Good day, and welcome to the Grupo Financie ro Galicia fourth quarter 2021 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, sir.
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 U.S. federal securities laws. They 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, for its initials in Spanish, the Argentine economy recorded a 9.3% year-over-year expansion during November, and the economic recovery for 2021 would have ended with an increase of around 10.3%. Excluding the tax on big fortunes and the IMF SDRs, special drawing rights, the primary fiscal deficit for the fourth quarter reached 1.8% of GDP, accumulating 33.6% of GDP in 2021.
When considering the above-mentioned extraordinary sources of revenues, the primary fiscal deficit for 2021 totaled 2.1% of GDP. The National Consumer Price Index recorded a 10.2% increase during the fourth quarter and reached 50.9% in 2021, up from 36.1% recorded in 2020. On the monetary front, the Argentine Central Bank expanded the monetary base by ARS 714 billion in the quarter, and by ARS 1.18 trillion throughout the year, recording a 47.9% increase in the 12 months ended in December 2021. Meanwhile, the exchange rate averaged ARS 101.9 per dollar in December, a 3.7% increase against the average for September. When compared to December 2020, the Argentine peso underwent an 18.8% devaluation.
In December, the average rate on peso-denominated private sector time deposits for up to 59 days was 34.6%, similar level to the average recorded throughout 2021. Private sector deposits in pesos amounted to ARS 7.73 trillion in December, increasing 14.5% during the quarter and 58.9% in the last 12 months. Time deposits in pesos rose 5.5% during the quarter and 58% in the year, and peso-denominated transactional deposits increased 22.9% and 60.6% respectively in the same periods, all measured in nominal terms. Private sector dollar-denominated deposits amounted to $15.3 billion, decreasing 6.6% during the quarter, but increasing 1.1% in the last 12 months.
During December, peso-denominated loans to the private sector averaged ARS 4 trillion, increasing 20.9% in the quarter and 47.9% when compared to December 2020. Also in nominal terms, while private sector dollar-denominated loans amounted to $4.1 billion, recording an 18.8% contraction during the fourth quarter and a 22.9% decrease when compared to December 2020. Turning now to Grupo Financiero Galicia. Net income for 2021 amounted to ARS 32.9 billion, 15% lower than in the previous year, which represented a 2% return on average assets and an 11.6% return on average shareholders' equity.
The result was mainly due to profits from Banco Galicia for ARS 24.7 billion, from Naranja X for ARS 6.2 billion, from Galicia Asset Management for ARS 2.1 billion, and from Galicia Seguros for ARS 1 billion. Going to the fourth quarter, net income amounted to ARS 9 billion, up 86% from the year ago quarter, mainly due to profits from Banco Galicia for ARS 7.5 billion, from Naranja X for ARS 1.5 billion, from Galicia Asset Management for ARS 673 million, and from Galicia Seguros for ARS 247 million. This profit represented a 2.2% annualized return on average assets and a 12% return on average shareholders' equity.
Banco Galicia net income for the quarter was 76% higher than the year-ago quarter, mainly due to a 35% higher net operating income, offset by higher loss from other operating expenses and a 13% increase of the results from the net monetary position. Net interest income increased 26%, with interest income growing 21% year-over-year, mainly due to the growth of interest on repurchase agreement transactions and on public sector securities. Interest expenses grew 17% due to a 15% higher interest on time deposits. Average interest earning assets grew 2%, reaching ARS 970 billion, mainly due to an increase in the average volume of other interest earning assets in pesos, offset by the decrease of the average volume of loans.
In the same period, its yield increased 378 basis points, reaching 36.25%. Interest-bearing liabilities increased 2% from the fourth quarter of 2020, amounting to ARS 802 billion. This growth was due to an increase in the average balance of peso-denominated time deposits and other deposits, offset by a decrease of dollar-denominated time deposits and debt securities. During this period, its cost increased 277 basis points to 20.94%. Net Fee Income increased 8% from December 2020, mainly due to higher fees for deposit accounts and utility bills collection services, offset by lower trade card fees. Net income from financial instruments decreased 8%, and gains from gold and FX quotation difference were down 66% from the year-ago quarter, mainly due to a reduction in the volume of foreign currency trading.
