Banco Macro S.A. (BMA) Q2 2020 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 Second Quarter 2020 Earnings Conference Call. We would like to inform you that Q2 2020 press release is available to download at the Investor Relations website at Banco Macro, at www.macro.com.ar/relaciones-inversores/. Also, this event is being recorded and all participants will be in listen-only mode during the Company's presentation. After the Company's remarks are completed, there will be a question and answer session and at that time, further instructions will be given. [Operator Instructions] It is now my pleasure to introduce our speakers for today. Joining us from Argentina are Mr. Gustavo Manriquez, Chief Executive Officer; Mr. Jorge Scarinci, Chief Financial Officer; and Mr. Nicolas Torres from IR. Now, I will turn the call over to Mr. Nicolas Torres. You may begin your conference.

Thank you. Good morning and welcome to Banco Macro's second quarter 2020 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 with the SEC and it's available at our website. Second quarter 2020 press release was distributed yesterday and it's also available at our website. All figures are in largely in pesos and have been restated in terms of the measuring unit current at the end of the reporting period. As of January 2020, the bank began reporting results applying hyperinflation accounting in accordance with IFRS IAS 29 as established by the central bank. For ease of comparison figures of previous quarters of 2019 have been restated applying IAS 29 to reflect the accumulated effect of the inflation adjustment for each period through June 30, 2020. I will now briefly comment on the bank's second quarter 2020 financial results. Banco Macro's net income for the quarter was ARS6.4 billion, 14% lower than in the first quarter of 2020 and 111% higher than the ARS3 billion posted a year ago. The bank's second quarter 2020 accumulated ROE and ROA of 23% to 25.2%, respectively, remain healthy and show the bank's earning potential. Net operating income before general and administrative and personnel expenses for the second quarter of 2020 was ARS22.2 billion, decreasing 9% or ARS2.3 billion quarter-on-quarter, but 27% or ARS4.7 billion higher than a year ago. Operating income after general and administrative expenses was ARS8.5 billion, 24% or ARS2.7 billion lower than in the first quarter of 2020, but ARS8.3 billion higher than in the second quarter of 2019. In the quarter, net interest income totaled ARS20 billion, 11% or ARS2.4 billion lower than the result posted in 1Q '20 and 19% or ARS4.6 billion lower than the result posted one year ago. In the second quarter of 2020, interest income totaled ARS29.6 billion, 9% or ARS3 billion lower than in 1Q '20 due to lower income from loans and lower income from government securities, and 36% or ARS16.4 billion lower than the previous year. Within interest income, interest on loans decreased 12% or ARS2.5 billion quarter-on-quarter due to a 408 basis points decrease in the average lending rate, down to 31.5% from 35.6% registered in the first quarter of 2020, while the average volume of the loan portfolio remained practically unchanged. Interest income decreased 17% or ARS3.6 billion year-on-year. In second quarter of 2020, interest on loans represented 61% of total interest income. Net income from government and private securities decreased 12% or ARS1.3 billion quarter-on-quarter due to lower income from private securities. Compared to the second quarter of 2019, net income from government and private securities decreased 56% or ARS12.2 billion. In the second quarter of 2020, FX gains including investment in derivative financing, totaled ARS805 million due to the 9% Argentine peso depreciation against the U.S. dollar and the bank's long spot dollar position. FX trading results continue to be impacted by stricter currency controls and regulations. In the second quarter of 2020, interest expense totaled ARS9.6 billion, a 6% or ARS560 million decreased compared to the first quarter of 2020 and 55% or ARS11.8 billion lower on a yearly basis. Within interest expenses, interest on deposits decreased 6% or ARS566 million quarter-on-quarter, mainly driven by a 262 basis points decrease in the average interest rates paid on deposits. Rates came down from 16.3% in the first quarter of 2020 to 13.6% in the second quarter of 2020. On a yearly basis, interest on deposits decreased 57% or ARS11.3 billion. In