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

Good morning, ladies and gentlemen. Welcome to Grupo Financiero Galicia First Quarter 2025 Earnings Call. This conference is being recorded, and the replay will be available at the company's website at gfgsa.com. [Operator Instructions] Some of the statements made during this conference call will be forward-looking statements within the meaning of the safe harbor provision of the U.S. Federal Securities Laws and subject to risks and uncertainties that could cause actual results to differ materially from those expressed. Investors should be aware of events related to the macroeconomic scenario, the financial industry andOther factors that could cause results to differ materially from those expressed in the respective forwardlooking statements. Now I'll turn the conference over to Mr. Pablo Firvida, Head of Investor Relations. You may begin your conference, sir.

Thank you, Sofia. Good morning, and welcome to this conference call. I'm Pablo Firvida, together with me is Gonzalo Fernandez Covaro. According to the monthly indicator for economic activity, MI, the Argentine economy recorded a 5.6% year-over-year increase during March, while in year-to-date terms, the economic expansion reached 6.1%. During the first quarter of 2025, the primary surplus reached 0.5% of GDP and the overall surplus 0.2% of GDP. This implied a slight deterioration compared to the first quarter of 2024 when primary surplus was 0.7% of GDP. The National Consumer Price Index accumulated an 8.6% increase during the first quarter of 2025 and an 11.6% rise as of the end of April, reaching a 47.3% annual variation from April 2024. On the monetary front, the monetary base increased by ARS 0.8 trillion in the first quarter, recording a 145% increase as compared to March 2024. The exchange rate maintained a 2% monthly growth throughout 2024 and the Argentine Central Bank slowed the pace of adjustment to 1% per month starting February 1, 2025. The exchange rate averaged ARS 1,069 per dollar in March 2025, a 20.5% devaluation in year-over-year terms. On April 11, 2025, the Central Bank implemented a foreign exchange regime with a band within which the exchange rate may fluctuate freely. These bands were initially set between ARS 1,000 and ARS 1,400 per dollar and will be adjusted monthly at a rate of minus 1% for the lower bound and plus 1% for the upper bound. The monetary policy rate started 2025 at 22%, but was reduced in late January to 29% and remained at this level until nowadays. In March 2025, the average rate on peso-denominated private sector time deposits for up to 59-days stood at 29.5%, 55.9 percentage points below the March 2024 average. Private sector deposits in pesos averaged ARS 80.6 trillion in March, increasing by 8.5% during the quarter and 89.9% in the last 12 months. Time deposits in pesos rose 16.5% during the quarter and 125.9% in the year and peso-denominated transactional deposits increased 0.6% during the quarter and 60% in year-over-year terms. Private sector dollar-denominated deposits amounted to $29.7 billion in March 2025, decreasing 6.6% during the quarter and rising 78.3% in the last 12 months. Peso-denominated loans to private sector averaged ARS 60.8 trillion in March, showing a 20.1% quarterly increase and a 228.1% year-over-year rise and private sector dollar-denominated loans amounted to ARS 14.1 billion, increasing 42.1% and 225.8%, respectively. Turning now to Grupo Financiero Galicia. Net income for the first quarter amounted to ARS 146 billion, 63% lower from the year ago quarter. The result comes from profits from Naranja X for ARS 64 billion, from Banco Galicia for ARS 37 billion, from Galicia Asset Management for ARS 29 billion and from Galicia Seguros for ARS 11 billion. This profit represented a 1.7% annualized return on average assets and an 8.8% return on average shareholders' equity. Going to Banco Galicia, the result of the quarter was negatively affected by the reduction in the prices of the trading bond portfolio and the increase in the cost of risk associated with the growth of the loan book and the increase in the NPLs in the retail segment. The net income for the quarter was 90% lower than in the same quarter of 2024 due to an 84% lower operating result. This was primarily a consequence of a 68% decrease of net operating income as net interest income decreased 66%, mainly because during the first quarter of 2024, the bond portfolio adjusted by inflation had remarkably high yields. Net results from financial instruments fell 65% due to the reduction in the bond portfolio and results from foreign currency quotation differences decreased 80%. The above-mentioned decreases were partially offset by a 26% growth of net fee income. Average interest-earning assets reached ARS 14.9 trillion, 45% higher than in the