Earnings Call: Q2 2021

Aug 25, 2021

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 2021 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 presentation. After 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 the operator. First of all, let me point out 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 2020, filed with the U.S. Securities and Exchange Commission. Today with us, we have Mr. Ernesto Gallardo, CFO, Mrs. Inés Lanusse, IRO, and Mrs. Belén Fourcade, investor relations. Ms. Fourcade, you may begin your conference. Good morning, everyone, and welcome to BBVA Argentina's second quarter 2021 earnings conference call. Before we begin our formal remarks, let me stress that some of the statements made during the course of this conference call 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 differ materially from those expressed in the forward-looking statements, including factors that may be beyond the company's control. For a description of these risks, please refer to our SEC filings and earnings release, which are available at our investor relations website, ir.bbva.com.ar. Speaking during today's call will be Inés Lanusse and 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 regulation, we have begun reporting results applying hyperinflation accounting pursuant to IFRS rule IAS 29. For ease of comparability, 2020 and 2021 figures have been restated to reflect the accumulated effect of inflation adjustment for each period through June 30th, 2021. Now, let me turn the call over to Inés. Thank you, Belén, and thank all of you for joining us on our second quarter 2021 conference call. The second quarter of 2021 has been impacted by the second wave of COVID-19 in the context of the sanitary crisis which the country has been going through for more than a year. This implied a deceleration of activity with a persistent uncertainty generated by pending midterm elections and unsolved conflicts related to foreign debt with International Monetary Fund. Banco BBVA Argentina operating results stand out on the second quarter of 2021, growing 14.5% compared to the previous quarter, boosted by an improvement in net fee income with a focus on operating efficiency, denoting an adequate expense management, and by the preservation of margins in a context marked by volatility and rate controls. Meanwhile, the bank closely monitors its business financial conditions and operating results in the aim of anticipating possible effects of the gradual removal of regulations implemented by the government during the pandemic, and especially over asset quality and margins. Regarding digitalization, our service offering has evolved in such way that by the end of June 2021, digital clients penetration reached 74% from 69% a year back, while that of mobile clients reached 62% from 57% in the same period. Trend aims towards stabilization, considering that the pandemic has caused an important shift towards the adoption of digital channels by clients. Lastly, in terms of responsible banking, in July 2021, BBVA at a global level announced it would double its target of channeling sustainable financing to EUR 200 billion, Banco BBVA Argentina being part and collaborating with this target. I will now comment on the bank's second quarter 2021 financial results. BBVA Argentina's second quarter 2021 net income, including inflation adjustment effects, totaled ARS 7.2 billion, growing 119.3% quarter-over-quarter and 14.3% year-over-year. Quarterly results are mainly explained by, 1, a better net operating income due to a larger fee income. Second, the reversal of the provisions recorded in accordance to Central Bank instructions in connection with the repayment of income tax inflation adjustment for 2017 and 2018 fiscal years, for a total of ARS 4.3 billion as a result of an assessment funded on legal and tax advisory opinions in which the bank considers that probability of getting a final instance favorable court ruling are higher for those fiscal years. The accumulated net income for the first 6 months of 2021 was ARS 10.5 billion, 23.7% above the accumulated net income for the first half of 2020 of ARS 8.5 billion. The accumulated ROE of the second quarter 2021 is 16.5, while the accumulated ROA is 2.5%. In the quarter, net interest income totaled ARS 24.3 billion, 1.7% higher than the results posted in the first quarter of 2021, and 1.9% higher than the result posted a year-ago. In second quarter 2021, although in percentage terms, interest expenses increased more than interest income, in monetary terms, growth in interest income compensates the increase in interest cost and reflects a positive net interest income. In second quarter 2021, interest income totaled ARS 43.7 billion, increasing 7.2% compared to the first quarter of 2021, and 