Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

Q4 2010 Earnings Call

February 17, 2011 11:00 AM ET

Executives

Pablo Firvida – VP, IR

Analysts

Saul Martinez – JP Morgan

Tito Labarta – Deutsche Bank

Boris Molina – Santander

Arthur Bryan (ph) – Deltec (ph)

Denis Parisien – Deutsche Bank

Federico Rey -Raymond James

Federico Rey – Raymond James

Operator

Welcome to the Grupo Financiero Galicia’s Fourth Quarter 2010 Conference Call. This call is being recorded.

At this time I would like to turn the call over to Mr. Pablo Firvida. Please go ahead, sir.

Pablo Firvida

Thank you. Good morning ladies and gentlemen. Welcome to the Grupo Financiero Galicia fourth quarter fiscal year 2010 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 advanced performance during the quarter. Then we will take your questions.

Some of the statements made during this conference call would be forward-looking statements within the meaning of the Safe Harbor Provisions of the U.S. Federal and Securities Laws. This forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements.

During the fourth quarter of 2010, the Argentine economy performed under the influence of a positive international scenario. High liquidity levels and the weakness of the U.S. dollar, foster the flow of capitals, the emerging economies in search of higher returns. Thus allowing the maintenance of the good performance of Argentine financial assets recorded in the prior quarters.

In addition, changes in crop forecast due to climate factors, renewed momentum of grain prices which will also have a positive impact on the Argentine commercial balance, it’s fiscal revenues and in the supply of U.S. orders. Even though GDP official data for the fourth quarter is still not available, private estimates 0.1% growth above the 0.8% recorded in the previous quarter. We’re giving as a result, an annual growth of 8.2%, an estimate for 2011, 5.5% increase.

During the quarter, national fiscal revenues increased 29.8% year-over-year while primary expenditures grew 37.5% year-over-year. Thus the primary surplus for the quarter amounted to Ps.4.16 billion more than Ps.4 billion lower than a year before. For 2010, primary surplus amounted to Ps.24.9 billion or 1.7% of GDP more than Ps.7 billion higher than in 2009.

Consumer prices maintained its growing pace increasing 2.4% in the quarter, as measured by the official index and 5.2% according to private estimates with a trailing 12 months GPI inflation reaching 10.5%, which is also lower than the 22% estimated by private consultant for the same period.

On the monitory front, the portfolios registration process in the fourth quarter was slower than in the previous one. The estimated outsource were around $2 billion compared to $2.5 billion for the prior quarter and reaching $11 billion for the whole year.

The Argentine Center Bank expanded the monitory base by Ps.20.6 in the quarter and in this context, the exchange rate increased from 3.96 to Ps.3.98 per dollar during the quarter.

Other interest rates paid by private banks increased during the quarter, raised on time deposits in pesos for up to 59 days increased 10.3%, a 36 basis points increase.

Lending rates also recorded an increase as compared to previous quarter with over drop rates growing 78 basis points ending the fourth quarter at an average of 19.3%.

Private sector deposits at the end of the quarter amounted to Ps.256 billion with a 9.3% growth during the quarter, and a 29.7% inter annual increase. Transactional deposits increased 13.1% in the quarter.

Total loss to private sector at the end of the quarter amounted to Ps.197 billion, a 12.3% increase in the quarter and a 37.8% inter annual increase.

Turning now to the bank, net income for the fourth quarter amounted to Ps.197.8 million nearly four times the Ps.53.6 million profit recorded in the same quarter of the prior year. For the whole fiscal year, net income amounted to Ps.469.1 million and net income before the amortization of amparo reached Ps.750.1 million showing a significant increase as compared to Ps.281.1 million from the prior year. This progress was a consequence of a significant improvement in the vast financial condition due to a series of factors.

In first place, the significant increase in the volume of activity with the private sector. With credit to the private sector growing 49.5% year-over-year or 41.5% not considering CFA. On deposits from the private sector growing 30.5% year-over-year or 28.5% without CFA.

In second place, the Ps.2.4 billion increase of the bank’s exposure to the non-financial public sector. This exposure as a percentage of total assets decreased from 14.2% to 4.2% during 2010 and as of the end of 2010, there are no near big difference between the market value and the accounting value.

