Earnings Call: Q2 2019

Aug 8, 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 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.arrelacionesinversores 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 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's 2Q 2019 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 it's available at our website. QQ 2019 press release was distributed yesterday and it's also available at our website. I will now briefly comment on the bank's Q2 2019 financial results. Banco Macro's net income for the quarter was MXN 7,000,000,000, 4 percent or MXN 312,000,000 lower than in 1Q 2019 and 124 percent higher than the ARS 3,900,000,000 posted a year ago based on an increase in net interest income and net fee income. The bank's 2Q 2019 accumulated ROE and ROE of 47% and 7.7%, respectively, remained healthy and showed the bank's earning potential. Recurring net income in the quarter totaled ARS 7,800,000,000, 37 percent or ARS 2,100,000,000 higher than in the previous quarter. Recurring net operating income before general and administrative and personnel expenses for Q2 2019 was ARS20.6 billion, increasing 24% or ARS4.1 billion quarter on quarter. Recurring operating income after general and administrative expenses was ARS 11,100,000,000, 39 percent or ARS 3,100,000,000 higher than in the previous quarter. In the quarter, net interest income totaled ARS 16,800,000,000, 30 percent or ARS 3,900,000,000 higher than the result posted in Q1 2019 and 85 percent or ARS 7,700,000,000 higher than the result posted 1 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% of ARS 4,400,000,000 quarter on quarter due to higher lease volume and higher interest rates. Compared to 2Q 2018, net income from government and private securities increased 3 76% or ARS 11,800,000,000. In Q2 2019, FX gains included investment in the Rebit Financial totaled ARS 3.21 1,000,000 gain. In 2019, interest expenses totaled ARS 14,600,000, 27 percent or ARS 3,100,000,000 higher than in 1Q 2019 and 2 22 percent or ARS 10,000,000,000 higher on a yearly basis. Within interest expenses, interest on deposits increased 28% or ARS 3,000,000 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 2 50 percent or ARS 9,700,000,000. In Q2 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 3,400,000,000, 2% higher than 1Q 2019. On a yearly basis, net fee income increased 26% or ARS710,000,000. In Q2 2019, net income from financial assets and liabilities, fair value through profit or loss totaled MXN 133 million, decreasing 93% compared with the Q1 of this year. It should be noted that 1Q 2019 includes mark to market of the remaining stake that we have in Prisma. In the quarter, other operating income decreased 68% or ARS 2,100,000,000. 1Q 2019 include a positive result from the sale of the 51% stake in Prisma. On a yearly basis, other operating income increased 64 percent or ARS 383,000,000. In Q2 2019, Banco Macro's personal and administrative expenses totaled ARS 7,200,000,000, 38 percent or ARS 2,000,000,000 higher than in the previous quarter. Employee benefits increased 57 percent from ARS 1,800,000,000 quarter over quarter. The main drivers for the increases were higher social securities contribution and charter increases agreed with the union. Compared to 2Q next 2018, general and administrative and personnel expenses were 101% higher. As of June 2019, the accumulated efficiency ratio reached 33.5%, improving from the 38 0.7% posted in Q2 2018. In 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 7.0 5,000,000 quarter on quarter and 16% year on year. It is important to mention that Banco Macro's 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 Q 2018, while private sector deposits decreased 16% quarter on quarter but increased 21% year on year. As of June 2019, Banco Macro's transactional accounts represents approximately 32% of total deposits. Banco Macro's market share over private deposits as of June 2019 totaled 7%. In terms of asset quality, Banco Macro's nonperforming total financial ratio reached 2.12% and the coverage ratio reached 116.14%. In terms of capitalization, Banco Macro accounted an excess capital of ARS 51,000,000,000, which represented a total regulatory capital ratio of 26.3 percent and a Tier 1 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 deposit ratio reached 66.4%. Overall, we have accounted for another positive quarter. We continued 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 our well optimized 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. The first question will come from Gabriel Nobrega of Citibank. Hi, everyone. Thank you for the opportunity to ask questions. During the quarter, looking at your NPL ratios, we know that they actually decreased from corporates, which if I'm not mistaken, it was the first time in over 8 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 upper market, and this is and this continues down on performing very bad. However, I just wanted to in the Q3 or even in Q4? Thank you. Gabriel, this is Jorge Scarinchi 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 Q2 and maybe the 1st month of the Q3. So 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. And therefore, the decline in NPLs in coming quarters also should be in a progressive trend, not in a very sharp trend. So I would say that this is it should be close to the peak of NPLs. And if you allow me just a 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 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. And 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 a fee? 