Banco Macro S.A. (BMA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's 1Q 203 Earnings Conference Call. We would like to inform you that 1Q 23 press release is available to download at the Investor Relations website of Banco Macro at www.macro.com.ar/relaciones-inversores. Also, this event is being recorded. [Operator Instructions] It is now my pleasure to introduce our speakers joining us from Argentina are Mr. Gustavo Manriquez, Chief Executive Officer; and Mr. Jorge Scarinci, Chief Financial Officer; and Mr. Nicolas Torres, IR. Now I will turn the conference over to Mr. Nicolas Torres. You may begin your conference.

Thank you, Anthony. Good morning, and welcome to Banco Macro's First Quarter 2023 Conference Call. Any comments we may make today may include forward-looking statements, which are subject to various conditions, and these are outlined in our 20-F, which was filed to the SEC, and it's available at our website. First quarter 2023 press release was distributed yesterday, and it's available at our website. All figures are in Argentinian pesos and have been restated in terms of the measuring unit current at the end of the reporting period. As of the first quarter of 2020, the bank began reporting results applying hyperinflation accounting in accordance with IFRS IAS 29 as established by the Central Bank of Argentina. For recent comparison, figures of previous quarters have been restated applying IAS 29 to reflect the accumulated effect of the inflation adjustment for each period through March 31, 2023. I will now briefly comment on the bank's first quarter 2023 financial results. Banco Macro's net income for the quarter was ARS 9.8 billion, 52% lower than the fourth quarter of 2022 and 20% lower than the result posted a year ago. The bank's first quarter 2023 ROE and ROA of 8.2% and 1.7% respectively, remained healthy and showed the bank's earnings potential. Net operating income before general, administrative and personnel expenses for the first quarter of 2023 was ARS 167.8 billion, increasing 5% or ARS 8 billion quarter-on-quarter due to higher income from financial instruments at fair value to profit or loss and higher net fee income. On a yearly basis, net operating income before general, administrative and personnel expenses increased 28% or ARS 36.8 billion. In the first quarter of 2023, provision for loan losses totaled ARS 3.5 billion, 13% or ARS 397 million higher than in the previous quarter. On a yearly basis, provision for loan losses increased 129% or ARS 1.9 billion. Operating income after general, administrative and personnel expenses were ARS 103.9 billion, 9% or ARS 8.8 billion higher than in the fourth quarter of 2022 and 39% or ARS 29.3 billion higher than the first quarter of 2022. In the quarter, net interest income totaled ARS 97.7 billion, 4% or ARS 4.1 billion lower than the result posted in the fourth quarter of 2022 and 14% or ARS 12 billion higher than the result posted 1 year ago. In the first quarter of 2023, interest income totaled ARS 228.6 billion, 5% or ARS 13 million lower than in the fourth quarter of 2022. Due to lower income from government securities, it was 63% or ARS 88 million higher than the previous year. Within interest income, interest and loans increased 2% or ARS 1.6 billion quarter-on-quarter due to a 304 basis point increase in the average lending rate. On a yearly basis, income from interest on loans was 25% or ARS 17.3 billion higher. In the first quarter of 2023, interest on loans represented 38% of total interest income. Net income from government and private securities decreased 9% or ARS 13.1 billion quarter-on-quarter due to lower income from government securities. Compared to the first quarter of 2022, net income from government and private securities increased 91% or ARS 64.6 billion. In the first quarter of 2023, FX gains, including investment in diluted financing totaled ARS 36.7 billion gain due to the 18% Argentine peso depreciation against the U.S. dollar and the bank's long dollar position. In the first quarter of 2023, interest expense totaled ARS 130.9 billion, a 6% or ARS 9 billion decrease compared to the fourth quarter of 2022 and 138% or ARS [ 75.9 ] billion higher than on a yearly basis. Within interest expenses, interest on deposits decreased 7% or ARS 10.1 billion quarter-on-quarter, mainly driven by a 14% decrease in the average volume of private sector deposits while the average interest rate paid on deposits increased 537 basis points. On a yearly basis, interest on deposits increased 143% or ARS 75.1 