Provision for loan losses were 68% lower than those recorded in the same quarter of 2020, year in which they were affected by the COVID-19 context. Personnel expenses were 3% higher than in the fourth quarter of 2020, while administrative expenses increased 20% as compared to a year before, due to an increase in fees and compensation for services and in expenses related to maintenance and betterment of Grupo's and IT. Other operating expenses for the quarter totaled ARS 8.1 billion compared to the ARS 1.5 billion profit recorded in the year ago quarter. It is worth to remember that in the fourth quarter of 2020, this item included an ARS 8 billion gain from the reversal of COVID-19 related provision, which were initially recorded in this item, and then reclassified as provision for loan losses.
Without considering this effect, the increase was mainly related to an 87% higher turnover tax. The income tax charge was 40% lower than in the fourth quarter of 2020, with effective tax rate being 30%. The bank's financing to the private sector reached ARS 633 billion at the end of the quarter, down 14% in the last 12 months, mainly due to a 9% decrease of loans in pesos and a 46% decrease of dollar-denominated loans. Exposure to public sector increased 50% year-over-year, primarily due to the growth of repurchase agreement transactions with the Argentine Central Bank. Excluding these repos and central bank instruments, net exposure represented 11% of total assets compared to 5% as of the end of the fourth quarter of 2020.
Deposits reached ARS 1 trillion, 2% higher than a year before, with dollar deposits falling 21% and peso deposits growing 9%. The bank's estimated market share of loans to private sector was 12.2%, 85 basis points lower than at the end of a year ago quarter. The market share of deposits from the private sector was ten point three percent, 20 basis points higher than in the same quarter of 2020. As regards asset quality, the ratio of non-performing loans to total financing ended the quarter at 3.37%, recording a 210 basis points deterioration as compared to the 1.27% of the fourth quarter of the prior year, mainly due to the end of the regulatory waivers for the classification of the loan portfolio established by the Argentine Central Bank during the 2020 lockdown.
At the same time, the coverage with allowances reached 177%, down from the 501% from a year ago, which was also influenced by the additional provisions recorded in connection with the COVID-19. As of December 2021, the bank's total regulatory capital ratio reached 24%, increasing 120 basis points from the end of the same quarter of 2020. The bank's liquid assets represented 123% of transactional deposits and 60% of total deposits, down fro m 159% and 68% respectively from a year before. In summary, in a very challenging and volatile macro environment, Grupo Financiero Galicia was able to sustain profitability and to keep asset quality, liquidity, and solvency metrics at very healthy levels. We are now ready to answer the questions that you may have. Thank you.
If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using the speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. Our first question comes from Ernesto Gabilondo with Bank of America.
Hi. Good morning, Pablo. Thanks for taking questions. My first question is on the implications of the IMF agreement. How do you see this will translate in terms of loan and deposit growth this year? What are the challenges for this year? Because we continue to see high rates, high inflation levels, so that could put some pressure for real loan growth and in the results of the net monetary position. Also related to this, do you think that the IMF agreement could be helping the banks to get rid of the cap rates in credit cards, the subsidized loans and the floors on deposits? Meaning like a lighter regulation for the banks. Then my second question is on your net interest income growth.
As you mentioned, one of the key drivers was the repo agreements with the Central Bank. Just wanted to understand if this is something that we should continue to expect for this year. My last question is on how will be your expectations for the ROE for this year. Thank you.
Hi, Ernesto. I took down notes. I hope I don't forget anything. Well, regarding the IMF, the government and the IMF announced a pre-agreement that basically established some improvement path in terms of fiscal deficits and the financing of that deficit. Now they are discussing the details, the small print, and then the agreement must be submitted to the Congress, and later it must be approved by the board of the IMF. We don't have too much details. Of course, it's as we always say, a condition necessary to have an agreement with the IMF to clear the horizon of the financial needs and due date. Of course, we need more reforms.
There is nothing yet written in terms of effects, controls or the level of the effects. Definitely, thinking in lower fiscal deficit, it will mean lower inflation, that, of course, will improve things. For this year, we really don't see too many changes in terms of growth in loans and deposits in pesos. We are forecasting slightly higher inflation for this year. Last year ended at 60.9%. The average of the estimates of the economists in Argentina that submit their expectations to the Central Bank of the Argentine Republic stands at 55% inflation. With those or with this projected inflation, we are forecasting similar nominal growth both in deposits and loans. Perhaps a couple of percentage points above in loans, but nothing really material.
Of course, with a higher inflation index, the negative result that comes from the exposure to inflation is higher. The net monetary position result should be higher negative, right? Well, I don't know if you read that the central bank issued a regulation allowing banks to pay dividends considering the accumulated results of 2021 up to 20% of that amount payable in 12-month installments. That will help to reduce slightly the net worth in order to reduce the net monetary position result.
