Good day, and welcome to the Grupo Financiero Galicia third quarter 2021 earnings release. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Pablo Firvida. Please go ahead, sir.
Thank you, Nick. 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 are 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. Actual results may differ materially from those discussed. According to the Monthly Estimator of Economic Activity, EMAE, the Argentine economy recorded an 11.6% year-over-year expansion during September, and shows a 10.9% growth for the first nine months.
The primary deficit for the first nine months of 2021 is only 0.3% of GDP, and it is worth mentioning that without the one-time extraordinary revenue from the wealth tax and the SDRs from the IMF, that figure would have been 1.8% of GDP. The National Consumer Price Index recorded a 9.3% increase during the third quarter and reached a 52.4% annual variation in September 2021. On the monetary front, the Argentine Central Bank expanded the monetary base by ARS 205 billion in the third quarter, recording a 26.4% increase in the last 12 months. Meanwhile, the exchange rate averaged 98.3 pesos per dollar in September, a 3.2% increase against the average for June.
When compared to September 2020, the Argentine peso underwent a 23% devaluation. In September, the average rate on peso-denominated private sector time deposits for up to 59 days was 34.6%, similar levels to the average recorded in June. Public sector deposits in pesos amounted to ARS 6.8 trillion in September, increasing 12.8% nominally during the quarter, and 29.3% in the last 12 months. Time deposits in pesos rose 12% in nominal terms during the quarter, and 51.1% in the year, and peso-denominated transactional deposits 14.1% and 14.6% respectively in the same periods. Public sector dollar-denominated deposits amounted to $16.4 billion, increasing 0.9% during the quarter, and decreasing 4.3% in the last 12 months.
As of the end of September, ARS-denominated loans to the private sector amounted to ARS 3.3 trillion, decreasing in nominal terms 10.5% in the quarter, and 35.9% when compared to September 2020. Private sector dollar-denominated loans amounted to $5.1 billion, recording a 6.1% decrease during the quarter and a 16.9% reduction year-over-year. Turning now to Grupo Financiero Galicia, net income for the quarter amounted to ARS 9.4 billion, growing 24% in real terms from the same year-ago quarter.
This profit was mainly due to gains from Banco Galicia of ARS 6.9 billion, from Naranja X for ARS 2.2 billion, from Galicia Asset Management for ARS 437 million, and from Galicia Seguros for ARS 248 million. The annualized return on average assets was 2.6%, and the return on average shareholder equity, 14.2%. Banco Galicia's net income for the quarter increased 14% in real terms from the same year ago quarter, mainly due to a 6% higher net operating income, and 18% lower personnel expenses, and 61% decrease in bank tax, offset by a 58% higher loss from the monetary position and a 28% increase of other operating expenses.
Net interest income increased 13% in real terms, with interest income growing 23% year-over-year, and interest expenses, 29%. Average interest-earning assets decreased 6% in the same period, mainly due to decreases of 38% in dollar-denominated loans, 26% of peso-denominated loans, and 15% of government securities in pesos. Was also offset by a 169% increase of other interest-earning assets in pesos. In the same period, its yield increased 560 basis points, primarily due to higher yields on other interest-earning assets in pesos, mainly in purchase agreement transactions with the Argentine Central Bank.
Interest-bearing liabilities decreased 8% from the third quarter of 2020, due to a 28% decrease in the average balance of current deposits in pesos. A 27% decrease of dollar-denominated time deposits and a 12% decrease of dollar-denominated savings accounts, offset by a 9% increase of peso-denominated time deposits. During this period, its cost increased 586 basis points, mainly as a result of a 517 basis points increase in the average interest rate of peso-denominated time deposits. Net fee income increased 8% from September 2020, mainly due to higher fees on deposit accounts, 27%, and on utility bill collection services, 43%, partially offset by lower trade-related fees, 8%. Net income from financial instruments decreased 11%, mainly due to a 15% decrease in the results of holding securities due to lower holdings.
