Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's 2Q '19 Earnings Conference Call. We would like to inform you that the 2Q '19 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. [Operator Instructions] 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. Nicolas Torres, IR. Now I will turn the conference over to Mr. Nicolas Torres. You may begin your conference.

Good morning and welcome to Banco Macro's 2Q '19 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 it's available at our website. 2Q '19 press release was distributed yesterday and it's also available at our website. I will now briefly comment on the bank's second quarter '19 financial results. Banco Macro's net income for the quarter was ARS 7 billion, 4% or ARS 312 million lower than in 1Q '19 and 124% higher than the ARS 3.9 billion posted a year ago based on an increase in net interest income and in net fee income. The bank's 2Q '19 accumulated ROE and ROA of 47% and 7.7%, respectively, remained healthy and showed the bank's earning potential. Recurring net income in the quarter totaled ARS 7.8 billion, 37% or ARS 2.1 billion higher than in the previous quarter. Recurring net operating income before general, administrative and personnel expenses for 2Q '19 was ARS 20.6 billion, increasing 24% or ARS 4.1 billion quarter-on-quarter. Recurring operating income after general and administrative expenses was ARS 11.1 billion, 39% or ARS 3.1 billion higher than in the previous quarter. In the quarter, net interest income totaled ARS 16.8 billion, 30% or ARS 3.9 billion higher than the result posted in 1Q '19 and 85% or ARS 7.7 billion higher than the result posted one year ago. This performance can be traced to a 28% quarter-on-quarter increase in interest income and a 27% increase in interest expenses. Within interest income, interest on loans increased 1% quarter-on-quarter and 42% year-on-year. In 2Q '19, interest on loans represented 47% of total interest income. Net income from government and private securities increased 57% or ARS…

[Operator Instructions] The first question will come from Gabriel Nobrega of Citibank.

Hi, everyone. Thank you for the opportunity to ask questions. During the quarter, looking at your NPL ratios, we note that they actually decreased from corporates, which, if I'm not mistaken, it was the first time in over eight quarters in which we saw year-end corporate NPLs actually decreasing. However, on the other hand, we saw that your consumer NPL ratios actually increased, reaching almost 2%. And here, I understand that only a small portion of your payroll loans are in the open market and this continues down and performing very bad. However, I just wanted to understand with you, where do you think that we are in the NPL cycle and if you believe that 2Q '19 was actually the peak or it should only be in the third quarter or even in the fourth quarter.

This is Jorge Scarinci answering. Thank you for your question. I would say that in terms of economic activity, yes, we're in presence of the worst part of the recession between the second quarter and the first month of the third quarter, so we expect that NPL should be in the peak or near the peak. From now on, we should be slightly better macroeconomic figures, even though the rebound that we are forecasting is not that very steep, should be a kind of timid recovery in the economy. And therefore, the decline in NPLs in coming quarters also should be in a progressive trend, not being a very sharp trend. So I would say that this should be close to the peak of NPLs.

Sure. I mean just a follow-up here. Looking at your NPL ratios, they reached around 2.1% in this quarter. What do you believe they should reach by the end of the year?

I think that should be right in the area of 2% approx. That's the idea that we have. Depending also on what's going on in the macro, but looking to the programs that we are working with, in the area of 2%.

Alright, that's very clear. And as for my second question, could you just give us more color on what happened with the payment of the social security charges that you had to pay to AFIP. Is there any way that you could maybe appeal to this decision and even reverse the fine that you paid?

Yes, of course, we are going to appeal on that. We described in the last part of our press release all the facts that we follow in the different instances of justice and et cetera. But of course, we are going to appeal to that. Yes, of course.

Alright, sorry, just a follow-up here. Do you have maybe a timetable of when this could happen?

No. Honestly, it's not that very easy to predict. No.

Alright, that's very clear. Thank you, Jorge.

You're welcome.

The next question will come from Ernesto Gabilondo of Bank of America.

