Jun 9, 2020
Operator
Good morning, ladies and gentlemen. Thank you for waiting.
At this time, we would like to welcome everyone to Banco Macro's first quarter 2020 earnings conference call. We would like to inform you that the first quarter 2020 press release is available to download at the Investor Relations website at Banco Macro, www.macro.com.ar/relaciones-inversores/.
Also, this event is being recorded. 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 from Investor Relations.
I would now like to turn the conference over to Mr. Nicolas Torres.
You may begin.
Nicolas Torres
Good morning and welcome to Banco Macro's first quarter 2020 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 is available at our website.
First quarter 2020 press release was distributed yesterday and it's also available at our website. All figures are in Argentinean Pesos and have been restated in terms of the measuring unit current at the time of the reporting period.
As of the first quarter of 2020, the bank began reporting results applying Hyperinflation Accounting, in accordance with IFRS IAS 29 established by the Central Bank. For ease of comparison, figures of previous quarters of 2019 have been restated applying IAS 29 to reflect the accumulated effect of the inflation adjustment for each period through March 31, 2020.
I will now briefly comment on the bank's first quarter 2020 financial results. Banco Macro's net income for the quarter was ARS7.1 billion, 15% higher than in 4Q 2019 and 80% higher than the ARS3.9 billion posted a year ago, based on an increase in net interest income.
The bank's first quarter 2020 accumulated ROE and ROA of 27.3% and 4.9% respectively, remained healthy and show the bank's earnings potential. Net operating income before general, administrative and personnel expenses for first quarter of 2020 was ARS23.3 billion, decreasing 25% or AR7.6 billion quarter-on-quarter but 16% higher than a year ago.
Operating income after general and administrative expenses and personnel expenses was ARS10.7 billion, 31% or ARS4.8 billion higher than in fourth quarter of 2019 but 68% or ARS4.8 billion higher than in the first quarter of 2019. In the quarter, net interest income totaled ARS21.3 billion, 17% or ARS4.2 billion lower than the result posted in 4Q 2019 but ARS1.3 billion higher than the result posted one year ago.
In the first quarter of 2020, interest income totaled ARS30.9 billion, 16% or ARS6 billion lower than in 4Q 2019 and 18% or ARS6.8 billion lower than the previous year. Within interest income, interest on loans decreased 22% or ARS5.4 billion quarter-on-quarter due to an 8% decrease in the loan portfolio and a 600 basis point decrease in the average lending rate.
Interest income decreased 14% or ARS3.1 billion year-on-year. In the first quarter of 2020, interest on loans represented 63% of total interest income.
Net income from government and private securities decreased 1% or ARS148 million quarter-on-quarter due to lower income from private securities. Compared to the first quarter of 2019, net income from government and private securities decreased 25% or ARS3.6 billion.
In the first quarter of 2020, FX gains, including investment in the derivative financing, totaled ARS568 billion gain due to the 8% Argentine pesos depreciation against the U.S. dollar and the bank's long dollar spot position.
FX gains decreased 96% or ARS1.1 billion quarter-on-quarter due to lower results from trading given the stricter currency controls and regulations. In the first quarter of 2020, interest expense totaled ARS9.6 billion, a 15% or ARS1.8 billion decrease compared to the fourth quarter of 2019 and 46% or ARS8.1 billion lower on a yearly basis.
Within interest expenses, interest on deposits decreased 17% or ARS1.8 billion quarter-on-quarter, mainly driven by a 400 basis points decrease in the average time deposit interest rates. As a consequence of lower Leliq rates that came down from 55% at the beginning of the quarter to a level of 38% at the end of the first quarter of 2020.
On a yearly basis, interest on deposits decreased 47% or ARS7.6 billion. In the first quarter of 2020, interest on deposits represented 91% of the bank's financial expenses.
As of the first quarter 2020, the bank's net interest margin was 19.2%, lower than the 24.8% posted in 4Q 2019 and 1Q 2019. In the first quarter of 2020, net fee income totaled ARS4.4 billion, 4% lower than in the fourth quarter of 2019 and on a yearly basis, net fee income decreased 14% or ARS700 million.