In third place, the bank reduced its dollar to nominate the debt by approximately $200 million through the repayment of the bonds during January 2010 and through the redemption of all the 2014 bonds.

On February 22, 2011, the bank will redeem $90.1 million of the 2019 subordinated bonds corresponding to the capitalized interest from 2004 to the end of 2010. After this redemption, the outstanding principal amount of subordinated bonds will be $218.2 million.

Last but not least, since the third quarter of fiscal year 2010 the bank incorporated CFA results, which amounted to Ps.89.4 million as well as the Ps.51.7 million profit from the amortization of the negative goodwill stemming from its acquisition. As of December 31, 2010, the negative goodwill amounted to Ps.465.6 million. All these improvements allow the bank to amortize the total amount of deferred losses from amparo claims during the year Ps.84.8 million in the fourth quarter and Ps.281 million in the year.

As of December 31, 2010, the Bank’s consolidated credit exposure to private sector reached Ps.25.9 million and its market share of loan to private sector was 8.95%. The Bank’s total deposits reached Ps.22.2 million as of December 31, 2010, and its estimated market share of deposits from the private sector was 8.33%.

During the fourth quarter, a significant improvement in the asset quality was recorded. The non-accrual loan portfolios for total loan ratio reached 3.4% and it’s coverage with allowance for loan losses reached 137.5%. These ratios compared to 4.8% and 118.5% from the same quarter of 2009 respectively.

As to the advanced results, the average interest earning assets were Ps.5 billion as compared to same quarter of the previous fiscal year mainly as a result of the Ps.7.5 billion increased in the average portfolio of loans to private sector partially offset by the Ps.2.2 billion decrease in the average balance of the portfolio public sector securities.

The net interest income were 80% year-over-year, net income from services increased 35.6% year-over-year or 33.7% excluding CFA. Provision for loan losses for the fourth quarter of 2010 amounted to Ps.162.3 million, Ps.12.1 million lower than in the same quarter of the prior year despite including Ps.23.9 million corresponding to CFA.

Administrative expenses for the quarter increased 54.9% year-over-year, about 40.4% not including CFA. The former valuation is explained by a 56.6% increase in personal expenses and a 52.7% growth in the other operating expenses.

As of December 31, 2010, the Bank’s consolidated computable capital exceeded by Ps.1.6 billion, the Ps.2 billion minimum capital requirement or an 80% excess.

In summary, this was a very successful quarter with an impressive strengthening of our balance sheet, a continuous growth in the interim addition with the private sector of the bank, the original credit card companies and at CFA levels, the reduction of exposure to public sector and of the dollar to the nominated debt. We also have better asset quality, solvency, and liquidity ratios and no negative difference between the market value and the group value of the remainder of our exposure to public sector. We consider that we have finished with the legacy issues and the Bank’s Board of Directors is willing to propose the bank shareholders to attribute Ps.100.1 million cash dividend.

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

Question-and-Answer Session

Operator

(Operator Instruction). And we will go first to Saul Martinez with JP Morgan.

Saul Martinez – JP Morgan

Hi, good afternoon. I just have a question on, how to think about your sustainable profitability, your ROE the earnings power, this quarter you had about 31% return on equity despite of the fact that you had the amparo amortization which will no longer effect your results, having said that you also had pretty strong bond yield, government bond yields, I think about 21% in the quarter. The CFA transaction continues to do well. I mean how should we, I mean, is this say, do you think that the earnings that you generated this quarter and the ROE you generated this quarter are a sustainable type of level or is there is something in these results that make it an exceptionally strong quarter?

Pablo Firvida

Hey, hi. Well, really it’s a hard to say how much is sustainable, but definitely the fourth quarter results are, I would say more important to project on the first two quarters. Basically, because we ended with the legacy issues and because we are the CFA, of course, it’s important to have in mind that next year the bank will begin to pay income tax because as of today, we had or as of the end of last year we had taxes carried forward. So, in the proportion of the results coming from the bank, we will have the tax rate, that it’s a, well the legal one is 35%.

