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Edited Transcript of BMA4.BA earnings conference call or presentation 20-Feb-20 4:00pm GMT

Q4 2019 Banco Macro SA Earnings Call

Buenos Aires Mar 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Banco Macro SA earnings conference call or presentation Thursday, February 20, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jorge Francisco Scarinci

Banco Macro S.A. - Finance & IR Manager

* Nicolas Torres

Banco Macro S.A. - Manager of IR

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Conference Call Participants

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* Brian Flores

Citigroup Inc, Research Division - Senior Associate

* Carlos Gomez-Lopez

HSBC, Research Division - Senior Analyst, Latin America Financials

* Domingos Falavina

JP Morgan Chase & Co, Research Division - Head of Latin America Financials

* Ernesto María Gabilondo Márquez

BofA Merrill Lynch, Research Division - Associate

* Gabriel da Nóbrega

Citigroup Inc, Research Division - Research Analyst

* Santiago Petri;Templeton;Senior Executive Director

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. And thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's 4Q '19 Earnings Conference Call. We would like to inform you that the 4Q '19 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. (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.

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Nicolas Torres, Banco Macro S.A. - Manager of IR [2]

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Good morning. And welcome to Banco Macro's 4Q '19 conference call. Any comment 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.

4Q '19 press release was distributed yesterday and it's also available at our website. I will now briefly comment on the bank's 4Q '19 financial results.

Banco Macro's net income for the quarter was ARS 13.3 billion, 1% higher than in 3Q '19 and 153% higher than the ARS 5.2 billion posted a year ago, based on an increase in net interest income and in net fee income. The bank's 4Q '19 accumulated ROE (sic) [ROAE] and ROA (sic) [ROAA] of 59% and 10.4%, respectively, remains healthy and show the bank's earnings potential.

On a fiscal year basis, Banco Macro earned ARS 40.8 billion in fiscal year 2019, 159% higher than the ARS 15.7 billion earned in fiscal year 2018.

Net operating income before general and administrative and personnel expenses for 4Q '19 was ARS 29.7 billion, increasing 13% or ARS 3.5 billion quarter-on-quarter, and 83% higher than a year ago.

Operating income after general and administrative expenses and personnel expenses was ARS 16.4 billion, 38% or ARS 4.5 billion higher than in 3Q '19 and 117% or ARS 8.9 billion higher than in 4Q '18.

In fiscal year 2019, operating income totaled ARS 48.1 billion, 114% higher than in fiscal year 2018. In the quarter, net interest income totaled ARS 22.7 billion, 13% or ARS 2.7 billion higher than the result posted in 3Q '19 and 85% or ARS 10.4 billion higher than the result posted 1 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 ARS 72.5 billion, 83% higher than the ARS 39.6 billion registered in fiscal year 2018.

In 4Q '19, interest income totaled 38 -- ARS 2.8 billion (sic) [ARS 32.8 billion] 8% or ARS 2.8 billion lower than in 3Q '19 and 38% or ARS 9 billion higher than the previous year.

Within interest income, interest on loans increased 38% or ARS 6.1 billion quarter-on-quarter and 42% year-on-year. In 4Q '19, interest on loans represented 67% of total interest income. During fiscal year 2019, interest on loans totaled ARS 67.5 billion, increasing 42% compared to fiscal year 2018.

Net income from government and private securities decreased 49% or ARS 9.5 billion quarter-on-quarter, due to lower LELIQs volume and lower interest rates. Compared to 4Q '18, net income from government and private securities increased 25% or ARS 2 billion.

In fiscal year 2019, net income from government and private securities totaled ARS 53.8 billion, 204% (sic) [245%] higher than in fiscal year 2018. In 4Q '19, FX gains, including investment in derivative financing, totaled a ARS 1.3 billion gain.

During fiscal year 2019, FX gains totaled ARS 3.1 billion compared to a ARS 1.4 billion loss posted in fiscal year 2018. In 4Q '19, interest expenses totaled ARS 10.1 billion, 35% or ARS 5.4 billion decrease compared to 3Q '19, and 12% or ARS 1.4 billion lower on a yearly basis.

