Grupo Financiero Galicia (NASDAQ:GGAL)
Q3 2011 Earnings Call
November 10, 2011 11:00 AM ET
Pablo Firvida – Head, IR
Daniel Abud – Citi
Federico Rey – Raymond James
Nicolas Chialva – Itaú BBA
Walter Chiarvesio – Santander Bank
Good day and welcome to this Grupo Financiero Galicia SA third quarter 2011 conference call. This call is being recorded. At this time I would like to turn the conference over to Mr. Pablo please go ahead sir.
Thank you. Good morning ladies and gentlemen. Welcome to the Grupo Financiero Galicia third quarter of fiscal year 2011 conference call. I am Pablo Firvida Investor Relations. With me today are some members of the management of the bank and Grupo who want to thank you for attending this call.
I would like 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 actual results to differ materially from those expressed in the forward looking statements.
During the third quarter, international and financial markets remained highly volatile and with increased uncertainty related to the solvency of certain European economies, specially Greece and the potential contingent to the rest of the region. Economic growth showed signs of a slight recovery compared to the previous quarter in the US. Under the influence of this international scenario, the Argentine economy maintained its good performance, but showing a deceleration as compared to the previous quarter. Private estimates point to a 5.3% year-over-year growth while Argentine GDP is expected to grow around 6.5% for the whole year. During the quarter national fiscal revenues increased 33% year-over-year showing an acceleration as compared to the 31% recorded in the second quarter while growth of primary expenditures accelerated from 32.4% in the second quarter to 36% year-over-year in the third quarter as a consequence of the electoral process. The primary surplus for the quarter amounted to 1.3 billion pesos, 8.4 billion pesos lower than a year before. After interest payments of 4.4 billion pesos, the global balance was at 3.1 billion pesos deficit.
Consumer prices maintained its growth phase increasing 2.4% in the quarter as measured by the official index and 4.5% according to private estimates. While annual inflation rate as of September 2011 reached 9.9% and 21.9% respectively.
On the monetary front, the portfolio realization process in the third quarter was more intense than in the previous one as a consequence of the international uncertainty and the electoral process. We estimate that outflows were around $8.4 billion compared to $6.2 billion for the prior quarter.
The Argentine Central Bank expanded the monetary base by 16 billion pesos in the quarter and exchange rate increased from 4.11 to 4.21 pesos per dollar during the quarter representing a depreciation of 2.3%. Average interest rates paid by private banks increased during the quarter. Rates deposits in pesos for up to 59 days increased to 12%, 150 basis points increased from June 2011. The rates on overdraft ended the quarter at an average of 19.3% with a 95 [ph] pesos points increase.
Private sector deposits at the end of the quarter amounted to 310 billion pesos with a 4.5% growth during the quarter and a 32.3% inter-annual increase. Then deposits increased 6.7% in the quarter which transactional deposits grew 3.7%. Total loans per private sector at the end of the quarter amounted to 268 billion pesos, a 12.9% increase in the quarter and a 52.3% inter-annual increase.
Turning now to Grupo Financiero Galicia, I would like to make a short introduction regarding certain changes which took place during the quarter. In first place (inaudible) closing the insurance company of Grupo began submitting its financial results at the same dates as of the rest of the subsidiaries. As a consequence, Grupo's income statement includes six months of results from the company while until the previous quarter results were included with a three months delay.
Secondly, at the bank's level, all the year-over-year comparisons include figures from CFA as the bank to control the CFA at the end of June 2010 and began consolidating its income statement in the third quarter of 2010.
Finally, some steps have been taken in order to reorganize the corporate structure with a basic idea of allocating under the control of our holding companies (inaudible) the whole regional credit card business structure comprising all our operating companies, issues of credit cards and the processing and collection companies.
In the same process (inaudible) sold its 5% interest in CFA of which 3% was acquired by Grupo Financiero Galicia and 2% by the bank which now owns 97% of CFA. It is also worth mentioning that none of these changes modified the direct or indirect control of the subsidiaries involved. This being said, Grupo Financiero Galicia's net income total 275.2 million pesos including 15.9 million pesos were responding to the three additional months from Americana holding due to the above mentioned change in the submission dates of these figures.
