Banco Macro S.A.

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Bankro Macro's second quarter 2020 earnings conference call. We'd like to inform you that Q2 20 press release is available to download at the investor relations website of Bankro Macro at www.macro.com.ar forward slash Relaciones dash Inversios. Also, this event is being recorded and all participants will be in a listen-only mode during the company's presentations. After the company's remarks are completed, there will be a question and answer session, and at that time, further instructions will be given. Should any participant need assistance during the call, please press stars and zeros to signal the operator. It is now my pleasure to introduce our speakers for today. Joining us from Argentina are Mr. Gustavo Manriquez, Chief Executive Officer, Mr. Jorge Scardinci, Chief Financial Officer, and Mr. Nicolas Torres, IR. Now, I will turn the call over to Mr. Nicolas Torres. You may begin your conference.

Thank you. Good morning, and welcome to Banco Macro's second quarter 2020 conference call. Any comments we may make today may include forward written statements, which are subject to various conditions, and these are outlined in our 28th, which was filed through the SEC, and it's available at our website. Second quarter 2020 press release was distributed yesterday, and it's also available at our website. All figures are in our site in Texas and have been restated in terms of the measuring unit at the end of the reporting period. As of January 2020, the bank began reporting results applying hyperinflation accounting in accordance with IFRS IAS 29, as established by the central bank. For ease of comparison, figures of previous quarters of 2019 had been restated applying IAS 29 to reflect the accumulated effect of the inflation adjustment for each period through June 30, 2020. I will now briefly comment on the bank's second quarter 2020 financial results. Banco Macro's net income for the quarter was 6.4 billion pesos, 14% lower than in the first quarter of 2020, and 111% higher than the 3 billion pesos posted a year ago. The bank's second quarter 2020 accumulated ROE and ROA of 23.5% respectively, remained healthy, and showed the bank's earning potential. Net operating income before general and administrative and personal expenses Second quarter of 2020 was 22.2 billion pesos, decreasing 9% or 2.3 billion pesos. Quarter on quarter, that's 27% or 4.7 billion pesos higher than a year ago. Operating income after general and administrative expenses was 8.5 billion pesos, 24% or 2.7 billion pesos lower than the first quarter of 2020, but 8.3 billion pesos higher than the second quarter of 2019. In the quarter, net interest income totaled 20 billion pesos, 11% or 2.4 billion pesos lower than the result posted in 1Q20, and 19% or 4.6 billion pesos lower than the result posted one year ago. In the second quarter of 2020, interest income totaled 29.6 billion pesos, 9% or 3 billion pesos lower than in 1Q20. Due to lower income from loans and lower income from government securities, and 36% or 16.4 billion pesos lower than the previous year. With an interest income, interest on loans decreased 12% or 2.5 billion pesos quarter-on-quarter due to a 408 basis points decrease in the average lending rate down to 31.5 from 35.6 registered in the first quarter of 2020, while the average volume of the loan portfolio remained practically unchanged. interest income decreased 17% or 3.6 billion pesos year on year. In second quarter of 2020, interest on loans represented 61% of total interest income. Net income from government and private securities decreased 12% or 1.3 billion pesos quarter on quarter due to lower income from private securities. Compared to second quarter of 2019, net income from government and private securities decreased 56% or 12.2 billion pesos In the second quarter of 2020, FX gains, including investments in the realty financing, totaled 805 billion pesos. Due to the 9% Argentine peso depreciation against the U.S. dollar and the bank's long spot dollar position, FX trading results continue to be impacted by stricter currency controls and regulations. In the second quarter of 2020, interest expense totaled 9.6 billion pesos, a 6% or 560 million pesos decrease compared to the first quarter of 2020, and 55% or 11.8 billion pesos lower on a yearly basis. Within interest expenses, interest on deposits decreased 6% or 566 million pesos quarter on quarter, mainly driven by a 262 basis points decrease in the