30.1% compared to the second quarter of 2020. Quarterly increase is mainly driven by 110.3% surge in premium from repo conceptions and 12% improvement in income from CER-UVA adjustments, the latter related to income from public securities linked to set indexes. The whole increase was offset by a fall in credit cards by 21.6% and 21.7% fall in income from overdraft, the latter due to lower demand. Interest expenses totaled ARS 19.4 billion, denoting a 15.1% increase quarter-over-quarter and a 99.4% increase year-over-year. Quarterly increase is described by 1, an increase in interest expenses from time deposits and investment accounts, mainly due to large portfolio, especially the latter. B, an increase in checking account expenses. C, greater expenses by UVA/CER adjustment driven by time deposits linked to set indexes, also due to a larger portfolio. Interest from time deposits and investment accounts explained 73.9% of interest expenses versus 79.2% the previous quarter. This expanded 7.5% quarter-over-quarter and 86.4% year-over-year. Net fee income as of the second quarter of 2021 totaled ARS 5.4 billion, growing 45.9% quarter-over-quarter and 16.3% year-over-year. In the second quarter of 2021, fee income totaled ARS 9.5 billion, growing 4% quarter-over-quarter and 4% year-over-year. The quarterly increase is mainly explained by the income from credit cards line item, mostly due to an increase in consumption, driven by a recovery in the entertainment and recreational sectors, in addition to a contrasting effect against the previous quarter as restrictions in fee increments and charges were lifted. Regarding fee expenses, these totaled ARS 4.1 billion, contracting 14.4% quarter-over-quarter and 8.7% year-over-year. Lower expenses are partially explained by lower digital sales expenses and a positive effect in the revaluation of miles purchase in 2020 within the LATAM program linked to the foreign exchange rate. During the second quarter of 2021, personal benefits and administrative expenses totaled ARS 12.2 billion, decreasing 1.3% compared to the first quarter of 2021, and increasing 4.5% compared to the second quarter of 2020. Personal benefits contracted 1.9% quarter-over-quarter and increased 6.8% year-over-year. The quarterly decrease is partially explained by an 11% increase in inflation in the same period and a lower payroll expenditure. This was offset by salary increases arranged through collective bargaining agreements, which incremented wages in April by 11.5%. As of the second quarter of 2021, administrative expenses fell 0.6% quarter-over-quarter and increased 2.1% year-over-year. The quarterly fall is also explained by a greater inflation during quarter than the nominal increases in expenses. The accumulated efficiency ratio as of the second quarter of 2021 was 70.1%, below the 72.5% and above the 56% reported in the first quarter 2021 and the second quarter 2020 respectively. The decrease is explained by a higher percentage increase in the denominator than the numerator, which has been positively, especially affected by an improvement in net fee income. Excluding inflation adjustment, the second quarter 2020 accumulated efficiency ratio would have been 47.1%, improving compared to the 50.1% of the first quarter of 2021 and the 47.4% of the second quarter of 2020. In terms of activity, private sector loans as of the second quarter of 2021 totaled ARS 319.7 billion, decreasing 2.9% quarter-over-quarter and 15% year-over-year. Loans to the private sector in pesos decreased 5% in the second quarter of 2021 and 14.1% year-over-year, especially driven by the decrease in real terms in credit cards, other loans, and overdrafts. Loans to the private sector denominated in foreign currency increased 14.4% quarter-over-quarter and fell 20.4% year-over-year. The increase of the later during the quarter is mainly explained by a 39.2% increase in discounted instrument, a 13.2% increase in loans for the pre-financing and financing of exports, and a 7.6% increase in other loans. These loans, measured in U.S. dollars, grew 10% quarter-over-quarter and fell 41.4% year-over-year. The depreciation of the Argentine pesos versus the U.S. dollar was 3.9% quarter-over-quarter and 26.4% year-over-year. In real terms, retail loans have fallen 2.7% quarter-over-quarter and grown 4.4% year-over-year. Commercial loans contracted 3.2% quarter-over-quarter and 34% year-over-year, both in real terms. Decline in both retail and commercial portfolio and in the total loan portfolio are mainly explained by the effect of inflation during the second quarter of 2021, which reached 11%. In nominal terms, the retail, commercial, and total loan portfolio all increased 8%, 7.4%, and 7.8%, respectively, during the quarter, yet unable to offset the impact of inflation