Banco Macro - Q2 2022

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's second quarter 2022 earnings conference call. We would like to inform you that the 2Q 2022 press release is available to download at the investor relations website of Banco Macro, www.macro.com.ar/relaciones-inversores. Also, this event is being recorded, and all participants will be in listen-only mode during the company's presentation. After the company's remarks are completed, there will be a question and answer session. At that time, further instructions will be given. Should any participant need assistance during this call, please press star zero to signal the operator. It is now my pleasure to introduce our speakers. Joining us from Argentina are Mr. Gustavo Manriquez, Chief Executive Officer, Mr. Jorge Scarinci, Chief Financial Officer, and Mr. Nicolás Torres, IR.

Now, I will turn the conference over to Mr. Nicolás Torres. You may begin your conference.

Nicolás Torres (Investor Relations Officer)

Thank you. Good morning, and welcome to Banco Macro second quarter 2022 conference call. Any comment we may make today may include forward-looking statements which are subject to various conditions, and these are outlined in our 20-F, which was filed to the SEC, and it's available at our website. Second quarter 2022 press release was distributed yesterday, and it's also available at our website. All figures are in Argentine pesos and have been restated in terms of the measuring unit current at the end of the reporting period. As of 2020, the bank began reporting results applying hyperinflation accounting in accordance with IFRS IAS 29, as established by the Central Bank of the Argentine Republic. For ease of comparison, figures of previous quarters have been restated applying IAS 29 to reflect the accumulated effect of the inflation adjustment for each period through June 30, 2022.

I will now briefly comment on the bank's second quarter 2022 financial results. Banco Macro's net income for the quarter was ARS 4 billion, 41% lower than the first quarter of 2022 and 45% lower than the result posted a year ago. The bank's second quarter 2022 annualized ROE and ROA of 5.1% and 1.3% respectively remained healthy and shows the bank's earnings potential. Net operating income before general and administrative and personal expenses for the second quarter of 2022 was ARS 81.3 billion. ARS 6 billion higher quarter on quarter due to higher net interest income and higher FX gains. On a yearly basis, net operating income increased 26% or ARS 16.6 billion due to higher net interest income and higher net fee income.

Operating income after general and administrative expenses and personal expenses was ARS 44.5 billion, 4% or ARS 1.6 billion higher than in the first quarter of 2022, and 39% or ARS 12.6 billion higher than in the same quarter of last year. In the quarter, net interest income totaled ARS 53.1 billion, 8% or ARS 4 billion higher than the result posted in the first quarter of 2022, and 27% or ARS 11.3 billion higher than the result posted 1 year ago. In the second quarter of 2022, interest income totaled ARS 96.1 billion, 19% or ARS 15.3 billion higher than in the first quarter of 2022, and 32% or ARS 23.5 billion higher than the previous year.

Within interest income, interest on loans totaled ARS 41.7 billion and increased 5% or ARS 2 billion quarter-on-quarter, mainly due to a 350 basis points increase in the average bill lending rate. Interest income increased 10% or ARS 3.7 billion year-on-year. In the second quarter of 2022, interest on loans represented 43% of total interest income. Net income from government and private securities increased 32% or ARS 13.1 billion quarter-on-quarter due to higher income from government securities. Compared to the second quarter of 2021, net income from government and private securities increased 66% or ARS 21.3 billion.

In the second quarter of 2022, income from repos totaled ARS 699 million, 38% or ARS 192 million higher than in the previous quarter, and 69% or ARS 1.5 billion lower than the result posted a year ago. In the second quarter of 2022, FX gains including investment derivative financing totaled ARS 5.4 billion gain, which was 49% or ARS 1.8 billion higher than the first quarter of 2022, and ARS 4.3 billion higher than the previous year due to the bank's long dollar position and the peso depreciation during the quarter.

In the second quarter of 2022, interest expenses totaled ARS 42.9 billion, 36% or ARS 11.3 billion higher compared to the first quarter of 2022, and 39% or ARS 12.2 billion higher on a yearly basis. Within interest expenses, interest on deposits increased 35%, or ARS 10.7 billion quarter-over-quarter, mainly driven by a 650 basis points increase in the average interest rate paid on deposits, while the average volume of private sector deposits increased 5%. On a yearly basis, interest on deposits decreased 4.7% or ARS 11.7 billion. In the second quarter of 2022, interest on deposits represented 95% of the bank's financial expenses.

