Grupo Financiero Galicia S.A.

Hello and welcome to the third quarter 2023 earnings release for Grupo Financiero Galicia. My name is Melissa and I will be your coordinator for today's event. Please note this conference is being recorded and for the duration of the call, your lines will be in a listen-only mode. However, you will have the opportunity to ask questions at the end of the presentation. This can be done by pressing star 1 on your telephone keypad to register your questions. If you require assistance at any point, please press star zero and you will be connected to an operator. I'll now turn the call over to Pablo Servida. Please go ahead.

Thank you, Melissa. Good morning and welcome to this conference call. I will make a concise 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 US federal securities laws and are subject to risk and uncertainty that could cause actual results to differ materially from those expressed. According to the monthly indicator for economic activity, the Argentine economy recorded a 0.3% year-over-year expansion during August. In year-to-date terms, the economic downturn stood at minus 1.6%, but year 2023 would end with a number closer to minus 2%, according to the Argentine Central Bank's market expectations survey. During the third quarter of 2023, the primary fiscal deficit reached 1.4% of GDP. This implied a slight deterioration against the 1.3% deficit accumulated during the same period of 2022. This outcome was explained by a 100.5% revenue increase in year-to-date terms, whereas primary spending rose 104.3%. The National Consumer Price Index accumulated a 103.2% increase during the first nine months of 2023. Inflation reached 142.7% annual variation in October 2023, which entailed an acceleration against the previous year's inflation, with inflation hitting its highest mark in 30 years. On the monetary front, the Argentine Central Bank expanded the monetary base by 942.5 billion pesos in the third quarter, recording a 66.6% increase in year-on-year terms. After the primary elections held in August, the Argentine Central Bank devalued the Argentine peso by 17.9%, which stood at 350 pesos per dollar between August 14 and November 15. Since then, the effect started displaying a daily crawl of around 0.1%. The average exchange rate in September stood at 350 pesos per dollar, which entailed a 50.6% peso devaluation for the first nine months of the year. When compared to September 2022, the Argentine peso underwent a 59% devaluation. The monetary authority rate interest rates after the primary election with the policy rate at the minimum rate for time deposits under 30 million pesos up to 118 percent. After the National Institute for Statistics published September inflation in mid-October, the policy rate was raised again and currently stands at 133 percent, as well as the minimum rate for time deposits. In September 2023, the average rate on peso-denominated private sector time deposits for up to 59 days stood 114%, 46.9 percentage points above the average of September 2022. Private sector deposits in pesos averaged 27.3 trillion pesos in September, increasing by 24.7% during the quarter and 121.7% in the last 12 months. Time deposits in pesos rose 22.7%, during the quarter and 121.2% year over year. While peso denominated transactional deposits increased 27.4 and 123.4% respectively in the same period. Private sector dollar denominated deposits amounted to $15 billion in September, 2023 decreasing 2.9% during the quarter and increasing 1% in the last 12 months. Peso denominated loans to the private sector averaged 11.7 trillion pesos in September, increasing 23% in the quarter and 101.4% when compared to September 2022. While private sector dollar denominated loans amounted to $3.8 billion recording a 2% retraction during the quarter, and a 5.2% expansion when compared to September 2022. In terms of politics, after the primaries, we had presidential elections in October, and after this first round, last Sunday, November 19th, there was a runoff, and Javier Millet was elected president. He will take office on December 10th. Coming now to Grupo Financiero Galicia, net income for the third quarter amounted to 54.2 billion pesos, 103% higher from the year-ago quarter, mainly due to profits from Banco Galicia for 51.1 billion pesos, from Galicia Asset Management for 3.3 billion pesos, and from Galicia Seguros for 590 million pesos, partially offset by the 2.3 billion pesos loans from Naranja X. This profit represented