Banco Macro S.A. (BMA) Q3 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 Third Quarter 2016 Earnings Conference Call. We would like to inform you that the 3Q 2016 press release is available to download at the Investor Relations web site of Banco Macro at www.ri-macro.com.ar. 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. [Operator Instructions] It is now my pleasure to introduce our speakers. Joining us from Argentina are Mr. Jorge Pablo Brito, Member of the Board of Directors; Mr. Gustavo Manriquez, General Manager; Mr. Jorge Scarinci, Finance and IR Manager; Ines Lanusse, Head of IR and other members of the bank’s management team. Now, I will turn the conference over to Ms. Ines Lanusse, Head of IR. You may begin your conference.

Good morning and welcome to Banco Marco’s third quarter 2016 conference call. Any comments 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 in our web site. Third quarter 2016 press release was distributed yesterday and is also available at our web site. 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 444 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 third quarter 2016 financial results. Banco Macro’s net income for the quarter was Ps. 1.6 billion, or 48% higher than the Ps. 1.1 billion earned one year ago, based on higher net financial income and higher fees. The bank’s accumulated annualized third quarter 2016 ROE and ROA of 35.2% and 5.4% respectively remained healthy and showed the bank’s earning potential. In the quarter, net financial income totaled Ps .4.0 billion, or 45% higher than the Ps. 2.7 billion registered one year ago. This performance can be traced to a 48% year-on-year increase in financial income and 61% year-on-year increase in financial expenses. Within financial income, interest on loans rose 43% year-over-year due to a 150 basis points increase in the average private sector lending interest rate and to a 36% growth in the average private loan portfolio. In third quarter 2016, interest on loans represented 75% of total financial income. In addition, net income from government and private securities increased 73% year-over-year. Meanwhile, within financial expenses, interest on deposits grew 55% year-over-year due to a 55% increase in the average volume of the interest-bearing deposits of time deposits and to 240 [ph] 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 17.3% as of the third quarter of 2015 to 18.5% as of the third quarter 2016. And 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 15.2% as of the third quarter of 2016 from 15.8% as of the third quarter of 2015. The bank’s net fee income grew 26% year-over-year, based on fee charges on deposit accounts and debit and credit card fees. Administrative expenses rose 37% year-over-year, mainly due to an increase in personnel expenses, primarily salary increases and other costs and higher other operating expenses. The accumulated efficiency ratio reached 47% in third quarter of 2016. In third quarter of 2016, Banco Macro’s effective income tax rate was 35.6% compared to 38.1% registered in third quarter of 2015. In terms of loan growth, the bank’s financing to the private sector increased 8% quarter-over-quarter. On a yearly basis, the bank’s financing to the private sector increased 35% year-over-year and on which commercial loans for the productive investments have been included. Credit cards and personal loans also grew year-over-year. On the funding side, total deposits grew 12% quarter-over-quarter and 47% year-over-year. Private sector deposits grew 9% on a quarterly basis, while public sector deposits also increased 38%. As of September 2016, Banco Macro’s transactional accounts represented approximately 42% of total deposits, and therefore, the bank’s consolidated average cost of funds was 11.8%. In terms of asset quality, Banco Marco’s non-performing to total financing ratio reached 1.46%, improving from last year’s levels of 1.77%. The coverage ratio reached 155.15%. In terms of capitalization, Banco Macro accounted an excess capital of Ps. 10.5 billion, which represented a regulatory capitalization ratio and Basel III of 17.3%. 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 44.7%. 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.

[Operator Instructions] The first question comes from Nicholas Riva with Citi. Please go ahead.

