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

Welcome to first quarter 2024 earnings release. My name is Alan. I will be our coordinator for today's event. Please note, this 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 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 an 8.4% year-over-year contraction during March. In year-to-date terms, the economic downturn reached to 5.3%. During the first quarter, the primary surplus reached 0.6% of GDP and an overall surplus of 0.2% compared to a 0.4% primary deficit in the first quarter of last year. This result was explained by a 254.6% year-over-year increase of revenues, whereas primary spending rose 144.1% the national consumer price index accumulated a 51.6% increase during the first quarter and 287.6% in the last 12 months ended on March 31, 2024. However, monthly inflation has decelerated in recent months from 25.5% in December 2023 to 8.8% in April 2024 trend, which is expected to continue. On the monetary front, the monetary base increased by ARS 2.9 trillion in the first quarter of this year, recording 132.1% increase in year-over-year terms. After taking office, the Central Bank devalued the exchange rate by 54.2% on December 13, 118.3% variation after which the FX has maintained a 2% monthly [indiscernible] impact. The exchange rate averaged ARS 850.3 per dollar in March, a 76.1% devaluation in year-over-year terms. The overnight repo rate remain the reference monetary policy interest rate after having replaced the Leliq rate in December 2023. Since then, the monetary authority lowered the policy interest rate from 133% to 40%. It is also worth to mention that on March 11, the Central Bank eliminated the regulation that established a minimum interest rate on time deposits. In March 2024, the average rate on peso-denominated private sector time deposits for up to 59 days, stood at 85.3%, 13.9 percentage points above the average for March of last year. Since March rates for time deposits were lower in line with the reduction of the monetary policy interest rate and currently stands at an average of close to 30%. Private sector deposits in pesos averaged ARS 42.4 trillion in March, increasing 29.6% during the quarter and 137.8% in the last 12 months. Time deposits in pesos rose 42.5% during the quarter and 104.2% year-over-year. While peso-denominated transactional deposits increased 21.2% and 174.8% respectively, in the same period. Private sector dollar-denominated deposits amounted to $16.7 billion as of the end of March, increasing 14.7% during the quarter and 2% as compared to March 2023. Peso-denominated loans to private sector averaged ARS 18.5 trillion in March, increasing 20.4% in the quarter and 144% when compared to the year before, while private sector dollar-denominated loans amounted to $4.3 billion recording a 24.5% expansion during the quarter and a 17.5% price when compared to March last year. Turning now to the results for the quarter. Net income attributable to Grupo Financiero Galicia amounted to ARS 255.5 billion, 263% higher than the year ago quarter, mainly due to profits from Banco Galicia for ARS 244.3 billion from Naranja X for ARS 22.6 billion and from Galicia Asset Management for ARS 11.3 billion, offset by a ARS 16.4 billion of loss from Galicia Seguros. This profit represented a 7.1% annualized return on average assets and a 32.4% return on average shareholders' equity. Banco Galicia's net income for the quarter was 319% higher than in the year ago quarter, mainly due to a 157% increase of the operating income, partially offset by 102% increase of the loss from the net monetary position. Net operating income increased 102% primarily due to a 209% higher net interest income, offset by an 18% lower results from financial instruments and of 36% decrease in the results from gold and foreign currency quotation differences. Average interest-earning assets reached ARS 6.6 trillion, 25% lower than in the same quarter of last year, mainly due to a 61% decrease of the portfolio of government securities and a 33% reduction in the average balance of loans in pesos. In the same period, its yield increased 63 percentage points, reaching 127%. Interest-bearing liabilities decreased 29% from March of last year amounting to ARS 5.3 trillion, mainly due to a 59% decrease in time deposits in pesos. During this period, its cost increased 9.7 percentage points to 52.2%. Interest income increased 55% due to a 48% growth of interest from government securities, a 338% increase of interest on repurchase agreement transactions and a 12% increase of interest on loans and other financing. Interest expenses decreased 14% as a consequence of a 33% lower interest on time deposits due to the decrease in its average volume. Net fee income decreased 6% from March last year, mainly due to a 25% lower profit from fees on bundles of products and offer a 34% decrease on utility bill and collection services, partially offset by a 68% increase of other fees. Net income from financial instruments decreased 18% due to lower results from government securities and to losses from derivative financial instruments. Gains from gold and FX quotation differences was 36% lower from the year ago quarter, including the results from foreign currency trading. Other operating income increased 43% in the quarter because of a 126% increase in other adjustments and interest on miscellaneous receivables. As regards to provision for loan losses, the amount for the quarter was 37% higher than the one recorded in the year ago quarter, reaching to ARS 47.3 billion. Personnel expenses were 3% higher than in the first quarter of 2023, in line with the 5% increase of staff and salary agreements with the union. Administrative expenses were 10% higher as a consequence of the 34% higher taxes and 20% higher expenses for maintenance and repairment of goods and IT, offset by a 51% lower expenses for publicity from promotion and research. Other operating expenses increased 64% mainly due to higher charges for other provisions. The income tax charge was 517% higher than in the first quarter of 2023 due to higher operating results. The bank's financing to the private sector reached ARS 3.9 trillion at the end of the quarter, down 20% in the last 12 months, with peso-denominated loans decreasing 29% and dollar-denominated loans growing 37%. Net exposure to the public sector decreased 15% year-over-year because of lower exposure to Central Bank, Leliq, and repurchase agreement transactions. Public sector exposure, excluding Central Bank exposure, represented 23% of total assets compared to 13% as of the end of the first quarter of last year. Deposits reached ARS 6.5 trillion, 26% lower than the year before, mainly due to a 52% decrease of time deposits in pesos and a 47% decrease of current account in pesos. The bank's estimated market share of loans to the private sector was 12.2%, 52 basis points lower than at the end of the year ago quarter. And the market share of deposits from the private sector was 10.2%, 38 basis points higher than in the same quarter of 2023. The bank's liquid assets represented 102.5% of transactional deposits and 64.4% of total deposits compared to 115.9% and 57.9%, respectively, from a year before. As regards to asset quality, the ratio of nonperforming loans to total financing ended the quarter at 2.09%, recording a 41 basis point improvement as compared to the 2.50% of the first quarter of the prior year. At the same time, the coverage with allowances reached 148%, down 38 percentage points from the 186% recording a year ago. As of the end of March 2024, the bank's total regulatory capital ratio reached 32.1%, increasing 862 basis points from the end of the same quarter of the prior year while Tier 1 ratio was 30.9%, up 935 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 improve the level of profitability despite the significant impact of the high inflation and the steep recession recorded in the quarter. We are now ready to answer the questions that you may have. Thank you.

