Banco Macro S.A. ADR (representing Ten Class B Common Shares)

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's second quarter 2023 earnings conference call. We would like to inform you that the second quarter 2023 press release is available to download at the Investor Relations website of Banco Macro at www.macro.com.ar slash relations slash investors. 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 participants need assistance during this call, please press star then zero to signal the operator. It is now my pleasure to introduce our speakers. Joining us from Argentina are Mr. Gustavo Manriquez, Chief Executive Officer, Mr. George Scarancy, Chief Financial Officer, and Mr. Nicholas Torres of Investor Relations. Now I will turn the conference over to Mr. Nicholas Torres. You may begin your conference.

Thank you, Andrea. Good morning, and welcome to Bank of Macros' second quarter 2023 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. Second quarter 2023 press release was distributed on Wednesday, and it's available at the 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 year 2020, the bank began reporting results, applying high-profile financial 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 IES 29 to reflect the accumulated effect of the inflation adjustment for each period through June 30, 2023. I will now briefly comment on the bank's second quarter 2023 financial results. Bank of America's net income for the quarter was 44.2 million pesos, 265% higher than the first quarter of 2023, and 394% higher than the result posted a year ago. the banks accumulated ROE and ROA of 15.5% and 3.9% respectively, remained healthy, and showed the bank's earnings potential. Net operating income before general, administrative, and personal expenses for the second quarter of 2003 was 2,264.1 billion pesos, increasing 27% of 56.4 billion pesos per quarter due to higher income from financial instruments at fair value to profit or loss and higher FX gains. On a yearly basis, net operating income before general administrative and personal expenses increased 50 percent or 88.5 billion pesos. In the second quarter of 2023, provision for loan losses totaled 5.5 billion pesos, 28 percent or 1.2 billion pesos higher than in the previous quarter. On a yearly basis, provision for loan losses increased 232 percent or 3.9 billion pesos. Operating income after general administrative and personal expenses was 173.1 billion pesos, 35% or 44.4 billion pesos higher than the first quarter of 2023, and 81% or 77.2 billion pesos higher than the second quarter of 2022. In the quarter, net interest income totaled 107.9 billion pesos, 11% or 12.9 billion pesos lower than the result posted in the first quarter of 2023, and 7% or 7.9 billion pesos lower than the result posted a year ago. In the second quarter of 2023, interest income totaled 307.1 billion pesos, 9% or 24.1 billion pesos higher than the first quarter of 2023, and 48% or 100 billion pesos higher than the previous year. Within interest income, interest and loans increased 12% or 13.1 billion pesos quarter-on-quarter due to a 760 basis points increase in the average lending rate, while the average volume of private sector loans decreased 3%. On a yearly basis, income from interest on loans was 34 percent or 30 billion higher. In the second quarter of 2023, interest on loans represented 34 percent of total interest income. Net income from government and private securities decreased 1 percent or 1.9 billion pesos for an quarter due to lower income from government securities. Compared to the second quarter of 2022, net income from government and private securities increased 43 percent or 49.7 billion pesos. In the second quarter of 2023, FX gains, including investments in the realty financing, totaled a 3.3 billion pesos gain due to the 23% Argentine peso depreciation against the U.S. dollar at the bank's longest dollar position. In the second quarter of 2023, interest expense totaled 199.2 billion pesos, a 23% or 37.1 billion pesos increase compared to the first quarter of 2023, and 119 or 108 billion pesos higher on a yearly basis. Within interest expenses, interest on deposits increased 23% or 36 billion pesos, quarter on quarter, mainly driven by a 3% increase in the average volume of private sector deposits, while the average interest rates paid on deposits increased 940 basis points. On a yearly basis, interest on deposits increased 120% or 106 billion pesos. In the second quarter of 2023, interest on deposits represented 97% of the bank's financial expenses. In the second quarter of 2023, the bank's net interest margin, including effects, was 38.3%, higher than the 33.6% posted in the first quarter of 2023, and higher than the 24.7% posted in the second quarter of 2022. In the second quarter of 2023, net fee income totaled 26.3 billion pesos, 3% or 932 million pesos lower than the first quarter of 2023. On a yearly basis, net fee income was 2% higher. In the second quarter of 2023, net income from financial assets and liabilities at fair value to profit or loss totaled a 51.9 billion pesos gain, mainly due to the marked market of DUA bonds. On a yearly basis, net income from financial assets and liabilities at fair value to profit or loss increased 226% of $36 million. In the quarter, other operating income totaled $7 billion, increasing 8% compared to the first quarter of 2023. On a yearly basis, other operating income decreased 7% of $578 million. In the second quarter of 2023, Bank of Macro's personal and administrative expenses totaled $47.9 billion, 10% or $4.4 billion higher than the previous quarter. due to higher administrative expenses and higher employee benefits. On a yearly basis, personal and administrative expenses increased 1% to 507 million pesos. In the second quarter of 2023, the efficiency ratio reached 21.7%, improving from the 25.5% posted in the first quarter of 2023. In the second quarter of 2023, expenses increased 9%, while net interest income plus net fee income plus other operating income increased 28%. In the second quarter of 2023, the result from the net monetary position totaled 109.4 billion pesos loss, slightly higher than the loss posted in the first quarter of 2023, as a consequence of higher inflation observed in the quarter, which was 200 basis points higher than in the first quarter of 2023. Inflation in the quarter was 23.78% compared to 21.73% in the first quarter of 2023. In the second quarter of 2023, Bancomat's respective tax rate was 30.2%. 4%, and further information is provided in Note 22 to our financial statements. In terms of loan growth, the bank's financing to the private sector totaled $872.5 billion, increasing 1% or $13 billion quarter-on-quarter, and increasing 9% or $88 billion year-on-year. Within commercial loans, overdraft documents and others stand out, with a 32% of $21.5 billion increase and an 11% or 13.7 billion pesos, and 6% of 7 billion pesos increased, respectively. It is important to mention that Banco Macro's market share of private sector loans as of June 2023 reached 7.8%. On the funding side, total deposits increased 5% or 90.2 billion pesos quarter-on-quarter, totaling 1.9 trillion pesos, and increased 3% or 52.8 billion pesos year-on-year. Private sector deposits increased 6% on 94.7 billion pesos quarter-on-quarter, while private sector deposits decreased 4% quarter-on-quarter. The increase in private sector deposits was led by demand deposits, which increased 9% or 64.6 billion pesos quarter-on-quarter, while time deposits increased 2% or 20.5 billion pesos. Within private sector deposits, personal deposits increased 7%, while U.S. dollar deposits decreased 24% or 288 million. As of June 2023, Bank of America's transactional accounts represented approximately 39% of total deposits, and Bank of America's market share over private sector deposits as of June 2023 totaled 6.5%. In terms of asset quality, Bank of America's non-performing to total financial ratio reached 1.37%. The coverage ratio measured as total allowance under expected credit losses over non-performing loans under central bank rules. remained stable at 146.05%. Consumer portfolio non-performing loans deteriorated nine basis points and were up to 1.43% from 134 in the previous quarter, while commercial portfolio non-performing loans improved 55 basis points in the second quarter of 2023. In terms of capitalization, Banco Macro accounted an excess capital of 570.7 billion pesos, which represented a total capital ratio of 35.3%. 9% and a tier one ratio of 33%. The bank's aim is to make the best use of this excess capital. The bank's liquidity remained more than appropriate. Liquid assets total deposit ratio reached 95%. Overall, we have accounted for another positive quarter. We continue showing a solid financial position. Asset quality remained under control and closing monitor. We keep on working to improve more our efficiency standards and we keep a well optimized deposit base. Lastly, before taking your calls, we wanted to announce that Banco Macro entered a purchase agreement to acquire 400% of the shares and votes of Banco Itaú Argentina and its subsidiaries, basically Itaú Asset Management and Itaú Valores. This agreement is subject to the completion of certain conditions, substantially the approval of the transaction by the Central Bank of Argentina. The price of the agreement was set at $50 million, which will be paid on the closing date of the transaction and an additional amount resulted from the potential adjustment that would be eventually set based on the results obtained by Banco Itaú Argentina and its subsidiaries between April 1st, 2023 and the closing date. At this time, we would like to take the questions you may have.

