Earnings Call: Q4 2020

Mar 11, 2021

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's 4Q 'twenty Earnings Conference Call. We would like to inform you that the 4Q 'twenty press release is available for download at the Investor Relations website of Banco Macro, www.macro.com.arrelaciones arrelaciones versores. Also, this event is being recorded, and all participants will be in a listen only mode during the company's presentation. After the company's remarks are completed, there will be a question and answer session. At that time, further instructions will be given. It is now my pleasure to introduce our speakers. Joining us from Argentina are Mr. Gustavo Enriquez, Chief Executive Officer Mr. Jorge Scarinci, Chief Financial Officer and Mr. Nicolas Torres, IR. Now I will turn the conference over to Mr. Nicolas Torres. You may begin your conference. Good morning, and welcome to Banco Macro's Q4 2020 conference call. Any comments we may make today may include forward looking was distributed yesterday and is also available at our website. All figures are in Argentine pesos and have been restated in terms of the measurement in current at the end of the reporting period. As of the Q1 of 2020, the bank began reporting results applying hyperinflation accounting in accordance with IFRS IAS 29, established by the Central Bank of Argentina. For ease of comparison, figures of previous quarters have been restated at time IAS 29 to reflect the accumulated effect of the inflation adjustment for each period through December 31, 2020. I will now briefly comment on the bank's Q4 2020 financial results. Banco Macro's net income for the quarter was ARS6.9 billion, 2% higher than in the Q3 of 2020 and 11% lower than the result posted a year ago. The bank's Q4 2020 accumulated ROE and ROA of $20,900,000 and $4,300,000 respectively, remained healthy and show the bank's earnings potential. In fiscal year 2020, total comprehensive income totaled MXN 25,300,000,000, 5% lower than the result posted in fiscal year 2019. Net operating income before general and administrative and personnel expenses for the Q4 of 2020 was ARS 17,400,000,000, decreasing 20 percent or ARS 4,400,000,000 quarter on quarter and 55 percent or ARS21,600,000,000 lower than a year ago. In fiscal year 2020, net operating income before general and administrative and personnel expenses totaled ARS95.2 billion, 12% lower than the previous year. Operating income after general and administrative expenses was ARS523,000,000, 89 percent or ARS 4,400,000,000 lower than in the Q3 of 2020 and 97% lower than in the Q4 of 2019. In the quarter, net interest income totaled ARS 21,700,000,000, 8 percent or ARS 1,800,000,000 lower than the result posted in the Q3 of 2020 and 32% or ARS 10,500,000,000 lower than the result posted 1 year ago. In fiscal year 2020, net interest income was 19% lower than in fiscal year 2019 as a result of different regulations adopted by the Central Bank that set caps on lending rates and floor on deposit rates. In the Q4 of 2020, interest income totaled ARS 41.6 1,000,000,000, 2 percent or ARS 651,000,000 higher than in the Q3 of 2020 due to higher income from government securities and 11% or ARS 5,000,000,000 lower than in the previous year. Within interest income, interest on loans decreased 1% or ARS 164 1,000,000 quarter on quarter. Interest income decreased 38 percent or ARS 11,800,000,000 year on year. In the Q4 of 2020, interest on loans represented 47% of total interest income. In fiscal year 2020, interest on loans totaled ARS85,600,000,000 and decreased 23% compared to fiscal year 2019. Net income from government and private securities increased 4% or ARS680 1,000,000 quarter on quarter due to higher income from government securities. Compared to the Q4 of 2019, net income from government and private securities decreased 38% or ARS 5,400,000,000. In the Q4 of 2020, FX gains, including investments in derivative financing, totaled ARS 1,200,000,000 an increase compared to the Q3 of 2020. Due to the 10% Argentine peso depreciation against the U. S. Dollars and the bank's long spot dollar position. In the Q4 of 2020, interest expense totaled ARS19.8 billion, 14% or ARS2.4 billion higher compared to the Q3 of 2020 and 38% or ARS 5,400,000,000 higher on a yearly basis. Within interest expense, interest on deposits increased 14 percent or ARS 2,400,000,000 quarter on quarter, mainly driven by a 3 20 basis points increase in the average interest rate paid on deposits. The average budget rate increased 4 52 basis points quarter on quarter. On a yearly basis, interest on deposits increased 40% or ARS5.4 billion. In the Q4 of 2020, interest on deposits represented 94% of the bank's financial expenses. In the Q4 of 2020, the bank's net interest margin including FX was 16.3% lower than the 17.1 posted in the Q3 of 2020 and the 33.6 registered in the Q4 of 2019. In the Q4 of 2020, net fee income totaled ARS5.7 billion, 4 percent or ARS209 million lower than in the Q3 of 2020. On a yearly basis, net fee income decreased 3% or ARS 170,000,000. In fiscal year 2020, net fee income was 7% lower than in the previous year. In the Q4 of 2020, net income from financial assets and liabilities at fair value of profit or loss totaled MXN 10,700,000,000 loss as a consequence of the inflation adjustment applied to our Leliq holdings. Higher inflation was observed in the quarter together with higher Leliq volume. In the quarter, other operating income totaled ARS 1,400,000,000, increasing 