Earnings conference call. We would like to inform you that the first quarter 2020 press release is available to download at the investor relations website at Banco Macro, www.macro.com.ar/relaciones-inversores. This event is being recorded. All participants will be in listen-only mode during the company's presentation. After the company's remarks are completed, there'll 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 then zero to signal an 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 from Investor Relations. I would now like to turn the conference over to Mr. Nicolas Torres. You may begin.
Good morning, welcome to Banco Macro's First 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. First 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 the inflation adjustment for each period through March 31st, 2020.
I will now briefly comment on the bank's first quarter 2020 financial results. Banco Macro's net income for the quarter was ARS 7.1 billion, 15% higher than in 4Q19, and 80% higher than the ARS 3.9 billion posted a year ago, based on an increase in net interest income. The bank's first quarter 2020 accumulated ROE and ROA of 27.3% and 4.9%, respectively, remained healthy and showed the bank's earnings potential. Net operating income before general and administrative and personal expenses for first quarter of 2020 was ARS 23.3 billion, decreasing 25% or ARS 7.6 billion quarter-on-quarter, but 16% higher than a year ago. Operating income after general and administrative expenses and personal expenses was ARS 10.7 billion, 31% or ARS 4.8 billion lower than in the fourth quarter of 2019, but 68% or ARS 4.3 billion higher than in the first quarter of 2019.
In the quarter, net interest income totaled ARS 21.3 billion, 17% or ARS 4.2 billion lower than the result posted in 4Q19, but ARS 1.3 billion higher than the result posted one year ago. In the first quarter of 2020, interest income totaled ARS 30.9 billion, 16% or ARS 6 billion lower than in 4Q19, and 18% or ARS 6.8 billion lower than the previous year. Within interest income, interest on loans decreased 22% or ARS 5.4 billion quarter-on-quarter due to an 8% decrease in the loan portfolio and a 600-basis point decrease in the average lending rate. Interest income decreased 14% or ARS 3.1 billion year-on-year. The first quarter of 2020, interest on loans represented 63% of total interest income. Net income from government and private securities decreased 1% or ARS 148 million quarter-on-quarter due to lower income from private securities.
Compared to the first quarter of 2019, net income from government and private securities decreased 25% or ARS 3.6 billion. In the first quarter of 2020, FX gains including investments in the derivative financing totaled ARS 568 million gain due to the 8% Argentine peso depreciation against the U.S. dollars and the bank loans dollar spot position. FX gains decreased 96% or ARS 1.1 billion quarter-on-quarter due to lower results from trading given the stricter currency controls and regulations. In the first quarter of 2020, interest expense totaled ARS 9.6 billion, a 50% or ARS 1.8 billion decrease compared to the fourth quarter of 2019, and 46% or ARS 8.1 billion lower on a yearly basis.
Within interest expenses, interest on deposits decreased 17% or ARS 1.8 billion quarter-over-quarter, mainly driven by a 400-basis points decrease in the average time deposit interest rates as a consequence of lower LELIQ rates that came down from 55% at the beginning of the quarter to a level of 38% at the end of the first quarter of 2020. On a year-over-year basis, interest on deposits decreased 47% or ARS 7.6 billion. In the first quarter of 2020, interest on deposits represented 91% of the bank's financial expenses. As of the first quarter of 2020, the bank's net interest margin was 19.2%, lower than the 24.8% posted in 4Q19 and 1Q19. In the first quarter of 2020, net fee income totaled ARS 4.4 billion, 4% lower than in the fourth quarter of 2019.
On a yearly basis, net fee income decreased 14% or ARS 700 million. In the first quarter of 2020, net income from financial assets and liabilities fair value through profit or loss totaled ARS 4.1 billion loss as a consequence of the inflation adjustment applied to our LELIQ holdings and a lower income from government securities. In the quarter, other operating income totaled ARS 1.1 billion, decreasing 9% compared to the fourth quarter of 2019. On a yearly basis, other operating income increased 77%, or ARS 3.7 billion. In the first quarter of 2020, Banco Macro's personal administrative expenses totaled ARS 7.4 billion, 20%, or ARS 1.9 billion lower than the previous quarter due to lower expenses related to employee benefits and lower maintenance and conservation fees. On a yearly basis, personal administrative expenses decreased 9%, or ARS 690 million.
