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 the Banco Macro's 2Q2024 earnings conference call. We would like to inform you that the 2Q2024 press release is available to download at the Investor Relations website of Banco Macro at www.macro.com.ar. 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 Menriquez, Chief Executive Officer, Mr. Jorge Scalinci, Chief Financial Officer, and Mr. Nicolas Torres, IR. Now, I will turn the conference over to Mr. Nicolas Torres. You may begin your conference.

Thank you, Nico. Good morning, and welcome to Banco Macro's second quarter 2024 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 2024 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 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 IES 29 to reflect the accumulated effect of the inflation adjustment for each period through June 30, 2024. I will now briefly comment on the bank's second quarter 2024 financial results. In the six months ended June 30, 2024, Bank of Macro's net income totaled 93.1 billion pesos. This result was 55% or 115.9 billion pesos lower than in the six months of 2023. As of the second quarter of 2024, the accumulated annualized return on average equity and the accumulated annualized return on average assets were 5.4 and 1.7% respectively. In the six months ended June 30, 2024, operating income before general administrative and personal expenses totaled 2.38 trillion pesos, 36% or 628.2 billion pesos higher than in the six months of 2023. Net operating income before general and personal expenses for the first half of 2024 were 1.59 trillion pesos, increasing 41% or 464.7 billion pesos when compared to the first half of 2023. Bank of America's second quarter 2024 net income total at 233.2 billion pesos loss, which was 559.6 billion pesos lower than the previous quarter, and 397.3 billion pesos lower year-on-year, mainly due to the mark-to-market of government securities, financial assets at fair value to profit or loss, and lower FX gains registered in the quarter. It is important to notice that if government securities, including financial assets at fair value to profit or loss, namely Inflation-adjusted bonds due in 2027 have been valued instead at amortized cost to second quarter 2024 net income would have been 605.5 billion pesos higher. Furthermore, as it is probably known, Banco Macro recently exercised about half of some of the put options that it held on certain inflation-adjusted securities. Given the current breakdown of our government securities portfolio, the bank estimates that net income could have been around 300 billion pesos higher had the remaining inflation-adjusted securities been valued at amortized cost. In the second quarter of 2024, provision for loan losses totaled 16.5 billion pesos, 26% or 5.9 billion pesos lower than in the first quarter of 2024. On a yearly basis, provision for loan losses decreased 20% of operating income after general and personal expenses were $99.1 billion in the second quarter of 2024, 93% or $1.4 trillion lower than in the first quarter of 2024, and 85% or $544 billion lower than a year ago. In the quarter, net interest income totaled $188 billion, 6% or 12.7 billion pesos lower than the first quarter of 2024 and 53% or 213.1 billion pesos lower year-on-year. Interest income decreased 27% while interest expenses decreased 33%. In the second quarter of 2024, interest income totaled 619.7 billion pesos 27% or 229.8 billion pesos lower than in the first quarter of 2024, and 46% or 521.4 billion pesos lower than in the second quarter of 2023. Income from interest on loans and other financing totaled 410.2 billion pesos, 26% or 142.7 billion pesos lower compared with the previous quarter, mainly due to a 25.9 percentage point decrease in the average lending rate, which was partially upset by a 9% increase in the average volume of private sector loans. On a yearly basis, income from interest on loans decreased 10% of 45.2 billion pesos. In the second quarter of 2024, interest on loans represented 66% of total interest income. In the second quarter of 2024, income from government and private securities increased 40% of 4.7 billion pesos quarter-on-quarter, and decreased 74% of 157.2 billion pesos compared with the same period of last year. In the second quarter of 2024, income from prepos totaled 48.7 billion pesos, 73% or 131.4 billion pesos lower than the previous quarter, and 29% or 19.5 billion pesos lower than a year ago. In the second quarter of 2024, FX income totaled 25.6 billion pesos, 73% or 69.9 billion pesos lower than the previous quarter, and 91% or 256.1 billion pesos lower than a year ago. FX income gain was due to the 6.3% Argentine peso depreciation against the U.S. dollar and the bank's long dollar position during the quarter. It is important to notice that the bank's average long dollar position decreased 59% during the quarter. In the second quarter of 2024, interest expense totaled 431.7 billion pesos, decreasing 33% of 217.1 billion pesos compared to the previous quarter, and 42% or 308.3 billion pesos lower when compared to the second quarter of 2023. Within interest expense, interest on deposits decreased 33% of 208.8 billion pesos quarter on quarter, due to a 25.4 percentage points decrease in the average rate paid on deposits, while the average volume of deposits from the private sector increased 16%. On a yearly basis, interest on