Earnings Call: Q3 2018

Nov 28, 2018

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 3rd Quarter 2018 Earnings Conference Call. We would like to inform you that the Q3 2018 press release is available to download at the Investor Relations website of Banco Macro's www.rimacro.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. Joining us from Argentina are Mr. Jorge Scarinci, Chief Financial Officer and Mr. Nicolas Torres of Investor Relations. Now I will turn the conference over to Mr. Nicolas Torres. You may begin your conference. Good morning, and welcome to Banco Macro's 3rd quarter 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 revised file to the SEC and is available at our website. Q3 'eighteen press release was distributed yesterday and is also available at our website. As from fiscal year 2018, Banco Macro results are reported under Communication A-six thousand one hundred and fourteen of the Central Bank of Argentina. Tiers for fiscal year 20 17 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 Q3 of 'eighteen financial results. Banco Macro's net income for the quarter was ARS 3,800,000,000, 22 percent or ARS 700,000,000 higher than Q2 of 2018 and 39% higher than the ARS 2,800,000,000 posted a year ago based on an increase in net interest income and an increase in net fee income. The bank's Q3 'eighteen accumulated ROE and ROA of 27.8% and 5.6% respectively remains healthy and show the bank's earning potential. Net operating income for Q3 '18 was ARS 12,900,000,000, increasing 41 percent or ARS 3,700,000,000 year over year. Operating income was ARS 5,500,000,000, 31 percent or ARS 1,300,000,000 higher than a year ago. In the quarter, net interest income totaled ARS 10,300,000,000, 14% higher than the ARS 9,000,000,000 registered in 2Q 2018 and 17% higher than the result posted 1 year ago. This performance can be traced to a 90 percent year over year increase in interest income and a 133% increase year over year in interest expenses. Within the interest income, interest on loans rose 19% quarter over quarter due to the increase in the average lending rate. In 3Q 'eighteen, interest on loans represented 73% of total interest income. On a yearly basis, interest on loans rose 72% or ARS 5,200,000,000 Net income from government and private securities increased 39% or ARS 1,300,000,000 quarter over quarter, mainly due to higher Leliqs volume. Compared to 3Q 'seventeen, net income from government and private securities increased 100 and 68 percent or ARS 2.8 billion. In 3Q 'eighteen, differences imported prices of foreign currency decreased ARS232,000,000, totaling a ARS1.2 billion loss. As a consequence of the 42 percent Argentine peso depreciation against the U. S. Dollar and the bank short FX positions. It is worth mentioning that income related to government and private securities and AAA and loans to AAA companies more than compensated the short FX position loss. In 3Q 'eighteen, interest expenses totaled ARS 6,500,000,000, a 43% or ARS 2 point 2,000,000,000 increase compared with 2Q 'eighteen and 133 percent or ARS 3,700,000,000 higher on a yearly basis. Within interest expenses, interest on deposits increased 47 percent or ARS1.8 billion quarter over quarter, mainly driven by a 22% increase in the average volume of time deposits and a 3 34 basis points increase in the average time deposit interest rates. In 3Q 'eighteen, interest on deposits represented 88% of the bank's financial expenses. As of 3Q 'eighteen, the bank's accumulated net interest margin was 15.2 percent, unchanged from 2Q 'eighteen and wider than in 3Q 'seventeen. In 3Q 'eighteen, net fee income totaled ARS 2,100,000,000. On a yearly basis, net fee income increased 32% or ARS 500,000,000. In the quarter, other operating income increased 44% or ARS 610,000,000. Other income stands out with a ARS 567,000,000 increase related to the buyback of our corporate bonds. On a yearly basis, other operating income increased 89% or ARS 935,000,000. In 3Q 'eighteen, Banco Macro personnel and administrative expenses totaled ARS 4,500,000,000 and increased 13% quarter over quarter. Enjoy benefits increased 11% quarter over quarter as a result of salary increases agreed with the union. Compared to 3Q 'seventeen, general, administrative and personnel expenses increased in 3Q 'eighteen, 44%. As of September 2018, the accumulated efficiency ratio reached 38.9%, improving from the 40 1.42% posted in 3Q 'seventeen. This was a result of a 12% increase in expenses and a 21% increase in net interest income, net fee income and other operating income as a whole in 3Q 'eighteen. Banco Macro continues to be the most efficient bank in Argentina. 