Within interest expenses, interest on deposits decreased 34% or ARS 4.8 billion quarter-on-quarter, mainly driven by an 18% decrease in the average volume of time deposits and a 21.4 percentage points decrease in the average time deposit interest rates. On a yearly basis, interest on deposits decreased 12% or ARS 1.3 billion.

In 4Q '19, interest on deposits represented 93% of the bank's financial expenses. In fiscal year 2019, interest expense totaled ARS 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 '19 and the 14.9% registered in 4Q '18.

In 4Q '19, net fee income totaled ARS 4.1 billion, 10% higher than in 3Q '19. And on a yearly basis, net fee income increased 32% or ARS 1 billion. In fiscal year 2019, net fee income totaled ARS 14.6 billion, increasing 31% compared to fiscal year 2018. In 4Q '19, net income from financial assets and liabilities at fair value to profit and loss totaled ARS 2.6 billion, increasing 292% or ARS 1.9 billion compared to 3Q '19.

For fiscal year 2019, net income from financial assets and liabilities at fair value to profit and loss totaled ARS 5.3 billion gain, 402% higher than in fiscal year 2018.

In the quarter, other operating income totaled ARS 926 million, decreasing 9% compared to 3Q '19. And on a yearly basis, other operating income increased 69% or ARS 378 million. In fiscal year 2019, other operating income totaled ARS 6.1 billion, 117% higher than in fiscal year 2018.

In 4Q '19, Banco Macro's personnel and administrative expenses totaled ARS 8.3 billion, 13% higher or ARS 941 million than the previous quarter. On a yearly basis, personnel and administrative expenses increased 58% or ARS 3 billion. 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 '19 and 37.9% registered a year ago.

In fiscal year 2019, Banco Macro's effective tax rate was 16.3% lower than the 30.7% (sic) [30.6%] 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 decided to adjust income tax by inflation.

In terms of loan growth, the bank's financing to the private sector grew 10% or ARS 18.7 billion quarter-on-quarter and 22% or ARS 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 ARS 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 ARS 3.7 billion quarter-on-quarter and increased 10% or ARS 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 ARS 18.5 billion quarter-on-quarter, while the time deposits decreased 11% or ARS 13.2 billion. Within private sector deposits, peso deposits increased 2% or ARS 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 of 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 ARS 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 deposit ratio reached 59%. Overall, we have accounted for another positive quarter. We continued 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-itemized deposit base.

At this time, we would like to take the questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Today's first question comes from Ernesto Gabilondo of Bank of America.

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [2]

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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 hyperinflation accounting. I think you will be reporting it next quarter. So just wondering if you have estimated how was your 2019 ROE, including hyperinflation accounting?

And then for my last question, do 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?

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Jorge Francisco Scarinci, Banco Macro S.A. - Finance & IR Manager [3]

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Hi, Ernesto. This is Jorge Scarinci answering. How are you? On your -- the first part of your question about loan growth expectations, honestly, is not 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 expectations, 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 probability 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. And at the same time, there was some decrease in reserve requirements tied to credit card operations. The net of this on the P&L shows, of course, making a forecast on noninterest rates make a net positive impact of 100 -- approximately ARS 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%. And so that is basically the question that you have. I don't know if I'm missing, someone?

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [4]

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Yes. So here's the last one. 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.

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Jorge Francisco Scarinci, Banco Macro S.A. - Finance & IR Manager [5]

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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 validate 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're in February. There's still 10 more months to come in Argentina, and that's a lot of time. So the scenario could change from 1 month to the other. But basically, the idea that we have for the moment is to try to maintain the adjusted ROE in 2020.

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Operator [6]

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And our next question today comes from Gabriel Nóbrega of Citibank.

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Gabriel da Nóbrega, Citigroup Inc, Research Division - Research Analyst [7]

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I have a -- my first question, actually, on the top-down that you're seeing. It's already been 2 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 2 fronts? I will make a second question afterwards.

