Bolsas y Mercados Argentinos S.A. (BYMA) Earnings Call Transcript

Very well. Thank you, everyone, for joining today. For those that don't know me, my name is Alejandro Berney, I am the Investor Relations Officer for BYMA. And we will be presenting our second quarter results today. Here, you can see our results for the second quarter. In the middle of the page, you will find the historical numbers. In other words, the nominal, not adjusted by inflation results. And the 2 columns on the right hand of the page are the results adjusted by inflation. So what I'd like to point out is the growth of both business lines. The central securities depository grew 17% in real terms, the exchange 30% in real terms, and therefore, our income grew 25% in real terms as well. Expenses grew a little bit over inflation. They were -- they grew 18% in real terms. We will talk about several one-offs that we had this quarter that were part of this real growth. So our net operating result as a result of this, grew 30% in real terms. It's important to highlight also the difference in the inflation adjustment impact. Last year, the inflation was high versus the devaluation, which was very low with the crawling peg and therefore, the net income was negative, whereas this year, first of all, the inflation was lower than the devaluation. The inflation this quarter, the second quarter was 6% and the devaluation was close to 12%. Therefore, our portfolio, which was mostly dollarized showed a better result related to the inflation adjustment impact. The other thing is that a higher proportion of the portfolio was in pesos which, therefore, has a higher return, and that contributed also to financial income being net positive, taking away the effect of the inflation adjustment impact. So we had a very good net income line based on these changes. Going into the -- each of the business lines. First of all, the depository, you can see the assets under custody measured in face value in the graph at the top of the page, 166% growth year-on-year. And in terms of market value, it had a 59% growth year-on-year. Despite the good annual growth the quarter-on-quarter numbers didn't express that much growth, and this is due to the changes in monetary policy that we had. In April of this year, the public debt rollover was very low. There was an auction on April 14 and another auction in April 24. Both of them average 75%. And therefore, we saw a lot of bills maturing and not all of them were being re-bought by the investors -- by the local investors here in Argentina. Therefore, the public debt that we held in custody did experience a drop of 8% in April. And subsequent to that, it started growing again. And by the beginning of the third quarter, it was already up at 20%. So this was something that was just very particular of that moment in time. If you may recall, in April of this year was when the FX policy was changed. The market -- the Central Bank moved from a crawling peg to a free dirty flotation policy. And therefore, in those days, there was a little bit of nervousness in the market as to how it was going to play out. And we saw a lot of local banks and local investors staying on the sidelines and not renovating all of the debt that was maturing. And therefore, that was the result of the rollover being less than 100%. So that has already gone by. And therefore, we are seeing a good evolution after that drop in April. On top of that, when we look at the market valuation, the other reason for the drop was also a bad quarter in terms of prices on the equities, that dropped 14% measured by the S&P MERVAL Index. And so on top of having less bills, we also experienced having a lower value in equities. The good news looking at the revenue is that -- we had a very good quarter due to corporate actions. Corporate actions are typically -- there is -- there are a lot of them happening in the second quarter. And this year, in particular, we had much more dividends being paid. And therefore, the central securities depository had a good growth in the first business line, which is the normal services, the ADC, the core -- I'm sorry, the core services of the depository, the ADC services experienced a good growth both on an annual basis as well as on a quarterly basis. So we did not suffer from the drop in assets on the custody as much. Going into the exchange. As usual, the exchange continues to grow faster than the central securities depository. And you can see here that year-on-year, we experienced a growth of 86%. So a good growth. When you look at quarter-on-quarter here, the changes in monetary and FX policy also had impact on the trading and the nervousness in the markets as well. So we'll go into the different asset classes. Starting with equity, year-on-year, also nice growth, 125% in terms of average daily traded values. And if you look at the graph on the bottom left, you can see that quarter-on-quarter, what is local equities also had a nice growth of 7%. And if you take into account that there were less trading days which subtracted 6% on the revenues, and you take into account that the S&P MERVAL dropped 14%, then our ADTV would have been higher for that asset class and our revenues as well. So although it did show a growth, it did not translate all into a revenue because of fewer trading days and because of the drop in prices. If you look at the