Banco Bbva Argentina SA (BBAR) 2017 Q4 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 BBVA Francés 4Q '17 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. Diego Cesarini, Finance and Investor Relations Manager; and Mrs.

Cecilia Acuna, Head of Investor Relations.

Mrs.

Acuna, you may begin your conference.

Thank you.

Good morning, everyone.

As usual, we will start with a brief summary on the most important topics of the fourth quarter of 2017, and then we'll be open to questions.

I'd like to make a brief review on the macroeconomic environment.

Argentina's economy kept momentum over the third quarter of 2017 [with o went] 0.9% quarter-on-quarter.

The GDP had a 4.2% variation compared to the third quarter of 2016, driven by private investment and consumption.

Inflation for the fourth quarter was 6.1%, and thus, the CPI accumulated a 24.8% variation in the year.

By the end of December, the government announced a change in the inflation finance scheme.

As a consequence, the new inflation target for 2018 will be 15%, 10% in 2019 and 5% in 2020.

The peso depreciated 8.4% in the fourth quarter, driving the dollar from ARS 17.32 per dollar by the end of September to ARS 18.77 per dollar by the end of December, which means a devaluation of 18.4% in the year.

After October elections, the government proposed a structural reform agenda with a price in the midterm.

These reforms include the fiscal compact with the provinces and the change in taxation and social securities law.

Now let's turn into the bank performance.

BBVA Francés ended the year achieving the target set in terms of growth.

It increased its customer base both in the case of individuals and legal persons, and it also gained market share in terms of loans.

In the fourth quarter of the year, BBVA Francés reached a net income of ARS 1.4 billion, which means a 25.2% increase quarter-on-quarter and 144% increase compared to the same quarter of 2016, accumulating a gain of ARS 3.9 billion by the end of the year.

The bank's ROE was 18.2%, and the ROA was 2.1%.

Net financial income increased by 15.2% in the last quarter and 40.6% compared to the same (inaudible) 2016.

The quarterly variation is mainly due to a higher volume of intermediation with the private sector and to the increase of the bank's own funds, which was partially offset by higher financial expenses caused by an increase in the average rate of the proceeds arising from the monetary policy implemented by the Central Bank.

The net interest margin, excluding the results for foreign exchange difference, decreased 3 basis points in the quarter from 10.67% to 10.64% as a consequence of the higher pace of growth in the dollar activity, while the mean with foreign exchange difference, result grew 18 basis point to 12.89%.

The mean in pesos increased 20 basis points quarter-on-quarter.

Even though there was an increase in the liabilities rate, it was partially offset by a better funding mix, which is higher [weight of site account], in addition to the increase in the asset rights.

The mean in foreign currencies was up 52 basis points, mainly driven by a rise in the performance of the loan portfolio.

Net income from services rose 4.5% compared to the previous quarter and 51.6% compared to the same quarter of 2016.

The previous quarter includes recurrent annual income released over the quarter.

Without considering this effect, the variation was 14.8%.

Income grew 7.9% in the quarter, mainly due to the higher commission from credit cards and deposit accounts, where [outsee] expenditures increase at a pace of 11.9%.

Administrative expenses increased 11.7% in the last 3 months and 23.2% compared to the same quarter of 2016.

Personnel expenses increased 17.8% during the quarter, including higher charge as a result of applying a provision to write the value for the difference between the realization, 24.8%; and the higher inflation estimated in the labor agreement of 19.5%; and other compensation rate during the quarter.

Without considering that effect, the personnel expenses would have reduced to an increase of 4.7% end of the year.

On the other hand, general expenses increased 4% over the previous quarter and 25.5% compared to the same quarter of 2016.

The efficiency ratio in the quarter reached 16 -- 56.8%, showing a slight improvement compared to the previous quarter, driven by both higher income as well as higher restriction in expenses.

