Banco Bbva Argentina SA (BBAR) 2020 Q2 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 Second 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 the 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; Ms. Ines Lanusse, IRO; and Mr. Javier Kelly, Investor Relations Manager. Mr. Kelly, you may begin your conference.

Hello, everyone, and welcome to BBVA Argentina Earnings conference call for a discussion of our second 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 that 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 this risk, 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 today 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 June 30, 2020.

Now let me turn the call over to Ines.

Thank you, Javier, and thank you all of you for joining us on our second 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 client and employee safety for the central offices and in the branch network. In particular, branches have applied the necessary protection measures in line with the highest security standards to minimize risks in interaction. The bank has shown great adaptive capacity on the one hand by the agile incorporation of the all COVID-19 support measures pressures, and on the other hand, by making them available to clients through different channels, thus providing an efficient service to clients during the pandemic. All these has been possible, thanks to the investment and digitalization done during the last years, providing all its services through digital tenants, both to retail and corporate clients. The penetration of digital clients reached 69.3% from 67.7%, and the penetration of mobile clients reached 57.4% from 56.1% in the prior quarter. In these unprecedented times, the bank has once again demonstrated resilience, maintaining a solid asset liquidity, solid levels of capital, well above regulatory requirements and has also been able to improve its loan portfolio quality. On the other hand, through the efficiency plan implemented into the fourth quarter of last year, the bank has been able to reduced expenses in a sustained manner for 2 quarters in a row.

Now I will comment on the bank's second quarter 2020 financial results. All figures mentioned herein after are measured in current currency at the end of the reporting period, including the corresponding financial sales for previous periods provided for comparative purposes, unless otherwise noted. BBVA Argentina's second quarter 2020 net income, including inflation adjustment effect, totaled ARS 2.6 billion, 21.9% lower than the ARS 3.3 billion posted a quarter ago, and 17 -- 70.1% lower than the ARS 8.6 billion posted a year ago. The quarter-over-quarter decrease is mainly explained by the fall in the economic activity as a consequence of the mandatory lockdown due to the COVID-19 pandemic and the sharp decline in interest rates tariff from changes in the country monetary policy set by the Central Bank, among other regulation also conducted by the Central Bank. The year-over-year decrease is partially explained by the ARS 1.1 billion dividend we received as a consequence of our participation in Prisma during the second quarter 2019.

In the quarter, net interest income totaled ARS 15.9 billion, 13.9% (sic) [8.4%] lower than results posted in the first quarter of 2020, and 17.1% lower than the results posted during the second quarter of 2019. These gyrations were mainly explained by the decrease in the average yield of the Central Bank Leliq, which was partially offset by the decrease in peso cost of funds following the trend of decreasing market interest rates and an increase in side deposits. The quarter-over-quarter performance can be traced to the decline in active interest rates driven by the credit support measures promoted by the government, to contract the effect of the pandemic and by the contraction in government securities as a consequence of the monetary policy implemented by the government.

Income from government securities fell 10.2% or ARS 673 million compared to the first quarter of 2020 and 52.7% or ARS 6.6 billion compared to the first quarter of 2019. This is explained by the decrease in the monetary policy rate promoted by the Central Bank. This contraction was offset by the increase in the position in Leliq, derivates from the new regulations that enables a higher precision in Leliq, in line with what was granted in time deposits at minimum rate. Interest income from loans and other financing totaled ARS 14.2 billion, decreasing 10.7% pesos quarter-over-quarter. This is mainly explained by the implementation of credit lines to SMEs at 24%, zero rate credit lines and the lower credit card financing rate.

In the second quarter of 2020, interest from time deposits represented 79.1% of the bank's total interest expenses, decreasing 24.8% in the quarter and 66% in the year.

Net fee income amounted to ARS 3.1 billion, 57.3% pesos higher quarter-over-quarter as a result of a commercial award receiving during the quarter, plus the saving granted by the lower expenses related to credit card benefits as a result of the lower activity due to the extended extension of the mandatory lockdown. This effect more than offset the fall in activity due to the effects of the pandemic. Net income from financial instrument at fair value decreased sequentially, totaling ARS 1 billion vis-à-vis ARS 1.3 billion in the prior quarter. This is explained by the lower volume of forward transaction as a consequence of the lower activity driven by the regulation and the broad spread between the blue chip swap and the official dollar rate. In the second quarter of 2020, asset gain, including foreign currency forward transactions, totaled ARS 1.5 billion, decreasing 3.2% quarter-over-quarter. This is a consequence of the lower activity due to the regular changes implemented to the exchange market, partially offset by an increase in the income generated from the purchase and sale of foreign currency.

