Good day, welcome to the Grupo Financiero Galicia first quarter 2018 earnings release conference call. This call is being recorded. At this time, I would like to turn the conference call over to Mr. Pablo Firvida. Please go ahead.
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 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% year-on-year increase during the first quarter of this year. A mild deceleration when compared with the 5.3% increase of the previous quarter. In 2017, the GDP ended the year with a 2.9% expansion. During 2018's first quarter, the primary deficit amounted to 0.3% of GDP, or ARS 31 billion, overachieving the official target of 0.6% of GDP for such period.
It is worth highlighting that the government has decided to strengthen this year's primary fiscal goals, which now stand at 2.7%. Previously, the target was 3.2%, entailing a 1.1% reduction in terms of GDP. According to the National Institute of Statistics, the National Consumer Price Index accumulated a 6.7% hike during the first quarter of the year. Annual inflation stood at 25.4% in March 2018. On the monetary front, the Argentine Central Bank contracted the monetary base by ARS 5.6 billion in the quarter, a 29% growth in the last 12 months. Meanwhile, the exchange rate averaged ARS 20.24 per USD in March, a 14.2% depreciation against the average for December 2017. When compared to March 2017, the Argentine peso recorded a 30.4% depreciation.
In March, the average rate on peso-denominated private sector term deposits for up to 59 days was 21.8%, 10 basis points below the average recorded in last December. Private sector deposits in pesos at the end of the quarter amounted to almost ARS 1,485 billion, increasing 2.4% during the quarter and 26.8% in the last 12 months. Transactional deposits in pesos fell 5% during the first quarter, while peso-denominated term deposits rose 12.1%. At the end of March, loans to the private sector in pesos amounted to ARS 1,431 billion, recording an 8.1% increase during the quarter and a 49.2% increase during the last 12 months. Turning now to Grupo Financiero Galicia.
In first place, I would like to remind you that since January 1st, 2018, figures are reported in accordance with IFRS and also that since that date, some changes in our organizational structure became effective, being the most significant that 83% of Tarjetas Regionales is currently under the direct control of Grupo Financiero Galicia due to its spin-off from the bank and also after the acquisition of a 6% additional interest in said company. The other important change was the sale of CFA. Having said this, Grupo Financiero Galicia's net income for the quarter amounted to nearly ARS 3 billion, 109% higher year over year. This was mainly due to profits from Banco Galicia for ARS 2 billion, in Tarjetas Regionales for ARS 699 million, in Galicia Administradora de Fondos for ARS 159 million, and in Sudamericana Holding for ARS 146 million.
In addition, it includes net operating income of ARS 71 million, partially offset by administrative expenses of ARS 29 million. Going to Banco Galicia, which accounted for 66% of Grupo's results from equity investments, a 50% increase in the net income from the year-ago quarter was a consequence of a 53% increase in net interest income and a 17% increase in net fee income, offset by a 34% increase in personnel expenses and administrative expenses. The net operating income increased ARS 3 billion or 51%. The growth of net interest income was mainly due to the increase in the portfolio of loans to the private sector and higher spreads. That of net fee income is mainly related to fees on deposit accounts.
Average interest-earning assets grew ARS 62 billion year over year. Its yield increased 63 basis points, mainly due to a 570 basis points increase in the yield on government securities. Interest-earning liabilities grew ARS 55 billion during the same period. Its cost decreased 83 basis points, primarily as a result of a better mix of deposits. Provision for loan losses for the quarter amounted to ARS 963 million, ARS 432 million higher than in the same quarter of the prior year, mainly due to those related to the individuals portfolio and to an increase of regulatory provisions on loans in normal situation as a consequence of the growth in volumes.
Personnel expenses increased 27% as compared to a year before, mainly as a consequence of salary increase agreements with the unions. Administrative expenses grew 43%, primarily due to increases in the level of activity and of expenses related to services provided to the bank. The bank's credit exposure to the private sector reached ARS 196 billion at the end of the quarter, up 50% in the last 12 months. Deposits reached ARS 198 billion, up 27% in a year. The bank's estimated market share of loans to the private sector was 9.54%, 26 basis points lower than at the end of a year ago quarter. The market share of deposits from the private sector was 9.57%, recording a 42 basis points decrease in the same period.
