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Banco Macro S A (BMA) Q1 2019 Earnings Call Transcript

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Banco Macro S.A. (NYSE: BMA)
Q1 2019 Earnings Call
May 10, 2019, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's First Quarter 2019 Earnings Conference Call. We would like to inform you that the First Quarter 2019 Press Release is available to download at the investor relations website of Banco Macro, at www.ri-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 *0 to signal the operator.

It is now my pleasure to introduce our speakers today. Joining us from Argentina are Mr. Gustavo Manriquez, Chief Executive Officer; Mr. Jorge Scarinci, Chief Financial Officer; and Mr. Nicolas Torres, Investor Relations.

Now, I'd like to turn the conference over to Mr. Nicolas Torres. You may now begin your conference.

Nicolas Torres -- Investor Relations

Good morning and welcome to Banco Marco's first quarter '19 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 20-F, which was filed with the SEC and is available at our website. First quarter 19 press release was distributed yesterday and is also available at our website.

I will now briefly comment on the bank's first quarter '19 financial results. Banco Macro's net income for the quarter was 7.3 billion pesos, 40% or 2.1 billion pesos higher than fourth quarter 18, and 106% higher from the 5 billion pesos posted a year ago. Based on an increased net interest income and net fee income.

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The bank's first quarter '19 ROE and ROA of 50% and 8.4% respectively remain healthy and showed the bank's earnings potential. Net income for first quarter 2019 included a 1.9 billion pesos positive results related to the sale of 51% stake that Macro had in Prisma, and the mark to market of the 49% remaining stake. Excluding Prisma's sale result recurring ROE and ROA in the first quarter '19 would have been 37.2% and 6.3% respectively.

Net operating income from first quarter '19 was 19.1 billion pesos, increasing 18% or 2.9 billion pesos quarter-over-quarter, and 78% or 8.5 billion pesos compared to the previous year. Operating income after general and administrative expenses was 10.5 billion pesos, 39% or 2.9 billion pesos higher than in fourth quarter 18. And 105% higher than a year ago.

In the quarter, net interest income totaled 12.9 billion pesos, 5%, or 643 million pesos higher than the result posted in 4Q18. And 63% or 5 billion pesos higher than the result posted one year ago. This performance can be placed to a 2% quarter-on-quarter increase in interest income, and a 1% decrease in interest expenses. On the interest income, interest on loans decreased 7% or 1.1 billion pesos quarter-over-quarter. On a yearly basis, interest on loans increased 59% or 5.4 billion pesos. In first quarter '19, interest on loans represented 60% of total interest income.

Net income from government and private securities increased 20% or 1.6 billion pesos quarter-on-quarter due to higher -- high interest rates. Compared to the first quarter of last year, net income from government and private securities increased 345% or 7.3 billion pesos. In 1Q19, differences in quoted prices of gold and foreign currency, including investment in derivative financing totaled a 250 million pesos-gain. During the first quarter 2019, Banco Macro's strategy was to sell U.S. dollars in the spot market, and invest the result in pesos in Leliqs. While, at the same time, hedging the FX position with investment in derivatives. This strategy proved to be highly successful and profitable during the quarter.

In first quarter of 2019, interest expenses totaled 11.5 billion pesos, 1% or 62 million pesos decreased compared to the fourth quarter of last year. And 238%, or 8.1 billion pesos higher on a yearly basis. With interest expense, interest on the profits decreased 1% or 57 million pesos quarter-on-quarter, mainly driven by an increase in the average volume of time deposits, and a decrease in the average time deposit interest rates. On a yearly basis, interest on the deposits increased 252% or 7.6 billion pesos.

In 1Q19, interest on deposits represented 92% of the bank's financial expenses. As of 1Q19, the bank's net interest margin, including FX was 17.2% higher than the 14.9 posted in 4Q18 and the 15.4 registered in 1Q18. In 1Q19, net fee income totaled 3.3 billion pesos, 2% higher than 4Q18. On a yearly basis, net fee income increased 40% or 951 million pesos. In 1Q19, net income from financial assets and liabilities at fair value through profit or loss totaled 2 billion pesos, increasing 442% or 1.6 billion pesos compared with 4Q18.