In the first quarter of 2020, net income from financial assets and liabilities at fair value through profit or loss totaled ARS4.1 billion loss as a consequence of the inflation adjustment applied to our Leliq holdings and a lower income from government securities. In the quarter, other operating income totaled ARS1.1 billion, decreasing 9% compared to the fourth quarter of 2019.
On a yearly basis, other operating income increased 77% or ARS3.7 billion. In the first quarter of 2020, Banco Macro's personnel and administrative expenses totaled ARS7.4 billion, 20% or ARS1.9 billion lower than the previous quarter due to lower expenses related to employee benefits and lower maintenance and conservation fees.
On a yearly basis, personnel and administrative expenses decreased 9% or ARS690 million. As of March 2020, the efficiency ratio reached 39.8%, deteriorating from the 35.5% posted in 4Q 2019.
In the first quarter of 2020, Banco Macro's effective tax rate was 35.8%, lower than the 41.4% registered during the fourth quarter of 2019 and the 38.3% registered a year ago. In terms of loan growth, the bank's financing to the private sector decreased 4% or ARS9.2 billion quarter-on-quarter and 15% of ARS38.7 billion year-on-year.
Within commercial loans, documents and others stand out with a 8% and a 14% increase quarter-on-quarter respectively. On the consumer side, personal and credit card loans decreased 4% and 3%, respectively in the quarter.
Within private sector financing, peso financing decreased 4% or ARS7.6 billion while U.S. dollar financing decreased 11% or $74 million.
It is important to mention that Banco Macro's market share over private sector loans as of March 20 reached 8.1%. On the funding side, total deposits increased 10% or ARS27.9 billion quarter-on-quarter and decreased 23% and ARS93.1 billion year-on-year.
Private sector deposits increased 7% quarter-on-quarter, while private sector deposits increased 44% quarter-on-quarter. The increase in private sector deposits was led by demand deposits increased 6% or ARS8.1 billion quarter-on-quarter, while time deposits increased 11% or ARS12.9 billion.
Within private sector deposits, peso deposits increased 14% or ARS26.3 billion while U.S. dollar deposits decreased 8% or $106 million.
As of March 2020, Banco Macro's transactional accounts represented approximately 51% of total deposits. Banco Macro's market share over private sector deposits as of March 2020 totaled 6.1%.
In terms of asset quality, Banco Macro's nonperforming to total financial ratio reached 1.36%. The coverage ratio measured as total allowances under expected credit losses over nonperforming loans under Central Bank rules reached 173.49%.
The improvement in asset quality is related to recent measures by the Central Bank of Argentina in the current pandemic COVID-19 context, particularly the 60 days grace period that was added to debtor classification before a loan is considered nonperforming. In terms of capitalization, Banco Macro accounted an excess capital of ARS96.4 billion which represented a total regulatory capital ratio of 32% and a TIER1 Ratio of 25.4%.
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 66%. Overall, we have accounted for another positive quarter.
We continued showing a solid financial position. Asset quality remain under control and closely monitored.
We keep on working to improve more our efficiency standards and we will keep a well-itemized deposit base. At this time, we would like to take the questions you may have.
Operator
[Operator Instructions]. Our first question is from Gabriel da Nóbrega from Citi.
Go ahead.
Gabriel da Nóbrega
Hi Everyone. Good morning and thank you for the opportunity to ask question.
My first question is actually on the NPL ratio. I am just wondering, with this new waiver of the Central Bank allowing you to categorize loans only after 60 days as nonperforming.
When do you expect for you to reach the peak of the NPL ratios? And also being that we are already in June, how have the vintages been performing and if there is a specific sector which you are looking more closely?
And I will make a second question afterwards. Thank you.
Jorge Scarinci
Good morning Gabriel. This is Jorge Scarinci answering.
Yes, according to the regulation of the Central Bank, it gives us 60 more days to categorize the NPLs. Honestly, we still do not know until when this regulation is going to be in play.