a 3.4% annualized return on average assets and a 17% return on average shareholders' equity. Banco Valencia net income for the quarter was 126% higher than in the year-ago quarter, as the net operating income increased 79%. Average interest earning assets reached 3.55 trillion pesos, 6% lower than in the same quarter of 2022, mainly due to a 13% decrease of loans in pesos. In the same period, its yield increased almost 37 percentage points, reaching 92.2%. Interest-bearing liabilities increased 2% from September 2022, amounting to 3.08 trillion pesos. This growth was mainly due to a 4% increase in time deposits in pesos. During this period, its cost increased 30.1 percentage points to 68.3%. Considering together net interest income and net income from financial instruments, they grew 35% from the same quarter of 2022. It is worth to remember the change in evaluation model of the deliques acquired from January 1st, 2023. These instruments used to be valued at fair value, and the criteria was changed to amortize cost. Thus, each yield is being recorded as interest income instead of within results from financial instruments. Net fee income increased 17% from September, 2022, mainly due to 19% higher profits from trade card fees, 32% increase from other fees and 9% higher fees from bundles of products. The gains from gold and FX quotation differences were 419% higher from the year-goal quarter, including the results from foreign currency trading. Other operating income increased 101% in the quarter as a result of a 58% increase in other adjustments and interest and miscellaneous receivables as a consequence of devaluation of financial instruments granted as collateral, and to a 452% increase in other income. As regards provision for loan losses, the amount for the quarter was 20% higher than those recorded in the year-ago quarter, reaching 20 billion pesos. Personal expenses were 9% higher than in the third quarter of 2022, in line with a 3% increase of staff and of salary increases above inflation, while administrative expenses were 5% higher due to a 27% increase of taxes. Other operating expenses increased 49% due to a 55% higher turnover tax due to an increase in the gross income tax from financial operations, and 51% higher charges for other provisions related to discounts on credit cards and payroll accounts. The income tax charge was 15.8 billion pesos, higher than in the third quarter of 2022, with an effective tax rate of 26%. The bank's financing to the private sector reached 2 trillion pesos at the end of the quarter, down 6% in the last 12 months, with peso-denominated loans decreasing 7% and dollar denominated loans, 29%. Net exposure to the public sector increased 1% year over year as a result of higher holdings of dual bonds and bodies offset by lower holdings of LELIC. Excluding the exposure to the central bank, LELIC, LDIB, and repurchase agreement transactions, net exposure represented 16% of total assets the same level as of the end of the third quarter of last year. Deposits reached 3.75 trillion pesos, 6% lower than a year before, mainly due to a 14% decrease of time deposits in pesos. The bank's estimated market share of loans to private sector was 11.68%, 16 basis points higher than at the end of a year ago quarter, and the market share of deposits from the private sector was almost 10%, 20 basic points lower than in the same quarter of 2022. The bank's liquid assets represented 110% of transactional deposits and 55% of total deposits up from 109 and 53% respectively from a year before. As regards asset quality, the ratio of non-performing loans to total financing ending the quarter at 2.46%, recording a 41 basic points deterioration as compared to the 2.05% of the third quarter of the prior year. At the same time, the coverage with allowances reached 134%, down 100 percentage points from the 234% recorded a year ago. As of the end of September, 2023, the bank's total regulatory capital ratio reached 25%, decreasing 78 basis points from the end of the same quarter of 2022, while tier one ratio was 24.1%, growing 22 basis points during the same period. In summary, in a particularly challenging and volatile political and macro environment, Grupo Financiero Galicia was able to keep asset quality, liquidity, and solvency metrics at healthy levels and to sustain a good level of profitability in spite of the significant impact of the high inflation of the quarter. We are now ready to answer the questions that you may have. Thank you.

