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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Grupo Financiero Galicia Third Quarter 2019 Earnings Release Conference Call. This call is being recorded. At this time, I would like to turn the call over to Pablo Firvida. Please go ahead, sir.
Thank you. Good morning, and welcome to this conference call. I will make a short introduction and then, we will take your questions. Some of the statements made during this conference call will be forward-looking statements within the meaning of the safe harbor provisions of the U.S. federal securities laws and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed.
According to private estimates, the Argentine economy recorded a 1.3% year-over-year contraction during the third quarter of 2019 compared to a 0.6% year-over-year expansion in the second quarter. During the first 9 months of 2019, the primary fiscal surplus amounted to MXN22.9 billion, exceeding by MXN25.4 billion, the target for the period. According to the National Institute of Statistics, the national consumer price index recorded a 37.7% increase during the first 9 months of the year. On the monetary front, the Argentine Central Bank contracted the monetary base by MXN65. [Technical Difficulty] Thank you. Sorry for that technical problem. And I will get back to what I was saying. On the monetary front, the Argentine Central Bank contracted the monetary base by MXN65.8 billion in the third quarter, a 4.9% decrease against the second quarter.
Meanwhile, the exchange rate averaged MXN56.5 per dollar in September, a 29% increase against the average for June 2019. When compared to September 2018, the FX rate increased to 46.4%. In September, the average rate on peso-denominated private sector time deposits, for up to 59 days, was 60%, 9.1 percentage points above the average recorded last June. Private sector deposits in pesos amounted to MXN2.5 trillion, increasing 1.8% during the quarter and 42.5% since September last year.
Transactional deposits in pesos rose 7.6% during the third quarter and 37.8% in the last 12 months. Pesos-denominated time deposits decreased 3.6% in the quarter and picked up 48% year-over-year. In addition, private sector deposits in dollars amounted to $21.4 billion, decreasing 31% during the quarter and 20.9% as compared to September last year.
As of the end of the quarter, peso-denominated loans to private sector amounted to MXN1.65 trillion, recording a 7.1% increase during the quarter and a 4.6% increase when compared to September last year. In turn, U.S. dollar-denominated loans amounted to $13.4 billion, recording a 15.1% decrease during the quarter and a 15.7% decrease when compared to September last year. [Technical Difficulty]
Ladies and gentlemen, please stand by while we reconnect our speaker.
Thank you. Sorry for another technical problem. I was saying say that as a result of the political uncertainty, the country risk premium increased significantly and the dollarization of the economy accelerated. As a consequence, the government took emergency measures, including debt reprofiling and capital controls.
Turning now to Grupo Financiero Galicia. Net income attributable to Grupo for the third quarter of 2019 amounted to MXN11.6 billion, 175% higher than the same quarter of the previous year, mainly due to profits from Banco Galicia for MXN10.1 billion,
from Tarjetas Regionales for MXN1.1 billion, from Sudamericana Holding for MXN228 million, and from Galicia Administradora de Fondos for MXN85 million, increased by net operating income of MXN131 million and partially offset by personnel and administrative expenses of MXN53 million.
This profit represented a 7.1% annualized return on average assets and a 58.2% return on average shareholders' equity compared to 3.6% and 34.6% of a year ago.
Banco Galicia net income for the quarter increased 197% from the year-ago quarter as a result of the higher net operating income, mainly related to the growth of the net income from financial instruments and took profits from gold and foreign currency potential differences.
Net interest income for the quarter increased 14% as compared to the same period of 2018, primarily as a consequence of a 43% higher interest on loans and on repurchase agreement transactions.
Net income from financial instruments increased 167% from the one we called in the same quarter of 2018, as a consequence of higher holdings of central bank paper, Leliq, partially offset by lower yield on government securities, mainly treasury bills, LETES. The profits from gold and foreign currency quotation differences amounted to MXN1.7 billion, including a MXN3.8 million profit [Technical Difficulty].
Ladies and gentlemen, one second, please standby.
Thank you. Well, due to these technical problems, we are suffering. I would prefer to give you time to Q&A as all the information I was going to read is in the press release. So I'm now ready to answer the questions. Thank you.
[Operator Instructions]. Your first question comes from Gabriel Nóbrega of Citibank.
Thank you, Pablo, for the thorough presentation as well. My question is still on the political outlook? I know it's only been 3 weeks since the elections. But I wanted to get a sense from you what you're seeing? And then what strategies has the bank been taking, having taking into account what you've been seeing? And I'll make a second question afterwards.
Well, it's really hard to say what the elected President is going to do, what regulations, meaning not only regulations just for the financial system, mainly an economic plan or what measures he will take because we don't even know who's going to be the minister - the cabinet, now they've all the ministers. So the bank has been focused on being very liquid, both in dollars and in pesos, and I would say trying to protect as much as possible profitability and the capital situation and asset quality. Then we are seeing the first results of all the efficiencies that we have been trying to get with digitalization. But really going forward, we need to see what the economic plan will be, who are going to be the members of the cabinet, and what measures can be taken that would affect directly as a financial system. Sorry, I don't - I would answer if you have any specific questions regarding that, now what we could be doing.
