Banco Bbva Argentina SA (BBAR) 2020 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to BBVA Argentina's Third Quarter 2020 Results Conference Call. We would like to inform you that this event is being recorded. (Operator Instructions)

First of all, let me stress that some of the statements made during this conference call may be forward-looking statements within the meaning of the safe harbor provisions found in Section 27A of the Securities Act of 1933 under U.S. federal securities law. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Additional information concerning these factors is contained in BBVA Argentina's annual report on Form 20-F for the fiscal year 2019 filed with the U.S. Securities and Exchange Commission.

Today with us, we have Mr. Ernesto Gallardo, CFO; Mrs. Ines Lanusse, IRO; and Mr. Javier Kelly, Investor Relations Manager. Mr. Kelly, you may begin your conference.

Hello, everyone, and welcome to the BBVA Argentina earnings conference call for a discussion of our third quarter 2020 results.

Before we begin our formal remarks, allow me to remind you that certain statements made during the course of the discussion may constitute forward-looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to materially differ, including factors that may be beyond the company's control. For a description of these risks, please refer to our filings with the SEC and our earnings release, which are available at our Investor Relations website, ir.bbva.com.ar.

Speaking during today's call will be Ines Lanusse. Also joining us today is Ernesto Gallardo, our Chief Financial Officer, who will be available for the Q&A session.

Please note that starting January 1, 2020, as per Central Bank regulations, we have begun reporting results applying hyperinflation accounting in accordance with IFRS rule IAS 29. For ease of comparability, figures for all quarters of 2019 have been restated applying IAS 29 to reflect the cumulative effect of the inflation adjustment for each period through September 30, 2020.

Now let me turn the call over to Ines.

Thank you, Javier, and thank you all of you for joining us on the third quarter 2020 earnings conference call. We hope you and your beloved ones are healthy and safe on these challenging times.

From the beginning of the pandemic, BBVA Argentina has prioritized its clients and employee safety, both in central offices and in branch network. The bank has provided its clients, through its traditional and digital channels, not only its wide range of products, but also all possible support that has surged through the health emergency regulation implemented by the Argentine government.

Regarding digital transformation, the penetration of digital clients reached 71% from 69% on the -- and the penetration of mobile clients reached 59% from 57% in the prior quarter. Moreover, digital branches have been launched in October '20, combining several features between human capital and structure facilities to promote client service, aiming to digitalize and migrate clients to remote channels.

In terms of responsible banking, BBVA Argentina keeps working towards a sustainability model, supporting the responsible business actions regarding inclusion, financial education and environmental protection as part of its compromise with the country.

Meanwhile, the bank closely monitors the impact of the pandemic over the business, financial conditions and operating results, in the aim of anticipating possible actions to optimize value for its shareholders and it keeps the solidity it has widely developed for as long as the volatility and uncertainty as seen during 2020 remains.

I will now comment on the bank's third quarter 2020 financial results. All figures mentioned here, in fact, are measured in current currency at the end of the reporting period, including the corresponding financial figures for the previous periods provided for comparative purpose, unless otherwise noted.

BBVA Argentina's third quarter 2020 net income, including inflation adjustment effect, total ARS 2.83 billion, 2.9% higher than the ARS 2.75 billion posted a quarter ago and 65.4% lower than the ARS 8.19 billion posted a year ago. The quarter-over-quarter increase is mainly explained by a lower income tax derivate from the reduced taxable base, additional to temporary differences between fiscal and accounting inflation adjustment regulation. The year-over-year decrease is partially explained by the impact of the pandemic and the sharp contraction of the interest rate as a consequence of the monetary policy implemented by the government during 2020.

In the third quarter, net income from write-down of assets at amortized cost and at fair value through other comprehensive income reflected a loss of ARS 4.0 billion, 79.3% greater than that recorded in the prior quarter. 72% of the result in this line is mainly explained by the accumulation inflation adjustment in other comprehensive income or the remaining position in U.S. dollar-linked notes, LELINK, which the bank exchanged in the voluntary swap offered by the National Treasury on July 17, 2020.

