Good morning, ladies and gentlemen. Thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's fourth quarter 2018 earnings conference call. We would like to inform you that the fourth quarter 2018 press release is available to download at the investor relations website of Banco Macro at www.ri.macro.com.ar. This event is being recorded, and all participants will be in a listen-only mode during the company's presentations. 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. Joining us from Argentina are Mr. Gustavo Manriquez, Chief Executive Officer, Mr. Jorge Scarinci, Chief Financial Officer, and Mr. Nicolas Torres, IR.
I will turn the conference over to Mr. Nicolas Torres. Sir, you may begin your conference.
Good morning. Welcome to Banco Macro for Q18 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 available at our website. Q18 press release was distributed on Friday and is also available at our website. From fiscal year 2018, Banco Macro results are reported under Communication A 6114 of the Central Bank of Argentina. Figures for fiscal year 2017 have been restated in accordance with IFRS, and some items have been reclassified in order to make a comparison between periods possible. I will now briefly comment on the bank's four Q18 financial results.
Banco Macro's net income for the quarter was ARS 5.2 billion, 37%, or ARS 1.4 billion higher than in 3Q18, and 67% higher than the ARS 3.1 billion posted a year ago, based on an increase in net interest income and an increase in net fee income. The bank's four Q18 accumulated return on equity and return on assets of 30.7% and 5.8%, respectively, remains healthy and show the bank's earning potential. On a fiscal year basis, Banco Macro earned ARS 15.8 billion in fiscal year 2018, or 55% higher than the ARS 10.1 billion earned in fiscal year 2017. Net operating income before general, administrative, and personal expenses for 4Q18 was ARS 16.2 billion, increasing 62% or ARS 6.2 billion year-over-year. Operating income after general and administrative expenses was ARS 7.6 billion, 81% or ARS 3.4 billion higher than a year ago.
In fiscal year 2018, operating income totaled ARS 22.5 billion, 51% higher than in fiscal year 2017. In the quarter, net interest income totaled ARS 12.3 billion, 19% higher than the ARS 10 billion registered in 3Q18, and 66% higher than the result posted one year ago. This performance can be traced to a 128% year-over-year increase in interest income and a 276% year-over-year increase in interest expenses. In fiscal year 2018, net interest income totaled ARS 39.6 billion, 64% higher than the ARS 24.1 billion registered in fiscal year 2017. Within interest income, interest on loans rose 26%, or ARS 3.2 billion quarter-over-quarter, due to a 7% increase in the average volume of loans and a 450 basis points increase in the average lending rate. On a yearly basis, interest on loans were 87%, or ARS 7.2 billion higher.
In 4Q18, interest on loans represented 65% of total interest income. During fiscal year 2018, interest on loans totaled ARS 47.5 billion, increasing 68% compared to fiscal year 2017. Net income from government and private securities increased 77%, or ARS 3.5 billion quarter-over-quarter, due to higher lending volume and higher interest rates. Compared to 4Q17, net income from government and private securities increased 294%, or ARS 6 billion. In fiscal year 2018, net income from government and private securities totaled ARS 17.7 billion, 208% higher than the results posted in fiscal year 2017. In 4Q18, differences in quoted prices of gold and foreign currency totaled an ARS 729 million gain as a consequence of the 8% Argentine peso appreciation against the USD and the bank's short FX position during most of the quarter.
In 4Q18, interest expenses totaled ARS 11.5 billion, a 78%, or ARS 5 billion increase compared to 3Q18 and 280%, or ARS 8.5 billion higher on a yearly basis. Within interest expenses, interest on deposits increased 87%, or ARS 5 billion quarter-over-quarter, mainly driven by a 19% increase in the average volume of time deposits and a 640 basis points increase in the average time deposit interest rates. On a yearly basis, interest on deposits increased 301%, or ARS 8 billion. In 4Q18, interest on deposits represented 92% of the bank's financial expenses. In fiscal year 2018, interest on deposits totaled ARS 23.2 billion and were 150% higher than in fiscal year 2017. As of fourth quarter of 2018, the bank's accumulated net interest margin, including FX, was 14.9%, higher than the 14% posted in 3Q 2018, and the 14.7% registered in 4Q 2017.
In 4Q 2018, net fee income totaled ARS 3.1 billion. On a yearly basis, net fee income increased 38%, or ARS 864 million. During fiscal year 2018, net fee income totaled ARS 11.1 billion, 31% higher than in fiscal year 2017, with fees charged on checking and saving accounts standing out. In the quarter, other operating income increased 54%, or ARS 633 million. Other income stands out with an ARS 548 million decrease compared to third quarter 2018, given that there was no buyback of corporate bonds during 4Q 2018. On a yearly basis, other operating income increased 69%, or ARS 218 million. In 4Q 2018, Banco Macro's personal administrative expenses totaled ARS 5.2 billion and increased 16% quarter-over-quarter. Employee benefits increased 15% quarter-over-quarter as a result of salary increases agreed with the union.
