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 first quarter 2021 earnings conference call. We would like to inform you that the first quarter 2021 press release is available to download at the investor relations website of Banco Macro at www.macro.com.ar front slash relations dash investors front slash. Also, this event is being recorded and all participants will be in a 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 Manriquez, Chief Executive Officer, Mr. Jorge Scarrenci, Chief Financial Officer and Mr. Nicholas Torres of Investor Relations. Now I would like to turn the conference over to Mr. Nicholas Torres. You may begin your conference, sir.

Thank you. Good morning and welcome to Banco Macro's first quarter 2021 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 it's available at our website. First quarter 2021 press release was distributed yesterday and it's also available at our website. All figures are in Argentine pesos and have been restated in terms of the measuring unit current at the end of the reporting period. As of the first quarter of 2020, the bank began reporting results applying hyperinflation accounting in accordance with IFRS IAS 29 as established by the Central Bank of Argentina. For ease of comparison, Figures of previous quarters have been restated, applying IAS 29 to reflect the accumulated effect of the inflation adjustment for each period through March 31, 2021. I will now briefly comment on the Bank's first quarter 2021 financial results. Banco Macro's net income for the quarter was 2.2 billion pesos, 39% lower than in the fourth quarter of 2020, and 77% lower than the result posted a year ago. the bank's first quarter 2021 annualized ROE and ROA of 5.4% and 1.1%, respectively, remained healthy and showed the bank's earnings potential. Net operating income before general and personal expenses for the first quarter of 2021 was 37.2 billion pesos, increasing 5% or 1.8 billion pesos quarter-on-quarter due to lower loan loss provisions, and higher income from financial instruments at fair value through profit or loss. On a yearly basis, net operating income decreased 10% or 4.1 billion pesos due to lower net interest income and lower net pay income. Operating income after general administrative and personal expenses was 18.9 billion pesos, 16% or 2.6 billion pesos higher than the fourth quarter of 2020, and 19% percent lower than in the first quarter of 2020. In the quarter, net interest income totaled 23.8 billion pesos, 3 percent or 761 million pesos lower than the result posted in the fourth quarter of 2020, and 22 percent or 6.6 million pesos lower than the result posted one year ago, as a result of different regulations adopted by the central bank that set caps on lending rates and floors on deposit rates. In the first quarter of 2021, interest income totaled 45.1 billion pesos, 4% or 1.9 billion pesos lower than the fourth quarter of 2020, and 2% or 1 billion pesos higher than the previous year. Within interest income, interest on loans increased 1% or 194 billion pesos quarter on quarter. Interest income decreased 20% or 5.4 billion pesos year on year. In the first quarter of 2021, Interest on loans represented 50% of total interest income. Net income from government and private securities decreased 6% or 1.3 billion pesos quarter-on-quarter due to lower income from government securities. Compared to the first quarter of 2020, net income from government and private securities decreased 31% or 4.9 billion pesos. In the first quarter of 2021, FX gains, including investment in direct financing, totaled a 1.2 billion pesos gain. 15% or 221 million pesos lower than in the fourth quarter of 2020. The gain in the quarter is due to the 10% Argentine peso depreciation against the U.S. dollar and advanced long spot dollar position. On a yearly basis, FX gains increased 60% or 456 million pesos. In the first quarter of 2021, interest expenses totaled 21.3 billion pesos, 5% or 1.1 billion pesos lower compared to the fourth quarter of 2020, and 55% or 7.6 billion pesos higher on a yearly basis. Within interest expenses, interest on deposits decreased 5% or 1 billion pesos quarter on quarter, mainly driven by a 7% decrease in the average volume of planned deposits, which was partially offset by a 64 basis points increase in the average interest rate paid on deposits. On a yearly basis, interest on deposits increased 61% or 7.7 billion pesos. In the first quarter of 2021, interest on deposits represented 95% of the bank's financial expenses. The first quarter of 2021, the bank's net interest margin, including effects, was 17.4%, higher than the 16.3% posted in the fourth quarter of 2020, and lower than the 25.2% registered one year ago. In the first quarter of 2021, net fee income totaled 5.9 billion pesos, 7% or 466 million pesos lower than the fourth quarter of 2020. On a yearly basis, net fee income decreased 6% or 393 million pesos. In the first quarter of 2021, net income from financial assets and liabilities at fair value for profit or loss totaled a 4.6 billion pesos gain, 23% or 854 million pesos higher than in the previous quarter. This gain is mostly related to higher income from government securities and investment in equity instruments, mainly the