In the quarter, net interest income totaled ARS 16.6 billion, ARS 2.6 billion (sic) [2.6%] lower than the results posted in the second quarter of 2020 and 25.6% lower than the result posted a year ago. The decline is mainly explained by an increase in the average minimum rate of time deposits and of interest-bearing checking accounts, in addition to a shift in deposit mix from site deposits to time deposits, all of these which offset the greater income delivered from a higher position in Central Bank LELIQs.

Income from government securities increased by 34.1% compared to the second quarter of 2020 and fell 38.4% compared to the third quarter of 2019. The sequential increase is explained by the increase in the LELIQ position as a consequence of the increment in time deposit combined with Central Bank regulations that enable a higher excess LELIQ position in line with what was granted in time deposits at minimum rate.

Interest income from loans and other financing totaled ARS 14.8 billion, decreasing 3.3% quarter-over-quarter. This is explained mainly by the contraction in overdrafts, a direct consequence of the economic situation, partially offset by the pickup in credit card transactions and loans to the prefinancing and financial exposures, mainly in pesos.

In third quarter 2020, interest on time deposits represented 86.4% of the bank's total interest expenses, increasing 48.5% in the quarter.

Net fee income amounted to ARS 3.0 billion, 10.2% lower quarter-over-quarter. This contraction is explained by fees from credit card consumption received during the second quarter and, in a lower extent, by the slight pickup in expenses as a consequence of the surge in the activity. If fees from credit card consumption received in the second quarter were excluded, net fee income in the third quarter would have increased 27.7% quarter-over-quarter.

Net income from financial instruments at fair value totaled ARS 886 million, decreasing 34.8% quarter-over-quarter. This is explained by the lower volume in income from government securities, explained by the reduction of exposure to LELIQ during the last month of the quarter.

In the third quarter of 2020, FX gains, including foreign currency foreign transactions totaled ARS 1.6 billion, increasing 0.5% quarter-over-quarter due to an increase in results from purchase and sale of foreign currency, derivate from a surge in the activity.

Moving on to the expenses during the third quarter of 2020. Personnel and administrative expenses totaled ARS 8.9 billion, increasing 6.5% quarter-over-quarter and decreasing 12.1% year-over-year.

Personnel benefits expanded 7.3% in the quarter, reaching ARS 4.6 billion. This increase is mainly explained due to the increments in salaries as a consequence of a collective bargaining agreement with labor unions on July 16, 2020.

Administrative expenses grew 5.7% in the quarter, mainly explained by an increment in armored transportation services derived from a surge in activity and increase in FX market restrictions enforced in September, partially offset by savings in administrative services and rentals.

The accumulated efficiency ratio in the third quarter of 2020 was 58%, above the 54.7% and the 43.9% reported in the second quarter of 2020 and in the third quarter of 2019, respectively. The increase is explained by a higher percentage increment of the expenses than net income, which was -- which has been mainly affected by the increase in financial expenses. Excluding inflation adjustments included in the lines income from monetary position and net income from write-down of assets at amortized cost and at fair value through OCI, the accumulated efficiency ratio as of the third quarter of 2020 would reach 46.2%.

In the third quarter of 2020, other operating expenses contracted 11.2% quarter-over-quarter due to the reduction in the turnover tax for the recognition of the advanced payments of this tax for 2020 (sic) [2021] in the city of Buenos Aires.

On the other hand, there is also a reduction in other operating expenses as a consequence of the release of legal provisions.

In terms of activity, the bank financing to the private sector totaled ARS 258.6 billion, decreasing 4.1% quarter-over-quarter and decreasing 10.6% year-over-year, both in real terms.

BBVA Argentina consolidated market share over the private sector loans as of September 2020 reached 8.25% from 8.13% in third quarter 2019. Loans to the private sector in pesos remained flat quarter-over-quarter and increased 12% in the year. Dollar-denominated loans decreased 22.8% quarter-over-quarter, measured in pesos, and 29.3%, measured in dollars, mainly driven by the contraction in demand of loans in foreign currency.

Regarding the retail portfolio, including mortgages, pledge, consumer and credit card loans, these have increased 7.3% quarter-over-quarter and fell 1.5% year-over-year. In the quarter, the greatest increase are reflected in pledge loans and credit card loans, the latter boosted by Ahora 12 and Ahora 18 programs.