the second quarter of 2020, interest on deposits represented 91% of the bank's financial expenses. As of the second quarter of 2020, the bank's accumulated net interest margin, including FX, was 22.3%, lower than the 25.2% posted in the first quarter of 2020 and higher than the 20% registered one year ago. In the second quarter of 2020, net fee income totaled ARS4.6 billion, unchanged from the first quarter of 2020. On a yearly basis, net fee income decreased 7% or ARS324 million. In the second quarter of 2020, net income from financial assets and liabilities at fair value through profit or loss totaled ARS2 billion loss as a consequence of the inflation adjustment applied to our LELIQ holdings. In the quarter, other operating income totaled ARS1.1 billion, decreasing 8% compared to the first quarter of 2020. On a yearly basis, other operating income increased 11% or ARS137 million. In the second quarter of 2020, Banco Macro's personnel and administrative expenses totaled ARS8.6 billion, 11% or ARS840 million higher than the previous quarter due to higher expenses related to employee benefits and higher administrative expenses. On a yearly basis, personnel and administrative expenses decreased 18% or ARS1.9 billion. In the second quarter of 2020, the efficiency ratio reached 43.3%, deteriorating from the 39.8% posted in the previous quarter. Excluding inflation adjustment on our LELIQ holdings shown under income from financial instruments at fair value through profit or loss, from the efficiency ratio calculation, efficiency ratio would have been 37.2% in the second quarter of 2020 and 31.6% in the first quarter of 2020. In the second quarter of 2020, Banco Macro's effective tax rate was 28.9%, lower than the 35.8% registered during the first quarter of '20. In terms of loan growth, the bank's financing to the private sector decreased 5% or ARS12.2 billion quarter-on-quarter and 12% or ARS30.4 billion year-on-year. Within commercial loans, others stand out with a 30% or ARS9 billion increase quarter-on-quarter mainly due to the loans extended to SMEs at a 24% interest rate as part of the relief package given the COVID-19 pandemic. On the consumer side, personal and credit card loans decreased 5% and 3%, respectively, in the quarter. Within private sector financing, peso financing increased ARS244 million, while U.S. dollar financing decreased 36% or $232 million. It is important to mention that Banco Macro's market share over private sector loans as of June 2020 reached 7.5%. On the funding side, total deposits increased 24% or ARS78 billion quarter-on-quarter and increased ARS214 million year-on-year. Private sector deposits increased 16% quarter-on-quarter, while public sector deposits increased 107% quarter-on-quarter. The increase in private sector deposits was led by time deposits, which increased 18% or ARS23.5 billion quarter-on-quarter while demand deposits increased 13% or ARS20.5 billion. Within private sector deposits, peso deposits increased 24% or ARS52.3 billion, while U.S. dollar deposits decreased 15% or ARS179 million. As of June 2020, Banco Macro's transactional accounts represented approximately 49% of total deposits. Banco Macro's market share over private sector deposits as of June 2020 totaled 6.3%. In terms of asset quality, Banco Macro's nonperforming to total financial ratio reached 1.52%. The coverage ratio, measured as total allowances under expected credit losses over nonperforming loans under Central Bank rules, improved significantly and totaled 210.64%. Asset quality continues to be positively affected by recent measures adopted by the Central Bank of Argentina in the current pandemic COVID-19 context, particularly the 60-day grace period that was added to debtor classification before a loan is considered as nonperforming. In terms of capitalization, Banco Macro showed an excess capital of ARS101 billion, which represented a total regulatory capital ratio of 32.1% and a Tier 1 ratio of 25%. The bank's aim is to make the best use of this excess capital. Bank's liquidity remains more than appropriate. Liquid assets to total deposits ratio reached 54%. Overall, we have accounted for another positive quarter. We continue showing a solid financial position. Asset quality remained under control and closely monitored. We keep on working to improve more our efficiency standards, and we keep as well atomized deposit base. At this time, we would like to take the questions you may have.

