Grupo Financiero Galicia S.A.
Q1 2016 Earnings Call Transcript

Published: 12 May 2016

[Operator:]

Welcome to this Grupo Financiero Galicia First Quarter 2016 Earnings Release Conference Call. This call is being recorded. At this time I’d like to turn the call over to Pablo Firvida. Please go ahead, sir.

[Pablo Firvida:]

Thank you. Good morning and welcome to this conference call. I will make a short introduction and then we will take your questions. I need to say that 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. These forward-looking statements are subject to risks and uncertainty that could cause actual results to differ materially from those expressed in the forward-looking statements. According to prior estimates, the Argentine economy showed a 0.3% annual growth for the first quarter of 2016, which compares with a 2.2% annual growth in the previous quarter. In the first quarter of 2016, the primary deficit reached 0.8% of GDP and act as a payment of interest, and income from and sales [ph] and from the Central Bank, the global deficit represented 0.6% of GDP. Due to methodological reforms, the Institute of Statistics didn’t publish official inflation since the fourth quarter of 2015. For private estimates, consumer prices expanded 7.3% in the first quarter. On the monetary front, the Argentine Central Bank contracted the monetary rates by ARS50.9 billion in the first quarter, accumulating at 30.1% growth during the last year. The monthly average of the foreign currency exchange rate increased from ARS11.43 to ARS14.96 per dollar in the quarter, representing 30.9% depreciation. In March, the average rate on peso-denominated private sector bank deposits for up to 59 days increased to 28.96%, 111 basis points higher than the 27.85% in December 2015. Private sector deposits in pesos at the end of the quarter amounted to ARS933 billion growing 2.5% during the first quarter of the year and 32.8%. Transactional deposits in pesos decreased 0.8% and peso-denominated time deposits increased 5.4%. At the end of March, loan to private sector in pesos amounted to ARS773 billion recording a 0.1% increased from December 2015, and 31% inter-annual increase. Turning now to Grupo Financiero Galicia. Net income for the quarter amounted to ARS1.3 billion, 41% higher year-over-year mainly due to profits from Banco Galicia for ARS1.1 billion, Sudamericana Holding for ARS166 million and from Galicia Administradora de Fondos for ARS30 million. The Bank's net income increased 30% from a year ago quarter as a consequence of the 26% year-over-year growth of net operating income. Net financial income grew 30% due both to an increase in the portfolio of loans to private sector and of government securities offset by a contraction in the spread, where net income from services grew 21%, mainly due to fees related to national and regional credit card, to deposit accounts and to foreign trade. Average inter-selling assets grew ARS49 billion year-over-year and its yield decreased 2,010 basis points with a significant decrease in the yield on the portfolio of government securities of 1,100 basis points mainly due to higher rate and lower yields of dollar-denominated Lebac. Interest-bearing liabilities grew by ARS38 billion during the same period and its costs increased to 120 basis points, mainly due to higher average interest rate on bank deposits and on debt securities. Provision for loan losses for the quarter amounted to ARS618 million, 4.6% higher than the ARS591 million recorded in the same quarter of the prior year. Administrative expenses were 37% higher year-over-year with personnel expenses growing 32%, mainly due to a provision recorded during the quarter on account of future salary increases. The remaining administrative expenses grew 43% mainly due to increases in taxes, cash transportation, maintenance, electricity and communications expenses. The Bank's credit exposure to the private sector reached ARS120 billion at the end of the quarter, up 43% in the last 12 months and deposits reached ARS108 billion, up 54% in a year. The Bank's estimated market share of loans to the private sector was 9.64% and the market share of deposits from the private sector was 9.37%, increasing 58 basis points and 66 basis points, respectively in the last 12 months. As it regards to asset quality, the consolidated NPL ratio considering the loan book of the Bank the credit card subsidiary and CFA, ended the quarter at 3.3% compared with 3.7% of the first quarter of the prior year. The consolidated coverage of NPLs with allowances reached a 108% slightly above the 107% figure recorded a year ago. As of March 31, 2016, the Bank's consolidated computable capital exceeded by ARS2 billion, the ARS12 billion minimum requirements or 16%, and the total capital ratio reached 11.8%. It is worth to mention that these figures decreased due to certain regulatory changes and due to the reduction in the percentage of the balance of the subordinated bond as needed as Tier II capital from 42% to 24%. The Bank's liquid assets at the end of the quarter represented 92% of the Bank's transactional deposits and 42% of its total deposits, compared to 77% and 36% ratios from a year before, respectively. As to summary, of the banking activity, during the first quarter of 2016, the Bank had good operating results keeping its asset quality metrics at reasonable level and has improved its liquidity indicators. At the same time market share of private sector loans and deposits also recorded significant increases. Sudamericana Holdings and Galicia Administradora de Fondos continue to show also very good growth rates. We are now ready to answer the questions that you may have. Thank you.

