Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's 2Q18 earnings conference call. We would like to inform you that the 2Q18 press release is available to download at the investor relations website of Banco Macro, 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 the call, please press star zero to signal an 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, Mr. Nicolás Torres, IR. I'll turn the conference over to Mr. Nicolás Torres.
You may begin your conference.
Good morning and welcome to Banco Macro 2Q18 conference call. Any comments we may make today may include forward-looking statements, which are subject to various conditions, these are outlined in our 20-F, which was filed to the SEC and is available at our website. 2Q18 press release was released yesterday, it's 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, convergence of accounting standards to IFRS. Figures for fiscal year 2017 have been restated in accordance with IFRS, some items have been reclassified in order to make a comparison between periods possible. I will now briefly comment on the bank's 2Q18 financial results.
Banco Macro's net income for the quarter was ARS 3.1 billion, 40% higher than the ARS 2.2 billion posted a year ago, based on an increase in net interest income and an increase in net fee income. The bank's 2Q18 accumulated return on equity and return on assets of 27.2% and 5.4% respectively, remains healthy and shows the bank's earning potential. Net operating income before general and administrative and personal expenses for 2Q18 was ARS 10.7 billion, increasing 33% or ARS 2 billion year-over-year. Operating income after general, administrative, and personal expenses was ARS 4.3 billion, 25% or ARS 866 million higher than a year ago. The quarter, net interest income totaled ARS 9.1 billion, 15% higher than the ARS 7.9 billion registered in 1Q18, 66% higher than the result posted one year ago.
This performance can be traced to a 74% increase year-over-year in interest income and 92% increase year-on-year in interest expenses. Within interest income, interest on loans rose 13% quarter-over-quarter due to the growth in the average volume of private loan portfolio. In 2Q18, interest on loans represented 76% of total interest income. On a yearly basis, interest on loans rose 59% or ARS 3.9 billion. Net income from government and private securities increased 49% or ARS 1.1 billion quarter-over-quarter, mainly due to higher Lebacs volume. Compared to 2Q17, net income from government and private securities increased 162% or ARS 2 billion. In 2Q18, difference in forward prices of foreign currency decreased ARS 1.2 billion, totaling an ARS 1.1 billion loss as a consequence of the 43% Argentine peso depreciation against the US dollar and the bank's short FX position.
In 2Q18, interest expenses totaled ARS 4.5 billion, 33% higher or ARS 1.1 billion compared with 1Q18, and 92% or ARS 2.1 billion higher on a yearly basis. Within interest expense, interest on deposits increased 29% or ARS 800 million quarter-over-quarter, mainly driven by an increase in the average volume of time deposits and an increase in the average time deposit interest rates. In 2Q18, interest on deposits represented 86% of the bank's financial expenses, 3 percentage points lower than in 1Q18. As of 2Q18, the bank's accumulated net interest margin was 15.2%, higher than the 14.4% posted in 2Q17. In 2Q18, net fee income totaled ARS 1.9 billion. On a yearly basis, net fee income increased 28% or ARS 412 million. In the quarter, other operating income increased 5% with fees charged on debit and credit cards and other fees standing out with 9% and 51% increases respectively.
On a yearly basis, other operating income increased 29% or ARS 308 million. In 2Q18, Banco Macro's personal, administrative, and general administrative expenses totaled ARS 4 billion and increased 17% quarter-over-quarter. Employee benefits increased 21% quarter-over-quarter as a result of IFRS adoption related to vacations and social security contributions, and salary increases agreed with the union. Compared to 2Q17, general, administrative, and personal expenses in 2Q18 were 35% higher. As of June 2018, the accumulated efficiency ratio reached 42.4%, down from 44.9% posted in 2Q17. This was as a result of a 31% increase in expenses and a 39% increase in net interest income, net fee income, and other operating income as a whole in 2Q18. Banco Macro continues to be the most efficient bank in Argentina. In 2Q18, Banco Macro's effective income tax rate was 28.8%, compared to 34.7% in 2Q17.
