Earnings Call Transcript - BMA Q2 2024

Nicolás Torres, IR

Thank you, Nick. Good morning, and welcome to Banco Macro's second quarter 2024 conference call. Any comment 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 it's available at our website. Second quarter 2024 press release was distributed yesterday and it's available at our website. All figures are in Argentine pesos and have been restated in terms of the measuring unit current at the end of the reporting period. As of 2020, the bank began reporting results applying Hyperinflation Accounting, in accordance with IFRS IAS 29 as established by the Central Bank of Argentina. For ease of comparison, figures of previous quarters have been restated applying IAS 29 to reflect the accumulated effect of the inflation adjustment for each period through June 30, 2024. I will now briefly comment on the bank's second quarter 2024 financial results. In the six months ended June 30, 2024, Banco Macro's net income totaled ARS93.1 billion. This result was 55% or ARS115.9 billion lower than in the six months of 2023. As of the second quarter of 2024, the accumulated annualized return on average equity and accumulated annualized return on average assets were 5.4% and 1.7%, respectively. In the six months ended June 30, 2024, operating income, before general, administrative, and personnel expenses, totaled ARS2.38 trillion, 36% or ARS628.2 billion higher than in the six months of 2023. Net operating income, before general and administrative expense and personnel expenses, for the first half of 2024 were ARS1.59 trillion, increasing 41% or ARS464.7 billion when compared to the first half of 2023. Banco Macro's second quarter 2024 net income totaled ARS233.2 billion loss, which was ARS559.6 billion lower than the previous quarter and ARS397.3 billion lower year-on-year, mainly due to the mark-to-market of government securities, financial assets at fair value to profit or loss, and lower FX gains registered in the quarter. It is important to note that if government securities, including financial assets at fair value to profit or loss, namely inflation-adjusted bonds due in 2027, had been valued instead at amortized cost to second quarter 2024, net income would have been ARS605.5 billion higher. Furthermore, as it is publicly known, Banco Macro recently exercised about half of some of the put options that it held on certain inflation-adjusted securities. Given the current breakdown of our government securities portfolio, the bank estimates that net income could have been around ARS300 billion higher had the remaining inflation-adjusted securities been valued at amortized cost. In the second quarter of 2024, provision for loan losses totaled ARS16.5 billion, 26% or ARS5.9 billion lower than in the first quarter of 2024. On a yearly basis, provision for loan losses decreased 20% or ARS4 billion. Operating income, after general and administrative and personnel expenses, was ARS99.1 billion in the second quarter of 2024, 93% or ARS1.4 trillion lower than in the first quarter of 2024 and 85% or ARS544 billion lower than a year ago. In the quarter, net interest income totaled ARS188 billion, 6% or ARS12.7 billion lower than in the first quarter of 2024 and 53% or ARS213.1 billion lower year-on-year. Interest income decreased 27%, while interest expenses decreased 33%. In the second quarter of 2024, interest income totaled ARS619.7 billion, 27% or ARS229.8 billion lower than in the first quarter of 2024 and 46% or ARS521.4 billion lower than in the second quarter of 2023. Income from interest on loans and other financing totaled ARS410.2 billion, 26% or ARS142.7 billion lower compared with the previous quarter, mainly due to a 25.9 percentage points decrease in the average lending rate which was partially offset by a 9% increase in the average volume of private sector loans. On a yearly basis, income from interest on loans decreased 10% or ARS45.2 billion. In the second quarter of 2024, interest on loans represented 66% of total interest income. In the second quarter of 2024, income from government and private securities increased 40% or ARS44.7 billion quarter-on-quarter and decreased 74% or ARS457.2 billion compared with the same period of last year. In the second quarter of 2024, income from Repos totaled ARS48.7 billion, 73% or ARS131.4 billion lower than the previous quarter and 29% or ARS19.5 billion lower than a year ago. In the second quarter of 2024, FX income totaled ARS25.6 billion, 73% or ARS69.9 billion lower than the previous quarter and 91% or ARS256.1 billion lower than a year ago. FX income gain was due to the 6.3% Argentine peso depreciation against the US dollar and the bank's long dollar position during the quarter. It is important to notice that the bank's average long dollar position decreased 59% during the quarter. In the second quarter of 2024, interest expense totaled ARS431.7 billion, decreasing 33% or ARS217.1 billion compared to the previous quarter and 42% or ARS308.3 billion lower when compared to the second quarter of 2023. Within interest expense, interest on deposits decreased 33% or ARS208.8 billion quarter-on-quarter, due to a 25.4 percentage points