Turning now to the bank, net income for the third quarter amounted to 265.3 million pesos, 93% higher than the 137.8 million pesos profit reported in the same quarter of fiscal year 2010. Primary (inaudible) to the significant increase in the volume of activity with the private sector. The bank's great exposure to the private sector reach 33.9 billion pesos up 50% during the last 12 months and deposits reached 28.8 billion pesos up 44.2% during the same period. As of September 30, 2011, the banks estimated market shares of both loans and deposits under private sector were 8.6%. During the quarter, the bank continued improving its asset quality. The non-acquired loan portfolio of total loans of private sector decreased to 2.9% and its coverage with allowances for loan losses increased to 145.4% from 3.8% and 132.8% respectively from the previous year.
As regards, the bank's results, the average inter-selling assets grew 11 billion pesos as compared to the same quarter of the previous fiscal year as a consequence of the 9.2 billion pesos increase in the average portfolio of loan to private sector.
Interest bearing liabilities increased 8.6 billion pesos during the same period due to the increase of the average balances of saving accounts and deposits under securities. The average yield on inter-selling assets increased 258 basis points compared to the third quarter of fiscal year 2010 while the average cost of interest bearing liabilities increased 105 basis points during the same period.
Net income from services increased 38.4% year-over-year with very higher growth, interest related fees is related to credit cards to (inaudible) and to deposits.
Provisions for loan losses for the third quarter amounted to 205.5 million pesos, 52.3 million higher than in the same quarter of the prior year. As expenses were 45.7% higher than the same quarter of the previous year with personal expenses growing 43.7% and the remaining expenses 48.2%.
The above mentioned increase in expenses was the consequence of salary increases agreed with the unions, the higher headcount 361 new employees at Banco Galicia and 1024 of the (inaudible) credit companies on CFA. The greater level of activity, the expansion of the distribution network or dead branches and point of sale and the impact of inflation during the period. As a result of the changes in the realization of tractor mentioned before, a 16.4 million pesos profit was recorded due to the accelerated amortization of the goodwill of CFA while as of being of September 2011, the bank still have 371.7 million pesos of negative goodwill to be amortized.
The income tax charge was 374.2 million pesos, 61.3 million pesos higher quarter-over-quarter and 310.5 million pesos higher than in the third quarter of 2010. As the bank finally consumed all of its tax loss carried forward.
As of September 30th, 2011 the bank's exposure to private sector excluding debt securities issued by the Argentine Central Bank reached 1.6 billion pesos or 3.5% on total consolidated assets. At the same date the bank's consolidated computable capital exceeded by 1.5 billion pesos, the 2.5 billion pesos minimum capital requirement. A similar excess to the one recorded on September 2010. As of the end of the third quarter the bank's liquid assets represented 72.4% of the bank's deposits are 38.3% of its total deposits.
In summary, this was another very successful quarter with a continuous growth in the indetermination with the private sector with important growth in net finance on phase with improved asset quality and liquidity ratios and ROE. We are now ready to answer the questions that you may have. Thank you.
(Operator Instructions). We'll take our first question from Daniel Abud with Citi.
Daniel Abud – Citi
If you look at the activity that you posted in the third quarter, it still shows an indicated 50% or so even in your pace and that's with the old set of the portfolio, from portfolios to SMEs and to pursue them long. Is that the same already in the third quarter given what was the incorporating from the point of the positive behavior and what can we expect as a reasonable target for loan growth at Galicia next year. And on the reported side, have you seen an acceleration of the deposit out of the system, I remember when we discussed this before the elections, most of the deposits were staying in the system but change in the remuneration from pesos to dollar but seems given the news would be reeling that that may have changed in recent weeks where people are still in more profitable staying in the system and are trying to withdraw from the system. What you have seen in terms of the positive behavior since the close of the quarter?
