Q2 2023 Grupo Financiero Galicia SA Earnings Call

Speaker 2: You're currently on hold for today's second quarter 2023 earnings release conference call. At this time, we're assembling today's audience to plan to be underway shortly. We appreciate your patience. Please remain on the line.As you can imagine, we have no NBA

Speaker 3: recording a 47.8% increase from June 2022. The exchange rate averaged 248.8 pesos per dollar in June , 2023, a 43.9% increase against the average of December , which implies a 30.5% peso devaluation. When compared to June , 2022, the average year of the 10 peso underwent a 50.7% devaluation.

Speaker 3: In June 2023, the average rate on PISCO-denominated private sector time deposits for 59 days was

Speaker 3: In June 2023, the average rate on PISCO-denominated private sector time deposits for 59 days stood at 92.9%.

Speaker 3: 44.5 percentage points above the average of June 2022. After the primary elections, the Argentine Central Bank devalued the peso by 17.9%.

Speaker 3: choose 350 pesos per dollar.

Speaker 3: Additionally, the monetary authority increased interest rates.

Speaker 3: with the monetary policy rate and the minimum rate for time deposits under 30 million pesos currently standing at 118 percent.

Speaker 3: Private sector deposits in pesos averaged 21.9 trillion pesos in June , increasing 22.6 percent during the quarter and 115.5 percent in the last 12 months.

Speaker 3: Then the positive in pesos rose 23.8% during the quarter and 125.8% in the year.

Speaker 3: The SO-denominated transactional deposits increased 21.2% during the second quarter and 106.9% in year-on-year terms.

Speaker 3: Private sector dollar-denominated deposits amounted to $15.5 billion at the end of the quarter, decreasing 5.2% in the quarter and 0.6% in the last 12 months.

Speaker 3: During June , PISO-denominated loans to the private sector averaged 9.5 trillion PISO.

Speaker 3: increasing 25.6% in the quarter and 86.5% when compared to June 2022.

Speaker 3: while private sector dollar-denominated loans amounted to $3.8 billion, recording an expansion of 4.6% during the quarter and of 0.3% when compared to June 2022.

Speaker 3: Turning now to RUPE financial Elicia, the income for the second quarter amounted to 58 billion pesos.

Speaker 3: 425% higher from the year goal quarter.

Speaker 3: mainly due to profits from Banco Galicia for 51.8 billion pesos, from Galicia Asset Management for 4.4 billion pesos, from Galicia Seguros for 894 million pesos, and from NaragaX for 185 million pesos.

Speaker 3: annualized return on average assets, and a 25.9% return on average shareholder equity. Banco Alicia net income for the quarter was 555% higher than in the year ago quarter. The net operating income increased 62%, mainly due to 196% increase in net interest income. Average interest ending assets reached 2.68 trillion pesos, similar level to that of the same quarter of 2022, mainly due to a 14% decrease in the average volume of peso-denominated loans.

Speaker 3: offset by 110% increase in the average volume of other intersailing assets in pesos. In the same period, its yield increased almost 34.2 percentage points, reaching 79.1%.

Speaker 3: Interest-bearing liabilities increased 4% from June 2022, amounting to 2.31 trillion pesos. This growth was mainly due to a 12% increase in the average balance of 10 deposits in pesos, offset by a 20% decrease in the average balance of 10 deposits in pesos.

Speaker 3: Net interest income for the quarter increased 196 percent from the same quarter of 2022, with interest income growing 131 percent and interest expenses growing 108 percent in the same period. It is worth to remember the change in the valuation model of the Argentine Central Land Paper, LELIC, acquired from January 1, 2023. These instruments used to be valued at fair value and the criteria was changed to a multi-scorch, thus its yield is being recorded as interest income instead of interest income.

Speaker 3: within results from financial instruments. Net fee income increased 15% from June 2022, mainly due to a 27% increase of fees related to bundle of products.

Speaker 3: Other operating expenses increased 70% due to an 80% higher turnover tax due to an increase in the gross income tax from financial operations as a consequence of the increase in the holding of the leaks and 57% higher charges for other provisions related to discounts on credit cards and payroll accounts. The income tax charge was 17.1 billion pesos higher than in the second quarter of 2022 with an effective tax rate of 25%. The bank's financing to the private sector reached 1.58% due to an increase in the total

Speaker 3: Exposure to public sector increased 22% year over year due to a 36% increase in the holding of the leaks.