Gains from gold and FX valuation differences were down 82% from the year-ago quarter, making ARS 616 million, including ARS 261 million profit from foreign currency trading. Provisions for loan losses were 80% lower than in the same quarter of the prior year, and personnel expenses decreased 18% from the third quarter of 2020, mainly due to a 7% reduction in staff. While administrative expenses increased 5% compared to the year before because of a 33% increase in taxes, partially offset by a 50% decline in fees and consultation services. Other operating expenses for the quarter increased 28%, mainly due to a 29% higher turnover tax and a 37% increase in other provisions compared with the same period of the previous year.
Loans and financing to the public sector reached ARS 512 billion at the end of the quarter, down 25% in the last 12 months, mainly due to a 19% decrease of loans in pesos and a 31% decrease of dollar-denominated loans. Exposure to the public sector increased 36% year-over-year, primarily due to the growth of purchase agreement transactions with the Argentine Central Bank. Excluding these repos and Central Bank instruments, net exposure represented 3% of total assets and 37% as of the end of the third quarter of 2020. Deposits reached ARS 935 billion, similar level from the year before, with dollar deposits falling 10% and peso deposits growing 2%.
The bank's estimated market share of loans to private sector was 11.3%, 134 basis points lower than at the end of the year-ago quarter. The market share of deposits from the public sector was 10.5%, 30 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 12.16%, recording 196 basis points deterioration as compared with the 2%-2.20% of the third 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 ratio was 172%, down from 302% from a year ago. At the end of September 2021, the bank's total regulatory capital ratio reached 27%, increasing 386 basis points from the end of the same quarter of 2020. The bank's equity ratios represented 159% of transactional deposits and 68% of total deposits, up from 81% and 46%, respectively, from a year ago, from a year before. In summary, in a very challenging and volatile macro environment, Grupo Financiero Galicia was able to improve profitability, asset quality, liquidity, and solvency metrics at very healthy levels. We are now ready to answer the questions that you may have. Thank you.
Thank you. If you would like to ask questions, please signal by pressing star one on your telephone keypad. If you're using a 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, and we'll pause for just a moment to allow everyone an opportunity to signal. Our first question comes from Ernesto Gabilondo with Bank of America. Please go ahead.
Hi. Good morning, Pablo. Thanks for your presentation and for the opportunity to ask questions. I have a couple of questions on my side. The first one is on the economic, political outlook. After the midterm elections, what do you think are the key challenges ahead, and what are the key dates that you recommend us to follow? And how do you see interest rates, inflation, and FX? My second question is on your net interest income. We saw an important growth in the quarter, but also we noticed that it benefited from repos with the Central Bank. I wanted to understand how sustainable you think this repo with the Central Bank, and what would be the strategy for the NII in the next quarters?
Okay. Hi, Ernesto. Well, first, going to the political and macroeconomic environment, as you mentioned last November 14th, we had the midterm elections. The main opposition party got roughly 44% of the votes and the government got 43%. Basically, what the immediate thing is that two-thirds of the population of the voters didn't vote for the government. Which means that the Congress will change and the government will not have the quorum, and also will have to negotiate to pass the different laws. I think that's a good news. Going forward, we see a key agreement with the IMF. Everybody keeps saying that we need to reach an agreement.
Even this week, the Minister of Economy said that he would like to get the agreement before the year end. Some other economists are saying that it could be most likely that it occurs some time before the end of March, when Argentina has to pay a big installment if there is no agreement. That is the base case scenario. What we need to see is what programs or what will be the two-year plan that the president mentioned, that they will have to approve and agree with the IMF. In our base case scenario, we are not seeing any significant change in terms of inflation and interest rates. Inflation for this year will be around 50% and our chief economist is expecting similar levels.
The exchange situation is that we have many different exchange rates. Most of the analysts say that there should be some kind of devaluation in the official exchange rate. But we need that to come after the agreement with the IMF. What is good news we have in the macro is the rebound in GDP. Last year, Argentina's GDP contracted 9.9%. The last numbers, they point that this year's GDP will grow 9.7%. There will be almost a full recovery. Of course, there's about 1% left to get to the end of 2019 level. Going to the net interest income and margins, we see kind of flat margins. As always many moving parts.
