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Grupo Financiero Galicia S.A. (NASDAQ:GGAL)
Q4 2019 Earnings Call
Feb 21, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Grupo Financiero Galicia Fourth 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.

Pablo Firvida -- Investor Relations Officer

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 0.6% year-over-year contraction during the fourth quarter of 2019. As a consequence, according to private estimates, the economy accumulated a 2% fall during 2019 and the primary deficit reached 0.4% of GDP, a 1.9% reduction compared to 2018. The national consumer price index recorded an 11.7% increase during the quarter, accumulating a 53.8% inflation in 2019.

On the monetary front, the Argentine Central Bank expanded the monetary base by ARS585.4 billion in the quarter, recording a 34.5% increase in the last 12 months. Meanwhile, the exchange rate averaged ARS59.88 per dollar in December, a 6% depreciation against the average for September 2019. When compared to December 2018, the Argentine peso recorded a 58.1% depreciation. In December, the average rate on peso denominated private sector time deposits for up to 59 days was 52%, 18 percentage points below the average recorded last September. Private sector deposits in pesos amounted to ARS2.8 trillion, increasing 13.1% during the quarter and 35.4% in the last 12 months.

Transactional deposits in pesos rose 20.4% during the quarter and 46% in the year. On the other hand, peso-denominated bank deposits increased 6% in the quarter, increasing 24.9% during 2019. Private sector deposits in dollars amounted to $19.5 billion, decreasing 8.9% during the quarter and 32.8% in the last 12 months. As of the end of December, peso-denominated loans to private sector amounted to ARS1.85 trillion, increasing 11.7% in the quarter and 18.6% when compared to December 2018. In turn, U.S. dollar-denominated loans amounted to $10.3 billion, recording a 23.2% decrease during the quarter and a 32.8% decrease in the year.

Turning now to Grupo Financiero Galicia. Net income for 2019 was 188% higher than in the previous year, reaching ARS41.6 billion, which represented a 6.5% return on average assets and 56.4% return on average stockholders' equity. The profit was mainly due to profits from Banco Galicia for ARS35.2 billion; from Tarjetas Regionales for ARS4.7 billion; from Sudamericana Holding for ARS1 billion; and from Galicia Administradora de Fondos for ARS307 million. The profit per share for the fiscal year amounted to ARS29.13 compared to ARS10.11 per share for fiscal year 2018.

Going through the fourth quarter, net income amounted for ARS9.3 billion. Up 111% from the year-ago quarter, mainly due to profits from Banco Galicia for ARS7.2 billion, from Tarjetas Regionales for ARS1.7 billion, from Sudamericana Holding for ARS242 million and from Galicia Administradora de Fondos for ARS31 million. This profit represented a 5.6% annualized return on average assets and a 41.4% return on average stockholders' equity.

Banco Galicia net income for the quarter increased 71% from the year-ago quarter, as a result of a higher net operating income mainly related to the growth of net interest income and net income from financial instruments, partially offset [Technical Issues] Okay. I think it got cut when I was saying that Banco Galicia net income for the quarter increased 71% from the year-ago quarter, as a result of a higher net operating income, mainly related to the growth of net interest income and net income from financial instruments, partially offset by higher loan loss provisions.

Interest income for the quarter increased 55% as compared to the same period of 2018, primarily as a consequence of higher interest on loans and on repurchase agreement transactions, while interest expenses were up 20%, mainly due to higher interest rates on time deposits. Average interest selling assets grew ARS90 billion or 31% year-over-year, and its yield increased 302 basis points, mainly due to an increase in the yield on peso-denominated loans. Interest-bearing liabilities grew ARS23 billion or 8% during the same period, and its cost increased 222 basis points, mainly as a result of the increase in the average interest rate on peso-denominated time deposits.

Net income from financial instruments increased 26% from the one recorded in the same quarter of 2018. As a consequence of higher profits from government securities due to higher holdings of Argentine Central Bank paper. Profits from gold and foreign currency quotation differences amounted to ARS3.3 billion, including ARS2.8 billion gain from foreign currency trading, growing 94% when compared to ARS1.7 billion profit from the same quarter of 2018.

Provision for loan losses were 96% higher than the same quarter of the prior year, mainly due to the evolution of arrears in the consumer portfolio and to higher regulatory provisions from the portfolio in normal situation plus one specific commercial client.

Personnel expenses increased 66% as compared to the year before, mainly due to salary increase agreement with the union. And administrative expenses grew by 106%, mainly due to higher maintenance and higher fees and compensation for services. The Bank's financing to the private sector reached ARS369 billion at the end of the quarter. Up 28% in the last 12 months, mainly due to the growth of peso-denominated loans, while dollar-denominated financing decreased 1% measured in pesos, about 38% [Phonetic] measured in dollars.

