Banco Macro's (BMA) Management on Q2 2016 Results - Earnings Call Transcript

| About: Banco Macro (BMA)

Banco Macro SA (NYSE:BMA)

Q2 2016 Earnings Conference Call

August 10, 2016 11:00 am ET

Executives

Ines Lanusse - Head of IR

Jorge Scarinci - Finance and IR Manager

Analysts

Nicholas Riva - Citibank

Carlos Macedo - Goldman Sachs

Marcelo Telles - Credit Suisse

Jorge Chirino - Morgan Stanley

Ricardo Cavanagh - Itau

Carlos Gomez - HSBC

Domingos Falavina - JPMorgan

Babatunde Ojo - Harding Loevner

Operator

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's 2Q 2016 Earnings Conference Call.

We would like to inform you that 2Q 2016 press release is available to download at the Investor Relations Web site 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. [Operator Instructions]

It is now my pleasure to introduce our speakers. Joining us from Argentina are Mr. Jorge Pablo Brito, Member of the Board of Directors; Mr. Gustavo Manriquez, General Manager; Mr. Jorge Scarinci, Finance and IR Manager; Ines Lanusse, Head of IR and other members of the bank's management team.

Now, I will turn the conference over to Ms. Ines Lanusse, Head of IR. You may begin your conference.

Ines Lanusse

Good morning and welcome to Banco Marco's second quarter 2016 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 to the SEC and is available in our Web site. Second quarter 2016 press release was distributed yesterday and is also available at our Web site.

Banco Macro is one of the leading private banks in Argentina with a strong presence in the interior of the country and a branch network of 438 branches. Even though we are a universal bank, we focus on low to middle income individuals and SMEs. Banco Macro is a financial agent of four provinces in Argentina; Salta, Jujuy, Misiones, and Tucumán.

I will now briefly comment on the bank's second quarter 2016 financial results. Banco Macro's net income for the quarter was Ps.1.8 billion, or 119% higher than the Ps.824.2 million earned one year ago, based on higher net financial income and higher fees. The bank's accumulated annualized second quarter 2016 ROE and ROA of 36.7% and 5.7% respectively, remained healthy and showed the bank's earning potential.

In the quarter, net financial income totaled Ps.4.1 billion, or 96% higher than the Ps.2.1 billion registered one year ago. This performance can be traced to a 80% year-on-year increase in financial income and 64% year-on-year increase in financial expenses.

Within financial income, interest on loans rose 60% year-over-year due to a 285 basis point increase in the average private sector lending interest rate and to a 36% growth in the average private loan portfolio. In second quarter 2016, interest on loans represented 71% of the total financial income. In addition, net income from government and private securities increased 317% year-over-year.

Meanwhile, within financial expenses, interest on deposits grew 70% year-over-year due to a 51% increase in the average volume of the interest-bearing deposits, of time deposits and to a 280 basis points increase in the average time deposit interest rate.

Excluding FX gains, the former combined effect resulted in an increase of the bank's net interest margin from 17.6% as of the second quarter of 2015 to 18.8% as of the second quarter of 2016. And we also excluded income from government and private securities and guaranteed loans, including further adjustments on the calculation, the bank's net interest margin would have been 15.3% as of the second quarter of 2016 from 16.1% as of the second quarter of 2015.

The bank's net fee income grew 19% year-over-year, based on fee charges on deposit accounts and debit and credit card fees. Administrative expenses rose 40% year-over-year, mainly due to an increase in personnel expenses, primarily salaries increases and other costs and higher other operating expenses. The accumulated efficiency ratio reached 46.3% in second quarter of 2016.

In second quarter of 2016, Banco Macro's effective income tax rate was 35%, compared to 36.2% registered in the second quarter of 2015.

In terms of loan growth, the bank's financing to the private sector increased 30% quarter-over-quarter. On a yearly basis, the bank's financing to the private sector increased 37% year-over-year and on which commercial loans for the productive investments have been included. Credit cards and personal loans also grew year-over-year.

On the funding side, total deposits grew 9% quarter-over-quarter and 41% year-over-year. Private sector deposits grew 8% on a quarterly basis, while public sector deposits also increased 15%. As of June 2016, Banco Macro's transactional accounts represented approximately 45% of the total deposits, and therefore, the bank's consolidated average cost of funds was 12.5%.

