Good day, and welcome to the Grupo Financiero Galicia Q1 2022 Earnings Release. Today's conference is being recorded. At this time, I would like to turn the comment over to Pablo Firvida. Please go ahead.
Thank you. 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 US 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 9.1% year-over-year expansion during February. Even though the economic recovery reaches 7% during the first two months of the year, 2022 will end with figures closer to 3.5% according to the market expectation survey published by the Argentine Central Bank.
During Q1 , the primary deficit reached 0.3% of GDP, and in 2021, the primary deficit amounted to 2.1% of GDP, including revenues from the so-called Millionaire's Tax and the IMF's SDRs. Without them, the primary deficit stood at 3.5% of GDP. The National Consumer Price Index recorded a 16.1% increase in the first three months of the year, and reached a 55.1% annual variation in March, the highest rate of the last 30 years. On the monetary front, the Argentine Central Bank expanded the monetary base by ARS 270 billion in the quarter, recording a 45.2% increase in the last 12 months.
Meanwhile, the exchange rate averaged 109.46 pesos per dollar in the quarter, increasing 7.4% against the average for December. When compared to March 2021, the Argentine peso underwent a 16.8% devaluation. In terms of interest rates during 2022, there were several increases. In March, the average rate on peso-denominated private sector time deposits for up to 59 days was 43.3%, around six percentage points higher than the average recorded throughout 2021. Private sector deposits in pesos amounted to ARS 8.5 trillion in March, increasing 10% in nominal terms during the quarter, and 57% in the last twelve months. Time deposits in pesos rose 19.3% during the quarter, and 56% in the last twelve months.
Peso-denominated transactional deposits increased 2.3% and 58.5%, respectively in the same periods. Private sector dollar-denominated deposits amounted to $15.3 billion, decreasing 0.3% during the quarter, and 3.6% in the last twelve months. During March, peso-denominated loans to the private sector averaged ARS 4.4 trillion, increasing 9.3% in the quarter, and 52.7% when compared to March 2021. While private sector dollar-denominated loans amounted to $3.9 billion, recording a 6.7% contraction during Q1 , and a 24.7% reduction when compared to March 2021, all figures are in nominal terms. Turning now to Grupo Financiero Galicia.
Net income for Q1 amounted to ARS 5.2 billion, up 51% from the year ago quarter, mainly due to profits from Banco Galicia for ARS 4.7 billion, from Galicia Asset Management for ARS 776 million, from Galicia Seguros for ARS 235 million, and from Naranja X for ARS 5 million. This profit represented a 1.1% annualized return on average assets, and a 5.9% return on average shareholder's equity. Banco Galicia's net income for the quarter was 153% higher than in the year ago quarter, mainly due to a 61% higher operating income, offset by a 56% higher loss from the net monetary position.
The net operating income increased 23%, mainly due to a 49% increase in net results from financial instruments, offset by 7% lower net interest income, with interest income growing 4% year-over-year, while interest expenses increased 7%, mainly due to higher rates on time deposits. Average interest- earning assets were down 4%, reaching ARS 1 trillion, mainly due to a decrease in the average volume of loans. In the same period, its yield increased 750 basis points, reaching 40.5%. Interest-bearing liabilities decreased 2% from Q1 2021, amounting to ARS 932 billion. This decline was due to a decrease in the average balance of dollar-denominated savings accounts, offset by an increase of peso-denominated other deposits.
During this period, its cost increased 191 basis points to 21.75%. Fee income increased 12% from March 2021, mainly due to higher fees on deposit accounts, on credit cards, and on utility bills collection services. Net income from financial instruments increased 49% due to higher results from government securities and from private sector securities, the latter as a consequence of the sale of the remaining shares in Prisma. Gains from gold and effects quotation differences were up 3% from the year ago quarter, including the results from foreign currency trading. As regards provision for loan losses, the amount for the quarter was 62% higher than that recorded in the same quarter of 2021, reaching ARS 2.2 billion.
Personnel expenses were 8% lower than in Q1 2021, primarily due to a 6% decrease in staff, while administrative expenses increased 5% as compared to the year before, due to increases in higher administrative services, in maintenance and repair of goods and IT, and in publicity promotion and research expenses. Other operating expenses for the quarter totaled ARS 10.9 billion, 9% below the amount recorded in the year-ago quarter. The ,Income tax charge was 21% higher than in Q1 2021, with the effective tax rate being 35%. The bank's financing to the private sector reached ARS 678 billion at the end of the quarter, down 10% in the last 12 months, mainly due to a 5% decrease in loans in pesos and a 43% decrease of dollar-denominated loans.
