Good day, and welcome to the Grupo Financiero Galicia Q2, 2022 Earnings Release. Today's conference is being recorded. At this time, I would like to turn the conference over to Pablo Firvida. Please go ahead.
Thank you, Allie. Good morning, and welcome to this conference call. I will make a short introduction, and then we will take your questions. Some of the statements made during this conference call will be forward-looking statements within the meaning of the safe harbor provisions of the U.S. Federal Securities laws and are subject to risk and uncertainty that could cause actual results to differ materially from those expressed. According to the Monthly Indicator for Economic Activity, EMAE, the Argentine economy recorded a 1.1% recovery during June, reaching a 6.3% growth when compared to the H1 of 2021, and a 6.4% year-over-year expansion. According to the Market Expectation Survey of Argentine Central Bank, REM, in 2022, the economic recovery will be 3.4%. During the Q2, the primary deficit reached 1% of GDP.
The Consumer Price Index recorded a 17.3% increase during the quarter, accumulating 36.1% in 2022, and 64% during the twelve months ended in June 2022. On the monetary front, the Central Bank expanded the monetary base by ARS 468 billion in the Q2 and recorded a 44.2% increase in the last twelve months. Meanwhile, the exchange rate averaged ARS 122.74 per dollar in June, a 12.1% increase against the average for March 2022. When compared to June 2021, the Argentine peso underwent a 22.4% devaluation. In June, the average rate on peso-denominated private sector term deposits for up to 59 days was 49.6%, around fifteen percentage points higher than the average recorded in 2021.
As of the end of the quarter, minimum interest rate for time deposits below ARS 10 million was established at 61%, and in mid-August was once again increased to 69.5%. Private sector deposits in pesos amounted to ARS 10.2 trillion in June, increasing 19.9% during the quarter and 69.9% in the last twelve months in nominal terms. Peso-denominated term deposits rose 21.2% during the quarter and 71.2% in the last twelve months, while transactional deposits increased nominally 18.9% and 69.7% respectively in the same periods. Private sector dollar-denominated deposits amounted to $15.6 billion, increasing 2.2% during the quarter and decreasing 4% in the last twelve months.
During June, peso-denominated loans to private sector averaged ARS 5.1 trillion, increasing 17% in the quarter and 17.8% when compared to June 2021. While private sector dollar-denominated loans amounted to $3.8 billion, recording a 0.2% contraction during the Q2 and a 29.1% reduction when compared to a year before, all in nominal terms. Turning now to Grupo Financiero Galicia. Net income for the Q2 amounted to ARS 5.1 billion, down 65% from the year-ago quarter as most of the subsidiaries had lower results.
The mentioned net income was mainly due to profits from Banco Galicia for ARS 3.7 billion, from Galicia Asset Management for ARS 1.1 billion, from Naranja X for ARS 491 million, and from Galicia Seguros for ARS 188 million. This profit represented a 0.9% annualized return on average assets and a 5.1% return on average shareholder's equity. Banco Galicia net income for the quarter was 66% lower than in the year-ago quarter, mainly due to a 73% higher loss from the net monetary position. The net operating income increased 7%, mainly due to a 66% increase in net interest income, offset by 9% lower results from financial instruments and a 14% lower other operating income.
Average interest earning assets were down 3%, reaching ARS 1.2 trillion, mainly due to a 58% decrease in the average volume of peso-denominated other interest earning assets and a 41% decrease in the average volume of dollar-denominated loans. In the same period, each yield increased 954 basis points, reaching 44.8%. Interest-bearing liabilities decreased 9% from the Q2 of 2021, amounting to ARS 1 trillion. This decline was due to a 22% decrease in the average balance of dollar-denominated savings accounts, a 5% decrease in the average balance of peso-denominated time deposits, and a 30% decrease in the average balance of dollar-denominated time deposits. During this period, its cost increased 739 basis points to 28.4%.
