Banco Macro S.A. (BMA) Q1 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's First Quarter 2016 Earnings Conference Call. We would like to inform you that First Quarter 2016 release is available to download at the Investor Relations website of Banco Macro at www.ri-macro.com.ar. Also, this event is being recorded and all participants will be in a 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. [Operator Instructions] It is now my pleasure to introduce our speakers. Joining us from Argentina are Mr. Jorge Pablo Brito, Member of the Executive Committee; Mr. Guillermo Goldberg, Financial Deputy General Manager; Mr. Jorge Scarinci, Finance and IR Manager and Ines Lanusse, IR Officer and other members of the bank's management team. I will now turn the conference over to Ms. Ines Lanusse, IR Officer. You may begin your conference.

Good morning, and welcome to Banco Macro's first quarter 2016 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 is available at our website. Our first quarter 2016 press release was distributed last Thursday, and it is also available at our website. Banco Macro is one of the leading private banks in Argentina, with a strong presence in the interior of the country and a branch network of 439 branches. Even though we are a universal bank, we focus on low to middle income individuals and SMEs. Banco Macro is a financial agent of four provinces in Argentina; Salta, Jujuy, Misiones, and Tucumán. I will now briefly comment on the bank's first quarter 2016 financial results. Banco Macro's net income for the quarter was Ps.1.4 billion, or 126% higher than the Ps.1.1 billion earned one year ago, based on a higher net financial income and higher fees. The bank’s accumulated annualized first quarter 2016 ROE and ROA are 33.3% and 5.1% respectively, remained healthy and showed the bank’s earning potential. In the quarter, net financial income totaled Ps.3.3 billion, or 21% higher than the Ps.2.7 billion registered one year ago. This performance can be traced to a 41% year-on-year increase in financial income and 68% year-on-year increase in financial expenses. Within financial income, interest on loans rose 49% year-over-year due to a 200 basis point increase in the average private sector lending interest rate and to a 38% growth in the average private loan portfolio. In first quarter 2016, interest on loans represented 77% of the total financial income. In addition, net income from government and private securities increased 8% year-over-year due to the increase in peso denominated securities market prices. Meanwhile, within financial expenses, interest on deposits grew 76% year-over-year due to a 56% increase in the average volume of interest-bearing deposits, of time deposits and to a 250 basis points increase in the average time deposit interest rate. Excluding FX gains, the former combined effect resulted in an increase of the bank's net interest margin from 19.6% as of the fourth quarter of 2015 to 16.7% as of the first quarter of 2016. We also excluded income from government and private securities and guaranteed loans, including further adjustments on the calculation, the bank's net interest margin would have been relatively lower from 15.4% from last year's levels to 15.2% as of the first quarter of 2016. The bank's net fee income grew 20% year-over-year, based on fee charge on deposit accounts and debit and credit card fees. Administrative expenses rose 34% year-over-year, mainly due to an increase in personnel expenses, primarily salaries increases [indiscernible] and higher other operating expenses. The accumulated efficiency ratio reached 47.9% in first quarter 2016. In first quarter 2016, Banco Macro's effective income tax rate was 35.1%, compared to 37.6% registered in first quarter 2015. In terms of loan growth, the bank's financing to the private sector slightly decreased Ps.218.8 million quarter-over-quarter. On a yearly basis, the bank's financing to the private sector increased 30% year-over-year and on which commercial loans for productive investments have been included. Credit cards and personal loans also grew year-over-year. On the funding side, total deposits grew 9% quarter-over-quarter and 43% year-over-year. Private sector deposits grew 11% on a quarterly basis, while public sector deposits decreased 4%. As of March 2016, Banco Macro's transactional accounts represented approximately 42% of total deposits, and, therefore, the bank's consolidated average cost of funds was 12%. In terms of asset quality, Banco Marco's non-performing to total financing ratio reached 1.53%, improving from last year's level of 1.92%. The coverage ratio reached 151.47%. In terms of capitalization, Banco Macro accounted an excess capital of Ps.8.7 billion which represented a capitalization ratio of 23.5%. The bank's aim is to make the best use of this excess capital. The bank's liquidity remains appropriate. Liquid assets to total deposit ratio reached 44.4%. Banco Macro accounted for another positive quarter. We continued showing a solid financial position. Asset quality is under control and closely monitored. We continue working to improve more efficiency standards. We have one of the cleanest balance sheets in Argentine's banking sector, and we keep a well-optimized deposit base. At this time, we would like to take the questions you may have.