6% compared to Q3 of 2020. On a yearly basis, other operating income decreased 9% or ARS 115,000,000. In the Q4 of 2020, Banco Banco's personnel and administrative expenses totaled ARS 10,800,000,000, 1% or ARS 67,000,000 higher than the previous quarter due to higher administrative expenses. On a yearly basis, personnel and administrative expenses decreased 8% or MXN968 1,000,000. In fiscal year 2020, administrative expenses plus employees benefits decreased 11% compared to fiscal year 2019, showing the strict cost control policies adopted by the bank's senior management. In the Q4 of 2020, the efficiency ratio reached 50.7% deteriorating from the 49.9% posted in Q3 of 2020. In the quarter, expenses increased 1%, while net interest income plus net fee income plus other operating income decreased 16%. In fiscal year 2020, Banco Macro's effective tax rate was 28.8 percent lower than the 39.1% registered during the fiscal year 2019. In terms of loan growth, the bank's financing to the private sector totaled ARS 252,500,000,000, decreasing 2 percent ARS 6,100,000,000 quarter on quarter and 12 percent or ARS 31,900,000,000 lower year on year as a consequence of the economic recession that affected Argentina during 2020. Within commercial loans, documents stand out with a 10% to ARS2.4 billion increase quarter on quarter, mostly due to loans extended to SNEs. Meanwhile, other decreased 20% or ARS 9,700,000,000. On the consumer side, credit card loans increased 9% or ARS 5,300,000,000 in the quarter. Within private sector financing, peso financing decreased 1 percent or ARS 3,400,000,000 while U. S. Dollar financing decreased 19% or $64,000,000 It is important to mention that Banco Macro's market share over private sector loans as of December 2020 reached 7.1%. On the funding side, total deposits decreased 11 percent or ARS 59,800,000,000 quarter on quarter and increased ARS 138 point 6 billion year on year. Private sector deposits decreased 4% quarter on quarter, while public sector deposits decreased 37% quarter on quarter. The decrease in private sector deposits was led by time deposits, which decreased 8% or ARS 18,800,000,000 quarter on quarter, while demand deposits increased 2% or ARS 4,200,000,000. Within private sector deposits, peso deposits decreased 1% or COP3.9 billion, while U. S. Dollar deposits decreased 22% or COP249 1,000,000. As of December 2020, Bank of Macros transactional accounts represented approximately 48% of total deposits. Bank of Macros market share over private deposits as of December 2020 totaled 6.4%. In terms of asset quality, Bancomapro's non performing total financial ratio reached 0.78%. The coverage ratio measured as total allowances under expected credit losses over nonperforming loans under Central Bank rules improved significantly and totaled 479.2 percent. Consumer portfolio nonperforming loans improved 23 basis points, down to 0.73 from 0.96 in the previous quarter. While commercial portfolio nonperforming loans improved 65 basis points in the Q4 of 2020, down to 0.9% from 155% in the quarter ago. The improvement in commercial non performing loans can be traced to the write off of a specific our export of client. Asset quality continues to be positively affected by risk measures adopted by the Central Bank of Argentina in the current pandemic COVID-nineteen context, particularly the 60 day grace period that was added to debt reclassification before a loan is considered as non performing. In terms of capitalization, Blackcombacros accounted an excess capital of MXN 132,100,000,000, which represented a total reputed to the capital ratio of 34.2% and a Tier 1 ratio of 27.1%. It should be noted that on October 21, 2020, the Special Shareholders Meeting decided on a supplementary dividend of up to MXN3.8 billion. The supplementary dividend is calculated by multiplying the MXN20 per share dividend already declared and approved by the shareholders meeting held in April 2020 by the variation in the consumer price index between April and the date in which the Central Bank's approval is granted. The ARS 3,800,000 from the supplementary dividend were deducted from the shareholders' equity in the Q4 of 2020. The bank's aim is to base the best use of this excess capital. The bank's liquidity remained more than appropriate. Liquid assets to total ratios reached 90%. Overall, we have accounted for another positive quarter. We continue showing a solid financial position. Asset quality remain under control and closely monitored. We keep on working to improve more our efficiency standards and we keep a well optimized deposit base. At this time, we would like to take the questions you may have. Thank you. We will now begin the question and answer session. And the first question will come from Ernesto Gabbelondo with Bank of America. Please go ahead. Hi, good morning, Jorge and Nicolas. Thanks for the opportunity. My question is on your expectations for the payment behavior of the deferred portfolio once clients have finished their grace period? Also, can you share with us what is the percentage of your portfolio that is under a grace period or that is deferred? And what was the amount of additional provisions related to COVID-nineteen that were built during 2020? Because I think also in the press release, you were also mentioning that in the 4th quarter, you start to create provisions, but more related to corporates. So if you can separate how much are related to COVID, how much are related to those corporates? And how