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Operator
Good morning, ladies and gentlemen, and thank you for waiting.
At this time, we would like to welcome everyone to BBVA Francés' 3Q '18 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 risks 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 2017, filed with the U.S. Securities and Exchange Commission.
Today with us, we have Mr. Ernesto Gallardo, CFO; and Mrs.
Cecilia Acuña, Head of Investor Relations.
Mrs.
Acuña, you may begin your conference.
Cecilia Acuña - IR
Thank you.
Good afternoon, everyone.
As usual, I will start with a brief summary on the most important topic of the third quarter of 2018, and then we'll be open to questions.
Now I'd like to make a brief review on the macroeconomic environment.
The agreement with International Monetary Fund in June did not restore confidence as expected and triggered a new round of capital outlook and further depreciation of the peso during the third quarter, which only [settled] down after a renewed commitment to perform greater risk assessment.
In this context, a new agreement with the IMF was reached, going from $50 billion to $56.7 billion.
The inflation target we planned was abandoned, and we placed a new monetary exchange system that seeks to keep the monetary base constant in nominal terms until June 2019.
Together within, the Central Bank continues to increase the cash reserve requirements up to [2.300] basis points in the third quarter of 2018.
[Good to] economic (inaudible) the demand for credit have plunged, but deposit maintain a good performance, although slowing the pace of growth.
Now I'd like to make a brief review on the bank's performance.
First of all, I'd like to remind you that since January 1, 2018, figures are reported in accordance with IFRS.
Having said this, in the third quarter of 2018, BBVA Francés reached a net income of ARS 3 billion, 41.6% and 117.7% higher than the net income registered in the previous quarter, and in the third quarter of 2017, in the last K, we stated for comparative purposes.
During the third quarter of 2018, the ROE reached 4%, and the ROA, 34.8%, compared to 3.5% and 26.4% published in the previous quarter, respectively.
Net operating income reached ARS 10 billion, increasing 27.2% compared to the previous quarter, and by 71.4% compared to the third quarter 2017.
As a clarification, a reclassification was performed during this quarter due to the change in the criteria regarding the deferral of credit card admission fee, which were previously recorded as net interest income and are now recorded as net fee income and other operating income.
Operating expenses reached ARS 6.2 billion, an increase of 18.7% compared to the previous quarter due to higher corporate expenses.
The efficiency ratio for the quarter reached 46.7%, showing an improvement around 281 basis points compared to the previous quarter, and 822 basis points compared to the third quarter 2017.
In connection to the activity level, at the end of September, the private sector loan portfolio totaled ARS 178.6 billion, increasing 10.2% during the quarter and 61.5% in the last 12 months.
As a clarification, as of the third quarter, both client financial services is not longer recorded on a consolidated basis.
Loans consolidated market share was 8.38%, showing an increase of 33 basis points in the last 12 months.
Credit growth was affected during the quarter by the devaluation of the peso and higher interest rate, resulting in a strong increase of loans in dollars, mainly due to restoration of the new value of the currency and a mild growth in pesos.
With regard to loans to individuals, credit card and personal loans recorded a positive performance, offsetting the slowdown in the demand for mortgages loans.
Commercial loan growth was mainly due to depreciation of the peso.
At the end of September, the asset quality ratio was 0.99% with recovery ratio of 220.5%.
The cost of risk reached 131.71%, 22 basis points above last quarter due to some deterioration, mainly on the retail portfolio.
The drought that affected the country during the first months of the year did not have a significant impact on the affected portfolio.
Total deposits reached ARS 247.2 billion at the end of September, increasing 28.2% compared to the previous quarter, and 90.5% compared with the third quarter of 2017.
Foreign currency deposits remained stable during the quarter, but the balance reflects the depreciation of the peso.
Local currency deposits increased 18.7%, mainly due to increases in saving accounts and current accounts with interest.
BBVA Francés continues to show an adequate level of solvencies.
At the end of September, the total capital ratio was 14.1%, 52 basis points lower than the ratio at June, mainly due to the higher risk-weighted assets, both denominated in foreign currency as a consequence of the devaluation of the peso.
The ratio Tier 1 was 12.9% [as intended].
Thank you very much.
We are now ready to answer your questions.
Operator
(Operator Instructions) Our first question comes from Alonso Garcia with Crédit Suisse.
Ricardo Alonso Garcia - Research Analyst
First of all, I would like to talk about margins.
We observed margins flattish versus the previous quarter despite much higher Central Bank rates versus second quarter, basically given the higher tax levels and deposit costs.
But what should we expect from current levels?
Do you think we can expect higher margins for the fourth quarter as loan yields catch up with the higher deposit costs on the back of repricing and also even higher Central Bank rates in the fourth quarter?
And also, if you have any preliminary expectations for next year?
Ernesto Ramón Gallardo Jimenez - CFO, Director of Finance & Planning and Head of Market Relations
We can expect similar level of margins for the fourth quarter.
It will depend on, of course, on the evolution of interest rates of the Central Bank, but we are expecting to maintain, more or less, the level that we have until the end of the year because we've never changed in that sense in the level of interest rates -- of peak in interest rates.
For the next year, we are expecting to have or to see a decrease in interest rates during the year, but it is something that will depend on many, many uncertainties that we have in front of us.
So the idea that we have is that we maintain at the beginning of the year at least the same kind of margins that we have in terms of client spreads.
Ricardo Alonso Garcia - Research Analyst
And when you say that you expect similar margins for the fourth quarter, are you considering like the all-in margin also considering results from valuation of securities that goes outside the NII?
Or you're only talking about NII?
