Earnings Call: Q2 2020

Sep 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 2nd Quarter 2020 Earnings Conference Call. We'd like to inform you that Q2 'twenty press release is available to download at the Investor Relations website of Banco Macro at www.macro.com dot arrelaciones Inversdios. Also, this event is being recorded and all participants It is now my pleasure to introduce our speakers for today. Joining us from Argentina are Mr. Gustavo Manriquez, Chief Executive Officer Mr. Jorge Scarunci, Chief Financial Officer and Mr. Nicolas Torres, IR. Now I will turn the call over to Mr. Nicolas Torres. You may begin your conference. Thank you. Good morning, and welcome to Banco Macro's 2nd quarter 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. 2nd quarter 2020 press release was distributed yesterday and is 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 January 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 at IAS 29 to reflect the cumulative effect of the inflation adjustment for each period through June 30, 2020. I will now briefly comment on the bank's Q2 2020 financial results. Banco Macro's net income for the quarter was ARS 6,400,000,000, 14% lower than in the Q1 of 2020 and 111% higher than the ARS 3,000,000,000 posted a year ago. The bank's Q2 2020 accumulated ROE and ROA of 23% and 5.2%, respectively, remained healthy and show the bank's earnings potential. Net operating income before general and administrative and personnel expenses for the Q2 of 2020 was ARS22.2 billion, decreasing 9% or ARS2.3 billion quarter on quarter, but 27 percent or ARS 4,700,000,000 higher than a year ago. Operating income after general and administrative expenses was ARS 8,500,000,000, 24 percent or ARS 2,700,000,000 lower than in the Q1 of 2020, but ARS 8,300,000,000 higher than in the Q2 of 2019. In the quarter, net interest income totaled ARS 20,000,000,000, 11% or ARS2.4 billion lower than the result posted in 1Q 'twenty and 19% or ARS1.6 billion lower than the result posted 1 year ago. In the Q2 of 2020, interest income totaled ARS 29,600,000,000, 9% or ARS 3,000,000,000 lower than in 1Q 'twenty due to lower income from loans and lower income from government securities and 36% or ARS 16,400,000,000 lower than the previous year. Within interest income, interest on loans decreased 12% or ARS2.5 billion quarter on quarter due to a 4 0 8 basis points decrease in the average lending rate down to 31.5% from 35.6% registered in the Q1 of 2020, while the average volume of the loan portfolio remained practically unchanged. Interest income decreased 17 percent or ARS 3,600,000,000 year on year. In Q2 of 2020, interest on loans represented 61% of total interest income. Net income from government and private securities decreased 12% or ARS 1,300,000,000 quarter on quarter due to lower income from private securities. Compared to the Q2 of 2019, net income from government and private securities decreased 56% or ARS 12,200,000,000. In the Q2 of 2020, FX gains, including investments in derivative financing, totaled ARS 805,000,000. Due to the 9% Argentine peso depreciation against the U. S. Dollar and the bank loan spot dollar position. FX trading results continued to be impacted by stricter currency controls and regulations. In the Q2 of 2020, interest expense totaled ARS9.6 billion, a 6% or ARS560,000,000 decrease compared to the Q1 of 2020 and 55 percent or ARS 11,800,000,000 lower on a yearly basis. Within interest expenses, interest on deposits decreased 6% or ARS 566,000,000 quarter on quarter, mainly driven by a 2 62 basis points decrease in the average interest rates paid on deposits. Rates came down from 16.3% in the Q1 of 2020 to 13.6% in the Q2 of 2020. On a year end basis, interest on deposits decreased 57% or ARS 11,300,000,000. In the Q2 of 2020, interest on deposits represented 91% of the bank's financial expenses. As of the Q2 of 2020, the bank's accumulated net interest margin, including FX, was 22.3%, lower than the 25.2% posted in the Q1 of 2020 and higher than 20% registered 1 year ago. In the Q2 of 2020, net fee income totaled ARS 4,600,000,000, unchanged from the Q1 of 2020. On a yearly basis, net fee income decreased 7% or ARS324 1,000,000. In the Q2 of 2020, net income from financial assets and liabilities at fair value of profit or loss totaled ARS 2,000,000,000 loss as a consequence of the inflation adjustment applied to our Leliq holdings. In the quarter, other operating income totaled ARS 1,100,000,000, decreasing 8% compared to the Q1 of 2020. On a yearly basis, other operating income increased 11% or ARS137 1,000,000. The Q2 of 2020 Banco Macro's personal and administrative expenses totaled ARS 8,600,000,000, 11% or ARS 840,000,000 higher than the previous quarter due to higher expenses related to employee benefits and higher administrative expenses. On a yearly basis, personnel and administrative expenses decreased 18% or ARS 1,900,000,000. In the Q2 of 2020, the efficiency ratio reached 43.3%, deteriorating from the ARS 39.8% posted in the previous quarter. Excluding the inflation adjustment on our Alelix holding, shown under an income from financial instruments at fair value to profit or loss, From the efficiency ratio calculation, the efficiency ratio would have been 37.2% in the Q2 of 2020 and 31.6% in the Q1 of 2020. In the Q2 of 2020, Banco Macro's effective tax rate was $28,900,000 lower than the $35,800,000 registered during the Q1 of 2020. In terms of loan