Exposure to the public sector increased 23% year-over-year. Excluding the exposure to central banks, net exposure represented 19% of total assets, compared to 7% as of the end of Q1 2021. Deposits reached ARS 1.1 trillion, 2% lower than a year before, with dollar deposits falling 24% and peso deposits growing 5%. The bank's estimated market share of loans to the private sector was 12.1%, 61 basis points lower than at the end of the year-ago quarter. The market share of deposits from the private sector was 10.2%, 32 basis points higher than in the same quarter of 2021.
As regards asset quality, the ratio of non-performing loans to total financing ended the quarter at 3.11%, recording 148 basis points deterioration as compared to the 1.63% of Q1 of the prior year. At the same time, the coverage with allowances reached 180%, down from the 391% from a year ago. As of the end of March 2022, the bank's total regulatory capital ratio reached 24%, decreasing 52 basis points from the end of the same quarter of 2021. The bank's liquid assets represented 113% of transactional deposits and 63% of total deposits, up from 105% and 58% 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 press star one on your telephone keypad. If you're on a speakerphone, please pick up your handset and make sure mute function is turned off so that your signal reaches 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. Can you share with us what are the latest political events, potential regulations that could be impacting the banking sector? You can mention those positive and negatives, if it is the case. I believe it's still soon, but I will appreciate your thoughts on whom are you seeing as the potential presidential forces. That's my first question. My second question is on your expectations on loan and deposit growth, considering your expectations for inflation and interest rates. My last question is on Prisma.
I would like to hear from you how much did you benefit from the non-recurring gain from Prisma, and how much do you expect to receive in the next quarters?
Okay. Thank you, Ernesto. Well, first, the political outlook is kind of difficult to predict. The main opposition, I would say, is within the government, the coalition. Right now, between the president and the vice president, there are many fights and accusations. Actually in some congress session, some initiatives sent by the president were approved by the real opposition and some member of the congress of the current government didn't approve it, like the IMF deal, for example. This current government coalition is losing on a monthly basis, I would say, support and approval.
This week, there was some polls saying that 20% of the population approves Alberto Fernández, the government, and also that the image of Cristina Kirchner is at the lowest level since many years, at 25% positive image. In the opposition, I would say Cambiemos, the Macri and the Radicals and other smaller parties, a coalition, there are also some discussions. What most of the political analysts say is that they are, I would say, competing for the next year primaries, but once there is a winner, everybody will be together.
The last comment on the political, I would say, environment is that the appearance of Javier Milei, an economist, I would say , a liberal, orthodox economist, who is having lots of support, not only in center-right and higher- income people, but also in the lower part of the population, the lower- income part of the population. Basically, he has a speech against the political caste, as he says. You know? He says that Congress is too expensive, that all the politicians are worried about raising taxes and not fostering economic growth. Some analysts are saying that the appearance of Milei is the result of the population being tired of the old politicians. Next year, there will be presidential elections in October.
We will have primaries in August, but many provinces will begin having their elections in March. We will have a full next year of elections, and there we will see more clearly who will be the candidates for each party. Sorry, it was a long political outlook. In terms of regulation, the Central Bank already is, I would say, rich in terms of regulation. We have minimum rates, caps on other rates, regulations on dividends on certain fees, and we don't foresee any further regulation. Well, the last regulation they launched was the prohibition on banks from selling cryptocurrencies. Banco Galicia was the first bank to launch this alternative for their clients. Later that week, the Central Bank said that it wasn't allowed for banks.
Going to the second question, loans and deposits. Our expectation on inflation is a moving target. Three months ago, our chief economist was forecasting 55% annual inflation. With the last two months' readings, right now, most of the economists are forecasting 65% inflation. With higher inflation, it's harder to grow in real terms. Right now, our expectation for deposit growth is around 60%-63% growth, so some percentage points below inflation. On loans is from 62%-65%. I would say it equals inflation or slightly below inflation. Basically, following the nominality or the working capital, the consumption follows the inflation. In the case of Prisma, we finished with the sale of our holding in that company.
We used to have 15% of the company. We sold three years ago, 7.6%. In February, 7.4%. You will not see any further results in the Profit and Loss. They informed that the impact was positive in Q1 of ARS 2.7 billion.
