Good morning, ladies and gentlemen. Thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's third quarter 2020 earnings conference call. We would like to inform you that the 3Q 2020 press release is available to download at the investor relations website of Banco Macro, www.macro.com.ar/relaciones-inversores. This event is being recorded, and all participants will be in 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. Should any participant need assistance during this call, please press star zero to signal the operator. It is now my pleasure to introduce our speakers. Joining us from Argentina are Mr. Gustavo Manriquez, Chief Executive Officer, Mr. Jorge Scarinci, Chief Financial Officer, and Mr. Nicolas Torres, IR. I will turn the conference over to Mr. Nicolas Torres.
You may begin your conference.
Good morning and welcome to Banco Macro's third quarter 2020 conference call. Any comment we may make today may include forward-looking statements, which are subject to various conditions, and these are outlined in our 20-F, which was filed to the SEC and it's available at our website. Third quarter 2020 press release was distributed yesterday and it's also available at our website. All figures are in Argentine pesos and have been restated in terms of the measuring unit current at the end of the reporting period. As of the first quarter of 2020, the bank began reporting results applying hyperinflation accounting in accordance with IFRS IAS 29, as established by the Central Bank. For ease of comparison, figures of previous quarters of 2019 have been restated applying IAS 29 to reflect the accumulated effect of inflation adjustment for each period through September 30, 2020.
I will now briefly comment on the bank's third quarter financial results. Banco Macro's net income for the quarter was ARS 6.1 billion, 12% lower than in the second quarter of 2020, and 33% lower than the result posted a year ago. The bank's third quarter 2020 accumulated ROE and ROA of 21.5 and 4.6, respectively, remain healthy and show the bank's earnings potential. Net operating income before general and administrative and personal expenses for the third quarter of 2020 was ARS 19.6 billion, decreasing 18% or ARS 4.3 billion quarter-on-quarter, and 5% or ARS 1.1 billion lower than a year ago. Operating income after general and administrative expenses was ARS 4.4 billion, 52% or ARS 4.8 billion lower than in the second quarter of 2020, but ARS 4.5 billion higher than in the third quarter of 2019.
In the quarter, net interest income totaled ARS 21.2 billion, 2% or ARS 417 million lower than the result posted in the second quarter of 2020, and 26% or ARS 7.6 billion lower than the result posted one year ago. The third quarter of 2020 interest income totaled ARS 36.8 billion, 15% or ARS 4.9 billion higher than in the second quarter of 2020 due to higher income from government securities and 28% or ARS 14.3 billion lower than the previous year. Within interest income, interest on loans decreased 9% or ARS 1.7 billion quarter-over-quarter due to a 155 basis point decrease in the average lending rate, down to 30% from 31.5% in the second quarter of 2020. While the average volume of private sector loans decreased 5% in the quarter. Interest income decreased 23% or ARS 5.4 billion year-over-year.
In third quarter of 2020, interest on loans represented 48% of total interest income. Net income from government and private securities increased 56% or ARS 6 billion quarter-on-quarter due to higher income from government securities and higher volume. Compared to the third quarter of 2019, net income from government and private securities decreased 39% or ARS 11 billion. In the third quarter of 2020, FX gains, including investments in the regulatory financing, total at ARS 1.2 billion gain due to the 8% Argentine peso depreciation against the US dollar and the bank's long spot dollar position. FX trading results continue to be impacted by stricter currency controls and regulations. In third quarter 2020, interest expense totaled ARS 15.6 billion, 52% or ARS 5.3 billion increase compared to the second quarter of 2020, and 30% or ARS 6.8 billion lower on a yearly basis.
Within interest expenses, interest on deposits increased 54% or ARS 5.4 billion quarter-on-quarter, mainly driven by a 300 basis points increase in the average interest rates paid on deposits. The average borrow rate increased 458 basis points quarter-on-quarter. On a yearly basis, interest on deposits decreased 28% or ARS 5.8 billion. In the third quarter of 2020, interest on deposits represent 94% of the bank's financial expense. As of the second quarter of 2020, the bank's accumulated net interest margin, including FX, was 20.3% lower than the 22.3% posted in the second quarter of 2020 and the 21.5% registered one year ago. The third quarter of 2020, net fee income totaled ARS 5.3 billion, 5% or ARS 267 million higher than the second quarter of 2020.
