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

Hello, and welcome to Grupo Financiero Galicia Second Quarter 2024 Earnings Release. My name is George, I'll be the coordinator for today's event. Please note that this conference is being recorded. [Operator Instructions] I'd like to hand the call over to your host today, Mr. Pablo Firvida, Head of Investor Relations. Please go ahead, sir.

Thank you, George. 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 3.9% year-over-year contraction during June. In year-to-date terms, the economic downturn reached to 3.2%. During the second quarter, the primary surplus amounted to 0.5% of GDP, which compares to 0.6% primary deficit in the second quarter of the previous year. This result was explained by 257.6% year-over-year increase of revenues, whereas primary spending rose 165.2%. The financial surplus amounted to 0.2% during the second quarter. The national consumer price index recorded a 79.8% increase during the first half of 2024 and kept its decreasing trend from monthly figures of 25.5% recorded in December 2023 to [ 4% ] in last July, accumulating 87% in the first 7 months of 2024. The Central Bank devalued the exchange rate by 54.2% on December 13 last year, a 118.3% variation, after which the FX has maintained a 2% monthly [indiscernible] [ peso ], which persists to this day. The exchange rate averaged ARS 903.8 per dollar in June 2024, implying a 72.5% devaluation in year-over-year terms. The overnight repo rate remains the reference monetary policy interest rate during the second quarter of 2024, after having replaced the Leliq rate back in December 2023. So far this year, the Monetary Authority lowered the policy interest rate 5x from 133% to its current 40%. It is also worth mentioning that as of July 22, the Central Bank [ ceased ] overnight reverse repo operations. The fiscal liquidity bills, or [ LETES ], issued by the Treasury have been defined as the new liquidity regulation instrument. In June 2024, the average rate on peso-denominated private sector time deposits for up to [ 59 ] days stood at 33.4%, up [ 59.5 ] percentage points below the average for June 2023. Currently, rates for time deposits stand at an average of around 38%. Private sector deposits in pesos averaged ARS [ 52.7 ] trillion in June, increasing 24.2% during the quarter and 141.3% in the last 12 months. Time deposits in pesos rose 23.3% during the quarter and 103.3% year-over-year, while peso-denominated transactional deposits increased 24.5% during the second quarter and 183.1% in year-over-year terms. Private sector dollar-denominated deposits averaged $17.7 billion in June, increasing 6.5% during the quarter and 14.6% when compared to June 2023. The peso-denominated loans to private sector averaged ARS 25.7 trillion in June, increasing 38.6% in the quarter and 169.1% when compared to a year before. Private sector total denominated loans amounted to $6.4 billion, recording a 47.7% expansion during the quarter and a 66.2% rise when compared to June 2023. Turning now to the results for the quarter. Net income attributable to Grupo Financiero Galicia amounted to ARS 409 billion, 90% higher from the year-ago quarter, mainly due to profits from Banco Galicia for ARS 296 billion, from Naranja X for ARS 81 billion, from Galicia Asset Management for ARS 12 billion and from Galicia Seguros for ARS 10 billion. This profit represented a 9.7% annualized return on average assets and a 42.5% return on average shareholders' equity. Going to Banco Galicia, net income for the quarter was 54% higher than in the year-ago quarter, mainly due to a 34% increase of the operating income, partially offset by a [ 165% ] increase of the income tax. Net operating income increased 24%, primarily due to a 46% higher net interest income and a 72% higher net result from financial instruments, offset by a 69% decrease in the results from gold and foreign currency quotation differences. Average interest selling