Banco Bbva Argentina SA (BBAR) 2019 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for waiting.

At this time, we would like to welcome everyone to BBVA Argentina's Fourth Quarter 2019 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; Mrs.

Ines Lanusse, IRO; and Mr. Javier Kelly, Investor Relations Manager.

Mr. Kelly, you may begin your conference.

Hello, everyone, and welcome to the BBVA Argentina earnings conference call for the discussion of our fourth 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 constitute forward-looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks 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 and our earnings release, which are available at our Investor Relations website ir.bbva.com.ar.

Now let me turn the call over to Ines.

Thank you, Javier.

And thank you all for joining us on our fourth quarter 2019 earnings conference call.

Let me start by recalling some landmarks we achieved during this year.

As a group, we reached a notable milestone of adopting a unique global identity, BBVA.

This new identity reflects one of the values of the group.

We are one team.

We'd emphasize the importance of employees and their commitment with the bank.

The purpose of BBVA remains focused on bringing the agent opportunity to everyone, helping our clients to achieve their life and business goals.

For the fifth consecutive year, BBVA Argentina remains the most recommended bank according to the study carried out by Ipsos Argentina which measures retail NPS, net promoter score, for the bank.

Also, the bank was able to conclude the cultural change that had been proposed to begin operating under the agile methodology, which allows to put the customer first and to solve their needs.

BBVA Argentina continues to be at the forefront using technology and data as the main management tool.

During 2019, we reached 2.65 million net active customers, up from 2.51 million a year ago.

This represents a 5.5% increase in our active customer client base.

The digital transformation process has continued to progress at a good pace, having reached a new record of 66% digital active clients as of December 2019 from 60% a year ago.

Similar, 54% of our customers interact with us through mobile phones versus 44% as of December 2018.

These KPIs continue to be an important driver for us during 2020.

2019 was a challenging year in which the volatility of the exchange rate and the acceleration of inflation motivated the execution of our restrictive monetary policy with high interest rates and its consequent impact on the economic activity.

In this context, the Argentine financial system has demonstrated its strength and resilience maintaining strong balance sheet, high solvency and liquidity ratios and NPLs under control.

It is worth recalling that there has been a significant outflow of U.S. dollar deposits after August 2019 primary without these generating any liquidity problem in the system and being able to satisfactorily meet all customer deposit demand.

Now I will start commenting on the bank's fourth quarter 2019 and full year financial highlights.

BBVA Argentina has been able to deliver very good results based on an appropriate business strategy with digital transformation and operational efficiency ascertained for pillars.

During 2019, we have been able to reach a record high net income, more than triple the result of the previous year, ASR 31.4 million (sic) [ASR 31.4 billion] versus ASR 9.7 million (sic) [ASR 9.7 billion] and reaching an average ROE of almost 61%.

BBVA Argentina's fourth quarter 2019 net income totaled ASR 7.4 billion, 153.5% higher than the ASR 2.9 billion posted a year ago and 33% lower than the ASR 11.1 billion posted last quarter, mainly explained by the improvement in loan losses allowances, mainly explained as a concept of our increase in Molca's provision from 75% to 100%, ASR 547 million, and by increasing of the operating expenses driven from the implementation of a one-time provision in fourth quarter 2019 of the efficiency plan the bank is already in carrying out BBVA Argentina 2019 results and we trace to the sale of the bank's participation in Prisma, the high interest rates from Central Bank notes where the bank excess liquidity was allocated and to the better funding mix, which allows the banks to protect the net interest margin.

Excluding Prisma sale that took place in the first quarter of 2019, ROE and ROA would have been 55.6% and 7.2%, respectively.

And the results for the 12 months ended in December 2019 would have been ASR 29 billion.

In the quarter, net interest income totaled ASR 16.8 billion, 7.8% higher than the result posted in the third quarter 2019 and 98.8% higher than the result posted 1 year ago.

This performance can be traced to a 4.2% quarter-over-quarter decrease in interest income, mainly explained by the contraction of government securities as a consequence of the monetary policy implemented by the government and a 20.4% saving in interest expenses and evidencing the ability of the bank to reduce the cost of funds.

In fourth quarter 2019, interest on loans represented 59% of total interest income and interest on time deposits represented 85% of the bank's total interest expenses.

In fourth quarter 2019, net fee income was ASR 1.6 billion, 4% higher than the previous quarter.