We think that depending on the pandemic evolution, we think that between second and third quarter we could be seeking or maybe part of the fourth quarter also, the peak on NPLs. Honestly, we have to say that our portfolio is performing better than expected.
Remember that we have higher exposure in the interior of the country where the quarantine is having less effect and activity a bit higher than in Buenos Aires city and probably Buenos Aires area. So we are not seeing any specific sector having big problems.
Basically, may be restaurants, those kind of services where we have low exposure. But according to our portfolio, we are having, of course, a very close eye on the evolution of portfolio and on the NPLs.
But we are positively impacted with the figures that we are seeing. So bottomline, the peek at could be seen between, I would say, third quarter and the beginning of the fourth quarter of this year.
Gabriel da Nóbrega
Thanks Jorge. And if you allow me, just to follow-up on this question.
What would be your real NPL, if you had not applied these waiver of 60 days?
Jorge Scarinci
I would assume that a more or a normalized ratio could be close to the one that we saw in December of last year, 2%, 2.1% approx.
Gabriel da Nóbrega
All right. And as for my second question, it's actually on your level of profitability.
This was the first quarter where we saw the unreal profitability of bank. And I am just wondering, given that the interest rate has come down a lot, there are also a change in mix with more corporate loans.
Do you believe that this level of around 27% in this quarter could be sustainable for the coming quarters?
Jorge Scarinci
I would assume that being in the mid-20s is something that we could see as highly probable that could be the average ROE for the bank for this year, of course, in the current conditions. If conditions are changing, we would be changing the forecast.
But I would assume that in the area of mid-20s is something that we could be achieving.
Gabriel da Nóbrega
All right. That's very clear.
Thank you so much.
Jorge Scarinci
You are welcome Gabriel.
Operator
Our next question is from Jason Mollin from Scotiabank. Go ahead.
Jason Mollin
Hi everyone. Nicolas Torres, Jorge, those are interesting comments.
What is the base case macro outlook that you are working with to talk about NPL similar to the fourth quarter of last year of ROE in inflation adjusted terms and real terms in the mid-20s? Is that taking into consideration that you don't have to make provisions this year or much provisions this year?
Or it is that kind of a longer term sustainable profitability expectation? Thanks.
Jorge Scarinci
Hi Jason. How are you?
Good to hear you here in this conference. According to the NPL similar level than the end of last year, was the first quarter 2020 NPL normalized ratio instead of being the 1.4%, it could be in the area of 2.1%.
By the end of the year, we see this ratio a bit higher between 2.5% and 3% because we are seeing some deterioration because of the pandemic going on here in Argentina. Therefore, we will have to do further the provisions.
The mid-20s ROEs is considering the scenario that we have for the moment, this Argentina GDP going down between 9% and 11%, with inflation being between 45% and 50%, according to what the local economies are estimating for this year.
Jason Mollin
And when you talk, I mean I am interested in what you said about somewhat normalized NPLs. I mean, your clients are, what percentage of the client, I mean they are not paying, right, they don't have to pay given this or they are paying or some of them don't have to pay?
Like, what's going on with the payment cash flows? And are you seeing, I mean is that base, this expectation or this normalized NPL, is that based on the cash flows you are seeing people deposit?
They are getting their paycheck if they work for government agency or they are not, their paycheck is secure if they are a government employee or a municipal employees, et cetera? How would you normalize?
We have trouble in other countries because with kind of, one thing is, are you postponing so if people don't have to pay because you are giving them a grace period and they are paying anyway, that's interesting? What kind of color can you give us on the dynamic?
Are people trying to reschedule their loans? Are they trying to pay?
Do you see the deposit they reschedule but deposits are going into their accounts? Any color would be appreciated.
Thank you.
Jorge Scarinci
No. Basically, according to what we are seeing in our book is consumers, at least approximately 65% of our loan book and most of that is tied to payrolls, we are seeing a very high level of payments, both in credit cards and personal loans.