growth, the bank's financing to the private sector decreased 5% or ARS 12,200,000,000 quarter on quarter and 12% or ARS 30,400,000,000 year on year. Within commercial loans, others stand out with a 30% or ARS9 1,000,000,000 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, personal and credit card loans decreased 5% and 3%, respectively, in the quarter. Within private sector financing, peso financing increased ARS244,000,000 while U. S. Dollar financing decreased 36% or $232,000,000 It is important to mention that Banco Macro's market share over private sector loans as of June 2020 reached 7.5%. On the funding side, total deposits increased 24 percent or ARS 70,000,000,000 quarter on quarter and increased ARS 214,000,000 year on year. Private sector deposits increased 16% quarter on quarter, while public sector deposits increased 107% quarter on quarter. The increase in private sector deposits was led by time deposits, which increased 18% or ARS23.5 billion quarter on quarter, while demand deposits increased 13% or ARS20,500,000,000. Within private sector deposits, peso deposits increased 24 percent or ARS 52,300,000,000 while US dollar deposits decreased 15% or ARS179 1,000,000. As of June 2020, Banco Macro's transactional accounts represented approximately 49% of total deposits. Banco Macro's market share of the private deposits as of June 2020 totaled 6.3%. In terms of asset quality, Bank of America's non performing total financial ratio reached 1.52%. The coverage ratio measured as total allowances under expected credit losses over non performing loans under Central Bank rules improved significantly and totaled 210.64%. Asset quality continues to be positively affected by recent pressures 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 or classification before a loan is considered as non performing. In terms of capitalization, Banco Macro accounted an excess capital of ARS101 billion, which represented a total regulatory capital ratio of 32.1 and a Tier 1 ratio of 25%. The bank's aim is to make the best use of this excess capital. Bank's liquidity remains more than appropriate. Liquid assets total deposit ratio reached 54%. Overall, we have accounted for another positive quarter. We continue showing a solid financial position. Asset quality remained under control and closely monitored. We keep on working to improve more our efficiency standards and we keep up well atomized deposit base. At this time, we would like to take the questions you may have. And our first question today will come from Ernesto Gabilondo with Bank of America. Please go ahead. Hi, good morning, Gustavo, Jorge and Nicolas. Hope you're well. My first question is on provision charges. Can you elaborate on how much of the total loan portfolio has been related to deferrals in commercial and consumer loans, refinance credit cards and with the support to SMEs. Do you have an estimate of how much additional provisions have been created this year based on expected losses? And how much does that represent of your total loan portfolio? Also, how much do you estimate that the additional provisions represent of the loan book that has been subject to deferrals, refinance credit cards and to support with SMEs? Then my second question is on margins. Where do you see interest rates by year end? And how do you see the potential impacts on margins for this and next year? And then my last question is on expenses. How should we think about this line during the year? Are you evaluating to reduce personnel or branches to mitigate some of the potential impacts of the pandemic? Thank you. Hi, Ernesto. How are you? Thanks for your questions. We can start with your second question about margins and interest rates. What we're expecting for interest rates by year end is a slight increase basically because what the market is expecting is a kind of a pickup in the monthly inflation index. So we believe that there should be a slight increase in nominal interest rates by year end. Even though that we are seeing in terms of margins some kind of slight contraction in the 3rd quarter because there were some increase in deposit interest rates, while Delek's or the repo's interest rates remain unchanged. So we are foreseeing that in the Q3, we are going to see an additional compression in the net interest margin. However, for the Q4, depending on how the nominal rates behave, we could see some stability or might be a little bit of widening or recovering the portion of the margin that we lost in the second and third quarter. On your third question related to expenses, what we are expecting for the rest of the year is to continue I mean, having a very close eye on expenses, both on personnel and other administrative expenses. We are not we do not have any official program on layoff or closing down branches, even though that's as we have been doing the last several years, we try to be extremely efficient in our cost controls and that's why the idea of the management and the Board, of course, is to continue showing excellent level of efficiency going forward as we have been showing the numbers of the last quarters. In terms of your first question that was divided in 2 or 3 different questions. In terms of the provisions charges that we are doing in the Q2, we increased the provisions compared to the Q1, mainly because of the consequences of the COVID-nineteen that I think that worldwide is very unknown. All the consequences that we are going to have