Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's third quarter 2019 earnings conference call. We would like to inform you that the 3Q19 press release is available to download at the investor relations website of Banco Macro, www.macro.com.ar/relaciones-inversores. 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. Should any participant need assistance during this call, please press star and zero to signal the 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, IR.
Now I will turn the conference over to Mr. Nicolas Torres. You may begin your conference.
Good morning and welcome to Banco Macro third quarter '19 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. Third quarter '19 press release was distributed last Friday, and it's also available at our website. I will now briefly comment on the bank's 3Q19 financial results. Banco Macro's net income for the quarter was ARS 13.2 billion, 87% or ARS 6.2 billion higher than in 2Q19, and 243% higher than the ARS 3.8 billion posted a year ago, based on an increase in net interest income and in net fee income. The bank's 3Q19 accumulated ROE and ROA of 57.3% and 9.4% respectively, remain healthy and show the bank's earning potential.
Recovering net income in the quarter totaled ARS 15.5 billion, 99% or ARS 7.7 billion higher than in the previous quarter. Recurrent net operating income before general and administrative and personal expenses for 3Q19 was ARS 26.2 billion, increasing 27% or ARS 5.6 billion quarter-on-quarter and 103% higher than a year ago. Recurrent operating income after general and administrative expenses and personal expenses was ARS 14.3 billion, 28% or ARS 3.2 billion higher than in 2Q19 and 160% higher than in 3Q18. In the quarter, net interest income totaled ARS 20.1 billion, 19% or ARS 3.3 billion higher than the result posted in 2Q19, and 94% or ARS 9.7 billion higher than the result posted one 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 3Q19, interest on loans represent 45% of total interest income. Net income from government and private securities increased 27% or ARS 4.1 billion quarter-on-quarter due to higher release volume and higher interest rates. Compared to 3Q18, net income from government and private securities increased 334% or ARS 14.6 billion. In 3Q19, FX gains including investment in their financing totaled ARS 2.2 billion gain. In 3Q19, interest expenses totaled ARS 15.5 billion, 7% or ARS 1 billion increase compared to 2Q19 and 139% or ARS 9 billion higher on a yearly basis. Within interest expenses, interest on deposits increased 5% or ARS 640 million 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% or ARS 8.5 billion. In 3Q19, interest on deposits represented 91% of the bank's financial expenses. As of 3Q19, the bank's accumulated net interest margin, including FX, was 19.1%, higher than the 17.6% posted in 2Q19 and the 14% registered in 3Q18. In 3Q19, net fee income totaled ARS 3.8 billion, 11% higher than in 2Q19. On a yearly basis, net fee income increased 31% or ARS 885 million. In 3Q19, net income from financial assets and liabilities at fair value to profit or loss totaled ARS 659 million, increasing 395% or ARS 526 million compared to 2Q19. In the quarter, other operating income totaled ARS 1.1 billion, increasing 9% compared to 2Q19.
On a yearly basis, other operating income decreased 11% or ARS 131 million. In 3Q19, Banco Macro's personal administrative expenses total ARS 7.3 billion, 2% or ARS 114 million higher than the previous quarter. Employee benefits decreased 10% or ARS 500 million quarter-on-quarter. As of September 2019, the accumulated efficiency ratio reached 32.5%, improving from the 33.5% posted in 2Q19 and the 37.6% registered a year ago. In 3Q19, Banco Macro's income tax resulted in a ARS 1.3 billion gain. During this quarter, 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 ARS 18.1 billion quarter-on-quarter, 15% or ARS 24.5 billion 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 ARS 25.1 billion quarter-on-quarter and increased 22% or ARS 46.6 billion year-on-year. Private sector deposits decreased 8% quarter-on-quarter, while public sector deposits decreased 13% quarter-on-quarter. The decrease in private sector deposits was led by term deposits, which decreased 19% or ARS 28.4 billion quarter-on-quarter, while demand deposits increased 4% or ARS 4.4 billion. Within private sector deposits, peso-denominated deposits decreased 6% or ARS 9.8 billion, while US dollar deposits decreased 36% or $765 million. It is important to mention that this strategy of reducing the bank's 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 non-performing to total financial ratio reached 1.9%. The coverage ratio reached 124.16%. In terms of capitalization, Banco Macro accorded an excess capital of ARS 60.1 billion, which represented a total regulatory capital ratio of 26.5% 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. Liquidity assets to total deposit ratio reached 61%. Overall, we have accounted for another positive quarter. We continue to show a solid financial position. Asset quality remain under control and closely monitored. We keep on working to improve more our efficiency standards, and we keep a well-itemized 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. If you would like to ask a question, please press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. One moment, please, for the first question. The first question comes from Gabriel Nobrega with Citibank. Please go ahead.
