Banco Macro S.A.

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's 2Q19 earnings conference call. We would like to inform you that the 2Q19 press release is available to download at the Investor Relations website of Banco Macro. www.macro.com.ar 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. at that time further instructions will be given should any participant need assistance during this call please press star then zero to signal the operator it is now my pleasure to introduce our speakers joining us from argentina are mr gustavo manriquez chief executive officer mr jorge scarinci chief financial officer and mr nicolas torres ir Now I will turn the conference over to Mr. Nicolás Torres. You may begin your conference.

Good morning and welcome to Banco Macro QQ19 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 20F, which was filed to the SEC, and it's available at our website. QQ19 press release was distributed yesterday, and it's also available at our website. I will now briefly comment on the bank's second quarter 19 financial results. Bank of Macro's net income for the quarter was 7 billion pesos, 4%, or 312 million pesos lower than in 1Q19, and 124% higher than the 3.9 billion pesos posted a year ago, based on an increase in net interest income and net fee income. The bank's 2Q19 accumulated ROE and ROA of 47 and 7.7%, respectively, remained healthy and showed the bank's earning potential. Recurring net income in the quarter totaled 7.8 billion pesos, 37% or 2.1 billion pesos higher than in the previous quarter. Recurring net operating income before general and administrative and personal expenses for 2019 was 20.6 billion pesos, increasing 24% or 4.1 billion pesos quarter-on-quarter. Recurring operating income after general and administrative expenses was 11.1 billion pesos, 39% or 3.1 billion pesos higher than in the previous quarter. In the quarter, net inverse income totaled 16.8 billion pesos, 30% or 3.9 billion pesos higher than the result posted in 2019, and 85% or 7.7 billion pesos higher than the result posted one year ago. This performance can be traced to a 28% quarter-on-quarter increase in interest income and a 27% increase in interest expenses. Within interest income, interest on loans increased 1% quarter-on-quarter and 42% year-on-year. In 2019, interest on loans represented 47% of total interest income. Net income from government and private securities increased 57% of 4.4 billion pesos. quarter-on-quarter due to higher leaks volume and higher interest rates. Compared to QQ18, net income from government and private securities increased 376%, or 11.8 billion pesos. In QQ19, FX gains, including investment in the rigid financing, totaled a 321 million pesos gain. In QQ19, interest expenses totaled 14.6 billion pesos, 27% or 3.1 billion pesos higher than in 1Q19, and 222% or 10 billion pesos higher on a yearly basis. Within interest expenses, interest on deposits increased 28% or 3 million pesos quarter on quarter, mainly driven by an increase in the average volume of time deposits and an increase in the average time deposit interest rates. On a yearly basis, interest on deposits increased 250% or 9.7 billion pesos. In 2Q19, interest on deposits represented 93% of the bank's financial expenses. As of 2Q19, the bank's accumulated net interest margin, including the effects, was 17.6%, higher than the 17.2% posted in 1Q19 and the 14.4% registered in 2Q18. In 2Q19, net fee income totaled 3.4 billion pesos, 2% higher than 1Q19. On a yearly basis, net fee income increased 26% or 710 million pesos. In 2019, net income from financial assets and liabilities for value to profit or loss totaled 133 million pesos, decreasing 93% compared with the first quarter of this year. It should be noted that 1Q19 includes the marked market of the remaining stake that we have in Prisma. In the quarter, other operating income decreased 68% or 2.1 billion pesos. One Q19 included a positive result from the sale of the 51% stake in Prisma. On a yearly basis, other operating income increased 64% or 383 billion pesos. In Q19, Bank of America's personal and administrative expenses totaled 7.2 billion pesos, 38% or 2 billion pesos higher than in the previous quarter. employee benefits increased 57% from 1.8 billion quarter of a quarter. The main drivers for the increases were higher social security contribution and salary increases agreed with the union. Compared to Q18, general administrative and personal expenses were 101% higher. As of June 2019, the accumulated efficiency ratio reached 33.5%, improving from the 38.7% posted in Q18. In 2019, Banco Macro's effective income tax rate was 29% compared to 30.1% in 2019. In terms of loan wealth, the bank's financing to the private sector grew $705 million quarter-on-quarter and 16% year-on-year. It is important to mention that Banco Macro's market share over private sector loans as of June 2019 reached 7.7%. On the funding side, total deposits grew 4% quarter-on-quarter and 58% year-on-year. Private sector deposits grew 7% quarter-on-quarter and 63% compared to Q18, while public sector deposits decreased 16% quarter-on-quarter but increased 21% year-on-year. As of June 2019, Bancomat's transactional accounts represent approximately 42% of total deposits. Bancomat's market share over private deposits as of June 2019 increased total 7%. In terms of asset quality, Banco Macro's non-performance total financial ratio reached 2.12%, and the coverage ratio reached 116.14%. In terms of capitalization, Banco Macro accounted an excess capital of 51 billion pesos, which represented a total regulatory capital ratio of 26.3%, and a tier one ratio of 19.6%. The bank's aim is to make the best use of this excess capital. The bank's liquidity remains more than appropriate, with assets to total deposit ratio with 66.4%. Overall, we have accounted for another positive quarter. We continue showing a solid financial position. Asset quality remains under control and closely monitored. We keep on working to improve more our efficiency standards, and we keep a well-atomized deposit base. At this time, we would like to take the questions you may have.