3Q 'eighteen Banco Macro's effective income tax rate was 30.9% compared to 35.6% in 3Q 'seventeen. The statutory tax rate was cut in the latest tax reform bill and as of January 2018 stands at 30% and will further reduce in January 2020 to 25%. In terms of loan growth, the bank's financing to the private sector grew 11% quarter over quarter, 43% year over year. It is important to mention that Banco Macro's market share over private sector loans as of September 2018 reached 7.5%. On the funding side, total deposits grew 18% quarter over quarter and 56% year over year. Private sector deposits grew 20% quarter over quarter and 60% compared to 3Q 'seventeen, while private sector deposits increased 3% quarter over quarter. As of September 2018, Banco Macro's transactional accounts represented approximately 46% of total deposits. Banco Macro's market share over private deposits as of September 2018 totaled 6.8%. In terms of asset quality, Bancomacro's nonperformance total financial ratio reached 1.63%. The coverage ratio reached 131.05%. Banco Macro continues to show outstanding asset quality metrics with one of the lowest NPL ratio and highest coverage ratio in the industry. In terms of capitalization, Banco Macro accounted an excess capital of ARS 40 4,100,000,000, which represented a total regulatory capital ratio of 26.4% and a Tier 1 ratio of 18.9%. The decrease is in regulatory capital ratio of 120 basis points and Tier 1 ratio of 2 60 basis points originated from the share buyback program. During 3Q 'eighteen, the bank repurchased 21,400,000 shares for a total amount of ARS 3,100,000,000. 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 51.7%. 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, and we have one of the cleanest balance sheets in Argentina banking sector, and we keep a well atomized deposit base. At this time, we would like to take the questions you may have. At this time, we are going to open it up for question and answers. Our first question comes from Alonso Garcia with Credit Suisse. Please go ahead. Good morning, Irma. Thank you for taking my question. My question is regarding debt quality. I wanted to hear your thoughts on the outlook for the next couple of quarters. In particular, if you think we have reached a peak already in terms of cost of risk and NPL formation rate this quarter? Or do you believe we should expect further deterioration before seeing a recovery? And also related to that, we have seen the COVID ratio declining for consecutive quarters. And in particular, the provisioning of new NPLs in the past couple of months have looked abnormally low. So I want to hear your thoughts on this front and whether we should expect and whether we should expect the coverage ratio to stabilize. Alonso, this is Jorge Carinthi. How are you? According to your first question, in terms of asset quality, we have been commenting in the previous quarters conference calls, sorry, that because of the economic situation in Argentina and the recession that we were undergoing, we proactively started to stop the lending machine. I would say that close to mid to the Q2 of this year, we started doing that. And a consequence of having a good asset quality is because we stopped lending maybe before our peers. Plus that we have been commenting that asset quality is going to deteriorate because of the recession, and we think that we are going to see Q4 of this year and also maybe Q1 of next year with, I would say, weak economic conditions. And of course, this is going to impact the NPL ratio, not only Banco Macro, but also in the system. So we think that we might see in the next two quarters some additional deterioration in asset quality, maybe reaching 2% by the end of the Q1 of next year, but that is something that we are forecasting. And in terms of the coverage ratio, if you have a chance that in almost 1 year ago, we decided to build our cushion there to lift the coverage ratio to level of close to 190%. And the idea of that is to use that cushion in some period of time with weak economic conditions, and that is the time for the second and third quarter of this year, maybe also in Q4. So the idea was to build that cushion and use it in this quarter. So the idea of the bank is always to be about 100 percent of coverage ratio. I think that 120, 130 would be something reasonable to forecast in the next couple of quarters and also in the long run. Run. Our next question comes from Nicolas Riva with Bank of America. Please go ahead. Yes. Thanks very much, Jorge, for taking my question. Just two questions. The first one on the on this income that you reported from financial assets at fair value, the ARS 499,000,000, you didn't include higher income from the investment portfolio. What's the nature of that? Is that mostly realized like cash gains on the portfolio or mostly paper mark to market gains? And then my second question on the financial agency agreement. You said that you renewed the agreement with the province of Misiones. I believe that you had also done the same thing with Tubman. If you can do an update on the status of the agreements with Jujuy and Salta. Nicolas, I will start answering your second question first. Yes, on the agreement that we have renewed, there was we have been commenting this for many times. We have had no problem to renew that in the past and we are demonstrating that we have no problem to renew them in these times. We have excellent relationship with the provinces, and that's why we are we have been able to renew these contracts for another 10 years. So basically, that was easygoing, no problem. And in the relation with the SALTA and you were asking about SALTA and the other province? Well, those are doing 224 and onwards. So there is like 6 years more to go. So we have to wait a