Banco Bbva Argentina SA (BBAR) 2019 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 BBVA Argentina's 3Q '19 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 Argentina's annual report on Form 20-F for the fiscal year 2018 filed with the U.S. Securities and Exchange Commission.

Today with us, we have Mr. Ernesto Gallardo, CFO; Ms. Ines Lanusse, IRO; and Mr. Javier Kelly, Investor Relations Manager.

Ms. Lanusse, you may begin your conference.

Good morning, everyone, and thank you for joining us today for a discussion of our third quarter 2019 results.

Before we begin our formal remarks, allow me to remind you that certain statements made during the course of the discussion may contain forward-looking statements, which are based on management's current expectations and beliefs and are subject to a number of risk and uncertainties that could cause actual results to materially differ, including factors that may be beyond the company's control.

For a description of these risks, please refer to our filings with the SEC under the earnings release which are available at our new Investor Relations website, ir.bbva.com.ar.

Before I start commenting on the bank's financial results, let me also remind you that as of July 1, 2019, BBVA Argentina has started to consolidate its balance sheet line-by-line with the activities of PCA Finance, Rombo Compañia Financiera and Volkswagen Financial Services.

Prior to this change, the activity of these joint ventures were reflected under income from associates under the proportional consolidation method.

This change is attributed to the modification of the shareholders' agreement by which the bank acquires the power to run the activities of the 3 joint ventures.

Based on the above, the bank results should be considered on a consolidated basis.

Now I will comment on the bank's third quarter 2019 financial results.

BBVA Argentina third quarter 2019 net income totaled ARS 11.1 billion, 63.9% higher than the ARS 6.8 billion posted in the second quarter of 2019 and 264.8% higher than the ARS 3 billion posted a year ago, mainly based on the increase in net interest income and foreign exchange results.

The accumulated net income for the 9 months ended as of September 30, 2019, was ARS 23.9 billion, 253.3% higher than the same period of last year.

The bank presented an accumulated return on equity of 63.2% and a return on asset of 8%, proving the bank's earning potential.

If the Prisma effect is not taken into account, ROE and ROA would have been 58.8% and 7.4%, respectively.

Without taking into consideration the consolidation with PCA, Rombo and Volkswagen, operating income would have been ARS 10.1 billion, 14.8% higher than the previous quarter; and net income would have been ARS 10.7 billion, 58.3% higher than second quarter 2019.

It is worth mentioning that as of August 28, 2019, the national government extended the maturity for short-term notes, LETEs, LECAP, LECER and LELINK.

As of the third quarter of 2019, BBVA Argentina reports a portfolio of national security, subject to restructuring, for an amount of ARS 10 billion, which are priced at fair value through other comprehensive income, over which, a ARS 4.9 billion loss has been recognized as a consequence of changes in the contractual flow.

In the quarter, net interest income totaled ARS 15.6 billion, 19.8% higher than the result posted in the second quarter of 2019 and 129.2% higher than the result posted 1 year ago.

This performance can be traced to a 17.6% quarter-over-quarter increase in interest income and a 14.9% increase in interest expenses.

When excluding the joint venture consolidation, net interest income for the period would have amounted ARS 14.8 billion, growing 13.9% quarter-over-quarter and 118% year-over-year.

Within interest income, interest on loans increased 26.8% quarter-over-quarter and 63.6% year-over-year.

In third quarter 2019, interest on loans represented 56% of total interest income.

Net income from government securities increased 13.8 quarter-over-quarter due to the high mix volume and higher interest rates.

Compared to third quarter 2018, income from government securities increased 362.8%.

In third quarter 2019, interest on time deposits represented 77% of the bank's total interest expenses, increasing 11.5% in the quarter and 134.4% in the year.

In third quarter of 2019, net interest margin, including foreign exchange difference, was 25.6% higher than the 23.1% in the second quarter of 2019 and 15.6% as of the third quarter of 2018, supported by a greater contribution of the security portfolio and an improvement in the client rate spreads.

In the third quarter of 2019, net fee income was ARS 1.5 billion, 19.5% less than in the previous quarter.

We saw a good growth in fee charges driven by the repricing on fees and bundled services and increasing the volume of activity between accounts and an increase in the foreign currency transactions.

However, this good performance was offset by higher expenses and commissions paid mainly to debit and credit card issues with U.S. dollar components.

