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 fourth quarter 2022 earnings conference call. We would like to inform you that the 4Q22 press release is available to download at the Investor Relations website of Banco Macro, www.macro.com.ar slash Relaciones Inverseos. 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 Manriquez, Chief Executive Officer, Mr. Jorge Scurence, Chief Financial Officer, and Mr. Nicholas Torres, IR. Now, I will turn the conference over to Mr. Nicholas Torres. You may begin your conference.

Thank you, Gary. Good morning, and welcome to Banco Macro's fourth quarter 2022 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. Fourth quarter 2022 press release was distributed yesterday, and it's 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 December 31st, 2022. I will now briefly comment on the bank's fourth quarter 2022 financial results. Banco Macros net income for the quarter was 16.6 billion pesos, 59% higher than the third quarter of 2022 and 19% lower than the result posted a year ago. The bank's fourth quarter 2022 ROE and ROA of 16.9% and 3.3% respectively remained healthy and showed the bank's earnings potential. In fiscal year 2022, total comprehensive income totaled 37.5 billion pesos, which was 32% lower than the result posted in fiscal year 2021. Net operating income before general administrative and personal expenses for the fourth quarter of 2022 was 131.3 billion pesos, decreasing 8% or 11.3 billion pesos quarter on quarter due to lower income from financial instruments at fair value to profit or loss. On a yearly basis, net income before general administrative and personal expenses increased 36% or 34 billion pesos. In fiscal year 2022, net operating income before general administrative and personal expenses totaled 498.2 billion pesos, which was 36% higher than the previous year. In the fourth quarter of 2022, provision for loan losses totaled 2.5 billion pesos, which was 861 million pesos higher than in the previous quarter. On a yearly basis, provision for loan losses decreased 34% to 1.3 billion pesos. Operating income after general administrative and personal expenses was 78.2 billion pesos, 11% or 10 billion pesos lower than the third quarter of 2022, and 79% or 34.5 billion pesos higher than the fourth quarter of 2021. In the quarter, net interest income totaled 83.6 billion pesos, 12% or 9.1 billion pesos higher than the result posted in the third quarter of 2022, and 20% or 14 billion pesos higher than the result posted one year ago. In fiscal year 2022, net interest income was 20% higher than in fiscal year 2021 as a result of different regulations adopted by the central bank that set caps on lending rates and flow on deposit rates. In the fourth quarter of 2022, interest income totaled 198.6 billion pesos, 23% of 37.7 billion pesos higher than in the third quarter of 2022 due to higher income from government securities and was 79% or 87.8 billion pesos higher than the previous year. Within interest income, interest and loans increased 7% or 4.5 billion pesos quarter-on-quarter due to a 570 basis points increase in the average lending rate. On a yearly basis, income from interest and loans was 21% or 12 billion higher. In the fourth quarter of 2022, interest and loans represented 35% of total interest income. In fiscal year 2022, interest and loans totaled 251 billion pesos and increased 12% compared to fiscal year 2021. Net income from government and private securities increased 34% or 30.7 billion pesos quarter on quarter due to higher income from government securities. Compared to the fourth quarter of 2021, net income from government and private securities increased 144% or 71.9 billion pesos. In the fourth quarter of 2022, FX gains, including investments in their equity financing, totaled a 30.6 billion pesos gain due to a 20% Argentine peso depreciation against the U.S. dollar and the bank's long dollar position. In the fourth quarter of 2022, interest expense totaled 115 billion pesos, which was 33% or 28.6 billion pesos higher compared to the third quarter of 2022. and 179% or 73.8 billion pesos higher on a yearly basis. Within interest expenses, interest on deposits increased 34% or 28.5 billion pesos or a quarter, mainly driven by a 10% increase in the average volume of private sector deposits, while the average interest rates paid on deposits increased 860 basis points. On a yearly basis, interest on deposits increased 187% or 73.8 billion pesos. In the fourth quarter of 2022, interest on deposits represented 98% of the bank's financial expenses. In fiscal year 2022, interest expense increased 67% compared to fiscal year 2021. In the fourth quarter of 2022, the bank's net interest margin, including FX, was 32.7%, which was higher than the 28% 0.1% posted in the third quarter of 2022, and the 21.2% registered in the fourth quarter of 2021. In fourth quarter 2022, net fee income totaled $17 billion, 2% or $361 million higher than in third quarter of 2022. On a yearly