same quarter of 2024, primarily due to a 97% increase of the average portfolio of loans in pesos and of 702% of dollar-denominated loans, partially offset by an 88% reduction in the average balance of other interest-earning assets in pesos. In the same period, its yield decreased 95 percentage points, reaching 31.9%. Interest-bearing liabilities increased 67% from March 2024, amounting to ARS 13.6 trillion, primarily due to the increase of time deposits in pesos and saving accounts and other deposits in foreign currency. During this period, its cost decreased 41 percentage points to 13.9%. Net interest income decreased 66% when compared to the first quarter of 2024. This was the result of a 63% decrease in interest income because of an 80% lower interest on government securities and a 99% lower interest on repo transactions, together with a 58% decrease in interest expenses due to a 46% lower interest rate on time deposits and an 80% interest rate on other deposits. Net fee income increased 26% from March 2024 due to a 26% higher income from credit card fees and of 34% from fees on deposits. Net income from financial instruments decreased 65% due to a 67% lower results from government securities. Gains from FX quotation differences were 80% lower than the year ago quarter, including the results from foreign currency trading. Other operating income decreased 39% in the quarter, while provisions for loan losses increased 193% because of the growth of the financing portfolio and to an increase in delinquency. Personnel expenses were 19% lower than a year before. And it is worth to mention that during this quarter, we began to use the provision for restructuring expenses established in the fourth quarter of 2024. Administrative expenses increased 25% due to a 57% increase of higher administrative services and a 20% increase of expenses for maintenance and repairment of goods and IT, and 187% higher publicity promotions and research expenses. Other operating expenses decreased 49% due to a 52% lower turnover tax related to financial operations and 97% lower charges for other provisions. Results from the net monetary position decreased 79% year-over-year following the downward evolution of the inflation. The income tax charge was 65% lower than in the year ago quarter due to lower operating results. Finally, the other comprehensive income included a ARS 75.1 billion loss, mainly due to treasury bills [ breakups ]. The bank's financing to the private sector reached ARS 12.6 trillion at the end of the quarter, up 107% in the last 12 months, with peso financing increasing 88% and dollar-denominated financing growing 177%. While by credit line, promissory notes increased 171%, credit card financing, 66% and personal loans, 221%. Net exposure to the public sector decreased 35% year-over-year, primarily due to the reduction of repo transactions. This exposure represented 19% of total assets as of the end of the quarter compared to 40% of the year before. Deposits reached ARS 15 trillion, 48% higher than a year before, mainly due to 121% increase in saving accounts in dollars and a 69% increase in time deposits in pesos, partially offset by a 16% decrease in other deposits in pesos. The bank's estimated market share of loans to private sector was 13%, 78 basis points higher than at the end of the year ago quarter and the market share of deposits from the private sector was 14.2%, 400 basis points higher than in the same quarter of 2024. The bank's liquid assets represented 62.4% of transactional deposits and 39.3% of total deposits compared to 104.9% and 65.9%, respectively, from a year before. As regards asset quality, the ratio of nonperforming loans to total financing ended the quarter at 2.75%, recording a 66 basis points deterioration as compared to the 2.09% of the first quarter of the prior year. At the same time, the coverage with allowances reached 153.3%, up 4.9 percentage points from the 148.4% recorded a year ago. As of the end of March 2025, the bank's total regulatory capital ratio reached 21.1% decreasing 10.7 percentage points from the end of the same quarter of 2024, while the Tier 1 ratio was 20.8%, down 12.5 percentage points during the same period. Consolidated with Galicia Mas, the total capital ratio would have been 25.3%. In summary, in a challenging political and macro environment, Grupo Financiero Galicia was able to keep asset quality, liquidity, solvency and profitability metrics at healthy levels and at the same time, continue to move forward with the integration with Galicia Mas, which would be completed before the end of next June. We are now ready to answer the questions that you may have. Thank you.

We are going to start the question-and-answer session for investors and analyst. [Operator Instructions]Our first question comes from Brian Flores with Citi.

