Banco Bbva Argentina SA (BBAR) 2003 Q3 法說會逐字稿

Good day everybody, and welcome to the Banco Frances third quarter earnings conference call. As a reminder, today's call is being recorded. With us today are Mr. Marcelo Canestri, CFO; Soledad Linzioni of our Research Department; Maria Elena Siburu, Investor Relations Manager; and Claudio Gonzales, the Head of the Accounting Department. At this time, I would like to turn the conference over Maria Elena Siburu, please go ahead.

Okay, thank you very much and good afternoon everybody. Let me stress that some of the statements made in this conference call may be forward-looking statements within the meaning of the safe harbor provision found in Section 27A of the Securities Act of 1973 under the US Securities Law. These forward-looking statements are subject to risk 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 Banco Frances annual reports on Form 20-F for the year 2002, filed with the SEC this June.

Before going into the comments on September quarter earnings, I would like to make a quick review on the macroeconomic environment of the quarter, and its impact on the industry. In the first half of 2003, the economy grew at a 6.6 year-over-year rate. According to preliminary monthly indicators for the third quarter, economy remained robust, in spite of a slower growth in construction and real supermarket sales vis-a-vis the previous this year. However, industrial production growing 0.3% in the second quarter increased 1.7% in the third quarter.

Non-durable consumption factors such as food and beverages are now catching up with the import institution sectors that lead the initial rally in early 2003. Consumer demand has begun to improve on the back of stronger employment figures, higher real wages, and lowering interest rates. Consumer prices remained on the contra (ph), growing 0.5% in the present quarter. There was higher volatility in the foreign exchange rate, with a 3.7% devaluation of the peso, and 30 days CD rates from an average 8.3% in June to 4.4% in September.

Profits continue to flow back into the system showing 2b pesos increase during the quarter mostly in July. In August and September, monetary expansion decelerated compared to the previous quarter basically due to lower reserved purchases by the Central Bank.

Going now to our bank. Following the 2002 crisis, Banco Frances focused its business strategy on the transactional business aiming at recomposing future profitability on the back of a larger customer base. Commercial activity based on both state-of-the-art technology and a wide distribution network was focused on increasing the profits, lowering the cost of funds, increasing fee revenues, and maximizing the recovery of non-performing loans. Moreover, during the present quarter, amidst a more stable environment, the bank decided to resume lending. The economy needs credit to recover and the banking system needs the intermediation business to rebuild profitability.

Banco Frances is a leading private sector bank in deposits with 8.2% market share in total deposits as of September 2003. Market share in new time deposits in pesos, which is 10.6%. And for loans, the bank emphasizes credit to retail segment, mainly personal loans and credit card financing, whereas in the quarters segment, the bank fosters financing through trusts and other short term loans such as notes discounted and warrants, mainly working capital financing. More important, Frances had an excellent performance in transactional banking reaching a leading position in products such as debit and credit card consumption, ATM transactions of a number of clients with payroll services. Today, 40% of the average balance of saving accounts is related to direct debit related funds. The commercial efforts [Inaudible] to recover profitability. The bank improved efficiency by adjusting operating structures to the near business profile. More than 74 retail branches were closed until [Inaudible] reduced by 24%. The bank remains strongly committed towards cost control and targets further improvements in the efficiency ratio. Management expects stability for the near future with CP growing 4.8% in 2004, low CPI inflation in a 7% level, stable foreign exchange rates and neutral interest rate for 30-day CD. Deposits growth in the systems will reach 16% in 2004 and loans 21%.

And let me now make some particular comments on the bank's results. Net income for the third quarter of fiscal year 2003 accounted for a 35m loss as compared to 7.2m loss registered in the previous quarter. However, operating income improved 95% as compared to the June quarter. Net financial income was positively impacted by the drop in interest rates and a 3.7% depreciation of the peso amounting to 43m pesos. Administrative expenses decreased 2.5%, while net income from services increased by 6% leading to improved efficiencies. And most important, loan loss provisions were 21m pesos positive during this quarter, following the restructuring of certain non-performing loan portfolios, which led to reverse bank provisions.