We saw an increase in credit card fees driven by the effect of year-end consumption and by the growth of fees income as a consequence of the increase of transactional activity.

However, this good performance was offset by higher expenses and commissions paid mainly to debit and credit card issuers and to customer acquisition expenses.

It is important to mention that through our campaign, BBVA Argentina registered more than 232,000 active clients during 2019 compared to more than 180,000 that had been acquired in 2018.

This represents a 28% increase based on acquisition strategy to acquire new customers through nontraditional channels and branches, sales force and call center.

Net income from financial instruments at fair value increased sequentially, totaling ASR 2.0 billion vis-à-vis, ASR 1.4 billion in the prior quarter.

The increase is a result of the uptake of Prisma valuation impacting in profit from private securities plus the impact of Prisma's put option valuation for an extra consideration of ASR 685 million.

In fourth quarter 2019, FX gains, including foreign currency forward transactions totaled ASR 2.6 billion, decreasing 31.3% quarter-over-quarter.

This is a consequence of the lower activity due to the regulatory change implemented to the exchange market.

Moving on to expenses.

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

During fourth quarter 2019, personnel and administrative expenses totaled ASR 7.9 billion increasing 11% quarter-over-quarter and 65.5% year-over-year.

Personnel benefits increased 13.2% in the quarter, while administrative expenses increased 8.7% in the same period.

The increase in personnel benefit was mainly explained by mandatory salary increases agreed with the unions to adjust to the inflationary environment and their compensation scheme.

Increasing administrative expenses was mainly driven by the expenses incurred in the modernization of equipment and branches and by the depreciation of the pesos.

As of December 2019, the accumulated efficiency ratio remained low reaching 37% and improving from the 48.9% posted in fourth quarter 2018.

During 2019, personnel expenses grew in line with inflation while administrative expenses grew above inflation explained by the increment in armored transportation and by the impact of peso depreciation in dollar-denominated expenses.

It is worth mentioning that other operational expenses reflect the onetime provision for ARS 2.1 billion for the process that bank decided to implement in order to achieve better efficiency and agility in the decision-making process.

BBVA Argentina effective tax rate was 12% lower than the 29% accumulated during 2018, mainly caused by the incorporation of the tax inflation adjustment in the third quarter of 2019.

In terms of activity, the bank's financing to the private sector totaled ASR 201.5 billion, decreasing 4.9% quarter-over-quarter and increasing 14.5% year-over-year.

BBVA Argentina consolidated market share over the private sector loan as of December 2019 reached 7.71%.

Private loans denominated in pesos grew 9.8% quarter-over-quarter and 43.6% in the year.

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

The dollar portfolio was prudently reduced in order to adjust our risk exposure combined with the lack of demand for U.S. dollar loans.

Regarding the retail portfolio, including mortgage loans, pledge loans, personal loans and credit cards, credit cards was the one that grew the most, 35.4%, quarter-over-quarter and 72.6% year-over-year, clearly outpassing inflation.

Our credit card financing market share increased 128 basis points to 12.19% from 10.91% a year ago.

Commercial loans include the overdrafts, documents, leasing and other loans contracted 21.5% quarter-over-quarter and 16% year-over-year, mainly explained by the prudential reduction of prefinancing and export financing lines in U.S. dollar notes that were turned into pesos.

In the fourth quarter 2019, gross loans-to-deposit ratio was 70.3% compared to 71.6% a year ago.

Regarding exposure to the public sector, excluding Central Bank instruments, this quarter, BBVA Argentina reduced its exposure, measured as a percentage of total assets to its lowest level in the last 2 years, reaching 3.7%.

In the quarter, our total exposure to the public sector excluding Central Bank notes was ASR 16.1 billion, down from ASR 17.9 billion in the prior quarter, which is mainly denominated in pesos or in U.S. dollar-linked security.

U.S. denominated notes latest represent less than 1% of the total security portfolio as of December 2019.

As of December 2019, asset quality, measured as a nonperforming loans over total loans, reached 3.57%, mainly due to the contraction of the loan portfolio.

Coverage ratio reached 113.04%.

During the quarter, the provision for Molino Cañuelas increased to 100% from 75% in the previous quarter representing ASR 547 million.

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

On the funding side, private sector deposits in the third quarter 2019 totaled, or in the fourth, ASR 294 billion, up 7.1% sequentially and 13.3% from the third quarter 2019.

Private sector deposits in local currency were ASR 175.1 billion, increasing 14.6% quarter-over-quarter and 21.9% year-over-year.