deposits decreased 42% of 304.5 billion pesos. In the second quarter of 2024, the bank's net interest margin, including effects, was 19.9%, lower than the 26.2% posted in the first quarter of 2024 and the 38.3% posted in the second quarter of 2023. In the second quarter of 2024, Bank of America's net credit income totaled 95.7 billion pesos, 8% or 6.8 billion pesos higher than the first quarter of 2024, and was 2% or 2.1 billion pesos lower than the same period of last year. In the second quarter of 2024, net income from financial assets and liabilities at fair value to profit or loss totaled 121.2 billion pesos gain, decreasing 92% or 1.39 trillion pesos in the quarter. This gain was smaller due to the negative marked market of some government securities. Basically, inflation adjusted bonds in the amount of 1.41 trillion pesos. In the quarter, other operating income totaled 46.2 billion pesos, 7% or 3.3 billion pesos lower than the first quarter of 2024. On a yearly basis, other operating income increased 62% or 17.8 billion pesos. In the second quarter of 2024, Bank of Macro's administrative expenses plus employee benefits totaled 203.5 billion pesos, 15% or 35.3 billion pesos lower than in the previous quarter, due to lower employee benefits, which decreased 14%, and lower administrative expenses, which decreased 17%. On a yearly basis, administrative expenses plus employee benefits increased 14% or 25.6 billion pesos. As of the second quarter of 2024, the accumulated efficiency ratio, which 22.2%, deteriorating from the 14.7% posted in the first quarter of 2024 and the 22.2% posted one year ago. In the second quarter of 2024, expenses decreased 14% when net interest income plus net fee income plus other operating income decreased 77% compared to the first quarter of 2024. In the second quarter of 2024, The result from the net monetary position totaled 462.7 billion pesos loss, 56% or 591.3 billion pesos lower than the lowest posted in the first quarter of 2024, and 14% 56.1 billion pesos higher than the lowest posted a year ago. The result is a consequence of lower inflation during the quarter. Inflation was 18.6%. in the second quarter of 2024 compared to the 51.6% registered in the first quarter of 2024, while the net monetary position remained unchanged. In the second quarter of 2024, given MACOS-negative net income for the quarter, no income tax charge was recorded. Part of that information is provided in Note 21 to our financial statements. In terms of loan growth, the bank's total finances reached 3.47 trillion pesos, increasing 17% or 504.1 billion pesos quarter-and-quarter and 5% or 154.5 billion pesos higher year-on-year. Within commercial loans, documents stand out with a 7% or 43.6 billion pesos increase when others increase 27% or 158.3 billion pesos. Within consumer lending, personal loans increased 29% or 111.9 billion pesos while credit card loans increased 11% or 77.8 billion pesos. Peso financing increased 20% or 563.8 billion pesos in the quarter, while U.S. dollar financing increased $2 million. It is important to mention that Banco Macro's market share over private sector loans as of June 2024 reached 9.1%. On the funding side, total deposits increased 13% or 769.5 billion pesos quarter-on-quarter, totaling 6.74 trillion pesos, and decreased 5% of 329.3 billion pesos year-on-year. Private sector deposits increased 11% of 591.5 billion pesos quarter-on-quarter, while public sector deposits increased 30% of 181.9 billion pesos quarter-on-quarter. The increase in private sector deposits was led by D-1 deposits, which increased 23% of 583 81.5 billion pesos, while 10 deposits decreased 2% of 54.5 billion pesos quarter-on-quarter. Within private sector deposits, pesos deposits increased 17% or 774.6 billion pesos, while U.S. dollar deposits decreased 6% or 97 million dollars. As of June 2024, Bank of America's transactional accounts represented approximately 52% of total deposits. Bank of Macros market share over private sector deposits as of June 2024 totaled 8.1%. In terms of asset quality, Bank of Macros non-performing to total financial ratio reached 1.23%. The coverage ratio measured as total allowances under expected credit losses over non-performing loans under central bank rules reached 181.4%. Consumer portfolio non-performing loans deteriorated five basis points, up to 152% from 147% in the previous quarter, while commercial portfolio non-performing loans deteriorated one basis point in the second quarter of 2024. In terms of capitalization, Banco Macros accounted an excess capital of 2.36 trillion pesos, which represented a capital adequacy ratio of 35.7% and a tier one ratio of 34%. The bank's aim is to make the best use of this excess capital. Long-term liquidity remained more than appropriate. Liquid assets to total deposit ratio reached 98% in the second quarter of 2024. Overall, we have accounted for a positive first half of 2024. We continue showing a solid financial position. Asset quality remains under control and closely monitored. We keep on working to improve more our efficiency standards, and we keep a well-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 then 1 on your touchtone phone. To withdraw your question, please press star then 2. One moment, please, while we poll for the first question. And our first question today will come from Ernesto Gabriando with Bank of America. Please go ahead.