On a yearly basis, net fee income decreased 2% or ARS 124 million. In 3Q 2020, net income from financial assets and liabilities at fair value to profit or loss totaled at ARS 7.5 billion loss, as a consequence of the inflation assessment 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 1.2 billion, increasing 3% compared to the second quarter of 2020. On a yearly basis, other operating income decreased 22% or ARS 328 million. In 3Q 2020, Banco Macro's personal and administrative expenses totaled ARS 9.6 billion, 3% or ARS 299 million higher than the previous quarter, due to higher administrative expenses. On a yearly basis, personal and administrative expenses decreased 9% or ARS 904 million.
In the third quarter of 2020, the efficiency ratio reached 45.9, deteriorating from the 41.6 posted in the second quarter of 2020. Excluding the inflation adjustment on our LELIQ holdings, shown under income from financial instruments and fair values through profit or loss from the efficiency ratio, the efficiency ratio would have been 34.7 in the third quarter of 2020 and 33.7 in the second quarter of 2020. In the third quarter of 2020, Banco Macro's effective tax rate was 34.2, higher than the 28.9 registered in the previous quarter. In terms of loan growth, the bank's financing to the private sector decreased 2% or ARS 3.9 billion quarter-on-quarter, and 12% of ARS 31.9 billion year-on-year.
Within commercial loans, others stand out with a 7% or ARS 2.8 billion increase quarter-on-quarter, mainly due to the loans extended to SMEs at a 24% interest rate as part of the relief package given the COVID-19 pandemic. On the consumer side, credit card loans increased 8% or ARS 3.7 billion in the quarter. Within private sector financing, peso financing increased 2% or ARS 4.7 billion, while US dollar financing decreased 32% or $147 million. It is important to mention that Banco Macro's market share over private sector loans as of September 2020 reached 7.6%. On the funding side, total deposits increased 13% or ARS 56 billion quarter-on-quarter, and increased ARS 138 billion year-on-year. Private sector deposits increased 4% quarter-on-quarter, while public sector deposits increased 64% quarter-on-quarter.
The increase in private sector deposits was led by time deposits, which increased 17% or ARS 29.4 billion quarter-on-quarter, while demand deposits decreased 6% or ARS 11.8 billion. Within private sector deposits, peso deposits increased 6% or ARS 17.2 billion, while US dollar deposits decreased 11% or $124 million. As of September 2020, Banco Macro's transactional accounts represented approximately 44% of total deposits. Banco Macro's market share over private sector deposits as of September 2020 totaled 6.6%. In terms of asset quality, Banco Macro's non-performing to total financing ratio reached 1.14%, and the coverage ratio measured as total allowances under expected credit losses over non-performing loans under Central Bank rules improved significantly and totaled 302.9%.
Asset quality continued to be positively affected by recent measures adopted by the Central Bank of Argentina in the current pandemic 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, Banco Macro accounted an excess capital of ARS 116.9 billion, which represented a total regulatory capital ratio of 34.8% and a Tier 1 ratio of 27.3%. It should be noted that on October 21st, 2020, the special shareholders meeting decided on a complementary dividend of up to ARS 3.8 billion. The supplementary dividend is calculated by multiplying the ARS 20 per share dividend already declared and approved by the shareholders meeting held in April by the variation in the consumer price index between April and the date in which the Central Bank's approval is granted.
The ARS 3.8 billion from the complementary dividend will be deducted from shareholders' equity in the fourth quarter of 2020. The Bank's aim is to make the best use of this excess capital. The Bank's liquidity remained more than appropriate. Liquid assets to total deposit ratio reached 87%. 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.
We will now begin a question and answer session for investors and analysts, if you would like to ask a question please press star one on your touch-tone phone, if you are using a speaker phone, please take up your handset before pressing any key, to withdraw your question please press star then two. At this time we will pause momentarily to assemble our roster. Our first question comes from Ernesto Gabilondo with Bank of America. Please go ahead.
Hi, good morning, Jorge and Nicolas. My sincere condolences to the Brito family, and thanks for the opportunity. My first question is on NIMs and net interest income growth. During the quarter, we noticed loan book contraction, a decrease in the average lending rate, and higher funding costs that are likely due to the floor on interest rates. All this translated in NIM pressure in the quarter. How should we think about NIM and the trend in the net interest income in the next quarters, and when do you expect to see real loan growth again?
