Good day everyone, welcome to today's Grupo Financiero Galicia fourth quarter 2018 earnings release conference. Today's call is being recorded. Now I'd like to turn the call over to Mr. Pablo Firvida. Please go ahead, sir.
Thank you. Good morning, welcome to this conference call. I will make a short introduction, 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 6.2% year-over-year contraction during the fourth quarter of 2018, from a 3.3% year-over-year contraction in the third quarter. Therefore, according to private estimates, the economy accumulated a 2.6% year-over-year fall during 2018. During the fourth quarter, the primary deficit amounted to ARS 186 billion, accumulating a ARS 374 billion deficit in 2018, or 2.4% of GDP, overachieving the official target of 2.7% of GDP.
According to the National Institute of Statistics, the national consumer price index recorded an 11.5% increase during the fourth quarter of the year, reaching an annual inflation of 47.6% for 2018. On the monetary front, the Argentine Central Bank expanded the monetary base by ARS 159 billion in the fourth quarter, reaching a 41% growth in the year. Meanwhile, the exchange rate averaged ARS 37.8 per USD in December, a 2.1% appreciation against the average for September last year. When compared to December 2017, the Argentine peso recorded 113.4% depreciation. In December, the average rate on peso-denominated private sector time deposits for up to 59 days was 48.6%, seven percentage points above the average recorded last September. Private sector deposits in pesos amounted to ARS 2.1 trillion, increasing 18.8% during the quarter and 41.6% in the year.
Transactional deposits in pesos rose 13.2% during fourth quarter, 23% in the year. On the other hand, peso-denominated time deposits increased 25.5% in the last quarter, increased 67.5% during last year. As of the end of December, peso-denominated loans to the private sector amounted to ARS 1.5 trillion, recording a 2% decrease in the quarter and a 16.8% increase during the year. Turning now to Grupo Financiero Galicia. Net income for 2018 amounted to ARS 14.4 billion, 67% higher than the previous year, mainly due to profits from Banco Galicia for ARS 11.5 billion, from Tarjetas Regionales for ARS 1.8 billion, from Sudamericana Holding for ARS 571 million, and from Galicia Administradora de Fondos for ARS 402 million.
Net income for the quarter amounted to ARS 4.4 billion, 55% higher year-over-year, mainly due to profits from Banco Galicia for ARS 4.2 billion, in Sudamericana Holding for ARS 140 million, and in Galicia Administradora de Fondos for ARS 44 million, which were partially offset by a ARS 22 million loss from Tarjetas Regionales. Going to Banco Galicia, net income for the quarter increased 120% from the year-ago quarter. Excluding the effect of the split up of Tarjetas Regionales, net income increased 224% in the last 12 months. This was a result of 104% higher net operating income, mainly due to the 509% growth of the net results from financial instruments.
Net interest income for the quarter increased 29% as compared to the same period of 2017, mainly due to 156% increase in interest on the portfolio of loans to the private sector, offset by a 284% increase in interest expenses. Average interest earning assets grew ARS 107 billion, or 59% year-over-year, and its yield increased 16.75 percentage points, mainly due to an increase in the yield on peso-denominated government securities. Interest-bearing liabilities grew ARS 296 billion or 89% during the same period, and its cost increased 976 basis points, mainly as a result of the increase in the average interest rate on peso-denominated time deposits.
Provision for loan losses for the quarter amounted to ARS 2 billion, 158% higher than the same quarter of the prior year, mainly due to the evolution of credit in arrears of the consumer portfolio, and to a higher regulatory provision on the portfolio in normal situation as a consequence of the increase in the volume of credit. Personnel expenses increased 45% as compared to a year before, mainly due to salary increase agreements with the union. Administrative expenses grew 51%, due to increases of 136% in maintenance expenses and 49% in taxes. The bank's financing to the private sector reached ARS 288 billion at the end of the quarter, up 58% in the last 12 months, and deposits reached ARS 361 billion, up 80% in a year.