Hi good afternoon, Jorge and Nicolas. And thanks for taking the questions. I have three questions from my side. The first one, can you elaborate on what have you been hearing in terms of polls ahead of the primary elections? And my second question is if we start to see lower interest rates, how should we think on net interest income growth? How fast do you expect to compensate the lower yield on securities with credit demand? And how much additional repricing do you expect to have? And finally, my last question is in terms of loan growth. It came below inflation. So do you think the low credit demand will continue during the third quarter or do you think it will start to pick up after the presidential elections?

Referring to your first question in terms of polls, there are many polls out there in Argentina, national polls, provincial polls. So there are many. Honestly, I don't want you to expect another side comment here on the poll, because they can change maybe a bit tomorrow. So I think that we should wait for next month. There are two more days or three more days to go, and we will have more final results on these primary elections on here. Honestly, I don't know if it's worth commenting on the polls that you already have on the table. I'm just saying that we are having here – I think that for the moment, the market is working with those scenarios. It's pretty calm. So let's go to your second question in terms of the trend on interest rates. Even though we were seeing some decline in the LELIQs interest rates, and that was also impacting on the rate that we were paying on the time deposits, of course, on the downward trend, in the last, I would say, two weeks almost, there was a kind of reverse in this trend. The LELIQs interest rates went up from the level of mid to high 50s to low 60s as they are right now. And therefore, we stopped on the decline on the time deposit rates that we were paying. So the comment that we have is that you already see or saw in the press release that we were able to expand the margin on the handoff of high interest rates. On a scenario of declining interest rates, of course, what we are going to do is to transfer the lower rate that we are getting on the LELIQs into lower time deposit interest rates, as we have been doing that in different other scenarios. And the idea is to – as soon as we have a credit demand coming, and this is part of your third question, we are going to allocate the funds on new loans instead of the LELIQs. However, what we are seeing is sluggish credit demand. As what we saw in second quarter, we are for the moment seeing the same trend in the third quarter. Honestly, besides the results on the primary elections, maybe on the first-round election that's going to happen by the end of October, I think that credit demand is more tied to the level of interest rate than the political scenario, even though the political scenario also helps. But I would not be a very optimistic on a very steep rebound in credit demand in the second half of the year, even though with a positive outlook on politics. So I would say that this year, loans are going to be growing well below inflation. So that's the scenario that we are working with.

Perfect, thank you very much, Jorge.

You're welcome Ernesto.

The next question will come from Jason Mollin of Scotiabank.

Hi, thank you. My question is a follow-up on the social security contribution. I just want to understand, was this cash payment that was made in the quarter? And understanding – reading the disclosure at the end of the release, it sounds like there was disagreement that now with AFIP, but then AFIP decided to go to the Attorney General and there was a payment plan. I mean what is the bottom line here? This was a payment that was made and that you're waiting – you're going to appeal, because there was a negative decision against the bank or is the decision still pending?

No. Hi, Jason, how are you?

Fine.

No, not – well, it's not a cash payment; this is going to be paid in different installments, like six installments. So the decision is that, because we have this kind of version of – the local version of the IRS, we decided to tie to these six installment plans to pay. But in the meantime, we are going to be – appeal to the decision. So of course, the final outcome, we don't know. But that's why we decided to make a provision and enter into this installment facility payment agreement that we got.

So you entered into the agreement, you've provisioned – the number I see that I believe I understand is ARS 1.1 billion and then we wouldn't expect any other accounting impacts, the way I read your statement from this issue?

Well, the extra, let's say, extra payment that you will notice is that compared to the following quarters, we will have to pay close to maybe ARS 150 million more per quarter on the new percentage of social contribution compared to the one that we were allocating the following quarters. But apart from that, no, we are not going to make additional provisions on this issue.

Thank you. Maybe some comments on the outlook and how the bank is preparing for this weekend for this poll and for potential volatility in the FX and perhaps some kind of response in rates. The kind of liquidity it had, is it trying to bolster liquidity even more?