Net exposure represented 13% of total assets, the same level as of the end of the second quarter of 2022. Deposits reached 2.95 trillion pesos, 1% lower than a year before, mainly due to a 34% decrease of checking around in pesos, partially offset by a 34% higher balance of other deposits in pesos. The bank's estimated market share of loans to private sector was 11.77%, 30 basic points lower than at the end of a year or quarter.

And the market share of deposits from the private sector was 9.92%, 24 basic points lower than in the same quarter of last year.

The bank's liquid assets were presented 123% of transactional deposits and 58% of total deposits.

As regards asset quality, the ratio of non-performing loans to total financing ended the quarter at 2.65%, recording a 49 basic points deterioration as compared to the 2.16% of the second quarter of the prior year. At the same time, the coverage with allowances reached 161%, down 57 percentage points from the 218% recorded a year ago.

As of the end of June 2023, the bank's total regulatory capital reached 23.64%.

decreasing 45 basis points from the end of the same quarter of 2022. In summary, in a particularly challenging and volatile macro environment, the group of financial organizations was able to keep asset quality, liquidity and solvency metrics at healthy levels and to significantly improve its 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.

of the high inflation of the quarter. We are now ready to answer the questions that you may have. Thank you.

If you would like to ask a question, simply press the star key followed by the digit 1 on your telephone keypad. Also, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Once again, press star 1 at this time. We'll pause for a moment.

And we'll first hear from Brian Flores of Citibank.

Hi Tim, good morning. Just two questions on my side. The first one is a mid-term strategic one regarding the positioning of some candidates.

Hi Tim, good morning. Just two questions on my side. The first one is a midterm strategic one regarding the positioning of some candidates with the central bank.

Given that we now have a bit more disability on what they are intending to do with the central bank, should we expect any reduction in your exposure before the election?

And if you could share any call or on your conversations that you've had with any approaches on the candidates teams.

It would be great. And I'll do my second question afterwards. Thank you.

Okay. Hi, Brian .

Well, when you were asking the first idea that came to my mind is...

a statement made by the former congressman.

saying that.

When you are far from becoming a prescient, meaning you have a low percentage of votes, you can have extreme statements.

when you come closer to becoming a president because you are having more votes you become more cautious

So many of the statements

actually made by Mille that was a surprise with 30% of the votes.

were made when he was very far from becoming president. And still today, I think the...

the environment or the...

The situation is very open because first the difference

was very small between the three main candidates. 30% of Mille, 28% of the Juntof Por el Camio, basically Macri's party, and 27% of the Peronism with the Cishnerism. So between the 385% with very small difference.

and with 70% of the voters actually voting.

This is usual that in the primaries there is a smaller percentage of voters.

So when we come to the elections in October , we think that perhaps we'll be more than 2 million voters.

adding to this small difference. So really, we are in an open situation. But what we think as a clear message is that almost two thirds of the population wants some kind of change of regime.

as with this change of regime.

But everybody is thinking that the key measures to balance or improve the economy is to reduce the fiscal deficit and we are happy with that. That would mean there will be less monetary expansion and less leaks going forward. So in the mid-term strategy, as you said, we are happy with the exposure to the central bank and with the government.

papers, basically because we are seeing deposits growing in line with inflation and loans growing around 10 to 15 percentage points below inflation. So that gap is invested in both 28 days central long for the really

and in government paper that basically are tied to inflation and allow us to hedge against inflation.

Sorry if the answer was too long, but I wanted to include the political environment, not only the potential measures of the candidate.

No worries, Paulo, that's perfect. And my second question is a bit on asset quality. I just wanted to understand what are you seeing there because as you mentioned, long-growth is still below deposits and inflation growth. So just willing to understand a bit more, what are you seeing there on asset quality and...

been deteriorating slightly, really from very low levels.

In the case of the bank, it became from 216 to 2.65 the NPLs, so really very, very low. If you think in an economy that is not growing this high level of inflation, economic and political uncertainty, one could think of much higher.

ratios of NPLs. Also, coverage is very healthy, above 160%.