assets reached ARS 8.6 trillion, 18% lower than in the same quarter 2023, mainly due to a 42% decrease of the portfolio of government securities in pesos and a 33% reduction in the average balance of loans in pesos, offset by 92% higher volume of other interest earning assets in pesos. In the same period, its yield decreased 33 basis points, reaching 75.2%. Interest-bearing liabilities decreased 29% from June 2023, amounting to ARS 6.1 trillion, mainly due to a 56% decrease in time deposits in pesos. During this period, its cost decreased 25.7 percentage points to 30.9%. Net interest income increased 46% from the second quarter of last year, although interest income fell 22% due to decreases of 31% of interest and government securities, 26% on loans and other financing and 46% on promissory notes. This was more than offset by the 61 drop of interest expenses due to a 67% lower interest on time deposits. Net fee income decreased 6% from June 2023, mainly due to a 25% lower profit from fees on bundles of products and of 21% on deposit accounts, partially offset by a 78% increase of foreign trade fees. Net income from financial instruments increased 72% due to a 414% higher result from government securities, offset by 83% lower result from private sector securities. Gains from gold and FX quotation differences was 69% lower from the year-ago quarter, including the results from foreign currency trading. Other operating income decreased 23% in the quarter, while provision for loan losses increased 49%. Personnel expenses were 30% higher than in the second quarter of 2023 due to a 4% increase in staff, salary increase agreements with the union and an increase in provisions for personnel compensation and rewards. Administrative expenses were 18% higher as a consequence of 28% higher taxes and 37% higher expenses for maintenance and repairment of goods and IT. Other operating expenses decreased 7% due to a 33% lower turnover tax. And the income tax charge was 165% higher than in the second quarter of the previous year due to higher operating results. The bank's financing to the private sector reached ARS 5.4 trillion at the end of the quarter, down 7% in the last 12 months, with peso financing decreasing 20% and dollar-denominated financing growing 103%. Net exposure to the public sector decreased 15% year-over-year because of lower holding of Leliqs, partially offset by an increase of securities adjusted by CER at amortized cost and of government securities in pesos at fair value through other comprehensive income. Excluding the exposure to the Central Bank, repos, Leliq and [ LETES ], net exposure represented 37% of total assets compared to 23% as of the end of the second quarter of 2023. Deposits reached ARS 8.3 trillion, 24% lower than the year before, mainly due to a [ 58% ] decrease on time deposits in pesos. The bank's estimated market share of loans to the private sector was 11.9%, 12 basis points higher than at the end of the year-ago quarter. And the market share of deposits from the private sector was 10.5%, [ 57 ] basis points higher than in the same quarter of 2023. The bank's liquid assets represented 80.1% of transactional deposits and 55.7% of total deposits compared to 104.9% and 65.9%, respectively, from a year before. As regards to asset quality, the ratio of nonperforming loans to total financing ended the quarter at 1.98%, recording a 67 basis points improvement as compared to 2.65% of the second quarter of the prior year. At the same time, the coverage with allowances reached 160.3%, down 48 basis points from the 160.8% recorded a year ago. As of the end of June 2024, the bank's total regulatory capital ratio reached 28.8%, increasing 512 basis points from the end of the same quarter of 2023, while Tier 1 ratio was 27.8%, up 600 basis points during the same period. In summary, in a 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. We are now ready to answer the questions that you may have. Thank you.