decrease in the average rate paid on deposits, while the average volume of deposits from the private sector increased 16%. On a yearly basis, interest on deposits decreased 42% or ARS304.5 billion. In the second quarter of 2024, the bank's net interest margin including FX was 19.9%, lower than the 26.2% posted in the first quarter of 2024 and the 38.3% posted in the second quarter of 2023. In the second quarter of 2024, Banco Macro's net fee income totaled ARS95.7 billion, 8% or ARS6.8 billion higher than in the first quarter of 2024 and was 2% or ARS2.1 billion lower than the same period of last year. In the second quarter of 2024, net income from financial assets and liabilities at fair value through profit or loss totaled a gain of ARS121.2 billion, decreasing 92% in the quarter. This gain was smaller due to the negative mark-to-market of some government securities, basically inflation-adjusted bonds, amounting to ARS1.41 trillion. In the quarter, other operating income totaled ARS46.2 billion, 7% or ARS3.3 billion lower than in the first quarter of '24. On a yearly basis, other operating income increased 62% or ARS17.8 billion. In the second quarter of 2024, Banco Macro's administrative expenses plus employee benefits totaled ARS203.5 billion, 15% or ARS35.3 billion lower than in the previous quarter, due to lower employee benefits which decreased 14% and lower administrative expenses which decreased 17%. On a yearly basis, administrative expenses plus employee benefits increased 14% or ARS25.6 billion. As of the second quarter of 2024, the accumulated efficiency ratio reached 22.2%, deteriorating from the 14.7% posted in the first quarter of 2024 and the 22.2% posted one year ago. In the second quarter of 2024, expenses decreased 14%, while net interest income plus net fee income plus other operating income decreased 77% compared to the first quarter of 2024. In the second quarter of 2024, the result from the net monetary position totaled a loss of ARS462.7 billion, 56% or ARS591.3 billion lower than the loss posted in the first quarter of 2024 and 14% or ARS56.1 billion higher than the loss posted a year ago. This result is a consequence of lower inflation during the quarter. Inflation was 18.6% in the second quarter of 2024 compared to the 51.6% registered in the first quarter of 2024, while the net monetary position remained unchanged. In the second quarter of 2024, given Macro's negative net income for the quarter, no income tax charge was recorded. Further information is provided in Note 21 to our financial statements. In terms of loan growth, the bank's total financing reached ARS3.47 trillion, increasing 17% or ARS504.1 billion quarter-on-quarter and 5% or ARS154.5 billion higher year-on-year. Within commercial loans, documents stand out with a 7% or ARS43.6 billion increase, while others increased 27% or ARS158.3 billion. Within consumer lending, personal loans increased 29% or ARS111.9 billion while credit card loans increased 11% or ARS77.8 billion. Peso financing increased 20% in the quarter, while US dollar financing increased $2 million. It is important to mention that Banco Macro's market share over private sector loans as of June 2024 reached 9.1%. On the funding side, total deposits increased 13% or ARS769.5 billion quarter-on-quarter, totaling ARS6.74 trillion and decreased 5% or ARS329.3 billion year-on-year. Private sector deposits increased 11% or ARS591.5 billion quarter-on-quarter, while private sector deposits increased 30% or ARS181.9 billion quarter-on-quarter. The increase in private sector deposits was led by demand deposits, which increased 23% or ARS581.5 billion, while time deposits decreased 2% or ARS54.5 billion quarter-on-quarter. Within private sector deposits, peso deposits increased 17% or ARS774.6 billion, while US dollar deposits decreased 6% or $97 million. As of June 2024, Banco Macro's transactional accounts represented approximately 52% of total deposits. Banco Macro's market share over private sector deposits as of June 2024 totaled 8.1%. In terms of asset quality, Banco Macro's non-performing to total financial ratio reached 1.23%. The coverage ratio measured as total allowances under expected credit losses over non-performing loans under Central Bank rules reached 181.4%. Consumer portfolio non-performing loans deteriorated 5 basis points up to 1.52% from 1.47% in the previous quarter, while commercial portfolio non-performing loans deteriorated 1 basis point in the second quarter of 2024. In terms of capitalization, Banco Macro accounted an excess capital of ARS2.36 trillion, which represented a capital adequacy ratio of 35.7% and Tier 1 ratio of 34%. The bank's aim is to make the best use of this excess capital. The bank's liquidity remained more than appropriate. Liquid assets to total deposit ratio reached 98% in the second quarter of 2024. Overall, we have accounted for a positive first half of 2024. We continue showing a solid financial position, asset quality remains under control and closely monitored, we keep on working to improve more our efficiency standards and we keep a well-optimized deposit base. At this time, we would like to take the questions you may have.

