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 third quarter 2023 earnings conference call. We would like to inform you that the 3Q23 press release is available to download at the Investor Relations website of Banco Macro, www.macro.com.ar slash Relaciones hyphen Inversores. 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 Scorinci, Chief Financial Officer, and Mr. Nicolas Torres, Investor Relations. Now, I will turn the conference over to Mr. Nicolas Torres. You may begin your conference.

Thank you, Gary. Good morning, and welcome to Banco Macros' third quarter 2023 conference call. Any comments 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. Top quarter 2023 press release was distributed last Wednesday, and it's available at our website. All figures are in urgent and have been restated in terms of the measure and unit current at the end of the reporting period. As of 2020, the bank began reporting results applying hyperinflation accountings. 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 effects of inflation adjustment for each period through September 30, 2023. I will now briefly comment on the bank's quarter 2023 financial results. Bank of Macro's net income for the quarter was 7.5 billion pesos, 87% lower than in the second quarter of 2023. and 55% lower than the year ago. The bank's accumulated ROE and ROA of 11.3 and 2.8% respectively remain healthy and show the bank's earnings potential. Net operating income before general admission and personal expenses for the third quarter of 2023 was 356.5 billion pesos, increasing 364 million pesos quarter-and-a-quarter. On a yearly basis, net operating income before general and personal expenses increased 23% or 66.7 billion pesos. In the fourth quarter of 2023, provision for loan losses totaled 4.9 billion pesos, 35% or 2.6 billion pesos lower than in the previous quarter. On a yearly basis, provision for loan losses increased 43% or 1.5 billion pesos. Operating income after general administrative and personal expenses was 235 billion pesos or 1% 1% or 1.7 billion pesos higher than in the second quarter of 2023, and 31% or 56.1 billion pesos higher than in the third quarter of 2022. In the quarter, net interest income totaled 112.7 billion pesos, 23% or 32.8 billion pesos lower than the result posted in the second quarter of 2023, and 26% or 38.6 billion pesos lower than the result posted one year ago. In the third quarter of 2023, interest income totaled 429.1 billion pesos, 4% or 15.1 billion pesos higher than in the second quarter of 2023, and 31% or 102.3 billion pesos higher than the previous year. Within interest income, interest on loans increased 11% or 18.1 billion pesos quarter-on-quarter due to a 574 basis points increase in the average lending rate, while the average volume of private sector loans was practically unchanged. On a yearly basis, income from interest on loans was 36% or 47.5 billion higher. In the third quarter of 2023, interest on loans represented 42% of total interest income. Net income from government and private securities decreased 7% or 16 billion pesos quarter on quarter due to lower income from government securities. Compared to the third quarter of 2022, net income from government and private securities increased 12% or 21.8 billion pesos. In the third quarter of 2023, income from repos totaled $37.6 billion, 52% or $12.8 billion higher than the previous quarter, and 304% or $28.3 billion higher than the same period of last year. In the third quarter of 2023, FX gains, including investment in the U of T financing, totaled $238.1 billion gain, $135.8 billion higher than the previous quarter, and $200 billion higher than a year ago. This result is mainly due to the 36.4% Argentine peso depreciation against the U.S. dollar and the bank's long dollar position, including dollar linked and dual bonds. In the first quarter of 2023, interest expense totaled 316.4 billion pesos, an 18% of 47.9 billion pesos increase compared to the second quarter of 2023, and 80% or 140.9 billion pesos higher on a yearly basis. Within interest expenses, interest on deposits increased 19% for the $8.7 billion quarter-on-quarter, mainly driven by a 1,017 basis points increase in the average interest rate paid on deposits, while the average volume of private sector deposits increased 3%. On a yearly basis, interest on deposits increased 80% or $138.2 billion. In the third quarter of 2023, interest on deposits represented 98% of the bank's financial expenses. In the third quarter of 2023, the bank's net interest margin, including FX, was 58.7 percent, higher than the 38.3 percent posted in the second quarter of 2023, and higher than the 28.1 percent posted in the third quarter of 2022. In the fourth quarter of 2023, net income, net fee income totaled 35.5 billion pesos, 20 million pesos lower than the second quarter of 2023, and on a yearly basis, net fee income was 5 