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 second 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's 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 the 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 the BBVA Argentina's annual report on Form 20F for the fiscal year 2019, filed with the U.S. Securities and Exchange Commission. Today with us we have Mr. Ernesto Gallardo, CFO, Mrs. Ines Lanuce, IRO, and Mr. Javier Kelly, Investor Relations Manager. Mr. Kelly, you may begin your conference.

Hello, everyone, and welcome to BBVA Argentina earnings conference call for a discussion of our second quarter 2020 results. Before we begin our 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 that 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.pbva.com.ar. Speaking today, will be Ines Lanice, 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 1st, 2020, as per central bank regulations, 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 cumulative effect of the inflation adjustment for each period through June 13, 2020. Now, let me turn the call over to Ines.

Thank you, Javier, and thank you all of you for joining us on our second 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 employee safety, both in central offices as in the branch network. In particular, branches have applied the necessary protection measures in line with the highest security standards to minimize risks in interaction. The bank has shown great adaptive capacity on the one hand by the agile incorporation of the old COVID-19 support measures and on the other hand by making them available to clients through different channels, thus providing an efficient service to clients during the pandemic. All these have been possible thanks to the investment and the digitalization done during the last years, providing all its services through digital channels both to retail and corporate clients. The penetration of digital clients reached 69.3% from 67.7%, and the penetration of mobile clients reached 57.4% from 56.1% in the prior quarter. In these unprecedented times, the bank has once again demonstrated its resilience, maintaining a solid assembly credit, solid levels of capital, well above regulatory requirements, and has also been able to improve its loan portfolio qualities. On the other hand, through the efficiency plan implemented in the fourth quarter of last year, the bank has been able to reduce its expenses in a sustained manner for two quarters in a row. Now, I will comment on the bank's second quarter 2020 financial results. All status mentioned during after are measured in current currency at the end of the reporting period, including the corresponding financial status for previous periods provided for comparative purpose unless otherwise noted. BBVA Argentinas, Second quarter 2020 net income, including inflation adjustment effects, totals 2.6 billion pesos, 21.9% lower than the 3.3 billion pesos posted a quarter ago, and 70.1% lower than the 8.6 billion pesos posted a year ago. The quarter-over-quarter decrease is mainly explained by the fall in the economic activity as a consequence of the mandatory lockdown due to the COVID-19 pandemic and the sharp decline in interest rates derived from changes in the country monetary policy set by the central bank, among other regulations also conducted by the central bank. The year-over-year decrease is partially explained by the 1.1 billion pesos dividend we received as a consequence of our participation in PRISMA during the second quarter of 2019. In the quarter, net interest income totaled 15.9 billion pesos, 13.9 lower than the results posted in the first quarter of 2020, and 17.1 lower than the results posted during the second quarter of 2019. These variations were mainly explained by the decrease in the average yield of the central bank, which is partially assessed by the decrease in peso cost of funds following the trend of decreasing market interest rates and an increase inside the profits. The quarter-over-quarter performance can be traced to the decline in active interest rates driven by the credit support measures promoted by the government to counteract the effects of the pandemic and by the contraction in government security as a consequence of the monetary policy implemented by the government. Income from government securities fell 10.2% or 673 million pesos compared to the first quarter of 2020 and 52.7% or 6.6 billion pesos compared to the first quarter of 2019. This is explained by the decrease in the monetary policy rate promoted by the central bank. This contraction was offset by the increase in the position in Lalit derived from the new regulations that enables a higher position in Lalit in line with what was granted in 20% minimum rate. Interests come from loans and other financing, total 14.2 billion pesos, decreasing 10.7% pesos quarter over quarter. This is mainly explained by the implementation of credit lines to SMEs at 24%, zero rate credit lines, and the lower credit card financing rate. In the second quarter of 2020, interest from time deposits represented 79.1% of advanced total interest expenses, decreasing 24.8% in the quarter and 56% in the year. Net income amounted to 3.1 billion pesos, 57.3% pesos higher quarter over quarter as a result of a commercial award receiving during the quarter, plus the saving granted by the lower expenses related to credit card benefits as a result of the lower activity due to the extension of the mandatory lockdown. This effect more than offset the fall in activity due to the effects of the pandemic. Net income from financial instrument at fair value decreased sequentially, totaling 1 billion pesos vis-a-vis 1.3 billion pesos in the prior quarter. This is explained by the lower volume of forward transaction as a consequence of the lower activity driven by the regulation and the broad spread between the blue-cheeked swap and the official dollar rates. In the second quarter of 2020, assets gained, including foreign currency forward transactions, total 1.5 billion pesos, decreasing 3.2% quarter over quarter. This is a consequence of the lower activity due to the regular changes implemented to the exchange market, partially upset by an increase in the income generated from the purchase and sell of foreign currency. Moving on to the expenses. For the second quarter in a row, we experienced a sequential contraction in the personal and administrative expenses line. During the second quarter of 2020, personal and administrative expenses