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

Hello, and welcome to the Third Quarter 2023 Earnings Release for Grupo Financiero Galicia. My name is Melissa, and I will be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I'll now turn the call over to Pablo Firvida. Please go ahead.

Thank you, Melissa. Good morning, and welcome to this conference call. I will make a concise 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, the Argentine economy recorded a 0.3% year-over-year expansion during August. In year-to-date terms, the economic downturn stood at minus 1.6%, but year 2023 with a number closer to minus 2% according to the Argentine Central Bank's market expectations survey. During the third quarter of 2023, the primary fiscal deficit reached 1.4% of GDP. This implies a slight deterioration against the 1.3% deficit accumulated during the same period of 2022. This outcome was explained by a 100.5% revenue increase in year-to-date terms, whereas primary spending rose 104.3%. The National Consumer Price Index accumulated a 103.2% increase during the first 9 months of 2023. Inflation reached 142.7% annual variation in October 2023, which entailed an acceleration against the previous year's inflation, with inflation hitting its highest mark in 30 years. On the monetary front, the Argentine Central Bank expanded the monetary base by ARS 942.5 billion in the third quarter, recording a 66.6% increase in year-on-year terms. After the primary elections held in August, the Argentine Central Bank devalued the Argentine peso by 17.9%, which stood at ARS 350 per dollar between August 14 and November 15. Since then, the effect started displaying a daily crawl of around 0.1%. The average exchange rate in September stood at ARS 350 per dollar, which entailed a 50.6% peso devaluation for the first 9 months of the year. When compared to September 2022, the Argentine peso underwent a 59% devaluation. The monetary authority raised interest rates after the primary election, with the policy rate at the minimum rate for time deposits under ARS 30 million up to 118%. After the National Institute for Statistics published September inflation in mid-October, the policy rate was raised again and currently stands at 133%, as well as the minimum rate for time deposits. In September 2023, the average rate on peso-denominated private sector time deposits for up to 59 days stood at 114%, 46. 9 percentage points above the average of September 2022. Private sector deposits in pesos averaged ARS 27.3 trillion in September, increasing by 24.7% during the quarter, and 121.7% in the last 12 months. Time deposits in pesos rose 22.7% during the quarter, and 121.2% year-over-year, while peso-denominated transactional deposits increased 27.4% and 123.4%, respectively, in the same period. Private sector dollar-denominated deposits amounted to $15 billion in September 2023, decreasing 2.9% during the quarter and increasing 1% in the last 12 months. Peso-denominated loans to the private sector averaged ARS 11.7 trillion in September, increasing 23% in the quarter and 101.4% when compared to September 2022, while private sector dollar-denominated loans amounted to $3.8 billion, recording a 2% retraction during the quarter and a 5.2% expansion when compared to September 2022. In terms of politics, after the primaries held in August, we had Presidential elections in October. And after this first round, last Sunday, November 19, there was a run-off and Javier Milei was elected President. He will take office on December 10. Turning now to Grupo Financiero Galicia. Net income for the third quarter amounted to ARS 54.2 billion, 103% higher from the year-ago quarter, mainly due to profits from Banco Galicia for ARS 51.1 billion, from Galicia Asset Management for ARS 3.3 billion, and from Galicia Seguros for ARS 590 million, partially offset by the ARS 2.3 billion of loans from Naranja X. This profit represented a 3.4% annualized return on average assets and a 17% return on average shareholders' equity. Banco Galicia's net income for the quarter was 126% higher than in the year-ago quarter as the net operating income increased 79%. Average interest-earning assets reached ARS 3.55 trillion, 