percent, or 1.6 billion pesos higher. In the third quarter of 2023, net income from financial assets and liabilities of fair value to profit or loss totaled a $36.4 billion loss, mainly due to the marked market of government securities. On a yearly basis, net income from financial assets and liabilities of fair value to profit or loss decreased $97.2 billion. In the quarter, other operating income totaled $11.3 billion, increasing 9 percent or $1 billion compared to the second quarter of 2023. On a yearly basis, other operating income increased 26 percent, or 2.4 billion pesos. In the fourth quarter of 2023, Bank of Macro's personal and administrative expenses totaled 56.2 billion pesos, 3 percent, or 1.6 billion pesos higher than the previous quarter due to higher employee benefits, which were partially offset by a 102 million pesos decrease in administrative expenses. On a yearly basis, personal and administrative expenses increased 7 percent, or 4.4 billion pesos. In the fourth quarter of 2023, the efficiency ratio reached 22.4%, deteriorating from the 21.7% posted in the second quarter of 2023. In the third quarter of 2023, expenses increased 3%, while net interest income, net fee income, plus other operating income decreased 1%. In the fourth quarter of 2023, the results on the net monetary position totaled a $215.9 billion loss, considerably higher than the loss posted in the second quarter of 2023, as a consequence of higher inflation observed in the quarter, which was 1,104 basis points higher than the second quarter of 2023. Inflation in the third quarter of 2023 was 34.8%, compared to 23.8% in the second quarter of 2023. In the third quarter of 2023, Banco Macro's effective tax rate was 60.5%, and further information is provided in No. 22 to our financial statements. In terms of loan growth, the bank's total finance totaled 1.2 trillion pesos, decreasing 4% of 50.8 billion pesos quarter-on-quarter and 5% 57.8 billion pesos lower year-on-year. Within commercial loans, overdrafts stand out with a 5% or 5.9 billion pesos decrease, while documents increase 16% of 30.2 billion pesos. It is important to mention that Banco Macro's market share over past sector loans, as of September 2023, reached 7.7 percent. On the funding side, total deposits decreased 22 percent, or $526 billion, quarter-on-quarter, totaling $2 trillion, and decreased 25 percent, or $670 billion, year-on-year. Private sector deposits decreased 23% for 554.8 billion pesos quarter-and-quarter, while private sector deposits decreased 875 million pesos quarter-and-quarter. The decrease in private sector deposits was led by CAM deposits, which decreased 30% for 374.2 billion pesos quarter-and-quarter, while demand deposits decreased 16% for 174.3 billion pesos. Within private sector deposits, pesos deposits decreased 24% or 549.7 million pesos, while U.S. dollar deposits decreased 28% or 351 million. As of September 2023, Banco Macro's transactional accounts represented approximately 46% of total deposits. Banco Macro's market share with private sector deposits as of September 2023 totaled 5.3%. In terms of asset quality, Banco Macro's non-performing total financial ratio reached 1.39 percent. The coverage ratio measured at total allowance under expected credit losses over non-performing loans under central bank rules remained stable at 133.93 percent. Consumer portfolio non-performing loans deteriorated five basis points, up to 148 from 143 percent in the previous quarter, while commercial portfolio non-performing loans improved four basis points in the second quarter of 2023, down to 1.14 percent from 1.18 percent in the previous quarter. In terms of capitalization, Banco Madras accounted an excess capital of 788.3 billion pesos, which represented a total regulatory capital ratio of 37.9 percent and a tier one ratio of 34.8 percent. 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 99 percent. 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 pitching standards, and we keep a well-atomized deposit base. Finally, on November 2nd, 2023, the Central Bank of Argentina approved the sale of Itaú Argentina, now Banco BMA, to Banco Magro. Banco Magro has now acquired 100% of the shares and votes of Banco Itaú Argentina and its subsidiaries. Itaú African Management and Itaú Valores. The price of the agreement was set at 50 million U.S. dollars, which was paid on November 3. An additional amount resulted from a potential adjustment that will be eventually set based on the results obtained by Bank of Itaú Argentina and subsidiaries between April 1, 2023, and the closing date will be determined at a future date. At this time, we would like to take questions that 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 touchtone phone. If you are using a speakerphone, 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 today is from Ernesto Gabilanto with Bank of America. Please go ahead.