Thank you. As a reminder, if you would like to ask a question, you may press star 1 on your telephone keypad. If you would like to withdraw your question for any reason, you may press star 2. You will be advised when to ask your question. Our first question comes from Brian Flores of Citibank. Please go ahead.

Hi, Tim. Good morning. Congratulations on your results. I was going to do two questions. The first one is on how are you thinking about your exposure to the public sector in terms of strategy and maturity? I'm also wondering if you already have any contacts with the transition team directly or via the banking association. Any insight there on the receptivity, openness, et cetera, would be greatly appreciated. And after, I'll do my second question. Thank you.

Okay. Hi, Brian. Well, the exposure to the public sector is made up by two parts. and basically repost with the central bank and a government bonds. The leaks are 28 days short term, basically paper issued by the central bank. And it's the location we have from the money coming from deposits that is not demanded by the private sector in the form of loans. The current central bank sets a minimum interest rate for time deposits. So we must take these deposits and the only way not to lose money and to invest these deposits is to purchase LELIPS. LELIPS or the RICOS, one day exposure to a central bank. Many conversations, rumors, or even politicians, including Milet, they have said that part of the main considerations when they decide or set the economic plan is to solve the issue of levy. We consider that there is no need to take any I would say, unfriendly decision or restructuring with LELICS. Actually, the elected President Millet said that he wants to respect private property and all the rights. So within, I would say, a consistent economic plan, the reduction of LELICS should be similar but in the opposite direction of how they were created. Basically they were created because the central bank printed money to finance the treasury, the national treasury and also the central bank purchased a government bonds in order to have within certain ranges the effects, the financial effects And therefore they issue the leaks in order to sterilize this money. If the new government cuts the public spending or goes to the public super average and not deficit as is the case today, there will be no pressure. And also the monetization of the economy that today is around 2.3% in terms of GDP. could go to normal levels of 2.5%. So this, if the government cuts spending, they don't have the need to print money, and monetization goes back to normal levels, not high levels, normal levels, the leaks will not be a problem. And also, again, the economic plan is consistent, sustainable, and grants confidence, the stock of LELICs will shift quickly to loans to the private sector. This is central line. In terms of government bonds, most of our exposure is to, it's in pesos adjusted by CTI, and it's the way we find to hedge our network against inflation. It's not a perfect hedge because there is a two-month lag between the inflation printed monthly and the one that we receive in the bonds, but it's the best way we find to hedge against inflation. We want to have exposure with government bonds, again, to cover our network. Of course, we would prefer to lend to millions of clients from the private sector. The issue is that with this level of inflation and therefore this level of nominal interest rate, loan demand is actually smaller than inflation, and that's why loans to GDP are going down and loans or our loan book in real terms is shrinking. In terms of contact with the elected president or team, we still don't know and it was not announced not only the future needs of economy nor the president of the central bank. There are some names and rumors, but they were not officially elected or communicated. Perhaps this alliance with Macri's party will need some kind of conversations, agreements or discussions. Through Ariba, we, or ADEVA, I would say, issued a document a couple of months ago proposing a solution, a virtual solution for the leaks. This is available and public, but there were not individual contacts due, mainly because we don't have the name of the counterpart. Sorry, the answer was too long, Brian.

No, Pablo, this is perfect. Thank you. And my final question is, with nearly one month to go, I'm just wondering if there were going to be any guidance changes for 2023 ROE.

Well, the accumulated ROE stands at 17%. In the third quarter, it was 17%. So far, well, it's very sensitive to the monthly inflation. As you can see in that line in the P&L, the results due to monetary losses due to inflation. But we think it could be between 15 and 17 for the full year. Next year, well, there are lots of questions I think we are in a period or in a moment that is a kind of inflection point. There will be a new economic regime and I think lots of regulations will disappear and I think changes could be if everything goes in the right direction. loan book recovery could be much faster than expected.

Perfect. Thank you very much.

You're welcome, Brian.

Thank you. Our next question comes from Ernesto Gabilondo from Bank of America. Please go ahead.

Hi. Good morning, Pablo. Congrats on the results and thanks for taking my call. My first question is on the potential economic outlook for Argentina. Which do you think would be like the key execution risks for the new administration? How do you see the possibility to implement structural reforms considering that there will be like a divided Congress as neither the officialism or all the right parties will have majority. So anything on that will be very helpful. And then my second question is a follow-up on the LELICs exposure. So as you mentioned, if LELICs are eliminated, the banks will have an important excess of liquidity, but will not be remunerated as before. And then you will have to allocate that into loans. However, considering the high level of interest rates and inflation in Argentina, how do you see the appetite for credit demand next year, especially for those that are more related to individuals? And then my last question is on this potential dollarization of the economy. So far, we have seen that in the proposals, it could take a year and a half, two years for the implementation. So, just considering what could happen to the banks that they have more than 90% in pesos, how are you seeing that dollarization process? for the banks if there could be any potential impact. For example, if we have a depreciation of the peso, that could also create, at least at the beginning, a lot of inflation also. There are a lot of moving parts, so it will be interesting to know your view also on this dollarization part. Thank you.

