Banco BBVA Argentina S.A. (BBAR) Q4 2019 Earnings Report, Transcript and Summary

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. [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' 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. Inés 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 Inés. Inés Lanusse: Thanks you, Javier, and thank all of you for joining us on our fourth quarter 2019 earnings conference call. Let me start be recalling some landmarks we achieve during this year. As a Group we reached the notable milestone of adopting a unique global identity, “BBVA”. This new identity reflects one of the values of the Group, "We are one team", which emphasizes the importance of employees and their commitment with the bank. The purpose of BBVA remains focused on “Bringing the age of 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 tools. 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 their mobile phones, versus 44% as of December 2018. This KPI continues to be an important driver for us during 2020. 2019 was a challenging year, a year in which the volatility of the exchange rate and the acceleration of inflation motivated the execution of a restrictive monetary policy, with high interest rates and its consequent impact in the economic activity. In this context, the Argentine financial system has demonstrated its strength and resilience, maintaining strong balance sheets, 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 the August 2019 primaries without this generating any liquidity problem in the system and being able to satisfactorily meet all customer deposit demands. 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 as a central pillars. During 2019 we have been able to reach a record high net income that more than tripled the results of the previous year 31.4 million pesos versus 9.7 million pesos, and reaching an average ROE of almost 61%. BBVA Argentina´s fourth quarter 2019 net income totaled 7.4 billion pesos, 153.5% higher than the 2.9 billion pesos posted a year ago and 33.0% lower than the 11.1 billion pesos posted last quarter, mainly explained by an increment in loan loss allowances mainly explained as a consequence of increasing Molca’s provisions from 75% to 100%, 547 million pesos, and by the increase of other operating expenses driven from the implementation of a one-time provision in 4Q19 of the efficiency plan the bank is already carrying out. BBVA Argentina´s 2019 results can be traced to: the sale of the Bank´s participation in Prisma, the high interest rates form Central Bank Notes where the bank’s excess liquidity was allocated, and to the better funding mix which allowed the Bank to protect the Net Interest Margin. Excluding the Prisma sale that took place during the first quarter of 2019, ROE and ROA would have been 55.6% and 7.2% respectively, and the result for the 12 months ended in December 2019 would have been 29 billion pesos. In the quarter, net interest income totaled 16.8 billion pesos, 7.8% higher than the result posted in third quarter 2019 and 98.8% higher than the result posted one 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% savings 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 1.6 billion pesos, 4% higher than in the previous quarter. We saw an increase in credit cards fees, driven by the effect of year-end consumption and by the growth of fee 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, through our campaigns, BBVA Argentina registered more than 232,000 active clients during 2019 compared to more than 180,000 that had acquired in 2018. This represents a 28% increase based on acquisition strategy to acquire new customers through nontraditional channels as branches, sales force and call center. Net income from financial instruments at fair value increased sequentially, totaling $2.0 billion pesos vis-à-vis 1.4 billion pesos in the prior quarter. The increase is resultant of the update of Prisma valuation, impacting in profit from private securities plus the impact of Prisma´s put option valuation, for an extra-consideration of 685 million pesos. In fourth quarter, FX gains, including foreign currency forward transaction, totaled 2.6 billion pesos decreasing 31.3% quarter-over-quarter. This is a consequence of the lower activity due to the regulatory changes implemented to the exchange market. Moving on to expenses. We experienced a sequential increase in the personnel and administration expenses line. During fourth quarter 2019, personnel and administrative expenses totaled 7.9 billion pesos, increasing 11% quarter-over-quarter and 65.5% year-over-year. Personnel benefits increased 13.2% in the quarter while administration expenses increased 8.7% 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 and their compensation schemes. The increase in administration expenses was mainly driven by the expenses incurred in the modernization of equipment and branches and by the depreciation of the peso. 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 one time provision for 2.1 billion pesos for the process the Bank decided to implement, in order to achieve better efficiency and agility in the decision-making processes. BBVA Argentina’s effective tax rate was 12%, lower than the 29% accumulated during 2018, mainly caused by the incorporation of the tax inflation adjustments in third quarter of 2019. In terms of activity, the bank's financing to the private sector totaled 201.5 billion pesos, decreasing 4.9% quarter-over-quarter and increasing 14.5% year-over-year. BBVA Argentina consolidated market share over the private sector loans 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 decrease both measured in pesos and in dollars. The dollar portfolio was prudently reduced in order to adjust our risk exposure combined with a lack of demand for USD loans. Regarding the retail portfolio including mortgage loans, pledge loans, personal loans and credit cards, credit card was the one that grew the most, 35.4% quarter-over-quarter and 72.6% year-over-year clearly outpacing inflation. Our Credit Card Financing market share increased 128 basis points to 12.19% from 10.91% a year ago. Commercial loans, including overdrafts, documents, leasings, and other loans, contracted 21.5% quarter-over-quarter and 16% year-over-year, mainly explained by the prudential reduction of pre-financing and export financing lines in U.S. dollars that were turned into peso loans. In the fourth quarter 2019, gross loans-to-deposits ratio was 70.3% compare 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 percentage of total assets - to its lowest level in the last two years, reaching 3.7%. In the quarter, our total exposure to the public sector excluding Central Bank notes was $16.1 billion, down from $17.9 billion in the prior quarter, which is mainly denominated in pesos or in U.S. dollar linked securities. US denominated notes letes, represents less than 1% of the total security portfolio as of December 2019. As of December 2019, asset quality, measured as non-performing loans over total loans, reached 3.57%, mainly due to a contraction of the loan portfolio. Coverage ratio reached 113.04%. During the quarter the provision for Molinos Cañuelas increased to 100% from 75% in the previous quarter, representing 547 million pesos. It is worth mentioning that Molinos Cañuelas’ debt is still denominated in dollars. On the funding side, private sector deposits in the fourth quarter 2019 totaled $294 billion, up 7.1% sequentially and 13.3% than fourth quarter 2018. Private sector deposits in local currency were $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 deposits in foreign currency decreased both measured in pesos and in dollars. As of December 2019, BBVA’s transactional accounts including checking and saving accounts represented 68.7% of total deposits from 65.3% a year ago, evidencing the ability of the bank to improve the funding mix. BBVA Argentina consolidated market share over 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 ARS 29.0 billion pesos, which represented 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 82.0% of total deposit as of December 31, 2019. Last, yesterday, February 18, 2020, BBVA Argentina has decided to schedule the Annual Ordinary and Extraordinary Shareholders’ Meeting for April 7, 2020, where a $2.5 billion cash dividend distribution will be considered, corresponding to the partial write off of the optional reserve fund for future profit distribution. This distribution is subject to 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 our 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 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.

