Banco BBVA Argentina S.A. (NYSE:BBAR) Q3 2020 Results Conference Call November 25, 2020 10:00 AM ET
Ernesto Gallardo – CFO
Ines Lanusse – IRO
Javier Kelly – IRM
Conference Call Participants
Gabriel Nobrega – Citi
Alejandra Aranda – Itau
Carlos Gomez – HSBC
Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to BBVA Argentina’s Third Quarter 2020 Results Conference Call. We would like to inform you that this event is being recorded and all participants will be in listen-only mode during the Company’s presentation. After company remarks are completed, there will be a question and answer section. At that time further instructions will be given. [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 the BBVA Argentina’s annual report on Form 20-F for the fiscal year 2019 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. Mr. Kelly, you may begin your conference.
Hello everyone, and welcome to the BBVA Argentina earnings conference call for the discussion of our third quarter 2020 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.
Speaking today will be Ines Lanusse, also joining us today is Ernesto Gallardo our Chief Financial Officer, who will be available for the Q&A session. Please note that starting January first 2020, as per Central Bank regulation, we have begun reporting results applying hyperinflation accounting in accordance with IFRS Rule IAS 29. For ease of comparability, figures for all quarters of 2019 have been restated applying IAS 29 to reflect the accumulated effect of the inflation adjustment for each period through September 30, 2020.
Now, let me turn the call over to Ines
Thanks you Javier, and thank all of you for joining us on our third quarter 2020 earnings conference call. We hope you and your beloved ones are healthy and safe on these challenging times. From the beginning of the pandemic, BBVA Argentina has prioritized its clients’ and employees’ safety, both in central offices as in the branch network. The Bank has provided its clients, through its traditional and digital channels, not only its wide range of products but also all possible support that has surged through the health emergency regulation implemented by the Argentine Government.
Regarding digital transformation, the penetration of digital clients reached 71% from 69% and the penetration of mobile clients reached 59% from 57% in the prior quarter. Moreover, digital branches have been launched in October 2020 combining several features between human capital and structure facilities to promote client self-service, aiming to digitalize and migrate clients to remote channels.
In terms of responsible banking, BBVA Argentina keeps working towards its sustainability model, supporting responsible business actions regarding inclusion, financial education and environmental protection, as part of its compromise with the country.
Meanwhile, the Bank closely monitors the impact of the pandemic over its business, financial conditions and operating results, in the aim of anticipating possible actions to optimize value for its shareholders, as it keeps the solidity it has wisely developed, for as long as the volatility and uncertainty as seen during 2020 remains.
I will now comment on the Bank’s third quarter 2020 financial results. All figures mentioned hereinafter are measured in current currency at the end of the reporting period, including the corresponding financial figures for previous periods provided for comparative purposes, unless otherwise noted.
BBVA Argentina’s third quarter 2020 net income; including inflation adjustment effects; totaled ARS2.83 billion, 2.9% higher than the ARS2.75 billion posted a quarter ago, and 65.4% lower than the ARS8.19 billion posted a year ago. The Quarter-over-Quarter increase is mainly explained by a lower income tax derived from a reduced taxable base, additional to temporary differences between fiscal and accounting inflation adjustment regulations.
The year-over-year decrease is partially explained by the impact of the pandemic and by the sharp contraction of the interest rates as a consequence of the monetary policy implemented by the government during 2020.
In the third quarter, net income from write-down of assets at amortized cost and at fair value through other comprehensive income reflects a loss of ARS4 billion, 79.3% greater than that recorded in the prior quarter. 72% of the result in this line is mainly explained by the accumulated inflation adjustment in other comprehensive income of the remaining position in U.S. dollar linked notes LELINK, which the Bank exchanged in the voluntary swap offered by the National Treasury on July 17, 2020.
In the quarter, net interest income totaled ARS16.6 billion, 2.6% lower than the result posted in the second quarter of 2020 and 25.6% lower than the result posted a year ago. This decline is mainly explained by an increase in the average minimum rate of time deposits and of interest-bearing checking accounts, in addition to a shift in deposit mix from sight deposits to time deposits, all of this which offsets the greater income derived from a higher position in Central Bank LELIQs.