[Operator Instructions] We'll take our first question from Ernesto Gabilondo, Bank of America.

My first question will be on your loan growth expectations. I just wonder what will be the macro assumptions behind loan growth you can elaborate on how are you seeing GDP growth for this next year and also inflation and interest rates? And then my second question will be on your loan-to-deposit ratio. Most of the Argentine banks are starting to resume real loan growth on the normalized rates, low inflation. How would you see the evolution of the loan-to-deposit ratio in the next years? And lastly, I would like to ask you about your ROE expectations. I would like to hear about your thoughts for the second quarter given that you will start to lend. But at the same time, you will have a lot of moving parts. I think my perception is that second quarter will be tough, but then to have a second half recovery in terms of the ROE. So how would you see the ROE evolution throughout the year? How do you see the ROE for this year? And how do you see it sustainable longer term?

Ernesto, okay. Well, first, loan growth, we see it, as you mentioned, growing in real terms this year. The trigger will be when inflation is close to 5% per month. We are going in the right track. According to our estimates, the year will end up with loans growing around 30% in real terms. This has to, I would say, assumptions on inflation and GDP evolution, inflation close to 140% for the full year, although it's a moving target, and it has been coming down. Actually, we are perhaps closer to 135%. The recession we have seen in the first quarter looks like it's getting to a bottom. So -- but nevertheless, the full year will be with -- will suffer a GDP contraction of roughly 3.8%. That is what our Chief Economist is forecasting and most of the economies are in the same region. But for next year, we are forecasting a 5% GDP growth and a much lower inflation. How much low, depends on many things, but I would say, between 35% and 40%. Definitely still high, but coming from these high levels we have been having in the last years, I would say. Next year, with a much lower inflation and GDP growing, as I mentioned, the loan book should be expanding significantly and perhaps the first loans to react will be the commercial ones and then the individual. Still, it's too early to say how much or what percentage in real terms. But definitely, it will be substantial.