in the next, I don't know, 6, 12, 18 months or 24 months. So we have increased that provisioning level. Also, we highlight that we will reach a coverage ratio of 2 10%. But I mean the message here is that we are closely monitoring also asset quality. As we have been stating many times, we are local bank and we have to be a bit more conservative than maybe other international banks in the sense that we cannot ask for extra money in case of a crisis to any headquarters abroad. So we have to be very conservative in that front. So we are on a daily basis monitoring the asset quality and the evolution of that. And for the moment, we are we feel very comfortable of the situation that we are having in the bank. In terms of loans that were reprogrammed, we can include or add some additional information by e mail if you want, but just not to enter into many details, dollars 700,000,000 in corporates or companies, $22,500 in consumer and $50,000 in credit cards. That's the big numbers on the loans that have been reprogrammed. And do you have an estimate given that you build additional provisions in Q2 when compared to the Q1? Do you know how much of these additional provisions are to the loan book that's been subject to deferrals or the refinance credit cards or will that support in SMEs? Let me go into those numbers. There's something that we put in the press release there in the paragraph talking about the at the beginning in Page number 4 about the provisions. You can have some details there just not to maybe take other people's question. But you can go to Page number 4 of our press release. There is a paragraph there that we are putting some info. But in case that you need additional one, please contact us as we can provide it. Yes, perfect. Thank you, Jorge. Because I saw that it was practically the amount that you break down that was registered as provision charges in the 2nd quarter. It was close to ARS 2,200,000,000 of foreign time pesos. So just wanted to understand maybe that, that breakdown was more related to the loan book that could be at risk and that you are considering some part of provisions to that loan book at risk. But I agree that maybe we can follow-up later, truly understand how much additional provisions have been built to this loan book. Thank you. You're welcome, Alberto. And our next question will come from Gabriel da Nobrega with Citigroup. Please go ahead. Hi, everyone. Good afternoon and thank you for the opportunity to ask questions. I actually have two questions on asset quality. The first one, when we look at your NPL ratios, they actually increased this quarter. And for us, this is a bit strange because even with the flexibilization that the BCRA has given to you And we also saw other of your peers seeing NPL ratios decreasing. It was a bit weird seeing that your NPL ratios deteriorated this quarter. So if you could just elaborate and then give us some more color of what's happening here. And also if you could maybe give us the figure of your NPL ratios without the flexibilization of the 60 days that would help us a lot? As for my second question, it is actually a follow-up regarding provisions. We understand that you already made these unsizable provisions this quarter. But looking forward, are you comfortable with your coverage ratio? Or are you expecting to maybe have to continue making higher provisions due to the higher delinquency we are going to see? Thank you. Hi, Gabriel. Thanks for your questions. On your first question, honestly, we think that a quarterly increase from 136 to 152 considering the recession that we are having worldwide more in Argentina plus the COVID-nineteen, we do not take that as a big deterioration as a quality. I think that is something normal. Congrats to our peers if they show some decrease there. Honestly, it depends the quarter or the timeframe that you are taking. We think that 152 with a coverage of 210 are showing excellent levels. And again, we feel extremely comfortable to how we are managing the asset quality on the bank as well as we have been doing this in past crisis. And going forward in the Q3, we think that we might include some additional provisions. Honestly, we don't know as much as the one that we did in the 2nd quarter. But again, we still do not know, I think that this is something that the world is wondering, the total effects on this pandemic and the implications on the economy with the additional thing that the recession that we are ongoing in Argentina and the spike that we are foreseeing with inflation by the end of the year, depending on the new economic program is what we are going to see for next year in terms of economic activity. So overall, we think that in terms of asset quality, we are doing fine with additional provisions in the Q3, maybe not as much as in the one that we put in the segment. And again, the NPL ratio deterioration on a quarterly basis, we think that is pretty normal considering the scenario that we are ongoing. Perfect. Could you just tell us what would be your NPL ratio if you had not had the waiver of the Central Bank? Yes. Honestly, we're not taking the exact number, but should be between 2.63.2, approx. Perfect. Perfect. Thank you so much. You're welcome, Gabriel. And our next question will come from Alfonso Garcia with Credit Suisse. Please go ahead. Good morning, everyone. Thank you for taking my question. My question is actually on loan growth. Just wanted to hear your thoughts on how