Feb 20, 2020
Operator
Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's 4Q 2019 Earnings Conference Call.
We would like to inform you that the 4Q 2019 press release is available to download at the Investor Relations website of Banco Macro, www.macro.com.ar/relaciones-inversores/. 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.
Gustavo Manriquez, Chief Executive Officer; Mr. Jorge Scarinci, Chief Financial Officer; and Mr.
Nicolas Torres, IR. Now, I will turn the conference over to Mr.
Nicolas Torres. You may begin your conference sir.
Nicolas Torres
Good morning and welcome to Banco Macro's 4Q 2019 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 at our website.
4Q 2019 press release was distributed yesterday, and it's also available at our website. I will now briefly comment on the bank's 4Q 2019 financial results.
Banco Macro's net income for the quarter was Ps.13.3 billion, 1% higher than in 3Q 2019 and 153% higher than the Ps.5.2 billion posted a year ago, based on an increase in net interest income and in net fee income. The bank's 4Q 2019 accumulated ROE and ROA of 59% and 10.4% respectively, remained healthy and show the bank's earning potential.
On a fiscal year basis, Banco Macro earned Ps.40.8 billion in fiscal year 2019, 159% higher than the Ps.15.7 billion earned in fiscal year 2018. Net operating income before general, administrative and personnel expenses for 4Q 2019 was Ps.29.7 billion, increasing 13% or Ps.3.5 billion quarter-on-quarter and 83% higher than a year ago.
Operating income after general and administrative expenses and personnel expenses was Ps.16.4 billion, 38% or Ps.4.5 billion higher than in 3Q 2019 and 117% or Ps.8.9 billion higher than in 4Q 2018. In fiscal year 2019, operating income totaled Ps.38.1 billion, 114% higher than in fiscal year 2018.
In the quarter, net interest income totaled Ps.22.7 billion, 13% or Ps.2.7 billion higher than the result posted in 3Q 2019 and 85% or Ps.10.4 billion higher than the result posted one year ago. This performance can be traced to an 8% quarter-on-quarter decrease in interest income and a 35% decrease in interest expenses.
In fiscal year 2019, net interest income totaled Ps.22.5 billion, 83% higher than the Ps.39.6 billion registered in fiscal year 2018. In 4Q, interest income totaled Ps.32.8 billion, 8% or Ps.2.8 billion lower than in 3Q 2019 and 38% or Ps.9 billion higher than the previous year.
Within interest income, interest on loans increased 38% or Ps.6.1 billion quarter-on-quarter and 42% year-on-year. In 4Q 2019, interest on loans represent 67% of total interest income.
During fiscal year 2019, interest on loans totaled Ps.67.5 billion increasing 42% compared to fiscal year 2018. Net income from government and private securities decreased 49% or Ps.
9.5 billion quarter-on-quarter due to lower LELIQs volume and lower interest rates. Compared to 4Q 2018, net income from government and private securities increased 25% or Ps.2 billion.
In fiscal year 2019, net income from government and private securities totaled Ps.53.8 billion, 204% higher than in fiscal year 2018. In 4Q 2019, FX gains, including investment in derivative financing, totaled Ps.1.3 billion gain.
During fiscal year 2019, FX gains totaled Ps.3.1 billion compared to Ps.1.4 billion loss posted in fiscal year 2018. In 43 2019, interest expenses totaled Ps.10.1 billion, 35%, or Ps.4.4 billion decrease compared to 3Q 2019 and 12% or Ps.1.4 billion lower on a yearly basis.
Within interest expenses, interest on deposits decreased 34% or Ps.4.8 billion quarter-on-quarter, mainly driven by an 18% decrease in the average volume of time deposits and 21.4 percentage points decrease in the average time deposit interest rates. On a yearly basis, interest on deposits decreased 12% or Ps.1.3 billion.
In 4Q 2019, interest on deposits represented 93% of the bank's financial expenses. In fiscal year 2019, interest expense totaled Ps.51.6 billion and was 99% higher than in fiscal year 2018.