during the same period. BBVA's consolidated market share of private sector loans was 8.21% as of the second quarter of 2021 from 8.54% a year ago. In the second quarter of 2021, gross loans to deposit ratio was 52.9% from 68% a year ago. In the second quarter of 2021, NPL ratio was 2.49% compared to the 1.72% recorded in the first quarter of 2021. The increase is mainly explained by the expiration of grace periods related to deferred credit card payments, which caused an increase in the retail non-performing portfolio and the normalization of grace periods granted by the temporary flexibility in central bank regulations regarding debt classifications during the COVID-19 pandemic. Regarding the commercial portfolio, this showed a satisfactory credit performance. The coverage ratio was 187.88% in the second quarter of 2021 versus the 275.22% recorded in the first quarter of 2021. The change in the ratio reflects the subtle reduction in allowance, but mainly the increase in NPLs, in particular on the retail loan portfolio. Cost of risk reached 2.61% as of the second quarter of 2021, higher than the first quarter of 2021's 2.47%. This is mainly explained by the greater reduction in the loan portfolio in contrast to the contraction in loan loss allowances in real terms. In nominal terms, loan loss allowances saw a higher increase than the loan portfolio. In the second quarter of 2021, exposure to the public sector, excluding central bank instruments, reached 6.5%, similar to the 6.4% recorded in the previous quarter. On the funding side, total deposits reached ARS 609.1 billion, increasing 8.1% quarter-over-quarter and 8.6% year-over-year. Private non-financial sector deposits in the second quarter of 2021 reached ARS 601.6 billion, increasing 8.2% quarter-over-quarter and 9% year-over-year. Private non-financial sector deposits in pesos totaled ARS 442.1 billion, growing 11.8% compared to the first quarter of 2021 and 15.9% compared to the second quarter of 2020. The quarterly increase is mainly affected by the growth inside deposits, especially checking accounts, in particular interest-bearing checking accounts and saving accounts. All deposits in local currency grew in real terms during the quarter. Private non-financial sector deposits in foreign currency expressed in ARS fell 0.6% quarter-over-quarter and 6.5% year-over-year. Measured in USD, these deposits fell 4.5% quarter-over-quarter and 31.2% year-over-year. As of the second quarter of 2021, the bank's transactional deposits represent 65.4% of total non-financial private deposits versus 63.7% in the first quarter of 2021. The bank's consolidated market share of private deposits was 7.41% as of the second quarter of 2021, from 6.52% a year ago. In terms of capitalization, Banco BBVA Argentina continued to show strong solvency indicators in the second quarter of 2021. Capital ratio reached 23.3%, Tier 1 ratio was 22.6%, and capital excess over regulatory requirement was ARS 78.8 billion, or 184.5%. 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 74.8% and 79.8% of total deposits as of June 30th, respectively. 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. To ask a question, you may press star then one 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 two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Gabriel Nobrega with Citigroup. Please go ahead. Hi, everyone. Good morning, thanks for the opportunity to ask questions. I actually have two questions here. I wanted to understand a bit more on the asset quality side. You mentioned in your press release, that the grace periods have ended for the credit cards. I was just really wondering, as these grace periods continue to expire, even though there's also the waiver of the central bank, I just wanted to understand, what are you seeing in terms of asset quality? Is there any part of your loan book which is starting to worry you? Is this all inside the risk parameters which you forecasted over the past year, and which you also duly raised provisions? I'll ask a second question afterwards. Thank you. Hi Gabriel, nice to speak to you this morning. Okay, regarding asset quality, as of June 30, the deferred portfolio was only 10% of our book, mainly retail and the credit card. As you mentioned, all the waivers from the central bank has been lifted. Basically, we're seeing the tendency in line with what we were thinking. Actually, the retail, since, as I mentioned, most of the deferred is retail, it's behaving very well. The clients are paying, we're comfortable with our asset quality ratios. We are projecting towards the end of 2021 NPL around 2.9%, increasing a little bit, mainly by the retail book now. Also, it has an effect of the loan book, which is now growing in real terms. It's both some increase in the NPL on the