Hi Ernesto, good morning. This is Jorge Scarinci. Thanks for the condolences. In terms of your question, it has been pretty clear that in the last, I would say three quarters, there's a kind of decline trend in the net interest margin, and the net interest income, not only Banco Macro, but also in our peers, is a consequence of the regulatory changes carried out by the Central Bank. Going forward, we expect in the fourth quarter of this year, another slight contraction in the NIM, compared to the third quarter. Basically, on the latest change of the Central Bank that are impacting in the fourth quarter. Going forward, we are expecting stable, might be slightly decreasing margins in 2021.
For the moment, we are not seeing any upside room in margins, having a backward-looking view on the attitude of the Central Bank and the regulations that they have been taking. I would assume stable to slightly decreasing margins going forward.
Yeah. Thank you, Jorge. What about the loan growth? When do you expect to have real loan growth? I have a second question in terms of asset quality, specifically NPLs. After ending the relief programs, when do you expect to have a peak of NPLs next year? What should be approximately that level of NPL ratio?
In terms of loan growth for next year, we are assuming consensus on GDP growth in real terms in the area of 5% for 2021. Considering that, also, market consensus of inflation for next year is in the area of 50%. We are looking for real loan growth, approximately 30%, and deposit growth in real terms in the area of 20%, 25%. In terms of asset quality, according to the numbers we have been releasing, we are acting in a very conservative way. We have to say that the cover ratio is, in our view, above more long-term level. Of course, considering what is going on with the pandemic and the recession in Argentina, we became more conservative there. The peak for NPLs, we have to wait to see the evolution of the pandemic here because there is a second round in the U.S. and Europe.
We don't know if that is going to happen in Latin America, in Argentina. For the moment, we are considering that between the first and second quarter of next year, we could see a peak in terms of NPLs. We are seeing a kind of recovery in the second half of next year.
Perfect. Thank you, Jorge.
You are welcome, Ernesto.
The next question is from Jason Mollin with Scotiabank. Please go ahead.
Yes, hi. Thanks for the opportunity, Jorge, Nicolas. My question is on the business mix geographically. The last numbers I remember from some time ago was Banco Macro had something like 85, almost 90% of its ATMs, and 80% of its branches outside of the province of Buenos Aires. The system was probably more like 50%. Can you talk about how the business is evolving in the different geographies? Is there more going on outside of Buenos Aires relative to the past because of COVID-19 and less lockdowns? Is there the opportunity for more recovery in Buenos Aires, if in fact, we move forward and things get better?
Hi, Jason, how are you? What we have seen according to the pandemic is the first wave was stronger in BA City and the province of Buenos Aires. This area started to stabilize in the number of cases, and there was an increase in the provinces, mainly in Córdoba, Santa Fe, maybe Mendoza, Salta. Some of the provinces, not all of them. Again, that increase or jump that we saw in the provinces are being stabilized again here. Again, the big concern is what is going to happen next year in autumn, if we are going to have a second wave or not. I would say that, across the country, the number of cases and death has been pretty stable in the last, let's say, two weeks. In terms of economic activity, the recession that happened in Argentina was across the board.
We have to say that as a positive for the interior, we have to say that commodity prices are much higher. The agribusiness sector is having a momentum here, and of course, they are in the interior. Santa Fe, Córdoba, part of Entre Ríos, Mendoza, are having a good recovery in that sense. What we are expecting for next year is that the recovery in the interior is going to be similar or may be slightly higher than maybe in BA City. Also, the province of Buenos Aires is going to have a good performance there because of the agribusiness sector. Honestly, we are not seeing big differences between the recovery in the interior and in BA City.
That's helpful. Much appreciated. Thanks.
You are welcome, Jason. Good to hear you.
The next question is from Gabriel Nobrega with Citigroup. Please go ahead.
Hi, everyone. Good morning, and thank you for the opportunity to ask questions. I actually have another question related to asset quality as well. We saw during this quarter that you continued on making higher provisions. Even though you comment in your press release that you created additional provisions, could you just maybe tell us out of the ARS 1.7 billion, which you provisioned during this quarter, how much was only related to COVID? Also, related to that, given that you already have a very high coverage ratio, do you expect that maybe provisions in the fourth quarter and going on towards 2021, they come back to levels of the first quarter, or are you going to maybe be a bit more conservative given that there could be a second wave? I'll ask a second question afterwards. Thank you.