As of the fourth quarter of 2019, the bank's accumulated net interest margin, including FX, was 21.1%, higher than the 19.1% posted in 3Q 2019 and the 14.9% registered in 4Q 2018. In 4Q 2019, net fee income totaled Ps.4.1 billion, 10% higher than in 3Q 2019, and on a yearly basis, net fee income increased 32% or Ps.1 billion.
In fiscal year 2019, net fee income totaled Ps.14.6 billion, increasing 31% compared to fiscal year 2018. In 4Q 2019, net income from financial assets and liabilities at fair value through profit or loss totaled Ps.2.6 billion, increasing 292% or Ps.1.9 billion compared to 3Q 2019.
In fiscal year 2019, net income from financial assets and liabilities at fair value through profit or loss totaled Ps.5.3 billion gain, 402% higher than in fiscal year 2018. In the quarter, other operating income totaled Ps.926 million, decreasing 9% compared to 3Q 2019.
On a yearly basis, other operating income increased 69% from Ps.378 million. In fiscal year 2019, other operating income totaled Ps.6.1 billion, 117% higher than in fiscal year 2018.
In 4Q 2019, Banco Macro's personnel and administrative expenses totaled Ps.8.3 billion, 13% higher or Ps.941 million than the previous quarter. On a yearly basis, personnel and administrative expenses increased 58% or Ps.3 million.
In fiscal year 2019, administrative expenses plus employee benefits increased 64% compared to fiscal year 2018. As of December 2019, the accumulated efficiency ratio reached 32.3%, improving from the 33.2% posted in 3Q 2019 and the 37.9% registered a year ago.
In fiscal year 2019, Banco Macro's effective tax rate was 16.3% lower than the 30.7% registered during fiscal year 2018. During 2019 and in accordance with applicable income tax law and regulations and the evolution of Consumer Price Index, the bank's decided to adjust income tax by inflation.
In terms of loan growth, the bank's financing to the private sector grew 10% or Ps.18.7 billion quarter-on-quarter and 22% or Ps.38.6 billion year-on-year. Within commercial loans, growth was driven by overdrafts and others with a 32% and a 52% increase quarter on quarter respectively.
On the consumer side, growth was driven by credit card loans which grew 27% or Ps.9 billion in the quarter. It is important to mention that Banco Macro's market share over private sector loans as of December 2019 reached 8.1%.
On the funding side, total deposits increased 1% or Ps.3.7 billion quarter-on-quarter and increased 10% or Ps.24.9 billion year-on-year. Private sector deposits increased 3% quarter-on-quarter, while public sector deposits decreased 14% quarter-on-quarter.
The increase in private sector deposits was led by demand deposits, which increased 17% or Ps.18.5 billion quarter-on-quarter, while time deposits decreased 11% or Ps.13.2 billion. Within private sector deposits, peso deposits increased 2% or Ps.4.3 billion, while U.S.
dollar deposits decreased 6% or $84 million. As of December 2019, Banco Macro's transactional accounts represented approximately 54% of total deposits.
Banco Macro's market share over private deposits as of December 2019 totaled 6.2%. In terms of asset quality, Banco Macro's nonperforming to total financial ratio reached 2.07% and the coverage ratio reached 123.08%.
In terms of capitalization, Banco Macro accounted for an excess capital of Ps.69 billion, which represented a total regulatory capital ratio of 27.3% and a Tier 1 ratio of 20%. 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 59%.
Overall, we have accounted for another positive quarter. 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'll keep a well-itemized deposit base.
At this time, we would like to take the questions you may have.
Operator
Thank you. At this time we’re going to open it up for question-and-answers.
[Operator Instructions] Today’s first question comes from Ernesto Gabilondo of Bank of America. Please go ahead.
Ernesto Gabilondo
Hi, good morning Gustavo, Jorge and Nicolas, and thanks for the opportunity to make questions. My first question is on your loan growth expectations.
We have seen lower interest rates. We failed to see credit demand above inflation.
Well, yesterday, we saw the introduction of some caps on interest rates. So I remember in the former administration this decentivized some of the banks from lending.
So any color on this will be much appreciated. And then on my second question is on the EPR [ph] inflation accounting.
