Banco Bbva Argentina SA (BBAR) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to the Banco Frances Second Quarter 2008 Earnings Release Conference Call. Today's call is being recorded. At this time I would like to turn the call over to Daniel Sandigliano, Investor Relations, Martin Zarich, Chief Financial Officer, and Cecilia Acuna, Investor Relations. Please go ahead.

Good morning, everybody. Let me say that some of the statement made during this conference call 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 laws. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Additional information concerning this factor is contained in Banco Frances annual report on Form 20-F for the fiscal year 2007 filed with the U.S. Securities and Exchange Commission.

As customary, we will make a brief summary of the most important topics of the second quarter of fiscal year 2008 and then we will be open to questions. Let's begin with the macroeconomic environment. In 2008 second quarter (inaudible) economic activity grew by 8.4% year-over-year accumulated up to May, maintaining the first quarter extension rate.

Towards the end of April, the decrease in the [export] liquidations together with greater [prioritization] produced a significant rise in the foreign exchange rate at ARS3.18 [per dollar]. (inaudible) to avoid a great depreciation of the Argentine peso. The foreign exchange rate grows at ARS3.02 pesos per dollar by the end of June. The [central-run] reserves were reduced by [$2.9 million] in the quarter.

[Tax receipts] in the quarter increase 36% and the national private sector (inaudible) increased 24% with respect to the same quarter of 2007. The primary fiscal expenditures continued its increasing trend essentially by the [74] rise in [grants] to the private sector. The deposits fell 1.2% average [soon] against March 2008, essentially because additional liquidity was not generated by the [experienced sector].

[At the return] of this decrease, the [valuable rate] of [credit bank] that was at 8% leverage by the end of March are right at levels of 18% during June, to finalize that [months at] 16%. As a consequence, during June [a deceleration to place] in private sector loans.

According to the bank's performance during the first semester of the year, the private sector financing growth allow it to improve the income generation. The private sector incomes are more and more important while the private sector incomes diminished. Also, an active management of the risk assumed caused the bank to have the best asset quality of the financial system.

It is important to emphasize that the bank has an excess of capital of the minimum required by the Central Bank [that exists] ARS700 million, which provides the bank with enough resources to continue its growth. Additionally, the bank has an excellent position of liquidity that allow it to bear the transitory reduction of deposits experienced in the second quarter of 2008.

Now let's move on to the P&Ls. The increase in the net income is mainly explained by increase in net financial incomes coming from the private sector. The higher net income from services and a lower exposure in our income expenses. These variations were partially offset by an increase in administrative expenses and an adjustment in the value of the private sector portfolio, which exceed the Central Bank requirements.

Net financial income total ARS203.6 million in the second quarter of 2008, showing a decrease not only as compared to the previous quarter but also to the same quarter of 2007. This reduction is mainly explained by the adjustment in the value of the private sector portfolio, which represented a loss of [ARS140.3 million] in this quarter. It is important to highlight that such a loss exceeds the Central Bank's requirements by ARS65.6 million and was partially offset by an expansion in the private business contribution in the (inaudible) due to higher interest rates in the [asset] and increase in volumes as compared with previous quarters.

Regarding net income from services, the bank continued with the positive trend in incomes coming from the [personal] business with an expansion of 5.6% in the quarter and 26.9% in the last 12 months. The enlargement is mainly explained by an increase in fees related with insurance, credit cards and current and saving accounts together with those coming from the foreign trade operations.

Administrative expenses grew by [5.9%] in the last three months as compared with the previous quarter and 33.3% as compared with the same quarter of 2007. The increase [received] in the quarter is mainly explained by higher personnel expenses as a result of the agreement with the labor unions, which took place in march of 2008, partially offset by a lower charge [resistor] in the [bank's position] jointly with an increase in our [organization] and development expenses as a consequence of the larger activity level and a rise in prices.

On the other hand, the rise in expenses against last year's level was up 33.3% and was mainly driven by higher activity in the core business and more investment, which causes an increase in [personal and organizational] expenses jointly with higher advertising and promotional expenditures. This increases took place last year with[higher salaries which, through the agreement with the labor union during April 2007 and March 2008, essentially with a larger number of employees related to the advertising and promotional expenditures, which reflected a higher presence of the bank in the [media] and higher costs.

Other income expenses recorded a loss of ARS3.2 million in the second quarter, 97% lower as compared with the prior quarter. It's important to mention that during the first quarter the bank had completed the amortization of the (inaudible).

As for the activity level, the private sector loan portfolio reached approximately ARS9.2 million by June 30, 2008, falling slightly as compared with the previous quarter. However, compared with the same quarter a year ago, it grew 27.7%. In spite of the fact that during the second quarter of 2008 [of growing private] business decreased, the bank continued focusing on the retail segment, which maintained the expansion, growing at nearly ARS400 million during the quarter.