In the second quarter of 2022, the bank's net interest margin, including FX, was 24.5% higher than the 22.8% posted in the first quarter of 2022, and the 18.8% registered in the second quarter of 2021. In the second quarter of 2022, net fee income totaled ARS 11.9 billion, ARS 49 million lower than the first quarter of 2022. On a yearly basis, net fee income increased 8% or ARS 842 million. In the second quarter of 2022, net income from financial assets and liabilities at fair value to profit and loss totaled ARS 7.7 billion, 2% or ARS 180 million higher than the previous quarter.

This increase is mostly related to higher income from government securities, which increased 26% or ARS 1.3 billion. On a yearly basis, net income from financial assets and liabilities at fair value to profit or loss decreased 11% or ARS 917 million. In the quarter, other operating income totaled ARS 3.9 billion, 1% or ARS 54 million higher compared to the first quarter of 2022. On a yearly basis, other operating income increased 68% or ARS 1.6 billion. In the second quarter of 2022, Banco Macro's personnel and administrative expenses totaled ARS 22 billion, 22% or ARS 4 billion higher than the previous quarter. As personnel expenses increased 32% as a consequence of salary increases agreed with the union, while administrative expenses increased 6%.

On a yearly basis, personnel administrative expenses increased 10% or ARS 1.4 billion. As of the second quarter of 2022, the efficiency ratio reached 31.3%, deteriorating from the 29.6% posted in the first quarter of 2022. In the second quarter of 2022, expenses increased 20%, while net interest income, plus net fee income, plus other operating income increased 7% compared to the first quarter of 2022.

In the second quarter of 2022, the result from the net monetary position totaled a ARS 38.2 billion loss, which was 13% or ARS 4.3 billion higher than the loss posted in the first quarter of 2022 due to higher inflation observed in the quarter, which was 123 basis points above the first quarter of 2022. Inflation was 17.3% in the second quarter of 2022 compared to 16.1% in the first quarter of 2022. In the second quarter of 2022, Banco Macro's effective tax rate was 33%. More information is provided in our financial statements.

In terms of loan growth, the bank's financing to the private sector totaled ARS 446 billion, increasing 2% or ARS 9.9 billion quarter-over-quarter, and 2% or ARS 6.9 billion higher year-over-year. Within commercial lending, overdraft documents and others stand out with a 29%, 10% and 16% increase respectively. Meanwhile, within consumer lending, credit card loans increased 5%, while personal loans decreased 6%. Within private sector financing, peso financing increased 1% or ARS 4.1 billion, while US dollar financing increased 12% or $21 million. It is important to mention that Banco Macro's market share with private sector loans as of June 2022 reached 7.2%.

On the funding side, total deposits totaled ARS 858.2 billion, and increased 8% or ARS 63.4 billion quarter-over-quarter, and 6% or ARS 50.9 billion higher year-over-year. Private sector deposits increased 10% quarter-over-quarter, while public sector deposits decreased 9% quarter-over-quarter. The increase in private sector deposits was led by time deposits, which increased 15% or ARS 49.8 billion quarter-over-quarter, while demand deposits increased 6% or ARS 20.7 billion. Within private sector deposits, peso deposits increased 9% or ARS 62.5 billion, while US dollar deposits decreased 11% or $150 million. As of June 2022, Banco Macro's transactional accounts represented approximately 48% of total deposits.

Banco Macro's market share of private sector deposits as of June 2022 totaled 5.9%. In terms of asset quality, Banco Macro's non-performing to total financing ratio reached 1.25%. The coverage ratio, measured as total allowances under expected credit losses over non-performing loans under certain Basel rules, totaled 159.71%. Consumer portfolio non-performing loans improved 11 basis points, down to 1.24% from 1.35% in the previous quarter. While commercial portfolio non-performing loans improved 149 basis points in the second quarter of 2022, down to 1.8% from 2.76% in the previous quarter, mainly due to a reversal of an SME client which showed signs of credit deterioration in the previous quarter.