Thank you. Hi, good morning, Jorge and Nico. Thanks for the opportunity to ask questions. My first question will be on your long road and asset quality expectations for this next year. And then my second question is if you can elaborate a little bit more on the puts that macro executed with the central bank And also, if you know the timeline and the implications of the repos that the central bank is proposing. And also, can you remind us how much is your position on securities linked to inflation and what will be your strategy going forward with these instruments? And finally, my last question is on ROE. How do you see it for the end of the year? and what you think will be the sustainable level. Thank you.

Hi, Ernesto. This is Jorge speaking. How are you? About your first question in terms of asset quality, I think that the level that we are showing is extremely good and low. I think that going forward, if the economy recovers, as is expected for 2025, we are going to be a bit more aggressive in growing in lending, and therefore delinquency could rise a little bit. But to manageable levels, again, I think that this is already commented before, but Since 2008, the peak that we had in our delinquency rate was 3% in 2009. So I think that without any problems, we could be right in this, the current ratio between 2 and 2.5 without any problem in the case that we become more aggressive in lending. I will go to your third question. I will leave your second question for For the last one, the third question about the bonds that we have that are adjusted to inflation. Currently, we have a level of 3.7 billion pesos, or in your case, it's trillion pesos of bonds that are tied to inflation. This is approximately 120% of the equity, and it's also 110% of the monetary position. The monetary position is the one that is basically the one that adjusts our income statement to inflation. And in that sense, we are linked to hedge against inflation. Going forward, I think that depending on what's happening with the inflation rates, that last month was 4% on a monthly basis, and we believe that inflation is going to continue in the downward trend. However, we are, according to the economy that we listen, they are not expecting inflation to become below the 2% unless until November, December. And the probability of that is maybe the order of 50%. So for the moment, we are going to keep this portfolio tied to inflation. And if market conditions change, we are going to, at some point, maybe exercise the boot option or make it into a swap into fixed rate nodes depending on market conditions. In terms of your fourth question, in terms of how are we going forward, for 2024, we think that we would be ranging between 10% and 13%. In real terms, going forward and in a more sustainable level, we think that we could be delivering between 15% to 20% ROE in real terms. And your second question about the exercise of the production that we did the 1st of July. Basically, the ALCO decided to execute half of the position of the bond that we have tied to inflation after the conference that the co-minister and the president of the central bank held, saying that the amount of pesos was going to be fixed in the market. Therefore, we decided to execute that position in order to get extra liquidity and to have more elements in order to be more aggressive in future lending. And on the repos that the central bank is offering, I mean, that is for banks which have some transitionary liquidity problems. I think they are okay. In our case, we are extremely liquid. We are not, of course, using those repos. But the repos are good. always there, they have been always there, and the only thing is this new thing is that the central bank reduced the interest rates on the repos to a level of 48%, so to make it more accessible for banks in order to get extra liquidity. So I think that answers all your questions, Ernesto.

Yes, thank you very much, Jorge. Just a follow-up. The first one is, well, two follow-ups. One in terms of the long road, So any color on what could be the pace of long road for this year and for next year? And then the other follow-up, you were mentioning that you executed half of the puts. So can you just remind us how was the amount of those securities that you held before?

Yeah. In terms of, I've got you a second question. Yeah, you executed half of the options that we had was like 2 trillion pesos in bonds that we exercise and sell to the central bank. And that amount of pesos we received as extra liquidity. And currently we hold another 2 trillion pesos in put options in case that we want to exercise these inflation-linked bonds to the central bank. Going to the loan growth for 2024, we expect to have positive rates in the order of maybe 15% area for 2024. And we believe that with a recovery on GDP in 2025, we could be at least 30%, 35% positive rates of growth in loans for next year.

Excellent. Thank you very much, Jorge.