We will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from Ernesto Gabilondo with Bank of America. Please go ahead.

My first question is on provision charges. Can you elaborate on how much of the total loan portfolio has been related to deferrals in commercial and consumer loans, refinanced credit cards and with the support to SMEs? And do you have an estimate of how much additional provisions have been created this year based on expected losses? And how much does that represent of your total loan portfolio? Also, how much do you estimate that the additional provisions represent of the loan book that has been subject to deferrals, refinanced credit cards and to support with SMEs? And then my second question is on margins. Where do you see interest rates by year-end? And how do you see the potential impacts on margins for this next year? And then my last question is on expenses. How should we think about this line during the year? Are you evaluating to reduce personnel or branches to mitigate some of the potential impacts of the pandemic?

Thanks for your questions. We can start with your second question about margins and interest rates. What we're expecting for interest rates by year-end is a slight increase, basically because what the market is expecting is a kind of a pickup in the monthly inflation index. So we believe that there should be a slight increase in nominal interest rates by year-end. Even though that, we are seeing in terms of margins some kind of slight contraction in the third quarter, because there were some increase in deposit interest rates, while the LELIQs or the repos interest rates remain unchanged. So we are foreseeing that in the third quarter, we are going to see an additional compression in the net interest margin. However, for the fourth quarter depending on how the nominal rates behave, we could see some stability or might be a little bit of widening or recovering the portion of the margin that we lost in the second and third quarter. On your third question related to expenses, what we are expecting for the rest of the year is to continue, I mean, having a very close eye on expenses, both on personnel and other administrative expenses, we are not -- we do not have any official program on layoff or closing down branches, even though that as we have been doing in the last several years, we try to be extremely efficient in our cost controls. And that's why the idea of the management and the Board, of course, is to continue showing excellent level of efficiency going forward, as we have been showing the numbers of the last quarters. In terms of your first question that was divided in two or three different questions, in terms of the provision charges that we are doing in the second quarter, we increased the provisions compared to the first quarter mainly because of the consequences of the COVID-19 that I think that, worldwide, is very unknown, all the consequences that we are going to have in the next I don't know, 6, 12, 18 months or 24 months. So we have increased that provision level. Also, we highlight that we reached a coverage ratio of 210%, but I mean the message here is that we are closely monitoring also asset quality. As we have been saying many times, we are a local bank. And we have to be a bit more conservative than maybe other international banks in the sense that we cannot ask for extra money in case of a crisis to any headquarters abroad. So we have to be very conservative in that front. So we are, on a daily basis, monitoring the asset quality and evolution of that. And for the moment, we are -- we feel very comfortable of the situation that we are having in the bank. In terms of loans that they were reprogrammed, we can include or add some additional information by email if you want, but just not to enter into many details: ARS700 million in corporates or companies, ARS22,500 in consumer and ARS50,000 in credit cards. That's the big numbers on the loans that have been reprogrammed.

And do you have an estimate, given that you built additional provisions in second quarter when compared to the first quarter, do you know how much of these additional provisions are to the loan book that's been subject to deferrals or the refinanced credit cards or with the support in support in SMEs?

Let me go into those numbers. There's something that we put in the press release there in the paragraph talking about the -- at the beginning in Page number 4 about provisions. You can have some details there, just not to maybe take other people's questions. But you can go to Page number 4 of our press release. There is a part there that we are putting some info. But in case that you need additional one, please contact us as we can provide it.

Yes, perfect. Because I saw that it was practically the amount that you break down that was registered as provision charges in the second quarter, it was close to 2.2 million pesos of Argentine pesos. So I just wanted to understand maybe that, that breakdown was more related to the loan book that could be at risk and that you are considering some part of provisions to that loan book at risk. But we have -- I agree that maybe we can follow-up later to really understand how much additional provisions have been built to this loan book. Thank you.

You’re welcome Ernesto.

And our next question will come from Gabriel da Nóbrega with Citigroup. Please go ahead. Gabriel da Nóbrega: I actually have two questions on asset quality. The first one, when we look at your NPL ratios, they actually increased this quarter. And for us, this is a bit strange because even with the flexibilization that the BCRA has given to you, and we also saw other of your peers seeing NPL ratios decreasing, it was a bit weird seeing that your NPL ratio's deteriorated this quarter. So if you could just elaborate and give us some more color of what's happening here? And also, if you could maybe give us the end figure of your NPL ratios without the flexibilization of the 60 days that would help us a lot. And as for my second question, it is actually a follow-up regarding provisions. We understand that you already made these sizable provisions this quarter. But looking forward, are you comfortable with the coverage ratio? Or are you expecting to maybe have to continue making higher provisions due to the higher delinquency we are going to see?

Gabriel, thanks for your questions. On your first question, honestly, we think that a quarter increase from 1.36% to 1.52%, considering the recession that we are having worldwide, more in Argentina plus COVID-19, we do not take that as a big deterioration in asset quality. I think that is something normal. Congrats to our peers if they show some decrease there. Honestly, it depends on the quarter or the time frame that you are taking. We think that 1.52% with a coverage of 2.10% are showing excellent levels. And again, we feel extremely comfortable to how we are managing the asset quality on the bank as well as we have been doing this in past crises. And going forward in the third quarter, we think that we might include some additional provisions. Honestly, we don't know as much as the one that we did in the second quarter. But again, we still do not have -- know, I think that this is something that the world is wondering, the total effects on this pandemic and the implications on the economy, with the additional thing that the recession that we are ongoing in Argentina. And despite that we are foreseeing with inflation by the end of the year, depending on the new economic program is what we are going to see for next year in terms of economic activity. So overall, we think that in terms of asset quality, we are doing fine with additional provisions in the third quarter, maybe not as much as the one that we put in the second. And again, the NPL ratio deterioration on a quarterly basis, we think that it's pretty normal considering the scenario that we are ongoing. Gabriel da Nóbrega: Perfect. Could you just tell us what would be your NPL ratio if you had not yet had the waiver of the Central Bank?