In terms of capitalization, Banco Macro's accounted an excess capital of ARS 284.3 billion, which represented a total regulated capital ratio of 40.5% and a Tier 1 ratio of 35.9%. It should be noted that on May twelfth, the Superintendencia de Entidades Financieras y Cambiarias of the Central Bank of the Argentine Republic informed us that it authorized Banco Macro to distribute profits in cash or in kind for an aggregate amount of ARS 19.7 billion, and the distribution should be carried out in 12 monthly equal and consecutive installments. As of this date, the bank has paid on June, 7th a cash dividend in the amount of ARS 9.9 billion, which correspond to installments 1 through 6.

On July, 6th a cash dividend in the amount of ARS 1.6 billion, which was installment 7. On August, 2 a cash dividend in the amount of ARS 1.6 billion, which is installment 8. The bank's aim is to make the best use of this excess capital. The bank's liquidity remained more than appropriate. Liquid assets to total deposit ratio reached 90%.

Jorge Scarinci (CFO)

Overall, we have accounted for another positive quarter. We continue showing solid financial position. Asset quality remain under control and closely monitored. We keep on working to improve more our efficiency standards, and we keep a well-optimized deposit base. At this time, we would like to take the questions you may have.

Operator (participant)

At this time, we're going to open it up for questions and answers. If you would like to ask a question, please press star one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. One moment please for the first question. The first question is from Ernesto Gabilondo with Bank of America. Please go ahead.

Ernesto Gabilondo (VP of Research)

Hi, good morning, Gustavo, Jorge, and Nicolás. Thank you for your presentation. I have 3 questions from my side. The first one is on the macro outlook. I would like to hear from you how you see the inflation and the interest rates by year-end. Given the higher levels, when do you see the potential normalization in both indicators, especially considering that if at some point you have lower rates in Argentina, that could translate into the peso depreciation. My second question is on loan growth. Also would like to hear from you considering the inflation, how do you see real loan growth for the year. You think it's still achievable, or do you think it could be more something of next year?

My last question is, where do you see the ROE for this year? Thank you.

Jorge Scarinci (CFO)

Hi, Ernesto. Good morning. This is Jorge Scarinci. How are you? On your first question, according to the local economists, inflation in 2022 should be ranging between 85%-95%. That is the range of the consensus of the economists here. What we are seeing in terms of interest rates, nominally speaking, is that they will maybe slightly increase by year-end in order to catch up the inflation pace. We are not seeing, for the moment, that we are going to have big real interest rates by year-end, but we are going to have slightly higher nominal interest rates. That in our view should help in our net interest margin to keep on expanding. In terms of the effects, that is the million-dollar question.

We understand also, looking at what local economies are predicting is that the official FX should move at a higher speed, monthly speaking in order to give some kind of a sweet at least to the agribusiness sector to start selling dollars. Honestly, we believe that the Economy Minister Massa would like to maybe finish with a more complex economic program before starting to have a higher speed devaluation program here in Argentina. We understand that the official FX is well behind the inflation rate. For the moment is not helping a lot. But towards year-end, we could see maybe a faster pace on the monthly devaluation of the official FX.

In terms of your second question, looking at the loan growth, I mean, what we are seeing is that after the big increase on the nominal interest rates, we are seeing loan demand maybe a bit more sluggish. We think that by year-end, we are going to finish 2022 with loans growing similar to the inflation rates. We are not seeing a major positive increase in real terms in loan growth by year-end. Third question, in terms of ROE, it's not easy to answer this question, but we are targeting or we would like to be in the area of 10% positive real ROE by year-end. That would be between 9% and 11% or 8% and 12%.

The idea is to be around 10% for year-end 2022.

Ernesto Gabilondo (VP of Research)

Perfect. Thank you very much, Jorge.

Jorge Scarinci (CFO)

You're welcome.

Operator (participant)

Again, if you have a question, please press star then one. The next question is from Nicolas Riva, also with Bank of America. Please go ahead.