Thinking in regulation in terms of floors, caps in credit cards and the productive line, the Central Bank recently issued a communication that changed a little bit some of these rates, increasing the floors for time deposits, but also increasing the interest rates we can charge on credit card financing in the productive line and in other different small loans. Changing also some reserve requirements, franchise, so the and also the yield on the LELIQs. The net effect we are estimating will be higher net income or net financial income of around ARS 1 billion.
Although we have a higher cost of funding, we can also pass through the increase in the cost of funding to the rates we charge. The Net Interest Income for next year should be higher, of course, already adjusted by inflation, around 3% order of magnitude. The ROE would be in the area of 10%. Something lower than this year, basically for the higher inflation we are estimating, and also the effective tax rate could be something higher than the current year. I think I answered all the questions. Ernesto.
Yes, Pablo, this is super helpful, very detailed. It helps a lot. Just to follow up, the Net Interest Income growth expectations, and that you provided like the net impact from regulation will be an extra ARS 1 billion, in Argentine pesos. Considering that this year or this last quarter, driver was the repurchase agreement, just wondering if that strategy will continue, during this year.
Well, the excess liquidity we have been receiving when deposits were growing faster than loan demand was allocated to Central Bank. The Central Bank have or has basically two instruments, the LELIQs and the repos. For LELIQs, we had limits, so for some months the exposure to LELIQs was rather flattish, and we saw the repo transactions growing. Recently there was another change in regulation that allows banks to increase their exposure to LELIQs. Before there was a formula that took as base the stock of LELIQs at certain months. Now it's you can invest the equivalent of your peso denominated time deposit. So we can invest more in LELIQs a nd less in repurchase agreement. LELIQs interest rate is higher, so the exposure to Central Bank perhaps will be the same, let's say, in percentage terms, but with a higher yield due to the change in LELIQs.
Excellent. Thank you very much.
You're welcome, Ernesto.
Our next question comes from Juan Recalde with Scotiabank.
Hi, Pablo. Thank you for taking my question. The first one is related to the macro environment. What are the main macro assumptions used in your base case? Second question would be related to the dividends. That 20% you mentioned that the central bank authorized, is it 20% of 2021 earnings or does it also include 2020 earnings? Related to that, do you have the amount defined to be paid in monthly installments in 2022 that's related to dividends? Thank you.
Hi, Juan. First, in terms of macro assumptions, a good source is the REM. In Spanish it's Relevamiento de Expectativas de Mercado or Market Expectation Poll that is submitted by, I don't know exactly today, but in the past years it was made up of the opinions of around fifty economists and consultants. The numbers are, I would say, there is not a big range between the different opinions. Everybody's foreseeing a higher inflation. The average is 55%, again, coming up from 50.9% of 2021. This 2021, GDP will grow around 10.3%, recovering from the big drop of 2020. Due to the imbalances, most of the economists are forecasting a 3% GDP growth for 2022.
The FX stands at ARS 160 per dollar at year-end. Of course, this is the official one. Well, the commercial surplus between exports and imports around $11.5 billion or so. Interest rates a little bit higher with the BADLAR at 40%. This is more or less the same expectations or variables we are considering in our scenario. In terms of dividends, the central bank approved that we banks can pay the accumulated results considering December 2021. The central bank has to authorize this payment. One thing we have to consider is that Banco Galicia will be paying monthly installments to Grupo Financiero Galicia.
Grupo Financiero Galicia could be paying in different installments, but definitely not monthly to the shareholders. The current base scenario could be that Grupo Financiero Galicia could be paying something like ARS 3.5 billion in May after the annual shareholders meeting of April, and then perhaps another payment in September of something like ARS 4 billion-ARS 5 billion. This is again estimated and considering the authorization of the central bank.
Perfect. That's really helpful. Thank you. Thank you, Pablo.
You're welcome, Juan.
Our next question comes from Alonso Garcia with Credit Suisse.
Hi, good morning, everyone. Thank you for taking my question. My first question is on volume growth. I mean, you mentioned loans to grow in line this year with inflation slightly ahead of that, probably. Just wanted to ask which segments or products do you think would be leading growth in 2022? I mean, in the fourth quarter, we saw very strong growth coming from the commercial side, less so in individual, despite the very strong growth in Naranja X. Just wanted to hear your thoughts on the composition of loan growth this year. My second question would be on the competitive landscape in Argentina, both considering the incumbent banks, but also the incoming players such as FinTechs, right?