At this time, we're going to open it up for question and answers. If you would like to ask a question, please press star one on your touchtone phone. If you were using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question will come from Gabriel Nobrega of Citibank.

Hi, everyone. Thank you for the opportunity to ask questions. During the quarter, looking at your NPL ratios, we know that they actually decreased from corporates, which, if I'm not mistaken, it was the first time in over eight quarters which we saw your corporate NPLs actually decreasing. However, on the other hand, we saw that your consumer NPL ratios actually increased. reaching almost 3%. Here, I understand that only a small portion of your payroll loans are in the upper market, and this continues on performing very bad. However, I just wanted to understand with you, where do you think that we are in the NPL cycle, and if you believe that 2Q19 was actually the peak, or it should only be in the third quarter or even in the fourth quarter? Thank you.

Hi, Gabriel. This is Jorge Scarinchi answering questions. Thanks for your question. Well, I would say that in terms of economic activity, yes, we're in presence of the worst part of the recession between the second quarter and maybe the first month of the third quarter. So we expect that NPL should be in the peak or near the peak. From now on, we should be slightly better macroeconomic figures, even though the rebound that we are forecasting is not that very steep, should be a kind of a timid recovery in the economy. And therefore, the decline in MPLs in coming quarters also should be in a progressive trend, not in a very sharp trend. So I would say that this should be close to the peak of MPLs.

And if you'll allow me just to follow up here, looking at your NPO ratios, they reached around 2.1% in this quarter. What do you believe they should reach by the end of the year?

I think that should be ranked in the area of 2% approximately. That's the idea that we have, depending also on what's going on in the macro, but looking to the focus that we are working with,

uh in the area of two percent all right um that's very clear and that's for my second question um could you just give us more color on what happened with the payment of the social security charges that you had to pay to a fee um is there any way that you could maybe appeal to this decision and even reverse the fine that you paid

Yes, of course, we are going to appeal on that. We described in the last part of our press release all the steps that we follow in the different instances of justice and et cetera. But, of course, we're going to appeal to that. Yes, of course.

Sorry, just in follow-up here, do you have maybe an AEM timetable of when this could happen?

No, honestly, it's not that very easy to predict, no.

All right, that's very clear. Thank you, Jorge. You're welcome.

The next question will come from Ernesto Gabalando of Bank of America.

Hi, good afternoon, Jorge and Nicolas, and thanks for taking questions. I have three questions from my side. On the first one, Can you elaborate on what have you been hearing in terms of polls ahead of the primary elections? And my second question is, if we start to see lower interest rates, how should we think on net interest income growth? How fast do you expect to compensate the lower yield on securities with credit demand, and how much additional repricing do you expect to have? And finally, my last question is in terms of long road. It came below inflation. Do you think the low credit demand will continue during the third quarter, or do you think it will start to pick up after the presidential elections? Thank you.

Ernesto, how are you? Referring to your first question in terms of polls, there are many polls out there in Argentina, national polls, provincial polls. So there are many. Honestly, I don't want you to spend a lot of time commenting on the polls because they can change maybe a bit tomorrow. So I think that we should wait for next Monday. There are two more days or three more days to go, and we will have more final results on these primary elections on here. Honestly, I don't know if it is worth commenting on the polls that you already have on the table. are the same that we are having here. I think that for the moment, the market is working with those scenarios. It's pretty calm. So let's go to your second question in terms of the trend on interest rates. Even though we were seeing some declining in the leaked interest rates, and that was also impacting on the rate that we were paying on the time deposits, of course, on the downward trend, In the last, I would say, two weeks almost, there was a kind of reverse in this trend, and the relief interest rates went up from level of mid to high 50s to low 60s, as they are right now, and therefore we stopped on the decline on the time deposit rate that we were paying. So the comment that we have is that you already see or saw in the that we were able to expand the margin on the handle of higher interest rates. On a scenario of declining interest rates, of course, what we are going to do is to transfer the lower rate that we are getting on the into lower time deposit interest rates, as we have been doing that in different other scenarios. And the idea is to, as soon as we have credit man coming, and this is part of the third question, we are going to allocate the funds on new loans instead of the beliefs. However, what we are seeing is sluggish credit demand as what we saw in second quarter. We are, for the moment, seeing the same trend in the third quarter. besides the results on the primary elections or maybe on the first round elections that's going to happen by the end of October, I think that credit demand is more tied to the level of interest rates than the political scenario, even though the political scenario also helps. But I would not be very optimistic on a very steep rebound in credit demand in the second half of the year, even though with a positive outlook on politics, So I would say that this year, loans are going to be growing well below inflation. So that's the scenario that we are working with.

