Banco BBVA Argentina S.A. ADS

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to BBVA Argentina's first 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 the company remarks are completed, there will be a question and answer session. At that time, further instructions will be given. Should any participant need assistance during this call, please press star zero to reach an operator. 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 2019, filed with the U.S. Securities and Exchange Commission. Today with us we have Mr. Ernesto Gershado, CFO, Mrs. Inez Lunuzzi, 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 first 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 this risk, please refer to our filings with the SEC and our earnings release, which are available at our investor relations website, ir.pbba.com.ar. Speaking of which, calling 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 this quarter, as per Central Bank's regulation, we will begin 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 March 31st, 2020. Now, let me turn the call over to Ines.

Thank you, Javier, and thank you all for joining us on our first quarter 2020 earnings conference call. We hope you and your beloved ones are healthy and safe on these challenging times. BBVA Argentina is going through a complex scenario combining one On the one hand, the health of the emergency represented by the COVID-19 pandemic, and on the other hand, an economy immersed in a recession worsening by the high levels of inflation. The Argentine government, like most of the countries affected by COVID-19, implemented a quarantine that is still in force, although in different phases, depending on the situation in each of the countries' provinces. In this context, BBVA Argentina has focused primarily on caring for the health of its employees and also that of its clients. More than 90% of employees in the central areas are working remotely, and all the necessary protective measures have been implemented in the branch network for both employees and customers. And it is in this moment where the digital transformation efforts initiated by the bank years ago takes on special relevance by allowing our clients in a situation as complex as a quarantine to carry out their operations through the digital channels at their disposal through the app and or the bank's website. The penetration of digital clients reached 67.8% from 66.5% and the penetration of mobile clients reached 56.1% from 53.8% in the prior quarter. And while the recovery comes, PBI Argentina considers that it is in an advantage competition position to face the current challenges. A solid liquidity position supported by mostly transactional funding with low cost and an adequate capital levels well above regulatory requirements. Also in this context, the bank has collaborated with measures to support the productive sector and society promoted by the national government and has launched others on an individual basis, such as the donation of 20 billion pesos to the Red Cross and the Let's Be One campaign to fight COVID-19. EDDA Argentina continues working on its sustainability model and supporting responsible business actions on issues of inclusion, financial education, and care for the environment as part of its commitment to the country. Now I will 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 first quarter 2020 net income, including inflation adjustment effects, totaled 3.1 million pesos, 20% net income. 20.1% lower than the 3.9 billion pesos posted a quarter ago, and 36.2% lower than the 4.9 billion pesos posted a year ago. The quarter-over-quarter decrease is mainly explained by the fall in economic activity and the sharp decline in interest rates derived from changes in the country's monetary policy and the beginning of the mandatory lockdown due to COVID-19 pandemic. The year-over-year decrease is mainly explained by the one-time sale of Prisma Medio Reparo occurred in the first quarter of 2019. Excluding the Prisma effect, the first quarter net income, including inflation adjustment effects, would have decreased 6.9% from 3.3 billion pesos in the fourth quarter and increased 72% from the 1.8 billion pesos in the first quarter of 2019. During the quarter, the bank presented a positive real return on equity of 14.5% and a real return on assets of 2.5%, providing the bank's refinance. In the quarter, net interest income totaled 16.4 billion pesos, 14.5% lower than the results posted in the fourth quarter of 2019, and 9.3% higher than the results posted during the first quarter of 2019. These variations were mainly explained by the decrease in the average yield of the central bank leak, which was partially upset by the decrease in peso cost of funds, following the trends of decreasing market interest rates and an increase in site deposits. The quarter-over-quarter performance can be traced to the lagging decline in active interest rates, a fall in the UBA index, and by the reduction in the government securities position as a consequence of the monetary policy implemented by the government. Income from government and central bank securities fell 17.1%, or 1.3 billion pesos, compared to the fourth quarter of 2019. and 14 to 10 or 1 billion pesos compared to the third quarter of 2019. This is explained by the decrease in mandatory policy rates promoted by the central banks, combined with a lower position of central bank on account of a new regulation restricting site deposit reserves requirement integration. Interest income from loans and other financing totals 15.1 billion pesos, decreasing 18.8% or 3.5 billion pesos quarter over quarter. This is mainly explained by the seasonality of the business and lower active rates in line with the liquidity excess generated by change in regulation conducted by the central bank. In the first quarter of 2020, interest from time deposit represented 78.9% of the bank's total interest expenses, decreasing 26.4% in the quarter and 40.6% in the year. Net fee income amounted to 1.9 billion pesos, 5.9%, or 105 million pesos higher than the previous quarter. This is explained by an increase in federal prices lower expenses related to credit card benefits, which were partially offset by the fall in activity, product of a seasonal effect, and aggravated by the beginning of the mandatory lockdown due to the COVID-19. Net income from financial instruments at fair value decreased sequentially, totaling 1.0 billion pesos vis-a-vis 2.4 billion pesos in the prior quarter. When excluding the result from the production valuation of Prisma Sale in the fourth quarter 2019, the decrease would have been 33.4% instead of 57.8% in the quarter. When excluding the profit from the Prisma