Grupo Financiero Galicia - Q1 2024

Transcript

Operator (participant)

Welcome to first quarter 2024 earnings release. My name is Alan, I'll be your coordinator for today's event. Please note, this call is being recorded, and for the duration, your lines will be on listen only. However, you will have the opportunity to ask questions at the end. This can be done by pressing star one on your telephone keypad. If you require assistance at any time, please press star zero, and you'll be connected to an operator. I'll now hand you over to your host, Pablo Firvida, to begin today's conference. Thank you.

Pablo Firvida (Institutional Relations Manager)

Thank you. Good morning, and welcome to this conference call. I will make a concise introduction, and then we will take your questions. Some of the statements made during this conference call will be forward-looking statements within the meaning of the safe harbor provisions of the U.S. Federal Securities laws and are subject to risk and uncertainty that could cause actual results to differ materially from those expressed. According to the Monthly Indicator for Economic Activity, the Argentine economy recorded an 8.4% year-over-year contraction during March. In year-to-date terms, the economic downturn reached to 5.3%. During the first quarter, the primary surplus reached 0.6% of GDP and an overall surplus of 0.2%, compared to a 0.4% primary deficit in the first quarter of last year.

This result was explained by a 254.6% year-over-year increase of revenues, whereas primary spending rose 144.1%. The National Consumer Price Index accumulated a 51.6% increase during the first quarter and a 287.6% in the last twelve months, ended on March 31, 2024. However, monthly inflation has decelerated in recent months from 25.5% in December 2023 to 8.8% in April 2024, trend which is expected to continue. On the monetary front, the monetary base increased by ARS 2.9 trillion in the first quarter of this year, recording a 132.1% increase in year-over-year terms.

After taking office, the central bank devalued the exchange rate by 54.2% on December 13, a 118.3% variation, after which the effect has maintained a 2% monthly crawling peg. The exchange rate averaged 850.3 pesos per dollar in March, a 76.1% devaluation in year-over-year terms. The overnight repo rate remained the reference monetary policy interest rate after having replaced the Leliq rate in December 2023. Since then, the monetary authority lowered the policy interest rate five times from 133% - 40%. It is also worth to mention that on March 11, the central bank eliminated the regulation that established a minimum interest rate on time deposits.

In March 2024, the average rate on peso-denominated private sector time deposits for up to 59 days stood at 85.3%, 13.9 percentage points above the average for March of last year. Since March, rates for time deposits were lower, in line with the reduction of the monetary policy interest rate, and currently stands at an average of close to 30%. Private sector deposits in pesos averaged ARS 42.4 trillion in March, increasing 29.6% during the quarter and 137.8% in the last 12 months. Time deposits in pesos rose 42.5% during the quarter and 104.2% year-over-year, while peso-denominated transactional deposits increased 21.2% and 174.8% respectively in the same periods.

Private sector dollar-denominated deposits amounted to $16.7 billion as of the end of March, increasing 14.7% during the quarter and 2% as compared to March 2023. Peso-denominated loans to the private sector averaged ARS 18.5 trillion in March, increasing 20.4% in the quarter and 144% when compared to a year before. While private sector dollar-denominated loans amounted to $4.3 billion, recording a 24.5% expansion during the quarter and a 17.5% rise when compared to March last year.

Turning now to the results for the quarter, net income attributable to Grupo Financiero Galicia amounted to ARS 255.5 billion, 263% higher than the year-ago quarter, mainly due to profits from Banco Galicia for ARS 244.3 billion, from Naranja X for ARS 22.6 billion, and from Galicia Asset Management for ARS 11.3 billion, offset by a ARS 16.4 billion loss from Galicia Seguros. This profit represented a 7.1% annualized return on average assets, and a 32.4% return on average shareholder's equity.

Banco Galicia's net income for the quarter was 319% higher than in the year-ago quarter, mainly due to a 157% increase of the operating income, partially offset by a 102% increase of the loss from the net monetary position. Net operating income increased 102%, primarily due to a 209% higher net interest income, offset by an 18% lower result from financial instruments, and a 36% decrease in the results from gold and foreign currency quotation differences. Average interest earning assets reached ARS 6.6 trillion, 25% lower than in the same quarter of last year, mainly due to a 61% decrease of the portfolio of government securities, and a 33% reduction in the average balance of loans in pesos.