I think you will be reporting it next quarter. So I am just wondering if you have estimated how was your 2019 ROE including EPR inflation accounting.
And then for my last question you see the possibility of the net earnings contracting in 2020 or showing a lower earnings growth due to lower security gains and still soft credit demand? Thank you.
Jorge Scarinci
Hi, Ernesto. This is Jorge Scarinci answering.
How are you? The first part of your question about loan growth expectations.
Honestly, this is very easy to project or to forecast in this volatile scenario, but in general terms, we are forecasting loan growth to be slightly below inflation expectation considering that the market consensus is expecting inflation to be in the area of 45. So, therefore, we are looking for nominal growth of loans a little bit below that.
In terms of the caps on interest rate that yesterday, Central Bank said, I think that we have been commenting about this, the priority of these measures to happen. Finally, they appeared here according to this cap on interest rates on credit cards at the level of 55% starting as of March.
At the same time, there was some decrease in reserve requirements tied to credit corporations. The net of these on the P&L shows of course making a forecast on interest rate make a net positive impact of 100 – approximately Ps.100 million in 2020.
Then on your question about inflation accounting, we are going to start reporting adjusted numbers in the first quarter of 2020 and we are working on that. In terms of ROE, adjusted by inflation in 2019 is in the area of 18%.
So that is basically the questions that you have. I don't know if I'm missing someone.
Ernesto Gabilondo
Yes, thank you. So yes, the last one is considering that probably you will see lower security gains in 2020.
I don’t know if you should see lower earnings growth or actually earnings contracting in 2020.
Jorge Scarinci
Yes. If you only look at security gains could be of course for the moment interest rates are lower than the ones that we saw last year.
Even though banks in general try to defend the margin as much as we can and that is something that we are working on. But of course everything has a limit in the sense that if we see more downward pressure on interest rates and on security rates, we will try to translate that to depositors.
At some point depositors will not covalidate that. So, until we reach that point, we will try to defend the margin as much as we can.
So we are trying to maintain the ROE levels for 2020 relatively similar than – in real terms similar than the one that we posted in 2019. But again, we are in February, there is still 10 more months to come in Argentina and that's a lot of time.
So the scenario could change from one month to the other. But basically the idea that we have for the moment is to try to maintain the adjusted ROE in 2020.
Ernesto Gabilondo
Perfect. Thank you very much.
Jorge Scarinci
You’re welcome.
Operator
Our next question today comes from Gabriel Nobrega of Citibank. Please go ahead.
Gabriel Nobrega
Hi everyone, good afternoon and thank you for the opportunity to ask questions. I have a – my I have the first question, actually, on the top-down that you're seeing.
It's already been two months that the new administration has come in. I understand the situation isn't still as clear as we had thought, mainly because the administration is still talking about the bonds and the restructuring of the debt.
But having said this, what do you believe will be the main challenges and opportunities that you could have over this year? And what are you implementing – what strategies are you implementing in order to untackle these two fronts?
I will make a second question afterwards. Thank you.
Jorge Scarinci
Hi, Gabriel how are you. Yes you are right, we thought that at this point could have a better or clearer landscape on 2020.
However, we are still working and dealing with volatile scenarios. And with the government that has not announced an economic program yet.
That restructuring is the main issue for the government. And honestly we do not know exactly at what time that is going to be finally solved.
So for the moment, I would say that economic activity continues to be very sluggish. According to market consensus, GDP is expected to be minus 1% in real terms in 2020, inflation in the year of 45 as I commented in the previous question to Ernesto.
So basically challenges and opportunities is – I mean we have seen and we have sailed through these volatile scenario many times in the last 20 years, 25 years in Argentina. And Banco Macro has a high liquid position and excess capital that put us in the top ranking of solvency here in Argentina.
And so if there is an opportunity in terms of organic growth, we are going to go through that highway. If there is an opportunity through organic growth, we might take that one also.
So we are going to, as Nicolas commented in the comments, we're going to make on the excess capital, the best use that we consider and try to defend the margin as much as we can in these scenario of downward trend on interest rates.
Gabriel Nobrega
All right. That's very clear and thank you.
And as for my second question it is actually looking at your asset quality, we saw the provisions increased a lot and I understand that this comes a lot from Byzantine being that the loan went to category four and you had to have to provision for this. I also understand there are other companies, but maybe looking forward being that your NPL ratios also increased this year.
Do you expect that, you should make more provisions over the year to uncover these companies and also if you could just mention what coverage you have achieved for Byzantine please.
Jorge Scarinci
As far as we continue to see sluggish economic activity, I think that we might see more deterioration in asset quality, even though that taking into consideration that we have a 2% of NPL to total loans when the season is close to seven. So this is the result of many years of working on our current standards and of course to have our consumer portfolio very tight to payrolls.
But you're right, that we are seeing some corporate or commercial companies going into travel. So the idea is that we want to maintain the coverage ratio in the area of 120 to 150.
Byzantine provisioned 100%. So going forward, again, if these economic situations continues for most of 220, we could see NPLs in our – the NPL ratio going between 2.2, 2.4 by the end of the year.
I am maintaining, as I mentioned before, the coverage in the area of 120, 140 approx.
Gabriel Nobrega
Can I just make a follow-up here? In this coverage which you are guiding between 120 and 140, are you already contemplating the implementation of the expected loss model under IFRS9?
Jorge Scarinci
Not if – I mean we are going to start with that maybe by mid-year or we have not started yet.
Gabriel Nobrega
All right, clear, thank you.
Jorge Scarinci
You're welcome.
Operator
And our next question today comes from Domingos Falavina of JP Morgan. Please go ahead.
Domingos Falavina
Thank you gentlemen, also for taking the call. I just want to run through the basic forecast and I'm sorry if I missed that in the beginning, but like we have an inflation of around 45.
If you could just, give even in ranges, like loan growth 40 to 45 NII above the same as loan, cost of risk effective tax rate. I understand your goal is to kind of maintain a similar ROE 2020 over 2019, but just, so that we have, we understand it's volatile, Argentina, but just to have a directional view on how you guys are thinking about next year, about this year?
Sorry.
Jorge Scarinci
Hi Domingos, yes, as I mentioned before, we are in February and it happened to me in the last maybe two or three years at least that we're forecasting some scenario at the beginning of the year and the scenario changed completely in the following months and our expectation, some forecasts where - we're thrown to the trash.
Domingos Falavina
The same here, but always good to know what you are thinking.
Jorge Scarinci
Inflation in the area of 40, you have to take into consideration loan growth between 35 and 40, net interest income an increase of maybe 25 to 30. The effective income tax rate – it is not easy to forecast in the sense that we are going to both adjust inflation numbers, but it is going to be maybe in the area of what we posted in 2019.
Deposit growth also similar and loan growth between 35 and 40. Expenses, those in salaries I think that the negotiations have not started yet, but I think that salaries should be growing below inflation expectations, so between 35 and 40, I would assume.
So for expenses I would make an average growth of maybe 40 area approx. Those are the main issues.
Domingos Falavina
Yet the cost of risk I think is the only one we did not touch.
Jorge Scarinci
Yes, cost of risk. Yes.
Again, depending on market conditions, that could range between 2.5 and 3.5.
Domingos Falavina
Okay. And the last one on my side is the growth should be more tilted to consumers, more corporates, SMEs, how exactly would you guess that?
Jorge Scarinci
The what? Sorry.
Domingos Falavina
The loan growth, like the strategy for 2020 is originating in which segment?
Jorge Scarinci
No, I think that's, I mean, should be nominally speaking both. I would assume that could be 60%, 65% consumer and the rest commercial.
Domingos Falavina
Super clear. Thank you.
Jorge Scarinci
You are welcome Domingos.
Operator
[Operator Instructions] Today's next question comes from Carlos Gomez at HSBC. Please go ahead.
Carlos Gomez
Yes. A couple of clarifications, could you let us know where your average interest rate on credit cards was before the implementation of this cap at 55%.