Operator, Operator

At this time, we're going to open it up for questions and answers. Our first question today will come from Ernesto Gabilondo with Bank of America. Please go ahead.

Ernesto Gabilondo, Analyst

Thank you. Hi, good morning, Jorge and Nico. Thanks for the opportunity to ask questions. My first question will be on your loan growth and asset quality expectations for this and next year. And my second question is, if you can elaborate a little bit more on the puts that Macro executed with the Central Bank? And also if you know the timeline and the implications of the repos that the Central Bank is proposing? And also, can you remind us how much is your position on securities linked to inflation? And what will be your strategy going forward with these instruments? And finally, my last question is on ROE. How do you see it for the end of the year? And what do you think will be the sustainable level? Thank you.

Jorge Scarinci, CFO

Hi, Ernesto. This is Jorge speaking. How are you? About your first question in terms of asset quality, I think that the level that we are showing is extremely good and low. I think that going forward, the economy will recover, as is expected for 2025. We are going to be a bit more aggressive in growing in lending, and therefore, delinquency could rise a little bit, but to manageable levels. Again, I think that this is already commented before, but since 2008, the peak that we've had in our delinquency rate was 3% in 2009. So, I think that without any problems, we could be rising this current ratio to levels between 2% and 2.5% without any problem in the case that we become more aggressive in lending. I will go to your third question. I will leave your second question for the last one. The third question about the bonds that we have that are adjusted to inflation. Currently, we have a level of ARS3.7 trillion of bonds that are tied to inflation. This is approximately 120% of the equity, and it's also 110% of the monetary position. The monetary position is the one that adjusts our income statement to inflation. And in that sense, we are linked or hedged against inflation. Going forward, I think that depending on what's happening with the inflation rates, that in last month was 4% on a monthly basis, and we believe that inflation is going to continue with the downward trend. However, we are, according to the economists that we listen, not expecting inflation to become below the 2% until November, December, and the probability of that is maybe the order of 50%. So, for the moment, we are going to keep this portfolio tied to inflation. And if market conditions change, we may exercise the put option or make a swap into fixed-rate notes depending on market conditions. In terms of your fourth question, in terms of ROE going forward, for 2024, we think that we would be ranging between 10% and 13% in real terms. Going forward and in a more sustainable level, we think that we could be delivering between 15% to 20% ROE in real terms. On your second question about the exercise of the put option that we did on the 1st of July, the ALCO decided to execute half of the position of the bond that we have tied to inflation after the conference that the economist and the President of the Central Bank held, saying that the amount of pesos was going to be fixed in the market. Therefore, we decided to exercise that position in order to get extra liquidity and to have more elements to be more aggressive in future lending. On the repos that the Central Bank is offering, I think they are okay for banks which have some transitional liquidity problems. In our case, we are extremely liquid. We are not, of course, using those repos. But the repos are always there. They have been always there. The only thing that is new is that the Central Bank reduced the interest rates on the repos to a level of 48%, so to make it more accessible for banks to get extra liquidity. So, I think I answered all your questions, Ernesto.

Ernesto Gabilondo, Analyst

Thank you very much, Jorge. I have a couple of follow-up questions. First, regarding loan growth, can you provide any insights on the expected pace for this year and next year? Second, you mentioned that you executed half of the puts. Could you remind us of the amount of those securities you held previously?

Jorge Scarinci, CFO

Yeah. In terms of your second question. Yeah, we executed half of the put options that we had. It was like ARS2 trillion in bonds that we exercised and sent to the Central Bank. That amount of pesos we received as extra liquidity. And currently, we hold another ARS2 trillion in put options in case that we want to exercise these inflationary bonds to the Central Bank. Going to the loan growth for 2024, we expect to have positive rates in the order of maybe 15% for 2024. And we believe that with a recovery on GDP in 2025, we could be looking at at least 30% to 35% positive rates of growth in loans for next year.

Ernesto Gabilondo, Analyst

Excellent. Thank you very much, Jorge.

Operator, Operator

The next question comes from Brian Flores with Citibank. Please go ahead.

Brian Flores, Analyst

Hi, Jorge, Nicolás, and team. Thank you very much for the opportunity. I wanted to ask on NIMs, right, because as you say, repos are still helping, but I think the average earned yields are decreasing. Also, you have some relief on the deposit base. I know this is a very hard question, right, because it's a very fluid environment, but when do you think NIMs could stabilize? I think that's my first question. And then, my second one, you mentioned capital, right? Do you have any updates on any regulatory changes that would allow you to distribute maybe higher dividend yields going forward? Thank you.