do you think you have already created provisions for the expected NPL peak in the Q2? Thank you. Ernesto, good morning. This is Jorge Carinthis. How are you? Thanks for your questions. In terms of the portfolio that we have under this 60 day rate period, It's approximately 13.5 percent of total loans. We complete that in pesos is approximately ARS 34,000,000,000. We can split that between approximately ARS2.1 billion in corporates and then individuals approximately ARS 32,000,000,000. I would say that ARS 20,000,000, almost ARS 25,000,000,000 of BIN loans and about ARS 7,000,000,000 in credit cards. In terms of the additional provisions that we posted in 2020 related to the COVID-nineteen are $3,100,000,000 dollars including corporates and individuals. Is that okay? Yes. So thank you, Jorge. So on the MXN 34,000,000,000 that is under a grace period, how are your expectations after the clients finish this grace period? Do you know how much of this will be paying or could be delayed? You have to have an idea if the provisions cleared related to COVID-nineteen are enough for this year? Unless I would say that this 60 day period raise could be maybe extended by the Central Bank, but this will depend on the economic activity, the pickup on the economy. I would say that the Central Bank is trying to maintain the great quality health of the system. So this could be extended. Honestly, we don't know if this is going to happen and how long is going to be or the extension of this regulation. I have to say that meanwhile, we are going to maintain the level of provisioning. We are forecasting for 2021 between 2.5% and 3% the cost of risk to our books. We are forecasting for 2021 recovering the economy in the area of 7% in real terms And the consensus for inflation for 2021 is 44%. So for the moment, we think that this 60 day is going to be extended because we might see some positive recovery figures for the economy starting by late of Q2 of 2021. That is what the market is expecting. Okay, perfect. Thank you. And then just let me make another question in terms of NIMs. What are you expecting on NIMs considering the sub CVIs on loans and the caps on credit cards and the flows on deposits? How should we think of NIMs this year? That's a good question, Ernesto. Honestly, what we saw in the past in 2020 was a narrowing of our margin in along the industry. We think that at least 1st and second quarter might be Q3, we are going to keep on seeing this level of NIM. We are not expecting an expansion on the NIM. We think that the mix between the increase in lending and increasing deposits. We are not seeing many a big variation in rates and volumes in order to affect the NIM here. So I would assume for 2021 a NIM between what we saw in the 3rd quarter and Q4, kind of an average of that. We could see something happen by the end of the year, but honestly, it is not easy to forecast that. So our forecast is approximately on average between the 3rd Q4 of 2020. And the next question will come from Juan Ricaldi from Scotiabank. Please go ahead. Hi, good morning, Gustavo, Jose Nicolas. Thank you for taking my question. I have two questions, one related to the ROE outlook and the second one related to the other comprehensive income. In terms of the ROE outlook for 2021, you mentioned that you expect inflation to be around 44%, that's higher than inflation in 2020. So how should we think about the ROE for 2021? What's your base case for ROE in 2021? And the second question related to the is related to the OCI. We saw a sizable negative comprehensive income of around $3,000,000,000 I think in the Q4. Can you talk a little bit about what drove that and whether we should expect these losses to reverse in the future? Hi, Juan. How are you? Related to your first question, the ROE that we are expecting with the scenario that I described before is in real terms between 10% and 15% for 2021. Again, we do not calculate inflation. We always take the consensus of the market that for the moment is 44% for 2021, a recovery in GDP, as I mentioned before, in the area of 7 percent. Loans and deposits growing slightly above the inflation, would assume between 5% 10 percent increase in both loans and deposits above inflation. So that is how we are reaching the 10% to 15% ROE for 2021. In terms of your second question, there was a change in the accounting of public bonds, on sovereign bonds that we did in the 4Q. That was the impact on the ORE in the negative. Going forward, I would say in 2021, we are going to see a much, I would say, tidy income statement because there was a regulation that was put out by the Central Bank in order to put all the inflation affecting not only the Leliqs, but also the public bonds to put that above the net income line. So we are going to see a much tidy or tighter income statement in 2021 compared to the one that we saw in 2020. And the next question will be from Gabriel Nobrega with Citi. Please go ahead. Hi, everyone. Good afternoon and thank you for the opportunity to ask questions. So actually just going back to this part of profitability, it really called our attention here that you reached a real ROE of almost 20% on top of a very high capital base. And now you are saying that this is going to compress to around 10% to 15%, mainly because of the pressures which we're seeing on provisions and also because NIMs are going to be sort of flattish. And so I was just wondering, are there any other strategies which you could maybe implement, be it on