Banco Bbva Argentina SA (BBAR) 2008 Q1 法說會逐字稿

Ladies and gentlemen, good day and thank you for your patience. We'd like to welcome you to the Banco Frances first quarter 2008 earnings release conference call.

Now as a reminder, today's call is being recorded. At this time, [actually] joining us for today's conference call are Martin Zarich, CFO and Cecilia Acuna, Investor Relations.

At this time, for opening remarks, I'd like to turn the conference over to [Cecilia Acuna], Investor Relations Officer.

Sorry. Good morning everybody. 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 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 contained in Banco Frances' annual report on Form 20-F for the fiscal year 2007, filed to the U.S. Securities and Exchange Commission.

As customary, we'll make a brief summary of the most important pieces of this first quarter of fiscal year 2008, and then we'll be open to questions.

Let's begin with the macroeconomic environment. In the first quarter of 2008, economic activity continued to expand. The economy grew by 9.4% year over year, on average in January/February slightly above the 9.1% recorded in the last quarter of 2007.

In March, however, both construction and [agricultural] activities fell compared to February, due to the farmers' strike and changes in holiday period. In spite of this, manufacturing rose by 6.8% year over year in the first quarter.

Customer receipts continued to outperform during the quarter, rising on average by 41% year over year, driven by the 110% increase in export duties, which reflects both the hike in international commodity prices and the higher taxes -- tax rate being applied on -- now on new exports.

The primary fiscal surplus of the national public sector rose to nearly ARS9m, a 74% improvement compared to the same period of 2007, both due to higher incomes and lower expenditure growth. Primary surplus fiscal spending, which has increased by 22% in the last quarter of 2007 grew by 35% in the first quarter of 2008.

Inflation, as measured by the CPI index of the Greater Buenos Aires area, which is used to calculate CER assessment of government bonds, averaged almost 9% year over year during this period.

The trade surplus continued to improve as grain and oil seed prices. 60% of Argentine corn reached unprecedented height in average market 2008. The trade balance accumulated a surplus of $3b, almost 50% higher than third quarter 2007.

Despite of the ample external surplus, the Central Bank only purchased $2.5m in the foreign exchange market. International reserves however reached $60m at the end of March, an increase of $4m during the quarter due to purchases by the Central Bank -- sorry, by Banco de Argentina on the back of this [decrease]. The exchange rate remains fairly stable.

During the first quarter, the international crisis did not have a big impact on domestic financial variables. As a result of Central Bank's purchases in the foreign exchange market, (inaudible) decreases led to an expense of in interest rates. As a consequence, variable rates at Frances Bank fell from 13.6% in December 2007 to 8.5% in March this year.

Going to the Bank's performance, during the year 2008, BBVA Banco Frances continued focusing in expanding its financial activities in the public sector with special emphasis in the retail and middle market segment.

(Inaudible) loans increased at a solid state during these three months of the year. Furthermore, the outstanding growth in commercial activities was represented in higher net income from services. The consolidation in the personal businesses, including means of payment and administration, especially (inaudible), insurance, opening of new accounts and credit and varying cost operations had an improvement and an important positive impact on operating income.

As for activity levels, our private sector loan portfolio continued its expansion, growing ARS560m during the first quarter of 2008. Personal account loans led to the increase in the retail segment, while in the middle market and corporate business, advances and commercial loans experienced a higher growth, especially those related with export operations.

Regarding [liabilities], during the first quarter of fiscal year 2008, the profits grew by ARS118m. Growth was driven by rises in current and savings accounts. This allowed BBVA Banco Frances to reduce its funding costs from previous quarters. As mentioned, current and credit accounts continued to gain participation in the Bank's funding mix while time deposits increased.

It's important to highlight that the decrease in time deposits was due to a drop in corporate time deposits and a decrease in CER adjusted time deposits, partially offset by the expansion in retail time deposits.

In relation to private sector growth, during the fiscal year of -- first fiscal year of 2008, their total decreased as a result of capital amortizations derived from maturities in guarantee loans and bids issued by Central Bank.