As of March 2020, efficiency ratio reached 39.8%, deteriorating from the 35.5% posted in fourth Q19. In the first quarter of 2020, Banco Macro's effective tax rate was 35.8%, lower than the 41.4% registered during the fourth quarter of 2019 and the 38.3% registered a year ago. In terms of loan growth, the bank's financing to the private sector decreased 4%, or ARS 9.2 billion quarter-on-quarter, and 15%, or ARS 38.7 billion year-on-year. Within commercial loans, documents and others stand out with an 8% and a 14% increase quarter-on-quarter respectively. On the consumer side, personal and credit card loans decreased 4% and 3% respectively in the quarter. Within private sector financing, peso financing decreased 4%, or ARS 7.6 billion, while U.S. dollar financing decreased 11%, or $74 million.
It is important to mention that Banco Macro's market share over private sector loans as of March 2020 reached 8.1%. On the funding side, total deposits increased 10%, or ARS 27.9 billion quarter-on-quarter, and increased 23%, or ARS 93.1 billion year-on-year. Private sector deposits increased 7% quarter-on-quarter, while public sector deposits increased 44% quarter-on-quarter. The increase in private sector deposits was led by demand deposits, which increased 6%, or ARS 8.1 billion quarter-on-quarter, while time deposits increased 11%, or ARS 12.9 billion. Within private sector deposits, peso deposits increased 14%, or ARS 26.3 billion, while U.S. dollar deposits decreased 8%, or $106 million. As of March 2020, Banco Macro's transactional accounts represented approximately 51% of total deposits. Banco Macro's market share over private sector deposits as of March 2020 totaled 6.1%.
In terms of asset quality, Banco Macro's non-performing total financial ratio reached 1.36%. The coverage ratio, measured as total allowances under expected credit losses over non-performing loans under Central Bank rules, reached 173.49%. The improvement in asset quality is related to recent measures adopted by the Central Bank of Argentina in the current pandemic COVID-19 context, particularly the days grace period that was added to the classification before a loan is considered non-performing. In terms of capitalization, Banco Macro accounted an excess capital of ARS 96.4 billion, which represented a total regulatory capital ratio of 32% and a Tier 1 ratio of 25.4%. The bank aims 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 66%. 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 efficiency standards, and we keep a well-itemized deposit base. At this time, we would like to take the questions you may have.
We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Gabriel da Nóbrega from Citi. Go ahead.
Hi, everyone. Good morning, and thank you for the opportunity to ask questions. My first question is actually on the NPL ratio. I'm just wondering, with this new waiver of the Central Bank allowing you to categorize loans only after 60 days as non-performing, when do you expect for you to reach the peak of the NPL ratios? Also, being that we are already in June, how have the vintages been performing, and if there is a specific sector which you are looking more closely? I'll make the second question afterwards. Thank you.
Good morning, Gabriel. This is Jorge Scarinci answering. According to the regulation of the Central Bank, it gives us 60 more days to categorize the NPLs. We still do not know until when this regulation is going to be in place. We think that, depending on the pandemic evolution, we think that between second and third quarter, we could be seeing, or maybe part of the fourth quarter also, the peak on NPLs. We have to say that our portfolio is performing better than expected. Remember that we have a higher exposure
In the interior of the country, where the quarantine is having less effect and activity is a bit higher than in Buenos Aires City and Province of Buenos Aires area. We are not seeing any specific sector having big problems. Basically, maybe restaurants, those kind of services where we have low exposure. According to our portfolio, we are having, of course, a very close eye on the evolution of the portfolio and on the NPLs. We are positively impacted with the figures that we are seeing. Bottom line, the peak that could be seen between, I would say, third quarter and the beginning of the fourth quarter of this year.
Jorge, if you allow me just to follow up on this question, what would be your real NPL if you had not applied the waiver of 60 days?
I would assume that a more normalized ratio could be close to the one that we saw in December of last year, 2%, 2.1% approx.
All right. As for my second question, it's actually on your level of profitability. This was the first quarter where we saw the unreal profitability of the bank. I'm just wondering, given that the interest rate has come down a lot, there also a change in mix with more corporate loans. Do you believe that this level of around 27% in this quarter could be sustainable for the coming quarters?
I would assume that being in the mid-20s is something that we could see as highly probable, that could be the average ROE for the bank for this year. Of course, in the current conditions. If conditions are changing, we could be changing the forecast. But I would assume that in the area of mid-20s is something that we could be achieving.