retail book and the loan book, which in real terms, is going to decrease by the end of 2021. Regarding coverage, just to complete all the asset quality information, we are projecting a decrease in the ratio going around 170%. Again, the effect comes from the growth of NPLs, the retail book, and lower allowances. The cost of risk, we are projecting an increase to around 3.1%. The line of loan loss allowances, we're seeing some decrease, although it is increasing the absolute numbers in the second half of the year. In the overall of the year, it's decreasing a little bit. The average total loan book, it's decreasing in real terms. Again, we are comfortable with our asset quality, obviously, very closely monitored now. Thank you, Inés. This is very clear. As per my second question, I just wanted to understand how much of provisions did you do for the fiscal years of 2017 and 2018 related to inflation adjustments. I'm just trying to understand here, because in the first quarter, you guys reversed some provisions which you had created back then. This quarter, you reversed some more ARS 4.3 billion in provisions. I'm just trying to understand if you have already reversed all of the stock of provisions which you had done, just to understand what we should be expecting going forward. Thank you. Yes. Okay. All that information is explained in the press release. As you mentioned, there were three. One, we reversed for ARS 1.2. Those in nominal terms in the first quarter of this year, was for the acción declarativa of 2016, that had been recorded in 2017. You have to recall that at that time, the Central Bank obliged us to do that provision for that acción declarativa that replaced, and we had a favorable court ruling in the first quarter of this year. That one was the first one. For the second quarter, what we did was reverse the one corresponding to 2017 for ARS 1 billion, and the one for 2018 for ARS 3.2 billion. That adds the ARS 4.3 that were reversed in the second quarter of 2021. Those are the three acción declarativa that we have. They have all been reversed. The last 2 in the second quarter, let me make it clear. We were advised by our legal opinion, by our auditors, that since the first ruling, since we got a favorable ruling for the one of 2016, we were okay by reversing these 2 other provisions. We actually informed the Central Bank we were going to do this. That's why we reversed it. The court ruling still is pending. We have what happened with the one of 2016. From our advisors, they were okay to revert this provision. There's no more action pending to be reverted. All right. Very clear. Thank you so much. You're welcome. The next question is from Carlos Gomez with HSBC. Please go ahead. Hello, Inés. Good morning, and congratulations on the results and especially the tax result. I wanted to know what your expectations are for the year in terms of volume growth, both of assets, loans, and deposits. Now that your tax situation is resolved, where do you see your returns for the rest of the year and for next year? Thanks. Hi, Carlos. Nice to speak to you again. For our projections for the private loan book for the year 2021, we are projecting a contraction around 3.6% in real terms, always speaking in real terms. We are seeing a decrease in pesos of around 8% and dollars growing around 34%, because the base was very low. Basically, we are trying to place in very safe loans in dollars some part of our, instead of having the deposits in dollars at zero rates, we try to place some of those in safe loan demand in dollars. Being that said, since we are in real terms, we are projecting a decrease of 3.6%. We are seeing the system decreasing even more in real terms. We are projecting the system to decrease around 18%. We are projecting for 2021 an inflation around 50%, the same inflation projection for 2022. Regarding total deposits, there we're seeing a growth in real terms around 3.1%. The system, we're still seeing the system decreasing 6% in real terms. We are seeing an increase in real terms around 3%. If you split that by currency, we are seeing peso deposits growing around 1.4% and US dollars around 7.3%. Regarding tax, as you mentioned, yes, we have done all these reverses. We are waiting to see the numbers of July to try to understand what would be the most normalized tax rate to project. For your model, you should use around 30%-35%. Going to the net income line that I understood you were projecting that, what we're seeing towards 2021, we are seeing obviously with the comparison of the figures of 2020, taking them to the values of 2021. Now, inflation-adjusted, the net income should remain flat compared to what was the result of 2020. Thank you. Sorry, if I could follow up, because it was really quick. On loans for in US dollars, if I