billion. In the first quarter of 2023, interest on deposits represented 98% of the bank's financial expenses. In the first quarter of 2023, the bank net interest margin, including FX, was 33.6% higher than the 32.7% posted in the fourth quarter of 2022 and a 22.8% in the first quarter of 2022. In the first quarter of 2023, net fee income totaled ARS 22 billion, 6% or ARS 1.3 billion higher than in the fourth quarter of '22. On a yearly basis, net fee income was 6% higher. In the first quarter of 2023, net income from financial assets and liabilities at fair value through profit or loss totaled ARS 9.2 billion gain mainly due to the mark-to-market of dual bonds. In the quarter, other operating income totaled ARS 5.10 billion decreasing 18% compared to the fourth quarter of 2022. On a yearly basis, other operating income decreased 16% or ARS 1.1 billion. In the first quarter of 2023, Banco Macro's personnel and administrative expenses totaled ARS 35.1 billion, 1% or ARS [ 424 ] million lower than the previous quarter, due to lower administrative expenses which were partially offset by higher employee benefits. On a yearly basis, personnel and administrative expenses increased 12% or ARS 3.8 billion. In the first quarter of 2023, the efficiency ratio reached 25.5%, improving from the 28.6% posted in the fourth quarter of 2022. In the first quarter of 2023, expenses decreased 1%, while net interest income plus net fee income plus other operating income increased 6%. In the first quarter of 2023, the result from the net monetary position totaled ARS 88.4 billion loss, which was 27% or ARS 19 billion higher than the loss posted in the fourth quarter of '22, as a consequence of higher inflation observed in the quarter, which was 444 basis points above the level registered in the fourth quarter of '22. Inflation was 21.7% and was up from 17.3% from the previous quarter. In the first quarter of 2023, Banco Macro's effective tax rate was 36.3%. Further information is provided in Note 22 to our financial statements. In terms of loan growth, the bank's financing to the private sector totaled ARS 694.5 billion, decreasing 4% or ARS 30.4 billion quarter-on-quarter and decreasing 8% or ARS 63.5 billion year-on-year. Within commercial loans, overdraft stand out with a 10% or ARS 6.2 billion decrease quarter-on-quarter. On the consumer side, credit card loans decreased 7% or ARS 16.1 billion in the quarter, while personal loans and mortgages decreased 7%. It is important to mention that Banco Macro's market share over private sector loans as of March 2023 reached 7.3%. On the funding side, total deposits decreased 7% or ARS 112.6 billion quarter-on-quarter and increased 6% or ARS [indiscernible] year-on-year. Private sector deposits decreased 6% or ARS 89.7 billion quarter-on-quarter, with public sector deposits decreased 17% quarter-on-quarter. The decrease in private sector deposits was led by demand deposits, which decreased 13% or ARS 83.4 billion quarter-on-quarter, while term deposits increased 4% or ARS 27 billion. Within private sector deposits, peso deposits decreased 8% or ARS 109.1 billion, while U.S. dollar deposits decreased 17% or ARS 196 million. As of March 2023, Banco Macro's transactional accounts represented approximately 42% of total costs. Banco Macro's market share over private sector deposits as of March 2023 totaled 6.1%. In terms of asset quality, Banco Macro's nonperforming to total financial ratio reached 1.41%, the coverage ratio measured as total allowance and our expected credit losses over nonperforming loans under Central Bank rules totaled 145.3%. Consumer portfolio nonperforming loans deteriorated 24 basis points, up to 1.34% from 1.1% in the previous quarter while commercial portfolio nonperforming loans improved 22 basis points in the first quarter of 2023. They were down to 173% from 195% in the previous quarter. In terms of capitalization, Banco Macro accounted an excess capital of ARS 520 billion, which represented a total regulatory capital ratio of 42.4% and a Tier 1 ratio of 39.1%. The bank's aim is to make the best use of this excess capital. The bank's liquidity remained more than appropriate. Liquid assets to total deposit ratio reached 97%. Overall, we have accounted for another positive quarter. We continued to show a solid financial position. Asset quality remain under control and closely monitored. We keep on working to improve more our efficiency standards, and we keep a well-optimized deposit base. At this time, we would like to take the questions you may have.