The bank's estimated market share of loans to the private sector was 10.5%, 87 basis points higher than at the end of the year-ago quarter, and the market share of deposits from the private sector was 11.1%, recording an 88 basis point increase in the same period. As regards asset quality, the NPL ratio ended the quarter at 2.88%, recording an 88 basis point deterioration as compared with the 2% of the fourth quarter of the prior year, and the coverage of NPLs with allowances reached 104%, down from 112% from a year ago. As of December 31st, 2018, the bank's consolidated computable capital exceeded by ARS 22.1 billion or 82%, the ARS 27 billion minimum capital requirement. The total regulatory capital reached 15.1%, increasing 424 basis points from the same quarter of fiscal year 2017.
In summary, during the fourth quarter of 2018, Grupo Financiero Galicia had good operating results in a challenging macro environment, and its main asset, Banco Galicia, was able to gain market share of loans and deposits to keep its asset quality, liquidity, and profitability metrics at reasonable 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 for fiscal year 2018 under IFRS. Each application would have a significant effect on the financial statements, turning Grupo Financiero Galicia's ARS 14.4 billion nominal profit into a ARS 455 million loss, and its equity to grow from the reported figure of ARS 54.9 billion to ARS 63.5 billion approximately. We are now ready to answer the questions that you may have. Thank you.
Thank you. If you'd like to ask a question today, please signal by pressing star one on your telephone keypad. If you're joining us using a speakerphone, please release the mute feature from your phone to allow your signal to reach our equipment. Again, that's star one, if you'd like to ask a question. We'll turn first to Ernesto Gabilondo with Bank of America.
Hi. Good afternoon, Pablo, and thanks for the opportunity to take questions. I will only do one question, so I will allow them to do the rest of the questions. When I look to the securities and FX gains in the P&L, they were three times higher than in the first quarter of 2017, and they are roughly 40% of your total operating income. I understand the rationale to invest in securities under this challenging macro, but what do you need to see to start seeing, again, higher credit demand? If you can give us some color in your expectations for the long run this year, it will be highly appreciated. Thank you.
Okay. Hi, Ernesto. Yes. I would say that since the beginning of May last year, basically, loan demand from the private sector decelerated and the growth in deposits was allocated to invest in central bank paper mainly. At the beginning, there was the LEBAC stock, then LELIQ with high yields. Yes, this source of revenues replaced the interest intermediation with the private sector. For this year, considering an inflation in our base case scenario around 30%, we think loans can grow a couple of percentage points, close to inflation. Could be 28 or 32, let's say. We give this range as some macroeconomic variables are not so easy to project these days. Some years ago, our guidance was a little bit more accurate. Right now, loan growth should grow in the area of inflation.
Okay, perfect. Any color between the segments, which one is growing higher than the other?
Well, the loans to individuals have been growing with personal loans first, then credit card financing, slightly below inflation. SMEs actually decreased in nominal terms, and big corporates grew when we look especially at dollar-denominated loans, taking advantage of low interest rates in dollars. Of course, these loans are granted to exporters or to suppliers of exporters.
Do you think that for the 28%-32% guidance, the trend lines on the segments will be the same?
Yes. What we need to recover a positive loan growth in real terms is definitely a lower interest rate. The Badlar interest rate one year ago was around 22%. Right now, it's closer to 37%. Although it has been going down lately, we need a further reduction in interest rates, both in the Badlar, and that is the benchmark from which we lend to the private sector.
Perfect. Thank you, Pablo.
You're welcome, Ernesto.
We'll turn next to Gabriel Norega with Citi.
Hi, Pablo. Thank you for the opportunity of taking questions. It actually got to my attention that during the quarter, Tarjetas actually saw a loss.
What I understood here, it actually had to do with some hired provisions that you made there. I just wanted to maybe get a sense from you if this business is actually worrying you and if the bank is implementing any strategies for Tarjetas during the year, and I'll make a second question afterwards. Thank you.
Hi, Gabriel. Actually, three reasons for the loss of Naranja or Tarjetas Regionales in the fourth quarter. One, as you said, was increase in provisions, although NPLs improved to levels of 6.8%. The second reason was the increase in the cost of funding. With this level of higher interest rate, Naranja needs to fund its lending in the market, so either through lines from banks or with bonds issued locally. There was an increase in their cost of funding. The third one was the merger between Naranja and Nevada that had certain, I would say, extraordinary expenses like certain severance payment and the cost of the merger. For this year and for this quarter, we are forecasting positive results for Naranja. One thing that we spoke perhaps some months ago is that Naranja requested the Central Bank, the authorization to take deposits. The authorization is still pending.