If we normalize the net fee income and we subtract from the second quarter 2019, the incentive we received from the credit card issues, and we included in the third quarter 2019, which is comparable with what happened in the third quarter 2018, we would have shown an increase of 33.2% quarter-over-quarter and 14% year-over-year.

Net income from financial instruments at fair value decreased sequentially, totaling ARS 1.4 billion vis-à-vis to ARS 2.1 billion in the prior quarter.

If we exclude the ARS 716 million dividend we received from our participation in Prisma, the bank would -- had reported a gain of ARS 33 million, increasing 2.4% in the quarter.

In the third quarter of 2019, FX gains, including foreign currency forwards transactions totaled ARS 3.8 billion, increasing 83.8% quarter-over-quarter.

This increase was mainly attributed to the Argentine peso depreciation and the long stop positive position BBVA Argentina had during the quarter.

Moving on to the expenses.

We experienced a sequential increase in the personnel and administrative expenses line.

During the third quarter of 2019, personnel and administrative expenses totaled ARS 7.1 billion, increasing 25.5% quarter-over-quarter and 64.1% year-over-year.

Personnel benefits increased 12.6% in the quarter, while administrative expenses increased 42.7% in the same period.

The increase in personnel benefits was mainly explained by mandatory salary increases agreed with the unions to adjust to the inflationary environment.

The increase in administrative expenses was mainly driven by the increment in armored transportation cost due to a higher amount of cash in transit.

As of September 2019, the accumulated efficiency ratio remains low, reaching 35.7% and improving for the 42 -- 47.2% posted in the third quarter of 2018.

BBVA Argentina's effective tax rate was 15%, lower than the 27% accumulated as of the second quarter of 2019, mainly caused by the incorporation of the tax inflation adjustment in the third quarter of 2019.

In terms of activity, the bank financing to the private sector totaled ARS 211.8 billion, increasing 14.7 quarter-over-quarter and 22.5 year-over-year.

It is important to mention that BBVA Argentina consolidated market share of the private sector loan as of September of 2019 reached 8.13%.

Private loans denominated in pesos grew 28.7% quarter-over-quarter and 36.2% in the year.

This was not the case for dollar-denominated loans, which decreased, both measured in pesos and in dollars.

Regarding the retail portfolio, including mortgages, pledge loans, personal loans and credit cards, pledge loans grew the most due to the consolidation with the associates.

Excluding pledge loans, credit cards increased the most, growing 11.6% quarter-over-quarter and 42.6% year-over-year.

Mortgage loans reflect the impact of rising inflation.

Commercial loans, including overdraft, documents and other loans increased 6.6% quarter-over-quarter and 11.6% year-over-year.

The line with the highest growth was overdraft, increasing 83.4% in the quarter and 7.2% in a yearly basis.

In the third quarter of 2019, gross loans-to-deposit ratio improved from 70 -- 67.5% in the second quarter to 78.2%.

Regarding exposure to the public sector, excluding Central Bank instruments, this quarter, BBVA Argentina reduced its exposure, measured as a percentage of total assets by 179 basis points.

In the quarter, our total exposure to the public sector was ARS 17.9 billion, down from ARS 24 billion in the prior quarter.

As of September 30, 2019, asset quality, measured as nonperforming loans over the total loans, reached 3.3 -- 3.31%, with a coverage ratio of 105.08%.

During the quarter, the provision of Molino Cañuelas increased to 75% from 50% in the previous quarter.

It is worth mentioning that Molino Cañuelas debt is still denominated in dollars.

On the funding side, private sector deposit in the third quarter 2019 totaled ARS 271.5 billion, down from 3 -- down 3.8% sequentially and 10.8% higher than in the third quarter 2018.

Private nonfinancial sector deposits in local currency were ARS 152.8 billion, increasing 3.2% quarter-over-quarter and 17.8% year-over-year.

This is mainly explained by an increase in checking account deposits, which was offset by the fall in time deposits.

Private nonfinancial sector deposits in foreign currency decreased, both measured in pesos and in dollars.

As of September 2019, BBVA's transactional accounts, including checking and saving accounts, represent 65.5% of total deposits.

BBVA Argentina consolidated market share over the private sector deposit as of September 2019 reached 7.14%.

In terms of capitalization, BBVA Argentina accounted an excess capital of ARS 26.6 billion, which represented a total regulatory capital ratio of 17.1% and a Tier 1 ratio of 16.4%.

The bank aim is to make the best use of this capital.