mark-to-market of our 4.5% Christmas stake. In the quarter, other operating income totaled 1.6 million pesos, increasing 5% compared to the fourth quarter of 2020. And on a yearly basis, other operating income increased 5% or 81 million pesos. In the first quarter of 2021, Banco Macro's personal and administrative expenses total 10.7 billion pesos, 12% or 1.5 billion pesos lower than the previous quarter, due to lower administrative expenses and lower employee benefits. On a yearly basis, personal and administrative expenses decreased 1% or 116 million pesos, showing the strict cost control policies adopted by the bank's senior management. In the first quarter of 2021, the efficiency ratio reached 35.7%, improving from the 38.8% percent posted in the fourth quarter of 2020. In the quarter, expenses decreased 11 percent, while net interest income plus net fee income plus other operating income decreased 3 percent. In the first quarter of 2021, the results from the next monetary position totaled a 14.4 billion pesos loss, 20 percent or 2.4 billion pesos higher than the loss posted in the fourth quarter of 2020. Due to higher inflation observed in the quarter, which was 163 basis points higher than in the fourth quarter, going up from 11.33% to 12.95%. On a yearly basis, the loss related to the monetary position increased 75% or 6.2 billion pesos. This is the first quarter in which the result from the net monetary position is shown per communication A7211 of the Central Bank of Argentina in which the inflation adjustment on early leaks and other government securities is included, which was previously shown in net income from financial instruments at fair value through profit or loss. In the first quarter of 2021, Bank of America's expected tax rate was 51.4%, higher than the 16.3% registered during the fourth quarter of 2020, and 36.9% registered one year ago. In terms of loan growth, The bank's financing to the private sector totaled 259.4 billion pesos, decreasing 9% or 25.8 billion pesos quarter-on-quarter, and 17% or 54.1 billion pesos lower year-on-year as a consequence of the economic recession that affected Argentina during 2020 and with loan demand. Commercial loans decreased 13% or 17.9 billion pesos, among which others count out as loans extended to SMEs as part of the relief package given the COVID-19 pandemic started to come in. Consumer lending decreased 5% or 7.6 million pesos. Credit card loans decreased 9%. Within private sector financing, peso financing decreased 9% or 23.9 billion pesos, while U.S. dollar financing decreased 15% or $47 million. It is important to mention that Banco Macro's market share over private sector loans of March 2021, reached 7.3%. On the funding side, total deposits decreased 17%, or 94.8 billion pesos quarter-on-quarter, and increased 3%, or 13.2 billion pesos year-on-year. Private sector deposits decreased 14% quarter-on-quarter, while private sector deposits decreased 33% quarter-on-quarter. The decrease in private sector deposits was led by demand deposits, which decreased 16% or 37.9 billion pesos quarter-on-quarter, while time deposits decreased 13% or 29.7 billion pesos. Within private sector deposits, peso deposits decreased 19% or 90.6 billion pesos, while U.S. dollar deposits decreased 13% or 134 million dollars. As of March 2021, Banco Macro's transactional accounts represented approximately 49% of total deposits. Banco Macro's market share over private deposits as of March 2021 totaled 5.6%. In terms of asset quality, Banco Macro's non-performing total financial ratio reached 0.92%, and the coverage ratio measured as total allowances under expected credit losses over non-performing loans under central bank rules total 387.82%. Consumer portfolio non-performing loans deteriorated 16 basis points up to 0.89% from 0.73% in the previous quarter, while commercial portfolio non-performing loans deteriorated 10 basis points in the first quarter of 2021. Asset quality continues to be positively affected by recent measures adopted by the Central Bank of Argentina in the current pandemic context, particularly the 60-day grace period that was added to debt or classification before a loan is considered as non-performing. In terms of capitalization, Banco Magro counted an excess capital of 157.4 billion pesos, which represented a total regulatory capital ratio of 37.7% and a tier one ratio of 30.3%. It should be noted that on April 30th, 2021, the shareholders' meeting approved a dividend of up to 10 billion pesos in cash or dividend in kind. The 10 billion pesos from the dividend will be deducted from shareholders' equity in the second quarter of 2021. Defective distribution of the dividends as approved by the shareholders' meeting is subject to Central Bank's authorization. Percent of communication A7181 from the Central Bank of Argentina, the distribution of profits by financial entities is suspended until June 30th The bank's aim is to make the best use of the excess capital. The bank's liquidity remains more than appropriate. Liquid assets' total deposit ratio reached 94%. 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 agency standards, and we keep a well-atomized deposit base. At this time, we would like to take the questions that you may have.