Yes. Before moving to the loan-to-deposit ratio, in terms of interest rates, how do you see them for the rest of the year and next year?

Yes. Well, interest rates have been coming down significantly, not only the repo rate, but also that is the reference rate that had an impact on all the rates. One month ago, I remember that the repo rate was at 70%. Today, it's at 40%. Time deposits as I mentioned in the first quarter, we're at 85% interest rates and today are at 30%. So we are seeing interest rates coming down, will be a function of the evolution of the economy. With this reduction in inflation and interest rates, we see this loan demand picking up quickly. So we will see some type of margin compression coming from very, very high levels and will be gradual. But we are seeing that the volume will more than offset the compression in margins.

Yes. So given that the reference rate was at around more than 100% last year and today it's already at 40%, do you think it could be more sustained at this level, at least for this year before going a little bit lower?

Yes, could be the case. Also, the Central Bank has many, I would say, simultaneous objectives and they said that this reference rate but also are looking at the FX evolution. So perhaps for this year, it will be difficult to see much more reduction in interest rate. But for next year, it could be the case that interest rates will be going down again. Of course, the Central Bank -- well, I don't know if to say, of course, that the Central Bank typically don't allow us to anticipate their moves. They are very efficient in setting a new price signals, regulations. But looking at the inflation and the effects we are seeing it looks like this interest rate level, it could remain for this year or perhaps with small reductions or adjustments. When we go to the loan-to-deposit ratio, if I'm not wrong, the third quarter ended with 50% loan-to-deposit ratio. It's the difference between pesos and dollars. Of course, in dollars, it's much lower. Although we have been seeing a pickup in dollar loans -- in the demand of dollar loans. So it can grow and we don't have -- or I would say the ratios are so low that there is plenty of room to grow. We don't see them getting to the levels we had in 2017 that were close to 90% or 95%. But we will navigate in this transition, but we are -- we have room to improve that ratio. In terms of ROE expectation last year, Grupo Financiero Galicia had an ROE of 17.4%. This third quarter was very strong with about 32%. It will be hard to replicate the same numbers. So we will see some declining ROE in the following quarters. But in my opinion, will be in the area of 20% for the full year. Of course, as you also mentioned Ernesto, there are many moving parts, but we are confident that we will adapt to this pricing as I mentioned.

Excellent. So the ROE for the full year around 20% and that you think it could be maintained for the next years have 20%.

Yes, perhaps I'm being a little bit conservative, taking into account the first quarter. But yes, with the information we have today, I would say, 20% and perhaps at the same level or even a little bit higher for next year.

We will take our next question from Brian Flores Citibank.

I have 2 questions. The first one is on strategy. I wanted to ask you, how are you preparing to compete against fintechs, right? You have a very strong consumer franchise. But I think eventually fintechs pressure and they have pressure everyone regarding fees and being very fast in terms of implementing a credit offer for consumers. So just wanting to get your views on how are you preparing your franchise going forward particularly as we saw this quarter, some pressures on noninterest expenses, which also is a very important item, right? In the end, efficiency gains are a very important part of the equation. Just how are you thinking about this? And then I'll ask my second question.