Just wanted to hear your thoughts on what are the implications of these new incoming players into the system in terms of growth, not only in loans, but also especially in terms of deposit accounts. Thank you.
Hi, Alonso. Well, yes, as you said, the fourth quarter, the main driver for loan growth were the commercial side and specifically the big companies. There is certain seasonality in the loan book around the year. From now till the end of June, the agricultural sector is a big client as a sector in terms of loan demand. But we are also seeing a recovery in credit card financing and also in personal loans. Actually in certain months there are promotions or we are pushing some personal loans. If we look at December 2021 and December 2022, really we don't see any material change in the breakdown of our loan book.
Yes, we see even more pesos and less dollars, the breakdown between currencies, because all the dollar bracket in terms of both loans and deposits is shrinking gradually, very marginally, but it's a leakage while the peso bracket is growing. In terms of the competitive environment, there are many small players, mainly in means of payments or prepaid cards. The only big player is Mercado Pago that is basically tackling non-bankerized segments, small merchants, but it's more means of payments, not really deposits. There are new regulations that affect these virtual wallets. Basically, the money we have from virtual wallets in banks must be or must have a 100% reserve requirement.
There are increasing regulations that try to make the competition equal, basically in terms of knowing your client or anti-money laundering rules. So again, many small fintechs that tackle a part of the payment industry, but not really big players competing with the incumbent banks. Of course, this is dynamic, but today, we are not really seeing any big player. As I always say, all the banks are digital, so in many cases there is no need to change or to open an account in a pure digital bank because you can do it already with your bank. Great. Thank you very much for answering. You're welcome, Alonso.
Our next question comes from Carlos Gomez-Lopez with HSBC.
Hello, good morning, and thank you for taking my question. Just to follow up on things you have already said. First, with the agreement with the IMF, there is the idea that we will have real interest rates, despite the regulations and the limits, the minimums on deposit payments. Shouldn't that, in principle, improve your margin, going forward? The second is you said that you expect the tax rate to go up, slightly. We wanted to understand, exactly why, and if there are any changes that we should be aware of. And the third, the rule on dividends. Is this final? Because, you know, monthly seems very, very hard to execute for many banks.
In your case, you can send the dividends to the group and you can handle it, but I can imagine that other listed banks would find it a little bit of a nightmare to have to operate like this. Could they still review the rule? Again, as you said, the rule is that they can distribute the accumulated up to December 2021. Does that mean accumulated earnings up to December 2021, and that would mean the previous three years without dividends? Or just the earnings for calendar year 2021? That wasn't clear. Thank you.
Hi, Carlos. Well, there are many discussions in the newspapers regarding the real interest rate issue that the IMF would be recommending that in the beginning of January, the central bank raised the interest rates for the LELIQs time deposits, the productive line, the credit card financing. Also in the papers, there were news that with a high monthly inflation reading of last month that was 3.9%, the central bank would be evaluating increasing the interest rate. It's likely that we will perhaps close the gap or have less negative interest rate. In this scenario, yes, definitely the margin should improve. That's why we also are not very bullish in terms of volume recovery.
The tax rate, if you remember the 2020 year, it was about 40%. 2021 was around 30%. Well, depending if we look at the bank or group or what. Let's say 40+ at the bank and 30% at the bank, 2020 and 2021. Perhaps this year it goes to 34%-35%. It's. I would say there is some technicality with the lag in repricing of fixed assets and other assets, and the way they calculate and make the payments. If the tax rate is 35%, but it had this movement or volatility, and we estimate that this year will be similar to the nominal one, the 35%.
In terms of dividends, each time we close a fiscal year, we say what percentage of the results goes to different reserves. Then what the Central Bank authorize is the accumulated reserves available for payment for dividend distribution as of the end of 2021. This is something that someone asked, why we are issuing or why we issued the results earlier than other banks or earlier than other years, because we want to begin the process of requesting authorization for the payment of dividends sooner rather than later. Yes, it will be complicated for someone that wants to send abroad every month the dividends in the 12-month installments.
That's why we at Grupo would be thinking in some, I would say, quarterly or something like that, payments. One in April, one in September, and then perhaps the rest for 2023. The first payment in May would be, in theory, coming from dividends, from the other subsidiaries, and the second payment would be coming from dividends, from the bank. These monthly installments from the bank, again, once and if the central bank authorizes the amount requested.
Okay. That is clear. Still, again, you can distribute your distributable reserves. I'm not sure this is your balance sheet. What is the size of those distributable reserves right now? They would not correspond to the earnings of 2021. Presumably, they are bigger than that, right?
