Earnings Call: Q4 2019

Feb 20, 2020

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's 4Q 2019 Earnings Conference Call. We would like to inform you that the 4Q 'nineteen press release is available to download at the Investor Relations website of Banco Macro, www.macro.com.ar/relaciones Inversource. 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 Scarinchi, Chief Financial Officer and Mr. Nicolas Torres, IR. Now, I will turn the conference over to Mr. Nicolas Torres. You may begin your conference, sir. Good morning, and welcome to Banco Macro's 4Q 'nineteen 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. 4Q 'nineteen press release was listed yesterday and it's also available at our website. I will now briefly comment on the bank's 4Q 'nineteen financial results. Banco Macro's net income for the quarter was MXN13.3 billion, 1% higher than in 3Q 'nineteen and 153% higher than the MXN5.2 billion posted a year ago based on an increase in net interest income and in net fee income. The bank's 4Q 2019 accumulated ROE and ROA of 59% 10.4% respectively remained healthy and showed the bank's earnings potential. On a fiscal year basis, Banco Macro earned ARS40.8 billion in fiscal year 2019, 159 percent higher than the ARS15.7 billion earned in fiscal year 2018. Net operating income before general and administrative and personnel expenses for 4Q 'nineteen was ARS29.7 billion, increasing 13% or ARS3.5 billion quarter on quarter and 83% higher than a year ago. Operating income after general and administrative expenses and personnel expenses was ARS 16,400,000,000, 38 percent or ARS 4,500,000,000 higher than in 3Q 'nineteen and ARS 1 117 percent or ARS 8,900,000,000 higher than in 4Q 'eighteen. In fiscal year 2019, operating income totaled ARS48.1 billion, 114 percent higher than in fiscal year 2018. In the quarter, net interest income totaled ARS22,700,000,000, 13% or ARS2.7 billion higher than the result posted in 3Q 'nineteen and 85% or ARS10.4 billion higher than the result posted 1 year ago. This performance can be traced to an 8% quarter on quarter decrease in interest income and a 35% decrease in interest expenses. In fiscal year 2019, net interest income totaled ARS22.5 billion, 83 percent higher than the ARS39.6 billion registered in fiscal year 2018. In 4Q 'nineteen, interest income totaled ARS 32 800,000,000, 8 percent or ARS 2,800,000,000 lower than in 3Q 'nineteen and 38 percent or ARS 9,000,000,000 higher than the previous year. Within interest income, interest on loans increased 38% or ARS 6,100,000,000 quarter on quarter 42% year on year. In 4Q 'nineteen, interest on loans represented 67% of total interest income. During fiscal year 2019, interest on loans totaled ARS67.5 billion, increasing 42% compared to fiscal year 2018. Net income from government and private securities decreased 49% or ARS9.5 billion quarter on quarter due to lower Leliq's volume and lower interest rates. Compared to 4Q 'eighteen, net income from government and private securities increased 25% or ARS 2,000,000,000. In fiscal year 2019, net income from government and private securities totaled ARS 53,800,000,000, two zero 4% higher than in fiscal year 2018. In 4Q 'nineteen, FX gains including investment in the realty financing totaled a ARS1.3 billion gain. During fiscal year 2019, FX gains totaled ARS3.1 billion compared to ARS1.4 billion loss posted in fiscal year 2018. In 4Q 'nineteen, interest expenses totaled ARS10.1 billion, 35 percent or ARS5.4 billion decrease compared to Q3 'nineteen and 12% or ARS1.4 billion lower on a yearly basis. Within interest expenses, interest and deposits decreased 34% or ARS4.8 billion quarter on quarter, mainly driven by an 18% decrease in the average volume of planned deposits and a 21.4 percentage points decrease in the average time deposit interest rates. On a yearly basis, interest on deposits decreased 12% or ARS1.3 billion. In 4Q 'nineteen, interest on deposits represented 93% of the bank's financial expenses. In fiscal year 2019, interest expense totaled ARS51.6 billion and was 99% higher than in fiscal year 2018. As of the Q4 of 2019, the bank's accumulated net interest margin, including FX, was 21.1%, higher than the 19.1% posted in 3Q 'nineteen and the 14.9% registered in 4Q 'eighteen. In 4Q 'nineteen, net fee income totaled ARS4.1 billion, 10% higher than in 3Q 'nineteen and on a yearly basis, net fee income increased 32% or ARS1 1,000,000,000. In fiscal year 2019, net fee income totaled ARS14.6 billion increasing 31% compared to fiscal year 2018. In 4Q 'nineteen, net income from financial assets and liabilities at fair value to profit and loss totaled ARS2.6 billion, increasing 2 92 percent or ARS1.9 billion compared to 3Q 'nineteen. In fiscal year 2019, net income from financial assets and liabilities fair value profit loss totaled ARS5.3 billion gain, 402% higher than in fiscal year 2018. In the quarter, other operating income totaled ARS926 million, decreasing 9% compared to 3Q 'nineteen. And on a yearly basis, other operating income increased 69% or ARS3 78,000,000. In fiscal year 2019, other operating income totaled ARS6.1 billion, 117% higher than in fiscal year 2018. In 4Q 'nineteen, Banco Macro's personnel and administrative expenses totaled ARS8.3 billion, 13% higher or ARS941 million than the previous quarter. On a yearly basis, personnel and administrative expenses increased 58% or ARS3 1,000,000,000. In fiscal year 2019, administrative expenses cost related benefits increased 64% compared to fiscal year 2018. As of December 2019, the accumulated