Grupo Financiero Galicia S.A. (GGAL) Earnings Call Transcript & Summary

Good day, and welcome to the First Quarter 2023 earnings release. Today's call is being recorded. [Operator Instructions] I will now hand you over to your host, Pablo Firvida to begin today's conference. Thank you.

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 risks and uncertainties that could cause actual results to differ materially from those expressed. According to the monthly indicator for economic activity, MI, the Argentine economy recorded a 1.3% year-over-year expansion during March. In year-to-date terms, the economic recovery reached 1.5% as compared with the first 3 months of 2022. During the first quarter, the primary deficit reached 0.4% of GDP. This implies an increase as compared to the 0.2% deficit of the first quarter of 2022, results that was explained by the 78.3% increase of revenues whereas primary spending rose 89.8%. The national consumer price index recorded a 21.7% increase during the quarter and a 32% rise between January and April. Inflation reached 108 annual variation in April 2023, which entailed an acceleration against April 2022's 58% inflation. With inflation hitting its highest mark in 30 years. On the monetary front, the Argentine Central Bank expanded the monetary base by ARS 165.7 billion in the quarter, recording a 52.8% increase in year-on-year terms. The exchange rate averaged ARS 203.1 per dollar in March, a 17.5% increase against the 14.9% peso devaluation average in December. When compared to March 2022, the Argentine peso underwent a 46.1% devaluation. In March 2023, the average rate on peso-denominated private sector time deposits for up to 59 days stood at 71.5%, 30.7 percentage points above the March 22 -- 2022 average. The average rate displayed a similar level to the 70% average recorded last December. However, the Argentine Central Bank has been increasing interest rates as of mid-March and the minimum interest rate for retail and deposits currently stands at 97%. Private sector deposits in pesos averaged ARS 17.8 trillion in March, increasing 17.5% during the quarter, and 110.7% in the last 12 months. Time deposits in pesos rose 20% during the quarter and 121.1% in the year, while peso-denominated transactional deposits increased 15.3% during the first quarter and 101.7% in year-on-year terms. Private sector dollar-denominated deposits amounted to $16.4 billion in March, increasing 3.9% during the quarter and 7.1% in the last 12 months. During March, peso-denominated loans to private sector averaged ARS 7.6 trillion, increasing 13.2% in the quarter and 73.6% when compared to March 2022. While private sector dollar-denominated loans amounted to $3.7 billion recording a 5.8% expansion during the first quarter, but a 4.2% contraction when compared to March 2022. Turning now to Grupo Financiero Galicia. Net income for the first quarter amounted to ARS 18.1 billion, 71% higher from the year ago quarter, mainly due to profits from Banco Galicia for ARS 15 billion, from Galicia Asset Management for ARS 2.2 billion, from Galicia Seguros for ARS 697 million and from Naranja X for ARS 607 million. This profit represented a 1.9% annualized return on average assets and a 9.8% return on average shareholders' equity. Banco Galicia's net income for the quarter was 55% higher than in the year ago quarter. The net operating income increased 30% mainly due to 166% increase in results from net interest income, offset by a 34% lower results from financial instruments. Adding up both concepts, the growth was 26%. Average interest-earning assets were up 5%, reaching ARS 2.23 trillion, mainly due to a 38% increase in the average volume of government securities in pesos, offset by an 18% decrease in the average volume of peso-denominated loans. In the same period, its yield increased almost 25 percentage points reaching 63.3%. Interest-bearing liabilities increased 2% from the first quarter of 2022, amounting to ARS 1.92 trillion. This growth was mainly due to a 12% increase in the average balance of time deposits in pesos offset by a decrease of the average balance of saving accounts, both in pesos and in dollars and by dollar-denominated time deposits. During this period, its cost increased 23.3 percentage points to 45.5%. Net interest income for the quarter increased 166% from the same quarter of 2022 with interest income growing 124% and interest expenses growing 110% in the same period. Net fee income increased 14% from March 2022, mainly due to a 47% increase of fees on collection and a 9% increase of fees from credit cards. Net income from financial instruments decreased 34% as a consequence of the change in the valuation model of the instruments issued by the Argentine Central Bank from fair value to amortized costs. Gains from gold and FX quotation differences were 253% higher from the year ago quarter, including the results from foreign currency trading. As regards to provisions, for loan losses, the amount for the quarter was 92% higher than those recorded in the year ago quarter, reaching ARS 9.1 billion. Personnel expenses were 22% higher than in the first quarter of 2022 primarily due to salary increase agreements with the union and to a 4% increase of staff, while administrative expenses were 7% lower due to lower expenses for maintenance and repairment of goods and IT and for higher administrative services. Other operating expenses increased 52% due to higher turnover tax on financial operations as a consequence of the increase in the holdings of Leliqs. The income tax charge was 15% higher than in the first quarter of 2022 with an effective tax rate of 28.6%. The bank's financing to the private sector reached ARS 1.26 trillion at the end of the quarter, down 9% in the last 12 months mainly due to a 14% decrease of peso-denominated loans. Exposure to public sector increased 17% year-over-year and excluding the exposure to Central Bank, net exposure represented 12% of total assets compared to a 19% as of the end of the first quarter of last year. Deposits reached ARS 2.26 trillion, 2% lower than a year before mainly due to decreases of checking and saving accounts in pesos, partially offset by a higher balance of peso-denominated time deposits. The Bank's estimated market share of loans to private sector was 11.69%, 39 basis points lower than at the end of the year ago quarter. And the market share of deposits from the private sector was 9.75%, 44 basis points lower than in the same quarter of the previous year. As regards to asset quality, the ratio of nonperforming loans to total financing ended the quarter at 2.50% recording a 61-basis point improvement as compared to the 3.11% of the first quarter of the prior year. At the same time, the coverage with allowances reached 186%, up 580 basis points from the 180.2% recorded a year ago. As of the end of March, the bank's total regulatory capital ratio reached 23.47%, decreasing 62 basis points from the end of the same quarter of the previous year. The bank's liquid assets represented 114% of transactional deposits and 57% of total deposits, up from 94% and 52%, respectively, from a year before. In summary, in a very challenging and volatile market environment, Grupo Financiero Galicia was able to keep asset quality, liquidity and solvency metrics at very healthy levels and to improve its profitability in spite of the significant impact of the very high inflation of the quarter. We are now ready to answer the questions that you may have. Thank you.