That third tax rate was cut in the latest tax reform bill, and as of January 2018, it stands at 30%. And it will be further reduced in January 2020 to 25%. In terms of loan growth, the bank's financing to the private sector grew 6% quarter-over-quarter, 44% year-on-year. It is important to mention that Banco Macro's market share over private sector as of June 2018 reached 7.4%. On the funding side, total deposits grew 20% quarter-over-quarter and 45% year-on-year. Private sector deposits grew 18% quarter-over-quarter and 42% compared to 2017, while public sector deposits increased 40% quarter-on-quarter. As of June 2018, Banco Macro's transactional accounts represented approximately 48% of total deposits. Banco Macro's market share over private deposits as of June 2018, 6.7%, unchanged from March 2018.
In terms of asset quality, Banco Macro's non-performing total financial ratio reached 1.38%. The coverage ratio reached 149.3%. Banco Macro continues to show outstanding asset quality metrics, with one of the lowest NPR ratios and highest coverage ratios in the industry. In terms of capitalization, Banco Macro accounted an excess capital of ARS 41.5 billion, which represented a total regulatory capital ratio of 27.6% and a Tier 1 ratio of 21.5%. 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, which was 52.3%. 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, we keep a well-itemized deposit base. At this time, we would like to take the questions you may have.
Okay, at this time, we're 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. At this time, we will pause momentarily to assemble our roster. Our first question comes from Gabriel Nóbrega with Citibank. Please go ahead.
Hi, everyone. Thank you for the opportunity. I have a question regarding your asset quality. During the quarter, we saw that both consumer and commercial segments deteriorated in a similar pace. Do you believe that this deterioration is only due to the worsening of the macro environment, do you believe that there are some specific cases that you are monitoring? Also going forward, what could we expect for the remainder of the year? I'll make a second question after this. Thank you.
Hi, Gabriel. In relation to that, of course, you have to understand that this is a consequence of the recession that started in Argentina in the last part of the first quarter, second quarter, and it's also lasting the third quarter. No particular issues between both portfolios. It's a consequence of the slowing economy. You have to take into consideration that the 1.4% NPL ratio is one of the best, or the best, in the industry, and you can see that when you compare to the other peers that are also quoted there. When you look at the coverage ratio, even though it has gone down a little bit, it continues to be at the level of 150. We do not have a specific numeric target on the coverage ratio, always being above 120, 130.
I think that we are pretty comfortable in terms of asset quality. Let me add that this is also a proactive measure that the board and also the CEO took when we saw that the slowing economy was arriving, was a little bit slowing down the increasing loans in order to reduce the trade risk. It's a combination.
All right. Thank you. During the quarter, we also saw that you had a large impact from the differences in trading due to your short position in dollars. I was just wondering if you could give us maybe a little bit more color on what is your current position and if you're doing anything else to maybe reduce this short position in dollars. Thank you.
The result on the short position was basically, we were not expecting, and I think that no one was expecting such a devaluation of the peso in such a short period of time. That was the result of almost ARS 1 billion loss that we accounted in the quarter. I cannot tell you or talk about the third quarter. In general terms, the short position is much narrower. The result there is going to be, I would say, on the positive. That is what I can say in terms of the third quarter performance or going forward.
That's very clear. Thank you.
You're welcome.
Our next question comes from Domingo Pietrani with J.P. Morgan. Please go ahead.
Thank you. Actually, I also have two questions. One on the short position. It seemed to me that the regulation was more to prevent the banks to be very long in U.S. dollars. I guess exploring a little bit more, is that just a proprietary, meaning, bank view that dollar should go one way or another? Or is there a structural position in which you're almost structurally short on U.S. dollars because of the deposits versus liabilities? Then I'll ask the second.
The regulation that was changed was the cap on the long side that you can be in dollars was reduced from 30 to 5 in two steps. On the short, you can continue to grow until 30% of the equity. We were foreseeing that on that scenario of a high interest rates level, the depreciation of the peso was not going to be that much. That's why we continue with the short position in US dollars, basically on the financial dollars, because you know that on the commercial dollars, we have to be completely hedged because of Central Bank regulations. That was the view. We were also getting high interest rate levels on the Lebacs that we were investing with those pesos that we got from that short position in dollars.