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Jorge Francisco Scarinci, Banco Macro S.A. - Finance & IR Manager [8]

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Hi, Gabriel. How are you? Yes, you're right. We, 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, debt restructuring is the main issue for the government. And honestly, we still do not know exactly at what time that is going to be finally solved. So for the moment, I would say that economic activity continued to be very sluggish. According to market consensus, GDP is expected to be minus 1% in real terms. In 2020, inflation in the area 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, 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. 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 this scenario of downward trend on interest rates.

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Gabriel da Nóbrega, Citigroup Inc, Research Division - Research Analyst [9]

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All right. That's very clear. And as for my second question, I was actually looking at your asset quality. We saw that provisions increased a lot, and I understand that this comes a lot from Vicentin being that the loan went to category 4, and you had to provision for this. I also understand there are other companies. But maybe looking forward, being that your NPL ratios also increase 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 Vicentin, please?

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Jorge Francisco Scarinci, Banco Macro S.A. - Finance & IR Manager [10]

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As far as we continue to see sluggish economic activity, I think that we might see more deterioration in asset quality, even though that -- take into consideration that we have a 2% of NPL to total loans when the system is close to 7%. So this is the result of many years of working on our credit standards, and, of course, to have a consumer portfolio very tight to payrolls. But what -- you are right that we are seeing some corporate or commercial companies going into trouble.

So the idea is that we want to maintain the coverage ratio in the area of 120% to 150%. Vicentin is provisioned 100%. So going forward, again, if these economic situations continue for most of 2020, we could see NPLs in our -- the NPL ratio going between 2.2%, 2.4% by the end of the year and maintaining, as I mentioned before, the coverage in the year of 120%, 140% approx.

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Gabriel da Nóbrega, Citigroup Inc, Research Division - Research Analyst [11]

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Can I just make a follow-up here? In this coverage, which you're guiding between 120% and 140%, are you already contemplating the implementation of the expected loss model under IFRS 9?

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Jorge Francisco Scarinci, Banco Macro S.A. - Finance & IR Manager [12]

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No -- I mean, we are going to start with that maybe by midyear. We have not started yet.

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Operator [13]

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And our next question today comes from Domingos Falavina of JPMorgan.

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Domingos Falavina, JP Morgan Chase & Co, Research Division - Head of Latin America Financials [14]

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I just wanted to run through you the basic forecast, and I'm sorry if I missed that in the beginning. But like with an inflation of around 45%, if you could just give, even in ranges, like loan growth, 40% to 45%, NII, about the same as loan, cost of risk, effective tax rate. I understand your goal is to kind of maintain a similar ROE, 2020 over '19, 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.

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Jorge Francisco Scarinci, Banco Macro S.A. - Finance & IR Manager [15]

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Hi, Domingos. Yes, I mean, as I mentioned before, we are in February, and this happened to me in the last maybe 2, 3 years, at least that. We were forecasting some scenario at the beginning of the year, and the scenario changed completely in the following months and our expectations and forecasts were thrown to -- were threw to the trash...

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Domingos Falavina, JP Morgan Chase & Co, Research Division - Head of Latin America Financials [16]

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Yes. The same here, but always good to know what you're thinking.

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Jorge Francisco Scarinci, Banco Macro S.A. - Finance & IR Manager [17]

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With the 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's not easy to forecast in the sense that we are going to post adjusted inflation numbers, but it's 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 are -- in salaries, I think that 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.

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Domingos Falavina, JP Morgan Chase & Co, Research Division - Head of Latin America Financials [18]

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Yes. The cost of risk, I think, is the only one we didn't touch?

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Jorge Francisco Scarinci, Banco Macro S.A. - Finance & IR Manager [19]

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Yes, cost of risk, again, depending on market conditions, that could range between 2.5% and 3.5%.

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Domingos Falavina, JP Morgan Chase & Co, Research Division - Head of Latin America Financials [20]

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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?

