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Edited Transcript of GGAL.BA earnings conference call or presentation 10-Mar-21 4:00pm GMT

·34 min read

Q4 2020 Grupo Financiero Galicia SA Earnings Call Buenos Aires Mar 11, 2021 (Thomson StreetEvents) -- Edited Transcript of Grupo Financiero Galicia SA earnings conference call or presentation Wednesday, March 10, 2021 at 4:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Pablo Eduardo Firvida Grupo Financiero Galicia S.A. - Institutional & IR Manager ================================================================================ Conference Call Participants ================================================================================ * Carlos Gomez-Lopez HSBC, Research Division - Senior Analyst, Latin America Financials * Ernesto María Gabilondo Márquez BofA Securities, Research Division - Associate * Gabriel da Nóbrega Citigroup Inc., Research Division - Research Analyst * Juan Ignacio Recalde Scotiabank Global Banking and Markets, Research Division - Associate * Nicolas Alejandro Riva BofA Securities, Research Division - Research Analyst * Ricardo Alonso Garcia Crédit Suisse AG, Research Division - Research Analyst * Yuri R. Fernandes JPMorgan Chase & Co, Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to this Grupo Financiero Galicia Fourth Quarter 2020 Earnings Release Conference Call. This call is being recorded. And at this time, I would like to turn the conference over to Pablo Firvida. Please go ahead, sir. -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [2] -------------------------------------------------------------------------------- Thank you, Jenny. Good morning, and welcome to this conference call. I will make a short introduction, and then we will take your questions. Some of the statements made during this conference call will be forward-looking statements within the meaning of the safe harbor provisions of the U.S. federal securities laws and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed. According to prior estimates, the Argentine economy recorded a 4.6% year-over-year contraction during the fourth quarter of 2020. Consequently, the economy accumulated a 10% fall during the year. And the primary fiscal deficit reached 6.5% of GDP. The national consumer price index recorded an 11.7% increase during the quarter, accumulating a 36.1% inflation in 2020. On the monetary front, the Argentine Central Bank expanded the monetary base by ARS 76.6 billion in the quarter, recording a 30.3% increase in the last 12 months. Throughout the year, the monetary base expanded by ARS 574.9 billion, increasing from 8.8% of GDP to 9.1% by year-end. Meanwhile, the exchange rate averaged ARS 82.72 per dollar in December, a 9.1% depreciation against the average for September 2020. When compared to December 2019, the Argentine peso recorded a 27.6% depreciation. In December, the average interest rate on peso-denominated private sector time deposits for up to 59 days was 34.7%, 4.3 percentage points higher than the average recorded last September. Private sector deposits in pesos amounted to ARS 5.1 trillion, increasing 10.4% during the quarter and 84.6% in 2020. Transactional deposits in pesos rose 17.9% during the quarter and 91.5% in the year, while peso-denominated time deposits increased 2.5% in the fourth quarter and 81% during 2020. Private sector deposits in dollars amounted to $16 billion, decreasing 1.6% during the quarter and 18.2% in the last 12 months. As of the end of December, peso-denominated loans to private sector amounted to ARS 2.7 trillion, increasing 11.1% in the quarter and 49.6% when compared to December 2019. In turn, U.S. dollar-denominated loans amounted to $5.3 billion, recording a 12.4% decrease during the quarter and almost 50% decrease in the year. Turning now to Grupo Financiero Galicia. Net income for 2020 amounted to ARS 26.4 billion, 11% lower than in the previous year, which represented a 2.6% return on average assets and a 15.8% return on average shareholders' equity. The profit was mainly due to profits from Banco Galicia for ARS 22.2 billion; from Tarjetas Regionales for ARS 1.8 billion; from Galicia Administradora de Fondos for ARS 1.12 billion, sorry; and from Sudamericana Holding for ARS 1.1 billion. Going to the fourth quarter, net income amounted to ARS 3.1 billion, up 133% from the year ago quarter, mainly due to profits from Banco Galicia for ARS 2.7 billion; from Galicia Administradora de Fondos for ARS 222 million; from Tarjetas Regionales for ARS 152 million; and from Sudamericana Holding for ARS 42 million. This profit represented a 1.2% annualized return on average assets and a 7% return on average shareholder's equity. Banco Galicia, ARS 2.7 billion net income for the quarter was significantly higher than the ARS 212 million of the year ago quarter, mainly due to a 37% decrease in administrative expenses. Net interest income decreased 28% as interest income was down 13% and interest expenses were down 3%. -------------------------------------------------------------------------------- Operator [3] -------------------------------------------------------------------------------- And ladies and gentlemen, our presenter has disconnected at this time. Please stand by while we work to reconnect him. Please go ahead. -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [4] -------------------------------------------------------------------------------- Thank you. Sorry for that technical problem, I will resume with a Grupo Financiero Galicia numbers. Net income for 2020 amounted to ARS 26.4 billion, 11% lower than in the previous