We have a part of our loans at fixed interest rates, even subsidized or determined by the Central Bank. The same for time deposits. The breakdown of time deposits and transactional deposits and also the breakdown of loans is not changing dramatically. Going specifically to the repo situation, it is an instrument the bank uses to invest, for a certain date, its liquidity and deposits growth and loan demand that comes all of the same reason. The good news is that for the fourth quarter, we are seeing a significant loan demand in the order of 6%-8% nominal growth per month in October and so far November. Part of that liquidity invested in the central bank should go to the private sector.
Great, Carlos. Thank you very much, Carlos.
You're welcome, Ernesto.
Thank you. Our next question comes from Rodrigo Nistor with JP Morgan. Please go ahead.
Hi, good morning, and thank you for the opportunity of asking a question. Over the last few quarters, Naranja X became increasingly relevant in average contribution to the consolidated result. What should we expect going forward for this business? Is it fair to think that Naranja X could be 3%-5% of the consolidated net income? Then a follow-up on the same topic, if you could share with us some extra color on the business performance. Why is it doing much better than the bank? Is it just a matter of regulation or there are other things explaining the good metrics? Thank you.
Hi, Rodrigo. Well, we are comparing Naranja X numbers with the previous year. That was extraordinary low. Last year, the government, the company, the Naranja X, was finishing many projects, mergers, some I would say, extraordinary expenses due to digitization. Now we are seeing the more I would say, usual type of profitability. When we look at the numbers, there was a significant growth in the financial income, which involved an expansion in margins and in loans. Last year, origination was almost frozen due to, [inaudible] of the company. If you look at the loan evolution, it was like 55% growth, September 2021 compared to September 2020.
What is also good news is the good level of ROE. Going forward, we expect to go on seeing this kind of 20% level ROE. It's likely that it will represent between, let's say, 20% and 25% of Grupo's consolidated net income.
Thank you very much. That was very helpful.
Thank you.
Thank you. Our next question comes from Jason Mollin with Scotiabank. Please go ahead.
Hi, Pablo. Thanks for the opportunity to ask questions. My question is on the digitalization initiative, and you just mentioned expenses related to that. Can you talk a little bit more about what Galicia is doing there, and if we should be expecting those expenses related to that to increase going forward? Maybe on that note, give us an update on the competitive environment for these digital. Thank you.
Okay. Hi, Jason. Internally, we tend to say that we no longer speak about digital transformation. It was a project like four years ago. Now we are. We say we are digital. It's no longer a transformation. Of course, there is an ongoing investment in different initiatives to increase and have new releases. When we look at our apps and phone banking and online banking, you can do anything there, and you don't need to go to branches. Actually, if you look at the number of branches, there was a reduction in the third quarter from 327 to 318. It's likely that by year-end we will see 315.
Now there is a new regulation from the Central Bank that in order to close or merge branches, you need to have the authorization from the Central Bank. So it's likely that we will request some authorization there. In the previous months, we announced the merger of those branches before this new regulation. When we look at some numbers, we have two or three main indicators. One is digital clients, defined as clients with at least one login during the last 30 days, as well with the total active clients, and that number is 63%. Another metric we use is the full digital clients. These are clients that didn't use any physical channels during the last 30 days. That number is around 20%.
When we look at also sales of products or opening of new accounts or deposited checks, everything that has to do with the digital channels grew dramatically. For example, echeqs we launched them back, I would say one year ago, and now they represent 54% of deposited checks. And branches now represent 10%, but one year ago they represented 30%. It's definitely the investment in digitalization, now it seems it's positive, the fruits or the effect. When we see also Naranja is a digital company, Naranja X. We have or is in the process of having just one app, because in the past we have Naranja X, a new product launched, I would say two or three years ago.
The old company, Naranja, with its own app, now it's everything in one. Again, you can do anything with that app. The bank launched MODO. MODO was an initiative by the main four private sector banks, Galicia and Santander, BBVA and Macro, in a way to allow P2P transfer of money, payment with QR, to have two pay cards or different banks to make payments. In a way, MODO is competing with Mercado Pago and other much smaller that appear in the market.
