Welcome to this Grupo Finacao Galicia First Quarter 2020 Earnings Release Conference Call. This call is being recorded. At this time, I'd like to turn the call over to Mr. Pablo Fervida. 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 and are subject to risk and uncertainty that could cause actual results to differ materially from those expressed. According to private estimates, the Argentine economy recorded a 5 0.4% year over year contraction during the Q1 of 2020 from a 1.1% year over year contraction in the Q4 of 2019. And the implementation of mandatory social distancing in order to reduce the risk of contagion. March, the economy fell 9.8% and according to private estimates activity, climate 7.2% in April.
During the Q1 of 2020, the primary fiscal balance amounted to ARS156 1,000,000,000 deficit minus 0.5 percent of GDP. At the end of April, the accumulated fiscal deficit of 2020 rose to 1.3% of GDP, resulting from increase in public spending and a contraction of fiscal revenues. The higher spending was a consequence of the implementation of a fiscal stimulus package, mainly consisting of direct transfers to unemployed, social plan beneficiaries and informal sector workers as well as of aid to companies in the form of labor tax reductions and partial payment of salaries. In the case of revenues, the reduction was caused by the economic paralysis during the month of social distancing measures. According to the National Institute of Statistics, the consumer price index recorded a 7.8% increase during the Q1 of the year.
On the monetary front, the Argentine Central Bank expanded the monetary base by ARS396.7 billion in the first quarter, a 20.9% expansion against the Q4 of 2019. This trend continued during April May, during which the monetary base increased 33.1% and 57.1% in year over year terms, respectively. This was mainly prompted by the Central Bank's transfers to the treasury for a total amount of ARS740 1,000,000,000 between April 28. In order to finance the fiscal stimulus package partially compensated by operations with Leliq, the short term bills issued by the Central Bank. Meanwhile, the official exchange rate averaged MXN63.12 per dollar in March, a 5.4% increase against the average for December 2019 and a 52.6% from March 2019.
The average interest rate on peso denominated private sector time deposits for up to 59 days was 29.3% for March, 11.8 percentage points below the average recorded last December. Private sector deposits in pesos amounted to ARS3.5 trillion, increasing 25.2% during the Q1 and 57.3% when compared to March 2019. Transactional deposits in pesos rose 30.4% against December last year and increased 91% in the year, while peso denominated time deposits increased 16.8% in the Q1 and 25.9% year over year. As of the end of March, peso denominated loans to the private sector amounted to ARS1.98 trillion, recording a 6.5% increase during the quarter and a 29.6% increase when compared to March 2019. Turning now to Grupo Financino Alicia, it is worth to mention that since the beginning of 2020, reported figures tend to be adjusted by inflation in accordance to IAS 29 for financial information in hyperinflationary economies and the provisioning methodology changed the expected credit loss model according to 100 Times Central Bank Regulations and to IFRS 9.
Taking this into consideration and going to the information for the Q1, net income amounted to ARS8.3 billion, down 22% from a year ago quarter. This profit was mainly due to gains from Banco Alicia or ARS 6,900,000,000 from target rationales for ARS 1,000,000,000, from Su Americana Holdings for ARS 274 1,000,000 and from Galicia and Itador del Fundos for ARS 89,000,000. The annualized return on average assets was 4.4% and the return on average shareholders' equity is 27.1%. Banco Alicja's net income for the quarter decreased 35% from the year ago quarter as a result of a 20 2% lower net operating income, mainly related to the decrease of net income from financial instruments and of other operating income, partially offset by the growth of net interest income. Interest income for the quarter increased 10% as compared to the same quarter period of 2019, while interest expenses were down 26%.
Average inter selling assets were down ARS59 1,000,000,000 or 11% year over year, mainly due to the decrease of dollar denominated loans and of government securities, partially offset by the growth of the peso denominated loans and of other inter selling assets. In the same period, its yield decreased 65 basis points, mainly due to lower yields on other interest earning assets in pesos and in dollars. Interest bearing liabilities decreased ARS113 1,000,000,000 or 21% from the Q1 of 2019, primarily due to lower balances of dollar denominated liabilities and its cost decreased 126 basis points, mainly as a result of a lower average interest rate on other interest bearing liabilities in pesos and on pesos denominated time deposits. Net fee income decreased 26% in the last 12 months due to lower fees on deposit accounts. Net income from financial instruments decreased 43% as a consequence of lower holdings and yields on Argentine centered bank paper.