[Operator:]

[Operator Instructions]. And we'll take our first question will come from Catalina Araya with J.P Morgan.

[Catalina Araya:]

Hi good morning. Thanks for taking my question. My question is regarding capital. I just want to understand what has been the different regulations that compress the Tier 1 and the total capital ratio? Do you expect further Basel III implementation to affect the capital ratio? And then lastly, what would be the minimum capital ratio at which level you would get very concerned and you would look for strategic options to improve it? Thank you.

[Pablo Firvida:]

How are you Catalina? The regulatory changes were in particular, there was that we announced the previous quarter basically due to the different calculated way and month of calculation of the capital requirements and the moment in which we consider the capital. Also, there were some minor changes in terms of market risk and some deductions. The big drop compared from the -- comparing the fourth quarter with this quarter is a smaller percentage of our subordinated bond that can be admitted as Tier II capital. We think that without issuing any instrument being shares or any subordinated bond, we could be improving the current ratio, but around a 2 percentage points at the end of the year. Of course, we are looking at it. There are many -- I would say small actions that they are going to improve the capital situation, For example we need to have a margin on the operations with their raw facts [ph] if we reduce that, the volume of operations we need less margin and we have less capital requirements.

[Catalina Araya:]

Sorry, just to clarify, so without issuing debt or anything this year, you expect that by year end the capital ratio will decline by 2 percentage points or closer to 10%?

[Pablo Firvida:]

Growth 2%.

[Catalina Araya:]

Growth 2%.

[Pablo Firvida:]

Sorry, if I said the opposite.

[Catalina Araya:]

No, I though you said burn 2 percentage points. Okay, it would grow.

[Pablo Firvida:]

Yes, well grow.

[Catalina Araya:]

Okay. Perfect. And then is there any other Basel III or type of regulation been in talks that could pressure more of the capital, or all the regulatory changes have been made?

[Pablo Firvida:]

I would say that most have been made. We are going towards Basel III gradually with different buffers, but we don't think there will be any material change.

[Catalina Araya:]

Thank you.

[Pablo Firvida:]

You are welcome, Catalina.

[Operator:]

[Operator Instructions] We'll go next to Frederic de Mariz with UBS.

[Frederic de Mariz:]

Good morning everyone. Thank you for the conference call, couple of questions on my side. The first one is follow-up on Catalina's, and I wanted to get your latest thoughts on loan growth, and when you mentioned this capital optimization, I was curious to see if that involves a lower loan growth for the Bank until year end to get to that 2 percentage you mentioned. But generally speaking, what do you expect from loan growth in the coming quarters? And importantly, do you expect loan growth to be faster than -- to be higher than inflation, and then I will come back to my second question. Thank you.

[Pablo Firvida:]

No, basically the different actions to improve the capital ratio do not -- or changing the growth, the prospect of our loan book is not under the curtain. Our other, I would say more cosmetic measures like deductions of course we can allocate a capital in different loans and products and some recorded capital. But it's not the way or the intention I mentioned in terms of improving the capital situation or ratio. Going to the loan growth, we think, this year we'll be growing less than inflation. Right now our estimate for inflation for the full year will be around 33% to 35%. Our loan book is perhaps will grow at around 30%, 30% plus, little bit slight above. For this year, we think loans can grow much higher than inflation also with much lower inflation as expected. Perhaps, next year the inflation could go from 35% to 18%. So, loan book could grow at 30% also next year, but real growth and much higher than inflation.

[Frederic de Mariz:]

That's very clear. And this -- in this balance between the loan growth and obviously the margin and all the normalization that you talk about, how do you think about margin? We saw some decline in the first quarter. Can you balance with your latest thoughts about the yield on the asset side for loans and securities and also the funding curve, and how you think of margin for this year and maybe next year?

