Banco BBVA Argentina S.A. (BBAR) Q3 2019 Earnings Report, Transcript and Summary

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 and all participants will be in listen-only mode during both companies presentation. After the companies 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 US 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’ Annual report on Form 20-F for the Fiscal Year 2018, filed with the US 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 for joining us today for the 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 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 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 1st 2019, BBVA Argentina has started to consolidate its balance sheet line by line with the activity of PSA Finance, Rombo Compañía Financiera and Volkswagen Financial services. Prior to this change, the activities 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 agreements, by which the bank acquires the power to run the activities of the three joint ventures. Based on the above, the bank result should be considered on a consolidated basis. Now I will comment on the bank's third quarter 2019 financial results. BBVA Argentina´s third quarter 2019 net income totaled ARS11.1 billion, 63.9% higher than the ARS6.8 billion posted in the second quarter 2019 and 264.8% higher than the ARS3 billion posted a year ago, mainly based on the increase in net interest income and foreign exchange results. The accumulated net income for the nine months ended as of September 30, 2019 was ARS23.9 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 assets of 8.0% 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 PSA, Rombo and Volkswagen, operating income would have been ARS10.1 billion, 14.8% higher than the previous Quarter and net income would have been ARS10.7 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 2019, BBVA Argentina reports a portfolio of national securities subject to restructuring for an amount of ARS10 billion which are priced at fair value through other comprehensive income, over which ARS4.9 billion loss has been recognized as a consequence of changes in the contractual flows. In the quarter, net interest income totaled ARS15.6 billion, 19.8% higher than the result posted in the second quarter of 2019 and 129.2% higher than the result posted one 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 ventures consolidation, net interest income for the period would have amounted ARS14.8 billion, growing 13.9% quarter-over-quarter, and 118.0% year-over-year. Within interest income, interest on loans increased 26.8% quarter-over-quarter and 63.6% year-over-year. In the 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 higher 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. On third quarter of 2019, net interest margin including foreign exchange differences was 25.6% higher than the 23.1% on second quarter 2019 and 15.6% as of the third quarter of 2018, supported by a greater contribution of the securities portfolio and an improvement in client rate spreads. In the third quarter of 2019, net fee income, was ARS1.5 billion, 19.5% less than in the previous quarter. We saw a good growth in fees charged, driven by the re-pricing on fees on bundled services, an increase in the volume of activities between accounts and an increase in foreign currency transaction. However, this good performance was offset by higher expenses and commissions paid mainly to debit and credit card issuers, with US Dollar components. If we normalized the net fee income, and we subtract from the second quarter 2019 the incentive we received from the credit card issuers, and we include it 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 ARS1.4 billion vis-à-vis ARS2.1 billion in the prior quarter. If we exclude the ARS716 million dividend we received from our participation in Prisma, the bank would have reported a gain of ARS33 million increasing 2.4% in the quarter. In the third quarter of 2019, FX gains, including foreign currency forward transaction, totaled ARS3.8 billion increasing 83.8% quarter-over-quarter. This increase was mainly attributed to the Argentine Peso depreciation and the long spot position BBVA Argentina had during the quarter. Moving on to expense, we experienced a sequential increase in the personnel and administration 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 administration 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 administration expenses was mainly driven by the increment in armored transportation cost due to higher amounts of cash-in-transit. As of September 2019, the accumulated efficiency ratio remained low, reaching 35.7%, and improving from the 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 adjustments in third quarter 2019. In terms of activity, the bank's 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 over the private sector loans as of September 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 decrease both measured in pesos and in dollars. Regarding the retail portfolio including mortgage loans, 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 overdrafts, documents, and other loans, increased 6.6% quarter-over-quarter and 11.6% year-over-year. The line with the highest growth was overdrafts, increasing 83.4% in the quarter and 7.2% on a yearly basis. In the third quarter 2019 gross loans-to-deposits ratio improved from 67.5% in second quarter 2019 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 ARS17.9 billion, down from ARS24.0 billion in the prior quarter. As of September 30, 2019, asset quality, measured as non-performing loans over total loans, reached 3.31% with a coverage ratio of 105.08%. During the quarter the provision for Molinos Cañuelas increased to 75% from 50% in the previous quarter. It is worth mentioning that Molinos Cañuelas’ debt is still denominated in dollars. On the funding side, private sector deposits in the third quarter 2019 totaled ARS271.5 billion, down 3.8% sequentially and 10.8% higher than in the third quarter 2018. Private non-financial sector deposits in local currency were 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 offsets the fall in time deposits. Private non-financial 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 represented 65.5% of total deposits. BBVA Argentina consolidated market share over the private sector deposits as of September 2019 reached 7.14%. In terms of capitalization, BBVA Argentina accounted an excess capital of ARS26.6 billion, which represented a total regulatory capital ratio of 17.1% and a Tier 1 ratio of 16.4%. 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 57.8% and 66.7% of the total deposit 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 NPL ratios in the financial system. This concludes our prepared remarks. We will now take your questions. Operator, please open the line for questions.

Thank you. The floor is now open for questions. [Operator Instructions] The first question will come from Gabriel Nóbrega with Citibank. Please go ahead. Gabriel Nóbrega: Hi, everyone. Good afternoon. And thank you for taking my questions. It's already been two weeks since the administration one 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 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. Thank you.