No. I mean, Jason, we have been working, of course, preparing the bank for this political scenario, increasing a little bit the liquidity in pesos and also in dollars. You can notice that in the equity ratio that we are posting in the quarter. We are slightly long in our FX position. And I would say that no matter the result that we are – we get here that – again, this is a primary election. The bank is prepared for, let's say, both results in the sense that we are liquid in the case that there would be some volatility on interest rates or time deposits decisions – taking decision process by the people. Or if we have a positive scenario in the case of an outcome with Macri having a good performance in this election, we will continue allocating either in LELIQs, or if there is credit demand surging, we are going to allocate funds there. So we have been undergoing this type of volatility from the political scenario for the last 20 years in Argentina. So I would say that, frankly, that Banco Macro has the ability to move from one scenario to the other with a very – a lot easier because the – making decision process is very indoors and very fast here. So as we have been demonstrating in the last years with different presidents, with different economic cycles, the bank has always – has been showing excellent results in terms of bottom line, solvency, asset quality, so they need to continue the same trend.

And lastly, just a question on the accounting for inflation, you highlighted that again in this release that the expectation is for the bank to start reporting inflation accounting next year. But you gave a calculation that the earnings for the first six months, if I remember correctly, would have been ARS 4.8 billion if you accounted for inflation, the inflation adjustment. And I guess that's versus reported of ARS 14-plus billion. That does – a coincidence, our calculation is that the inflation loss will be approximately ARS 4.8 billion in the second quarter alone. Is that an accurate assessment? What we did was take the shareholders' equity and subtracted the fixed assets and intangibles and multiplied that by the inflation of, I guess, it was almost 9.5%, 10%? Does that make sense?

I couldn't get all the [indiscernible] Jason, can you repeat that?

No, what would be the inflation impact if you had to account for inflation accounting in the second quarter, which we know you won't have to do till next year? But our calculation is taking the shareholders' equity and subtracting the fixed assets and intangibles, and that's what's exposed. That's the net monetary position exposed to inflation. So we multiply that by the inflation in the quarter, we come up with about 4.8 billion loss.

Approximately – let's say, approximately, yes, but approximately.

That's very helpful.

Thanks. Thanks Jason.

Welcome.

The next question will come from Alonso Garcia of Credit Suisse.

Good morning, everyone. Thank you for taking my question. My question is, firstly, just a follow-up. I'm sorry to miss this on the social contributions. I just want to – so you had one impact of ARS 1.1 billion in the OpEx line. But my understanding is you also have an impact on the other operating expense line, right? So what was the overall impact of this adjustment this quarter? And if I understood correctly from a previous question, this quarter was a onetime impact, and next quarters, we will only see ARS 150 million operational expense on this line compared to previous quarters. Is that correct?

The total impact is close to 1.9 billion, but of course, there you would have to deduct the impact on the income tax, so it's 1.5.

Understood, so it was 1.1 in OpEx line and the rest in other operating expense, correct?

Yeah, yeah.

Okay. Perfect. And my second question would be just on fees. I mean fees are [indiscernible] inflation. So if you could comment here what are the main drivers for this and we should expect this trend to revert next year and see fees growing more in tandem with inflation or maybe even above that?

Yeah, so Alonso, the point is that we have to announce the Central Bank when we are going to increase inflation. And we had a difficult phase on the last quarter to have the approval of the Central Bank on the last increase in the fees. So basically, that's why we are having a fee performance below inflation. The idea, of course, of the bank is to be in line with inflation, but we were not able to transfer all the price increases we would like to. But the idea going forward is to maintain the fee increases in line with inflation. So for next year, I already mentioned is that fees should be growing in line with inflation in the area of 30%.

Perfect, understood, thank you very much.

You're welcome.

The next question will come from Yuri Fernandes of JPMorgan.