In the same period, its yield increased 63 percentage points, reaching 127%. Interest-bearing liabilities decreased 29% from March of last year, amounting to ARS 5.3 trillion, mainly due to a 59% decrease in term deposits in pesos. During this period, its cost increased 9.7 percentage points to 52.2%. Interest income increased 55% due to a 48% growth of interest on government securities, a 338% increase of interest on repurchase agreement transactions, and a 12% increase of interest on loans and other financing. Interest expenses decreased 14% as a consequence of a 33% lower interest on term deposits, due to the decrease in its average volume.

Net fee income decreased 6% from March last year, mainly due to a 25% lower profit from fees on bundles of products, and a 34% decrease on utility bills and collection services, partially offset by a 68% increase of other fees. Net income from financial instruments decreased 18% due to lower results from government securities and to losses from derivative financial instruments. Gains from gold and FX quotation differences were 36% lower from the year ago quarter, including the results from foreign currency trading. Other operating income increased 43% in the quarter because of a 126% increase in other adjustments and interest on miscellaneous receivables. As regards provision for loan losses, the amount for the quarter was 37% higher than the one recorded in the year ago quarter, reaching ARS 47.3 billion.

Personnel expenses were 3% higher than in the first quarter of 2023, in line with a 5% increase of staff and of salary agreements with the union. Administrative expenses were 10% higher as a consequence of a 34% higher taxes, and 20% higher expenses for maintenance and repair of goods and IT, offset by a 51% lower expenses for publicity from promotion and research. Other operating expenses increased 64%, mainly due to higher charges for other provisions. The income tax charge was 517% higher than in the first quarter of 2023, due to higher operating results. The bank's financing to the private sector reached ARS 3.9 trillion at the end of the quarter, down 20% in the last twelve months, with peso-denominated loans decreasing 29% and dollar-denominated loans growing 37%.

Net exposure to the public sector decreased 15% year-over-year because of lower exposure to the central bank, Leliq, and repurchase agreement transactions. Public sector exposure, excluding central bank exposure, represented 23% of total assets, compared to 13% as of the end of the first quarter of last year. Deposits reached ARS 6.5 trillion, 26% lower than a year before, mainly due to a 52% decrease of time deposits in pesos, and a 47% decrease of current account in pesos. The bank's estimated market share of loans to the private sector was 12.2%, 52 basis points lower than at the end of the year-ago quarter, and the market share of deposits from the private sector was 10.2%, 38 basis points higher than in the same quarter of 2023.

The bank's liquid assets represented 102.5% of transactional deposits, and 64.4% of total deposits, compared to 115.9% and 57.9% respectively from a year before. As regards asset quality, the ratio of non-performing loans to total financing ended the quarter at 2.09%, recording a 41 basis points improvement, as compared to the 2.50% of the first quarter of the prior year. At the same time, the coverage with allowances reached 148%, down 38 percentage points from the 186% recording a year ago.

As of the end of March 2024, the bank's total regulatory capital ratio reached 32.1%, increasing 862 basis points from the end of the same quarter of the prior year, while Tier One ratio was 30.9%, up 935 basis points during the same period. In summary, in a particularly challenging and volatile political and macro environment, Grupo Financiero Galicia was able to keep asset quality, liquidity, and solvency metrics at healthy levels, and to improve the level of profitability, despite the significant impact of the high inflation and the steep recession recorded in the quarter. We are now ready to answer the questions that you may have. Thank you.

Operator (participant)

Thank you. If you'd like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. To withdraw your question, please press star two. You'll be advised when to ask your questions. We'll take our first question from Ernesto Gabilondo, Bank of America. Your line is open, please go ahead.

Ernesto Gabilondo (Vice President and Senior Equity Research Analyst)

Thank you. Hi, good morning, Pablo, thanks for the opportunity. My first question will be on your long growth expectations. I just wonder what will be the macro assumptions behind long growth. If you can elaborate on how are you seeing GDP growth for this and next year.