In terms of asset quality, Banco Marco's non-performing to the total financing ratio reached 1.52%, improving from last year's levels of 1.92%. The coverage ratio reached 150.51%.

In terms of capitalization, Banco Macro accounted an excess capital of Ps.9.0 billion, which represented a regulatory capitalization ratio and Basel III of 16.2%. The bank's aim is to make the best use of this excess capital. The bank's liquidity remains appropriate. Liquid assets to total deposit ratio reached 41%.

Banco Macro accounted for another positive quarter. We continued showing a solid financial position. Asset quality is under control and closely monitored. We continue working to improve more efficiency standards. We have one of the cleanest balance sheets in Argentine's banking sector, and we keep a well-optimized deposit base.

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

Jorge Scarinci

Hi, operator. At this time, we can enter the Q&A please.

Question-and-Answer Session

Operator

Thank you. At this time, we are going to open it up for questions and answers. [Operator Instructions] The first question is from Nicholas Riva of Citibank. Please go ahead.

Nicholas Riva

Okay. Thanks Ines and Jorge for taking my questions. I had question on the securities portfolio. So you earned Ps. 2 billion in the interest income from the securities portfolio in the second quarter and I see there is Ps. 1.1 billion in interest income from your portfolio of LEVAX. And then, there is another Ps. 900 million in interest income. I would assume this is from the equity portfolio, but if you can explain to me, if this is the mark-to-market realized gains and dividend income from the equity portfolio. And also how big right now your equity portfolio is and what kind of normal level of interest income that you can get from these equity portfolio.

And also in the quarter, your net income was Ps. 1.8 billion. Net of the funding cost, net of taxes, how much of the Ps. 1 billion is coming from the securities portfolio? Thank you.

Jorge Scarinci

Hi, Nicholas. On your first question, the income from the securities portfolio is a combination of the LEBACs, the equity portfolio and also the sovereign bond portfolio that we have. All of them are mark-to-market. So, in terms of the income, the income there was basically because the increase in the prices of the equity portfolio and the sovereign bond portfolio that sums up to the Ps. 900 million that you are talking about plus the Ps. 1.1 billion income coming from the LEBACs. It's only mark-to-market the result we are not considering the dividends or any other interest. Everything is mark-to-market.

In the second part of your question going forward basically now the decision that the bank made was to start with using this equity portfolio. So, the equity portfolio will be reduced by 30% in the next 30 to 45 days. As of today, this equity portfolio is Ps. 1.1 billion and we go down to maybe Ps. 900 million in the next month or so.

Going forward, honestly, it is almost impossible to forecast basically the income coming from this portfolio because you will have to forecast the price behavior of this 7 or 8 stock that are forming the equity portfolio. So basically, this is hard for us to give a guidance there. So I will leave that job to you.

I can't remember the last question that you made.

Nicholas Riva

Yes. And the last part was, net of the funding cost, net of taxes in the second quarter, how much did you get in net income really from these equity portfolio, we already know that the mark-to-market was Ps. 900 million.

Jorge Scarinci

Sir, hold on one sec. Hi, Nicholas, just give me some time, I can send you. Tell me what's the target by that question, what you are trying to get there?

Nicholas Riva

No. I was just trying to get the contribution to the net income, so I already know what's the contribution to the interest income, but net of the funding cost and net of taxes how much like, of the Ps.1.8 billion in net income, how are you gaining really from the equity portfolio, net of everything, net of funding cost and taxes?

Jorge Scarinci

Yes. For the funding cost, there we can put, or the marginal funding cost, or the average funding cost, it rightly depends. So you have two different scenarios.

Nicholas Riva

It's fine. We can take it offline. The only thing is, the reduction in the equity portfolio is 30%, has to do with more money being relocated really to the loan portfolio and acceleration of loan growth going forward or?

Jorge Scarinci

Partly for that and partly because we believe that prices on the equities are -- have grown quite far for the moment. So we are trying to do some trading there and reducing the portfolio. But, let me give you some explanation in terms of the income coming from these equity portfolios, so that the bond portfolio -- basically we have excess liquidity because we are expecting a stronger loan growth demand to come in the future and that's why we are allocating this. This is a liquidity in different financial instruments by -- like LEBACs, like the equity portfolio and sovereign bonds.

