Welcome to the Grupo Financiero Galicia third quarter 2019 earnings release conference call. This call is being recorded. At this time, I would like to turn the call 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 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 1.3% year-over-year contraction during the third quarter of 2019, compared to a 0.6% year-over-year expansion in the second quarter. During the first nine months of 2019, the primary fiscal surplus amounted to ARS 22.9 billion, exceeding by ARS 25.4 billion the target for the period. According to the National Institute of Statistics, the national consumer price index recorded a 37.7% increase during the first nine months of the year.
On the monetary front, the Argentine Central Bank contracted the monetary base by ARS 65.8 billion in the third quarter, a 4.9% decrease against the second quarter. Meanwhile, the exchange rate averaged ARS 56.5 per dollar in September, a 29% increase against the average for June 2019. When compared to September 2018, the FX rate increased at 46.4%. In September, the average rate on ARS-denominated private sector term deposits for up to 59 days was 60%, 9.1 percentage points above the average recorded last June. Private sector deposits in ARS amounted to ARS 2.5 trillion, increasing 1.8% during the quarter and 42.5% since September last year. Transactional deposits in ARS rose 7.6% during the third quarter and 37.8% in the last 12 months. ARS-denominated term deposits decreased 3.6% in the quarter and picked up 48% year-over-year.
Private sector deposits in dollars amounted to $21.4 billion, decreasing 31% during the quarter and 20.9% as compared to September last year. As of the end of the quarter, peso-denominated loans to the private sector amounted to ARS 1.65 trillion, recording a 7.1% increase during the quarter and a 4.6% increase when compared to September last year. U.S. Dollar-denominated loans amounted to $13.4 billion, recording a 15.1% decrease during the quarter and a 15.7% decrease when compared to September last year.
Ladies and gentlemen, please stand by while we reconnect our speaker. There will be music on the call until it continues. One moment please.
Thank you. Sorry for another technical problem. I was saying that as a result of the political uncertainty, the country risk premium increased significantly, and the dollarization of the economy accelerated. As a consequence, the government took emergency measures, including debt reprofiling and capital controls. Turning now to Grupo Financiero Galicia. Net income attributable to Grupo for the third quarter of 2019 amounted to ARS 11.6 billion, 175% higher than the same quarter of the previous year, mainly due to profits from Banco Galicia for ARS 10.1 billion, from Tarjetas Regionales for ARS 1.1 billion, from Sudamericana Holdings for ARS 228 million, and from Galicia Administradora de Fondos for ARS 85 million. Increased net operating income of ARS 131 million, partially offset by personnel and administrative expenses of ARS 53 million.
This profit represented a 7.1% annualized return on average assets, and a 58.2% return on average shareholders' equity, compared to 3.6% and 34.6% of a year ago. Banco Galicia net income for the quarter increased 197% from the year ago quarter as a result of the higher net operating income, mainly related to the growth of the net income from financial instruments and to profits from gold and foreign currency quotation differences. Net interest income for the quarter increased 14% as compared to the same period of 2018, primarily as a consequence of a 43% higher interest on loans and on repurchase agreement transactions. Net income from financial instruments increased 167% from the one recorded in the same quarter of 2018 as a consequence of higher holdings of central bank paper, LELIQ, partially offset by a lower yield on government securities, mainly Treasury bills, LECAPs.
The profits from gold and foreign currency quotation differences amounted to ARS 1.7 billion, including a ARS 3.8 million profit.
Ladies and gentlemen, once again, please stand by. There will be music until we reconnect our speaker. One moment, please.
Thank you. Well, due to these technical problems we are suffering, I would prefer to give you time to Q&A, as all the information I was going to read is in the press release. I'm now ready to answer the questions. Thank you.
Perfect. Thank you. Ladies and gentlemen on the phone lines, if you have a question, 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, ladies and gentlemen, if you'd like to ask a question, please press star one now. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Your first question comes from Gabriel da Nóbrega of Citibank. Please go ahead.
Hi, everyone, and thank you for the opportunity. Thank you, Pablo, for the thorough presentation as well. My question is still on the political outlook. I know it's already been three weeks since the elections, but I wanted to get a sense from you, what are you seeing? What strategies has the bank been taking, having taken into account what you've been seeing? I'll make a second question afterward. Thank you.
It's really hard to say what the elected president is going to do or what regulations, meaning not only regulations just for the financial system, mainly an economic plan or what measures he will take, because we don't even know who is going to be the cabinet, all the ministers. The bank has been focused on being very liquid, both in dollars and in pesos. I would say, trying to protect as much as possible profitability and the capital situation and asset quality. We are seeing the first results of all the efficiencies that we have been trying to get with digitalization. Really, going forward, we need to see what the economic plan will be, who are going to be the members of the cabinet, and what measures can be taken that would affect directly the financial system.
Sorry, I wouldn't answer if you have any specific questions regarding that, what we could be doing.
