Galicia's Q3 2025 Earnings Call: Contradictions Emerge on Loan Growth, NPL Recovery, Margin Expectations, and Capital Policy

Guidance:

• FY2025 ROE ~4% reported; ~6% excluding one‑offs.
• 2026 ROE guidance: 11%–12%; Q4'26 run‑rate ~15%; longer‑term target mid‑teens (15%–20%).
• Loan growth guidance ~25% real for 2026; deposits ~20% real.
• NPLs expected to peak around Mar‑2026 at ~6%–7%; cost of risk peak ~9%–10%.
• Margins bottomed in Oct; rapid recovery in Nov–Dec and healthy margins expected into 1H26.
• No material additional HSBC restructuring charges expected beyond Q3.

Business Commentary:

* Economic and Financial Environment: - The Argentine economy recorded a 5% year-over-year increase in economic activity during September, with the national consumer price index accumulating a 6% increase in the third quarter of 2025. - The primary surplus reached 0.5% of GDP, while overall surplus was 0.1% of GDP, driven by a 32.8% year-over-year increase in revenues and a 30.6% rise in primary spending. - High volatility in the months leading up to the midterm elections led to an exchange rate devaluation, with the ARS 1,400 per dollar in September representing a 15.6% devaluation compared to June 2025.

• Bank Performance and Financial Metrics:
• Net loss for the quarter amounted to ARS 87.7 billion, due to losses from various subsidiaries, with a minus 0.8% annualized return on average assets and a 4.7% return on average shareholders' equity.
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• The quarter included ARS 105.3 billion in restructuring expenses following the merger with HSBC, impacting margins and asset quality.

• Interest-bearing liabilities increased 27%, amounting to ARS 19.9 trillion, while average interest earning assets rose 8% to ARS 22.7 trillion.

• Loan and Deposit Trends:

• Private sector deposits in pesos increased 5.6% during the quarter and 53% year-over-year, with time deposits in pesos rising 13.1% during the quarter.
• Private sector dollar-denominated deposits amounted to $32.6 billion, increasing 7.2% during the quarter and 38.9% year-over-year.

• Private sector loans to the private sector averaged ARS 79.3 trillion, showing a 9.7% quarterly increase and a 105.4% year-over-year growth.

• Asset Quality and Credit Risk:

• The ratio of nonperforming loans to total financing ended the quarter at 5.8%, with a 140 basis points deterioration compared to the previous quarter, primarily limited to personal loans and credit card financing.
• The coverage with allowances reached 105%, down 16.4 percentage points from the previous quarter.
• The bank's total regulatory capital ratio reached 22.1%, decreasing 160 basis points from the previous quarter, reflecting reserve requirements affecting equity.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • "we expect an improvement in profitability during the fourth quarter and next year." "we're expecting an ROE in the low teens range... between 11% and 12%." "we are already really seeing margins at the same level than second quarter...in November." "peak on NPLs in March of next year...around 6%, 7%."

Q&A:

• Question from Daniel Vaz (J. Safra Corretora de Valores e Cambio Ltda, Research Division): Capital ratio fell ~120bps QoQ; given new vintage improvements and expected NPL peak, what is your minimum capital appetite and would you limit originations or change duration vs fintechs?
  Response: Management comfortable with capital after OCI rebound; minimum appetite ~13%–13.5% CET1, Tier‑1 bank ratio was ~24.5% in October, no near‑term need to restrict growth but they are slowing mortgages and tightening consumer origination durations.

• Question from Ernesto María Gabilondo Márquez (BofA Securities, Research Division): What are loan growth expectations per segment for next year and where are private investments emerging; also, confirm NPL peak timing/range and whether cost of risk will peak similarly?
  Response: Expect ~25% real loan growth (outpacing market), commercial focus on oil & gas, mining, copper/lithium and agribusiness; NPLs to peak ~Mar‑2026 around 6%–7% and cost of risk to peak ~9%–10% then decline.

• Question from Ernesto María Gabilondo Márquez (BofA Securities, Research Division): Are you considering tapping the bond markets (debt financing) next year?
  Response: Debt issuance remains a considered alternative but not currently needed; they will evaluate market windows and cost if larger tickets/project finance require it.

• Question from Brian Flores (Citigroup Inc., Research Division): Does the ROE recovery imply mid/high single digits in early 2026 and a gradual path to 15% by Q4'26; and will your funding cost advantage (deposits) persist or intensify a funding war in 2026?
  Response: Yes — ROE recovery is gradual with weaker early‑2026 and acceleration to ~15% by Q4'26; funding priority is deposit growth (cheapest, stable source) though they may tap markets if credit growth outpaces deposits.

• Question from Brian Flores (Citigroup Inc., Research Division): Are you revising prior deposit growth guidance (~35% real) and what do you expect for deposit growth next year?
  Response: Maintaining current year guidance; for 2026 they expect ~20% real deposit growth versus ~25% lending growth (subject to macro moves).

• Question from Daer Labarta (Goldman Sachs Group, Inc., Research Division): On Naranja: will its NPLs peak in 1Q as well, ability to resume growth; and are margins at the bottom or will recovery take longer?
  Response: Naranja should peak around Mar‑2026 too but will recover faster due to shorter loan durations; margins bottomed in Oct with a quick recovery in Nov–Dec and expect Dec levels in line with Q2.

• Question from Daer Labarta (Goldman Sachs Group, Inc., Research Division): Are recent reserve‑requirement cuts sufficient or will further Central Bank easing be needed to improve liquidity?
  Response: Recent CB tweaks (including a 3.5% cash encashment reduction effective Dec‑1) help margins but are modest; further revisions could occur next year if market conditions require them.