The bank maintained its leadership in the financial system (inaudible) in terms of the risk assumed, showing solid ratios of asset quality. The number [common] ratio, with respect to all [sites] of finances reached 0.8% with coverage [of number common] loans with provisions of [252.3%] by the end of June 2008. It is important to mention that the number of common loans grew by [21.8%] during the last three months and [9.5%] as compared to the same quarter of the prior year. Meanwhile, allowances grew by 6.6% during the last quarter and by 26.2% in comparison with the same quarter of the previous fiscal year.

Total private sector exposure continued to [trend in] during the second quarter of 2008, mainly by maturities and sales of (inaudible) issued by the Central Bank. The private sector national government debt did not show [greater] changes in the last quarter. Nevertheless, in the last 12 months it diminished due to capital amortization by maturities in guarantee loans and the contribution of provisions.

During this quarter, the valuation difference of the (inaudible) portfolio resisted an increase of ARS2.5 million due to the incorporation of new holdings to this category. [Resulting irregularities] the environment of uncertainty that took place during the second quarter caused reduction of deposits in the total financial system. In Banco Frances, the variations represented a decline of 3.8%, excluding the (inaudible) deposits.

[All] in current accounts was 3.3% while the increase in [timed] deposits was 3.9%. Deposits performance during the last 12 months showed an expansion of 9.9%. In the last 12 months, current and savings accounts grew by 16.4% and 17.4% respectively [that's in] its participation in the bank's [funding mix] by 3%, allowing the bank to maintain an average funding cost in similar levels than the previous quarter. Thank you very much. We are now ready to answer your questions.

Thank you.

(OPERATOR INSTRUCTIONS)

And we'll take our first question from Tito Labarta with Deutsche Bank.

Hi. Good morning. So two questions. One, just given the decline that we saw in loans and deposits in the quarter, I just want to get your expectations for the remainder of the year, what do you see for a full year loan growth? And also, second question, also saw a slight deterioration in asset quality. Is that something you think will continue or what are your expectations for the asset quality for the rest of the year? Thanks.

Okay. This is Martin Zarich. Good morning. Regarding our expectation of our loan and deposit growth, first I would like to say that during (inaudible - background noise) which are clearly well past the moment in which we observed the minimum level of deposit in the short-term crisis we had during the second-- during the second quarter. So the second part of June and all of July, deposits have been going up. So -- and have been going up in rather strong way.

Actually, what we are facing now is a system -- a financial system as a whole which is very liquid. Just to give you an example, the level of funding received by the Central Bank -- I mean repos by the Central Bank right now are in the level of ARS13 billion together -- putting together the public and the private financial system.

What this means is that probably we'll observe in the future, probably during the rest of the year, I mean, if [currency] comes down in terms of the economic crisis, of political crisis do not change, we are going to observe -- we expect to observe a follow-up of the recovery we've been looking at during the last weeks. So I would say that our expectation is from now on to go at a level of growth in the system for the next quarters well above what we saw during the second quarter but probably below what we have been seeing during 2007.

Our projections now, for example, for 2009, are made with the policies that both deposits and loans are going to grow at a range of [16%] annually. So this implies a reduction in the speed of growth of the system but definitely implies also recovery from what we have been seeing during the second quarter. So this definitely means low growth financial system, in terms of inflation, I mean. But probably that there is also implying our ability to maintain the levels of [the spread] we've been looking at during this last quarter. So this regarding the first question.

The second question about asset quality. Well I'm not sure if you mentioned the word deterioration together with asset quality. I would say that -- I mean, if you are saying that we have a deterioration from 0.7% to 0.8%, I will accept that. However, I would say that the situation of Banco Frances in terms of asset quality is clearly excellent. Given all the consideration and given all the situation we've been facing, the fact that we have an NPL ratio of 0.7% or 0.8% is the same for me, basically. And a coverage ratio of well above 200% is showing the complete leadership we have in this respect in the financial system.

Obviously we expect some degree of deterioration, but let me -- let me stress that we're in -- probably two or three quarters ago I was asked the same question in 2007 -- at the end of 2007, the same question about the prospects for asset quality. Probably I said that our forecast for December 2008 was to have an NPL ratio of 1.2%. And that basically the reason for that is that we are -- we've been all this time changing the mix in our loan portfolio, going probably in a more strong way to consumer lending to all the retail side of our balance sheet. And this, only this implies an increase in the total NPL ratio just because of a change of mix.