6% lower than in the same quarter of 2022, mainly due to a 13% decrease of loans in pesos. In the same period, its yield increased almost 37 percentage points, reaching 92.2%. Interest-bearing liabilities increased 2% from September 2022, amounting to ARS 3.08 trillion. This growth was mainly due to a 4% increase in time deposits in pesos. During this period, its cost increased 30.1 percentage points to 68.3%. Considering together net interest income and net interest -- and net income from financial instruments, they grew 35% from the same quarter of 2022. It is worth to remember the change in the valuation model of the Leliqs acquired from January 1, 2023. These instruments used to be valued at fair value, and the criteria was changed to amortized cost. Thus it is being recorded as interest income instead of within results from financial instruments. Net fee income increased 17% from September 2022, mainly due to 19% higher profits from credit card fees, 32% increase from other fees, and 9% higher fees from [ bundle of ] products. Gains from gold and FX flotation differences were 419% higher from the year-ago quarter, including the results from foreign currency trading. Other operating income increased 101% in the quarter as a result of a 58% increase in other adjustments and interest on miscellaneous receivables as a consequence of devaluation of financial instruments granted as collateral, and to 452% increase in other income. As regards provision for loan losses, the amount for the quarter was 20% higher than those recorded in the year-ago quarter, reaching ARS 20 billion. Personnel expenses were 9% higher than in the third quarter of 2022, in line with the 3% increase of staff and of salary increases above inflation, while administrative expenses were 5% higher due to a 27% increase of taxes. Other operating expenses increased 49% due to a 55% higher turnover tax due to an increase in the gross income tax from financial operations, and 51% higher charges for other provisions related to discounts on credit cards and payroll accounts. The income tax charge was ARS 15.8 billion, higher than in the third quarter of 2022. We had an effective tax rate of 26%. The bank's financing to the private sector reached ARS 2 trillion at the end of the quarter, down 6% in the last 12 months, with peso-denominated loans decreasing 7%, and dollar-denominated loans, 29%. Net exposure to the public sector increased 1% year-over-year as a result of higher holdings of dual bonds and [Botes] offset by lower holdings of Leliqs. Excluding the exposure to the Central Bank, Leliqs, credit and repurchase agreement transactions, net exposure represented 16% of total assets, the same level as of the end of the third quarter of last year. Deposits reached ARS 3.75 trillion, 6% lower than the year before, mainly due to a 14% decrease of time deposits in pesos. The bank's estimated market share of loans to the private sector was 11.68%, 15 basis points higher than at the end of the year-ago quarter. And the market share of deposits from the private sector was almost 10%, 20 basis points lower than in the same quarter of 2022. The bank's liquid assets represented 110% of transactional deposits and 55% of total deposits, up from 109% and 53%, respectively, from a year before. As regards asset quality, the ratio of nonperforming loans to total financing ending the quarter at 2.46%, recording a 41 basis points deterioration as compared to the 2.05% of the third quarter of the prior year. At the same time, the coverage with allowances reached 134%, down 100 percentage points from the 234% recorded a year ago. As of the end of September 2023, the bank's total regulatory capital ratio reached 25%, decreasing 78 basis points from the end of the same quarter of 2022, while Tier 1 ratio was 24.1%, growing 22 basis points during the same period. In summary, in a particularly challenging and volatile political and macro environment, Grupo Financiero Galicia was able to keep asset quality, liquidity and solvency metrics at healthy levels and to sustain a good level of profitability in spite of the significant impact of the 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 of Citibank.