I understand, it's very difficult. I actually have a follow-up going into the asset quality. During this quarter, I saw that the bank made a lot more of charge offs? And as a consequence, we actually saw the NPL ratios for the bank decreasing. So what I actually wanted to understand here is, why did you make so much higher charge-offs in the same quarter? And if you believe that we are at the peak of the NPL ratios? Or when could we even reach this peak?
Well, the NPL ratio improved due to the certain, I would say, recovery in the denominator on loans, and also the bank, it had sold some individual loan book that was past due for many months. It was around MXN1.7 billion. So both effects explained the improvement in the NPL ratio. We think that next year, we could see some recovery in loan demand and within an environment with lower interest rates that perhaps will help to improve even further the asset quality. So perhaps, we are close to the highest level. We have to see, again, economic plan, members of the cabinet. But in theory, we should be closer to the peak.
And your next question is from Alanso Garcia of Crédit Suisse.
My first question is on taxes. I mean, is this inflation adjustment that you and other banks are doing for taxes, is it still subject to any sort of ruling by tax authority? Or is it already final? I mean, is there a risk that you can - you have to revert this adjustment at the end of the year? Or is there a risk that you are not going to do it next year, if inflation rates also give room for that? Or is it already something final? And my second question would be on the Leliq position. I mean, we already saw a significant decline in this exposure in the third quarter. If I ask a question, do you see there is still room or appetite on your end to requisite further?
Alonso, in the case of income tax, the law is clear that we can adjust the numbers by inflation in order to calculate the income tax. In the third quarter, we did that, the charge was roughly MXN2 billion. If we hadn't done that, it would have been something around MXN1.6 billion higher, but it's under the current regulation. In the second quarter, what we did is we did altogether in the second quarter, the adjustments corresponding to the first and second quarter. But we don't foresee any change. And in the fourth quarter, we should see similar effective tax rate as the third quarter, around 16%.
Regarding the Leliqs, we decided to be very liquid. So we split, I would say, the exposure to central bank between Leliqs and repo transactions. So there, you will see that we have roughly MXN45 billion between - of Leliqs and another MXN45 billion or MXN46 billion with repo transactions. These are shorter-term instruments, again, in order to be very, very liquid.
Your next question comes from Yuri Fernandes of JP Morgan.
I have a question regarding the debt reprofiling. I was unable to find the exact value of the hit on your figures? I think you mentioned MXN2.3 billion, only caps, but not sure if that's the impact from the debt reprofiling. So if you can clarify what was the amount? That would be nice. And I have a second question regard your loans in dollars, how has been your policy on that? You mentioned about having more liquidity in dollars, but are you lending, what are the - your strategy for that segment?
Okay. Yuri, the amount of the debt or the impact of the debt reprofiling was around MXN2 billion. The instruments that we have in August not necessarily are the same that we have at the end of September. So it's perhaps hard to see the exact effect on each different bonds, but it was MXN2 billion. That is slightly that will be recovered when we collect the remaining 85% of those reprofiled short-term paper. The loans in dollars, what the decision was to keep on originating loan in dollars to exporters, again with the same main objective to be very liquid. Prepare for, I would say, a worse scenario than the actual one. So we are over liquid. And we then have billions of billions of dollars bills that we imported. So we are prepared, and we have been, I would say, or we overreacted. So we are very comfortable. And with the decision was to stop originating in dollars, and we are offering loans in pesos to exporters.
Your next question comes from Carlos Gomez of HSBC.
Two questions. First, on the reprofiling, you have a MXN2 billion loss, you said you might recover. It will be legal recourse that the bank individually or in association with the other banks get used to attract this unilateral reprofiling of the debt?
And second, what's your expectation for tax rate in 2020?
Yes. Well, in - you mean taking this issue to the courts in order to fight for the reprofiling?
Yes.
Well, it's not - it's very short term, really. Not I would say, it was not discussed. It's part of the financial system rules, I would say. Really, it was a very short-term postponement of payment. So the - although the hit, in accounting terms, was, I would say, significant, if we consider MXN2 billion significant. We think we will collect them in the short term.
Okay.
Next, regarding the income tax rate, yes, it will be 25% next year? Yes. So far, it will be 25% the income tax rate next year.
Income on inflation-adjusted earnings or on non-earnings?
Adjusted by inflation. The interest - the tax rate would be 25%.
Okay. So it's on earnings adjusted by inflation, like this year?
Yes. Yes. Hello?
[Operator Instructions]. Mr. Firvida, there are no longer any questions in the queue. I'd like to hand it back over to you for closing remarks.
Okay. Thank you for attending this call. Sorry for the technical problems. If you have any questions, please do not hesitate to call us. Good morning. Bye-bye.
And this concludes today's call. We thank you for your participation. You may disconnect your lines, and have a wonderful day, everyone. Take care.