Net interest income for the quarter increased 66% from the same quarter of 2021, with interest income growing 42% and interest expenses growing 22% in the same period. Net fee income decreased 5% from June 2021, mainly due to a 7% lower fees on credit cards. Net income from financial instruments decreased 9% due to lower results from derivative financial instruments. Gains from gold and effects quotation differences were 97% higher from the year-ago quarter, including the results from foreign currency trading. As regards provision for loan losses, the amount for the quarter was 10% higher than those recorded in the same quarter of 2021, reaching ARS 5.6 billion.
Personnel expenses were 9% higher than the Q2 of 2021, primarily due to salary increase agreements with the union, while administrative expenses increased 7%, and other operating expenses decreased 8% as compared to a year before. The income tax charge was significantly lower than in the Q2 of 2021, with an accumulated effective tax rate of 25% during the H1 of 2022. The bank's financing to the private sector reached ARS 845 billion at the end of the quarter, up 4% in the last twelve months, mainly due to a 9% increase of loans in pesos. Exposure to the public sector increased 3% year-over-year.
Excluding the exposure to the central bank, net exposure represented 13% of total assets, compared to 11% as of the end of the Q2 of 2021. Deposits reached ARS 1.4 trillion, 3% lower than a year before, mainly due to a 21% decrease of dollar-denominated saving accounts and a 10% decrease of peso-denominated current accounts, offset by a 4% increase of peso-denominated time deposits. The bank's estimated market share of loans to the private sector was 12.1%, 13 basis points higher than at the end of a year-ago quarter. The market share of deposits from the private sector was 10.1%, 16 basis points lower than in the same quarter of 2021.
As regards asset quality, the ratio of non-performing loans to total financing ended the quarter at 2.16%, recording a 98 basis points improvement as compared to the 3.14% of the Q2 of the prior year. At the same time, the coverage with allowances reached 218.5%, similar level than a year ago. As of the end of June 2022, the bank's regulatory capital ratio reached 24.1%, decreasing 96 basis points from the end of the same quarter of 2021. The bank's liquid assets represented 114% of transactional deposits and 62% of total deposits, up from 107% and 61% respectively from a year before.
In summary, in a very challenging and volatile macro environment, Grupo Financiero Galicia was able to keep asset quality, liquidity, and solvency metrics at very healthy levels, while profitability was negatively affected by the very high inflation of the quarter. We are now ready to answer the questions that you may have. Thank you.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure mute function is turned off to allow your signal to reach our equipment. Again, it is star one if you would like to ask a question. We'll go ahead and take our first question from Ernesto Gabilondo with Bank of America. Please go ahead.
Hi, good morning, Pablo. Thank you for your presentation. I have three questions from my side. The first one is on the political outlook. I understand we're still far from the elections, but seems there's a lot of division among the political forces. I think there's still no preference for a candidate. How are you seeing the political outlook ahead of the elections? My second question is on loan growth. We continue to see credit penetration at historical lows. I think it's around 10% of GDP. Considering this scenario of high inflation, high rates, we think they are preventing this normalization to start thinking about loan growth. When do you expect to start seeing double digits real loan growth in Argentina?
My last question is on asset quality. As you mentioned in your presentation, there were some charges in your loan portfolio. Can you elaborate if they were related to corporates, and which type of sectors, and how should we think about the NPLs and the cost of risk in the next quarters? Thank you.
Hi, Ernesto. Well, first, the political outlook, as you mentioned, is uncertain. We are about one year far from the primaries. I think the division that you can see both in the current governing party and in the opposition will mean that many forces or people will compete in the primaries. Once the results of the primaries are known, my guess or my idea and many of the political analysts agree on that, or I agree with them, is that everybody will be aligned below the one that gets more votes within each party.
Currently, when we look at the government names, most of them have a very high negative image, not only Alberto Fernández, Cristina Fernández de Kirchner, Kicillof, Máximo Kirchner. They have, like, 30% good image and 70% bad, so it's hard for them. We don't know who will be competing in that respect and if the Peronism will be together or there will be different factions. Sergio Massa also has a more negative image than positive. In the opposition, something similar happens, many names, but with better positive image. There you could have Mauricio Macri, or, you know, Horacio Rodríguez Larreta, Patricia Bullrich, Facundo Manes from the Radicalism.