All right. That's very clear. Thank you so much.
You're welcome, Gabriel.
Our next question is from Jason Mollin from Scotiabank. Go ahead.
Hi, everyone. Jorge, those are interesting comments. What is the base case macro outlook that you're working with to talk about NPLs similar to the fourth quarter of last year or of ROE in inflation-adjusted terms, in real terms, in the mid-20s? Is that taking into consideration that you don't have to make provisions this year or much provisions this year? Is that kind of a longer-term sustainable profitability expectation? Thanks.
Hi, Jason. How are you? Good to hear you here in this conference. According to the NPL similar levels than the end of last year was the first quarter 2020 NPL normalized ratio, instead of being the 1.4%, could be in the area of 2.1%. By the end of the year, we see this ratio a bit higher, between 2.5% and 3%, because we are seeing some deterioration because of the pandemic going on here in Argentina. Therefore, we will have to do further provisions. The mid-20s ROEs is continuing the scenario that we have for the moment, is Argentina GDP going down between 9% and 11%, with inflation being between 45% and 50%, according to what the local economists are estimating for this year.
When you talk about, I'm interested in what you said about somewhat normalized NPLs. Your clients, what percentage of the clients, they're not paying, right? They don't have to pay, given this, or they are paying, or some of them don't have to pay? What's going on with the payment cash flows? Are you seeing, is this expectation or this normalized NPL, is that based on the cash flows you're seeing people deposit, they're getting their paycheck if they work for a government agency or they're not, their paycheck is secure if they're a government employee or a municipal employee, et cetera? How would you normalize that? We have trouble in other countries because with kind of, one thing is, are you postponing? If people don't have to pay because you're giving them a grace period and they're paying anyway, that's interesting.
What kind of color can you give us on the dynamic? Are people trying to reschedule their loans? Are they trying to pay? Do you see the deposit they've rescheduled, but deposits are going into their accounts? Any color would be appreciated. Thank you.
Basically, according to what we are seeing in our book is consumers, that is approximately 65% of our loan book. Most of that is tied to payrolls. We are seeing a very high level of payments, both in credit cards and personal loans. On the commercial portfolio, that is the remaining 30%-35%, what we are seeing that, yes, maybe some small and medium-sized company are a bit delayed on the payments. Again, in a better situation that we would have expected at the beginning or three months ago.
According to the evolution, we think that there will be a bit more of the deterioration in the portfolio with a combination of some increase in NPLs and a kind of stagnant or sluggish loan portfolio performance in the next quarter or two quarters because we are not seeing big loan demand, and therefore the ratio of NPLs to total loans could be deteriorating. In general terms, Jason, we are very happy on the evolution of how our customers are doing with their debts.
That's very encouraging. Maybe just a general comment on the regulatory environment and if recent changes, and if you expect more going forward, in particular, directed lending requirements, et cetera. Thanks.
Yes. Well, all the regulations that I think that you are aware of, if we are expecting some more, honestly, don't know. Could be. I think that the last regulation on the floor on CD interest rate, is going to be maintained for a little while. That is putting a kind of, also of a floor on the cost of the deposits that all the banking sector is having in order to attract people, investors, consumers, to keep on renewing the CDs in pesos and not looking to the US dollar. Honestly, I don't know if there could be additional regulations coming on foreign trade and which kind of companies could be accessing to the official FX markets and all that. There could be some more regulation coming. Honestly, I do not have a very clear picture on which front, but there could be some more coming.
Thank you. Appreciate your comments.
You are welcome, Jason.
Our next question is from Ernesto Gabilondo from Bank of America. Go ahead.
Hi, Jorge and Nicolas. Thanks for the opportunity. My question is on your loan book exposure. Can you tell us which are the sectors that are most exposed due to the lockdown? If you have granted relief programs to your clients, can you elaborate how much do they represent of your total loan book, and if you can break them down by sector? My second question is a follow-up on regulation. Can you remind us all the key regulation that is happening in Argentina? For example, capital controls, the coverage, the FX intervention. I don't know if I'm missing anything. How has this affected or potentially affect your business? My last question is in this new line under hyperinflation accounting that you will be presenting this net monetary position in the P&L.
Can you give us some kind or color on how should we think about a trend for this line in the coming quarters? Thank you.