Jorge Scarinci, CFO

Hey, Brian. How are you? Let's answer your second question first. I mean, we have to wait till next year. For the moment, we haven't seen any new regulation coming. Remember that when we have to pay dividends using basically what the Board proposed to the shareholders meeting the payment of dividends in March, so we have to wait till next year. At that time, it’s basically when the Central Bank always puts a new regulation on the amount of dividend that could be delivered and the amount of installments. Remember that last year, the number of installments was six. This year, the number of installments was reduced to three. So, I think that we are positive in the way that the economic conditions improved and the Central Bank's reserves increased going forward. We are positive that we could be allowed to pay dividends maybe in only one installment, and that is really positive. In terms of your first question on NIMs, you have a chance to go through the press release, the NIM in pesos increased or expanded a little bit. Basically, you were right. There was some little increase in the cost of funds. Remember that, in our case, the amount of transactional deposits where we paid almost 0% there is almost 45% of total deposits. And on the time deposit side, basically, in those that we are the financial agents of the four provinces, we could be paying slightly below average interest rates. So, this gives us a kind of slight competitive advantage in order to continue expanding a little bit the NIMs. And going forward, we think that the NIMs are going to remain pretty stable. So, the increase in the net interest income is going to come through the increase in lending hand in hand with an increase in the funding.

Brian Flores, Analyst

Perfect. If I can follow up just with your last comment, how is demand evolving? What do you think or where do you see the biggest opportunities to grow your loan book right now?

Jorge Scarinci, CFO

I mean, there was a decrease in interest rates in the system that was a consequence of the reduction in inflation, and we think that there was a recovery in lending in most of the areas, basically, SMEs and some consumer. Going forward, we think that we see some recovery in the real levels of salaries. We are going to see consumption pushing a little bit harder. And also, we are having these new investments in different areas as a consequence of this rigid program approval for companies, we are going to see also corporate or company demand for new lending. So, this is going to be across the board we think in 2025. Imagine that the level of lending that we have is pretty sluggish or pretty low. It's around 6% of loans to GDP. So, we think that the potential growth here is huge.

Brian Flores, Analyst

Okay, Jorge. Thank you.

Jorge Scarinci, CFO

You're welcome, Brian.

Operator, Operator

The next question comes from Marina Mertens with Latin Securities. Please go ahead.

Marina Mertens, Analyst

Hi, good morning, and thank you for taking my question. Over the past two quarters, results were largely influenced by the strong performance of the securities portfolio, but that trend reversed this quarter, negatively affecting results. Do you anticipate that the securities portfolio will continue to drive results for the rest of the year, or when should we expect the increased loans to have a more significant impact on results? Thank you.

Jorge Scarinci, CFO

Hi. How are you? I mean, in terms of income coming from the bond portfolio, as we stated in the press release, after executing or exercising half of our bond portfolio or the puts that we have on the bond portfolio, the remaining half of that, the ALCO decided to account it on the cost plus yield instead of having mark-to-market. So, going forward in the coming quarters, we are going to see more stability in the results coming from bonds, and we think that with the pickup in lending, we are going to start seeing that loans or, in this case, interest income from loans are going to start having a bit more or better performance in the income statement line.

Marina Mertens, Analyst

Great. Thank you very much.

Jorge Scarinci, CFO

You're welcome.

Operator, Operator

The next question comes from Yuri Fernandes with JPMorgan. Please go ahead.

Yuri Fernandes, Analyst

Thank you, guys, for the opportunity to ask questions. Just one on these loans versus securities mix, right? And even on the securities mix, right, you have this new instrument, lessee, this basically one-year term. My question is, like on loans and on this lessee, maybe you are increasing the duration, right, of your assets. I think the fiscal liquidity ladder is one year. Although you have the put, you can sell this, but I think, like to a one-year term kind of instrument, you are growing more your loans. So, trying to think about your net monetary results, like inflation is moving lower, so this should be a tailwind. But having more loans and having less, I would say, inflation-linked securities, how to think about your balance sheet versus inflation, right? If inflation is wrong and inflation starts accelerating, is the balance sheet getting riskier to some degree because you have more longer-term maturity assets than you used to have in the past when you have more short-term instruments? That's my first question. My second question is regarding further M&As, right? You just had Itau. I think there is still consolidation to happen in Argentina, so I just would like to know the appetite of Banco Macro for new opportunities, if your message is, 'Well, let's digest Itau, let's keep working on what we have' or 'No, we have a lot of excess capital, and we are still open to new opportunities?' And a third question, more on regulatory updates, right? This is still, I think, an important topic. If you can remind us what can be the next Central Bank regulatory change that can benefit the banks? I think there were many moving parts on rates and reserve requirements. What should we expect for the future on the regulatory front to be a tailwind for you? Thank you.