So if we were not expecting this positive trend in loans in the future, we will have to take the opposite decision is to reduce the excess liquidity. But at the same time, we will be reducing series. So we will be reducing our balance sheet, however, on the P&L, you will have a neutral or maybe positive impact.

What I mean here is that, what we have been reading in many analyst reports on the results on Banco Marco not this quarter but in different quarter was that the income coming from the security portfolio was to be et cetera, et cetera. Basically, this is where we are locating safe liquidity. We cannot put that money at 0% interest. Imagine that if allocating that at the REPO that Central Bank give me 25% on the rating one day. So from then onwards or upwards, we are going to get an extra income coming to this portfolio. So if we cannot allocate that in loans, we have to allocate that in other financial opportunities that we have.

So if not, we will have to reduce our balance sheet by reducing this and in that case reducing the excess liquidity. So this is part of the business of the bank. So I want to make that clear because I have been reading these for different many quarters on different analysts commenting on this security portfolios income in Banco Marco.

Nicholas Riva

Thanks.

Jorge Scarinci

Is that clear?

Nicholas Riva

Yes. Yes, it is. Thank you.

Jorge Scarinci

Thanks.

Operator

The next question is from Carlos Macedo of Goldman Sachs. Please go ahead.

Carlos Macedo

Thanks. Good morning gentlemen. I have a couple of questions, first question is on fees, I understand that you have some constraints in changing the prices for the fees you charged, I understand also that's coming out in September, just want to understand how far back you can be and what -- should our look be for fee expansion say for the next 12 months supposed to the last six months?

Second question, just following up a little bit on growth, loan growth specifically, we did see a significant growth in the corporate book in this quarter driven by the productive lines that you've been gauging and just trying to get an idea, what the outlook is there if you could give us some color of how those volumes can work and how far you can grow -- how much further you can grow those portfolios? Thanks.

Jorge Scarinci

Hey Carlos, on terms of fees, yes there were some constraints that were released in the past and of course we have to announce any fee increase with 90 days in advance, so the impact that we are going to see is in September, we are going to increase our fees across the board. So I think that in 2016, we are going to finish with a fee increase that is going to be in the area of 30%. And for next year we are looking forward to be more in the area of 25%, since the inflation also will be going down next year.

In terms of loan growth; yes, the increase that you see in the second quarter was very good also it is important to mention that in terms of economic activity the second quarter was really low here in Argentina. We expect that third and fourth quarter to be not very positive, but of course based on the second quarter, so we are expecting similar levels of growth for the third and fourth quarter this year. So we should be finishing the calendar 2016 with an increasing loans in the area of 40%. And for next year, we are also expecting GDP to be positive in real growth in the area of 3%, 3.5%, so for next year we are also being optimistic in terms of loan growth being with the forecast of the area of 33.5% in loan growth for 2017.

Carlos Macedo

Okay. Thanks. Just going back to the -- trying to understand a little bit more of the product itself as you mentioned here the credit line for productive financing and financial inclusion I mean, is that explains much of the increase or was it more distributed along, at several different products?

Jorge Scarinci

I think that was across the board. Of course, those lands also collaborate, but was not the main -- the main reason for the increase. Also there are other lines that we're displaying that.

Carlos Macedo

Okay, fantastic. Thank you so much.

Jorge Scarinci

No problem. Also remember that there is only 9% of the financing to the private sector comes to from those credit loans that you mentioned.

Carlos Macedo

Okay. Good. Thanks.

Jorge Scarinci

Welcome.

Operator

The next question comes from Marcelo Telles of Credit Suisse. Please go ahead.

Marcello Telles

Hello, everyone thanks for the time. I have a couple of questions, the first one when we look in terms of the -- your deposits of the Central Bank try to believe is primary reserve requirements, we saw there was kind of a decline versus the previous quarter. And if you compare that level of reserve requirements to your amount of deposits that ratio came down quite a bit and when you look at your peer that also reported yesterday, there was a big increase.

So I was wondering, if you could explain what happened there I mean because if you're in a reserve requirement was supposed -- they were increased in June, and was wondering only if this reduction have to let's say earn more on development bond side because you had let's say more free cash through quasi, government securities may be for sure there is a possible reason for that. But if you could explain, I would appreciate why the different trends versus your peer?