year, which represented a 2.6% return on average assets and a 15.8% return on average shareholders' equity. The profit was mainly due to profits from Banco Galicia for ARS 22 billion; from Tarjetas Regionales for ARS 1.8 billion; from Galicia Administradora de Fondos for ARS 1.1 billion; and from Sudamericana Holding also for ARS 1.1 billion. Going to the fourth quarter, net income amounted to ARS 3.1 billion, up 133% from the year ago quarter, mainly due to profits from Banco Galicia for ARS 2.7 billion; from Galicia Galicia Administradora de Fondos for ARS 272 million; from Tarjetas Regionales for ARS 152 million; and from Sudamericana Holding for ARS 42 million. This profit represented a 1.2% annualized return on average assets and a 7% return on average shareholders' equity. Banco Galicia's ARS 2.7 billion net income for the quarter was significantly higher than the ARS 212 million of the year ago quarter, mainly due to a 37% decrease in administrative expenses. Net interest income decreased 28% as interest income was down 13% and interest expenses were down 3%. Average interest earning assets increased ARS 86 billion or 16% year-over-year, mainly due to the 33% growth of peso-denominated loans and 91% of peso-denominated government securities, partially offset by a 59% decrease of dollar-denominated loans and a 73% decrease of dollar-denominated government securities. In the same period, (inaudible) decreased 537 basis points, primarily due to a lower yield on peso-denominated government securities and loans. Interest-bearing liabilities increased ARS 63 billion from the fourth quarter of 2019, primarily due to an increase in the average balance of peso-denominated saving accounts and time deposits, offset by a decrease in dollar-denominated saving accounts [and its] cost decreased 315 basis points, mainly as a result of a lower interest rate on peso-denominated time deposits. Net income decreased 6% in the last 12 months, mainly due to lower fees on deposit accounts. Net income from financial instruments increased 47% due to a 322% increase in results from other government securities and of 260% from private sector securities, which includes results from the valuation of Prisma Medios de Pago. Gains from gold and foreign currency quotation difference was down 68% from the year ago quarter, reaching ARS 1.5 billion, including a ARS 933 million profit from foreign currency trading. Provision for loan losses were 109% higher than in the same quarter of the prior year. During the quarter, the provision for possible losses as a consequence of the context of COVID considered in other operating expenses was included in the expected credit loss model. Personnel expenses decreased 26% from the same quarter of 2019, mainly due to a 6% decrease in staff and lower charges for severance payments. While administrative expenses decreased 26% as compared to the year before, as a consequence of lower maintenance and return of goods and IT and lower fees and compensation for services due to the reimbursements of expenses. Other operating expenses for the quarter resulted in a ARS 1 billion gain as a consequence of the incorporation of the provision for COVID to the expected credit loss model. The bank's financing to the private sector reached ARS 487 billion at the end of the quarter, up 3% in the last 12 months, mainly due to an increase of loans in pesos, partially offset by a decrease of dollar-denominated loans. Net exposure to the public sector increased 58% year-over-year. And excluding the [Leliq] it represented 5% of total assets compared to 4% at the end of the fourth quarter of 2019. Deposits reached ARS 678 billion, up 25% in the year, as peso-denominated deposits increased 49%, while dollar deposits fell 16%. The bank's estimated market share of loans to private sector was 13%, 153 basis points higher than at the end of the year ago quarter and the market share of deposits from the private sector was 10%, 15 basis points higher than in the same quarter of 2019. As regards to asset quality, the ratio of nonperforming loans to total financing ended the quarter at 1.3%, recording 288 basis points improvement as compared with the 4.15% of the fourth quarter of the prior year. And the coverage with allowances reached 501%, up from 110% coverage from a year ago. As of the end of December 2020, the bank's consolidated computable capital exceeded by ARS 101 billion or 180%, the ARS 15 billion minimum capital requirement. And the total regulatory capital ratio reached 22.9%, increasing by 535 basis points from the end of the same quarter of 2019. In summary, in a very challenging and volatile macro environment, Grupo Financiero Galicia have shown good results and was able to keep asset quality, liquidity, solvency and profitability metrics at good levels. We are now ready to answer the questions that you may have. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And we will go first to Juan Recalde of Scotiabank. -------------------------------------------------------------------------------- Juan Ignacio Recalde, Scotiabank Global Banking and Markets, Research Division - Associate [2] -------------------------------------------------------------------------------- I have 2 questions. One is related to the profitability outlook in 2021. And the second one related to the reversal of provisions. That happened -- that I saw in the quarter. So the first question related to profitability. So inflation is expected to increase in 2021. I think it was around 36% in 2020. And your ROE in inflation-adjusted terms was around 16% in 2020. Now inflation is expected to pick up to around 48% in 2021. So I wonder what the ROE outlook for 2021, what's your ROE expectation? Do you expect it to be lower than in 2020 or to improve? And the second question related to the other provisions that are booked in other operating expenses. I saw a reversal of ARS 5.5 billion of provisions in the fourth quarter. Can you provide a little bit of color on this? Were those provisions reversed and included in the loan loss provisions? Any color there would be helpful. -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [3] -------------------------------------------------------------------------------- Yes. Thank you, Juan. Well, as you mentioned, inflation for 2020 was around 36% and our real ROE was 16%. Our current estimate for 2021 inflation is 45%. We revisited or changed the estimate recently. Of course, this is a moving target. Keeping everything constant, the higher the inflation, the lower real ROE. The thing is that typically, when the inflation grows, interest rates tend to grow, perhaps, with a lag. Also, we adjust prices wherever we can in products that are not regulated. So it's not that direct to consider that, meaning a higher inflation will mean necessarily lower profitability in the same proportion. But we can assume that if inflation is 45%, ROE could be something lower, I would say, between 10% and 15%, lower than 16%. I mean, that's wide range that I'm giving you. Of course, we have also many regulations that affect margins and interest rates, (inaudible) time deposits and also maximum or minimum rates for different lending. So we can -- we must see how [they] pass-through to costs and the interest rates we can charge is feasible, but this is the kind of profitability we see. In terms of provisions, in the second quarter of 2020, the bank built a provision for certain accounts that were off balance sheet, mainly guarantees granted and used amounts of checking accounts and also credit card limits. So this type of accounts -- off-balance sheet accounts must have a provision classified within other operating expenses. In the fourth quarter, we had a reclassification. So we changed the -- we reduced the other provisions account, and we increased the allowance for loan losses. But if you look at the consolidated cost of risk of Grupo Financiero Galicia in terms of total financing, you will see that changes are not that important, I would say. There -- the reclassification is not seen, and you can see that the cost of risk increased to 4.7%, if I'm not wrong with the number. I don't know if that was clear enough, Juan? -------------------------------------------------------------------------------- Juan Ignacio Recalde, Scotiabank Global Banking and Markets, Research Division - Associate [4] -------------------------------------------------------------------------------- Yes, that was very clear, Pablo. -------------------------------------------------------------------------------- Operator [5] -------------------------------------------------------------------------------- And we'll go to our next question from Ernesto Gabilondo of Bank of America. -------------------------------------------------------------------------------- Ernesto María Gabilondo Márquez, BofA Securities, Research Division - Associate [6] -------------------------------------------------------------------------------- My question is on your expectations for the payment behavior of the deferred portfolio once clients have finished grace period? And also, how much is the percentage of your portfolio under a grace period or that is deferred? And what was the amount of additional provisions related to COVID-19 that were built during last year? -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [7] -------------------------------------------------------------------------------- Okay. Ernesto. Our -- if we consider our deferred loans, basically installment of personal loans that our clients chose to defer, plus the deferral or, I would say, refinancing of credit cards that basically have 2 moments: one in April and the other in September. This considering both the installment of personal loans and this credit card, as of December, represented 4.2% of total loans. We have some questions from some different analysts, why numbers of banks defer. My answer would be that depending what the different banks consider as deferral, some of our peers consider not just the amounts of the installments that were deferred, but also the total outstanding capital of the personal loan. So if the outstanding capital of the personal loan is ARS 100,000 and the not paid installment is ARS 20,000, we just consider ARS 20,000, not the total amount. And basically, because the clients have the possibility to defer around 9 monthly installments. And in most of the cases, the clients defer 1, 2 or 3 installments, basically in the month in which the quarantine was very strict. And we have a big coverage using the expected loss model. You saw that the coverage stands at around 500%. When we look at the total provisions around ARS 31 billion. Out of that amount, roughly ARS 11 billion are related to provisions of COVID-19. -------------------------------------------------------------------------------- Ernesto María Gabilondo Márquez, BofA Securities, Research Division - Associate [8] -------------------------------------------------------------------------------- Okay. So don't you think that given the high reserve coverage ratio and this ARS 11 billion that [you] created last year, don't you think maybe [you are over provision] considering that the deferred portfolio is only 