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 20 20 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.
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 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. Ines Lanouce, IRO and Mr.
Javier Kelly, Investor Relations Manager. Mr. Kelly, you may begin your conference.
Hello, everyone, and welcome to the UVA Argentina Earnings Conference Call for a discussion of our Q2 2020 results. Before we begin our formal remarks, allow me to remind you that certain statements made during the course of the discussion may constitute forward looking statements, which are based on management's current expectations and beliefs 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. Evva.com.r. Speaking today will be Ernesto Nuncie.
Also joining us today is Ernesto Gallardo, 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 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 30, 2020. Now let me turn the call over to Ines.
Thank you, Javier, and thank you all of you for joining us on our Q2 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 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 interruption. The banks have shown great adaptive capacity, on the one hand, by the agile incorporation of the oil COVID-nineteen 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 in 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 percent and the penetration of mobile clients reached 57.4% from 56 0.1% in the prior quarter. In these unprecedented times, the bank has once again demonstrated resilience maintaining a solid assembly credit, solid levels of capital well above regulatory requirements and has also been able to improve its loan portfolio quality. On the other hand, through the efficiency plan implemented into the Q4 of last year, the bank has been able to reduce its expenses in a sustained manner for 2 quarters in a row. Now I will comment on the bank's Q2 2020 financial results.
All David mentioned, sorry, in answer, 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 Argentina's 2nd quarter 2020 net income, including inflation adjustment effects, totaled ARS 2,600,000,000, 21.9 percent lower than the ARS 3,300,000,000 posted a quarter ago and ARS 17, 70.1 percent lower than the ARS 8,600,000,000 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-nineteen pandemic and the sharp decline in interest rates, tariffs from changes in the country monetary policy set by the Central Bank, among other regulation also conducted by the Central Bank. The year over year decrease is partially explained by the MXN 1,100,000,000 dividend we received as a consequence of our participation in Prisma during the Q2 2019. In the quarter, net interest income totaled ARS 15,900,000,000, 13,900,000 lower than the results posted in the Q1 of 2020 and 17.1% lower than the results posted during the Q2 of 2019.
These durations were mainly explained by the decrease in the average yield of the Central Bank Levitt, which was partially offset by the decrease in peso cost of funds following the trend of decreasing market interest rate and an increase in seismic 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 effect of the pandemic and by the contraction in government securities as a consequence of the monetary policy implemented by the government. Income from government securities fell 10.2 percent or ARS 673,000,000 compared to the Q1 of 2020 52.7 percent or ARS 6,600,000 compared to the Q1 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 Leliq, Derivate from the new regulations have enabled a higher position in Lalique in line with what was granted in 20 positive minimum rates.
Interests as compared to loans and other financing totaled ARS 14,200,000,000, decreasing 10.7 percent 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 Q2 of 2020, interest from time deposits represented 79.1 percent of Advanced total interest expenses, decreasing 24.8% in the quarter and 66% in the year. Net fee income amounted to ARS 3,100,000,000, 57.3 percent, pesos higher quarter over quarter as a result of the commercial awards receiving during the quarter plus the saving granted by the lower expenses related to credit card benefit as a result of the lower activity due to the extended 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 instruments at fair value decreased sequentially, totaling ARS 1,000,000,000 visavis, ARS 1,300,000,000 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 chip swap and the official dollar rate. In the Q2 of 2020, FX gains, including foreign currency forward transactions, totaled ARS 1.5 1,000,000,000 decreasing 3.2 percent quarter over quarter. This is a consequence of the lower activity due to the regular changes implemented to the exchange market, partially offset by an increase in the income generated from the purchase and sale of foreign currency. Moving on to the expenses.
For the Q2 in a row, we experienced a sequential contraction in the personnel and administrative expenses line. During the Q2 of 2020, personnel and administrative expenses totaled ARS 7,800,000,000, decreasing 7.8 percent quarter over quarter and 6% year over year. Personal benefits contracted 15.2% in the quarter, reaching ARS 4,000,000,000 generating savings for over ARS 700,000,000. This is a consequence of the efficiency plans we put in place during the Q4 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 47.4% and worsening from the 36.1 percent posted in the Q2 of last year. This is a consequence of the step of construction in the income, which is not offset by the savings generated in expenses. In the Q2 of 2020, other operation expenses contracted 0.0.0 percent. This decrease is explained by the decline in other allowances due to real estate checking account unused checking account overdraft.
In terms of activity, the bank financing to the private sector totaled ARS 250,400,000,000, increasing 5.4 percent 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 Q2 in a row, reaching 8.54%. Private loans denominated in pesos grew 11.1% quarter over quarter in real terms and 30.2 percent 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 tax decline can be seen in the pledge and consumer loans, both declined between 15.2% and 5.5 percent, respectively. This decline was partially offset by the increase in credit card consumption boosted by 0 rate credit lines and our adopted programs. Commercial loans, including overdrafts, discounted instruments, sneezing, COMEX and other loans grew 11.6 percent quarter over quarter and fell 10.3% year over year. The quarterly increase is mainly explained by the strong growth of the other loans lines, especially past due interest corporate loans, we grew 63.2 percent or ARS 18.5 billion in the quarter, followed by discounted instruments that grew 9% in the quarter. As of June 30, the bank has disbursed more than ARS 20,500,000,000 to more than ARS 9,000 in the need to be allocated in payroll payments, discounted documents and working capital at a 24% nominal annual rate.