The relative difference of available for sale portfolio improved by ARS7m when compared to the loss recorded as of December 31 of 2007. As of March 2008, Frances' exposure to the macroeconomic represented 13% of total assets, down from 16% in March 2007. This valuation is in line with the Bank's strategy to encourage private sector activity. So you can (inaudible) to the (inaudible) exposure to the private sector.

Now let's move on to the P&L. Let me start with the first quarter of 2008 total ARS74.3m. The increase in the net income gains against last year of course is explained mainly by the advance in net income from services, together with lower expenses in other income expenses, which more than offset higher administrative expenses.

On the other hand, net income improved totally compared to the previous quarter as both net financial income and net income from services increased strongly with a reference in expenses.

Concerning financial income, net income -- net financial income reached ARS260m, more than 9% higher than the previous quarter, but 10% below levels posted during the first quarter of 2007. The increase, compared with the previous quarter, is due to the continuing growth in product marketing and increase in CER positions as well due to the increase in price index and higher results from our guaranteed loans holdings.

On the other hand, income from securities and short term investments decreased from previous quarter levels due to lower holdings of instruments issued by the Central Bank and a valuation assessment in the private sector portfolio. Furthermore, lower income from investments in treasury bonds negatively affected net financial income. This declined showed not only the ARS0m loss due to the assessment in the value of private sector portfolios, but also the difference with year ago figures that included ARS38m of gain from the sale of guaranteed loans. However, this difference in net financial income was offset by larger private margin.

Regarding net income from services, the Bank continued its expansion in the transactional business, retaining a significant source of income from these activities. As a result of this trend, net income from services increased 5% and 26%, respectively, compared to the quarters end in December and March 2007.

Growth is explained by an increase in fees related to the consumer segment, mainly those from current and savings accounts, credit cards and insurance business, with those related to strong trends in the new market segment.

Administrative expenses decreased 4% during the first quarter of 2008 with moderated declines in both personnel and advertising and promotion expenses. In contrast, (inaudible) posted a considerable 39% increase when compared to the quarter ending on March 31, 2007, explained by significant increases in all of these components.

As I said, the drop in administrative expenses during the first three months of 2008 was led by a 7% decline in personnel expenditure and a larger 27% both in advertising and promotional expenses. Both reductions are explained by the (inaudible) increases shown by this Company during the previous quarter when an assessment took place in the provisions of bonuses for better than projected results during the fiscal year 2007 and higher advertising expenses related mostly to the Blue campaign.

At the same time, the jump in expenses against year ago levels was also mainly driven by these two components as personnel expenditures grew 49%, sorry. And advertising and promotion expenses to be the same as an annual hit of 47% in March 31, 2007. These important increases took place last year with higher salary risk to the agreement we delivered even during April 2007 and March 2008 jointly with the larger number of employees due to higher activity levels and to the advertising and promotion expenditure reflecting a higher presence of the Bank in the media.

During this first quarter of 2008, the Bank opened three new retail branches in strategic points of the country, which reinforced its presence in the period with high economic growth.

By the end of March 2008, our income expenses totaled a loss of ARS111m, mainly related to the last monthly amortization of the loss derived from the payment of deposits and the legal injunctions ARS68m, accelerated amortization of goodwill by ARS12m and to the provisions [that hit us] for our accounting expenses.

It is important to mention that during the first quarter, the Bank has completed the amortization profits of the assets related with legal injunctions.

As for asset quality, BBVA Banco Frances continued showing an excellent performance in terms of asset quality standards. As of March 31, 2008, the non-performing ratio reached [0.6%] with a growth of non-performing loans with provisions of 298.8%. That allows the Bank to maintain its derivatives in the financial system in terms of the risk [pattern].

The growth in private lending activities also led to an increase in non-performing charges, mainly reflected in greater amounts of provisions made on the new loan portfolio.

While regarding capitalization, total portfolio equity of BBVA Banco Frances as of March 31, 2008 amounting -- amounted ARS1.9m -- ARS1.9b, sorry, with a ARS688m expense capital over minimum requirements in accordance to Central Bank's regulations.

Thus, the [services] provides enough resources to maintain the (inaudible) loans portfolio goals. The decrease (inaudible) in the excess over the capital required during the last 12 months, is mainly explained by higher requirements costs by the increase in the private sector finances and a [write] in the (inaudible). It's important to highlight that the decrease in services for the equities is explained mainly by the payment of cash dividends in April 2008, for an amount of ARS164m in accordance to resolutions of the ordinary and extraordinary shareholders' meeting as of March 28, 2008.

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

(OPERATOR INSTRUCTIONS) And our first question comes from Juan Partida with JP Morgan.

Thanks. My question is regarding your estimation for expenses for the year, I guess after reaching the contractual salary increase for the year, so that it's easier to calculate what we should expect. What are you looking for in terms of asset growth this year?

And also, I would just like to get your take on the actual political situation in Argentina, what parties [being] there right now.? Thank you.

Okay Juan, on the expenses question, which is a little bit (inaudible), right now I would say that having established the amount of increase with the union -- with the banking union for the year, we are now estimating an increase in total expenses in the range -- somewhere in the range between 25% and 30%.

When you listen to these amounts, this percentage, you have to take into account two different considerations. First of all, that we are expecting personnel expense in the near term to increase in the range of about 30%. This is more than what it was signed in the contract with the union because, basically, we are having a different kind of increase. To provide an explanation, but the way it impacts in 2008 is higher than the way the same increase in the union contract would have impacted in 2007. So when you listen to a 20% increase with the union, actually, including all the different impacts, it is going to be somewhere in the range between 25% and 30%. That's for payroll expense.

On the other administrative expense side, two different issues. First, all what we consider to be, to some extent, fixed expense, are going to be in the general trend of the inflation rate. And by that what we mean is, the inflation rate, that we are establishing is according to different indexes that are going now in the country. That is somewhere around 20% for the year -- for the complete year.

But the total increase of 30% is going to be higher because we are still running at higher rates in expenses related to the commercial activities. Let me give you two examples. We are forecasting a significant increase in expenses related to advertising and an increase in expenses related to -- the kind of expenses you pay because of variable commissions on sales -- to external sales forces. Those commissions amount to an increase of about -- between 40% and 50%. So on near terms [25%] but when going into the breakdown of that number, you have different qualifications today.

Regarding your second question, well I would say that the decision we are facing now is, in political terms, is that the most significant conflict -- demonstrations we're having now is with all the agricultural sector. As you probably know, we have the different organizations of the agricultural sector have renewed their strike. This is a different strike in the sense of the -- compared to the first one because they're not producing problems of disposition of the products in the city, so there's not the kind of the impact that they had in the first one. But they are not allowing exports, basically.

And there are, so far, minor effects in terms of our ability to travel by the different highways of the country, and so on. So in terms of practical significance, probably the strike is of lower impact. In terms of political implications, it's basically the same. So what we are seeing now is a demonstration that was probably going to make a political/economic announcement in May 25, which is the Independence Day in Argentina.

And probably the last news according to the newspapers, we will find out that there is probably a decline during that -- in that day because they would like to solve the conflict with the agricultural sector before that. I believe that they are in a very significant need of really initiatives. And what we are seeing now is the general population enlarging the side of the agricultural sector, basically, especially the big cities. And what we also see is an increase in the levels of uneasiness in terms of the financial sector, basically regarding the appreciation of the dollar in our network -- in the financial system as a whole.

Other than that, you have to couple that with a cessation of the right inflation. But at the same time, we believe that we still have significant good numbers in terms of GDP growth, exports, trade surplus, cash surplus, regulation of foreign reserves in the Central Bank and so on. So it's basically a problem of confidence and a story of lack of initiatives now in the administration. And given the past in Argentina, some short term volatility in terms of how the US calculation is appreciating against the Peso. But again, you have to be very powerful to decide, speculating against the Peso when the Central Bank has [$50b] in reserves.

Yes, that's very helpful. If I could quickly follow up with a question on the shift in deposits from pesos to dollars, have we seen any significant activity in that regard?