Compared to 4Q 2017, general administrative and personal expenses in 4Q 2018 were 46% higher. As of December 2018, the accumulated efficiency ratio reached 37.9%, improving from the 39.1% posted in 3Q 2018, and the 40.2% posted in 4Q 2017. This was as a result of a 16% increase in expenses and a 27% increase in net interest income, net fee income, and other operating income as a whole. Banco Macro continues to be the most efficient bank in Argentina. In fiscal year 2018, the accumulated efficiency ratio was 37.9%, significantly better than the 40% posted in fiscal year 2017. This was as a result of a 38% increase in expenses and a 45% increase in income. In fiscal year 2018, Banco Macro's effective income tax rate was 30.6%, compared to 32.7% in fiscal year 2017.
The statutory tax rate was cut in the late tax reform bill. As of January 2018, stands at 30%. It will further reduce in January 2020 to 25%. In terms of loan growth, the bank's financing to the private sector grew 2% quarter-on-quarter, 36% year-on-year. It is important to mention that Banco Macro's market share over private sector loans as of December 2018 reached 7.9%. On the funding side, total deposits grew 12% quarter-on-quarter and 65% year-on-year. Private sector deposits grew 14% quarter-on-quarter and 67% compared to 4Q 2017, while public sector deposits decreased 4% quarter-on-quarter. As of December 2018, Banco Macro's transactional accounts represented approximately 43% of total deposits. Banco Macro's market share over private deposits as of December 2018 totaled 7%.
In terms of asset quality, Banco Macro's non-performing to total financial ratio reached 1.91%. The coverage ratio reached 117.74%. In terms of capitalization, Banco Macro accounted an excess capital of ARS 45.7 billion, which represented a total regulatory capital ratio of 26.5% and a Tier 1 ratio of 19.7%. The bank's aim is to make the best use of this excess capital. The bank's liquidity remains more than appropriate. Liquid assets total deposit ratio reached 57.1%. Overall, we have accounted for another positive quarter. We continue showing a solid financial position. Asset quality continues under control and closely monitored. We keep on working to improve more our efficiency standards. We have one of the cleanest balance sheets in Argentina's banking sector, and we keep a well-itemized 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. If you would like to withdraw that question, please press star then two. Please hold for the first question. Our first question today comes from Nicolas Riva with Bank of America. Please go ahead with your question.
Thanks very much, Jorge and Nico, for taking my questions. Just two quick questions. First, on coverage of NPLs, we saw it continue to decrease now to 118% as of December. I believe that you guys had said that the idea was to use some of the excess coverage earlier last year, now, how do you feel with this coverage now it's slightly above 100%? If you have a target for the coverage for NPLs. The second question on asset quality, we saw the continued increase in the NPL ratio now to 1.9%. Given what's going on in the economy in Argentina, what's your outlook for the NPL ratio for the end of this year? Thanks.
Hi, Nicolas. This is Jorge Scarinci. On your first question, yes, you're right. We have been commenting this in previous calls. The idea that we built up the 180% coverage was in good times. In order to use that excess in bad times. We have been using that excess in the last three quarters. As always, we want to be above 100%. I would say that little by little, we are going to build up this ratio by the end of the year, ranging between 120%-140%.
We do not have a specific target, we should be ranging there by the end of the year. In terms of asset quality ratio, well, imagine that the Argentine economy was down more than 2% in real terms in 2018. We were forecasting this recession by April, May. That's why we, at that time, decided to stop lending aggressively and focus on asset quality control. The 1.9%, I think, is totally manageable for us. Going forward, we think that the first quarter and second quarter of 2019 are going to show similar levels.
Maybe we are going to see some marginal improvement by the end of the year. I would say that we should be in the area of 1.5%-1.7% by the end of the year. Of course, depending on the economic reaction that we are forecasting to see in the third and fourth quarter.
Okay. Jorge, a follow-up on this. Basically, you are saying that we already reached probably the peak in NPL ratios. We should be more or less stable in the second half of this year.
Yeah, I would say that the first quarter, maybe January to mid-February, that could be also seen as the lowest part of the economic cycle. Honestly, I don't know the exact number that we are going to post in the first quarter, but it's going to be similar than the one that we posted in the fourth quarter of last year.
Okay. Thanks, Jorge. Thanks very much.
Welcome, Nicolas.
Our next question comes from Gabriel Nobrega with Citi. Please go ahead with your question.
Hi, everyone, and thank you for the opportunity to ask questions. During this quarter, I actually noticed that your results from financial instruments or government securities actually decreased quarter-over-quarter, which is quite peculiar, as you have a high exposure to these high-yielding assets. What I actually want to understand from you is, if you are not booking the results from this in your interest income, and also what is the flexibility that you have between classifying results from securities in your NII and in the separate line that you have in your P&L? Thank you. I'll make a second question afterwards.
