Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's first quarter 2019 earnings conference call. We would like to inform you that the first quarter 2019 press release is available to download at the investor relations website of Banco Macro at www.ri-macro.com.ar. 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 zero to signal the operator. It is now my pleasure to introduce our speakers today. Joining us from Argentina are Mr. Gustavo Manriquez, Chief Executive Officer, Mr. Jorge Scarinci, Chief Financial Officer, and Mr. Nicolás Torres in investor relations.
Now I'd like to turn the conference over to Mr. Nicolás Torres. You may now begin your conference.
Good morning, welcome to Banco Macro's first quarter 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 with the SEC and it's available at our website. First quarter 2019 press release was distributed yesterday, and it's also available at our website. I will now briefly comment on the bank's first quarter 2019 financial results. Banco Macro net income for the quarter was ARS 7.3 billion, 40% or ARS 2.1 billion higher than fourth quarter 2018, and 106% higher than the ARS 3.5 billion posted a year ago based on an increased net interest income and net fee income. The bank's first quarter 2019 ROE and ROA of 50% and 8.4% respectively, remain healthy and show the bank's earning potential.
Net income for first quarter 2019 included a ARS 1.9 billion positive result related to the sale of the first 51% stake that Macro had in Prisma, and the mark to market of the 49% remaining stake. Excluding Prisma sale result, recurring ROE and ROA in first quarter 2019 would have been 37.2% and 6.3% respectively. Net operating income for first quarter 2019 was ARS 19.1 billion, increasing 18% or ARS 2.9 billion quarter-over-quarter, and 78% or ARS 8.4 billion compared to the previous year. Operating income after general and administrative expenses was ARS 10.5 billion, 39% or ARS 2.9 billion higher than fourth quarter 2018, and 105% higher than a year ago.
In the quarter, net interest income totaled ARS 12.9 billion, 5% or ARS 643 million higher than the result posted in 4Q18, and 53% or ARS 5 billion higher than the result posted one year ago. This performance can be traced to a 2% quarter-on-quarter increase in interest income and a 1% decrease in interest expenses. Within interest income, interest on loans decreased 7% or ARS 1.1 billion quarter-on-quarter. On a yearly basis, interest on loans increased 59% or ARS 5.4 billion. In first quarter 19, interest on loans represented 60% of total interest income. Net income from government and private securities increased 20% or ARS 1.6 billion quarter-on-quarter due to higher LEBAC volume and high interest rates.
Compared to the first quarter of last year, net income from government and private securities increased 345% or ARS 7.3 billion. In 1Q19, differences in quote prices of gold and foreign currency, including derivative financing, totaled ARS 250 million gain. During the first quarter of 2019, Banco Macro strategy was to sell US dollars in the spot market and invest the resulting pesos in the LEBAC, while at the same time hedging the FX position with investment in derivatives. This strategy proved to be highly successful and profitable during the quarter. In first quarter of 2019, interest expenses totaled ARS 11.5 billion, 1% or ARS 62 million decrease compared to the fourth quarter of last year, and 238% or ARS 1.1 billion higher on a yearly basis.
Within interest expense, interest on deposits decreased 1% or ARS 57 million quarter-on-quarter, mainly driven by an increase in the average volume of time deposits and a decrease in the average time deposit interest rates. On a yearly basis, interest on deposits increased 252% or ARS 7.6 billion. In 1Q19, interest on deposits represented 92% of the bank financial expenses. At 1Q19, the bank's net interest margin, including effects, was 17.2%, higher than the 14.9% posted in 4Q18, and the 15.4% registered in 1Q18. In 1Q19, net fee income totaled ARS 3.3 billion, 2% higher than in 4Q18. On a yearly basis, net fee income increased 40% or ARS 951 million. In 1Q19, net income from financial liabilities at fair value to profit or loss totaled ARS 2 billion, increasing 442% or ARS 1.6 billion compared with 4Q18.