Okay. Okay. Hi, Ernesto. Well, perhaps I can begin with the dollarization issue. I think, and many people around the financial system or even many economies think that dollarization is not feasible without dollars, basically, I always say that the private sector of Argentina is very long in dollars, but the public sector is very short of dollars. It's hard for the public sector to dollarize. Let's say that they get the dollars in order to dollarize. First, they should have to make many homework to put the numbers of the economy in order. That is what many economists are saying. And even Millet is saying that the population should choose which currency they use to pay or to collect. So I don't think a dollarization as in other countries would take place even in one or two years, as you mentioned. And when I think in the financial system, I think that some potential regulation that was created 22 years ago or so said that banks can lend in dollars just to exporters. So if there were to be a dollarization, that would mean a lot of risk in terms of lending in dollars to individuals or companies that do not generate dollars. So we need to let the realization is not something we are seeing as feasible. Also the alliance with Macri and Patricia Bullrich I think are putting this alternative farther or they are that is a good word, the possibility of dollarization. In terms of execution risk, I think that after the elections of last Sunday, Millet found a lot of support from the population. He got almost 56% of the votes. 11.5 or so percent more percentage points more than NASA. So he has the mandate and many congressmen received that piece of information. So I think that within Milley's party, Macri's and some other could get a quorum and approval of laws that are necessary to make reforms. Other smaller reforms could be done with the will, I would say, of the executive power. But, of course, is the main risk of Millet, the execution risk, as I would say that his ideas or his trend in economic terms are in the good direction, reducing fiscal spending, pointing to fiscal superavid, no more printing of money by the central bank, giving freedom to the private sector, so many good intentions. And as I said, many of these decisions will be his decisions with power, other he will need the Congress. For example, when they said at the beginning of the campaign that they will shut the central bank, lately they are saying that what they want to do is to prohibit that the central bank prints money. Of course, the superintendency of banks is needed to supervise banks and to set the regulations and to eliminate many distorted regulations. Instead of, or going back to the third question, the Linux, well, the B2 cycle would be Linux shifting to a private sector launch, but that will take some time, perhaps a couple of months, six months, I don't know how much. We don't know what is the economic team of Millet thinking when they say solving the issue of the lease, but they said that they want to respect private property to pay debts, that anything will be done in a friendly way. So I guess they could offer a menu of alternatives if they want to do something, but at market value. it shouldn't create a problem for the banks. And if they finish with the obligation for banks to pay a minimum interest rate on time deposits, we can stop taking time deposits and not investing in the LEED. So really at this point, there are many question marks, but we are confident that anything will be done in a rational way, because as I said, the LELICs are the other side of the coin of private sector deposits. So anything that they do and affect the asset side, it has a correlation on the liability side. I think I answered everything, Ernesto.

Yes, no, perfect. Thank you very much, Pablo.

You're welcome.

Thank you. Our next question comes from Nicolas Riva from Bank of America. Please go ahead.

Thanks, Pablo, for the chance to ask questions. And I'm going to also follow up, circle back on what Brian and Ernesto asked about the LELICs. And I think that your point, if I understood correctly, Pablo, is that going forward with a reduction in the fiscal deficit, there won't be a need really for the government to continue printing as much pesos to finance the fiscal deficit, and therefore there won't be a need to continue issuing those LELICs. My question is more on the stock of the outstanding LELICs, which right now is between 20 and 25% of the total assets of the entire banking sector, and over one times the equity. What could be, I mean, for example, if one alternative that has been discussed or not would be an exchange of these LELICs for government obligations? Because, again, if there were to be, let's say, a debt exchange where the banks have to take a relevant haircut on those LELICs, then there could be a very negative impact on the equity of the banks, given that, again, the LELICs are over one times the shareholders' equity of So my question is if there has been any discussion with incoming administration regarding that treatment or a potential debt exchange of the deliques for federal government obligations.

Hi, Nicolas. Well, using the government paper they have, they could simply sell the bonds and pay back the deliques. That could be an alternative. There were no discussions in that respect. But if any solution is done within or even voluntary terms or friendly terms or market terms, there should be no impact on the equity of banks. But again, we think that the issue could be solved just, well, again, within a consistent economic plan, not just looking at the leaks. But if you generate confidence, the price of bonds go up and there is a demand for bonds, you can sell them. Also, if they reduce the fiscal expenditure and get to a super habit or surplus, there will be no need to print money. Again, they could sell the government bonds they have. And not only we can be reducing the leaks because they are 28 days instrument, we can also allocate in repos, but the central bank and everybody knows that, as you said, the size of the leaks is significant in terms of the networks of the banks. So any solution, and again, is the other coin of the deposit that's even more important, not the health of banks or the financial system, but it's also the money of the depositors. So any solution that we think could be virtuous must consider these two interests, not only the network or the health of the financial system, the depositors. Thanks very much, Pablo. You're welcome, Nicolás.

Thank you. Our next question comes from Carlos Gomez with HSBC. Please go ahead.

Good morning, and thank you for taking the question. I have two. The first one is if you could comment on the acquisition of the SURA assets, the insurance business, and how what you expect to do with it and how that changes your outlook for the coming years. The second, I noticed that you have a decrease in the credit card balances, so you seem to be a bit more cautious when it comes to credit, and also you have a decrease in the current accounts, 31%. Could you comment on those two lines?