Just to be sure.
Ernesto Ramón Gallardo Jimenez - CFO, Director of Finance & Planning and Head of Market Relations
I'm talking about the net interest income coming from everything that is included in the net interest income.
So I am talking also about the hard to collect and sell portfolio that we have in that part of the balance sheet, so considering the Central Bank assets.
That is the relationship -- you're talking about margins, so we're talking about how to tame liabilities in that sense.
If there is a kind of decrease, so -- a small decrease in interest rates, it will affect both liabilities and assets.
Ricardo Alonso Garcia - Research Analyst
Okay.
Great.
And regarding -- just last question regarding asset quality.
I wanted to check what segment is generating more pressure currently, and if you believe that cost of risk for this quarter should be seen at the peak?
Or when do you anticipate a stabilization in provisions?
Ernesto Ramón Gallardo Jimenez - CFO, Director of Finance & Planning and Head of Market Relations
In terms of cost of risk, I think that we can expect maybe a little bit higher for the next -- for the last quarter of the year.
But around the levels that we have -- I mean, we will be -- we will continue being one of the most conservative, let's say, or having one of the best cost of risk in the sector.
I think that due to the environment that we have, we could foresee a little bit higher number, but nothing to worry, really.
Cecilia Acuña - IR
Only 10% of our risk is cost of risk that we presented.
Ricardo Alonso Garcia - Research Analyst
Okay.
And which sector is causing more pressure right now?
Is it the retail segment?
Or are you seeing issues on the commercial side as well?
Ernesto Ramón Gallardo Jimenez - CFO, Director of Finance & Planning and Head of Market Relations
In the retail as well.
I mean, it's what we've seen.
The other thing is that you'll never know if you are going to have something specifically in the company.
But I think that is more in the retail portfolio.
Operator
Our next question comes from Gabriel Nóbrega with Citi.
Gabriel da Nóbrega - Research Analyst
I actually have a follow-up on this question on asset quality.
We are actually seeing that your NPLs are increasing, and I think it's very understandable due to the deteriorating macroeconomic situation.
But during the quarter, we saw that you increased well your provisions and you reached a really high cost of risk while still maintaining a very solid coverage ratio of around 220%.
And so my question is, what maybe are you seeing in terms of asset quality risks that are worrying you?
And why do you think you need to continue making such high provisions if you are already very well covered?
And I'll make a second question afterwards.
Cecilia Acuña - IR
Well, during the quarter, we increased, as you say, the provisions slightly because the retail segment and some companies that have problems, that was the reason of the increase.
And for the following quarter, we will see what will happen.
Gabriel?
Gabriel da Nóbrega - Research Analyst
All right.
Yes.
Okay.
And what I just want to understand, maybe if I try to rephrase this question, is that do you think that it is reasonable for your bank to continue on having a coverage ratio above 200%?
Cecilia Acuña - IR
Above?
It could be a little lower than that level.
Ernesto Ramón Gallardo Jimenez - CFO, Director of Finance & Planning and Head of Market Relations
We are not expecting to see in the last quarter of the year.
Even considering the circumstances or the environment that we have, we are not foreseeing a strong decrease on the coverage ratio.
We could have it.
We can -- we could have -- we could see a smaller number, the coverage ratio, but it should be close but to that number.
I mean, below that around 200% level, yes, should be.
Cecilia Acuña - IR
It's really that we have not implemented IFRS now, but we have a good level of provision if we need to implement it right now.
Gabriel da Nóbrega - Research Analyst
All right.
Perfectly understood.
And I have another question regarding your loan growth.
We see that it continues to be above inflation at around 60% year-over-year.
However, this continues to be mainly pushed by the dollar-denominated loans and the peso depreciation.
Despite this, we still saw that you were able to gain share.
And so what I would like to understand from you is if you want to continue on them growing and them gaining share?
Or are you beginning to invest all of these and lack of demand in credit into government securities?
Cecilia Acuña - IR
So we will -- we intend to continue.
We're gaining market share.
It's difficult in this environment.
But the idea of the bank is to close the gap with our competitors in terms of share, so we will continue with the plan.
Ernesto Ramón Gallardo Jimenez - CFO, Director of Finance & Planning and Head of Market Relations
Okay.
We are doing our business in a business as usual, let's say, model, being always conservative and prudent in our decisions.
But we are not -- we didn't close any, let's say, kind of activity.
And we are, let's say, we're growing with the economy.
And we grow with the activities that there is in the market.
So in that sense, if we can gain market share, we will do it.
The investments in the -- in other assets like Leliq or others, Central Bank assets, it's due to be new requirements of liquidity (inaudible) effective.
So I mean, the class requirements that we have coming from the Central Bank is what is behind the increase of this portfolio, but not because we don't -- let's say, we try to close the loans, portfolio or something like that and then to buy or to purchase Central Bank assets.
The other question, just coming back to the question about the coverage ratio.
I mean, the idea, again, we cannot say that we are not going to suffer above the coverage ratio due to the behavior of the portfolio.
We cannot foresee, let's say, a bad behavior for maybe a corporate or a company, no.
In that case, we could see some deterioration of the numbers.
But we think that we will maintain very well numbers of coverage ratio and cost of risk.
Operator
This concludes the question-and-answer section.
At this time, I would like to turn the floor back to Mrs.
Acuña for any closing remarks.
Cecilia Acuña - IR
Okay.
Thanks again for joining us.
And if you have any further questions, please contact us in our offices.
Thank you.
Operator
Thank you.
This concludes today's presentation.
You may disconnect your line at this time, and have a nice day.