Just wanted -- the first one, if I can, on the guidance. We have seen some of your peers already shifting some of the lines in the guidance. And I think you did not mention it in your remarks. So I just wanted to know if you're making any changes on any of the lines. And then the second question is on asset quality because we are seeing some fast deterioration. I know there was some changes on accounting, and I know the fourth quarter had perhaps some spikes. But I think now this is more comparable, and we are still seeing some pressures on asset quality. So could you elaborate a bit on where is it coming from this increase in delinquency, particularly? And also we should expect this to normalize or maybe, I don't know, the new ranges -- I know we're coming from a low base, but the new range is a bit higher than what we were initially expecting.

Yes. Thank you for the question. I mean in terms of guidance, we are seeing ROE for the year now between 12% and 13% for the group. As we said, this is a transition year for us and we believe for the entire financial system, where we are building our portfolio, and we're coming from very low levels of lending. So we're in that process of building the portfolio and compensating lower margins with higher volumes. And on top of that, we have the merge with Galicia Mas, and we expect some expenses on the transition -- on the integration from the IT side, but also from the integration, we expect -- we may be short on the restructuring provision booked last quarter. We may need a bit more. So we don't know numbers yet, but that's what we are seeing with how things are evolving, which is a good news for the future. It may have some more expenses this year. So that's why we are changing also the guidance on ROE for the group. Talking about delinquency or NPLs, I mean, we were coming -- the increase in NPLs comes from the individual portfolio, not wholesale. Wholesale is really flat. So I would say this is entire for our consumer lending, let's say. But that is the one that grew fastest and started to grow fast. So we were coming from very low levels. We expect -- so we saw -- as the financial system in Argentina saw increase on NPLs, we are seeing that. We made some changes in origination in the fourth quarter because I think we are also trying to look what the sweet spot where we want to be. After a high growth, it's something unusual for the local system to grow as fast. So we are now -- we made those changes. So we expect this to stabilize. And by the end of the year, the NPLs to be around or a bit less than what we are currently having. We may see still a spike in NPLs in the next couple of months, but then a reduction or stabilization for the end of the year. So we knew that, that was something was going to happen when you grow at this pace. Again, we were coming from low levels. We believe that now with the changes we make, we will be able to stabilize that and get to a normal, let's say, levels.

So just to confirm on the ROE range, you're decreasing a bit from 15% to 12% to 13%. And then can you confirm if the loan growth of 50% in real terms and deposits between 30% and 40% are reiterated or have any changes?

No, the growth rates are -- we are keeping those. We think that those are still what's going to happen, yes. Remember that as you said 12%, 13% in real terms. So our ROE has already excluded inflation because in Argentina, we have inflation accounting and that's already included in the P&L, as you just said.

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

My first one will be a follow-up in asset quality. So we noticed a higher NPL ratio. But at the same time, we also saw cost of risk normalized from last quarter as it was abnormally high because of an impact on Naranja. So just wondering how should we think about the cost of risk evolving in the next quarters and for the full year? My second question is on expenses. We saw lower-than-expected expenses because you have started to use the expense provision build for HSBC in fourth quarter. But at the same time, you were saying that you should expect some expenses related to IT and the integration costs related to Galicia Mas. So I just wanted to think how should we expect OpEx growth for the year? And if there is at some point, room to do some cost synergies? And my last question will be on deposits. We have seen one of your peers remunerating deposits at 32% to attract clients. So I just wanted to know if you are following a similar strategy with your credit card business? Would it be the same strategy at the bank? So any color on this remuneration on deposits on each of the subsidiaries will be very helpful.