• Question from Camila Villaça Azevedo (UBS): Can you detail asset quality dynamics this quarter by segment and what NPL and coverage levels should we expect by year‑end and going forward?
  Response: End‑2026 target NPLs ~4%–4.5%; current coverage ~101.5% and expected to rise toward ~110% by end‑2026 as models normalize and new‑vintage performance materializes.

• Question from Pedro Offenhenden (Latin Securities): Are there any remaining HSBC integration/restructuring costs that will impact upcoming quarters?
  Response: The bulk of restructuring costs were booked in Q3; only small residual system‑related items may appear in Q4 — no material additional restructuring charges expected.

• Question from Carlos Gomez-Lopez (HSBC Global Investment Research): What macro assumptions are you using (GDP, inflation, FX) for next year; is your current LDR a constraint and are you seeing sustained dollarization or a drop in dollar purchases?
  Response: Internal assumptions: GDP ~4% this year and ~3.7% next, inflation ~30% year‑end and ~18% next year, FX ~ARS1,410 year‑end and ~ARS1,610 end‑next; LDR ~99%–100% but liquidity coverage >180% so not a binding constraint and dollar lending demand is strong in commercial; customer dollar purchases fell from ~$50M/day to ≈$15M/day.

• Question from Yuri Fernandes (JPMorgan Chase & Co, Research Division): Why are you confident NPLs will peak in 1Q‑2026 and what leading indicators/models support this; how will expected‑loss accounting affect provisions timing?
  Response: Confidence rests on tighter underwriting (higher scores, lower limits), better performance of new vintages versus old vintages and active monitoring by vintage; provisions will decline gradually as new vintages prove performance—cannot drop immediately because reserves are set against historical portfolio behavior.

• Question from Santiago Petri (Franklin Templeton Investments Corp.): What loans‑to‑GDP assumption underlies your mid‑teens ROE target and is 15%–20% ROE the sustainable steady state?
  Response: Loans/GDP ~10%–11% today, assumed to rise ~2pp per year; long‑term sustainable ROE target is 15%–20% with mid‑teens achievable by 2027 under the stated assumptions.

Contradiction Point 1

Loan Growth Expectations

It involves changes in financial forecasts, specifically regarding loan growth expectations, which are critical indicators for investors.

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2025Q3: Loan growth is expected to be 25% in real terms, with commercial lending and investments in oil, mining, and agribusiness sectors. - Gonzalo Covaro(CFO)

Does this guidance reflect any adjustments to previously guided ranges for loan growth and deposits? How does the capital level affect potential dividend payouts? - Brian Flores (Citi)

2025Q2: Loan growth is now seen closer to 30% to 40% from 50% before due to volatility and stability measures in consumer lending. - Gonzalo Fernandez Covaro(CFO)

Contradiction Point 2

NPL Peak and Recovery Timeline

It directly impacts expectations regarding asset quality and the bank's financial performance.

When do you expect Naranja's NPLs to peak, and what are your expectations for margin recovery? - Daer Labarta (Goldman Sachs Group, Inc.)

2025Q3: NPL peak at Naranja is expected in March, similar to the bank's peak. Margins reached a bottom in October, with November and December showing a strong recovery to pre-volatility levels. - Gonzalo Covaro(CFO)

When do you expect NPL stabilization, and will financial margins grow in the second half of the year? - Pedro Leduc (Itaú BBA)

2025Q2: NPLs are expected to stabilize by the end of Q3, with slight increases during the quarter. - Gonzalo Fernandez Covaro(CFO)

Contradiction Point 3

Net Interest Margin Recovery Expectations

It affects investor expectations for the bank's profitability and financial performance.

When do you expect Naranja's NPLs to peak, and what is your outlook for margin recovery? - Daer Labarta (Goldman Sachs Group, Inc.)

2025Q3: We expect a margin recovery as of this quarter, with 2.8% in the fourth quarter and around 3% for 2026. - Gonzalo Covaro(CFO)

When do you expect NPL stabilization, and will financial margins grow in the second half of the year? - Pedro Leduc (Itaú BBA)

2025Q2: We will likely see a margin recovery as of the coming quarters. - Gonzalo Fernandez Covaro(CFO)

Contradiction Point 4

Consumer Lending Strategy

It impacts the company's strategic focus and business growth prospects.

When do you expect Naranja’s NPLs to peak and what is your outlook for margin recovery? - Daer Labarta (Goldman Sachs Group, Inc.)

2025Q3: The now is time for money. The strategy for next year is to keep a very tight consumer lending book in terms of the asset quality. - Gonzalo Covaro(CFO)

When do you expect NPL stabilization, and will financial margins grow in the second half of the year? - Pedro Leduc (Itaú BBA)

2025Q2: Consumer lending now is intended to be a space that we will grow less than before. - Gonzalo Fernandez Covaro(CFO)

Contradiction Point 5

Capital Adequacy and Dividend Policy

It influences investor confidence and expectations for future dividend payments.

What are your expectations for loan growth next year and your plans for participating in private investments? - Ernesto María Gabilondo Márquez (BofA Securities)

2025Q3: Capital adequacy ratio stood at 13.2% as of September, in line with our internal target of maintaining a minimum end-2025 ratio of 13%. - Gonzalo Covaro(CFO)

Does the guidance reflect any changes to prior loan growth and deposit ranges? How does capital impact potential dividend payouts? - Brian Flores (Citi)

2025Q2: We believe that by the end of 2025, we will be in a position to continue paying a dividend in line with the historical dividend payout as long as the capital remains above 13%. - Gonzalo Fernandez Covaro(CFO)