Pablo Firvida (Institutional Relations Manager)

Mm-hmm.

Ernesto Gabilondo (Vice President and Senior Equity Research Analyst)

and also inflation and interest rates. And then my second question will be on your loan to deposit ratio. As most of the Argentine banks are starting to resume real loan growth under normalized rates, lower inflation, how would you see the evolution of the loan to deposit ratio in the next years? And lastly, I would like to ask you about your ROE expectations. I would like to hear about your thoughts for this second quarter, given that you will start to lend, but at the same time you will have a lot of moving parts. I think my perception is that second quarter will be tough, but then you will have a second half recovering in terms of the ROE. So how would you see the ROE evolution throughout the year?

How do you see the ROE for this year, and how do you see it sustainable, longer term? Thank you.

Pablo Firvida (Institutional Relations Manager)

Okay. Hello, Ernesto. Well, first, loan growth, we see it, as you mentioned, growing in real terms, this year. The trigger, will be when inflation is close to 5%, per month. We are going in the, in the right track. According to our estimates, the year will end up with loans growing around 30% in real terms. This, has two, I would say, assumptions on inflation and, and GDP evolution. Inflation, close to 140% for the full year, although it's a moving target and it has been coming down. Actually, we are perhaps closer to 135%.

The recession we have seen in the first quarter looks like it's getting to a bottom, so but nevertheless, the full year will be with, or will suffer a GDP contraction of roughly 3.8%. That is what our chief economist is forecasting, and most of the economists are in the same region. But for next year, we are forecasting a 5% GDP growth and a much lower inflation. How much low depends on many things, but I would say between 35% and 40%. Definitely still high, but coming from these high levels we have been having in the last few years, I would say.

Next year, with a much lower inflation and GDP growing as I mentioned, the loan book should be expanding significantly. Perhaps the first loans to react will be the commercial ones and then the individuals. Still, it's too early to say how much or what percentage in real terms, but definitely it will be substantial. For the loan deposit. Yes.

Ernesto Gabilondo (Vice President and Senior Equity Research Analyst)

Yeah, before moving to the loan to deposit ratio, in terms of interest rates, how do you see them for the rest of the year, next year?

Pablo Firvida (Institutional Relations Manager)

Yes. Well, interest rates, they have been coming down significantly, not only the Repo rate, but also that is the reference rate that has an impact on all the rates. One month ago, I remember that the Repo rate was at 70%. Today it's at 40%. Time deposits, as I mentioned in the first quarter, were at 85%, and today are at 30%. So we are seeing interest rates coming down, will be a function of the evolution of the economy. With this reduction in inflation and interest rates, we see this loan demand picking up quickly.

So we will see some type of margin compression coming from very, very high levels and will be gradual, but we are seeing that the volume will more than offset the compression in margins. The

Ernesto Gabilondo (Vice President and Senior Equity Research Analyst)

Okay. Given that-

Pablo Firvida (Institutional Relations Manager)

Yes.

Ernesto Gabilondo (Vice President and Senior Equity Research Analyst)

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

Pablo Firvida (Institutional Relations Manager)

Yes, could be the case. Also, the central bank has many, I would say, simultaneous objectives, and they set this reference rate, but also are looking at the effects evolution. So, perhaps for this year, it will be difficult to see much more reduction in interest rate, but for next year, it could be the case that interest rates will be going down again. Of course, the central bank... Well, I don't know if to say of course, but these central banks typically don't allow us to anticipate their moves.

They are very efficient in setting a new price signals, regulations, but looking at the inflation and the effects we are seeing, looks like this interest rate level, it could remain for this year, or perhaps with small reductions or adjustments.

Ernesto Gabilondo (Vice President and Senior Equity Research Analyst)

Perfect. Perfect.

Pablo Firvida (Institutional Relations Manager)

Okay. When we go to the loan to deposit ratio, if I'm not wrong, the third quarter ended with 50% loan to deposit ratio. It's the difference between pesos and dollars, of course, in dollars it's much lower, although we have been seeing a pickup in dollar loans in the demand of dollar loans. So it can grow, and we don't have, or I would say we, the ratios are so low that there is plenty of room to grow. We don't see them getting to the levels we had in 2017, that were close to 90% or 95%. But we will navigate in this transition, but we have room to improve that ratio.