[Operator Instructions] Our very first question today is coming from Ernesto Gabilondo of Bank of America.

Congrats in the results. My first question will be on long road and asset quality. We noticed an important deterioration in Naranja's credit card business. So just wondering how do you see the asset quality for Naranja and for Galicia in terms of NPLs and cost of risk going forward, especially as we are starting to see an expansion of the credit business? And my second question is if you can elaborate a little bit more on the -- on doing positions that the ban executed with the Central Bank related to the puts. What were the implications into the P&L and balance sheet? And also if you can talk a little bit about the timeline and implications of the repos that is proposing the Central Bank? And also related to this, can you remind us how much of your position on securities link to inflation and how they are being classified in your balance sheet? And my last question is on your ROE guidance for this year. If we could assume a sustainable ROE above 20% in the next year? Thank you.

Okay. Thank you, Ernesto. I'll try to answer everything. If I forget something, please let me know. First, loan growth. We have -- we were saying in previous calls that we were forecasting a real loan growth to take place once monthly inflation goes below 5% on a monthly basis. That's occurred, and we saw a real growth in loans, slight or small in May, more important in June. And we are already seeing good demand for July, August and for the rest of the year. So at the beginning or -- let's say, last quarter, we were thinking that loans could be growing at around 30% in real terms for the full year. Now we are revising a little bit up that number, perhaps in the range between 35% and 40%. Of course, many things are moving, but this is our current expectation. In the case of Naranja X, they also saw the increase in loan demand. In the case of the bank, was something like [ 18% ]; in the case of Naranja, 21%. One thing that is important to keep in mind is that as you originate new loans, you have to provision a portion of that, roughly 1% of that. So part of the increase in the cost of risk is due to the increase in the loan book. Having said that, our -- at the bank level, the NPL stands at roughly 2%. We don't see any, I would say, deterioration. Of course, with the growth in the loan book, cost of risk should be growing slightly. In the case of Naranja, the asset quality was something like 4.3%. Basically, some deterioration in personal loans. The dynamics are even more significant that the bank, they have been growing deposits a lot from very low levels because they are, I would say, pretty new in taking time deposits or saving time deposits. And they [ lend ] a lot. And therefore, with the growth in the loan book, also the cost of risk increase. But going forward, we don't see any deterioration in the asset quality. And of course, the cost of risk will be more in line with the expected losses and the growth in the loan book. So that was loan growth and asset quality, differentiating between the bank and Naranja X. In the case of this issue with the Central Bank and the [ CMV ] regarding the exercise of the puts, in the first quarter, we had a provision, ARS 46 billion. That was the amount that the Central Bank and the [ CMV ] was saying that -- it was the prejudice that they suffer, multiplied by 2. Basically, we built the cushion because the difference of the amount of the exercise of that [ puts ] was ARS 23 billion. So we had -- we made a provision of ARS 46 billion. In some time during the second quarter, the Central Bank debits from our account at the Central Bank, ARS 28.8 billion, so let's say, ARS 29 billion. That was a kind of a preliminary gesture of goodwill from part of Banco Galicia saying, "okay, if you are saying that you're damaged because of our exercise of the put work, ARS 23 billion, there is that amount adjusted by an interest rate that was at 28.8." And we go on in the process of defending and waiting for the [ CMV ] to have their final ruling. So today, we have an excess provision of roughly ARS 17 billion. But of course, this issue is still open. And then you asked about the puts we have and if we sold them, if I'm not wrong, Ernesto?

Yes. How is the exposure after the puts and how was before?

Yes. Well, we sold all the puts to Central Bank. We received ARS 16.6 billion. That was in July. And the net result of that was in the order of half of that because we were accruing part of the prime we paid on those puts. There were many puts. So we sold -- we have no longer any puts against the Central Bank. We sold them, and there will be a positive result in July. And then ROE guidance, well, so far, the year is much better in terms of results in ROE than expected at the beginning of the year. The first-half ROE stands closer to 37%. We are forecasting lower ROEs for the third quarter and the fourth one. But with this first half, we think that we will end up between 25% and 30% for the full year. Going forward, let's say, for next year, of course, the -- sorry, one comment. And this is without considering the positive effect and of the purchase of HSBC Argentina. That is the stand-alone business. Once the transaction is approved and the numbers are incorporated to our numbers. Of course, there will be many changes. And for next year, again, thinking a stand-alone business, should be in the range between 20%, 25%. Again, many things are going to happen in the meantime, but that is the current guidance, information, projections and estimates that we have.

Just a follow-up in terms of the overall securities. Can you remind us how is your position on securities linked to inflation? And how are you classifying them? I don't know if they are for [ held ] for sale or for maturity?

Yes. Well, actually, in the press release, we have a chart that is exposure to the public sector. And there, you will see the bonds that are accounted as available for sale or at market price at a cost plus yield and the ones that are mark-to-market that with the results shown in other comprehensive income, the variation. Most of the bonds in pesos adjusted by CPI are cost plus yield, while the rest are mark-to-market in general.

Our next question is coming from Brian Flores from Citibank.

I wanted to ask a bit on growth. Where should we see the focus on growth? Should it be across the board? Should it be more on personal loans? If you could elaborate a bit on what are you seeing like the best recoveries in terms of demand? I know generally, it begins on the corporate side, but then it filters down to consumer. If you could expand a bit on the dynamics that you are seeing, that would be very good for us. Then on my second question, I wanted to ask on NIMs. I know this is a very hard question, but I know deals are decreasing, but also this is obviously helping you on interest expenses, too. So I wanted to ask you, when should we see NIMs stabilizing? That would be very helpful.