efficiency ratio reached 32.3%, improving from the 33.2% posted in 3Q 2019 and 37.9% registered a year ago. In fiscal year 2019, Banco Macro's effective tax rate was 16.3%, lower than the 30.7% registered during fiscal year 2018. During 2019, in accordance with applicable income tax law and regulations and the evolution of consumer price index, the bank decided to adjust income tax by inflation. In terms of loan growth, the bank's financing to the private sector grew 10% or ARS18.7 billion quarter on quarter and 22% or ARS38.6 billion year on year. Within commercial loans, growth was driven by overdraft and others with a 32% and a 52% increase quarter on quarter respectively. On the consumer side, growth was driven by credit card loans, which grew 27% or ARS9 1,000,000,000 in the quarter. It is important to mention that Banco Macro's market share over private sector loans as of December 2019 reached 8.1%. On the funding side, total deposits increased 1% or ARS 3 point 7,000,000,000 quarter on quarter and increased 10% or ARS24,900,000,000 year on year. Private sector deposits increased 3% quarter on quarter, while public sector deposits decreased 14% quarter on quarter. The increase in private sector deposits was led by payment deposits, which increased 17 percent or ARS18.5 billion quarter on quarter, while time deposits decreased 11% or ARS 13,200,000,000. Within private sector deposits, peso deposits increased 2% or ARS 4,300,000,000 while U. S. Dollar deposits decreased 6% or $84,000,000 As of December 2019, Banco Macro's transactional accounts represented approximately 54% of total deposits. Banco Macro's market share of private deposits as of December 2019 totaled 6.2%. In terms of asset quality, Banco Macro's non performing total financial ratio reached 2.07% and the coverage ratio reached 123.08%. In terms of capitalization, Banco Macro accounted for an excess capital of ARS 69,000,000,000, which represented a total regulatory capital ratio of 27.3% and a Tier 1 ratio of 20%. The bank's aim is to make the best use of this excess capital. Bank's liquidity remained more than appropriate. Liquid assets to our deposit ratio reached 59%. Overall, we have accounted for another positive quarter. We continue to show it at solid financial position. Asset quality remains under control and closely monitored. We keep on working to improve more our efficiency standards and we keep a well atomized deposit base. At this time, we would like to take the questions you may have. Thank you. At this time, we're going to open it up for question and Today's first question comes from Ernesto Gabriondo of Bank of America. Please go ahead. Hi, good morning, Gustavos, Jorge and Nicolas, and thanks for the opportunity to make questions. My first question is on your loan growth expectations. We have seen lower interest rates. We failed to see credit demand above inflation. Well, yesterday, we saw the introduction of some caps on interest rates. So I remember in the former administration, So, I remember in the former administration, this incentivize some of the banks from lending. So, any color on this will be much appreciated. And then on my second question is on the hyperinflation accounting. I think you will be reporting it next quarter. So just wondering if you have estimated how was your 2019 ROE including hyperinflation accounting? And then for my last question, do you see the possibility of the net earnings contracting in 2020 or showing a lower earnings growth due to lower security gains and still soft credit demands? Thank you. Hi, Emetto. This is Jorge, Carinthia, answering. How are you? On the first part of your question about loan growth expectations, honestly, it is not very easy to project or to forecast in this volatile scenario. But in general terms, we are forecasting loan growth to be slightly below inflation expectation, considering that the market consensus is expecting inflation to be in the area of 45%. So therefore, we are looking for nominal growth of loans a little bit below that. In terms of the caps on interest rate that yesterday Central Bank said, I think that we have been commenting about this the probability of this measure to happen. Finally, they appeared here according to this cap on interest rates on credit cards at the level of 55% starting as of March. And at the same time, there was some decrease in reserve requirements tied to credit card operations. The net of these on the P and L shows, of course, making a forecast on interest rate, make a net positive impact of ARS100 approximately ARS100 1,000,000 in 2020. Then on your question about inflation accounting, we are going to start reporting adjusted numbers in the Q1 of 2020 and we are working on that. In terms of ROE adjusted by inflation in 2019, it's in the area of 18%. So that is basically the question that you have. I don't know if I'm missing someone. Yes. Thank you. So just the last one, considering that probably you will see lower security gains in 2020, I don't know if you should see lower earnings growth or actually earnings contracting in 2020? Yes, if you only look at security gains could be of course for the moment interest rates are lower than the ones that we saw last year, even though banks in general try to defend the margin as much as we can and that is something that we are working on. But of course, everything has a limit in the sense that if we see more downward pressure on interest rates and on security rates. We will try to translate that to depositors. At some point, depositors will not consolidate that. So until