average interest rates paid on deposits. Rates came down from 16.3% in the first quarter of 2020 to 13.6% in the second quarter of 2020. On a yearly basis, interest on deposits decreased 57% or 11.3 billion pesos. In the second quarter of 2020, interest on deposits represented 91% of the bank's financial expenses. As of the second quarter of 2020, the bank's accumulated net interest margin, including the tax, was 22.3%. lower than the 25.2 posted in the first quarter of 2020 and higher than 20% registered one year ago. In the second quarter of 2020, net fee income totaled $4.6 billion and changed from the first quarter of 2020. On a yearly basis, net fee income decreased 7% or $324 million. In the second quarter of 2020, net income from financial assets and liabilities of fair value, profit, or loss total 2 billion pesos loss, as a consequence of the inflation adjustment applied to our LELIC holdings. In the quarter, other operating income totaled 1.1 billion pesos, decreasing 8% compared to the first quarter of 2020. On a yearly basis, other operating income increased 11% or 137 billion pesos. The second quarter of 2020, Bank of America's personal and administrative expenses totaled 8.6 billion pesos, 11% or 840 million pesos higher than the previous quarter, due to higher expenses related to employee benefits and higher administrative expenses. On a yearly basis, personal administrative expenses decreased 18% or 1.9 billion pesos. In the second quarter of 2020, the efficiency ratio reached 43.3%, deteriorating from the 39.8% posted in the previous quarter. Excluding inflation adjustment on analytics holding shown under income from financial instruments of fair value support or loss, from the efficiency ratio calculation, the efficiency ratio would have been 37.2 in the second quarter of 2020 and 31.6 in the first quarter of 2020. In the second quarter of 2020, Banco Macro's expected tax rate was 28.9, lower than the 35.8 registered during the first quarter of 2020. In terms of loan growth, the bank's financing to the private sector decreased 5% or 12.2 billion pesos quarter on quarter and 12% or 30.4 billion pesos year on year. Within commercial loans, others stand out with a 30% or 9 billion pesos increase quarter on quarter, mainly due to the loans extended to SMEs at a 24% interest rate as part of the relief package given the COVID-19 pandemic. On the consumer side, personal and credit card loans decreased 5% and 3% respectively in the quarter. Within private sector financing, PESA financing increased 244 million pesos, while U.S. dollar financing decreased 36% of $232 million. It is important to mention that Banco Marcos market share over private sector loans as of June 2020 reached 7.5%. On the funding side, Total deposits increased 24% for 78 billion pesos quarter-on-quarter and increased 214 million pesos year-on-year. Private sector deposits increased 16% quarter-on-quarter, while public sector deposits increased 107% quarter-on-quarter. The increase in private sector deposits was led by time deposits, which increased 18% for 23.5 billion pesos quarter-on-quarter while demand deposits increased 13% for 20.5 billion pesos. Within private taxable deposits, taxable deposits increased 24% for 52.3 billion pesos, while U.S. dollar deposits decreased 15% for 179 million pesos. As of June 2020, Bank of America's transactional accounts represented approximately 49% of total deposits. Bank of America's market share of its private deposits As of June 2020, total 6.3%. In terms of asset quality, Bank of America's non-performing total financial ratio reached 1.52%. The coverage ratio measured as total allowances under expected credit losses over non-performing loans under central bank rules improved significantly and totaled 210.64%. As the quality continues to be possibly affected by recent pressures, adopted by the Central Bank of Argentina in the current pandemic COVID-19 context, particularly the 60-day grace period that was added to debtor classification before a loan is considered as non-performing. In terms of capitalization, Banco Macro accounted an excess capital of 101 billion pesos, which represented a total regulatory capital ratio of 32.1 and a tier one ratio of 25%. The bank saying, is to make the best use of this capital. Once liquidity remains more than appropriate, liquid assets' total deposit ratio reached 54%. 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-automized deposit base. At this time, we would like to take the questions you may have.