Good morning, Gustavo, Jorge, and Nicolas. Thanks for the opportunity. My first question will be on the potential economic outlook for Argentina. Which do you think could be the key execution risks for the new administration? How do you see the possibility to implement structural reforms, considering that Congress could be kind of divided as neither the officialism or the right parties will have the majority. Also related to this macro-political context, we have seen Caputo will be appointed as the new economy minister. He has been hinting that the capital controls will not be lifted right away and the dollarization process will be a medium-term target. So having said that, how are you seeing the dual currency in the medium term? How should we think about the Argentine peso against the blue sheep? And considering the high inflation levels, when should we start to think of lower rates for Argentina? And I will also kind of relate it to this. We have been seeing that Millet will want to remove the central bank, reduce all the leaks exposure. So if that happens, how are you positioning this excess liquidity? Do you want to allocate it into loans? But again, considering this context of high levels of interest rates and inflation, How fast do you think will be the credit demand next year? Thank you.

Hi, Ernesto. Good morning. This is Jorge Carinzi. Thanks for your questions. I will try to summarize my answers. On the outlook for 2024 for Argentina, I think that's... even though it is a bit early, but most of the economic consultants in Argentina are like dividing next year into two. The first half with a higher inflation compared to the second half, basically because of at least the market is expecting some devaluation on the official effects. and some adjustments on tariff prices and also on oil and gas prices. And that would affect short-term inflation. And therefore, the first half of 2024, we should be seeing a high inflation number compared to the second half, again, according to local economies here. In terms of the new administration, Honestly, it seems to be like a year ago they were elected. However, it's only one week since Millet was elected president. For sure, things in Argentina run in a very high speed. However, we are still two weeks before December the 10th when he's going to be appointed in. Therefore, in the last week, we have seen or heard many names to be appointed as ministers, and they were, like, laid down. New names appeared. So I would say that we have to be a little bit careful and patient on the names, on the ministers that will help Millet to tackle the next four years for Argentina. I think that the biggest challenge for Millet basically is inflation, of course, and how he will try to reduce the fiscal deficit, also with the reform that he's planning to send to the Congress. And again, here at the Congress, he will need the help of because the amount of deputies and senators belonging to Millet are very few. Honestly, it is not an easy task as of today to make what is going to happen in the next 30 or 90 or 120 days of Millet's period. So we have to be a little patient on that and to see how things evolve. According to Millet's statement, he has a clear picture on the economic, monetary, and fiscal situation, and he will try to do his best on the measures. But again, we have to wait because measures will be taken from December the 10th onwards, and law projects are going to be sent to the Congress after December the 10th. So we have to wait a little bit more to see official announcements and not only newspaper statements on Millet's proposals. And this is including everything. Also, the dollarization that two months ago was an issue and now apparently is not a big issue that could take place in two or three years after the normalization of the economy. Same happened with the situation of the central bank, that now the last statements are saying that the central bank is not going to be closed day number one, but he wants to improve the balance of the central bank first. So, again, a bit of patience on the evolution of the announcements and the official statements low projects and measures that will take place after December the 10th. In terms of Banco Macro, we decided to reduce at some point the exposure to the central bank. So at late September, about more in the fourth quarter, we decided to start the reduction of the elite exposure with the central bank. At some point, reducing some institutional deposits, also extending additional loans, short-term loans to AAA companies, and also increasing the amount of sovereign bonds in local currency in pesos, basically the dual bonds and dollar lien bonds. So, Ernesto, that was kind of a summary on the bunch of questions that you asked.

Very interesting, very interesting. Jorge, just a follow-up on this related to your exposure to dual bonds and dollar-linked bonds. So how are you thinking for next year? Because we have seen that most of the banks have benefited because they have not been lending and they have been using this excess liquidity into these securities. So thinking that next year could be more challenging. And actually, in this quarter, we saw a lot of volatility. You did very well in terms of FX gains, but we have some losses in the security. So how should we think about this, or how should we think about the sensitivity, which are the variables that we will have to be looking in the next quarters?