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

Hi, Jorge, Nicolas, and Tim. Thank you very much for the opportunity. I wanted to ask on NIMS, right, because, as you say, repos are still helping, but I think the average earned yields are decreasing. Also, you have some relief on the deposit base. And I know this is a very hard question, right, because it's a very fluid environment. But when do you think NIMS could stabilize? I think that's my first question. And then on a second one, you mentioned capital, right? Do you have any updates on any regulatory changes that would allow you to distribute maybe higher dividend yields going forward? Thank you.

Hey, Brian, how are you? Let's answer your second question first. I mean, we have to wait till next year. For the moment, we haven't seen any new regulation coming. Remember that when we have to pay dividends, basically when the board proposed to the shareholders meeting, the payment of dividends is in March. So we have to wait till next year. At that time, it's basically when the central bank always put a new regulation on the amount of dividend that basically could be delivered and the amount of installments. Remember that last year, the number of installments were six. This year, the number of installments were reduced to three. So I think that we are positive in the way that the economy conditions improved. and then central banks, which have increased going forward, we are positive that we could be allowed to pay dividends maybe in only one installment, and that would be positive. In terms of your first questions and NIM, you have a chance to go through the NIM in pesos increase, so expanded dividends. Basically, you were right, there was some little increase in the cost of funds. Remember that in our case, the amount of transactional deposits where we paid almost 0% there is almost 45% of total deposits. And on the time deposit side, basically in those that we are the financial agent of the four provinces, we could be paying slightly below average interest rates. So this gives us a kind of slight competitive advantage in order to continue expanding a little bit the NIMS. And going forward, we think that the NIMS are going to remain pretty stable. So the increase in the net interest income

is going to come through the increase in in lending uh through and all hand in hand with increasing in the funding uh perfect if i can follow up just with your last comment um how is demand evolving what do you think or where do you see the biggest opportunities to grow your your long book right now i mean there was a decrease in

interest rates in the system that was a consequence of the reduction in in inflation and we think that there was a recovery in lending in most of the areas basically snes and some consumer going forward we think that we that we see some recovery in in the real levels of salaries we are going to see consumption pushing a little bit harder and also if we are having these uh new investments on uh in different areas uh as a consequence of this rigi program approval for companies and we are going to see also corporates or companies also demanding for a new landing so it is going to be across the board we think in 2025 Imagine that the level of lending that we have is pretty sluggish or pretty low. It's around 6% of loans to GDP. So we think that the potential growth here is huge.

Thank you. You're welcome, Brian.

The next question comes from Marina Mertens with Latin Security. Please go ahead.

Hi, good morning, and thanks for taking my question. So in the previous two quarters, results were driven by the strong performance in the securities portfolio, which the trend reversed this quarter and negatively impacted results. Do you expect the securities portfolio to keep on driving results in the remainder of the year, or when should we expect to see the increase in loans to have a more relevant impact on results. Thank you.

Hi, how are you? I mean, in terms of income coming from the bond portfolio, as we stated in the press release, after executing or exercising half of our bond portfolio, or the puts that we have on the bond portfolio. The remaining half of that, the ALCO decided to account it on the cost plus yield instead of having market to market. So going forward in coming quarters, we are going to see more stability in the results coming from bonds. And we think that With the pickup in lending, we are going to start seeing that loans or in this case interest income from loans are going to start having a bit more or better performance in the income segment line.

Great. Thank you very much.

You're welcome. The next question comes from Yuri Fernandez with JP Morgan. Please go ahead.

Thank you, guys, for the opportunity of asking questions. Just one on these loans versus securities mix, right? And even on the securities mix, right, you have this, I think it's LEFI, this new instrument that is a one-year. Basically, my question is, like on loans and on this LEFI, maybe you are increasing the duration of your assets. I think the fiscal liquidity letter is one year, although you have the put you can sell this, but I think like it's a one year term kind of instrument, you are growing more your loans. So trying to think about your net monetary results, like inflation is moving lower, so this should be a tailwind, but having more loans and having less, I would say, inflation-linked securities, how to think about your balance sheet versus inflation, right? If inflation is wrong and inflation starts accelerating, is the balance sheet getting riskier at some degree because you have more, you know, longer term maturity assets than you used to have in the past when you have more short term instruments? That's my first question. My second question is regarding further M&As, right? You just had Itaú. I think that is, consolidation to happen in Argentina so I just would like to know the appetite of Banco Macro for for new new opportunities if your message is well let's digest it all let's keep working what we have or or no we have a lot of excess capital and we are still you know open for new opportunities and a third question more on regulatory updates right this is still I think an important topic if you can remind us what can be the next central bank regulatory change that can benefit the banks. I think there were many moving parts on rates and reserve requirements. What should we expect for the future on the regulatory front to be a tailwind for you? Thank you.