Yes. Brian. Well, we have been competing with fintechs for many years now. Mercado Pago is the largest fintech or big tech due to the -- they were born through Mercado Livre. They -- so they got -- they got their clients from the e-commerce platform and then they converted these clients into Mercado Power clients. So they have many clients with awarded. We have Naranja X, that is, I would say, the second fintech in terms of active monthly users. And all the banks are digital. You need scale to become more efficient. That's why in a way we announced the purchase of HSBC. We also had, as you mentioned, a pressure on fees this quarter, but mainly because of the high inflation level in the quarter and the price increases couldn't be reflected or adjusted in the first quarter. So the next quarter, you will see an improvement in fee income. So -- and if I had to say today, where banks are making money, I would say that much more with big corporate, medium-sized SMEs, agricultural sector, private banking clients and not so much the typical massive fintech clients. Having said that, we tackle this non so profitable businesses with Naranja X. And as I mentioned, we have been competing with them. And I think that both Mercado Power and Naranja X and perhaps other much smaller companies are kind of barrier for newcomers. It should be very difficult for -- I don't want to mention another company that any new fintech coming to Argentina from CEO, it's almost impossible in my opinion. Very costly. And perhaps it was easier when the interest rate in the world was much lower and it was easy to raise money. Now you have to have profitability much quicker than in the past. And the other question?

Yes. The second question was on the communicate that you published very recently on the sanction by CNV. Just wanted to ask you, how did you reach this conclusion? Was it on -- is it your estimate? Is based on conversations with the regulator? Or is that an internal and with your lawyers and it could have some upside risk? And when I say upside risk is, could it be more than what you are estimating just because on the communicate, we didn't have much details. So if you could expand a bit on this would be great.

Yes. Excellent. Well, this sanction, as you mentioned, actually it was an investigation that the CNV, the local SEC informed us on April 30, that they initiated this investigation. So we, in turn, initiated our internal investigation to find out if what the CNV [indiscernible] was the case or not. Actually, at that moment, we didn't have to relevant a significant [ 6-K ] because when there is an investigation begins, there is nothing to communicate. Yesterday, as we issued the press release and we advance with the internal investigation we said or we communicate formally that we were in this process. We will answer to the CNV on May 29. The number that the CNV is saying that was what we got above what should be the correct number is ARS 23 billion. The preliminary -- our preliminary numbers are much lower, but that will be answered on May 29. But in order to be prudent, we had a provision of ARS 23 billion plus another ARS 23 billion. So actually, the provision is ARS 46 billion. It was not something we spoke with the regulator. It was a prudent decision in order to have in our books cover most of all, and perhaps more than the final number that we will -- that the CNV and the Central Bank will tell us. The thing is not so easy is the number because executing -- well, all the banks that pay prime have put right to sell to the Central Bank different bonds. In this case, it was a dual bond, and it was not very liquid and the price that the Central Bank on an ordinary basis sets is an extrapolation of some dots. And so there are many different analysis in which you can say, which is the correct price. And depending on that, the impact is ARS 23 billion or half or whatever or even nothing if you compare, I don't know, other dual bonds or dollar link or other instruments. So that is what we said as we issued the results, we are saying that we built a provision because of this in initial investigation that it's not at all close. I don't know if it was clear.

No, it was clear. I just think maybe a quick follow-up that would be useful. So you're saying as I mentioned, it could be less, but also -- I mean, is there a probability that it could be more than this? Or do you think maybe the limit is on the returning the ARS 23 billion plus the ARS 23 billion, which maybe the limit is around -- around ARS 50 billion? Or do you think there is a chance to see the regulator sanctions a higher number?

Really, it's difficult to predict. If you analyze these curves, the dots, the extrapolation, the number should be much lower. But it's impossible to predict the -- also the fine. So as I mentioned, as a prudent way, we provisioned this ARS 46 billion. But it's hard really to say if it's enough or it's a lot or it will be marginal the effect in the next quarters.

Okay. Pablo, just to finalize, and I'm sorry here to ask on this topic, maybe a lot of questions, but you say this will be maybe by '29 you're going to present and you're going to answer formally to CNV. By when do you think we could get like a final resolution from CNV?

The CNV doesn't have a deadline, they are not -- there is not a process or a procedure that says, I don't know, in 10 days you have to answer. We hope to get the answer as soon as possible. We would like to close this investigation because definitely, we are not happy at all with the situation. So the sooner the better, but it's not in our hands. We will answer the answer will not be public once the situation is close or settled, it will become public.

We will take our next question from Carlos Gomez, HSBC.