Congratulations on your results. I was going to do two questions. The first one is on how are you thinking about your exposure to the public sector in terms of strategy and maturity? And also wondering if you have already had any contacts with the transition team directly or via the banking association. Any insight there on the receptivity, openness, et cetera, would be greatly appreciated. And after I'll do my second question.

Brian. Well, the exposure to the public sector is made up by two parts, Leliqs and basically repos with the Central Bank and government bonds. The Leliqs are 28 days short-term basically, paper issued by the Central Bank. And it's the allocation we have from the money coming from deposits that is not demanded by the private sector in the form of loans. The current Central Bank sets a minimum interest rate for time deposits, so we must take the deposits, and the only way not to lose money and to invest the deposits is to purchase Leliqs. Leliqs or the repos with 1-day exposure to Central Bank. In many conversations, rumors, or even politicians, including Milei, have said that part of the main considerations when they decide or set the economic plan is to solve the issue of Leliqs. We consider that there is no need to make -- to take any, I would say, unfriendly decision or restructuring with Leliqs. Actually, the elected President Milei said that he wants to respect private property and all the rights. So within, I would say, a consistent economic plan, the reduction of Leliqs should be similar but in the opposite direction as how they were created. Basically, they were created because the Central Bank printed money to finance the treasury, the national treasury, and also the Central Bank purchased government bonds in order to have, within certain ranges, the effects, the financial effects. And therefore, they issue Leliqs in order to sterilize this money. If the new government cuts the public spending or rolls to the public [ superavit ] and not deficit that is the case today, there will be no pressure. And also the monetization of the economy that today is around 2.3% in terms of GDP could go to more normal levels of 2.5%. So this -- if the government cuts spending, they don't have the need to print money, and monetization goes back to normal levels, not high levels, normal levels, Leliqs will not be a problem. And also if, again, the economic plan is consistent, sustainable and grants confidence, the stock of Leliqs will shift quickly to loans to the private sector. This is Central Bank. In terms of government bonds, most of our exposure is to -- it's in pesos adjusted by CPI, and it's the way we find to hedge our network against inflation. It's not a perfect hedge because there is a 2-month lag between the inflation printed monthly and the one that we receive in the bonds, but it's the best way we find to hedge against inflation. We want to have exposure with government bonds, again to cover our network. Of course, we would prefer to lend to millions of clients from the private sector. The issue is that with this level of inflation, and therefore, this level of nominal interest rates, loan demand is actually smaller than inflation, and that's why loan-to-GDP are going down and loans -- or our loan book in real terms is shrinking. In terms of contact with the elected President or team, we still don't know, and it was not announced, not only the future Minister of Economy, nor the President of the Central Bank. There are some names and rumors, but they were not officially elected or communicated. Perhaps this alliance with Macri's party will need some kind of conversations, agreement or discussions. Through [ Aveva ], we -- or [ Aveva ], I would say, issued a document a couple of months ago proposing a solution -- a bid to solution for Leliqs. This is available and public. But there were not individual contacts due, or mainly because we don't have the name of the counterpart. Sorry if the answer was too long, Brian.

No, Pablo, this is perfect. And my final question is with nearly one more to go, I'm just wondering if there were going to be any guidance changes for 2023 ROE.

Well, the accumulated ROE stands at 17%, in the third quarter was 17%. So far -- well, it's very sensitive to the monthly inflation, as you can see in the -- in that line in the P&L, the results due to -- monetized losses due to inflation, but we think it could be between 15% and 17% for the full year. Next year, well, we -- there are lots of questions. I think we are in a period or in a moment, there is a kind of inflection point. There will be a new economic regime and I think lots of regulations will disappear. And I think changes could be, if everything goes in the right direction, loan book recovery could be much faster than expected.

Our next question comes from Ernesto Gabilondo from Bank of America.

Congrats on the results. My first question is on the potential economic outlook for Argentina. Which do you think would be like the key execution risks for the new administration? How do you see the possibility to implement structural reforms considering that there will be like a divided Congress as neither the official [ liaison ] or all the right parties will have majority? So anything on that will be very helpful. And then my second question is a follow-up on the Leliqs exposure. So as you mentioned, if Leliqs are eliminated, the banks will have an important excess of liquidity, but will not be remunerated as before, and then you will have to allocate that into loans. However, considering the high level of interest rates and inflation in Argentina, how do you see the appetite for credit demand next year, especially for those that are more related to individuals? And then my last question is on this potential dollarization of the economy. So far, we have seen that in the proposals, it could take 1.5 years, 2 years for the implementation. So just considering what could happen to the banks, they have more than 90% in pesos, how are you seeing that dollarization process for the banks, if there could be any potential impact? For example, if we have a depreciation of the peso, that could also create at least, the beginning, a lot of inflation also. There are a lot of moving parts. So will be interesting to know your view also on this dollarization part.

