Welcome to the Grupo Financiero Galicia First Quarter 2019 Earnings Release Conference Call. This call is being recorded. At this time, I would like to turn the conference over to Pablo Fiervida. 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 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 5.5% year over year contraction during the Q1 of 2019 from a 6.2% year over year contraction in the Q4 of 2018. During the Q1, the primary fiscal balance amounted to ARS 10,300,000,000 surplus, which stood above the ARS 6,000,000,000 target for the Q1 of the year. According to the National Institute of Statistics, the National Consumer Price Index recorded an 11.8% increase during the 1st 3 months of the year. On the monetary front, the Argentine Central Bank contracted the monetary base by ARS 57,500,000,000 in the quarter, a 4.1% reduction.
Meanwhile, the exchange rate averaged ARS 41.35 per dollar in March, a 9.4% increase against the average of for December 2018. When compared to the same month of 2018, the FX rate increased 104.4%. In March, the average rate on peso denominated private sector time deposits for up to 59 days was 40.26%, 6 percentage points below the average recorded last December. Private sector deposits in pesos amounted to ARS 2,200,000,000, increasing 7.4% during the quarter and 47.9% in the year. Transactional deposits in pesos fell 0.8% during the Q1 and increased 28.9% in the year.
Peso denominated time deposits increased 15.5% in the Q1 and increased 70.9% year over year. As of the end of March, peso denominated loans to private sector amounted to ARS 1,530,000,000,000, recording a 1.4% decrease during the quarter and a 6.6% increase when compared to March last year. Turning now to Grupo Financiero Galicia. Net income attributable to Grupo Financiero Galicia for the Q1 of this year amounted to ARS 9,000,000,000, 201% higher than the same quarter of the previous year, mainly due to profits from Banco Alicia for ARS 7,800,000,000 from Tagetas Regionales for ARS 867,000,000 from SUO Americana Holding, ARS 495,000,000 and from Galicia Mi Tera de Fundos for ARS 77,000,000. Going to Banco Adhesive.
Net income for the quarter increased 300% from the year ago quarter. This was a result of 104% higher net operating income, mainly due to the growth of the net income from financial instruments and of other operating income partially offset by higher loan loss provisions. Excluding the effect of the sale of Prisma, net income increased 150% in the last 12 months. Net interest income for the quarter decreased 56% as compared to the same period of 2018, primarily as a consequence of a 276% higher interest on time deposits. This decrease in net interest income was more than compensated with the increase in the net income from financial instruments, which amounted to ARS 15,000,000,000 for the quarter, up ARS 13,600,000,000 from ARS 1,600,000,000 amounted recorded in the same quarter of last year.
As a consequence of the increase in results related to higher holdings of Leliq. Net income from financial instruments also includes the results from the revaluation of the remaining bank's interest in Prisma. In addition, other operating income recorded high growth levels, too as it includes the profits from the sale of 51% of the bank's interest in Prisma. Provision for loan losses for the quarter amounted to ARS 6,100,000,000, 158 percent higher than in the same quarter of the prior year, mainly due to the evolution of credits in arrears of the consumer portfolio and to higher regulatory provisions on the portfolio in normal situation as a consequence of the increase in the volume of credit, together with the regulatory provision equivalent to 100% of the finance portion of the sale of price of Prisma. Personal expenses increased 37% as compared to a year before, mainly due to salary increase agreements with the union, and administrative expenses grew 42%, mainly due to higher taxes and to growth of expenses related to higher services.
The bank's financing to the private sector reached ARS309 billion at the end of the quarter, up 56% in the last 12 months, 19% growth for the peso financing and 18.8% for the financing in foreign exchange measure in dollars. And deposits reached ARS410,000,000,000, up 107% in a year. Peso denominated deposits grew 82% and FX deposits measured in dollars 15.5%. The bank's estimated market share of low corporate sector was 10.9%, 141 basis points higher than at the end of a year ago quarter, and the market share of deposits from the private sector was 11.5%, recording an 181 basis points increase in the same period. As regards asset quality, the NPL ratio ended the quarter at 3.95 percent recording 164 basis points deterioration as compared with the 2.31 percent of the Q1 of the prior year, and the coverage of NPLs with allowances reached 104%, down from 106% from a year ago.
As of March 31, 2019, the bank's consolidated convertible capital exceeded by ARS 26,000,000,000 or 85 percent, the ARS 30,000,000,000 minimum capital requirement. And the total regulatory capital ratio reached 15.2%, increasing 105 basis points from the same quarter of fiscal year 2018. In summary, during the Q1 of this year, Grupo Financiero Alice had good results in a challenging macro environment, and its main asset, Banco Alicia, was able to gain market share of loans and deposits and to keep liquidity, solvency and profitability metrics at high levels. In addition, it is worth to mention that due to Argentine Central Bank regulations until the end of fiscal year 2019, financial institutions are not allowed to make inflation accounting adjustments as it would have been the case under IFRS. Its application would have a significant effect on the financial statements, telling Grupo Financiero Alicia 9,000,000,000 nominal profit for the quarter into ARS 4,000,000,000 profit and its equity to grow from the reported figure of ARS 63,700,000,000 to ARS 75,100,000,000 approximately as of March 2019.