basis, net fee income was unchanged from a year ago. In fiscal year 2022, net fee income was 4% higher than in the previous year. In the fourth quarter of 2022, net income from financial assets and liabilities for value to profit or loss totaled 3.3 billion pesos loss, which was 32 billion lower than the previous quarter, mainly due to dual bonds. In fiscal year 2022, net income from financial assets and liabilities for value to profit or loss was 24% higher than the fiscal year 2021, mainly due to higher income from government securities. In the quarter 2021, other operating income totaled 5.7 billion pesos, increasing 31% compared to the third quarter of 2022. On a yearly basis, other operating income decreased 49% or 1.9 billion pesos. In the fourth quarter of 2022, Banco Macro's personal administrative expenses totaled 29.2 billion pesos, 4% or 1.2 billion pesos lower than the previous quarter, due to lower employee benefits, which were partially offset by higher administrative expenses. On a yearly basis, personal and administrative expenses decreased 4% for 1.2 billion pesos. In fiscal year 2022, administrative expenses plus employee benefits increased 1% compared to fiscal year 2021, showing the strict cost control policies adopted by the bank's senior management. As of the fourth quarter of 2022, the efficiency ratio reached 28.6% improvement from the 29.1% posted in third quarter of 2022, And in the fourth quarter of 2022, expenses increased 3% when net interest income plus net fee income plus other operating income increased 33%. In the fourth quarter of 2022, the results from the net monetary position totaled 56.9 billion pesos loss, which was 17% or 11.4 billion pesos lower than the loss posted in the third quarter of 2022 as a consequence of lower inflation. It was 468 basis points below the third quarter of 2022. Inflation in the quarter was 17.3% compared to 22% in the third quarter of 2022. In fiscal year 2022, Banco Macro's effective tax rate was 31.1%, higher than the 5.8% tax rate registered during fiscal year 2021. It should be noted that in fiscal year 2021, effective tax rate was affected by the implications of inflation adjustment on accounting and tax balances and the determination of the income tax due and deferred income tax. More information is provided in note 25 to our financial statements. In terms of loan growth, the bank's financing to the private sector totaled $596.4 billion, increasing $2 billion quarter-on-quarter and decreasing 12% or 83.3%. billion pesos year on year. Within commercial loans, overdrafts stand out with a 2% or 1.1 billion pesos decrease quarter on quarter. On the consumer side, credit card loans increase 6% or 10 billion pesos in the quarter, while personal loans and mortgages decrease 7% and 4% respectively. In fiscal year 2022, credit card loans stand out with a 3% increase, while personal loans decrease 25%. It is important to mention that Banco Macro's market share over private sector loans as of December 2022 reached 7.4%. On the funding side, total deposits decreased 2% or 23.5 billion pesos quarter-on-quarter and increased 13% or 148.3 billion pesos year-on-year. Private sector deposits increased 2% quarter-on-quarter, while private sector deposits decreased 30% quarter-on-quarter. The increase in private sector deposits was led by demand deposits, which increased 5% or 27.6 million pesos per quarter, while prime deposits decreased 2% or 9 billion pesos. Within private sector deposits, peso deposits decreased 4% or 41.7 billion pesos, while U.S. dollar deposits decreased 7% or $72 million. As of December 2022, Banco Macro's transactional accounts represented approximately 45% of total deposits. Bank of America's market share with private sector deposits as of December 2022 totaled 6.3 percent. In terms of asset quality, Bank of America's non-performing total financial ratio reached 1.25 percent. The coverage ratio measured as total allowances under expected credit losses over non-performing loans under the central bank rules improved a total 151.7 percent. Consumer portfolio non-performing loans improved 14 basis points down to 1.1 from 1.23 in the previous quarter, while commercial portfolio non-performing loans deteriorated 52 basis points in the fourth quarter of 2022, which was up to 95% from 1.43 in the previous quarter. In terms of capitalization, Banco Macro accounted an excess capital of 410 billion pesos, which represented a total regulatory capital ratio of 39.9%, and a tier one ratio of 36.6%. The bank's aim is to make the best use of this excess capital. The bank's liquidity remained more than appropriate, liquid assets to total deposit ratio reached 95%. Overall, we have accounted for another positive quarter. We continue showing a solid financial position. Asset quality remain 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 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. Our first question is from Ernesto Gabilondo with Bank of America. Please go ahead.