We will now begin the question and answer session. If you would like to ask a question, please press star, then 1 on your touchtone phone. To withdraw your question, please press store then two. One moment please for the first question. And our first question comes from Brian Flores of Citibank. Please go ahead.

Hi, Tim. Good morning and congratulations on the reports. Just two quick questions on my side. The first one is on Itaú, Argentina. And I just wanted to ask you, you actually consume capital in this operation because it may seem as if the purchase was holding no book value. So just wondering if this actually accreted to your capital ratio. And the second one is on the central bank's decision yesterday to change the remuneration of the profits in the digital wallets. So just really one thing to understand. If you consider this a threat to your deposit base at some point, any call on the type of these deposits would be greatly appreciated. Thank you very much.

Hi, Brian. How are you? Yeah, so far there's not a lot of additional information we can add on the announcement that we did on on the agreement that we reached with Itaú to buy its operations in Argentina. Available data is public according to the central bank website. There you will find all the data on Itaú. The book value, the latest numbers that we got I think is as of June. in terms of Argentine pesos is 83.3 billion pesos. The agreement said that we're going to pay 50 million dollars, so we are paying approximately, rough numbers, 20% of book value on those operations. In terms of your second questions on those deposits coming from virtual wallets, basically we do not have those deposits here. We assume that, of course, that is going to affect those virtual wallets in terms of profitability because those interest has to be accrued on their clients, but we do not have those kinds of deposits at the bank.

