Banco Bbva Argentina SA (BBAR) 2020 Q1 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 First 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 first 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 at 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 this quarter as per Central Bank's regulation, we will begin 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 accumulated effect of the inflation adjustment for each period through March 31, 2020.

Now let me turn the call over to Ines.

Thank you, Javier, and thank you all for joining us on our first quarter 2020 earnings conference call.

We hope you and your beloved ones are healthy and safe in these challenging times.

BBVA Argentina is going through a complex scenario, combining on one hand the health of the emergency represented by the COVID-19 pandemic, and on the other hand, an economy immersed in a recession worsening by the high levels of inflation.

The Argentine government, like most of the countries affected by COVID-19, implemented a quarantine that is still in force, although in different phases, depending on the situation in each of the country's provinces.

In this context, BBVA Argentina has focused primarily on caring for the health of its employees and also that of its clients.

More than 90% of the employees in the central areas are working remotely, and all the necessary protective measures have been implemented in the branch network for both employees and customers.

And it is in this moment where the digital transformation efforts initiated by the bank years ago, takes on special relevance by allowing our clients in a situation as complex as a quarantine to carry out their operations through the digital channels at their disposals through the app and/or at the bank's website.

The penetration of digital clients reached 67.8% from 66.5% and the penetration of mobile clients reached 56.1% from 53.8% in the prior quarter.

And while the recovery comes, BBVA Argentina considers that it is in an advantaged competition, positioned to face the current challenges, a solid liquidity position supported by mostly transactional funding with low cost and an adequate capital levels well above regulatory requirements.

Also in this context, the bank has collaborated with measures to support the productive sector and society promoted by the national government and has launched others on an individual basis, such as the donation of ARS 20 billion to the Red Cross and then Let's Be One campaign to fight COVID-19.

BBVA Argentina continues working on its sustainability model and supporting responsible business actions on issues of inclusion, financial education and care for the environment as part of its commitment to the country.

Now I will comment on the bank's first 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 figures for previous periods provided for comparative purposes unless otherwise noted.

BBVA Argentina's first quarter 2020 net income, including inflation adjustment effects, totaled ARS 3.1 billion, 20.1% lower than the ARS 3.9 billion posted a quarter ago and 36.2% lower than the ARS 4.9 billion posted a year ago.

The quarter-over-quarter decrease is mainly explained by the fall in economic activity and the sharp decline in interest rate derived from changes in the country's monetary policy and the beginning of the mandatory lockdown due to COVID-19 pandemic.

The year-over-year decrease is mainly explained by the onetime sale of Prisma Medios de Pago occurred in the first quarter of 2019.

Excluding the Prisma effect, the third quarter net income, including inflation adjustment effect would have decreased 6.9% from ARS 3.3 billion in the fourth quarter and increased 72% from the ARS 1.8 billion in the first quarter of 2019.

During the quarter, the bank presented a positive real return on equity of 14.5% and a real return on assets of 2.5%, provided in advance refinance.

In the quarter, net interest income totaled ARS 16.4 billion, 14.5% lower than the results posted in the fourth quarter of 2019, and 9.3% higher than the result posted during the first quarter 2019.

These variations 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 rate and an increase in site deposits.

The quarter-over-quarter performance can be traced to the lagging decline in active interest rates, a fall in the UVA index and by the reduction in the government securities position as a consequence of the monetary policy implemented by the government.

Income from government and Central Backed securities fell 17.1% or ARS 1.3 billion compared to the fourth quarter 2019 and 14% or ARS 1 billion compared to the third quarter of 2019.

This is explained by the decrease in monetary policy rate promoted by the Central Bank, combined with a lower position of Central Bank Leliq on account of a new regulation restricting sight deposit reserve requirement integration.

Interest income from loans and other financing totaled ARS 15.1 billion, decreasing 18.8% or ARS 3.5 billion quarter-over-quarter.

It is mainly explained by the seasonality of the business and lower active rates, in line with the liquidity excess generated by change in regulation conducted by the Central Bank.

In the first quarter of 2020, interest from time deposits represented 78.9% of the bank's total interest expenses, decreasing 26.4% in the quarter and 40.6% in the year.

Net fee income amounted to ARS 1.9 billion, 5.9% or ARS 105 million higher than the previous quarter.

This is explained by the increase in product prices, lower expenses related to credit card benefits, which were partially offset by the fall in activity, product of seasonal effect and aggravated by the beginning of the mandatory lockdown due to the COVID-19.

Net income from financial instrument at fair value decreased sequentially, totaling ARS 1.7 billion vis-à-vis, ARS 2.4 billion in the prior quarter.

