Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to BBVA Argentina's third 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 company remarks are completed, there will be a question-and-answer section. 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 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 Gallardo, CFO, Mrs. Inés Lanusse, IRO, and Mr. Javier Kelly, Investor Relations Manager. Mr. Kelly, you may begin your conference.
Hello, everyone, welcome to the BBVA Argentina earnings conference call for a discussion of our third 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 expectation and belief 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 relation website, ir.bbva.com.ar. Speaking during today's call will be Inés 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 January 1st, 2020, as per central banking regulations, we have begun reporting results applying hyperinflation accounting in accordance with IFRS rule IAS 29. For ease of comparability, figures for all quarter of 2019 have been restated applying IAS 29 to reflect the accumulated effect of the inflation adjustment for each period through September 30, 2020. Now, let me turn the call over to Inés.
Thank you, Javier, and thank you all of you for joining us on the third 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 employees safety, both in central offices and in branch network. The bank has provided its clients, through its traditional and digital channels, not only its wide range of products, but also all possible support that has surged through the health emergency regulation implemented by the Argentine government. Regarding digital transformation, the penetration of digital clients reached 71%, from 69%, and the penetration of mobile clients reached 59%, from 57% in the prior quarter.
Moreover, digital branches have been launched in October 2020, combining several features between human capital and structure facilities to promote client self-service, aiming to digitalize and migrate clients to remote channels. In terms of responsible banking, BBVA Argentina keeps working towards a sustainability model, supporting the responsible business actions regarding inclusion, financial education, and environmental protection as part of its comprehensive compromise with the country. Meanwhile, the bank closely monitors the impact of the pandemic over its business financial conditions and operating results in the aim of anticipating possible actions to optimize value for its shareholders, and it keeps the solidity it has widely developed for as long as the volatility and uncertainty are seen during 2020 remain. I will now comment on the bank's third quarter 2020 financial results.
All figures mentioned herein are measured in current currency at the end of the reporting period, including the corresponding financial figures for the previous periods provided for comparative purpose, unless otherwise noted. BBVA Argentina's third quarter 2020 net income, including inflation adjustment effects, totaled ARS 2.83 billion, 2.9% higher than the ARS 2.75 billion posted a quarter ago, and 65.4% lower than the ARS 8.19 billion posted a year ago. The quarter-over-quarter increase is mainly explained by a lower income tax derived from the reduced taxable base, additional to temporary differences between fiscal and accounting inflation adjustment regulations.
The year-over-year decrease is partially explained by the impact of the pandemic and the sharp contraction of the interest rate as a consequence of the monetary policy implemented by the government during 2020. In the third quarter, net income from write-down of assets at amortized cost and at fair value through other comprehensive income reflected a loss of ARS 4.0 billion, 79.3% greater than the record in the prior quarter. 72% of the result in this line is mainly explained by the accumulation inflation adjustment in other comprehensive income of the remaining position in US dollar-linked notes (LELINK) which the bank exchanged in the voluntary swap offered by the National Treasury on July 17th, 2020. In the quarter, net interest income total ARS 16.6 billion, ARS 2.6 billion lower than the result posted in the second quarter of 2020 and 25.6% lower than the result posted a year ago.
The decline is mainly explained by an increase in the average minimum rate of time deposits and of interest-bearing checking accounts, in addition to a shift in deposit mix from sight deposits to time deposits. All of these which offset the greater income derived from a higher position in central bank LELIQs. Income from government securities increased by 34.1% compared to the second quarter of 2020, and fell 38.4% compared to the third quarter of 2019. The sequential increase is explained by an increase in the LELIQ position as a consequence of the increment in time deposits, combined with central bank regulations that enable a higher excess LELIQ position in line with what was granted in time deposits at minimum rate. Interest income from loans and other financing total ARS 14.8 billion, decreasing 3.3% quarter-over-quarter.
