Banco Bbva Argentina SA (BBAR) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to the BBVA Francés' Third Quarter 2017 Results Conference Call. We would like to inform you that this event is being recorded. (Operator Instructions) First of all, 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 under 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 BBVA Francés' Annual Report on Form 20-F for the fiscal year 2016 filed with the U.S. Securities and Exchange Commission.

Today with us, we have Mr. Ignacio Sanz, CFO; Mr. Diego Sasorini, Finance and Investor Relations manager; and Mrs. Cecilia Acuna, Head of Investor Relations. Mrs. Acuna, you may begin your conference.

Thank you. As usual, we will start with a brief summary on the most important topics of the third quarter of 2017, and then we'll be open to questions. I'd like to make a brief review on the macroeconomic environment. Argentina has commenced the fourth consecutive quarter of economic recovery. In terms of GDP, economy grew 2.7% during the second quarter compared to the same period of 2016 as the activity growth was mainly driven by investments and by consumption performance.

Inflation was 5.1% in the third quarter, thus the CPI accumulated 17.6% variation during the year. The Central Bank continued with its stringent monetary policy profile, raising the rate up till 28.75%. The peso depreciated 4.3% in the third quarter, closing at ARS 17.32 per U.S. dollar at the end of the period, (inaudible) and evaluation of 14.2% in the last 12 months. It is important to mention that on November, the Central Bank determined that the credit line for productive finance and financial inclusion will be applied until December 2019. The growth for next year will be a percentage of month-by-month financial private deposit in pesos at the end of November. According to the newest schedule, the growth for January 2018 will be 16.5% and will decrease 1.5% monthly until reaches 0% in December 2019.

Now let's turn into the bank performance. BBVA Francés continued with its growth plan, focusing on increasing its market share. In this sense, the bank has maintained its customer acquisition strategy through digital campaigns and by partners alliances and by resourcing its [prescience], based on not only in the retail banking segment, but also in the small- and medium-sized company segment. As a result, approximately 229,000 net consumer cash rates and 1,500 new companies were added during the year.

BBVA Francés reached net income of ARS 1.1 billion in the third quarter of 2017, accumulated a net profit of ARS 2.5 billion in the first 9 months of the year. The quarter result show a 25.7% increase in relation to the previous quarter, net of the effect of the income tax recorded in the third period, and a 21.6% rise compared to the same quarter of 2016.

The annualized ROE was 21.7%, while the ROA amounted to 2.5%. Net financial income grew 15.7% in the third quarter and 40% compared to the same quarter of 2016, mainly due to a higher volume of intermediation with a private sector and through the increase of [influence]. Moreover, the result of foreign exchange differences show a positive evolution, both in trading income as well as in recycled holdings. The net interest margin ratio by currency show a positive evolution, driven by a better funding mix on the local currency side and an improvement on the loan portfolio return on the foreign currency side. The total [mix of] 70 basis points due to the change in the mix with a higher contribution of the activity in dollars. It is important to mention that the bank continued working on the reduction of local currency, physical resellers helped our branches. During the quarter, [they] balanced at 12% versus the previous ones, which represents an average of 5% of total deposits.

Net income for services show a positive evolution, growing 31.1% and 20% compared to the previous quarter and the same quarter of 2016, respectively.

The quarter includes recurring annual income realized during the period. Disregarding such effects, devaluation amounts to 20.5%. Income grew 18.2% in the quarter, mainly due to higher commission for credit cards and the closing accounts, whereas expenditures increased up a slower [price] 6.3%. And [make up] of expenses increased 4.3% in the last 3 months and 33% in comparison with the same quarter of 2016.

General and personal expenses grew 2.5% over the previous quarter and 31% year-over-year. This period includes an ARS 80 million provision corresponding to personalized compensation agreement included in the banking agreement. Without such provision, expenditures would have fallen slightly during the quarter and increased 25% compared to the same period of 2016.