When excluding the result from the put option valuation of Prisma sale in the fourth quarter 2019, the decrease would have been 33.4%, instead of 57.8% in the quarter.

When excluding the profit from the Prisma sale ARS 2.3 billion inflation adjusted, the year-on-year contraction would have been 31% instead of 73.3%.

In the first quarter of 2020, FX gain, including foreign currency forward transaction, totaled ARS 1.2 billion, decreasing 60.1% quarter-over-quarter.

It is a consequence of the lower activity due to the regulatory changes implemented to the exchange market and the less volatility.

Moving on to expenses.

We experienced a sequential contraction in the personnel and administrative expenses line.

During the first quarter of 2020, personnel and administrative expenses totaled ARS 8.0 billion, decreasing 10% quarter-over-quarter and increasing 9% year-over-year.

In terms of personnel expenses, note that this quarter, we have increased salary by fixed amounts that on average had followed inflation, as there are no new rearrangements with the labor unions regarding salary increases.

The savings in administrative expenses are driven by lower expenses incurred in armored transportation services, consequence of a lower amount of cash in transit derived from FX market restrictions.

As of March 2020, the quarterly efficiency ratio increased sequentially, reaching 47.4% and worsening from the 42% posted in the first quarter of 2019.

This is a consequence of a steeper contraction in the income, which is not offset by the savings generated in expenses.

Other operational expenses reflected the onetime provision implemented in the fourth quarter of 2019 by the banks that will not be charged as of this quarter.

The bank has already merged 5 branches from 2,051 (sic) [251] as of December 2019 to 246 as of March 2020.

In terms of activity, the bank financing to the private sector totaled ARS 225.5 billion, increasing 3.8% quarter-over-quarter in real terms and decreasing 17.3% year-over-year, also in real terms.

BBVA Argentina consolidated market share of the private sector loans as of December -- sorry, as of March 2019 increased sequentially, reaching 8.35%.

Private loans denominated in pesos, grew 3.8% quarter-over-quarter in real terms and contracted 17.3% in the year, also in real terms.

Dollar-denominated loans increased 5.4% quarter-over-quarter, measured in pesos and decreased 2.1% measured in dollars.

Regarding the retail portfolio, including mortgage loans, pledged loans, personal loans and credit cards, these have decreased 7.8% sequentially and 4.0% year-over-year.

The lower annual variation is driven by the fact that during the third quarter of 2019, the bank started the consolidated PCA (sic) [PSA] and Volkswagen.

In the first quarter of 2020, credit cards and pledge loans decreased the most, 9.4% and 8.8%, respectively.

Besides the seasonality effect, it also goes in line with a less genuine loan demand due to the macroeconomic situation in the country.

Commercial loans, including overdraft, discounted instruments, leasing, [ComEx] and other loans, grew 20.4% quarter-over-quarter and fell 28.2% year-over-year.

The quarterly increase is mainly explain by exponential growth of the overdraft line, which grew 90.1% or ARS 14 billion in the quarter by the line that grew 37.3% or ARS 7.4 billion, sequentially, and by the other loans line, especially past due interest corporate loans, which grew 5.2% or ARS 793 million in the quarter.

In the first quarter of 2020, gross loans to deposit ratio was 70.3% compared to the 68.2% a year ago.

As of March 2019 -- sorry, March 2020, asset quality, measured as total nonperforming portfolio over total portfolio, reached 2.78%, mainly due to the temporary flexibility of the Central Bank implemented as a consequence of the COVID-19 pandemic, in which extends grace periods in 60 days.

Coverage ratio reached 186.12%.

This is explained by an increase in allowances as a consequence of the implementation of impairment model and the change in BCR regulations regarding debt classification.

Allowances in the first quarter of 2020 reflect expected losses driven by adoption of the IFRS 9 standard as of January 1, 2020, excluding subsidiaries, PCA (sic) PSA and Volkswagen, which will start implementing IFRS 9 as of 2021 pursuant Central Bank regulations.

Additionally, application of the IFRS 9 impairment model is temporarily excluded for the nonfinancial public sector debt instruments.

Regarding exposure to the public sector, excluding Central Bank instruments, this quarter, BBVA Argentina maintained its exposure, measured as a percentage of total assets in its lowest level reaching 3.6% in the quarter.

Our total exposure to the public sector, excluding Central Bank notes, was ARS 18.3 billion, up from ARS 17.4 billion in the prior quarter.

This exposure is mainly denominated in pesos or in U.S. dollar-linked securities.