Profits from gold and foreign currency quotation differences amounted to ARS756 1,000,000, out of which ARS751 1,000,000 were gains from foreign currency trading. Provisions for loan losses were 69% higher than in the same quarter of the prior year, mainly due to the evolution of arrears in the consumer portfolio and to higher regulatory provisions as a consequence of the increase of the loan portfolio. Personnel expenses decreased 2% as compared to the year before, mainly due to salary increase agreements with the union, which were slightly below inflation. In addition, administrative expenses grew 15%, mainly due to higher expenses related to maintenance and repairman of goods and IT. The bank's financing to the private sector reached ARS379 1,000,000,000 at the end of the quarter, down 14% in the last 12 months, mainly due to the decrease of dollar denominated loans.
Net exposure to the public sector decreased 40% year over year and excluding Leliqs, it represents 5% of total assets compared to 4% in the Q1 of 2019. Deposits reached ARS482 1,000,000,000 down 21% a year with dollar deposits falling 47% and peso denominated deposits being relatively stable as a whole, but improving the mix as current account grew 38% and saving accounts 23%, while time deposits decreased 23%. The bank's estimated market share of loans to private sector was 12.4%, 151 basis points higher than at the end of the year ago quarter and the market share of deposits from the private sector was 10.1%, increasing 138 basic pounds in the same period. As regards asset quality, the NPLO ended the quarter at 3.63 percent recording a 32 basis points improvement as compared with 3.95 percent of the Q1 of the prior year and the coverage of NPLs with allowances reached 178%,
up from
81.8% from a year ago. As of the end of March 2020, the bank consolidated from Pultano Capital exceeded by 3,800,000,000 or 159 percent, the ARS 41,900,000,000 minimum capital requirement. And the total regulatory capital ratio reached 21.2 percent increasing by 600 basis points from the end of the same quarter of fiscal year 2019. In summary, during the Q1, Grupo Financiero Alicia has shown good results in a very challenging and volatile macro environment, keeping liquidity, solvency and profitability metrics at high levels. It is also worth to mention that although during the quarter, the COVID-nineteen had a limited impact on our business as the lockdown began on March 20, the Board of Directors continually analyzed the evolution of the situation and takes all measures within its reach to guarantee business continuity, preserving the health and safety of employees, customers and other stakeholders, striving also to reduce the impact on profitability and asset quality of the lower level of activity and higher level of unemployment.
We are now ready to answer the questions that you may have. Thank you.
Thank And our first question is from Gabriel da Nobrega with Citibank. Please go ahead.
Hi, Pablo. Good afternoon and thank you for the I'd actually like to make a first question on asset quality and I'm looking more into your delinquency. Being that we are already in June, I imagine that since these results in March, you already have a more clear overview of what has been happening with delinquencies. If you could maybe give us more color how the vintages are progressing, how companies and individuals, they are paying their loans as well. And if you could talk a bit more specifically about your Tardes business, which could be a bit more riskier in this moment?
And I'll make a second question afterwards. Thank you.
Okay. Hi, Gabriel. Well, NPLs at the end of March at the bank level were at 3.63%. Without considering a change in regulation from the Central Bank allowing to postpone the classification of non performing loans for 60 additional days, NPLs would have been around 4%, so still low. And we are expecting some deterioration.
I think we are not seeing really that much in April May even without considering this change in regulation. So at the end of the year, our current expectation, considering the evolution the expected evolution of GDP and unemployment are the 2 main variables, tend to tend us to estimate NPLs to be between 5% and 5.2% at year end. Of course, some people took the advantage of postponing payments of their personal loans or credit cards mainly in April. In May, part of them decided to pay personal loans and credit cards. The interest rate on credit cards is at 43% and personal loans, the contractual rates, let's say, around 50%.
