Banco Macro S.A. (NYSE:BMA) Q3 2023 Earnings Call Transcript

Banco Macro S.A. (NYSE:BMA) Q3 2023 Earnings Call Transcript November 27, 2023

Operator: Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro’s Third Quarter 2023 Earnings Conference Call. We would like to inform you that the 3Q ‘23 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, Investor Relations. Now, I will turn the conference over to Mr. Nicolas Torres. You may begin your conference.

Nicolas Torres: Thank you, Garry. Good morning, and welcome to Banco Macro’s third quarter 2023 conference call. Any comments we may make today may include forward-looking statements, which are subject to various conditions and these are applied in our 20-F, which was filed to the SEC, and it’s available at our website. Third quarter 2023 press release was distributed last Wednesday and it’s available at our website. All figures are in Argentinian 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 recent comparison, figures of previous quarters have been restated applying IAS 29 to reflect the accumulated effect of the inflation adjustment for each period through September 30, 2023.

I will now briefly comment on the bank’s third quarter 2023 financial results. Banco Macro’s net income for the quarter was ARS7.5 billion, 87% lower than in the second quarter of 2023, and 65% lower than the result posted a year ago. The bank’s accumulated ROE and ROA of 11.3% and 2.8%, respectively, remained healthy and showed the bank’s earnings potential. Net operating income before general administrative and personal expenses for the third quarter of 2023 was ARS356.5 billion, increasing ARS364 million quarter-on-quarter. On a yearly basis, net operating income before general and personal expenses increased 23% or ARS66.7 billion. In the third quarter of 2023, provision for loan losses totaled ARS4.9 billion, 35% or ARS2.6 billion lower than in the previous quarter.

On a yearly basis, provision for loan losses increased 43%, or ARS1.5 billion. Operating income after general, administrative and personnel expenses was ARS235 billion, or 1% or ARS1.7 billion higher than in the second quarter of 2023, and 31% or ARS56.1 billion higher than in the third quarter of 2022. In the quarter, net interest income totaled ARS112.7 billion, 23% or ARS32.8 billion lower than the result posted in the second quarter of 2023, and 26% or ARS38.6 billion lower than the result posted one year ago. In the third quarter of 2023, interest income totaled ARS429.1 billion, 4% or ARS15.1 billion higher than in the second quarter of 2023, and 31% or ARS102.3 billion higher than the previous year. Within interest income, interest on loans increased 11% or ARS18.1 billion quarter-on-quarter due to a 574 basis points increase in the average lending rate, while the average volume of private sector loans was practically unchanged.

On a yearly basis, income from interest on loans was 36% or ARS47.5 billion higher. In the third quarter of 2023, interest on loans represented 42% of total interest income. Net income from government and private securities decreased 7% or ARS16 billion quarter-on-quarter, due to lower income from government securities. Compared to the third quarter of 2022, net income from government and private securities increased 12%, or ARS21.8 billion. In the third quarter of 2023, income from Repos totaled ARS37.6 billion, 52% or ARS12.8 billion higher than the previous quarter, and 304% or ARS28.3 billion higher than the same period of last year. In the third quarter of 2023, FX gains, including investment in derivative financing totaled ARS238.1 billion gain, ARS135.8 billion higher than the previous quarter, and ARS200 billion higher than a year ago.

This result is mainly due to the 36.4% Argentine peso depreciation against the U.S. dollar, and the bank’s long dollar position, including dollar-linked and dual bonds. In the third quarter of 2023, interest expense totaled ARS316.4 billion, an 18% or ARS47.9 billion increase compared to the second quarter of 2023, and 80% or ARS140.9 billion higher on a yearly basis. Within interest expenses, interest on deposits increased 19%, ARS48.7 million quarter-on-quarter, mainly driven by 1,072 basis points increase in the average interest rate paid on deposits, while the average volume of private sector deposits decreased 3%. On a yearly basis, interest on deposits increased 80% or ARS138.2 billion. In the third quarter of 2023, interest on deposits represented 98% of the Bank’s financial expenses.

In the third quarter of 2023, the Bank’s net interest margin, including FX, was 58.7%, higher than the 38.3% posted in the second quarter of 2023, and higher than the 28.1% posted in the third quarter of 2022. In the third quarter of 2023, net income — net fee income totaled ARS35.5 billion, ARS20 million lower than in the second quarter of 2023, and on a yearly basis, net fee income was 5% or ARS1.6 billion higher. In the third quarter of 2023, net income from financial assets and liabilities at fair value through profit or loss totaled ARS36.4 billion loss, mainly due to the mark-to-market of government securities. On a yearly basis, net income from financial assets and liabilities at fair value through profit or loss decreased ARS97.2 billion.

In the quarter, other operating income totaled ARS11.3 billion, increasing 9% or ARS1 billion compared to the second quarter of 2023. On a yearly basis, other operating income increased 26% or ARS2.4 billion. In the third quarter of 2023, Banco Marco’s personnel and administrative expenses totaled ARS66.2 billion, 3% or ARS1.6 billion higher than the previous quarter due to higher employee benefits, which were partially offset by ARS102 million decrease in administrative expenses. On a yearly basis, personnel and administrative expenses increased 7% or ARS4.4 billion. In the third quarter of 2023, the efficiency ratio reached 22.4%, deteriorating from the 21.7% posted in the second quarter of 2023. In the third quarter of 2023, expenses increased 3%, while net interest income plus net fee income plus other operating income decreased 1%.

In the third quarter of 2023, the result from the net monetary position totaled ARS215.9 billion loss, considerably higher than the loss posted in the second quarter of 2023 as a consequence of higher inflation observed in the quarter, which was 1,104 basis points higher than the second quarter of 2023. Inflation in the third quarter of 2023 was 34.8% compared to 23.8% in the second quarter of 2023. In the third quarter of 2023, Banco Macro’s effective tax rate was 60.5% and further information is provided in Note 22 to our financial statements. In terms of loan growth, the Bank’s total financing totaled ARS1.2 trillion, decreasing 4% or ARS50.8 billion quarter-on-quarter and 5% ARS57.8 billion lower year-on-year. Within commercial loans, overdrafts stand out with a 5% or ARS5.9 billion decrease while documents increased 16% or ARS30.2 billion.

It is important to mention that Banco Macro’s market share over private sector loans as of September 2023 reached 7.7%. On the funding side, total deposits decreased 22% or ARS556 billion quarter-on-quarter totaling ARS2 trillion, and decreased 25% or ARS670 billion year-on-year. Private sector deposits decreased 23% or ARS554.8 billion quarter-on-quarter, while public sector deposits decreased ARS875 million quarter-on-quarter. The decrease in private sector deposits was led by time deposits, which decreased 30% or ARS374.2 billion quarter-on-quarter, while demand deposits decreased 16% or ARS174.3 billion. Within private sector deposits, peso deposits increased 24% or ARS549.7 billion, while US dollar deposits decreased 28% or $351 million.

As of September 2023, Banco Macro’s transactional accounts represented approximately 46% of total deposits. Banco Macro’s market share over private sector deposits as of September 2023 totaled 5.3%. In terms of asset quality, Banco Macro’s non-performing total financial ratio reached 1.39%. The coverage ratio measured as total allowances under Expected Credit Losses over Non-Performing loans under Central Bank rules remained stable at 133.93%. Consumer portfolio non-performing loans deteriorated five basis points, up to 148 from 143% in the previous quarter, while commercial portfolio non-performing loans improved four basis points in the second quarter of 2023, down to 1.14% from 1.18% in the previous quarter. In terms of capitalization, Banco Macro’s accounted an excess capital of ARS788.3 billion, which represented a total regulatory capital ratio of 37.9% and a Tier 1 ratio of 34.8%.

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 99%. Overall, we have accounted for another positive quarter. We continue showing a solid financial position. Asset quality remained under control and closely monitored. We keep on working to improve more our efficiency standards, and we keep a well-optimized deposit base. Finally, on November 2, 2023, the Central Bank of Argentina approved the sale of Itau Argentina, now Banco BMA, to Banco Macro. Banco Macro has now acquired 100% of the share and votes of Banco Itau Argentina and its subsidiaries. Itau Asset Management and Itau Valores. The price of the agreement was set at $50 million, which was paid on November 3.