U.S.-denominated notes latest represented less than 1% of the total security portfolio as of the end of the quarter, which has already been exchanged.

On the funding side, private sector deposit in the first quarter 2020 totaled ARS 324 billion, up 3.4% sequentially and down 21.1% when compared with the first quarter of 2019 in real term.

Private sector deposits in local currency were ARS 210 billion, increasing 11.9% quarter-over-quarter and decreasing 1.6% year-over-year.

This is mainly explained by the strong growth in saving accounts and checking account deposits, which offset the decrease in time deposits in the quarter, but not in the year.

Private sector deposits in foreign currency decreased both measured in pesos and in dollars.

During the first quarter of 2019, U.S. dollar deposit withdrawal continued, but at a slower pace than we observed during the last month of 2019.

As of March 2020, BBVA's transactional accounts, including checking and saving accounts represent 68.9% of total deposits from 64.2% a year ago, evidencing the ability of the bank to improve the funding mix.

BBVA Argentina consolidated market share over the private sector deposits as of March -- sorry, as of March 2019 (sic) [March 2020] reached 6.79%.

In terms of capitalization, BBVA Argentina accounted an excess capital of ARS 48.6 billion, represented a total regulatory capital ratio of 21.8% and a Tier 1 ratio of 21.2%.

The increase is affected by the initial IAS 29 adjustment over the nonmonetary assets and the change in BCR regulations of provisions which allowed banks to consider the difference between loan loss allowances recorded by IFRS 9, our provisions recorded as of November 30, 2019, with previous methodology, ARS 3.4 billion, as ordinary Level 1 capital.

The bank's aim is to make the best use of this excess capital.

The bank's liquidity ratio in pesos and in dollars remained healthy at 60.6% and 82.3% of total deposits as of March 31, respectively.

This concludes our prepared remarks.

We will now take your questions.

Operator, please open the line for questions.

(Operator Instructions) The first question comes from Gabriel Nóbrega of Citi.

I would actually like to ask 2 questions regarding asset quality.

First, are you seeing any overall sectors on being that we're already in June, which are starting to present maybe higher levels of delinquency, how are you managing that as well?

And I have a second question regarding provisions.

Being that you implemented the expected loss model already this quarter, it was also joined with the new regulation by the Central Bank allowing you to give a waiver of 60 days before classifying a loan as nonperforming.

So my question here is that we will probably see the NPL ratio deterioration being postponed more maybe towards the end of the year.

So I was wondering if have you thought about already making extraordinary provisions related to COVID-19.

And does the Central Bank actually allow you to do this?

Or you have to do the losses as they come along in your expected loss model?

Gabriel, thank you for your question.

Okay.

Regarding your first question, probably the sector we are monitoring the most is the energy sector.

Transportation and leisure is also something we are also concentrating.

In a way, NPLs are very low compared to the system.

Also because of this exception, the Central Bank has done giving extra 60 days for loans that were maturing.

To give you an idea, the NPL, without these exceptions, would have been 3.54%.

And if we would not include this exception the Central Bank is doing on our NPL, we're expecting our NPL to go to the end of year, around 4.5%.

Also, regarding NPL, it's worth noticing that we still have Molca.

Molca will be write off at the -- in June, at the end -- in the second quarter.

So you could see this exception of NPLs continue.

The NPL without (inaudible) without considering the increase in loans would decrease even more to 1.75%.

And your second question regarding provisioning, we are not doing any extra provisioning regarding COVID.

We are provisioning goals in line with IFRS 9. So there's nothing extra to be done.

The only exception that Central Bank has done is that the difference you had from your provisioning as of November 30 to the one you had to implement with IFRS 9 is included in capital.

You have an extra buffer as [capital one].

The next question is from Alonso Garcia of Crédit Suisse.

I just wanted to ask exactly about the exact impact of IFRS 9 this quarter.

I mean what was the size of the initial impact of implementation?

And I just wanted to clarify if figures for 4Q '19 and 1Q '19 were expressed under IFRS 9 and expected loss provisioning or not?

Just to have a clear view and be able to compare the numbers vis-à-vis 1Q '20?

That would be my first question.

So this is Javier.

The provision -- the initial provision for IFRS 9 that was implemented in January this year is ARS 2.1 billion.

Can you repeat the rest of your question, please?

Yes.

If you expressed or restated your 4Q '19 and 1Q '19 provision in numbers to make them IFRS 9?

Or are they still under the previous provision in methodologies?

No.

It has been all restated to show in IFRS 9.

Okay.

My second question would be -- I mean, could you please comment on the degree of adherence of your customers to your relief programs?