There are also speculations about who will be a candidate for president, for mayor of the city of Buenos Aires, for the province of Buenos Aires. Again, once the primaries take place, it's likely that the opposition will be unified. Another important thing to look at is that some provinces could be moving forward their elections, basically to split the or not to be together with the national elections to avoid or some governors would like to avoid to lose if they think that the current government, they will lose. Now t hey want to split the election. In terms of loan growth, well, definitely the loan-to-GDP ratio is very low, and as you mentioned, historically low at around 10%.
We don't see really in the short term this ratio growing because inflation is key to have an even positive one-digit real growth. The high inflation is an obstacle for that. To reduce inflation, any government will need more than a short term. What we are hearing from Massa is that the statements are in the right direction to reduce fiscal deficit in order to reduce money printing, so there will be less pressure on inflation. Definitely we need to see a much lower inflation in order to have a positive loan growth. In terms of asset quality, well, the metrics are very healthy, not only when we look at Non Performing Loans ratio, coverage, or cost of risk.
Basically, that is on the other side of the coin because inflation is high. You see the negative impact in the P&L basically when we adjust by inflation, because many of the loans were granted at negative real interest rates, so it's easy for the clients to repay it. Instead of seeing the loan loss provisions growing significantly, you see it when we adjust by inflation, right? In the results from the net monetary positions. Particularly in the quarter, there were some movements and change of certain parameters in terms of expected losses, the Markov Model. There was a usage of some cushion that was built during the pandemic due to the COVID-19.
Going forward, we see a very healthy trends in all the aspects of asset quality.
Perfect. Super helpful. Thank you very much. Just one last question. When looking to what Galicia delivered in ROE in the H1, how should we think about the ROE for this year?
Well, we are seeing a better Q3 and according to our estimate projections and the different variables we measure, a much better Q4 . We are keeping our guidance of high single-digit ROE. Let's say, in the last quarter, I think I mentioned between 8% and 10%, it could be in the same level.
Perfect. Thank you very much, Pablo.
You're welcome, Ernesto.
We'll go ahead and move on to our next question from Alonso Garcia with Credit Suisse. Please go ahead.
Hi. Good morning to everyone, and thank you for taking my question. My question is on credit card segment. Just wanted to ask about the difference between the performance that we see at the bank and at Naranja X. In the quarter, credit cards at the bank, so CRE grew almost 4% sequentially. In Tarjeta Naranja we saw a 1% decline. Just wanted to check with you why the difference in performance, if you think it's something related to demand or supply. Any color you can provide on that sense would be helpful. Thank you.
Hi, Alonso. Well, in both cases, I would say, the credit card business it has been having significant changes, not only when we look at the evolution of the merchant discount rate that has been going down by regulation in an agreement that banks had with the central bank and the antitrust agency back in, I think it was 2017. Also, many expenses related to credit cards were changed, all alliances with different airlines, and in many cases, our loyalty programs. So many, in many cases, the different it depends on savings of expenses related to credit cards more than the growth or not in volume or in purchases.
In the case of the bank, we have a much higher income bracket type of individual client, and sometimes there is more volatility when there are, I don't know, for example, the Mother's Day or the Father's Day or holiday. In the case of Naranja tends to be more stable and the average ticket is smaller and the number of tickets per statement is smaller b ut thinking in a medium-term view, we see both businesses, especially the credit card business, very healthy. Recovering profitability with this savings we have, we are taking with expenses related to credit cards.
Thank you. In the previous question, you mentioned that you were feeling comfortable with asset quality trends across the board. Is this the same case for Naranja X?
In terms of asset quality? Yes. Yes.
Okay. Thank you very much, Pablo.