[Operator Instructions] Our first question comes from Alonso Garcia with Credit Suisse.

My first question is regarding the credit activity that you expect for the year. I mean, after trailing equation significantly, what should we expect in terms of creating growth during 2020 and what lines should drive this growth? And the second question is on the evolution of expenses. What should we expect in terms of operating growth this year, should we see an original impact from these transformation and efficiencies strategy or should we start seeing the benefit of the strategy this year, please help us clarify that? Thank you very much. Inés Lanusse: Let's talk first about the credit activity what happened in the quarter you know, quarter-over-quarter there was a reduction of nearly five points due basically to the tragic reduction of U.S. total loans. And obviously there is no loan demand in dollars. If you would exclude the deconsolidation of Rombo in the fourth quarter, the contraction would have been only 1.6%. In year-over-year basis, the growth was 14.5% and if you had excluded basically the consolidation of the three companies, the growth would have been 8.1%. Again, that growth on a year-on-year basis was mainly driven by the credit card line, which grows way above inflation mortgages with the effects of loans that are tied to inflation. And secondly, it’s offset by commercial loans that were reduced because of the less U.S. dollar loan. Going forward during January numbers we have as of January 2020, the bank has been growing in loans over the system. Basically the portfolio that is growing a little bit faster is a commercial portfolio. We are offering a 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 have still not been decided properly the current activity is sort of stopped. For the year, we are expecting - for 2020, we're expecting loans to grow above inflation. We are projecting an inflation for 2020 around 50%. And let me add also that we are projecting the deposit growing a little bit below inflation. Regarding your expense - your expense line 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 it organization and capture these advantages. Just to give you an example, we're in the process of merging five branches two in the city of Buenos Aires, two in the Buenos Aires province. One is in the [indiscernible] in the coming months, all of the sites were rented. Our headquarter 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 our global strategy but regarding cost, the provision is one-time that we implemented in the fourth quarter - the implementation has already started - and that effect is just added one-time in the fourth quarter. During 2020 you should have a positive effect from this efficiency we will start doing or we already started doing. The rest of the line personnel expenses probably growing a little bit below inflation definitely an administrative expense is the same.

So overall with this provision that you're already made in 4Q for this year for 2020 we should see OpEx growth overall OpEx growth below inflation, definitely right? Inés Lanusse: Yes, because of the efficiency plan we have already started to implement.