we reach that point, we will try to defend the margin as much as we can. So we are trying to maintain the ROE levels for 2020 relatively similar than in real terms, similar than the one that we posted in 2019. But again, we are in February. There's still 10 more months to come in Argentina and that's a lot of time. So the scenario could change from 1 month to the other. But basically, the idea that we have for the moment is to try to maintain the adjusted ROE in 2020. Perfect. Thank you very much. Welcome. And our next question today comes from Gabriel Nobrega of Citibank. Please go ahead. Hi, everyone. Good afternoon and thank you for the opportunity to ask questions. I have a first question actually on the top down that you're seeing. It's already been 2 months that the new administration has come in. I understand that the situation isn't still as clear as we had thought, mainly because the administration is still talking about the bonds and the restructuring of the debts. But having said this, what do you believe will be the main challenges and opportunities that you could have over this year? And what Hi, Gauril. How are you? Yes, you're right. We thought that at this point, we could have a better or clearer landscape on 2020. However, we are still working and dealing with volatile scenarios and with the government that has not announced an economic program yet. Debt restructuring is the main issue for the government. And honestly, we still do not know exactly at what time that is going to be finally solved. So for the moment, I would say that economic activity continue to be very sluggish. According to market consensus, GDP is expected to be minus 1% in real terms in 2020, inflation in the year of 45% as I commented in the previous question to Ernesto. So basically challenges and opportunities is, I mean, we have seen and we have sailed through this volatile scenario many times in the last 20, 25 years in Argentina and Banco Macro has high liquid position and excess capital that put us in the top ranking of solvency here in Argentina. So if there is an organic growth, we might take that one also. So we are going to as Nicolas commented in the comments, we are going to make on the excess capital the best use that we consider and try to defend the margin as much as we can in this scenario of downward trend on interest rates. All right. That's very clear. And thank you. And as for my second question, especially looking at your asset quality. We saw that provisions increased a lot. And I understand that this comes a lot from Vicente being that the loan went to category 4 and you had to provision for this. I also understand there are other companies, But maybe looking forward, being that your NPL ratio has also increased this year, do you expect that you should make more provisions over the year to uncover these companies? And also, if you could just mention what coverage you have achieved for vistentine, please? As far as we continue to see a sluggish economic activity, I think that we might see more deterioration in asset quality, even though that take into consideration that we have a 2% of NPL to total loans when the system is close to 7%. So this is the result of many years of working on our credit standards and of course to have a consumer portfolio very tied to payrolls. But what you're right that we are seeing some corporate or commercial companies going into trouble. So the idea is that we want to maintain the coverage ratio in the area of $120,000,000 to $150,000,000 Vicente is provision 100%. So going forward, again, if these economic situations continues for most of 2020, we could see NPLs in our the NPL ratio going between 2.2, 2.4 by the end of the year. And maintaining as I mentioned before the coverage in the year of 120, 140 approx. Can I just make a follow-up here? In this coverage, which you are guiding between 120 and 140, are you already contemplating the implementation of the expected loss model under IFRS 9? No, I mean we are going to start with that maybe by mid year. We have not started yet. All right, clear. Thank you. You're welcome. And our next question today comes from Domingos Falavina of JPMorgan. Please go ahead. Thank you, gentlemen, also for taking the call. I just want to run through you the basic forecast and I'm sorry if I missed that in the beginning. But like with an inflation of around 45, if you could just give even in ranges like loan growth 40 to 45, NII above the same as loan, cost of risk, effective tax rate. I understand your goal is to kind of maintain a similar ROE 2020 over 2019, but just so that we have we understand it's volatile Argentina, but just to have a directional view on how you guys are thinking about next year about this year, sorry. Hi, Domingos. Yes, I mean, as I mentioned before, we are in February and it happened to me in the last maybe 2, 3 years at least that we were forecasting some scenario at the beginning of the year and the scenario change completely in the following months and our expectations and forecasts were through to the trash. Yes, the same here, but always good to know what you're saying. With inflation in the area of 40%, you have to take into consideration loan growth between 35% and 40%, net interest income an increase of maybe 25% to 30%. The effective income tax rate, it's not easy to forecast in the sense that we are going to post adjusted inflation numbers, but it's going to be maybe in the area of what we posted in 2019. Deposit growth also similar and loan growth between 35% and 40%. Expenses, those are in