Earnings Call: Q1 2019

May 10, 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 First Quarter 2019 Earnings Conference Call. We would like to inform you that the Q1 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. It is now my pleasure to introduce our speakers today. Joining us from Argentina are Mr. Gustavo Manriquez, Chief Executive Officer Mr. Jorge Scarinchi, Chief Financial Officer and Mr. Nicolas Torres, Investor Relations. Now, I'd like to turn the conference over to Mr. Nicolas Torres. You may now begin your conference. Good morning, and welcome to Bancro Macro's Q1 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 with the SEC and is available on our website. First quarter 2019 press release was distributed yesterday and is also available at our website. I will now briefly comment on the bank's Q1 2019 financial results. Banco Macro's net income for the quarter was ARS 7,300,000,000, 40 percent or ARS 2,100,000,000 higher than Q4 2018 and 106 percent higher than the ARS 3,500,000,000 posted a year ago based on an increased net interest income and net fee income. The bank's Q1 2019 ROE and ROA of 50% and 8.4%, respectively, remained healthy and shows the bank's earning potential. Net income for the Q1 2019 included a ARS 1,900,000,000 positive result related to the sale of 51% stake that Macro had in Prisma and the mark to market of the 49% remaining stake. Excluding Prisma sales results, recurring ROE and ROA in the Q1 2019 would have been 37.2% and 6.3%, respectively. Net operating income for Q1 2019 was ARS 19,100,000,000, increasing 18% or ARS 2,900,000,000 quarter over quarter and 78% or ARS 8,400,000,000 compared to the previous year. Operating income after general and administrative expenses was ARS 10,500,000,000, 39 percent or ARS 2,900,000,000 higher than in Q4 2018 and 105% higher than a year ago. In the quarter, net interest income totaled MXN 12,900,000,000, 5 percent or ARS643 1,000,000 higher than the result posted in 4Q 2018 and 53 percent or ARS 5,000,000,000 higher than the result posted 1 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 MXN 1,100,000,000 quarter on quarter. On a yearly basis, interest on loans increased 59 percent or ARS 5,400,000,000. In Q1 2019, interest on loans represented 60% of total interest income. Net income from government and private securities increased 20% or MXN1.6 billion quarter on quarter due to higher the mix volume and high interest rate. Compared to the Q1 of last year, net income from government and private securities increased 3.45 percent or ARS 7,300,000,000. In 1Q8 twenty nineteen, differences in quoted prices of gold and foreign currency, including peso derivative financing, totaled a COP 250,000,000 gain. During the Q1 of 2019, Bank of America's strategy was to sell U. S. Dollars in the spot market and invest the result in pesos in the LEX, while at the same time hedging the FX position with investment in the RioCan. This strategy proved to be highly successful and profitable during the quarter. In Q1 of 2019, interest expenses totaled ARS 11,500,000,000, 1 percent or ARS 52,000,000,000 decrease compared to the 4th quarter of last year and 2 38 percent or ARS 1,100,000,000 higher on a yearly basis. Within interest expense, interest on deposits decreased 1% or ARS 57,000,000 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 2 52 percent or ARS 7,600,000,000. In 1Q 2019, interest on deposits represented 92% of the bank financial expenses. As of 1Q 2019, the bank's net interest margin, including FX, was 17.2%, higher than the 14.9% positive in 4Q 2018 and the ARS 15.4 percent versus ARS 1Q 2018. In 1Q 2019, net fee income totaled ARS 3,300,000,000, 2% higher than in 4Q 2018. On a yearly basis, net fee income increased 40% or ARS 951,000,000. In 2019, net income from financial liabilities at fair value to profit or loss totaled ARS 2,000,000,000, increasing 4 42 percent or ARS 1,600,000,000 compared with 4Q 2018. 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 2,500,000,000. Other income stands out with a ARS 2,300,000,000 increase compared to the Q4 of last year, related to the sale of the 51% stake that we had in Prisma. On a yearly basis, other operating income increased 4 23 percent or ARS 2,500,000,000. In 1Q 2019, bank of macros personnel and administrative expenses totaled ARS 5,200,000,000, unchanged from the previous quarter. Employee benefits were unchanged quarter over quarter and compared to the Q1 of last year, general and administrative expenses increased 53%. As of March 2019, the efficiency ratio reached 28.6%, improving from the 39.7% posted 4Q 'eighteen and 35.6% posted in 1Q 'eighteen. This was a result of a 1% increase in expenses and a 28% increase in net interest income, net fee income and other trading income as a whole in the Q 20 19. Banco Macro continues to be the most efficient bank in Argentina. If we exclude regional segment effects, the efficiency ratio would have been 31.6% in Q1 2019. In Q1 2019, Banco Macro's effective income tax rate was 30.1% compared to 31% in 4Q 2018. The statutory tax rate was cut in the latest tax reform bill and 