Saul Martinez – JP Morgan

Go ahead. Sorry Pablo.

Pablo Firvida

And also at the beginning of or perhaps in March or April there will be an agreement with the Union regarding personal experiences or the wages and negotiations. In general or what is the use in the, or it’s a history. Is that it’s becoming effective since January, so we will have some increase in salaries, but also what history tell us is that, we in general the banks, I would say, we tried to part through these salary increases to basic. So, definitely ROE should be closer 230 than 220 as we saw in the past. We have seen a sharp increase in the last few years as we manage to clean up all the legacy issues and now we are showing the returns.

Saul Martinez – JP Morgan

How much does your tax rate go up by at the group level? And do you have any stance for how we should think about the wage renegotiation, I mean, I think private sector, as much as 25%, 30% is that, maybe thinking the wage renegotiations that should be in that magnitude?

Pablo Firvida

Yes, we have in mind something around 25% in terms of wage negotiation and tax rate is 35%. There are some differences between the accounting rules and the tax rules mainly regarding credit loses. So, in some cases you’ll see higher tax rate for the bonds especially. But that is really, it’s a result, the effective tax rate, not the variable.

Saul Martinez – JP Morgan

Okay, all right. Thanks a lot.

Pablo Firvida

You’re welcome.

Operator

And we will take our next question from Tito Labarta with Deutsche Bank.

Tito Labarta – Deutsche Bank

Hi Pablo and thanks for the call. Just to follow up a little bit on Saul’s question. I think in the securities, you mentioned the yields about 20%. I just want to get a sense that it is data sustainable yield or there anything extraordinary there. And also would there be any extraordinary gains from the reductions you mentioned earlier on the call. And then second question, there is also a significant amount of loan recovery around Ps.58 million, is it data sustainable level, or is that just a onetime item, if you can communicate some more color on that as well, thank you?

Pablo Firvida

Regarding the interest from government bonds, you see a sharp increase between third quarter and fourth quarter. I would say the sustainable level will be roughly 40 million below the fourth quarter figures something around the 110 million instead of a 150 million. Because in the third quarter we made a valuation allowance in order to sell the discount bonds and in the fourth quarter we sold the discount bonds with some gains, so really, outside the sustainable or a clean number or a cleaner number would be 110 something like that. What was the other question Tito, sorry?

Tito Labarta – Deutsche Bank

In terms of loan recoveries, there was a significant amount, I think around Ps.58 million, so just want to get a level, it’s that sustainable or what you would expect in terms of loan recoveries?

Pablo Firvida

Well, that line is suffered outside the structural change when we began towards CFA because they recovered a big portion, it’s started again to saying what will be sustainable that definitely the numbers should be more in line with the third and fourth quarter with the previous ones.

Tito Labarta – Deutsche Bank

Okay. And then, I guess just to follow up briefly, do you expect there will be more loan recoveries from CFA, is that, do you know how much you could recover from CFA?

Pablo Firvida

No basically, I’m not speaking about the specific numbers regarding CFA, the idea, I want to translate is that CFA has when we began towards CFA in the third quarter, you can see a jump in that line. Also, the figure is higher in the fourth quarter and it also related because we have other CFA in their operating, I would say a business they have more recoveries. So, the figures would be definitely more in line with the third quarter and fourth quarter and with the previous ones when we didn’t have CFA consolidated with our figures.

Tito Labarta – Deutsche Bank

All right. Thank you.

Operator

We will take our next question from Boris Molina with Santander.

Boris Molina – Santander

Yes, thank you. Pablo, couple of questions regarding the outlook for the year. How do you expect the loan portfolio to continue to grow and would you see drive stronger in consumer finance and cards or would you see that corporate credit, it should lead the way. And how should we think about a little bit about your growth in deposits because you tend to have a higher loan deposit ratio, I don’t know if you’re thinking of a particular way of how to sustain or improve this going forward?

