Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's 2Q 2019 earnings conference call. We would like to inform you that the 2Q 2019 press release is available to download at the investor relations website of Banco Macro, www.macro.com.ar/relaciones-inversores. 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. Should any participant need assistance during this call, please press star then 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. Nicolás Torres, IR. I will turn the conference over to Mr. Nicolás Torres.
You may begin your conference.
Good morning and welcome to Banco Macro 2Q 2019 conference call. Any comment we may make today may include forward-looking statements which are subject to various conditions. These are outlined in our 20-F, which was filed to the SEC, and it's available at the website. 2Q 2019 press release was distributed yesterday. It's also available at our website. I will now briefly comment on the bank's second quarter 2019 financial results. Banco Macro's net income for the quarter was ARS 7 billion, 4% or ARS 312 million lower than 1Q 2019, and 124% higher than the ARS 3.9 billion posted a year ago, based on an increase in net interest income and net fee income. The bank's 2Q 2019 accumulated ROE and ROA of 47% and 7.7%, respectively, remain healthy and show the bank's earning potential.
Regarding net income in the quarter, totaled ARS 7.8 billion, 37% or ARS 2.1 billion higher than in the previous quarter. Recurrent net operating income before general and administrative and personal expenses for 2Q 2019 was ARS 20.6 billion, increasing 24% or ARS 4.1 billion quarter-on-quarter. Recurrent operating income after general and administrative expenses was ARS 11.1 billion, 39% or ARS 3.1 billion higher than in the previous quarter. In the quarter, net interest income totaled ARS 16.8 billion, 30% or ARS 3.9 billion higher than the result posted in 1Q 2019, and 85% or ARS 7.7 billion higher than the result posted one year ago. This performance can be traced to a 28% quarter-on-quarter increase in interest income and a 27% increase in interest expenses. Within interest income, interest on loans increased 1% quarter-on-quarter and 42% year-on-year.
In 2Q 2019, interest on loans represented 47% of total interest income. Net income from government and private securities increased 57% or ARS 5.4 billion quarter-on-quarter due to higher lease volume and higher interest rates. Compared to 2Q 2018, net income from government and private securities increased 376% or ARS 11.8 billion. In 2Q 2019, FX gains, including investment in the rated financing, total a ARS 321 million gain. In 2Q 2019, interest expenses totaled ARS 14.6 million, 27% or ARS 3.1 billion higher than 1Q 2019 and 222% or ARS 10 billion higher on a yearly-basis. Within interest expenses, interest on deposits increased 28% or ARS 3 million quarter-on-quarter, mainly driven by an increase in the average volume of time deposits and increase in the average time deposit interest rates. On a yearly-basis, interest on deposits increased 250% or ARS 9.7 billion.
In 2Q 2019, interest on deposits represented 93% of the bank's financial expenses. As of Q2 2019, the bank's accumulated net interest margin, including FX, was 17.6%, higher than the 17.2% posted in 1Q 2019 and the 14.4% registered in 2Q 2018. In 2Q 2019, net fee income totaled ARS 3.4 billion, 2% higher than 1Q 2019. On a yearly basis, net fee income increased 26% or ARS 710 million. In 2Q 2019, net income from financial assets and liabilities fair value to profit or loss totaled ARS 133 million, decreasing 93% compared with the first quarter of this year. It should be noted that 1Q 2019 includes mark-to- market of the remaining stake that we now have in Prisma. In the quarter, other operating income decreased 68% or ARS 2.1 billion. 1Q 2019 include a positive result from the sale of the 51% stake in Prisma.
On a yearly basis, other operating income increased 64% or ARS 383 million. In 2Q 2019, Banco Macro's personal administrative expenses totaled ARS 7.2 billion, 38% or ARS 2 billion higher than in the previous quarter. Employee benefits increased 57% or ARS 1.8 billion quarter-on-quarter. The main drivers for the increases were higher social security contributions and salary increases agreed with the union. Compared to 2Q 2018, general administrative and personal expenses were 101% higher. As of June 2019, the accumulated efficiency ratio reached 33.5%, improving from the 38.7% posted in Q2 2018. In 2Q 2019, Banco Macro's effective income tax rate was 29%, compared to 30.1% in 1Q 2019. In terms of loan growth, the bank's financing to the private sector grew ARS 705 million quarter-on-quarter and 16% year-on-year.
It is important to mention that Banco Macro market share over private sector loans as of June 2019 reached 7.7%. On the funding side, total deposits grew 4% quarter-on-quarter and 58% year-on-year. Private sector deposits grew 7% quarter-on-quarter and 63% compared to 2Q 2018, while public sector deposits decreased 16% quarter-on-quarter, but increased 21% year-on-year. As of June 2019, Banco Macro's transactional accounts represent approximately 42% of total deposits. Banco Macro's market share over private deposits as of June 2019 total 7%. In terms of asset quality, Banco Macro's non-performance to total financial ratio reached 2.12%, and the coverage ratio reached 116.14%. In terms of capitalization, Banco Macro counted an excess capital of ARS 51 billion, which represented a total regulatory capital ratio of 26.3% and a tier one ratio of 19.6%.