The idea is to take advantage of their vast client base and get cheaper funding.
All right. That's very clear. On the second question, I actually wanted to understand a bit more of your asset quality. Seeing that we saw a deterioration and delinquency given that the NPL ratio for Tarjetas actually decreased, but for the bank increased at around 50 basis points here, I wanted to maybe get a sense, when should we expect NPL ratios to peak, and if there are any segments that are currently worrying you.
The first quarter of this year will be comparing with the first quarter of 2018. That was a very good quarter. Perhaps the worst in quarter-over-quarter comparison, year-over-year basically, will be at the end of the first quarter of this year. We see a stabilization of the cost of risk. In the case of the bank, the cost of risk in the fourth quarter was around 3.5%. We think it could stabilize at these levels. In the case of Tarjeta Naranja, it was a little bit higher in the fourth quarter. We think it will go down for the full year. The segments that are more, I would say, subject to deterioration are when we look at individuals, the lower the income, and when we look at companies, the lower, I would say, the size.
Micro SMEs and lower income segments are the ones that have been deteriorating more than the rest of the client base. Again, at levels of on a consolidated basis, the NPL ratio is at 3.5%, really not, I would say, high compared to even other financial markets or our own history.
All right. If you just allow me a follow-up here, what are you expecting for consolidated cost of risk by the end of the year?
Consolidated, around 4%.
All right. Very clear. Thank you.
You're welcome.
Thank you. Just a quick reminder to press star one if you do have a question today. Next, we'll turn to Yuri Fernandes with J.P. Morgan.
Thank you, gentlemen. I had a question on efficiency ratio, if you can provide some color on how you see G&A evolving in 2019 and also fees. I know that fees and insurance, they had a tough year. You had some MDR regulation pressure on fees. Should we expect a better momentum for fees going on, like maybe fees going more in line with inflation? Also the same about the insurance revenue. First, if you can comment on this, on cost to income, how you are seeing those things. My second question.
is regarding Prisma. If you can make a follow-up. I know that you comment in the release that you already received around $60 million from the sale. At what value this was booked? Basically, how much capital gain should we see in the first quarter because of the Prisma sale? If the impact on the acting income should be material for you? Thank you.
Okay. Hi, Yuri. Well, when we look at efficiency, the fourth quarter numbers for the bank were very good, mainly because the, I would say, significant increase in financial income coming from the LELIQs, coming from FX results, and also from interest. The costs followed a slower pace as inflation ended at 47.6%, but the average inflation was closer to 35%, around 35%. This year, you saw a significant increase or improvement in the efficiency ratio. It should go the other way, I would say, this year. Efficiency should get back to levels around 50% when we look at the bank's figures. Insurance definitely has a lot of potential for growth due to fiscal incentives for saving products. The reduction in the MDR is very small for this year. It will be more than compensated with volume.
To give you an idea, the interchange fee will go down from 1.85% to 1.65%. The rest of the fees we charge will be in line with inflation. Fees in Argentina typically are a function of inflation and not a function of a loan evolution. Regarding Prisma, we sold 51% of our holding. We used to have 15.1% of the shares of Prisma. We were number 2 shareholder in terms of size. We sold 7.7%, and we keep 7.4%, and we have three years to sell this 7.4%. The price for our 51% of the share was $106 million. We received 60% of that in cash. 40% will be financed in five years, 70% in USD, and 30% in ARS with different interest rates. In our books, the 100% of our holding in Prisma was, at the end of year 2018, at around $5.5 million.
It's a significant gain, of course, subject to the 30% income tax. We are going to show the gain in the first quarter, considering the price we received in cash. We will have to make provisions for the 40%. We will be showing gradually that gain once we receive the different installments.
Super clear. Just coming back to the first point. It's fair to assume that expenses should grow above inflation this year, right? As you said, the trend is of a worsening cost to income ratio for 2019.
