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

Q2 2012 Earnings Call

August 15, 2012 11:00 AM ET

Executives

Pablo Firvida – Head, IR

Analysts

Nicolas Chialva – Itaú BBA

Phillip Rowe – GWI Asset Management

Federico Rey – Raymond James

Operator

Welcome to the Grupo Financiero Galicia Second 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 second quarter 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 second quarter of 2012, international and financial markets showed a moderate rise in volatility returning to levels seen in the fourth quarter of 2011, mainly due to remaining doubts regarding European Fiscal and financial situation. Global economic activity decelerated its pace of growth with some visions as Europe experiencing recession.

Under the influence of this international scenario, the Argentine economy weakened. Private estimates of economic activity point to a 2% annual drop in the second quarter compared with a 3% year-over-year expansion in the first quarter.

During the quarter, national fiscal revenues increased 22% year-over-year, compared to the 29% recorded in the first quarter, while growth of primary expenditures decelerated from 31% in the first quarter to 27% year-over-year in the second quarter. The primary surplus for the quarter amounted to 2.7 billion pesos, 3.3 billion pesos lower than a year before and after interest payments of 8.3 billion pesos, the global balance was 5.5 billion pesos reported.

Consumer prices slightly increased its growth pace expanding 2.5% in the quarter, as measured by the official index and 6% according to private estimates. While annual inflation rates as of the end of June reached 9.9% and 22.1% respectively.

On the monetary front, the portfolio of realization process continued diminishing in the second quarter due to increasing controls over dollar purchases. We estimate that outflows were around $2.4 billion compared to $2.7 billion for the prior quarter.

The Argentine Central Bank expanded the monetary base by 23.5 billion pesos in the quarter and exchange rate increased from 4.38 pesos to 4.53 pesos per dollar during the quarter representing a depreciation of 3.4%.

Average interest rates paid by private banks decreased during the quarter. In June, the average rate on pesos-denominated time deposits for up to 59 days decreased to 12% from 12.9% in March 2012, while the average rate on overdraft increased 357 basis points to 20.5%.

Private sector deposits at the end of June amounted to 365 billion pesos with a 5.4% growth during the quarter, and a 23.1% inter-annual increase. Peso-denominated deposits increased around 10%, while dollar denominated deposits decreased nearly 22%. Transactional deposits grew 8.6%, and time deposits increased 1.1%.

At the end of the quarter, total loans for private sector amounted to 319 billion pesos, recording a 6.4% increase from March 2012 and a 35.9% inter-annual increase.

Turning now to Grupo Financiero Galicia, net income for the quarter amounted to 339.1 million pesos, 36.4% higher year-over-year and 20.4% quarter-over-quarterly. This result was mainly due to profits from its interest in Banco Galicia for 312.5 million pesos and Sudamericana Holding for 22.6 million pesos. Banco Galicia’s net income for the quarter amounted 329.2 million pesos compared to a 247.7 million profit year-over-year. Annualized return on assets and on equity for the bank reached 2.7% and 32.6% respectively.

The bank’s credit exposure to private sector reached 41 billion pesos up 31% during the last 12 months and deposits reached 33 billion pesos up 20% during the same period. At the end of the quarter the bank estimated market shares of both private sector loans and deposits were 8.53% and 8.70% respectively.

As regards to asset quality, the NPL ratio a 36 basis points increase year-over-year ending the quarter at 3.42% and its coverage with allowances for loan losses decreased from 141% to 128% 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 55% year-over-year due to higher volume together with an increase in the financial margin. The average interest earning assets grew by 11.2 billion pesos year-over-year and its yield increased 303 basis points.

Interest bearing liabilities increased 7.6 billion pesos during the same period while its costs increased 177 basis points. Net income from services increased 29% year-over-year explained by the growth in fees related to deposit accounts to credit cards and to insurance.

Provisions for loan losses for the quarter amounted to 348.7 million pesos, 156.8 million pesos higher than in the same quarter of the prior year. Administrative expenses were 38% higher year-over-year. Personal expenses grew 37.6% as a consequence of the salary increase agreements with the unions and of the growth in the headcount while the remaining administrative expenses grew 38.7% due to the expansion of 58 branches in our distribution network during the last 12 months and to the higher level of activity and the impact of inflation.

As of June 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 2.5% on total consolidated assets.

At the same date, the bank’s consolidated computable capital exceeded by 1.5 billion pesos, the 3.6 billion pesos minimum capital requirement. This success was similar to that of a year before. Even though, an additional requirement in connection with the operational risk was established since April 2012 which amounted to 398 million pesos as of the end of the second quarter.