totaled 7.8 billion pesos, decreasing 7.8% quarter over quarter and 6% year over year. Personal benefits contracted 15.2% in the quarter, reaching 4 billion pesos, generating savings for over 700 million pesos. This is a consequence of the efficiency plans we put in place during the fourth quarter of the last year. Administrative expenses grew 1.3% in the quarter. This increase is a consequence of the adjustment we had to make in order to continue operating during the pandemic. As of June 2020, the quarterly efficiency ratio remained stable sequentially, reaching 47.3% and worsening from the 36.1% posted in the second quarter of last year. There is a consequence of a step of construction in the income, which is not upset by the saving generated in expenses. In the second quarter of 2020, other operation expenses contracted 26.7%. This decrease is explained by the decline in other allowances due to the unsealed checking account or unused checking account overdrafts. In terms of activity, the bank's financing to the private sector totaled 250.4 billion pesos, increasing 5.4% quarter-over-quarter in real terms and decreasing 5% year-over-year also in real terms. BBVA Argentina consolidating market share over the private sector loans as of June 2020 increased for a second quarter in a row, reaching 8.54%. Target loans denominated in pesos grew 11.1% quarter over quarter in real terms and 30.2% in the year, also in real terms. Dollar denominated loans decreased 19.6% quarter over quarter measured in pesos and 26.4% measured in dollars. Regarding the retail portfolio, including mortgage loans, pledging and personal loans and credit cards, these have decreased 0.2% sequentially and grew 0.9% year-over-year. In the quarter, the fixed decline can be seen in the pledge and consumer loans, both declines depleting 15.2% and 5.5% respectively. This decline was partially offset by the increase in credit card consumption boosted by zero-rate credit lines and our adoption programs. Commercial loans, including overdrafts, discounted instruments, leasing, comics, and other loans grew 11.6% quarter over quarter and fell 10.3% year over year. The quarterly increase is mainly explained by the strong growth of the other loan lines, especially past due interest corporate loans, which grew 63.2% or 18.5 billion pesos in the quarter, followed by discounted instruments that grew 9% in the quarter. As of June 30, the bank has disbursed more than 20.5 billion pesos in loans to more than 9,000 as a need to be allocated in payroll payments, discounted documents, and working capital at a 24% nominal annual rate. As of June of this year, DBA Argentina has described 1.8 billion pesos of Fogart-granted loans and 7 million pesos in loans for self-employed individuals at zero interest rate. In the second quarter of 2020, gross loans-to-deposit ratio was 68% compared to 67.5% a year ago. As of June of 2019, asset quality measured as total non-performing portfolio over total portfolio reached 1.56%, the lowest in the last 12 months. The ratio was possibly affected by the temporary flexibility the central bank implemented as a consequence of the COVID-19 pandemic, in which extends great period in 60 days. but the greatest impact was that during the second quarter of the year, the bank proceeded to perform Molinos-Cañuelas debt write-off, which at the moment of the write-off amounted to 2.7 million pesos. The ratio reached 268.38%. This is explained by the decrease in the non-performing loans, mainly as a consequence of Molinos-Cañuelas write-off. Allowances in the second quarter of 2020 reflect Expected losses streamed by the adoption of IFRS 9 standards as of January 1st, 2020, excluding subsidies, PCA, Peugeot, and Volkswagen, which will start implementing IFRS 9 as of 2021, pursuant to this central bank regulation. Additional application of the IFRS 9 impairment model is temporary excluding for non-financial public sector debt instruments. Regarding exposure to the public sector excluding central bank instruments, this quarter BBVA Argentina decreased its exposure, measured as a percentage of total assets, reaching 3.3%. In the quarter, our total exposure to the public sector excluding central bank notes was 17.8 billion pesos, down from 19.3 billion pesos in the prior quarter. This exposure is also all denominated in pesos or in US dollar linked securities since the bank swapped all of its latest position in May voluntary swap. After the end of the quarter on July 17, 2020, the bank participated in the voluntary swap offered by the National Treasury and swapped 100% of the remaining position in the link in exchange of Bonser maturity in 2023 and 2024. On the funding side, private sector deposits in the second quarter of 2020 shows that 367 billion pesos up 7.6% sequentially and down 8.5% when compared with the third quarter of 2019 in real time. Private sector deposits in local currency were 254 billion pesos, increasing 14.6% quarter-over-quarter and 20.1% year-over-year. This is mainly explained by the strong growth in time deposits, saving accounts, and checking accounts, which offset the quarterly fall in interest-bearing checking accounts. Private sector deposits in foreign currencies decreased both measured in pesos and in dollars. During the second quarter of 2019, U.S. dollar deposit withdrawal continued, but at a slower pace than the observed during the last month of 2019. As of June 2020, BBVA transactional accounts, including checking and saving accounts, represent 66.4% of total deposits from 64.5% a year ago, evidencing the ability of the bank to improve the funding mix. BBVA Argentina consolidated market share of the private sector deposits as of June 2020 reached 6.5%. In terms of capitalization, BBVA Argentina accounted an excess capital of 53.2 billion pesos, which represented a total regulatory capital ratio of 21.9% and a tier one ratio of 21.2%. The bank's aim is to make the best use of the success of it. The bank liquidity rate in pesos and in dollars remains healthy at 56.5% and 80.3% of total deposits as of June 30, respectively. This concludes our preliminary mass. We will now take your questions. Operator, please open the line for questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Please limit your questions to 1 with a single follow-up. If you have additional questions, you may re-enter the queue. At this time, we will pause momentarily to assemble our roster. Our first question is from Gabriel Nobrega with Citigroup. Please go ahead.