First on the loan side, yes till the third quarter we are seeing 50% year-over-year growth. With October and November and December coming and housing coming, we think that perhaps the year will end up at around 45% very high growth. For the next year it will of course depend on many macroeconomic variables beginning with who will be the miniature of economy. But all the analysts are envisioning lower GDP growth like 3%. That of course will affect the loan growth. I would say to be on the safe side at 20% could be a very I would say achievable growth rate we launched and also tied to deposits. Then going to deposit question, in October we have seen very growth rates in deposits. Yes there was a realization process 20% of the total deposits are in dollars. What we are seeing in the bank and the system is a gradual decrease in basically saving accounts in saving accounts in dollars, I would say that it's not an economic impact what can worry the system, it's more a break in the trend that for many years both the positive business have been growing steadily, but we are in the same situation at the system. Deposit in business are growing very fast and one thing about the dollar I mean the deposits, half of them roughly are used to lend to exporters with very low spreads and other 50% is at the Central Bank. So really from an economic standpoint it is not very relevant.
Daniel Abud – Citi
So to make sure I understood, the response you gave to the deposit question Pablo, you are saying that you've been seeing a gradual decrease in savings I guess in dollars but not an increasing peso deposit. Actually peso deposit that continues to grow after we go through the third quarter.
We'll take our next question from Federico Rey with Raymond James.
Federico Rey – Raymond James
Hi good morning everybody thanks for the call. My question is regarding margins. I'd like to understand considering the structure of your assets and liabilities, what should be the impact of the recent increase in the interest rates, in the funding rates. If it is possible for your interest margin or not consider the structure of assets and liabilities. Thank you.
Well the first, the increase in the level rate is not the ton deposits as you know we have whole sale deposits and retail deposits and the first reaction of course is with action in spread but in terms of margin usually we can keep them or increase them 45% of our deposits are ton deposits so an increase in the level rate, it's not first time to all the ton deposits and through time we try to pass through that increase to the active interest rate. Also we have to look at the mix of our loan book and 60% of loan book matures within six months. So the reprising is very weak. So to make a summary of this long answer, margins should be from table to a little bit higher, spreads could compress in the first quarter.
(Operator Instructions). We will take our next question from Nicolas Chialva with Itaú BBA.
Nicolas Chialva – Itaú BBA
My question regards the effective tax rates which you have (inaudible) of the credit card. Seems to be have done 35 more closely to 42%. So I was wondering why we see credit card interest rate so high and what could we expect going forward?
Yes, as I mentioned, the tax loss carried forward was consumed, so now the business units, the banks, the regional (inaudible) CFA are having a 35% income tax rate. The thing is that basically two concepts are not treated the same way from a reporting standpoint compared to a tax accounting and basically these are the price, the illusion of the public sector bonds that for tax purposes have to mark-to-market while from our accounting, this is not reflected. So these prices of bonds go up we have to have a higher income charge but not in the accounting, it's not reflected in the accounting, this variation in the price of the bonds.
The other is basically the asset quality charges that we cannot deduct as an expense, the 100% of that charge. And basically the local IRAs let you use that charge as a deductible experience once you began certain actions in order to try to recover that amount. So you will see normally and going forward an effective tax rate a little bit higher than this 35% perhaps closer to 39 not to 41%.
And we will take our next question from Ramesh Narayan with Infosys [ph].
Well, many thanks for taking my question. Just can you give me some more color on public sector affects as of September 2011, it's around 5.2 billion including Argentine Central Bank. I would like to know how the valuation criteria for this public sector works. Is it mark-to-market or is it on cast plus yield and also I know from March 2011, Central Bank has changed the valuation criteria for public sector assets. If you throw some light on all this it would be very helpful, thanks.