2.4% of total loans? -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [9] -------------------------------------------------------------------------------- Well, with our models and the information we have today, we think that during 2021, the cost of risk will go down and the coverage will go down. We feel that we have a coverage that is enough for, I would say, different scenarios that we project. But we are very comfortable with the provisioning level that we built during 2020. -------------------------------------------------------------------------------- Ernesto María Gabilondo Márquez, BofA Securities, Research Division - Associate [10] -------------------------------------------------------------------------------- Perfect. And do you have like a guidance range for the cost of risk this year? (inaudible) soon to predict? -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [11] -------------------------------------------------------------------------------- Well, in the fourth quarter, the consolidated cost of risk was 4.7%. In the third quarter, was 4.8%. In the fourth quarter of 2019 was in the 3.6% level. Right now, we are thinking that perhaps for the full year could be around 4%. We are (inaudible) very good asset quality metrics, not only in the bank but also, and even more, I would say, even surprisingly, in Naranja. So -- and also, we have to consider that last year, as I mentioned in my previous speech, GDP contracted 10%. And for this year, we are forecasting a rebound of between 6% to 6.5%. So asset quality should -- despite this -- for variance from the Central Bank, the asset quality should be, I would say, healthy or better than in the previous year. -------------------------------------------------------------------------------- Ernesto María Gabilondo Márquez, BofA Securities, Research Division - Associate [12] -------------------------------------------------------------------------------- Okay. Perfect. And just let me make a second question in terms of NIMs. How should we expect the evolution of NIMs considering the [subsidies] on loans and [cap rates] on credit cards. Do you think that the economic recovery should be enough to accelerate the (inaudible) portfolio and support NIMs? Or what do you think will be the driver or the risk for NIMs in this year? -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [13] -------------------------------------------------------------------------------- Yes. NIMs were lower in the fourth quarter than in the average or the total NIM for 2020. For the year, it was around 20%, the NIM. And in the fourth quarter, it was 17%. In the fourth quarter, we saw, I would say, all the impacts of the minimum interest rates on time deposits and the maximum interest rate on, I would say, directed lending. So we think that NIM could be similar to the fourth quarter of 2020. They are, as always, many variables play in different directions. But with our current estimates, we think it can be stable at around 17%. -------------------------------------------------------------------------------- Ernesto María Gabilondo Márquez, BofA Securities, Research Division - Associate [14] -------------------------------------------------------------------------------- Okay. Perfect. So it will be stable when compared to the fourth quarter and some pressures when compared to annual basis, right? -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [15] -------------------------------------------------------------------------------- Exactly. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- We'll move to our next question from Gabriel Nóbrega of Citi. -------------------------------------------------------------------------------- Gabriel da Nóbrega, Citigroup Inc., Research Division - Research Analyst [17] -------------------------------------------------------------------------------- Just a follow-up here. So you guys reclassified these additional provisions that you had faced in the other operating expenses into provisions this quarter. So if I'm not mistaken, provisions would have been around ARS 6.4 billion. And then this -- if this is correct, I just wanted to understand if you ended up generating additional provisions related to COVID or related to any [clients here?] And (inaudible) second question afterwards. -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [18] -------------------------------------------------------------------------------- Basically, it was a reclassification of the provision that we have in other operating expenses as a provision of around ARS 5.5 billion. That now is in the allowance for loan losses, basically, because we have built that provision in the second quarter related to off-balance sheet accounts and due to Central Bank accounting rules. When you have other provision related to off-balance sheet accounts, you have to include it not within the line, I would say, of the typical cost of risk. What we did was this reclassification that [probably] basically had to do with the new calculation of the expected loss model. So now you can see the provisioning for our financing within the allowance for loan losses provisions. And as I mentioned earlier, the key, I would say, number is the cost of risk of Grupo Financiero Galicia, considering, I would say, not only provisions on loans, but also on other financing. So that includes, historically, not only in the fourth quarter, but also in the previous quarters, both provisions, that, I would say, clean the effect of this reclassification. -------------------------------------------------------------------------------- Gabriel