you see volumes evolving from here. I mean, so far, loans are 10% down year over year. You are underperforming some of your main peers. So wanted to see your thoughts on how should we see loan growth evolving over here and what segments should drive growth in the coming quarters? And regarding the special credit line for SMEs at 24%, If you think most of that is already done or do you think you will continue uniting strongly on that front? Thank you. Hi, Alfonso. Thanks for your question. In terms of loan growth, we also provided information in the press release about the total loan growth comparison between the former quarter and 1 year ago. But in addition, we also put the behavior of Peso loans and also U. S. Dollar loans. There you can see that the total loan behavior is extremely influenced by the decline in dollar denominated loans. If you look at the peso loan behavior, we grew 1% quarter on quarter and 11% year over year. So going forward, we think that in the peso loan book, we are going to continue showing slightly positive numbers here. We think that there could be some statistic recovery by the Q4 of this year, again, depending on how the COVID-nineteen affects the economy, but if we are going to enter in a more or less strict phase of the pandemic. We are seeing some recovery in the Q4. In addition, on the dollar denominated loan portfolio, we think that we are going to continue decreasing in that area basically because margins in the dollar business are extremely low and we are not incentivizing that business. But on the peso, we are seeing positive numbers on in real terms going forward for the 3rd Q4. And in terms of sorry about the second question, in terms of SMEs, I mean, if there is a recovery, this is going to be a recovery across the board. SMEs, we think they are the ones that have been more affected by the recession and the pandemic. So the level of credit in that level is very low. So I think that if the perspective or the landscape for both the pandemic and the recovery of the economy are better, we are going to see a bit more demand coming from SMEs. Still at least 24% interest rate as part of this program? Yes. And our next question will come from Nicolas Riva with Bank of America. Please go ahead. I have a follow-up on the prior questions about all these loan reprogramings. Can you give us a bit of an idea? You already mentioned that the actual NPL ratio would be probably between 2.6% and 3.2% if you were to include all these loan reprogramings as NPLs. Can you give us an idea in terms of next steps, the future steps for these reprograms? Loan book, for example, I mean, you're already 2 months into the Q3. Should we expect to see more of these grace periods in loan reprograms in the Q3. When would you expect to start unwinding some of these measures given everything that's going on in Argentina and everything that was going on even before we ended the COVID-nineteen pandemic in Argentina? And then the second question, it's about deposits. If I look at the deposits from the public sector, and we know that you are financial agent for a number of provinces in Argentina. I see that the deposits from the public sector basically doubled or more than doubled in the Q2 versus the prior quarter. Any color on that? Did you get like a new contract with any of with Aperolius as a financial agent or any changes to existing contract that justify the big change? Thank you. Nicolas, thanks for the questions. On your first question in terms of NPLs, we are seeing some in the Q3 some additional new reprogramming on some balances on the credit cards. Honestly, going forward, I think that this time of programs are going to be maintained until the economy start to pick up again. I think that the government is committed to allow people to extend the payments on credit cards and on personal loans in order to see not to see a big spike in terms of NPLs. So meanwhile, we are going to see this program to be maintained. Honestly, the one that I mentioned about credit cards has happened last week. Going forward, we do not have an official information about new reprogramming or extension in installments or whatever. But again, we think that the government is committed to help people and companies in order to transit this recession and pandemic period as best as possible. In terms of your second question, the increase in the public sector deposits are mainly driven by the ANSES that is the fund that is managing the retirees money that has been depositing or making time deposits in Banco Macro in a higher speed than the ones that we saw in the previous quarters. So that is the main reason of the increase in public sector deposits, basically 30 days or 40 days time deposit in pesos. Okay. Thanks very much, Jorge. You're welcome, Nicolas. And our next question will come from Yuri Fernandes with JPMorgan. Please go ahead. Thank you, Jorge and Nicolas. I have a question regarding margins. If I understood correctly, you said margins may slightly go up because of higher rates. And I believe the mix shift of local currency loans may also help on that regards. But what about the time deposits? I know it's like 35% to 40 percent of your loans, but the new regulation, should be a headwind, right, like the minimum remuneration. So just asking if you have taking that into account when you said margins should likely recover. And my second question is regarding the province is right, like if you can give us a