Grupo Financiero Galicia S.A.

Hello, welcome to Grupo Financiero Galicia second quarter 2024 earnings release. My name is George. I'll be a coordinator for today's event. Please note that this conference is being recorded, and for the duration of the call, you're going to be in listen-only mode. However, you'll have the opportunity to ask questions towards the end of the presentation, and this can be done by pressing star 1 on your telephone keypad to answer your question. If your question is at any point, please press star zero and you will be connected to an operator. And I have the call with your host today, Mr. Pablo Filvita, Head of Investor Relations. Please go ahead, sir.

Thank you, George. 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 U.S. 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 3.9% year-over-year contraction during June. In year-to-date terms, the economic downturn reached to 3.2%. During the second quarter, the primary surplus amounted to 0.5% of GDP, which compares to a 0.6% primary deficit in the second quarter of the previous year. This result was explained by a 257.6% year over year increase of revenues, whereas primary spending rose 165.2%. The financial surplus amounted to 0.2% during the second quarter. The National Consumer Price Index recorded a 79.8% increase during the first half of 2024 and kept its decreasing trend from monthly figures of 25.5% recorded in December 2023 to 4% in last July, accumulating 87% in the first seven months of 2024. The central bank devalued the exchange rate by 54.2% on December 13 last year, a 118.3% variation, after which the FX has maintained a 2% monthly crawling peg, which persists to this day. The exchange rate averaged 903.8 pesos per dollar in June, 2024, implying a 72.5% devaluation in year-over-year terms. The overnight repo rate remained the reference monetary policy interest rate during the second quarter of 2024, after having replaced the LELIC rate back in December 2023. So far this year, the monetary authority lowered the policy interest rate five times, from 133% to its current 40%. It is also worth mentioning that as of July 22nd, the Central Bank ceased overnight reverse RIP operations. The fiscal liquidity bills, or LEPIs, issued by the Treasury have been defined as the new liquidity regulation instrument. In June 2024, the average rate on peso-denominated private sector time deposits for up to 59 days stood at 33.4%, 59.5 percentage points below the average for June 2023. Currently, rates for time deposits stand at an average of around 38%. Private sector deposits in pesos averaged 52.7 trillion pesos in June, increasing 24.2% during the quarter and 141.3% in the last 12 months. Time deposits in pesos rose 23.3% during the quarter and 103.3% year over year, while peso-denominated transactional deposits increased 24.5% during the second quarter and 183.1% in year over year terms. Private sector dollar-denominated deposits averaged $17.7 billion in June increasing 6.5% during the quarter and 14.6% when compared to June, 2023. Peso denominated loans to private sector average 25.7 trillion pesos in June, increasing 38.6% in the quarter and 169.1% when compared to a year before. Private sector dollar denominated loans amounted to $6.4 billion recording a 47.7% expansion during the quarter and a 66.2% rise when compared to June 2023. Turning now to the results for the quarter, net income attributable to Grupo Financiero Galicia amounted to 409 billion pesos, 90% higher from the year-ago quarter, mainly due to profits from Banco Galicia for 296 billion pesos from Naranja X for 81 billion pesos, from Galicia Asset Management for 12 billion pesos, and from Galicia Seguros for 10 billion pesos. This profit represented a 9.7% annualized return on average assets and a 42.5% return on average shareholders' equity. Going to Banco Galicia, net income for the quarter was 54% higher than in the year-over-quarter, mainly due to a 34% increase of the operating income, partially offset by a 165% increase of the income tax. Net operating income increased 24%, primarily due to a 46% higher net interest income and a 