Yes, thanks Ines for taking my questions. So I have two questions. The first one on interchange fees, I understand that the senate has already approved a reduction in the interchange fees that the banks make in credit card transactions from 3% to 1.5% and in debit from 1.5% to 0. So my question is, if this is approved in the lower house and become law, what would be the negative impact in your bottom line from losing this revenues and also what you think is the most likely outcome from this, and then my second question on loan growth. I know this, if I look [Technical Difficulty] products for company discounted documents overdraft, you had very strong quarter-on-quarter but in credit cards only 2% quarter-on-quarter, personal lending 6%. So you can maybe explain the dynamics that you are seeing in terms of demand from corporate and individuals and also what’s the outlook for next year, thanks.

Hello Nicholas, this is Jorge Scarinci. How are you?

Hello Jorge.

Okay in related, first, let’s go to your second question. In terms of loan growth, what we are seeing is a slightly more demand coming from the commercial area rather than the consumer one. But that is in relative terms so that’s why you see in terms of percentages, a higher percentage increase in basically commercial lines rather than consumer, however, since our book is 60% consumer and 40% commercial in absolute terms, the number is may be such as even larger on the consumer than in the commercial. But the trend is that as we have stating is that in the last years, companies have been only demanding for working capital and I think that little by little they are starting to demand a bit more for investment, not very long term but something with six months, nine months. And that is the same trend that we are looking for 2017 maybe stronger demand from companies rather than consumer, this is again a relative term. So for next year, we are forecasting loan growth in the area of 30% nominal, when you compare that to the expectation for inflation with that, this is expected to be between 20 and 22, you are having a good positive real rate of loan growth in for next year. And this year, we expect to finish with a nominal level of plus 35% on our loan book. In relation to your third question, it’s still not approved the reduction on those fees that is being treated at Congress, remember that here we, the government trying to implement the order in CHO [ph] this means is a team performance for product that have a local manufacturing and of course that is what the banks are arguing, they are saying to continue extending the number of installment for those type of products from the order loses to the order – the CHO that means from 12 to 18 installment, banks are especially not to have these low project approved by the Congress. So for the moment, there is nothing new on these projects on credit card fees. So it is in a standby position. We continue charging the same fees that we are charging.

Okay, thanks Jorge. But in the case that this passing to law, and the interchange on credit card goes down to 1.5% and on debit to 0%. Where would be in that case the negative impact for your bottom line?

Honestly, it’s not very easy to answer that question in exact number because that we have also an impact in the promotions that we will be doing on the credit card that will have an impact in volume consumption also. So, it is very tough to say and to give you an exact number but we are going to make some molding on that and maybe at some point disclosure potential impact on Banco Macro. Of course, I would like to mention and highlight here that if the law is approved, the impact on Banco Macro is going to be relatively or much lower let’s say than in the other banks since in terms of credit cards, we are bank number four. We have some other competitors, we have much higher number of credit cards and the impact on them is going to be much larger than in Banco Macro.

Thanks, okay.

The next question comes from Domingos Falavina with JPMorgan. Please go ahead.

Yes, thank you for taking my question, Jorge and team. My question relates a bit with the ROE outlook. In this base case scenario where you have loan growth on the 30% so basically on real terms, real growth with inflation of 20-22, what kind of ROE do you believe the bank can deliver and what’s the outlook that you bake in [Technical Difficulty]

Hi Domingos, well I think that you are expert here on forecasting but according to that scenario, I think that we could be delivering ROEs in the area of mid 30s for next year without forecasting LEBACs to continue be in a way of allocating excess liquidity even though that remember that for next year, we are forecasting that for the third year after three years, loans are growing to grow faster than deposits, so at some point the excess liquidity is going to shrink a little bit. In terms of interest rates for the LEVAX, we are forecasting next year on average LEVAX rate, I mean the 35 days to be in the area of between 19% and 20% according to the estimate that we have. That’s on average, okay.

Understood. And my second question is regarding more M&A. I mean, Ines just mentioned your comfortable capital position of 17.3%. There was a recent view in there – I guess myself and some clients, some investors expected Macro to have a bit more proactive or more aggressive decision on consolidated the market, so I just wanted to understand what happen and if you see any other opportunities that could be coming up in the Argentine market for further consolidation?