[Operator Instructions] Our next question comes from Gabriel Nóbrega with Citibank. Gabriel Nóbrega: And we are already in the second month of the year and 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 two to three months. What do you believe are going to be the main challenges and the opportunities for the bank - during this year and I’ll make a second question afterwards? Thank you. Inés Lanusse: I wouldn't say I take your point that government has been in place for two 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 trigger more than 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 - you can see that the proposal we did for dividend is - the payout ratio is low compared to previous year. And basically, to protect the capital in case new measures arise 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 the U.S. dollar loan which is a big portion - 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 loan.

Maybe let me add some ideas about this question. After so months 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 because 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 extent - we are let's say communicating all the impacts that we see of each of the different measures they're trying or they're thinking to take. So in that sense, let me also add that we have a huge reserve requirements right now for the banks. So there is enough available space in some cases to reduce that reserve requirements to let the banks to manage the difference measurement survey that the government is taking right now that is to compensate if there is a cost for the banks. So in that sense, what we are - seeing right now or something now is that the government is not taking - let’s say release from measures that will put in danger or in risk the banking 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 their measurement - all the different new regulation they implemented in the last week. Most of them or the majority is going to create a good environment for loan growth. Even and despite the negative, we could think about it in negative terms, they're reducing 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 these situations that we have right now after as you mentioned before, a couple of months of these new government. Gabriel Nóbrega: And if you allow me just one 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, a couple of months back and it's willing to even talk to you guys, other banks as well promote different 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 you in fact maybe starting to see a bit more demand especially on the retail side?

Well, what we think is two issues here, we seen that in the wholesale part of the portfolio, we have and starting point really low. So, we are expecting clear recovery from that side of the loan portfolio. In the retail side of the portfolio, we have two 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 with that part of the portfolio that has been compensated even if we receive a small interest rate, we aren't being - we have the compensation coming from the reset requirements. And so, this is a good thing, because we have seen right now an increase in that portfolio - only in good interest rate considering the release of the reserve requirements. So on the other hand, I'm sorry - I didn't understood properly your question related to Central Bank, will you please elaborate a little bit more at the beginning you mentioned about this Central Bank. Gabriel Nóbrega: I was just wondering if - with the Central Bank maybe being more willing to own some talk 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 were unable to distribute dividends?

Well, the Central Bank is intervening in the market trying to create the conditions for some 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 - of the new regulation they are launching to the market. So, they’ve been in the market, yes, on their under their responsibilities, mainly considering the interest rate movements and the cuts they're 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've seen that before December, you could think about it on the say more - how can I say stronger, 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.

There aren’t too many. I'm going to ask three if you don’t mind. First, I am a bit surprised that you mentioned that 50% loan growth that seems to way above where we are today. And again, on the similarity measures that the government wants introduced. But we wanted to clarify where exactly do you think that is going to reflect it and when. Second, I would like you to comment about the tax rate for 2021. You paid as you mentioned as a three plus percent last year. We know that you have inflation accountant in here, but we would like to know where your effective tax rate to be. And finally, we would like to know with respect to your ROE to be above inflation on this year and tend to be reported inflation adjusted terms also probably the result itself will be positive or negative depending on that? Thank you. Inés Lanusse: Carlos, 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? Inés Lanusse: Okay, yes, understood. Regarding loan growth basically would be grown with consumption. The government is implementing measure I would say promote the consumption and we come from a very low starting point. So they increase, it’s going to be very evident. That's why we're projecting loan growth, get it in line with inflation and deposits low inflation, and we are projecting an inflation of 50%. Then we have to see what the final inflation is. Regarding tax rates, you should take into consideration that there was a new implementation issue for 2020 supposedly. The tax rate - regulatory tax rate should be 25 - that was stopped under regulatory tax rate should be 30%, and regulatory because you should consider for your model. Going forward, what finally effective tax rate is going to depend on the inflation. Now, we are going to be applying to the balance sheet as inflation starts to acquire probably you can take as a reference the fourth quarter tax rate that you calculated in around [indiscernible], if I am not mistaken, 5%.

So, just to clarify here, your tax will be applied on your gross income in nominal terms, or an inflation adjusted terms, the 30% will apply to your inflation adjusted earnings or to your nominal earnings? Inés Lanusse: Inflation adjusted.

To the 30% of inflation adjusted earnings. Inés Lanusse: If you see the P&L after the restart from this subsidiaries, there is going to be a new line called [indiscernible], 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.

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

What, sorry.

Would 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 one, the first point is we don't know exactly where is going to be inflation rate for the year, but considering a 50% which is our expectation 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 of the, on the - the receipt requirements that if the central bank is going to change this, then we will have more opportunities 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.

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

No, we are not going to reflect a loss. In fact, we are expecting - 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, or 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. Inés Lanusse for any closing remarks. Inés Lanusse: 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.

Thank you. This concludes today's presentation. You may disconnect your line at this time and have a nice day.