Well, if we consider, let's say, the 30% December to December estimated inflation, yes. If we consider the average inflation, that will be higher. We will be growing expenses in line with that average inflation. Yes, the full year efficiency ratio should have some deterioration compared to the 40% levels we saw last year.
Super clear. Many thanks.
You're welcome, Yuri.
Next, we'll move to Carlos Gomez-Lopez with HSBC.
Hello, good morning. First of all, thank you very much for the additional disclosure. It is very much appreciated, and you give very good numbers here. I have three technical questions. The first one refers to your inflation adjustment, the one that you disclose in your press release. Is it exactly the same that you will have in the 20F, or it may look different when you report to the SEC?
Well-
Yeah, go ahead.
Sorry.
No, go ahead.
Go ahead with the three questions. Well, hi, Carlos. Go ahead.
Yeah, go ahead.
We have a delay. Well, let me answer the first one. Under IFRS or for the SEC, we will be a full IFRS. We will show all the numbers adjusted by inflation, and I would say the bottom line and the adjusted net worth will be the same. The difference is that in the 20F, we will have all the detailed information.
Sorry, no material difference in terms of the inflation-adjusted result. Okay, the second one referring to Prisma. If I understand correctly, you will only record the gain for the 60% that you sell in cash right now. The other 40%, you will serve and accrue over time. What happens to the remaining 49% in your books? Do you have to increase its value to the one in the transaction, or it remains at the original book value?
Well, you know we have IFRS, the Central Bank has certain, I would say, proprietary adjustments. Following IFRS, we should have to book them at fair value. Once we get to the point of updating, let's say, or revaluing our holding of the remaining shares in Prisma, we will have to get the approval from the Central Bank. My feeling is that should be close, if not the same of the price we obtain, we have to see it. Definitely not the very low book value that we have today. As I said, 15% of the shares were worth ARS 5.5 million or ARS 6 million.
When you write this up to the value approved by the Central Bank, is that recorded as gain or recorded directly against equity until you sell it? How do you treat it accounting-wise?
Through equity.
Just through equity. All right. That's very clear. Thank you so much.
You're welcome.
Just a quick reminder to press star one if you do have a question today. Next, we'll move to Alonso Garcia with Credit Suisse.
Good morning, everyone. Thank you for taking my question. My question is if you could provide some guidance on margin evolution for this year. Exactly what lines you are considering for this margin? Considering, what is your assumption in terms of Central Bank rate for that guidance? Also, what are you assuming in terms of reserve requirements by Central Bank? Do you expect them to remain at current levels? Do you see even room for potential increases, increased volatility? Do you think they will be lowered? Any color on that regard will be appreciated. Thank you.
Okay. Hi, Alonso. Our net financial margin is made up by the net interest income, net results from financial instruments, and the gold and foreign currency quotation differences. Actually, we are taking deposits which cost goes within net interest income, and part of that is allocated to LELIQs that have the yield in the net results from financial instruments. Considering all these lines, we are expecting some margin expansion. Considering the 2018 full number, that was around 14.7%. Actually, 14.7% was the fourth quarter. For the full year was 13.7. We think it can go at around 14%. Some, let's say, 50 basis points expansion for the full year. Something lower than the fourth quarter and little bit higher than the full year margin. Regarding reserve requirements, we don't have any, I would say, opinion.
We think it should make sense for the Central Bank to reduce it, but we don't have any idea about, I would say, timing or what type of reserve requirement, if remunerated or non-remunerated, will be decided to reduce. In our estimates, we are not making any assumption in changes in the reserve requirement.
Perfect. In terms of interest rate by year-end, do you have any expectation behind this guidance?
Yes. We are considering that the Badlar rate will gradually go down to levels around 30% at year-end, and the yield on LELIQ from 37%-39% at year-end.
Perfect. Thank you very much.
You're welcome.
At this point, there are no other questions in the queue. Just a final reminder to press star one if you do have a question today. Mr. Firvida, no one else has signaled. I'll turn the conference back to you for any additional or closing remarks.
Okay. Thank you, Lara. Well, thank you everybody for attending this call. If you have any questions, please do not hesitate to contact us. Good morning. Thank you.
With that, we'll conclude today's conference. Thank you everyone for your participation. You may now disconnect.