Thank you. 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 touchtone phone. Please unmute your phone and record your name clearly when prompted. One moment, please, for the first question. And the first question will come from Pedro Nobrega with Citigroup. Please go ahead.

Hi, everyone. Yes, this is Gabriel here. So I just wanted to check in on the asset quality front this quarter. We saw you booked almost no provisions. So if you could just maybe give us a bit of color here. Did you maybe reverse any provisions which you had done in the last year or are just really confident and uncomfortable with your current risk profile that you don't need to create these provisions? And then just lastly, how should we think of provisions going forward? And lastly, second question afterwards. Thank you.

Hi, Gabriel. This is Jorge Carinchi. Yes, the answer to your question is basically that we think that We have a reasonable level of provisioning. We were very conservative in 2020. So considering the situation of our loan book, we consider that the level of provisions is fairly enough considering what is going on now and what we are expecting for the rest of the coming quarters. Going forward, I would assume as a as a cost of risk estimate between, let's say, 2% and 2.5% for the whole 2021.

All right. That's very clear. And as for my second question, looking at your capital base, I understand you have already declared these in dividends. But even if we were to subtract these dividends from your capital, your common equity tier one ratio would still be above 20%. And so I just wanted to understand, are there any other strategies which the bank is pursuing on this excess capital? Do you maybe think that an acquisition makes sense right now?

There's not a lot to do considering the regulations established by the central bank. I mean, inorganic growth has been always an element present in Banco Macro's strategy for the last 20 years, so that could be a strategy. Of course, we are open to any possibilities. However, we have to see if there is any bank willing to leave the game, but that could be an alternative possibility. But apart from that, we are not finding for the moment another attractive element in order to put – where to put the excess capital, honestly.

All right. Fair enough. Thanks so much. Thanks, Gabriel.

The next question will come from Ernesto Gabilondo with Bank of America. Please go ahead.

Good morning, Jorge and Nicolas. My question is on inflation. When looking to April's inflation, it's already at 46%, so a little bit higher when compared to March. Do you expect it could be higher in the second quarter and then normalizing for the rest of the year? I just want to know how would this be impacting the results of the net monetary position? And then also you can share with us your expectations for interest rates and the effective tax rate in the coming quarters will be very helpful. Thank you.

Hi, Ernesto. In terms of inflation, yes. You know that we do not measure inflation, but according to the local economies that say consider those mechanism of trying to estimate inflation. They say that the first quarter was the highest quarter. The coming quarters should be showing a bit lower of inflation. Expectations for 2021 are between 45, 47, approx. So we should be seeing lower inflation levels second, third, and fourth quarter. So that is going to have a, let's say, positive impact in our income statement, basically because the level of the monetary position is going to be, should be below the level that we posted in the first quarter. In terms of the guideline for interest rate, honestly, for the moment, we are not seeing any movement on interest rates. In the second quarter, we think that the level is going to be maintained. However, according to some also local economies, they are expecting for some increase in the third and fourth quarter of the year, maybe between 100 and 200 basis points. Honestly, I don't know. I mean, when you look at the macroeconomic variables, we think that a higher level of nominal interest rate should be needed here. However, the central bank is not showing any movement or any guidance in that front. But according to local economies, they are saying that in the third or fourth quarter, we should be seeing an increase in interest rate. Going forward, I would expect for second, third, and fourth quarter of this year in terms of margins, I would assume an average between what we saw in the fourth quarter of last year and the first quarter of this year, considering the current level of interest rates. In terms of effective income tax rates, yes. I mean, you know that here in Argentina, taxes is a bit of a mess, and we have a kind of accounting balance for taxes and another accounting balance for P&L. I mean, For estimation purposes, I would assume a 35%, between 35 and 37% income tax rates as an average for the year. That is what we are expecting for this year according to what the local version of IRS has in its pockets.