color on how Santa Fe, Cordoba, Salt, like the main provinces in which macro operates are behaving regarding on growth and asset quality. When you compare versus Buenos Aires, do you think it's fair to say that those regions are doing better or no? Like what can you tell us about your geographic exposure? Thank you. Hi, Judy. Thanks for the questions. No, I mean, in terms of margins, what I mentioned is that in the Q3, we're going to see additional compression in margins, basically of the minimum because of the minimum time deposit rate and also because the Teleleaks and repo rates remain unchanged. However, in the Q4, if nominal rates are going to go up as we are expecting, depending on the range that we are seeing those rates going up in the leagues and repos and also deposits, margins could remain stable or slightly expanding. That is what I mentioned before. In terms of your second question about the provinces, you know that in terms of our spending, 80% of our business is basically in the interior of the country. A very small portion is in the area of the city and the province of Buenos Aires. So for the moment, what we are seeing that in the interior, the situation is kind of similar of the Buenos Aires Province in the sense that the only sector that is doing good, let's say, is the Greek agriculture sector. The rest of the sectors are showing some decline in terms of activity compared to last year, but we are not seeing any province with any dramatic problem of any specific sector. So I would say that for the moment, there is kind of a parallel or similar situation between the most important provinces of the interior and the Buenos Aires province. Okay. So no tailwinds and no headwinds coming from the provinces, right? You're behaving very similar to your peers that are more exposed to the Buenos Aires region, right? Not for the moment. Okay. Thank you. You're welcome. And our next question will come from Carlos Gomez with HSBC. Please go ahead. Hi, good morning. A couple of questions. 1 on your capital, your book value, we see there is a decline or rather stabilization, I think, in nominal terms within the first and the second quarter, any big changes there? And have you restated the Q1 because we don't exactly the same number that you get into the restated figures. So that is the book value. 2nd, regarding the dividend, we understand that you have provision for it, but it's still pending approval. We wanted to know if you have any news about that. And finally, on the line of loan at 24%, do you consider that you are making any type of return on that? Or that's just the cost of doing business and you accept negative return at this point? Thank you. Hi, Carlos. How are you? In terms of first question about the book value or the capital, we deducted the amount of the dividends there. So that's why you are seeing a decline in the nominal level. And also we adjusted at the Q1. So that's the difference in the period that we are seeing. In terms of the dividend, it's still pending. We for the moment, we do not have additional information coming from the Central Bank when this dividend is going to be allowed or approved to be paid. So honestly, no additional information there. In terms of the 24% credit line, remember that we have some additional reserve requirements benefits there. So the 24% nominal interest rate that we are extending the loans, if you add the benefits of some reserve requirements, it goes up to 38%, similar to the release interest rate. So meanwhile, these benefits are being sustained. We are going to continue extending this credit line. Of course, the Central Bank knows that there's a limit for that. So if the Central Bank wants to continue to see banks incentivizing these 24% credit line, they will have to add other incentives or benefits in order to take the 24% interest rates to more reasonable levels. All right. And our next question will come from Juan Ricalde with Scotiabank. Please go ahead. Hi. Thank you for taking my questions. My question will be related to the result from U. S. Monetary position. We've seen that you have had a positive impact of around BRL400 1,000,000 in this quarter. It was around BRL300 1,000,000 in the previous quarter. So inflation, as you mentioned, inflation is expected to pick up in the rest of the year. So how should we think about the aside from net monetary position in the coming quarters? Thank you. Hi, Juan. How are you? Let me give you if you take consideration all the inflation impacting all the balance because here because of Central Bank regulation, we have to put part in one side of the income statement, another part of the inflation adjustments on another part. If you put all together, we are having a negative impact on inflation going forward. I would say that the negative number is going to increase depending on the level of inflation that we think is going to go slightly up plus the behavior of the monetary assets and liabilities. Honestly, it's not very easy to forecast this number. It's going to be negative in the range of, I would say, the average that we see between the second and third quarter. And this concludes our question and answer session. I'd like to turn the conference back over to Mr. Nicolas Torres for any closing remarks. Thank you all for your interest in Banco Macro. We appreciate your time and look forward to speaking with you again. Good day. And the conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.