In connection to the activity level, the private sector loan portfolio amounted to ARS 128.3 billion, which means a rise both in the quarter and over the last 12 months, with variations reaching 18.7% and 66.4%, respectively.

As a result of the implemented growth strategy, the private loans market share, included the joint venture, grew 71 basis point over the year.

Such market share reached 8.3% at the end of December.

This dynamism in financial companies both in local and foreign currency should be highlighted.

Foreign trade operation advances, and discounted and purchases note were the lines with the highest increase.

But lease options and collateral lines also regained momentum.

In consumer loans, an increase in mortgages stands out, 45.5% in the quarter, as well as personal loans and car loans with growth 18.4% and 10%, respectively.

At the end of December, the asset quality ratio stood at 0.69% with (inaudible) ratio of 253.1%.

Because of this, at the end of December, it was 1.3%.

Total deposits amounted to ARS 164.1 billion, growing 18.5% and 34.4% during the quarter and in the last 12 month, respectively.

Over the year, [site] accounts rose 60.6%, and time deposits rose 25.1%.

Deposits in pesos grew 18.7% in the quarter and 33.1% in the year.

By the end of December, deposits in foreign currencies reached ARS 54.3 billion equal to $2.9 billion, accounting for 35.3% of the bank's total deposits.

BBVA Francés maintained adequate liquidity and solvency levels.

By the end of December, liquid assets accounted for 35.3% of the bank deposits.

The capital ratio reached 14.7%, with an excess of capital of ARS 12.4 billion, 79% over the minimum amount required.

Considering the conservation [background], the capital excess would amount to ARS 6.7 billion.

Thank you very much.

We are now ready to answer your questions.

(Operator Instructions) The first question is from Nicolas Riva of Citi.

I have 2 questions, the first one on credit quality.

We acknowledge that your current quality metrics remain very solid.

However, we did see a drop in the current ratio of the NPLs down to 253%.

So my question is if you plan to continue lowering your coverage ratio and maybe to converge to a coverage ratio that we see in some of your peers.

And then my second question is on net interest margins.

We saw that your net interest margin contracted during the quarter.

You explained in the press release that, that was driven by the [higher] mix of USD dollar loans.

My question is, as you grow faster in segments where traditionally you had a small operation, like for example, small or medium companies, if this should have an impact in your net interest margin for this year.

And what's your outlook for the NIM for this year?

Okay, Nicolas.

This is Diego.

Thank you for your question.

I will address the first one regarding credit quality.

As you mentioned, we have kept, during this quarter, very good asset quality.

We haven't seen any deterioration in how our customers are paying, but it is true that we have made some reversions on the generic provisions because we -- when we made the calculations to compare with IFRS 9, even if this year, it's not entering into our accounting.

We are comfortable with reducing somewhat our level of provisions.

In this quarter, this reversion was around ARS 100 million and/or ARS 120 million, and that is what took our level of coverage to ARS 250.

So we are not expecting next year that coverage ratio to deteriorate any further, maybe a little, but not to reach the level of our competitors.

Regarding your second question about NIM, as we explained in our press release, this was not a bad quarter even if rates on deposits went up.

And what we have seen is that our total NIM remains stable.

But when you look at that NIM in both currencies, it increased, like around 20 basis points in local currency and around 50 in FX.

For next year, we are expecting some decrease in these NIMs, but not as much as we expected maybe 6 months ago.

We are expecting probably a decrease around 40 or 50 basis points for the average of 2018, comparing to the average of 2017.

Regarding your question about SMEs, it is true that we are growing faster.

Maybe we were a little aggressive on prices during the third quarter of this year to catch up with volume.

But right now, we are increasing prices, and the portfolio reacted well.

We didn't lose share.

We even gained market share during the fourth quarter, and prices are in line with market.

So we are not expecting to have an impact on this issue.

As you know, during this 2018, the productive lines are going down, since the bank issued that regulation by the end of the year.

So that is good news for banks in Argentina, and that measure will probably help to keep margins stable.