The positive result was driven by the mark-to-market of the remaining 49% stake that Macro has in Prisma. In the quarter, other operating income increased ARS 2.5 billion. Other income stands out with a ARS 2.3 billion increase compared to the fourth quarter of last year, related to the sale of the 51% stake that we had in Prisma. On a yearly basis, other operating income increased 423% or ARS 2.5 billion. In 1Q19, Banco Macro's personal and administrative expenses totaled ARS 5.2 billion, unchanged from the previous quarter. Employee benefits were unchanged quarter-over-quarter, and compared to the first quarter of last year, general administrative and personal expenses increased 53%. As of March 2019, the efficiency ratio reached 28.6%, improving from the 39.7% posted in 4Q18 and the 35.6% posted in 1Q18.
This was as a result of a 1% increase in expenses and a 28% increase in net interest income, net fee income, and other operating income as a whole in 2019. Banco Macro continues to be the most efficient bank in Argentina. If we exclude Prisma sale effect, the efficiency ratio would have been 31.6% in first quarter 2019. In first quarter 2019, Banco Macro's effective income tax rate was 30.1% compared to the 31% in 4Q 2018. This third tax rate was cut in the latest tax reform bill, as of January 2019, stands at 30%. In terms of loan growth, the bank's financing to the private sector grew 1% quarter-on-quarter, 21% year-on-year. It is important to mention that Banco Macro's market share over private sector loans as of March 2019 reached 7.7%.
On the funding side, total deposits grew 15% quarter-on-quarter 82% year-on-year. Private sector deposits grew 12% quarter-on-quarter 80% compared to the first quarter of 2018, while public sector deposits increased 36% quarter-on-quarter 104% year-on-year. As of March 2019, Banco Macro's transactional accounts represented approximately 37% of total deposits. Banco Macro's market share over private sector deposits as of March 2019 total 6.9%. In terms of asset quality, Banco Macro's non-performing to total financing ratio reached 2.03% and the coverage ratio reached 119.23%. In terms of capitalization, Banco Macro accounted an excess capital ARS 52.1 billion, which represented a total regulatory capital ratio of 27.7% a Tier 1 ratio of 20.6%.
In order to consider the upcoming cash dividend payment of ARS 6.4 billion with the current integrated capital, the regulatory capital ratio would be 25.3% and the Tier 1 ratio would be 18.2%. 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 66%. Overall, we have accounted for another positive quarter. We continue to show a sound financial position. Asset quality remain under control and closely monitored. We keep on working to improve our efficiency standards, we keep a well-optimized deposit base. At this time, we would like to take the questions you may have.
We will now begin the question and answer session. If you would like to ask a question, please press star then one on your touchtone phone. If you'd like to withdraw that question, please press star then two. One moment please for the first question. Our first question comes from Gabriel Nóbrega with Citi. Please go ahead.
Hi, everyone, and thank you for the opportunity to ask questions. I wanted to maybe understand a little bit further why you have decided to fully write off the exposure you had to Molca. We have heard from some of your peers that there are ongoing discussions with this company. It is still operating with around 20 factories. Some of your peers even mentioned that there could be a possible 50% of reversal. I'm just trying to understand why you have already wrote it off, if there could be this possibility of reversals down the road. I'll make a second question afterwards.
Good morning, Gabriel. This is Jorge Scarinci speaking. This was a decision of the credit committee, approved by the board, to make a write-off of Molino Cañuelas. It is true that the company is still working. It is also true that we think that we are going to recover part of this. I don't know how to quantify it, yet in the future, we are positive on this front. As a credit policy, both the credit committee, the senior credit committee and the board decided to write it off. It's an internal policy.
All right. If you just allow me a follow-up here, could you just remind us what was your direct exposure to this company?
Yeah. The direct exposure was approximately ARS 390 million.
All right. Perfect. I have a second question. It's also on asset quality. It got to my attention that during the quarter, your NPL ratios for the retail portfolio deteriorated around 40 basis points. I understand that you have a significant portion of your loans in this portfolio as personal loans, and if I'm not mistaken, out of this, around 50% are coming from the public sector. Could you just maybe give us more color on what happened here? What should we be looking for through 2019, and also if we have reached the peak from NPL ratios. Thank you.
