Banco Bbva Argentina SA (BBAR) 2010 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the BBVA Banco Frances Reports Consolidated Second Quarter Earnings for Fiscal Year 2010 Conference Call. Just a reminder, today's call is being recorded. And now, I would like to turn the conference over to Mr. Daniel Sandigliano. Please go ahead sir.

Thank you, good morning everybody. Let me state that our statements made during this conference call may be forward looking statements within the meaning of the Safe Harbor Provisions found in the section 27-A of the Securities Act of 1933 under US Federal Securities Law. These forward looking statements are subject to risks and uncertainties and could cause actual results to differ materially from those expressed in the forward looking statements.

Additional information concerning these factors is contained in BBVA Banco Frances annual report on form 20-F for the fiscal year 2009 filed to the US Securities and Exchange Commission. As customary, we will make a brief summary of the most important topics of the second quarter of fiscal year 2010, and then we will be open to questions.

Let's begin with the macroeconomic environment. During April and May 2010, economic activity accelerated its pace of recovery. The monthly estimator of economic activity grew 3.2% compared to the previous quarter in a seasonally adjusted series. The high level of consumption and increase in investment drove the recovery.

During the second quarter of 2010, fiscal revenues increased 38.5% compared to the same quarter of the previous year. The recovery was aided by the improvement in economic activity and the contribution of the tax -- the export tax following the significant harvest recovered. VA tax and income tax grew above average in the same period.

The primary fiscal surplus of the national public sector was ARS7.6 billion, an increase of 185% compared to the second quarter of 2009. Improvement was due to the positive performance of tax collection and other fiscal resources, while primary spending grew 28.3% in annual terms during the second quarter of 2009.

The Central Bank intervention in the foreign exchange market was a net purchase of US$3.7 billion during the quarter. The exchange rate, according to the Central Bank, close at ARS3.93 per US dollar, an increase of 1.4% compared to March 31st, 2010.

The Central Bank international reserves stock reached US$49 billion, increasing US$1.8 billion during the quarter. The Badlar rate at private banks was 10.3% at the end of the quarter. The slight upward trend during the quarter was mainly due to increasing trade demands, however the liquidity ratios of the financial system remained stable.

Total deposits in the financial system increased 14.6% on average in the second quarter of 2010, while private deposits rose 6.3%. Private sector loans showed an increase of 8.7% during the second quarter, reflecting an improvement compared to the performance of the first quarter of 2010.

[Now] to the Bank's performance, the bank's net income totaled ARS203.4 million at the end of the second quarter of 2010, growing 27.4% compared to the previous quarter and accumulating ARS363.1 million in the first six months of the year. Meanwhile net interest income registered a slight decrease of 9.1% during the quarter, mainly due to lower gains from public bonds portfolio. The revenues originated by the private sector maintained the upward trend.

The expansion in the private loan portfolio mainly in the middle market and retail segments, together with an adequate fund structure supported the steady growth of private gains. The increase of 12.1% compared to the same quarter of 2009 is a consequence of important growth from the private sectors, as well as the improvement in the valuation of public bonds portfolio.

As we mentioned, public sector loan portfolio registered a significant increase of 12.2% during the second quarter, whereas in annual terms the increase was 15.1%. In the last 12 months, financing to small and mid sized companies showed the best performance, increasing 40%, while retail segment increased 18% during the same period.

BBVA Banco Frances continues to show solid asset quality and coverage ratios, maintaining its [asset] position in the Argentine financial system in terms of risk assumed. As of June 30th, 2010, the number from the loans ratio was 0.7% with a coverage level of 380.7%. In terms of liabilities, during the second quarter of the year, the bank's recurrent deposits grew 6.6%, both balances in sight accounts, as well as in time deposits showed increases.

BBVA Banco Frances maintained adequate levels of liquidities and solvencies. As of June 30th, 2010, liquid assets represented 40.4% of bank's deposits. On the other hand, the capital ratio reached 16.9% of the weighted risk assets. This is the excess of our required capital, it was higher than ARS1 billion at the end of June 30th, 2010.

In accordance with the resolutions approved by the ordinary and extraordinary shareholders meeting during June 2010, BBVA Banco Frances paid cash dividends of ARS480 million for corresponding to the fiscal year ended December 31st, 2009.

Now, let's move onto the P&L. Net financial income reached ARS433.3 million at the end of the second quarter of 2010, decreasing 9.1% compared to the previous quarter, mainly as a consequence of lower income coming from public bonds, which was partially offset by increase in net financial income generated by private sector intermediation.