little bit to renew them. But I would say that there will be no problem there. But it's too far to answer today. And in relation to your first question, yes, basically, that's income from securities that were sold in the quarter or basically that were mark to market in the quarter. Our next question comes from Gabriel Nobrega with Citi. Hi, everyone. Thank you for the opportunity. I actually wanted to know a bit more of this short dollar position that you have. If I'm not mistaken, in the previous quarter conference call, you guys said that you would be willing to maybe reduce this position. However, during the quarter, we saw an even bigger loss than what we had seen in the Q2. So here, I would just like to maybe understand how should we look at this short position going forward and if we should expect maybe another loss in the Q4? And I'll make a second question afterwards. Gabriel, well, if you go to Page 13 of the press release, there you will have a chart on the foreign currency position. And the last row there, you can see the reduction between the Q2 and Q3 in terms of the position sold on FX that go went from $142,900,000 to $97,600,000 So that was the reduction that we were commenting in the previous quarter. However, the big jump that we saw in the FX at the end of September resulted in the result of almost ARS 1,200,000,000 loss that we accounted there. However, as we have been explaining in the previous quarter conference call and also in this press release, with those pesos that we receive or we got from the sole position on the FX, we have been investing that in Leliqs, Le Vaz and also loans to AAA companies that more than compensated this EUR 1,200,000,000 loss. So that is the answer to your question. All right. That's very clear. And I actually have a follow-up. You said that you expect maybe asset quality to further deteriorate given the macroeconomic scenarios. So here, Could you maybe just talk about, is there any sector or is there any part of your loan book that you are more REIT with than the others? I would say that also as we have commented before, on the consumer, basically on the open market, even though we have a very small exposure there, only 7% of our personal loans are on open market. Basically, we call open market to those people that do not receive their salaries in Banco Macro. So in that segment, we saw a bit more risk than in the others. And also on the corporate sector, in SMEs, basically, sectors, I would say, maybe construction, some industrial machinery, maybe auto parts. But as a whole, I would say that the whole economy is suffering. So more or less, all the sectors are having negative performance when they are compared to a year ago. So but we are not finding a one specific sector where we are very concerned basically. All right. That's very clear. Thank you. You're welcome, Gabriel. Our next question comes from Carlos Gomez with HSBC. Please go ahead, Carlos. Hi, good morning, Jorge. I wanted to ask you about the buyback. You obviously executed a large portion in this quarter. The program has been reopened. Do you continue to consider that a good use of your capital? And do you need to hit the price target that you need to, I think, EUR 158 for you to continue buying back stock? 2nd, as part of your investment, in the past, you have built a portfolio of Argentine equities, and you were actually able to sell and time the sale quite well. Are you buying Argentine equities today? On the buyback, basically, that was a decision that the Board took at that time because the price was going down. I would say that we decided to put in place a big buyback program that was split in 2 or 3 different moments. For the moment, the Board is not considering another buyback program, but it will depend also in market conditions. But for the moment, it's not under consideration. In terms of your second question about Bilibab equity portfolio on Argentine companies, no, for the moment, we are not considering that. Also, it will depend on market conditions. And if I can follow-up, I mean, you obviously, as you said, you stopped growing. You have grown less than the other 26% year on year in pesos. I know it's hard to say, but when do you think you will reopen the tap? And would you how much would you expect to grow next year? I mean, we have to say that Argentina, with the new agreement with the IMF, is trying to reach a balanced fiscal account for next year and also until June next year, a 0% increase in the monetary base. So that is a very tight monetary and fiscal program. So the idea is that we are forecasting next year to grow our loan book in similar levels than inflation, that is to say between 25%, 28%. That is the forecast that we are working as of today. And can you remind us how much you expect inflation to be this year? I mean what is the starting point for your own portfolio? For this year, inflation is expected to be between 45%, 46 percent. There are no further questions at this time. This concludes the question and answer session. I would now turn the call over to Mr. Nicolas Torres for final consideration. Thank you all for your interest in Banco Macro. We appreciate your time and look forward to speaking with you again. Good day.