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 Q1 of last year. While private sector deposits increased 46% quarter on quarter and 104% year on year. As of March 2019, Banco Macro's transactional accounts represented approximately 37% of total deposits. Bancomacro's market share over private sector deposits as of March 2019 totaled 6.9%. In terms of asset quality, Bank of America's non conformance total financial ratio reached 3.03% and the coverage ratio reached 119.23 percent. In terms of capitalization, Banco Macro accounted an excess capital of ARS 52.1 billion, which represented a total regulatory capital ratio of 27.7 percent and a Tier 1 ratio of 20.6 percent. If we were to consider the upcoming cash dividend payment of ARS 6,400,000,000 with acquired 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 program deposit ratio reached 66%. Overall, we have accounted for another positive quarter. We continue to show a solid financial position. Asset sales remain under control and closely monitored. We keep on working to move forward more efficiency standards and we keep our 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. And our first question comes from Gabriel Nobrega 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 Molka. As we have heard from some of your peers that there are ongoing discussions with this company. It is still operating with around 20 factories. And some of your peers even mentioned that there could be a possible 50% of reversals. So I'm just trying to understand why you have already wrote it off, if there could be this possibility of reversals down the road? And I'll make a second question afterwards. 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 Canuelas. 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. But yes, in the future, we are positive on this front. But 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. And if you just allow me a follow-up here, could you just remind us what was your direct exposure to this company? Yes. Direct exposure was approximately ARS 390,000,000. 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 bps. I understand that you have a significant portion of your loans in this portfolio as on payroll loans. And if I'm not mistaken, out of this, around 50% are coming from the public sector. So 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 ratio? Thank you. Yes. This 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. So this is a portion that is not performing really well. And on the credit card business, we have approximately 64% of the credit card portfolio tied to the payrolls, therefore 36 percent on the open market. And also here, this is a portion that is not performing well and it is affecting the consumer non performing portfolio. So going forward, it is going to be very tight 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. And for sure, real GDP is going to be down more than 1%, 1.5% this year. So we think that when you look at some statistics that we are reaching the bottom of the economic activity in terms of annual comparisons. So we would get according to that, that we are or in the worst part of the economic cycle or reaching this point. But it is not very easy to assure this with 100% of assurance. So we think that in terms of NPLs going forward, we are going to be around the 2%, 2.1%. We are not forecasting for the moment a major deterioration here in this ratio. So but again, this is going to be in hand what's happening with the economy. If there is some losing in the interest rates after or in the second half, that is going to be as a consequence of if inflation monthly inflation goes down. So it's not very easy. But we think that according to what we are seeing that we are going to maintain this around 2%, 2.1% of NPLs going forward. All right, Jorge. That's very clear. Thank you. You are welcome, Gabriel. And 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 are the main what will be the main constraints or drivers for that to happen during the remainder of the year? Thank you. Alonso, well, you have the chance to see not only in Banco Macro, but also in the other Argentine banks' press releases, quarter on quarter loan growth has been very sluggish because the economy is really bad and interest rates are really high. So it is not very easy to forecast volume growth for this year. Also, some the consensus have been increasing inflation target for this year from high-20s to high 30s, close to 40. So 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. So these numbers should be ranging around 30 percent for this year nominal growth for loans. Of course, for next year, it is tougher, will depends on the economy and inflation. So if having what the economic consensus is forecasting for next year, that industry 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. But again, this is kind of a monthly basis movie 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. So you have many different variables that could affect the economy in 2019 2020. But 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 waiting with. Sure. Thank you. And 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 