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 third quarter 2019 earnings conference call. We would like to inform you that the 3Q19 press release is available to download at the Investor Relations website of Banco Macro. www.macro.com.ar slash Relaciones Investories. 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 zero to signal the operator. It is now my pleasure to introduce our speakers. Joining us from Argentina are Mr. Gustavo Monriquez, Chief Executive Officer, Mr. George Scorsini, Chief Financial Officer, and Mr. Nicholas Torres, IR. Now I will turn the conference over to Mr. Nicholas Torres. You may begin your conference.

Good morning and welcome to Banco Macro's third quarter and team conference call. Any comment 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 is available at our website. The 3.19 press release was distributed last Friday, and it's also available at our website. I will now briefly comment on the bank's 3.19 financial results. Banco Macro's net income for the quarter was 13.2 billion pesos, 87% or 6.2 billion pesos higher than in QQ19, and 243% higher than the 3.8 billion pesos posted a year ago, based on an increase in net interest income and in net fee income. The bank's 3Q19 accumulated ROE and ROA of 57.3% and 9.4% respectively remained healthy and showed the bank's earning potential. Recurring net income in the quarter totaled 15.5 billion pesos, 99% or 7.7 billion pesos higher than in the previous quarter. Recurring net operating income before general and personal expenses for Q3 2019 was 26.2 billion pesos, increasing 27% or 5.6 billion pesos quarter-on-quarter and 103% higher than a year ago. The current operating income after general administrative expenses and personal expenses was 14.3 billion pesos, 28% or 3.2 billion pesos higher than in QQ 2019 and 160% higher than in QQ 2018. In the quarter, Net interest income totaled 20.1 billion pesos, 19% or 3.3 billion pesos higher than the result posted in QQ19, and 94% or 9.7 billion pesos higher than the result posted one year ago. This performance comes with trace to a 14% quarter-on-quarter increase in interest income and a 7% increase in interest expenses. Within interest income, interest on loans increased 9% quarter-on-quarter and 30% year-on-year. In 3Q19, interest on loans represent 45% of total interest income. Net income from government and private securities increased 27%, or 4.1 billion pesos, quarter on quarter, due to higher Linux volume and higher interest rates. Compared to 3Q18, net income from government and private securities increased 334%, or 14.6 billion pesos. In 3Q19, FX gains, including investment in active financing, total 2.2 billion pesos gain. In 3Q19, interest expenses total 15.5 billion pesos, 7% or 1 billion pesos increase compared to 2Q19, and 139% or 9 billion pesos higher on a yearly basis. Within interest expenses, interest on deposits increase 5% or 640% 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 149% or 8.5 billion pesos. In 3Q19, interest on deposits represented 91% of the bank's financial expenses. As of 3Q19, the bank's accumulated net interest margin, including the FX, was 19.1%. higher than the 17.6% posted in QQ19 and the 14% registered in 3Q18. In 3Q19, net fee income totaled 3.8 billion pesos, 11% higher than in QQ19. On a yearly basis, net fee income increased 31% or 885 million pesos. In 3Q19, net income from financial assets and liabilities at fair value and profit or loss totaled 659 million pesos, increasing 395% or 526 million pesos compared to 2Q19. In the quarter, other operating income totaled 1.1 billion pesos, increasing 9% compared to 2Q19. On a yearly basis, other operating income decreased 11% or 131 million pesos. In 3Q19, Banco Macro's personal administrative expenses totaled 7.3 billion pesos, 2% or 114 million pesos higher than the previous quarter. Employee benefits decreased 10% or 500 million quarter-on-quarter. As of September 2019, the accumulated efficiency ratio reached 32.5%, improving from the 33.5% posted in QQ19 and the 37.6% registered a year ago. In QQ19, Banco Macro's income tax resulted in a 1.3 billion pesos gain during this quarter and in accordance with applicable income tax law and regulations and the evolution of consumer price index, the banks decided to adjust income tax by inflation. In terms of loan growth, the banks financing to the private sector grew 10%, or 18.1 billion pesos quarter-on-quarter, and 15%, or 24.5 billion pesos year-on-year. It is important to mention that Banco Madras market share over private sector loans as of September 2019 reached 7.7%. On the funding side, total deposits decreased 9% or 25.1 billion pesos quarter-on-quarter and increased 22% or 46.6 billion pesos year-on-year. Private sector deposits decreased 8% quarter-on-quarter, while public sector deposits decreased 13% quarter-on-quarter. The decrease in private sector deposits was led by CAM deposits, which decreased 19% or 28.4 billion pesos quarter-on-quarter. while demand deposits increased 4% or 4.4 billion pesos. Within private sector deposits, peso-denominated deposits decreased 6% or 9.8 billion pesos, while U.S. dollar deposits decreased 36% or 765 million. It is important to mention that this strategy of reducing the bank's daily exposure and peso deposit base was decided proactively in order to reallocate the excess liquidity in loans and other financial instruments. As of September 2019, Banco Macro's transactional accounts represented approximately 47% of total deposits. Banco Macro's market share over private sector deposits totaled 6.5% as of September 2019. In terms of asset quality, Banco Macro's non-performing to total financial ratio reached 1.9%. The coverage ratio reached 124.16%. In terms of capitalization, Banco Macro accounted an excess capital of 60.1 billion pesos, which represented a total recovery capital ratio of 26.5% and a Tier 1 ratio of 18.9%. The bank's aim is to make the best use of this excess capital. The bank's liquidity remained more than appropriate, making assets' total deposit ratio reach 61%. Overall, we have accounted for another positive quarter We continue to show 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 questions and answers. If you would like to ask a question, please press star then 1 on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. One moment please for the first question. The first question comes from Gabrielle Nobregra with Citibank. Please go ahead.