On the other hand, net financial income grew 12.2% compared to the same quarter 2009, registering significant growth from the private sector, as well as the improvement in the valuation of the public bond portfolio. Meanwhile, income from public and private securities in the second quarter of 2010 dropped 41.7% and 16.8% compared to the previous quarter, and the same quarter of 2009, respectively.

This lower profitability reflects a different development in the valuation of public sector bonds. Regarding provisions for loan losses, it increased in the second quarter of 2010 as a result of significant growth in the loan portfolio, both in the retail segment and in the small and medium sized companies' segment.

During the second quarter of 2010, net income from services totaled ARS249.4 million, implying a decrease of 5.4% compared to the previous quarter, while there was an increase of 14.1% compared to the quarter ending June 30th, 2009.

The decrease during the quarter is related, first, by an increase in expenditures for services following the launch of the Frances Go and LanPass programs. And second, by the new legislation that eliminates the collection of fees on payroll accounts. This was partially offset by the increase in income from credit cards due to higher activity level and greater fees related to foreign exchange activity.

Administrative expenses decreased 3.4% during the second quarter of 2010, and increased by 23.1% in the last 12 months. Compared to the previous quarter, the decrease was a result of lower personal expenses. During the first quarter of 2010, higher charges from voluntary retirements were registered.

The increase in general expenses during the quarter was caused by higher advertising and promotion expenses as a consequence of a more active Frances Go and LanPass campaign together with a higher charge in bank transaction tax due to the payment of cash dividends for the fiscal year 2009.

Personnel expenses increased compared to the same quarter of 2009, due to the labor agreement signed in 2010. General expenses also grew in the last 12 months as a consequence of an increase in commercial activity, a higher level of investment associated with changing the image of the branch offices and the effects of inflation.

Finally, a significant valuation in the provisions of income tax charge was registered mainly due to an assessment in the fiscal valuation of public bonds. As for the activity level, the private sector loan portfolio reached ARS11.6 billion at June 30th, 2010, increasing 12.2% and 15.1% compared with the previous quarter and with the same quarter of 2009 respectively.

Significant expansion during the quarter was driven by growth principally in the middle market segment where financing for foreign trade operations and other loans showed the best performance, while the growth in retail segment was lead by growth in credit cards, car loans and personal loans.

Private sector loans performance has affected an increase of 15.1% compared to the same quarter of 2009, mainly due to growth in the retail segment. Once again, credit cards, personal loans and car loans boosted the expansion. Advances, discount loans and other loans is the same in the middle market and corporate segment.

Regarding the public sector debt, during the second quarter of 2010, it maintained a similar level than in recent quarters. It's important to note that the relative weight of public asset is diminishing due to the increase in other assets, mainly the growth of loans to the private sector. In terms of liabilities, total deposits reached more than ARS20 billion as of June 30th, 2010, increasing 8.5% during the quarter, and 7.7% compared to the second quarter of 2009.

It's important to highlight that current account sheet balances include transitory deposits. Consequently, excluding such transitory funds deposits grew 6.6% during the second quarter and 15.8% in the last 12 months. Similarly, without considering transitory deposits, current accounts increased 24.2% during the last 12 months representing 56.2% of total deposits at the end of June 30th, 2010.

On the other hand, time deposits grew 6.3% and 7.4% compared with the previous quarter and with the same quarter a year ago respectively. Total shareholder equity of the bank totaled ARS2.8 million as of June 30th, 2010, whereas the access of capital over the Central Bank requirements was ARS1 billion. The capital ratios reached 16.9% of risk weighted assets as assumed for the period 2010. Well, thank you very much. We are now ready to answer your questions.

Ladies and gentlemen, our question and answer session is conducted electronically. (Operator Instructions). Our first question today comes from Ricky Sperber with Citi.

And I have two questions. My first question is on the coverage ratio of loan loss reserves to NPLs. We saw a significant increase in the coverage ratio this quarter to almost 400%. Why the need to increase this coverage ratio so much, given that the prospect for the Argentine economy looks better going forward? And would you expect to decrease that coverage going forward?

And the second question comes on loan growth. Well, what's your expectation now on loan growth for 2010, and if you can give us maybe an early guidance of loan growth for 2011, and in what segments is the bank looking to grow the most? Thank you.

Okay. First, regarding provisions, keep in mind that basically from all the stock of loan loss provisions we have, the vast majority of the total amount are generic provisions. So, in the way we compute these generic provisions, basically we don't control the amount. That is, if we grow in any -- in each specific kind of segment, we have to increase generic provisions just by growing, so corporate would be 1%.

In terms of local accounting regulations, we have to do 1% irrespective of the type of loan. According to international standards, we tend to go to more conservative levels of generic provisions for consumption loans, almost on the level of 2% to 3% depending on the product. That is, if we grow, we increase generic provisions, and given the fact that we have a very good asset quality, the coverage ratio ends up being what it is. So, in the end it's not a target for us. It's not a target in itself. We just have to comply with the regulations. So, that is the answer regarding provisions.