Moving on to the expenses. For the second quarter in the row, we experienced a sequential contraction in the personal and administrative expenses line. During the second quarter of 2020, personnel and administrative expenses totaled ARS 7.8 billion, decreasing 7.8% quarter-over-quarter and 6% year-over-year. Personnel benefits contracted 15.2% in the quarter, reaching ARS 4 billion, generating savings for over ARS 700 million. This is a consequence of the efficiency plans we put in place during the fourth quarter of the last year. Administrative expenses grew 1.3% in the quarter. This increase is a consequence of the adjustment we have to make in order to continue operating during the pandemic. As of June 2020, the quarterly efficiency ratio remained stable sequentially, reaching 47.4% and worsening from the 36.1% posted in the second quarter of last year. It is a consequence of a [step-up construction] in the income, which is not offset by the savings generated in expenses. In the second quarter of 2020, other operation expenses contracted 26.7%. This decrease is explained by the decline in other allowances due to the unseen checking account -- unused checking account overdraft.

In terms of activity, the bank financing to the private sector totaled ARS 250.4 billion, increasing 5.4% quarter-over-quarter in real terms and decreasing 5% year-over-year also in real term. BBVA Argentina consolidated market share over the private sector loans as of June 2020, increase for second quarter in a row, reaching 8.54%. Target loans denominated in pesos grew 11.1% quarter-over-quarter in real terms and 30.2% in the year, also in real terms. Dollar-denominated loans decreased 19.6% quarter-over-quarter, measured in pesos and 26.4% measured in dollars.

Regarding the retail portfolio, including mortgage loans, pledge loans, personal loans and credit cards, these have decreased 0.2% sequentially and grew 0.9% year-over-year. In the quarter, the tax decline can be seen in the pledge and consumer loans, both decline -- decreasing 15.2% and 5.5%, respectively. This decline was partially offset by the increase in credit card consumption, boosted by zero-rate credit lines and (inaudible) programs. Commercial loans, including overdraft, discounted instruments, leasing, Comex and other loans grew 11.6% quarter-over-quarter and fell 10.3% year-over-year. The quarterly increase is mainly explained by the strong growth of the other line -- loan lines, especially past due interest corporate loans, which grew 63.2% or ARS 18.5 billion, in the quarter, followed by discounted instruments that grew 9% in the quarter.

As of June 30, the bank has disbursed more than ARS 20.5 billion in loans to more than 9,000 SMEs to be allocated in payroll payments, discounted document and working capital at a 24% nominal annual rate. As of June of this year, BBVA Argentina has disbursed ARS 1.8 billion of total granted loans and ARS 7 million in loans for self-employed individuals at 0 interest rate. In the second quarter of 2020, gross loans to deposit ratio was 68% compared to 70 -- 67.5% a year ago. As of June of 2019, asset quality, measured as total loan performing portfolio over total portfolio, reached 1.56%, the lowest in the last 12 months. The ratio was possibly affected by the temporary flexibility the Central Bank implemented as a consequence of the COVID-19 pandemic, and which extends grade period in 60 days. But the greatest impact was that during the second quarter of the year, the bank proceed to perform Molinos Cañuelas debt write-offs, which at the moment of the write-off amounted to ARS 2.7 billion. Coverage ratio reached 268.38% (sic) [269.38%]. This is explained by the decrease in the nonperforming loans, mainly as a consequence of Molinos Cañuelas write-off. Allowances in the second quarter of 2020 reflect expected losses driven by the adoption of IFRS 9 standard as of January 1, 2020, excluding subsidies [PSA and VWFS], which will start implementing IFRS 9 as of 2021 to advance to grade Central Bank's regulation. Additional application of the IFRS 9 in impairment model is temporary excluding for nonfinancial public sector debt instruments.