Also in the case of Naranja, the losses or negative results perhaps are seen more with the adjustment by inflation more than the loan loss provisions.
Right. Thank you, Pablo.
You're welcome, Alonso.
We'll go ahead and move on to our next question from Walter Chiarvesio with Banco Santander . Please go ahead.
Hi. Hi, Pablo. How are you? I was checking the numbers in the results from securities, and I found it surprisingly low, compared to other quarters and given the increasing size of securities that the bank holds in the balance sheet. I was wondering if there was some mark-to-market loss, given the volatility that many bonds suffered during the Q2. If you had some mark-to-market loss, that you recorded in your balance sheet, in the Q2?
Hi, Walter. Well, that's an accounting, I don't know if the word would be trick. It's how accountants show the results from securities. Within net interest income, there is a breakdown on page 15 of the press release. You see the interest income and the interest expenses, and within interest income, there is a line that says public sector securities that has been growing significantly. You have to look at both lines. This line within net interest income and the other line that you were mentioning that are the net results from financial instruments. Basically within net interest income, what we include is what the results of the bonds that are at amortized cost or cost plus yield.
That basically are the BOTE, the bonds we have as part of our reserve requirements and the LECER, CPI adjusted bonds that basically are used to hedge partially, not fully, against inflation. That's done on the other line in the results from financial instruments. You have the LELIQs and the bonds mark-to-market. I don't know if I was clear.
Okay.
Thank you.
I will double-check the head of the table that you mentioned. Thank you for the answer.
You're welcome.
As a reminder, if you'd like to ask a question, please signal by pressing star one on your telephone keypad. We'll go ahead and move on to our next question from Carlos Gomez-Lopez with HSBC. Please go ahead.
Hello. Thank you for taking my questions. Two of them. The first one is we have seen among one of your competitors a large adjustment on the tax line, because of deferred tax assets. Does Grupo Financiero Galicia have anything like that now or in the future that we should take into consideration? Would you need to have an adjustment or a positive or negative to your tax rate? Second, we see that you have increased your exposure to the public sector and now 13% of assets, ex the Central Bank. Is there any concern that at some point the government, as part of the new economic plan, might restructure some of its assets, whether Treasury or Central Bank, and that would affect your results? Thank you.
Hi, Carlos. Regarding the tax adjustment of other competitors, well, actually, two, as far as I know, two banks showed a significant positive result in the Q2. In our case, and other competitors, we did something similar gradually beginning last year. Basically, there was no big jump, and we are not foreseeing any jump positive result for the future. The key thing to understand, in my opinion, is that the effective tax rate is a result of financial accounting and tax accounting. When the accountants calculate the income tax, they have 35% on pre-tax tax accounting. Then when we look at the effective tax rate, it's a strange animal.
That's why I mentioned that we are seeing an effective tax rate of 25% in the H1 of the year, and it's likely that for the H2 , we will have another 25% effective tax rate. Again, it's something that comes from tax accounting and the other that is financial accounting. In terms of public sector exposure, basically, we increase in this CER or CPI or inflation-adjusted bonds called LECER in order to try to protect against inflation.
I mentioned a couple of times before that the hedge is not perfect because there is a lag since you begin accruing a higher inflation with the bonds mainly compared with the adjustment we make in the monetary loss adjustment that is instant in the accounting. With this two months in lag, we tend to cover a part of that position or to protect against inflation, basically. Of course, government bonds are risky assets. The numbers we see on a monthly basis in the asset and liability management committee are within the appetite, are within the market share of our exposure.
Basically, if we have 12% market share of loans, our market share of exposure to certain bonds or the LELIQ is similar. One thing that the central bank issued about one month ago, I think, is the possibility to purchase put options in which banks, once they purchase this put, can sell the bonds issued by the government to the central bank. Basically, it's a liquidity window. Also you change the one that pays, instead of being the government, the central bank would pay or purchase those bonds. Well, that's what I have to answer to that, Carlos.
More or less. Thank you so much.