Thank you. At this time we’re going to open up for questions and answers. [Operator Instructions] And that question will come from Nicholas Riva of Citi.

Yeah, thanks Ines for taking my questions. My first question is on efficiency, your operating expenses grew 34% year-on-year, while your fees grew 20% year-on-year and net interest grew 21% year-on-year. So we did see this quarter a bit duration in efficiency, what is your outlook for OpEx growth this year and also for the cost to income ratio? So that’s my first question. My second question is on the net interest margin, if inflation decelerates in the second half of this year or into 2017 interest rates come down, what would be the impact on your net interest margin or what is the sensitivity in your name to a decline of let’s say a 100 basis points in interest rates? Thank you.

Hi Nicholas, this is Jorge Scarinci. On your first question, yes, the numbers that you mentioned are true in the quarter, even though that we continue to have 47.9% of efficiency ratio one of that based in the Argentine banking industry. Going forward, we expect the net fee income to react on vis-a-via on the loan growth that we’re expecting for the second half of the year, and also we’re expecting the net interest income also to have a better performance as the first quarter that as you know with the seasonally lowest quarter of the fourth quarter. In terms of summing that you could put in your [indiscernible] going forward the lower size on the – or the impact on the SEDESA that was announced couple of weeks ago that we’ll have an impact in our case of around Ps.35 million a month of lower impact in interest expenses. So that’s a positive news going forward on the net interest income. And according to the net fee income we’re expecting in 2016 to have an increase between mid to high 20s compared to 2015. Therefore, we’re expecting to finish 2016 with an efficiency ratio in the area of the mid-40s. On your second question, regarding the net interest margin, basically we expect to maintain our net interest margin relatively stable in the area of maybe 2016 or 2015 of three quarters that is the net interest margins without considering any FX gains or bond gains that the fewer intermediation margins. So we expect that to remain pretty stable and we are not seeing an impact at least on the negative side or an increase of 100 basis points on the domestic interface.

Okay, thanks Jorge.

Welcome.

The next question comes from Carlos Gomez of HSBC New York.

Hi, thank you for my taking questions. I wanted to know first if you could clarify why fee income increased relatively less than the lines, only 20% year-on-year there were something specific about that? And also if you can give us your outlook for – as you mentioned for loan growth at the end of the year and also for the next one or two years, I mean now that things have moved on we have had some definitions in the government policy, how does it look, what did you expect to?

Hi Carlos, how are you? In terms of – I will come first on your last part of the question. Loan growth for this year we’re expecting to be let’s say slightly above 30%, we’re slightly fine tuning our estimates because the high domestic interest rates are remaining slightly more than what we have previously forecasted. So between 30% and 32% our loan growth is expected to be in 2016, and in mid-30s for 2017 since we’re expecting a recovery of 3% or 3.5% in the [indiscernible] for next year. Basically in terms of the first part of your question according to the net fee income growth, basically the first quarter is not the best for fee generations and when you see the composition you might see also that the credit related fees are not performing really good, basically that in line what we have shown in our loan growth that was also flat over quarter-over-quarter but therefore we are expecting that to recover in the second, third and fourth quarters finishing to meet the high 20s the net interest margin performance.

I have a follow-up, do you see any effect from the restrictions to fee increases that were implemented under the previous administration and do you expect that to be removed in the future?

Yes, at some point yes, and as you might know in September banks has no limit in order to increase fees.

Thank you.

September, September 2016 I mean.