On the commercial portfolio, that is the remaining 30%, 35%, what we have seen is that, yes, maybe some small and medium size company are a bit delayed on the payment. But again, in a better situation that we would have to stated at the beginning or three months ago.
And according to the evolution, we think that there would be a bit more of a deterioration in the portfolio with a combination of some increase in NPLs and kind of stagnant or sluggish loan portfolio performance in the next quarter or two quarters because we are not seeing big loan demand and therefore the ratio of NPLs to total loans could be deteriorating. But in general terms, Jason, we are very happy on the evolution of how our customers are doing with their debt.
Jason Mollin
That's very encouraging. Maybe just a general comment on the regulatory environment and recent changes and if you expect more going forward, in particular directed lending requirements et cetera?
Thanks.
Jorge Scarinci
Yes. Well, all the regulations that I think that you are aware of, if we are expecting some more, honestly don't know, could be.
I think that the last regulation on the floor on CD's interest rate is going to be maintained for a little while. That is putting kind of also a floor on the cost of the deposits that all the banking sector is having in order to attract people, investors, consumers to keep on renewing CDs in pesos and not looking to the U.S.
dollar. Honestly, I don't know if there could be additional regulations coming on foreign trade and which kind of companies accessing to the official FX market and all that.
But there could be some more regulation coming. Honestly, I am not very, I do not have a clear picture on which front, but there could be some more coming.
Jason Mollin
Thank you. I appreciate your comments.
Jorge Scarinci
You are welcome, Jason.
Operator
Our next question is from Ernesto Gabilondo from Bank of America. Go ahead.
Ernesto Gabilondo
Hi Jorge and Nicolas. Thanks for the opportunity.
My question is on your loan book exposure. Can you tell us which are the sectors that are most exposed due to the lockdown?
And if you have granted relief programs to your clients, can you elaborate how much do they represent of your total loan book and if you can break them down by sector? And my second question is a follow-up on regulation.
So can you remind us all the key regulation that is happening in Argentina? For example, capital controls, the coverage, the FX interpretation, I don't know if I am missing anything?
And how has these affected or potentially affected your business? And then my last question is, in this new line on the Hyperinflation Accounting that you will be presenting this net monetary position in the P&L, can you give us some kind of color and how should we think about a trend for this line in the coming quarters?
Thank you.
Jorge Scarinci
Ernesto, thanks for your questions. Let's start with the second question about the regulations.
Basically, the regulations that we have seen lately were on the area of, again, putting a floor on CD's interest rate paid to the people, basically to maintain their traction on the peso market instead of looking to the FX market. The other regulations were that nobody can buy more than $200 per month at the official FX rate.
And additional regulations on the trade FX balance to those companies that want access to the official FX market. We have to complete a lot of papers.
They have to declare that they do not have a dollar position abroad, et cetera, et cetera. So basically, most of the regulations are towards the few access to the official FX market because the Central Bank foreign reserves have been going down.
And on the other side, just to keep on maintaining the peso market in an attractive level in order to have depositors renewing their peso depositing in that currency and not trying to go to maybe unofficial FX market. On your third question on the inflation accounting, just to give you a kind of summary because it's a very complex process that could take us a lot of time to explain here.
But you will have to take into consideration the evolution of the monetary asset and of the monetary liability. When there is increase in the monetary asset, you have a negative impact on these accounts.
On the other hand, if you have a decline on the monetary assets, you have a gain. The behavior on the liabilities is the opposite.
When you have an increase, it's a loss and a decline is a gain. So that's the kind of a summary on these account and how you have to look after that.
In terms of your first question and the exposure that we have here, basically on the retail including agri business that is the highest exposure that we have in our portfolio, we have 42.6% exposure there. And that is why itemized with construction being maybe 1.2%.
Food and beverage is 8%. Financial services is 3.5%.
Transportation and communication is 3.8%. Manufacturing and wholesale is 1.7%.
Electricity, oil and gas, 1.2%. So this is a very itemized exposure to our portfolio in terms of the sectors.
Ernesto Gabilondo
And about your relief programs to your clients, how much do they represent of your book? And if you can break them by sector?