The bank's aim is to make the best use of this excess capital. The bank's liquidity remained more than appropriate. Liquid assets to total deposits ratio reached 66.4%. 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 our efficiency standards, and we keep as well a managed 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 question and answers. If you would like to ask a question, please press star 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. At this time, we will pause momentarily to assemble our roster. The first question will come from Gabriel Nóbrega of Citibank.
Hi, everyone. Thank you for the opportunity to ask questions. During the quarter, looking at your NPL ratios, we note that they actually decreased from corporates, which, if I'm not mistaken, it was the first time in over eight quarters, which we saw your corporate NPLs actually decreasing. However, on the other hand, we saw that your consumer NPL ratios actually increased, reaching almost 3%. Here, I understand that only a small portion of your payroll loans are in the open market, and this continues on outperforming very bad. However, I just wanted to understand with you, where do you think that we are in the NPL cycle, and if you believe that 2Q 2019 was actually the peak, or it should only be in the third quarter or even in the fourth quarter? Thank you.
Hi, Gabriel. This is Jorge Scarinci answering. Thanks for your question. I would say that in terms of economic activity, yes, we're in presence of the worst part of the recession between the second quarter and maybe the first month of the third quarter. We expect that NPL should be in the peak or near the peak. From now onwards, we should be slightly better macroeconomic figures, even though the rebound that we are forecasting is not that very steep. Should be a kind of a timid recovery in the economy, therefore, the decline in NPLs in coming quarters also should be in a progressive trend, not in a very sharp trend. I would say that this should be close to the peak of NPLs.
If you allow me just in follow-up here, looking at your NPL ratios, they reached around 2.1% in this quarter. What do you believe they should reach by the end of the year?
I think that should be ranging in the area of 2% approx. That's the idea that we have, depending also on what's going on in the macro, but looking to the focus that we are working with, in the area of 2%.
All right. That's very clear. As for my second question, could you just give us more color on what happened with the payment of the Social Security charges that you had to pay to AFIP? Is there any way that you could maybe appeal to this decision and even reverse the fine that you paid?
Yes, of course, we are going to appeal on that. We described in the last part of our press release all the steps that we follow in the different instances of justice and et cetera. Of course, we're going to appeal to that. Yes, of course.
All right. Sorry, just in follow-up here, do you have maybe a timetable of when this could happen?
No. Honestly, it's not that very easy to predict. No.
All right. That's very clear. Thank you, Jorge.
You're welcome.
The next question will come from Ernesto Gabilondo of Bank of America.
Hi, good afternoon, Jorge and Nicolás, and thanks for taking questions. I have three questions from my side. On the first one, can you elaborate on what have you been hearing in terms of polls ahead of the primary elections? My second question is, if we start to see lower interest rates, how should we think on net interest income growth? How fast do you expect to compensate the lower yield on securities with credit demand, and how much additional repricing do you expect to have? Finally, my last question is, in terms of loan growth, it came below inflation. Do you think the low credit demand will continue during the third quarter, or do you think it will start to pick up after the presidential elections? Thank you.
Ernesto, how are you? Referring to your first question in terms of polls, there are many polls out there here in Argentina. National polls, provincial polls. There are many. Honestly, I don't want to spend a lot of time commenting on the polls because they can change maybe a bit tomorrow. I think that we should wait for next Monday. There are two more days or three more days to go, and we will have more final results on these primary elections on here. Honestly, I don't know if it is worth commenting on the polls that you already have on the table. I understand that we are having here, I think that for the moment the market is working with those scenarios. It's pretty calm. Let's go to your second question in terms of the trend on interest rates.
Even though we were seeing some decline in the Leliq interest rate, and that was also impacting on the rate that we were paying on the time deposits, of course, on the downward trend. In the last, I would say two weeks almost, there was a kind of reverse in this trend, and the Leliq interest rates went up from level of mid to high 50s to low 60s, as they are right now. Therefore, we stop on the decline on the time deposit rate that we were paying. The comment that we have is that you already see or saw in the press release that we were able to expand the margin on the handle of high interest rates.
On a scenario of declining interest rates, of course, what we are going to do is to transfer the lower rate that we are getting on the Leliqs into lower time deposit interest rates, as we have been doing that in different other scenarios. The idea is to, as soon as we have credit demand coming, and this is part of the third question, we are going to allocate the funds on new loans instead of the Leliqs. However, what we are seeing is a sluggish credit demand, as what we saw in second quarter. We are, for the moment, seeing the same trend in the third quarter.