General expenses rose 6.5% over the previous quarter and 35.6% compared with the same quarter of 2016, mainly due to higher tax charges, amortization and rents arising from agreements renegotiations. This effect were partially offset by a reduction of the transport of fallible costs, which evidences the actions taken by the bank to control the expenditures. Consequently, the efficiency ratio improved by 850 basis points during the quarter to 57% as a result of both higher income and higher expenditures restraint.

In connection to the activity level. The private sector loan portfolio, net of over 9 operations, totaled ARS 108 billion, growing 20.8% during the quarter and 52.1% year-over-year. As a result of these performance, BBVA Francés' market share of private loans grew 47 basis points, reaching 8.1% at the end of September. The private loan growth was mainly driven by an increase in the commercial financing, both in local and foreign currency as well as in the consumption loans, mainly mortgages, personal loans and car loans. At the end of the third quarter, total NPL ratio fell to 0.7%, mainly due to the important growth of the loan portfolio, whereas the recovery ratio amounts to 271%. The cost of risk was 1.4%.

In terms of liabilities, total deposits reached ARS 129.9 million, growing 3.4% quarter-over-quarter and 41.4% year-over-year. On the peso deposit side, side deposits held 2.2% during the quarter, affected by higher foreign exchange purchases from customers during the pre-elections period, and grew 33.8% in the last 12 months, where finally profits grew 2.8% during the quarter and 3.9% year-over-year.

On the other side, foreign currency deposits grew 10.3% quarter-over-quarter and 111% year-over-year, representing 35% of the bank total deposits at the end of September. The bank's liquidity levels amount to 34.7%, thus showing a 700 basis point decrease with respect to the previous quarter as a result of the higher loan volume. In July 2017, BBVA Francés carried out a primary follow-on equity offering in Argentina and a growth issuance 76 million new ordinary shares. This resulted in an increase of approximately 400 basis points of the total capital ratio. And at the end of the third quarter, the capital ratio was 14.8%.

Finally, on August 10, 2017, BBVA Francés paid out ARS 111 million plus vigilance for the fiscal year 2016, equal to ARS 1.49 per share.

Thank you very much. We are now ready to answer your questions.

(Operator Instructions) The first question comes from the Gabriel Nóbrega with UBS.

We are beginning to see a turnaround in your operations. And I just want to get a bit more color on what strategies you have been doing that are proving to be successful. And what we should expect going forward as these strategies begin to materialize? And I'll make my second question after that.

Gabriel, thank you for your question. This is Diego Cesarini. Well, regarding our strategy, we'd been telling the market that we have decided to be more aggressive on growth. During the last 2 years, we have been growing significantly in the number of clients. But from the -- since the last quarter, that has shown also in the volume of our operations and loans. I think this is the result of a lot of things that the bank did, and they have matured. For example, we have reorganized our SMEs business, our division. We have -- we are more closer to the clients, we have more points of sale right now, and we have decided to be more aggressive on lower income SMEs. This is -- this activity has shown very good results during the last quarter, but we have also seen good results on mortgages and consumer loans, for example, and also dollar activity. We think this is sustainable. We are convinced that we have to be a more than 10% market share bank in a couple of years. So I think that you can expect this kind of behavior in the bank activity in the coming quarters, maybe not as high as this quarter because we gained almost 50 basis points of market share, but we think that we will be gaining market share in the coming quarters.

All right. And the second question, it's more of a follow-up as well. We saw in this quarter very strong loan growth. What should we be expecting for the fourth quarter? And also as we go into 2018, what are you probably seeing in terms of your [nominal] loan growth as well?

Okay. Well, we are planning to end the year with a growth of at least 55%. So I think that, that should probably mean that we are going to grow this quarter by around 13% or 14%, at least. For next year, we're expecting the market to grow at least 35%, and we want to outperform that market by at least 10%. So we are on the path of gaining market share again next year.

(Operator Instructions) The next question comes from Nicolas Riva with Citi.

My first question is going to be on credit quality. Credit quality remains very strong for Francés, and we saw a further improvement in the NPL ratio, down 20 basis points quarter-on-quarter. However, we noticed that you increased your loan loss duration. So I wanted to ask what was the reason for that increase? And if that means that you are expecting asset quality to kind of deteriorate down the road. And finally, your coverage ratio is 271% of NPLs, which is a very, very high level. What would be your optimal coverage ratio? And do you see room to increase this coverage to drive further (inaudible)?