Yes, from the 5.2 billion pesos of exposure to the public sector, a 1.6 really is exposure to the fair government, a 3.6 is the exposure to the central bank. In the case of the exposure to the federal government we have two instruments. The one called Bonnard 2015 that is at a cost plus yield, the yield while it's tied to (inaudible) rate, so today is around 28%, so it's something like (inaudible) plus 9% the yield. And these are not exact figures. Now another magnitude. This was 750 million pesos. Then we have some equities in financial trust with underlying assets being other public sector bonds. The main ones of those underlying assets is Bonnard 2018 and there we can have a yield, if the market price is higher than our book value. If the market price is lower, we don't have any yields on that equity. Most of the financial results you will see under a public sector bonds are from the (inaudible), it was something like a 198 million pesos, more or less 100 came from this trading line that was basically the (inaudible).
Approximate can you tell me out of 5.2 billion, what percentage of 5.2 billion is mark-to-market and what percentage is cost plus yield.
In the cost plus yield is 750 million pesos and then you can assume that 800 million pesos are in a kind of situation? You can assume it's not mark-to-market. As of September, if we work mark-to-market everything there was a small negative amount that goes something like 55 million pesos.
Okay if everything mark-to-market there would be negative amount of 55 million, right?
Yes, negative 55 million pesos. That was at the end of September, at the end of October that is a zero. Of course there is a relay, but the difference is like that.
Okay, is that the numbers what I see in the press release of 5.2 billion and as of 3Q 2010 its 3.5 billion, is it on leg to leg comparison, the valuation criteria used for these numbers are same?
Yes, basically yes.
Because I know that Central Bank changed the valuation criteria from March 1st, 2011. So I assume you'll use one proforma basis you have used this same valuation criteria for 3Q 2010 also, right?
Yes, but the instruments we have normally have similar valuations and one year ago the difference between the market prices and the good value was also zero, 8 million pesos negative. So really didn’t change the situation.
So you mean to say there is no due to the declining bond prices, due to declining prices in the market there is no much impact on your public sector assets just it is mark-to-market then loss in the negative value as of October would be 55 million, other than that there is no any loss right?
Yes, no loss and no gain basically. These recovering prices are not going to be reflected in the October income statement. So we are accruing the yield of course if prices go down you have something that is less attractive or less valuable but it's not reflected in the P&L.
(Operator Instructions). And we will take our next question from Walter Chiarvesio with Santander Bank.
Walter Chiarvesio – Santander Bank
I have two questions. The first one is you mentioned Pablo two factors explaining the high tax rate. I asked you please if you could repeat the second one, that is my first question and the second one is, while the bank seems to be engaged in this growth process of lending in Argentina and on that is also expanding its branch networks and employees staff. Consider the (inaudible) in the local market people scared about the depreciation, that is widening the gap between the long-growth and deposit growth. Do you think these growth plans in branches (inaudible) that there are could be revised in these situations continuous or under your assumption of 20% growth in long next year? How do you see this outlook regarding this current situation?
The first question regarding the tax concept that were different from tax income statement against the reported figures. One was the prices of the bonds and other was a charge on the provision for loan losses that we cannot take the 100% of that charge, the accounting amount for tax purposes. It’s a percentage because the local IRAs request that you have begun certain actions in order to collect that money, if not you could put any number and so that you pay no taxes. So you have to, we have a certain percentage that we deduct for income tax purposes. And the second question, of course we have a plan to open branches at the bank level, we even have them approved by the central bank and also we have another plan of opening branches basically through (inaudible) in the outskirts of (inaudible). Of course although we have plans we are flexible and there is a flow of openings that you can postpone and revise if things are not as you see at the moment you have to take the decision. For example, in the case of the bank we have a plan to open 20 branches next year and in the case of (inaudible) 15. For example (inaudible) three of the locations are already rented. The rest are projects or due to expansion that perhaps could be postponed once a thing got clear. But basically yes, we are in the process of revising and the things are dynamic and you always can put on your break.
And it appears we have no further questions at this time.
Okay, thank you for attending this call. If you have any question, please do not hesitate to contact us. Good morning bye, bye.
And that does conclude today's conference again. Thank you for your participation today.
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