Hi, Gabriel, how are you? I would say that almost 100% of the provisions done in the quarter are related to the COVID pandemic. Honestly, we are still ongoing the fourth quarter. It is pretty unclear what we are going to do in terms of provision in the fourth quarter. I would say that we are going to try to maintain a coverage ratio maybe higher than the level we have been stating in previous years without the pandemic. Honestly, this ratio could be slightly lower than the one that we reach in the third quarter. We could see a reduction in this ratio, maybe in the fourth quarter in 2021. The level we posted in the third quarter was extraordinarily high.
We are going to maintain the same attitude and policy related to asset quality that we have been carrying out in the last years, in the sense that we always try to be as much conservative as we can. Of course, the pandemic is a dynamic process. We are going to keep on monitoring this very closely in order to maintain the good levels of asset quality that we have been performing.
Okay. Perfectly clear. I have another question on volumes as well. During this quarter, we saw that corporate loans continued to decrease due to the muted demand. One thing which caught our attention here is that the retail portfolio has been increasing since the first quarter, right? It even increased this quarter as well. I just wanted to understand here, if you are already starting to see higher demand specifically for retail loans, or did something change in your risk appetite?
No, I would say that in terms of the corporate loans, to take into consideration is that there are parts of corporate loans that are in US dollars on pre-finance to exports. Because of the behavior that we've seen in the dollar deposits that have been going out from, not only from Banco Macro, but of the system at all, banks have been reducing the pre-finance to exporters. When you see the numbers, those loans are included and mostly on corporates. On the peso lending to corporates, we continue to assist corporates that basically are demanding this type of peso loans only for working capital. We are not seeing investment for the moment. Going forward, next year, in the forecast that I gave for real loan growth, we're including there a more or higher demand from corporates coming from peso loans.
Retail loans?
Also next year, we're expecting also a recovery in consumption and retail loans. The 30% real growth in loans are including increase in both corporate and retail.
All right. Perfect. Thank you so much, Jorge.
You're welcome.
Again, if you have a question, please press star, then one. The next question is from Alonso García with Credit Suisse. Please go ahead.
Thank you. Good morning, everyone. Thank you for taking my question. My questions are actually regarding the fee line and the OpEx line. Regarding fees, we observed a slight pickup in the quarter compared to 2Q as the economy has been reopened. Still you are 2% down year-over-year. I wanted to understand how do you see dynamics for next year, considering that, as you mentioned in your press release, you will be allowed by the Central Bank to increase fees by the beginning of next year. Also on the OpEx side, I just want to understand how much of this reduction in real terms in OpEx year-over-year is related to the lower activity given the pandemic, or how much of this negative real growth in OpEx is sustainable and can be expected for 2021 and onwards. Thank you very much.
Hi, Alonso. In terms of fees, yes, we are in a continuous negotiation with the Central Bank in terms of trying to have a fee increase, the most related to the inflation figure as much as we can. In terms of the fee income in nominal levels, we are going to be similar than the inflation level for next year. In real terms, we are going to keep on working on fee expenses, trying to reduce that in order to have a net fee increase in real terms in 2021. Of course, if that is the scenario, we believe that we could have between 5%-7% net fee growth in real terms for next year. We are not expecting a huge increase in real terms for fees for next year.
In terms of expenses, well, in the last year, what you have noticed is also a kind of a reduction in the number of employees because we are not involved in any active reduction plan, but there are people that are retiring or moving to other jobs. For the moment, we have not replaced them. The number of employees has gone down in the last year. Going forward, we are going to monitor the level of the activity in the country, the recovery of the activity, the recovery loan growth, et cetera. The idea is to keep expenses under control as much as we can. In terms of salaries, for the moment, it's not pretty clear the increase that unions are going to ask in 2021. Remember that salaries are approximately 65% of total expenses.
To give you an idea, in 2020, the total increase for salary was 34%, with inflation between 37% and 38%. Next year, if we have to guess, the increase that unions might get is also going to be slightly below inflation. The idea to have a kind of control in real terms of expenses.
Understood. Thank you very much. Just a follow-up, in terms of loan growth, this 30% you mentioned is real for next year, right? 30% above inflation.
Yes. Real in pesos. Yes.
All right. Thank you very much, Jorge.
You're welcome, Alonso.
There are no further questions at this time. This concludes the question and answer session. I will now turn over to Mr. Nicolas 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.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.