So and companies are doing well. Let's keep in mind also that loans to GDP is very, very low. Last year, there was a contraction in real terms in that ratio. So of course, it's our focus to keep and monitor asset quality, but these are the kind of deterioration we are seeing. In the case of Tarcitana Ranca, despite the segment is a more fragile or sensitive to economic crisis.
In many cases, the Naranja car is the only source of financing, and so they must keep it alive. And actually, we saw some improvement in March, slight deterioration in April and an improvement in May. So of course, depending on the length of the pandemic and the GDP evolution, we will see some further deterioration. But if in the case of the bank, it was around 1 percentage point. In the case of Naranja, it could be around 2 percentage points deterioration.
This is the type of information or guidance we can speak of with the current estimates, of course.
All right. Thank you for this color. It's been very helpful. And this actually leads into my second question. They really got my attention here saying that you are actually seeing some improvements already in the May, right?
So what could this mean for your provisions being that the asset quality, as you already said, is actually behaving better than expected. Do you believe that the provisioning level also taking into consideration that you're already in the expected loss model, do you think that it could maintain these levels of maybe around MXN 5,000,000,000 for the remainder of the year? Or are you expecting a pickup maybe towards the end of the year after these postponements from the waiver of 60 days that the Central Bank is giving for the classification of these debtors?
Well, first, one comment is that in the Q1, the expected loss meant that we had around BRL 1,300,000,000 additional provisioning. And despite this improvement, as I said, in May compared to April, it's marginal and not really relevant. And in June, it's likely that all the variables that we use to calculate the expected losses and the forward looking will be changed. So we are seeing a similar, I would say, increase in the cost of risk as the increase we are expecting in NPLs. So if from, let's say, 4% NPL today without this regulatory change or regulatory forbearance, we are expecting something around 5% towards the end of the year.
In the case of cost of risk, we could be thinking in around 1 percentage point increase.
All
right. That's perfectly clear. Thank you so much.
You're welcome, Gabriel.
And we have a question from Carlos Gomez with HSBC. Please go ahead.
Hi, good morning. And apologies if you have already told this. Can you remind us of what your assumptions are for loan growth and for returns for this year?
Yes. Hi, Carlos. For loans, we are, of course, having an estimate based on the estimated inflation. So we are thinking in inflation plus 5%, slightly below the deposit the estimate that is inflation plus 10%. In the case of profitability, it's hard to make or to give guidance.
2nd quarter, we think will be decent, perhaps in line with the Q1. The 3rd Q4, we will have to see when the economic activity begins to rebound, what will be the impacts on real wages,
unemployment.
The peak of NPLs should be at the end of the Q3 or beginning of 4th. But of course, our objective and what we think will happen is that we will have a positive real return on equity. Now of course, we are just showing real numbers, so a positive ROE.
And again, your inflation expectation was how much?
Inflation expectation is a moving target As monthly last monthly readings were low, the poll called REM that around 50 Economists answer to the Central Bank say that we expect inflation to be 43.7 percent for this year. We are a little bit higher around 48%. So that is our current estimate for inflation.
And so let me just ask that, I mean, 5% real from where we start seems like a very big recovery. And do you see any evidence that activity is indeed starting to recover?
Again, it seems like
a bit of an optimistic assumption.
You mean recovering in different sectors of the economy?
Yes, in activity and eventually in loan demand.
Well, loan demand was mainly due to the corporate sector. At the beginning, big corporates assuring liquidity, then SMEs. In the case of individuals, demand is very soft. Personal loans, of course, we originate every month and even we originate more personal loans than our competitors, but not really important numbers in the case of credit card consumption in real terms when it's coming down, not significantly, but it's less than the previous month. Of course, there are sectors that are doing well like the typical Argentine agricultural sector, food and beverage, supermarkets in general or food merchants, cleaning, pharmacies, of course, all these sectors are doing well.
It's easy to understand that to reason hotels, restaurants are not doing well, although there are protocols in certain provinces for restaurants to be reopening and construction is also down. There are many provinces that began already opening many other activities. But I would say that July August will be still a tough month as here is the peak of the COVID due to winter months. We made some analysis and on average, SMEs revenues went down like 20% in real terms. Of course, there you have some SME sector that had their revenues growing and some of them perhaps saw the revenues plummeting like 70%.