So in September you will be free to set your fees?

Yes.

Okay, thank you.

You’re welcome.

And the next question comes from Federico Rey of Raymond James.

Yeah, hi, good morning. I have a question regarding net interest margin, I heard that you said that you’re expecting stable margins for the rest of the year. I would like to know if you have calculated at least from a theoretical point of view what should be the benefit coming from the removal of the – I mean the caps on the new rates and the flow on deposit rates which were removed by the end of last year? Thank you.

Hi Federico, the net impact on that was not that much. Basically we increased between 3 and 4 percentage points the consumer lending interest rates. And at some point we’re able to reduce by 50 basis point deposit rates on retail deposits. I would say that the impact that we saw in the first quarter of 2016 according to that issue was between 30 to 40 basis points basically, no more than that.

Okay, thank you very much.

Also – sorry Federico, going on with this – with your question, you know that those loans that are regulated by the central bank, the productive line of loans continues even though the interest rate is slightly high but those loans continue, so at that point the average rates on those are of course much lower than the rate that we can charge on basically consumer loans or even though to some SMEs that are not involved with those credit lines.

Okay. Are you expecting another increase in the rate for those loans as to place at the end of the year?

No so far, no news on that front for the moment.

Okay, thank you.

Welcome.

And the next question will come from Catalina Araya JPMorgan.

Hi yes, good morning, thanks for taking my question. First I would just want to know if we can get an update on the potential acquisition on city, more to know if city has provided details on what’s exactly for sale and if you guys would think that this will be complementary to your operations. And then my second question would be regarding the linear [indiscernible], have you estimated what would be the potential if the regulation goes away in that scenario that this deposits would be used to lend at a higher rates? Thank you.

Thanks, Catalina. Your first question according to city honestly we don’t have a major news, we’re expecting some data to be released in the next days but basically we are going to have a look at them, of course, it looks – these are first glance it looked attractive the transaction because the position mainly of the branch and the clients are a complement for Banco Macro’s strategy. But apart from that we don’t have more news or more comments on that. On the second question, the [indiscernible] was that I was commenting to Federico before, basically we have no news according to what will happen in the future. Honestly the interest rate was moved from 19 to 22 and we don’t have to see the percentage of 7.5% of private sector deposits but for the moment we’re not having any news or any guidance from the central bank if those parameters are going to be changed. So for the moment we continue working with those numbers.

Okay, so just to follow-up the linear [indiscernible] the regulation goes under December right, hasn’t been roll over for next year or what’s the update there?

Yes, basically every six months could be lower – the last day of June for example, but this every six months.

Okay, thank you.

Welcome.

And the next question will come from Domingos Falavina of JPMorgan.

Hi, good morning all. My question is adding actually to Carlos’s question, on the fee side you mentioned the fees on originating loans, new loans they came down, but what surprised me a little bit was actually the fee expense side which is what kept you from delivering even better results from the fees. It seems they grew about 70%, could you explain a little bit more what are those fees exactly?

Well basically there were some fees related to some campaigns on year because what we’re trying on to do on credit cards in order to catch up a little bit with our competitors since we are bank number four in terms of market share, in terms of credit cards and we want to have a more balanced consumer lending book since we are number one in terms of personal lending. So those efforts were accounted in the first quarter, I mean marketing campaigns and all those expenses were accounted in the first quarter. So that was basically the increase in the first quarter and the fee expense side that you were saying.

So basically it’s not a structural cost, we could see fees growing more in the upcoming quarters.

That’s what we’re forecasting, yes.

Understood. And my second question if I may, we noticed that the salary adjustments with the negotiations of the union on the banks just came out. How does the low 30% fall within your budget and your forecast for expenses grow for the year?

No, well that was – the agreement with the unions was reached last Friday and was 33%. So basically since 60% or 65% of our expenses are salaries, I would say that between 30% and 32% increase that we are seeing for expenses for this year.

Understood, thank you very much. Congratulations on the quarter.