Hi, everyone. Thank you for the opportunity to ask questions. My question here is more on the top-down. We're already entering the third week since the elections. I know it may be still a bit early to understand where this administration is going to go, but I actually wanted to understand how have you been preparing the bank for this very volatile scenario? And also, as we move on to December, what are your strategies there to improve prepare the bank for this new administration? And I'll make a second question afterwards. Thank you.

Hi, Gabriel. How are you? This is Jorge Carincio. I'm sorry. As you might notice, in the quarter, we were working on reallocating the excess liquidity from the leaks into short-term lending to AAA companies and also investing in other financial instruments like corporate bonds in pesos, everything. And at the same time, we're seeing some reduction in peso-denominated deposits and also in dollar-denominated deposits as a consequence of what's happened in the past three elections and also in the election that Alberto Fernandez won the past 23rd of October. We have been working on the bank in order to maintain the level of profitability, and that is something that we have successfully done, looking at the numbers that we posted in the third quarter, maintaining or even widening the net interest margin that we also posted in the quarter, keeping asset quality completely under control at the level of 1.9%, as we have shown, relatively or much better than the average of the system. And we are working to put the bank or to maintain the bank as liquid as we can, maintaining profitability and waiting for the new administration to take place and to see if there are going to be new regulations. Depending on those regulations, we are going to focus on them, but always working on maintaining the bank's solvency, liquidity, and asset quality. For the moment, we do not have additional information on what the new administration could be doing on the economic program as a whole, and also on if there's going to be new regulation coming from the central bank on the banking sector. We keep on going in this direction, working on, as I mentioned before, maintaining the margin, profitability, liquidity, and asset quality.

All right. That's perfectly clear, Jorge. And as for my second question, it's also actually a follow-up here. I understand you have been maybe diversifying your investments as well, but being that securities has come down from representing 26% of your total assets to around 22% in the third quarter. And also, as we have been seeing these deposits coming out from the bank and the reference interest rates also coming down, do you believe that maybe this was the peak for your net interest margin and this should become to come down in the coming quarters? Or do you believe that as you diversify, you will be able to maintain this momentum going forward?

That's a good question, Gabriel. I think that the level of the margin that we saw in the third quarter, I think that is one of the highest in the last, I would say, five, six years. I'm not so sure that we are going to maintain that level, as you mentioned, because of the declining interest rate that we are seeing and also because and the elite rates are going down and most of the rates in the system are going down so i would say that we could be even though it is a bit early to say but could we could be going back to level of maybe a second quarter levels in terms of net interest margin approach but again i think that this is a bit early but it's not going to be very easy to maintain the level of net is the margin that we achieve in the third quarter perfect poor head thank you you're welcome

The next question comes from Nicolas Riva with Bank of America. Please go ahead.