This is mainly explained by the increase in demand deposits, which offsets the fall in time deposits.

Private sector deposit in foreign currency decreased both measured in pesos and in dollars.

As of December 2019, BBVA's transactional accounts, including checking and saving accounts, represent 68.7% of the total deposits from 65.3% a year ago, evidencing the ability of the bank to improve the funding.

BBVA Argentina consolidated market share of the private sector deposits as of December 2019 reached 7.14%, flat when compared with the third quarter.

In terms of capitalization, BBVA Argentina accounted an excess capital of ASR 29 billion, which represents a total regulatory capital ratio of 17.8% and a Tier 1 ratio of 17.1%, the highest of the last 8 quarters.

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

The bank's liquidity ratio in pesos and dollars remained healthy at 61.9% and 82% of total deposits as of December 31, 2019.

Last, yesterday, February 18, 2020, BBVA Argentina had decided to schedule the annual ordinary and extraordinary shareholders' meeting for April 7, 2020, where a EUR 2.5 billion cash dividend distribution will be considered, corresponding to the partial write-off of the optional reserve funds for future profit distribution.

This distribution is subject to the Central Bank prior approval.

The aim of the bank is to protect the equity due to the uncertainty of the macroeconomic scenario and possible measures that could affect the capital ratio.

Overall, despite the complex economic scenario in which the bank has been operating, the fourth quarter has been very positive both for the great results obtained and for the balance sheet quality which remains in terms of the liquidity and capital and reports 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)

Our first question comes from Alonso Garcia with Crédit Suisse.

My first question is regarding the trade activity that you expect for this year, I mean, after trailing inflation significantly.

What should we expect in terms of creating growth during 2020 and what lines should drive this growth?

And my second question is on the evolution of expenses.

What should we expect in terms of OpEx growth this year?

Should we see an additional impact from this transformation and efficiency strategy?

Or should we start seeing the benefit of this strategy this year?

Please help us clarify that.

Let's talk first about the credit activity, what happened in the quarter.

As you know, quarter-over-quarter, it was a reduction of nearly 5 points due basically to the tragic reduction of U.S. dollar loans.

And obviously, because there is no loan demand in dollars.

If you would exclude the consolidate -- deconsolidation of Rombo in the fourth quarter, the contraction would have been only 1.6%.

In a year-on-year basis, the growth was 14.5%.

And if you had excluded the -- basically the consolidation of the 3 companies, the growth would have been 8.1%.

Again, that growth on a year-on-year basis was mainly driven by the credit card lines, which grows way above inflation, mortgages with the effect of the loans that are tied to the inflation.

And especially, it's offset by commercial loans that were reduced because of the less U.S. dollar loans.

Going forward, during January, numbers we have are, as of January, 2020, the bank has been growing in loans provider system.

Basically, the portfolio that is growing a little bit faster is commercial portfolio.

We are offering mainly peso loans.

And definitely, we are in a position that we would like to keep offering loans in dollars, but there is no demand.

So basically, that's what we're seeing.

Obviously, you have to take into consideration, January is seasonally low.

And also because of the macroeconomic scenario where things had still not been decided probably the credit activities sort of stopped.

For the year, we are expecting -- for 2020 we're expecting low loans to grow above inflation.

We are projecting an inflation for 2020, around 50%.

And let me add also that we are projecting deposit growing a little bit below inflation.

Regarding your expense question, as we mentioned, we did a one-time provision that affects other operating expenses.

That provision is in line with the digitalization transformation strategy, and we need the bank to adapt its organization and capture these advantages.

Just to give you an example.

We're in the process of mergering 5 branches, 2 in the city of Buenos Aires, 2 in the Buenos Aires province, 1 is Santiago del Estero in the coming months.

All of the 5 were rented.

Headquarters areas are also considering this strategy, and this will help improve our efficiency ratio, mainly coming from the digitalization transformation plan that goes along with a global strategy.

But regarding costs, the provision is a one-time that we implemented in the fourth quarter.

The implementation has already started and that effect we just had a one-time in the fourth quarter.

And deposit.

In fact we have...

Exactly.

In the -- during 2020, you should have a positive effect from this efficiency you will start doing -- or you already started doing.

The rest of the line, personnel expenses, probably growing a little bit below inflation definitely and administrative expenses the same.

Okay.

So overall, with this provision that you already made in 4Q, for this year, for 2020, we should see OpEx growth -- overall OpEx growth below inflation, definitely, right?