Pablo Firvida

Hi Boris, the first the loan to deposit ratio, when you look at the consolidated figures, it’s kind of misleading because we have three different businesses, the banks, the regional credit card companies and CFA. Regional credit card companies take deposits and CFA small portion of its funding. So, we should analyze that dividing by three there to the business. In the case of the bank, in zero terms I would say that, we are projecting long growth something smaller or lower done this year. For the system we are seeing something around 28% to 30% growth. We think we can grow a little bit more, but not at the rates that we grew in 2010. And basically, because we see deposits growing less than the previous year 2010 and mainly because of the electoral or the elections that we are having in October and in many cases people tend to save not within the system, so deposits tend to grow less. And regarding where we see the growth in lending, today we have 56% of our loan to individuals, you could take into account the three, the banks, regional credit card companies and CFA and we don’t see a material change in that mix so that means that within the bank we will allocate more funds or more lending to companies and of course, regional credit card companies and CFA just for individuals. But in general terms, if we consider three business units we don’t see much material mix there or change in the mix.

Boris Molina – Santander

Okay, thank you.

Pablo Firvida

And regarding the quality, we have this 3.4 figure on a consolidated basis and also a good coverage of 137%, we don’t see these figures changing dramatically. Of course, the provision for loan losses will be higher because the volume will grow, but the asset quality ratios, we don’t see really material valuations there for the whole year.

Boris Molina – Santander

Okay. One final question, you started paying dividends, it’s great provision for the bank, congratulations. What could we expect to see sustainable payout ratio going forward, do you any idea, how do you think this would evolve?

Pablo Firvida

Well, it’s I would say too early, because it’s the first dividend in nine years or ten years. In the past, I would say in the 90s, but it’s really very far from now, the outside, the bank used to pay 20% as an average of its net income. But now, we have another bank, another environment and I think each year the recession will be taking, taking into account the capital position, the potential for growth in lending, I would say as a case by case analysis.

Boris Molina – Santander

Okay. Thank you.

Operator

(Operator Instructions) And we will go back to Boris Molina with Santander.

Boris Molina – Santander

Yes hello, sorry, I forgot to ask you, when would you expect to have the consolidated financial statements for the Grupo, will they anytime, they will?

Pablo Firvida

Well, there are also problem or outside problem. Signature and approval of the signature so tomorrow they – I would say the legal balance sheet will be available at the – what fate of the CND.

Boris Molina – Santander

Excellent, thank you so much.

Pablo Firvida

You’re welcome.

Operator

And we will go next to Arthur Bryan from Deltec (ph).

Arthur Bryan – Deltec

Sir, the inflation is running, I guess, 25%, 30% in Argentina, should that change dramatically either one way or another, up or down? What is that – how prepared are you for dealing with a change in the current inflation area regime?

Pablo Firvida

Okay, hi. Well, first we don’t see a change in the government for this year regarding the inflation issue. We don’t see the government tackling the problem. So, we are prepared to live with another year of around 25% inflation. And really, it has been the history of Argentina for many years, currently annoying inflation is along a legacy issue we have and we – and I would say that inflation is one of the reasons why we have so low penetration of deposits and loans in particular as a percentage of GP, we have ratios of 13% and 17% respectively, so if the inflation is tackled we think this ratios could grow dramatically. So, inflation is short term and the short term deposits are short term so we will end short term and we are a – most of the lending is with buyable rates, floating rates. And we have a, I would say particularly compared to other banks that we have a very important operation of credit cards that’s – it’s a kind of a hedge against inflation in the sense that when prices go up, the credit card companies charge a fee on that narratives and also our fees go up to, a part of our fees go up as the inflation goes up. And that’s I would say what I can say to that question.

Arthur Bryan – Deltec

Okay, can I ask you a second question?

Pablo Firvida

Sure.

Arthur Bryan – Deltec

The CFA acquisition looks to me to be an acquisition that you’d love to do every day because it’s been very accretive for you. Is it fully integrated and what has it done for your overall picture? What did it bring to you other than a bottom line adjustment?