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Jorge Francisco Scarinci, Banco Macro S.A. - Finance & IR Manager [21]

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The what -- sorry?

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Domingos Falavina, JP Morgan Chase & Co, Research Division - Head of Latin America Financials [22]

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The loan growth, like the strategy for 2020 is originating in which segment?

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Jorge Francisco Scarinci, Banco Macro S.A. - Finance & IR Manager [23]

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No, I think that -- I mean, should be nominally speaking, both. I would assume that could be 60%, 65% consumer and the rest commercial.

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Operator [24]

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(Operator Instructions) Today's next question comes from Carlos Gomez of HSBC.

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Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [25]

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A couple of clarifications. Could you let us know where your average interest rate on credit card 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?

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Jorge Francisco Scarinci, Banco Macro S.A. - Finance & IR Manager [26]

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Hi, Carlos. How are you? The average rate before the 55% cap was 75%. That's your first question. The second one, the statutory rate is 30%, but depending on the impact of the inflation, I think that the effective is going to be below that.

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Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [27]

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So the effective on the -- again, the effective on the inflation-adjusted earnings or effective on the earnings without inflation adjustment?

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Jorge Francisco Scarinci, Banco Macro S.A. - Finance & IR Manager [28]

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Might be both, but I think that the effective on the adjusted numbers is going to be much lower than the 30%.

And I couldn't get the last question, Carlos.

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Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [29]

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Yes, I was wondering if the inflation adjustment, which we understand will be one line, I think after the pretax earnings, correct me if I'm wrong, if it will be the same in your local currency financial statements or in your 20-F?

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Jorge Francisco Scarinci, Banco Macro S.A. - Finance & IR Manager [30]

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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.

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Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [31]

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Okay. And will you -- by the way, will you also adjust the history, as in the past, you would give us inflation-adjusted numbers, inflation-adjusted historical numbers?

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Jorge Francisco Scarinci, Banco Macro S.A. - Finance & IR Manager [32]

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We are not so sure about that. If I have to answer now, I would say no, but we are still also working with our accounting department, the Central Bank, and external auditors on that because there's a very complicated calculation on that. So we are still trying to see if 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.

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Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [33]

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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.

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Jorge Francisco Scarinci, Banco Macro S.A. - Finance & IR Manager [34]

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Okay. So I will send you, instead of a press release, a book.

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Operator [35]

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And our next question comes from Santiago Petri of Templeton.

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Santiago Petri;Templeton;Senior Executive Director, [36]

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Today, there was a press report that states that this was related to fintech, so I would like to know if this impacts your activities in any sense, that if for which the automatic direction of the installments from loans from there because I think it's -- so I would like to know if -- how do you collect your loans? And if this applies to you?

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Jorge Francisco Scarinci, Banco Macro S.A. - Finance & IR Manager [37]

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Hi, Santiago. No, basically, this is -- this measure have a much higher impact on the fintechs. Basically, when you have your client an 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 the banks basically.

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Operator [38]

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And our next question comes from Brian Flores of Citibank.

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Brian Flores, Citigroup Inc, Research Division - Senior Associate [39]

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Just a quick question on your funding cost. We saw it decreasing quarter-on-quarter significantly. So I just wanted to think -- I mean, sorry to ask you, how are you thinking about this particularly going forward? And how recurrent do you think this could be going forward?

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Jorge Francisco Scarinci, Banco Macro S.A. - Finance & IR Manager [40]

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Of course, I think that some of these, I mentioned that before, banks always try to defend the margin. So we'll try to translate 100% or the most that we can, the decrease on the LELIQs rate to our depositors. But of course, you have a limit. That's the point wherein the depositor says, I'm not going to renew this peso time deposit because it's well below inflation and 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 further reducing the funding cost compared to what we have done in 2019.

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Operator [41]

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And there are no more questions at this time, so this concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Nicolas Torres for final considerations.

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Nicolas Torres, Banco Macro S.A. - Manager of IR [42]

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

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Operator [43]

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