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 2018 earnings conference call. We would like to inform you that first quarter 2018 press release is available to download at the investor relations website of Banco Macro, ri.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 zero to signal the operator. It is now my pleasure to introduce our speakers. Joining us from Argentina are Mr. Jorge Pablo Brito, Vice Chairman, Mr. Gustavo Manriquez, CEO, Mr. Jorge Scarinci, CFO, and Mr. Nicolás Torres, IR, and other members of the bank's management team.
I will turn the conference over to Mr. Nicolás Torres. You may begin your conference.
Good morning. Welcome to Banco Macro's 1Q18 conference call. Any comment we may make today may include forward-looking statements which are subject to various conditions. These are outlined in our 20-F with the file to the SEC and is available at our website. 1Q18 press release was distributed yesterday and it's also available at our website. This is the first quarterly release under Communication A 6114 of the Central Bank of Argentina, convergence of accounting standards to IFRS. Tables from previous quarters may differ from the ones originally reported in order to make a comparison between periods possible. I will now briefly comment on the bank's 1Q18 financial results.
Banco Macro's net income for the quarter was ARS 3.6 billion, or 17% higher than the ARS 3 billion earned in the previous quarter. 77% higher than the result posted a year ago, based on an increase in net financial income, net fee income, and cost control. The bank's 1Q18 accumulated ROE and ROA of 29.4% and 6.2%, respectively, remain healthy and show the bank's earning potential. The operating result for 1Q18 was ARS 5.1 billion, increasing 11% or ARS 509 million quarter-on-quarter and 65% or ARS 2.1 billion year-on-year. In the quarter, net financial income totaled ARS 7.3 billion, 6% higher than the ARS 6.9 billion registered in 4Q17. 56% higher than the result posted one year ago. This performance can be traced to a 55% year-on-year increase in financial income and a 50% year-on-year increase in financial expenses.
In 1Q18, interest on loans represented 75% of total financial income. On a yearly basis, interest on loans rose 46%, or ARS 2.8 billion. Within financial income, interest on loans rose 10% quarter on quarter due to the growth in the average volume of private loan portfolio. Compared to 1Q17, net income from government and private securities increased 162%, or ARS 1.4 billion. Net income from government and private securities decreased 1%, or ARS 15 million, quarter on quarter, mainly due to lower Lebac volume. In 1Q18, financial expenses totaled ARS 4.5 billion, an 11%, or ARS 462 million, increase compared with 4Q17, and 50%, or ARS 1.5 billion, higher on a yearly basis.
Within financial expenses, interest on deposits increased 11%, or ARS 320 million, quarter on quarter, mainly because of an increase in the average volume of time deposits and a slight increase in the average time deposit interest rate. In 1Q18, interest on deposits represented 66% of the bank's financial expenses, 1% lower than in 4Q17. As of 1Q18, the bank's net interest margin was 18.7%, higher than the 18.3% posted in 4Q17 and the 18.3% posted in 1Q17. Had income from government and private securities and warranted loans been excluded, the bank's net interest margin would have been 16.6% in 1Q18, higher than the 16.1% in 4Q17 and lower than the 17.5% posted a year ago. On a yearly basis, net fee income increased 20%, or ARS 321 million. In 1Q18, net fee income totaled ARS 1.9 billion.
Net fee income grew 3% quarter on quarter, or ARS 48 million, with an 8% increase on fees charged on deposit accounts. In 1Q18, Banco Macro's administrative expenses totaled ARS 3.6 billion and decreased 4% quarter on quarter. Personnel expenses decreased 9% quarter on quarter and increased 17% compared to the previous year due to salary increases. Compared to 1Q17, administrative expenses in the quarter were 25% higher. As of March 2018, the efficiency ratio reached 38.8%, down from 43.3% posted in the previous quarter and 45.4% in 1Q17. This was as a result of a 4% decrease in administrative expenses, in line with the bank's focus of improving efficiency, and a 6% increase in net financial and net fee income as a whole in 1Q18. Banco Macro continues to be the most efficient bank in Argentina.
In 1Q18, Banco Macro's effective income tax rate was 31.3%, compared to 27.5% registered in 4Q17 and 35.1% in 1Q17. The statutory tax rate was cut in the latest tax reform bill, and starting from January 2018, is 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 10%, 52% year on year. It is important to mention that Banco Macro's market share over private sector loans as of March 2018 reached 8.1%, increasing 20 basis points from December 2017. On the funding side, total deposits grew 4% quarter on quarter and 30% year on year. Private sector deposits grew 3% quarter on quarter and 33% compared to 1Q17, while public sector deposits increased 7% quarter on quarter. As of March 2018, Banco Macro's transactional accounts represented approximately 47% of total deposits.
Banco Macro's market share over private deposits as of March 2018 totaled 7.7%, unchanged from December 2017. In terms of asset quality, Banco Macro's non-performing to total financial ratio reached 1.11% in the quarter. The coverage ratio reached 178%. In terms of capitalization, Banco Macro accounted an excess capital of ARS 37.6 billion, which represented a total regulatory capital ratio of 27.3%, and a Tier 1 ratio of 22.4%. The bank's aim is to make the best use of this excess capital. The bank's liquidity remained appropriate. Liquid assets to total deposits ratio reached 44.9%. It's important to mention that under Communication A 6114 from the Central Bank of Argentina, repos are no longer part of the portfolio of government and private securities and are not included in liquid assets. Overall, once again, Banco Macro posted 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's banking sector, and we keep a well-optimized deposit base. At this time, we would like to take the questions you may have.
Thank you. At this time, we are going to open the call up for questions and answers. If you would like to ask a question, please press star then one on your touchtone 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 for a moment to assemble our roster. Our first question today will come from Ernesto Gabilondo of Bank of America Merrill Lynch. Please go ahead.
Hi. Good morning. Thanks for taking questions, and congrats on your results. When do you think we could start to see lower credit demand and asset quality deterioration from the recent peso depreciation and the sharp increase in interest rates? I know it's a difficult question to answer, but any color that you can provide will be very helpful. Please remember us how much of your loan portfolio and funding are at floating rates. Also, if you can share with us what could be the impact from the recent increase in interest rates on your securities position on Lebacs will be helpful. My second question is on asset quality. The cost of risk was 1.6% in the first quarter. I remember that in the last call, you mentioned that it will be at most up to these levels.
Considering the recent macro environment, do you think you could still maintain the cost of risk at these levels? Thank you.
Good morning. Hi. This is Jorge Scarinci speaking. As you mentioned, it's a bit early to answer some of your questions because the effect on the increase in interest rates and the devaluation of the peso happened in the last two weeks. Yesterday, we have a better year for these variables and also today for what's going on. It's a calm day here. Honestly, it's not very easy to understand. Of course, we are fine-tuning our internal forecast. I would say that what we were forecasting for GDP growth, that was between 2.5% or 2.6% in real terms for this year, is going to be lower. Honestly, for the moment, we don't know how much, because we want to see a little bit how long this level of interest rate is being maintained by the central bank, similar than the level of the FX.
I would say that the NIM that we were forecasting for this year that was between low to mid-40s, is also going to be fine-tuned a little bit downwards. Again, it's a bit early to say how much. Going to the asset quality forecast, honestly, we are not seeing big changes in the asset quality behavior compared to what we have been seeing in the month of March and April. Also it's a bit early, but honestly, we are not seeing any dramatic or considerable changes so far in asset quality or non-performing. The idea for the moment is to maintain the level of cost to risk at 1.5, 1.6, 1.7, around this. There's not going to be a dramatic change for the moment. That is something that we are forecasting.
I couldn't get, I think that was the last part of your first question about loans and deposits composition. Can you repeat me that, please?
Exactly. Just if you can share how much is at floating rates in terms of loans and in terms of funding, also, on your securities position, how much do you have on Lebacs and what could be the impact from this high interest rate environment?
Okay. According to loans, we have 92% of our loans at fixed rate. Also remember that a big portion of these fixed rate loans are in the consumer lending portfolio, which are yielding rates above or close to, let's say, 40% plus fees. 92% is fixed rate. In terms of deposits, you know that 50% of our deposits are time deposits, 65% of deposits are retail deposits. The average maturity in these time deposits is slightly below 60 days. As of today, the average rate that we are renewing our time deposits is in the area of 24%, so it's well below the Badlar rate. In terms of the Lebacs portfolio, we are having close to 18% of total assets in Lebacs.
We are going to have, in the second quarter, a good performance in trading, basically because we have been investing that in higher interest rate because the Lebacs portfolio is very short-term.
Perfect. Thank you very much, Jorge.
You're welcome.
Our next question will come from Carlos Macedo of Goldman Sachs. Please go ahead.
Hi. Thanks, gentlemen. Thanks for taking questions. First question, just to be sure and very clear, the big impact or the big depreciation in the peso, I know that you show us that you have a very small net exposure to FX. Just to be very clear, the impact is minimal from that exposure. Just checking that right second. You have a bigger exposure to inflation with more loans than the liabilities coming from there. If inflation does accelerate on the back of the devaluation of the currency, what do you think will be the impact on your margins and overall on your bottom line?
Hi, Carlos. Yeah, you're right. Yeah, first question, in terms of the excess exposure, we have a very little short position there. That is correct. Therefore, the impact is extremely minor. Also, in terms of exposure to inflation, yes, we are long on inflation. I think that if there is an acceleration, of course, the net long position in inflation is relatively small compared to our balance. I would say that the impact on the net interest margin that we are forecasting on an acceleration on inflation is between 20-30 basis points, no more than that.
Okay. Thank you, Jorge. Just one follow-up. You mentioned that your consumer book is all fixed or 90% is fixed. What is the average duration in this book? How quickly does it turn around?
Sorry, what was that? I couldn't get that.
The duration on the consumer book that's 90% fixed.
Yeah. The duration of that portfolio?
Yeah.
It's in the area of 20 months.
Okay. Thank you.
Welcome.
Our next question will come from Nicolas Riva of Bank of America. Please go ahead.
Yeah. Thanks, Jorge, for taking my question. I have a question on funding. I saw the deposits grew well below the pace of the growth of your credit book, 30% year-over-year, 4% quarter-over-quarter. I wanted to ask if you're worried about that, if funding could be an issue that restricts credit growth this year. Also, if you look at the loan-to-deposit ratio, which used to be well below 100% for the bank, now is approaching 100%. Kind of my question here is, what's your plan to make sure that your funding keeps up the pace with your credit growth for this year, especially given that maybe credit markets are not as open for foreign companies right now?
Also, this is not in the data report in the first quarter, but over the last few weeks, have you seen anything abnormal in terms of deposit outflows from clients? Thanks.
Hi, Nicolas. Yeah, the point is that we issue a local bond that was replacing some funding. The idea is that we are going to grow in the area between mid to high 20s deposit this year. Fine-tuning the long growth is going to be slightly below 40, but again, this is a bit early to fine-tune that. We are not concerned about funding. We think that we have everything to keep on growing in these levels. Yes, when you look only at the loan-to-deposit ratio, it's reaching close to 100 because we have other sources of funds, the bond that we issued recently and the other bonds that we have issued before. Depending on market conditions, we could be raising more funds locally or abroad, depending on the market.
Honestly, we are not concerned in terms of funding that could prevent us to continue growing. That's not an issue for us at the moment. In terms of any data on deposit outflow in the last weeks, I would say no. Deposits keep on growing both in pesos and dollars in Banco Macro in the last weeks.
Thanks.
Welcome.
Our next question will come from Alonso Garcia of Credit Suisse. Please go ahead.
Hi, good morning, everyone, and thank you for taking my question. I just want to follow up on the funding side. You mentioned that funding is not a concern to you as you are using other sources of funding besides deposits. I did want to touch base on the deposit cost, because this quarter, interest on deposits increased way above deposit growth. I'm wondering, what are you expecting in the coming months or actually in the second quarter now that you will have to compete for deposits versus stronger or more attractive Lebac bills? My second question is just on the provision side. I just want to know if there was an impact on IFRS, and if so, how much was this impact, because asset quality actually behaved pretty well during the quarter, but provisions were up 30%.
I just wonder if there was any effect on that front. Thank you.
Hi, Alonso. No, in terms of funding, again, we are not concerned. We know that all the system is here growing at a lower pace than lending, but we continue to be the most liquid bank in the Argentine banking sector, so it's not a concern. In the second quarter, what we are going to see because the increase in rates is, for the moment, we are seeing an increase in the funding rate. Remember that because of geographic location of our branches and the profile of our clients, we have a relatively much lower cost of funds than our competitors or peers that are more based in BA City. Most of our clients are not thinking about investing in Lebacs.
That's why, as I commented on or in the former question, I answered that the average cost of our time deposits are well below the Badlar rate. That is something to keep an eye on. In terms of your second question, no impact in terms of IFRS on our provision. The increase was basically because of internal matters. Honestly, in terms of IFRS, there was no impact there.
Okay, perfect.
Sorry.
Could you Sorry.
Sorry, there was some decline in the fourth quarter of 2017, that's why what you are seeing is a bigger increase between 4Q 2017 and 1Q 2018.
Okay, nothing, as you mentioned before, nothing really concerning on asset quality at this point.
No.
Perfect. Thank you very much.
The next question will come from Frederic de Mariz of UBS. Please go ahead.
Good morning, everyone. Jorge, thank you for the opportunity. A couple of follow-ups and a question. On the follow-up, I was wondering whether you would have an estimate of what this higher Lebac means for your margins for this year. If we estimate that the Lebac stays at 40% or close to that level for the next few months until inflation normalizes, which seems to be the consensus, what does it mean for your net interest margins for the full year? I'm also curious to see what does it mean for your lending spreads. Do you expect to reprice your credit portfolio based on that Lebac, or do you think there's no direct connection between the asset rate on the Lebac side and your loans? Second question on asset quality. I think you made it very clear that there's no impact for now.
I'm curious to hear, are you following the secondary impact of the FX? By this I mean your clients, are they exposed to the FX? Could they suffer from the FX depreciation? Is it something that you're tracking internally? Last question on the capital strategy. You announced a buyback. Just wanted to get an update from you in terms of capital usage in the next few quarters. Thank you.
Hi, Frederic. In terms of first question, yes, we are having a higher rate on the Lebac that we are investing. We have to see, again, how long this scenario is going to be maintained, but let's assume this scenario continues for the rest of the year, that I think is not probable. The impact on the NIM would be between 100 and 150 basis points wider. We think that this is not going to be maintained. We are going to see maybe lower rates in the second part of the year. I would assume between 75 to 100 increase or widening on the net interest margin on the back of the Lebac's interest rate increase. Lending, of course, is repriced according to the secondary market Lebac's interest rate, and of course, other source of excess liquidity that is not invested in Lebac is repriced there.
Plus, consumer loans were also repriced according to that Lebac, therefore, consumer lending was increased between 300 and 400 basis points. Asset quality, for the moment, as I mentioned before, we are not seeing any dramatic or big change in the behavior of the NPL portfolio. We are not seeing big impact in terms of the FX depreciation. Once again, remember that the amount of loans in USD are very small compared to the peso loan portfolio. I would say that, by the way, on the regional economies, the depreciation is positive for those economies and positive for exports. The impact there should be positive, but in terms of NPLs, no negative impact for the moment. Finally, on the buyback program, basically, the decision of the board was made more than one week ago in a very weak or gray day for the markets.
The idea is basically to send an important message to the investor community, similar than the one that we sent in 2009, when we were the first Argentine company to put a buyback program in process, is that we want to support the long-term shareholders of Banco Macro, and to say that part of the liquidity that we have is going to be used there in the case of the price goes below the one set by the board. That was the important message that the board wanted to send to the market.
That's very clear. Thank you very much.
You're welcome.
Our next question will come from Yuri Fernandes of J.P. Morgan. Please go ahead.
Thank you, gentlemen. I have a question on loan growth. Just to be sure, if you continue to have the 40% loan growth for this year, you are tracking above that now, but as you have mentioned, that there should be some deceleration going on. Just to be sure, if you believe the year-end books should grow above 40% as you were thinking before. My second question is related to your agribusiness portfolio. Just to be sure, I got your point that asset quality behaved, but just to be sure if the agribusiness portfolio is doing okay, given all the weather impact you had in Argentina in the last months. Thank you.
Hey, how are you? I think it's a bit early to make any fine-tune on loan growth or estimate for this year. I would assume that it's going to be slightly below 40% this year. We want to see how long this level of interest rate is being maintained. If you want to fine-tune your model, I would fine-tune a little bit below 40% nominal this year, loan growth. For the moment, that is all what we can say. In terms of asset quality, basically no impact in terms of what's going on the agribusiness sector. We have very few clients, I would say that we can count them with the fingers of the two hands that come to the bank to see any kind of refinancing.
I would say that the agribusiness sector here is a very profitable and liquid sector, and therefore, we are not seeing any impact in terms of the drought that we've seen here in Argentina. Asset quality there is pretty under control.
Okay, thank you.
You are welcome.
Our next question will come from Henrik Milton of Coeli. Please go ahead.
Yes, hello, this is Henrik Milton. Thank you for very much, very good report. I'm wondering if you can say anything about how the sales of mortgage loans is going and what the prospects are for those.
Hi, Henrik. I would say that the mortgages demand cooled down a little bit on the back of the increase on the FX in the last five months, and also on the back of the interest rate increases by the bank. Therefore, the demand is a bit more sluggish. I would say that once inflation cools down below 20%, we are going to see a kind of rebound of the demand. For the moment, it's a little bit smaller, shorter or sluggish compared what we were accustomed to see at the end of 2017.
Okay, second question, and that is if you were trying to buy Banco Patagonia, have you made any progress regarding that M&A activity?
No, that deal is completely dead. Done deal.
Okay. Any other M&As coming on?
Nothing on the formal side. Honestly, we do not have any formal mandate on the table, so we are keeping an eye on any potential transaction going on. For the moment, no.
Okay. Thank you very much.
You're welcome.
Our next question will come from Jörg Friedemann of Citibank. Please go ahead.
Thank you for the opportunity to make questions, gentlemen. I saw, of course, the release and compared that to previous release figures, but just wondering if you could guide us through the main relevant reclassifications under the new accounting criteria since you still don't have the clear reallocations. Also, I noted that your balance sheet was also affected by that with, I think, equity increasing by about 8%. Just wondering if that was the effect of the revaluation of the real estate assets and whether and when you are going to implement IFRS 9. Thank you very much.
Hi, George. How are you? This afternoon, you are going to have the complete balance sheet income statement according to IFRS that will be filed this afternoon. Yes, the impact that we had in terms of equity is an increase of 8% because of IFRS is something that we have been mentioning in the last year that that was going to be the impact. In terms of IFRS 9, we are going to start reporting that next year in 2019.
Okay, perfect. I really appreciate the clarifications, and I will be waiting for the complete set of financials this afternoon. Thank you.