Nicolas Riva (Director)

Thanks very much, Jorge and Nicolás for taking my questions. I have 2 questions. First on the 2026 bond, I wanted to ask if you consider doing a tender offer given that the bond is trading in the 70's and losing capital treatment. My understanding is you could only call it once a quarter last year, but you can still do a tender offer, market price plus any premium at any time. If you would need to get dollars from the central bank to buy back the bond or if you could use your current dollar position. Because my understanding is that when you issued this bond, you kept the dollars, the $400 million for the most part. So that's my first question. My second question on your exposure to the public sector.

You report this. You have $2.2 billion in the LELIQs. In total, your exposure to the public sector is roughly $4.5 billion using the official exchange rates at the end of June, which compares to $2.7 billion in equity, right? In the second quarter, you earned average interest rate of about 50% annually on these, the LELIQs and on the government bonds in pesos. I assume the risk weight on this is gonna be close to zero, which means it's a great investment for you. The risk, of course, would be in a worst case scenario, a default by the government on the peso debt, the peso-denominated debt, and even by the central bank on the LELIQs.

How do you think about this exposure to the public sector? Can you easily reuse this exposure in a worst case scenario? Have there been any discussions between the banks and the Central Bank and the government about this, all of this exposure to LELIQs and government bonds? Thanks.

Jorge Scarinci (CFO)

Hi, Nicolás. Your first question about our 2026 bond because it's a subordinated bond, we first of all have to ask permission to the central bank in any kind of tender or buyback or whatever. That's first point. Second point, we have the dollars. We have dollars in our position to do any kind of buyback and tender. I don't know if at this time the central bank would allow us to use those dollars for that. Honestly, for the moment, we are in a wait and see position in that sense. We have the dollars. Second question in terms of the exposure to the public sector.

I mean, looking at what happened in the second quarter, when there was a kind of pressure sale on the domestic debt in pesos, we had the Central Bank rapidly acting and putting bids on all the curve in pesos. Since then, the Central Bank is there on the bid side. According to conversations that we have with the Central Bank, the idea is for them to continue in that attitude, so putting a kind of security to the financial sector in that sense. Also, recently, the Economy Minister Massa successfully did a swap in the debt in pesos due until October and moved that debt into mid next year.

We think that going forward, they could be doing something similar in the debt due in by the end of the year in pesos. We are not seeing any kind of big risk in terms of a restructuring in the peso debt for the moment. We think that the exposure that we have on the LELIQs, that is almost 100% on the CDs in pesos that we have, that is a kind of almost the maximum that we can have in the LELIQs according to the local regulation. We think that the risk of the central bank or the central bank risk is minor according to what it's seen in Argentina for the last 60 years.

In terms of the exposure to the treasury, again, we are for the moment putting a low, very low probability of restructuring the debt in pesos. Also, at some point, we have to hedge our equity. Since we have a kind of a cap on the dollars, we are trying to hedge that as much as we can in terms of the inflation exposure. The idea is to continue for the moment. It is also important to notice that the Central Bank has been issuing put options, so banks that hold this kind of debt to the treasury, we can sell that at once to the Central Bank in case of any potential crisis.

Plus, that the Central Bank is on the curve, on the market, on the bid side, just in case. That said, we are assuming that the probability for this kind of debt restructuring is extremely low for the moment.

Nicolas Riva (Director)

Thanks very much for that, Jorge. On a follow-up on the last point about the LELIQs, do you think that if you wanted to, you could easily decide not to renew the LELIQs with the central bank? Would you get that money easily from the central bank? Has your view about the central bank being lower risk changed at all with Massa being in the Ministry of Economy and, perhaps with less money printing by the central bank?

Jorge Scarinci (CFO)

No, I mean, I think it was last month, we did that, or we took that attitude in terms of maybe renewing partially the LELIQs. We received the money without any problem. No, basically that for the moment, even though Massa is economy minister, the central bank is doing, I mean, its job, and we think there's no problem in terms of decreasing the LELIQs exposure there in terms of the exposure to the central bank. No. Not at all.

Nicolas Riva (Director)

Thanks very much, Jorge.

Jorge Scarinci (CFO)

You're welcome.

Operator (participant)

There are no further questions at this time. This concludes the question and answer session. I will now turn over to Mr. Nicolás Torres for his final considerations.

Nicolás Torres (Investor Relations Officer)

Thank you all for your interest in Banco Macro. We appreciate your time and look forward to speaking with you again soon. Good day.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.