Hi, Brian. Well, as you said, in terms of loan growth, it began with big corporates. Last year in the first quarter, in dollars, they were demanding dollars, now more pesos as the interest rates went down significantly. We are also seeing some loan demand from SMEs and the agricultural sector, although the agricultural sector has some seasonality. And last, individuals, we are seeing some rebound in personal loans and credit card financing. Of course, this is just the bank. Now when we look at Naranja X, it's just individual credit cards and personal loans. And we also launched 2 or 3 months ago, mortgage loans. And this is a product that will begin to appear in our balance sheet because it has a lag between the -- when the client request the loan and when it's finally granted and when they purchase the apartment and the notary makes all the paperwork. But in the past, we saw that they reached to roughly 6% of our total loan book. In this case, perhaps it could get to the same level in 1 year. So this is how we see growth in the loan book. In terms of NIMs, as you said, they are going down from very, very high levels. The NIMs include, of course, the yield on all our interest-earning assets that includes government paper and Central Bank paper and our loans to the private sector. We think there will be a further reduction that we see it as very gradual because now as we don't have the obligation to pay a minimum interest rate on time deposits, we have more flexibility to set the time deposit rate. Also, as monthly inflation is going down, the breakdown between deposits with costs -- basically time deposits or remunerated accounts against the transaction accounts improves for our side. Basically, as inflation is lower, the opportunity cost of leaving money in saving account or checking account at zero interest goes down. So the breakdown and the average cost of funding improves for us. So when we focus in just in the intermediation with the private sector, basically, the deposit base and the loan book, we can see NIMs at levels of 27%, 25%. And perhaps we will remain at those levels or gradually go down, but we don't see any significant compression going to the levels we saw -- for example, in 2017, in 2018, we saw NIMs at around 15%, 19%. In this case, we think it will take a little bit more time.

Thank you. Pablo, if I may, just a quick follow-up. Regarding coverage, I think the level that we are seeing is a bit low. And as you were saying, you have intentions to continue accelerating. So do you think we should see a higher peak in terms of cost of risk first before normalizing as you mentioned? Or do you think, at the end, we shouldn't see a big spike in terms of increasing the coverage? And then if I may, just a final one. You mentioned the acquisition of HSBC Argentina. When do you see this like happening officially or when do you think we should see or hear news from the Central Bank's approval?

Okay. Well, we are comfortable with the coverage levels. And actually, when you look at a longer period of time, they are at, I would say, higher levels than they used to be. The coverage comes from models with expected losses, but really, we don't see a material difference. They are -- actually, in the case of the bank, it was almost flat at 160% from 1 year ago. In the case of HSBC, we don't have any particular date from the Central Bank. We think it could be in the next couple of months, either September or October. So the consolidation of numbers should occur likely in the fourth quarter. And in mid-2025, perhaps all the businesses could be merged. And we will have 1 bank, 1 insurance company, 1 asset management company.

Our next question will be coming from Marina Mertens, calling from Latin Securities.

So I have a question regarding Naranja X, which has significantly contributed to this quarter's results and ROE. So how do you plan to leverage on its performance in your overall strategy? And also, which were the main drivers behind this growth in both loans and deposits?

Hi, Marina. Well, Naranja has had a great quarter, basically because the interest rate environment changed dramatically. First -- well, due to the pretty recent ability of Naranja X to take deposits, their cost of funding went down. In the past, when they were not allowed to take deposits, they depended on market -- in the capital markets basically or lines from different banks. So now with their own deposits, the cost of funding went down. And in particular, with interest rates going down, their cost of funding went down much faster than the impact on their loan book. Right now, to give you some sense of numbers, Naranja X is paying roughly 40% on the deposits. And they are charging 100% in personal loans and 80% -- these are big numbers. Perhaps it's 82-or-so percent on credit card financing. So I would say they are now seeing the results of their investments they did in previous years. Actually, in the last 2 years, their profitability wasn't very good because they were investing in all these capabilities. Now they are a digital -- pure digital company. They open hundred thousands of accounts every month. They see double-digit growth rates in deposits and loans. So they are doing very well. That is, I would say, why Naranja is doing so well. Going forward, NIMs should compress a little bit as the stock of loans begin to yield lower interest rates. But we see a very good year for Naranja X.