the P and L or maybe a faster capital deployment, which could even provide some upside to these ROE figures? And I'll make a second question afterwards. Thank you. Hi, Gabriel. How are you? No, honestly, what we are seeing is, first of all, a higher inflation scenario. Then what we are seeing is that, as I mentioned before, the margin is going to remain at least the first three quarters of the year similar level than the one that we saw in the Q4. And in the Q4, part of the at the beginning of the Q4, we continue having some extra net interest margin. I would say that were measures that were passed by middle or beginning of Q4. So no, I would assume that taking into consideration the conservative scenario and of course the struggle that we are going to carry out in terms of expenses, trying to maintain expenses similar or below inflation levels. That's why that we are forecasting between 10%, 15% real return. But in terms of the capital that we are going to deploy, as we have been showing in the past, we try to deploy the capital in those assets that develops or brings the best rate, return rate for the bank. So we are forecasting again a recovery starting by late second quarter of the year. So basically, those are the assumptions that we have in order to meet these ROE expectations. Okay. That's very clear. And as per my second question, could you maybe just elaborate on what happened with your effective tax rate? Because when we look here in the quarter, in my estimates, it was around 8%. But in the other quarters, it was between 30% to 35%. So if you could just maybe give us a bit more color on what's happened here? Basically, the statutory rate here on the income statement is 30%. The thing here is that we made the adjustments on inflation to the income tax in the 4th quarter and that's why we are showing a lower income tax or effective income tax rate. That was an accounting issue, basically that. But if you have to forecast going forward, consider the 30% rate. All right, perfect. Thank you very much. You're welcome, Odie. The next question is from Alonso Garcia with Credit Suisse. Please go ahead. Good morning, everyone. Thank you for taking my question. I wanted to check with you, I mean, regarding the equity question, you mentioned that 13.5% of your total loans were under this additional 60 day period grace that Central Bank is granting for calculating NPLs, so basically taking the 90 days to 150 days. So I wanted to check if besides that, if there is any portion of your portfolio that is currently still under payment holidays as the ones that you had back in April last year? And also regarding asset quality, if you could mention when do you expect the NPL ratio to peak and at which level? And from current levels, if you expect the commercial or the retail segment to drive that deterioration? Thank you. Hi, Alonso. How are you? Launching in category 3 to 5, all of the ones that are being including the 60 day peers are including those categories between 3 to 5. So they're included there. On the question on the recovery on loans, Basically, what we are seeing is some recovery on the corporate side on export oriented industries and agribusiness. Then we can see some recovery or pickup in construction compared to last year. In terms of individual, some recovery also in consumption in personal loans. But again, that is going to happen Q2 afterwards. Thank you. But in terms of the NPL ratio, do you expect it to peak? I mean, I know it will depend on Central Bank's regulation, but what is your best case and when the NPL ratio will peak? And what level do you expect to be that peak and what segment are you most concerned about in terms of asset quality? Is it the retail portfolio or is it the commercial portfolio at this point? Thank you. Yes, it will depend on the extension on this regulation of the 60 day grace period. Depending on that, we could see a deterioration on the NPL ratio, maybe level of between 2%, 2.5% could be. Honestly, it's hard to say when that could be happening because it will depends on the extension on this rule. Now basically, I would say that, well, last year was a disaster for the world. But for Argentina, I think that was a very bad year because we have some apart from the COVID-nineteen, we have some internal issues going on. And therefore, the recession was maybe deeper than expected and deeper than in other countries. And what we saw on we are still seeing some consumers having problems for payment basically because some layoffs happened in Argentina and of course, the economic activity collapsed for every company. And also some on the range of SMEs on the corporates that depending on the industry, they are showing field problems to recover. But again, if the scenario is what the system is expecting or the consensus is expecting that from Q2 onwards we are going to see a recovery there, We could see some healthier behaviors of SMEs and consumers going forward. The next question will come from Carlos Gomez with HSBC. Please go ahead. Hi, good afternoon. Could you reiterate the comment about the tax rate? We have seen them higher for most of your competitors, but lower in your case. So I wanted to understand the discrepancy. And regarding profitability, so you are targeting 10% to And regarding profitability, so you are targeting 10% to 15% in real ROE for next year. What could change that more? Is it more growth or the elimination of regulations or lower inflation? Hi, Carlos. How are you? No, as I commented