Loan growth, we have a very positive view of loan growth standing at mid year. As you can see, we went through a very, very positive second quarter. We have a clear indication that that's going to be the trend for the remaining part of the year, and we certainly hope to be growing probably at some level in the -- at some level close to the average of the first and second quarter of 2010.

By that, I mean that it's going to be better than the first quarter and probably not as good as the second one, but all in all, we expect to repeat in terms of semester. That's our expectation, and that is not an expectation that would earn us an increase in market share. That is I mean we believe this sector as a whole will continue a significant growth.

2011 is more difficult to say, because I think that at some point in time close to the end of 2010, we are going to face -- with this level of rates, we are going to face some -- we've been building loan portfolio growth thanks to a decrease in excess liquidity on the peso segment that we have built up during 2009.

So, that explains why we are growing loans faster than deposits right now. That cannot go on forever, because in the end we are going to get to our logical liquidity levels and we will have to converge in terms of speed of growth. So, in the end I believe that in 2011, the key issue is going to be deposit growth and not loan growth.

Okay, understood. Thank you. Just two follow-ups, just to make sure, on the first question on the coverage, so if I understand you correctly, you follow a little bit more stringent international standard for generic loans than your peers, and therefore your coverage will tend to be definitely higher than them.

Well, yes. I cannot assure you that regarding all our competitors. Obviously we are following, especially -- we are following international standards. Basically what BBVA has to face in Spain, we believe in countercyclical provisions.

Yes.

That implies that in loan growth processes such as -- especially on the consumption side, the key issue here is the consumption side.

Yes.

We are going to increase generic provisions in order to be able to dismantle them if the cycle changes. Yes, we do that.

Great, understood. And then on the second question, what specific products and what specific segments are you targeting in terms of loan growth?

Well, no specific target. Basically we are targeting each and every segment. Obviously in the last six months, we've been more successful on the mid market corporations, definitely especially on the peso segment. The dollar segment is very, very much inactive, in terms of lack of demand.

Yes.

And when we consider the retail side, we've been more aggressive as a whole on personal loans. That is the typical installment loan, credit cards, there's been a lot of long term financing going on in the credit card business. And then the car loan business has been growing a lot, in our case through our JVs with Renault and Peugeot.

Great, thank you.

We'll take our next question from Tito Labarta from Deutsche Bank.

Hi, good morning, just a couple of questions. First, just to follow up a little bit more on the provisions going forward, just wanted to get a sense in terms of -- so, do you expect then provisions to continue to grow, actually probably grow faster than loans or at least inline with loans going forward? Just wanted to get to a level of provisions that you expect to be recurring.

And what would be the target then that you have for your coverage ratio? And do you think that you could use some of these excess reserves to maybe offset provisions in the future or improve profitability? I just want to gets a little more color on that.

And then second question, just in terms of fee income, you saw a slight decline in the quarter, you mentioned partially due to some regulation and some marketing campaigns. I just want to get a sense of that, was that like a one time thing or what kind of growth you expect going forward in fees? Thank you.

Okay Tito, again, regarding provisions, we don't have a target, basically because we can't. Once we declare we have a policy, and the policy is local regulations regarding generic provisions. And when I say I don't have a target, it's that basically because we feel that we have very good levels of provisions. I don't have to make extra provisions beside the policy we already have.

So, what we have here is a system with two characteristics in our case, fast growth, and on the same side, very good asset quality. That means that your specific provisions do not need to grow, because you have a very good asset quality performance, and then you have growth. So, if I lend ARS100 in a corporate loan, I have to provision ARS1 in generic provisions. If that is a credit card, I will do somewhere between ARS2.5 and ARS3, and basically the same for a personal loan.

That's the policy because that's the policy in terms of local regulations and European regulations. If we decrease loan portfolio at some point in time, you're going to see those generic provisions going down, and you're going to see the coverage ratio going down. So, in that sense, what I mean is I don't have a target. It's going to be a dependent [viable], not an independent one, okay? Basically our target is more in terms of NPL ratio more than coverage ratio. So, that is provisions.

Fee income, two issues there. First one is the regulatory news, and all of them bad news, okay? Let me stress two of them -- well, the two that are really relevant. The first one is, there was at the beginning of the year, enforcement by the Central Bank of the elimination of a fee we were charging on checking accounts regarding to overdrafts. I don't want to be too technical here, but that implies a decrease in commissions in the order of ARS1.2 million per month, that is ARS3.6 million per quarter, first effect.