And we will now begin the question and answer session. If you'd like to ask a question, please press stars and 1 on your touch-tone phone. Please unmute your phone when your name is prompted. One moment, please, for the first question. And our first question today will come from Ernesto Gabilondo with Bank of America. Please go ahead.

Hi, good morning, Gustavo, Jorge, and Nicolas. Hope you're well. My first question is on provision charges. Can you elaborate on how much of the total loan portfolio has been related to deferrals in commercial and consumer loans, refinance credit cards, and with the support to SMEs? Do you have an estimate of how much additional provisions have been created this year based on expected losses? And how much does that represent of your total loan portfolio? Also, how much do you estimate that the additional provisions represent of the loan book that has been subject to deferrals, refinance credit cards, and to support with SMEs? And then my second question is on margins. Where do you see interest rates by year-end, and how do you see the potential impacts on margins for this and next year? And then my last question is on expenses. How should we think about this line during the year? Are you evaluating to reduce personnel or branches to mitigate some of the potential impacts of the pandemic? Thank you.

Hi Ernesto, how are you? Thanks for your questions. We can start with your second question about margins and interest rates. what we're expecting for interest rates by year end is a slight increase, basically because what the market is expecting is a kind of a pickup in the monthly inflation index. So we believe that there should be a slight increase in nominal interest rates by year end. Even though that we are seeing in terms of margins some kind of slight contraction in the third quarter because there were some increase in deposit interest rates while the deliques or the repos interest rates remain unchanged. So we are foreseeing that in the third quarter, we are going to see an additional compression in the net interest margin. However, for the fourth quarter, depending on how the nominal rates behave, we could see some stability or might be a little bit of widening or recovering the portion of the margin that we lost in the second and third quarter. On your third question related to expenses, what we are expecting for the rest of the year is to continue, I mean, having a very close eye on expenses, both on personal and other administrative expenses. We do not have any official program on layoff or closing down branches. Even though that, as we have been doing the last several years, we try to be extremely efficient in our cost controls. And that's why the idea of the management and the board, of course, is to continue showing excellent level of efficiency going forward, as we have been showing the numbers of the last quarters. In terms of your first question that was divided in two or three different questions, in terms of the provisions charges that we are doing in the second quarter we increased the provisions compared to the first quarter mainly because of the consequences of the COVID-19 that I think that worldwide is very unknown all the consequences that we are going to have in the next I don't know, six, 12, 18 months, or 24 months. So we have increased that provision level. Also, we highlight that we reach a coverage ratio of 210%. But, I mean, the message here is that we are closely monitoring also asset quality. We have been saying many times we are a local bank. And we have to be a bit more conservative than maybe other international banks in the sense that we cannot ask for extra money in case of a crisis to any headquarters abroad. So we have to be very conservative in that front. So we are on a daily basis monitoring the asset quality and the evolution of that. And for the moment, we feel very comfortable of the situation that we are having in the bank. In terms of loans that were reprogrammed, and we can include or add some additional information by email if you want, but just not to enter into many details, 700 million in corporates or companies, 22,500 in consumer, and 15,000 in credit cards. That's the big numbers on the loans that have been reprogrammed.

And do you have an estimate, given that you built additional provisions in second quarter when compared to the first quarter, do you know how much of these additional provisions are to the loan book that's been subject to deferrals or the refinance credit cards or the supports in SMEs?

Let me go into those numbers. There's something that we put in the press release there in the paragraph talking about the beginning in page number four about the provisions. You can have some details there just not to maybe take other people's questions. But you can go to page number four of our press release. There is a paragraph there that we are putting some info. But in case that you need an additional one, please contact us and we can provide it.

Yes, perfect. Thank you, Jorge. Because I saw that it was practically the amount that you break down that was registered as provision charges in the second quarter. It was close to 2.2 billion pesos, so you just wanted to understand maybe that that breakdown was more related to the loan book that could be at risk. and that you are considering some part of provisions to that loan book at risk. But well, I agree that maybe we can follow up later to really understand how much additional provisions have been built to this loan book. Thank you.

And our next question will come from Gabriel Norbrega with Citigroup. Thanks. Go ahead.

Hi, everyone. Good afternoon, and thank you for the opportunity to ask questions. I actually have two questions on asset quality. The first one, when we look at your NPL ratios, they actually increased this quarter, and for us, this is a bit strange because even with the flexibilization that the BCRA has given to you, and we also saw Other of your peers seen NPO ratios decreasing. It was a bit weird seeing that your NPO ratios deteriorated this quarter. So if you could just elaborate and give us more color of what's happening here, and also if you could maybe give us the figure of your NPO ratios without the inflexibilization of the 60 days, that would help us a lot. And as for my second question, it is actually in follow-up. regarding provisions. We understand that you already made it even sizable provision this quarter, but looking forward, are you comfortable with your coverage ratio or are you expecting to maybe have to continue making higher provision due to the higher delinquency we are going to see? Thank you.

Hi, Gabriel. Thanks for your questions. On your first question, honestly, we think that a working increase from 136 to 152, considering the recession that we are having worldwide, more in Argentina, plus the COVID-19, we do not take that as a big deterioration as a quality. I think that is something normal. Congrats to our peers if they show some decrease there. Honestly, it depends the quarter or the timeframe that you are taking. We think that 152 with a coverage of 210 are showing excellent levels. And again, we feel extremely comfortable to how we are managing the asset quality on the bank, as well as we have been doing this in past crises. And going forward in the third quarter, we think that we might include some additional provisions. Honestly, we don't know as much as the one that we did in the second quarter. But again, we still do not know, I think that this is something that the world is wondering, the total effects on this pandemic and the implications on the economy with the additional thing that the recession that we are ongoing in Argentina and the spike that we are foreseeing with inflation by the end of the year, depending on the new economic program is what we are going to see for next year in terms of economic activity. So overall, we think that in terms of asset quality, we are doing fine with additional provisions in the third quarter, maybe not as much as the one that we put in the second. And again, the NPL ratio deterioration on a quarterly basis, we think that is pretty normal considering the scenario that we are ongoing.