So actually after this short-term crisis of the second quarter, we are not changing that prospect. We are still expecting to end somewhere in the range of 1.1%, 1.2%. And the composition of this, let me be very clear about this, and again, let's put ourselves in December 2008 and with this kind of forecast I was mentioning, 1.1%, 1.2%, this is going to be obtained with the retail side of the loan portfolio in the range of 1.6%, 1.7%. And of course a compensating degree in the corporate loan portfolio and the small and medium corporations.

If we go to 1.6%, 1.7% in the retail loan portfolio, let me mention that we are doing nowadays, we are doing provisions on this portfolio in new loans of 2.5% to 3% depending on the product. So from an expected loss approach, we are provisioning more than the NPL ratio that we are expecting to have in two quarters.

All right. Thank you very much.

We'll take our next question from [Juan Partito] with UBS.

Hi. Good morning. My question is regarding the performance of the securities portfolio, particularly the one subject to Circular 3911. Why was it that you decided to take losses over and above what the circular is requiring, particularly because it appears that you still had some other securities transferred to the available for sale category to avoid taking the valuation hit through the income statement. If you could explain what was the rationale behind those two -- those two movements? Thank you.

Okay. Let's concentrate in the most significant position, which is the [Bovar 2020], which is producing this kind of adjustment we are mentioning. This is a portfolio of more than ARS800 million in a month. In this -- in this asset, we are not going with the available for sale but basically what we have there is a bond which has no price and so -- I mean, I don't recall the exact name of the category but it's not -- it's not available for sale.

Actually, what we are doing there is we are valuing at accounting [plus] the internal rate of return. So in this bond, the Central Bank over the last year has been producing each month a rate of [discount change] to be used for the valuation of the portfolio. The Banco Central has been changing this rate over time as up to June in this case. Actually, up to July. And they will probably continue with this.

As of June, the implied rate given by the Central Bank was 8.30% -- 8.3%. What we find now is that the market, if we -- I mean, there is no price for this bond in the market but there is price -- there is a price for the bond comparable to this one in the market. For example, if you look at the Bovar 2018, you can find that, for example, as of June 30, the internal rate of return implied by the price of the Bovar 2018 was close to 12%. If you allow for the different situation between the 2018 and the 2020, probably you have to aim at something like 12.3%, 12.5%. okay?

So this could be considered the target rate of discount to be according to price. So as you can see, clearly see, the Central Bank is still lagging a lot in this valuation. So what we decided during the last quarters, the fourth quarter of 2007, the first and the second of 2008, we decided to include in our income statement additional provisions for this bond. And so this is what we've been doing so far and the valuation we have for the Bovar 2020 in our accounting now, given this voluntary provision, is [implicit] rate of 10.3%.

So we get much closer to the implied discount rate according to market price now, what we believe to be the market price, because I insist there is no market price for this bond, is much closer than the rate of discount being given by Central Bank. So what we are doing here is we are trying to adapt valuation to what we consider to be something closer to the market price.

Having said this, I would like to mention that the problem here is that we are facing internal rate of discount for this bond that are reflecting the problem with the [XR index] in Argentina. So I'm afraid that what we are doing, both the Central Bank to some extent and ourselves to a higher extent, is that we are pursuing a valuation, a lower valuation, as if there was no recovery in sight for this bonds. I mean, we are putting ourselves in a valuation position of a very low performance of the XR index in the future.

If there is some degree of recovery in the XR index in the future, because I mean the trend in the XR increase changes, for example, which has not been the case so far. What we should expect is a degree of recovery in this bonds and probably a recovery -- partial recovery of these provisions. But this has been the rationale for what we have been doing so far.

Okay. And with regards to the -- did you reclassify any other securities, not 2020s, into the available for sale category this quarter and how much was that?

No, I don't recall having made a -- I mean, there was no -- you are looking at the increasing in (inaudible) for sale on page eight of the statement. No. I think that what you are seeing there is a change in Central Bank positions. There is no relevant change in any other public bond in our portfolio. What you see there is when we increase the position of the Central Bank [business] notes, we put them in the available for sale category from the beginning. But we have not reclassified.

Okay. Okay, and if I could very quickly follow up just with how much did you get from the [Besa IPO] in the second quarter?

Okay. In the second quarter, what we have accounted for is a level of ARS31 million, close to ARS31 million.

Thank you very much.

Our next question comes from [Mathias Sacerdote] with JPMorgan.

Hello. I have a quick question regarding the [line] net other income as expenses. We saw a big improvement and we know that around [60 millions] to [70 millions] are related to the reduction in injunction costs. But we would like to know what else drove that improvement. And also, how to think about this line moving forward.

Okay. Okay, Mathias. There may be one significant source of changes, the one you mentioned, which is earlier injunctions. This amounts to probably something like [70 million] difference. However, the other aspect you have to consider is -- (inaudible)?

No.

No. I mean you are talking about net other income, right?