Commercial loans, including overdrafts, discounted instruments, leasing, foreign trade and other loans, fell 15.3% quarter-over-quarter and 19.9% year-over-year. The quarterly decrease is mainly explained by a 41% decline in overdraft and a 27.6% decline in loans for the prefinancing and financing of exports. This was partially offset by a 15.7% increase in discounted instruments and a 2.2% increase in company loans.

As of September 30, the banks had [ARS 247.9 billion] in COVID-19 supported credit lines.

In the third quarter 2020, gross loan-to-deposit ratio was 66% compared to the 79% a year ago.

As of September 2020, asset quality, measured as total nonperforming portfolio over total portfolio, reached 1.16%, the lowest in the last 12 months. This ratio was positively affected by the temporary flexibility in BCRA regulations regarding debt classification during the COVID-19 pandemic, which extends grace periods in 60 days before a loan is classified as nonperforming and suspends the mandatory reclassification of clients that have been in an irregular performance with other institutions but a regular performance with the bank. These waivers are in effect until December 31, 2020.

The coverage ratio, allowance over total nonperforming portfolio, increased to 355.26% in the third quarter of 2020 from 269.38% in the second quarter of 2020. This is explained by a decrease in nonperforming loans, which is greater than the increase in allowances, as a consequence of the implementation of impairment models and the continuing effect of waivers enforced through BCRA regulations regarding debt classification.

Cost of risk, loan loss allowances over average total loans, reached 1.37%, lower than the 4.27% recorded in the second quarter of 2020. It is mainly explained by an adequate evolution in credit quality, especially in the commercial portfolio.

Allowances for the bank in the third quarter of 2020 reflects expected losses driven by adoption of the IFRS 9 standards as of January 1, 2021, expect for debitor instruments issued by nonfinancial government sectors, which were temporarily excluded from the scope of such standards.

In the third quarter, exposure to the public sector, excluding Central Bank instruments, measured as a percentage of total assets, reached 4.3%, above the 3.3% recorded in the prior quarter. Our total exposure to the public sector, excluding Central Bank notes, was ARS 25.1 billion, above the ARS 19.2 billion in the prior quarter. It is worth noting that on July 17, the bank participated in the voluntary swap offered by the National Treasury and swapped its remaining position in sovereign U.S. dollar-linked notes, LELINK, in the exchange of bundle of sovereign bonds in pesos adjusted by inflation, BONCER, maturing in 2023 and 2024. This left the bank's portfolio mutually free of U.S. dollar and U.S. dollar-linked denominated securities.

On the funding side, private sector deposits in the third quarter of 2020 totaled ARS 393 billion, remaining flat quarter-over-quarter and growing 6% when compared with the third quarter of 2019.

Private sector deposits in local currency were ARS 279 billion, increasing 2.2% quarter-over-quarter and 33.8% year-over-year. This is mainly explained by the strong growth in time deposits, especially of investment accounts, and to a lesser extent by the growth of checking accounts.

Private sector deposits in foreign currency decreased, both measured in pesos and in dollars. Towards the end of the quarter, U.S. dollar deposits withdrawal increased as a consequence of the enhanced restrictions over the FX market. After operability was reestablished under new Central Bank regulations, foreign currency deposit withdrawal slowed down, returning to levels observed during the previous months.

As of September 2020, BBVA transactional deposits, including checking and saving accounts, represent 63.1% of total deposits from 66.4% a year ago.

BBVA Argentina consolidated market share of private sector deposits as of September 2020 reached 6.48%.

In terms of capitalization, BBVA Argentina continues to show strong solvency indicators, accounting an excess capital of ARS 61.9 billion, entitling a total regulatory capital ratio of 23.3% and a Tier 1 ratio of 22.6%. The bank's aim is to make the best use of the excess capital. The bank's liquidity ratio in pesos and dollars remained healthy at 51.1% and 86% of total deposits as of September 30, respectively.

Last but not least, on November 20, the General Extraordinary Shareholders Meeting approved a distribution of a complementary cash dividend for the sum of ARS 12 billion through the partial write-off of the optional reserve for future distribution of earnings, in the aim to increase the ARS 2.5 billion cash dividends approved in the shareholders meeting of May 15, 2020, subject to BCRA approval. With this additional dividend, the payout ratio would reach 46%.