Hi, 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 or how he's going to address the country going forward. Regarding the bank, we have seen some extra deposits out flowing, the system in line with a system much more and more than that. And going forward what we are projecting regarding loan growth for the quarter, probably some decrease routine for the fourth quarter of 2019, but the deposit growing in the fourth quarter of 2019. Gabriel Nóbrega: Alright and just again a follow up here, sorry, we have heard that maybe an 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 momentum in orientation and 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. Gabriel Nóbrega: Alright, perfect. And as for my second question, it's actually on the impacts from the depth, re-profiling, we saw another one of your peers passing this impact through it some P&L specifically on the NII front. However, when we looked at your results, I understood you actually pass this to 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 depth re-profiling going forward, please.

Yeah, okay. I've you mentioned the returns from those securities basically is the administration of the excess liquidity that the bank has, which is done by the asset and liability committee. So that's why the effect you feed under other impressive income. From the total amount that was re-profiled, basically, you have ARS731 million in LECAP. You have ARS245 million in LETEs, that was the only amount that if you wouldn't have had a re-profile, you would have been able to recognize that interest in the quarter and you have ARS9 million of LELINK. Since these securities are administered – are dealt by the asset and liability committee these securities are hold to maturity. So what you're reflecting in the balance sheets in other compressing or is that decreasing the price, but since you hold the security till maturity once you are able to get the interest, you're going to see that effect on the P&L. Gabriel Nóbrega: Alight, so on the P&L it's to come on the NII front right?

Exactly, on NII, once the security matures and we're able to collect the interest rate of those activities, obviously, there's no default on those securities, no. Gabriel Nóbrega: Perfect, thank you.

[Operator Instructions] The next question comes from Alonso Garcia with Credit Suisse. Please go ahead.

Good morning, everyone. Thank you for taking my question. My first question is regarding the exposure to Central Bank Instruments. Given some comments made by the President on – or by the elected President [indiscernible] and/or by his applied source regarding the LELINK, I mean, there is some uncertainty surrounding this instrument. 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 the LELINK and what would be the sort of impact on profitability from switching out of the LELINK. And my second question would be quality. I would like to hear you, if you can share, what would be the – what would have been the pro forma NPL ratio considering the consolidation of the auto loan portfolios. And what is the outlook ahead considering the current outlook for GDP, inflation and interest rates? Thank you.

Okay, so regarding LELINK again, it's all comments that you're seeing in the press and it's difficult to say what's going to happen with that. Our position in LELINK has decreased in the quarter. As you can see in our press release, also after the last word lamentation where you can't use LELINK as minimum cash requirements, that also makes our position in LELINK somehow reduce 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 LELINK. There's a lot of rumors that nothing really official and what's going to happen with that. The truth is LELINK 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 get the money from our clients and we put them in LELINK. So it's a decision on the government what they want to do with that. Regarding NPLs, the consolidation is and the NPL ratio. The joint venture effect is only representing 4 to 5% of that NPL amount probably is more important to give you the NPL excluding Molinos Cañuelas. Molinos Cañuelas was – as we mentioned in the remarks, it's a US dollar debt. So you 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 increase so much, but if you would take off the effect of Molinos Cañuelas, NPL would have been 2.25. And your third question was more regarding the macro scenario correct?

No, it was just on the outlook on profit quality, considering the outlook, inflation and interest rates, what do you expect for NPLs and provisions going forward based on that?

Probably you will take provision of Molinos Cañuelas up to 100% by the end of the year, that's a possibility and nothing rather than the number operate and that's the main case that makes our NPL growth on particular because it's a US dollar denominated loan.

Understood, thank you very much.

The next question comes from Carlos Gomez with HSBC. Please go ahead.

Hello, nice. Good morning. 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. [indiscernible] you have given us the results for the year could you possibly give us the results in inflation adjusted terms for each quarter so that we start to build our series into to be prepared for implementation next year. Second, in terms of Molinos Cañuelas, so can you confirm that you classify it as non-performing this quarter, but now before or was it in the second quarter you started classifying? And finally, what other bib NPLs do you think you might be seeing and in what sectors and where do you think the NPLs could pick? Thank you.

Hi, Carlos, nice to hear from you. Regarding inflation adjustment we are providing the accumulated inflation adjustments as of the nine months. Inflation adjustment should be applied as of January of next year. So you 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 Molinos Cañuelas has to do with – that is dollar denominated debt. So that makes increasing NPLs go higher. Going forward again the main effect you have in NPLs was Molinos Cañuelas and you had some instance of a company from the white line that had a peso – had a dollar loan and it was specified. It's around ARS500 million. So it had this refinance 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 debts in other financial institutions. So based on Central Bank's regulation despite the company has no debt with us. We are obliged to provision the pesos also, so that also makes our provisions increase. And there was a third question Carlos.

Yeah, whether you think the NPLs will be peak?

We didn't have right now a number, we thought. Sorry, it's something that we are now elaborating a little bit more careful because all the ratings for Argentina due to these countries 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 are – 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 to IFRS 9. And on the other hand, we think that she's 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 this 100 or 200 basis points in your Tier 1 capital or three or four?

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 these 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 expecting the IFRS 9 in place in January this year or next year.

Yeah, very clear, thank you so much.

[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 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.

And thank you. This does conclude today's presentation. You may disconnect your line at this time and have a nice day.