Income from government securities increased by 34.1% compared to second quarter of 2020, and fell 38.4% compared to third quarter of 2019. This sequential increase is explained by an increase in the LELIQ position, as a consequence of an increment in time deposits, combined with Central Bank regulation that enables a higher excess LELIQ position in line with what was granted in time deposits at minimum rate.
Interest income from loans and other financing totaled ARS14.8 billion, decreasing 3.3% quarter over quarter. This is mainly explained by the contraction in overdrafts, a direct consequence of the economic situation, partially offset by the pick-up in credit card transactions and loans to the pre-financing and financing of exports mainly in pesos.
In third quarter of 2020, interest from time deposits represented 86.4% of the Bank’s total interest expense, increasing 48.5% in the quarter. Net fee income amounted to ARS3 billion, 10.2% lower quarter-over-quarter. This contraction is explained by fees from credit card consumption received during the second quarter, and in a lower extent, by the slight pick-up in expenses as a consequence of a surge in activity.
If fees from credit card consumption received in the second quarter were excluded, net fee income in the third quarter would have increased 27.7% quarter over quarter. Net income from financial instruments at fair value totaled ARS886 million, decreasing 34.8% quarter over quarter. This is explained by the lower volume in income from government securities, explained by the reduction of exposure to LELIQs during the last months of the quarter.
In third quarter of 2020, FX gains, including foreign currency forward transactions, totaled ARS1.6 billion increasing 0.5% quarter over quarter, due to an increase in results from purchase-and-sale of foreign currency, derived from a surge in activity.
Moving on to expenses, during third quarter of 2020, personnel and administrative expenses totaled ARS8.9 billion, increasing 6.5% quarter-over-quarter and decreasing 12.1% year-over-year.
Personnel benefits expanded 7.3% in the quarter, reaching ARS4.6 billion. This increase is mainly due to an increment in salaries, as a consequence of a collective bargaining agreement with labor unions on July 16, 2020.
Administrative expenses grew 5.7% in the quarter, mainly explained by an increment in armored transportation services, derived from a surge in activity and increased FX market restrictions enforced in September, partially offset by savings in administrative services and rentals.
The accumulated efficiency ratio as of third quarter of 2020 was 58%, above the 54.7% and the 43.9% reported in second quarter of 2020 and in third quarter of 2019 respectively. The increase is explained by a higher percentage increment of the expenses than the income, which has been mainly affected by the increase in financial expenses.
Excluding inflation adjustments included in the lines income from the monetary position and net income from write-down of assets at amortized cost and at fair value through OCI, the accumulated efficiency ratio as of third quarter of 2020 would reach 46.2%.
In third quarter of 2020, other operating expenses contracted 11.2% quarter-over-quarter, due to a reduction in Turnover tax, for the recognition of an advanced payment of this tax for 2021 in the City of Buenos Aires. On the other hand, there is also a reduction in other operating expenses as a consequence of the release of legal provisions.
In terms of activity, the Bank’s financing to the private sector totaled ARS258.6 billion, decreasing 4.1% quarter-over-quarter, and decreasing 10.6% year-over-year, both real terms. BBVA Argentina consolidated market share over the private sector loans as of September 2020 reached 8.25% from 8.13% in third quarter of 2019.
Loans to the private sector in pesos remained flat quarter-over-quarter and increased 12% in the year. Dollar-denominated loans decreased 22.8% quarter-over-quarter measured in pesos and 29.3% measured in dollars, mainly driven by the contraction in demand of loans in foreign currency.
Regarding the retail portfolio including mortgage, pledge, consumer and credit card loans, these have increased 7.3% quarter over quarter and fell 1.5% year-over-year. In the quarter, the greatest increases are reflected in pledge loans and credit card loans, the latter boosted by Ahora 12 and Ahora 18 programs.