When we look at your digital banks, they are too small, and in my opinion, the challenge for them will be to have enough capital to grow, b ecause many times the value proposal is not to charge anything in order to get clients, but that has limit.
Thanks for the color. Very helpful. Appreciate it.
Thank you.
Thank you. Our next question comes from Carlos Gomez-Lopez of HSBC. Please go ahead.
Yes, hello, Pablo. Also want to ask about the outlook, and we know things are difficult. If you put the [inaudible] do you think that you will end up growing or not growing [inaudible] this year? What about next year? The second question is that you have been accumulating a significant amount of capital. We know that there has been limitations on the [inaudible] for distribution by banks. Do you have any indication if those could come to an end at the end of the year? Have you initiated discussions with [inaudible]? What do you think will happen to capital distributions for you and for the other entities in the system?
Hi, Carlos. In terms of loans to the private sector, so far they are growing below inflation. I mentioned that first quarter, in the first quarter we are seeing a positive significant real growth. It's likely that for full 2021, the loan book will grow inflation plus 10%. Inflation is 54 or so, that's 51.1. For next year, we are forecasting right now that inflation will be 52% but loans in pesos will grow the same percentage. Nominally equals inflation. No real growth, but for the system, we are forecasting some additional double-digit growth for us, so that to recover part of the market share in loans that we lost this year.
Part of this loss was something that we managed. Basically, we didn't want to contemplate very low interest rates for loans to these corporates. Some of our competitors were very aggressive and the reduction in our loan book was basically concentrated in large corporates. In terms of capital, yes, as you said, as we are not able to pay dividend at the bank level, we are accumulating capital. Total capital ratios stand at 20.10%. Yes, we requested the Central Bank to allow banks to pay dividends because the higher your net worth, the higher the negative impact using provisions. I really don't know if the central bank will listen to the bank's request or not. Yes, we will talk it through the bank's association, basically.
Because the banking association has requested authorization for dividend payments. Do you expect to receive an answer in the coming few weeks or is that something for next year? Or is it part of the negotiation with the IMF? Any guidance in that regard?
Well, the timing is really unpredictable, and really, I don't know if the agreement will be. I guess, the agreement with the IMF did not include this topic really. So it's more a central bank issue. I guess, it would be something more first quarter if we will get first quarter next year if we get the answer. I think this is the, I guess.
One follow-up question. To the best of our knowledge, banks can do bond spreads. Is that also an option that the group has considered as a possibility to utilize liquidity?
Well, any listed company can do that, meaning that, the listed entity is Grupo Financiero Galicia, and, the holding needs the liquidity from the banks. Actually, also, in order to pay dividends, the Grupo needs us. We cannot receive dividends from the banks. The holding company depends on dividends from Naranja, from any of the subsidiaries. Yes, we analyzed it. In fact, the ideal thing would be, the bank would be the listing entity because it's the one with the liquidity. For that, it would be similar to have authorization to pay dividends.
In principle, the bank cannot buy shares of the holding company.
It will need authorization from the central bank because it would be seen as paying a dividend. There are limitations of related party transactions and how much exposure you can have intra-company. It's also how you have legal implications that make it easy to integrate. Of course, we analyze all these alternatives.
Thank you, sir.
You're welcome.
Thank you. Once again, if you'd like to ask a question, please press star one. We'll take our next question from Paula Arregui with TPCG. Please go ahead.
Hi. Thank you for taking my question. I would like to know what were the main drivers of increasing other interest earning assets in Banco Galicia? Thank you.
Yes. Within other operating assets, the main item is the repo transactions with the central bank. These are seven-day exposures. The interest rate is 36.5%. You can see that the stock grew a lot. That is the explanation for that interest result.
Perfect. Thank you.
You're welcome.
Thank you. That concludes today's question and answer session. Mr. Firvida, at this time I'll turn the conference back to you for any additional or closing remarks.
Thank you, Nick. Thank you all for attending this call. If you have any questions, please do not hesitate to contact us. Good morning and Happy Thanksgiving. Bye-bye.
This concludes today's call. Thank you all for your participation. You may now disconnect.