(Operator Instructions) Our next question comes from Jorge Kuri of Morgan Stanley.

Could you help us with your outlook for credit growth this year?

You explain right now what your NIM expectations are.

And so when you put the 2 together, your growth guidance and your NIM expectation, where do you think your financial revenues will end up this year?

And can you just remind us -- my second question, can you remind us where the effective tax rate will end this year versus last year, please?

Okay.

Thank you, Jorge.

Regarding your first question about growth and NIMs.

What we're expecting for 2018 is our credit portfolio to grow at least 10 points above market.

We're expecting the loans in the financial system in Argentina to grow at least 34%, 35%.

And so we are expecting the bank to outpace the market and grow around 45%, 47%.

Seeing this margin stable or reducing a little, like I said before, we're expecting the net interest margin to grow around 40% for this year.

And regarding the tax effective rate, we are expecting that to be around 29% -- between 29% and 30% for this year.

All right.

And just -- sorry, if I may add a follow-up.

The 10% that you point above industry growth, can you give us a little bit more color on what specific products you think you can grow much faster?

And for how long can you do this, right?

I mean it's not a easy thing to grow significantly above the market for a sustainable period of time.

So is this is a catch-up in 2018 and we're done?

Or you think this could potentially be a multi-year issue?

And again, what specific products do you think are going to drive that?

Okay.

I will start for -- by the final part of your question.

We will not be done with what we will do in 2018.

Our intention is to be a bank of above 10% market share in a couple of years and to catch up with the leaders of these markets right now, who are Banco Galicia and Santander in terms of loans.

The products we are -- have been focusing are SMEs, first of all.

We -- historically, the bank had a very high participation in the upscale part of that segment.

And since the second half of this year, we have been refocusing and trying to make it better in the mid- and low part of the SMEs.

So we will keep pushing on those segments.

And then, of course, we will be -- we will keep being aggressive on mortgages.

This new product that the Argentinian financial system has developed this year is pushing very, very fast.

We have ended the year among the first banks in terms of monthly origination, so we intend to keep that position.

We think that within 2018, public sector banks will step -- I will not dare say that they will step aside, but they will have a less important participation in this market.

So private banks probably will have a bigger portion of this cake.

So we will keep being leaders in mortgages and, of course, in our car loans segment, where we have been leaders for many years and we have almost 20% of the market.

We think that there are a lot of opportunities in those markets because Argentinian car sales in the country have been going up.

Last year was probably the second best in our history, and there is a high chances that this year will be a record one.

So this market just finances 24%, 25% of new car sales.

And we think that, that percentage should go up.

So that means that the bank, along our joint ventures, will have a big opportunity in that segment.

And finally, we are trying to catch up with our personal and consumer lines, where we had been lagging behind for the last 2 or 3 years.

And since June, July, we have started to perform better, and we have regained almost 50 basis points.

And we have started the year in good shape, too.

So I think that those are the 4 main core lines where we intend to keep growing.

Our next question is from [Fernando Arez] (sic) [Fernando Suarez] of AR Partners.

My first question was related to why your personnel expenses went up in the quarter 19% and I mean -- there wasn't any agreement with a union.

Okay.

Well, Fernando, the personnel expenses were up 18%, as you said, during the last quarter.

And that was mainly because the agreement we had signed -- there is the same agreement that every bank in the -- in Argentina signed in -- last February, I guess, said that if inflation was above 19.5%, we had to pay the difference to our employees.

So that's what happened in the last quarter.

Inflation was finally 24.8%.

So that difference, that is around 530 basis points, we had to give that salary increase to our employees.

That is what is mainly reflected in that fourth quarter.

There were also some special expenses that banks also agreed with the unions, and in our case -- every bank pays them in the last quarter in December.

But in our case, we registered them in the fourth quarter.

Probably starting this year, we will distribute those expenses all along the year so they will not give this misinformation regarding how much expenses grew.

