Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to BBVA Argentina's 2nd 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's presentation. After company's remarks are completed, there will be a question and answer session. At that time, further instructions will be given.
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 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 20F for the fiscal year 2020 filed with the U. S. Securities and Exchange Commission.
Today with us, we have Mr. Ernesto Gallardo, CFO Mrs. Ines L'Unoussay, IRO and Mrs. Benin Forcade, Investor Relations. Ms.
Forcade, you may begin your conference.
Good morning, everyone, and welcome to BB Argentina's 2nd 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 Ines La Nuce and Ernesto Baccardo, our Chief Financial Officer, who will be available for the Q and A session. Please note that starting January 1, 2020, as per Central Bank Regulation, we have begun reporting results applying hyperinflation accounting pursuant to IFRS rule IAS 29. For risk of comparability, 20.2021 figures have been restated to reflect the accumulated effect of inflation adjustment for each period through June 30, 2021. Now let me turn the call over to Ines.
Thank you, Belen, and thank all of you for joining us on our Q2 2021 conference call. The Q2 of 2021 has been impacted by the second wave of COVID-nineteen 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. BBVA Argentina operating results stand out on the Q2 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 finance 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 200,000,000,000 BBVA Argentina being part and collaborating with this target. I will now comment on the bank's Q2 2021 financial results. BBVA Argentina's Q2 2021 net income, including inflation adjustment effects, totaled ARS 7,200,000,000, growing ARS 119.3 percent quarter over quarter and 14 0.3% year over year.
Quarterly results are mainly explained by: 1, a better net operating income due to a larger fee income and 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 20 18 fiscal years for a total of ARS 4,300,000,000 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 favoring court ruling are higher for those fiscal years. The accumulated net income for the 1st 6 months of 2021 was ARS 10,500,000,000, 23.7 percent above the accumulated net income for the first half of twenty twenty of ARS 8,500,000,000. The accumulated ROE of the Q2 2021 is ARS 16.5 percent, while the accumulated ROA is 2.5%. In the quarter, net interest income totaled ARS24.3 billion, 1.7 percent higher than the results posted in the Q1 of 2021 and 1.9% higher than the result posted a year ago. In Q2 2021, although in percentage terms, interest expenses increased more than interest income, in monetary terms, growth in interest income compensates the increase in interest costs and reflects a positive net interest income.
In Q2 2021, interest income totaled ARS 43,700,000,000, increasing 7.2% compared to the Q1 of 2021 and 30.1% compared to the Q2 of 2020. Quarterly increase is mainly driven by 110.3% surge in premium from repo transactions and 12% improvement in income from share Uber adjustments, the later related to income from public securities linked to certain indexes. The whole increase was offset by a fall in credit cards by 21.6 percent and 21.7% fall in income from overdraft, the later due to lower demand. Interest expenses totaled ARS 19,400,000,000, denoting a 15.1% increase quarter over quarter and a ARS 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 later b, an increase in checking account expenses and c, greater expenses by UVA set adjustment driven by time deposits linked to such indexes, also due to a larger portfolio.
Interest from time deposits and investment accounts explained 73.9% of interest expenses versus 79.2 percent the previous quarter. This expanded 7.5% quarter over quarter and 80 0.4% year over year. Net fee income as of the Q2 of 2021 totaled ARS5.4 billion, growing 45.9 percent quarter over quarter and 16.3% year over year. In the Q2 of 2021, fee income totaled ARS 9,500,000,000, 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 4,100,000,000 contracting 14.4 percent quarter over quarter and 8.7% year over year. Lower expenses are partially explained by lower digital sales expenses and the positive effect in the regulation of my purchase in 2020 within the LATAM program linked to the foreign exchange rate. During the Q2 of 2021, personnel benefits and administrative expenses totaled ARS 12,200,000,000, decreasing 1.3% compared to the Q1 of 2021 an increasing 4.5% compared to the Q2 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 Q2 of 2021, administrative expenses fell 0.6% quarter over quarter and increased 2.1% year over year. The quarter in full is also explained by a greater inflation during quarter than the nominal increases in expenses. The accumulated efficiency ratio as of the Q2 of 2021 was 70.1%, below the 72.5% and above the 56% reported in the Q1 2021 and the Q2 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 2nd quarter 2020 accumulated efficiency ratio would have been 47.1%, improving compared to the 50.1% of the Q1 of 2021 and the 47.4% of the Q2 2020. In terms of activity, private sector loans as of the Q2 of 2021 totaled ARS 319,700,000,000, decreasing 2.9% quarter over quarter and 15% year over year. Loans to the private sector in pesos decreased 5% in the Q2 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 percent 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 refinancing 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 effects of inflation during the Q2 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 percent as of the Q2 of 2021 from 8.54% a year ago. In the Q2 of 2021, gross loans to deposit ratio was 52.9% from 68% a year ago. In the Q2 of 2021, NPL ratio was 2.49 percent compared to the 1.72% recorded in the Q1 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-nineteen pandemic. Regarding the commercial portfolio, this showed a satisfactory credit performance.