Okay. Hi, Ernesto. Well, perhaps I can begin with the dollarization issue. I think, and many people around the financial system or even many economists think that dollarization is not feasible without dollars basically for the -- I always say that the private sector of Argentina is very long in dollars, that the public sector is very short of dollars. So the public sector is -- or it's hard for the public sector to dollarize. To, let's say, that they get the dollars, in order to dollarize, first, they should have to make many homework to put the numbers of the economy in order. And once that is done, the -- why to dollarize, that is what many economists are saying. And even Milei is saying that the population should choose which currency they use to pay or to collect. So I don't think a dollarization as in other countries would take place even in 1 or 2 years, as you mentioned. And when I think in the financial system, I think that some prudential regulation that was created 22 years ago or so said that banks can lend in dollars just to exporters. So if there were to be a dollarization, that would mean a lot of risk in terms of lending in dollars to individuals or companies that do not generate dollars. So really, the dollarization is not something that we are seeing as feasible. Also the alliance with Macri and Patricia Bullrich, I think are putting this alternative farther, or they are evaporating, that is a good word, the possibility of dollarization. In terms of execution risk, I think that after the elections of last Sunday, Milei found a lot of support from the population. He had almost 56% of the votes, 11.5-or-so percent more -- percentage points more than Massa. So he has the mandate and many congressmen received that piece of information. So I think that within Milei's party, Macri's and some others, could get quorum and approval of laws that are necessary to make reforms. Other smaller reforms could be done with the will, I would say, of the executive power. But of course, is the main risk of Milei, the execution risk, as I would say that his ideas or his trend in economic terms are in the good direction: reducing fiscal spending, pointing to fiscal [ superavit ], no more printing of money by the Central Bank, giving freedom to the private sector. So many good intentions. And as I said, many of these decisions will be key decisions, with power other, he will need the congress. For example, when they said at the beginning of the campaign that they will shut the Central Bank, lately, we are seeing that what they want to do is to prohibit the Central Bank prints money. Of course, the superintendency of banks is needed to supervise banks and to set the regulations and to eliminate many distorted regulations. Instead of -- or going back to the third question, the Leliqs, well, the [indiscernible] cycle would be Leliqs shifting to the private sector loans, but that will take some time, perhaps couple of months, 6 months, I don't know how much. We don't know what is the economic team of Milei thinking when they say solving the issue of Leliqs. But they said that they want to respect private property, to pay debts, that anything will be done in a friendly way. So I guess they could offer a menu of alternatives if they want to do something, but at a market value. So it shouldn't create a problem for the banks. And if they finish with the obligation for banks to pay a minimum interest rate on time deposits, we can stop taking time deposits and not investing in Leliqs. So really, at this point, there are many question marks, but we are confident that the anything will be done in a rational way because, as I said, the Leliqs are the other side of the coin of private sector deposits. So anything that they do can affect the asset size, they have a correlation on the liability side. I think I answered everything, Ernesto.

Our next question comes from Nicolas Riva from Bank of America.

And I'm going to also follow up, circle back on what Brian and Ernesto asked about the Leliqs. And I think that your point, if I understood correctly, Pablo, is that going forward with a reduction in the fiscal deficit, there won't be a need really for the government to continue printing as much pesos to finance the fiscal deficit, and therefore, there won't be a need to continue issuing those Leliqs. My question is more on the stock of the outstanding Leliqs, which right now is between 20% and 25% of the total assets of the entire banking sector and over 1x the equity, what could be -- I mean, for example, if one alternative that has been discussed or not would be an exchange of these Leliqs for government obligations because, again, if there were to be, let's say, a debt exchange where the banks have to take a relevant haircut on those Leliqs, then there could be a very negative impact on the equity of the banks given that, again, that Leliqs are over 1x the shareholders' equity of banks. So my question is if there's been any discussion with incoming administration regarding that treatment or a potential debt exchange of Leliqs for federal government obligations.

Well, using the government paper they have, they could simply sell the bonds and pay back the Leliqs, that could be an alternative. There were no discussions in that respect. But if any solution is done with -- or even voluntary terms or friendly terms or market terms, there should be no impact on the equity of banks. But again, we think that the issue could be solved just -- well, again, within a consistent economic plan, not just looking at Leliqs, but if you generate confidence, price of bonds, they go up and there is a demand for bonds, you can sell them. Also if they reduce the fiscal expenditure and get to [ superavit ], or surplus, there will be no need to print money, again, they could sell the government bonds they have. And not only we can be reducing Leliqs because they are 28 days instrument, we can also allocate in repos. But the Central Bank, everybody knows that, as you said, the size of the Leliqs is significant in terms of the net worth of the banks. So any solution, and again, is the other coin of deposits, that's even more important, the health -- just the health of banks or the financial system that is also the money of the depositors. So any solution that we think could be virtuous must consider these two interests, not only the net worth or the health of the financial system, but also the depositors.

Our next question comes from Carlos Gomez with HSBC.

I have two. The first one is if you could comment on the acquisition of the [ SURA ] assets, the insurance business, and how -- what you expect to do -- what you think are the changes, your outlook, for the coming years? The second, I noticed that you had a decrease in the credit card balances. So you seem to be more cautious when it comes to credit. And also you had a decrease in the current accounts, 31%. Could you comment on those two lines?