[Operator Instructions] Our first question will come from Brian Flores with Citibank.

I just have 2 questions. The first one is on ROE. So I know you're running at high levels of capital, and this could be a headwind, but are you changing the soft guidance you provided on the -- around 10% ROE from the previous conference call? And my second point is on politics. Given the momentum in Milei's candidacy, I just wanted to know if you know of any specific measures proposed by him or his team that could affect the banking regulation?

Brian, this is Jorge Scarinci. On your first question about ROE guidance that we gave in the former quarter conference call. Basically, what I'm thinking is what we mentioned was a kind of a range of guidance. Basically, what we are seeing right now in Argentina is high inflation than the one that we -- at least the consensus was expecting. So the range for ROE for this year should be slightly lower than 10%, should be 9% or 8.5% area. So because the consensus is expecting inflation to be 130% compared to the 94% that we had in 2022. So basically, this is not an operating level. Because at an operating level, we are showing good growth rates year-over-year and quarter-over-quarter. But in terms of bottom line, we are affected by high inflation. Second -- your second question, honestly, we do not make a lot of comments on politics, but honestly, we do not know as far as for the moment, any potential measure on Milei's candidacy. So honestly, no clue in this politics question that you asked.

Our next question will come from Ernesto Gabilondo with Bank of America.

I have 3 from my side. The first one will be on your expectations for loan growth considering that -- well, as you mentioned, we have been seeing higher inflation and higher interest rates in Argentina. So if you can elaborate on your expectations per segment for this year will be helpful. Then my second question is on your sensitivity to the Argentine peso and inflation. I think you have a dual bond position that benefits from the peso depreciation and the higher inflation. So I would like to understand the sensitivity. So for example, an increase of 100 basis points on inflation or 100 basis points on the depreciation of the Argentine peso. What would that mean in terms of Argentine pesos in your P&L? I know it's a difficult one to estimate. But something approximately will help us. And then my last question is on your Tier 1 ratio. So we have seen that the regulator has allowed the banks to start paying excess capital and allow you to pay dividends. So after paying the dividends, where do you see your Tier 1 ratio? And where do you see will be like your targets or your comfortable level for the Tier 1 ratio during the next years?

First question, in terms of loan growth, again, what we are seeing is that loans are going to grow in nominal levels but are going to decrease in real terms as what we are seeing for the moment. Basically, this is a special year in terms of elections plus high inflation and of course, high nominal rates. So we are not expecting a pressure on loan demand. So we are expecting loans to be below inflation between 5% and 10% in 2023, mostly in the commercial area, maybe not that much in the consumption portfolio. But the total loan book should be down between 5% and 10% compared to inflation in 2023. In terms of your second question about the sensitivity on the dual bond portfolio and a 1% increase in inflation or the devaluation of the official effects could be impacting our loan book. As you mentioned, it's not that easy to measure, but I would assume approximately, in pesos should be after income tax, in the area of ARS 2.3 billion, ARS 2.4 billion, a 1% increase in inflation, 1% increase on the devaluation of the official effects. So take this number as a rough number, okay? In terms of your fourth question, the Tier 1 ratio that, of course, we know, and we are conscious that it's a high number that this is a consequence of what has happened in previous years about raising capital and 2 years of -- that we cannot -- banks, in general, could not pay cash dividends. So as we mentioned, we are allowed to pay dividends this year again in 6 installments. Assuming that the dividend payment would be 1 installment, the Tier 1 ratio would be down from a level of 39.1% that we posted in this press release to approximately 32%. However, since the dividend is going to be paid in installments, the Tier 1 ratio might not decline that much because we are going to have the monthly results that could at some point offset the decline on the Tier 1 because of the payment of the dividend. But of course, going forward, we would like to work, of course, with a narrower Tier 1 ratio. We are going to continue paying cash dividends. And again, as always, we mentioned, the consolidation or concentration process in the banking sector in Argentina, we think that this continues. So it might happen that in the future, there could be a possibility for an M&A. So we could use this excess capital for those purposes also plus that we have to, as we always comment, that we are a private local bank. So we have to be a bit more conservative and always work with a cushion in terms of capital for organic growth. So let's assume that in a normalized scenario with a normalized inflation level, we should be working with a Tier 1 ratio ranging in the area of 18%, 20%. But that is a long-term normalized scenario. Just to give you an idea where the ideal Tier 1 ratio for Banco Macro would be.