Yeah, it is true what you are commenting here. It is 93% of our personal loans are tied to payrolls. Therefore, you have a 7% on the open market. This is a portion that is not performing really well. On the credit card business, we have approximately 64% of the credit card portfolio tied to the payrolls. Therefore, 36% on the open market. Also here, this is a portion that is not performing well and it is affecting the consumer non-performing portfolio. Going forward, it is going to be very tied and hand-in-hand with the economy track here. Honestly, it is not very easy for us to predict what will happen with the economy in 2019, because interest rates continue to be high. The central banks continue with this tough monetary policy.
For sure, real GDP is going to be down more than 1.5% this year. We think that when you look at some statistics, that we are reaching the bottom of the economic activity in terms of annual comparisons. We would guess according to that we are, or in the worst part of the economic cycle or reaching this point. It is not very easy to assure this with 100% of assurance. We think that in terms of NPLs going forward, we are going to be around the 2.1%. We are not forecasting for the moment a major deterioration here in this ratio. Again, this is going to be in hand what's happening with the economy.
If there's some loosening in the interest rates after or in the second half, that is going to be as a consequence of if monthly inflation goes down. It's not very easy, but we think that according to what we are seeing, that we are going to maintain this around 2.1% of NPLs going forward.
All right, Jorge. That's very clear. Thank you.
You are welcome, Gabriel.
Our next question comes from Alonso Garcia with Credit Suisse. Please go ahead.
Good morning. Thank you for taking my question. My question is regarding volume growth. Can you update us on your volume growth expectations for this year, probably for next year, and when do you think, if any, when do you think credit demand could start picking up and what will be the main constraints or drivers for that to happen during the remainder of the year? Thank you.
Hi, Alonso. Well, have you had the chance to see not only in Banco Macro, I think, but also in the other Argentine banks, press releases, quarter-on-quarter loan growth rate has been very sluggish because the economy is really bad and interest rates are really high. It is not very easy to forecast volume growth for this year. Also some, the consensus has been increasing inflation targets for this year from high 20s to high 30s, close to 40. I would say that this year we might see some real decrease in terms of loan growth. Therefore, we should be growing nominally below inflation. This number should be ranging around 30% for this year, nominal growth for loans. For next year, it is tougher. It will depend on the economy and inflation.
If, having what the economic consensus is forecasting for next year, that interest rates should be going down sharply, also inflation cooling down, we expect that there's going to be a pickup in loan demand, and therefore we could be seeing some positive real loan growth next year. Again, this is it's kind of a monthly basis moving that can change depending on the monthly inflation that we are having in 2019. Also take into consideration that we are in a year where we are going to have presidential elections in October. You have many different variables that could affect the economy in 2019 and 2020. As a summary, I would say that this year, negative real growth. Next year, positive real growth in loans. That is with the scenario that we are working with.
Sure. Thank you. Just a brief follow-up. Do you see any particular segment performing better than the rest of the portfolio, or do you see both commercial and consumer performing rather similarly?
No. What we are seeing is that from a nominal point of view, we are maintaining our consumer loan portfolio. The commercial loan portfolio is slightly decreasing. Going forward, depending on the salaries increases that might happen in the economy, we could see some pickup in consumption. I would say that commercial portfolio will continue in a working capital phase. Maybe next year we could see a bit more of investment depending on the economic horizon that and the last case. Not a big difference between the two portfolios.
Mr. Thank you very much.
You're welcome.
Our next question comes from Carlos Gomez-Lopez, with HSBC. Please go ahead.
Yes. Thank you. Going back to the loan growth, I was struck by the fact that you have had no loan growth whatsoever in ARS in the last year. In fact, it's -2%. Should we see that as you being more conservative than the rest of the system? Is this something that you expect to continue going forward? Second, I have a technical question. The capital gain that you have experienced with Prisma, is that already in your capital ratios or that is still to come? Thank you so much.
Hi, Carlos. How are you? On your first question, I would say that the strategy of the bank is, at this time, not to look at market share. It's to look at asset quality and, of course, profitability. If we have to lose some points of market share, no problem. We want to keep asset quality the best as we can and, of course, profitability as high as we can. That's why we are forecasting some negative real growth this year in lending. We are focused on maintaining a lot of controls in asset quality and a lot of controls in profitability. Tough times here. If we are going to have a negative performance there, well, that's the case, we're going to have positive performance in other ratios of the balance.