72% higher net result from financial instruments. upset by a 69% decrease in the results from gold and foreign currency quotation differences. Average inter-selling assets reached 8.6 trillion pesos, 18% lower than in the same quarter of 2023, mainly due to a 42% decrease of the portfolio of governance securities in pesos and a 33% reduction in the average balance of loans in pesos. offset by 92% higher volume of other inter-selling assets in pesos. In the same period, its yield decreased 33 basis points, reaching 75.2%. Inter-varying liabilities decreased 29% from June 2023, amounting to 6.1 trillion pesos, mainly due to a 56% decrease in time deposits in pesos. During this period, its cost decreased 25.7 percentage points to 30.9%. Net interest income increased 46% from the second quarter of last year, although interest income fell 22% due to decreases of 31% of interest on government securities, 26% on loans and other financing, and 46% on promissory notes. This was more than offset by a 61% drop of interest expenses due to a 67% lower interest on time deposits. Net fee income decreased 6% from June 2023, mainly due to a 25% lower profit from fees on bundles of products and of 21% on deposit accounts, partially offset by a 78% increase of foreign trade fees. The income from financial instruments increased 72% due to a 414% higher result from government securities, offset by a 83% lower result from private sector securities. Gains from gold and effects quotation differences were 69% lower from the year-ago quarter, including the results from foreign currency trading. Other operating income decreased 23% in the quarter while provision for loan losses increased 49%. Personal expenses were 30% higher than in the second quarter of 2023 due to a 4% increase in staff, salary increase agreements with the union and an increase in provisions for personal compensations and rewards. Administrative expenses were 18% higher as a consequence of a 28% higher taxes and a 37% higher expenses for maintenance and repairment of goods and IT. Other operating expenses decreased 7% due to a 33% lower turnover tax and the income tax charge was 165% higher than in the second quarter of the previous year due to higher operating results. The bank's financing to the private sector reached 5.4 trillion pesos at the end of the quarter, down 7% in the last 12 months, with peso financing decreasing 20% and dollar denominated financing growing 103%. Net exposure to public sector decreased 15% year over year because of lower holding of LELICs, partially upset by an increase of securities adjusted by CER at amortized cost and of government securities in pesos at fair value through other comprehensive income. Excluding the exposure to the central bank, , net exposure represented 37% of total assets compared to 23% as of the end of the second quarter of 2023. Deposits reached 8.3 trillion pesos, 24% lower than a year before, mainly due to a 58% decrease on time deposits in pesos. The bank's estimated market share of loans to the private sector was 11.9%, 12 basis points higher than at the end of a year-end roll quarter. And the market share of deposits from the private sector was 10.5%, 57 basis points higher than in the same quarter of 2023. The bank's liquid assets represented 80.1% of transactional deposits and 55.7% of total deposits compared to 104.9% and 65.9% respectively from a year before. As regards asset quality, the ratio of non-performing loans to total financing ended the quarter at 1.98%, recording a 67 basic points improvement as compared to the 2.65% of the second quarter of the prior year. At the same time, the coverage with allowances reached 160.3%, down 48 basic points from the 160.8% reported a year ago. As of the end of June 2024, the bank's total regulatory capital ratio reached 28.8%, increasing 512% basic points from the end of the same quarter of 2023, while tier one ratio was 27.8%, up 600 basic points during the same period. In summary, in a 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 improve the level of profitability. We are now ready to answer the questions that you may have. Thank you.

