Earnings Call: Q3 2020

Dec 1, 2020

Earnings release

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's 3rd Quarter 2020 Earnings Conference Call. We would like to inform you that the 3Q 'twenty press release is available to download at the Investor Relations website of Banco Macro, www.macro.com.arrelaciones invasores. Also, 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. It is now my pleasure to introduce our speakers. Joining us from Argentina are Mr. Gustavo Manriquez, Chief Executive Officer Mr. Jorge Guarintze, 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 Q3 2020 conference call. Any comments 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 is available at our website. Q3 2020 press release was distributed yesterday and it's also available at our website. All figures are in Argentine, Texas and have been restated in terms measuring unit 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 as established by the Central Bank. For ease of comparison, figures of previous quarter 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 3rd quarter financial results. Banco Macro's net income for the quarter was ARS6.1 billion, 12% lower than in the Q2 of 2020 and 33% lower than the result posted a year ago. The bank's Q3 2020 accumulated ROE and ROA of 21.5 and 4.6 respectively remained healthy and show the bank's earnings potential. Net operating income before general and administrative and personal expenses for the Q3 of 2020 was ARS19.6 billion, decreasing 18% or ARS4.3 billion quarter on quarter and 5 percent or ARS1.1 billion lower than a year ago. Operating income after general and administrative expenses was ARS 4,400,000,000, 52 percent or ARS 4,800,000,000 lower than in the Q2 of 2020, but ARS 4,500,000,000 higher than in the Q3 of 2019. In the quarter, net interest income totaled ARS21.2 billion, 2 percent or ARS417 million lower than the result posted in the Q2 of 2020 and 26 percent or Ps. 7,600,000,000 lower than the result posted 1 year ago. The Q3 of 2020 interest income totaled ARS36.8 billion, 15 percent or ARS4.9 billion higher than in the Q2 of 2020 due to higher income from government securities and 28% or MXN 14,300,000,000 lower than the previous year. Within interest income, interest on loans decreased 9% or ARS1.7 billion quarter on quarter due to a 155 basis point decrease in the average lending rate, down to 30% from 31.5% in the Q2 of 2020, while the average volume of private sector loans decreased 5% in the quarter. Interest income decreased 23% or ARS 5,400,000,000 year on year. In Q3 of 2020, interest of loans represented 48% of total interest income. Net income from government and private securities increased 56 percent or ARS6 1,000,000,000 quarter on quarter due to higher income from government securities and higher volume. Compared to the Q3 of 2019, net income from government and private securities decreased 39% or ARS 11,000,000,000. In the Q3 of 2020, FX gains including investments in the derivative financing totaled a ARS 1,200,000,000 dollars gain due to the 8% Argentine peso depreciation against the U. S. Dollar and the bank's long spot dollar position. FX trading results continue to be impacted by stricter currency controls and regulations. In Q3 2020, interest expense totaled ARS 15,600,000,000, 52 percent or ARS 5,300,000,000 increase compared to the Q2 of 2020 and 30 percent or ARS6.8 billion lower on a yearly basis. Within interest expenses, interest and deposits increased 54 percent or ARS5.4 billion quarter on quarter, mainly driven by a 300 basis points increase in the average interest rates paid on deposits. The average federal rate increased 4.58 basis points quarter on quarter. On a yearly basis, interest on deposits decreased 28% or ARS 5,800,000,000. In the Q3 of 2020, interest on deposits represent 94% of the bank's financial expenses. As of the Q2 of 2020, the bank's accumulated net interest margin including FX was $20,300,000 lower than the $22,300,000 posted in the Q2 of 2020 and the ARS21.5 billion registered 1 year ago. The Q3 of 2020 net fee income totaled ARS5.3 billion, 5 percent or ARS 267,000,000 higher than in the Q2 of 2020. On a yearly basis, net fee income decreased 2% or ARS124 1,000,000. In 3Q 2020, net income from financial assets and liabilities at fair value to profit or loss totaled ARS7.5 billion loss as a consequence of the inflation adjustment applied to our LINK holdings. Higher inflation was observed in the quarter together with higher LINK volume. In the quarter, other operating income totaled ARS 1.2 1,000,000,000, increasing 3% compared to the Q2 of 2020. On a yearly basis, other operating income decreased 22% or ARS328 1,000,000. In 3Q 2020, Banco Macro's personal and administrative expenses totaled ARS9.6 billion, 3% or ARS299 1,000,000 higher than in the previous quarter due to higher administrative expenses. On a yearly basis, personnel and administrative expenses decreased 9% or ARS 9 0 4,000,000. In the Q3 of 2020, the efficiency ratio reached ARS 45.9, deteriorating from the ARS 41.6 posted in the Q2 of 2020. Excluding the financial adjustment on our Lalique Holdings shown under income