As of June of this year, BBVA Argentina has described ARS 1,800,000,000 of TOGAR granted loans and ARS 7,000,000 in loans for self regulated individuals at 0 interest rate. In the Q2 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 nonperforming portfolio over total portfolio reached 1.56%, the lowest in the last 12 months. The ratio was positively affected by the temporary flexibility the Central Bank implemented as a consequence of the COVID-nineteen pandemic in which extends grace period in 60 days. But the greatest impact was that during the Q2 of the year, the bank proceeds to perform Molina Paduela's debt write off, which at the moment of the write off amounted to ARS 2,700,000,000.
Our ratio reached 268.38 percent. This is explained by the decrease in the nonperforming loans, mainly as a consequence of Molinhos Canola's write off. Allowances in the Q2 of 2020 reflect expected losses driven by the adoption of IFRS 9 standard as of January 1, 2020, excluding subsidies, PPOJO and BOSBARRIEN, which will start implementing IFRS 9 as of 2021 pursuant to central bulk population. Additional application of the IFRS 9 impairment model is temporary excluding for nonfinancial public sector debt instruments. Regarding exposure to the public sector, excluding Central Bank Instruments, this quarter BBVA Argentina decreases exposure measured as a percentage of total assets reaching 3.3%.
In the quarter, our total exposure to the public sector, excluding Central Bank Note, was ARS 17,800,000,000, down from ARS 19,300,000,000 in the prior quarter. This exposure is also denominated in pesos or in U. S. 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 bonserved maturity in 2023 2024.
On the funding side, private sectors is deposits in the Q2 of 2020 totaled MXN367 billion, up 7.6% sequentially and down 8.5% when compared with the Q3 of 2019 in real terms. Private sector deposits in local currency were ARS254 1,000,000,000, increasing 14.6 percent quarter over quarter and 20.1% year over year. This is mainly explained by the strong growth in same deposits, saving accounts and checking accounts, which offset the quarterly fall in interest bearing checking accounts. Private sector deposits in foreign currency decreased both measured in pesos and in dollars. During the Q2 of 2019, U.
S. Dollar deposit withdrawal continued but at 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 percent 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 ARS 53,200,000,000, which represented a total regulatory capital ratio of 21.9% and a Tier 1 ratio of 21.2%.
The bank aim is to make the best use of the excess capital. The bank's liquidity ratio in pesos and in dollars remained healthy at 56.5% 80.3 percent 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 session. 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 rolled off Molka and we saw your own 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 within 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 label with your coverage level this quarter? And I'll make a second question afterwards. Thank you.
Gabriel, thanks for your question. Yes, as you mentioned, we had basically NPL improved in this quarter basically by 2 factors. We write it off, Monica, and also with the waiver we have for 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 Central Bank. We are projecting an NPL towards the end of the year around 3 point 53% more or less.
That is excluding all of the Central Bank waivers we have. Regarding coverage, yes sorry, going back to NPL, just to make it clear, the effect is mainly done because we had a sharper reduction of the nonperforming 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 our coverage ratio towards the end of the year around 170%. The effect you had in this quarter is mainly because the denominator in a corporate ratio, which includes the NPLs, decreased more than the effect of that in the provisions in the denominator. We feel comfortable with this level of provisioning. Our portfolio is quite 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. 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 lower interest rates and also the benefits from the lower non remunerated reserve rates requirement 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 re pricing all of your assets to be in lower interest rate environment?
Thank you.
I didn't the sound is I can't 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 its savings 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 El Limon, which was this ARS 2,000,000,000 that were previously in the other comprehensive income. And now we have to recognize that lower price in the P and L.
Going forward, you should see also an effect in that line because of the 60% remaining that, as we mentioned, swap in July 2020. So you're going to see also a negative effect in the Q3. But the net interest 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.
Mr. Garcia, your line is open. Thank you for taking my question. My question is actually a follow-up. First, can you hear me now?
Now yes, you 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. 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 Q3, Q4, maybe even in the Q1 of next year? And I mean in terms of NPLs and provisions, when do you think the peak will take place? And if you have a color on the level of either cost of risk or NPLs that we could see at the peak? Thank you.
Okay. Hello, Alonso. How are you doing? We expect a lot of depending on Central Bank Regulation, if the waiver continues or doesn't continue. Being that said, we expect to be more towards the Q4 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 NPLs 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 quarters despite the deterioration that we are going to see most likely in the second half of the year. Is that correct?
Yes. 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 Q4 of 2020.
Right. Okay, okay. Got it. And just finally on the margins. So you mentioned that you expect 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? Or do you think there could be upside next year if you resume growth in your retail loan portfolio?
Alonso, you may imagine to predict 2021. In Argentina, it's quite difficult. A lot 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 2020.
And if we see an improvement in the economy, you should see the retail portfolio picking up and that definitely should help our market margins. Regarding the budget, we are basically working on it. So it's still difficult to predict 2021.
The next question is from Carlos Gomez with HSBC New York. Please go ahead.
Hi, Inez. Good morning. My first question is about loan growth. You had already been saying that you expect it to grow above inflation, and you are growing above inflation. Can you explain to us what the origin of this growth is?
Is it because there is more obligation to land 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 calculate it 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 as we do that, we come from a very low base in 2020. Remember, we had a huge amount of loans in dollars that sharply decreased 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 special lines we're offering around 24% at the 0 interest rate. The retail portfolio, despite it's 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 loan book. But it's not genuine demand per se. It's basically we come from a very low base in 2020 plus the mandatory loans that you are providing, I mean, everything in pesos. Your second question was regarding our tax rate. Yes, as you can see, we ended the quarter with a tax rate around 44%, higher than the regulatory 30%.
Basically, that has to be to do with the difference in the fiscal base that you need to take to consider the tax we have to pay from the base you see on the P and L. It's 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 rate that we should expect to
be in? At least for this year. At this point 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. Linusse 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 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 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.