In terms of ROE expectation, last year, Grupo Financiero Galicia had an ROE of 17.4%. This third quarter was very strong, with about 32%. It will be hard to replicate the same numbers, so, so we will see some declining ROE in the following quarters, but in my opinion, we'll be in the area of 20% for the full year. Of course, there are, as you also mentioned, Ernesto, there are many moving parts, but we are confident that we will adapt to these price signals I mentioned.

Ernesto Gabilondo (Vice President and Senior Equity Research Analyst)

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

Pablo Firvida (Institutional Relations Manager)

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

Ernesto Gabilondo (Vice President and Senior Equity Research Analyst)

Excellent. Thank you very much, Pablo.

Pablo Firvida (Institutional Relations Manager)

You're welcome, Ernesto.

Operator (participant)

We will take our next question from Brian Flores, Citibank. Your line is open. Please go ahead.

Brian Flores (VP in Equity Research)

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

Pablo Firvida (Institutional Relations Manager)

Yes. Hi, Brian. Well, we have been competing with fintechs for many years now. Mercado Pago is the largest fintech or bigtech, due to the fact that they were born through Mercado Libre. They, so they got the clients from the e-commerce platform, and then they converted these clients into Mercado Pago clients. So they have many clients with their wallet. We have Naranja X, that is, I would say, the second fintech in terms of active monthly users, and all the banks are digital. You need scale to become more efficient, that's why, in a way, we announced the purchase of HSBC.

We also had, as you mentioned, a pressure on fees this quarter, but mainly because of the high inflation level in the quarter, and the price increases couldn't be reflected or adjusted in the first quarter. So the next quarter, you will see an improvement in fee income. So, and if I had to say today, where banks are making money, I would say that much more with big corporates, medium size SMEs, agricultural sector, private banking clients, and not so much the typical massive fintech client.

Having said that, we tackle these not-so-profitable businesses with Naranja X, and, as I mentioned, we have been competing with them, and I think that both Mercado Pago and Naranja X, and perhaps other much smaller companies, are a kind of barrier for newcomers. It should be very difficult for, I don't want to mention another company that, any new fintech coming to Argentina from zero, it's almost impossible, in my opinion. Very costly, and, perhaps it was easier when the interest rate in the world was much lower, and it was easy to raise money. Now, you have to have profitability much quicker than in the past.

Brian Flores (VP in Equity Research)

Uh, perfect.

Pablo Firvida (Institutional Relations Manager)

And the other question, Brian?

Brian Flores (VP in Equity Research)

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

Pablo Firvida (Institutional Relations Manager)

Yes. Excellent. Well, this sanction, as you mentioned, actually was an investigation that the CNV, the local SEC, informed us on April 30th, that they initiated this investigation. So we, in turn, initiated our internal investigation in order to find out, if what the CNV alleged was, the case or not. Actually, at that moment, we didn't have, a hecho relevante, a significant, a 6-K, because when there is an investigation begins, there is nothing to communicate. Yesterday, as we issued the press release, and we advanced with the internal investigation, we said, or we communicated formally, that we were in this process. We will answer to the CNV on May 29.

The number that the CNV is saying that was what we got above the, what should be the correct number, is ARS 23 billion. Our preliminary numbers are much lower, but that will be answered on May 29. But in order to be prudent, we have a provision of ARS 23 billion, plus another ARS 23 billion, so actually the provision is ARS 46 billion. It was not something we spoke with the regulator, it was a prudent decision in order to have in our books cover most of all, and perhaps more than the final number that the CNV and the central bank will tell us.

The thing is not so easy, this the number, because executing, well, you know, all the banks that pay a prime have the right to sell to the central bank different bonds. In this case, it was a dual bond, and it was not very liquid, and the price that the central bank, on an ordinary basis, sets is an extrapolation of some dots, and so there are many different analyses in which you can say which is the correct price, and depending on that, the impact is ARS 23 billion or half or whatever, or even nothing if you compare, I don't know, other dual bonds or dollar link or other instruments. So, that is what we said as we issued the results.