Perfect, very helpful. And for my second question, is there any update related to regulation For example, if we should expect subsidies to continue or cap rates or floors or anything else?

I mean, we think that for the moment the regulations are going to be maintained. Honestly, we do not know what will happen by the end of the year after midterm elections. But for the second quarter, at least, big part of the third quarter, we are seeing that the present regulations are going to be maintained.

Perfect. Thank you so much.

You're welcome, Alex. The next question will come from Alejandro Heranda with ETAL. Please go ahead.

Hi. Good morning, Jorge and Nicolás. Thank you for the call. And just to have a little bit of color on what you're seeing on the deposit side and how are you thinking about the liability management? And then the second thing is that the Treasury has $1.2 billion to roll over in the next three months, which looks quite challenging. And we saw a measure yesterday from the central bank that it was really uninspiring. So what do you expect in terms of additional measures going forward? What do you think that they're that we could expect from them in the coming months?

Hi, Alejandro, how are you? I mean, in terms of deposits, what we have seen is, of course, the nominal level of deposits in the system is growing. In terms of our asset and liability management, we are trying to find which is the best the best level of deposit that we should have because as you know, the loan demand is picking up but in a very tiny speed. So if we increase a lot of deposits, we have to apply that excess liquidity either in repost to the central bank or funding the treasury in order to have an attractive interest rate in order to compensate the level of the deposit rate. Therefore, we are not aggressive or that aggressive in terms of increasing our deposit base. For the moment, we are trying to find out which is the best level, always keeping an eye as all we have done on the profitability of the bank. We do not want to increase market share if that is going to affect the profitability of the bank. So, in first place, we put profitability. In terms of your second question, according to the regulation that the central bank put out yesterday, I mean, we understand that the Treasury needs a lot of financing in the coming future, as you mentioned. This is a kind of a voluntary element in order to reduce the level of LELIC and increase the level of local public bonds in pesos and put that as a way of the reserve requirement at the central bank. Of course, we are analyzing the measure. We consider that the risk of having the central bank as a debtor is is better than having the Treasury as a vector. I think that public-owned banks are going to use this regulation, but I don't know what will be the reaction of the rest of the banking system. Again, we still don't know what we are going to do. We are going to be, of course, pretty conservative. trying to find out which is the best for Banco Macro, and, of course, keeping a close eye on depositors. This is the key question here, if depositors would feel comfortable with their deposits being applied on these reserve requirements in the form of public sector bonds. So that is what we are going to keep an eye on.

Okay, thank you very much.

You're welcome.

The next question will come from Alonzo Garcia with Credit Suisse. Please go ahead.

Hello, everyone. Thank you for taking my question. My question is on the volume side. I mean, we observe not only in Banco Macro but in the rest of your peers as low starting in loan volumes in 2021. I know that seasonality has something to do with that. Also, the fact that you report in real terms and inflation was even higher in the first quarter compared to the fourth quarter. But is there something else? Could you please comment on how you are seeing demand dynamics both on the commercial side and on the retail side? And also on your side, how is your risk appetite at the moment? Thank you. And how do you expect this to evolve for the remainder of the year. Thank you.

Hi, Alonso. I mean, loan demand is, of course, pretty tied to expectations. That is not new. Expectations here in Argentina for the moment is a recovery in GDP compared to the big decline that Argentina suffered in 2020. but the recovery of the GDP returns is expected to be between 6% and 7%. Inflation, as I mentioned before, between 45% and 47%. That is what the market is expecting. So for the moment, we continue to see companies demanding working capital short-term in pesos. You know that having the midterm election Around the corner is something that is a big question mark there depending on the result, what will be the new policies that the government could be taking. In terms of consumers, what we are seeing is a bit of increase in consumer demand tied to the increase in the nominal level of salaries tied to the negotiations between the unions and and the companies, but you have to consider that we continue to have the pandemic with us. You know that the last nine days, and this is going to last next Sunday, there was a big kind of close of the economy here in Argentina and the commuting in order to reduce the level of of people having this COVID-19. The level of the vaccine or the amount of the population having two doses of vaccine here is slightly below 3%. So that is going in a very slow motion or a slow speed. So that is also affecting the behavior of consumers. So we think that by the end of the year, loan increase in Banco Macro is going to be slightly positive in real terms. What we expect is to see between the third and the fourth quarter a pickup in loan demand.