Yeah, I mean, you're right. In the third quarter, there was some declining prices, basically, on the dual bonds and dollar-linked bonds as a consequence of some statements made by Millet at that time. However, what we are seeing in the fourth quarter is a big recovery in the prices of these bonds. And nowadays, the markets continue showing some... hedge against the potential devaluation of the official effects. So the fourth quarter performance on these bonds is looking very good. Honestly, this is a way that we have been mentioning this many times, that it's a way of hedging the equity of the bank, since banks cannot be long in dollars. So we found this as another way way of protecting the equity of the bank. For next year, I think that conditions might change depending on how the market evolves, how inflation expectations are for the second half. If expectations for inflation decline, this could bring, and of course, in hand-in-hand with the decline of nominal rates, this would bring additional loan demand But again, this if happens is going to happen by the end of 2024. So I think that next year should be challenging. And at some point, banks would have to see where to allocate the excess liquidity. And in the case of Banco Macro, as we have been proving in last years, we always try to allocate excess liquidity in profitable assets with a risk-reward equation to be positive for the bank, always looking at profitability, solvency, and liquidity. So that's the idea, Ernesto.

Excellent, Jorge. And just a last question. How do you see the ROE for this and for next year?

I mean, for this year... while the fourth quarter is not close yet, we might see something in the area of high teens or maybe close to 20%, depending on the evolution of bond prices. So in that area. For next year, tougher to forecast. Let's assume that we are working with a scenario between 10% to 15% in real terms.

Perfect. Perfect. Thank you very much.

The next question is from Brian Flores with Citibank. Please go ahead.

Hi, Tim. Thank you for the opportunity to ask questions. I have two questions. The first one is on the strategic rationale of deposits. We saw, contrary to some of your peers, a shrinkage in deposits on a quarter-on-quarter basis. So I just wanted to understand... What is your rationale behind this? That is my first question. And then on the second question, we saw some effects on the effective surgery. I think the notes were very clear. I was wondering if these effects are recurring in nature. We should see something more for the remainder of the year. Any other insights here is very helpful. Thank you.

Hi, Brian. How are you? Let's start with the second question. In terms of the taxes, I mean, if you look at the ninth month income tax rate, it is 35%. And basically, it was slightly below in the first two quarters. And basically, the third quarter, we are catching up in order to reach the 35% income tax statutory rate that we have here in Argentina. In terms of your first quarter, the behavior of deposit is related to what I mentioned to Ernesto's questioning. I mean, we decided at some point to reduce some institutional deposits in the tragedy of reducing the allocation of assets and exposure to the central bank. basically because we decided to pay lower interest rates to those depositors that they move to other banks. That is the main reason for that.

Okay, perfect. And then just to confirm, because I didn't hear very clearly, you were thinking about ROE for next year between 12 and 15. Is this correct?

If that is correct, again, very preliminary estimates, because, of course, next year is going to be an important year in the sense of we are going to have a new president, a new economic cabinet, new measures. So as of today, we are working with that scenario. That could change at the beginning of 2024, depending on the measures and, of course, the outcome. that the current might be looking for in terms of inflation, GDP, etc.

Keep it here. Thank you.

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

Thanks very much, Nicolas and Jorge, for the chance to ask questions. So, Jorge, I want to circle back on kind of the prior question, the initial question that, well, Ernesto made multiple questions, but one of the topics that he wanted to discuss was LELIC's exposure. So, and in this case, really talking about Banco Macro, but, you know, as a CFO of one of the largest banks, if you can provide some insights into, at this point, what do you think is the new administration's plan for the LELIC? Because it seems to me, right, you know, here talking based on on what i see here from new york would be that the market solution that the new administration is talking about could be just exchanging the stock of the leaks for longer-term government bonds is that the way you see it as well and i'm not you said the new administration hasn't even taken off if you're going to do that december 10th it seems like a year since uh... millie won the election but it has only been a week and also if at this point you think that the restructuring of the leaks could include any haircut to the principle. I would assume going forward that there's going to be very little, if any, new issuance from LELICS, but I wanted to also get your thoughts in terms of how you think this administration is going to treat that stock of outstanding LELICS. Thanks very much, Jorge.