CEDEARs here, we experienced a drop. This is something that has not happened since the beginning of the trading of CEDEARs. We did see less activity, less number of accounts. We attributed to the fact that there was a lot of nervousness during those -- during the second quarter as well. International markets, we're very, very volatile. And we saw, therefore, local investors a little bit on the sidelines not being as active as they used to be. The quarter-on-quarter drop in terms of the active accounts was 16% approximately across all asset classes, but they were very similar between fixed income equity and CEDEARs. And actually, we've seen more recently as the situation has turned around. We have seen the activity increase again in the number of accounts, and that is why we attribute it to something very particular around the market sentiment in that quarter. Fixed income did see a very significant growth, both annually as well as quarter-on-quarter of the average daily traded value. And here, it's interesting to see the changes of the FX policy. We did see fewer retail active in the market, but we didn't -- but the flip side is that we saw more arbitrage and that is why volumes went up, as you can see from the graph, from both graphs on the right hand of the page. The top graph is what we call the guaranteed segment, and the bottom is the bilateral or non-guaranteed segment where BYMA does not guarantee the settlement of the trade. But as I was saying, both types of trading saw a very significant increase again year-on-year as well as quarter-on-quarter, and we attribute that to the changes in FX policy. Now when you go to the revenues in this asset class, we do not see a quarter-on-quarter growth. The annual growth was still very significant. The quarter-on-quarter, we saw a small decrease due to two things mostly. First of all, there were a couple of large banks that were not paying the SENEBI fee. The SENEBI is the bilateral segment. We have a pricing arrangement where the fixed fee paid by a client reduces the variable fee that you pay. That is one option. Others preferred not to pay the fixed fee, and therefore, they were paying a higher variable. So the switch from higher variable to a fixed plus lower variable reduced the fees on this quarter, specifically measured to the previous quarter and in spite of the higher volumes traded on the exchange. The second reason was an adjustment on fees that are paid when an investor does both T0 and a T+1 transaction. You buy in T0, sell in T1 or the other way around. When you do that type of financing because basically, you're just buying for a day and selling the next, that type of arbitrage or financing, we also reduced the fees and that also impacted on the quarter-on-quarter. The [ calciones ], our on-exchange repo also continued to show very nice growth rates. And here, we wanted to point out that starting in the third quarter, we are changing how we limit the volumes taken by each broker in this segment. We have seen that there's a lot more demand, but we had been limiting the amount of cash that takers would be getting. We would limit the more the side of how much cash is taken by different brokers. And the change in the model should help us grow this segment more in the future. There was a limit as to how much could be transacted by brokers based on their net worth. We are moving to limited only based on the portfolio of guarantees they leave with us and removing, therefore, the limit based on the net worth of the broker. In terms of market data, this has evolved in line with the FX. So we haven't experienced new clients here. The evolution is simply because all of these fees are based in dollars, the evolution has -- is related to the evolution of the official exchange rate, therefore. Moving now into expenses. You can see, first of all, that technology expenditures grew very significantly. And we pointed out this is due to the fact that there were several one-offs that were paid this quarter. We implemented both a Millennium and the NASDAQ upgrade. Millennium is our trading platform [indiscernible] for trading and NASDAQ is our custody platform. Both of these based -- and due to the growth we've experienced, we upgraded both of them, which led to some large fees paid this quarter. And in addition, we also paid some annual licensing this quarter. And therefore, we experienced a couple of large one-offs that actually should have been spread out more on an annual basis, and therefore, we see this large growth. Next quarter, we should not be seeing that type of growth at all. And in terms of compensation also, this quarter, we paid and the variable compensation and so we experienced a little bit of a hike there as well, and that is why it has been above inflation. As you may recall from previous presentations, the compensation line, which is the largest one, typically evolves with inflation or even a couple of percentage points below inflation. This also was a one-off for the year and therefore, shows a higher amount than if it would have been solely for inflation. The other large expense line is the taxes that continues to grow with our invoicing. And therefore, it is a flat fee that is a -- of flat percentage, I'm sorry, that goes in line with invoicing and with our revenues, therefore. Carlos, if I may, I'll leave the questions towards the end, please.