This is explained mainly by the contraction in overdraft, a direct consequence of the economic situation, partially offset by the pickup in credit card transactions and loans to the pre-financing and financing exporters, mainly in pesos. In third quarter 2020, interest from time deposits represented 86.4% of the bank's total interest expenses, increasing 48.5% in the quarter. Net fee income amounted to ARS 3.0 billion, 10.2% lower quarter-over-quarter. This contraction is explained by fees from credit card consumption received during the second quarter, and in a lower extent, by the slight pickup in expenses as a consequence of the surge in the activity. If fees from credit card consumption received in the second quarter were excluded, net fee income in the third quarter would have increased 27.7% quarter-over-quarter. Net income from financial instruments at fair value totaled ARS 886 million, decreasing 34.8% quarter-over-quarter.
This is explained by the lower volume in income from government securities, explained by the reduction of exposure to LELIQs during the last month of the quarter. In the third quarter of 2020, FX gain, including foreign currency forward transactions, totaled ARS 1.6 billion, increasing 0.5% quarter-over-quarter due to an increase in results from purchase and sale of foreign currency derived from a surge in the activity. Moving on to the expenses during the third quarter of 2020, personnel and administrative expenses totaled ARS 8.9 billion, increasing 6.5% quarter-over-quarter and decreasing 12.1% year-over-year. Personnel benefits expanded 7.3% in the quarter, reaching ARS 4.6 billion. This increase is mainly explained due to the increment in salaries as a consequence of a collective bargaining agreement with labor unions on July 16th, 2020.
Administrative expenses grew 5.7% in the quarter, mainly explained by an increment in armored and transportation services driven from the surge in activity and increase in FX market restrictions in force in September, partially offset by savings in administrative services and rentals. The accumulated efficiency ratio as of third quarter of 2020 was 58%, above the 54.7% and the 43.9% reported in the second quarter of 2020 and in the third quarter of 2019, respectively. The increase is explained by a higher percentage increment of the expenses than the income, which has been mainly affected by the increase in financial expenses. Excluding inflation adjustments included in the line income from monetary positions and net income from write-down of assets at amortized cost and at fair value through OCI, the accumulated efficiency ratio as of the third quarter of 2020 would reach 46.2%.
In the third quarter of 2020, other operating expenses contracted 11.2% quarter-over-quarter due to the reduction in the turnover tax for the recognition of the advanced payments of this tax for 2020 in the city of Buenos Aires. On the other hand, there is also a reduction in other operating expenses as a consequence of the relief of legal provisions. In terms of activity, the bank financing to the private sector totaled ARS 258.6 billion, decreasing 4.1% quarter-over-quarter and decreasing 10.6% year-over-year, both in real terms. BBVA Argentina consolidated market share over the private sector loans as of September 2020 reached 8.25% from 8.13% in third quarter 2019. Loans to the private sector in pesos remained flat quarter-over-quarter and increased 12% in the year.
Dollar-denominated loans decreased 22.8% quarter-over-quarter measured in pesos and 29.3% measured in dollars, mainly driven by the contraction in the balance of loans in foreign currency. Regarding the retail portfolio, including mortgages, pledge, consumer, and credit card loans, these have increased 7.3% quarter-over-quarter and fell 1.5% year-over-year. In the quarter, the greatest increase are reflected in pledge loans and credit card loans, the latter boosted by Ahora 12 and Ahora 18 programs. Commercial loans, including overdraft, discounted instruments, leasing, foreign trade, and other loans, fell 15.3% quarter-over-quarter and 19.9% year-over-year. The quarterly decrease is mainly explained by a 41% decline in overdrafts and a 27.6% decline in loans for the pre-financing and financing of exports. This was partially offset by a 15.7% increase in discounted instruments and a 2.2% increase in company loans.