Hi, Gabriel. First of all, the bank took the decision that we were going to post the income coming from securities in the interest income line or in the interest income segment. Other banks decided to put that below the net interest income. That is a decision of any bank. Banco Macro decided to put this on the interest income line. We had a very good result in terms of interest income coming from securities, basically on the investment that we had on Leliqs, that in the fourth quarter, we decided to take advantage of the increase in the interest rates of the Leliq that reached 75% at some point, and then started to go down, by increasing at the same time the level of time deposits. The spread was extremely positive for the bank. Well, the numbers are showing very good performance in that level.
That's the answer for your question.
All right. If you may allow me just a follow-up here. As we see interest rates actually decreasing, what do you expect to do with this excess liquidity that you have? Do you expect to continue on investing into the Leliqs?
As it's happened in the past, well, if you understand Banco Macro, we have the highest liquidity ratios in the system. Of course, the idea is to always invest in short-term instruments with attractive interest rates. At some point, were the Lebacs, now are the Leliqs. The idea is that we will continue investing the excess liquidity at the Leliqs. Going forward, I would forecast attractive income coming from the securities in the interest income line coming from the Leliq investments. Yes.
All right. That's very clear. Could you also maybe share with us what are your expectations for loan growth? Are there maybe any segments that you want to grow more? Here, maybe I am trying to actually understand if you actually want to gain share during this year or do you prefer to be a bit more cautious? Thank you.
Well, Gabriel, we have to track very carefully the economy. As I mentioned before, we are seeing the first and second quarter with some sluggish economy numbers, some reaction in the third and fourth quarter. At the end, 2019 is going to be a negative real growth in GDP. It's not going to be a good year for going very aggressively on lending. We are forecasting that loan growth is going to be similar than the inflation that the consensus is estimating for this year. That is in the area of 30%-32%. We are not going to be aggressively lending this year. Again, we want to keep a close eye, as always, to the bottom line. We do not care about market share on these years of economic recession. Maybe next year, depending on economic conditions, we could be a bit more aggressive in lending.
All right. That's very clear, Jorge. Thank you.
You are welcome, Gabriel.
Once again, if you'd like to ask a question, please press star then one. Our next question comes from Ernesto Gabilondo with Bank of America. Please go ahead.
Hi, good morning, Jorge and Nicolas. A couple of questions from my side. My first question is if you can provide any guidance for this year on net interest income growth and OPEX growth, and any color on your expectations for the bottom line growth. Also, if you can provide your macro assumptions behind your expectations will be much appreciated. Then my second question is on M&A activity. We have seen in the past your interest to pursue an acquisition, such as Banco Patagonia, given your high capital levels. Given that the Argentine banks industry is one of the most fragmented in the region, and considering the current valuations, don't you think it's the best time to pursue an acquisition, or do you prefer to wait after the elections? Thank you.
Ernesto, how are you? In terms of guidance, if you take that we're expecting loan growth between 30%-32%, also margins, I would say that are going to be stable to slightly increasing in this year compared to what we saw in 2018. Expense is growing similar to inflation. You get what you get on your model. I'm not going to give exact guidance on every single line of the income statement. These are the basic numbers that we are working for, or working with, sorry. We're expecting an attractive and nominal growth in bottom line, according to the numbers I gave you. In terms of your second question on M&A. First of all, I agree with you that we have excess capital, and we have always been waiting for the opportunity to buy another bank.
First of all, you need an official deal on the table. For the moment, there's no official deal on the table. Of course, we are always keeping a close eye on any single opportunity that would appear, but for the moment, there's nothing there. I would say that a person that is interested or looking forward to sell might wait a little bit after the election, or might wait to see maybe prices going up a little more than the current prices. We are going to make the best use of excess capital, and we are going to go for the opportunity when it is there and at the price that we consider that is the best for Banco Macro.
Perfect. Thank you very much. Any call and what could be the impact to your profitability once you have the implementation of hyperinflation accounting?
No. As we stated there, we have not finished with the calculations and the auditors working there. As soon as we get the period, we are going to announce that. For the moment, there's no final number there.
Okay. Thank you very much.
You're welcome, Ernesto.
Our next question comes from Carlos Gomez-Lopez with HSBC. Please go ahead with your question.
Hello, good morning. I would like to know if you are planning to reopen the repurchase program that you have been executing last year. Thank you.
Hi, Carlos. How are you? Not for the moment, but of course, the board is going to track the stock price, and depending on the level they are and the decision of the board, we could be reopening there. For the moment, it's not under the ordinary schedule.
Thank you very much.
You're welcome, Carlos.
There are no further questions at this time. This concludes the question and answer session. I'll turn the conference back over to Mr. Nicolas Torres for final considerations.
Thanks, everyone, for your interest in Banco Macro. Have a good day. Bye-bye.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your line.