Okay, thank you.

And our next question comes from Frederic de Mariz of UBS.

Thank you, good morning everyone. Thank you, Ines for the conference call, a couple of questions on my side. I was curious to see if you could give some more color on the asset quality especially considering the spike in inflation for April and also the slow economy that we’re expecting for this year? What kind of segment in the economy would be the most concerning for you and are you seeing any increase in delinquencies either in consumer or in some corporates? That’s the first question, and then the second question is more generic, we’re following obviously the agreement with the [indiscernible] and you have a very slow, very low expense rates to dollar assets. And I was wondering whether you were expecting to increase the lending in dollars on the assets and dollars in the next three quarters or how you’re thinking about this agreements with the [indiscernible] in general terms? Thank you.

Hi, how are you? On your first question in terms of NPLs, well we’re showing a good performance not only on commercial wise but in all system, but in this case specifically [indiscernible] on the consumer side you have to take into account that 90% of our personal loans are private payrolls. We have three different types of payrolls, the private sector, the prudential public sectors and the retirees so that these are very important, I mean characteristic that Banco Marco has compared to our peers. That is one of the main reason we have such a low level of NPLs on the consumer side. On the commercial side, going forward we can see some increase or some deterioration in that front. As you mentioned, since we are expecting between 1% and 2% negative GDP performance for this year, basically we could see something like that. So going forward we could see the ratio of 1.5% of NPLs going up to maybe 1.75% or 2% but no more than that. Basically we are not expecting a high deterioration of this ratio, and also considering that next year we are seeing a recovery of the economy, we think that’s asset quality, in our case it’s under control. On your second question, basically in terms of bolder assets we look more at the performance of the nominal effects will to have a higher exposure or low exposure. In the first quarter what we’re excited is at some point to reduce our low level exposure to allocate those spaces at the high level of interest rating pesos. And going forward we are going to do the same like monitoring the performance of the nominal effects, the performance of the domestic reintegrating pesos and depending on that we are going to have a higher exposure in dollars or lower exposure in dollars.

That’s very good, thank you again.

[Operator Instructions] And our next question will be a follow-up from Nicholas Riva of Citi.

Yeah, thanks. Jorge, I have a follow-up, some newspapers in Argentina are mentioned in this morning that [indiscernible] could be looking to sell or reduce their equity stakes and their companies, we know that the [indiscernible] owns about 20% of your shares. In terms of how this would work, do you think they would be selling that in the market or maybe there would be a negotiation between the [indiscernible] and your controlling shareholders? Thank you.

Hi, Nicholas. The [indiscernible] has 31% of the shares of Banco Marco and as you may know that was inherited that they receive after the nationalization of the private banks and funds that happened in 2008. The former administration decided to keep those shares as a kind of strategic assets and these new administrations maybe have a different approach on how they manage the portfolio of the [indiscernible]. So according to what appears in the newspaper today, honestly I have no further comment that also only appears in newspapers. Going forward we could see some changes in how the [indiscernible] manage the portfolio but how they will do that honestly we do not know. If I have to guess, and this is my personal opinion, I’m not seeing they’re selling the secondary market, so that could be seen – they could do that in fair replacement maybe in the U.S. or in the foreign markets but this is my personal view, and we don’t have official information on that.

Okay, thanks, Jorge.

Welcome.

And next we have a question from Santiago Ruiz of TPC&G.

Hi Jorge. My question is regarding loan growth, we saw loan growth growing below deposits growth. I was wondering if this is the tendency that will continue in the future. And also regarding loan growth, do you see demand for loan growth in the second half of the year coming more from companies or from individuals?