Regarding exposure to the public sector, excluding Central Bank instruments, this quarter, BBVA Argentina decreases exposure, measured as a percentage of total assets, reaching 3.3%. In the quarter, our total exposure to the public sector, excluding Central Bank note, was ARS 17.8 billion, down from ARS 19.3 billion in the prior quarter. This exposure is also -- is all denominated in pesos or in U.S. dollar linked securities since the bank swapped all of its latest position in May voluntary swap. After the end of the quarter, on July 17, 2020, the banks participated in the voluntary swap offered by the national treasury and swapped 100% of the remaining position in Leliq in exchange of BONCER maturity in 2023 and 2024.

On the funding side, private sector deposits in the second quarter of 2020 totaled ARS 367 billion, up 7.6% sequentially and down 8.5% when compared with the first quarter of '19 in real time. Private sector deposits in local currency were ARS 254 billion, increasing 14.6% quarter-on-quarter and 20.1% year-over-year. This is mainly explained by the strong growth in time deposits, saving accounts and checking accounts, which offset the quarterly volume interest-bearing checking accounts. Private sector deposits in foreign currency decreased, both measured in pesos and in dollars. During the second quarter of 2019, U.S. dollar deposit withdrawal continued but at slower pace than the offset during the last month of 2019.

As of June 2020, BBVA transactional accounts, including checking and saving accounts, represent 66.4% of total deposits from 64% -- 64.5% a year ago, evidencing the ability of the bank to improve the funding mix. BBVA Argentina consolidated market share of the private sector deposit as of June 2020, reached 6.5%. In terms of capitalization, BBVA Argentina accounted an excess capital of ARS 53.2 billion, which represented a total regulatory capital ratio of 21.9% and a Tier 1 ratio of 21.2%. The bank aim is to make the best use of the success criteria. The bank liquidity ratio in pesos and in dollars remained healthy at 56.5% and 80.3% of total deposits as of June 30, respectively.

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

(Operator Instructions) Our first question is from Gabriel Nóbrega with Citigroup.

So during the quarter, we saw that you finally wrote off Molca, and we saw your coverage ratio levels going back to the previous very high levels, which we had seen in the past. And my question here is, taking into consideration what you're seeing with some specific segments, what the economists are expecting for Argentina as well. Do you expect to maybe have to make additional and extraordinary provisions only related to COVID? Or are you comfortable with your coverage level this quarter? And I'll make a second question afterwards.

Gabriel, thanks for your question. Yes, as you mentioned, we had -- basically NPL improved in this quarter, basically by 2 factors. We write it off Molca and also with the waiver we have from Central Bank. To give you an idea, our NPL as of June would have been 2.14% if we wouldn't have the waivers of Central Bank. We are projecting an NPL towards the end of the year, around 3.53%, more or less. That is excluding all the Central Bank waivers we have. Regarding coverage, yes -- sorry, going back to NPL, just to make it clear, the effect is mainly down because we had a sharper reduction of the nonperforming loan and the loan book, the denominator grew more.

Going towards coverage, it has increased a lot. As you mentioned, it looks more like the sort of coverage we had in the past. The idea is to take it down. We're expecting a coverage ratio, towards the end of the year, around 170%. The effect you had in this quarter is mainly because the denominator in a coverage ratio, which includes the NPLs, decreased more than the effect it had in the provisions in the denominator. We feel comfortable with this level of provisioning. Our portfolio is quite -- is very healthy. As you see, the retail portfolio, NPL remained stable, and you had a sharp decrease in the commercial line. So we are feeling comfortable with the extra level of provisioning we are having, which is full IFRS 9.

All right. Perfect. And as for my second question, actually, looking at your net financial margin. And I'm here, I'm also including the net loss from the write-down of assets, which fell a lot during the quarter, even though we had lower interest rates and also the benefits from the lower nonremunerated reserve rate requirements due to the bank disbursing loans at a 24% interest rate. So what I wanted to understand is that should we see maybe your total financial margin staying at these levels? Or could there even be some more added pressure as you begin repricing all of your assets to the lower interest rate environment?

I did -- the sound is, I can't hear you very well. I understand you're asking by the line of net interest income, correct? That line towards the end of the year -- you should keep seeing it stable towards the end of the year. You had an extra effect on the line which we had to recognize the collection of the capital payment of the 25% of the Leliq which was ARS 2 billion. That was previously in the other comprehensive income. And now we have to recognize that lower price in the P&L. Going forward, you should see also an effect in that line because of the 60% remaining that, as we mentioned

(technical difficulty)

swap in July 2020. So you're going to see also a negative effect in the third quarter. But the net interest income, you should see it stable going forward towards the end of the year.