The board is very committed to asset quality and profitability at this time, that's what we are following here. Second question, no, the revaluation is not impacted in the capital ratios yet.
Sorry. The sale, neither the sale nor the revaluation is in the capital ratios, or one is and the other is not? How does it work?
Sorry, can you repeat that, Carlos, please?
Sure. You have the sale of 51%, of which 60% you record now, and then you have the revaluation of 49% that you still retain of the company. Do either of those two parts get reflected in the capital ratios, or it has not been reflected yet for either of them?
We're going to see the impact of the revaluation next quarter.
Okay. The gain already came this quarter.
Yeah.
Okay. All right. Thank you. Can you give us a guidance, the impact that we should see from this revaluation?
Not for the moment. I do not have a precise number, I do not want to give you a number that could change in the next quarter. Prefer not to give you a number now.
Okay. Thank you so much.
You're welcome, Carlos.
Once again, ladies and gentlemen, if you'd like to ask a question, please press star then one. Our next question comes from Nicolas Riva with Bank of America. Please go ahead.
Yeah. Thanks very much, Jorge, for taking my question. I have an open-ended question. It's not about the numbers of the quarter. This year we have elections in Argentina, and the two leading candidates are Macri and Cristina. We don't know if Cristina is going to run, but we know how Cristina's government intervene in the banking system. They put caps on interest rates. They put floors on interest rates on term deposits. My question is, how do you think a Cristina Kirchner government would impact the banking sector specifically, and how are you prepared for that scenario? Thanks.
Hi, Nicolas. It's not an easy question. First of all, we don't know if Cristina is going to be a candidate. We have to wait until June 22nd to see if she's going to be a candidate. Second, if she's a candidate, according to the latest poll that we are seeing, she will be losing in a second round. Third, how can Cristina could be in a third mandate of Argentina is like we are in the fourth derivative of the presidential's attitude towards the banking sector. We should be doing a lot of decisions here. I don't know how to answer that question. Honestly, have a low probability to have a very assurance here. Honestly, I don't know.
I don't know how to say, because you need to step a lot of barriers before, and then I think that only she knows the answer to that question. It is impossible for me to know it. I'm sorry, but it's tough to answer that.
Okay. Jorge, at least is it fair to say that during the last few years of the Kirchner administration, even though inflation was very high and interest rates were high as well, banks managed to do quite well, really, given the short-term duration of the loan portfolio. Probably the theory of consolidation of the banking system will get delayed, but, at least based on the experience from her years in government, the banks managed to do reasonably well within that economy. Is that fair to say?
Banks at that time have, I would say, good performance in terms of earnings. Maybe valuations were not that good, but in terms of what happened between 2003 and 2015, I would say that the system improved a lot in terms of liquidity, solvency, capitalization, also concentration. Yes.
Thanks, Jorge.
You're welcome.
Our next question comes from Yuri Fernandes with JP Morgan. Please go ahead.
Thank you, gentlemen. I have actually 2 questions. The first one is about the margin. How should we think this with the changing interest and asset mix, should we expect margins to keep likely decreasing? How are you seeing this? My second question is regarding the recent credit card regulation in Argentina. I know you are somewhat less exposed than some peers, how decreasing the payment, the settlement date from 19 days to 10 days may impact your earnings going on. Thank you.
Hi, Yuri. How are you? I would say that margins will remain stable with deployment of interest rates in a slightly declining scenario. In the case of Banco Macro, we should be some expansion in margins. Little, not that much. I would assume for this year, stability in the margins. Not a big change here. In terms of your second question, in terms of the impact that we have in credit cards, I would assume that in terms of the impact on bottom line, it's around between 2.7% and 3% impact on bottom line on the new regulation credit cards. This is an assumption with Banco Macro not doing anything to offset this impact. For sure that we are going to do or to take some measures here, maybe to review some promotions. The net effect is going to be lower than that.
Ex ante, I would say 2.7% to 3% impact to the bottom line.
Very clear. Thank you very much.
You're welcome.
There are no further questions at this time, this will conclude the question and answer session. I'd like to turn the conference back over to Mr. Nicolas Torres for any closing remarks.
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.