The positive result was driven by the market-to-market of the remaining 49% stake that Macro has in Prisma. In the quarter, other operating income increased 2.5 billion pesos. Other income stands out with a 2.3 billion pesos increase compared to the fourth quarter of last year related to the sale of the 51% stake that we had in Prisma. On a yearly basis, other operating income increased 423%, or 2.5 billion pesos. In 1Q19. Banco Macro's personnel and administrative totaled 5.2 billion pesos, unchanged from the previous quarter. Employee benefits were unchanged quarter-over-quarter. And compared to the first quarter of last year, general, administrative, and personnel expenses increased 53%.

As of March 2019, the efficiency ratio reached 28.6% improving from the 39.7% posted in 4Q18, and 35.2% posted in 1Q18. This was the result of a 1% increase in expenses, and a 28% increase in net interest income, net fee income, and other operating income as a whole in 1Q19.

Banco Macro, continues to be the most efficient bank in Argentina. If we exclude Prisma's sale effect, the efficiency ratio would have been 31.6% in first quarter '19. In first quarter '19, Banco Macro's effective income tax rate was 30.1% compared to 31% in 4Q18. The statutory tax rate was cut in the latest tax reform bill. And as of January 2019, it stands at 30%.

In terms of loan growth, the bank's financing to the private sector grew 1% quarter-on-quarter, 21% year-on-year. It is important to mention that Banco Macro's market share over private sector loans as of March 2019 reached 7.7%. On the funding side, total deposits grew 15% quarter-on-quarter, and 82% year-on-year. Private sector deposits grew 12% quarter-on-quarter, and 80% compared to the first quarter of last year. While, private sector deposits increased 46% quarter-on-quarter, and 104% year-on-year. As of March 2019, Banco Macro's transactional accounts represented approximately 37% of total deposits. Banco Macro's market share over private sector deposits as of March 2019, total 6.9%.

In terms of asset quality, Banco Macro's non-performing to total financing ratio reached 2.03%. And the coverage ratio reached 119.23%. In terms of capitalization, Banco Macro accounted an excess of capital, 52.1 billion pesos, which represented a total regulatory capital ratio of 27.7%, and a Tier 1 Ratio of 20.6%.

If we were to consider the upcoming cash dividend payment of 6.4 billion pesos with the current integrated capital, the regulatory capital ratio would be 25.3%, and the Tier 1 ratio would be 18.2%. The bank's aim is to make the best use of this excess capital. The bank's liquidity remains more than appropriate, liquid assets to total deposits ratio reached 66%. Overall, we have accounted for another positive quarter. We continue to show a solid financial position. Asset quality remains under control and closely monitored. We keep on working to improve our efficiency standards, and we keep on working our deposit base.

...

At this time, we would like to take the questions you may have.

Questions and Answers:

Operator

We will now begin the question-and-answer session. If you'd like to ask a question, please press *1 on your touchtone phone. If you'd like to withdraw that question, please press *2. One moment, please, for the first question.

And our first question comes from Gabriel Nobrega, with Citi. Please, go ahead.

Gabriel Nobrega -- Citi-Analyst

Hi, everyone. And thank you for the opportunity to ask questions. I wanted to maybe understand a little bit further why you have decided to fully write off the exposure you had through Molca? As we have heard from some of your peers that there are ongoing discussions with this company, it is still operating with around 20 factories, and some of your peers even mentioned that there could be a possible 50% of reversals. So, I'm just trying to understand why you have already wrote it off, if there could be this possibility of reversals down the road? And I'll make a second question afterwards.

Jorge Scarinci -- Chief Financial Officer

Good morning, Gabriel. This is Jorge Scarinci speaking. This was a decision of the credit committee approved by the board to make the write-off of Molino Cañuelas. It is true that the company is still working. It is also true that we think that we are going to recover a part of this. I don't know how to quantify. But yes, in the future, we are positive on this brand. But as of credit policy, both the credit committee, the senior credit committee and the board decided to write it off. It's an internal policy.