So to remember the 3 questions, cost of risk. Cost of risk as you see, for the group is stable. We have seen a bit increase in the bank and a bit reduction in Naranja. So talking about the bank, Galicia Banco, I mean, we'll see a spike in the first quarter, as it says. We may see something also to continue in the second quarter, but then start to go down, and we expect a lower number in the fourth quarter, around 5%, 5.5%, something like that, 5.6% versus the 6.8% that we are having now. So for the bank, we see [indiscernible] is stable and for the bank, we'll see an improvement on the second half of the year. First half we still be at these levels. We may see for the second half, some improvement because of all the actions on the origination that I mentioned. Talking about expenses, I think was the second one about the -- I mean, what you see -- you see a reduction in expenses quarter-over-quarter, not just because we are using the provision, but because last quarter, we booked the provision. So last quarter, you have a provision but this year -- this quarter, you don't have it. Because the provision is paying for voluntary redundancies. So that's the main variation you'll see quarter-over-quarter. But -- so that's talking about -- I think you are talking about the synergies on Galicia Mas or former HSBC. That's going -- that's -- I mean, it's -- I think the good news is we are anticipating and having a fast approach on synergies because we may be able to perform almost 90% of the synergies expected this year. The point is it's difficult now to predict on which space because at some point, you have the saving, but also if that happens, we may have a bit of higher restructuring expenses. As I mentioned in prior question, we -- the provision that we booked last quarter may not be enough. So if this trend continues. So if that happens, we may have a one-off this year of more restructuring expenses, but with the good news that we are getting a sustainable saving for the future. So for the year, I would say it's a bit soon to say because it will be a mix of accelerating some synergies. And so the good thing of the savings, but also the one-off of the restructuring. But we expect that -- I think that the summary is that at the end, we may end with a bit higher expenses because of the integration, system expenses and restructuring expenses, but with a faster approach, so we can start next year better than what we thought when we thought about this plan. And I think there was another one.

Remuneration of deposits.

Remuneration of deposits. I mean, as you know, Naranja X remunerating deposits is plan of their business model. I mean they take deposits on the digital wallet and they lend personal loans. In the bank its different. As you know, our current deposit base, we have our mutual fund, which is called FIMA, the money market deposits that is 24/7. So customers can use that as a remunerating account. we are not seeing any big change in the near future. Of course, we are always analyzing strategic alternatives and see what's best for our customers and for our funding base. But I wouldn't say we are making any -- we are thinking in any major change in the near future. This, of course, can change, as I said, because we're always analyzing opportunity. But so far, we believe that for the bank, we are not thinking in that we're going to apply that option, let's say.

Perfect Gonzalo. Just a follow-up on this last one. Can you share with us how much are you remunerating in Naranja X? How much is in the mutual funds of the bank? Just to have an idea of how is the difference between them? And additionally, are you seeing competitors being aggressive and at some point, potentially changing the strategy of your -- of the bank? Or do you think it's still too soon to know?

I mean if you're talking about that, I mean, about remunerating accounts so far, as you said, we just saw one bank doing it. So we don't -- we haven't seen a real change in the market. If you look at market share, I mean, banks with higher market share haven't changed that policy so far, we are not seeing any change in general. Of course, there are some players that may do, as you mentioned. So we are not seeing other changes like that. Of course, that may happen. In terms of rates...

Yes. I would like to add some comment there. Today, the funding breakdown in pesos for us is 70% with cost, 30% with no cost. And it's very atomized. And as inflation is going down, this threaten is becoming smaller, I would say. It was very important to remunerate transactional accounts or deposits when monthly inflation was much higher than today. In the case of our money market fund, the last yield I saw was around 23.8%, 24%. That is what is yielding and you can withdraw it any time, any day, any hour. And in the case of Naranja X, it's in the range of 30%. It has some different like buckets and you have limits in terms of amount, but on average, it would be around that number.

Yes. If you leave more the money like a time deposit, they pay you more. But I think it's important what Pablo just said. I mean we see that the attractiveness of the remuneration with inflation going down is always valid, but it lose attractiveness for the customer base because of the lower interest rates and the less inflation to combat.

Our next question comes from Carlos Gomez-Lopez with HSBC.

I don't think you have mentioned the economic assumptions that you have. I would like to know what you expect in terms of growth, inflation and exchange rate and interest rates by the end of the year and next year? Second, in terms of asset quality, you mentioned that on the corporate portfolio, everything has been fine. But we are seeing news of a number of corporates which are starting to not pay at least the debentures, the capital markets issuance. Do you think that you will see more such problems as interest rates go down and companies have to change their business models? Are you concerned about your cost of risk in the corporate segment?

Talking about the second question first, starting, and then I leave Pablo to take the other one. On the wholesale, yes, I mean, for example, you are talking, I'm sure about news over the last days about a company that is defaulting their issuance or the commercial papers. For example, in that exposure, we have a very, very low, less than $6 million unsecured and then a couple of million secured. So we have a very low exposure on that one. So I mean, we -- with this change of Argentina they made -- this change of country model, I would say, maybe sectors winners and sectors that we lose. So far that our portfolio is well balanced and really, of course, that if things doesn't improve as expected in Argentina, things can go south. But so far, we don't -- we are not seeing a concentration in an area where an industry that is concerning us that can affect materially our performance. We can have things here and there, but we are not seeing so far, as I said, a concentration that can -- that is concerning us for the reasons you just mentioned.