Hi Santiago, now of course, we expect some recovery in loan growth that is going to go hand-in-hand with reduction in the domestic rates that we have at some point in this second quarter. And of course that will be related to the base of the inflation. Going forward what we are expecting at some point is demand coming from both consumer and commercial but at some point we are expecting some higher demand coming from the commercial area, since this is big opportunity after many years of having a more clear horizon or what we’re having on in terms of inflation and fiscal [indiscernible] and all those market economic figures that these government should be announcing and publishing and giving forecast something that the former administration didn’t do, so maybe we have a more clear picture of what would happen going forward. And therefore the loan demand will come more from maybe commercial areas and consumers. I’m not saying that consumption is not going to continue growing but the growth rate that we might see in consumption could be slightly lower than what we saw in the previous years.

Okay, thanks.

Welcome.

And next we have a question from Santiago Petri of Franklin Templeton.

Yes, hi. Good afternoon, thanks for the call. One question is related to provision expenses, what would be your level of provisions for this year, I mean you’ve reduced slightly the roll of provisions year-on-year in the first quarter, so that will be the first question. And the second question is about medium term with normalization of interest rates towards more regional levels with the control of inflation [indiscernible], do you expect net interest margin to go up or down or stay the same as now?

Hi Santiago, your first question according provisioning, we’re expecting to provision in the area of 1% of total loans in the whole 2016, that’s the idea but of course, depending on how delinquency rates perform we could be fine tuning that target, but for the moment we are having 1% of average loans to be the level of provisioning for this year. In your second question, it depends which is your long-term view is, your long-term view is five or seven years with nominal rates going down, inflation being a single [indiscernible] on Argentina having or recovering the twins both fiscal and commercial. So we are talking about a different Argentina and of course, the level of normalization should be two or three times the level that we have right now. My answer would say that maybe these margins would be down in that scenario, but of course, since bank will be intermediating or at least Banco Marco will be intermediating a much, much larger amount of money, the results on their net interest income line will be of course very positive, compensating the decrease in the net interest margin.

Okay. No, I mean we’re really away from the future for the development of the financial industry in Argentina but essentially I was wondering what’s your view on interest margins with normalization scenario in Argentina so essentially should we – do we have an estimate of how many basis points you should come down I mean when the inflation in the 10% annual rate?

Honestly Santiago, no, because that could be a focus of five to seven years. We have an approximate idea that could be in the area of 10% but could be 9%, could be 11% depending on many issues but of course, will not be 16% that we are performing right now for sure, but an approximately calculation is around 10%.

Okay, excellent. Thanks a lot.

You’re welcome.

And the next question comes from [indiscernible] Asset Management.

Hi. The central bank allows – in the investments allow that mortgages in the parts to be indexed DUB. I wanted to know what’s your thoughts were and if you saw any demand for mortgages at this moment.

Hi, [ph] Ignacio. Yes, we have on our line of products these mortgages tied to [indiscernible]. Honestly we have some – of course, phone calls, some people approaching to the branches asking on the current status of these products. However we think that’s the monthly inflation is slightly higher than what the consumers or customers are expecting to come and demand more on these products. So for the moment we are not seeing demand in the next month depending on how inflation performs and how much inflation goes down, we could see some more demand on more of these and try to do these. But for the moment demand is also zero here.

I think so, okay. Thank you very much.

You’re welcome.

Thank you. And our next question is a follow-up from Carlos Gomez of HSBC New York.

Yes, thank you again. You’re going to have some changes in the board of directors of the Bank, should that have any relevance for the day-to-day management, anything that we investor should know about that?

Hi Carlos again, the shareholders meeting is taking place tomorrow. Honestly there are changes in the boards, I think that the directors that are leaving and also directors that are being proposed to be included I think that all of them are excellent professionals. I think that going forward we could see – and this is my personal view, that positively impacting the changes, I’m not seeing why the change should be negative. So I’m positive on the changes and I think that would be positive for the whole bank and the whole organization.

But again all of these changes are at the board level, as far as I have seen there is no change in the management level, is that correct?

Yes, that’s correct. Yeah.

Thank you.

You’re welcome.

Okay. There are no further questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Ines Lanusse for any final considerations.

Thank you everyone for your interest in Banco Macro. We appreciate your time and look forward to speaking you to again. Have a good day.

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