No that is pretty clear that we are buyers. We want to be, we want to increase our market share in a market that we are seeing also expanding but that is not means that we are going to buy anything at any price. Of course, we are going to have a very deep analysis on the potential acquisitions that we might be doing, we were involved in the Citi transaction, at some point, we decided to step down because there were some issues there that we’re not seeing in the lines of our policies, so we shut [ph] down. That mean that Banco Macro wants to grow to acquire another bank but that means that we are going to go without any analysis and paying any price for acquisitions. We want to be cautious. Remember that you will not find in Argentina’s banking sector a bank as Banco Macro that we have acquired more than 11 banks in 20 years and all of them are already merged. So we have the expertise there, we have this as capital. So we are buyers. We know that a bank wanted to leave the Argentine banking sector they first have to notice Banco Macro. So I think that is the answer on your question.

Yes, but I am sorry. Was it more of a pricing issue or was it more like a geographical positioning or a product that didn’t really match what you had in mind?

No going forward, it is pretty clear that we want to step further in what is the Buenos Aires area, also we will be looking at the complementation of our businesses since we are trying to maybe improve or increase the penetration or the medium to high income people that we have been doing in the interior. So we select a brand that we are trying to install that in Buenos Aires area, so that’s another issue. Of course the price is also another condition to be considered. I think that, those are the main characteristics on acquired bank that we were looking at.

Okay perfect, thank you.

Welcome.

The next question comes from Frederic De Mariz with UBS. Please go ahead.

Thank you. Good morning, Jorge, Ines and team. Thank you for the opportunity. I have a couple of followups actually on the previous questions. The first one on loan growth, I think you explained very well that the driver was essentially corporates and the consumer was a bit weaker, I am just curious to know and get a bit more granularity from you was there any big ticket items in the quarter, any big corporate that drove the growth up or was it pretty spread out and also if you could give some color on the sectors where you’re seeing more activities, so just to get a big more insights into what sectors are doing well and which ones are a bit slower on the corporate side. And then my second question goes with this, you started mentioning that deposits have been growing well and maybe loan growth will outpace deposit growth for next year, I wanted to hear to hear from you, you know, what you are seeing in terms of deposit trends by currency but also by type of deposit [Technical Difficulty]

To pick up remember that there was recession here that in the second quarter reaches lowest part as a consequence of increasing the interest rates basically in the first quarter of the year. So now similarly, we are seeing some recoveries in different sectors, the energy sector apparently is one of the most dynamic ones trying to embed going forward and trying to demand some loans more medium terms. Another sector that we see that may be picking up is infrastructure and also construction for next year. Basically, we believe that those sectors are going to start investing and being the leaders. Also the agri business sector is going to be pretty active next year. So those are the main sectors that we are seeing a pretty active. In terms of for example the automobile industry that is more tied to the behavior and the recovery in the Brazilian market, so for the moment we are not seeing many changes there. So that is a picture or the movie that we are seeing on the long run going forward. In terms of deposits, basically what we are seeing that deposits are going to grow in the area between 23%, 25% nominal next year. As of today, we have 87% of our deposits being in pesos, 13% in dollars that mix is going to be relatively maintained, it could 80-20 as a consequence of the tax amnesty that we are going on here in Argentina. But no more than or no further than that basically in terms of the increase or the percentage increases of each sector is going to be in there between 23%, 25% mostly in pesos.

That’s very helpful. And if I may follow-up, do you have any sense on funding cost for next year, how would you see it considering that the mix might be changing a bit?

No funding cost is going to, in our view go down, that is going to go hand-in-hand with inflation and with other nominal rates, so at some point we are going to see the average funding cost of Banco Macro approaching or maybe going below 10% at the end of next year if inflation consolidate in the area of 20% and the average [ph] rate of course is going to be below 20%. So in terms of the average, we should be going slightly below 10% by the end of next year.

That’s very helpful. Thank you very much.

Welcome.