Yes because of the efficiency plan, you have already started to implement.

(Operator Instructions) Our next question comes from Gabriel Nobrega with Citibank.

We are already in the second month of the year.

The new administration has already been in the post for a few months.

So being that we have a much more clear picture than what we had in the past conference call, I would like to impose a question of -- taking into consideration what we've seen over the last 2 to 3 months, what do you believe are going to be the main challenges and the opportunities for the bank in -- during this year?

And I'll make a second question afterwards.

I would say that I take your point that the government has been in place for 2 months, but the scenario is still not clear.

The main point that needs to be clear out is the renegotiation of the debt.

And I think that's a trigger for them to be able to see how the government is going to continue managing the country in the coming months.

So I think we still are and we still have a high uncertainty on where the country is going.

Being that said, the bank, obviously, is going to protect its capital.

That's why the -- you can see that the proposal we did for dividend is -- the fair ratio is low compared to previous year, and basically is to protect the capital, engage new measures that arrive from the government.

We want to still have a higher buffer above the regulatory capital.

We're going to keep protecting liquidity.

And regarding activity, we will accompany the economic cycle.

As I was mentioning before, the reduction we did in U.S. dollar loan, which is a big portion of our -- was a big portion of our portfolio, in some part was proactive to protect the balance sheet, but also, we are not having demand for U.S. dollar loans.

Maybe let me add some ideas about this question.

After some months, we -- what we know right now is that these government and the Central Bank, both of them, they are keeping an open dialogue with the banking system.

This is pretty good for us -- precaution for the economy, for the society because we are in advance, analyzing and discussing some measures that they are thinking to take.

So we are extending.

We are, let's say, communicating all the impact that we see of each of the different measures they are trying or they are thinking to take.

So in that sense, let me also add that we have a huge reserve requirements right now in the -- for the banks.

So there is enough available space in some cases to reduce that research requirement to let the banks to manage the different measures -- measurement, sorry, that the government is taking right now in order to compensate, if there is a cost for the banks.

So in that sense, what we see -- we've seen right now -- until now is that the government is not taking, let's say, really strong measures that will put in danger or in risk the demand in activity.

So the good thing is an open dialogue with the system -- with the banking system and enough available space to be compensated for some of the measures that they are taking.

So this is good.

And in all the measurements, all the different new regulation they implemented in the last weeks, most of them or the majority is going to create a good environment for loan growth.

Even despite the negative -- we could think about it in the negative terms, the reduce in interest rates, the cutting rates.

On the other hand, we are managing the customer spread to deal with this reduction in interest rates.

So we think that we can manage this situation that we have right now after, as you mentioned before, a couple of months of this new government.

And if you allow me, just a follow-up here.

Do you believe that seeing that maybe the Central Bank isn't going to be -- isn't going to interfere as much as we might have thought couple of months back and it's willing to unpack to you guys or the banks as well promote this space where maybe banks will be able to lend again.

Do you believe that this is the main factor behind your guidance of loan growth coming in above inflation?

Or are you, in fact, maybe starting to see a bit more demand, especially on the retail side?

Well, what we think is -- well, 2 issues here.

We think that in the wholesale part of the portfolio, we have a starting point really low.

So we are expecting a clear recovery from that side of the loan portfolio.

In the retail side of the portfolio, we have 2 main, let's say, products, personal loans and credit card loans.

In the credit card loans, of course, there is some measures that the government has taken right now.

And we have seen a clear increase in that part of the portfolio.

That has been compensated.

Even if we receive a small interest rate, we are being -- we have the compensation coming from the reserve requirement.

So this is a good thing because we are -- we have seen right now an increase in that portfolio at all-in good interest rates considering the release of the reserve requirements.

So on the other hand, I'm sorry, I didn't understood properly your question related to the Central Bank.

Could you please elaborate a little bit more?

At the beginning you mentioned something about the Central Bank.

I was just wondering if -- with the Central Bank maybe being more willing to some talks with the banks and other players.

If you don't believe that there will be a higher interference, like the one we had in the previous administration when interest rates were capped, fee rates were capped as well.

Banks weren't able to distribute dividends.

Well, the Central Bank is intervening in the market, trying to create the conditions for strong growth.

But at the same time, as I mentioned before, they are keeping an open line in order to discuss with the banks every step they are thinking to take.