Mm-hmm. I understand it's very difficult, so thank you for that. I actually have a follow-up going into the asset quality. During this quarter, I saw that the bank made a lot more of charge-offs, and as a consequence, we actually saw the NPL ratios for the bank decreasing. What I actually wanted to understand here is why did you make so much higher charge-offs this quarter, and if you believe that we are at the peak of the NPL ratios, or when could we even reach this peak? Thank you.
Well, the NPL ratio improved due to the certain, I would say, recovery in the denominator on loans. Also, the bank had sold some individual loan book that was past due for many months. It was around ARS 1.7 billion. Both effects explain the improvement in the NPL ratio. We think that next year, we could see some recovery in loan demand in an environment with lower interest rates that perhaps will help to improve even further the asset quality. Perhaps we are close to the highest level. We have to see, again, economic plan, members of the cabinet, in theory, we should be closer to the peak.
Very clear. Thank you.
You're welcome.
Your next question is from Alonso Garcia of Credit Suisse. Please go ahead.
Good morning, everyone, and thank you for taking my question. My first question is on taxes. Is this inflation adjustment that you and other banks are doing for taxes, is it still subject to any sort of ruling by a tax authority, or is it already final? Is there a risk that you have to revert this adjustment at the end of the year, or is there a risk that you are not going to do it next year if inflation rates also give room for that, or is it already something final? My second question would be on the Leliq position. We already saw a significant decline in this exposure in the third quarter. My question is if there is still room or appetite on your end to decrease it further. Thank you very much.
Hi, Alonso. In the case of income tax, the law is clear that we can adjust the numbers by inflation in order to calculate the income tax. In the third quarter, we did that. The charge was roughly ARS 2 billion. If we hadn't done that, it would have been something around ARS 1.6 billion higher, but it's under the current regulation. In the second quarter, what we did is we did altogether in the second quarter, the adjustments corresponding to the first and second quarter. We don't foresee any change, and in the fourth quarter, we should see a similar effective tax rate as the third quarter, around 16%. Regarding the LELIQ, we decided to be very liquid. We split, I would say, the exposure to the central bank between LELIQ and repo transactions.
There you will see that we have roughly ARS 45 billion of LELIQs and another ARS 45 or ARS 46 with repo transactions. These are shorter-term instruments, again, in order to be very liquid.
Great. Thank you.
You're welcome.
Your next question comes from Yuri Fernandes of JP Morgan. Please go ahead.
Thank you, gentlemen. I have a question regarding the debt reprofiling. I was unable to find the executive value of the hit on your figures. I think you mentioned ARS 2.3 billion on the cap, not sure if that's the impact from the debt reprofiling. If you can clarify what was the amount, that would be nice. I have a second question regarding your loans in dollars. How has been your policy on that? You mentioned about having more liquidity in dollars, are you lending? What is your strategy for that segment? Thank you.
Hi, Yuri. The amount of the debt or the impact of the debt reprofiling was around ARS 2 billion. The instruments that we had in August not necessarily are the same that we had at the end of September, it's perhaps hard to see the exact effect on each different bond, but it was ARS 2 billion. That is likely that will be recovered when we collect the remaining 85% of those reprofiled short-term paper. The loans in dollars, the decision was to keep on originating a loan in dollars to exporters, again, with this same main objective, to be very liquid, prepare for, I would say, a worse scenario than the actual one. We are over-liquid, and we even have billions of dollar bills that we imported. We are prepared, and we overreacted. We are very comfortable.
The decision was to stop originating in dollars, and we are offering loans in pesos to exporters.
Great. Thank you.
You're welcome.
Your next question comes from Carlos Gomez of HSBC. Please go ahead.
Yes, hi. Good morning. Two questions. First, on the reprofiling, you have an ARS 2 billion loss you said you might recover. Is there any legal recourse that the bank individually or in association with the other banks can use to address this unilateral reprofiling of debt? Second, what's your expectation for tax rate in 2020? Thank you.
Yes. Well, you mean taking this issue to the courts in order to fight for the reprofiling?
Yes.
Well, it's very short-term, really. I would say it was not discussed. It's part of the financial system rules, I would say. Really, it was a very short-term postponement of payment. Although the hit in accounting terms was, I would say, significant, if we consider ARS 2 billion significant, we think we will collect them in the short term.
Okay.
Regarding the income tax rate, yes, it will be 25% next year. Yes. So far, it will be 25%, the income tax rate next year.
Income on inflation-adjusted earnings or on nominal earnings?
Adjusted by inflation, the tax rate will be 25%.
Okay. It's on earnings adjusted by inflation, like this year.
Yes. Hello?
Once again, ladies and gentlemen, if you have any additional questions, please press star one. Again, ladies and gentlemen, please press star one for questions. One moment, please. Mr. Firvida, there are no longer any questions in the queue. I'd like to hand it back over to you for closing remarks.
Okay. Thank you for attending this call. Sorry for the technical problems. If you have any questions, please do not hesitate to call us. Good morning. Bye-bye.
This concludes today's call. We thank you for your participation. You may disconnect your lines, and have a wonderful day, everyone. Take care.