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Grupo Financiero Galicia S.A. (NASDAQ:GGAL)

Q3 2012 Earnings Call

November 12, 2012 11:00 AM ET

Executives

Pablo Firvida – Head, IR

Analysts

Nicolas Chialva – Itaú BBA

Federico Rey – Raymond James

Operator

Welcome to the Grupo Financiero Galicia Third Quarter Earnings Release Conference Call. This call is being recorded. At this time, I would like to turn the call over to Pablo Firvida. Please go ahead, sir.

Pablo Firvida

Thank you. Good morning, ladies and gentlemen. Welcome to Grupo Financiero Galicia third quarter of fiscal year 2012 conference call. I am Pablo Firvida, Head of Investor Relations. With me today are some members of the management of the Bank and Grupo. We want to thank you for attending this call.

I will make a short introduction in order to explain the operating conditions under which the reported results have occurred and summarize the Bank’s performance during the quarter then we will take your questions.

Some of the statements made during this conference call will be forward-looking statements within the meaning of the Safe Harbor provisions of the US Federal Securities laws. These forward looking statements are subject to risk and uncertainty that could cause actual results to differ materially from those expressed in the forward-looking statements.

During the third quarter of 2012, international and financial markets showed a drop in volatility returning to levels seen before the subprime crisis mostly due to announcement of new monetary expansion programs made by the main central banks. Despite of these financial markets optimism, global economy activity remains weak, U.S.A and China growing and the European economy falling without clean signs of recovery. Under these international contexts, the Argentinean economy showed a slight recovery of 1% in the third quarter as compared to the second quarter. Nevertheless, private estimates of economic activity point to a 0.8% annual drop in the third quarter compared with a 2.2% year-over-year contraction in the second quarter.

During the quarter, national fiscal revenues increased 24% year-over-year, compared to the 20% recorded in the second quarter, while the growth of primary expenditures decelerated from 30% in the second quarter to 24% year-over-year in the third quarter. The primary surplus for the quarter amounted to 1.8 billion pesos, while a year before it was 1.3 billion pesos. After interest payments of 7.3 billion pesos, the global balance was at 5.5 billion pesos deficit.

Growth base of consumer prices remain relatively stable expanding 2.5% in the quarter, as measured by the official index and 5.2% according to private estimates. While annual inflation rates as of the end of September reached 10% and 22.8% respectively.

On the monetary front, the Argentine Central Bank’s expanded the monetary base by 21 billion pesos or 8.6% in the quarter and exchange rate increased from 4.53 to 4.69 peso per dollar representing a depreciation of 3.7%.

Average interest rates paid by private banks increased during the quarter. In September, the average rate on pesos-denominated time deposits for up to 59 days increased to 13.9% from 12% in June 2012, while the average rate on overdraft increased 74 basis points to 21.1%.

Private sector deposits at the end of September amounted to 381 billion pesos with a 4.5% growth during the quarter, and a 23.1% inter-annual increase. Peso-denominated deposits increased around 6%, while dollar denominated deposits decreased nearly 11%. Time deposits increased 10%, and transactional deposits grew 0.4%. At the end of the quarter, total loans for private sector amounted to 340 billion pesos, recording a 6.7% increase from June 2012 and a 28.1% inter-annual increase.

Turning now to Grupo Financiero Galicia, net income for the quarter amounted to 347.2 million pesos, 26.2% higher year-over-year and 2.4% quarter-over-quarter. This result was mainly due to profits from its interest in Banco Galicia for 323.1 million pesos and in Sudamericana Holding for 30 million pesos. Banco Galicia’s net income for the quarter amounted to 340.4 million pesos compared to a 265.3 million profits a year ago. Annualized return on assets and on equity for the Bank reached 2.7% and 31% respectively.

The Bank’s credit exposure to private sector reached 43.6 billion pesos up 28.6% during the last 12 months and deposits reached 35.6 billion pesos up 23.5% during the same period. At the end of the quarter the Bank’s estimated market shares of both private sector loans and deposits were 8.52% and 8.83% respectively.

As regards to asset quality, the NPL ratio showed a 75 basis points increase year-over-year ending the quarter at 3.64% and its coverage with allowances for loan losses decreased from 145% to 120% in the same period. Although the retail loan book is showing signs of deterioration, NPL’s coverage are healthy regarding historical terms. It’s worth mentioning that due to our consumer finance subsidiaries, the consolidate asset quality figures are different from the financial (inaudible). But if you can see that the Bank is standing alone, the asset quality metrics are comparable to our peer groups.

The net financial income increased 42% year-over-year due to higher volume together with an increase in the financial margin. The average interest earning assets grew by 9.4 billion pesos year-over-year and its yield increased 336 basis points.

Interest bearing liabilities increased 6.6 billion pesos during the same period while its costs increased 214 basis points. Net income from services increased 33% year-over-year explained by the growth in fees related to credit cards, deposit accounts and to insurance.