Hi. Good morning, Jorge and Nicolas. Thanks for the opportunity. My first question is on the political and macro outlook. Can you give us some color on who are the potential presidential candidates and how are the initial polls looking? And then on the macro outlook, interest rates and inflation are well above Macri's administration. So I'm just wondering if there is a positive presidential outcome, how fast the new government would be able to fix such high variables and of course to avoid a heavy depreciation of the currency. Then the second question is on long road. So how should we think about long road this year considering the high level of inflation? And then my last question is on your expected ROE for 2023. How should we think about it if interest rates start to trend down at some point during the second half of the year? Thank you.

Hi, Ernesto. Good morning. This is Jorge Scarinci. On the political outlook, I think it's a bit early. Honestly, there are many names that could be candidates, but the primary elections are in August. Until then, or at least until May, we can hear a bunch of names fully run around candidates. But I think that after May, we are going to have a shorter list of potential candidates. So honestly, I don't know if it is worth spending time right now talking about what could be the candidates, because again, the list is going to be much narrower than all the names that we are seeing appearing in the press. In terms of the macro expectations, we believe that in 2023 and according to private consultants, inflation is going to remain similar levels than the level of 2022. And in terms of interest rates, we are not forecasting in the short term any kind of movement on interest rates. Honestly, For the moment, we are not seeing a decline in interest rates in the second half for the moment. And in terms of loan growth in 2023, also according to the consensus of the market, GDP is going to be nearly flat in real terms. And therefore, we're expecting almost no growth in real terms in loans. So it's going to be similar inflation. In terms of expectations for ROE, we would like to maintain the 10% area as a kind of a forecast for this year. If we are not having any strange event, we think that we could achieve it without any problem.

Perfect. Thank you very much, Jorge.

You're welcome, Ernesto. The next question is from Brian Flores with Citibank. Please go ahead.

Hi, Jorge and Nicolás. Thank you for the opportunity. I have two on my side. The first one is I wanted to understand a bit better the mechanics of the mark-to-market in government securities. I was just curious about it because we saw that during the quarter you saw the interest income from these securities going up. mainly in line with what we saw in the third quarter, but we saw a very different outcome regarding the mark-to-market. So just, can you remind us how this works? And then I'll ask a second question after this. Thank you.

Hi, Brian. How are you? Yes, it's a bit complicated. There are two or three different places in the income statement where you have the income from securities, but In the interest income side, there you have the accrued interest. In another line, you have part of the bond portfolio that is exposed to a mark-to-market system. So we have two different systems. One that is that you accrue the income, and on the other line, it's below the net income, There you put the difference between the accrued income and mark-to-market. And also we have some mark-to-market bonds that the result of that is put on there. Hold on one second. It's below the net interest income line that is net income from financial instruments at fair value. So it's a bit complicated, but income from securities are spread all over the income stated in different accounts.

Okay, perfect. But my question is, is this mark-to-market done mechanically, or is this something you kind of decide to do at a certain point in time, just because, for example, And during the third quarter, we saw a very different thing with rates going up. So just wondering if this is something you do periodically or is a more deterministic thing?

No, I mean, if you're talking about the decline between the third quarter and fourth quarter in this line of net income from financial instruments at fair value, that is mark-to-market. Only that. Yeah, there were less increasing prices in those bonds that we have at mark-to-market. That's it, yeah. The mark-to-market is mechanical, yes.

That is perfect. Okay. And then just for the second question, we see you have a very high capital ratio. Just wondering, have you heard any updates from the regulator regarding the permission to distribute higher dividends?

We expect to have news on that front in the coming two or three weeks in terms of the allowance to distribute dividends. Again, for the moment, no news, but we think that we might have some news before, of course, the shareholders' meeting. So in the next couple of weeks, we should have some news.

That is perfect. Thank you.

You are welcome, Brian. The next question is from Yuri Fernandez with JP Morgan. Please go ahead.