Thank you. Thank you very much, Mr. Fiorida. Ladies and gentlemen, once again, if you have any questions, please press star 1 on your telephone keypad. Please also ensure your mute function is not activated in order to let your signature equipment. So that's star 1 for questions. Our very first question today is coming from Ernesto Gabilondo of Bank of America. Please go ahead.

Thank you. Hi, good morning, Pablo and Etienne. Congrats in the results. My first question will be on long road and asset quality. We noticed an important deterioration in Naranja's credit card business. So just wondering how do you see the asset quality for Naranja and for Galicia in terms of MPLs and customer risk going forward? especially as we are starting to see an expansion of the credit business. And my second question is if you can elaborate a little bit more on the undoing positions that the bank executed with the central bank related to the puts. What were the implications into the P&L and balance sheet? And also you can talk a little bit about the timeline and implications of the repos that is proposing the central bank. And also related to this, can you remind us how much of your position on securities linked to inflation and how they are being classified in your balance sheet? And my last question is on your ROE guidance for this year, if we could assume a sustainable ROE above 20% in the next year. Thank you.

Okay, thank you, Ernesto. I'll try to answer everything. If I forget something, please let me know. First, loan growth. We have a we were saying in previous calls that we were forecasting a real loan growth to take place once month inflation goes below 5% on a monthly basis. That occurred and we saw a real growth in loans, slight or small in May, more important in June, and we are already seeing good demand for July, August, and for the rest of the year. At the beginning, or let's say last quarter, we were thinking that loans could be growing at around 30% in real terms for the full year. Now we are revising a little bit up that number, perhaps in the range between 35% and 40%. Of course, many things are moving, but this is our current In the case of Naranja, they also saw a big increase in loan demand. In the case of the bank, it was something like 18%. In the case of Naranja, 21%. One thing that is important to keep in mind is that as you originate new loans, you have to provision a portion of that, roughly 1% of that, so part of the increase in the cost of risk is due to the increase in the loan book. Having said that, at the bank level, the NPL stands at roughly 2%. We don't see any, I would say, deterioration. Of course, with the growth in the loan book, cost of risk should be growing slightly. In the case of Naranja, their asset quality was something like 4.3%. Basically, some iteration in personal loans, their dynamics are even more significant at the bank. They have been growing deposits a lot from very low levels because they are, I would say, pretty new in saving time deposits. And they lend a lot and therefore with the growth in their loan book also the cost of risk increase. But going forward we don't see any deterioration in the asset quality and of course the cost of risk will be more in line with the expected losses and the growth in the loan book. So that was loan growth and asset quality differentiating between the bank and Naranjaya. In the case of this issue with the central bank and the CMB regarding the exercise of the puts, in the first quarter we had a provision, 46 billion pesos. That was the the amount that the central bank and the CNB was saying that it was the prejudice that they suffered multiplied by two. Basically, we built a cushion because the difference of the amount of the exercise of that put was 23 billion pesos. So we made a provision of 46. In some time during the second quarter, the central bank, there is from our account at the central bank, 28.8 billion pesos. So let's say 29 billion pesos. That was a kind of a preliminary gesture of goodwill from part of Banco Valencia saying, okay, if you are saying that your damage because of our exercise of the put was 23 billion pesos. And there is that amount adjusted by an interest rate that was a 28.8. And we go on in the process of defending and waiting for the CMB to have their final decision. So today we have an excess provision of roughly 17 billion pesos. But, of course, this issue is still open. Then you asked about the puts we have. And if we sold them, if I'm not wrong, Ernesto, Yes.

Yes. How is the exposure after the puts and how was before?

Yes. Well, we sold all the puts to the central bank. We received 16.6 billion pesos. That was in July. And the net result of that was in the order of half of that. because we were accruing part of the prime we paid on those puts. There were many puts. So we sold. We have no longer any puts against the central bank. We sold them, and there will be a positive result in July. And then ROE guidance. Well, so far the year is much better in terms of results and ROEs than expected at the beginning of the year. The first half ROE stands closer to 37%. We are forecasting lower ROEs for the third quarter and the fourth one. But with this first half, we think that we'll end up between 25 and 30% for the full year. Going forward, let's say for next year, of course, sorry, one comment, and this is without considering the positive effect of the purchase of HSBC Argentina. That is the standalone business. Once the transaction is approved, and the numbers are incorporated to our numbers, of course, there will be many, many changes. And for next year, again, thinking a standalone business should be in the range between 20, 25%. Again, many things are going to happen in the meantime, but that is the current trend. guidance, information, projections, and estimates that we have.

Excellent, excellent. Pablo, thank you very much. Just a follow-up in terms of the overall securities. Can you remind us how is your position on securities linked to inflation and how are you classifying them? I don't know if they are for hold for sale or for maturities.

Yes. Well, actually, in the press release, we have a chart that is exposure to the public sector. And there, you will see the bonds that are accounted as available for sale or at market price, at cost plus yield, and the ones that are at market to market, the results shown in other comprehensive income, the variation. Most of the bonds in pesos adjusted by CPI are cost plus yield, while the rest are mark-to-market in general.

Okay, perfect. Thank you very much, Pablo.

You're welcome, Ernesto.

Thank you. What's your question, sir? Our next question is coming from Brian Flores, calling from Citibank. Please go ahead.

Hi, Pablo and Tim. Thank you for the opportunity. I wanted to ask a bit on growth. Where should we see the focus on growth? Should it be across the board? Should it be more on personal loans? If you could elaborate a bit on where are you seeing the best recoveries in terms of demand? I know generally it begins on the corporate side, but then it filters down to consumer. If you could expand a bit on the dynamics that you are seeing, that would be very good for us. Then on my second question, I wanted to ask on NIMS. I know this is a very hard question, but I know yields are decreasing, but also this is obviously helping you on interest expenses too. So I wanted to ask you, when should we see NIMS that would be very helpful. Thank you.