Thank you. Yes, Carlos. First, in Sura, we purchased the Argentine operation of this Colombian company. And the business is very complimentary to Galicia Seguros business. Galicia Seguros is basically a bank assurance. They book the risk of and sell the book, basically the insurance. of the products sold by either Banco Galicia or Naranja X. In the case of Sura, the company is a little bit bigger than Galicia Seguros in terms of primes, personnel, and so on. But they bring many other lines of business that are, as I said, are complementary. For example, car insurance in the past, Banco Alicia sold car insurance, but third-party insurance. In the case of Sura, they have this product. Also Sura has many products for SMEs and the agricultural sector. And they also have a very good or even big network of independent producers. This would be the translation. It's like advisors that have the clients, the final client. This is around 4,000 independent advisors. That is another channel to sell insurance. So we are very happy with the transaction. The numbers will be added to our numbers beginning in October. So, so far, you are not seeing any of that. Regarding a loan demand and basically it's not that we are becoming risk averse, it's less demand let's say from the clients. The high nominal interest rates for individuals or also for companies are against and that's why the real terms loans are diminishing. What was the other question, Carlos, sorry?

It was about the checking accounts, but on loan demands, I mean, you have lost some market share. Again, is that a conscious decision or just a reflection of loan demands in the sectors in which you operate?

Well, in terms of market share, Actually, it was 11.66 in the last 12 months. I think it was 20 basis points growth. We lost in deposits from 11 to 10.7 to 10. And in that case, there are many reasons. Mainly, I would say, the bank can, let's say, adjust There are deposits not convalidating high interest rates for big deposits, typically either mutual funds or big corporates. But that's the problem with the photo we have at the end of, in this case, the quarter. But I wouldn't say it's a trend that we want to lose market share. On the contrary. to keep on growing market share. But again, it's not a variable that we can manage easily. It's more a demand problem. Thank you very much. You're welcome, Carlos.

If you have a question, you may press star one on your telephone keypad. And we have a question coming through from Jorge Moro of Fundamenta. Please go ahead.

Hi, Pablo. Thanks for taking my question. This is regarding the LELIC exposure. We noticed yesterday 60% of the auction was not rolled over. This is roughly $1.7 billion at the parallel exchange rate. So I'm curious here, what's the bank doing with all these pesos that you decided not to roll over yesterday?

Well, hi. Well, that was yesterday's option. As you said, the lower was around 40%. I don't have the details between private sector banks and public sector banks. What banks could do, the easy answer would be to shift from Linux to repo transactions with the central bank one day instead of 28 days. or what we can do is reject or fund deposits from mutual funds or remunerated accounts from either mutual funds or certain big corporates in order to reduce both asset and liability. I think this will be a moving trend a dynamic issue because if all the banks don't roll over the and go to repos with the central bank, we will be in a similar situation. Or if we reject all the deposits from big corporates or mutual funds, all the balances will shrink and we have to see who's the winner. I think we are in the early stages of this situation. I wouldn't extrapolate what happened yesterday with 40% roll over to the next options.

Okay, but just understand you have the ability to reject deposits.

Not from the retail. where we have to pay a minimum interest rate, we can do it for big corporates at lower rates or what we call the remunerated accounts for mutual funds or other banks.

Okay. And if I may just follow up on your net dollar position, it's around 32% of equity. Do you have a maximum position? I presume this is mostly on the dual bonds, right? Can you increase this further, or is there a cap?

Well, the thing there, we have a cap, a regulatory cap. Actually, we must be close or hedge in the spot position, and we can go along with forward contracts up to 5% of the regulatory capital. The thing is that when you look at the balance sheet, it has some, I would say, different treatment when we look at what we say are assets in dollars. Because, for example, the dual bonds and the levits in the accounting are considered dollar assets but not for the regulatory or the regulation regarding the position in dollars. That's why it looks so high. Actually, if you deduct the holdings of dual bonds and LDIB, it must be slightly negative at the end of September.

Okay. Thank you very much, Pablo.

You're welcome.

Thank you. And as we have no further questions in the queue, I would like to turn it back over to Pablo Fervida for any closing remarks.

Well, thank you very much, all of you, for attending this call. If you have any further questions, please do not hesitate to contact us. Good morning and happy Thanksgiving for the U.S.