Earnings Call: Q3 2019

Nov 12, 2019

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 2019 earnings conference call. We would like to inform you that the 3Q 2019 press release is available to download at the Investor Relations website of banco macro, www.macro. Com.arrealacionesinvestories. 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 Monriquez, Chief Executive Officer Mr. George Scorsini, Chief Financial Officer and Nicholas Torres, IR. Now I will turn the conference over to Mr. Nicholas Torres. You may begin your conference. Good morning, and welcome to Banco Macro's Q3 2019 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 is available at our website. 3 quarter 2019 press release was distributed last Friday and is also available at our website. I will now briefly comment on the bank's 3 quarter 2019 financial results. Banco Macro's net income for the quarter was ARS 13,200,000,000, 87 percent or ARS 6,200,000,000 higher than in 2Q 2019 and 2 43% higher than the ARS 3,800,000,000 posted a year ago, based on an increase in net interest income and in net fee income. The bank's 3Q 2019 accumulated ROE and ROA of 57.3% and 9.4% respectively remained healthy and show the bank's earning potential. Recurring net income in the quarter totaled ARS 15,500,000,000, 99 percent or ARS 7,700,000,000 higher than in the previous quarter. The current net operating income before general and administrative and personnel expenses for 3 quarter 2019 was MXN 26,200,000,000, increasing 27 percent or MXN 5,600,000,000 quarter on quarter and 103% higher than a year ago. Recurrent operating income after general and administrative expenses and personnel expenses was ARS 14,300,000,000, 28% or ARS 3,200,000,000 higher than in 2Q 'nineteen and 160% higher than in 3Q 'eighteen. In the quarter, net interest income totaled MXN20.1 billion, 19 percent or MXN 3,300,000,000 higher than the result posted in Q2 'nineteen and 94% or Ps. 9,700,000,000 higher than the result posted 1 year ago. This performance can be traced to a 14% quarter on quarter increase in interest income and a 7% increase in interest expenses. Within interest income, interest on loans increased 9% quarter on quarter and 30% year on year. In 3Q 'nineteen, interest on loans represent 45% of total interest income. Net income from government and private securities increased 27 percent or ARS 4,100,000,000 quarter on quarter due to higher earnings volume and higher interest rates. Compared to 3Q 2018, net income from government and private securities increased 3 34 percent or ARS 14,600,000,000. In 3Q 'nineteen, FX gains included in investment in derivative financing totaled ARS 2,200,000,000 gain. In 3Q 'nineteen, interest expenses totaled ARS 15,500,000,000, 7 percent or ARS 1,000,000,000 increase compared to QQ 'nineteen and 139 percent or ARS 9,000,000,000 higher on a yearly basis. Within interest expenses, interest and deposits increased 5% or ARS640,000,000 quarter on quarter, mainly driven by an increase in the average volume of time deposits and an increase in the average time deposit interest rates. On a yearly basis, interest on deposits increased 149 percent or MXN 8,500,000,000. In 3Q 2019, interest and deposits represented 91% of the bank's financial expenses. As of 3Q 2019, the bank's accumulated net interest margin, including FX, was 19.1%, higher than the 17.6% posted in QQ 'nineteen and the 14% registered in 3Q 'eighteen. In 3Q 'nineteen, net fee income totaled ARS 3,800,000,000, 11% higher than in Q2 2019. On a yearly basis, net fee income increased 31% or ARS 885,000,000. In fiscal 2019, net income from financial assets and liabilities at fair value, profit or loss totaled ARS659,000,000, increasing 3 95 percent or ARS526,000,000 compared to Q2 'nineteen. In the quarter, other operating income totaled ARS 1,100,000,000, increasing 9% compared to 2Q 'nineteen. On a year on year basis, other operating income decreased 11% or ARS 131,000,000. In 3Q 2019, Banco Macro's personnel and administrative expenses totaled Ps. 73,000,000,000, 2 percent or Ps. 114,000,000 higher than the previous quarter. Emblem E benefits decreased 10% or MXN 500,000,000 quarter on quarter. As of September 2019, the accumulated efficiency ratio reached 32.5%, improving from the 33.5% positive in 2Q 'nineteen and the 37.6% registered a year ago. In Q2 'nineteen, Banco Macro's income tax resulted in a MXN 1,300,000,000 gain during this quarter and in accordance with applicable income tax law and regulations and the evolution of consumer price index, the banks decided to adjust income tax by inflation. In terms of loan growth, the bank's financing to the private sector grew 10% or ARS 18,100,000,000 quarter on quarter and 15% or MXN 24,500,000,000 year on year. It is important to mention that Banco Macro's market share over private sector loans as of September 2019 reached 7.7%. On the funding side, total deposits decreased 9% or COP 25 point 1,000,000,000 pesos quarter on quarter and increased 22 percent or MXN 46,600,000,000 year on year. Private sector deposits decreased 8% quarter on quarter, while private sector deposits decreased 13% quarter on quarter. The decrease in private sector deposits was led by hand deposits, which decreased 19% or Ps. 28,400,000,000 quarter on quarter, while demand deposits increased 4% or Ps. 4,400,000,000. Within private sector deposits, peso denominated deposits decreased 6% or ARS 9,800,000,000 while U. S. Dollar deposits decreased 36% or ARS 765,000,000. Dollars It is important to mention that this strategy of reducing the bank's fixed exposure and peso deposit base was decided proactively in order to reallocate the excess liquidity in loans and other financial instruments. As of September 2019, Banco Macro's transactional accounts represented approximately 47% of total deposits. Banco Macro's market share over private sector deposits totaled 6.5% as of September 2019. In terms of asset quality, Banco Macro's nonperforming to total financial ratio reached 1.9%. The coverage ratio reached 124.16%. In terms of capitalization, Banco Macro accounted an excess capital of ARS 60,100,000,000, which represented a total capital ratio of 26.5 percent and a Tier 1 ratio of 18.9%. 