The bank’s liquid assets at the end of June represented 70% of the bank’s transactional deposits and 37% 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). We do at this time have one question in the queue. This will be from Nicolas Chialva with Itaú BBA. Please go ahead.

Nicolas Chialva – Itaú BBA

Hello Pablo, and good morning and thank you very much for hosting the call. I’ve got two questions. The first one would be, after seeing huge increase in loans at Tarjetas Regionales which, loan portfolio grew much faster than the bank’s loan portfolio. I’m wondering, which are the drivers of this loan growth, I mean, are these loans growing in line with clients and their assumption or is it that clients are financing a larger share of their purchases?

Pablo Firvida

Okay. And the second question do you want me to?

Nicolas Chialva – Itaú BBA

Okay. The second question in regards to asset quality. And you mentioned that the bank on a standalone basis has comparable metrics to that of we experienced. So, I’m wondering, what has the imperial ratio has done for the bank for CFA and for Tarjetas Regionales on standalone basis. And how did this metrics vary in second Q, what explains the increase in NPL to total loan ratio and this in segment particular, you already stated that it was the original segment. But I’m wondering whether it was credit card to the consumer or any sub-segment in particular? And what can we kind of expect going forward regarding NPL, regarding of these provisions and NPL covers with the loan fees?

Pablo Firvida

Okay, perfect. First, regarding the growth in the regional credit card companies, there is no specific, just one answer to the increase in growth. Basically there is a component of more consumption and there is real consumption and also inflation included there. We have more clients and a little bit more financing. So, I would say that the three components are present there.

And if we look at the regions that are growing the most within Tarjetas Regionales in particular, the one that is growing higher, is the region of the Province of Buenos Aires and the City of Buenos Aires that is where during the last two years, they had been opening branches. If you look at our press release, you will see that in the last 12 months, the regional Tarjetas Regionales bank has opened 14 branches.

Now, for the second semester, we are ambitioning a couple of openings for Tarjetas Regionales, most of the expansion in the Province of Buenos Aires, and in the City of Buenos Aires, it’s over at this stage. So, more clients, more consumption, and some financing.

Nicolas Chialva – Itaú BBA

All right.

Pablo Firvida

In terms of asset quality, if you were to open the consolidated and deal ratio that was 3.4%, 3.42% in June, it’s roughly 2% for the bank, 5% for the regional greater companies and 9% for CFA. The evolution is, I would say particularly in individuals not in companies and both in banks and also in the consumer subsidiaries. For the rest of the year, we expect a gradual deterioration from 3.4% to something between 3.8% through 3.9%.

And we have been saying in the – I would say in the last year, we have been building up an anti-cyclical reserve, so, because we were foreseeing this slight deterioration. So, the coverage should be going down but between I would say 110% to 120%, definitely about 100%.

Nicolas Chialva – Itaú BBA

Great, thank you very much Pablo.

Pablo Firvida

You’re welcome Nicolas.

Operator

(Operator Instructions). And we do have another question in queue, this would be from Phillip Rowe with GWI Asset Management.

Phillip Rowe – GWI Asset Management

Hi Pablo, can you hear me okay?

Pablo Firvida

Excellent. Hi Phillip.

Phillip Rowe – GWI Asset Management

Hi, great, thank you. Congratulations on the quarter. Can you talk about what you think is the steady state in terms of I don’t know, average spending core credit card account, you said the number of branches of the regional credit card company is mostly down in Buenos Aires. But when does this reach a study state growth level above inflation at the end of this year that it reaches sort of a steady state or will it be a longer process? Thank you.

Pablo Firvida

Well, now, due to expansion, the consumption is higher than inflation, and say consumption is 40% or the growth in consumption is 40%, roughly 25%, this inflation of 15% is more a customer consuming more.

And we think that this growth real growth let’s say will decelerate due to the deceleration in the expansion process. But nothing I would say immediate. I think it would take I don’t know – it’s hard to project but two years. But the consumption customer – our clients are not changing.

Phillip Rowe – GWI Asset Management

Okay. And just – have you made any analysis of what the impact could be on you of complying with the government mandate which you launched to the small and medium (inaudible) of 2% to 5% a year product deposit?

Pablo Firvida

I think I go to your question, the old deal was not very good. But regarding this line that the government or this new regulation that the central bank issued, this 5% on the average of deposits for the month of June is roughly 1.4 billion pesos, a 50% must be lent to SMEs and the other 50% to corporates. This had to have up to 15% interest rate and the tenure of the loans it must be at least three years but an average life longer than two years.

