Grupo Financiero Galicia S.A. (GGAL) Earnings

Management highlights

- **Macroeconomic Context**: The Argentine economy expanded 2.7% year-over-year in June, with inflation decelerating to 1.9% monthly. Private sector peso deposits grew 8.4% quarter-over-quarter, while dollar deposits increased 1.9%. - **Banco Galicia Performance**: Net income rose 21% year-over-year, driven by lower funding costs, improved government securities performance, and efficiency gains from the HSBC integration. Net interest margin decreased slightly due to falling rates, but net income from financial instruments surged 275% sequentially. - **Asset Quality & Liquidity**: Nonperforming loans (NPLs) to total financing reached 8.3%, a deterioration of 60 basis points from Q1, though coverage ratios improved to 92.8%. Provisions declined 8% sequentially. Regulatory capital ratio stood at 26%, and Tier 1 at 25.9%. - **Strategic Focus**: Management emphasized disciplined growth, focusing on commercial dollar lending (oil/gas sector) and selective retail origination. They aim to balance treasury activities (government bonds) with private sector lending, noting internal limits on bond portfolios. - **Operational Efficiency**: Cost reductions are being captured from last year's restructuring. Headcount has returned to pre-acquisition levels. Management expects full-year operating costs to be 11% lower than the prior year.

Guidance

- **Loan Growth**: Revised expectations for full-year loan growth are between 10% and 15%, with most real growth expected to come from dollar-denominated commercial loans rather than peso loans. - **Deposit Growth**: Expected total deposit growth of approximately 10% for the year. - **Cost of Risk**: For Banco Galicia, the full-year cost of risk is guided to be around 8.3% (down from 9.3% currently). For Naranja X, NPLs are expected to decline to ~17% by year-end from ~20% in Q2, with coverage returning toward 100%. - **Profitability Targets**: Banco Galicia aims for a Return on Equity (ROE) of around 10% for the full year 2026, with a medium-term target of 15-20% (aiming for 15% next year). - **Efficiency Ratio**: Target to keep the efficiency ratio below 40% for the bank in 2026, with a long-term goal of 37-38%. - **Net Interest Margin (NIM)**: Expected full-year NIM for the bank to average around 16%, with potential downward pressure in H2 as rates normalize.

Segment performance

Net income for the second quarter amounted to ARS 258 billion, representing a 12% year-over-year increase. The financial performance by segment is as follows: Banco Galicia contributed ARS 158 billion; Fondos Fima contributed ARS 38 billion; Naranja X contributed ARS 36 billion; Galicia Seguros contributed ARS 23 billion; and Galicia Securities contributed ARS 8 billion.

Risks & headwinds

- **Credit Quality Deterioration**: The NPL ratio increased to 8.3% in Q2, indicating ongoing stress in the portfolio, particularly in credit cards and personal loans, although stabilization signs were observed late in the quarter. - **Macro Volatility**: Upcoming presidential elections may introduce market volatility, though management cites strong central bank reserves as a buffer against disruptions. - **Inflation Accounting Drag**: As inflation decreases, the impact of inflation accounting on P&L becomes more burdensome relative to shrinking nominal margins, complicating profitability comparisons. - **Currency Risk**: Lending in dollars carries devaluation risk, especially for non-dollar-producing companies, requiring strict prudential analysis. - **Regulatory/Tax Burden**: High local taxes (turnover tax, city taxes) and VAT on interest remain significant cost drivers that could erode margins if not addressed by regulators.

Analyst Q&A

• Q: Analysts asked about the sustainability of NIMs given rate normalization and the primary driver for ROE expansion. /

  A: Management stated NIMs face downward pressure as inflation falls, targeting ~16% for the bank full-year. The main driver for ROE expansion is credit growth, supported by reducing cost of risk (target 8.3%) and efficiency gains via AI and branch optimization, as margin expansion is unlikely in a low-inflation environment.

• Q: Questions focused on deposit sustainability, liquidity management for future loan growth, and capital adequacy. /

  A: Deposits are managed efficiently based on lending needs, with 10% annual growth expected. Capital is robust (26%), sufficient for three years of healthy growth without raising funds. Dollar liquidity is strictly managed (40-50% of deposits), supplemented by dollar commercial paper issuances to fund dollar lending.

• Q: Analysts sought details on retail loan growth strategies and NPL trends by segment. /

  A: Retail growth remains cautious, with personal loans expected to grow 4-5% in H2 through 'champion-challenger' testing of better-risk segments. NPL improvements are seen in higher-segment credit cards and personal loans, with overall NPLs targeted to fall to 6.3% by year-end.

• Q: Queries addressed the composition of the loan portfolio, specifically the rise in dollar loans and FX outlook. /

  A: Dollar loans now comprise ~1/3 of the portfolio, limited by liquidity constraints rather than demand. Management expects the USD/ARS exchange rate to reach ~1,600 by year-end and ~2,000 next year. Internal limits ensure dollar lending is backed by stable dollar deposits or wholesale funding.

• Q: Discussion centered on regulatory changes, including reserve requirements and tax reforms affecting lending costs. /

  A: Reserve requirement reductions are not on the immediate agenda but may return if lending grows significantly. Tax reforms, such as removing VAT on consumer loan interest or reducing turnover taxes, are viewed positively as they would lower customer borrowing costs and improve bank margins.