It's exactly bigger. It's not 20% of 32, and I'm not sure if we're going to reach exactly the 20%, but the number is not yet defined. If I had to give you a number, I would say between ARS 15 billion and ARS 19 billion.
That's the base.
The requested amount.
The requested amount would be ARS 15 billion-ARS 19 billion.
Yes, exactly.
The base would be higher, the requested will be between ARS 15 billion and ARS 19 billion . Okay. That is all.
Yes.
Thank you very much.
Again, take it as an estimated number. It's not yet defined.
That's clear. Thank you so much.
As a reminder, that is star one to ask a question. Our next question comes from Rodrigo Nistor with AR Partners.
Hi. Thank you for the opportunity of asking questions. My questions are related to the regulatory environment. Which are the principal regulations that are affecting your profitability right now? How do you reduce your negative impact, and if you expect any kind of relaxation of these regulations this year? Then, with the agreement with the IMF, including a significant decline in financial assistance from the central bank to the national treasury, if you expect any regulations that could oblige banks to increase their exposure to the treasury. Thank you.
Hi, Rodrigo. Well, some of the regulation that began in 2020 with the COVID-19 and the lockdown finished. Even some of the rates were increased. The credit card or the financing with credit cards grew from 43% to 49%. The yield on the mix also increased. It's true that the cost of time deposits increased, but as I mentioned, the net effect of all these interest rate increases would be positive in around ARS 1 billion for Banco Galicia. One regulation that definitely is not good for banks thinking in an environment of high inflation is a limitation on the payment of dividends. This regulation that appeared is better than nothing, but we would prefer to have more freedom in order to do that.
We don't really see changes in regulation in terms of or that would allow increases in exposure to the public sector. Particularly, we, Banco Galicia, increased the exposure to the public sector, not considering the LELIQs and repo transactions with the central bank. Mainly, those were CPI-adjusted bonds in order to cover from inflation. It's a hedging measure and not something that we see as permanent or that we think that the government is going to increase. Also the productive line is something that we don't prefer to have. Also the interest rate was increased from 35% to 41%. It's a better situation.
Many times, we say that we take advantage of that obligation to offer some SMEs part of their funding needs with a productive line and the rest at market rate. It's a kind of a marketing tool or selling tool. It's not that bad. Really the regulatory environment, in my opinion, improved, and I would say since the second quarter of 2021.
Thank you.
You're welcome, Rodrigo.
Once again, as a reminder, that is star one to ask a question. Our next question comes from Carlos Gomez-Lopez with HSBC.
Yes, Pablo, thanks again. Could you follow up, perhaps could we have a follow-up, any comments on Naranja X and, any possible ideas for a separate listings or another way to unlock value in the subsidiary, or is it too early days? Thank you.
Hi, Carlos. That was an idea I think 10 years ago. We were thinking or analyzing an IPO of Naranja X when it was just a credit card because at that moment, the bank was the owner of the controlling shareholding of Naranja, and it needed to strengthen the capital ratio. We also saw that there was a hidden value in Naranja. Many things happened in the meantime, and today we have a very healthy capital ratio. Naranja converted or is converting themselves under this umbrella of Naranja X into a fintech virtual wallet, big player in payments with merchants and acquirers, and also beginning soon to take deposits.
If we revisit that idea, I think it would be not in the short term. I think Naranja must show more track record of their new strategy. Definitely when we look at the old business, it's doing great. The fintech business is still in an investment mode. Out of the ARS 6.2 billion net income of 2021, ARS 9 billion net profit was from the old credit card business, and ARS 3 billion loss was the new business. Really it's something for the medium term if it is.
Okay.
I got it.
Now that you mention. Yeah. Now that you mention capital and it is true that traditionally, Galicia did not have a very strong capital base. Now you do. Ideally, where would you like your capital ratio to be in a more stabilized scenario?
Well, when we raised capital back in September 2017, our objective was 11.5%-12%. Now we have double, so I would say that we still prefer to have something closer to 12. The ratio grew due to the lack of the possibility to pay dividends. That 12% range will make much more sense.
Very good. Thank you very much.
You're welcome, Carlos.
We have no further phone questions at this time.
Okay. Thank you, Lauren. Thank you all for attending this call. If you have any further questions, please do not hesitate to contact us. Good morning. Bye-bye. Thank you.
That does conclude today's conference. We thank you for your participation. You may now disconnect.