Perfect. Could you just tell us what would be your NTO ratio if you had not had the waiver of the central bank?

Yeah, honestly, we don't have the exact number, but it should be between 2.6 and 3.2, approximately.

Perfect. Perfect. Thank you so much. You're welcome, Gabriel.

And our next question will come from Alfonso Garcia with Credit Suisse. Please go ahead.

Good morning, everyone. Thank you for taking my question. My question is actually on loan growth. I just wanted to hear your thoughts on how you see volumes evolving from here. I mean, so far, loans are 10% down year over year. You are underperforming some of your main peers. So I wanted to hear your thoughts on How should we see a long-growth evolving from here? And what segments should drive growth in the coming quarters? And regarding the special trade line for SMEs at 24%, do you think most of that is already done, or do you think you will continue remitting strongly on that front? Thank you.

Hi, Alfonso. Thanks for your question. In terms of long-growth, we also provided information about the total loan growth comparison between the former quarter and one year ago, but in addition, we also put the behavior of peso loans and also U.S. dollar loans. There, you can see that the total loan behavior is extremely influenced by the decline in dollar denominated loans. If you look at the peso loan behavior, we grew 1% quarter to quarter and 11% year over year. So going forward, we think that in the peso loan book, we are going to continue showing slightly positive numbers here. We think that there could be some statistic recovery by the fourth quarter of this year, again, depending on how the COVID-19 affects the economy. But if we are going to enter in a more or a less strict phase of the pandemic, we are seeing some recovery in the fourth quarter. In addition, on the dollar-denominated loan portfolio, we think that we are going to continue decreasing in that area, basically because margins in the dollar business are extremely low. and we are not incentivizing that business. But on the peso, we are seeing positive numbers in real terms going forward for the third and fourth quarter. And in terms of, sorry about the second question, in terms of SMEs, I mean, if there is a recovery, there is going to be a recovery across the board. SMEs, we think, are the ones that have been more affected by the recession and the pandemic. So the level of credit in that level is very low. So I think that is the perspective of the landscape for both the pandemic and the recovery of the economy are better. We are going to see a bit more demand coming from SMEs.

Still at this 24% interest rate as part of this program. Okay. Got it. Thank you very much.

You're welcome, Jorge. Thanks. And our next question will come from Nicolas Riva with Bank of America. Please go ahead. Yes.

Thanks very much for taking my questions, Jorge. I have a follow-up on the prior questions about all these loan reprogrammings. Can you give us a bit of an idea? You already mentioned that the actual MPL ratio would be probably between 2.6% and 3.2% if you were to include all these loan reprogramming as MPLs. Can you give us an idea in terms of next steps, the future steps for these reprogrammed loan books? For example, I mean, you're already two months into the third quarter. Should we expect to see more of these grace periods, loan reprogramming? in the third quarter, when would you expect to start unwinding some of these measures given everything that's going on in Argentina and everything that was going on even before really the COVID-19 pandemic in Argentina? And then the second question, it's about deposits. If I look at the deposits from the public sector, and we know that you are a financial agent for a number of provinces in Argentina, I see that the deposits from the public sector basically doubled or more than doubled in the second quarter versus the prior quarter. Any color on that? Did you get like a new contract with any of, with approaches as a financial agent or any changes to existing contracts that justify that big change?

Thank you. Nicolás, thanks for your questions. On your first question in terms of MVLs, We are seeing some, in the third quarter, some additional new reprogramming on some balances on the credit cards. Honestly, going forward, I think that this time of programs are going to be maintained until the economy start to pick up again. I think that the government is committed to allow people to extend the payments on credit cards and on personal loans in order to see, not to see a big spike in terms of MPLs. So, meanwhile, we are going to see this program to be maintained. Honestly, the one that I mentioned about credit cards has happened last week. Going forward, we do not have an official information about new programs reprogramming or extension in installments or whatever. But again, we think that the government is committed to help people and companies in order to transit this recession and pandemic period as best as possible. In terms of your second question, the increase in the public sector deposits are mainly driven by the UNFESC, that is the fund that is managing the retirees' money, that has been depositing or making time deposits in Banco Macro in a higher speed than the ones that we saw in the previous quarters. So that is the main reason of increasing public sector deposits. Basically, 30 days or 40 days time deposit in pesos.

Okay. Thanks very much, Jorge.

You're welcome, Nicolas. And our next question will come from Yuri Fernandez with JP Morgan. Please go ahead.