Pablo Firvida

Well, in short, yes it was a very good deal I would say, the reason we paid the low price was because we agreed that pricing in June 2009, when the world was not recovering in full. And we got the approval one year later in June 2010. It was a good business because of, I would say because of the negative goodwill, because of the income it’s bringing us and from outside strategic standpoint, it brings to us another I would say business unit focused in personal loans to low income people. And I would say combined our credit card companies that are very strong in interior of Argentina and through credit cards, with CFA, which is basically personal loans and more focus in Golosinas and its outskirt. So, from a geographical standpoint, I would say it’s a good combination from a product standpoint, they are also I would say complimental because one needs personal loans or the credit card but we don’t want to integrate them, because they are different products, different type of or many different things, for example the clients of the regional credit card companies will have a long relationship with the company, in many cases, CFA’s clients are just one time borrowers, but of course they are seniors in order to try to improve a cross selling between the clients and the products, but definitely at least at this stage we are not going to merge them.

Arthur Bryan – Deltec

That’s excellent. Thank you very much, sir.

Pablo Firvida

You’re welcome.

Operator

We will go next to Denis Parisien with Deutsche Bank.

Denis Parisien – Deutsche Bank

Hi, thanks very much for the call. And thanks for taking my question and congratulations on your strong results. Pablo, you mentioned something about redemption on a certain day this month of ex amount of dollars with your 2019 bonds. Could you just repeat the number for me please? And could you tell us what your intentions are with respect to the remaining 2019 bonds and any other possibilities of capital markets transactions in U.S. dollars or other currencies, thank you?

Pablo Firvida

Okay hi, Denis. Well, these 2019 bonds are part of the process of restructuring of a dollar they nominated that, that took place in 2004 at that moment we should, three bonds the 2010, 2014, and 2019. As I mentioned we paid everything of the 2010, 2014. These 2019 is what is subordinated bond that has the – well for us, to capital it has a paying kind loss. So, basically we have a coupon of 11%, 6% paying cash and 5% it’s been capitalized. So what we are going to do on February 22, is to redeem or to payback all these paying kind or capitalized interest that we have been doing since 2004 that is roughly $90 million. So after that, we will get back to the initial amount of subordinated bonds that is 218 million and tier 2 capital for us, the idea is to keep it, perhaps in the future we will love to replace it with a longer bond at lower rate, but it’s not in the short term, I would say. And regarding the other question about capital markets, we are always, or we meaning the treasuries always analyzing alternatives, but we don’t have nothing specific to say it right now.

Denis Parisien – Deutsche Bank

Thank you. Just to be clear on henceforth, you still have the option, the pick option going forward, you can continue to capitalize interest on that even after you?

Pablo Firvida

Yes, I would say the contractual losses will remain the same, the paying kind this 5% will remain till the end of the, or the cash flow of the one will be the same.

Denis Parisien – Deutsche Bank

Great. Thanks very much.

Pablo Firvida

You’re welcome, Denis.

Operator

We will go next to Federico Rey with Raymond James.

Federico Rey –Raymond James

Hi. Good morning. I have two follow up questions. The first one is regarding asset quality. And my question here is you have an idea of reasonable liberal for the coverage ratio. As you will be, the kind of level is okay or you call that number. And the second question is regarding the cash dividend. If you have an idea of about when you could be reaching the regulatory approval, thank you?

Pablo Firvida

Okay. Well, regarding asset quality this, well for all this year which is now, as I mentioned no material changes in this both in the NPLT of 3.4% and the coverage of 137.5% I think. And I would say, no material perhaps 140 is a target for the end of the year, not more than that we are comfortable with that range. And about dividend, well the shareholders have to approve it in the shareholders meeting that will be at the end of April. We think that by that moment the center banks will have approved the dividend payment and after the shareholders meeting we have, I think the legal term is 30 days, but we can do it in 15 and say even earlier.

Federico Rey – Raymond James

Okay. Thank you very much.

Pablo Firvida

You are welcome, Federico.

Operator

And at this time there are no further questions, I would like to turn it back to our speakers for any additional or closing remarks.

Pablo Firvida

Okay. Thank you for participating in this call. And please do not hesitate to call us if we can be of help with other questions that you may have. Thank you and good morning.

Operator

And this concludes today’s conference, we thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Grupo Financiero Galicia CEO Discusses Q4 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts