Banco Bbva Argentina SA (BBAR) 2007 Q4 法說會逐字稿

Please stand by. Good day, everyone, and welcome to this Banco Frances fourth quarter 2007 earnings release conference call. Today's call is being recorded.

Now I'd like to turn the call over to Daniel. Please go ahead, sir.

(technical difficulty) -- found in Section 27A of the Securities Act of 1933 and the 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 included in Banco Frances' annual report, on Form 20-F for the fiscal year 2006, filed to the U.S. Securities and Exchange Commission.

As customary, we will make a brief summary of the most important points of this fourth quarter of fiscal year 2007 and then we will be open to questions. Let's begin with the macroeconomic environment.

The Argentine economy showed no sign of a slowdown in the fourth quarter of 2007. According to the [amount estimator] of economic activity, overall economic activity also accelerated, growing by 9.4% year over year on average in October-November, while growth in the July-September period averaged 8.7%.

Thus, compared to December of 2006, the economy accumulated an 8.6% growth rate. Inflation, as measured by the CPI of the greater Buenos Aires area, which is used to calculated [CER] adjustment of sovereign bonds, averaged 8.5% year over year during this period, compared to 10.1% year over year in the fourth quarter of 2006.

Tax received rose 34.9% year over year in the fourth quarter, driven by VAT, social security contributions and export duties. The primary fiscal surplus of the national public sector fell 29%, because it was negatively affected by a 42.2% increase in primary expenditures. In addition, there was only ARS500 million of extraordinary income related to the social security reform during this quarter.

As for monetary policy, the exchange rate fell to ARS3.14 per dollar by the end of December, after having reached a maximum of ARS3.18 per dollar in October. During the quarter, the system liquidity was very strong. The central bank purchased $1.5 billion in the FX market and the international reserve reached $46.2 billion at the end of December, an increase of $3.3 billion during the quarter.

Interest rates continue at high but stable levels, with the variable rate at private banks got stable at a level of about 13.6%. The central bank continued to provide liquidity to the financial institutions, repurchasing securities on the secondary market and only partially [renewing levels] and no [maximum] maturities.

Deposits of the private sector grew 5.8% on average during the quarter, mainly in December due to the seasonal recurrent year end. Loans to the private sector exhibit a strong growth of 10.2% during the quarter, principally the consumer lines.

Going to the bank's performance, earnings for the fiscal year ending December 31, 2007, reached ARS235 million, representing an increase of 30.6% as compared to the prior year. The strong increase in private sector financing allowed the bank to replace public sector income with private sector income. This improvement in the income structure was also reflected in net income from services, which increased nearly 30% from year-ago level, due to a larger activity level.

As for the activity levels, the private sector loan portfolio grew 37% during 2007 and 12% in the last quarter. The bank focused on the retail and middle market segment. In the retail segment, personal loan, mortgages, credit card and car loans were the drivers, while in the middle market and corporate sectors, growth was driven by discounted notes and commercial loans, especially those related with export operations. The bank kept its leading position in corporate segment, even though it suffered a decrease in [advances].

Regarding liabilities, deposits grew 20% during 2007 and 5% in the last quarter. Savings and current accounts posted the most important increases, allowing the bank to improve its funding mix and helping the bank to reduce the impact of higher interest rates. By contrast, CER adjusted funds decreased 68% during the year and 39% in the last three months, increasing the CER index position.

In relation to private sector exposure, during 2007, it was reduced 23%, mainly due to the sale of [warranty] loans and [surety] bonds in the first quarter of the year.

It is important to mention that as a result of the recent international turmoil in financial markets and with the purpose of minimizing income volatility, our public asset portfolio, mainly [due] some notes issued by the central bank, was classified in available for sale category. By the end of 2007, the difference in the valuation of those assets totaled ARS42.8 million.

Well, now let's move on to the P&L. Net income for the fourth quarter of 2007 totaled ARS10.6 million. The reduction in net income as compared to the same quarter of previous year is mainly explained by higher administrative expenses, partially offset by higher financial income and income from services.

On the other hand, the lower net income as compared to previous quarters is related to a higher provision for loan losses, legal injunctions lost and the provisions booked for other contingencies.

Concerning financial income, the growth of our private sector loan portfolio previously mentioned reflected an increase in net financial income, which posted a 19% gain compared to the previous quarter and a 7% increase against the same quarter of 2006. This increase is also supported by higher gain generated by bills and notes issued by the central bank.

Net income from services also posted an increase during the quarter, as a result of larger activity levels and increasing 6% against third quarter and much more significant 26% compared to the same quarter of the previous year. This growth is explained by an increase in fees related to the consumer segment, especially those coming from current savings accounts, credit cards and insurance fees, jointly with those related to foreign trade in middle market segments.

Administrative expenses increased as well during the quarter, due to larger personnel and advertising expenditures and, to a lesser extent, to organizational and development expenses. Higher personnel expenses are mainly explained by a salary increase agreed with the labor union during April 2007 and an adjustment in the bonus provision [certainly] with a larger number of employees.

The rise in advertising and promotional expenses is related to a more aggressive commercial strategy, and the launch of the Blue segment, a segment specially designed for existing and potential clients within the ages of 18 and 30 years old, offering them specific benefits, discounts and products typically of their segment, which will better satisfy their needs.

As of December 31, 2007, the bank had 4,094 employees. The network includes 232 consumer branches, 27 branches specializing in the middle-market segment and four branches for large corporation banking, complemented by alternative channels.

During the last quarter, other income expenses totaled a loss of ARS106 million, mainly related to the monthly amortization of the loss derived from the payment of legal injunctions and to the provisions booked for other contingencies. As of December 31, 2007, the assets related with legal injunctions after amortization reached ARS57.5 million.

As for asset quality, BBVA Banco Frances maintained its strength in the financial indices as its main ratios kept on improving. As of December 31, 2007, the nonperforming ratio related to all types of finances reached 0.59%, with coverage of nonperforming loans with provisions of 315.6% in the same date. The growth in private lending activity also led to an increase in nonperforming charges, mainly reflected in greater amounts of provisions made on the new loan portfolio.

Regarding capitalization, as of December 31, 2007, BBVA Banco Frances is the second-largest private bank in terms of capitalization, with a shareholders' equity of ARS2.057 billion and an excess capital over minimal requirements in accordance to central bank regulations of ARS896 million. Such excess provides enough resources to maintain the private sector loan portfolio growth.

Recent developments. On February 12, 2008, the Board of Directors meeting approved a resolution to submit a proposal to the shareholders meeting, which is to be held on March 28, 2008, to distribute a total of ARS164 million as cash dividends. Such distribution would be subject to prior regulatory and contractual authorizations, shall be made pro rata to the nominal holdings of each shareholder.

Well, thank you very much. We are now ready to answer your questions.

(OPERATOR INSTRUCTIONS)

We'll take our first question from Mario Pierry with Deutsche Bank.

Yes, hi. Good morning. I have two questions. The first one is related to your coverage ratio. As you mentioned, the level of NPLs continued to improve, but at the same time you boosted your coverage ratio to 315%, so I'm just wondering what is your view for asset quality going forward? And the second question that I have is on your tax rate. We are calculating an effective tax rate of 25% in the quarter, while you have been paying about 3.5%.

Is this the new level of taxes that you'll be facing in the future? Thank you.

Okay, this is Martin Zarich. Let me answer your first question. Regarding asset quality, the level of coverage you are seeing, well above 300%, we have to keep in mind that this level is based on generic reserves, due to the regulations of the central bank.

By that, I mean that when we have to -- in regulatory terms, we have to provision 1% of the normal portfolio, given the fact that we have a very small nonperforming loan portfolio, that will always produce this kind of -- this level of coverage ratio. So even considering the fact that we have been provisioning more than required by the central bank because -- I'm now answering your question about our view for the future -- we have been provisioning -- increasing the provisioning -- of basically the consumer portfolio, all the different instruments of the consumer portfolio at levels between 2% and 2.5%, depending on the product.

In terms of our view for the future, we feel very comfortable with those levels. We feel that, of course, we shouldn't expect a level of 0.5% or 0.6% of NPL for the bank total to be sustainable, because in the end, if we grow in the consumer segment, even with a good macroeconomic environment, we are facing the average -- just by the mix effect -- the average NPL should go up. So we are provisioning 2% and 2.5% in the different consumer products. That would always produce an increase both on the NPL you are looking for the quarter, and that explains basically the difference between the fourth quarter and the third quarter in terms of provisionings, but you will always see a rise in the level of coverage.

So that's for the first question. Regarding the second -- tax rate. Yes, the tax rate. No, what you are seeing there, in Banco Frances is now under a tax shield in terms of effective rate. So we are not expecting to pay any taxes, any income tax -- that was the word I was looking for -- any income tax for all 2008 and to some extent, partially, in 2009. Partially.

The problem is that when you look at the numbers in the financial statement, you see that income tax coming from companies owned by the bank, very minor amounts. The problem is that given the fact that we have shown a lower income, net income, in this year, so the effective rate looks higher. But in terms of tax rate for the bank itself, it will continue to be 0% for 2008 and a small part of 2009. Was I clear with this answer?

Yes, very clear. Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS)

We'll hear next from Valerie Fry with Merrill Lynch.

Yes, good morning, everyone. Just two questions. The first question was regarding the provisions for contingencies that you had at the other income expenses line. If you could explain in a little bit more detail what those provisions are for and whether you expect them to continue to happen in coming quarters?

And the second question is on your expenses, particularly personnel expenses, which were up over 30% quarter on quarter. It was mentioned it was related primarily to bonus payments. What would be a normalized level of expenses if you excluded these effects? Thank you very much.

Okay, let me first answer your second question, which is easier. The second one, about personnel expenses, effectively, the impact is due to variable compensation. We always provision for variable compensation along the year. We try to do that in stable terms in the sense that we tend to provision on the expectation of a certain degree of payments to be realized at the beginning of the following year.

The fact is that the forecast we have now, the forecast we had at the closing of the year was showing us that we were running low in terms of the total amount of provisioning we had. So we had to adjust during the first -- excuse me, during the fourth quarter we had to adjust the total level of provisioning to face the amounts to be really paid in this month and in March.

So if you want to establish a more normal level, what you should do is to distribute the difference that you are seeing in the fourth quarter along the four quarters of the year. That should show you a more stable level of personnel expense for the whole year. Okay?

Okay.

That is due basically to overachievement of Banco Frances' goals, and so that implies higher management pay and in general terms, higher pay in variable compensation.

So your first question, about the provisioning, generic provisions or other contingencies, that is a very, very significant line in the fourth quarter in terms of the difference compared to the third quarter. So let me give you four or five topics there that explain the substantial difference, which is close to ARS65 million, when you compare the other income, other expense line for the third quarter. So I will discuss issues that are present in the fourth quarter, but other issues are present in the third quarter, and the comparisons, which amounts to ARS65 million.

First, there is one issue -- I will mention four or five different things. The first one is about Consolidar. Given all the pension fund reform, there is one company owned by Consolidar which is going to disappear. This is the life insurance company related to the mandatory pension plans. I don't want to go with different leads, but the whole system of life insurance in the reformed system is changing, so this company disappears, effectively, and what you saw in the third quarter is an extraordinary gain coming from the -- because we freeze reserves that were then for this company, so these reserves were not going to be used, so we froze them during the third quarter.

This amounts to ARS17 million that were an extraordinary gain in the third quarter, and obviously in the comparison of the fourth quarter do not show up. Okay, so that's one first key issue there, that's definitely one-time for all and you will not see that again.

Okay.

Secondly, there is a difference in the legal injunction expense, or legal injunction amortization of the fourth quarter compared to the third one of close to ARS6 million, more amortization in the fourth quarter, so that amounts to ARS6 million additional loss in the comparison.

Okay.

Then we have a third impact which is a consequence of a restructuring plan we've been doing during the fourth quarter and that produced extraordinary severance payments and we accounted for approximately ARS6 million in this other expense line. Obviously, this impact is also non-recurrent.

Sorry?

No, fine, fine, sorry.

Okay. So we have 17 plus six plus six, so far. Then you have two different kinds of provisioning we made during the fourth quarter. The first one, for close to ARS8 million, is related to legal cases on the commercial side. We tend to produce at the end of each year, according Banco Central regulations and according to all the audit reports, we end to produce updates on the status of all the commercial legal situations of the bank, different situations we have, class actions and so forth. And we have to value at the end of the year the evolution of those situations, of those cases.

Even though before we had at the end of 2007, we felt that we had to increase in about ARS8 million the level of provisioning we [would] expect.. Obviously, there is no one specific case that draws the additional ARS8 million. There is a long list of cases. This is a very typical situation and it's an end-of-the-year adjustment.

Okay.

Finally, the last case is a ARS21 million additional provision, ARS21 million, that we added for fiscal provisioning. And in this case, we are facing -- we have a lot of situations going on as every other bank in the country, in different jurisdictions, both federal or provincial, many legal cases also going on. And what we expect to have a contingency in different cases regarding to different taxes all over the country.

Again, we updated the situation, but in this case we have one specific situation in the city of Buenos Aires, regarding a claim by the government of the Buenos Aires city regarding what we call here Ingresos Brutos. It's a tax on revenues.

Okay, we have -- it's not Banco Frances. It's all the banks operating in the city of Buenos Aires, obviously all the banks in Argentina have a claim against them because they say we produced -- we paid this tax during 2002 and 2003 in a wrongful way. Obviously, we feel and we are pretty confident that our position will prevail in the sense that is the only logical way to look at way this tax should be raised in the context of the 2002 and 2003 crisis.

I don't want to go into specific details here, but this is a very significant claim. We have only a minor proportion in terms of provisioning, because we feel that we are going to win this case in the end. But we could face a very long battle with the government up to the Argentine supreme court, together with the rest of the banks, and we will probably pay on the way partial payments, to be recovered later, obviously, and obviously a lot of legal fees.

So we decided to increase the provisioning that we had for this case in ARS21 million. Obviously, this case is, again, a one-time for all situation and you will not see this happening again in the first quarter of 2008. All these five different situations amount to close to ARS60 million, obviously almost all the difference between the third and the fourth quarter.

Okay, thank you very much.

We'll take our next question from [Fredrico Rey].

Hi, good morning, everyone. I have two questions. The first one is related to salaries and I would like to know if you are having any discussion with the union, considering that, according to the press, they would be requiring a 30% increase during 2007 -- 2008, sorry.

And the second one is related to cash dividends, and my question is the payout ratio is increased, or is supposed to increase, in 2008 from 2007. I would like to know if you expect a higher level of this cash dividend ratio looking forward. Thank you.

Okay, regarding salaries, we are not discussing so far in terms of a new agreement. The usual practice here is that at the beginning of the year, mainly January and February, you pay some kind of advance, agreed with the union. We have done that so far in January, January and February, and then in March, April, we all proceed to a discussion with the unions.

So the discussion will come. It's going to be a very tough discussion, we foresee, because all the unions are monitoring each other in terms of what to demand. There is some sense in the banking union around the idea that they have asked for a low adjustment in 2007, so they want to recover and to close the gap.

So we don't have numbers, but certainly it's going to be pretty tough and we all want also to see what the government -- how the government tries to influence this situation, but expect a complicated situation, not only for the banking industry, but the country as a whole and the implications in terms of inflation going forward.

On cash dividends, well, we never make promises about this. We feel that we were in the position to increase substantially the payout ratio in 2007, compared to 2006, so we leave that. As Daniel was mentioning a few minutes ago, we have a clear situation of excess capital, but we want to be sure that we can finance growth going on. So we will try to keep good levels of payout ratio. I think that our level of payout ratio in Argentina, we are in a very good position comparatively with other banks and I think that we will do our most significant efforts to increase the number.

But I think that in terms of absolute amount of cash dividends, expect more in terms of increase in net income more than increase in the payout ratio, I suggest.

Thank you very much.

We'll hear next from [Thomas Zucker] with JPMorgan.

Hi, I've got two questions. The first one is you decreased slightly your exposure to public assets in 4Q. Is it something we should expect for 1Q as well? And the second one is about inflation. What do you -- what is your expectation for inflation? Thank you.

Excuse me, I didn't get your first question.

The first question is about your exposure to public assets. So I saw in the first --

Exposure to?

Public assets.

Oh, public assets, sorry.

Yes.

Okay, well, you already know that we have been decreasing our exposure to total assets. Nowadays, when we talk about public assets, we basically have two different situations. One is our public bond portfolio, basically guaranteed loans and [Bogar at 2020], and some for '12, and that's basically it. This is a long-term portfolio. This is a rather illiquid portfolio, so we expect this to be to some extent at a minimum a portfolio that is going to be with us for some time, of course.

If we feel that we can build the financial transactions necessary to dispose of those assets and the prices are right, we'll do that, but we tend to look at this portfolio as a very stable portfolio going on. The other part is the central bank portfolio, [Levax] and [Novax]. What we've been doing in the past is basically -- I mean, we tend to look at this position as a short-term position in the sense that we always look at these assets as liquid assets and we are always ready to dispose of them if we feel that we are in a good position in terms of pricing or return rates.

So what we've been doing in the recent past, when all the spreads tightened, I mean, the very recent past, we've been decreasing this portfolio. Nowadays, we believe that this is a liquidity reserve that we can dispose of if we have better opportunities in private sector assets. So given the kind of returns we are facing now in the short bonds, in the short central bank notes, we are looking at this portfolio as a very liquid one and one to be disposed if we have, for example, some reduction in the speed of increase of deposits, of retail deposits, and we want to keep assets going on, we can dispose of part of this portfolio to compensate. So you can look at this position to be a short-term one, basically.

And do you believe for next quarter that this will be the trend, for the next --

I believe that if returns are at the level we have now, what we will see is that we won't increase and we will have a trend to decrease this portfolio, provided we can secure high-earning assets or we can decrease expensive liabilities to compensate.

Okay, that's perfect.

Now, about your second question, inflation rate, your question on what about our view for 2008.

Exactly.

Okay, Well, in this respect, what we have is we feel that we are in a trend of somewhat accelerating inflation, obviously, and this is public discussion. I'm not exposing anything specifically. There is a lot of discussion about the reliability of the CPI index, the Buenos Aires CPI index, published by the government. This index is targeting a level of between 9% and 10% or 11% per year. There are obviously private reports placing the inflation rate for 2008 in levels well above that, but in terms of the impact in our balance sheet, the relevant one is the official one, because that implies the CER ratio.

So obviously when we discuss real figures or our expectations of money supply growth and so on, we tend to go for the private reports, but when we have to analyze our financial margin going forward, we have to look at the official one.

Okay, that's good. Thank you.

Thank you.

It appears we have no further questions at this time. Daniel, I would like to turn the conference back over to you for any additional or closing remarks.

Thanks again for joining us, and should you have any further questions, feel free to contact us in our offices. Thank you.

And that does conclude today's presentation. Thank you for your participation and have a great day.