from financial instruments and fair value to property or loss from the efficiency ratio, the efficiency ratio would have been 34.7% in the Q3 of 2020 and 33.7% in the Q2 of 2020. In the Q3 of 2020, bank's matter expected 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 3,900,000,000 quarter on quarter and 12% of ARS 31,900,000,000 year on year. Within commercial loans, others stand out with a 7% or ARS 2,800,000,000 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-nineteen pandemic. On the consumer side, credit card loans increased 8% or ARS 3,700,000,000 in the quarter. Within private sector financing, peso financing increased 2% or ARS 4,700,000,000 while US dollar financing decreased 32% or ARS 127 $1,000,000 It is important to mention that Bank of America's market share over private sector loans as of September 2020 reached 7.6%. On the funding side, total deposits increased 13% or COP 56,000,000,000 quarter on quarter and increased ARS138 1,000,000,000 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 29,400,000,000 quarter on quarter, while demand deposits decreased 6% or ARS 11,800,000,000. Within private sector deposits, peso deposits increased 6% or ARS 17,200,000,000 while U. S. Dollar deposits decreased 11% or 124 $1,000,000 As of September 2020, Banco Macro's transaction on accounts represented approximately 44% of total deposits. Bank of America's market share over private sector deposits as of September 2020 totaled 6.6%. In terms of asset quality, Bank of America's non performing to total financial 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 pro classification before a loan is considered as non performing. In terms of capitalization, Banco Macro came in an excess capital of MXN116.9 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 21, 2020, the Special Shareholders Meeting decided on a complementary dividend of up to ARS3.8 billion. The supplementary dividend is calculated by multiplying the ARS20 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 3,800,000,000 from the complementary dividend will be deducted from shareholders' equity in the Q4 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 total cost 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 our well optimized deposit base. At this time, we would like to take the questions you may have. We will now begin the question and answer session for investors and analysts. 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 Britos 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, decrease in the average lending rate and higher funding costs that are likely due to the floor on interest rates. So all these translated in NIM pressure in the quarter. So 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 Carinthi. Thanks for the condolences. In terms of your question, it is pretty clear that in the last, I would say, 3 quarters, these are kind of decline trend in the net interest margin and the net interest income, not only Banco Macro, but also in our peers. This is a consequence of the regulated changes capitalized by the Central Bank. Going forward, we expect in the Q4 of this year another slight contraction in the NIM compared to the 3rd quarter, basically on the latest change of the central bank that are impacting in the Q4. And going forward, we should we are expecting kind of stable, might be slightly decreasing margins in 2021. For the moment, we are not seeing any upside room in margins, having a kind of a risk of a backward looking view on the attitude of the Central Bank and that the regulation that they have been taking. So I would assume stable to slightly decreasing margins going forward. Thank you, Jorge. And then what about loan growth? When do you expect to have real loan growth? And then I have a second question in terms of asset quality, specifically NPLs. So after ending the relief programs, when do you expect to have a peak of NPLs next year? And 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%. So we are looking for real loan growth approximately 30% and deposit growth in real terms in the year 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 carbon ratio is in our view above more long term level, but 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. But for the moment, we are considering that between this first and second quarter of next year, we could see a peak in terms of NPLs. However, we are seeing kind of recovery in the second half of next year. Perfect. Thank you, Jorge. You're welcome, Renato. The next question is from Jason Marlin 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. And the system was probably more like 50%. Can you talk about how the business is evolving in the different geographies? Is the mix is there more going on outside of Buenos Aires relative to the past because of COVID and less lockdowns? And 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 BACT and the province of Buenos Aires. Then this area started to stabilize in the number of cases and there was a kind of increase in the provinces, mainly in Cordoba, Santa Fe, maybe Mendoza, some of the provinces, not all of them. But again, that increase of jam 