The coverage ratio was 187.88 percent in the Q2 of 2021 versus the 275.2 2% recorded in the Q1 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 Q2 of 2021, higher than the Q1 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 Q2 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 ARS609,100,000,000 increasing 8.1% quarter over quarter and 8.6% year over year. Private non financial sector deposits in the Q2 of 2021 reached ARS 600 and 1,600,000,000, increasing 8.2% quarter over quarter and 9% year over year. Private non financial sector deposits in pesos totaled ARS442,100,000,000, growing 11.8% compared to the Q1 of 20.31 and 15.9% compared to the Q2 of 2020. The quarterly increase is mainly affected by the growth in site 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 pesos fell 0.6% quarter over quarter and 6.5% year over year. Measured in U. S. Dollars, these deposits fell 4.5% quarter over quarter and 31.2% year over year.
As of the Q2 of 2021, the bank's transactional deposits represent 65.4 percent of total non financial private deposits versus 63.7% in the Q1 of 2021. The bank's consolidated market share of private deposits was 7.41 percent as of the Q2 of 2021 from 6.52% a year ago. In terms of capitalization, BBVA Argentina continues to show strong solvency indicators in the Q2 of 2021. Capital ratio reached 23.3 percent. Tier 1 ratio was 22.6 percent and capital excess over regulatory requirement was ARS 78,800,000,000 or 184.5 percent.
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 30, 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
Our first question comes from Gabriel Nobrega with Citigroup. Please go ahead.
Hi, everyone. Good morning for the opportunity to ask questions. I actually have 2 questions here. So 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.
And so I was just really wondering, as these grace periods continue to expire, even though there is also the waiver of the Central Bank, I just wanted to understand what are you seeing in terms of asset quality? Is there any parts of your loan book which is starting to worry you? Or is this all inside the risk parameters, which you forecasted over the past year and which you also duly raised provisions? And I'll ask the second question afterwards. Thank you.
Hello, Gregory. 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.
And basically, we're seeing the tendency in line with what we were thinking. Actually, the retailers, since, as I mentioned, most of the deferred is retail, It's behaving very well. The clients are paying, and we are comfortable with our asset quality ratios. We are projecting towards the end of 2021 NPL around 2.9%, so increasing a little bit, mainly by the retail book now. And also, it has an effect of loan book, which is not growing in real terms.
So it's both some increase in the NPL on the retail book and the loan book, which is in real term 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%. Basically, again, the effect comes from the growth of NPLs, the retail book, and lower allowances. And the cost of risk, we are projecting an increase to around 3.1%. Basically, the line of loan loss allowances, we're seeing some decrease, although it is increasing absolute numbers in the second half of the year, but in the overall of the year, it's decreasing a little bit.
But the average total loan book is decreasing in real terms. But again, we're confident with our asset quality, obviously, very closely monitored.
Thank you, Ines. This is very clear. And as part of my second question, I just wanted to understand how much of provisions did you do for the fiscal years of 2017 2018 related to inflation adjustments? I'm just trying to understand here because in the Q1 you guys reversed some provisions which you had created back then. And then this quarter, you reversed more of R4.3 billion dollars in provisions.
And so 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 for the Q4? Thank you.
Yes. Okay. That although that information is explained in the press release, as you mentioned, there were 3. One, we reversed for 1.2, those were nominal terms in the Q1 of this year, was for the action declarati of 20 16 that had been recorded in 2017. You have to recall that at that time the Centro Blanc obliged us to do that provision for that axiom declarati that we placed, and we had a favorable court ruling in the Q1 of this year.