The next question comes from Carlos Macedo with Goldman Sachs. Please go ahead.

Thank you. Good morning, gentlemen. A couple of questions actually follow-ups from the prior questions. Jorge, I heard you mentioned that you expect deposit growth of between 25%, 20% – 23%, 25%, loan growth around 30%. More growth at least it seems first on the corporate side has happened this quarter and rates coming down, how should we think about margins going into next year, this is trial acceleration in growth, should we expect margins to decline because of the change in mix, do you expect them to improve because funding cost are coming down and you’re tapping into what is low margin product which is our securities as you start working after excess liquidity. What should we think about margins going forward? Second question, same things in NPL, strong growth, with the growth the denominator will accelerate, is there room for the NPL ratio to decline further as you accelerate the denominator and the NPL calculation? Thank you.

Hi, Carlos. In terms of margins, we are seeing on the liability side, as I mentioned before the average cost of funds going down. On the asset side, there is a mix of speeds [ph] in the reduction in rates. We are seeing loan rates reducing but not up much maybe as lending rates basically because the mix that we have in our loan book, you know, that we have much more consumer and we are not seeing consumer loan rates growing as much down as maybe deposit rates. So at some point, that is going to maintain our margin relatively still for next year, we are forecasting the net interest margin on average for 2017, let’s say between the same level of 2016 and 50 basis points less. So no major changes for next year in terms of margin that is what we are forecasting for the moment. In terms of NPLs, I think that we are having an excellent leverage in terms of NPLs, not only Banco Macro but also the Argentine banking sector is a consequence of three or four different factors, I think that you know them, inflation, the great budo [ph] that is working really good in Argentina. So going forward, I think that when the demand and loan growth started to be much more positive in real terms, I think that in the medium long run, we are going to see NPLs more in the area of between 2.5%, 3% basically that is what we are seeing some deterioration going forward not next year but in the medium term when we are having of course a much larger banking sector. Remember that as of today we have only 12% of loans through GDP. So if we are forecasting 25% or 30% of loan through GDP, in that scenario we will be seeing NPLs in the area of maybe 3% but for that scenario we need to wait at least five more years.

Okay, so but just to be clear, I think the denominator accelerates before the numerator, right as usual?

Yes.

Okay, thank you. Thank you, okay.

Welcome.

The next question comes from Alejandra Aranda with Itau. Please go ahead.

Hi good morning, I have a question and then a follow-up. In terms of fees, I was wondering if you managed to increase them in September once they were liberalized and if you could give us a little bit more color on what can we expect going forward in the next couple of months? And then a follow-up in terms of deposits, I was wondering if you could explain a little bit more the effect of the public sector growth, we’ve seen a big uptick on this quarter, and I was wondering how should we think about this going forward?

Hi, Alejandra. In terms of fees, we expect, we increased fee in September, so basically the impact on the third quarter was meaningless. We are expecting wider impact in the fourth quarter and so that’s why the increase in a quarterly basis is not that much even though when you look the increase in the net fee income, sorry, in the fee income, the fee income is 31% in real terms. But were effecting the full impact on the increase that we’ve done in September to have that in the fourth quarter. In terms of deposits on the public sector, or public sector deposits, that’s a consequence of basically two factors, one, we saw some of these provinces issuing bonds abroad and of course that liquidity is managed by Banco Macro. Second, there was a large amount of money transfer from the national government to the provinces as a consequence of the new agreement between the – what is called the co-participation, the impact of the – detected co-participation. So that’s why what we are seeing on our provincial deposit level is a much larger funds. I think in the fourth quarter we could see this growth made equally internally [ph] because you know that in December, they have to pay, they have all the particular salary, so at some point that is going to cool down a little bit this increase and of course at some point, this provinces will have to use those funds that they got from issuing money abroad to invest at some point doing some investment in those provinces. So going forward, I think that even though we are seeing a growth rate, we are seeing slightly lower growth rates than the level that we see in the third quarter.

Okay, thank you very much.

