo. Hi, Gonzalo. Thank you for the call. I have two questions regarding securities. How do you expect the weight of securities to evolve in '25 this year? And if, do you have any projections of how the loan to asset and security to asset ratio could be brought this year?

Excellent. Hi, Pedro. Well, as we were saying in previous calls and meetings, the breakdown of our assets was strange, and we were saying that the government exposure should be going down while loans to the private sector should be going up.

Actually, in some quarters ago, government exposure represented 40% of total assets and loans to the private sector around 30%, and this quarter changed completely. The loans represent around 42% of the total assets in the case of the bank, and government exposure 22% of total assets. So, we are going into that's a trend when we think or look at years like 2017 or 2018, loans to the private sector represented roughly 65% of total assets, and government bonds around 15%.

So gradually we should be getting to these numbers in the of course in the past we had lots of government bonds because we were forced to take time deposits with a minimum interest rate and loan demand was not there due to high inflation and high nominal interest rates. That's why we ended with a big portion of our assets being government bonds and also in the past, a central bank paper. But as the system is normalizing, loans should be gaining share while government bonds should be losing share.

Thank you, Paulo. And if I can ask on the timing of that, like going back to the 2017 or '18 levels, would be the end of this year, 2026?

Well, perhaps in many times, Argentina surprised us for the good and for the bad. Changes are quicker than expected. With the loan demand, we are seeing perhaps, already at the end of this year, we could be perhaps not [65 but 60] or so.

So, we are seeing a very strong demand as I mentioned also in already in January and February. So perhaps at by year end, we could be having 60% of loans compared to total assets and of course, a reduction in government exposure.

Thank you, Pablo. Very good, yeah.

You're welcome, Pedro.

Jorge Mauro, Fundamental.

Yes, hello. My question is regarding the provisions at Naranja X When you look at the provision in this quarter, they increased more than 100%, it's 150% [Q&Q] So I'm just trying to understand, what has been driven this and what should we expect going forward?

Excellent. Hi, Jorge. Well, in the case of Naranja X, they increased the cost of risk roughly from 9% to 18%, this is extraordinary, why? For two reasons. The first one is, they were using an expected loss model that took into account certain variables that they use for a credit card lending that was the main product in the past. Once they began being a financial company, so therefore taking deposits and granting personal loans.

Now, the personal loans need another type of variables in order to estimate future losses. So they did all this change in the fourth quarter and also they changed the number of days in which they need to have charge-offs. So, it was extraordinary and we think, going forward, it should get back to a more normal level like this 9% or 9.5% they had in previous quarters.

Okay. So essentially, as you now -- you have a one-off hit because you need to increase provisions. Okay, I got it. On a recurring basis, it should go back to around 9%, 10%.

Exactly.

Okay. Thank you very much.

You're welcome, Jorge.

Brian Flores, Citi.

Thank you for the opportunity to ask another question. Just Pablo, I want to ask you on the right of (inaudible) and also the volatility, that this has driven, right? We saw fourth quarter, sorry, third quarter with over 40% levels of ROE. Now we have around 11%.

And particularly (inaudible) were increasing very strongly over the quarter. So if you could just explain if this is some seasonality, some deterioration in, I don't know, the great conditions, anything that you could help us provide sorry, try to help us understand a bit better, would be great. Thank you.

Well, hi, Brian again. Well, I think, I answered that, to Jorge in the previous, answer or question, but basically it's an extraordinary quarter. Because they changed the expected loss model. Basically, they had certain or some variables that were used in the past for calculating the expected losses on credit card financing.

And now, as they are growing very fast with personal loans, they needed to adjust this model because personal loan financing is riskier than credit card financing. And also they changed the charge of methodology. Basically, they changed the number of days in which they begin having this charge off.

So, the cost of risk increased from 9% to 18%, basically, big numbers, it should get back down to levels of 9 to 10% the cost of risk. Also, Naranja X is investing a lot in growth. So, that's why you see some deduction or reduction in ROEs. They are growing very fast, in number of clients, actually around 200,000 clients per month. So they are investing to grow, but the -- all the operational variables are very healthy.

Super helpful. Pablo, if I may, so then how should we think about the structural levels of ROE (inaudible) Do you think it's due to its efficiency, because I know it's very good. It's like something above '25, close to '30, or do you think it's more close to the 20 as the consolidated group?

Well, as the year in this investment and growth mood, I think in the -- during this year, we will see 15% to 20% real ROE, and then the target will be to have some -- somewhat higher, typically in normal conditions as Naranja X it tackles a riskier segments, their ROE should be somewhat higher than the bank.

Perfect, Pablo. Thank you.

Excellent. Thank you.

(Operator Instructions)

Any other question? Yes, Malovio, right?

Maclovio Piña, INCA Investments.

Great, thank you. I just have a very quick question. Can you please confirm the actual number of shares you have at the end of the quarter, because I've seen two numbers here. So I just want to make sure I have everything, absolutely correct?

The number of shares you said Maclovio?

Yes, please.

Yes. As of the end of December and after the first increasing in capital to pay HSBC, it was 1,588.5 million shares in order to take eight years you have to divide by 10. In February, we had a second issuance of shares to make a price adjustment, this was 17.7 million shares, again 1.77 ADRs would be (inaudible) So today the final number of shares is 1,606.25 million shares.

Okay. Excellent. Great. Thank you very much, Paul. I really appreciate it. Thank you for your time.

A pleasure, Maclovio.

(Operator Instructions) Murillo Ricini, Brodeso BBI.

Thank you guys. Thank you for the call. I'd like to better understand the dynamics of the ROE. So this, skyrocket of the ROE during the fourth quarter. If you could try to clean up a little bit this number with the one-offs just to better understand the dynamics for the future already heard that you are expecting something around 15% for 2025. So just to confirm this number as well? Thank you.

Hi, Murilo. Yes, the fourth quarter, it was impacted by the acquisition of HSBC. There, we said that the difference between the fair value and the amount paid was ARS724.5 billion. But the net amount after some provisions, we did it for restructuring purposes. It was ARS485 billion. Also, when we look at all the year ROE, it was influenced by the first half of the year in which we had very high yields from government bonds.

For 2025, we are saying that we have a real ROE of around 15%, and more normalized, let's say, a number that is or the main drivers are, well, the evolution of loans we are seeing, but also some extraordinary expenses we will have due to the merger. A process we are having between Galicia and HSBC's operations in Argentina.

Beginning in 2026, the objective will be to go to the area between 15% and 20%, so to improve real profitability. So this is the evolution, no, very high, extraordinary 2024. Another extraordinary year in 2025 due to the merger and then becoming more profitable and more aggressive if you want.

Very helpful, Pablo. Thank you.

You're welcome.

The Q&A section is over. We would like to hand the floor back to Pablo Firvida for the company final remarks. Please Mr. Pablo, your microphone is open.

Okay. Well, thank you all for attending this call. If you have any questions, please do not hesitate to contact us. Good morning, good afternoon, have a nice weekend.

Grupo Financiero Galicia conference is now closed. We thank you for participation, and wish you a very good day.