Second, for next year, your tax rate should be 30% again on your inflation adjusted earnings. Is that correct?
And finally, will the inflation adjustment be the same in your local currency statements as in your 20-F? Thank you.
Jorge Scarinci
Hi Carlos, how are you? The average rates before the 55% cap was 75.
That's your first question. The second one and the statutory rate is 30%, but depending on the impact of inflation, I think that the effective is going to be below that.
Carlos Gomez
Sorry, effective on the – again effective on the inflation adjusted earnings or effective on the earnings without inflation adjustment.
Jorge Scarinci
Might be both, but I think that the effective on the adjusted numbers is going to be much lower than the 30.
Carlos Gomez
Okay.
Jorge Scarinci
And I couldn't get the last question. Carlos.
Carlos Gomez
Yes. I was wondering if the inflation adjustment, which we understand will be one line.
I think after the pre-tax earnings, correct me if I'm wrong, if it will be the same as your local currency financial statements and in your 20-F?
Jorge Scarinci
Not so sure. I mean on the 20-F, we are still debating that with external auditors.
But on the local reporting and the Central Bank, we are going to report adjusted numbers.
Carlos Gomez
Okay. And will you also will you also adjust the history, like in the past, you would give us inflation adjusted numbers, inflation adjusted historical numbers?
Jorge Scarinci
We're not so sure about that. If I have to answer it now, I would say no.
But we are still also for working with our company department, the Central Bank and external auditors on that because these are very complicated calculation on that. So, we are still trying to see, we have to or we have maybe a kind of approval for the Central Bank that we can report without the adjusted numbers of the previous years.
Carlos Gomez
Okay. If you do have to present adjusted numbers, we beg you to present the nominal as well so that we can continue the historical series
Jorge Scarinci
Okay. So I will send you – say our press release, a book.
Thanks Carlos.
Carlos Gomez
Thank you so much.
Operator
And the next question comes from Santiago Petri of Templeton. Please go ahead.
Santiago Petri
Yes. Hi good afternoon guys.
Today, there was a press report that states that this was related to fintech, but I would like to know if this impact this, your activities in any sense that it for which the automatic deduction of the installments from loans, from they are because I think it is – so I would like to know if, how do you collect your loans and if this applies to you.
Jorge Scarinci
Basically, this measure have a much higher impact on the fintechs. Basically when you have your client account with you, you have the possibility to deduct the installment of the personal loan or the credit card, as we have been doing for the last 15 years.
So, it's not impacting banks basically.
Carlos Gomez
Okay. Thanks.
Thanks a lot.
Jorge Scarinci
You are welcome.
Operator
And our next question comes from Brian Flores of Citibank. Please go ahead.
Brian Flores
All right, thank you for the opportunity. Just a quick question on your funding cost, we saw it decreasing quarter on quarter significantly.
So just wanted to, sorry to ask you, how are you thinking about these particularly going forward how recurrent do you think it could be going forward? Thank you.
Jorge Scarinci
Of course. I think that's some of these, I mentioned that before, banks always try to defend the margins but we will try to translate 100% or the most as we can.
The decrease on LELIQ rate to our depositors. But of course you have a limit.
That's the point when the depositers says I'm not going to renew these peso time deposit because he's well below inflation, well below what I have in mind for the FX depreciation. So I'm going to, instead of renewing that, I'm going to, I don't know, buy a fridge, buy a car, go on holidays or maybe buy dollars on the informal market because we have FX control here.
So, there is a limit for the decrease on the funding cost. Going forward, I think that we are quite close to that limit, so I don't believe that we could go farther reducing the funding cost compared to what we have done in 2019
Carlos Gomez
Very clear. Thank you.
Jorge Scarinci
You're welcome.
Operator
And there are no more questions at this time, so this concludes the question-and-answer session. I would like to turn the conference back over to Mr.
Nicolas Torres for final consideration.
Nicolas Torres
Thank you all for your interest in Banco Macro. We appreciate your time and look forward to speaking with you again.
Good day.
Operator
Thank you. The conference has now concluded.
We thank you all for attending today's presentation. You may now disconnect.