You’re welcome.

The next question comes from Jorge Mauro with SPX Capital. Please go ahead.

Yes, hello, thanks for taking my question. This is regarding the [indiscernible] that the government subsidized. I wanted to understand, your level at the end of the third quarter was Ps. 3.7 billion and the target is to reach Ps. 10 billion. So you need to deploy additional Ps. 12 billion into this line, is this correct?

Hi, how are you? No, I mean the calculation for the whole has to be done through the over the private sector deposits and that has to be done until June of next year. As of today….

If you take – sorry private sector deposit was 87 billion at the end of the third quarter, is that right?

As of today we have almost Ps. 8 billion.

That’s the total line, Ps. 8 billion.

Yes.

But you have already lend?

Sorry.

You have already given Ps. 8 billion on this line of finance.

As of the third quarter of 2016.

Okay, perfect and then to reach this target, you need to increase these by how much?

It will depends on the level of the deposit that we have as of December. That level has to be calculated and we have to reach that 18% of the private sector deposit as of June.

Okay, in other words, what’s the percentage to that? If 8 billion that represent of your private sector deposits, it’s 9% is that right? And so you need to double this line to reach its target?

Sorry, I couldn’t get that, sorry. Can you repeat that?

The Ps. 8 billion represents 9% of your total deposits today. So if you need to get to 18%, you will roughly need to double this line of financing.

Yes, that’s approximately calculation, yes.

Okay and what will be the impact on your net interest margin if that were to happen, do you have any estimate?

No that is considered in the question that I was asked before that Carlos Macedo asked about the margin, that is being calculated there. So that’s why the focus that we have for 2017 is including a 50 basis point reduction on average compared to the average of 2016.

Okay, perfect, thank you very much, Jorge.

You’re welcome.

[Operator Instructions] The next question comes from Carlos Gomez with HSBC, New York. Please go ahead.

Hi, good morning and congratulation on the result. My first question is what is your expectation for the exchange rate the dollar and by the end of this year and by the end of next year? Second, do you have any type of concern that the corporates, or the provinces are now borrowing in U.S. dollars, are you taking any measures in case that they may have some type of currency mismatch? And finally, and I think we have asked this already but what are you seeing on a day-to-day basis in terms of demand. You mentioned that you have potential [ph] little bit more of demand on the corporate side, has the derivate [ph] or market in any was recovered during the fourth quarter? Thank you.

Hi Carlos. In terms of our FX positioning if I am not wrong, I didn’t hear, and correctly that you were asking. Basically, we are slightly short the Peso basically what we are forecasting is that the nominal depreciation of the peso against the U.S. dollar is going to be below the level of the nominal interest rate that we could get on the LEVAX for example. So we are approximately 3% short in our FX position. And the forecast for the nominal FX for the end of this year is 15.5 and for the end of next year is in the area 18.5. Could you repeat the please the third quarter.

Yes, are you concerned about currency risk that the corporates or the provinces may be taking by borrowing the U.S. dollars?

No, in terms of the corporates, no, we are not seeing many corporates taking U.S. orders and I think that at some point those corporates and at some point the provinces are trying to hedge that on the futures market but if I have to choose, I would that say that, no I would be, I mean on the public sector then on the private sector, but honoring for the moment that is not the main concern.

And the last question was about demand, are you seeing any retail demand picking up in the fourth quarter or market?

I mean, retail is or consumer, basically what we are seeing is maybe slightly lower growth rate in those or in that segment compared to the levels that were accustomed to see in the former years with a former penetration where consumption was the main driver for the economy. The point is that we have a big portfolio for the consumer so even though we have seen lower growth rates in terms of the absolute level is attractive. But for next year, we are expecting that consumer sector to continue demanding slightly below the commercial

Thank you.

You are welcome.

There are no further questions at this time. This concludes the question-and-answer session. I will now turn over to Mrs. Ines Lanusse for final considerations.

Okay, thank you for your time and have a good day.