The bank liquidity ratio in pesos and in dollars remained healthy at 57.8% and 66.7% of the total deposits as of September 30, respectively.

Overall, despite the complex economic scenario in which the bank has been operating, the third quarter has been very positive, both for the great results obtained and for the balance sheet quality, which remains strong in terms of liquidity and capital and records one of the most stable NPLs ratio in the financial system.

This concludes our prepared remarks.

We will now take your questions.

Operator, please open the line for questions.

(Operator Instructions) The first question will come from Gabriel Nóbrega with Citibank.

It's already been 2 weeks since the administration won.

I know it's still a long shot until December, but maybe could you tell us what you are seeing?

And in practical terms, what do you -- are you expecting in terms of this new administration?

And if you are already seeing any impacts there directly to the banking sector?

And I'll make a second question afterwards.

Gabriel, thank you for your question and joining the call.

As you said at the beginning, it's early to say.

The administration yet has not disclosed that much information on how he's going to address the country going forward.

Regarding the bank, we have seen some extra deposit outflow in the system, in line with the system, much more, more than that.

And going forward, what we are projecting regarding loan growth, for the quarter, probably some decrease we're seeing for the fourth quarter of 2019, but deposits growing in the fourth quarter of 2019.

All right.

And just a follow-up here.

We have heard that maybe SME directed lending could come back.

Have you heard anything about this as well?

Nothing official.

Obviously, if you base in the past that you had some of SME credit orientation that happened in 12 years of administration.

It's something that could happen.

But we have no official information to confirm that, that is going to happen.

All right.

Perfect.

And as for my second question, it's actually on the impacts from the debt reprofiling.

We saw another one of your peers passing this impact through its P&L, specifically on the NII front.

However, when we looked at your results, and I understood you actually passed this through the other comprehensive income, which ended up affecting your equity and not your P&L and your bottom line.

So here, could you maybe just elaborate how you booked these results?

And how we should maybe look at these results and the impact from the debt reprofiling going forward, please?

Yes.

Okay.

As you mentioned, we -- the results from those securities basically is -- it's the administration of the excess liquidity the bank has, which is done by the asset and liability committee.

So that's why the effect, you see it under other comprehensive income.

From the total amount that was reprofiled, basically, you have ARS 731 million in LECAP, you have ARS 245 million in LETEs.

That was the only amount that if you wouldn't have had a reprofile, you would have been able to recognize that interest in the quarter.

And you have ARS 9 million of LELINK.

Since these securities are administered -- are dealed by the asset and liability committee, these securities are hold to maturity.

So what you're reflecting in the balance sheet in other comprehensive income is that decrease in the price.

But since you hold this equity till maturity, once you are able to get the interest, you're going to see that effect on the P&L.

All right.

So on the P&L, it should come on the NII front, right?

Exactly, on NII, once you -- the security matures, and we're able to collect the interest rate of those securities.

Obviously, if there's no default on those securities.

(Operator Instructions) The next question comes from Alonso Garcia with Crédit Suisse.

My first question is regarding the exposure to Central Bank instruments.

Given some comments made by the President and/or by the elected President Alberto Fernandez and/or by his advisers regarding the Leliqs, I mean, there is some uncertainty surrounding these instruments.

So I don't know if you have any sort of strategy here to reduce your exposure to these sort of instruments.

If that is the case, with which instruments you would replace in the Leliqs?

And what would be the sort of impact on profitability from switching out of Leliqs?

And my second question would be on asset quality.

I would like to hear if you can share what would be the -- what would have been the pro forma NPL ratio without considering the consolidation of the auto loan portfolios?

And what is the outlook ahead, considering the current outlook for GDP, inflation and interest rates?

Okay.

So regarding Leliqs, again, it's all comments that you're seeing in the press, and it's difficult to say what's going to happen.

Our position in Leliqs has decreased in the quarter as you can see in our press release.

Also, after the last implementation, where you can't use Leliqs as minimum cash requirements, that also makes our position in Leliq somehow reduced, and you're going to try to defend your margin by reducing the cost of funds.

So basically, that's a strategy.

It's early to say what the government is going to do with Leliq.

There's a lot of rumors, but nothing really official on what's going to happen with that.

The truth is, Leliq is the instrument the banks use to put the money we get from clients that are in time deposits.

So basically -- it's basically, we'll get the money from our clients, and we put them in Leliq.

So it's a decision on the government on what they want to do with that.

Regarding NPLs, the consolidation is on the NPL ratio.