Thank you, gentlemen. I had a question regarding the balance of your government securities. There was a drop, a 13% decrease, mostly because of LELIQs. I just want to understand a little bit the rationale here. Maybe you – I don't know, like not willing to show a huge exposure to government securities, if that's something like this? And my second question is regarding regulations. We saw some changes on reserve requirements this quarter in Argentina, but it was really like on a specific case, on credit cards, traditional deposits. So my question is when do you see the reserve requirements for the amount of deposit [ph] and time deposits really decreasing in Argentina? How fast – if there is a positive outcome in elections, should we see this happening? Thank you.

Hey, how are you? I'm going to answer the second question first. I mean the trend or the speed on the decrease in interest rate is going to be very tied to the inflation rate. So depending on how inflation evolves and the speed of the deceleration of inflation that is going to be a good proxy for the decline in interest rates, both on the BADLAR, on the LELIQs. But assuming to what we are forecasting, the consensus we're forecasting for next year of the inflation is close to 30%. We are seeing the BADLAR rate in the area of between 5 and 6 percentage points above inflation at least and the LELIQs, at least, 5 to 7 or 8 percentage points above the BADLAR rates. So depending on that scenario and depending the speed on the decline in the inflation, we are going to see similar trend in the decline in interest rates there. And on the first question that you mentioned, the idea, of course, is that exposure on sovereign bonds is the same that we have been having in the last several years, a very conservative exposure there, a small portion of sovereign bond in pesos, and of course, allocating the most of the funds in excess liquidity on the LELIQs. Of course, that is short-term instrument here, and of course, this is what we consider the most attractive rate. So the idea is to continue with the same trend in terms of sovereign bonds and LELIQs.

The next question will come from Carlos Gomez of HSBC.

Hi, good morning. And I would like to go back to the inflation accounting. I would like to know if you already have the rules that are going to apply for inflation accounting next year. Or is this simply application of IFRS? And second, I mean, in this scenario you are describing, so you have inflation of 30%; BARDLAR of 35%, 36%; LELIQs, 42%, 44%; and loans, which are able to be less in real terms than they are today, and let's say, there isn't growth at all next year, what type of returns can Banco Macro produce, because that will be on a smaller level of interest earning assets, of course?

Carlos, in terms of your first question, no, the guidelines on inflation adjusting and accounting are the discussion of the Central Bank. They are not defined yet. So we do not have a final outcome there. On your second question, I mean, considering that scenario, I mean, Banco Macro, we have been showing and doing – we are going to try to do our best in order to have the highest return, the highest bottom line. Of course, this is a consequence of high revenues, maintaining costs under control as much as we can and carrying a lot of our asset quality. So we have to allocate the excess liquidity in LELIQs, because loans are not growing. We are going to do that if we are seeing some recovery on loans and rates are there compared to the LELIQs, we are going to partially switch on loans, of course, looking at asset quality. But I would say that in terms of bottom line, we are very nominal bottom line growth. We are confident for next year. When you adjust that to inflation, it will depend on the scenario of inflations that we have – that you have. The 30% that we are working with, we think that the return of Banco Macro for next year should be positive in the range of between – in the area – let's say, in the area of 15%. But again, this is a dynamic process. At the beginning of 2019, we were working with another scenario. We had to switch in the middle. So something similar could happen in 2020. So the idea that we have and the forecast that we work with, it's that one.

Okay. And when you say 15%, that's 15% nominal, which sort of real and that will be about 45% nominal more or less?

Yeah, yeah.

Yeah, and if I may follow up on – before on the guidelines, do you think that it is for certain that you will apply inflation accounting next year, because we are already in August or it might be delayed for an extra year?

That's a question for the Central Bank. But I think that we might be having inflation accounted for next year, yes.

Thank you so much.

You're welcome.

[Operator Instructions] Since there are no further questions at this time, this concludes the question-and-answer session. I will now turn the call over to Mr. Nicolas Torres for final considerations.

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

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.