Ernesto, thanks for your questions. Let's start with the second question about the regulations. Basically, the regulations that we've seen lately were on the area of, again, putting a floor on CDs interest rate paid to the people, basically to maintain the attraction on the peso market instead of looking to the FX market. The other regulations were that nobody can buy more than $200 per month at the official FX rate. Additional regulations on the trade FX balance to those companies that want to access to the official FX market will have to complete loads of papers. They have to declare that they do not have a U.S. dollar position abroad, et cetera. Basically, most of the regulations are towards the few access to the official FX market because the Central Bank foreign reserves have been going down.
On the other side, just to keep on maintaining the peso market in an attractive level in order to have depositors renewing the peso deposits in that currency and not trying to go to the maybe unofficial FX market. On your third question on the inflation accounting, just to give you a kind of summary because it's a very complex process that could take us a lot of time to explain here. You will have to take into consideration the evolution of the monetary assets and of the monetary liability. When there is an increase in the monetary assets, you have a negative impact on these accounts. On the other hand, if you have a decline on the monetary asset, you have a gain. The behavior on the liabilities is the opposite. Where you have an increase, it's a loss, and a decline is a gain.
That's a kind of a summary on this account and how you have to look after that. In terms of your first question on the exposure that we have here, basically on the retail, including agribusiness, that is the highest exposure that we have in our portfolio. We have a 42.6% exposure there. Then it is quite atomized, with construction being maybe 1.2%. For example, food and beverages is 8%, financial services is 3.5%. Transportation and communications is 3.8%, manufacturing and wholesale is 1.7%, electricity, oil, and gas, 1.2%. This is very atomized, the exposure we have in our portfolio in terms of the sectors.
About your relief programs to your clients, how much do they represent of your book? If you can break them by sector.
You mean the one that we are lending at 24%?
Yes. It's 24% of the total loan book?
No, no, the lines that we are lending at 24% interest rate, that is the rate for the customer because that part of if we lend at that rate, we have a benefit on the reserve requirements. We can allocate part of the reserve requirements with the LELIQs. The total return that we get in that trade line is 38%. As of today, we have to say that approximately, 15%-17% of our loan book is represented by these lines extended at 24% interest rate.
Perfect. This is mainly for corporates, or they are also coming for the retail segment?
No. For the MiPyMEs, that are small companies.
Okay. Perfect, understood. A follow-up on this monetary position. I understand the calculation, but thinking about the potential trends for the next quarters, you're expecting a higher increase in monetary assets, or what should we think about this in the next quarters?
The idea is that we are expecting an increase in the deposits. We want to continue maintaining or increasing our deposit base. Depending on loan demand, we could be growing a little bit our loan book, but I'm not seeing that as in a high rate in the next maybe couple of quarters. The excess liquidity, we are going to allocate them at the LELIQs or maybe buying some sovereign bonds in pesos tied to inflation.
Okay. Thank you very much, Jorge.
You're welcome, Ernesto.
Our next question is from Alonso García from Credit Suisse. Go ahead.
Good morning, everyone. Thank you for taking my question. My question is regarding your loan growth. I mean, compared to your other peers, Banco Macro reported lower dynamism in terms of credit growth during the first quarter. I just wanted to ask here if this is more related to a more conservative approach by Banco Macro's management or if, on the other hand, we could explain this by the geographical exposure that Macro has, which is more exposed to the provinces outside Buenos Aires, and if that's the case, if you are seeing the provinces being more impacted in terms of economic activity compared to the Buenos Aires region. Thank you very much.
Hi, Alonso. Good question. I think that is a combination of both. First of all, a kind of sluggish economic scenario that we were seeing in the first quarter, plus a bit more conservative view of Banco Macro's board of directors towards what's going on or what's going to happen in 2020. It's a combination of both. That was the idea of being a bit more restrictive on lending. Again, trying to put excess liquidity, that we are highly liquid, on LELIQs and maybe sovereign bonds in local currency tied to inflation.
Thank you. Just as a follow-up, do you think the economy will reopen sooner at the provinces than Buenos Aires? I think that's already the case. Do you expect to see a sooner recovery in the economy of your regions, compared to Buenos Aires?
Yes. As you mentioned, that is going on. You have that many provinces are having a fastest reopening of their activities than what is B.A. City and the province of Buenos Aires. Yes.
Okay, thank you very much.
Welcome, Alonso.
Our next question is from Domingos Falavina from JP Morgan. Go ahead.
Domingo.
Thank you, Nicolas. Can you guys hear me?
Yes.