Let me mention the following measures taken by the government during 2002 and 2003. The bank remains with both a long CER adjusted position and a long foreign currency position. This mismatch generated a loss in the first semester of 2003. However, the fall in interest rate reverted net financial income in the third quarter to return to a positive [Inaudible]. It is important to highlight that the 19 average cost in term deposits during the June 2003 quarter dropped to 7% as of the present quarter. Likewise, the depreciation of the peso had a positive effect, given that the bank has a long foreign currency position, which is around $88m. This positive position stems from the capitalization of debt last December. Going forward, it should be noted that the Congress has recently approved the compensations for banks regarding the difference between CER and CVS(ph), this is salary creation, Banco Frances has accounted for an asset of approximately 140m pesos, which should be compensated with a bond in pesos approving a rate equal to the average cost of funds in the system.

On the liability side, total deposits increased 20.4% in constant pesos, mainly due to our more stable macroenvironment and to the commercial efforts of Banco Frances to rebuild customer base and confidence. The 52% decrease in retailer (ph) deposits was more than offset by a 97% increase in saving deposits, saving accounts, while time deposits and current accounts showed a 63% and 50% growth respectively. As for risk assets, total exposure to public sector amounted to approximately 9b pesos as of September 2003, 3.2% lower than the figure posted in previous quarter, mainly due to the sale of some [Inaudible] registered in Banco Frances Cayman. The decrease in public loans, public sector loans, including CER adjustment and interest from 6.7b pesos as of June, to 6b as of September is related to a provincial debt restructuring regime whereby approximately from 660m pesos in loans granted to provinces were exchanged for a 16-year guaranteed bonds. Private sector loans decreased mainly due to the write-off of 34m pesos of commercial loans and to the cancellation of loans during the quarter.

Total non-performing loan portfolio decreased 11.8% as compared to June 2003 quarter, mainly explained by the 34m charge-off and by certain non-performing loans collected during September quarter. Non-performing ratio improved from 8.3% as of June to 8.05% as of September. The coverage ratio moved from 73.4 as of June to 69.8 as of September 2003, given the charge-off related to 100% provisions loan. As we mentioned that and taking into account total financing, this is loans, securities, and guarantees granted by the bank, the non-performing ratio reaches 11.1%, with a coverage ratio of 65%.

Going now to fee income, net income from services increased 6% as compared to the previous quarter, mainly due to fees related to service charges on deposit accounts, credit card fees, fees related to foreign trade and other fees. Such growth mainly originated by an increase in volume and prices, was partially offset by a decrease in custom market fees, which in the previous quarter registered fees coming from fund management services and subsidiaries. It is important to note that fees from foreign currency sales and purchases are not accounted for in net income from services, but in net financial income. As of September 2003, such fees amounted to approximately 16.3m pesos as compared to 17m pesos registered in the previous quarter.

Administrative expenses decreased to 0.5% as compared to June, led by a decrease in amortization, advertising and promotional expenses, and organization and development expenses, as well as lower personal expenses. Taking into account total fees plus foreign currency trading, the coverage ratio of fees versus administrative expenses of the bank increased from 51% in June to 60% in September. Banco Frances continues to be focused on cost control.

And finally, let me comment on some recent developments. In the first place, I would like to mention the purchase agreement that the Bank signed with the Credilogros Compania Financiera on October 31st, 2003, whereby Credilogros sold its whole equity interests in PSA Finance Argentina to Banco Frances for the aggregate purchase price of 11.9m pesos. At the same time, Credilogros canceled a loan received from Banco Frances for 11.7m pesos plus interest. Accordingly, Banco Frances now holds 50% of the capital stock of PSA Finance, which is a financial entity, organized in March 2002 to finance brand new and second hand Peugeot vehicles in the consumer segment.

Second, I will refer to the $135m FRN, which came due on October 31st, 2003. According to current regulations for financial institutions, previous authorization from the Central Bank is required for payment of principle on the FRN. Furthermore, such debts should be restructured, following the terms set forth by the Central Bank in order to obtain the necessary authorization. Given the negotiations for restructuring terms with FRN holders took longer than expected and due to formal producers, an extension of the original due date was agreed until November 30th. However, the bank expects to complete such process by November 19.

In the third place, I would comment on capital or equity. During the period's fiscal year, Banco Frances implemented a restructuring plan, which contemplated aspects related to the compliance with minimal liquidity requirements and technical ratios affected at that moment by the deposit run, legal measure adopted with regards to lawsuits and changes in the regulatory framework. And on our ratios, plan provided for the financial assistance of the our major holder BBVA and of the Central Bank, the sale of the bank stake in its Uruguay subsidiary, the launching of our rationalization plan, and 715m pesos capitalization. Most recently, on September 4th, 2003, the Central Bank requested Banco Frances to modify the restructuring plans admitted in 2002, to include measures, to increase computable network, and address compliance with new capital requirements to become effective as of January the 1st, 2004. On October 21, 2003, the bank submitted to the Central Bank a letter, with different alternative initiatives to be undertaken. Currently, the technical staff at the bank and at the Central Bank is discussing the best of this alternative, to be presented as a definite proposal to the Board of Directors of each entity.

In the fourth place, I will refer to the compensation of Banco Frances related to the asymmetric (ph) specifications. As of September 30th, 2003, Banco Frances keeps the registered in its assets [Inaudible], 2004 for an amount of 1.1b pesos, this is under public securities, and by the end of 2012, to be received for an amount of 248m pesos, under other receivables from financial institutions. The two amounts related to a nominal value of $607m. That amount is still subject validation from the Central Bank. However, on July 29, 2003, the Central Bank sends a note objecting to certain accounts and accounting criteria of the bank, on calculating the aforementioned compensations, regarding 362m pesos compensations.

In this respect, let me mention that the Board of Directors believe they have made proper accounting and is preparing a reply to Central Bank's objection and that as of September 30th, 2003, Banco Frances has general provisions for 370m pesos. Finally, in connection to the income tax accounting, let me mention that as of September 30, 2003, the bank registered under other receivables in the tax and advanced accounts, a taxable deferred asset of 185m pesos. On June 2003, the Central Bank objected to the registration of accounts related to the application of the deferred tax method. Such accounting method has been established by general accounting principles accepted in Argentina, and is worldwide recognized and applied. On June 26, 2003, the Board of Directors replied to the comments made by Central Bank on considering that current regulations did not prevent the application of deferred tax arising from this temporary measure differences between the accounting and fiscal results. Subsequently, on October 7, the supervisor (ph) of financial entities, we confirmed comments made in its letter June 19, 2003. Currently, the bank is evaluating actions to be undertaken. However, in October, the bank provisions 100% of the remaining balance of such assets. Thank you very much for your attention, and we are now prepared to answer your questions.

Thank you Ms. Siburu. The question and answer session will be conducted electronically. If you would like to ask a question, please press the star key followed by the digit one on your telephone. Now remember, if you are using a speakerphone to turn off your mute function in order to allow your signal to reach our equipment. Again, if you'd like to ask a question, please press star one now. Our first question comes from Carlos Gomez (ph) with Citigroup.

Hi, good morning. I have two or three questions referring to your last comments. The first one is regarding the capitalization. If we understand correctly from your press release, the Central Bank has asked you to address some issues. One would infer from that that your capitalization plan fell short of the requirements that will become -- that would come into place in January 2004? Is that the case, that you will be following short as you are today? Any issues that you are contemplating - do you contemplate a possible capital increase? And the second refers to this dispute with the Central Bank. Would you say that this dispute applies only to you or that in general, what compensation the banks expect to receive has been disputed by the Central Bank? Thank you.