Net exposure to the public sector increased 29% year-over-year. And excluding Leliq, it represented 4% of total assets compared to 3% for the fourth quarter of 2018. Deposits reached ARS398 billion, up 10% in a year with peso-denominated deposits growing 27% and U.S. dollar deposit falling 10% measured in pesos and 43% in dollar terms. The Bank's estimated market share of loans to private sector was 11.6%, a 106 basis points higher than at the end of the year-ago quarter. And the market share of deposits from the private sector was 9.9%, decreasing 116 basis points in the same period.

As regards to asset quality, the NPL ratio ended the quarter at 4.4%, recording a 155 basis points deterioration as compared with the 2.9% of the fourth quarter of the prior year. And the coverage of NPLs with allowances reached 110%, up from a 103.7% from a year ago. As of the end of 2019, the Bank's consolidated computable capital exceeded by ARS43.1 billion or 115% to ARS37.7 billion minimum capital requirement. And the total regulatory capital ratio reached 17.6%, increasing by 243 basis points from the end of the same quarter of fiscal year 2018.

In summary, during the fourth quarter of 2019, Grupo Financiero Galicia has shown good result in a very challenging and volatile macro environment, keeping liquidity, solvency and profitability metrics at high levels. We are now ready to answer the questions that you might have.

Thank you.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We'll take our first question from Alonso Garcia of Credit Suisse.

Alonso Garcia -- Credit Suisse -- Analyst

Good morning, everyone, and thank you for taking my question. My first question is regarding your expectations for loan growth and deposit growth compared to your inflation expectations this year, considering then the base, of course, is lower, but also that the macroeconomic conditions in Argentina remain uncertain for this year. And my second question is on the inflation adjusted accounting that you're reporting this year, what sort of ROE level do you expect for 2020, and what do you think -- I know it's hard, but what do you think would be a reasonable and sustainable ROE under this inflation accounting? Thank you.

Pablo Firvida -- Investor Relations Officer

Okay. Hi, Alonso. In terms of the loan growth, in this environment of lower interest rate and also we're forecasting some recovery in GDP toward the second half of the year. And as you said, coming from very low starting levels, we are forecasting loans growing around 10 percentage points of our inflation. So with an inflation of 40%, that is our current number, the loans could end up growing around 50% this year. Deposits sometimes lower, perhaps inflation plus 5% in that order.

When we speak about -- that was the first question. When we speak about the inflation adjustment, we informed in the press release in the last page that the -- what would have been the net worth and the net income of 2019, if inflation adjustment was applied. That number makes the ROE at around 20% to 21% in real terms. It's important to see that the nominal ROE was around 56%. The inflation was around 53.8%, so really -- the real ROE has nothing to do with the difference between nominal and inflation. For next year, depending on the inflation and also the monthly inflation because it's very sensitive on each month, we could be thinking in lower nominal ROE and somewhat lower real ROE, but really the adjustment is very difficult to forecast, mainly considering this volatility in the monthly readings.

Alonso Garcia -- Credit Suisse -- Analyst

Very clear. Thank you very much.

Pablo Firvida -- Investor Relations Officer

You're welcome.

Operator

Thank you. [Operator Instructions] We'll now move to our next question from Carlos Gomez of HSBC.

Carlos Gomez -- HSBC -- Analyst

Hi, good morning. I wanted to ask you about the measures to limit credit card interest rate and the offsetting reduction in reserve requirements that you experienced. Do you have a preliminary calculation as to the impact that this might have on your result? And second, I would like to know what do you expect your tax rate to be for this year? And whether you can confirm that it should be a tax on the inflation adjusted earnings? Thank you.

Pablo Firvida -- Investor Relations Officer

Hi, Carlos. The regulation that came the day before yesterday at night, they put a cut for financing with interest before -- with credit cards. The cap is 55%. That can be compared with around 75% that was the previous number. But I asked the -- it was a formula that took asset base the average cost of personal loans and that rate was coming down already. Really, the number we should be comparing with is around 71% and now 55%. Of course, that has a negative impact. But when we take into account the less reserve requirement, we have to have a non-remunerated that leaves [Phonetic] an equivalent amount in deposits. It's really a percentage of the consumption of a program called [Indecipherable]. But really, this improvement in reserve requirement or the yields in this reserve requirement is kind of offsetting the reduction in interest rate, perhaps something marginally negative but really we can assume it's almost equal.

Carlos Gomez -- HSBC -- Analyst

Okay. That's helpful. [Speech Overlap] In terms of credit cards, what would -- what happens to Tarjeta Naranja? The regulation of the price would be the personal loans plus 25%. And therefore, it would be 71% up?

Pablo Firvida -- Investor Relations Officer

This change doesn't apply in non-bank credit cards. So now, yes, the gap will be the former one [Indecipherable], up to 1.25 times the weighted average cost of personal loans in the system. With some -- technicality is that some public sector banks are not included in that number. But basically, net asset is [Phonetic] not affected by this cap.