You're welcome.
We'll go ahead and move on to our next question from Yuri Fernandes with JP Morgan. Please go ahead.
Hi, Pablo. Just to follow up regarding the profitability in the H2 . I guess you mentioned you're expecting, you know, some improvement here, but how to reconcile this with inflation, right? Because I guess you have tariff period adjustment. Inflation in July was super high. I guess it will remain running at those 6%, 7% on a monthly basis. So we had higher inflation. The net monetary position should be a headwind. W hat are you seeing to say that we will improve, just to help us understand here? That's the first one. I have a second one regarding it. It's very related to this one, but regarding Naranja.
Results improved a lot, although inflation was slightly higher in the Q2 , and we are seeing other consumer finance companies that they have less fixed assets to adjust for inflation and hedge a little bit from the net monetary gains suffering much more than Naranja. So what is driving the better results in the Naranja, given inflation was higher this quarter than the first two? You had a very, you know, close to zero earnings in the Q1 . Thank you.
Hi, Yuri. Well, definitely inflation is a key variable that influence negatively or positively the results. For our chief economist or our economic department, we are seeing some slight reduction in monthly readings of inflation in the H2 . More important than that is that there were many changes in the interest rates we have in the market. Lately, the central bank increased the interest rate we receive from LELIQs, repos, also from productive line or the lines, or interest rates we can charge on credit cards. It's true that they also raised the minimum interest rate we have to pay for time deposits, but as a whole, the situation improved. From that side, we are seeing a better result.
We have been making some efforts in terms of certain reduction expenses. Personnel expenses are going down. This particular Q2, we couldn't see it because of the salary increase we had in April. That was around 18%. In terms of number of people, you can see that it's going down like 5% to 6% or 7% per year. Also this lower effective tax rate we are seeing. Adding all these parts, you will see, or this is our expectation, that the Q3 we will be a little bit better and the Q4 much better. Also the lag I mentioned in terms of the bonds tied to inflation, no?
You will see the impact when inflation goes a little bit down and you are accruing previous higher inflation, you will see an expansion in the margin. Regarding Naranja, well, the results have been, in my opinion, a little volatile. The company is growing, it's investing, it's developing different businesses. So, when you look at, in this case, the Q2, the ARS 491 million, it's a mixture of the old and typical pure credit card business that is doing very well. Plus the financial company, Naranja that is investing and also, the acquiring system that is investing and all that has to do with ecosystem.
It's really a mixture of investment of new companies and products, and the very good performance of the old company.
T hat's super clear, Pablo. Basically, LELIQ tracking inflation , you also have some hedge on the inflation, cost to income, like you being more vocal on costs and lower taxes, and that was super clear. Thank you very much.
You're welcome, Yuri.
We'll take our next question from Nicolas Riva with Bank of America. Please go ahead.
Thanks very much, Pablo, for taking my questions. I got a few questions on the 2026 bond. The first one is you're paying roughly $20 million a year in coupon payments. My question is if you are buying the dollars from the central bank to make these payments, or if you are using dollars offshore, and if you are using dollars offshore, if you do need to get approval from the central bank for that? That's my first question. My second question is you had the call option on the 2026 last year. Of course, you didn't exercise that. The bond was callable only once at par, I believe, last year. However, can you do a tender offer on this bond at any point?
Do you need regulatory approval from the central bank to do this? My guess is you wouldn't at this point be thinking of that, and probably most likely you wouldn't get approval perhaps to get the dollars to buy back the bond. If you can give us any thoughts on that would be very helpful. Finally, besides the bonds that are issued at Banco Galicia, do you have any other near-term dollar maturities at other subsidiaries of the [HomeCo]? I see a bond at Tarjeta Naranja due in April next year, $8.5 million. If you can discuss where you plan to get the dollars to make that payment, I guess probably local peso-linked bond issued. If you can talk about that would be helpful. Thanks.