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 etcetera. But of course, we're going to appeal to that. Yes, of course. All right. Sorry, just in follow-up here. Do you have maybe AUM 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 Nicolas, 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? And 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? And finally, my last question is in terms of loan growth. It came below inflation. So do you think the low credit demand will continue during the Q3? Or do you think we'll 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 in here in Argentina, national polls, provincial polls. So there are many. Honestly, I don't want to spend a lot of time commenting on the poll because they can change maybe a bit in tomorrow. So I think that we should wait for next Monday, there are 2 more days or 3 more days to go, We will have more final results on these primary elections on here. Honestly, I don't know if it is worth commenting on the poll that you already have on the table are the same that we are having here. I think that for the moment, the market is working with those scenarios. It's pretty calm. So let's go to your second question in terms of the trend on interest rates. Even though we were seeing some decline in the release interest rate and that was also impacting on the rate that we're paying on the time deposits, of course, on the downward trend. In the last, I would say, 2 weeks almost, there was a kind of reverse in this trend. The releases of rates went up from level of mid to high 50s to low 60s as they are right now. And therefore, we stopped on the decline on the time deposit rate that we were paying. So 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 handoff 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 deposits as rates as we have been doing that in different other scenarios. And the idea is to as soon as we have credit man coming, and this is part of your 3rd question, we are going to allocate the funds on new loans instead of the Q2. We are, for the moment, seeing the same trend in the Q3. Honestly, besides the results on the primary election or maybe on the 1st run election that's 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. But I would not be very optimistic on a very steep rebounding in credit demand in the second half of the year even though with a positive outlook on politics. So I would say that this year, loans are going to be growing well below inflation. So that's the scenario that we are working with. Perfect. Thank you very much, Jose. You're 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? And understanding reading the disclosure at the end of the release, it sounds like there was this agreement that now with Afib, but then Afif decided to go to the attorney general and there was a payment plan. I mean, what is the bottom line here? This was a payment that was made and that you're waiting 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? No, this is not a cash payment. This is going to be paid in different installments, like 6 installments. So the decision is that because we have this kind of version of the local version of the IRS, We decided to tie to these 50 installment plans to pay. But in the meantime, we are going to appeal to this decision. So 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. So you've entered into the agreement, you've provisioned the number I see that I believe I understand is MXN 1,100,000,000 and then we wouldn't expect any other accounting impacts the way I read your statement from this issue. Well, the extra, let's say, extra payment that you will notice is that compared to the following quarter, we will have to pay close to maybe MXN 150,000,000 more per quarter on the new percentage of solar contribution compared to the one that we were allocating in the former quarters. But 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. How kind of liquidity it's had? Is it trying to bolster liquidity even more? No. I mean, 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 in the quarter. We are slightly long in our FX position. And I would say that no matter the result that we are 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 decision taking decision process by the people. Or if we have a positive scenario in the case of an outcome with the Mercury having a good performance in this election, we will continue allocating either in the league. So if there is credit demand surging, we are going to elevate funds there. So we have been undergoing this type of volatility from the political scenario for the last 20 years in Argentina. So I would say that something that Banco Macro has is the ability to move from one scenario to the other with a very a lot of speed here because you know that the making decision process is very indoors and very fast here. So as we have been demonstrating in the last years with different presence, with different economic cycles, the bank has been showing excellent results in terms of bottom line solvency asset quality. So the idea to continue the same trend. And 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. But you gave a calculation that the earnings for the 1st 6 months, if I remember correctly, would have been 4,800,000,000 dollars if you accounted for inflation, the inflation adjustment, and I guess that's versus reported of 14 +1000000000 dollars That does by coincidence, our calculation is that the inflation loss would be approximately $4,800,000,000 in the 2nd 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 direction in the Jason that you were referring