Thank you very much. Welcome.

The next question comes from Ernesto Gableando of Bank of America. Please go ahead.

Thank you. Hi, good morning, Gustavo, Jorge, and Nicolás. Congrats on your results, and thanks for the opportunity to ask questions. My first question would be on loan growth and asset quality. We noticed that you were the bank that posted the lower contraction in loans against other listed banks. But at the same time, we also saw a big jump in the provision charges. So what should we expect in terms of your long-run appetite for the second half of the year? And how should we think about the asset quality? My second question is on your investment strategy. We have seen your dual bonds position related to FX and inflation have been paying off. So how much do you hold today on those bonds, and how would you like to be positioned before the elections and after the elections? And my last question will be, given these high financial and FX gains that you experienced in this first half, how should we think about the ROE for this and next year? Thank you.

Good morning, Ernesto. In terms of your first question about loan growth asset quality, I think that it's not that useful to only look at one quarter. I think that in the two quarters of this year, and I think that in the coming two quarters at least, we are going to have loan performance in real terms, showing negative numbers. Imagine that with the level of inflation that we are having in Argentina and the election process that is coming in the next couple of months, loan demand is pretty, pretty sluggish. So I would not concentrate in what you see in only one quarter. I would try to see more a medium-term view And I think that overall, all Argentine banks are going to finish approximately with a negative real performance on lending. In terms of provisioning, what we are forecasting in this is that the economy is going to halt a little bit and it is expected to have a negative performance in real lending. GDP this year, so a kind of a more conservative view on what could be coming in the coming future. That's why we increased provisioning at this quarter. In terms of your second question about how we are positioned in terms of securities, yes, we are positioned in dual bonds and dollar-linked bonds. That is almost 95% of our security bonds. The remaining 5% is bonds tied to inflation. This is how we want to get before the election. Depending the outcome on the election, we are going to make some changes or not. But we think that we are in a very good position position in terms of securities according to what we are seeing on the effects on inflation coming. Your third question about ROE, we think that due to the good performance or better than expected performance on securities, I would assume that the real ROE for 2023 could be slightly below 20 or around 20. So that is what we are forecasting for 2023 real ROE.

And thank you. And the ROE for next year, should we think about something around that or lower than that?

I think it's a bit early, Ernesto, to answer that question because, I mean, the economic outcome for Argentina is not the same depending on who is the next president. So I prefer to wait a little bit for giving some guidance for 2024.

Okay, understood. Thank you very much. And just a last question on this acquisition on Itaú's Argentina operations. Yeah, it seems it was very attractive, the multiples for the transaction. But just wondering, your common equity tier one ratio after paying the $15 million and the dividends that you're expecting to pay for the rest of the year, how should we think about the common equity tier one ratio? And even after those payments, you will continue to hold a very high capital ratio. So can you share with us how much excess capital do you have? And if you will continue to explore potential M&A opportunities?

I mean, yes, it's clear that after the dividends that we are paying or we will be finishing to pay in a couple of months this year and the acquisition will continue to have capital or tier one ratios that would be around 30%, still high. Honestly, as always, we mentioned that we are examining or alerts on any potential player leaving the game for sure. And again, we are also prepared for organic growth if that is the case for 2024, 2025, depending on the outcome of the economy, or maybe to increase some future dividends if it is possible. So all the alternatives are on the table. As we always mentioned, what the bank has been doing the last years and we will continue doing in the future is to make the best use of the success capital.

Excellent. Now, thank you very much, Jorge.

You're welcome, Alberto.

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

Thanks, Jorge and Nico, for taking my questions. I have two questions. The first one, maybe if you can give a bit more color in terms of your FX position, because one thing that the regents and banks have said for a while is that there is a cap in terms of the long position you can have in dollars. But I think this refers only to the cash position. If I look at all of your assets and liabilities in dollars, you had $2.6 billion net long position. as of the end of June, and that's actually 91% of your equity, and you have been showing large FX translation gains in income stem because of that. So, again, if you can actually clarify that there is no actual cap in terms of the total net loan position, if I include all assets, and I read this in dollars, and also if you can tell us, let's say, Next week or whenever there is a large, basically there is, they removed the FX controls and the official exchange rate, the values essentially to the unofficial one. So there's, let's say, 100% devaluation. How would that impact actually your results and your capital ratios? And then the second question on Itaú. So my understanding is the price has been set in dollars, at $50 million. So I wanted to ask... Actually, if you have actually $50 million on hand to pay for this, or if you need to get access to dollars from the central bank to pay for this. Thanks.