This concludes our prepared remarks. We will now take your questions. Operator, please open the line for questions.

(Operator Instructions) Our first question comes from Gabriel Nóbrega with Citi.

I actually have 2 questions. The first is on the level of provisioning. We saw a large decrease in this quarter. I understand that it is because you were extremely comfortable. Your coverage ratio is well above 300%, if I'm not mistaken, just with the new historical high. And so I wanted to understand, even though you still don't have a clean picture of the NPLs due to the waivers from the Central Bank, I would just like to understand if you believe that you are going to keep making the same level of provisioning for the coming quarters? And I'll ask a second question afterwards.

Nice to talk to you. Okay. As we mentioned today, we have a question mark on when the waivers of the Central Bank will be taken out. So regarding our more asset projection for NPL, we do not increase this waiver. We are projecting an NPL to be around 1.90% by the end of 2020 and going a little bit higher, even more higher in 2021, reaching levels of 2.9% or around 3%.

As you mentioned, the level of provisions, we feel very confident. It's very high. We should see an increase in provisioning in the fourth quarter, mainly by the change in the variables affecting the IFRS 9 model. So that and also considering that your NPL will decrease -- sorry, will increase your NPL in the fourth quarter, should increase mainly because of the corporate portfolio. That should make the coverage go a little bit further down in -- by the end of 2020.

For 2021, again, it's more a question -- we still have a question on how NPLs will perform. If I would know, they should get a little bit worse. The waivers will, at the end of the day, define how the ratio behaves. But yes, provisioning should increase in the fourth quarter but again, mainly because of the change in the IFRS 9 projections.

Okay. Perfect. And then as for my second question, it's actually on your net interest income. So we have seen that since the first quarter, this has decreased a lot. While I understand that there is an effect here from the increase in the Badlar rate, it's still a significant decrease versus your peers. So if you could just maybe comment what's going on here. What's maybe being different than what the other larger 10 banks seeing?

And also, as we have -- as we're starting to see the Central Bank increasing interest rates again, what do you think should be the trajectory for your net interest income in the fourth quarter?

Okay. For the fourth quarter, we believe you should -- you would only see an increase in our net interest income, mainly because activity should start to increase, but that also it's a little bit increasing slightly due to the surge of the activity with the increasing cost of funds. As you all know, as you mentioned also, the time deposits are increasing. We are paying a minimum. So that increase in activity, that would increase our interest income. Increase will be a little bit compensated by the increase of cost of funds.

Going more towards 2021, we are also expecting activity to increase, probably going more to similar levels as 2019. But again, we should have -- we will see the pressure on the cost of funds. And that probably will affect the increase in loans. It's a question of mix. And also going more into the general activity of the bank, which is lending, it is more tied to the pickup in the demand that we saw in the last quarter, the effect of the subsidized loans that we're picking up, and now they're starting to decrease again despite we are seeing some pickup in the retail business.

And then if you just allow me a follow-up here since you talked about this demand question. We saw the new regulation for the subsidized loans at, I think, 30% for SMEs. Do you expect to start offering a lot of these? And maybe could this lead to a pickup in demand for the fourth quarter and for 2021 as well?

It's difficult to predict because we have lended, for example, the subsidized lines of 24%, now it's starting to reduce that demand, but also because we are obliged to lend this 7.5% of deposit base. As of November 20, we have already granted ARS 5.9 billion in this new line, which is not -- you have to place it, it's more -- it's not offset it. So basically, the demand for this type of loans is coming from that side.

Going forward, we need to see the macro economic conditions to become more stabilized. And there, we should see a pickup in loan demand.

The next question is from Alejandra Aranda with Itaú.

Could you tell us the percentage of loans reprogrammed? And if you could discriminate that between credit cards and the rest of your portfolio? And remind me, you said, what was the percentage of loans at the subsidized rate that you already had -- that you already have on your portfolio?

Okay. The support lines basically are the support line for the 24%, the 0 interest rate and all those lines that we're implementing for COVID represent ARS 47.6 billion.

Now this new regulation, the compulsory credit line, which is Communication 7140, as of November 20, we have already granted ARS 5.9 billion.

So the lines that were granted for the COVID or on the COVID lines now are going into the compulsory credit lines.