Hi, Nicolas. Well, regarding that bond, as you mentioned, it's a subordinated bond, $250 million, maturing in July 2026. The coupon is around 8%, so definitely it's $20 million per year. We have access to the market, and we can. We have been paying all the interest on the interest dates. Yes, we have the call option last year. The thing is that at this cost, or the interest rates we could be getting now are much higher, so it had no sense. In my opinion, we would have need approval from the central bank. I don't believe we are thinking of any tender offer.
Even to repurchase some bonds in the market, perhaps you also would have to request permission from the central bank because it's considered Tier 2 capital. It's true that this Tier 2 capital goes down 20% each year. Nevertheless, I think we should be needing approval. In my opinion, the most likely scenario is that in 2026 we could be repaying it, even perhaps issuing a non-subordinated bond, but it's very long-term. Actually, it will be close to the end, to the middle of the next presidential or not, close to the third year of the next president.
In the case of Naranja, some months ago, they had to pay in dollars an amortization of a local bond or with local law. The central bank allowed a certain percentage of the amortization of the instalment to be accessed at the market. The rest you had to restructure. Instead of doing that, what Naranja did is they issued that amount, and basically with local private banks or private banking. Actually, most of the participants in that issuance of a dollar bond were Banco Galicia's private banking clients.
It was to avoid a restructuring and to pay the amortization or the instalment that was due, and the central bank didn't allow us to get 100% of that.
Thank you very much for that, Pablo. Just one quick follow-up. For example, for the last coupon payment on the 26th, which must have been in July, and I know it wasn't a large amount, it was $10 million. For that, did you get the dollars from the central bank, or did you use dollars either onshore or offshore?
From the Central Bank.
Okay. Thanks very much, Pablo.
You're welcome, Nicolas.
It appears we have no further questions. Oh, we just got a question. We'll take our next question from Rodrigo Nistor with AR Partners. Please go ahead.
Hi, Pablo. Thank you for the call and for taking the question. My question is regarding the current interest rate environment. If you think that after the recent hikes, rates are at an appropriate level considering the expected inflation? A second question regarding your portfolio investment approach, if it has changed at all after the sell-off in the peso sovereign bonds, maybe if you're using this put option offered by the central bank or not? Thank you.
Hi, Rodrigo. The central bank has been increasing the different interest rates many times. I don't remember exactly how many times, but many, I would say March, April, May, almost once a month. Typically, they do it when they see the inflation monthly reading. If going forward, inflation goes down, perhaps there will be no further increases. As I mentioned in the previous answer, the last movement improved as a whole then our net financial income. The sell-off in some peso bonds took place at the end of June when Guzmán resigned and with Batakis and all that, those price reductions now are recovered.
Actually, we speak about the shadow, and shadow meaning the difference between the book value of certain bonds that are at cost plus yield compared to the market value. You can see that in the notes in our financial statement. At the end of June, that shadow was around -ARS 5 billion, and today that shadow is +ARS 2 billion. So it was a short period of time in which we saw many high increase and volatility, and then there was a recovery. As I mentioned, our change in terms of increasing the exposure to public sector is tied to LECER bonds in order to hedge against inflation.
It's not that we change other aspects of a public sector exposure, just because we need to cover the increase of inflation, you know. There are not many instruments available to do that.
Okay. Thank you.
Yep, you asked me something else, Rodrigo, or that's it?
Yeah, mention about the put option if you're using it or not?
Yeah. Well, we purchased a small amount in order to see how the system works, just to be prepared if we sometimes decide to purchase a bigger option, you know. Yes, we tried and it was okay, you know, but nothing significant in amount, in terms of amounts.
Okay. That was really helpful. Thank you.
You're welcome, Rodrigo.
We have no further questions. I would now like to turn the call back over to Pablo for any additional closing remarks.
Okay. Thank you, Allie. Thank you all for attending this call. If you have any further questions, please do not hesitate to contact us. Thank you again and have a good afternoon. Bye-bye.
With that does conclude today's call. Thank you for your participation. You may now disconnect.