Hi, Nicolas. How are you? In terms of your first question, banks are not allowed to be long in dollars in the spot position. way that you can be longing dollars up to 25% of the equity is through either futures or dollar link bonds, which are subscribing pesos. So what you are seeing that we are longing dollars is because we are having some positions in dollar link And also, depending on the structure or the report that you are seeing, sometimes the dual bonds are also used to belong in dollars. But in terms of assets and liabilities, in US dollars purely, you have to be completely hedged. So you can use some bonds that are in pesos that are dollar linked or dual just to belong in dollars up to 25% of the equity. And that's what we are, that's the picture that we are showing that you are looking at, that's why we are longing dollars, through those bonds basically. No other asset in US dollars. Again, peso denominated bonds that are tied to the evolution of the dollar of the official FX or either inflation or the official effects, the higher, which is the dual. So that's to be clear about that. Your question about the ITAU and the $50 million, yes, we have $50 million and we are going to use these dollars to pay for ITAU. We do not need, of course, the transaction has to be approved by the central bank first.

Jorge, thanks very much for that. Maybe just one follow-up on the first point. So, again, if I just look at the balance sheet, your FX position in dollars net long is $2.6 billion. Can you clarify if there's a 100% devaluation, you are not going to show a $2.6 billion gain because of that?

No, what we are going to, I mean, the impact on the balance sheet is going to be neutral in the sense that you have the same assets in dollars and liabilities in dollars. So in the accountancy or accountable, we are going to have a 0% impact on the P&L. On the net effect position of 2.5, what we are going to have is basically the impact on the bonds that are tied to the evolution of the effects, which are the dollar link and the dual bonds. If this 100% devaluation is higher than inflation, the impact that you are going to see is in those basically assets. And of course, it's not going to be $2.6 billion impact. Of course, it's going to be a bit less than that. But again, since we could be trading the dollar link and the dual bonds, this is a picture as of June. So now we are reaching September, so there may be some changes there, but the impact on devaluation 100% on the official effects is going to have an impact basically on the bonds that we have tied to the dollar.

Okay, thanks very much, Jorge.

You're welcome.

Again, if you would like to ask a question, please press star, then one. And our next question comes from Carlos Gomez of HSBC. Please go ahead.

Hello, Jorge. Congratulations on the results and on the acquisition. On the second, can you give us an idea about the expected timeline as to when you might receive approval? And we understand it's not in your hands. There will be changes at Central Bank, but When is it reasonable to expect that you would get possession of the asset? Also, I understand that the value agreed is based on the value of the bank as of April of this year and that it adjusts over time. Could you clarify that? The second question is about your earnings. I'm actually a bit surprised because you're right, this first half has been really good. rather the second quarter has been really good things look better but you know we have seen your real roe uh fluctuate um a lot i mean are you confident that you're going to get that closer to 20 before the end of the year and is there anything in the horizon by whoever comes and takes charge of the economy that could impact the profitability of the banks in the short and medium term thank you

Hi, Carlos. Thanks. On the approval, honestly, we think that it could happen before the end of this year. That is our view. But honestly, again, because we are having elections, it could be delayed a little bit. But the idea or what we have in mind is that this might be approved before the end of 2023 here. In terms of the operations, I couldn't get exactly the question that you asked, but basically, I mean, this is reaffirming what we have been saying many, many times, that we want to keep on growing in Argentina. I think that the acquisition of Itaú has a lot of value for Banco Macro, not only because we think that we are paying a good price on this operation because also it's increasing the number of branches, mainly in BHCT and Greater Buenos Aires, in the north part of Greater Buenos Aires. At some point it is almost doubling our presence in this area, and we have been highlighting that this is the area where we want to grow. Also, we have been stating that if there was a potential acquisition, our main target was to increase our presence in this area. So we are confirming what we have been saying. And also it's giving us some, of course, new clients on the commercial and the retail area. So I think it is a very good acquisition and very valuable for Banco Macro and more taking consideration the price that we are paying. And on your third question about ROE, I think that we are going to have a third quarter that's going to be as good or maybe better than the second one, basically because so far the securities or the bonds are performing really well. So that's why we think that, honestly, And now in the fourth quarter, it's a big question mark because a lot on the performance of the quarter will be tied to the outcome on the election. So that's why the target that we are putting in the area of 20% is because there's some uncertainty on how many securities could be performing in the fourth quarter. But of course, if the performance in that quarter continues on the trend that we are showing, ROE in real terms is going to be about 20%. But just put some interrogation mark on the fourth quarter.

Okay, that's very clear. Thank you so much. Thanks, Carlos.

There are no further questions at this time. This concludes the question and answer session. I will now turn the call 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. Have a good day.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.