Regarding the deferred loans, from the total loan book, they represent approximately 17% of the total book, and it's mainly composed by the credit card business.

Okay. Perfect. And two more questions, if I may. In terms of fees, could you give us some color on what to expect for the next year and for 4Q and also for growth in loans and deposits?

Yes. Regarding fees on the fourth quarter, you should see them going a little bit further down because the activity will start to increase. So you should see acquisition costs starting to increase. You already saw some of that in the third quarter. Despite if you had excluded that onetime gain we had in the second quarter, you would have seen an increase in fees.

Going forward to 2021, again, tied to the increase in inflation -- I'm sorry, in the activity, you could see -- you are going to see some increase in some products, in commissions with some products, so basically credit cards and safety boxes. We are projecting increases for January, June and October. Expenses to grow in line with inflation. And again, you should see some more client acquisition costs that probably we didn't see in 2020 that you're going to see in '21.

Probably, the trend, you should take as a reference what happened in 2019. We expect to have a trend similar to what happened that year.

Going to loan growth, to give you an idea, year-to-date, with the figures as of October, the bank -- in nominal terms, the bank has been growing around 32% above the system. That profit was growing around 40%, a little bit below the system. And we are projecting for the year-end loan growth in nominal terms to grow around 42%. That will be around 39 -- sorry, 3% in real time. We are projecting an inflation towards the end of the year of 39%.

Regarding deposits, these are going to grow -- still going to grow above loans growing around 50%, which also gives you real growth in real terms.

For 2021, the mix should be inverted. Loans should start to grow above deposits. Loans growing around above the system and deposit is also growing above the system. The inflation we are projecting for 2021 is 50%, so both our results growing above inflation.

(Operator Instructions) The next question is from Carlos Gomez with HSBC.

Could you clarify further the situation with the dividend? So you declared an initial dividend which, again, if I understand correctly, you did not pay, because the Central Bank has not allowed it. Now you're declaring a complementary dividend, which again will depend in Central Bank approval. And I imagine that they remain parked until the Central Bank changes its mind and you can pay for it. Do you have a realistic expectation to pay the dividend this year? Or this is more likely for next year? And if and when you are allowed, are you planning to do it in pesos? Or are you going to make any type of facilitation for foreign shareholders to access it in dollars?

Carlos, regarding Central Bank, there is no flexibility. It's difficult to say when we will be able to pay. The truth is that by doing this, we are increasing our monetary liabilities, which help hedging against inflation. Basically, you will see a lower effect on the line of inflation on the P&L. So despite we do not have the approval to distribute and we don't know when that's going to happen, this should have a positive effect in the P&L because we are trying to hedge inflation. So basically, that's the main difference.

So let us understand this, it's not completely clear to me. So you declare the dividend. So essentially, the dividend comes out of equity, but its categorization changes from nonmonetary liability to -- no, sorry, from monetary liability to nonmonetary liability?

No. It comes out from the equity and goes into the...

A new liability.

A liability. A monetary liability.

What happens is that you have less monetary assets at the end of the day.

So you'll have less monetary assets, because now this, we can sell liability as supposed to being part of the equity?

Correct.

Exactly. Exactly. That's the point.

All right. Is there any realized implication, taxes or otherwise? Because otherwise, it's just simply cosmetic this is, what happens to the inflation adjustment and therefore the reported earnings.

I'm not sure I understand your question. But basically, this gives you less inflation adjustment effect because you have the dividend on the liability side, on the monetary liabilities. That's the main effect. We're trying to hedge against inflation by doing this.

Okay. My other question was, if there is any fiscal impact from that, does your tax liability change because you have more or less...

The answer to that is there is not any fiscal impact because in terms of fiscality, you are going to consider it when you really pay the dividend, not when you declare the dividend.

This concludes the question-and-answer section. At this time, I would like to turn the floor back to Mrs. Lanusse for any closing remarks. .

Thank you, operator, and thank you all for joining us today. We appreciate your interest in us. We look forward to meeting more of you over the upcoming months and providing financial and business updates next quarter. As usual, if you have any further questions, please do not hesitate to reach us and we'll happily follow up. Thank you, and enjoy the rest of the day.

Thank you. This concludes today's presentation. You may disconnect your lines at this time, and have a nice day.