Jorge Scarinci
You mean the one that we are lending at 24%?
Ernesto Gabilondo
Yes. So it's 24% of your total loan book?
Jorge Scarinci
No. The loan that we are lending at 24% interest rate, that is the rate for the customer because that's part of, if we lend at that rate, we will have a benefit on the reserve requirement.
We can allocate part of the excess of the reserve requirement with the Leliq. So the total return that we get in that trade line is 38%.
But as of today, we have to say that approximately 15% to 17% of our loan book is represented by these lines extended at 24% interest rate.
Ernesto Gabilondo
And this is mainly for corporate? Or they are also coming for the retail segment?
Jorge Scarinci
No. For the medium or small companies.
Ernesto Gabilondo
Okay. Understood.
And then a follow-up on this monetary position. I understand the calculation.
But thinking about potential trend for the next quarters, you are expecting a higher increase in monetary assets? Or what should we think about these next quarters?
Jorge Scarinci
No. The idea is that we are expecting an increase in the deposits.
We want to continue maintaining or increasing our deposit base. And depending on loan demand, we could be growing a little bit our loan book.
But I am not seeing that in a high rate in the next maybe couple of quarters. The opposite excess liquidity, we are going to allocate them at the Leliqs or maybe buying some sovereign bonds in pesos tied to inflation.
Ernesto Gabilondo
Okay. Thank you very much Jorge.
Jorge Scarinci
You are welcome, Ernesto.
Operator
Our next question is from Alonso Garcia from Credit Suisse. Go ahead.
Alonso Garcia
Good morning everyone. Thank you for taking my question.
My question is regarding your loan growth. Compared to your other peers and Banco Macro reported lower dynamism in terms of credit growth during the first quarter.
So I just wanted to ask here if this is more related to more conservative approach by Banco Macro's management? Or if on the other hand, we could explain this by the geographical exposure that Macro has which is more exposed to provinces outside of Buenos Aires?
And if that's the case, if you are seeing the provinces being more impacted in terms of economic activity compared to the Buenos Aires region? Thank you very much.
Jorge Scarinci
Hi Alonso. Good question.
I think that it's a combination of both. First of all, a kind of a sluggish economic scenario that we were seeing in the first quarter plus a bit more a conservative view of Banco Macro's Board of Directors to what was going on or what's going to happen in 2020.
So it's a combination of both. That was the idea of being a bit more restrictive on lending.
Again, trying to put excessively liquidity that we are highly liquid on Leliqs and maybe sovereign bonds in local currency tied to inflation.
Alonso Garcia
Thank you. And just as a follow-up, do you think the economy will reopen sooner at the provinces at Buenos Aires.
I think that's already the case. So do you expect to see a sooner recovery in the economy of your regions compared to Buenos Aires?
Jorge Scarinci
Yes. As you mentioned, that is going on.
You have that many provinces are having a more faster reopening of their activities than what is with a bigger city and the province of Buenos Aires, yes.
Alonso Garcia
Okay. Thank you very much.
Jorge Scarinci
You are welcome, Alonso.
Operator
Our next question is Domingos Falavina from JPMorgan. Go ahead.
Domingos Falavina
Thank you Nicholas. Can you guys hear me?
Jorge Scarinci
Yes.
Domingos Falavina
Perfect. Hi, Jorge.
Now just two quick questions here. The first one is, I guess my understanding, you guys disclosed and very helpful information, the nominal rates and the real rates in the quarter and the spread is about 10% only.
So the first question is, are we looking at the real rates on an annualized base and the nominal rates like an inflation-only quarter, inflation. Basically we are having a hard time trying to reconcile the two.
The second question is more like trends, medium, long term. I know super hard to forecast.
But like big numbers. We saw your balance sheet basically shrinking year-on-year with some increase quarter-on-quarter, but overall it seems most banks in Argentina were derisking and shrinking.
This quarter, there was a very good job done on costs. What can we expect going forward, like what are the banks going to, on real terms, resume some kind of growth?
or should we see a financial hit and continuing to shrink and kind of partially being compensated by efficiency gains, if we look like one year from now or two years from now?