Now this is super helpful, Pablo. Please, just let me ask you another question on dividends. Just want to double- check if they have been approved by the shareholders, and when they expect to start making the first payment?
Yes. The shareholders approved at the end of the April shareholders meeting the payment of up to ARS 19 billion. We already paid ARS 11 billion. The ex-dividend on in Nasdaq was last Friday, 13. Most of the brokers and banks have already paid the shareholders or are in the process of paying. The idea is to pay ARS 4 billion in September, additionally, and another ARS four billion in January next year.
Excellent. Perfect. Thank you very much, Pablo.
You're welcome, Ernesto.
We'll go ahead and take our next question from Jason Mollin with Scotiabank. Please go ahead.
Hi, Pablo. Thanks for the call. These are challenging times in lots of places, but in particular in Argentina, and we appreciate Galicia's commitment to communicating with the market and taking our questions. My first question, I guess, would be on competition and how you're seeing, I mean, your traditional incumbents competing. Is there pressure on pricing, or in this environment, is it really about service? Maybe you can comment on the new entrants and the banks, the neobanks, or banks that don't have branches. Secondly, maybe in these tough times, it would be interesting to hear what Galicia is thinking about a positive outlook, or what is the positive scenario?
Like, how can we lay out a path to getting inflation down and moving towards real growth, especially for the banking system? Like, what are the positive factors if we wanted to highlight on what could go right and make things good for the banking system in Galicia in particular?
Okay. Hi, Jason Mollin. Well, in terms of competition, incumbent banks are, I would say, very strong, and they represent most of the volume and our market share. There are some small, fewer digital banks that really are very, very small. In this context of a lack of capital for many of these new companies that bet on growth and didn't pay much more attention to profitability, I think it will help banks. The only big competitor is Mercado Pago, but I would say that they reach some part of the population that used to not be so bancarized, mainly some smaller merchants. So they help to increase the bancarization.
In the case of one of the small digital banks, it was purchased by Ualá, which was Wilobank. The other small digital bank is Brubank, but really they are not big, or they are not a threat right now, and in my opinion, not in the medium term. Many of these new companies, not only in the fintech environment, are thinking in growing, even some of them becoming a regional player and then exiting with the upside now. The incumbent banks are very strong in the marketplace.
In terms of the positive outlook, I think right now, not only is the macroeconomy a challenge, but it's very related to the political uncertainty and these disputes within the government on what will happen next year. Most of the political analysts tend to say that there will be a change in the color, but we need to see how these provincial elections take place , who the candidates are, and how the polls evolve. In my opinion, the political uncertainty causes a lack of confidence, so there are many investment decisions are postponed. There is a vegetative growth and diversification in different sectors of the economy.
To have a positive outlook, in my opinion, we need a change in this something to have more certainty from a political standpoint. Going to the economic variables, I think inflation is key. In order to reduce inflation, you need to have l ower government expenses, or I would say not a fiscal deficit. I said lower expenses because taxes are already high. In many times, Argentina is, I would say, surprise everybody with the quick changes for good and for bad. If there are good signals in the political environment, I think the macro changes could be faster than we could imagine. The financial system is key to allow the economy to grow.
In the last two years, the ratio has been going down and all banks are liquid and strong in solvency terms and with good asset quality. We would also be very well prepared to a rebound in the loan demand.
That's helpful. Is there, you know, any comments on how to address this inflation? I mean, are the traditional hiking rates even more, or is there needs to be a change in the structure in general? I mean, like a big change for Argentina, or is it just the traditional going back to, you know, changing the model? Or is it, you know, we need to see rates. I mean, they're already high, of course, but in real terms, maybe, you know, much more negative or positive, excuse me, if they really raise them well above where inflation is. Is that the path to get Argentina's inflation under control?
Well, with the current government, they tend to raise rates, the LELIQ rates, the productive line rates, the credit card rates, all the time deposit rates. Once we have the high inflation readings of demand, they are running behind, I would say. They are also trying to get price agreements on some caps on certain products. It's really a recipe that has failed many times in the past. When you speak with most of the economists, a third of economists, they tend to say that this is an issue of a fiscal deficit. I think there is an agreement there, but we will need to see a change in government, in my opinion.
Thank you for your.
Public policies.
Thank you for your perspectives, Pablo.
Mm-hmm.
No, we know it's difficult.
Okay. Thank you, Jason.
We'll go ahead and take our next question from Carlos Gomez-Lopez with HSBC. Please go ahead.