An additional amount resulting from a potential adjustment that will be eventually set based on the results obtained by Banco Itau Argentina and its subsidies between April 1, 2023, and the closing date will be determined at a future date. At this time, we would like to take questions that you may have.

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Q&A Session

Operator: At this time we’re going to open it up for questions and answers. [Operator Instructions] Our first question today is from Ernesto Gabilondo with Bank of America. Please go ahead.

Ernesto Gabilondo: Hi. Good morning, Gustavo, Jorge and Nicolas. Thanks for the opportunity. My first question will be on the potential economic outlook for Argentina, which do you think could be the key execution risks for the new administration? How do you see the possibility to implement structural reforms considering that Congress could be kind of divided as neither the officialism or the right parties will have the majority? Also related to this macro-political context, we have seen Caputo will be appointed as the new Economic Minister. He has been hinting that the capital controls will not be lifted right away and the dollarization process will be a medium-term target. So, having said that, how are you seeing the dual currency in the medium term?

How should we think about the Argentine peso against the blue sheep? And considering the high inflation levels, when should we start to think of lower rates for Argentina? And I will also kind of related to this, we have been seeing that Milei will want to remove the Central Bank, reduce the leaks and exposure. So if that happens, how are you positioning this excess liquidity? Do you wanted to allocate it into loans? But again, considering this context of high levels of interest rates and inflation, how fast do you think will be the credit demand next year? Thank you.

Jorge Francisco Scarinci: Hi, Ernesto. Good morning. This is Jorge Scarinci. Thanks for your questions. I will try to summarize my answers. On the outlook for 2024 for Argentina, I think that even though it is a bit early, but most of the economic consultants in Argentina are like dividing next year into two. The first-half with a higher inflation compared to the second half basically because of because of as the market is expecting some devaluation on the official effects and some adjustments on tariff prices and also on oil and gas prices. And that could affect short-term inflation. And therefore, the first-half of 2024, we should be seeing a high inflation number compared to the second half, again, according to local economists here.

And in terms of the new administration, honestly, it seems to be like a year ago, they were elected. However, it’s only one week since Milei was elected President. For sure, things in Argentina run in a very high speed. However, we are still two weeks before December 10th when he is going to be appointed in. Therefore, in the last week, we have seen or heard many names to be appointed as ministers and they were laid down, new names appeared. So I would say that we have to be a little bit careful and patient on the names, on the ministries that would help Milei to tackle the next four years for Argentina. I think that the biggest challenge for Milei basically is inflation, of course, and how he will try to reduce the fiscal deficit, also with the reform that he’s planning to send to the Congress.

And again here at the Congress, he would need the help of Juntos por el Cambio because the amount of deputies and senators belonging to Milei are very few. Honestly, it is not an easy task as of today to make what is going to happen in the next 30 or 90 or 120 days of Milei’s period. So we have to be a little bit patient on that and to see how things evolve. According to Milei’s statement, he has a clear picture on the economic, monetary and fiscal situation, and he will try to do his best on the measures. But again, we have to wait because measures will be taken from December 10th onwards and law projects are going to be sent to the Congress after December 10 So we have to wait a little bit more to see official announcements are not only newspaper statements on Milei’s proposals.

And this is including everything, also the dollarization that two months ago was an issue. And now apparently it’s not a big issue. That could take place in two or three years after the normalization of the economy. Same happened with the situation of the Central Bank that — now the last statements are saying that Milei is saying that the Central Bank is not going to be closed, day number one, but he wants to improve the balance of the Central Bank first. So again a bit — a bit of patience on the evolution of the announcements on the official law projects and measures that will take place after December 10th. In terms of Banco Macro, we decided to reduce at some point the exposure to the Central Bank. So at late September, but more in the fourth quarter, we decided to start the reduction of the leaks exposure to — with the Central Bank, at some point, reducing some institutional deposits, also extending additional loans, short-term loans to AAA companies, and also increasing the amount of sovereign bonds in local currency in pesos, basically the dual bonds and dollar-linked bonds.

And so Ernesto, that was a kind of a summary on the bunch of questions that you asked.