economy horizon that and the last case, but not a big difference between the two portfolios. And our next question comes from Carlos Gomez 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 pesos in the last year. In fact, it's minus 2%. Should we see that as you being more conservative than the rest of the system? And is this something that you expect to continue going forward? And 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 these times, not to look at market share, is to look at asset quality and, of course, profitability. So 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. So again, 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. So if we are going to have a negative performance there, well, that's the case. We are going to have positive performance in other ratios of the balance. But the Board is very committed to asset quality and profitability at this time. So that's what we are following here. Second question, no. The revaluation is not impacted in the capital ratios, yes. But 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. 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. But the gain already came this quarter? Yes. Yes. Okay. All right. Thank you. Can you give us a guidance, I mean, the impact that we should see from this revaluation? Not for the moment. I do not have a precise number. So I do not want to give you a number that could change in the next quarter. So prefer not to give you a number now. Okay. Understood. Thank you so much. You're welcome, Carlos. And our next question comes from Nicolas Riva with Bank of America. Please go ahead. Yes. Thanks very much, Jorge, for taking my question. So I have an open ended question. It's not about the numbers of the quarter. So this year, we have elections in Argentina and the 2 leading candidates are Magre and Cristina. We don't know if Cristina is going to run, but we know how Cristina's government intervene in the banking floors on interest rates, on interest rates, on term deposits. So my question is, how do you think a Cristina Kirchner government would impact the bank in Central 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 22 to see if she's going to be a candidate. 2nd, if she's a candidate according to the latest poll that we are seeing, she will be losing in a 2nd round. So and 3rd, how can Cristina could be in a 3rd mandate of Argentina is like we are in the 4th derivative of the presidential's attitude towards the banking sector. So we should be doing a lot of suppositions here. And so I don't know how to answer that question. Honestly, it is very or have a low probability to have a very assurance here. So honestly, I don't know. I don't know how to say it, because you need to have you need to step a lot of barriers before. And then I think that only she knows the answer to that question. So it is impossible for me to know it. So I'm sorry, but it's tough to answer that. Okay. But Jorge, at least is it fair to say that during the last few years of the Equitio administration, even though inflation was very and interest rates were high as well, banks managed to do quite well really, given the short term duration of the loan portfolio. So probably the theory of consolidation of the banking system will get delayed, but at least based on the experience from carriers in government, the banks managed to do reasonably well within that context. Is that fair to say? No, yes. Banks at that time have, I would say, good performance in terms of earnings. The devaluations were not that good. But in terms of what happened between 20,301,015, I would say that the system improved a lot in terms of liquidity, solvency, capitalization, also concentration. So yes. Thanks, Jorge. You're welcome. And our next question comes from Yuri Fernandes with JPMorgan. Please go ahead. Thank you, gentlemen. I have actually two questions. The first one is about the margins. How should we think these with the changing interest earning asset mix? Should we expect margins to keep slightly decreasing? Or like how are you seeing this? And my second question is regarding the recent credit card regulation in Argentina. I know you're somewhat less exposed than some peers, but how decreasing the payment, the settlement date from 19 days to 10 days may impact your earnings going on? Thank you. Hi, Jureka. How are you? I would say that margins will remain stable with this level of interest rate in a slightly climbing scenario in the case of Banco Macro, which should be some expansion in margins, but little, not that much. So 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% 3% impact on bottom line on the new regulation credit cards. And this is an assumption with Banco Macro not doing or doing anything in terms of to offset this impact. For sure that we are going to do or to take some measures here, maybe to review some promotions. So the net effect is going to be lower than that. But 35 was, I would say, 2.7% to 3% impact to the bottom line. Very clear. Thank you very much. You're welcome. And there are no further questions at this time. So 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.