In terms of income tax, the effective tax will be -- or the nominal income tax rate will be 30%. It was to be reduced to 25%, but there was a loan that gets in the same level at 30%, and we calculate the income tax considering inflation adjustment.

Carlos Gomez -- HSBC -- Analyst

Thank you. Thank you very much.

Pablo Firvida -- Investor Relations Officer

You're welcome, Carlos.

Operator

Thank you. [Operator Instructions] We have another question comes from Brian Flores of Citi.

Brian Flores -- Citi -- Analyst

Hi. Thank you for the opportunity to ask the question. We saw some deterioration on your NPLs. And I was wondering if you are guiding for any figure for 2020? And what are the drivers behind your guidance? Thank you.

Pablo Firvida -- Investor Relations Officer

Okay. Hi, Brian. We saw an increase in NPLs this quarter, mainly at the bank level from 4% to -- the coverage is at 110%, healthy. We saw an improvement in NPLs in the level of Naranja. This quarter had the particularity of one commercial case, white products retailer, in which we had to provision ARS1 billion. Without that, NPLs would have been, I would say, similar and also, the cost of risk -- while the cost of risk, instead of being 5.1%, closer to 3.9%. So going forward, with this forecasted growth in loans, plus a recovery in the economy sequentially in the second quarter, NPLs to be improving. And toward the end of the year, this 4.4% that I was mentioning should be compared with around 3.8%.

Brian Flores -- Citi -- Analyst

Very Clear. Thank you.

Pablo Firvida -- Investor Relations Officer

You're welcome.

Operator

Thank you. We'll move to our next question. It is coming from Ernesto Gabilondo of Bank of America.

Ernesto Gabilondo -- Bank of America -- Analyst

Hi, good morning, Pablo. Thanks for the opportunity to make questions. A follow-up in the interest rate cap on credit cards. How much is the average interest rate of your credit card portfolio? And what do you think will be the reduction from the one that you're charging to the one that the Central Bank is proposing? Thank you.

Pablo Firvida -- Investor Relations Officer

When you look at the stock of loans related to credit cards, in December, it was around ARS95.6 billion, but that includes everything from the float or a lot of financing with no interest lending with installments, also a rural credit card that we have. So, really out of that, the amount is subject to financing with this card -- interest rate that was reduced was something lower than ARS10 billion, ARS9-point-something billion. The reduction, as I said, was something between -- or will be actually because it will begin in March from levels of 71% to 55%. And we will be offsetting that with a higher yield on part of the reserve requirement that now we don't have to constitute or we will not have a zero yield.

Ernesto Gabilondo -- Bank of America -- Analyst

Okay, perfect. Understood. Thank you very much.

Pablo Firvida -- Investor Relations Officer

You're welcome, Ernesto.

Operator

And our next question comes from Santiago Petri of Franklin.

Santiago Petri -- Franklin -- Analyst

Hello, Pablo. Hi. Good afternoon. The question is related to financial margin. Could you please split what will be the net interest margin from this consolidated financial margin? And how do you see this net interest margin and financial margin going into 2020 with all the attention on the Central Bank to reduce rates? Thank you.

Pablo Firvida -- Investor Relations Officer

Hi, Santiago. When we speak about the NIM, we see some compression going forward that will be offset with this volume increase. When we speak about NIMs of 20%, the breakdown is something around 28% in pesos and 2% in dollars. So, the breakdown between pesos and dollars, it's important also this gap between -- or the evolution or the different evolution between Leliq and Badlar. Lately, Leliq was going down faster than Badlar. But putting everything together with a 100 basis point reduction in NIMs, we would need around 5% growth in loans in order to offset that. Really in a lower industry rate environment, typically, margins compress, but volumes rebound. And [Indecipherable] the sustainability and the needs of the financial system for the medium term.

Santiago Petri -- Franklin -- Analyst

Okay, thanks. Thanks a lot.

Pablo Firvida -- Investor Relations Officer

You're welcome. Thank you.

Operator

[Operator Instructions] It appears we have no further questions, sir.

Pablo Firvida -- Investor Relations Officer

Okay. Ian, thank you. Well, thank you all for attending this call. If you have any further questions, please do not hesitate to contact us. Thank you, good morning, and good afternoon for the ones [Indecipherable]. [Operator Closing Remarks]

Duration: 26 minutes

Call participants:

Pablo Firvida -- Investor Relations Officer

Alonso Garcia -- Credit Suisse -- Analyst

Carlos Gomez -- HSBC -- Analyst

Brian Flores -- Citi -- Analyst

Ernesto Gabilondo -- Bank of America -- Analyst

Santiago Petri -- Franklin -- Analyst

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