Our next question will come from Yuri Fernandes with JPMorgan.

I have a question regarding deposits. Deposits are down 7% quarter-over-quarter. But when we look to the [indiscernible] deposits, and savings and all of that, they are down even more. And I kind of guess that there may be some seasonality first Q versus fourth Q. But looking year-over-year, they are still down. So my question is what is happening with deposits? What is your outlook there? And I have a second question regarding capital. like, for sure, you were not paying dividends. All those explanations you already gave in the previous question. But also the mix of loan to assets also changed a lot over the years, right? So you have much more government security than loans. And I think the risk bearing factors of this mix is super beneficial for your capital ratios. My question is, have you ever done like an exercise like returning to more normalized loan to asset mix? And what would be your capital ratio today? Because the concern is, at some point, let's say, Argentina becomes a more normalized banking sector and starts having more loans. How is your capital would look like? Like do you really have this amount of excess capital? Or is this mostly because you have like a very like government-related securities mix?

In terms of your deposit question, I mean, you have to consider the inflationary environment here. So at some point, it sounds quite reasonable that the people holding money in transactional accounts try to minimize those balances because inflation being at, I don't know, between 7.5% and 8% a month is a lot. So at some point, that could be some reasonable behavior from depositors on the transactional accounts. When you see the time deposits, they are growing quarter-on-quarter or year-over-year in real terms. And that is because of the increase on the interest rate that we have seen that the Central Bank have done in the last 60 or 90 days. So we think that the deposit behavior is quite reasonable. And of course, we continue to be pretty liquid in that sense. So in terms of funding, we feel pretty comfortable on the structure that we have right now on our deposit base. On your second question, we have not done the calculation exactly on what will happen if instead of having securities or government bonds that will be translated into new loans. As far as we know, of course, the level of loans to assets right now is one of the lowest in the history as a consequence of what we have mentioned. Previously, basically, the economy is not doing that well. Inflation is very high. Elections are going to take place in the next 4, 5 months. But when -- if you look backwards, I think that we reach loans to asset levels of close to 65%. I would say that in those areas, we would remain with a very high Tier 1 ratio. So in that sense, we do not have, of course, a problem of excess capital. We continue to be the best capitalized bank in Argentina. And we feel, again, comfortable with the level of capital that we have going forward, not in the present because of it says that volatility is high. But going forward, we think that we are going to be -- or become much more efficient on this excess capital.

No, that's pretty clear, Jorge. Just a follow-up on deposits. The minimum the pulse payment, right? It's only for time deposits, right? So most of your spread on deposits, they are coming from checking savings account. Is that correct? Or those deposits also have some kind of minimum government remuneration?

The minimum rate is for term deposits only.

Our next question will come from Carlos Gomez with HSBC.

Questions. I'm looking at the Page 16 of your press release, and I noticed that you have sharply reduced your exposure to share and increase your U.S. dollar net exposure. Is that correct? Are you currently USD 1.5 billion long? And if the time comes, how certain are you that is this net position is something that you could -- that you could have access to? And what is the reason for the reduction in [indiscernible] exposure? Was this a swap of assets or there is different views that you have about how things are going to go?