We are now ready to answer the questions that you may have. Thank you.
Thank you. We'll take our first question from Alonso Garcia with Credit Suisse.
Thank you. Good morning, everyone. My first my question is regarding asset quality. I mean, we observed a sharp deterioration in asset quality indicators, both at the bank level and at the credit cards of CRE. So my question is how much can these ratios how high can these ratios go in the coming quarters?
Do you think this is the peak of deterioration in asset quality? Or do you believe that there is still room for further deterioration down the road? Thank you.
Okay. Good morning, Alonso. In the bank's NPL ratio, there was a sharp increase from 2.88 percent to 3.95 percent, mainly due to one specific corporate case. Everybody knows is in the media, Molino Canuelas. Without that, I would say, particular case, NPLs would have grown to levels of 3.2%, in line with the slight deterioration we have been seeing and even forecasting.
And having said that, we think we are, I would say, close to the peak in terms of NPLs. In the Q1, we had inflation much higher than expected. And still the wage negotiations are not closed. So it's the worst situation in terms of purchasing power. Going forward, we think NPLs could be stabilizing or even improving towards the end of the year.
Also, that is NPLs considering the numerator. The denominator is not growing When we look at, for example, at Naranja's NPL that grew from 6.8% to 11 0.55%, we can see that loans even decreased in real terms. If they had grown with inflation, the number would have been closer to 10%. Again, due to the economic conditions of the country, this lag between inflation and salary increases. And also particularly in the case of Naranja, the credit card product is much better than personal loans, but many clients of Naraza were in a nonperforming situation with other financial companies.
And in the case of Naraha, they have to equalize the classification. So despite being in normal situation in Naraha, they are classified as nonperforming due to the nonperforming in other companies. So having said all this, we think the numbers should be gradually improving.
Thank you. And just as a brief follow-up, do you have an estimate of your cost of risk for either for the bank or for the entire group for the full year 2019?
Well, in and other thing, not only in the loan loss provision of this quarter, there was an extraordinary effect on due to Molino Canuelas in order to get to a 200% coverage. Also, we have a regulatory provision related with the sale of Prisma that was financed. So if we take out these two reasons or two items, the cost of risk in the case of the bank should grow down from roughly 7% to 3.5%. On a consolidated basis for the full year, it could be around 4%, 4.2%.
Perfect. Thank you very much.
You're welcome.
We'll take our next question from Ernesto Gabilondo with Bank of America Merrill Lynch.
Hi, good morning, Pablo, and thanks for taking questions. My question is on your strategy for next quarters. Given that there has been practically no lending demand in the industry, is the strategy will be to continue building a higher deposit base and invested it at the reliq market rates? And then for my second question, can you share with us your thoughts on the presidential elections, who is leading the polls and the scenarios that could be presenting next month by knowing the potential candidates? And finally, just one last question.
How much additional provisions from Molino Canuelas were created during the quarter? And how is now the coverage related to Molino Canuelas? Or did you provision 100% this quarter? Thank you.
Yes. Hi, Ernesto. Well, first question about strategy. We are navigating a scenario of volatility, political uncertainty that is tied to your second question. We are seeing deposits growth even above inflation for pesos.
Still now, also deposits in dollars, very healthy. Loan demand is not growing in part because of uncertainty, but also because of economic activity levels and the interest rate level. So the funding we are getting or the deposits of this liquidity is investing in invested in a big proportion in Central Bank Paper. That is from a pure asset and liability management perspective. When we look at the different operations, we keep on with our strategy of being a great bank, a bank of experience, growing our fee base, our client base, all our products.
We are not expanding the branch network. We are continuing with our digital transformation and being prepared for the moment in which interest rates begin to go down and loan demand picks up. So this is the first question. The second question about presidential elections is really hard to say at this time of the year because many different thresholds of moment or moments from now till the end of the year are going to take place. 1st, who are going to be the candidates because at the end of June, the list of candidates must be submitted.
Then the primary elections, then the 1st round and then the 2nd round. And till now, the usual, I would say, suspects are Cambiemos in the head of Mercury, Katrina Kiesner, again, she's not still a candidate and someone in the middle coming from the alternative a period of time that could be either Lavania or Masa. We need to know what happens there. If again, who are the candidates, what will happen in the primaries, perhaps that will bring forward a potential polarization. Definitely, the scenario is open.
Well, I have my own guest, educated guest, but I'll try to be very partial and try and make a more accurate case closer to the elections.
Perfect. And about the additional provision for Molinogu?
Yes. And about Molinogu Canuelas, the Molino Canuelas exposure was about ARS 1,800,000,000. It was in normal situation in December with a 25% provision. In the Q1, it was classified as nonperforming loan, and we have 104% coverage. So Molio Canuelas could be considered as 100%.
Great. Very helpful. Thank you very much, Paulo.
You're welcome, Ernesto.
We'll take our next question from Domingos Falazima with JPMorgan.
Hello. Good morning, everyone. Thank you also for taking the question. My question is more just trying to see the exact impact of Prisma Seo. We're struggling a little bit finding the lines.