As of September 30, the banks had granted ARS 47.9 billion in COVID-19 supported credit lines. In the third quarter of 2020, gross loans to deposit ratio was 66%, compared to the 79% a year ago. As of September 2020, asset quality measured as total non-performing portfolio over total portfolio, reached 1.16%, the lowest in the last 12 months. This ratio was positively affected by the temporary flexibility in BCRA regulations regarding debt classification during the COVID-19 pandemic, which extends grace periods in 60 days before a loan is classified as non-performing, and suspends the mandatory reclassification of clients that have been in irregular performance with other institutions but are regular performance with the bank. These waivers are in effect until December 31st, 2020. The coverage ratio ( allowance / total non-performing portfolio) increased to 355.26% in the third quarter of 2020 from 269.38% in the second quarter of 2020.
This is explained by a decrease in non-performing loans, which is greater than the increase in allowances as a consequence of the implementation of the impairment model and the continuing effect of waivers in force to BCRA regulations regarding debt classification. Cost of risk ( loan loss allowances / average total loans) reached 1.37%, lower than the 4.27% recorded in the second quarter of 2020. It is mainly explained by an adequate evolution in credit quality, especially in the commercial portfolio. Allowances for the bank in the third quarter of 2020 reflect expected losses driven by allocation of the IFRS 9 standard as of January 1st, 2020, except for debtor's instruments issued by non-financial general sectors, which were temporarily excluded from the scope of that standard.
In the third quarter, exposure to the public sector, excluding central bank instruments, measured as a percentage of total assets, reached 4.3%, above the 3.3% recorded in the prior quarter. Our total exposure to the public sector, excluding central bank notes, was ARS 25.1 billion, above the ARS 19.2 billion in the prior quarter. It is worth noting that on July 17, the bank participated in the voluntary swap offered by the National Treasury and swapped its remaining position in sovereign US dollar-linked notes ( LELINK) in the exchange of bundle of sovereign bonds in pesos adjusted by inflation ( BONCER) maturing in 2023 and 2024. This left the bank's portfolio virtually free of US dollar and US dollar-linked denominated securities.
On the funding side, private sector deposits in the third quarter of 2020 totaled ARS 393 billion, remaining flat quarter-over-quarter and growing 6% when compared with the third quarter of 2019. Private sector deposits in local currency were ARS 279 billion, increasing 2.2% quarter-over-quarter and 33.8% year-over-year. This is mainly explained by the strong growth in time deposits, especially of investment accounts. The latter extends by the growth of checking accounts. Private sector deposits in foreign currency decreased, both measured in pesos and in dollars. Towards the end of the quarter, US dollar deposit withdrawal increased as a consequence of the enhanced restrictions over the FX market. After operability was reestablished under new central bank regulations, foreign currency deposit withdrawal slowed down, returning to level observed during the previous months.
As of September 2020, BBVA transactional deposits, including checking and saving accounts, represent 63.1% of total deposits from 66.4% a year ago. BBVA Argentina consolidated market share of private sector deposits as of September 2020 reached 6.48%. In terms of capitalization, BBVA Argentina continues to show strong solvency indicators, accounting an excess capital of ARS 61.9 billion, entitling a total regulatory capital ratio of 23.2% and a Tier 1 ratio of 22.6%. The bank's aim is to make the best use of the excess capital. The bank's liquidity ratio in pesos and dollars remains healthy at 51.1% and 86% of total deposits as of September 30, respectively.
Last but not least, on November 20th, the general extraordinary shareholders meeting approved a distribution of a complimentary cash dividend for the sum of ARS 12 billion through the partial write-off of the optional reserve of future distribution of earnings, in the end, to increase the ARS 2.5 billion cash dividend approved in the shareholders meeting of May 15, 2020, subject to BCRA approval. With this additional dividend, the payout ratio would reach 46%. 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. At this time, we will pause momentarily to assemble our roster. Our first question comes from Gabriel da Nóbrega with Citi. Please go ahead.
Hi, everyone. Good afternoon. Thank you for the opportunity to ask questions. I actually have two questions. The first is on the level of provisioning. We saw a large decrease in this quarter. I understand that it is because you are extremely comfortable. Your coverage ratio is well above 300%, if I'm not mistaken, this is a new historical high. I wanted to understand, even though you still don't have a clean picture of the NPLs due to the waivers from the central bank, I would just like to understand if you believe that you are going to keep making the same level of provisioning for the coming quarters. I'll ask a second question afterwards. Thank you.