Commercial loans including overdrafts, discounted instruments, leasing, foreign trade, and other loans fell 15.3% quarter over quarter and 19.9% year-over-year. The quarterly decrease is mainly explained by a 41% decline in overdrafts, and a 27.6% decline in loans for the prefinancing and financing of exports. This was partially offset by a 15.7% increase in discounted instruments, and a 2.2% increase in company loans.
As of September 30, the Bank has granted ARS47.6 billion in COVID 19 support credit lines. In the third quarter of 2020 gross loans-to-deposits ratio was 66% compared to 79% a year ago. As of September 2020, asset quality, measured as total non-performing portfolio over total portfolio, reached 1.16%, the lowest in the last 12 months.
This ratio was positively affected by the temporary flexibility in BCRA regulation regarding debtor classification during the COVID-19 pandemic, which extends grace periods in 60 days before a loan is classified as non-performing, and suspends the mandatory reclassification of clients that have an irregular performance with other institutions but a regular performance with the Bank. These waivers are in effect until December 31, 2020.
The coverage ratio allowances total non-performing portfolio increased to 355.26% in third quarter of 2020, from 269.38% in second quarter of 2020. This is explained by a decrease in non-performing loans, which is greater than the increase in allowances as a consequence of the implementation of impairment models, and the continuing effect of waivers enforced though BCRA regulation regarding debtor classification.
Cost of risk loan loss allowances average total loans reached 1.37%, lower than the 4.27% recorded in second quarter of 2020. This is mainly explained by an adequate evolution in credit quality, especially in the commercial portfolio.
Allowances for the bank in third quarter of 2020 reflect expected losses driven by the adoption of the IFRS 9 standards as of January 1, 2020, except for debt instruments issued by the nonfinancial government sector which were temporarily excluded from the scope of such standard.
In the third quarter, exposure to the public sector excluding Central Bank instruments measured as a percentage of total assets reached 4.3%, above the 3.3% recorded the prior quarter. Our total exposure to the public sector excluding Central Bank notes was ARS25.1 billion, above the ARS19.2 billion in the prior quarter.
It is worth noting that on July 17th, the Bank participated in the voluntary swap offered by the National Treasury, and swapped its remaining position in Sovereign U.S. dollar linked notes LELINK in exchange of a bundle of sovereign bonds in pesos adjusted by inflation BONCER maturing in 2023 and 2024. This left the Bank portfolio virtually free of U.S. dollar and U.S. dollar link denominated securities.
On the funding side, private sector deposits in the third quarter of 2020 totaled ARS393 billion, remaining flat quarter over quarter, and growing 6% when compared with the third quarter of 2019.
Private sector deposits in local currency were ARS279 billion, increasing 2.2% quarter over quarter and 33.8% year-over-year. This is mainly explained by the strong growth in time deposits, especially of Investment accounts, and to a lesser extent, by the growth in checking accounts.
Private sector deposits in foreign currency decreased both measured in pesos and in dollars. Towards the end of the quarter, U.S. dollar deposit withdrawal increased as a consequence of the enhanced restrictions over the FX market. After operability was reestablished under new Central Bank regulations, foreign currency deposit withdrawal slowed down, returning to levels observed during previous months.
As of September 2020, BBVA’s transactional deposits including checking and saving accounts represented 63.1% of total deposits from 66.4% a year ago. BBVA Argentina consolidated market share on private sector deposits as of September 2020 reached 6.48%.
In terms of capitalization, BBVA Argentina continues to show strong solvency indicators, accounting an excess capital of ARS61.9 billion, entailing a total regulatory capital ratio of 23.3% and a Tier 1 ratio of 22.6%. 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 58.1% and 86% of total deposit as of September 30 respectively.
Last but not least, on November 20, the General Extraordinary Shareholders Meeting approved the distribution of a complementary cash dividend for the sum of ARS12 billion, through the partial write- off of the Optional Reserve for future distribution of earnings, in the aim to increase the ARS2.5 billion cash dividend approved by the General Shareholders Meeting on May 15, 2020, subject to BCRA approval. With this additional dividend, the payout ratio would reach 46%.
This concludes our prepared remarks. We will now take your questions. Operator, please open the line for questions.
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Gabriel Nobrega with Citi. Please go ahead.
Hi, everyone. Good afternoon. And thank you for the opportunity to ask questions. I actually have two questions. The first is around the level of provisioning. We saw a large decrease in this quarter. I understand that it is because you want to see a comfortable coverage ratio is well above 300%. If I’m not mistaken, this is a new historical high. And so I wanted to understand, even though you still don’t have a clear picture of the NPL due to the waivers from the Central Bank. I would just like to understand, if you believe that you are going to keep making the same level of provisioning for the coming quarters and I’ll ask second question afterwards. Thank you.
Hi, Gabriel, it’s nice to talk to you. Okay. Yes, as you mentioned today, we have a question mark or when the waivers all of the Central Bank will be taken out. So regarding our more asset projection for NPL, which is not inclusive waiver we are projecting on NPL to be around 1.90% by the end of 2020 and going a little bit higher even more higher in 2021, we can level to 2.9 or around to 2.10.
I mentioned the level of provisions we feel very confident and very high. You should see an increase in provisioning in the fourth quarter, namely by changing the variables affecting the IFRS 9 model. So that and also considering that our NPL will decrease — sorry will increase our NPL in the fourth quarter should increase mainly because of the growth rate portfolio that make the progress go a little bit further down by the end of 2020.
For 2021, again, it’s more a question, we see other question on how NPLs will perform, we know they should get rid of the word the way right, at the end of the day define how the rational behaves. But yes, provisioning should increase in the fourth quarter, but again, mainly because of the changing in the IFRS 9 projection.
And then that’s from a second question. It’s actually on your net interest income. So, we have seen that since the first quarter, this has decreased a lot. While I understand that there’s an effect here from the increase in the BADLAR rate. It’s still a significant decrease versus your peers. So if you could just maybe comment, what’s going on here? What’s going to be different than what the other Argentinean banks are seeing? And also, as we’re starting to see the Central Bank increasing interest rates again. What do you think should be the trajectory for your net interest income in the first quarter? Thank you.
For the first quarter, these issues, you want to see it increases our net interest income maybe because activity should start to increase, but that also is an a little bit increased activity with increasing cost of final value. Like you mentioned, also the focus on increasing the attainment minimal, so that increasing activity that will increase our interest income, increase will be a little bit compensated by the increase in cost of funds.
Going more towards 2021, we are also expecting activity to increase probably more to fill level 2019, but again, we should have that we see the pressure on the cost of funds. And that probably will affect the use in loans. It’s a question of mix and also going more into the genuine activity of the bank, which is lending. It is more, tight to becoming the demand now. We saw in the last quarter the agenda, the subsidized loans that were taken out, and now they’re starting to decrease again. Decides we’re doing something cutting returns.
And if you just allow me a follow-up here since he talked about this demand question. We saw your new regulation for the unsubsidized loans as I think 30% for SMEs. Do you expect to start offering a lot of these and maybe could this lead to a pickup in demand some for the fourth quarter and for 2021 as well?
It’s difficult to predict. We have lended first of all subsidized loan 24%. Now it’s starting to review the demand, but also because we are obliged to lend 7.5% of deposit base. As of November 20, we have already guaranteed ARS5.9 billion. In this new line, which is not in place, you have to play it is more a sort of service. So, basically the demand for these type of loans is coming from that side.
Going forward, we need to see the macroeconomic conditions to become more stabilized and there we should see a pickup in loan demand
The next question is from Alejandra Aranda with Itau. Please go ahead.
Hi. Could you tell us the percentage of loans for program, and if you could discriminate that between credit cards and the rest of your portfolio? And remind me, you said, what was the percentage of loans at a subsidized rate that you already have on your portfolio?