[Operator Instructions] We'll now go to Carlos Gomez of HSBC.

Congratulations on the results. Two questions. The first one, maybe you said this before, but could you give us your economic forecast for '24 and ' 25, in particular, inflation rates and the exchange rate? Second, could you, perhaps in simple terms, explain to us how you have managed your bond portfolio differently from your peers? Because we have seen quite significant results in securities for the 3 large banks. And where does it come from? And how should we expect that to evolve in the coming quarters?

Hi, Carlos. Well, regarding the main macroeconomic variables, I would say that the inflation and GDP, our last forecast on inflation from our research department was 130% for this year, perhaps, I would say, between 125% and 130%, they are revising that according to the different monthly readings we are forecasting; and 40% for year 2025. Of course, these numbers are moving targets, but these are the current figures. In terms of GDP, we see a contraction from -- for this year, of 3.5%. And we see a growth of 5% for next year. In terms of FX, there is the most difficult question because we are thinking that all these FX restrictions, the [ CIPO ], as we call it, could be eliminated some time this year, and that will change the numbers for the end of this year and also for next year. But if I had to tell you what we see for next year, is basically to keep devaluation and inflation at the same level, that would be to keep the same real exchange rate. Then regarding the elimination of the [ CIPO ] of all these FX restrictions, there are different opinions, different estimates. Some economies are speaking about -- before the midterm elections of next year, others in first quarter next year, not so close to the elections. We are still thinking that perhaps could happen before year-end for different reasons. And what we always say is that the current mix of economy and also many members of the Central Bank in their DNA are traders, and they don't anticipate their moves. So that's something that is very important to keep in mind.

Sorry, before you go on the ForEx, so if there is an adjustment in the exchange rate, so after the adjustment, where do you see the currency [ stabilizing ]?

Well, if you consider today the blend export -- the [ blend effect ] for exports, that is 80% of the official one, 20% of the blue-chip swap. And if you consider the import FX that takes a 17.5% tax, that would give you an 11 -- ARS 1,150 or ARS 1,200 per dollar for the official -- yes, for the new, let's say, a unified FX. Then for next year, if you apply inflation, I guess, would be closer to ARS 1,700 or so. But this is, again, the most difficult estimate to make. In the case of our bond portfolio, basically, we have all the CPI linkers or the bonds in pesos adjusted by [ itself ] by the CPI at a cost plus yield. Why? Because this is the position we used to cover our net worth against inflation. Mostly, in the rest of the bonds are mark-to-market. And as in our case, the bonds in pesos adjusted by CPI is a big portion of our loan book. That is why our results are not so volatile as in the case of our -- as it was the case in other competitors. As of now, I would say, 45% of our loan book is at cost plus yield. The rest is mark-to-market, but a big portion are the caps. The caps are 70 days on average duration. So really, they are the difference between market prices and book value are minimum. So basically, that is how we have our loan book -- our bond portfolio.

And therefore, for the rest of the year, you would expect it to yield, again, because there are a lot of CPI linkers? Do we expect it to yield weak inflation, declining with it?

Yes. Basically, we hope we have them at cost plus yield. And I would say that the yield should be close to inflation. So CPI or [ Ser ] plus 1% or so. So the assumption would be the same as inflation for this group of bonds.

[Operator Instructions] We do not have any further questions at this time. Mr. Firvida, I'd like to turn the call back over to you for any additional or closing remarks. Thank you.

Thank you, George. Well, thank you, everybody, for attending this call. If you have any further questions, please do not hesitate to contact us. Good morning, and have a nice weekend.

Thank you very much, Mr. Firvida. Ladies and gentlemen, that will conclude today's conference. Thank you for your attendance. You may now hang up. Have a good day. Thank you. Bye.