Hi, Brian. Well, as you said, in terms of loan growth, it began with big corporates. Last year, in the first quarter, in dollars, they were demanding dollars. Now, more pesos as the interest rates went down significantly. We are also seeing some loan demand from SMEs. and the agricultural sector, although the agricultural sector has some seasonality. And last, individuals. We are seeing some rebounding personal loans and credit card financing. Of course, this is just the bank. Now, when we look at Naranja X, it's just individuals, credit cards, and personal loans. And we also launched two or three months ago mortgage loans This is a product that will begin to appear in our balance sheet because it has a lag between when the client requests the loan and when it's finally granted and when they purchase the apartment and then the notary makes all the paperwork. But in the past, we saw that they reached to roughly 6% of our total loan book. In this case, perhaps it could get to the same level in one year. So this is how we see growth in the loan book. In terms of NIEMS, as you said, they are going down from very, very high levels. The means include, of course, the yield on all our interest-earning assets that include government paper, central bank paper, and our loans to private sector. We think there will be a further reduction, but we see it as very gradual because now as we don't have the obligation to pay a minimum interest rate on time deposits, we have more flexibility to set the time deposit rate. Also, as monthly inflation is going down, the breakdown between deposits with costs, basically time deposits or remunerated accounts against the transactional accounts improves for our site. Basically as inflation is lower, the opportunity cost of living money in saving account or taking account at zero interest goes down. So the breakdown and the average cost of funding improves for us. So when we focus in just in the intermediation with the private sector, basically the deposit base and the loan book, we can see NIMS at levels of 27, 25%, and perhaps they will remain at those levels or gradually go down, but we don't see any significant compression going to the levels we saw, for example, In 2017, 2018, we saw an inch at around 15, 19%. In this case, we think it will take a little bit more time.

Thank you, Pablo. If I may, just a quick follow-up. Sure. Regarding coverage, I think the level that we are seeing is a bit low. And as you were saying, you have intentions to continue accelerating So do you think we should see a higher peak in terms of cost of risk first before normalizing, as you mentioned? Or do you think, you know, in the end, we shouldn't see a big spike in terms of increasing the coverage? And then if I may, just a final one. You mentioned the acquisition of HSBC Argentina. When do you see this, like, happening officially? Or when do you think we should see or hear news from the central bank's approval? Thank you.

Okay. Well, we are comfortable with the coverage levels. And actually, when you look at a longer period of time, they are at, I would say, higher levels than they used to be. The coverage comes from models with expected losses. But really, we don't see material differences there. Actually, in the case of the banks, it was almost flat at 160% from one year ago. In the case of HSBC, we don't have any particular dates from the central bank. We think it could be in the next couple of months, either September or October. So the consolidation of numbers should occur likely in the fourth quarter, and in mid-2025, perhaps all the businesses could be merged, and we will have one bank, one insurance company, one asset management company.

Super clear. Thank you.

You're welcome. Thank you very much, Mr. President. Sorry for interrupting you, Mr. Fivita. Our next question will be coming from Marina Martins, calling from Latin Securities. Please go ahead.

Hi, good morning, Pablo. So I have a question regarding Naranja X, which has significantly contributed to this quarter's results and ROE. So how do you plan to leverage on its performance in your overall strategy? And also, which were the main drivers of behind this growth in both loans and deposits?

Hi, Marina. Well, Naranja had a great quarter basically because the interest rate environment changed dramatically. First, well, due to the pretty recent ability of Naranja X to take deposits, their cost of funding went down. In the past, when they were not allowed to take deposits, they depended on a market and the capital markets basically, or lines from different banks. So now with their own deposits, their cost of funding went down. And in particular, with interest rates going down, their cost of funding went down much faster than the impact on their loan book. Right now, to give you some sense of numbers, Naranja X is paying roughly 40% on the deposits and they are charging 100% in personal loans and 80%, these are big numbers, no? Perhaps it's 82 or so. on a credit card financing. So I would say they are now seeing the results of their investments they did in previous years. Actually in the last two years, their profitability wasn't very good because they were investing in all these capabilities. Now they are a digital, pure digital company They open hundred thousands of accounts every month. They see a double digit growth rates in deposits and loans. So they are doing very well. That is, I would say why Naranja is doing so well. Going forward, NIMS should compress a little bit as the stock of loans begin to yield lower interest rates. But we see a very good year for Northern Heights.