So that was the first one. For the Q2, what we did was reverse the one corresponding to 2017 for ARS 1,000,000,000 and the one for 2018 for ARS 3,200,000,000. That adds the ARS 4.2 ARS 4.3 billion, sorry, that were reversed in the Q2 of 2021. Those are the 3 Apsiena clarativa 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 the auditors that since the first ruling, we got a favorable ruling for the 1 of 2016, we were okay by reversing these two other provisions. We actually informed the Central Bank we were going to do this, and that's why we reversed it. The court ruling still is expanding, but we have the what happened with the one of 2016 from our advisers, they were okay to revert this provision. But there's no more action and headlarity pending to be reverted.
The next question is from Carlos Gomez with HSBC.
Hello, Ines. 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? And now that your tax situation is resolved, where do you see your return for the rest of the year and for next year?
Carlos, nice to speak to you again. Okay. Well, projections for the private loan book for the year 2021, we are projecting a contraction around 3.6 percent in real terms, always speaking in real terms. May we are seeing a decrease in pesos of around 8% and dollars growing around 34%, but because the base was very, very low. Basically, we are trying to place in very safe loans in dollars some part of our instead of having the deposits in dollar at 0 rates, we try to place some of those in safe long 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 point 4% and U. S. 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. But for your model, you should use around 30%, 35%. Now 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, inflation adjusted, the net income should remain flat compared to what was the result of 2020.
Sorry, if I could follow-up, if it was really quick. So on loans for in U. S. Dollars, if I understood correctly, do you expect growth? I think what you said 14%.
I'm asking because at this point in time, your loans in dollars are actually declining. So do you expect a reversal in the second half of the year?
No. We are seeing that loans in dollars, let me check it in, but the loans in dollars grew 14.4% in the quarter. So we are growing the loans in dollars.
Okay. And for the year as a whole, you said you were spending
Yes. But again, it's a very small portfolio. Just remember that our private loan book in dollars is only 13%. What we are doing is we came from a very low base because we are not really lending in dollars. What we're doing is instead of having the deposits lower 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 dollars.
But the increase in dollars, it's mainly because of the numbers, of the base value was very, very, very low. There's not that much activity in the loan book in dollars.
Okay. That is clear. And if I may follow-up, I don't think the last call is too long anyway. On your dividends, to clarify, the dividend suspension, I think, extended until the end of the year, you approved a dividend. Can you do us 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 21,500,000,000 in the liabilities pending of distributions when the central banks approve distributions.
Does that include the dividend you approved this year or not?
The EUR 7,000,000,000, yes, correct. The last EUR 7,000,000,000, correct. You have there's a table in our presentation, but let me recap. Hold on. I have here the figures.
You have from 2019, 14.5. There were 2 declarations of dividends that those are pending of distribution and €7,000,000,000 for the results of 2020. That adds 21.5
The next question is from Rodrigo Nistor with AR Partners. Please go ahead.
Hi, good morning and thank you for taking my question. My question is on funding. I mean, given the high levels of inflation, I think it's increasingly hard to get access to cheap funding. So what do you expect in terms of mix for your funding base for the rest of the year? And maybe a follow-up on this.
If you believe that wallets like Arcavopago and Voila are having a meaningful impact on availability of cheap deposits?
Okay. Yes, 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 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 Aurora Dose, so the return is not that good. So what we are doing, but is actually that's why you see the percentage of deposits that in Aplazo, that is growing, but it's something that we control. We decide to give a to corporates, pay some of that interest rate and put that on public debt, which gives us a better return.
I don't know if I answered the question.
Yes. And what about the
Sorry, public debt public debt, I mean, Central Bank Instruments, sorry, not to confuse Central Bank Instruments, not Reposalex, sorry.
Yes, that's clear. And what about the impact of wells like Mercado Paolo and Hualao 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 are not concerned. We have MOLO, which is working, but site deposits are growing. At the same time, we see site deposit grow. Today, site deposits represent 66% of our portfolio.
It's increasing compared to the previous quarter. So it's not something that concern us. The problem in Argentina is the low banking penetration. Yes, they are cutting deposits, but we are not yet that concerned on the funding side. The liquidity of the banks is very, very high.
And again, by this strategy, we are doing to cut to get funding that we pay something for the corporates. We pay some but invest in invest it in Central Bank notes gives us a better return.
This concludes the question and answer session. At this time, I would like to turn the floor back to Ms. Villanusa for any closing remarks.
Okay. Thank you for your time, and please contact us if you have any further