And the other question is, we saw a big jump in revolving credit lines overdraft, so I was -- can you elaborate a little bit more exactly what happened there, is that something that sustainable or you think that could be some sort of correction in the quarters to come it was a big contributor to your loan growth for the quarter? Thank you.

Jorge Scarinci

Hi, in your first question can you tell me which is the table or the base on the press release that you are looking at that information please?

Marcello Telles

Yes. The information would be when you look at your cash and due from banks. Yes you have the break down you, have cash and then you have deposits at the Central Bank, I understand this line has component of the, let's say the reserve requirements that are being deposited at Central Bank. And we see to compare the ratio of those deposits in Central Bank versus your amount of deposits it actually came down quite a bit I think from 23% to 18%. I was expecting that to happen to go the other way right given the increasing reserve requirements in June?

Jorge Scarinci

Yes. But, let me explain you that, what you are seeing in that table the dealers has cash involved not only that we saw reserve requirement also involves the cash or the money that you have on the branches on the end to end et cetera. So that was the difference between us and maybe some of our peers is that we have much less cash in branches on the ATMs than our peers. And this come from problems having with the Central Bank that was not accepting cash in this, first, I would say four or five months of the year that was a problem for many banks here in the system. However, we were very efficient in that area by keeping a low level of cash in branches on ATMs and that's why you are seeing a reduction there and in our peers you can see an increase in that line.

Marcello Telles

But, the evolution from the first to the second quarter, right, in this overall number, there was a decline, what you're saying is that the decline was led by the cash the ATMs let’s say your working capital are not on the reserve requirement of the Central Bank, is that correct?

Jorge Scarinci

Yes, yes.

Marcello Telles

Okay. Perfect. Thank you.

Jorge Scarinci

No, problem. In terms of loan growth in hearing the quarter, what's going on in Argentina, I would say that what we are seeing is, of course, these are going to be a year for recession in the economy with real GDP going down between 1.5% and 2% according to local economies. Therefore, we are expecting a positive loan growth demand come in third quarter, fourth quarter next year we're expecting real GDP growth.

So I think that we are coming from many years of -- some I would say uneconomic use of the macroeconomic variables and the current government is trying to put out those variables in [indiscernible], of course that is not resilient, we're not having from one day to the other. But, we are positive on that and that's why we are -- we are trying to be as aggressive as we can, of course, we think what's going on in Argentina is more of a demand problem more than supply problem. However, we are optimistic that in the future, in the next six to nine month, the picture is going to change and we are going to see more positive fields in terms of GDP. And of course, we are going to see higher levels of loan growth in our balance sheet, since we are very well prepared protecting increasing demand and we want to be the winners in this process of Argentina coming back to the growth.

Operator

The next question is from Jorge Chirino of Morgan Stanley. Please go ahead.

Jorge Chirino

Hi, good morning everyone and congrats for the numbers. First question is on operating expenses, for the first half you grew expenses roughly in line with the inflation around 37% or so. However, your revenues didn't grow much more than that. Can you walk us through what the outlook is for the next 12 months or so to what extent you can grow revenues below inflation, sorry expenses below inflation or at least below the revenue growth. What is it that you can do in order to have an expansion in efficiency ratios as we move forward?

And my second question is if you can give us an update on the process of Citibank selling its assets, do you have any dates or likely timeframe for the transaction to be announced and whether or not you are looking at it? Thank you.

Jorge Scarinci

Hi, Jorge. And of course, the bank's target is to continue improving in efficiency and we are working on that direction. Going forward, I think that we are positive in the sense that we could see expenses growing in line with inflation and seems we are forgetting inflation to go down in the future and salaries are basically 65% of expenses and basically they grew vis-à-vis inflation. We are seeing expenses growing nominally in a lower rate in the future.

However, in the positive side, since we are forecasting an increase in loan demand, we expect revenues to grow above inflation and the result for that is an improvement in efficiency. So I think that we have a very good mix going forward with inflation going down, loan demand going up, the increase in banking penetration in Argentina.

Since Banco Macro, is one of the main participant there and we will be one of the -- I would say again, the winners in the process of Argentina growing the financial pie, I would say that the combination is ideal for us to improve efficiency. Of course, I would say that being on the low-40 for next year or may be high 30s for 2018 is a target and we are going to work on that direction.