We are saying that we built a provision because of this initial investigation, that it's not at all closed. I don't know if it was clear.

Brian Flores (VP in Equity Research)

No, it was, it was clear. I just think maybe a quick follow-up that would be useful. So you're saying, as you mentioned, it could be less, but also, I mean, is there a probability that it could be more than this? Or is, do you think maybe the limit is on this returning the ARS 23 billion plus the ARS 23 billion, which are, maybe the limit is around 40, around ARS 50 billion? Or do you think there is a chance to see the regulator sanctions a higher number?

Pablo Firvida (Institutional Relations Manager)

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

Brian Flores (VP in Equity Research)

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

Pablo Firvida (Institutional Relations Manager)

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

Brian Flores (VP in Equity Research)

Super clear. Thank you.

Pablo Firvida (Institutional Relations Manager)

You're welcome, Brian.

Operator (participant)

We will take our next question from Carlos Gomez, HSBC. Your line is open. Please go ahead.

Carlos Gomez-Lopez (Research Analyst)

Hello. Thank you for taking the question. The first one, you show very carefully that your government exposure is now 23% of total assets, and it has been increasing. Is there an internal limit that you have set for that exposure? And if we understand correctly, that is not counted, I mean, part of that is not counted. The Lecaps are not counted as part of your public sector exposure today, right? That would be my first question. The second refers to loan demand. So you expect now to grow loans 30%, and we understand that things move very fast in Argentina, but you had a decline of 2% in the first quarter. What are you seeing so far? We are, you know, beyond the middle of the second quarter.

What are you seeing so far and are there any signs of renewed demand in Argentina that gives you hope that you will be able to get to that 30% by the end of the year? Thank you.

Pablo Firvida (Institutional Relations Manager)

Yes. Hi, Carlos. What we see, well, we make a difference between the government exposure, that, as you said, was 23% of total assets, and the central bank exposure, mainly repos today, as the Leliqs disappear, and they stood at 17%, so in total, 40%. There are regulatory limits on government exposure, and we also have our internal limits. And this 23% doesn't include the new Lecaps that were issued. Basically, the new Lecaps will be seen in the second quarter. Our objective is to keep this percentage around 25% of total assets. When the loan demand from the private sector picks up, basically this will be the source of funding.

It will be a shift from one these assets, the government loans, to lending to the private sector. We have, we are seeing some, I would say, timid or shy, loan demand, coming from companies. It began with dollars that were seen in the first quarter.... And when we speak with the commercial people of corporate banking or SMEs or the agricultural sector, they say that their clients have many projects, but they are waiting for some clarity or some, I would say, more a predictable macro variables, mainly lower inflation and a clearer path on effects. So in our assumption, we are seeing a loan demand, a rebounding already, in the early second half of the, or in the second semester, in the second half of the year.

Carlos Gomez-Lopez (Research Analyst)

All right. So you expect—I mean, you still expect that recovery to happen? And to give you another easy question, you mentioned inflation and GDP. What's your forecast for the current year?

Pablo Firvida (Institutional Relations Manager)

For the current year? What between 135%-140% inflation.

Carlos Gomez-Lopez (Research Analyst)

Mm-hmm.

Pablo Firvida (Institutional Relations Manager)

As, as I mentioned, before, it's a moving target. At the beginning of the year, when we were making our annual budget, the most of the economists were thinking 200%, then 180, and it has been coming down. And for this, for next year, it's perhaps early, but the, the current estimates are around or between 35% and 40%. And also, as I mentioned, very, still very high, but coming from the very high levels, of the previous years, it's a good, declining trend.

Carlos Gomez-Lopez (Research Analyst)

Yes, thank you. And, no, my question was about the currency. Where do you expect the peso, and the-

Pablo Firvida (Institutional Relations Manager)

Ah.

Carlos Gomez-Lopez (Research Analyst)

- and the CCL, exchange rate to finish? And again, I understand-

Pablo Firvida (Institutional Relations Manager)

Yes.