But this is the kind of sector by sector analysis. We expect that oil and gas will recover. That was affected not only by the lockdown, but also by international prices. I don't know if that's enough, Carlos.
Hello?
Sorry, I was speaking. Yes, thank you very much. Okay.
And our next question is Santiago Petri with Franklin Resources. Please go ahead.
Thank you. Hi, Pablo. The question is related to the position in Leliqs. How do you see the unwinding of this position in the second half of the year?
Well, in
Or you expect that to happen?
Yes. Well, really, Leliqs have been going down in most of the assets of the banks. And actually, the Central Bank issued different regulation so that banks reduce their exposure in order to lend to SMEs, individuals and so on. And if companies lend to SMEs at an interest rate of 24%, you are allowed to have more access to the LECs. And also when they raise the minimum interest rate that banks have to pay for time deposits to 79% of the Leliq rate now at 30%, they also allowed you to invest in the LIX.
I don't know really if the reduction in LIX will take less take place in the 2nd part of this year. The good thing is that the mandatory or not mandatory, but this, I would say, direct lending at 24% or even some lending to monotriodictas, self employed people at a 15% interest rate, cost a reduction in reserve requirements and we are allowed to invest in the LIGS. So the objective of the Central Bank so far has been to decrease the interest rate for the private sector clients and allowing banks to invest in the lease. Sometime in the future, perhaps short term future, medium term, I would say, the loan demand from the private sector will be coming or satisfied from money coming from Leliqs, basically banks selling Leliqs or not renewing their Leliq position and lending to the private sector. The stock of the lease of any bank is can be built or reduced very quickly as there are twice a month of this issuance of Leliqs.
As of March, our position was around ARS 81,000,000,000, roughly ARS 60,000,000,000 were, let's say, free Leliqs. The other were remunerated Leliqs from the reserve requirements, but they can go from or grow from 1 week to the other like ARS 30,000,000,000. So it's not something we see going down in the short term.
Thanks, Mario. Can you repeat me what was the portion of remunerated and non remunerated Leliqs? What was the breakdown?
Really, the Leliqs are remunerated. What I said is that out of the ARS 81,000,000,000, roughly ARS 22,000,000,000 were part of the reserve requirement integrated with Leliqs. And the other, like ARS 60 billion were Leliqs that we purchased, let's say, freely or not allocated to reserve requirements.
Okay, excellent. Thanks.
You're welcome. Of course, this amount of Leliqs that are used for the integration of reserve requirements changes as the stop of deposits changes. Perhaps today, instead of being EUR 22,000,000,000 would go to levels of EUR 30,000,000,000.
And our next question comes from Nicolas Rivo with Bank of America. Please go ahead.
Yes. Thanks very much for taking my questions. Pablo, I have two questions. The first one, on this announcement from the Central Bank that companies must use
dollar assets held abroad before they go to
a central bank to buy dollars to pay debt in foreign currency. Does this restriction apply to banks as well? And do you see basically any trouble having access to a central bank to buy dollars in order to pay, for example, your 2026 the coupon on your 2026 bond? So that's my first question. And then my second question, on this news about the government planning to nationalize the company, Bicentin, does this announcement make things easier for you as a creditor to deal directly with the federal government?
And yes, so what are your thoughts there? I noticed if you can remind us your exposure to Vicentin and how much you have provisioned for this exposure? Thank you.
Okay. Hi, Nicolas. Well, I will begin with the second question that is very easy. We have 0 exposure to Vicentin, so we have no problems there in terms of asset quality. It's, I would say, a bad signal for the market in general.
Today and well, yesterday and today, there were demonstrations, particularly in the province of Santa Fe. The government says that it's, I would say, isolated case and they are, let's say, angry because Vicente got a big loan from Banco Nation, the largest state owned bank back in December. So they have a suspicious of corruption and they want to recover that. They will have to pass a law in Congress. We have to see if that is obtained or not, but definitely it's not a good signal.