Great. Thank you.

You're welcome, Marina.

Thank you, ma'am. Ladies and gentlemen, as a reminder, if you have any questions or follow-up questions, please press star 1 on your telephone at this time. When I go to Carlos, Gomez of HSBC. Please go ahead. You have this open.

Hello, Pablo. Good morning and congratulations on the results. Two questions. The first one, maybe you said this before, but could you give us your economic forecast for 24 and 25, in particular inflation rate and the exchange rate? Second, could you perhaps in simple terms explain to us how you have managed your bond portfolio differently from your peers because we have seen quite significant results in securities for the three large banks. And where does it come from and how should we expect that to evolve in the coming quarters?

Thank you. Hi, Carlos. Well, regarding the main macroeconomic variables, I would say that being inflation and GDP, Our last forecast on inflation from our research development was 130% for this year. Perhaps I would say between 125 and 130. They are revising that according to the different monthly readings we are forecasting. And 40% for year 2025. Of course, these numbers are moving targets, but these are the current figures. In terms of GDP, we see a contraction for this year of 3.5%, and we see a growth of 5% for next year. In terms of effects, there is the most difficult question because we are thinking that all these FX restrictions, the SEPO as we call it, could be eliminated sometime this year. And that will change the numbers for the end of this year and also for next year. But if I had to tell you what we see for next year, basically to keep the valuation and inflation at the same level. That would be to keep the same real exchange rate. Then regarding the elimination of the SIPO, of all these FX restrictions, there are different opinions, different estimates. Some economists are speaking about before the midterm elections of next year, Others have seen first quarter next year not so close to the elections. We are still thinking that perhaps could happen before year end for different reasons. And what we always say is that the current myth of economy and also many members of the central bank in their DNA are traders and they don't anticipate their moves. So that's something that is very important to keep in mind.

Sorry, before you go on the forex, so if there is an adjustment in the exchange rate, so after the adjustment, where do you see the currency stabilizing?

Well, If you consider today the blend export, the blend FX for exports, that is 80% of the official one, 20% of the blue chip swap. And if you consider the import FX that takes a 17.5% tax, that would give you an 11, 1,150 or 1,200 pesos per dollar for the official, yes, for the new, let's say, and unified effects. Then for next year, if you apply inflation, I guess we'll be closer to 1,700 or so. But this is, again, the most difficult estimate to make. In the case of our bond portfolio, Basically we have all the CPI linkers or the bonds in pesos adjusted by the CPI at a cost plus yield. Why? Because this is the position we use to cover our network against inflation. Mostly the rest of the bonds are a mark to market. And in our case, the bonds in pesos adjusted by CPI is a big portion of our loan book. That is why our results are not so bad volatile as in the case of our, as it was the case in other competitors. As of now, I would say Forty-five percent of our loan book is at cost plus yield. The rest is at mark-to-market. But a big portion are lay caps. Lay caps are 70 days on average duration. So really there, the difference between market prices and book value are minimum. So basically that is how we have our loan book. our bond bond portfolio thank you and therefore for the rest of the year you would expect it to yield again because there are a lot of cpi linkers you would expect it to yield with inflation declining with it yes basically we as we hope we have them at cost plus yield and i would say that the yield should be close to inflation so cpi or ser plus 1% or so. So the assumption would be the same as inflation for this group of bonds.

Very clear. Thank you so much.

You're welcome, Carlos. Thank you, Mr. Gomez. Ladies and gentlemen, as a final reminder, if you have any questions or follow-up questions, please press star 1. We do not have any further questions at this time. Mr. Fervida, I'll let him call back over to you for any additional or closing remarks. Thank you.

Thank you, George. Well, thank you, everybody, for attending this call. If you have any further questions, please do not hesitate to contact us. Good morning and have a nice weekend.

Thank you very much, Mr. Fervida. Ladies and gentlemen, that will conclude today's conference. Thank you for your attendance. You may now hang up. Have a good day and goodbye.