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. But I would say that across the country, the number of cases and deaths have been pretty stable in the last, let's say, 2 weeks. In terms of economic activity, I mean, the recession that's 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. And of course, the agribusiness sector is having a momentum here. And of course, they are in the interior. So Santa Fe, Cordova, part of Entravillos, Mendoza are having a good recovery in that sense. So what we are expecting for next year is that the recovery in the interior is going to be similar or maybe slightly higher than maybe in BACET. Also the province of Buenos Aires is going to have a good performance there because of the agribusiness sector. But honestly, we are not seeing big, big differences between the recovery in the tier and in BICT. That's helpful. Much appreciated. Thanks. You're welcome, Jason. Good to hear you. You. The next question is from Gabriel Molgrade with Citigroup. Please go ahead. Hi, everyone. Good morning and thank you for So 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 $1,700,000,000 which you provisioned during this quarter, how much was only related to COVID? And then also related to that, given that you already have a very high coverage ratio, do you expect that maybe provisions in the 4th quarter and then going on towards 2021, they come back to levels of the Q1? Or are you going to maybe be a bit more conservative given that there could be a second wave? And I'll ask a second question afterwards. Thank you. Hi, Gabriel. How are you? I would say that most almost 100% of the provisions done in the quarter are related to the COVID pandemic. Honestly, we are still ongoing the Q4. We still it is pretty unclear what we are going to do in terms of provision in the Q4. 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 reached in the Q3. So we could see a reduction in this ratio maybe in the Q4 in 2021. The level that we posted in the Q3 was extraordinarily high. But 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 and we are going to keep on monitoring these very closely in order to maintain the good levels of other quality that we have been performing. Okay. Perfectly clear. And then I have another question on volumes as well. During this quarter, we saw that corporate loans continued to decrease due to the muted demand. But one thing which caught our attention here is that the retail portfolio has been increasing since the Q1, right? And it even increased this quarter as well. So I just wanted to understand here, if you are already starting to see higher demand specifically from 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 part of corporate loans that are in U. S. Dollars on pre finance to exports because of the behavior that we've seen in the dollar deposit 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. And when you see the numbers, they are those loans are included and mostly on corporates. On the peso lending to corporates, we continue to assist corporate 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. And then retail loans? Also next year, we're expecting also a recovery in consumption and retail loans. So the 30% real growth in loans are including increase in both corporate and retail. All right. Perfect. Thank you so much, Jose. You're welcome. The next question is from Alonso Garcia 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, I mean, we observed a slight pickup in the quarter compared to 2Q as the economy has been reopened, but still you are 2% down year over year. So 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 end of next year. And 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 build 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. So in terms of the fee income in nominal levels, we are going to be similar than 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 a kind of between 5% to 7% net fee growth in real term for next year. We are not expecting a huge increase in real term for Peace 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 of we are not involved in any active reduction plan, but since there are people that are retiring or moving to other jobs, For the moment, we have not replaced them. So 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 in loan growth, etcetera. So 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 that the increase that units are going to us in 2021. Remember that salaries are approximately 65% of total expenses. To give you an idea, in 2020, the total increase for salaries was 34% with inflation between 37% and 38%. So next year, if we have to guess, the increase that units might get is also going to be below slightly below inflation. So the idea to have a kind of control in real terms of expenses. Understood. Thank you very much. And just a follow-up in terms of loan growth, this 30% you mentioned is real for next year, right? So 30% above the question. Real in pesos, yes. All right. Thank you very much for that. 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 has now concluded. Thank you for attending today's presentation. You may now disconnect.