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 deposit ratio reached 61%. Overall, we have accounted for another positive quarter. We continue to show that 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 atomized deposit base. At this time, we would like to take the questions you may have. At this time, we're going to open it up for questions and answers. The first question comes from Gabriel Nobrega with Citibank. Please go ahead. Hi, everyone. Thank you for the opportunities to ask questions. My question here is more on the top down, we already entering the 3rd week since the elections. I know it may be still a bit early to understand where this administration isn't going to go. But I actually wanted to understand how have you been preparing the Mbank for this very volatile scenario? And also as we move on to December, what are your strategies there to prepare the bank for this new administration and I'll make a second question afterwards. Thank you. Hi Gabriel, how are you? This is Jorge Carintho, I'm sorry. As you might notice in the quarter, we were working on reallocating the excess liquidity from the LeEx into short term lending to AAA companies and also investing in other financial instruments like corporate bonds in pesos, everything. And at the same time, we're seeing some reduction in peso denominated deposits and also in dollar denominated deposits as a consequence of what's happened in the past reelection and also in the election that Alberto Fernandez won the past 23rd October. So we are we have been working on the bank in order to maintain the level of profitability and that is something that we have successfully done, looking at the numbers that we posted in the 3rd quarter, maintaining or even widening the net interest margin that we also posted in the quarter, keeping asset quality completely under control at the level of 1.9% as we have shown relatively or much better than the average of the system. And we are working to put the bank or to maintain the bank as liquid as we can, maintaining profitability and waiting for the new administration to take place and to see if there are going to be new regulations depending on those regulations, we are going to focus on them and but always working on maintaining the bank's solvency, liquidity and asset quality. For the moment, we do not have additional information on what the new administration could be doing on basically on the economic program as a whole and also on if there's going to be new regulation coming from the Central Bank or in the banking sector. So we'll keep on going on this direction, working on, as I mentioned before, maintain the margin, profitability, liquidity and asset quality. All right. That's perfectly clear, Jorge. And as for my second question, it's also actually a follow-up here. I understand you have been maybe diversifying your investments as well. But being that it to around 22% in the Q3? And also, as we have been seeing these deposits coming out from the bank and the reference interest rates also coming down, do you believe that maybe this was the peak for your net interest margin and this should become to come down in the coming quarters? Or do you believe that as you diversify, you will be able to maintain this NIM going forward? That's a good question, Gabriel. I think that the level of the margin that we saw in the Q3, I think that is one of the highest in the last, I would say, 5, 6 years. I'm not so sure that we are going to maintain that level as you mentioned because of the declining interest rate that we are seeing and also because the elite rates are going down and most of the rates in the system are going down. So I would say that we could be even though it is a bit early to say, but we could be going back to level of maybe 2nd quarter levels in terms of net interest margin approach. But again, I think that this is a bit early, but it's not going to be very easy to maintain the level of net interest margin that we achieved in the Q3. Perfect. Jorge, thank you. You're welcome, Garit. The next question comes from Nicolas Riva with Bank of America. Please go ahead. Yes. Thanks, Jorge and Nicolas for taking my question. It's a follow-up on the prior question. So regarding your Leliqs, which came down a lot this quarter, was this because you are concerned with the Central Bank not paying these obligations? Eventually, you are concerned about this risk exposure with the Central Bank. And also, what's the plan for the remaining LIX? Because they are still about 14% of your total assets. We should expect further reductions in these holdings given that you cannot use them for reserve requirements on checking accounts and savings accounts? Thanks. Hi, Nicolas. No, the deal is that we believe that or the