Provisions for loan losses for the quarter amounted to 341.3 million pesos, 135.8 million pesos higher than in the same quarter of the prior year mainly focused in the individual’s portfolio. Administrative expenses were 34.9% higher year-over-year with Personal expenses growing 36% as a consequence of the salary increase agreements with the unions and of the growth in the headcount while the remaining administrative expenses grew 33.4% due to the higher level of activity, the expansion of our distribution network during the last 12 months and the impact of inflation.

As of September 30, 2012, the Bank’s exposure to the public sector excluding debt securities issued by the Argentine Central Bank reached 1.4 billion pesos or 2.4% on total consolidated assets.

At the same date, the Bank’s consolidated computable capital exceeded by 1.4 billion pesos, the 3.9 billion pesos minimum capital requirement and the total capital ratio reached 13.46%. The Bank’s liquid assets at the end of June – September, sorry represented 76% of the Bank’s transactional deposits and 36% of its total deposits, similar levels of liquidity of our peer group.

The results were in line with our expectations with strong earnings growth made up by higher increases in revenues than in costs, in an environment with gradual asset quality deterioration.

We are now ready to answer the questions that you may have. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our question comes from Nicolas Chialva with Itaú BBA.

Nicolas Chialva – Itaú BBA

Hello, good morning and thank you for taking my call Pablo. The first one is, I’ve got two questions. The first one concentrated in asset quality and loan growth going forward. It seems that economy growth in Argentina is not going to be a dynamic success so far going forward. And asset quality consider (inaudible) gradually. So, I’m wondering how are you expecting to grow into the future, I mean, in the Argentine portfolio concentrated, in the meanwhile sort of shifting towards SMEs and at what rates?

Pablo Firvida

Okay, hi Nicolas. Despite the smaller growth in GDP, this year we are growing loans at around 29% in the last 12 months. Perhaps the year will be – will end with higher growth. And for next year we are foreseeing same rates around 30%. And to break-down this, I would say, with no changes we are a universal bank and we lend to all the segments of the market.

Perhaps within the different economic sectors, there are small changes like if we consider in your SMEs and the corporates we don’t see much in terms there. In terms of asset quality, if you look at the evolution of the NPLs, in the last three quarters, roughly there was 50 basis points deterioration, then 30 basis points and then 20 basis points. And we mentioned in previous calls and conversations too that this jump of 50 was due to the delay in the agreements with the unions this year. But and also, economic slowdown actuation is only for – the duration, we don’t change what we were seeing some months ago and in the year at around 3.8, let’s say 20 basis points deterioration.

And we recovered perhaps a little bit smaller, also we mentioned in particular last year, we have been building an anti-cyclical reserve. And we are using part of this reserve during this year. I don’t know if you – I mentioned out of your question.

Nicolas Chialva – Itaú BBA

No, no, that was it. But I’ve got another one, and it’s related to net interest margins, which dropped a little bit during the third Q after the large increase in the funding rate, I mean, in the value operate you already mentioned. What do you expect of spreads on net interest margins going forward?

Pablo Firvida

We see this level of 12.2, I would say stable, not growing or perhaps some small compression but around 12% I would say.

Nicolas Chialva – Itaú BBA

Okay, thank you very much Pablo.

Pablo Firvida

You’re welcome Nicolas.

Operator

(Operator Instructions). Our next question comes from Federico Rey with Raymond James.

Federico Rey – Raymond James

Yes, hi, I have a question on asset quality. You mentioned that you are expecting 3.8 by the end of this year. My question is what’s your expectation for next year if you have put in a steady decision on asset quality or in delinquency rates at that level or if you expect a gradual deterioration or on the other hand you’re expecting an improvement? And in the same line, what’s your view on the coverage ratio, you have been using a technical research that you created in the past, if you expect to continue reducing the coverage ratio or not?

And final question is regarding the asset quality across different segments, if you can comment on the performance of asset quality in Tarjetas Regionales, I mean, in CFA? Thank you.

Pablo Firvida

Okay. In years, for – in 2013, we see some slight deterioration I would say around 3.8, 3.9. And coverage perhaps going down to 110, 100 I would say would be bottom. So, again, from stable to some deterioration in terms of NPLs and using little bit more this reserve or but not going below 110 this range.

In terms of the breakdown of NPLs between bank, the credit card companies and CFA, the 3.6% is made up by around 2% at the bank level, around 6%, 6.5% in the credit cards and around 10% and 10.5% in CFA that is the breakdown from me.

Federico Rey – Raymond James

And regarding the breakdown, the performance for Regionales has been similar across the segments?

Pablo Firvida

Well, the numbers are a little bit higher in the consumer finance business, but the same happened in the individual portfolio of the bank. Clearly the companies have been performing very well. And we are seeing the same trends in all the individuals through all the segments. Of course the lower, the income let’s put it in other ways, the high income people of the bank are performing better than the lower income people. But within individuals we are seeing the same trends in the three business units, bank, credit card companies and CFA.

Federico Rey – Raymond James

Okay. Thank you.

Operator

(Operator Instructions). It appears there are no questions at this time. I would turn the conference back to our speakers for any additional or closing remarks.

Pablo Firvida

Okay. Thank you for attending this call. If you have any questions please do not hesitate to contact us. Good morning, bye-bye.

Operator

That concludes today’s conference. Thank you for your participation.

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