In terms of your second question, in terms of the process with Citi, we do not have any official announcement were involved in that process. We are going to have some news in the next, I don't know 20, 30, 40 days, of course, it will not depend on us, but honestly we do not have official information more than that, that we are involved we are working there and news will come in the next month or so.

Jorge Chirino

All right. Thank you, Jorge.

Jorge Scarinci

Welcome.

Operator

The next question comes from Ricardo Cavanagh from Itau. Please go ahead.

Ricardo Cavanagh

Yes, good morning, Jorge, Ines and everybody. My question pertains to the tax amnesty bill, I mean they are -- there is a wide range of expectations regarding the year end and well some very positive that this might be a game changer for the financial industry. So interested to see your views and specifically how do you see the possibility that attracts to the market high network clients that might be out these days?

Jorge Scarinci

Hi, Ricardo. Yes, I think that this new law that tax amnesty, were reported for the country at some point would be good for the financial sector. Of course, we are not promoting this law trying to be proactive contacting clients. We are more honestly reacting or reactive. Honestly, I don't know if this is the best way to cut high worth clients. We are in that sense trying to focus more on the increase on Argentina's economy going forward than to work on that front. And of course, we are ordering both in the process of Citi trying to tackle that's high work people or clients.

But, honestly with didn't have actually a picture on this -- on the result on this fiscal or tax amnesty law. And the impact on the high network clients for the banking sector, of course we got some doubts there.

Meanwhile we continue working on the process, with Citi, we continue working on the process of growing organically and being prepared for what we're seeing that will come in the future, it is more growth in the economy and we want to keep on gaining market shares and being a very important participant in the process and in the financial sector in Argentina.

Ricardo Cavanagh

Okay. Thank you for that. And then second, last one that would be well beyond what is taking place this year as the economy is in recession. But, on the provinces that you are very active, how do you see basically the economy prospect for next year?

Jorge Scarinci

I think that the whole economy is going to be better next year than 2016, that this is more a transitional year with high inflation, recession, of course, target rebalancing with pros and cons. We are positive in the sense that going forward also the agricultural sector is going to have a better 2017 than 2016. So in that sense, we are seeing that also with positive view.

Ricardo Cavanagh

Okay. Thank you all. Thank you very much Jorge.

Jorge Scarinci

Thanks Ricardo.

Operator

The next question comes from Carlos Gomez of HSBC. Please go ahead.

Carlos Gomez

Good morning. And again congratulations on the result. Two questions, first on the economic assumptions that you are using, you may have mentioned this, but what do you expect for inflation for this year, next year and a year after. And of course, everybody would like to know. But, we would like to know what you are projecting there and when you will give us the growth numbers, so obviously, they're nominal, so you are implicitly assuming a certain level of real growth?

The second question refers to your Forex position, we noticed that it declined very significantly this quarter to essentially nothing. So we wanted to know if that also expresses the view about the market and about where the currency is today? Thank you.

Jorge Scarinci

Hi, Carlos. For inflation assumptions for this year, we are working with a 40% inflation assumption, of course, we do not calculate inflation we get that from our consensus for the market. For next year, we are working with 23%, 25% inflation assumption and for 2018, 17%. So those are the assumptions that we are using for inflation.

Carlos Gomez

And if at all, presumably year end numbers, not average for the year, year end numbers, those are in December?

Jorge Scarinci

Yes.

Carlos Gomez

All right. Thank you very much.

Jorge Scarinci

That's right. In terms of the Forex, yes, what we believe is that in the race, let's say between Forex and interest rate, we think that the interest rate will be the winner, so that's why we use our Forex position and embed that Pesos in LEBACs, in sovereign bonds, in other pesos financial alternatives. So that was the main reason for the reaction in Forex position.

Carlos Gomez

So it is intentional, I would like to say, there is a market position?

Jorge Scarinci

Yes.

Carlos Gomez

Thank you.

Jorge Scarinci

Welcome.

Operator

The next question comes from Domingos Falavina of JPMorgan. Please go ahead.

Domingos Falavina

Thank you. Good morning all. Congratulations on the very strong set of figures you published. I also have an addition to the revenue line with securities and I completely understand the answer you gave on the excess liquidity being channeled towards securities and government investments as an alternative to loan. But, it did standout to us like the ROE as being unusually high. So in other ways, I guess I would like to ask is, if you work with some more normalized or a way if you look at the results you published with securities from government and by the securities around Ps. 2 billion, what would be more than normalized level that you believed is, this one should be 20?