Again, in the third quarter, the short position is narrower, and we are going to cover a much positive result there.
Just being sure it's like a carry trade position is not a structural position.
Yeah.
The second question is on the reserve requirements. We've seen quite a few changes on reserve requirements. Some of them remunerated, some of them not. My question is, what kind of NII impact do you expect on a 12-month normalized level, either in nominal terms or in %, coming from these higher requirements?
It's a good question. I think that going forward in the next 12 months, I would say that we could see some reduction on the reserve requirements that were increased recently as a way of reducing the amount of pesos in the system. We are not expecting these levels to be maintained for the next 12 or 18 months. If you want to do that calculation, I would say that the 11 percentage points that we got on the increase on the reserve requirements, where we can get almost 5% that can be remunerated through the LETE 2020, I would say that that excess of 6% that is not remunerated is impacting between 100 and 130 basis points on the NIM on an annualized basis.
Very clear. Thank you very much, Jorge.
You're welcome.
Our next question comes from Nicolas Riva with Bank of America. Please go ahead.
Yeah. Thanks, Jorge, for taking my question. I have only one. In the press release, you mentioned that you renewed the contract as financial agent for the province of Tucumán. I know that you are also financial agent for three more provinces, Jujuy, Salta, and Misiones. Can you give us an update on those contracts and where you are inclined to renew them? Thanks.
Hi, Nicolas. Honestly, there's no update in the sense that we always have been saying that when these contracts are due, we always renew them for another 10 years, and that is the intention of the bank. The next one due is in 2019 with the province of Misiones, what we are going to continue with the same with the other provinces when they're due.
Perfect. Thanks. Maybe one follow-up. In your balance sheet, you show that of your total deposits, 11% are coming from the public sector. Is most of this 11% coming from these provincial governments where you're a financial agent?
Yes. All of those public deposits belong from the liquidity of those provincial governments. Yes.
Perfect. Thanks, Jorge.
Welcome.
Our next question comes from Frederic de Mariz with UBS. Please go ahead.
Good morning, everyone. Gustavo, Jorge, Nicolás, thank you for the opportunity. 2 questions. The first one is a follow-up on asset quality. When you think of the next few months, obviously expecting that inflation will normalize and we'll have some kind of an improvement, what would be your biggest concern on the NPLs? Would it be more on the consumer side because of inflation? Or do you have some specific concerns about the corporate side? Just to get a sense of the trends and where you want to be a bit more conservative. The second question is on loan growth. It remains very strong, very high level, way above inflation. I was wondering, how do you consider the next few months, both in terms of supply of loans on our side, but also in terms of demand? Do you expect it to come down?
What could be your target for this year? Any color or any specific sectors that you would be looking at more carefully? Thank you.
Frederic, how are you? In relation to your first question, asset quality, I think that NPLs, in our case, could slightly deteriorate a little bit if the recessions continue for the third quarter and part of the fourth. According to some local economists, we are seeing some slight recovery in the fourth quarter of this year, first quarter of next year. That is good news for the economy and also for NPLs. I would say that the consumers, mostly on the open market, that means those that are getting their salary paid through Banco Macro would be seen as the riskiest sector in the next three to five months. Of course, we feel pretty comfortable in the way that we are managing NPLs. Going forward, year-end, we could see this NPL ratio, Banco Macro reaching 1.5, 1.6, unless something extraordinary happens.
We believe that we have this under control. In terms of loan growth, with your second question, we think that we are going to finish this year slightly above inflation. Inflation is expected to be between 30%-32% this year, we are expecting a positive real growth in loans. It's going to be between mid to high 30s at least. In terms of the sectors, I would say because of what's going on today on the news in Argentina, the construction sector would be seen as having some more volatility as one of the main sectors of Argentina. The other sectors, I think that are more going to have positive performance. For example, the agribusiness sector is going to have, next year, a very good performance. This year, we are not seeing pretty lot of concerns besides the construction sector.
That's great. That's very helpful, Jorge. If I may follow up on the construction or infrastructure sector, any idea of how much it represents for the total book in terms of relevance?