Jorge Scarinci, CFO

Hi. Thank you, Yuri. In terms of your first question, I mean, holding these inflation-linked securities, we are hedging our balance sheet against the adjustments for inflation on the monetary position. So, by increasing a little bit the duration of our loan book and always having positive real rates, the impact on the balance sheet and impact on the inflation-adjusted income statement is going to be positive. So, we are not seeing any challenge or any damage or risk there. So, it doesn't mean that the increasing duration is going to negatively affect our exposure to inflation, no. On your second question about M&A opportunities, yes, we are going to complete the legal merge with Itau in the fourth quarter of this year. So, by December of this year, everything is going to be under Banco Macro's umbrella. Going forward, I mean, we will be keeping a close eye on any opportunity that might happen in the banking sector. We think that we are one of the only buyers here. So, any potential player that could be interested in leaving, I think is going to knock on our door. So, we're going to be keeping a close eye, as I mentioned before, there. On your third question, Central Bank regulations that could improve a little bit the banking industry, I think that there are many. I think that little by little, the Central Bank is working on different regulations, but they want to go very slowly. They do not want to make any mistakes and take a measure that after two weeks, they have to turn it around. So, I think that they are little by little removing the gaps on interest rates, removing the floor on the deposit rates. So, I think that the Central Bank is working really well here, going very slowly because there is a complete bunch of regulations that need to be removed, but carefully. So, going forward, I think that they are going to have these new regulations that will be positive for the banking sector in order to be less regulated. That is going to be, in our view, positive for the big players such as Banco Macro.

Yuri Fernandes, Analyst

Super clear. Thank you very much.

Jorge Scarinci, CFO

You're welcome.

Operator, Operator

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

Carlos Gomez, Analyst

Hello, good morning. I have two questions. First, could you explain in simple terms what happened to the bond portfolio this quarter in comparison to previous quarters? What should we expect in the upcoming quarters? What would be the normal profitability yield on securities that we might anticipate? That should be all for now.

Jorge Scarinci, CFO

Hi, Carlos. How are you? As of June, we decided to execute the put on half of our position, which occurred on July 1st. Therefore, at the end of the second quarter, the amount of bonds we have remains unchanged. In the third quarter, you will see the effects of the put being exercised and a reduction in the bond portfolio. Additionally, we decided to change the accounting method; instead of marking to market, it will now be based on a cost plus yield mechanism. Moving forward, if we maintain this amount of bonds, a more realistic income level from the bond portfolio is expected to be between ARS30 trillion to ARS50 trillion on a quarterly basis.

Carlos Gomez, Analyst

Okay. And the position that you exercised, you have it now in CPI-linkage, right?

Jorge Scarinci, CFO

Yes.

Carlos Gomez, Analyst

Okay. Very good. My second question, which I didn't ask earlier, is about your capital and the significant dividend you are paying. The situation has changed, you are pursuing mergers and acquisitions, and there is loan growth in the system. Would you consider, given that you have a lot of excess capital, the possibility of consuming a significant portion of it quickly if loan growth increases? In the coming years, would you think about retaining more capital instead of increasing dividends?

Jorge Scarinci, CFO

Yes. If you look at the decline in the capital ratio from the first quarter to the second, you can see that Tier 1 decreased from 44.5% to 34%, which is a reduction of 10 percentage points due to dividend payments. Moving forward, we believe it's important to reach a more normalized level of excess capital. We anticipate a combination of organic growth that we will need in the coming years, along with potential M&A opportunities, especially as some other banks look to exit Argentina while continuing to provide attractive cash dividends. This mix is what we aim to maintain. In the future, a more sustainable capital ratio for Macro could be in the range of 18% to 22% Tier 1, rather than the current level. This will be utilized through organic growth and cash dividends first, followed by possible additional M&A. Therefore, aiming for a range of 18% to 22% feels more reasonable for us moving forward, along with possibly achieving higher market share performance.

Carlos Gomez, Analyst

Okay. Regarding M&A, we understand you are open to all possibilities. Is there anything in progress or do you expect to consider another transaction in the next three or four quarters?

Jorge Scarinci, CFO

No. Honestly, we are not looking to anything at the moment. I think that if something happens, it could be next year. I don't know exactly how many quarters, but next year or in 2026.

Carlos Gomez, Analyst

Okay. That's fair. Thank you.

Jorge Scarinci, CFO

Thank you, Carlos.

Operator, Operator

There are no more questions at this time. This concludes the question-and-answer session. I will now turn the call over to Mr. Nicolás Torres for final considerations.

Nicolás Torres, IR

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

Operator, Operator

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