Hi, Carlos. Now regarding the macroeconomic assumptions, these are from our Chief Economist. There is also a good source that is the Central Bank in which like 50 economies have their estimates, and it's a kind of average. But looking at our Chief Economist, in terms of GDP, he's forecasting 5.4% growth this year and 4.5% next year. Inflation for this year, 26%. That is the December-December variation. And for next year, 14%. When we look at the FX, it's a moving target, but the last number he gave us was 1,230 at the end of this year and close to 1,400 next year. These are the main assumptions. In terms of interest rates, all or most of the interest rates are going down a little bit due to this expected reduction in inflation.

So I mean we're at 32%, I think the policy rate is right now.

Rate is 29%.

29%, okay. So by the end of the year, lower than that?

Next year, he's forecasting something around 24%. Again, it's a moving target, but that was the last number he provided.

It's important to mention, Carlos, what we are seeing because of the high demand of lending and loans growing faster than deposits. We are not seeing really even though the Central Bank has reduced the monetary policy rate, we are not seeing that happen also that going together with the lending rates in the market because, again, as I said, I mean, demand for loans is high. And so we are not -- at that point and for that reason, we are not seeing that even though rates will continue going down, we are not seeing that lending rate mainly in the individuals, but also in SMEs that, that will continue to get that reduction. Of course, it may go something down, but not at the same proportion because, again, in the fact in the first quarter, we saw margin -- if you exclude margin government bonds, our margin reduction was mainly affected by the government trading portfolio. But if you exclude that and do margin in pesos, excluding the government bond performance, it increased a couple of hundred basis points from prior quarter. Because of the fast growth in lending, the high demand, the lending rates are not going down in the market. Just to complement that not because of Argentina situation, not necessarily a reduction in monetary policy rate will imply a reduction in the lending or in the whole margin of the banks.

Our next question comes from Pedro Leduc with Itau BBA.

First, on Naranja X specifically, very nice ROE close to 30%. If you can talk a little bit more about the business drivers here. It seems like on the NIM side and provisions also in the next few quarters. And if this should be still growing higher than the rest of the business? And then last second question and quick on the market share that you report there under Galicia Mas was fell from high 2s to low 2% this quarter. I understand there's an adjustment process taking place. So if you can share a little more if this is already the market share that we should see if there's already more going to the other parts of the group. So these will be the 2 questions.

I'll start with the second one, which is the Galicia market share. I mean what is happening there is we are anticipating customer migrations in wholesale, for example, meaning complex customers, we are already asking them to open accounts in Galicia and start to transfer deposits and their transactionality to Galicia. So it's easier for the integration, not need to migrate complex customers that, for example, you have to trade finance, structured products. I mean talking about wholesale, not retail. So in that case, we -- even though you see market share reduction, part of that is done by the movement or the transition to Galicia in advance to the migration. And so that for the market share part, if you want to answer the other?

Yes. On Naranja X, Pedro, you can see an increase in the margin, in the financial margin and an improvement in the cost of risk. Basically, these are the 2 main drivers, and they have been growing both in number of clients and in loans origination. Typically, for Naranja when interest rates go down, their cost of funding improves more than the interest rate they can charge for personal loans and credit card financing. So typically, there is a margin expansion in their case. It's different from the bank. And the cost of risk improved basically because in the fourth quarter, they have changed the model for expected losses. Basically, they had a model that took into account or use variables that were more related with credit card financing. And as they were growing significantly with personal loans, they had to adapt and change that model. That's why the cost of risk went down from levels of -- I don't remember exactly from 19% to 15% or so. So the profitability of Naranja should be good for the full year. What should happen is that the weight of the bank should be recovering. It's very unusual that Naranja has a higher net income that Banco Galicia.

Our next question from Rodrigo Nistor with Latin Securities.

With loan growth consistently outpacing deposit growth, a moderation in loan growth seems inevitable. How does management envision real loan growth settling post transition period, say, by early 4Q '26?