Yes, Carlos. First, [ SURA ], we purchased the Argentine operation of this Colombian company. And the business is very complementary to Galicia Seguros business. Galicia Seguros is basically a bank assurance. They book the risk of a -- sell the -- book basically the insurance of the products sold by either Banco Galicia or Naranja X. In the case of [ Sura ], the company is a little bit bigger than Galicia Seguros in terms of [ primes ] , personal and so on. But they bring many other lines of business that are, as I said, are complementary. For example, car insurance, in the past Banco Galicia sold car insurance, but third-party insurance. In the case of [ SURA ], they are -- they have this product. Also [ SURA ] has many products for SMEs and the agricultural sector. And they also have a very good or even big network of independent producers. This would be the translation. It's like advisers that have the clients, the final client -- this is around 4,000 independent advisers, that it's another channel to sell insurance. So we are very happy with the transaction. The numbers will be added to our numbers beginning in October. So, so far, you are not seeing any of that. Regarding loan demand, basically, it's not that we are becoming risk-averse. It's less demand, let's say, from the client. The high nominal interest rates for individuals or also for companies are against loan demand, and that's why the, in real terms, loans are diminishing. What was the other question, Carlos, sorry?

It was about [checking] accounts. But on loan demand, I mean, you have lost some market share. Again, is that a conscious decision, or just a reflection of loan demand in the sectors that you operate?

Well, in terms of market share, the loan -- actually, it was 11.66%, in the last 12 months, I think it was a 20 basis points growth. We lost in deposits from, let's say, 11% to 10.7% to 10%. And in that case, there are many reasons, mainly, I would say, the bank can, let's say, adjust their deposits, not [ convalidating ] high interest rates for big deposits, typically either mutual funds or big corporate. But that's a problem with the total we have at the end of, in this case, in the quarter. But I wouldn't say it's a trend that we want to lose market share. On the contrary, we want to keep on growing market share. But again, it's not a variable that we can manage easily. It's more a demand problem.

[Operator Instructions] And we have a question coming through from [ Jorge Mora ] of Fundamenta.

This is regarding the Leliq exposure. We noticed yesterday 60% of the auction was not rolled over. This is roughly $1.7 billion of the [ parallel ] exchange rate. So I'm curious here, what's the bank doing with all these spaces that you're deciding not to roll over yesterday?

Well, that was yesterday auction. As you said, [roll over] was around 40%. I don't have the details between private sector banks and public sector banks. What banks could do, the easy answer would be to shift from Leliqs to repo transactions with the Central Bank 1 day instead of 28 days. Or what we can do is reject time deposits from mutual funds or remunerated accounts from either mutual funds or certain big corporates, in order to reduce both asset and liability. I think this will be a moving thing, a dynamic issue, because if all the banks sell -- or don't roll over the Leliqs and go to repos with the Central Bank, we will be in a similar situation. Or if we reject all the deposits from big corporates or mutual funds, all the balances will shrink, and we have to see who [is the winner]. I think we are in the early stages of this situation. I wouldn't extrapolate what happened yesterday with 40% rollover to the next auctions.

Okay. But just to understand, you can -- you have the ability to reject deposits.

Not from the retail where we have to pay a minimum interest rate. We can do it for big corporates at lower rates or what we call the remunerated accounts for mutual funds or other banks.

Okay. And if I may just a follow-up on your net dollar position, it's around 32% of equity. Do you have a maximum position? I presume this is mostly on the dual ones, right? Can you increase this further, or is there a cap?

Well, the thing there, we have a cap, regulatory cap, actually, we must be close or hedged in the spot position, and we can go long with forward contracts up to 5% of the regulatory capital. The thing is that when you look at the balance sheet, it has some, I would say, different treatment when we look at what we say are assets in dollars. Because, for example, the dual bonds and the Leliqs are -- the accounting are considered dollar assets but not for the regulatory -- or the regulation regarding the position in dollars. That's why it looks so high. Actually, if you deduct the holdings of dual bonds and levies must be slightly negative at the end of September.

Thank you. And as we have no further questions in the queue, I would like to turn it back over to Pablo Firvida for any closing remarks.

Well, thank you very much, all of you, for attending this call. If you have any further questions, please do not hesitate to contact us. Good morning, and happy Thanksgiving for the U.S. investors and analysts. Bye-bye.

Thank you. That concludes today's conference. You may now disconnect.