Oh, perfect. Hi, Jorge.
Yes.
No, just two quick questions here. The first one is, I guess my understanding, you guys disclose, and it's very helpful information, the nominal rates and the real rates in the quarter, and the spread is about 10% only. The first question is, are we looking at the real rates on an annualized base and the nominal rates, like an inflation only quarter inflation? Basically, we had a hard time trying to reconcile the two. The second question is more like, trends, medium, long term. I know it's super hard to forecast, but like big numbers, we saw your balance sheet basically shrinking year-on-year with some increased quarter-on-quarter. Overall, it seems, most banks in Argentina are de-risking and shrinking. This quarter, there was very good job done on costs. What can we expect going forward?
Like, are the banks gonna, on real terms, resume some kind of growth or should we see a financial system continuing to shrink and kind of, partially being compensated by efficiency gains, if we look like one year from now or two years from now?
Hi, Domingos. Let's start with your second question. In general terms, you know that Banco Macro always have a bit more conservative behavior maybe than our peers. We have demonstrated that along the last 15 years. I think that that behavior is showing the good performance that we have in our numbers, excess capital, liquidity, asset quality, cost controls, et cetera. Depending on what we see as our most probable scenario, we could be becoming a bit more aggressive in lending or continue to be conservative. I think that I mentioned this in some other conference. If there is a possibility or depending on the scenario that we have to shrink a bit our balances, we are going to go for that in order to protect Banco Macro shareholders, the excess capital, the liquidity, and asset quality.
We want to be or feel comfortable, if we are going to extend our loan portfolio at a high rate. If not, we are going to become more conservative and allocate the excess liquidity in other investment alternatives as what we are doing right now or we have done in the past. That is a kind of a summary of what our policy in the near future. On your first question about the nominal rates and real rates is a bit messy, I understand, and it's also messy for us. If you consider, for example, the nominal rate for LELIQ is 38%, and when you look at the inflation rate in the first quarter, you are going to enter a conclusion that we invested that money at a positive real rate.
Similar than those loans that we have been extending at 24%, that according to the Central Bank regulation, we have some advantages in the reserve requirements. The final rate for us was 38%. Also we are gaining or lending at a positive real rate there. That is why we are also investing in some bonds in domestic currency tied to inflation adjustment plus a spread. That in the last, I would say, month or so, we have been buying at inflation + 15%, inflation + 12%, et cetera. That's how we are trying to protect the capital against inflation.
Okay. I understand you may have a positive rate, but it's unlikely 31% positive rate, right? Like if I look at private sector here, it's 41% versus 31%. I guess my question is, how do you get to 31%?
If you want, Domingos, we can call you later and explain to you how we get there so we can not spend much time here.
All right. That works.
Thanks.
Again, if you have a question, please press star then one. Our next question is from Santiago Petri from Franklin. Go ahead. Mr. Petri?
Yes. Can you hear me now? Hello?
Yes, Santiago. How are you?
Okay. Hi, how are you guys? My question was related to the inflation adjustment line, but I guess that I already got the answer from previous questions. Is it possible for you to give us some kind of expected growth in loans and deposits for this year? A second question, I know it's not related strictly to you, but how do you see the debt renegotiation of the government, and how that could improve things going forward, and particularly for your business? Thanks.
Hi, Santiago, how are you? Going forward, we expect to keep on increasing in peso-denominated deposits. I would say that the idea is to be 5 to 7 percentage points above inflation at the end of the year. In terms of loans, we believe that the loan evolution is going to be below inflation, maybe between 2 to 4, maybe 5 percentage points below inflation at the end of this year. We're going to have excess liquidity, and we are going to allocate that excess liquidity where we think is the best opportunity in order to maintain the capital of the bank. Sorry, can you remind me the second question? Was there two?
Yeah. The second is, with all the excitement about the debt renegotiation of the sovereign.
Okay
If this comes to be successful, what would you expect is going to be the impact on your activity?
Of course, we think that reaching to an agreement with the debt is going to be extremely good for the country and extremely good for the private sector in order to access to further financing, maybe not this year, but maybe next year, if there is a rebound of the domestic economy. I think that that is going to be very positive for banking sector for sure, but for the whole economy. Yes.
Okay. Thanks. Thanks a lot.
You are welcome, Santiago.
At this time, there's no more questions. This concludes our question and answer session. I would like to turn the conference back over to Banco Macro for 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.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.