The first comment I can say is that when you look at the loan-to-deposit ratio, typically, it's very different between pesos and dollar, big numbers in pesos, 90%, in dollars, 50%. We are seeing different growth rates from deposits and loans. But of course, the stocks are different. So we must look at the absolute amount. In certain months, there could be more shortage, let's say, of funding. And that is why the bank has been issuing different bonds recently in pesos, in dollars, typically in dollars, we sold the dollars and we lend pesos and we cover the dollars with the forward. So we are looking at different ways to have that demand satisfied. The idea is to keep on growing, and that's why we are keeping the guidance of 50% loan growth this year.

Yes. I mean just want to add. I mean, of course, we are doing -- going after institutional deposits like commercial [indiscernible] but also trying to focusing a lot in deposits, which is the core funding and the more safe funding. But we are seeing, of course, that the loans are growing faster than deposits, and that at some point will change because that not for Galicia, but for the local financial system could be a constraint in the lending growth. But we believe that even though [indiscernible] deposit doesn't grow, we believe that we are in a very well position to capture more market share in deposits, with our size and our reach to different segments and customers. We believe that we can do a good job there. And if the pie of deposit doesn't grow, we can get more market share and be able to continue growing our lending. So that's a focus of all the business lines to get more deposits. As you know, the raw material to continue growing lending. And again, we believe that we are in a good position to achieve that and be able to maintain the lending growth as projected.

Next question from [indiscernible]

With inflation decelerating, how do you see net interest margins evolving? Are there specific repricing strategies or asset mix shifts planned to help protect margins going forward? Deposits declined 5% quarter-on-quarter in real terms. Was this a seasonal effect or driven by a competitive pressure? What strategies are in place to recover deposit momentum? And do you expect the recent dollar-related measures announced by the government to enhance your dollar business and support deposit growth?

I mean deposits, as I said, deposits are growing -- that's something punctual. We are not seeing deposits reduction in general. And if you see in the bank, I think that's group what you are talking about. But I mean, we really -- what we are seeing is deposits growing lower than loans, but not that we are losing market share in deposits, nothing like that. So we are in the bank. We are not seeing that happening that could be something, again, temporal. But -- so we are continuing to focus, as I said before or our tools we foresee growing deposits because we want to continue growing lending. About -- talking about margins, I mean, we -- as I said, what you see here in margin reduction, yes, is an important reduction in government bonds quarter-over-quarter. If you go -- that it was an important income for banks, of course, but that March, April, we already start to see an increase or a recuperation on our trading portfolio, and we are 1/3 more or less of what we lose in the first quarter is already recovered between April and May. But if we excluded government bonds investments, I think, as I said before, we are seeing our margins in pesos, for example, being flat quarter-over-quarter. And if we exclude government lending in pesos, we are seeing an increase of 200 basis points between fourth quarter and first quarter. So we are seeing high demand in lending. So really, the lending rate has not gone down. In fact, in some products, lending rate has gone up in the last months, and it may continue happening if the lending demand continues at this level. So Margin, we may see some margin reduction in the government securities side. That depends, of course, also the volatility of Argentina and they see of how each of the bonds are trading. But on the lending side, we are seeing a margin stabilization and in some products, some slight increase going forward.

Our next question from Clemente Herrera with Falcom Asset Management.

How do you see ROE evolving this in the following years? You are well capitalized, so maybe you are seeing more space there.

I mean for ROE, as I said this year, I think we talked about 12%, 14% in the guidance. We see that to start to go up again for the future years, I mean, '26, '27. Our intention and our target is to continue maybe towards a 20% ROE stable, 20% ROE, maybe 17% next year and 20% the following one. That's a trend we want to -- but we believe that our -- considering our size, we should be trading or operating at a sustainable 20% ROE. That should be, of course, something that will go in stages after we finish the integration this year and start capturing all the value from the HSBC acquisition and finish with all the synergies, that would be my -- the evolution of the ROE that we at least are targeting for the future.

The question-and-answer session is over. We would like to hand the floor back to Mr. Pablo Firvida for the company's final remarks.

Okay. Thank you all for attending this call. If you have any further questions, please do not hesitate to contact us. Good morning. Bye-bye.

Grupo Financiero Galicia conference is now closed. We thank you for your participation, and wish you a nice...