salaries, I think that negotiations have not started yet, but I think that salaries should be growing below inflation expectations, so between $35,000,000 $40,000,000 I would assume. So for expenses, I would make an average growth of maybe 40 area approx. Those are the main issues. Yes. The cost of risk, I think, is the only one we didn't touch. Yes. Cost of risk, again, depending on market conditions that could range between 2.5 and 3.5. Okay. And the last one Okay. And the last one on my side is, the growth should be more tilted to consumers, more corporate, SME, how exactly would you guess that? The what, sorry? The loan growth, like the strategy for 2020 is originating in which segment? No, I think that I mean, should be no meaning speaking both, I would assume that could be 60%, 65% consumer and the rest commercial. Super clear. Thank you. You're welcome, Doniglos. Today's next question comes from Carlos Gomez at HSBC. Please go ahead. Yes. A couple of clarifications. Could you let us know where your average interest rate on credit cards was before the implementation of this cap at 55%? 2nd, for next year, your tax rate should be 30% again on your inflation adjusted earnings. Is that correct? And finally, will the inflation adjustment be the same in your local currency statements as in your 20 F? Thank you. Hi, Carlos. How are you? The average rate before the 55% cap was 75%. That's your first question. The second one, the statutory rate is 30%, but depending on the impact of inflation, I think that the effective is going to be below that. Sorry, the effective on the again, the effective on the inflation adjusted earnings or effective on the earnings without inflation adjustment? Might be both, but I think that the effective on the adjusted numbers is going to be much lower than the 30. Okay. And I couldn't get the last question, Carlos. Yes, I was wondering if the inflation adjustment, which we understand will be one line, I think, after the pretax earnings, correct me if I'm wrong, if it will be the same in your local currency financial statements or in your 20 F? Not so sure. I mean, on the 20 F, we are still debating that with external auditors. But on the local reporting on the Central Bank, we are going to report adjusted numbers. Okay. And by the way, will you also adjust the history as in the past you would give us inflation adjusted numbers inflation adjusted historical numbers? We're not so sure about that. If I have to answer now, I would say no, but we are still also working with our accounting department, the Central Bank and external auditors on that because it's a very complicated calculation on that. So we are still trying to see we have to or we have maybe a kind of approval for the Central Bank that we can report without the adjusted numbers of the previous years. Okay. If you do have to present adjusted numbers, we beg you to present the nominal as well so that we can continue the historical series. Okay. So I will send you a favor of a press release, a book. Okay. Thanks a lot. Thank you so much. And our next question comes from Santiago Petri of Templeton. Please go ahead. Yes. Hi, good afternoon, guys. Today, there was a press report that states that this was related to Fintech. So I would like to know if this impact this your activities in any sense that it forbids the automatic direction of the installments from loans from debit cards I think it's so I would like to know if how do you collect your loans and if this applies to you? Hi, Santiago. No, basically, this is this measure have a much higher impact on the Fintechs. Basically, when you have your client an account with you, you have the possibility to deduct the installment of the personal loan or the credit card as we have been doing for the last 15 years. So it's not impacting banks basically. Okay. Thanks. Thanks a lot. You are welcome, Santiago. And our next question comes from Brian Flores of Citibank. Please go ahead. Hi. Thank you for the opportunity. Just a quick question on your funding costs. We saw it decreasing quarter on quarter significantly. So just wanted to think I mean, sorry to ask you, how are you thinking about this particularly going forward and how recurrent do you think this could be going forward? Thank you. Of course, I think that's some of these I mentioned that before. Banks always try to defend margins, so we will try to translate 100% or the most as we can, the decrease on the release rate to our depositors, but of course you have a limit that's the point when the depositor says I'm not going to renew this peso time deposit because it's well below inflation and well below what I have in mind for the FX depreciation. So I'm going to instead of renewing that, I'm going to, I don't know, buy a fridge, buy a car, go on holidays or maybe by dollars on the informal market because we have FX control here. So there is a limit for the decrease on the funding cost. Going forward, I think that we are quite close to that limit. So I don't believe that we could go further reducing the funding cost compared to what we have done in 2019. Very clear. Thank you. You're welcome. And there are no more questions at this time. So this concludes the question and answer session. I'd like to turn the conference back over to Mr. Nicholas Torres for final considerations. Thank you all for your interest in Bank of Macro. We appreciate your time and look forward to speaking with you again. Good day. Thank you. The conference has now concluded. We thank you all for attending today's presentation. You may now disconnect.