Jorge Scarinci

Hi, Domingos. I think that going forward, we are thinking on higher level of penetration in banking sector with of course, the loans to the positive ratio being much higher than the 79% that we have right now. And of course, in that sense we could see a narrower margins. I think that more favorable and reasonable ROA could be in the area of 3% and so that is what we are thinking that our numbers will be in the next, I would say, let's say five years for example that will be more reasonable ratio in terms of ROA to work with.

Domingos Falavina

Perfect. And my second question is on asset quality. We saw a stabilization q-on-q and still significantly lower than last year. But obviously, there is a base effect there that sometimes helps when the growth is so fast. So when you look at the numbers my question is more on a qualitative basis, when you look at your loan book, do you see any -- even though its still very under penetrated, do you see any signs of potential problematic loans, I've drawn overdraft because of fast growth or any specific line or credit cards?

Jorge Scarinci

No. Honestly, in terms of problematic loans, no. It is also clear that, again, in the scenario that I mentioned before with higher banking penetration et cetera, et cetera. I think that we could see our NPL ratio higher than the 1.5 that we are having right now because you will have of course low inflation, so higher NPL ratio will be more reasonable to see there. But honestly, for the moment we are not seeing problematic loans in our book. So of course you can see that in the last, I would say five quarters the ratio was below 2% that was not because of luck because I would say that we have been working a lot in terms of asset quality indoors. So I think this is a combination of -- I would say at some point the inflation that is also helping up, a lot of work with that. We have been doing indoors in order to have the good levels of asset quality quality.

Domingos Falavina

But where -- I sorry, if I may add, one of your competitors mentioned that there is a seasonal renegotiation of salaries that takes place now and any support to have the NPLs a little bit higher in the middle of the year, and then, improve in the second half, should the same trend work for you or no?

Jorge Scarinci

Honestly, well, you can see that the NPLs remain pretty stable in the last three quarter. So, honestly, if there is an improvement in the second half I think it will be marginal, if this is going to be a deterioration will be also marginal. So I'm not seeing many changes -- lot of changes in the next six months.

Domingos Falavina

Very clear. Thank you very much.

Jorge Scarinci

Welcome.

Operator

The next question comes from Babatunde Ojo of Harding Loevner. Please go ahead.

Q - Babatunde Ojo

Thank you very much for the presentation. My first question is around your outlooks for your net interest margin. I know this area has reviewed the rate on -- the balance for the productive finance and financial institution credit line, and I was wondering if I add that to the interest rate have been dropped in on the LEBACs. Do you expect any contraction in your net interest margin for the rest of the year or are you expecting this because of the lower cost of funding? That's my first question.

Jorge Scarinci

Hi, good morning. Honestly, we were seeing some stability in the net interest margin, I mean in the adjusted net interest margin without considering income from securities in the area of between 15% and 15.5%. So that's what the level that we are forecasting for the next two quarters of the year.

Q - Babatunde Ojo

Okay. Thanks. That's very helpful. And the other question I have is on your fee expense growth, which has been high over the last two quarters because of the promotional campaign that you are doing on credit and debit card. Just wondering if you can give any call on, if that's going to continue for the rest of the year or when do you expect to end this campaign?

Jorge Scarinci

This campaign basically has been slowing down or that I would say that the main effect happened in the past and what we will see in the future is the result of this campaign in terms of the income coming from the fees on credit cards and debit cards for example. But, the major part of the campaign just finished.

Q - Babatunde Ojo

So, my question is, so if I look at your fee income -- net fee income right now. It's lower than inflation and the reason is not that your fee income is growing in line or somewhat higher rate, the fee expense is growing way faster and that you alluded to the fact that you will give more promotional campaign for the debit and credit cards. So, I was just wondering, if that [indiscernible] expect net fee income to grow at a limited rate or you expect that for the lower net fee income to continue to associate in the future. That will be my question.

Jorge Scarinci

Now, you should expect net fee income growing at a higher rate.

Q - Babatunde Ojo

Right. Next year or from next quarter?