Nicolás, I will answer your question. Honestly, what we've heard for the moment in terms of what the new administration might be doing are only unofficial comments. All of them are unofficial and we have heard a bunch of different measures. In terms of Banco Macro, I can tell you that, as I mentioned before, we decided to reduce this exposure to the central bank. So, we are going to reach December with no exposure to the leaks. I mean, 0% of the leaks exposure to the central bank started in December. So this is a process that we started almost two months ago. And according to what we've seen in the last auctions, there are other private banks that are following the same path that we initiated two months ago. So at some point, I would say that the new administration is going to have a much smaller amount of LELICs to work on. In my personal view, most of that is going to be in hands of public-owned banks. But honestly, I don't know what they are going to offer or what they are going to do with the LELIC stock that is going to be much, much smaller after December 10th, considering what we have seen in the latest auctions. But honestly, Nicolas, it is not easy for me to tell you what they are going to do, honestly, because all the statements have been very unofficial and according to the press, I still don't know if Caput is going to be the corner meter or if he's going to go to the chamber bank. So again, a lot of speculations there, so it would not be fair for me to comment on on those kind of measures.

And so, Jorge, if I can, one follow-up. So you said by the end of this year, by the end of December, we plan to have zero LELICs in our own balance sheet. Would you feel comfortable moving all of that exposure just from a central bank liability to just owning a federal government bond? Or would you prefer to reallocate those LELICs into a mix of national government bonds, but also some loans to the private sector?

Yes. I commented that, Nicolas. I mean, we started, this was a process that lasted for two months. It was a gradual process of decreasing the amount of the leaks. And on the other hand, reducing the amount of some institutional depositors, plus extending new loans to private companies, AAA, in the short term, plus at some point increasing exposure to sovereign bonds in pesos. So it's a combination of all that. Okay.

Thanks very much, Jorge.

You're welcome.

Again, if you have a question, please press star, then 1. The next question is from Carlos Gomez with HSBC. Please go ahead.

Thank you so much. So two questions. One is when one looks at your equity, It has barely changed year-on-year. Should we expect in the fourth quarter or just . The second question is regarding the acquisition of Itaú, Argentina. Could you give us some indication about how this is going to affect your .

Mr. Gomez, this is the conference operator. Unfortunately, your line seems to be breaking up. Could you try repeating your first question?

Hello?

Go ahead, Mr. Gomez.

Yes, and apologies for the quality of the line. My question was regarding the changes in shareholders' equity, which have been almost zero year on year, and I wanted to know exactly why that is, if it is the valuation of the bond. Second, if you could give us an indication about the impact of the acquisition of Banco Itaú Argentina on your capital pressures.

Thank you. Hi, Carlos. How are you? In terms of the equity evolution, I mean, this is a consequence of the cash dividend that we've been paying. reducing the amount, of course, of the equity, plus the increase on the results in real terms, and that basically in the first nine months of the year are kind of compensating for the cash dividend payment, basically. So this is why the equity is not changing that much compared to last year. In terms of Itaú, we are, I mean, it's not going to have a major impact in our capital base. The excess capital is going to continue to be similar than the one that we published in the third quarter. Basically, remember that for the payment, we issued a local debt, one-year duration for the payment of Itaú. So basically, the capital wage is not going to be alterated at all.

Thank you so much.

Welcome, Carlos. The next question is a follow-up from Nicolas Riva with Bank of America. Please go ahead.

Thanks very much, Jorge, for taking my follow-up question. One question about your dollar position outside of the country. One of the things that the CEO of Itaú mentioned in their earnings call was that an advantage for the Aquarium Bank and for them to sell, really, was that the Aquarium Bank, Banco Macro, could pay with dollars outside of the country. From what I remember, when you issued the 2026 bond for $400 million in 2016... Most of those $400 million were kept offshore. If you can remind us what's your dollar position outside of the country. I know that you just mentioned that you did issue a local bond to pay for the $50 million, but if you can remind us your dollar position outside of the country, that would be very helpful. Thanks.

Give me one second, because please, I have to check at the end of September, what was the broad list? Sorry, Nicolas, for the delay. $350 million as of September 2023 are kept in correspondent banks abroad.

Okay. So that's essentially the $400 million you had issued back in 2016 minus the $50 million to acquire Itaú, essentially. Yeah, approximately. Okay. Okay. Thanks very much, Jorge. You're welcome.

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

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

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.