Yeah, thanks, Jorge and Nicolas, for taking my question. It's a follow-up on the prior question. So regarding your , which came down a lot this quarter, was this because you are concerned with the central bank not paying these obligations? Eventually, you were concerned about this risk exposure with the central bank. And also, what's the plan for the remaining elites? Because they are still about 14% of your total assets. We should expect further reductions in these holdings, given that you cannot use them for reserve requirements on checking accounts and savings accounts. Thanks.

Hi, Nicolas. No, the idea is that we believe that the assumption is that the new administration could be maybe putting new regulation on the banking sector. I mean, the banking sector as a whole is highly profitable, and Argentina is going in a recession for the last, I would say, four years on average, or eight years on average. With inflation being double-digit, this year is going to reach maybe 60%, 65%, around 60%, sorry. So it's like the only system having profitability or showing profitability in Argentina. So our assumption that could be, again, there could be a new regulation coming. So that is the assumption. And we were working on maybe reducing the size of the bank in order that if there's going to be new regulation to have a lower impact on the bank's profitability. So once we were reducing the peso, we saw the peso deposit some going down and also the dollar deposit going down, we decided to allocate the excess liquidity in other vehicles because we saw or we took advantage on the leaks because there were some reserve requirements regulation that the central bank implemented at the end of the second quarter and in the third quarter that were extremely positive for taking new time deposits and allocating those funds in the leagues that we believe that would disappear in the future. So we started to unwind that big balloon in terms of the league that we built between the second quarter and the first month of the third quarter. So that is why we were doing what we did in the third quarter. And also in the fourth quarter, we continue reducing the LELIC level. I can't give you the exact number, but it's below 10% of total assets. And the idea is to maybe reach the end of November with a few millions in terms of LELIC because we have been replacing that with... loans to AAA companies and, again, other financial instruments. So that was the main reason why we were reducing the LELICs.

Thanks, Jorge. And maybe since you mentioned this concern that you might have of the new administration potentially doing things which could be negative for the banking system. I mean, in the past, Cristina Kirchner's government, they had put caps on interest rates. They had also required banks to get approval before increasing fees. Any of all those things, or even the treatment of the LELICs, but you are saying that the LELICs should be kind of unwinded by the end of November. Any of those things that concern you more, really, in the potential set of measures that the new administration could take?

No, I would say no. I mean, when you look at the period between 2011 and 2015, there were FX controls and there were a lot of regulations on the banking sector, and even though that, banks were also profitable. So, no, we do not have a specific concern in any of those measures. Honestly, we do not know which measure could be implemented. The idea is that we want to prepare the bank, if there is some of these measures, to have the less impact on the bank's solvency and profitability, and that's why we have been working on putting the bank on that situation towards the 10th of December.

Thanks very much, Jorge.

You're welcome, Nicolas.

The next question comes from Carlos Gomez with HSBC. Please go ahead.

Hello, good morning, and thank you for the call. We have seen interest rates decline sharply over the last few weeks. Do you see that as a consequence of more of the exchange controls or there's simply less demand for any type of financial asset? Second, for next year, and we know it's extremely difficult to project, do you expect any type of long growth or contraction like in this year? And what would you think your tax rate might be next year with inflation accounting? Thank you.

Hi, Carlos. How are you? On your first question, I would say that the decline in interest rates is as a consequence of the ethics controls because there are a lot of phases going on, and I think that that is the main reason why the central bank is working on reducing the level of interest rates. So that is what we think, and according to what we are seeing, we are going to reach the bottom of the level stated by the central bank that was 63% for the deliques, and that was achieved yesterday. So we're going to maintain this level until the end of the month. And at the end of the month, the central bank will have to state which is going to be the lower rate for December. But the main reasons are effects controls. 2020 long growth is not an easy question to answer. We think that according to the market consensus, inflation is going to be in the low 40s. And we believe that long growth is going to be a bit negative in real terms. So we are working with a scenario of long growth between 35, 38% for the moment. But of course, you know that this this landscape can change in one or two months, depending on what's happening with the new administration and the economic program and regulations. In terms of the tax rate, I would say that it's similar than the long row, could be changing. We think that according to the inflation level, we might be posting credits on the income tax. But again, we have to see how much inflation is going to be at the end of 2019 and 2020. And depending on that, and of course, depending on the growth that we are going to make in terms of assets, there you have the tax rate. But again, we think that there is going to be some credit, but it's difficult to make some assumptions at this time of the year.

Thank you very much.

Welcome, Carlos.

There are no questions at this time. This concludes the question and answer session. I will now turn over to Mr. Nicholas 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.