[Pablo Firvida:]

Well, this first quarter, first it's the lowest in terms of seasonality and the main reason because of the compression in margin was the lower yield on government securities mainly due to the increase in the holding of Lebac in dollars and that has much lower yield. Also we increased in the rate of term deposits, but with -- this high levels of interest rate and the elimination of certain regulation that affected basically caps and floors on certain interest rate, margins should be recovering in the next quarter. We are close to 11% now, perhaps the full year could be closer to 12% -- 12.23% in this levels.

[Operator:]

[Operator Instructions] Next question from Alejandra Aranda with Itau.

[Alejandra Aranda:]

Good morning Pablo. Congratulations on the results. I was curious to see, if you could explain a little bit more this strategy on betting Lebac in dollar, and also if you could comment on the spike on public sector deposits that you have which was quite significant both on year-over-year and quarterly basis? And then my third question would be on how you are seeing fees behaving this year and next?

[Pablo Firvida:]

Okay. We saw an important increase in dollar-denominated deposits. The allocation of those dollars is limited to loans to exporters, so another alternative was to purchase a short-term Lebac in dollars. Of course we prefer the intermediation in pesos, but we had to use those of this liquidity. The increasing public sector deposits, was mainly on [indiscernible]. And we think now it will be more I would say a constant not before the third jump in the past, with the previous inflation, we saw the opposite. Now we had a top and it went down quickly. I don't think there would be sudden changes going forward on that. In terms of fees, right now we have -- or all the banks have the ability to increase prices on fees for individuals up to 20%. We have to inform the clients with certain time, so in June the full prices could be effective. Of course it will not be for all the products on all the segments, but we will have that ability. And since September, we will have no-limit to fix prices. Of course the competition will play a good role there in terms of pricing. So for this year, we think fee income could be growing slightly above inflation.

[Operator:]

We'll take our next question from Walter Chiarvesio with Santander Bank.

[Walter Chiarvesio:]

Good afternoon Pablo, thank you for taking the questions. The first one is, if maybe you already mentioned, but if you can repeat how much of the stock in Lebac you have in U.S. dollar? That is the first one. And second is, what the is the Bank's expectations about Central Bank interest rate strategy in the next 12 months and the referenced interest rate [indiscernible], what do you see there?

[Pablo Firvida:]

As of the end of the, of March, we had roughly ARS10.9 billion pesos in dollar-denominated Lebac. And in terms of interest rate, Federico Sturzenegger mentioned that he will be reducing the Lebac interest as he sees inflation going down, this is his first objective. We think they are going to make it and we are forecasting the leverage [ph] at around 24% at year end. These were the three questions.

[Operator:]

[Operator Instructions] We'll take our next question from Frederic de Mariz from UBS.

[Frederic de Mariz:]

Pablo, just a follow-up on my side. Wanted to hear your thoughts about the MSCI discussion about [indiscernible] Argentina and whether you have seen anything or you have any thoughts on this? And also about [indiscernible], we've seen the product that potential clients might be selling and I was just curious to see, what would the impact for the markets for you -- anything you've seen on this theme? Thank you?

[Pablo Firvida:]

I didn't get the first part of the question. Frederic, sorry?

[Frederic de Mariz:]

Sure on the MSCI, there are discussion that Argentina could get out of Frontier and getting to MSCI EM Index, and I'm not sure if this is something you are following, or do you have any thoughts on this?

[Pablo Firvida:]

Well, definitely if that happens, it will be very good for all the elected shares and the for the news ones to come, because there will be more investors, more liquidity and well it's due to cycle. I read some months ago that it shouldn't be immediate that perhaps could be towards the end of this year, but I don't have any more recent information than that? Regarding the 20% of the shares of Grupo Financiero is in the hands of [indiscernible] want to sell those shares, they have to pass a law, because the previous government put a kind of lock law to avoid selling of those shares. And if they are interested, if they pass the law and if they sell the shares, I think they would do it in the best interest for them, basically trying to protect the price and diversifying and fragmenting the sales of shares. But I have no more information than that.

[Operator:]

And it appears there are no further questions at this time, so I'd like to return the conference to Mr. Pablo Firvida for any additional remarks.

[Pablo Firvida:]

Okay, thank you very much, all of you for attending this call. If you have any questions please do not hesitate to contact us. Good morning. Bye-bye.

[Operator:]

This does conclude today's conference. Thank you for your participation. You may now disconnect.