Sale, 2.3 billion pesos inflation adjusted, the year-on-year contraction would have been 31% instead of 73.3%. In the first quarter of 2020, FX gain, including foreign currency forward transaction, totaled 1.2 billion pesos, decreasing 60.1% quarter over quarter. This is a consequence of the lower activity due to the regulatory changes implemented to the exchange market and the less volatility. Moving on to expenses, we experienced a sequential contraction in the personal and administrative expenses line. During the first quarter of 2020, personal and administrative expenses totaled 8.0 billion pesos, decreasing 10% quarter over quarter and increasing 9% year over year. In terms of personal expenses, note that this quarter we have increased salary by six amounts that on average had followed inflation, as there are no new rearrangements with the labor unions regarding salary increases. The savings in administrative expenses are driven by lower expenses incurred in armament transportation services, consequence of a lower amount of cash in transit, derivatives from FX market restrictions. As of March 2020, the quarterly efficiency ratio increased sequentially, reaching 47.4% and worsening from the 42% posted in the first quarter of 2019. This is a consequence of a separate contraction in the income which is not offset by the saving generated in expenses. Other operational expenses reflected the one-time provision implemented in the fourth quarter of 2019 by the bank that will not be charged as of this quarter. The bank has already merged five franchises from 2021 as of December 2019 to 246 as of March 2020. In terms of activity, the bank's financing to the private sector totaled 225.5 billion pesos, increasing 3.8% quarter over quarter in real terms, and decreasing 17.3% year over year, also in real terms. PBDA Argentina consolidated market share of the private sector loans as of March 2019, increased sequentially, reaching 8.35%. Private loans denominated in pesos rose 3.8% quarter over quarter in real terms and contracted 17.3% in the year, also in real terms. Dollar denominated loans increased 5.4% quarter over quarter measured in pesos and decreased 2.1% measured in dollars. Regarding the retail portfolio, including mortgage loans, pledge loans, personal loans, and credit cards, These have decreased 7.8% sequentially and 4.0% year over year. The lower annual variation is driven by the fact that during the third quarter of 2019, the bank started to consolidate its PCA and was buying. In the first quarter of 2020, credit cards and pledge loans decreased the most, 9.4% and 8.8% respectively. Besides the seasonality effect, it also goes in line with a less genuine loan demand due to the macroeconomic situation in the country. Commercial loans, including overdraft, discounted instruments, leasing, comics, and other loans, grew 20.4% quarter over quarter and fell 28.2% year over year. The quarterly increase is mainly explaining the exponential growth of the overdraft line, which grew 90.1%, or 14 billion pesos in the quarter, by the line that grew 37.3%, or 7.4 billion pesos sequentially, and by the other loans line, especially past due interest corporate loans, which grew 5.2%, or 793 million pesos in the quarter. In the first quarter of 2020, gross loans to deposit ratio was 70.3% compared to the 68.2% a year ago. As of March 2019, sorry, March 2020, asset quality measured as total non-performing portfolio over total portfolio reached 2.78% mainly due to the temporary flexibility of the central bank implemented as a consequence of the COVID-19 pandemic in which it extends great periods in 60 days. Covered ratio reached 186.12%. This is explained by an increase in allowances as a consequence of the implementation of impairment models and the change in VCR regulations regarding debt classification. Allowances in the first quarter of 2020 reflect expected clauses reviewed by adoption of the IFRS 9 standard as of January 1st, 2020, excluding subsidiaries, PCA and Volkswagen, which will start implementing IFRS 9 as of 2021 pursuant central bank regulations. Application of the IFRS 9 pyramid model is temporary excluded for the non-financial public sector debt instruments. Regarding exposure to the public sector, excluding central bank instruments, this quarter, PVVA Argentina maintained its exposures, measured as a percentage of total assets in its lowest level, reaching 3.6% in the quarter. Our total exposure to the public sector, excluding central banknotes, was 18.3 billion pesos, up from 17.4 billion pesos in the prior quarter. This exposure is mainly denominated in pesos or in U.S. dollar-linked securities. U.S. denominated notes latest represented less than 1% of the total security portfolio as of the end of the quarter, which has already been exchanged. On the funding side, private sector deposit in the first quarter 2020 totaled 324 billion pesos, up 3.4% sequentially and down 21.1% when compared with the first quarter of 2019 in real terms. Private sector deposits in local currency were 210 billion pesos, increasing 11.9% quarter over quarter and decreasing 1.6% year over year. This is mainly explained by the strong growth in saving accounts and checking accounts deposits, which offset the decrease in time deposits in the quarter, but not in the year. Private sector deposits in foreign currency decreased both measured in pesos and in dollars. During the first quarter of 2019, U.S. dollar deposit withdrawal continued, but at a slower pace than we observed during the last month of 2019. As of March 2020, BBA's transactional accounts, including checking and sending accounts, represent 68.9% of total deposits from 64.2% a year ago, evidencing the ability of the bank to improve the funding mix. BBA Argentina consolidated market share over the private sector deposits as of March 2019, reaching 6.79%. In terms of capitalization, BBA Argentina accounted an excess capital of 48.6 billion pesos. We represented a total irregularity capital ratio of 21.8 and a tier 1 ratio of 21.2%. The increase is affected by the initial IAS 29 adjustment over the non-monetary assets and the change in BCR regulations over provisions with allowed banks. to consider the difference between loan loss allowances recorded by IFRS 9, approbations recorded as of November 30, 2019, with previous methodology, 3.4 billion pesos, extraordinary level one capital. The bank's aim is to make the best use of this excess capital. The bank's liquidity ratio in pesos and in dollars remains healthy at 60.6% and 82.3% of total deposits as of March 31st, respectively. This concludes our prepared remarks. We will now take your questions. Operator, please open the lines for questions.