Thank you.

Financial earnings. They have also seen -- they have shown a very nice recovery on a quarterly basis, and a nice growth again on an annual basis. A larger portion of our portfolio is in pesos, and that contributes more, therefore, in pesos. The FX difference was a good contributor to financial results this year. In the second quarter, there was a little bit of an acceleration when the FX policy was changed from crawling peg to a free -- a dirty flotation. And therefore, we had a good result there as well or a better result compared to the previous quarter. And this in spite of the fact that we had paid out a large dividend in April of $145 million, and therefore, our own cash position had come down, but still the financial income was greater than last quarter. As a result of the revenue growing and the expenses growing at a lower rate, we maintained -- we continue to be at highs in terms of EBITDA margin and operating margin. So EBITDA obviously includes the financial income that comes from the client, from the business side, whereas operating margin excludes all financial income and therefore, is a better test of our efficiency. It does not contemplate any variation of client cash and that is why we say it is a better measure of our efficiency, which we continue to be at all-time highs, as I mentioned. We will leave with you, our results as always. And in this page, we corrected the EBITDA, which was -- which had a typo in what we sent to last night. We already uploaded this version into our website. So apologies for that typo. But the important thing in this page, so as to not repeat the financial results and the efficiency, which we already mentioned. We wanted to highlight the changes which were not -- had not caused impact in this quarter, but will cause impact into several ones. First of all, we changed the market opening to align with the U.S. trading hours. And that gives us another half an hour of trading, as you may recall, there is a lot of arbitrage in equity and in CEDEARs and even in fixed income with the U.S., and therefore, a significant portion of our revenues come from arbitrage and therefore, giving another half an hour of trading should help us with our revenue. We changed the risk model and the assignment of amounts that can be traded for the on-exchange repo. So removing the net-worth limit that we had for the brokers. So that should also help us continue to expand the growth in that segment. The change in monetary policy also has been very significant at the local level. The Central Bank now does not receive cash or provide cash in today or overnight anymore. Basically, the local banks were very used to just letting all of their excess cash there and taking intraday as well. So because the Central Bank wants to move away from that role, it stopped with the LEFIs in July. And what that meant is that now banks must look towards other banks or the capital market to fund themselves. And therefore, we introduced a couple of new trading sessions, what we call simultaneous trades, which are actually repo as well, but we call it simultaneous trades to differentiate from the on-exchange repo and 2 others, which are the overnight repo and the intraday repo where the banks are looking for funding either overnight or intraday. So those sessions we have added, again, to help with the change in how the banks are funding themselves. And the other important change which we introduced in July, which we also sent to our e-mailing list is a significant change in how the equity business is charged. As you may recall, on the trading side, we charge -- BYMA charge 8 basis points on each leg of the transaction. And there is no fee for clearing and settlement. And the fee on the custody side was extremely low. So we reduced 1-basis-point starting in July. In September, we will reduce 2 more basis points on what we charge. So we went from 8 to 7, and then from 7 to 5. And we are increasing in September the custody fee, we will be charging 3.5 basis points on market value. And therefore, starting September, these fees, all in all, should be revenue neutral and should not impact BYMA's total line, but we are changing the distribution of income, moving it a little from the exchange over to the depository as a consequence of this. And that will put us more in line with international competition. The 5 basis points charged on the exchange will be 2 basis points for trading and 3 basis points for clearing and settlement, again, much more in line with what you see on other exchanges in the region. And the custody fee, which was subsidized by the trading. That also will revert to a more normal 3.5 basis points on market value, again, similar to what is being charged in the rest of the region. So these changes you will see in the third quarter, all of these, actually, you will see in the results of the third quarter of this year. Finally, some key projects. And sorry, we left the Spanish version of the titles on this page. So we will be changing that as well. Several of the key projects we have, we are implementing the launch, this began during this year. We continue to roll out APIs for market data and custody information. So that our local brokers and banks can interact much better with our systems and therefore, we continue to improve the scalability of the entire ecosystem. The upgrade of the Millennium system, which we just finished in the second quarter, that again, will allow us to continue to process a greater number of trades and reduce the latency. We launched also during the second quarter, a low latency network. So that, coupled with the upgrade of the Millennium system. Now we are ready to begin receiving HFTs, the high-frequency traders. So we will be attempting to expand into that segment, which we don't have in Argentina. That should be incremental revenue for us as well. The bilateral fixed income platform, which we call SENEBI. We launched a new web version and API access for those brokers that want to connect directly to the engine -- to the trading engine, so that also should help us, again, improve scalability across the ecosystem. We will be launching futures of the on-exchange repo rate and market makers. Again, what we are seeing is with the change in monetary policy of the need for more rate products. And therefore, we think that this will be a good addition to our trading venue. And we continue, as we said before, with the CCP -- the new CCP that will -- that is a system provided by NASDAQ, that should give us a lot of scalability as well. So that is it in terms of presentation, and I'll open it up for questions then. Carlos, please go ahead with your question.