The amount is fixed if we lend with deposits. And our mix of deposit is 55%, the transactional accounts. We can make money and there is no negative effect with interest rates we have today. Also it has to be – seen if the liquidity ratios remain the same or they change, with this 5%, we don’t see a much bigger impact and of course everything is dynamic and the bank wants to keep its profitability.

What perhaps will be further is to allocate all these amounts to SMEs because the amounts are small and together with 700 million pesos, we will take perhaps more time but we are working hard on that.

Phillip Rowe – GWI Asset Management

Okay, thank you very much.

Pablo Firvida

Okay, thanks.

Operator

And you have two more questions in the queue. At this time, we’ll go to Federico Rey, with Raymond James.

Federico Rey – Raymond James

Okay. Good morning everybody. I have a question regarding margins. During the quarter we saw a meaningful decline in the cost of funding. I would like to understand the apparent high spreads are sustainable or not? And the second question is regarding deposits, basically there was no growth quarter on quarter especially when both lands in sale deposits and in term deposits. I would like to entail this is part of our strategy of the bank in order to reduce cost of funds for – it’s part of the drain in dollar bucket related deposits? Thank you.

Pablo Firvida

Okay, hi Federico. We see the margins are on these levels up to 12.6% was the quarter. We could have some pressure but nothing below the 11% to 12%. The margins improved because of this reduction in the cost of funding you mentioned. Also the reduction in the dollar bucket of our balance sheet that has a lower interest both in assets and amenities.

But remember that we have this consumer finance businesses that they are higher margin businesses than the rest of the financial system. So, I mentioned the same happens with the NPS, higher risk and higher (inaudible). So, we think that also – although the better rate will increase let’s say 2 percentage points from now to the end of the year. We could maintain margins around this range I mentioned from 11% to 12%.

In terms of deposits, the explanation is the drop in dollar denominated deposits and the growth in peso denominated deposits. The objective of the bank is to increase its deposit base not to reduce it definitely.

And we have what, we have a chart in our press release, I think it’s stable then that has already daily deposits, you will see there that deposits in Pesos rule, and deposits in dollars diminished in a very important way. I don’t know if I answered everything.

Federico Rey – Raymond James

Yes, thank you.

Operator

(Operator Instructions). At this time we’ll move to (inaudible) with Santander. Please go ahead.

Unidentified Analyst

Hello good morning, thank you taking my questions. I would like to ask regarding the cost front, especially the guidance for – especially the guidance for year-end, now that you have mentioned that your expansion in branches is more or less done. And you don’t have more big investments in this?

Pablo Firvida

Hello.

Unidentified Analyst

Hello, I would like to ask you your guidance for cost growth now that you mentioned that your expansion in branches is more or less done.

Pablo Firvida

Sorry, we were out of the call, could you repeat the question, sorry.

Unidentified Analyst

Sure, sure, sure. I would like to ask you your guidance on cost growth now that you mentioned that your expansion in branches is more or less done in Buenos Aires?

Pablo Firvida

Yes, hi, for the bank, we still have some branches to open in the second semester, we are thinking in around five branches in Tarjetas Regionales one or two. So, it seems the regional flows but it’s over. 57% of our administrative expenses are personal in which we have a variable that we cannot handle that is the union agreement or the salary increase with the unions. And the rest have some inflation into it.

This introduction is to tell that we still see some growth of administrative expenses higher than inflation for the second half of the year. But looking at the whole year, it will be lower than the 2011 growth. And within this explanation of cost, we want to keep improving efficiency, because although we are increasing our inflation, our administrative expenses, the challenge and the objective is to increase more than that – our feels and then the financial income.

Unidentified Analyst

Okay. And do you have a target for efficiency?

Pablo Firvida

Well, not – perhaps we have some targets in the different companies, the consolidating figure of 63% that you saw in the press release it’s a consequence of this consolidation. But basically in a consolidated way we don’t have a number. But we are there to take it through someone it’s somewhere around 60% in the next two to three quarters.

Unidentified Analyst

Okay, thank you. And could you please repeat the coverage ratio guidance that you previously mentioned?

Pablo Firvida

Yes, from 110% to 120% at year end.

Unidentified Analyst

Okay, thank you very much.

Pablo Firvida

You’re welcome.

Operator

And at this time, we have no further questions in the queue.

Pablo Firvida

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

Operator

And again ladies and gentlemen, this does conclude today’s conference call. Thank you all for your participation. You may now disconnect.

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