So what I feel and what I see is that this Central Bank is considering -- really they are considering the different impacts that can -- of the new regulation they are launching to the market.

So -- and they have been in the market, yes, on their -- under their responsibilities, mainly considering the interest rate movements and the cuts that they are doing.

So they know they are cutting rates.

But on the contrary, they are letting the banks with enough freedom to take their decisions in terms of pricing management.

So honestly, I think that before December, you could think about a tough -- or, let's say, more, more -- how can I say, strong or stronger measures that, for the time being, they are taking right now.

(Operator Instructions) And our next question will come from Carlos Gomez with HSBC.

Since there ain't so many, I'm going to ask 3, if you don't mind.

First, I'm surprised that you mentioned a 50% loan growth.

That seems way above where we are today.

And again, I understand the stimulative measures that the government wants to introduce.

But we wanted to clarify where -- I mean where exactly do you think that, that is going to be reflected and when?

Second, I would like you to comment about the tax rate for 2021.

You paid, as you mentioned, (inaudible) 12% last year.

We know that you have inflation accounting this year, but we would like to know where you expect your effective tax rate to be.

And finally, we would like to know if you expect your ROE to be above inflation this year?

And can you be reporting inflation on adjusted terms, so probably the result itself will be positive or negative depending on that?

Carlos, sorry, could you repeat the -- this is Ines.

Could you repeat the first question?

That was not clear enough.

Yes.

Can you give a bit more clarity as to why you expect loan growth to recover all the way to 50% and whether that should be more on wholesale or on retail?

Okay.

Yes, understood.

Yes.

Regarding loan growth, basically, we would be growing with consumption.

The government is implementing measures, this (foreign language) promoting consumption.

And we come from a very low starting point.

So the increase -- it's going to be very evident.

That's why we're projecting loan growth a little bit in line with inflation and deposits below inflation, and we are projecting an inflation of 50%, then we have to be -- see what the final inflation is.

Regarding tax rate, you should take into consideration that there was a new reglementation issued that for 2020, supposedly, the tax rate -- regulatory tax rate should be 25%.

That was stopped, and the regulatory tax rate should be 30%.

As a regulatory that you should consider for your model.

Going forward, what finally effective tax rate is, it's going to depend on the inflation that we are going to be applying to the balance sheet as inflation starts to occur.

Probably, you can take as a reference, the fourth quarter tax rate that you calculated in around 5%, if I'm not mistaken, 5%.

So just to clarify here.

Your tax will be applied on your gross income in nominal terms or in inflation-adjusted terms.

The 30% will apply to your inflation-adjusted earnings or to your nominal earnings?

To inflation-adjusted.

So it will be 30% of inflation-adjusted earnings?

You're going to have the -- if you see the P&L, after the results from the subsidiaries, there's going to be a new line called resultado por posicion monetaria, where you're going to apply the effects of inflation to your balance -- to your P&L.

And then you're going to calculate the income tax.

All right.

And in terms of your returns, above or below inflation for the year?

What?

Sorry.

Do you expect your returns -- I mean, given that we have such a sharp reduction in interest rates and presumably a contraction in margin, do you expect your return on equity to be above the level of inflation in 2020?

It's going to be difficult, and it's going to be difficult to say right now because -- well, the first point is, we don't know exactly where it's going to be inflation rate for the year.

But considering 50%, which is our expectation, I think it's difficult to say it right now because we are in the middle of a period where the government is changing every regulation.

So it will depend mainly also on the reserve requirements that if the Central Bank is going to change this, then we will have more opportunity to see a return on equity around inflation levels.

So my view right now is that it is going to be really difficult to have a return on equity above inflation rate.

It is the answer.

I'm sorry to insist.

If that is the case, if your return on equity is not above inflation, since you will be reporting in inflation-adjusted terms, that means that the bank may actually report a loss in inflation-adjusted terms.

Is that correct?

No, no, no.

We are not going to reflect losses.

In fact, we are expecting to not -- to have a positive result, even considering inflation adjustment.

So the idea is that it will depend on your equity, of course.

So you don't need to have a return on equity, let's say, below inflation.

But this doesn't mean that we are going to have loss instead of profit.

(Operator Instructions) As I'm showing no further questions, this will conclude our question-and-answer session.

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

Ines Lanusse for any closing remarks.

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

We appreciate your interest in the company.

We look forward to meeting more of you over the upcoming months and providing financial and business updates 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 the day.

Thank you.

This concludes today's presentation.

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