Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's third quarter 2018 earnings conference call. We would like to inform you that the third quarter 2018 press release is available to download at the investor relations website of Banco Macro's www.macro.com.ar. 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 the call, please press star then zero to signal the operator. It is now my pleasure to introduce our speakers. Joining us from Argentina are Mr. Jorge Scarinci, Chief Financial Officer, and Mr. Nicolás Torres of Investor Relations. I will turn the conference over to Mr. Nicolás Torres.
You may begin your conference.
Good morning and welcome to Banco Macro's third 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 we would file to the SEC and is available at our website. Third quarter 2018 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 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 third quarter 2018 financial results.
Banco Macro's net income for the quarter was ARS 3.8 billion, 22%, or ARS 700 million higher than Q2 2018, and 39% higher than the ARS 2.8 billion posted a year ago, based on an increase in net interest income and an increase in net fee income. The bank's third quarter 2018 accumulated ROE and ROA of 27.8% and 5.6%, respectively, remain healthy and show the bank's earning potential. Net operating income for third quarter 2018 was ARS 12.9 billion, increasing 41%, or ARS 3.7 billion year-over-year. Operating income was ARS 5.5 billion, 31%, or ARS 1.3 billion higher than a year ago. In the quarter, net interest income totaled ARS 10.3 billion, 14% higher than the ARS 9 billion registered in Q2 2018, and 17% higher than the result posted one year ago.
This performance can be traced to a 19% year-over-year increase in interest income and a 133% increase year-over-year in interest expenses. Within interest income, interest on loans rose 19% quarter-over-quarter due to an increase in the average lending rate. In Q3 2018, interest on loans represented 73% of total interest income. On a yearly basis, interest on loans rose 72%, or ARS 5.2 billion. Net income from government and private securities increased 39%, or ARS 1.3 billion quarter-over-quarter, mainly due to higher Leliq volume. Compared to Q3 2017's, net income from government and private securities increased 168%, or ARS 2.8 billion. In Q3 2018, differences in foreign prices of foreign currency decreased ARS 232 million, totaling an ARS 1.2 billion loss. As a consequence of the 42% Argentine peso depreciation against the US dollar and the bank short FX positions.
It is worth mentioning that income related to government and private securities and loans to AAA companies more than compensated the short FX position loss. In Q3 2018, interest expenses totaled ARS 6.5 billion, a 43%, or ARS 2.2 billion increase compared with Q2 2018, and 133%, or ARS 3.7 billion higher on a yearly basis. Within interest expenses, interest on deposits increased 47%, or ARS 1.8 billion quarter-over-quarter, mainly driven by a 22% increase in the average volume of time deposits and a 334 basic point increase in the average time deposit interest rates. In Q3 2018, interest on deposits represented 88% of the bank's financial expenses. As of Q3 2018, the bank's accumulated net interest margin was 15.2%, unchanged from Q2 2018, and wider than in Q3 2017. In Q3 2018, net fee income totaled ARS 2.1 billion.
On a yearly basis, net fee income increased 32%, or ARS 500 million. In the quarter, other operating income increased 44%, or ARS 610 million. Other income stands out with an ARS 567 million increase related to the buyback of our corporate bonds. On a yearly basis, other operating income increased 89%, or ARS 935 million. In Q3 2018, Banco Macro personnel administrative expenses totaled ARS 4.5 billion and increased 13% quarter-over-quarter.
Employee benefits increased 11% quarter-over-quarter as a result of salary increases agreed with the union. Compared to 3Q 2017, general administrative and personnel expenses increased in 3Q 2018, 44%. As of September 2018, the accumulated efficiency ratio reached 38.9%, improving from the 41.2% posted in 3Q 2017. This was as 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 2018.
Banco Macro continues to be the most efficient bank in Argentina. 3Q 2018, Banco Macro expected income tax rate was 30.9% compared to 35.6% in 3Q 2017. Expected tax rate was cut in the latest tax reform bill, and as of January 2018, it stands at 30% and will further reduce in January 2020 to 25%. In terms of loan growth, the bank 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 2017, while public 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, Banco Macro's non-performing 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 ratios and highest coverage ratios in the industry. In terms of capitalization, Banco Macro accounted an excess capital of ARS 44.1 billion, which represented a total regulatory capital ratio of 26.4% and a Tier 1 ratio of 18.9%. The increases in regulatory capital ratio of 120 basis points and Tier 1 ratio of 260 basis points originated from the share buyback program. During 3Q 2018, the bank repurchased 21.4 million shares for a total amount of ARS 3.1 billion. 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. We have one of the cleanest balance sheets in Argentina banking sector. We keep a well-itemized 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. If you would like to ask a question, please press star one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Our first question comes from Alonso Garcia with Credit Suisse. Please go ahead.