Yes. Obviously, we do not have the exact number, but should be between 2.6% and 3.2% approx.

And our next question will come from Alonso Garcia with Crédit Suisse. Please go ahead.

My question is actually on loan growth. I just wanted to hear your thoughts on how you see volumes evolving from here. I mean so far, loans are 10% down year-over-year. You are underperforming some of your main peers. So I wanted to hear your thoughts on how should we see loan growth volume here, and what segments should drive growth in the coming quarters? And regarding the special credit line for SMEs at 24%, if you think most of that is already done? Or do you think you will continue originating strongly on that front?

Alonso, thanks for your question. In terms of loan growth, we also provided information in the press release about the total loan growth comparison between the former quarter and one year ago. But in addition, we also put the behavior of peso loans and also U.S. dollar loans. There you can see that the total loan behavior is extremely influenced by the decline in dollar-denominated loans. If you look at the peso loan behavior, we grew 1% quarter-on-quarter and 11% year-over-year. So going forward, we think that in the peso loan book, we are going to continue showing slightly positive numbers here. We think that there could be some statistic recovery by the fourth quarter of this year, again depending on how the COVID-19 affects the economy. But if we are going to enter in a more or less strict phase of the pandemic, we are seeing some recovery in the fourth quarter. In addition, on the dollar-denominated loan portfolio, we think that we are going to continue decreasing in that area, basically because margins in the dollar business are extremely low, and we are not incentivizing that business. But on the peso, we are seeing positive numbers on -- in real terms going forward for the third and fourth quarter. And in terms of -- sorry, about the second inquisition, so SMEs. I mean if there is a recovery, this is going to be a recovery across the board. SMEs, we think, are the ones that have been more affected by the recession and the pandemic, so the level of credit in that level is very low. So I think that if the perspective of the landscape for both the pandemic and the recovery of the economy are better, we are going to see a bit more demand coming from SMEs.

Still at least 24% interest rate as part of this program.

Yes.

Our next question will come from Nicolas Riva with Bank of America. Please go ahead.

I have a follow-up on the prior questions about all these loan reprogrammings. Can you give us a bit of an idea? You already mentioned that the actual NPL ratio would be probably between 2.6% and 3.2%, if you were to include all these loan reprogramming as NPLs have. Can you give us an idea in terms of next steps, the future steps for this reprogrammed loan book? For example, I mean you are already two months into the third quarter. Should we expect to see more of these grace periods, loan reprogrammings in the third quarter? When would you expect to start unwinding some of these measures, given everything that's going on in Argentina and everything that was going on even before we had the COVID-19 pandemic in Argentina? And then the second question is about deposits. If I look at the deposits from the public sector, and we know that you are a financial agent for a number of provinces in Argentina, I see that the deposit from the public sector basically doubled -- or more than doubled in the second quarter versus the prior quarter. Any color on that? Did you feel like a new contract with any of -- with a province as a financial agent? Or any changes to existing contracts that justify that big change?

Nicolas, thank for the questions. On your first question in terms of NPLs, we are seeing some, in the third quarter, some additional new reprogramming on some balances on the credit cards. Honestly, going forward, I think that's the time of programs are going to be maintained until the economy starts to pick up again. I think that the government is committed to allow people to extend the payments on credit cards, on personal loans in order to see -- not to see a big spike in terms of NPLs. So meanwhile, we are going to see this program to be maintained. Honestly, the one that Id mention about credit cards has happened last week going forward. We do not have an official information about new reprogramming or extension in installments or whatever. But again, we think the government is committed to help people and companies in order to transit this recession and pandemic period as best as possible. In terms of your second question, the increase in the public sector deposits are mainly driven by the ANSES. That is the fund that is managing the retirees' money, that has been depositing or making time deposits in Banco Macro in a higher speed than the ones that we saw in the previous quarters. So that is the main reason of the increase in public sector deposits, basically, 30 days or 40 days' time deposit in pesos.