Only 4% of the loan book is related to that sector.
That's great. Thank you very much.
You are welcome.
Our next question comes from Mario Pierry with Bank of America. Please go ahead.
Good morning, everybody. Let me ask you two questions as well. First one, your Tier 1 ratio above 20%, you announced an aggressive buyback program. What else can you do? Are you still looking for acquisitions? Once this buyback expires, would you consider doing another one? Just trying to get a sense, if you're going to use this opportunity that we're seeing now in Argentina, would you sell off in order then to finally execute your acquisition strategy? Second question is related to the trajectory of your net interest margin. If we take in consideration the higher rates, the repricing of the loan book, which normally lags the repricing of deposits, the changes to the reserve requirements, how do you see your net interest margin evolving over the next 12 months? Thank you.
Hi, Mario. Even though we have this excess capital that is the highest in the system, we also have been the most active in the way of making the best use of this excess capital. This is the second buyback program that we put in place. The first one was not executed because the price rebounded. Now we are buying, until today, more than 1% of the capital through this buyback. Depending on market conditions, the board of directors can launch another one when this expires. What else? As usual, I think that we are with open eyes in order to see if there is an opportunity for M&A. We continue to believe that there are too many banks in the Argentine banking sector, too fragmented. At some point in the next 12 to 24 months, there should be something there.
There was something in the past that we were involved, but unfortunately, we couldn't get them. We are always present in those processes, and that's the idea of the bank. In terms of net interest margin, when you look at the quarter, you can see that we were able to enlarge the net interest margin, even though all the movements on interest rates and reserve requirement increases. I would say that in the next 12 months, we are going to be able to maintain or even increase this net interest margin. Basically, even though, as you mentioned, most of our loans, a big portion are in fixed rate, but the big chunk of excess liquidity that we have, we can be investing them in high rates. Also, on the liability side, we did not co-validate high levels of interest rates.
Just to give you some hints on that, today, the Badlar rate is between 32% or 33%, and the average cost of our time deposits is slightly below 30%. That is the idea as we were here, working not only on the asset side, but also on the liability side in order to have a positive impact on the margin.
Very clear. Thank you.
You are welcome.
Our next question comes from Natalia Corfield with JP Morgan. Please go ahead.
Hi, good morning all. Thank you for taking my question. I have two questions. One is with regards to the balance sheet and income statement of this quarter. There were too many restatements on this quarter, and I'm wondering why did that happen, and what can we expect for future quarters? My second question is with regards to the buyback that you were doing on the shares. I understand totally the rationale you guys are seeing there. I'm wondering if you are not thinking about buying back your bond, too, because your bond is a subordinated note. You still have a very high Tier 1 ratio, and the bond has seen a significant drop in price. If the situation in Argentina continues the way it is, you might not need to use all the excess capital that you have.
I know you just mentioned that you can see some opportunity in M&A, but I'm wondering if that doesn't cross your mind. Thank you.
Hi, Natalia Corfield. On your first question, yes, we apologize. You know that this is the third year that we are working with IFRS numbers, this is not easy for the bank, and I think that all the banks are having the same, to have reconciliations on the past quarters under IFRS. I think that for the next quarters, figures are going to be much more reconciled, and the differences should be much, much less than the ones that we put out in this quarter, apologize again. On the second question, yes, I agree with you. If you have a chance to look, we have been buying back some bonds, basically those ones in local currency on the fixed rate and on the variable rate. These buybacks were reported to the local stock exchange and also to the SEC in the last days.
These buybacks were more on a reactive way, not proactive. You are right in terms of the subordinated bond, even though we have to take into consideration that when you buy back your shares, you have almost three years to decide what to do with them. In the terms of the subordinated debt, once you buy back, you have to reduce that portion that you are buying back from your equity immediately. It's not the same. Even though if there is a good transaction in the horizon, of course, we are going to have a look at that.
Okay. Thank you.
You're welcome.
Again, if you would like to ask a question, please press star, then one. There are no questions at this time. This concludes the question and answer session. I will now turn 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.