Gabriel Nobrega -- Citi -- Analyst

All right. And if you just allow me a follow-up here. Could you just remind us what was your direct exposure to this company?

Jorge Scarinci -- Chief Financial Officer

Yes. The direct exposure was approximately 390 million pesos.

Gabriel Nobrega -- Citi -- Analyst

All right. Perfect. I have a second question. It's also on asset quality. It got to my attention that during the quarter, your NPL ratios for the retail portfolio deteriorated around 40 bps. I understand that, that should have a significant portion of your loans in this portfolio as on payroll loans. And if I'm not mistaken, out of this, and around 50% are coming from the public sector. So, could you just maybe give us more color on what happened here? What should we be looking for through 2019? And also, if we have reached the peak from NPL ratios? Thank you.

Jorge Scarinci -- Chief Financial Officer

It is true what you are commenting here, 93% of our personal loans are tied to payrolls. Therefore, you have a 7% on the open market. So, this is the portion that is not performing really well. On the credit card business, we have approximately 64% of the credit card portfolio tied to the payrolls. Therefore, 36% is on the open market, and also here, this is a portion that is not performing well, and it is affecting the consumer non-performing portfolio.

Going forward, it is going to be very tight and hand-in-hand with the economy track here. Honestly, it's not very easy for us to predict what would happen with the economy in 2019 because, interest rates continue to be high. The central banks continue to discuss monetary policy. And for sure, real GDP is going to be down more than 1-1.5%. So, we think that when you look at some statistics, that we are reaching the bottom of the economic activity in terms of annual comparisons. So, we would get, according to data, we are in the worst part of the economic cycle, reaching this point, but it is not very easy to assure this with 100% of assurance.

So, we think that in terms of NPLs going forward, we are going to be around the 2-2.1%. We are not forecasting for the moment, major deterioration here in this ratio. Again, this is going to be in hand with what's happening with the economy, either losing in the interest rates after, or in the second half that it is going to be as a consequence of if monthly inflation goes down. Not very easy. But we think that according to what we are seeing, that we are going to maintain this around 2- 2.1% of NPLs going forward.

Gabriel Nobrega -- Citi-Analyst

All right, Jorge. That's very clear. Thank you.

Jorge Scarinci -- Chief Financial Officer

You are welcome, Gabriel.

Operator

And our next question comes from Alonso Garcia, with Credit Suisse. Please, go ahead.

Alonso Garcia -- Credit Suisse -- Analyst

Good morning. Thank you, for taking my question. My question, is regarding volume growth. Can you update us on your volume growth expectations for this year? Probably, for next year? When do you think, if any, when do you think credit demand could start picking up? What will be the main constraints or drivers for that to happen during the remainder of the year? Thank you.

Jorge Scarinci -- Chief Financial Officer

Hey, Alonso. Well, you've had the chance to see not only in Banco Macro, I think, but also in the other Argentine banks' press releases, quarter-on-quarter, loan growth has been very sluggish because, the economy is really bad, and interest rates are really high. So, it is not very easy to forecast volume growth for this year. Also, the consensus has been increasing inflation target for this year from high-20s to high-30s through to 40. So, I would say that this year, we might see some real decrease in terms of loan growth therefore, we should be growing nominally before inflation. So, these numbers should be ranging around 30% for this year, nominal growth for loans.

Of course, for next year it is tougher. Will depend on the economy and inflation. So, if having what the economic consensus is forecasting for next year, as interest rates should be going down sharply, also inflation cooling down, we expect that there's going to be a pick-up in loan demand, and therefore, we could be seeing some positive real loan growth next year. But again, this is kind of a monthly basis movie that can change depending on the monthly inflation that we are having in 2019. Also, take into consideration that we are in a year where we are going to have presidential elections in October. So, you have many different variables that could affect the economy in 2019 and 2020.