As regards asset quality, the NPL ratio ended the quarter at 2.41%, recording a 66 basis points increase as compared with the 1.75% of the first quarter of the prior year, and the coverage of NPLs with allowances reached 103.5%, down from 122.3% from a year ago. As of March this year, the capital exceeded by ARS 20 billion, the ARS 26 billion minimum capital requirement, or 77%, and the regulatory capital ratio reached 14.6%, increasing 289 basis points from the same quarter of fiscal year 2017. The bank's liquid assets at the end of the quarter represented 64% of the bank's transactional deposits and 39% of its total deposits, compared to 84% and 50% ratios from a year before, respectively. Going now to Tarjetas Regionales, which accounted to 24% of group results from equity investments.
The 22% growth in the net income was due to a 35% increase in net interest income and a 16% increase in net fees and other operating income, partially offset by increases of personnel and administrative expenses by 23% and 34%, respectively. Net loans and other financing grew 32%, while the NPL ratio reached 6.86%, improving 83 basis points during the last year. The coverage with provisions for loan losses was 108%, up from 99.7% as of the end of the first quarter of 2017. In summary, during the first quarter, Grupo Financiero Galicia subsidiaries had good operating conditions with strong loan growth, higher margins, and improvement in efficiency. Asset quality slightly deteriorated, and it is being closely monitored. We are now ready to answer the questions that you may have. Thank you.
If you would like to ask 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, it is star one. We'll take our first question from Ernesto Gabilondo with Bank of America. Please go ahead.
Hi, good morning, Pablo, and thanks for taking my call. Three questions from my side. The first one is, if you can explain which were the key accounting changes from the implementation of IFRS. From what we notice, part of NII and fees was reclassified to market-related revenues and other income. I don't know if there's something else that we're missing. The second question is, given the passive depreciation, the likely higher inflation levels, and the high interest rate environment, when do you see we can start to see an impact in loan growth and asset quality, if this lasts for more than this quarter? In this high interest rate environment, what could be the impact for your NIM, and how should we expect the correlation of NII with loan growth? My last question is on asset quality. As you mentioned, we have higher NPLs and provision charges.
This happened before the passive depreciation and increase in interest rates. How comfortable are you to improve these levels, which I think are above the guidance for the cost of risk between 2.6% and 2.8% of average loans? Thank you.
Okay. Hi, Ernesto. The line is not the best, so I missed part of your comments. Going to IFRS, as you mentioned, net financial income now has more detail between net interest income, results from financial instruments, and also gold and foreign currency quotation differences. Fee income, there were some reclassifications, some items that used to be within net interest income and net fee income, and also in other income or expenses, are now in two new lines called other operating income and also another line called other operating expenses. We kept, in the press release, this breakdown in order to be similar to the full financial statement that we publish in the local SEC and at the SEC. Basically, within other operating income, you find many lines that used to be within fee income.
The most important one are many fees related to the business of credit cards. The fees charged for bundles of products, and the other thing that I can remember is safe deposit boxes related fees. Going forward, I would suggest that we ask the Central Bank to let us reclassify again those fees that are basically one of our main products in terms of fees, under fees and not within other operating income. You mentioned the context of higher inflation, higher effects, also higher interest rate. This will, of course, affect loan demand, well, GDP first, growth. In terms of our impact on margins, volumes, and asset quality, margins should be expanding. We were in a trend, or we were envisioning a trend of interest rates going down and margins slightly compressing.
This recent turmoil stopped that trend, and we are seeing NIMs expanding, loan growth perhaps growing at the same nominal growth rate that we were envisioning. In real terms, due to higher inflation, there will be some reduction. Asset quality, some variables we will have to monitor. The first one is salaries increases compared to inflation. Many wage negotiations from different unions agreed a 15% salary increase. Some of those unions or negotiations have clauses that allow for reopenings of negotiations. Perhaps before year-end, there will be some additional salary increases, so there will not be such a loss in purchasing power. That is key in order to think in NPLs. We are running different scenarios and models. The NPL for the bank as of March was 2.4%. At the beginning of the year, we were forecasting some flattish number.
Perhaps right now, the most likely scenario could be a 30 basis points deterioration, so 2.7% at the end of the year. Again, these are all very new developments, we are recalculating many of our estimates.