[Operator Instructions] Our first question comes from Brian Flores from Citibank.

I have 2 questions. The first 1 is on the technical side. I wanted to ask on the classification of the securities. Just can you elaborate a bit on what is the rationale behind this and what treatment would you give to the securities? And then the second is just a follow-up regarding discussions on ROE for 2023. I think we mentioned somewhere around 9% inflation adjusted, just wanted to know with this [ harder ] perhaps environment, you reiterating this figure?

Brian. Well, the first question regarding the change in the model of accounting of Leliqs. Basically, that is the instrument issued by the Argentine Central Bank that changed from fair value to amortized cost. At the beginning of the year, the accounting department decided to change that because when Leliqs were first issued by the Central Bank, we thought they were going to be instruments for trading that could be purchased and sold within the month. Actually, as they are so short, they are issued for 28 days, and the average maturity is roughly 14 days. We decided to account them as amortized cost. So in -- I would say, the main output for your analysis is that in the past, the interest coming from the Leliqs were within results from financial instruments while now they are within interest from public securities within financial income basically. It makes, I would say, the comparison easier. And in this way, I think we are aligned with most of our peers in terms of accounting the results from Leliqs. The second question regarding ROE. The first quarter was 9.8%, and we think we can maintain this level for the full year. So we're around 10% ROE for 2023.

Our next question comes from Yuri Fernandes from JPMorgan.