As a summary, I would say that this year, negative real growth, next year, positive real growth in loans. That is with the scenarios that we are working with.

Alonso Garcia -- Credit Suisse -- Analyst

Sure, thank you. And just a brief follow-up. Do you see any particular segment performing better than the rest of the portfolio? Do you see both commercial and consumer performing rather similarly?

Jorge Scarinci -- Chief Financial Officer

No. What we are seeing is that, from a nominal point of view, we are maintaining our consumer loan portfolio. The commercial loan portfolio, is slightly decreasing. Going forward, depending on the salary increases that might happen in the economy, we could see some pick-up in consumption. I would say that commercial portfolio will continue in a working capital phase. Maybe next year, we could see a bit more of investment depending on the economic horizon and the landscape. But not that big difference between the 2 portfolios.

Alonso Garcia -- Credit Suisse -- Analyst

Understood. Thank you, very much.

Jorge Scarinci -- Chief Financial Officer

You're welcome.

Operator

And our next question comes from Carlos Gomez, with HSBC. Please, go ahead.

Carlos Gomez -- HSBC -- Analyst

Yes, thank you. Going back to the loan growth. I was distraught by the fact that you have had no loan growth whatsoever, in pesos, in the last year. In fact, it's minus-2%. Should we see that as you being more conservative -- of the system? And is this something that you expect to continue going forward? Second, I have a technical question. The capital gain that you have experienced with Prisma, is it already in your capital ratios, or that is still to come? Thank you, so much.

Jorge Scarinci -- Chief Financial Officer

Hi, Carlos. How are you? On your first question, I would say that the strategy of the bank is, at this time, not to look at market share; it's to look at asset quality, and of course, profitability. So, if we have to lose some points of market share, no problem. We want to keep asset quality the best as we can. And of course, profitability, as high as we can. Again, that's why we are forecasting some negative real growth this year in lending. And we are focused on maintaining a lot of controls in asset quality, and a lot of controls in profitability.

Tough times, here. If we are going to have a negative performance there, well, that's the case. We are going to have positive performance in other ranges of the balance. But the board is very committed to asset quality and profitability at this time. So, that's what we are following here. Second question, nom, the revaluation is not in the capital ratios yet.

Carlos Gomez -- HSBC -- Analyst

Sorry. The sale -- not the revaluation is in the capital ratios, or one is and the other is not? How does it work?

Jorge Scarinci -- Chief Financial Officer

Sorry, can you repeat that, Carlos, please?

Carlos Gomez -- HSBC -- Analyst

Sure. You have the sale of 51%, of which 60% you record now. And then, you have the revaluation of 49% that you still retain of the company. Do either of those 2 parts get reflected in the capital ratios? Or it has not been reflected yet, for either of them?

Jorge Scarinci -- Chief Financial Officer

We're going to see the impact of the revaluation next quarter.

Carlos Gomez -- HSBC -- Analyst

But the gain already came this quarter?

Jorge Scarinci -- Chief Financial Officer

Yes.

Carlos Gomez -- HSBC -- Analyst

All right. Thank you. Can you give us the guidance? I mean, the impact that we should see from this valuation?

Jorge Scarinci -- Chief Financial Officer

Not for the moment. I do not have a precise number, so I do not want to give you a number that would change in the next quarter. So, I prefer not to give you a number now.

Carlos Gomez -- HSBC -- Analyst

Thank you, so much.

Jorge Scarinci -- Chief Financial Officer

You are welcome, Carlos.

Operator

Once again, ladies and gentlemen, if you would like to ask the question, please press *1. And our next question comes from Nicolas Riva, with Bank of America. Please, go ahead.

Nicolas Riva -- Bank of America -- Analyst

Thank you, so much, Jorge, for taking my question. I have an open-ended question. It's not about the numbers of the quarter. So, this year, we have elections in Argentina, and the two leading candidates are Macri and Cristina. We don't know if Cristina is going to run. But we know how Cristina's government, intervening the banking system, they put caps on interest rates, they put closing terms on interest rates and term deposits. So, my question is, how do you think a Cristina Kirchner-government would impact the banking sector, specifically? How are you prepared for that scenario? Thanks.