before, it's basically an accounting issue that we made all the adjustments on inflation to this line in the 4th quarter. But going forward, as I mentioned before, you can use a 30% rate in order to forecast our P and L. In terms of yes, we could see that I mean these 10% to 15% ROE expectations is based on what I commented before, a 44% inflation as a consensus for the system here in Argentina. I would say that, yes, if we see low inflation, we are going to be above the 15% for sure in terms of return. And if there is a recovery higher than the one that we are expecting, the impact could be, of course, positive, but less than the impact of a lower inflation in Argentina. So our P and L is more sensitive to inflation than a recovery considering the current interest rates on loans and deposits. Okay. That's clear. And if I can follow-up, you also mentioned that interest rates look to be stable through the Q3. I mean, that seems to imply that you think that by the end of the year, we might see some type of adjustment in macroeconomic policy? It's very hard, but what are you envisioning and how are you preparing yourself? I mean, when you look at what's going on in the financial sector, all the economic books would advise you to increase interest rates and to maybe increase more the lending or asset rates than the borrowing rates. However, we are in Argentina, and of course, we challenge all the economic books and also considering that we have elections, midterm elections in October, I would assume that the Central Bank will try not to increase interest rates in order not to affect the recovery of the economy and that could be affecting a potential good record in the election for the official party. So that's what we are forecasting. Thank you very much, Jorge. You are welcome, Carlos. And the next question comes from Nick Pannitro with Morgan Stanley Investment Management. Please go ahead. Hi, Dave. Good morning. Just a quick question regarding your plans about the subordinated debt that you have that is callable in November this year. When I look at your capital ratios, you clearly don't need a subordinated debt. Nonetheless, it's well denominated, so you need the dollars. I think the market is pretty clear in terms of its expectations, what you're going to do with the bond, but I was just curious to hear your thoughts. Thank you. Hi, Nick. How are you? According to the level of today interest rate, if we are we not or will not call the bond, the bond would transform from the 6.75% fixed rate into a variable step down interest rate. Honestly, we are considering different scenarios, which is also pretty clear is that even the interest rate that that bond could have in this scenario, which is lower than the 6.75%, It is also true that for the moment, we cannot apply those funds to an attractive asset. So we are considering different scenarios for this bond. Again, this is the call date for this bond is the 5th November of this year. So we still have some money to see what's happening in the interest rates and also on maybe some potential demand on dollar denominated loans that could be a good alternative for allocation of those funds. But for the moment, we are not seeing that demand for dollar denominated loans. Right. And you mentioned different scenarios. Can you share your thoughts regarding what those scenarios could be? One is calling the bond that day, the other one is not calling the bond. Another one could be after the call date to buy back the bond. Partially, it will depends on market condition, on the rates, on economic activity in Argentina. So I would like to have your view on simple bank policies that are affecting banks' profitability like flow rates on deposits, credit lines with negative real rates. Do you expect them to remain in place for a long time? Also, your assumptions take into account the continuity of these policies? And a follow-up on that, in this highly regulated context, what's your commercial strategy? Does it make sense to gain market share? Thank you. Hi, Ramiro. For the moment, we are assuming that these regulations are going to be maintained. Of course, depending on the monthly inflation evolution of Argentina, we could see some fine tuning. But again, we are working with the scenario that the Central Bank does not want to change a lot his monetary strategy going forward. So we're assuming that in a big portion of this 2021, we are going to have to deal with these regulations. In terms of the commercial view, I think that well, you can see what's happening in part of 2020 that we decreased in real terms in our lending portfolio because we were not seeing that being aggressive was a good strategy for the bank and of course for the bank's profitability. So going forward, we are going to see if it is profitable for the bank to increase share, we are going for that. If not, we are going to continue as the last 2 quarters of the year. What we are assuming is that the recovery in the country is going to be a positive incentive for the bank to maybe marginally increase in market share with a positive impact on the P and L. Ladies and gentlemen, there are no further questions at this time. This concludes our question and answer session. I would now like to turn the conference back over to Nicholas Torres for final considerations. Thank you all for your interest in Banco Macro. We appreciate your time and look forward to speaking with you again. Good day. Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.