to. What would be the inflation impact if you had to account for inflation accounting in the Q2, which we know you won't have to do until next year, but 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. So if we multiply that by the inflation in the quarter, we come up with about $4,800,000,000 loss. Approximately let's say approximately, yes, but approximately. That's very helpful. Thanks. Thanks, Jason. You're welcome. The next question will come from Alonso Garcia of Credit Suisse. Good morning, everyone. Thank you for taking my question. My question is first just a follow-up. I'm sorry to insist on the total contributions. I just want to so you had one impact of ARS 1,100,000,000 in the OpEx line. But my understanding is you also had an impact on the other operating expense line, right? So what was the overall impact of this adjustment this quarter? And if I understood correctly from a previous question, this was this quarter was a one time impact and next quarter we will only see ARS150 1,000,000 operational expense on this line compared to previous quarters. Is that correct? The total impact is close to €1,900,000,000 but of course, there you would have to deduct the impact on the income tax. So it's €1,500,000,000 percent. So it was 1.1 percent in OpEx line and the rest in other operating expense, correct? Yes. Okay, perfect. Thank you. And my second question would be just on fees. I mean, fees are lagging significantly inflation. So if you could comment here what are the main drivers for these and 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. And we have some difficulties on the last quarter to have the approval of the Central Bank on the last increase in the fees. So 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. But the idea going forward is to maintain the fee increases in line with inflation. So for next year, I want to mention is that fee should be growing in line with inflation in the area of 30%. The next question will come from Yuri Fernandes of JPMorgan. Thank you, gentlemen. I have 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, like not willing to show a huge exposure to government securities. Maybe that's something like this. And my second question is regarding regulations. We saw some changes on reserve requirements this quarter in Argentina, but it was really like on a specific case on credit cards, judicial deposits. So my question is, when do you see the reserve requirements for the deposit and time deposit 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. I mean, the trend or the speed on the decreasing, the trend is going to be very tied to the inflation rate. So depending on how inflation evolves and the speed of the deceleration of inflation, that is going to be a good proxy for the declining in interest rates both on the Butler, on the Leliqs. But assuming to what we are forecasting or the consensus we're forecasting for next year of the inflation close to 30%, we are seeing the Basler rate in the area of between 5% and 6 percentage points above inflation at least and the Delix at least 5% to 7% or 8% to 8% above the backlog rate. So depending on that scenario and depending the speed of the decline in the inflation, we are going to see similar trend 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 same that we have been having in the last several years, a very conservative exposure there, small portion of sovereign bond in pesos and, of course, allocating the most that we find 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. So the idea to continue with the same trend in terms of sovereign bonds and the lease. 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 is it simply application of IFRS? And second, I mean, in this scenario you're describing, so you have inflation of 30%, but lot of 35%, 36%, so I think 30 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 about returns can Banco Macro produce? Because that will be on a smaller level of interest earning assets, of course. In terms of your first question, no, the guidelines on inflation adjustments and accounting are in the discussion of the Central Bank. They are not defined yet. So we do not have a final outcome there. On your second question, I mean, considering that scenario, I mean, Banco Macro, as we have been showing and doing, we are going to try to do our best 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. So you will have to allocate liquidity in the LIGS 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 Neliqs, We are going to partially switch on loans, of course, looking at asset quality. But 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 we have 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 in the area, let's say, in the area of 15%. But again, this is a dynamic process. At the beginning of 2019, we were working with another scenario. We have to switch in the middle. So something similar could happen in 2020. So the idea that we have and the forecast that we work with, it's that one. Okay. And when you say 15%, that's 15% nominal, which sorry, real and that will be about a 45% nominal more or less. Yes, yes. And if I may follow-up on before on the guidelines. Do you think is for certain that you will apply inflation accounting next year because we are already in August or it might be delayed for an extra year? That's the question for the Central Bank. But I think that we might be having inflation adjusted for next year, yes. Thank you so much. Welcome. 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. 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 has now concluded.