Jorge Scarinci

This year because as I mentioned in some previous questions, we have some constraints in terms of increasing fees because those were regulation that former administration pass through and they were realized in the second quarter of this year. And since we have to announce 90 days in advance an increasing fees, the impact on this fee increase we will have in the third and fourth quarter of this year.

Q - Babatunde Ojo

Got you. Very good. Another question I have is -- the other question I have is on the [indiscernible] area removed this restriction on having additional margin of 75% over the minimum capital requirements for annual distribution? Would that be in anyway -- will that in -- would you consider increasing the dividend from the back of that or you just maintain it has -- at least right now?

Jorge Scarinci

No. Basically we are not thinking increasing the dividend policy, honestly, the bank has in the past wants to final equilibrium in terms of cash dividend to have a solid capital position and of course having excess capital for organic or inorganic growth. So in that sense, we are planning our future. So for the moment, we are not planning to increase the dividend policy.

Q - Babatunde Ojo

Great. That's very helpful. But, the last question for me is, just basically getting a clarification from a question you answered before. So, pardon me for repeating this question. In your press release you have this Ps. 2 billion for the quarter coming from net income from government and private securities. And I know caller asked that question earlier, my question is, if I take that Ps. 2 billion, is it need to assume you said earlier that Ps. 900 million out of that this trading gains which is -- max to market gains. And the remaining 1.1 billion is interest income from your securities basically your LEBACs and other corporate bond, is that correct? Just want to be clear before I let this go on that.

Jorge Scarinci

Sorry, is it possible for you to repeat me the question because I couldn't get [Technical Difficulty]

Q - Babatunde Ojo

All right. I will repeat the question. So, if I looked at -- so for the second quarter you had Ps. 2 billion net income from private and government securities. So, I know embedded in that you said you have some mark-to-market gains, you have some interest income. Just want to be clear that the mark-to-market probably is Ps. 900 million and the remaining Ps. 1.1 billion is interest income, is that the correct way to look at it or is there any other way you want to make me look at this? That particular line item.

Jorge Scarinci

Could be an approximation, but it's not the exact figures because also the Ps. 1.1 million, sorry Ps. 1.1 billion that is coming from LEBACs, other combination interest plus mark-to-market income.

Q - Babatunde Ojo

So -- let me understand, so the Ps. 900 million that you talked about earlier that's just equity or the loss?

Jorge Scarinci

No. The Ps. 900 million is income from mark-to-market on the equity portfolio on the sovereign bond portfolio.

Q - Babatunde Ojo

On the sovereign bond portfolio, correct.

Jorge Scarinci

Yes.

Q - Babatunde Ojo

And the remaining Ps. 1.1 billion, can you give a split between interest income and trading gain, is that possible right now or something I should follow-up on?

Jorge Scarinci

Yes. From the LEBACs portfolio gain.

Q - Babatunde Ojo

Yes. So, I'm saying, can you give a split of that into interest income and trading gains, is that something --

Jorge Scarinci

I do not have that right now. But, I can get back to you afterwards.

Q - Babatunde Ojo

Great. Thank you very much. That's all I have.

Jorge Scarinci

You are welcome.

Operator

The next question is a follow-up from Carlos Gomez of HSBC. Please go ahead.

Carlos Gomez

Yes. Hi. Thank you for taking it again. I want to actually ask about new mortgages and the new index product that has been introduced similar to U.S., are you already offering this product and what are your realistic expectations for it in the next one or two or three years? Thank you.

Jorge Scarinci

Hi, Carlos. Yes. We are offering both mortgages and index and tied to -- let's say to inflation, of course, this is meaningless, the amount of operations that we have right now. I think that this could grow in the future vis-à-vis with actual inflation maybe in two or three years we could see a high volume of the transaction. But, for the moment, this is meaningless.

Carlos Gomez

And mortgages is that -- was that tied to this index or are there already any significant production or is it too early?

Jorge Scarinci

It's too early, I would think.

Carlos Gomez

Okay. Thank you.

Jorge Scarinci

Welcome.

Operator

There are no additional questions at this time. This concludes the question-and-answer session. I would now turn the call over to Mrs. Ines Lanusse for final consideration.

Ines Lanusse

Okay. Thank you all for your interest in Banco Macro. We appreciate your time and look forward to speaking to you again. Have a good day.

Operator

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

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