First, and apologies for raising the hand before. So I guess the main question I think for all of us would be what progress we have made in being able to access your stock more easily, to be able to buy and to sell. We know that there has been very significant easing of exchange controls, but it's a process. So we wanted to know how far it is and what is the best venue right now to be able to buy into your local market.

Carlos, indeed, after the changes in FX policy, which began on April 14 and went through some restrictions were lifted in May, those type of restrictions now are much easier. In terms of foreign investors specifically, foreign investors can come in through the official exchange market. And they -- current regulations allow them to leave also through the official exchange market. And that is for new money coming in. So leaving through the official exchange market can only happen if you came in through the official exchange market. The local banks have set up procedures to -- for investors to validate and show the money coming in as well as the results of the investment, and therefore, they approve the money leaving Argentina through the official exchange market. That is in place. As we understand, there's not a lot of investment coming in through that vehicle just yet. From what we hear, a lot has to do with the soon to have elections in September and October. There are a lot of investors on the sidelines waiting to see how the results play out in these two elections, September being the province of Buenos Aires and October being the National Congress elections. And having said all that, we continue to see some money coming in through the on-exchange FX market. So the restrictions were also -- some restrictions were also eliminated for the activity on exchange. And that is why we see more arbitrage now you saw on the fixed income volumes that the ADTV grew that has to do with the fact that there's more arbitrage now, specifically in fixed income as well as the monetary impact that also caused more volume on fixed income. But having said that, so we continue to see foreign investor activity come in through the exchange as we saw in the past. Both avenues continue. But again, there's not a lot of activity right now.

And if I can follow up, is there any -- currently, is there any requirement for a minimal stay of the money for either equity or fixed income investment?

There's no minimum stake. No. Going back to the official FX, the restriction is that you need to prove the investment results and that you can take out once that has been proven. Now the proof is done at the bank level. So you may find some banks that want more documentation in terms of showing the results of the FX of the investment.

Okay. And in practical terms, what has it meant for an investor? If I go in today, how long does it take for me to get in? And how long does it take practically for me to get out?

It will depend if the bank already has you as a client, okay? So assuming you already have your accounts open, which can take some time. Assuming you have your accounts opened, you can do the FX soon as you want, and you will receive the proceeds either same day or next day. The more common market is next day. So you will receive the peso proceeds next day. The pesos you will receive in a local account, therefore, that is why you need the local accounts established and that is -- that goes with my previous comment as to already being a client of the bank and having your back open, right? So you do the FX of T1. And therefore, the -- you have the pesos and then you buy T0 or T1, the investment, the regulation allows you any investment that trades on exchange in Argentina, any investment is valid. FX -- I mean, equity or fixed income basically. And there is no limit as to when you want to leave. So you can have it invested a day and next day leave with the proceeds. And that includes any dividend or income paid on that event as well. [indiscernible].

I had a couple of questions on the restrictions -- regulatory restrictions. You mentioned regulatory changes that impacted trading activity, what were like the main ones? And have you seen a recovery in that trade activity?

Yes. So we have seen a drop in active accounts, like I mentioned, mostly concentrated in the AL30, which, as you know, is the instrument that was mostly used for dollar MEP for exchanging pesos into dollars. We saw a drop in the number of accounts, but we saw more arbitrage because now one of the restrictions you probably recall, that was eliminated was that if a company was doing dollar MEP, they could not go into official FX market, right? So that was eliminated. So now we see more ADTV and fixed income. And we -- from what we have seen, it is related to more arbitrage because restrictions like that had been eliminated. I don't know if that answers your question.

Yes, clear. And there are still any regulation restrictions, well, you mentioned earlier that are you thinking are holding back activity?

Yes, there still are. Although physical persons can access the FX market freely, still, there are restrictions. As you know, for foreigners, foreigners cannot take out dividends paid in the past. So those type of restrictions still we believe make it harder for foreigners to send more money into Argentina. And that is why, again, we believe a lot of this is waiting on the sidelines. Pedro [indiscernible].