Our next question will come from Yuri Fernandes with JP Morgan. Please go ahead.

I have a question regarding margins. If I understood correctly, you said margins may slightly go up because of higher rates. And I believe the mix shift of local currency loans may also help on that regard, but what about the time deposits? I know it's like 35% to 40% of your loans, but the new regulation shouldn't be a headwind, right, like this minimum remuneration? So just asking if you have taken that into account when you said margins should likely recover? And my second question is regarding the provinces, right? Like if you can give us a color on how Santa Fe, Cordoba, South, like the main provinces in which macro operators behaving regarding loan growth and asset quality. When you compare versus Buenos Aires, do we think it's fair to say that those regions are doing better? Or no? Like what can you tell us out your geographic exposure?

Yuri, thank you for your questions. No, I mean in terms of margins, what I mentioned is that in the third quarter, we are going to see additional compression in margins, basically of the minimum -- because of the minimum time deposit rates and also because the LELIQs and repo rates remain unchanged. However, in the fourth quarter, if nominal rates are going to go up as we are expecting, depending on the range that we are seeing those rates going up in the LELIQs and repos and also deposits, margins could remain stable or slightly expanding. That is what I mentioned before. In terms of your second question about the provinces, you know that in terms of our standing, 80% of our business is basically in the interior of the country. A very small portion is in the area of the city and the province of Buenos Aires. So for the moment, what we are seeing that in interior, the situation is kind of similar of the Buenos Aires province in the sense that the only sector that is doing good, let's say, is the agricultural sector. The rest of the sectors are showing some decline in terms of activity compared to last year. But we are not seeing any province with any dramatic problem of any specific sector. So I would say that for the moment, there is kind of a parallel or similar situation between the most important provinces of the interior and the Buenos Aires province.

Okay, so no tailwinds and no headwind coming from the provinces, right? You are behaving very similar to your peers that are more exposed to the Buenos Aires region, right?

Not for the moment.

[Operator Instructions] And our next question will come from Carlos Gomez with HSBC. Please go ahead.

A couple of questions, one on your capital year book value, we see there is a decline, or rather, stabilization in nominal terms between the first and the second quarter, any big changes there? And have you restated the first quarter? Because we don't really expect the same number that you've written into the restated figures, so that is the book value? Second, regarding the dividend, we understand that you have provision for it, but it's just still pending approval. We wanted to know if you have any news about that. And finally, on the line of loan at 24%, do you consider that you are making any type of return on that? Or that's just the cost of doing business and you accept a negative return at this point?

In terms of your first question about the book value of the capital, we deducted the amount of the dividend there. So that's why you're seeing a decline in the nominal level, and also, yes, we adjusted in the first quarter. So that's the difference in the figure that you are seeing. In terms of the dividend, it's still pending. We -- for the moment, we do not have additional information coming from the Central Bank when this dividend is going to be allowed or to be paid. So, honestly, no additional information there. In terms of the 24% credit line, remember that we have some additional reserve requirements benefits there. So the 24% nominal interest rate that we are extending the loans, if you add the benefits of some reserve requirements, it goes up to 38%, similar to the LELIQs interest rate. So meanwhile, these benefits are being sustained. We are going to continue extending this credit line. Of course, the Central Bank knows that there's a limit for that. So if the Central Bank wants to continue to see banks incentivizing this 24% credit line, they will have to add other incentives or benefits in order to check the 24% interest rate to more reasonable levels.

And our next question will come from Juan Recalde with Scotiabank. Please go ahead.

My question would be related to the result from net monetary position. We've seen that you have had a positive impact of around 400 million in this quarter. It was around 300 million in the previous quarter. So inflation, as you mentioned, inflation is expected to pick up in the rest of the year. So how should we think about the side of net monetary position in the coming quarters?

Let me give you -- if you take consideration all the inflation impact in all the balance because here, because of Central Bank regulation, we have to put parting one side of the income segment, another part of the inflation adjustments on another part. If you put all together, we are having a negative impact on inflation going forward. I would say that the negative number is going to increase, depending on the level of inflation that we think is going to grow slightly up, plus the behavior of the monetary assets and liabilities. Honestly, it's not very easy to forecast this number. It's going to be negative in the range of, I would say, the average that we see between the second and third quarter.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Nicolas Torres for any closing remarks.

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 has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.