Jorge Scarinci
Hi Domingos. Let's start with your second question.
In general terms, you know that Banco Macro always has a bit more conservative behavior may be than our beers. We have demonstrated that along the last 15 years.
I think that behavior is showing that they would perform as we have in our numbers, excess capital, liquidity, asset quality, cost controls, et cetera. Depending on what we see as most probable scenario, we could be becoming a bit more aggressive in lending or continue to be conservative.
So I think that I mentioned this in some other conference. If there is a possibility or depending on the scenario, that we have to shrink a bit our balance sheet, we are going to do go for that in order to protect Banco Macro shareholders, the excess capital, the liquidity and asset quality.
So we want to be or feel comfortable if we are going to expand our loan portfolio at high rate. If not, we are going to become more conservative and allocate the excess liquidity in other investment alternatives as what we are doing right now or we have done in the past.
So that's the kind of a summary of what are our policy in the near future. On your first question about the nominal rates and real rate, it's a bit messy.
I understand and it's also messy for us. So if you consider, for example, the nominal rate for Leliq is 38% and when you look at the inflation rate in the first quarter, you are going to enter a conclusion that we invested that money at a positive real rate.
Similar than those loans that we have been extending at 24%, that according to the Central Bank regulation, we have some advantages in their reserve h requirements and the final rate for us was 38%. So also we are gaining at lending at a positive real rate there.
And that is why we are also investing in some bonds in domestic currency tied to inflation adjustment plus on spread that in the last, I would say, month or so we have been buying at inflation plus 15, inflation plus 12, et cetera. So that's how we are trying to protect the capital against inflation.
Domingos Falavina
Okay. But I understand you may have a positive rate, but it's unlikely 31% positive rate, right.
So if I look at private sector here, it's 41% verse 31%. I guess my question is, how do you get to 31%??
Jorge Scarinci
If you want, Domingos, we can call you later and explain you how we get there. So we can not spend much time here.
Domingos Falavina
All right. That works.
Jorge Scarinci
Thanks.
Operator
[Operator Instructions]. Our next question is from Santiago Petri from Franklin.
Go ahead. Mr.
Petri?
Santiago Petri
Yes. Can you hear me now?
Hello.
Jorge Scarinci
Yes. Santiago.
How are you?
Santiago Petri
Okay. Hi.
How are you guys. My question was related to the inflation adjustment line but I guess I already got the answer from previous questions.
So is it possible for you to give us some kind of expected growth in loans and deposits for this year? And a second question, I know it's not related strictly to you but how do you see the debt renegotiation of the government?
And how that could improve things going forward and particularly for your business? Thanks.
Jorge Scarinci
Hi Santiago. How are you?
Going forward, we expect to keep on increasing in peso nominated deposits. I would say that the idea is to be five to seven percentage points of inflation at the end of the year.
In terms of loans, we believe that the loan evolution is going to be a kind of below inflation, may be between two to four, maybe five percentage points below inflation at the end of this year. Therefore, we are going to have excess liquidity and we are going to allocate that excess liquidity where we think is the best opportunity in order to maintain the capital of the bank.
Sorry, can you remind me the second question was related to?
Santiago Petri
Yes. The second is, with all the excitement about the debt renegotiation of the sovereign, this comes to be successful, what would be, do you think, is going to be the impact on your activity?
Jorge Scarinci
No. Of course, we think that reaching to an agreement with the debt is going to be extremely good for the country and extremely good for the private sector in order to access to further financing, maybe not this year but maybe next year, if there is a rebound of the domestic economy.
I think that that is going to be very positive for banking sector for sure, but for the whole economy, yes.
Santiago Petri
Okay. Thanks.
Jorge Scarinci
You are welcome Santiago.
Operator
At this time, there are no more questions. So this concludes our question-and-answer session.
I would like to turn the conference back over Banco Macro for closing remarks.
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
The conference has now concluded. you for attending today's presentation.
You may now disconnect.