We could expect some slight deterioration going forward for the second half of the year, but really nothing dramatic. As I, many times, repeat, and sorry if I'm becoming a lot of, or you repeat a lot, this concept.

As inflation is very high and many of the loans were granted very short term with fixed interest rates, really the installments become diluted and it's easy for both companies and individuals to pay back their loans.

The other side of the coin is that with this high of inflation, we have a negative impact on the monetary loss due to inflation.

So we could see some slight deterioration, but nothing really dramatic. If I had to say a less than 3% NPLs at the end of the year.

Perfect Pablo, I'm just if I can just a final question with with these circumstances and this very strong quarter, are you revising your R.O.E. guidance for 2023?

This high ROE quarter gives us a higher forecast.

I would say that around 15% for the poolier, the original estimates were around 10%, so in the area of 15, 14 perhaps also. We have to see of course, and how.

the path through of this devaluation goes to inflation. And while inflation has a direct impact on the deciding that I mentioned the monetary loss due to inflation, but also it has impacts on interest rates, loan demand, deposits, fees.

I mean, the expense is back, got the thinking in a, you know, say in the base case scenario, our wish would have an increase of the other dimensions.

Thank you very much.

Thank you very much. You're welcome, Ryan.

Next we'll hear from Ernesto Galil, Juan Doe of Bank of America.

Thank you, Haigel morning, Pablo and again, and thanks for taking my poll. I have a free question for my side. The first one will be on the political outlook.

How much power does a president have in Argentina to make decisions related to IMF negotiations or to globalize the country or to make changes to the central bank? I think some of the decisions need to pass through Congress, but some decisions can...

My second question will be under investment strategy. So we continue to see high inflation levels, high interest rates, further deputation of the currency. So how is Galicia positioning to navigate under this volatility?

I don't know how are your positions in terms of bonds related to inflation or investments related to FX. It will be interesting. And then my last question is on how should we think about the long road under these economic variables? How should we think about the long road under these economic variables?

And how should we think about the ROE next year, considering that this year you have been benefiting because of the gains on investment securities and effects. But once we start to see an normalization, once we start to see lower rates, how should we think about the ROE? Thank you.

Hi, Ernesto. First, regarding the political power of the President.

I guess you are thinking in...

if Milay comes to office, if he will be able to put together certain reforms that he would like to have or at least he's saying that most of the changes must be done by law in Congress.

He will not if he repeats.

the election of the primaries, he will not have any, I would say, important presence in Congress. So he will need to have agreements or alliances. The most rational alliance would be with Macri Sparky, Huntopoel Gambio.

Between the two they could have a quorum and have a

loss that it can make reforms.

In terms of investments,

Sorry, I don't know if you have any comment on that.

In that question, so we know that Mille will need to have agreements in order to make structural changes. What are the things that...

Well, first in my opinion it's not clear.

If his advisors fully agree with certain speeches.

The main idea, economic idea he has been saying is dollarization.

from a practical standpoint, many even orthodox economies are saying that it's impossible, not only in the short term, but in the medium term too.

practical standpoint, many even orthodox economies are saying that it's impossible, not only in the short term, but in the medium term too. Others are saying that...

In order to get to a dollarization, you have to make a lot of homework, basically reducing the fiscal deficit and actual becoming a super average, not a deficit or surplus.

and so this type of economy say if you do the homework why dollarize it makes no sense. Others are saying that they would like to have

So this type of economy says if you do the homework, why dollarize? It makes no sense. Others are saying that they would like to have two currencies.

so that we can have contracts in dollars. But any big reform must be...

approved by Congress and that's why I'm saying that he must negotiate and have alliances. Even as I mentioned in the past or earlier in this call, when you have 20% of the votes, you can say I will close ministers, I will go from 20 plus ministers to eight and fire off all the income. So in my opinion, many of the ideas or projects will take time and they will need some kind of support. Well, going to the second question. Sorry, yes.

In terms of investment, first I will mention the dollar position. We cannot be long in dollars in the spot. The net position must be zero. We can go long in dollars through forward contracts. That could be up to 5% of the regulatory capital.

Sometimes we are longer than or shorter depending on the situation, what are the interest rates, the yield on different financial instruments. I would say that the risk appetite is to have this type of...

a government exposure, meaning with a two-month lag, so it's not a perfect coverage, but in a medium term it covers your liquid network.