Perfect. Thank you very much. Okay. You're welcome.

The next question will come from Jason Mullen of Scotiabank.

Hi. Thank you. My question is a follow-up on the the Social Security contribution. I just want to understand, was this a cash payment that was made in the quarter? And understanding, reading the disclosure at the end of the release, it sounds like there was this agreement that now with Afib, but then Afib decided to go to the Attorney General. and there was a payment plan. I mean, what is the bottom line here? This was a payment that was made and that you're waiting, you're going to appeal because there was a negative decision against the bank, or is the decision still pending? No.

Hi, Jason, how are you? No, this is not a cash payment. This is going to be paid in different installments, like six installments. So... The decision is that because we have this kind of version of the local version of the IRS, we decided to tie to these 60 installment plans to pay, but in the meantime, we are going to appeal to this decision. So, of course, the final outcome, we don't know, but that's why we decided to make a provision and enter into this installment facility payment agreement that we got.

So you've entered into the agreement, you've provisioned the number I see that I believe I understand is 1.1 billion pesos, and then we wouldn't expect any other accounting impacts, the way I read your statement from this issue. Yes.

The extra, let's say, extra payment that you will notice is that compared to the following quarter, we will have to pay close to maybe 150 million pesos more per quarter on the new percentage of social contribution compared to the one that we were allocating in the former quarters. But apart from that, no, we are not going to make additional provisions on this issue.

Thank you. Maybe some comments on the outlook and how the bank is preparing for this weekend, for this poll, and for potential volatility in the FX and perhaps some kind of response in rates. How same kind of liquidity it's had? Is it trying to bolster liquidity even more?

Well, I mean, Jason, we have been working, of course, preparing the bank for this political scenario, increasing a little bit the liquidity in pesos and also in dollars. You can notice that in the liquidity ratio that we are posting the quarter. We are slightly long in our FX position. I would say that no matter the result that we are getting, We get here that, again, this is a primary election. The bank is prepared for, let's say, both results in the sense that we are liquid in the case that there would be some volatility on interest rates or time deposits taking decision process by the people, or If we have a positive scenario in the case of an outcome with Macri having a good performance in this election, will we continue allocating either in the league? So if there is great demand surging, we are going to allocate funds there. So we have been undergoing this type of volatility from the political scenario for the last 20 years in Argentina. So I would say that something that Banco Macro has is the ability to move from one scenario to the other with a lot of speed here because you know that the making decision process is very indoors and very fast here. So as we have been demonstrating in the last years with different presidents, with different economic cycles, the bank has always been have been showing excellent results in terms of bottom line solvency, asset quality. So the need to continue centering.

And lastly, just a question on the accounting for inflation. You highlighted that again in this release, that the expectation is for the bank to start reporting inflation accounting next year. But you gave a calculation that the earnings for the first six months if I remember correctly, would have been $4.8 billion if you accounted for inflation, the inflation adjustment, and I guess that's versus reported of $14-plus billion. That does, by coincidence, our calculation is that the inflation loss would be approximately $4.8 billion in the second quarter alone. Is that an accurate assessment? What we did was take the shareholders' equity and subtracted the fixed assets and intangibles and multiplied that by the, uh, the inflation of, I guess it was almost nine and a half, 10%. Does that make sense? Uh, I couldn't get all the direction in the, what would be the inflation impact if you had to account for inflation accounting in the second quarter, which we know you won't have to do till next year, but our calculation is taking the shareholders equity, um, It's subtracting the fixed assets and intangibles, and that's what's exposed. That's the net monetary position exposed to inflation. So if we multiply that by the inflation in the quarter, we come up with about $4.8 billion loss.

Approximately, let's say approximately, yes, but approximately.

That's very helpful. Thanks. Thanks, Jason.

The next question will come from Alonso Garcia of Credit Suisse.

Good morning, everyone. Thank you for taking my question. My question first is just a follow-up. I'm sorry to insist on the social contributions. I just want to – so you had one impact of 1.1 billion pesos in the OPEX line, but my understanding is you also had an impact on the other operating expense line, right? What was the overall impact of this adjustment, this quarter? And if I understood correctly from a previous question, this quarter was a one-time impact, and next quarter we will only see 150 million pesos of additional expense on this line compared to previous quarters. Is that correct?

The total impact is close to 1.2. 9 billion, but of course there you would have to deduct the impact on the income tax, so it's 1.5.