I mean, how much of your clients have adhered to these programs in consumer, in mortgages, in SMEs?

And based on that, when do you expect to see a pickup in provisions?

Would that be in 2Q?

Do we have to wait until 3Q or maybe 4Q of this year?

Alonso, this is Ines.

The credit refinancing was not something that many of our customers participated.

And we didn't see an increase, a very high increase on our customers taking this possibility to extend their loan.

Regarding coverage, which I think it calls -- that was the second part of your question, it is important to mention that if we will do the write-off of Molca in the second quarter, you should see an increase in coverage.

But again, that has to do with the decrease you're going to see in Molca, and it's also tied to what finally happens with Central Bank exceptions regarding NPLs.

Okay.

And just to be clear, Molca is already 100% provision, right?

So increasing coverage will be just because it will stop being considered as an NPL.

Exactly.

It's 100% provision.

You need to -- according to Central Bank regulations, you need to wait 6 months to be able to write it off from your balance sheet.

Okay.

And just to be clear, the pickup in provisions will depend on the extension of the programs by Central Bank.

That's correct?

Exactly.

It's a combination of both the expansion of the exception of Central Bank and what happens with Molca.

(Operator Instructions) Our next question is from Carlos Gomez of HSBC, New York.

Can you give us an idea about what you expect for the year in terms of asset growth, loan growth and also, this is very hard to say, in terms of profitability in real terms?

And second, since your loan growth is negative in real term, you keep accumulating capital, you are not able to distribute at this point.

How do you intend to protect that capital?

Is it by real estate investments in the past?

Or are there any other options that you are considering?

Okay.

I'll answer the first part of your question regarding loan growth and deposit growth.

Ernesto will tackle the second part.

For loan growth for 2020, in nominal terms, we are projecting growth, both pesos and dollars, around 53%.

We are projecting an inflation of 47%.

We are projecting loan growth to be above what we're projecting for the system, which we're thinking -- we're projecting around 52 -- sorry, 42%.

Year-to-date, the last numbers until May 22, we've been growing -- sorry, year-to-date 18.8% versus 7.5% of the system.

So we're growing above the system already.

Regarding deposits, we're projecting deposits to grow around 55% in nominal terms, again, with an inflation of 47%.

And also growing above the system, which we're projecting deposits to grow around 46%.

Year-to-date, again, as of May 22, we have been growing 13% compared to the system around 24%.

The other question was related to the inflation exposure?

No, what you intend to do with the capital, which keeps accumulating at some point, I guess, you need to do something with it.

In the past, you have used real estate as a way to protect its value over time, is that a possibility now?

Yes.

You can imagine that this is one of the few possibilities that we have in order to protect our net income inflation adjusted.

It's clear that with the -- now it's not possible to pay dividends.

So we will keep them in our capital.

But as soon as -- remember that as soon as you declare that you are the (foreign language)

General shareholders.

General shareholders committee agrees to pay dividends, then you have to take out that amount for your capital.

So at some point, you have a protection.

If you declare that you are going to pay dividends, even if you cannot do it because you have this provision probably -- this rule, sorry, coming from the Central Bank.

So this is one thing.

The other thing is that it's not possible to make right now many strategies to protect your exposure to inflation.

One is to invest in real estate, and this is something that I can imagine that we and other banks, we will be analyzing maybe right now, maybe in the coming months.

This is something that we have to think about it because it's one possibility.

The other possibility is to invest in some assets that are inflation-linked like some treasury bonds that are linked to the inflation to the UVA or maybe other type of loans that are related to UVA, the inflation rate here.

So maybe you can try to increase the portion of your portfolio that this inflation linked like mortgages or some consumer loans that are linked to inflation or again to buy some assets coming -- well, treasury bonds linked inflation.

This is the only way.

You don't have too many other alternatives.

Right.

And we understand that.

And if I may follow up, I think there is time.

I mean, this first quarter, you posted a very decent profitability.

I think the system in general did, but the trend in interest rate is down.

Inflation is down for now but we all fear it might rebound in the future.

Would you say that your real profitability or your nominal profitability in the first quarter is replicable for the end of the year or your expectations are lower for the other 9 months?

I think it's replicable.

I mean, what we have seen is that -- the first thing is that, right now, we have really an inflation rate that is well below we were expecting 6 months ago.

Of course, this is maybe (inaudible) situation because all of us, we are expecting to see inflation rate going up in the next months.

But for the time being, we have an inflation rate that is at a very low, very low number.

I mean, 1.5% was the inflation rate for April, and we're expecting to see something like that in May and probably something around this or maybe a little bit above that in May.