The third question was regarding

The third question was regarding a long-row

With this level of inflation that implies a high level of interest rates, we are not seeing recovery in low demand in real terms.

So we need definitely...

a change in the economic regime that will attack inflation and in a virtuous cycle interest rates going down. We don't need inflation to go to levels of 10-20% to have real long road.

Actually with 50% inflation in the past, some quarters or years, we have a positive long run. But ultimately, with 3 digit inflation, it's not possible.

Anyway, so are we – BUILDING

and going forward in this.

scenario of build to cycle in my opinion it should be better for banks because long demand will expand.

Right now, low 2GDP is very, very low, around 9%, so really very low.

So, if inflation goes down, interest rates go down and volume expands significantly and it helps us to make a...

projections and better projections and decisions to invest not only as a bank, as a holding company, a group of financial elites already invested in an insurance company and also our clients can have a clear gaps in the Harold

horizon in order to invest. There are lots of projects in oil and gas, mining, agricultural sector, digital...

economy. So there is a lot of possibilities out there but we need definitely a much healthier a micro economy.

Thank you. So just on the last one, once we have better economic outlook and stronger long road, do you think that will be enough this year? The banks are benefiting a lot from the investment securities positions and FX.

I think that is likely not to continue next year. So do you think that with a stronger long road should be able to upset a lower yield from the securities portfolio?

Well, we have to see the speed of that. Many times the speed of changes in Argentina surprises everybody. But I would say yes, the compression in margin should be...

similar let's say to the increasing volume in loans and with lower inflation the monetary loss due to inflation will be lower. So ROEs should be I would say around 15% that would be a target, medium term target.

and perhaps with a much healthier mix, not just...

mainly due to a high interest from the leaks and government paper.

Excellent. Super helpful, Pablo. Thank you very much.

You're welcome, Edmond Storch.

Next, we'll hear from Yuri Fernandez of JP Morgan.

Hey Pablo, again. I have just written you on effects. If you can comment on the devou of August and your base case for the current during the year and like if you are calling for a further devou or not, what is your base case? You discussed your...

your effects gap, how it increased this quarter. So I guess you are being prepared for that. But I would like to understand, like the moving parts, how this impact you and what is your base case for a potential devolve in Argentina. Thank you.

Sorry, I couldn't hear you very properly. You said a potential default.

No, the valuation of the currency, right? The peso devaluated maybe 20% now in August . I guess there are some economies that they are calling for further devaluations after election. So I would like to hear your base case, what Galicia is calling for potential divorce.

and the impact for you because it seems our balance sheet is being more prepared like you're increasing our effects gap so also how a potential devolve impact you. Thank you.

As I mentioned, we cannot be long in dollars in the spot, so their deposition must be zero.

We can go long in dollars up to 5% of our regulatory capital with forward contracts.

We have one, I would say, waiver or different instrument that are the dual guns.

that with the evaluation we get

That's a...

benefit and it's not within the zero position in the spot. So in August after this devaluation you could see a benefit for next quarter of that devaluation. But in theory if we sell or we have no dual bonds there is no instant impact on devaluation of course.

we have to look at our clients. Really what happens in most of the cases is that the private sector in Argentina is very long in dollars.

and the public sector is the one that is short in dollars. So really there is a kind of wealth effect with the devaluation.

What is hard to forecast right now is what will be the

pass through to inflation of the devaluation of the official exchange rate because as imports have been controlled or restricted, many importers have been pricing their products at different exchange rates, not the official one that is allowed for importers.

But I would say that in general, the impact for banks of evaluation.

It's not that a direct one comes from the impact of our clients and again could be

I would say better. And one other thing is that most of the economies are saying that the financial dollars are too expensive and the official one perhaps is too cheap. So something about that with this 20%

increased to 350, we are getting closer to a more...

Okay.

rational or dollar or effects of equilibrium. We don't need to go to 650 or 700. The good exchange rate must be much lower than that.

Got it. So basically you make more money on financial income on the deval, but also higher inflation hurts your results from net monetary like the inflation results. So one upsets the other, but maybe your clients, they make more money, you have more deposits. So net maybe is more positive.

for the valuations in Argentina, right? Is that correct? Yes, yes, and one thing, if there is a normalization of the FX market, let's say instead of having so many exchange rates.