The joint venture effect is only -- represents 4% to 5% of that NPL amount.

Probably it's more important to give you the NPL, excluding Molino Cañuelas, and Molino Cañuelas was -- as we mentioned in the premier -- in the remarks, it's a U.S. dollar debt.

So you would have an effect of that in the increase in NPLs, plus you provisioned the debt from 50% to 75%.

So basically, that's what happened and why NPLs increased that much.

But if you would take out the asset of Molino Cañuelas, NPL would have been 2.2%.

And your third question was more regarding the macro scenario, correct?

No, it was just on the outlook for asset quality, considering the current macro outlook, GDP, inflation and interest rates.

What do you expect for NPLs and provisions going forward based on that?

Probably, you will take provision of Molino Cañuelas up to 100% by the end of the year.

That's a possibility.

And nothing rather than the normal operation, and that's the main case that makes our NPL growth, in particular, because it's a U.S. dollar-denominated loan.

The next question comes from Carlos Gomez with HSBC.

First of all, thank you for giving us the information about inflation adjustment and how it affects your earnings and your equity.

That's quite useful.

In the earning deck, you have given us the result for the year.

Could you possibly give us the result in inflation-adjusted terms for each quarter so that we start to build our shares and to be prepared for the implementation next year?

Second, in terms of Molino Cañuelas, so can you confirm that you classified it as nonperforming in this quarter, but not before, or was in the second quarter that you started classifying in?

And finally, what other big NPLs do you think you might be seeing and in what sectors and where do you think the NPLs could peak?

Regarding inflation adjustment, we are providing the accumulated inflation of the balance sheet as of the 9 months.

Inflation adjustment should be applied as of January of next year.

So you're probably are going to see that disclosed quarter-by-quarter, once we start presenting the quarter results of 2020, where you will have to disclose the comparable for 2019.

Regarding -- your next question was more regarding NPLs.

We had it as NPL already as of the third quarter of last year.

We went gradually provisioning more.

But the main effect you have on NPLs of Molino Cañuelas, it has to do with that, that is a dollar-denominated debt.

So that makes increasing NPLs go higher.

Going forward, again, the main effect you have in NPLs was Molino Cañuelas, and you had some effects of a company from the white line that had a peso -- had a dollar loan and that was specified.

It's around ARS 500 million.

So it had this refinanced and moved into pesos.

And then there's no other particular case that should be worried about.

You had also some NPLs increasing because there are companies that have debt in other financial institutions.

So based on Central Bank's regulations, despite the company has no debt with us, we are obliged to provision those debts also.

So that also makes our provisions increase.

And what was the third question, Carlos?

Yes.

Whether you think the NPLs will peak?

We don't have right now a number with us, sorry.

It's something that we are now elaborating a little bit more careful because all the ratings for Argentina due to these country ceiling and then the rating that was changed by the different rating agencies is something that we are now elaborating.

But given the case that we are calculating or providing the IFRS 9 provisioning for the holding company.

We -- right now, we know that we are not going to have any problem in that sense because we have enough provisions right now, assuming the change of -- to IFRS 9. And on the other hand, we think that this is going to be the first implementation here in Argentina, then the first impact will be in capital and not in results.

Could you give an idea about the order of magnitude of IFRS 9?

Excuse me?

Could you give us an idea about how much we are talking about?

Is this 100 or 200 basis points in your Tier 1 capital or 300 or 400?

No, no, no.

We are not talking about nothing relevant, really.

Okay.

And it will be applied in January 2020?

Excuse me?

It will be applied in January of 2020?

Is that what you expect?

That will be the first moment, but again, due to the uncertainties that we have right now in front of us with a new government, we are not -- we don't know if, finally, the Central Bank will apply this because we are waiting for some layouts that they have to provide the different -- all the banks in order to be able to calculate and properly, the provisioning by IFRS 9. So we are expecting IFRS 9 in place in January this year -- well, next year.

(Operator Instructions) This concludes our question-and-answer section.

At this time, I would like to turn the floor back over to Ms. Lanusse for any closing remarks.

Thank you, operator, and thank you all for joining us today.

We appreciate your interest in our company.

We look forward to meeting you -- more of you over the upcoming months and providing financial and business update next quarter.

As usual, if you have any further questions, please do not hesitate to reach us, and we'll be happy to follow-up.

Thank you, and enjoy the rest of your day.

This thus concludes today's presentation.

You may disconnect your line at this time, and have a nice day.