Carlos Gomez-Lopez (Research Analyst)

Nobody knows.

Pablo Firvida (Institutional Relations Manager)

No. The blue chip swap, the CCL. Well, right now, in this week mainly, we saw some recovery or increase in the price of the CCL. Hard to predict because we have the simple, no? The limitations on effects movement. Our, I would say, expectation is that the government will release most of these limitations, perhaps in September. And at that moment, perhaps we will see some increase in the effects, and the gap between the official effects and the financial dollars, it should narrow back as it was.

The last number I saw was 1,200 pesos for the official exchange rate at the end of the year, but this is—it's even harder to project than the inflation number. So, still having all these restrictions and makes the estimates hard. What is important to understand is that for banks, we are, we have to be hedged in dollars. We cannot be long or some we can, we could be something long in dollars through forward contracts, but in general, a devaluation doesn't have a direct impact on our balances.

Of course, there is an indirect impact on the numbers of our clients, and in general, when there is a devaluation, as the private sector is long in dollars in Argentina, there is a kind of wealth effect. But today, I would say that the main variable to monitor is inflation.

Carlos Gomez-Lopez (Research Analyst)

Okay. So for the Forex, right now, 1,200 for the official exchange rate?

Pablo Firvida (Institutional Relations Manager)

Yes.

Carlos Gomez-Lopez (Research Analyst)

Okay. Thank you so much.

Pablo Firvida (Institutional Relations Manager)

You're welcome, Carlos.

Operator (participant)

We will take our next question from Alonso Aramburu, BTG. Your line is open. Please go ahead.

Alonso Aramburú (Financial Analyst and Associate Partner)

Yes. Hi, good morning, and thank you for, for, for the call. Yeah, Pablo, I wanted to ask you about your, your capital ratios, given the demand you're expecting, very strong this year, and I would imagine that in 2025, you would also expect loan growth in real terms, probably above 40% as well. How do you see your capital ratios evolving? You have excess capital today. So just if you can give us a color on that, and, and also related to that, what you... What, what do you think is going to be the dividend policy of the bank? Thank you.

Pablo Firvida (Institutional Relations Manager)

Hi, Alonso. Well, the capital ratio is above 30%, so very high, much higher than what we would like. And actually, we announced dividends, and we paid dividends in May. Grupo Financiero Galicia paid two tranches. One was 65 billion pesos, the second one was 140.3 billion pesos. Why the second of 142, or 140.2 or 140.3 billion pesos, is because the central bank approved the payments of dividends from the banks to the holding company in three installments.

So, Grupo Financiero Galicia will receive two additional installments, let's say between $145 and $160, the next installments, because they will be adjusted by inflation, in June and in July, and then the board of directors of Grupo Financiero Galicia will decide the best moment to pay the other installments to the Grupo Financiero Galicia shareholders. Capital ratio will be reduced with this payment of dividends. We will also have an increase in our capital once we combine Banco Galicia and Grupo Financiero Galicia with HSBC. We have to see what will be the final effect, because the price was set at, set in dollars. But, as at the moment, when we announce the transaction, the price to book we paid was 40%.

I assume there will be a capital gain there. And with all the sensitivity analysis we can make, we see enough capital to distribute dividends, to absorb HSBC, and to grow our loan book this year and next year. And of course, we will be generating results. So really, capital it's not an issue in the medium term, I would say.

Alonso Aramburú (Financial Analyst and Associate Partner)

Okay, thank you, Pablo.

Pablo Firvida (Institutional Relations Manager)

You're welcome, Alonso.

Operator (participant)

We will take our next question from David Cardo. Vianta, your line is open. Please go ahead.

David Cardo (Analyst)

Yes, hello. Thank you, and well, congratulations on the results from the quarter. I have a couple of questions. First, on HSBC's acquisition. I understand first that it's not yet consolidated with the group. But I would like to know if... well, if you could give us some color on the rationale behind it, like, are there any synergies between both portfolios you're seeing, I mean, client-wise, that you're expecting to get or something of the sort? And, second, going back to the administrative process, you are still on the go with CNV. Other than the money, other than the financial fine and you may get, are there any other, let's say, trading restrictions that might be imposed on the group?