Honestly, besides the results from the primary elections or maybe on the first round elections are going to happen by the end of October, I think that credit demand is more tied to the level of interest rates than the political scenario, even though the political scenario also helps. I would not be very optimistic on a very steep rebound in credit demand in the second half of the year, even though with a positive outlook on politics. I would say that this year, loans are going to be growing well below inflation. That's the scenario that we are working with.
Perfect. Thank you very much, Jorge.
You are welcome.
The next question will come from Jason Mollin of Scotiabank.
Hi, thank you. My question is a follow-up on the Social Security contribution. I just want to understand, was this a cash payment that was made in the quarter? Understanding, reading the disclosure at the end of the release, it sounds like there was this agreement that now with AFIP, but then AFIP decided to go to the attorney general and there was a payment plan. What is the bottom line here? This was a payment that was made and that you're going to appeal because there was a negative decision against the bank, or is the decision still pending?
No. Hi, Jason, how are you?
Hi.
No, this was not a cash payment. This is going to be paid in different installments, like six installments. The decision in that, because we have this kind of version of the local version of the IRS, we decided to tie to these six installment plans to pay. In the meantime, we are going to appeal to the decision. Of course, the final outcome, we don't know, but that's why we decided to make a provision and enter into this installment facility payment agreement that we got.
You've entered into the agreement, you've provisioned the number I see that I believe I understand is ARS 1.1 billion.
Yeah.
We wouldn't expect any other accounting impacts, the way I read your statement from this issue?
The extra payment that you will notice is that, compared to the following quarter, we will have to pay close to maybe ARS 150 million more per quarter on the new percentage of social contribution compared to the one that we were allocating in former quarters. Apart from that, no, we are not going to make additional provisions on this issue.
Thank you. Maybe some comments on the outlook and how the bank is preparing for this weekend, for this poll, and for potential volatility in the FX and perhaps some kind of response in rates. The kind of liquidity it's had, i s it trying to bolster liquidity even more?
No, Jason, we have been working, of course, preparing the bank for this political scenario, increasing a little bit the liquidity in pesos and also in dollars. You can notice that in the liquidity ratio that we are posting the quarter. We are slightly long in our FX position. I would say that no matter the result that we get here, that again, this is a primary election. The bank is prepared for, let's say, both results, in the sense that we are liquid in the case that there would be some volatility on interest rates or time deposits, taking decision process by the people.
If we have a positive scenario in the case of an outcome with Macri having a good performance in this election, we will continue allocating either in Leliqs or if there is credit demand surging, we are going to allocate funds there. We have been undergoing this type of volatility from the political scenario for the last 20 years in Argentina. I would say that something that Banco Macro has is the ability to move from one scenario to the other without a lot of speed here, because you know that making decision process is very indoors and very fast here. As we have been demonstrating the last years with different presidents, with different economic cycles, the bank has been showing excellent results in terms of bottom line solvency, asset quality. The idea is to continue the same trend.
Lastly, just a question on the accounting for inflation. You highlighted that again in this release that the expectation is for the bank to start reporting inflation accounting next year. You gave a calculation that the earnings for the first six months, if I remember correctly, would have been ARS 4.8 billion, if you accounted for inflation, the inflation adjustment. I guess that's versus reported of ARS 14+ billion. By coincidence, our calculation is that the inflation loss would be approximately ARS 4.8 billion in the second quarter alone. Is that an accurate assessment? What we did was take the shareholders equity and subtracted the fixed assets and intangibles and multiplied that by the inflation of, I guess it was almost 9.5%, 10%. Does that make sense?
I couldn't get all the reckoning, Jason.
What would be the inflation impact if you had to account for inflation accounting in the second quarter, which we know you won't have to do till next year. Our calculation is taking the shareholders' equity, and subtracting the fixed assets and intangibles, and that's what's exposed. That's the net monetary position exposed to inflation. If we multiply that by the inflation in the quarter, we come up with about ARS 4.8 billion loss.
Approximately. Let's say approximately, yes. Approximately.
That's very helpful. Thanks.
Thanks, Jason.
Welcome.
The next question will come from Alonso Garcia of Credit Suisse.
Good morning, everyone. Thank you for taking my question. My question first is just a follow-up, I'm sorry to insist on the social contributions. You had one impact of ARS 1.1 billion in the OpEx line, but my understanding is you also had an impact on the other operating expense line, right? What was the overall impact of this adjustment this quarter? If I understood correctly from a previous question, this quarter was a one-time impact, and next quarters, we will only see ARS 150 million of additional expense on this line compared to previous quarters. Is that correct?
The total impact is close to ARS 1.9 billion, but of course, there you will have to deduct the impact on the income tax, so it's ARS 1.5 billion.
Understood. It was ARS 1.1 billion in OpEx line and the rest in other operating expense, correct?