Okay. Well, thank you, Nicholas. The main reason for NPLs going down and cost of risk going up is the growth in activity. That's just the reason. We haven't seen a deterioration of our portfolio, but the way we calculate the -- this cost of risk is dividing the -- our provisions on the average activity of the last year. So that's why the sudden increase in activity hits the -- this index the way it did, by going up. Regarding NPLs, that the same explanation. As our portfolio grew a lot during this quarter, the NPL goes down, and we have just shown more allowances because of volume. Those are generic provisions and not specific ones. We haven't seen any deterioration, as I said before, on our credit portfolio. Regarding coverage, the same explanation. That's just because of growth. And in the future, we expect -- as we expect on the whole system, as inflation goes down, you see a little bit deterioration on credit quality, but nothing that worries us. We are planning to have a cost of risk of around 1.5 or 1.6 in the middle term in 2019 or '20. That's not very above the level we are right now.

And then my second question on fee income. Because if you look at the breakdown between the gross fee income, then the fee expenses, we continue to see higher growth in the fee expenses line, up 46% year-on-year. And that's what's driving fee income growth below the pace of inflation. Can you discuss what's driving such a high growth in fee expenses? Is this expenses related to campaigns to attract the new clients? And also can you discuss which options you are taking to ensure that fee expenses grow at a more controlled pace?

Okay. I would split the answer in 2 because even if you see a high increase on a year-over-year level, when you look at the last quarter, the fee expenses grew considerably less than fee income. That's because we are keeping control on these expenses, and we plan to do so in the future. So what we are expecting for the fee life is this behavior to grow more on the income side than on the expenses side. With regarding the expenses, yes, they had to do with 2 things mainly. One of them is the cost of processing we pay to the companies that do the process of credit cards. Our level of consumption with our credit cards has been growing -- had been growing above the market. As we mentioned in the press release, we grew more or at least 9% this last quarter over the last quarter. And that's above the system. And so -- well, we do not manage that kind of cost. But on the other side, we are controlling expenses we make on the loyalty programs, probably you will see that on the first quarter of 2018, and we have been expending less on promotions, as I think that every bank in the system has been doing during the last couple of quarters. We -- fee incomes is one of the lines that we expect to perform well during the next quarters and next year.

(Operator Instructions) This concludes the question-and-answer session. At this time I would like to turn the floor back to Mrs. Acuña for any closing -- oh, it looks like we have more questions here. The next question comes from Martin [Gennouis] from Millennium.

A few follow-ups from me. You said that cost of risk will be around 1.5% in '19 and '20. What about next year? What do you think about next year?

Yes, I say 1.5%, and not 2.5%. I don't know if I (inaudible).

1.5%, yes. Sorry, 1.5%. What about 2018?

Okay. So for next year, we are expecting the level between 1.4% and 1.5%.

Okay. And can you comment on the net interest margin as well as fee growth for next year? Because some banks are saying that net interest margins should stay flat -- average net interest margins for next year should stay flat versus this year, others say there could be some contraction or there could be expansion. What do you think?

Well, a quarter ago, we were expecting a little contraction. We were talking about 100 basis points. But seeing the things that have been happening in Argentina, Central Bank increasing the level of interest rates. And recently, the communication that said that we are not going to comply with the productive lines anymore from last quarter of next year, and on the level of compliance, we'll be decreasing on a monthly basis. We are expecting now [a means] to be flat or maybe that -- even they could go highly up comparing with the last quarter of this year.

Okay. And quickly on this last quarter, it's still a little bit difficult to interpret it because you had a higher tax rate, around 40%. What was driving that? And what should we expect going forward? Should it be 35% going forward? Or should it still be higher than 35%?