Hi, everyone. Thank you for the opportunity to ask questions. My question here is more on the top-down. We are already entering the third week since the elections. I know it may be still a bit early to understand where this administration is going to go, but I actually wanted to understand, how have you been preparing the bank for this very volatile scenario? Also, as we move on to December, what are your strategies there to prepare the bank for this new administration? I'll make a second question afterwards. Thank you.
Hi, Gabriel. How are you? This is Jorge Scarinci answering. As you might notice in the quarter, we were working on reallocating the excess liquidity from the LELIQs into short-term lending to AAA companies and also investing in other financial instruments like corporate bonds in pesos, everything. At the same time, we were seeing some reduction in peso-denominated deposits and also in dollar-denominated deposits as a consequence of what happened in the past election and also in the election that Alberto Fernández won the past, 27th of October.
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 third 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. 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, 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 the economic program as a whole, and also on if there's going to be new regulations coming from the central bank on the banking sector. We 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. 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 securities has come down from representing 26% of your total assets to around 22% in the third quarter, 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 come down in the coming quarters? Do you believe that as you diversify, you will be able to maintain this momentum going forward?
No, it's a good question, Gabriel. I think that the level of the margin that we saw in the third quarter, I think that is one of the highest in the last, I would say five, six 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 LELIQ rates are going down and most of the rates in the system are going down. 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 second quarter levels in terms of net interest margin, approx.
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 third quarter.
Perfect, Jorge. Thank you.
You're welcome, Gabriel.
The next question comes from Nicolas Riva with Bank of America. Please go ahead.
Yeah. Thanks, Jorge and Nicolas for taking my question. It's a follow-up on the prior question. 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? Also what's the plan for the remaining LELIQs? 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 idea is that we believe that, or the assumption is that the new administration could be maybe putting new regulation on the banking sector. The banking sector as a whole is highly profitable, and Argentina is going in a recession for the last, I would say eight years on average. With inflation being double digit, this year is going to reach maybe around 60%. It's like the only system having profitability or showing profitability in Argentina. Our assumption that could be, again, there could be a new regulation coming. 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.
Once we saw the peso deposit sum going down and also the dollar deposit going down, we decided to allocate the excess liquidity in other vehicles because we saw or we took advantage on the LELIQs because there were some reserve requirements, regulations that the central bank implemented at the end of the second quarter and in the third quarter that were extremely positive for taking new time deposits and allocating those funds in the LELIQs that we believe that would disappear in the future. We started to unwind that big balloon in terms of the LELIQs that we built, I would say, in the second quarter and the first month of the third quarter. That is why we were doing what we did in the third quarter, and also in the fourth quarter, we continue reducing the LELIQs level.
I can give you the exact number, but it's below 10% of total assets. The idea is to maybe reach the end of November with a few ARS million in terms of LELIQs, because we have been replacing that with loans to AAA companies and again, other financial instruments. That was the main reason why we were reducing the LELIQs.
Thanks, Jorge. 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. 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 LELIQs, but you are saying that the LELIQs should be kind of, unwound by the end of 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. When you look at the period between 2011 and 2015, there were FX controls and there were a lot of regulations on the banking sector. Even though that, banks were also profitable. No, we do not have a specific concern in any of those measures. Honestly, we do not know which measure could be implemented. The idea that we want to prepare the bank, if the result 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 of December.
Thanks very much, Jorge.
You're welcome, Nicolas.
The next question comes from Carlos Gomez-Lopez 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 more of the FX controls, or there's simply less demand for any type of financial assets? Second, 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? What would you think your tax rate might be next year with inflation accounted? 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. That is what we think, and according to what we are seeing, we are going to reach the bottom of the level stated by the Central Bank. That was 63% for the LELIQs, and that was achieved yesterday. 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 state which is going to be the lower rate for December. The main reasons are FX control. 2020 loan growth 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. We are working with a scenario of loan growth between 35%-38% for the moment. Of course, you know that this landscape can change in one or two months, depending on what's happening with the new administration and economic program and regulations. In terms of the tax rate, I would say that is 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. Again, we have to see how much inflation is going to be at the end of 2019 and 2020.
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. Again, we think that there is going to be some credit. It's difficult to make some assumptions at this time of the year.
Thank you very much.
Welcome, Carlos.
There are no questions at this time. This concludes the question and answer session. I will now turn over to Mr. Nicolas Torres for final considerations.
Thank you all for your interest in Banco Macro. We appreciate your time and look forward to speaking with you again. Good day.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.