Hi, Gabriel. Nice to talk to you. Okay. Yes, as you mentioned today, we have a question mark on when the waivers of the central bank will be taken out. Regarding our more acid projection for NPL, we do not increase this waiver. We are projecting an NPL to be around 1.90% by the end of 2020 and going a little bit higher, even more higher in 2021, now reaching levels of 2.9% or around 3%. As you mentioned, the level of provisions, we feel very confident, it's very high. You should see an increase in provisioning in the fourth quarter, mainly by the change in the variables affecting the IFRS 9 model. Also consider that your NPL will increase. Your NPL in the fourth quarter should increase mainly because of the corporate portfolio.
That should make the coverage go a little bit further down by the end of 2020. For 2021, again, we still have a question on how NPLs will perform, despite we know they should get a little bit worse. The waivers will, at the end of the day, define how the ratio behaves. Yes, provisioning should increase in the fourth quarter, but again, mainly because of the change in the IFRS 9 projections.
Okay, perfect. Then I'll ask for my second question. It's actually on your net interest income. We have seen that since the first quarter, this has decreased a lot. While I understand that there is an effect here from the increase in the BADLAR rate, it's still a significant decrease versus your peers. If you could just maybe comment what's going on here, what's maybe being different than what the other larger 10 banks are seeing. Also, as we're starting to see the central bank increasing interest rates again, what do you think should be the trajectory for your net interest income in the fourth quarter? Thank you.
Okay. For the first quarter, we believe you will really see an increase in the net interest income, mainly because activity should start to increase. That also is a little bit increasing. Sorry, due to the surge of activity with increasing cost of funds. As you mentioned, also the fund deposits are increasing. We are paying a minimum. That increase in activity, that would increase our interest income, will be a little bit compensated by the increase of cost of funds. Going more towards 2021, we are also expecting activity to increase, probably going more to similar levels as 2019. Again, we will see the pressure on the cost of funds. That probably will affect the yields in loans.
It's a question of mix, also going more into the general activity of the bank, which is lending. It is more tied to the pickup in the demand that we saw in the last quarter, the effect of the subsidized loans that were picking up, now they're starting to decrease again, despite we are seeing some pickup in the retail business.
Thanks, Inés . If you just allow me, to follow up here, since you talked about this demand question. We saw the new regulation for the subsidized loans at, I think, 30% for SMEs. Do you expect to start offering a lot of these, and maybe could this lead to a pickup in demand for the fourth quarter and for 2021 as well?
It's difficult to predict, Gabriel. We have lended, for example, the subsidized line of 24%, now it's starting to reduce that demand. Also because we are obliged to lend this 7.5% of the deposit base. As of November 20, we have already granted ARS 5.9 billion in this new line, which is not, you have to place it's not offset it. Basically, the demand for this type of loans is coming from that side. Going forward, we need to see the macroeconomic conditions to become more stabilized. There we should see a pickup in loan demand.
Perfectly clear. Thank you so much.
The next question is from Alejandra Aranda with Itaú. Please go ahead.
Hi, Inés . Could you tell us the percentage of loans reprogram, and if you could discriminate that between credit cards and the rest of your portfolio? Remind me, you said, what was the percentage of loans at the subsidized rate that you already have on your portfolio?
Okay. To make it clear, the support line for the 24%, the zero interest rate and all those lines that were implemented for COVID represent ARS 47.6 billion. This new regulation, the compulsory credit line, which is Communication 7140, as of November 20, we have already granted ARS 5.9 billion. The lines that were granted for the COVID, on the COVID lines, now are going into the compulsory credit lines. Regarding the deferred loans from the total loan book, they represent approximately 17% of the total book, and it's mainly composed by the credit card business.