Yes. There are always some explanations for -- in every quarter when we are above or below the 35% level, sometimes they have to do with provisions, sometimes they have to do with, for example, the behavior of some bonds that we have in our portfolio, like Bogar 20. But in the future, you can expect a level of -- an average level of around 35%.

Okay. So bringing all of that together, I mean,, what is the clean net income run rate at the moment? And what do you expect for next quarter and next year? Because if you take out that, if you normalize the effect of the tax rate, and then you take out the ARS 80 million provisions you did in personal expenses and you normalize the cost of risk, given how high your coverage is, it seems that Q3 would have been closer to maybe ARS 1.3 billion than ARS 1.1 billion. And what does that mean going forward, given your loan growth expectations and NIM expectations? And for next year as well, if you could comment please.

Okay. For next quarter, we're expecting net fee income to grow at approximately 15%. The level of -- we will -- our idea is to keep growing on loans, probably provisions would still be high. But for next year, we are expecting ROE of approximately 21%, 22%. That's taking in account that our equity will be adjusted by IFRS by around ARS 4.5 billion. But we think that the level of income of the bank still is not at the level that it is our potential level. And we -- probably we will see in the coming quarters that we are targeting that level. Relating to the expenses that you mentioned with those ARS 80 million, they will -- those will also be present in the fourth quarter because what we did is to split the total cost in 2 quarters. So those ARS 80 million will be also be present in the fourth quarter.

Okay. And what fee income growth -- net fee income growth do you expect next year?

We are expecting a level of around between 25% and 30%.

But still below inflation and below loan growth?

Below loan growth, but above the level of inflation, which we are forecasting at around 16%.

And operating expenses? I mean, you've done quite well last quarter in terms of expenses, what operating expenses growth do you expect for next year?

We are forecasting a level of around -- between 16% and 18%, depending, of course, on the level of the wages that the U.S. are going to renegotiate.

Great. And when you said -- this is the final question for me. When you said Q4 net income will be up 15%, do you mean year-on-year? On Q-on-Q? Or what did you mean?

Q-on-Q. Year-over-year will be much higher because the last Q of last year was not a very strong figure.

(Operator Instructions) The next question comes from [David Lewis] with LGM.

Just a very quick question. On the mortgage growth that you saw this quarter, it was extremely strong, and we've seen the public sector banks offering subsidized mortgages. Just wanted to see how [clear you had to be] on prices to grow your mortgage equity?

Thank you. Well, we agree that the public sector bank are making subsidized loans. That worries us. We think that the level of prices should be at least 200 or 250 basis points above the level we are selling those products right now. We think that these prices will go up because we want this activity to be sustainable in the future. And we -- of course, we are not funding this activity with (inaudible) or inflation-adjusted liabilities right now, but we plan to do that in the future. And for doing so, we need prices of the -- on the assets to be higher than the ones that we are seeing right now. I think we are just on the early stages of this product. Maybe public sector bank prices were affected by the electionary process, but we are forecasting that these prices will go up in the coming quarter.

So were the rates you were offering, were they competitive with the public sector banks?

Right now, we're -- our portfolio is being originated with a rate of around 5.8 above inflation. If you compare that with Bánco Nación rates, which are at around 3.5, well that's above the public sector bank levels, but still, it's not enough.

Okay, great. And just on the cost of income ratio, you've done a good job of bringing it down over the last few quarters. I mean, what is the target? And when do you think you can get to below ARS 0.50?

Yes, probably -- for next year, we are targeting a level in the low 50s, probably around 20 -- ARS 0.52 or ARS 0.53. In the future, in 2019 and '20, probably, we are targeting a level below that probably at around ARS 0.50 or even slightly below. For this last quarter specifically, there are some issues that -- as I said before, one of them regarding this kind of expenses about personnel that probably will keep it still high in the high 50s.

(Operator Instructions) This concludes the question-and-answer section. At this time, I would like to turn the floor back over to Mrs. Acuna for any closing remarks.

Thank you. Thanks, again, for joining us, and if you have any further questions, please contact us in our offices.

Thank you. This concludes today's presentation. You may disconnect your line at this time, and have a nice day.

Thank you.

Thank you.

Thank you