Yeah.
Okay. Perfect. Thank you. My second question would be just on fees. Fees are lagging significantly inflation. If you could comment here, what are the main drivers for this? If we should expect this trend to revert next year and see fees growing more in tandem with inflation or maybe even above that. Thank you.
Yes, Alonso, the point is that we have to announce the central bank when we are going to increase inflation. We have some difficulties on the last quarter to have the approval of the central bank on the last increase in the fees. Basically, that's why we are having a fee performance below inflation. The idea, of course, of the bank is to be in line with inflation, but we were not able to transfer all the price increases we would like to. The idea going forward is to maintain the fee increases in line with inflation. For next year, our estimation is that fees should be growing in line with inflation in the area of 30%.
Perfect. Understood. Thank you very much.
You are welcome.
The next question will come from Yuri Fernandes of JP Morgan.
Thank you, gentlemen. I had a question regarding the balance of your government securities. There was a drop, a 13% decrease, mostly because of Leliqs. I just want to understand a little bit the rationale here. Maybe you, I don't know, not willing to show a huge exposure to government securities, i f that's something like this. My second question is regarding regulations. We saw some changes on reserve requirements this quarter in Argentina, but it was really on a specific case on credit cards, judicial deposits. My question is, when do you see the reserve requirements for demand deposits and time deposits really decreasing in Argentina? How fast, if there is a positive outcome in elections, should we see this happening? Thank you.
Hey, how are you? I'm going to answer the second question first. The trend or the speed on the decreasing interest rate is going to be very tied to the inflation rate. Depending on how inflation evolves and the speed of the deceleration of inflation, that is going to be a good proxy for the decline in interest rates, both on the BADLAR, on the Leliqs. Assuming to what we are forecasting or the consensus forecasting for next year of inflation close to 30%, we are seeing the BADLAR rate in the area of between 5 percentage points and 6 percentage points above inflation, at least, and the Leliqs at least 5 percentage points - 7 percentage points or 8 percentage points above the BADLAR rate.
Depending on that scenario, and depending the speed of the decline in the inflation, we are going to see similar trending in the decline in interest rates there. On the first question that you mentioned, the idea, of course, is that exposure on sovereign bonds is the trend that we have been having in the last several years, a very conservative exposure there. Small portion of sovereign bond in pesos. Of course, allocating the most that we can in excess liquidity on the Leliqs. Of course, that is short-term instrument here and of course, yielding what we consider the most attractive rate. The idea to continue with the same trend in terms of sovereign bonds and Leliqs.
The next question will come from Carlos Gomez of HSBC.
Hi, good morning. I would like to go back to the inflation accounting. I would like to know if you already have the rules that are going to apply for inflation accounting next year, or if it's simply application of IFRS. Second, in this scenario you are describing, so you have inflation of 30%, but a lot of 35%, 36%, Leliq, 42%, 44%, and loans which are going to be less in real terms than they are today, and let's see if there is any growth at all next year. What above returns can Banco Macro produce? That will be on a smaller level of interest rate analysis, of course. Thank you.
Hi, Carlos. How are you? In terms of your first question, no, the guidelines on inflation adjustments and accounting are under discussion at the central bank. They are not defined yet. We do not have a final outcome there. On your second question, considering that scenario, Banco Macro, as we have been showing and doing, we are going to try to do our best in order to have the highest return, the highest bottom line. Of course, this is a consequence of high revenues, maintaining costs under control as much as we can, and caring a lot about asset quality. You will have to allocate excess liquidity in Leliqs because loans are not growing.
We are going to do that. If we are seeing some recovery on loans and rates are there compared to the Leliqs, we are going to partially switch on loans, of course, looking at asset quality. I would say that in terms of bottom line, we are very nominal bottom line growth. We are confident for next year. When you adjust that to inflation, it will depend on the scenario of inflation that you have, the 30% that we are working with. We think that the return for Banco Macro for next year should be positive in the range of between, let's say, in the area of 15%. Again, this is a dynamic process. At the beginning of 2019, we were working with another scenario. We have to switch in the middle. Something similar could happen in 2020.
The idea that we have and the forecast that we work with is that one.
Okay. When you say 15%, that's 15% nominal, which, sorry, real, and that will be about a 45% nominal, more or less.
Yeah.
Yeah. If I may follow up on before on the guidelines, do you think it is for certain that you will apply inflation accounting next year because we are already in August, or it might be delayed for next year?
That's a question for the central bank, but I think that we might be having inflation adjusted for next year, yes.
Thank you so much.
Welcome.
Once again, if you have a question, please press star then one at this time. Again, it's star then one if you wish to ask a question. As there are no further questions at this time, this concludes the question and answer session. I will now turn the call over to Mr. Nicolás Torres for the 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 your lines. Have a great day.