Good morning, everyone. Thank you for taking my question. My question is regarding asset 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 if you believe we should expect further deterioration before seeing a recovery. Also related to that, we have seen the coverage ratio declining for four consecutive quarters. In particular, provisioning of new NPLs in the past couple of months have looked abnormally low. I want to hear your thoughts on this front and when we should expect the coverage ratio to stabilize. Thank you.
Hi, Alonso. This is Jorge Scarinci. How are you? According to your first question, in terms of asset quality, we have been commenting in the previous quarters, on 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 the second quarter of this year, we started doing that. 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. We think that we are going to see fourth quarter of this year and also maybe first quarter of next year, with, I would say, weak economic conditions.
Of course, this is going to impact the NPL ratio, not only Banco Macro, but also in the system. 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 first quarter of next year. That is something that we are forecasting. In terms of the coverage ratio, if you have a chance that in almost one year ago, we decided to build up a cushion there to
Lift the coverage ratio to level of close to 190%. 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 the fourth quarter. The idea was to build up that cushion and use it in this quarter. The idea of the bank is always to be above 100% 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.
Understood. Thank you very much.
You're welcome.
Our next question comes from Nicolas Riva with Bank of America. Please go ahead.
Thanks very much, Jorge, for taking my question. Just two questions. The first one on this income that you reported from financial assets at fair value, the ARS 499 million, you 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? My second question on the financial agency agreement, you said that you renew the agreement with the province of Misiones. I believe that you had also done the same thing with Tucumán. If you can do an update on the status of the agreements with Jujuy and Salta. Thanks.
Hi, Nicolas. I will start answering your second question first. On the agreement that we have renewed, 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 this time. We have excellent relationship with the provinces. That's why we have been able to renew this contract for another 10 years. Basically, that was easygoing, no problem. In the relation with Salta, you were asking about Salta and the other province?
Salta and Jujuy. Yes, Jujuy.
Well, those are due in 2024 and onwards, so there is six years more to go. We have to wait a little bit to renew them. I would say that there will be no problem there. It's too far to answer today, no? In relation to your first question, yes, basically, that income from securities that were sold in the quarter, or basically, they were mark-to-market in the quarter.
Okay. Thanks, Jorge. Thank you.
You're welcome, Nicolas.
Our next question comes from Gabriel Nóbrega with Citi. Please go ahead.
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. During the quarter, we saw an even bigger loss than what we had seen in the second quarter. 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 fourth quarter. I'll make a second question afterwards.
Hi, Gabriel. Well, if you go to page 13 of the press release, there you have a chart on the foreign currency position, and the last row there, you can see the reduction between the second quarter and third quarter in terms of the position sold on FX that went from $142.9 million- $97.6 million. That was the reduction that we were commenting in the previous quarter. The big jump that we saw in the FX at the end of September, resulted in the result of almost ARS 1.2 billion loss that we accounted there.
As we have been explaining in the previous quarter conference call and also in this press release, with those pesos that we received or we got from the sold position on the FX, we have been investing that in Leliq, Lebac, and also loans to triple A companies that more than compensated this ARS 1.2 billion loss. That is the answer to your question.
All right. That's very clear. I actually have a follow-up. You said that you expect maybe asset quality to further deteriorate given the macroeconomic scenarios. Here, could you maybe just talk about, is there any sector or is there any part of your loan book that you are more worried with than the others?
No, 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. 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. More or less, all the sectors are having negative performance when they are compared to a year ago. We are not finding one specific sector where we are very concerned, basically.
All right, that's very clear. Thank you.
You are welcome, Gabriel.
As a reminder, if you would like to ask a question, please press star then one on your phone. Our next question comes from Carlos Gomez-Lopez 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, do you need to hit the price target that you mentioned earlier, I think ARS 158, for you to continue buying back your stock? Second, 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? Thank you.
Hi, Carlos. How are you? 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 two or three different moments. For the moment, the board is not considering another buyback program. It will depend also on market conditions. For the moment, it's not under consideration. In terms of your second question about building up equity portfolio on Argentine companies, no, for the moment, we are not considering that. It will depend on market conditions.
If I can follow up, 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. When do you think you will reopen the tap, and how much would you expect to grow next year?
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. That is a very tight monetary and fiscal program. 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.
Okay, can you remind us how much you expect inflation to be this year? What is the starting point for your loan portfolio?
For this year, inflation is expected to be between 45%-46%.
Okay. Thank you very much.
Welcome, Carlos.
There are no further questions at this time. This concludes the question and answer session. I would now turn the call over to Mr. Nicolás 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. Thank you for attending today's presentation. You may now disconnect.