No, not really, not significantly. I would say that, first, we have to keep in mind -- and everybody knows our recent Bank history. And we have to keep in mind that nowadays, dollar deposits to total deposits, that ratio is 13%/14%. It has been pretty much stable. So dollar deposits are a minor fraction of deposit. And that is a very different situation when you compare it with 2000 and 2001 deposit.

And the second one is what you find now is not a shift from -- a significant shift from peso deposits to dollar deposits. Of course, there is some increase in time deposits in dollars, but that's basically a transitory impact. What we see is people buying dollars -- buying significant dollars. And what we see is an increase in that number. So after doing that and what they do with them, they probably store it in some way or we've had, of course, a typical situation of increased amount in safe deposit boxes, and so on. But if we don't see a significant shift from pesos to (inaudible).

Okay. Thank you.

(OPERATOR INSTRUCTIONS) And our next question is (inaudible). Mr. [Rey], your line is open, sir.

Good morning. I have a question regarding (inaudible) spreads. Regarding the potential adjustment on government related assets valuation, I would like to know if you perceive (inaudible) spreads considering the recent increase in the cost of funding the domestic deposits.

Okay. It's an interesting topic to discuss deposit costs because, in the end, what we see around the first quarter that we are reporting is the general trend of decrease in costs of our total funding base. And that is produced by two different factors. The first one is the change in mix -- a progressive change in mix that is in our favor in terms of going from [TD] funding to time deposits. And we've seen that in the numbers that (inaudible) was commenting a few minutes ago. So there's a mix effect in our favor. And it's a very central one. It's a very significant one.

So the second thing that we have to consider is that the union -- the call for (inaudible) integration of clear liquidity. So if you recall, when we completed the fiscal year 2007, we had, for example, a flat rate in the order of 13%. When we went out for Christmas, we were in levels of 13%. And when we came back, about January 10, we were at 8.5%. So this situation has remained basically for the fourth quarter.

And we had, at the end -- the question for us -- and at the same time, what we have done is we have reduced, that has enabled us to reduce our base of wholesale funding, as again we said a few minutes ago. And that allows us also to increase the unit cost in funding. So what we end up having at the end of the quarter, as you know, the first quarter, it's a purely situation in terms of general funding costs. I.e. it has all activities that we are in a leading position in the financial system in terms of average funding costs. And of course, if we run into the next quarter, in this one we are currently on, it will run into a situation of an increase -- a decrease in excess liquidity and we have to pay an increase in cost.

Of course, we have been, in the last month, in the last two weeks, basically an increase in flat (inaudible) rates. But a lot on the flat rate, on (inaudible) was in levels of ARS10, approximately, that we have recorded. This is a rate which is probably negative in real terms. It's difficult to say how much. It's really negative in real terms. So I would expect flat rates and rates in general to increase.

What we have a similar situation of increase in value costs while we have been having an increase in the general service bank. And we don't expect this situation to result in resolving the conflicts that we will face during the second quarter because in the end what we expect is that if we have an increase or a decrease in the general liquidity of the system, spreads are going to be in favor of (inaudible).

Okay. So you mean that you don't expect a decrease in margins considering the consumer increase during the past weeks of the bank loan rates.

No, because you have to keep in mind that we have more than 50% of our deposit base in number -- in different deposits. That is very -- as a nominal base, that's very significant and that allows us to experience an increase in margins when rates go up nominally.

Actually, what I think is that the real distortion we have now in the financial system in Argentina is that, in the long term, the situation we have with rates, basically, on the negative real side, we don't expect the system to increase in size. So the problem we see is that we always have --- we will continue to have and that's a part of the short term volatility we're experiencing now.

But in general terms, having real negative interest rates, the problem is not going to be a problem of spreads. The problem is that we will not face sustainable growth in the future. So probably all our expectations in the system we are expecting the system to grow deposits total volatility in the range of 20% or [50%] per year in deposits. That is going to be increasingly difficult if we continue to have a real negative range in the order of impact on 10%.

I am not worried about -- I am more worried about volumes than spreads.

Okay, thanks.

And we have no more questions.

Well thanks again for saying that. If you have any further questions, please to contact us in our offices. Bye.

That concludes today's conference call. Thank you for your participation and have a good day.