Thank you very much, Pablo. In terms of the cost of risk, are you expecting a higher number from what we used to have?
In terms of cost of risk, we are also forecasting something like 20 to 30 basis points increase compared to the cost of risk of this first quarter.
Perfect. Thank you very much, Pablo.
You're welcome, Ernesto.
We'll take our next question from Alonso Garcia with Credit Suisse. Please go ahead.
Good morning, everyone. Thanks for taking my question. My first question would be just to clarify what levels of Lebac and Badlar rates you are considering for year-end, behind this outlook for NIM expansion and a similar loan growth in nominal terms. That would be my first question. Thank you.
Sorry, Alonso, could you repeat the question and a little bit louder? I have problems with the connection.
Sure, no problem. My question is, first, what levels of Lebac and Badlar rates you are considering for year-end behind these expectations of loan growth in nominal terms, similar levels that you have mentioned before, and also behind this expectation of NIM expansion for the year.
Okay. Right now, Lebacs are yielding around 40%, and Badlar rate is 28.5%-29%. We think that gradually, Lebac yields should be going down and getting similar to the Badlar rate right now. Yields on Lebacs should end the year at around 30%. Badlar, closer to 24%-25%. That is our base case scenario for today. With this, we are estimating this 40% nominal loan growth.
Okay, thank you. Just lastly on asset quality, a couple of questions here. First, what are the main segments of your portfolio that caused this deterioration in asset quality? Was it mainly consumer, or did you see some impact from the agricultural sector given the drought at the beginning of the year? Also, my last question here is, at what levels of coverage do you see going forward? I am calculating at the consolidated level, something a bit around 105%, which compares to 107% in fourth quarter and 110% a year ago. Thank you.
Well, the deterioration or the potential deterioration should be in individuals and mainly the lower income segments. This is what has been going on recently. Also, as the nominal loan portfolio grew 50% in the last 12 months, there is 1% provisioning on that volume that is regulatory for loans that are in good conditions. It's not everything related to non-performing loans. The coverage, our guidance is that will be between 100%-110%.
Understood. Perfect. Thank you very much.
You're welcome.
As a reminder, if you would like to ask a question, it is star one. We will take our next question from Gabriel Nóbrega with UBS. Please go ahead.
Hi, everyone. Thank you for the opportunity. During this quarter, we saw that due to the IFRS reclassification, your Tier 1 ratio actually climbed up some 12%, which is well above levels that the bank had presented in the past few years. Could you just remind us what is a comfortable level for the bank, and if it would make sense to make an acquisition or possibly even increase your payout? Thank you.
Hello. The 14.6% total capital ratio was due to two things. First, the capitalization of the bank. We did follow on in September last year. We kept most of the funds at the holding company level till December 27. Due to the timing of the approval of the Central Bank that took place in mid-January, the regulatory ratio didn't contemplate the ARS 10 billion capitalization we did from the holding company to the bank at the end of December last year. I would say that the main impact was that capitalization, and then the second would be the revaluation of our fixed assets due to IFRS. The Tier 1 ratio stands today at 12.2%. We are comfortable with 11%. We are comfortable with these levels, thinking in the loan growth we are seeing.
If we were to purchase any bank, a thing that we are always open to and analyzing any opportunity, depending on the size, we could go to the market or not. From, I would say, pure organic growth, we are comfortable with the levels we have today.
That's very clear. Thank you.
You're welcome.
Once again, to ask a question, it is star one. We'll take our next question from Jorge Kuri with Morgan Stanley. Jorge, your line is open if you can unmute yourself. Hearing no response, we'll take our next question from Yuri Fernandes with JPMorgan.
Thank you, gentlemen. I have a question on Prisma, if you can provide an update on how the sale is doing, like the information memorandum, what are the latest updates on Prisma? My second question is regarding deposits. This has been a trend for other banks, but your deposits base grew about 27%, well below the loans. Are you concerned with liquidity going on? Are you trying to make any campaign to boost the growth on deposits? What are your view on deposits going forward? Thank you.
Okay. Hello. Really, the connection is not the best. The first question was regarding Prisma?
Yeah, that's it, on Prisma.