Hi, Al. Thank you. I have a follow-up regarding securities here. I guess, you know, it's the most relevant revenue line for you, right? Like we're checking loans, like loan revenues, they are only 30, 35% of the gross financial income. So securities are the big, big chunk. And you also have to add those other, you know, mark to mark, like the OCI. It's pretty relevant, right? So my question is, there is a discussion that rates could continue to move up in Argentina. I think the IMF, they had the hopes that we could see positive real rates in Argentina. I really don't know if that's possible or not. There is also, you know, a depth of discussion. But my question is, if rates continue to move much higher, is that good for you? Like, can you reprice quickly those portfolios or, I don't know, mark to mark may hurt you? Like, again, I'm trying just to understand, like in a, in a more long kind of question, what is your sensitivity to the elite, right? If the elite goes through, I don't know, 80, 90, how that impacts macro? Thank you.

Hi, Jury. Let's say that making a summary on your question, yes, if there is an increase in interest rates, we have a positive impact on our P&L. Basically, we have a chunk of, a much higher chunk of money in liquidity that we can repride faster than our deposit base. Thank you.

You're welcome. The next question is from Carlos Gomez with HSBC. Please go ahead.

Hello, Jorge. Hello, Nicolas. Thank you very much for having the call and taking the question. I mean, we're going into another electoral cycle. And as usual, we have expectations that things can change, there will be a new policy going forward. How would you compare this start of 2003 with the start of 2015, eight years ago, when we were in a similar situation? What do you think is more positive and what do you think is more negative compared to that point? Thank you.

Hi Carlos, how are you? I think that is a good question. Of course, it's a different scenario. In 2015, I think that the appearance of Mauricio Macri's political figure was completely new and there was a big of positive expectations on his presidency. And of course, the world, I think that was much different than the world that we have today. Today, I would say that even though there are some positive expectations on a change of government, I think that everyone knows that the new government will have less time than what Mauricio Macri had. in order to try to set up all the reforms and measures. I think that the inflation environment in Argentina today is much higher than the one that we had in 2015. The level of reserves in the central bank is much shorter or smaller now compared to 2015. So I think it is there you have the difference and coincidences. I think that today, I think that the scenario is a bit much harder for the new administration than what Mauricio Macri had in 2015. I think that the timing and of course the world, the region are completely different. Expectations on the new administration is is different than Mauricio Magri had in 2015. So I think it's a bit tougher for the coming governments.

Okay. And let me put it this way. Last time, in the last cycle, all the banks, you know, when things started moving, needed capital, they had capital raisings. Are you right now more inclined to preserve capital for that future demand or to distribute it if you are allowed by the central bank?

I mean, we think that you have a big excess, so we would like maybe to distribute part of that. But we think at the same time that could be in the future a time of possibilities for more concentration in the banking sector in Argentina. So we want to also have some excess capital if there is an opportunity for an M&A transaction. But we are conscious that the level of capital that we have right now is above the level that we would desire in a more normalized economic scenario.

Thank you very much, Jorge.

You are welcome, Carlos. Again, if you have a question, please press star then one. The next question is from Rodrigo Nistor with Latin Securities. Please go ahead.

Hi, thank you for taking my question. Can you discuss Banco Macro's current strategy with regards to exporting to the public sector and the central bank? I mean, given the upcoming elections, do you expect to make any changes on this strategy? And then are you willing to extend or to buy treasury instruments that mature beyond the 2023 election date, or do you prefer to stick to the leaks if that option was in the table? Thank you.

Rodrigo. We think that we accommodate our strategy depending on the economic cycle. And for the moment, I think that this scenario of high level of inflation with low demand from the private sector put us in a kind of compulsory bet on some public sector assets. But of course, going forward, if the economic scenario improves, of course, we are going to go back and focus more on the private sector loan demand. That is our core business and where we want to continue growing. In terms of the security, on the maturities on our security portfolio, basically, what we range is the yield that we can get in maybe shorter or longer. We think that we assign a very low probability of any kind of problem with the peso debt with this government and with the next government. So we feel comfortable with the level of debt that leads to the treasury and debt to the central bank that we have. But we believe that going forward in a better economic scenario, the level of exposure to public safety is going to be much smaller. But we feel comfortable with that level that we have right now.

Great. Thank you very much.

You're welcome.

There are no more questions at this time. This concludes the question and answer session. I will now turn the call back over to Mr. Nicholas Torres for his 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.