da Nóbrega, Citigroup Inc., Research Division - Research Analyst [19] -------------------------------------------------------------------------------- Okay, perfect, and then as for my second question, when you start looking at the NPL of the -- sorry, it has already decreased from [a high of around] 14% in [2019.] And now it's around 1.8%. We have actually been seeing that you continue to accelerate write-offs in the third quarter and in the fourth quarter. So here, I'm just wondering 2 things actually. First, if this improvement in the NPL of [Tarjetas] comes from all of these write-offs, which you have been doing? And then the other part is, as we have reached like 1.8% of NPLs, will this give you more confidence to continue accelerating and originating more in the segment? -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [20] -------------------------------------------------------------------------------- Well, in Naranja or in Tarjetas Regionales, many things caused the NPL ratio to go down to 1.75%. One thing is that we changed the charge-off policy. And now once the NPLs are [300, 1 year] basically nonperforming, we write-off in the past we have additional [amounts] of these nonperforming loans within our balance sheet. So that is why the write-offs grew. But also all the collection efforts and all the, I would say, the behavior of the clientele improved. One additional reason could be that in the case of banking cards, clients would defer payments, they could also defer personal loans installments. In the case of Naranja, they didn't have that ability. So they paid the Naranja [statement.] Also Naranja is stronger [interior] of Argentina and the agricultural sector behave better. And also the lockdown due to COVID was shorter and not so strict. So -- and also the loan book grew fast in the fourth quarter. So all these reasons explained the 1.75% NPL ratio. If we do not consider the additional 60 days of -- from 90 to 150 days to consider loan nonperforming, even in that scenario, the NPL ratio would have been 2.3%. So really very low. Going forward, we feel that there should be some deterioration basically because it's historically very, very low levels, but we are comfortable also with the level of coverage we have around 300%. -------------------------------------------------------------------------------- Gabriel da Nóbrega, Citigroup Inc., Research Division - Research Analyst [21] -------------------------------------------------------------------------------- And then just a follow-up here, with these low levels and the apparently comfortable coverage, do you expect to maybe accelerate more in the segment throughout 2020, or are you still a bit more conservative? -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [22] -------------------------------------------------------------------------------- In terms of loan growth on Naranja, sorry? -------------------------------------------------------------------------------- Gabriel da Nóbrega, Citigroup Inc., Research Division - Research Analyst [23] -------------------------------------------------------------------------------- Yes, yes, yes. -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [24] -------------------------------------------------------------------------------- Definitely, during 2020, Naranja was very conservative, mainly because of COVID, and we thought that asset quality was going to be much worse than it actually happened. And Naranja basically didn't change the limits for expenses and payments in installments. So the loan book didn't grow. For this year, we are thinking that the loan book could grow at around inflation plus 5 percentage points. Of course, being conservative but not as conservative or cautious as it was the case in 2020. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- And we'll move next to Alonso Garcia of Crédit Suisse. -------------------------------------------------------------------------------- Ricardo Alonso Garcia, Crédit Suisse AG, Research Division - Research Analyst [26] -------------------------------------------------------------------------------- My first question is regarding fees. I mean, they declined 4% in real terms last year. So what do you expect for this year? I mean, are you seeing room for increasing prices in some of your products already or just not yet? And second, regarding Tarjeta Naranja, we saw a very sharp increase in loan growth in the fourth quarter, close to 30%. So just wanted to check if this was related to seasonality, probably some pent-up demand from customers, or if there was something special driving growth in the quarter? And in that sense, what kind of loan growth do you expect for the bank and as a whole Galicia in 2021? -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [27] -------------------------------------------------------------------------------- Thank you, Alonso. Well (inaudible) last year, we were not able to raise prices on most of our products. For this year, the Central Bank allowed some price increases in 2 stages, 9% each on some regulated products. For the rest of the products, we will be raising prices in order to catch up the inflation. Of course, looking at our competitors. And what is important, I would say, to have in mind is this evolution of fees. It must be compared with the evolution of administrative expenses. Our target is to have the difference between fees and expenses to be positive, basically that efficiency improves. Why? Because perhaps fees will not be able to grow this year above inflation. Perhaps inflation less a couple of percentage points, but