Welcome.
Our next question will come from Natalia Corfield with J.P. Morgan. Please go ahead.
Yeah. Good morning, all. I have two main questions. One is in your funding. Do you have a breakdown of your loans deposits in dollars and in pesos? The other one is a clarification with regards to what you said with regards to margins. I understood that because of the Lebacs, there would be 100 basis points increase in your margins. I don't know if it's just related to Lebacs or this is an increase in the overall margin of Banco Macro. If you could touch base on that again, I would appreciate it. Thank you.
Hi, Natalia. Yes, basically what we were saying is that in the combination of the increase in rates that we have in the last weeks, mainly on the Lebacs, and to a lesser extent in our deposit base, we are forecasting a widening on our net interest margin between 75 and 100 basis points. However, we have to say that since this is a dynamic process, we have to see how interest rates evolve in the coming weeks. For the moment, that is the effect that we are forecasting in terms of net interest margin.
Okay. This reference, looking at the composition of your loans, you have 92% fixed, and it's 20 months. I imagine that it would be hard to reprice those loans. Basically, the increase in the Lebacs would offset the fact that you won't be able to reprice your loans at a very quick pace, and you had an increase in Badlar, which wasn't as big as in the Lebacs, but nevertheless, it was an increase. Is that the case? The Lebacs would compensate for a possible squeeze in margins related to your loans.
Yes, that is right.
Okay. The loans deposit in dollars and in pesos?
Mostly loans and deposit in pesos. In dollars, of course, margins are narrower. Even though we have been increasing some deposit rates in dollars, also there was a translation to an increase in dollar loans. Of course, the amount there of dollar loans and deposits are much narrower than the peso balance, and therefore margins are narrower. The big impact is on the peso side.
Okay. Thank you.
You're welcome.
Again, if you have a question, please press star then one. The next question will come from Gabriel Nóbrega with UBS. Please go ahead.
Hi, everyone. Thank you for the opportunity. My question is more on the effect side. We saw that it was controlled during the quarter. Could you just remind us how the negotiations with the banking union played out? Should we expect more pressure on personnel costs throughout the year, or do you believe you will be able to have more efficiency gains? Thank you.
Hey, Gabriel. How are you? Yes, the agreement that was reached with the union was a 15% increase in the salaries. Of course, if inflation is above that, there should be another set of discussions between the unions and the chambers. We think that it's going to be above 15% because we are forecasting, according to the consensus, inflation above 20%. Therefore, we are forecasting expenses to be growing this year in the area of 23%, 24%, even though that, I think that we are going to be able to maintain cost-to-income ratios in the low 40s, keeping and being the best or the most efficient bank in Argentina.
That's very clear. Thank you.
Thank you. Welcome.
Our next question will come from Carlos Gomez-Lopez of HSBC Bank USA. Please go ahead.
Hello, Jorge. Good morning. Two specific questions. First, on mortgages and funding for the mortgages, how much are you paying for UVA deposits at present, and how much are you charging for the mortgages? Do you think that the mortgage pricing is now at a level where it is economical? Second, do you have any plans for organic expansion in the Buenos Aires metropolitan area since you are no longer considering the acquisition of Banco Patagonia? Thank you very much.
Hi, Carlos. How are you? We are charging for UVA loan, UVA, and the spread is eight and a half. For a deposit, we are paying UVA plus four. That is the rate that we are paying for the moment. Second question, we are not expecting an aggressive expansion plan, organically speaking, in a sense, to open a set of many branches here. We are not planning that in the area of Buenos Aires. We continue growing through alliances with different companies, and we continue to believe that the opportunity to make a one-time growth in this area is through an acquisition, and therefore, that's why we are keeping a close eye to any potential opportunity that could appear in the market.
That's very clear. Thank you.
Welcome, Carlos.
Ladies and gentlemen, as I am showing no further questions, at this time, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Nicolás Torres for his 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 your line.