In terms of limitations to access the dollar market, this is something that or this regulation is part of a problem. International reserves were coming down and the government through the Central Bank in general issued regulation to avoid individuals and companies to access the FX market. In the case of debt, if it is for payment of either coupons of capital, there is no problem. Of course, we wouldn't be able to repurchase in advance a bond that will let's say, with the contractual cash flow, there are no problems. And as you said, if a company has no dollars outside, they will be able to access the FX market, for example, for imports.
It's one, let's say, additional regulation trying to stop the leakage of international reserves and the leakage of deposits in dollars in financial system.
Thanks very much, Paul.
You're welcome.
Our next question is Ernesto Tavalanvo with Bank of America. Please go ahead.
Hi, Pablo. Hope you are well. My question is a follow-up in the SMEs credit lines with interest rates at 24%. How much do they represent of your loan book? And what could be the implications for NIMs?
And then my second question is, if you're already seeing troubled companies in Argentina or under Chapter 11. I heard you before about the potential risky sectors, but just wondering if there's already one under Chapter 11. And then my last question is on regulation. So I don't know is there any updates in the interest rate caps in credit cards and the implications for your business?
Okay. Hi, Ernesto. Well, first on the loans at 24% to SMEs. As of March, the stock was very low, was around ARS 3,000,000,000. So but because the as I said, the lockdown began on March 20 and at that moment began this kind of stimulus package.
Until yesterday, the amount was around ARS 39,000,000,000, roughly 9% of our total loan book. In terms of NIMs, we don't see this as a 24% loan. Why? Because we have a forbearance in terms of reserve requirements. So for equal to 40% of the amount lent.
And so let's say, ARS 60 were lent and 40% were recovered, let's say, from the Central Bank that were yielding 0. So that EUR 40,000,000 are reinvested at a higher rate. So really, the effective, let's say, interest rate on these loans is around 37%, 38%. In terms of margins, all these, let's say, changes in different loans, interest rates or time deposit interest rate have some forbearance in terms of reserve requirements. So really the effective yield tends to be constant.
So really, in terms of NIMs, we are not seeing a change, perhaps a marginal thing, but also as the dollar bucket is shrinking and the peso bucket is growing, that will also help margins. And also the funding base is improving with more transactional accounts and less return deposits. So the impact on NIMs so far and perhaps in the second quarter will be minimum. Then we will have to see, of course, the asset quality tied to these loans, but companies are receiving or paying interest rates are negative in real time. So really, we think it will not be that hard to repay.
And one more comment on that, this ARS 39,000,000,000 as of yesterday lend to at 24% interest rate was or lend to roughly 22,000 SMEs, clients of the bank. These 22,000 were, let's say, peaked. We have like 82,000 SMEs. So we and part of these loans also have a guarantee from a public sector trust called FOGAR. So really, they are not that bad.
And even as it occurred in the past, like 5 years ago, when we had a mandatory lending line, the executives that then have their relationship with SMEs say that this kind of product makes or helps to improve the relationship and we get a cross selling opportunities. This is in terms of 24% line. In terms of Chapter 11, we have 2 big companies with problems in the past. One is Molino Canuelas or Molca that was fully provisioned and is off balance sheet right now. Other is Garabarino, that is a white product line retailer.
We also have a fully provision. Then I'm not familiar with any big case that it could be client of the bank with any, I would say, relevant exposure. And regarding your 4th question regarding regulations, The interest rate on credit card stands at 43%. Then other regulation on credit card on interest rate is this minimum interest rate for time deposits at 79% of the interest rate on the LEAP, now at 30%. And then you have the 24% that is really something that you grant taking advantage of the reduction in the reserve requirement and using that money to reinvest at the higher yield.
These are the, let's say, the regulation on interest rate so far.
Very helpful. Thank you very much, Pablo.
You're welcome, Alberto.
And there are no further questions at this time.
Okay. Thank you all for attending this call. If you have any questions, please do not hesitate to contact us. Good morning and take care. Bye bye.
This concludes today's call. Thank you for your participation. You may now disconnect.