Thank you, Jorge, Nicolas. I have a question regarding margins. If I understood correctly, you said margins may slightly go up because of higher rates, and I believe the mixed shift of local currency loans may also help on that regard. But what about the time deposits? I know it's like 35% to 40% of your loans, but the new regulation should be a headwind, right? Like the minimum remuneration. So just asking if you have taken that into account when you said margins should likely recover. And my second question is regarding the provinces, right? Like if you can give us a color on how Santa Fe, Cordoba, South, you know, like the main provinces in which macro-operates are behaving regarding long-growth and asset quality. When you compare versus Buenos Aires, do you think it's fair to say that those regions are doing better or no? Like, what can you tell us about your geographic exposure? Thank you.

Hi, Julio. Thanks for your questions. No, I mean, in terms of margins, what I mentioned is that in the third quarter, we're going to see additional compression in margins, basically because of the minimum time deposit rate and also because the leaks and repo rates remain unchanged. However, in the fourth quarter, if nominal rates are going to go up as we are expecting, depending on the range that we are seeing those rates going up in the leaks and repos and also deposits, margins could remain stable or slightly expanding. That is what I mentioned before. In terms of your second question about the provinces, you know that in terms of our standing, 80% of our business is basically in the interior of the country. A very small portion is in the area of the city and the province of Buenos Aires. So for the moment, what we are seeing is that in the interior, The situation is kind of similar of the Buenos Aires province in the sense that the only sector that is doing good, let's say, is the agriculture sector. The rest of the sectors are showing some decline in terms of activity compared to last year, but we are not seeing any province with any dramatic problem of any specific sector. So I would say that for the moment, there is kind of a parallel or similar situation between the most important provinces of the interior and the Buenos Aires province.

Okay, so no tailwinds and no headwinds coming from the provinces, right? You are behaving very similar to your peers that are more exposed to the Buenos Aires region, right? Not for the moment. Okay, thank you.

You are welcome. And once again, if you'd like to ask a question, please press star then one. And our next question will come from Carlos Gomez with HSBC. Please go ahead.

Hi. Good morning. Couple of questions. One on your capital, your book value. We see there is a decline or rather stabilization, I think, in nominal terms between the first and the second quarter. Any big changes there? And have you restated the first quarter? Because we don't know exactly the same number that you get into the restated figures. So that is the book value. Second, regarding the dividend, we understand that you have provision for it, but it's still pending approval. We wanted to know if you have any news about that. And finally, on the line of loan at 24%, do you consider that you are making any type of return on that? or that's just a course of doing business and you accept a negative return at this point. Thank you.

Hi Carlos, how are you? In terms of the first question about the value of the capital, we deducted the amount of the dividends there, so that's why you are seeing a decline in the nominal level, and also we adjusted at the first quarter, so that's the difference in the period that we are seeing. In terms of the dividend, it's still pending. For the moment, we do not have additional information coming from the central bank when this dividend is going to be allowed or approved to be paid. So honestly, no additional information there. In terms of the 44% trade line, remember that we have some additional reserve requirements benefits there so the 24% nominal interest rate that we are extending the loans if you add the benefits of standard reserve requirements it goes up to 38% similar to the elite interest rate so meanwhile these benefits are being sustained we are going to continue extending this credit line of course the central bank knows that there is a limit for that So if the central bank wants to continue to see banks incentivizing this 24% trade line, then we have to add other incentives or benefits in order to take the 24% of the trade to more reasonable levels.

That's pretty clear.

Thank you. Welcome, fellows. All right. And our next question will come from Juan Recalde with Scotiabank. Please go ahead.

Hi. Thank you for taking my question. My question will be related to the results from the monetary position. We've seen that you have had a positive impact of around $400 million in this quarter. It was around $300 million in the previous quarter. So inflation, as you mentioned, inflation is expected to pick up in the in the rest of the year. So how should we think about the aside from net monetary position in the coming quarters? Thank you.

Hi Juan, how are you? I want to give you, if you take consideration, all the inflation impacting in all the balance, because here, because of central bank regulation, we have to put part in one side of the income statement, another part of the inflation adjustments. On another part, if you put all together, we are having a negative effect on inflation going forward. I would say that the negative number is going to increase depending on the level of inflation that we think is going to go slightly up, plus the behavior of the monetary assets and liabilities. honestly, it's not very easy to forecast this number. It's going to be negative in the range of, I would say, the average that we see between the second and third quarter.

That is perfect. Thank you very much.

You're welcome.

And this concludes our question and answer session. I'd like to turn the conference back up to Mr. Nicolas Torres for any closing remarks.

Thank you all for your interest in Banco Macro. We appreciate your time and look forward to speaking with you again. Good day.

And the conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.