Okay, the support line for the 24% with zero interest rate and all those lines were implemented for this represents ARS47.6 billion. Now, if new regulation compulsory credit line, which is communication 71.40. As of November 20, we had already granted ARS5.9 billion. So the lines granted for the COVID and COVID lines now are going into the compulsory credit lines. Regarding the deferred loan, from the total loan book, they represent approximately 17% of the total book and it’s mainly composed by the credit card business.
Okay, perfect. And, two more questions, if I may. In terms of fees, could you give us some color on what to expect for the next year and for fourth quarter and also for growth in loans and deposit?
Yes, regarding fees on fourth quarter, you should see them go a little bit further down because the activity will start to increase. So, you should see acquisitions starting to increase. You already saw some of in the third quarter despite you had excluded that one-time gain we had in the second quarter you have seen an increase. Going forward to 2021, again, it tied to the increase in inflation. It’s starting with the activity.
You could see — you are going to see start increasing some products, particularly credit cards and safety buckets. We are projecting increasing in for January, June and October, expenses to grow with inflation. And again, we should see some more that client acquisition cost that we do see in 2020 and 2021. Probably that trend you should take as a reference what happened in the 2019. We expect to have trend similar to what happened here.
Going to loans growth, to give you an idea year-to-date with 2nd of October, the bank in nominal terms the bank has been growing around 32% above the system. That profit was growing around 42% and little bit below the system. And we are projecting for the year-end, loan growth in nominal terms to grow around 42% and will be around 39.3% and in real time. We are projecting inflation towards the end of the year of 39%.
Regarding the bucket, these are going to grow, still going to grow about, now growing around 60%, the real growth in real terms. For 2021, the mix should be inverted and loans should start to grow above the profit. Loans are growing around above the systems and deposits also growing above the system. The inflation we are projecting for 2021 is 50%. So, both sides are growing above inflation.
[Operator Instructions] The next question is from Carlos Gomez with HSBC.
Could you clarify further the situation with the dividends? So you’ve declared an initial dividend, which again, if I understand correctly, you did not pay because the Central Bank has not allowed it. Now, you’re declaring a component and dividend, which again will depend in Central Bank approval. And I imagine that they remain parked until the Central Bank continued minor and you can you can pay for it. Do you have a realistic expectation to pay the dividend this year or this is more likely for next year? And if and when you are allowed, are you planning to do it in pesos or are you want to make deposit facilitation for foreign shareholders to adjust in dollar?
Regarding Central Bank, there is no flexibility. It’s difficult to say when we wouldn’t be able to pay. The truth is that while doing this, we are increasing our monetary liabilities which are hedging against inflation. Basically, you will see a lower effect on the line of inflation on the P&L. So, despite we do not have the approval to do it and we don’t know when that’s going to happen, this should have a positive effect in the P&L because we are trying to hedge inflation. So, basically, that’s the main difference.
So, when you — let us understand this, so you declare a dividend. So essentially, the dividend comes out of equity, but its categorization changes from nonmonetary liability to — no, sorry, from monetary liability to nonmonetary liability?
No, it comes out from the equity and rose into the…
Liability, monitory liability.
What happened is that you have less net monetary assets.
Okay. So, you’ll have less monetary assets because now these we can say liability as opposed to being part of the equity.
Exactly, that’s the point.
All right. Is there any real life implication taxes or otherwise because otherwise it just simply cosmetic. It says what happens to the [indiscernible] adjustments and therefore the reported earnings?
I’m not sure I understand your question. But basically, this will give you less inflation adjustment effects because you have the dividends on the liability side on the monetary liabilities. That’s our main effect. We’re trying to hedge against inflation by doing this.
Okay. My other question was, is there any fiscal impact from the tax liability changed because we have more or less?
The answer to that is there is no any fiscal impact because in terms of fiscality you are going to consider it when you really paid a dividend, not when you declared the dividend.
This concludes the question-and-answer session. At this time, I would like to turn the floor back to Ms. Lanusse for any closing remarks.
Thank you, operator, and thank you all for joining us today. We appreciate your interest in us. We look forward to meet more of you over the upcoming month 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 the day.
Thank you. This concludes today’s presentation. You may disconnect your lines at this time. And have a nice day.