So I think that explains mostly the increase in those kind of expenses.

If you take those special cargos (sic) [charges] aside, our expenses just grew around 8%.

And you also asked me about this year negotiation, or I misunderstood?

No, no, no.

I -- my second question is more related to the net fee income, we've seen total annual net income growing 30%.

Clearly, you're starting to ramp up your special checking accounts, [just] new [with the] clients.

So those are starting to pay off, it seems to me.

And I would like to get some guidance from you (inaudible).

Okay.

Yes, it is true that fee incomes are growing fast.

They grew 52% comparing with fourth quarter of last year, and they grew 5% this last quarter.

But if you consider that in the -- during the third quarter, we have a special registration there of around ARS 150 million that was -- that were some incomes that we receive once a year from credit card companies.

Then the last quarter performance is even better.

We grew around 15% in the fourth quarter.

And the good news is that these excellent rates of growth do come without starting yet to get fees from our new customers.

We always say that starting in 2018, at some moment of 2018, we will start getting fees from all the new customers that we acquired during the last 2 years, 2.5 years, and that most of those customers enter the bank without paying fees for 2 years in most cases.

So those incomes will start to appear in our books starting the second half of next year.

So this increase that you are seeing right now is without them.

What we're seeing is that, for example, the deposit account fees are growing fast, around 60% on a yearly basis.

That is because increases in prices but also for new accounts.

We are seeing an excellent behavior in our credit card and debit card lines.

We are seeing there that we are gaining share in consumption.

Every quarter, we gain share.

Right now, our share stands around 12.8%.

That compares with 12.5% a quarter ago.

So the market is growing, but we are growing faster on the consumption of our credit cards.

We are also getting more fees on collection, on deposits -- sorry, on deposits of cash.

This is a problem that the bank had during the first and second quarter of last year, where we had higher expenses on higher balances on banknotes, and we decided to start getting more fees on companies that deposit cash in the bank.

So we are seeing there an increase of almost 100% comparing with last year.

So in general terms, we are seeing a very good performance in every fee line.

There's also, for example, commissions fees related to the operation in checks and documents that you see there in other piece.

And we expect all this behavior to go on, to keep on during the 2018 probably.

We are really confident that we will keep showing good percentage increases in these lines.

Great.

And my final question is related to the tax reform.

On top of what you have already mentioned, how the effect of tax rate, would you see -- do you see any other (inaudible) [difficulty] there?

Well, it's -- the main impact, of course, is regarding income tax.

That is being lowered from 35% to 30% in general terms, but there are also some other changes that will help us, but they are not so important in the short term.

For example, we will have a minimum not taxable regarding social contributions.

We will have a small decrease in that social contribution rate that we pay for, for the salaries of our employees.

There are also some changes in the debit and credit tax, which the bank pays in for their -- for the expenses.

But -- and finally, almost every province right now is discussing the new levels of the [janover] tax [they just approved those].

So we still don't have a precise amount of how much we are going to save in all of these reforms, but I would rather say that the impact is not so important during 2018.

It will be net-net even probably.

And -- but every year, the impact will be higher.

So probably by 2022, when all these changes will be complete, we will have a better result.

But we still don't have some details on how many of these reforms are going to be applied.

The next question comes from Rafael Frade of Bradesco.

Just to follow up on the fee income.

So could you walk us through what to expect over 2018?

So from what I understand, I would be expecting fourth quarter fees to come down, as you mentioned, because of these annual fees in the third quarter.

But in fact, it came very strong.

So it would be reasonable to expect more or less to keep this pace for the first and second quarter and then we could have a bigger impact for the second half given this [plan] that you mentioned.

So just to understand how we should think about it throughout the year.

Okay.

Well, in general terms, we're expecting fees to go up around 27% to 30% next year.

In the first quarter, we will have the impact of the decrease in the MDR fee, that will go down around 15 basis points.

So we -- you will see that in the -- from starting in January.