Correct.

Give me one second, please. Well yes, there are many things there. But basically what we've doing is different level of provisions. We -- yes, because -- excuse me for the confusion because I was thinking about Besa because of the last question. But Besa is not registered there.

What we have is, apart from the injunctions, we have different levels of provisions we made. We anticipated provisions during the first -- during the first quarter. There is a level of close to [20 million] not present in the first quarter which are not present in the second one. And then what we have there is different aspects, which are minor in terms of relevance. I mean, any of them separately.

What we should expect here in terms of the future is that the real injunctions should produce a level of what we've been seeing in the recent past, I mean the second quarter. Basically, this will produce a level of close to [10 million] per quarter because of the flow of new situations, of new cases that are brought to us. So a level of [10 million] per quarter should be expected in the near future. Other than that, probably nothing more significant that could be anticipated.

And could you tell me what those provisions were in the first quarter and is there any chance that they could repeat themselves this second half of the year or at the beginning of next year?

No. I wouldn't expect to see additional changes in that because this is basically done because we have altered the level of provisioning for, for example, personal related expenses or fees related to legal injunctions or fees related -- I mean or the provision for legal cases that we have to face. But definitely not regular provision in that we are going to make in the future.

The only aspect that we could expect in a regular basis are the ones that we've been discussing before, which are related to the valuation of public bonds or what we've been doing in the past that was the legal injunctions. But other than that, there's no reason to pursue regular provisioning in the future. You are not going to see that.

And finally, I understand that loan recoveries go through that line as well. What should we expect moving forward on loan recoveries? Do you have any -- ?

Well, loan recoveries, yes, correct. What you are going to see in loan recoveries is a level that is basically stable and it has been rather stable in the past. We've been looking at levels in the range of -- I mean, between probably something between ARS10 million, ARS12 million per quarter. Yes, because I have in mind a figure of ARS3 million to ARS4 million per month coming from written off loans.

This should be a rather stable, though decreasing amount, because, I mean, this is related to the level of NPL and the charge-offs we can be doing in the future since we expect our loan asset -- loan quality to be -- to be very good. We don't expect to increase substantially the level of write-offs. So I would expect this ARS10 million, ARS12 million per quarter number to keep decreasing, although, I mean, I've been forecasting this for many quarters now and thankfully I've been -- I've been mistaken so far.

Thank you. that was very helpful.

Our next question comes from [Federico Rey] with Raymond James.

Hi. Good morning. I have a question on the adjustment valuation of common related assets. To some extent it has been already answered. But I would like to know that, as you mentioned, you are now valued the Bovar 2020 with a discount rate of 10.3% and I would like to know if you expect to continue doing this and if you expect to take the valuation of this bond, it's a valuation similar to that of the 2018, in order to try to forecast if you are going to continue doing this excess provisioning going forward. Thanks.

Well is an interesting question because actually what we'll be doing probably is to monitor -- to keep monitoring prices and the trends in the market. Since [early], when we began this adjustment and when we were following the adjustment proposed by Central Bank, the aim, I keep recalling that as of July, August 2007, the Central Bank announced a trend that was leading to [8.30] in June. And [8.30] in June was, at that point in time, as of the third quarter of 2007, was a market price. So, I mean, if you were to reconcile with the market price, you just had to go to [8.30]. So we will -- I mean, we all began the road to [8.30] probably one year ago.

Weren't [surprised] that when we reach June, the market is no longer [8.30] but is somewhere between [12], [12.50] as of June. So the key issue here is how far should we go because of course in terms of short-term valuation, I mean, the market price is showing you an internal rate of discount. Just keep in mind that this specific bond, it's hold by two holders, basically two banks, so there's not going to be a market price. There is a loan maturity here and probably what we have here is more the qualification of the loan more than a public bond.

Having said this, the only -- the only thing we have in doubt is have we -- do we have to follow this valuation up to the last moment or up to a rate that almost seems slightly [recalled] by itself. I mean, rates that are generated because of the situation of the XR index. I definitely think that at some point in time in the future, definitely in the future, in the shorter future than the valuation of this bond, there is going to be some change in this , in the XR index is accounted for. So I will expect to see a recovery of this bond in the future.

So if we had to go up to [12], what we are going to produce is more reduction in the income statement in the following quarters only to see a significant positive surge in the next ones when there is a recovery. So, I mean, it's probably a question about the stability of the -- or the predictability of the income statement. We don't have a policy, we don't have a specific path we are going to follow. We'll keep looking at the market and our expectations.

Thank you.

(OPERATOR INSTRUCTIONS)

And we have no additional questions at this time.

Well thanks again for joining us. Should you have any further questions, don't hesitate to contact us in our offices. Bye. Thank you.

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