So my understanding is that this impacted other operating income at the bank level. So this was printed 5,892. My question is, how much did it impact each line? So how much did it impact other operating income? How much did it impact provisions?
And what kind of tax bracket did you use? Did this say or pay? And just so that we understand exactly what would be in the clean income statement.
Okay. Hi, Domingos. The sale of Prisma was a complex transaction in terms of accounting because it was sold 51% of the shares, 60% cash, 40% financed and the remaining 49% was revalued. And that revaluation also included a provision requested by the Central Bank. The net effect, even including income tax, was ARS 2,900,000,000.
The detail is in results from financial instrument. It includes ARS 2,200,000,000. That is due to the revaluation of our 49% of the shares that were not sold, net of the provision. In other operating income, there is ARS 3,800,000,000 that is the result of the sale of Prisma, of our 51% multiplied by 60%. And in the cost of risk, it's about ARS 1,700,000,000.
That is the provision for the 40% that was financed of the sold portion. Then we have some sales tax and income tax for about ARS 1,400,000,000. The net effect again is ARS 2,900,000,000. Very clear. Thank you very much.
Thank you.
Our next question comes from Gabriel Nobrega with Citi.
Hi, everyone, and thank you for the opportunity to ask questions. I actually have two questions. The first one is on regulations. We have seen over the past 2 or 3 months the Central Bank passing a lot of regulations for the banks. And in my view, the most impactful is on the reduction of the credit card settlements from 19 days to 10 days.
Could you maybe share with us if you have made any calculations on how much this could impact your net income for 2019? And I'll make a second question afterwards. Thank you.
Hi, Gabriel. Well, my first comment would be that a new regulation could be or the impact of a new regulation could be calculated looking at the past results. What usually happens is that when a new regulation appears, we do something to try to offset that. I remember in the past when the previous Central Bank Administration, meaning the previous government launched different measures in order to put caps on interest rates or minimum interest rates or even complications to raise fees, we did other or we took different actions in order to offset those problems. And in this particular case of reducing the days of payment with the credit cards from 19 to 10 days, we also have to make or to take certain assumptions.
For example, what would be the yield on which these funds are invested. So many other implications appear. So just thinking in the 8 months, and again, if we do nothing, it will be roughly ARS 1,000,000,000 net of income tax. Of course, we again, for the 8 months. That is if we do not do anything with the tenure or days in which we lend to our clients.
And also, we can reduce promotions or discounts or even eliminate free interest financing. So the head of the product credit cards, of course, will try to keep his budget at the same level. So this, again, has a theoretical impact, and then we do things in order to offset that.
All
right. That's very clear. And as for my second question, during the quarter, we saw one of your peers fully writing off the exposure that they had to AMOLCA. Dean, that you already mentioned having 100% coverage for this corporate, Why not write off this loan?
Well, we think we will recover a big percentage of that. If I had to give a big name out of my head, I would say roughly 50 plus. So we are going to keep it. And negotiations are and even drafting of documents is being advanced. So we think we will recover this kind of portion.
And also, the company's operating is it has many factories, around 20 factories, good brands. So they are not in normal situation, but operating normally, I would say.
All right. Just a follow-up here. From your cost of risk guidance of around 4% to 4.2%, are you taking into consideration the reversal of these 50%?
No, no, without considering that.
All right, perfect. Thank you, Pablo. You're welcome.
And we'll take our next question from Carlos Gomez with HSBC.
Pablo, two questions. 1 on the credit card legislation. Can you confirm that it will or will not apply to Parquette Aranja? I asked it because you're in the process of making it a financial institution. So maybe in that case, it might apply.
So we will get some certainty about that. And second, can you give us an estimate for loan growth for this year next year in pesos? Thank you.
I couldn't listen to you the second question, Carlos, sorry.
Loan growth for this year and next year. Okay.
Perfect. You're welcome. In the case of Tarjita La Ranca, this shortening of period of payment is not mandatory, so it's not for them basically because the regulation is applicable to financial institutions. Naranja through Parque Terre Caixionales, not through Naranca directly, will get a license from the Central Bank in order to take deposits, but it will not apply to the Naranja company as it is today. The other exception is our rural card, Target Tagalicia Rural, that doesn't apply.
So it's for basically individual clients. And again, it's the size I mentioned. For loan growth, we have to speak about nominal growth rates and real. For this year, we have been revisioning upwards the inflation estimate. 4 months ago, we were forecasting 30%, 28% to 30% inflation.
Right now, we are closer to 40%. In that having that in mind, our loans could be growing around 30% on for the system, perhaps a little bit lower, 27%, something like that. For next year, depending on the inflation, if the scenario of monthly inflation going down takes place, interest rate also should go down and loan demand should recover. So we could see some positive loan growth in real terms. But again, we are still far from that situation of interest rates really going down to a level that will or could improve our loan demand.
And there are no further questions at this time. I'd like to turn the conference back to Mr. Feovita for any additional or closing remarks.
Okay. Thank you all for attending this call. If you have any questions, please do not hesitate to contact us. Good morning.
Bye bye.
And that does conclude today's conference. We thank you for your participation. You may now disconnect.