So good -- let's say, good numbers in terms of inflation for this quarter.

We don't know what is going to happen with inflation in the second half of the year.

But if we have higher numbers, the good news is that we had the first 6 months with a very low inflation rate number, which is good for our, let's say, accumulation of inflation in our results.

Let me say it like that.

So this is one very important thing to see or to think what is going to happen with our profitability for the next months.

And the other point is interest rates going down.

Well, they went -- they already went down.

38% is the monetary policy rate.

And what we had in the last months was an activity that was hit by the pandemia, by the COVID, and interest rates going down, as you mentioned and financial system with plenty of liquidity.

It means having that, let's say, such a liquidity, this also generates an environment of interest rates, let's say, below in some -- in many cases, below the monetary policy rate.

This is a situation that, again, I think it's a temporary situation.

It was a temporary situation.

Right now, it's not the same because the Central Bank wanted to create an environment with very low interest rates in the market in order to, let's say, to fight against the situation of the COVID, but also against the situation of, let's say, the economical situation before the COVID.

Now it's different, a little bit different.

Central Bank changed a little bit its monetary policy, creating an environment with rates a little bit higher than in the last, let's say, 3 months.

Now we have -- well, let me maybe interrupt here.

You know that the Central Bank is trying to, let's say, take care about the impacts of the different measures that the government is taking to fight against the COVID and to fight against the impact of this quarantine.

In that sense, the central bank for the last months -- during the last month has been reducing the minimum effective requirements for the banks.

And also it has been, let's say, allowing us to invest in the Leliqs, the Central Bank bills.

So this has been, let's say, compensation for the different measures.

And it's -- it allowed us to have interest rates that in the market and also, let's say, is the same for all the banks, interest rates that are higher than we had in the last or before.

In that sense, I think interest rates -- low interest rate environment is something that has been compensated by an increase in the possibility to invest in treasury -- non-treasury bills, Central Bank bills, Leliqs at a rate of 38%.

So less investment in -- at 0% because we have been -- we have less minimum effective requirements.

And this is compensating this issue of low interest rate environment.

So -- well, I think we will be able to maintain the profitability in the next -- in this quarter and the next quarters of the year, I think.

But it is a real profitability.

The main issue is inflation at the end of the day, and it is helping right now.

And I think we have an impact in the second half, the fact that we had an inflation rate below expected.

(Operator Instructions) And we have a question from [Emiliano Fiori] of [Itau Bank.]

I would like to ask about the impact of the inflation in the balance sheet.

The account resultado por posicion monetaria if you explain a bit more about how to -- how you constructed that number?

Emiliano, this is Javier.

How you call it, the posicion monetaria is constructed by the effect of the nonmonetary assets, right?

So what you're seeing -- you have -- first, I would say, impact of ARS 15 billion that adjust the equity for December when you apply IAS 29.

And then you correct that -- you update that by the inflation of the period and that's the final effect of the IAS 29 for December.

Now with regard to...

You can make this calculation through the monetary assets and liabilities or your nonmonetary assets and liabilities.

For me, the best -- the easiest way to understand this is to do it through the nonmonetary assets and liabilities.

And the nonmonetary assets basically are the fixed assets, everything, real estate and something like that.

This is your natural hedge for the inflation exposure you have.

And what is the exposure you have, basically your capital.

This is what you have exposed to the inflation risk to capital.

So the gap between the, let's say, fixed rated assets like noninterest assets -- nonmonetary assets and the capital is the risk exposed to inflation.

And the way to do the -- to calculate the impact is you have to think about the -- that you have a transitional year, which was 2019 and you have to, let's say, calculate the impact of your exposure since the beginning of 2019 until the end of 2019 for the whole year, and then you start at the end of 2019.

So you start at the beginning of 2020 with the impact of the inflation on your exposure.

Meaning by exposure, capital less nonmonetary assets, basically real estate, et cetera.

So the impact of this adjustment was ARS 15 billion.

Once you have your capital expressed, considering the inflation during the 2019, then you start to adjust by inflation your exposure, basically your capital.

And then the impact for the first 3 months of the inflation on your capital exposure was ARS 6 billion.

So basically, the total impact of the inflation adjustment on the capital was ARS 16 billion -- sorry, sorry, ARS 21 billion, excuse me, ARS 21 billion, ARS 15 billion plus ARS 6 billion.

This concludes the question-and-answer session.

At this time, I would like to turn the floor back to Mrs.

Lanusse for closing remarks.

Thank you, operator, and thank you all for joining us today.

We appreciate your interest in our company.

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 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.