But also, there are good news because we are -- we have been renegotiating many of our alliances.

We spend part of the fees that we get from credit card consumption in giving benefits to our customers.

We have loyalty programs with LATAM, and we -- after last year decision of Central Bank to reduce the MDR fees, we -- every bank -- we started renegotiating our alliances.

And in our case, it was a more complex contract, and these renegotiations that took place in the second half of last year will start having the effect for the bank starting in January this year.

So we will see that the deterioration in fees has come from the decrease in the MDR fee, will be offset.

But our reduce in our -- decrease in our fee expenses regarding the benefits we offer our customers.

But leaving that apart, in the second semester as I said, probably you will start seeing additional revenues.

And I think that leaving that apart, I think that you will see -- we'll probably see a constant increase quarter-to-quarter in our fee expenses.

I don't think that with this increase that we saw during the last 2 quarters, we are done.

We will probably see a [tightening] increase in fees all along next year -- this year, sorry.

The next question is from Alonso Garcia of Crédit Suisse.

My first question is regarding the profits.

I mean, with loan growth this year around 45%, 47%, how much do you expect to grow deposits?

I mean, how much is the pressure at the system level in terms of funding right now?

And you have currently one of the lowest loan:deposit ratios in the system, so probably the pressure is lower for EBIT.

How much would you expect to grow deposits with this loan growth rate?

And if you have any kind of -- I mean maybe not target, but like a maximum level of loan deposit ratio that you would be willing to reach in the coming years.

And my second question is if you could provide some guidance in terms of OpEx growth for this year after the 32% -- 31%, 32% in 2017.

Okay.

Well, Alonso, thank you for your questions.

Regarding deposits, well, it is true that during last year, deposits grew much lower than the loans, in our case.

We also gained market share in deposits.

We grew 34%, I guess, in deposits, and the system grew 28%, if I'm not wrong.

So we use in the last year part of our cash and [in] liquidity.

We started last year with a high level of liquidity, and we used part of that to finance the extraordinary growth in loans.

What we are expecting for 2018, of course, it's a different year in which if we are growing 45% in loans, we should be able to grow at least 32%, 33% in deposits.

That is our expectation.

And the rest will be financed, of course, by equity, by income, and probably bank should be issuing some kind of bonds.

We have already done so in last December, we issued a small bond in the local market, and of course, we will be analyzing opportunities during this year.

Good news is that Central Bank started to lower interest rate, so there are more opportunities for deposits.

We have already seen that during the first 40 days of this year.

A lot of companies, insurance companies, mutual funds, have been more active on the deposit side, and we have been able to capture some funding that we were not -- we had not been able to capture last year.

So we are forecasting a better performance in wholesale segment, and -- but of course, for the bank, the crucial and core funding is the retail.

So we will be very active on our -- in our retail segment, and we have started the year with a good performance in our deposit growth there, and we will be focused on that.

We have a specific limit on that ratio, and of course, we're not willing to cross them.

So we will be very focused on growing in, as I said, in retail and wholesale markets.

Bank -- the bank has a very small participation in wholesale market, so we have plenty of room there to capture new customers.

And regarding your second question about expenses, what we are expecting is to grow at a couple of points above inflation.

We're expecting inflation to be around 18.5% for this year.

So what we mean is that we probably -- our expenses growth will be around 20%.

We have been working a lot last year in a lot of plans to cut expenses, and probably this year will be much better in terms of expenses growth related to inflation that the previous years were.

Perfect.

And just a last clarification on a previous answer.

You mentioned that with, again, loan growth of 45%, 47%, your financial income could grow around 40%.

Is that correct?

Yes, our net financial income should grow at around 40%, with loan portfolio growing at least 45%.

(Operator Instructions) There are no other questions at this time.

This concludes our question-and-answer section.

At this time, I would like to turn the floor back to Mrs.

Acuna for any closing remarks.

Okay.

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.