Very clear. Thank you for your answer, Jorge.

You're welcome, Alonso.

The next question will come from Carlos Gomez with HSBC New York. Please go ahead. Hello, good morning.

My question is a follow-up on the alternative to use treasury paper for your liquidity requirements. We understand that it is optional at this point, and you have made very clear that you prefer the credit of the central bank. Do you think there's a possibility that in the future it might be an obligation that you might have to buy

a paper from the government and if that is the case do you have any legal recourse against that thank you hi carlos yes for the moment it's voluntary honestly we we don't know if in the future is going to be um we're going to be forced to that if i have to guess i would say no because uh We had this type of experiences in the past in Argentina and the conclusion or the ending of that was not good, not for the country nor for the banking sector. But if that is the case, we are going to see if there is a legal alternative to go and if it is, we are going to go for that that is what i'm guessing for the moment but again i think that is going to be or it will continue to be voluntary we are not i mean we are sending a very low probability of occurrence that is going to be uh that we the banks are going to be for for that thank you very much and if i can follow up you had a particularly high um

inflation adjustment this quarter? I understand that there was a change in accounting and it was bigger also in the fourth quarter, but is this a normal level of adjustment or should we expect lower in the future? Not only because inflation goes down, but because there was something special in the quarter.

No, no, no, no. Nothing special. Going forward, we think that with the declining inflation, the level of these monetary losses is going to go Thank you. Welcome, Carlos.

The next question will come from Santiago Petri with Templeton. Please go ahead.

Yes, hi. Good afternoon. Hope you are all fine. I mean, my question is related to this new regulation. Can you remind us of the percentage reserve requirement now? And does this new regulation has already stated up to what percentage of these requirements can be integrated with public assets? And finally, what's the limit? Can you remind us what's the limit to the total public sector asset holdings and if this requirement eats into this limit? Thank you.

Hi, Santiago, how are you? In terms of the league, we can have up to 45% of transactional deposits and 27% of time deposits. For the moment, we have a level of close to 125 billion pesos in the league. I mean, going forward, We are going to continue. This regulation is starting next Tuesday, the 1st of June. We are going to continue as we are working right now with the leagues, not putting the sovereign bonds there. And honestly, we think that this regulation is more targeting the Banco Nacion or maybe Banco Provincia, they have a huge amount of sovereign bonds in pesos. And besides, this is a way of leaving more room for the Treasury to get extra financing and reducing the financing of the central bank through LELICs. But for the very beginning of June, we are going to continue as we are working right now.

Excellent. Sorry, can you remind us the limit to public sector holdings? At the moment, I mean, it's capped, no? So what is the limit?

In terms of the public sector, I mean, we have 130 billion pesos in public bonds in pesos, denominated in pesos. And that is around 21, 22% of total assets.

Okay. Thanks a lot. Thanks.

Welcome.

The next question will come from Rodrigo Nestor with AR Partners. Please go ahead.

Hi. Thank you for taking my question. My question is regarding strategy. Well, it seems that many of the variables that determine the banking sector results, like inflation, the level of monetary policy rates, are not under your control. So my question is, what is your approach with the variables you can control? What can you share with us on that front?

Rodrigo, I mean, no, what we are trying to do And we did that in 2020, and we're trying to do in 2021. I mean, because of the pandemic that we are undergoing and how that is affecting the economy as a whole of the country, is to work maybe in expenses, to work on the quality of the trade risk, trying to manage the best level of the deposits that we have i mean asset and liability management um basically again always looking on on the profitability of the bank and we are not caring about market share so that is something that in banco macro we have been looking for that in the last 30 years and the idea is to continue for that and If there is a possibility to use the excess capital in any of the alternatives, we are going to study and go for the best. So that is what we are working on a daily basis here in Banco Macro and those issues that I mentioned before.

Thank you. That was really clear.

You're welcome.

As there are no more questions at this time, this concludes the question and answer session. I would like to turn the conference back over to Mr. Nicholas Torag for any closing remarks. Please go ahead, sir.

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 has now concluded. Thank you for attending today's presentation. You may now disconnect.