Yes, thank you, Pablo. Two questions. The first one on Prisma. You said there was a ARS 2.7 billion impact. Could you clarify if that is pre-tax or after-tax? You may have said it before, but I didn't hear it. Second, is there a non-compete agreement with Prisma? And after it expires, is the bank willing to reenter the market? What are your plans currently? And finally, what would you say the chances are that inflation is not only higher, but we actually run into hyperinflation, 100, 200, 300%? What is the probability and what would the bank do to protect itself? Easy questions. Thank you.
Hi, Carlos. Well, the ARS 2.7 billion result from Prisma is after tax, because there were.
Okay.
In the accounting, there were in different lines, the different effects. We had not only income tax, but also sales tax. To have it simply or simpler, we said ARS 2.7 billion, but yes, it's after tax. Right now, Prisma is a supplier, and it's not really in the medium-term plans to enter into that market. We have other, I would say, priorities going forward. In terms of inflation, I didn't see any single economist speaking about such a high or bad scenario in terms of three digits inflation. The median of the market is at 65%. Some analysts are saying 60%, others 73%. This is the range.
The next months, most of the economies have seen a declining inflation from 6.7% to 6% to 5.2%, and going back to the 4% or 3.9% level. I think the Minister of Economy understands the issue. He had many critics from the government coalition, but the president is supporting him or backing him. We don't see that bad scenario.
Okay. Thank you so much.
What are we doing to protect? Sorry. You can see that our exposure to the public sector has been increasing. The increase is basically in CPI bonds or CER adjusted bonds, so that with a rising inflation, we have a higher interest income. The thing is that this is a technicality. There is a two-month lag since you adjust by inflation in the accounting and when you begin accruing the inflation with your bonds. So the March figures, you adjust with the March CPI, but you have a two-month lag to receive this high inflation readings in your bonds. That's why the coverage wasn't seen in Q1 .
It's likely to be seen in the second one, so that the monetary loss should be smaller.
Okay. All right. That makes sense. Thank you so much.
We'll take our next question from Rodrigo with AR Partners. Please go ahead.
Hi. Good morning, and thank you for the opportunity of asking questions. We have inflation in Q1 around 16%, which adversely impacted the groups and sector profitability. With a similar scenario assuming for this quarter, what should we expect from your different subsidiaries? I mean, what can or should be different to see a different picture in the following quarters? If you could comment in particular on the business dynamics for Naranja X, which seem to have suffered the most. Thank you.
Hi, Rodrigo. Well, a way to protect against this inflation is to purchase public sector bonds tied to CPI. The problem is this two-month lag between you have to adjust by inflation your numbers and you begin accruing the same high inflation. The 6.7% inflation we saw in March will be accruing in our bonds beginning in May, so these two months. That is what we have been doing. The other thing that will help to reduce the negative result due to inflation is to reduce the net worth with the payment of dividends. That helps.
In the case of Naranja, the traditional company, actually the credit card company, had a positive net income of roughly ARS 1.2 billion. The ARS five million was due to the other subsidiaries that basically is tied to the fact that the acquiring business purchases the POS and they give it for free to the merchants. It's kind of part of the investment period of that business. For this year, we are foreseeing a positive result of all the Naranja companies, perhaps not at the same level of the previous year, but definitely positive. If I have to give you a number, perhaps closer to 10% ROE.
Okay. Thank you.
You're welcome.
As a reminder, it is star one if you would like to ask a question. We'll go ahead and take another question from Carlos Gomez-Lopez. Please go ahead.
Yes, Pablo. A follow-up on the inflation-linked bonds. Since you mentioned that is the reason why the interest adjustment is so high this quarter. Could you perhaps quantify the impact of that? I mean, had the bonds been, you know, had their impact in the same month, what would the interest adjustment have been? Just to have a sense about where we would be on a more normalized basis. Thank you.
I'll give you a quick and bulk figure. Instead of being in the order of ARS 30 billion, the Net Monetary Position result, it could have been around ARS 24 billion. The thing is that many things change. I don't know if it's completely true for Q2. This is to give you a big number.
Okay. On the other hand, you have the +2.7% from Prisma, which is obviously now going to recover.
Mm-hmm.
Okay. All right. Very clear. Thanks again.
You're welcome.
It appears we have no further questions. I would like to now turn the call back over to Pablo.
Okay. Thank you for attending this call. If you have any further questions, please do not hesitate to contact us. Good morning. Bye-bye.
With that does conclude today's call. Thank you for your participation. You may now disconnect.