Pablo Firvida (Institutional Relations Manager)

Hello, David. Well, first, I will begin with the second part. I think that once, Well, first we have to finish with the investigation, no? But let's say, we need to pay the money back, the additional gain and the fine, it should be, I don't know what other sanctions could be. Perhaps some individuals or fines to individuals, but really, so far, or with the information we have today, I would say no other effect. Of course, we are, as I mentioned, we are not happy at all. We take care a lot of our reputation. Internally, it was a very bad surprise, but we need to finish investigations, the answer, and the outcome.

With HSBC, we are waiting for two things to get the closing. One is the approval from the central bank, and the other one that we feel or we estimate that will occur in the second semester, perhaps in the fourth quarter. And the other thing we have to achieve, or HSBC has to achieve, is to be able to disconnect HSBC Argentina with HSBC headquarters. There are some IT software and hardware things that must be disconnected in order to let the Argentine bank to operate as an independent vehicle. Well, the logic or the rationale with the purchase of HSBC was, well, the price was a good one in our opinion.

In the price, we didn't put any synergy, but I'm sure there will be some of them. We are getting new clients. It's hard to grow organically. You need a lot of time, so M&A is a good way to gain market share. They have not only good clients, they also have good employees. We are looking at also to get more talent. They have certain products and niches like they are very good in commerce, in foreign trade. They have a good wealth management. We are also getting an insurance company and an asset management company, so it will give us a 3.5% increase in market share. There could be some overlapping of certain branches.

We will need to see which ones are owned branches, either by HSBC, the current HSBC or Galicia, and which are rented. Perhaps at headquarters could be some overlapping, but typically in a normal year, in any bank, you lose certain number of people. Without doing anything very active, we could be getting to a good number of people, considering our staff and their staff. There will be synergies, but, as I mentioned, they were not priced in. I don't know if I answer you both questions.

Operator (participant)

Yes, absolutely. Perfect. Thank you.

Pablo Firvida (Institutional Relations Manager)

You're welcome, David.

Operator (participant)

We will take our next question from Marina Mertens, Latin Securities. Your line is open, please go ahead.

Marina Mertens (Head of Corporate Debt Research)

Hi, Pablo. Good morning. I have just one question regarding the central bank regulations. Which additional regulations do you expect to be lifted in the coming months, and how do you expect this to impact your business?

Pablo Firvida (Institutional Relations Manager)

Hi, Marina. Well, we are convinced that the central bank will make or will dismantle many regulations that were built in the previous administrations, because this central bank believes more in the competition and not so much in the micro regulation. So, the regulation that worried us the most was the minimum interest rate on time deposits that they lifted or they eliminated that minimum interest rate on time deposits in mid-March. So it was a good signal. Then any mandatory lending to SMEs or any cap on interest rates or more flexibility to merge branches is something we are seeing as necessary, and they are going to tackle that.

One thing that banks in general are fighting for for many years is to level the field with certain fintechs. Some fintechs are not regulated by the central bank, and we keep on saying that if they take deposits, if they grant loans, they must have reserve requirements, capital requirements. They have to provide information to the central bank, they have to know their clients in order to avoid money laundering or these type of things. So that would be also a good thing. Not only eliminating distortive regulations that sets caps or floors, but also regulating fintechs. We had some discussions with Mercado Pago regarding the QR, and this has been an issue for many months, even a year, I think.

And, well, there is need to have similar rights and obligations, that's I would say the main thing. So far, the central bank has been more focused on effects, inflation on their balance sheet, and I think it's the best thing they did, no? Now, the second round of measures, in my opinion, will be more regulating or deregulating the financial system, the banks.

Marina Mertens (Head of Corporate Debt Research)

Perfect. Thank you.

Pablo Firvida (Institutional Relations Manager)

You're welcome, Marina.

Operator (participant)

There are no further questions on the line, so I will now hand you back to your host for closing remarks.

Pablo Firvida (Institutional Relations Manager)

Well, okay. Thank you all for attending this call. If you have any further questions, please do not hesitate to contact us. Good morning, and have a nice weekend. Bye-bye.