as our target is to grow our administrative expenses less in terms of percentage points, there will be saving in that equation. In terms of Naranja, well, in the first 3 quarters, as I said, Naranja was more conservative. They didn't raise spending limits in the fourth quarter. Many limits were updated. For this 2021, we expect that Naranja loan book could grow between -- or around inflation plus 5 percentage points. So this inflation is 45%, as I mentioned, perhaps 50% in nominal terms. Similar to the loan growth we are forecasting for the bank in pesos. There -- our, I would say, guidance and calculations on loans are basically in pesos. The dollar bucket, both in dollars -- both in deposits and loans is kind of stable at the levels of December. So they are not either growing or shrinking as it was the case during 2019 or 2020. So these are the loans -- the loan growth we are forecasting. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- And we'll next go to Carlos Gomez of HSBC. -------------------------------------------------------------------------------- Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [29] -------------------------------------------------------------------------------- I have 3 brief questions. The first one to clarify on the provisions that you classified, it was ARS 5.5 billion, if I recall correctly. Originally, I think you had made about ARS 7.2 billion. So has the entire balance either being used or being transferred to loan loss provisions, or is there something that could still be reclassified in the future? The second refers to the tax rate, which was quite elevated throughout the year. We understand that also has to do with the inflation adjustment and the fact that you cannot take full advantage [it] do you expect for next year? And finally, Galicia [is in the rare position that] you have rather significantly more capital than you have externally had, Tier 1 of almost 19%. We know that you're constrained in the ability to pay dividends, although you are paying some. Would you consider either acquisitions or buyback at this point? -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [30] -------------------------------------------------------------------------------- Carlos, regarding the first question on provisions, yes, we reclassified around ARS 5.5 billion, and there is still some other provisions in that account, basically related to guarantees granted and also certain financing of balance sheet. Regarding tax rate, as you said, the inflation adjustment on taxes is different from the accounting one and also the main difference is that the cost of risk of the, I would say, the loan loss we have in our P&L cannot be taken as a deductible expense for tax reasons. So that is basically the difference. I would say, the nominal income tax rate is 30%, but it's really very hard to estimate what will be the effective tax rate this year because of these differences between the tax accounting and the reported accounting. The last question, sorry, was -- the third one was related to? -------------------------------------------------------------------------------- Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [31] -------------------------------------------------------------------------------- Yes, the use of capital either for buybacks or acquisitions? -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [32] -------------------------------------------------------------------------------- Yes. Actually, the result from the exposition to inflation was high, was around ARS 11 billion in the quarter because our liquid net worth is high. Of course, we would prefer to be able to pay dividends. There is not too much alternative in order to protect from that. Of course, we have real estate, but we are not willing to increase real estate. We analyze different bonds or dollar-linked bonds or UVA products. We are -- the asset and liability management committee is working on that. But definitely, inflation -- the high inflation (inaudible) real profitability. -------------------------------------------------------------------------------- Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [33] -------------------------------------------------------------------------------- And about acquisition or buybacks? -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [34] -------------------------------------------------------------------------------- Sorry, I couldn't hear you probably. -------------------------------------------------------------------------------- Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [35] -------------------------------------------------------------------------------- Yes. Would you consider any possible acquisitions of other banks or buybacks? -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [36] -------------------------------------------------------------------------------- Well, there -- the answer tends to be the same in all the years we have since we invest many years ago. Basically, we are always open to analyze any M&A opportunity that is in the market. Right now, there is nothing. Perhaps in the last couple of years, the question could be, if it's worth acquiring a typical bank or perhaps some fintech that could complement some part of our business or processes. But yes, we are always open to M&A. But again, we have nothing in the pipeline. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- Mr. Firvida, do we have time for any further questions. -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [38] -------------------------------------------------------------------------------- Okay. If we have no more questions... -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- I was just confirming, we have 2 more questions in the queue. Do we have time to take them, sir? -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [40] -------------------------------------------------------------------------------- Yes, sure, sure. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- We'll go to Yuri Fernandes of JPMorgan. -------------------------------------------------------------------------------- Yuri R. Fernandes, JPMorgan Chase & Co, Research Division - Analyst [42] -------------------------------------------------------------------------------- First one regarding expenses, I guess you already touched a little bit on that topic when you were discussing fees. Just to have some sense. So basically, the idea is for both fees and expenses to grow below inflation in 2021. Regarding expense, how much more room you see for optimization? Because the data for this quarter was very good, right? Like you had the headcount reduction. So just confirm that those numbers are right, like should be below inflation. And if you can provide a number, I guess, that would be helpful or some kind of range would be nice. And [whether] you want to cut expenses? You plan to keep reducing headcount, start closing more branches because I think the number of branches have been more stable. What's the strategy to deliver on costs? And my second question is regarding asset quality, just a follow-up. I understood from Ernesto's question, I think that 4.2% of your portfolio is under Leliq, but that number only includes installments. It does not include the full balance of that client. So my question is, is this correct? And can you provide the balance of the total balance, like the total exposure? I guess the concern here is that credit card has some more automatic kind of release, and you have like a bigger exposure to credit cards. And if those loans go bad, I guess it's not only the installment, right? The impact for NPL is going to be the full balance. So if you can provide some color on like the total exposure for Leliq, like considering the full balance? And also the peak of NPLs, like when do you plan to see Leliqs ending like the NPLs peaking? Because this quarter, like you had many helps right. Like as you said, charge offs were super high. You had like loan growth accelerating. So when do you see NPLs peaking? And if you can provide a number for us? I got the message that asset quality is better than you expected. But just for us to know about your expectations on the peak. -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [43] -------------------------------------------------------------------------------- Okay. Yuri, first, the cost reduction. It was very significant in fourth quarter compared with fourth quarter of the previous year. If we consider a full 2020 compared with 2019, I would say, it's -- I would say, more fair for comparison. And there, you can see that the saving was around a 5% in real terms. This is the kind of savings we could see in 2021. We try to save in many different lines, not only in terms of number of people that basically people retire, people change jobs. And we try not to replace these people. That is why you can see that in the last couple of years, the number of people is going down around 5% per year. And the objective is to have -- we will have fees growing a couple of percentage points below inflation. That is our estimate for this year. Then the saving in costs will offset that reduction in fees. In terms of asset quality, yes, the refinancing of the payments of credit cards in April and September, plus just the installments in personal loans that were deferred, represent 4.2% of total loans as of the end of December. If we were to consider all the outstanding personal loans of these clients, this number will grow to -- and also additional debt -- credit cards, the number will grow -- could grow to levels of 8%. But this is, as I tried to explain, not fair because after the clients deferred certain payments of credit cards and also certain installments of personal loans, they were paying the next installments and also if they accumulate that they lose the limit and they cannot use the credit card anymore. So even considering the worst-case scenarios, we feel comfortable with the coverage we have. Regarding the third question on NPLs. As you said, there are -- the information is not so easy to analyze because of these deferrals and forbearance. NPL, instead of being 1.3% of the bank without the additional 60 days, would have been 2.2% in the case of Naranja from 1.8% to 2.3%. But if there are no additional regulatory deferrals, we are estimating that the peak could be around July this year coming from these levels that I mentioned of 2.2%, 2.3% that are, I would say, the old ones without the forbearance, could grow to levels of 4%. But this, of course, is a very dynamic situation. And it's a gross estimate we are having in our models. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- And we'll go to Nicolas Riva, Bank of America. -------------------------------------------------------------------------------- Nicolas Alejandro Riva, BofA Securities, Research Division - Research Analyst [45] -------------------------------------------------------------------------------- I have 2 quick questions, more than anything to confirm things. You now report inflation adjusted financials. And I wanted to confirm, for the loan book, you reported 5% loan growth last year. I assumed the loan book is not adjusted for inflation. So I assume this was 5% loan growth in nominal terms, which compares to 36% inflation approximately in 2020 for the country, but I wanted to confirm that. And also that in the income statement that the impact from inflation is only reflected in that line results from monetary position so that net interest income, fee income, all of those figures, I wanted to confirm, those are all in nominal terms because they don't need to be adjusted, but I wanted to confirm. And second, on the FX restrictions, we saw that the Central Bank extended the restrictions to buy dollars to pay dollar debt until the end of this year. I believe for you, there is no impact because you don't have any dollar bonds coming due this year. I know that you can call the 2026 bond this year. I would assume you're not going to call that, but I wanted to confirm that with you and that there is no impact from the FX restrictions for you? -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [46] -------------------------------------------------------------------------------- First, the -- in the speech when I spoke about the growth rates of the system -- of the financial system of the whole, these are nominal figures without adjustment because it's not an accounting figure. In our press release, when you look at the charts within the level of activity part of the press release, these are accounting numbers. And yes, they are adjusted by inflation. So the growth rates are real. And actually are similar to the growth rates we thought we were going to have when we spoke, perhaps 1 year ago. So -- and one more thing regarding that question. Of course, the [favor] between the peso loans or deposits are very different from the dollar loans or deposits. So yes, we are seeing important nominal growth rates in peso, both in deposits and in loans, not -- it's not the case for the dollar part, but you can see the breakdown in the different charts. Regarding the monetary position or the effect of inflation in our accounting, I would say that most of it is within the monetary -- in that line, reflecting in the monetary position. There is, in our case, a tiny impact within other comprehensive income. And in the case of other peers, in recent quarters, they have within the results from monetary position, even a positive result and because they have a big impact within other comprehensive income. Now the Central Bank has said that all the impact of the monetary position must be reflected in the P&L. But to be precise in the answer, you can assume that in our case, most of the results from inflation is in that line. And regarding the restrictions to purchase dollars to pay financial debt, as you said, we have a call on our subordinated bond in July this year. And also, in that day, we have a reset on the interest rate we pay. With information on the numbers we have today, the coupon should be lower than the current one. So it really shouldn't make sense to call that bond. And with the restrictions, they are perhaps even impossible. So it's likely -- of course, I cannot say this is 100% true statement, it's likely that the subordinated bond will be paid in its maturity in 2026. So perhaps it's likely that we will not be able to call it. Of course, from 2021 to 2026, the bank could be purchasing or buying back part of those bonds if regulations permitted and also taking into account that each year in the last 5 years, we can compute a decreasing percentage of the subordinated bond as Tier 2 capital. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- And we do have one more question in the queue. Do we have time to take it, sir? -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [48] -------------------------------------------------------------------------------- Yes, yes. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- We'll go to that last question in the queue, and that's from [Diego Uriba] of Interamerican Advisors. -------------------------------------------------------------------------------- Unidentified Analyst, [50] -------------------------------------------------------------------------------- My question is about the capital restrictions. Don't they affect the (inaudible) in April? -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [51] -------------------------------------------------------------------------------- Well, the Naranja financial team is working on that. The last information I have is that they will not have any problem with that bond. But really, I should have to double check if there is any more recent information. As far as I know, they will be able to pay, but we can speak perhaps later in the day to check. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- And there are no other questions in the queue. I'll turn the call back to you, Mr. Firvida, for any additional comments. -------------------------------------------------------------------------------- Pablo Eduardo Firvida, Grupo Financiero Galicia S.A. - Institutional & IR Manager [53] -------------------------------------------------------------------------------- Okay. Jenny, just to say thank you for -- everybody for attending this call. And if anybody has any further questions, we are more than happy to answer them, and do not hesitate to contact us. Good morning and good afternoon. Bye-bye. -------------------------------------------------------------------------------- Operator [54] -------------------------------------------------------------------------------- And that does conclude the call. We would like to thank everyone for your participation, and you may now disconnect.