Hi, Julio. In terms of your first question, I mean, holding these inflation-leading securities, we are hedging our balance sheet against the adjustment for inflation on the monetary position. So by increasing a little bit the duration of our loan book and always having positive real rates, the impact on the balance sheet and the impact on the inflation adjusted income statement is going to be positive. So we are not seeing any challenge or any damage or risk there. So it doesn't mean that the increasing duration is going to negatively affect our exposure to inflation, no. On the second question about money opportunities, yes, we are going to complete the legal merge with Itaú in the fourth quarter of this year. So by December of this year, everything is going to be under Banco Macro's umbrella. Going forward, I mean... We will be keeping a close eye to any opportunity that might happen in the banking sector. We think that we are one of the only buyers here, so any potential player that could be interested in leaving, I think that is going to knock our door. So we're going to be keeping a close eye, as I mentioned before there. On the third question, central bank regulations that could improve a little bit the banking industry, I think that there are many. I think that little by little the central bank is working on different regulations, but they want to go very slowly. They do not want to make any mistakes and to take a measure that after two weeks they have to turn it around. So I think that they are little by little removing the gaps on interest rates, as they remove the floor on the deposit rates. So I think that the central bank is working really good here, going very slowly because there is a complete bunch of regulation that needs to be removed, but carefully. So going forward, I think that... they are going to have these new regulations on the positive for the banking sector in order to be less regulated. And that is going to be, in our view, positive for the big players as Banco Macro.

Super clear. Thank you very much.

Welcome.

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

Hello, good morning. Two questions. The first one is if you could explain in simple terms for us what happened to the bond portfolio this quarter, what is that in contrast to the previous quarter's and what we should expect in the coming quarters, what should be the normal profitability yield on securities that we might expect. And, yes, and I think that will be it, yeah.

Thank you very much. Well, no, I mean, as of June, I mean, we decided to execute or to exercise the put on half of our position, and that happened the 1st of July. So at the end of this second quarter, that's why the portfolio remains, in terms of the amount of bonds that we have, remains the same. In the third quarter, you're going to see the impact of the exercise of the puts and a reduction in the bond portfolio. And again, we said to make a change in the accounting. Instead of having market to market, it's going to be at a cost plus yield. So going forward, if we are maintaining this amount of bonds, a more reasonable level for the income from the bond portfolio is going to be in the area between 30 to 50 trillion pesos on a quarterly basis.

Okay. And the position that you exercise, you have it now in CPI linkers, right? Yes. Yes. Okay, very good. And then my second question, sorry I didn't ask before, is regarding your capital and the fact that you're paying a big dividend. I mean, the prospects have changed. You are doing M&A. There is long growth in the system. Would you review, I mean, we know that you have a lot of excess capital, but I mean, we could see a lot of it consumed pretty rapidly if long growth indeed goes up. Would you consider for the coming years perhaps you want to retain more capital? rather than pay more dividends?

I mean, if you see the reduction in the capital ratio from the first quarter to the second, you can see that it was a reduction. Looking at tier one, we're from 44.5% to 34%, so 10% each point there, because of the payment of dividends. going forward we agree and of course we would like to have a more uh normalized level of success capital but the combination of organic growth that we think that we are going to need for future years plus some emanating opportunities that might have in the past that we think that that would appear some other banks wanting to to leave argentina and uh the the they're yet to continue to pay attractive cash dividends. I think that that is the need that we want to maintain. So going forward, a more sustainable ratio for capital in the future for macro could be in the area of 18% to 22% T01, not the current level. So that is going to be consumed through organic growth plus cash dividends. first, and then the opportunity for another M&A. So going forward between 19 to 22 seems more reasonable for us. That is what we would like to have in the future with a maybe higher market share performance in the system.

And to go back to the M&A, and we understand you are open to all possibilities, is there anything in the works or anything that, you know, would you anticipate that you might be considering another transaction, let's say, in the next three or four quarters?

No, honestly, we are not looking to anything for the moment. I think that if something happens, it could be next year. I don't know exactly which, how many quarters, but next year or in 2026. Okay, that's clear. Thank you.

Thank you, Carlos. There are no more questions at this time. This concludes the question and answer session. I will now turn the call over to Mr. Nicolas 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.