Hi, everyone. Good morning, and thank you for the opportunity to ask questions. So during the quarter, we saw that you finally wrote off MoCA, and we saw your coverage ratio levels going back to the previous very high levels, which we had seen in the past. And my question here is, taking into consideration what you're seeing with some specific segments, what the economists are expecting for Argentina as well. Do you expect to maybe have to make additional and extraordinary provisions only related to COVID? Or are you comfortable with your coverage level this quarter? And I'll make a second question afterwards. Thank you.

Hello, Gabriel. Thanks for your question. Yes, as you mentioned, we had basically NPL improved in this quarter, basically by two factors. We write it off MOICA and also with the waiver we have from Central Bank. To give you an idea, our NPL as of June would have been 2.14% if we wouldn't have the waivers of of central bank. We are projecting an NPL towards the end of the year around 3.53% more or less. That is excluding all of the central bank waivers we have. Regarding coverage, yes. Sorry, going back to NPN, just to make it clear, the effect is mainly done because we had a sharper reduction of the non-performing loan and the loan book, the denominator, grew more. Going towards coverage, it has increased a lot. As you mentioned, it looks more like the sort of coverage we had in the past. The idea is to take it down. We're expecting a coverage ratio towards the end of the year around 170%. The effect you had in this quarter is mainly because the denominator in a coverage ratio, which includes the NPLs, decreased more than the effect you had in the provisions in the denominator. We feel comfortable with this level of provisioning. Our portfolio is very healthy. As you see, the retail portfolio NPL remains stable, and you had a sharp decrease in the commercial line. So we are feeling comfortable with the actual level of provisioning we are having, which is full IFRS 9.

All right, perfect. Thank you. And as for my second question, actually looking at your net financial margin, and I'm here, I'm also including the net loss from the write-down of assets, which fell a lot during the quarter, even though we had the lower interest rates and also the benefits from the lower non-remunerated reserve rate requirements due to the bank disbursing loans at the 24% interest rates. So what we wanted to understand is that should we see maybe your total financial margin staying at these levels, or could there even be some more added pressure as you begin repricing all of your assets to the lower interest rate environment? Thank you.

I can hear you very well. I understand you're asking by the line of net interest income, correct? That line, towards the end of the year, you should keep seeing it stable towards the end of the year. You had an extra effect on the line which we had to recognize the collection of the capital payment of the 25% of the LELINC, which was this 2 billion pesos. that were previously in the other comprehensive income, and now we have to recognize that lower price in the P&L. Going forward, you should see also an effect in that line because of the 60% remaining that, as we mentioned, There is a swap in July 2020. So you're going to see also a negative effect in the third quarter. But the net increased income, you should see it stable going forward towards the end of the year.

Perfect.

Thank you so much.

You're welcome.

The next question is from Alonso Garcia with Credit Suisse. Please go ahead.

Thank you for taking my question. My question is actually a follow-up. Hello, can you hear me now?

Now, yes. You should have shut down. Now I can hear you.

Hello?

Hello, yes.

Thank you. Thank you for taking my question. My question is actually a follow-up on asset quality. I just wanted to ask you, when do you, I mean, you said you feel comfortable with your current coverage levels. So I wanted to ask you, when do you expect asset quality to peak? Is it going to be in the third quarter, fourth quarter, maybe even in the first quarter of next year? And I mean in terms of MPLs and provisions. When do you think the peak will take place? And if you have a a color on the level of either cost of risk or NPL that we could see at the peak. Thank you.

Okay. Hello. Hello. How are you doing? We expect, a lot of us, depending on central bank's regulation, it either continues or doesn't continue. Being that said, we expect a peak more towards the fourth quarter of this year. And then, again, it depends on how much, regarding the ratio, how much the loan book finally grows. We are expecting a loan book to grow above inflation. we are projecting an inflation towards the end of the year around 47%. So those two variables will finally define the level of NPS you could see towards the end of the year or the coming 2021. But we feel comfortable, again, with the level of provisioning we are having.

Right, thank you. So you would expect... a rather stable level of provisioning or maybe an increase together with the growth of your loan portfolio. But in terms of cost of risk, you think current levels are sustainable for the coming quarter despite the deterioration that we are going to see most likely in the second half of the year. Is that correct?

The coverage ratio should go down towards the end of the year. NPLs should increase. but you could see a higher level of provision also towards the fourth quarter of 2020. Right.

Okay, okay, got it. And yeah, just finally on the margins, so you mentioned that you expected the net interest income to be stable for the remainder of the year. What do you think about next year? Do you think there could be additional pressures? Do you think there could be upside next year if you resume growth in your retail loan portfolio?

I don't know if you may imagine to predict 2021 in Argentina is quite difficult. I know we have to do what happens with the economy where the inflation level finishes at the end of 2020. Yes, definitely, we see a pickup at the end of 2000. If we see an improvement in the economy, you should see the retail portfolio picking up and that definitely should help Our market, our margins, regarding the budget, we are basically working on it. So it's still difficult to predict 2021.

Understood. Thank you very much.

Again, if you have a question, please press star then one. The next question is from Carlos Gomez with HSBC New York. Please go ahead.

Hi, Ines. Good morning. My first question is about loan growth. You had already been saying that you expected to grow above inflation, and you are. You are growing above inflation. Can you explain to us what the origin of this growth is? Is it because there is more poverty? obligation to learn at this 24% rate because there is more demand because interest rates are negative or because you want to grow your loan portfolio. And my second unrelated question is regarding your tax rate that was high. Can you explain how you calculated and whether it will be at these levels through the end of the year?

Thank you. Okay. Hi, Carlo. Nice to talk to you. Regarding loan growth, the projection we're giving that is to grow a little bit above inflation is basically that we come from a very low base in 2020. Remember, we had a huge amount of loans in dollars that sharply decreased recently. in 2021 and are still decreasing, we're not lending in dollars because exporters are now asking for PESO loans. So that should reflect the high increase in the loan portfolio. Mainly it will be driven definitely by the PESO portfolio and mainly by the commercial lines, mainly because of the special lines we're offering around 24% and the zero interest rate. The retail portfolio, despite it starting to pick up the credit cards, and there you can see also the 0% interest rate, and we have a little bit to do how fast it will recover, what finally happens with inflation. So basically that's what we are seeing on the logbook, but it's not genuine demand per se. It basically comes from a very low base in 2020, plus the mandatory loans that you are providing, and again, everything in pesos. Your second question was regarding tax rates. Yes, as you can see, we ended the quarter with a tax rate around 44%, higher than the regulatory 30%. Basically, that has to do with the difference between in the fiscal base that you need to take to consider the tax you have to pay from the base you see on the P&M. Basically, that is what distorts the effect on the effective tax rate. Probably going forward, you should assume a tax rate around 40% for your model.

And that is for this year and also for next year? I mean, that is the... At least for this year.

At least for this year. At least for this year because the main effect is that you're resonating the inflation. And again, as I mentioned, since you have to, the fiscal base to calculate tax is different from the accounts of the rate. Those are the distortions and it's mainly by the inflation effect.

Thank you so much.

This concludes the question and answer session. At this time, I would like to turn the floor back to Mrs. Lanuse for any closing remarks.

Thank you, operator, and thank you all for joining us. We appreciate your interest in the company. We look forward to meeting you more with you, and over the coming months, I'm providing financial and business updates next quarter. As usual, if you have any further questions, please do not hesitate to reach us, and we'll be happy to follow up. Thank you, and enjoy the rest of the day.

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