Understood. So it was 1.1 in OPEC line and the rest in other operating expense, correct? Yeah. Okay. Perfect. Thank you. And my second question would be just on fees. I mean, fees are lagging significantly in inflation. So if you could comment here, what are the main drivers for this? And we should expect this trend to revert next year and see fees growing more in tandem with inflation or maybe even above that. Thank you.

Yes, Alonso. The point is that we have to... And now the central bank, we are going to increase inflation. We have some difficulties on the last quarter to have the approval of the central bank on the last increase in the fees. So basically that's why we are having a peak performance below inflation. The idea of course of the bank is to be in line with inflation. But we were not able to transfer all the price increases that we would like to. But the idea going forward is to maintain the fee increases in line with inflation. So for next year, our dimension is that P should be growing in line with inflation in the area of 30%. Perfect.

Ernesto, thank you very much. You're welcome.

The next question will come from Yuri Fernandez of JP Morgan.

Thank you, gentlemen. I have a question regarding the balance of your government securities. There was a drop, a 13% decrease, mostly because of the leaks. I just want to understand a little bit the rationale here. Maybe you, I don't know, like not willing to show a huge exposure to government securities, if that's something like this. And my second question is regarding regulations. We saw some changes on reserve requirements this quarter in Argentina, but it was really like on a specific case on credit cards, fiducial deposits. So my question is, when do you see the reserve requirements for demand deposit and time deposit really decreasing in Argentina? How fast, if there is a positive outcome in elections, should we see this happening? Thank you.

Hey, how are you? I'm going to answer the second question first. I mean, the trend of the speed on the decrease in interest rates is going to be very tight to the inflation rate. So depending on how inflation evolves and the speed of the deceleration of inflation, that is going to be a good proxy for the declining in interest rates both on on the Butler, on the Leleaks. But assuming to what we are forecasting, the consensus we're forecasting for next year of inflation close to 30%, we are seeing the Butler rate in the area of between 5% and 6% points above inflation, at least, and the Leleaks at least 5% to 7% or 8% points above the Butler rate. So... Depending on that scenario and depending on the speed of the decline in inflation, we are going to see similar trend in the decline in interest rates there. On the first question that you mentioned, the idea, of course, is that exposure on sovereign bonds is the same that we have been having the last several years, the very conservative exposure there, small portion of sovereign bond in pesos, and, of course, allocating the most that we can in excess liquidity on the LILICs, of course, that is short-term instrument here, and, of course, yielding what we consider the most attractive rate. So the idea is to continue with the same trend in terms of sovereign bonds and LILICs.

The next question will come from Carlos Gomez of HSBC.

Hi, good morning. I would like to go back to the inflation accounting. I would like to know if you already have the rules that are going to apply for inflation accounting next year, or if it's simply application of IFRS. And second, I mean, in this scenario you're describing, so you have inflation of 30%, but lot of 35%, 36%, so you leak 42%, 44%. And loans, which are going to be less in real terms than they are today, and let's see if there is any growth at all next year, what type of returns can Banco Macro produce? Because that will be on a smaller level of interest and analysis, of course.

Thank you. Hi, Carlos. How are you? In terms of the first question, no. The guidelines on inflation adjustment and accounting are in the discussion at the central bank. They are not defined yet. So we do not have a final outcome there. On your second question, I mean, considering that scenario, I mean, Banco Macro, as we have been showing and doing, we are going to try to do our best in order to have the highest return, the highest bottom line. Of course, this is a consequence of high revenues, maintaining costs under control as much as we can, and caring a lot about asset quality. So if we have to allocate excess liquidity in the leaks because loans are not growing, we are going to do that. If we are seeing some recovery on loans and rates are there compared to the leagues, we are going to partially switch on loans, of course, looking at asset quality. But I would say that in terms of bottom line, we are very nominal bottom line growth. We are confident for next year. When you adjust that to inflation, it will depend on the scenario of inflation that you have. The 30% that we are working with, We think that the return for Banco Macro for next year should be positive in the range of between, let's say, in the area of 15%. But again, this is a dynamic process. At the beginning of 2019, we were working with another scenario. We have to switch in the middle, so something similar would happen in 2020. The idea that we have and the focus that we work with is that one.

Okay, and when you say 15%, that's 15% nominal, which, sorry, real, and that would be about a 45% nominal, more or less. Yes, yes. And if I may follow up on before on the guidelines, do you think it is for certain that you will apply inflation accounting next year because we are already in August, or it might be delayed for an extra year?

That's a question for the central bank, but I think that we might be having inflation for next year, yes.

Thank you so much.

You're welcome.

And once again, if you have a question, please press star then 1 at this time. Again, it's star then 1 if you wish to ask a question. Since there are no further questions at this time, this concludes the question and answer session. I will now turn the call over to Mr. Nicolas Torres for final considerations.

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 is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.