Jorge Scarinci -- Chief Financial Officer

Hi, Nicolas. It's not an easy question. First of all, we don't know if Cristina is going to be a candidate. We have to wait until June 22nd, to see if she's going to be a candidate. Second, if she's a candidate, according to the latest polls that we are seeing, she will be losing in the 2nd Round. Third, how could Cristina be in the 3rd mandate of Argentina? It's like, we are the 4th derivative of the presidential's attitude toward the banking sector. So, we should be doing a lot -- a lot of the positions here. So, I don't know how to answer that question.

Honestly, it's very -- or has a low probability to have an assurance here. Honestly, I don't know. I don't know what to say. Because, you need to have an -- you need to step a lot of barriers before. And then, I think that only she knows the answer to that question. So, it's impossible for me to know it. So, I'm sorry, but it's tough to answer that.

Nicolas Riva -- Bank of America -- Analyst

But Jorge, at least, is it fair to say that during the last few years of this administration, even though inflation was very high, and interest rates were high, as well, banks managed to do quite well, really, given the short-term duration of the loan portfolio. So, probably, the theory of consolidation of the banking system will get delayed. But I believe, based on the experience from current years in government, the banks managed to do reasonably well within that. Is that fair to say?

Jorge Scarinci -- Chief Financial Officer

Yes. Banks, at the time, we have a, I would say, good performance in terms of earnings. Valuations were not that good. But in terms of what happened between 2003 and 2015, I would say that the system improved a lot in terms of liquidity, solvency, capitalization also, concentration. So, yes.

Nicolas Riva -- Bank of America -- Analyst

Thanks, Jorge.

Jorge Scarinci -- Chief Financial Officer

You're welcome.

Operator

And our next question comes from Yuri Fernandes with J.P. Morgan. Please, go ahead.

Yuri Fernandes -- J.P. Morgan -- Analyst

Thank you, gentlemen. I have, actually, 2 questions. The first one, is about the margins. How should we think these, with the changing interest on assets mix should we expect margins to keep slightly decreasing? How are you seeing this? My second question is regarding the recent credit card regulation in Argentina. I know you are somewhat less exposed than some peers. How decreasing the payments, the settlement dates from 19 days to 10 days may impact your earnings going on? Thank you.

Jorge Scarinci -- Chief Financial Officer

Hi, Yuri. How are you? I would say that margins will remain stable with this level of interest rates. In a slightly climbing scenario in the case of Banco Macro, we should see some expansion margins. But level, not that much. So, I would assume, for this year, stability in the margins, not to be changed here. In terms of your second question, in terms of the impact that we have in credit cards, I would assume that in terms of the impact on bottom lines, around between 2.7% and 3%, impact on bottom lines on the new regulation credit cards.

This expansion, with Banco Macro not doing anything in terms of to offset this impact. For sure, that we are going to do, or to take some measures here, maybe to review some promotions. So, the net effect is going to be lower than that. But ceteris paribus, I would say 2.7% to 3% impact to the bottom line.

Yuri Fernandes -- J.P. Morgan -- Analyst

Very clear. Thank you, very much.

Jorge Scarinci -- Chief Financial Officer

You are welcome.

Operator

And there are no further questions at this time. So, this will conclude the question-and-answer session. I would like to turn the conference back over to Mr. Nicolas Torres for any closing remarks.

Nicolas Torres -- Investor Relations

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

...

Operator

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

Duration: 27 minutes

Call participants:

Nicolas Torres -- Investor Relations

Jorge Scarinci -- Chief Financial Officer

Gabriel Nobrega -- Citi-Analyst

Alonso Garcia -- Credit Suisse -- Analyst

Carlos Gomez -- HSBC -- Analyst

Nicolas Riva -- Bank of America -- Analyst

Yuri Fernandes -- J.P. Morgan -- Analyst

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