assumption is that the new administration could be maybe putting new regulation on the banking sector. I mean the banking sector as a whole is highly profitable and Argentina is going in a recession for the last, I would say, 4 years on average or 8 years on average With inflation being double digit, this year is going to reach maybe 60%, 65% around 60%, sorry. So it's like the only system having profitability or showing profitability in Argentina. So our assumption that that could be again, there could be a new regulation coming. So that is the assumption and we were working on maybe reducing the size of the bank in order that if there's going to be new regulation to have a lower impact on the bank's profitability. So once we were reducing the peso we saw the peso deposits going down and also the dollar deposits going down, we decided to allocate the excess liquidity in other vehicles because we saw or we took advantage on the LILIX because there were some reserve requirements regulation that the Central Bank implemented at the end of the second quarter and in the Q3 that were extremely positive for taking new time deposits and allocating those funds in the leagues that we believe that would disappear in the future. So we started to win that big balloon in terms of the league that we built between the I would say in the Q2 and the first month of the Q3. So that is why we were doing what we did in the Q3 and also in the Q4, we continue reducing the Leliq level. I can give you the exact number, but it's below 10% of total assets. And the idea is to maybe reach the end of November with a few millions in terms of the lead because we have been replacing that with loans with AAA companies and again other financial instruments. So that was the main reason why we were reducing the Leliqs. Thanks, Jorge. And maybe since you mentioned this concern that you might have of the new administration potentially doing things which could be negative for the banking system. I mean, in the past, Cristina Kirchner's government, they had put caps on interest rates. They had also required banks to get approval before increasing fees. Any of all those things or even the treatment of the Lelyx, but you're saying that Leliq should be kind of unwinded by the end of the November. Any of those things that concern you more really in the potential set of measures that the new administration could take? No, I would say no. I mean, when you look at the period between 2011 2015, there were FX controls and there were a lot of regulations on the banking sector, even though that banks were also profitable. So no, we do not have a specific concern in any of those measures. Honestly, we don't know. We do not know which measure could be implemented. The idea is that we want to prepare the bank if there is some of these measures to have the less impact on the bank's solvency and profitability. And that's why we have been working on putting the bank on that situation towards the 10th December. The next question comes from Carlos Gomez with HSBC. Please go ahead. Hello, good morning and thank you for the call. We have seen interest rates decline sharply over the last few weeks. Do you see that as a consequence of more of the exchange controls? Or there's simply less demand for any type of financial assets? 2nd, for next year, and we know it's extremely difficult to project, do you expect any type of loan growth or contraction like in this year? And what would you think your tax rate might be next year with inflation accounting? Thank you. Hi Carlos, how are you? On your first question, I would say that the decline in interest rate is as a consequence of the FX controls, because there are a lot of pesos going on and I think that is the main reason why the Central Bank has been working on reducing the level of interest rates. So that is what we think and according to what we are seeing, we are going to reach the bottom of the level achieved stated by the Central Bank that was 63% for the Leliqs and that was achieved yesterday. So we're going to maintain this level until the end of the month and at the end of the month the Central Bank will have to stay, which is going to be the lower rate for December. But the main reasons are FX control. 2020 loan growth, it is not an easy question to answer. We think that according to the market consensus, inflation is going to be in the low 40s. And we believe that loan growth is going to be a bit negative in real terms. So we are working with a scenario of loan growth between 35%, 38% for the moment. But of course, you know that this landscape can change in 1 or 2 months depending on what's happening with the new administration and the economic program and regulations. In terms of the tax rate, I would say that this similar than the loan growth could be changing. We think that according to the inflation level, we might be posting credits on the income tax. But again, we have to see how much inflation is going to be at the end of 2019 2020. And depending on that and of course depending on the growth that we are going to make in terms of assets, there you have the tax rate. But again, we think that there is going to be some credit, but it's difficult to make some assumptions at this time of the year. There are no questions at this time. This concludes the question and answer session. I will now turn over to Mr. Nicholas Torres for final considerations. Thank you all for your interest in 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.