understood correctly, you expect growth, I think what you said, 14%? I'm asking because at this point in time, your loans in US dollars are actually declining. You expect a reversal in the second half of the year? No, we are seeing the loans in $, let me check again. The loans in $ grew 14.4% in the quarter. They are growing, the loans in $. Okay. For the year as a whole year-on-year, you said you expect-? Yes. Again, it's a very small portfolio. Just remember that our private loan book in $ is only 13%. What we are doing is we came from a very low base because we were not really lending in $. What we're doing is instead of having the deposits in dollar at 0 interest rates, to those very safe customers that we know and we have a good relationship, we still are lending some in $. The increase in $, it's mainly because of the numbers, of the base that it was very low. There's not that much activity in the loan book in $. Okay. That is clear. If I may follow up, I don't think the call is too long anyway. On your dividends, to clarify, the dividend suspension has been extended, I think, until the end of the year. You approved a dividend. Can you do as in previous years, can you have the dividend approved and separated from equity, but pending payment until approved? Is that the plan? Correct. We have ARS 21.5 billion pesos in the liabilities pending of distributions when the central banks approve distributions. Does that include the dividend you approved this year or not? The ARS 7 billion, yes, correct. The last ARS 7 billions, correct. There's a table in our presentation, but let me recap. Hold on, I have here the figures. You have from 2019, ARS 14.5 billion. There were 2 declarations of dividends, that those are pending of distribution, and ARS 7 billions for the results of 2020. That adds ARS 21.5 billion. All right. Thank you very much. Again, if you have a question, please press star then one. The next question is from Rodrigo Nistor with AR Partners. Please go ahead. Hi, good morning. Thank you for taking my question. My question is on funding. Given the high levels of inflation, I think it's increasingly hard to get access to cheap funding. What do you expect in terms of mix for your funding base for the rest of the year? Maybe a follow-up on this, if you believe that wallets like Mercado Pago and Ualá are having a meaningful impact on availability of cheap deposits. Regarding the deposit funding strategy of the bank, basically what we are doing, as we mentioned in the press release, we have more liquidity this quarter. What we are doing is we are using to attract deposits from cuenta corriente remunerada, so that pays an interest rate from corporates mainly. It's something that we can easily give and take back. It's something that we control to get those deposits and invest them basically in public debt, which pays you more than financial intermediation. As you know, there's no credit demand. We have most of our book in credit cards. Credit card, 50% of that is Ahora 12, so the return is not that good. What we are doing, but is actually, that's why you see the percentage of deposit that in a plazo, that is growing, but it's something that we control. We decide to give cuenta corriente remunerada to corporates, pay some of that interest rate, and put that on public debt, gives us a better return. I don't know if I answered the question. Yeah. What about the impact of? Sorry. Public debt, I mean central bank instruments. Sorry, not to confuse. Central bank instruments, not repos and LELIQs. Sorry. Yeah, that's clear. What about the impact of wallets like Mercado Pago and Ualá on the availability of cheap deposits? Do you think that's something that might have an impact or still too small? Not for now. We're not concerned. We have MODO, which is working. Sight deposits are growing. At the same time we see sight deposits grow. Today, sight deposits represent 66% of our portfolio. It's increasing compared to the previous quarter. It's not something that concerns us. The problem with Argentina is the low banking penetration. Yes, they are cutting deposits. We're not yet that concerned on the funding side. The liquidity of the banks is very, very high. Again, by this strategy we are doing to get funding that we pay something for the corporates, we pay some cuenta corriente remunerada, but invest it in central bank notes, gives us a better return. Okay, thank you. That was helpful. You're welcome. This concludes the question and answer session. At this time, I would like to turn the floor back to Mrs. Lanusse for any closing remarks. Okay. Thank you for your time. Please contact us if you have any further question. Have a nice day. Thank you. This concludes today's presentation. You may disconnect your line at this time, and have a nice day.