Okay, perfect. Two more questions, if I may. In terms of fees, could you give us some color on what to expect for the next year, and for 4 Q, and also for growth in loans on deposits?
Yes. Regarding fees on the fourth quarter, you should see them going a little bit further down because the activity will start to increase. You should see acquisitions costs starting to increase. You already saw some of that in the third quarter, despite if you had excluded that one-time gain we had in the second quarter, you would have seen an increase in fees. Going forward to 2021, again, tied to the increase in inflation, sorry, increase in the activity, you are going to see some increase in some products, commission for some products, particularly credit cards and safety boxes. We are projecting increases for January, June, and October. Expenses to grow in line with inflation. Again, we should see some more client acquisition costs that probably you didn't see in 2020, that you're going to see in 2021.
Probably the trend you should take as a reference what happened in 2019. We expect to have a trend similar to what happened that year. Going to loan growth, to give you an idea, year to date with the figures as of October, the bank in nominal terms, the bank has been growing around 32% above the system. Deposits was growing around 40%, a little bit below the system. We are projecting for the year-end, loan growth in nominal terms to grow around 42%. That will be around 3% in real time. We are projecting an inflation towards the end of the year of 39%. Regarding deposits, these are still going to grow above loans, growing around 50%, which also gives you real growth in real terms.
For 2021, the mix should be inverted. Loans should start to grow above deposits. Loans growing above the system and deposits also growing above the system. The inflation we are projecting for 2021 is 50%. Both variables growing above inflation.
Okay. Thank you very much.
Welcome.
Again, if you have a question, please press star then one. The next question is from Carlos Gomez with HSBC. Please go ahead.
Hi, good morning. Could you clarify further the situation with the dividend? You declared an initial dividend, which again, if I understand correctly, you did not pay because the Central Bank has not allowed it. Now you're declaring a complimentary dividend, which again, will depend on Central Bank approval. I imagine that they remain parked until the Central Bank changing its mind and you can pay for it. Do you have a realistic expectation to pay the dividend this year, or this is more likely for next year? If and when you are allowed, are you planning to do it in pesos or are you going to make any type of facilitation for foreign shareholders to access it in dollars?
Hi, Carlos. Regarding Central Bank, there is no predictability. It's difficult to say when we will be able to pay. The truth is that by doing this, we are increasing our monetary liabilities, which help hedge against inflation. Basically, you will see a lower effect on the line of inflation on the P&L. Despite we do not have the approval to distribute, and we don't know when that's going to happen, this should have a positive effect on the P&L, because we are trying to hedge inflation. Basically, that's the main difference.
Let us understand this. It's not completely clear to me. You declare the dividend, so essentially the dividend comes out of equity, but its categorization changes from monetary liability to non-monetary liability?
No. It comes out from the equity and goes into the liability.
A new liability.
A liability. A monetary liability.
What happens is that you have less net monetary assets at the end of the day.
Okay, you'll have less monetary assets because now this becomes a liability as opposed to being part of the equity.
Correct.
Exactly. That's the point.
All right. Is there any real-life implication, taxes or otherwise? Because otherwise, it's just simply cosmetic. It's just what happens to the inflation adjustment and therefore the reported earnings.
I'm not sure I understand your question. Basically, this would give you less inflation adjustment effect because you have the dividends on the liability side, on the monetary liability. That's the main effect. We're trying to hedge against inflation by doing this.
Okay. Now, my other question was if there is any fiscal impact from that. Does your tax liability change because you have more or less?
The answer to that is there is not any fiscal impact because, in terms of fiscality, you are going to consider it when you really pay the dividend, not when you declare the dividend.
Okay. That is clear. Thank you.
This concludes the question-and-answer section. At this time, I would like to turn the floor back to Mrs. Lanusse for any closing remarks.
Thank you, operator, and thank you all for joining us today. We appreciate your interest in us. We look forward to meet 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 happily follow up. Thank you, and enjoy the rest of the day.
Thank you. This concludes today's presentation. You may disconnect your lines at this time, and have a nice day.