Yes. On Prisma, the current situation is that, well, a confidential number of non-binding offers were received. Most of them went to the second stage, meaning they will be submitting binding offers in mid-June, and the idea will be to close the deal before September this year. The rumors are that the offers were very good, we need to wait. The process is within the time framework the government was asking. The other question, in terms of deposits, we, many times, do not take wholesale time deposits, consolidating high interest rates if we have enough liquidity. Many times, the picture at the end of the quarter is not really representative of the deposit growth. Basically, the objective is to cover the demand of loans from our clients. If we need to get more deposits, we can play with that.
Really, it's a question of liquidity and cost. In April, before the turmoil, we issued two bonds, ARS 6.2 billion in the local market. Really, we are not concerned at all about liquidity.
Thank you.
You're welcome.
As a final reminder to ask a question, it is star one. We'll take our next question from Frederic Dembiski with UBS. Please go ahead.
Thank you. Good morning, everyone. Thank you for the opportunity. I just wanted to get back to the theme of efficiency and in particular on OpEx growth. You did a great job on the personnel expense side. Admin expenses grew way faster than inflation. I just wanted to understand, not so much what happened last year, but how you're thinking about the next quarters, and if you could comment a little bit about your digital strategy as well. Overall, what you expect for OpEx growth efficiency, but also what you think for digital trends in the country and for Galicia. Thank you.
Okay. Hi, Fred. Personnel expenses, of course, are tied to negotiations between the union and the banking association. We are increasing around 200 employees this year in order to follow or related to the branch expansion we have. We plan to open around 20 more branches in the next 12 months. The rest of our administrative expenses are related to other union agreements, but there were some specific things that made the growth in administrative expenses grow more than inflation, and that will be the case for the next quarters. Let me put some examples. Some technology licenses that are in USD clearly are affected by the devaluations. Cash transportation increased a lot due to the increase in the number of bills, both ARS and USD bills transported, and that is actually causing some banks to purchase some trucks in order to transport cash and not depending on some suppliers.
Due to IFRS, any expense we have on technology for new projects must go through a P&L. In the past, we used to capitalize those expenses and began amortizing those projects once they were operational. Now, all the expenses are going through a P&L. In terms of digitalization and technology, we are also investing in that with many different projects, with different processes and products. We hired an international consultant that is also a USD-denominated contract. I would say that for Argentine standards, we are one of the leaders in digital products and contact with the bank, not only with the online banking or office banking in the case of companies, but also a cell phone.
Right now, 90% of transactions are done with electronic means. Each, I would say, month, the number of sales of different products is increasing with digital means, personal loans or credit cards or additional cards or different even for companies. Each day, also the sale of product is increasing with electronic means or with digital channels.
Got you. Thank you, Pablo.
You're welcome. To finish the comment, due to these things that I mentioned, these items that have been growing, plus the expansion of our network of branches, expenses should grow above inflation, perhaps five percentage points above inflation.
Okay, great. Thank you.
And we will take our last question from Santiago Petri with Franklin. Please go ahead.
Hi, Pablo. Thanks for the call. Very briefly, could you tell us the level of increasing interest rates in overdrafts, SMEs? I do not know if you can give us some color on how much interest rates have been increasing since the stress moment of hiking rates by Central Bank. Thanks.
Yes. Hi, Santiago. Clearly, there was a pass-through of increases in interest rates due to the increase of the Central Bank or the increase in the Lebacs yield. The Lebacs, for example, went up from 26 to 40, while the Badlar went up from 22 to 29, let's say, so half of the percentage points. In the case of the loans, depending on the product and the segment, we made that pass-through. I would say that on average, we can speak of roughly 500 basis points, but it is really an average, because we have from credit cards to personal loans, mortgages, SMEs, agricultural sector, big corporates, one day, one week, one month, six months, 10, or so really it is a wide universe. On average, we could say that that was the kind of pass-through that we had.
Okay. Thanks a lot.
You're welcome.
It appears there are no further questions at this time. I would like to turn the conference call back over to Pablo for any additional or closing comments.
Okay. Thank you all for attending this call. If you have any questions, please do not hesitate to contact us later. Good morning.
Once again, that concludes today's call. We thank you all for your participation, and you may now disconnect.