The second one is a new regulation, a new law passed by the congress, that implies that I cannot charge any transaction in saving accounts related to the payment of salaries. So, if you have an account, and you get your salary paid in that account, I cannot charge you an ATM transaction or a cash transaction at our branches. That implies an impact of ARS2.7 million approx per month starting May.

So, that's why we put the comment in our press release in the second quarter, because that is a more significant impact on the second quarter. That is not going to be a one shot effect, that's going to be obviously a continuous effect, because it's a new regulation. And obviously we are trying to find opportunities. We are doing a lot of research and doing a lot of analysis in terms of finding ways to compensate, but we are still -- that's a work in process. So far we've been hit by these two new regulations.

There is one more coming into the near future, which we still cannot assess precisely, in terms of caps on insurance rates, on grades related insurance coming up probably on the last quarter of the year. So, a lot of activity in terms of regulations, and obviously we are trying to discuss, trying to compensate, so a lot of thinking going on, but that's reality. And the second one, the second effect that we were mentioning was -- you were asking about fee regulations, and anything else? I don't recall the last part of your question.

The promotions.

Oh, promotions, sorry. Yes, in fees paid, we are including a couple of -- the cost of a couple of alliances we began during the last -- yes, the second quarter, more significantly our agreement with Time for Fun, and at the end of the quarter, the start of our new agreement with LAN, the regional airline. So, that's going to be a negative impact in terms of fees paid, and obviously we hope in the future of fees received too.

Okay, thank you.

(Operator Instructions). We'll go next to Federico Rey-Marino with Raymond James.

Hi, my question was on fee income, which has been already answered. Thank you.

(Operator Instructions). We'll go to Luis Guzman with Santander.

Hello, good morning, yes, this is Boris Molina from Luis's line. I just have a question regarding margins. Could you comment a little bit on how with this rebounding credit demand, is the competition intensifying on the corporate or in the consumer segment, and what is happening with lending rates and spreads and whether you consider there's going to be any pressure going forward?

Okay, good point, a lot of pressure going on. There's strong competition all over the place in terms of loan growth, and you can see -- I would say starting in May, you see a lot of pressure in terms of spreads. Let me give you two of the examples. Personal loans rates, new personal loans are right now four percentage points below April rates, from 28% to 24%, that's an average in the system.

[Vehicle] rates have not changed that far, because basically the change has been produced through the increase of promotions. So, your net rate decreases without changing the explicit rate. On the mid market, lending through checks, what we call discounted documents in technical jargon here in Argentina, which is a short term lending, the most typical operational short term lending, July rates were 11% for Banco Frances mid market. And those were probably more on the 14% level in the first quarter of the year.

We made sure corporate short term spreads in basis points, two digits thankfully. And on the dollar side, we are doing -- I mean large corporations operations on the level of 1% yearly rate in dollar lending 180 days. And for a mid market corporation, that would be on the level of 3%. That is producing for us an average of 2.4%, and that level was probably six months ago, 5%.

Okay, so we are -- basically we are feeling a lot of pressure in terms of financial margin. We are compensating with volume as everybody is, and here the key issue is scale. I think that that is going to produce a very tough time ahead for small and mid size banks, because if you're not able to compete with increased sale of operations in a clear way, you are going to feel this pressure together with all these kind of regulations on the fee side and on the other side, the cost side, the increase in promotions, the marketing efforts, all the advertising we have to make, and these other increases going on through the agreement with the union in last March.

So, that is same thing. That is producing for us a general picture of increase in general spreads. And so far, the response has been very clear for all large banks in terms of volume increase. We have to hope to continue on that trend.

Okay, thank you. But you're optimistic that the [orange line] profitability of the bank should improve going forward despite -- if we factor out all the securities gains that you had last year that are non-recurrent, this stronger volume growth should compensate for margin pressures or do you think [ROE] is going to remain relatively flat.

I think there is going to be a clear compensation, but it's going to give us a lot of hard work to keep the pace, because so far I don't think that's going to continue for a long time, but so far the pressure and spreads has been very, very significant. Obviously, loan growth has been the same.

We've been growing at levels of 25%, 30% per year in terms of annualized basis. So, that's very significant growth and we are very optimistic in that sense in the way our distribution network is working, but we are feeling the pressure on different lines of the P&L, so a lot of work to do there in terms of recovering efficiency.

Excellent. Thank you very much and congratulations for the good set of results.

Yes, thanks.

And Mr. Sandigliano, we have no other questions at this time. I'll turn it back to you for closing remarks.

Okay, well thanks again for joining us, and should you have any further questions, don't hesitate to contact us in our offices. Goodbye.

Ladies and gentlemen, thank you for your participation, this does conclude today's conference. Have a wonderful day.