No, Carlos. The plan that the bank has already submitted to Central Bank is not referring to capital requirements because the capital requirements are new, are from 2003, and the plan that we submitted - no, the requirements are 2003. And the plan that we submitted was in 2004, and it was addressing problems of reserve requirements, liquidity reserve requirements. Okay? So, what - now we have a new capital requirement, which are going to be in force in January 2004. We have already commented on this, the problem of Frances, with respect to this capital requirement is that we comply with requirements on consolidated basis, but we don't comply on individual basis. And this is why the Central Bank is telling us to present a plan in order to comply on individual basis.

So, that we understand, when you are saying individual, you have Banco Frances, you have - sort of capital will be outside Banco Frances Argentina, how does that work, the capital is in Cayman, perhaps?

Yes, that's it.

Okay, so the capital is in...

When we calculate capital requirements, you have to calculate the computable net worth, and this is your net worth minus what you have in financial subsidiaries, which is Cayman in this case.

Can you give us an idea about how much capital there is in Cayman?

In Cayman, we have like $400m. The problem here is that the $400m that we have are nominal dollars. And for Cayman authorities, because we capitalized Cayman with boven (ph) . So for Cayman the boven are market price and for the Argentine authority, their boven are nominal price, yes, nominal price. So this is authority, so this is what we are discussing now with the Central Bank.

Do you anticipate that this might require further, even if temporary recapitalization of bank to comply with both authorities?

No, we are trying to analyze which are the alternatives.

Any other question?

We'll move on and take a question from Cynthia Bijou (ph) with Goldman Sachs.

Good afternoon Maria Elena. We saw a number of positive elements in the quarter, the increase in fees, the Italian expenses and obviously the expansion in deposits but we are still not seeing positive operating company provisions, in other words the bank is still or able to correlate operating expenses with fee income and net interest fee income. What do you think will take for the bank to show positive operating income, pre-provision figures and do you think it's lower expenses, higher fees a higher nemo combination of all of the above and if so how would that come about and when?

Okay, No, what we need is to improve net financial link, obviously we are trying to continue decreasing expenses and increasing in fees. But obviously, the intermediation business is for profitability now. This is why now the bank is beginning to lend and we expect to improve net finance of the income with then you don't.

So is it only lending or are you saying you can also decrease your funding cost and when will we see something more meaningful than insight?

No, what we see is in the future we are going to have perhaps a higher inflation remember that the inflation this year was 3.5 and for next year it's going to be 7. So, if rates are neutral in 2004, which is what we are expecting you are going to have a better spread on the stock.

Okay, thank you.

One question remaining. Again, if you 'd like to ask a question, please press star one. Next with Raymond James, Robetno Rivara (ph).

Hi, Maria Elena how are you? My question is referred to the lending side, which would be the reason in your view for this still unimpressive performance of the lending activity to the [Inaudible] sector basically?

I don't know. The problem is that the demand is still very very small. And we are improving, in fact, we are lending in small and medium sized companies like $25m per month. Obviously this is not too much, but we do see much more response in the consumer segments in personal loans and credit card financing, which obviously react quicker. But it's nothing more than a problem of low demand.

Thank you.

Carlos Gomez has a follow-up.

Yes hi. First if you could answer about the dispute with the Central Bank on the amount of compensation? And again, what your estimate is of where the agreement might be and what your chances are of not getting this amount and whether it is generalized also to other financial institutions from what you know? And the second question would be regarding this tax credit that you reversed in October. Did you use your general reserves for that or did it flow through results and therefore we should expect a large accounting loss in the fourth quarter? Thank you.

Carlos yes, the answer is yes, we used general provisions for that and with respect to the compensation I don't know, there are some other banks that may be having the same problem of Frances. We are discussing the figures with the Central Bank. We do think that the calculations that we made are in line with the regulations. And when this is going to be solved, Canestri?

We really expect to perhaps solve this problem in the first quarter of the next year because the discussion with the Central Bank will be in that period, we expect.

Ok. Thank you very much.

Ms. Siburu, we have no further questions in our queue at this time. I will turn the conference back over to you for additional or closing remarks.

Okay. Thank you everybody. We are going to be in our offices if you have some more questions. Thank you.

That does conclude today's conference call. Thank you for your participation.