The next question is from Alonso Garcia with Crédit Suisse.

My question is actually a follow up. First (inaudible) hello, can you hear me now?

Now, yes. You sort of shut down. But now I can hear you.

Hello?

Hello? Yes

My question is actually a follow-up on asset quality. I just wanted to ask you, when do you -- I mean, you said you feel comfortable with your current coverage levels. So I wanted to ask you, when do you expect asset quality to peak? Is it going to be the third quarter, fourth quarter maybe? Even in the first quarter of next year. And I mean in terms of NPLs provision, when you think the peak will take place. And if you have a color on the level of either cost of risk or NPL that we could see at the peak?

We expect at the -- depending on Central Bank's regulation now, if a waver continues or doesn't continue. Being that said, we expect the peak more towards the fourth quarter this year. And then again, it depends on how much -- regarding the ratio, how much the loan book finally grows. We are expecting a loan book to grow above inflation. We are projecting an inflation towards the end of the year around 47%. So those 2 variables will finally define the level of NPLS, you could see towards the end of the year or the coming 2021. But we feel comfortable, again, with the level of provisioning we are having.

So you would expect a rather stable level of provisioning or maybe an increase together with the growth of your loan portfolio. But in terms of cost of risk, you think current levels are sustainable for the coming quarters despite the deterioration that we are going to see most likely in the second half of the year. Is that correct?

The coverage ratio should go down towards the end of the year. NPLs should increase. But you could see a higher level of provision also towards the fourth quarter of 2020.

Okay. Okay. Got it. And just finally, on the margins. So you mentioned that you expect the net interest income to be stable for the remainder of the year. Do you -- what do you think about next year? Do you think there could be additional pressures? Or do you think there could be upside next year if you resume growth in your retail loan portfolio?

Alonso, you may imagine to predict 2021 in Argentina, it's quite difficult. A lot will have to do what happens with the economy, where the inflation level finishes at the end of 2020. Yes, definitely, we see a pickup at the end of 2020 and -- if we see an improvement in the economy, you should see the retail portfolio picking up, and that definitely should help our market margins because on the budget, we are basically working on it. So it's still difficult to predict 2021.

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

My first question is about loan growth. You had already been saying that you expect it to grow above inflation. And you are growing above inflation. Can you explain to us what the origin of this growth is? Is it because there is more obligation to land at this 24% rate because there is more demand because interest rates are negative? Or because you want to grow your loan portfolio? And my second unrelated question is regarding your tax rate that was high. Can you explain how you calculate it and whether it will be at these levels through the end of the year?

Okay. Regarding loan growth, the projection we're giving, that is to grow a little bit above inflation, it basically has to do that we come from a very low base in 2020. Remember, we had a huge amount of loans in dollars that sharply decreased in 2021 and are still decreasing, we're not lending in dollars because exporters are now asking peso loans. So that should reflect the high increase in the loan portfolio, mainly it will be driven definitely by the peso portfolio and mainly by the commercial lines, mainly because of the special lines we are offering around 24% and the 0 interest rate.

The retail portfolio, despite starting to pick up the [pace], and there you can see also the 0% interest rate. And we have a little bit to do, how fast it will recover. What we finally with inflation. So basically, that's what we are seeing on the loan book, but it's not genuine demand per se, is basically -- we come from a very low base in 2020, plus the mandatory loans that you are providing, again, everything in peso.

Your second question was regarding our tax rate. Yes. As you can see, we ended the quarter with our tax rate around 44%, higher than the regulatory 30%. Basically, that has to be -- to do with the difference in the fiscal base that you need to take to consider that tax rate of today from the base you see on the P&L. It's basically -- that is what the stores -- the effect on the effective tax rate. Probably going forward, you should assume a tax rate around 40% for your model.

And that is for this year and also for next year. I mean, that is the rate that we should expect...

At least for this year. At least for this year. Just for this year because the main effect is that you're resonating the inflation. And again, as I mentioned, since you have to -- the fiscal base you calculate tax is different from the [accountable rate]. Those are the distortions and it's mainly by the inflation effect.

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

Thank you, operator, and thank you all for joining us. We appreciate your interest in the company. We look forward to meeting you more with a view on our coming months and providing financial and business update next quarter. As usual, if you have any further questions, please do not hesitate to reach us, and we'll be happy to follow-up. Thank you, and enjoy the rest of the day.

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