Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to BBVA Argentina's 3Q19 results conference call. We would like to inform you that this event is being recorded, and all participants will be in a listen-only mode during both companies' presentations. After the companies' 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 2018, filed with the U.S. Securities and Exchange Commission. Today with us, we have Mr. Ernesto Gallardo, CFO, Ms. Inés Lanusse, IRO, and Mr. Javier Kelly, investor relations manager. Ms. Lanusse, you may begin your conference.
Good morning, everyone, and thank you for joining us today for a discussion of our third quarter 2019 results. Before we begin our formal remarks, allow me to remind you that certain statements made during the course of the discussion may contain 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 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 new investor relations website, ir.bbva.com.ar.
Before I start commenting on the bank's financial results, let me also remind you that as of July 1st, 2019, BBVA Argentina has started to consolidate its balance sheet line by line with the activities of PSA Finance, Rombo Compañía Financiera, and Volkswagen Financial Services. Prior to this change, the activity of these joint ventures was reflected under income from associates under the proportional consolidation method. This change is attributed to the modification of the shareholders' agreement by which the bank acquires the power to run the activities of the three joint ventures. Based on the above, the bank results should be considered on a consolidated basis. Now, I will comment on the bank's third quarter 2019 financial results.
BBVA Argentina third quarter 2019 net income totaled ARS 11.1 billion, 63.9% higher than the ARS 6.8 billion posted in the second quarter of 2019, and 264.8% higher than the ARS 3 billion posted a year ago, mainly based on the increase in net interest income and foreign exchange results. The accumulated net income for the nine months ended as of September 30th, 2019, was ARS 23.9 billion, 253.3% higher than the same period of last year. The bank presented an accumulated return on equity of 63.2%, and a return on assets of 8%, proving the bank's earning potential. If the PRISMA effect is not taken into account, ROE and ROA would have been 58.8% and 7.4%, respectively.
Without taking into consideration the consolidation with PSA, Rombo, and Volkswagen, operating income would have been ARS 10.1 billion, 14.8% higher than the previous quarter, and net income would have been ARS 10.7 billion, 58.3% higher than second quarter 2019. It is worth mentioning that as of August 28th, 2019, the national government extended the maturity for short-term notes, LETES, LECAP, LECER, and LELIQ. As of the third quarter of 2019, BBVA Argentina reports a portfolio of national securities subject to restructuring for an amount of ARS 10 billion, which are priced at fair value through other comprehensive income, over which a ARS 4.9 billion loss has been recognized as a consequence of changes in the contractual flow. In the quarter, net interest income totaled ARS 15.6 billion, 19.8% higher than the results posted in the second quarter of 2019, and 129.2% higher than the results posted one year ago.
This performance can be traced to a 17.6% quarter-over-quarter increase in interest income and a 14.9% increase in interest expenses. When excluding the joint venture consolidation, net interest income for the period would have amounted to ARS 14.8 billion, growing 13.9% quarter-over-quarter and at 118% year-over-year. With an interest income, interest on loans increased 26.8% quarter-over-quarter and 63.6% year-over-year. In the third quarter 2019, interest on loans represented 56% of total interest income. Net income from government securities increased 13.8% quarter-over-quarter due to the high mixed volume and higher interest rates. Compared to third quarter 2018, income from government securities increased 362.8%. In third quarter 2019, interest on time deposits represented 77% of the bank's total interest expenses, increasing 11.5% in the quarter, and 134.4% in the year.
On the third quarter of 2019, net interest margin, including foreign exchange difference, was 25.6% higher than the 23.1% in the second quarter of 2019, and 15.6% as of the third quarter of 2018, supported by a greater contribution of the security portfolio and an improvement in the client rate spreads. In the third quarter of 2019, net fee income was ARS 1.5 billion, 19.5% less than in the previous quarter. We saw a good growth in fee charges, driven by the repricing on fees and bundled services, an increase in the volume of activity between accounts, and an increase in the foreign currency transactions. However, this good performance was offset by higher expenses and commissions paid mainly to debit and credit card issues with U.S. dollar components.
If we normalize the net fee income and we subtract from the second quarter 2019, the incentive we received from the credit card issues, and we included in the third quarter 2019, which is comparable with what happened in the third quarter 2018, we would have shown an increase of 33.2% quarter-over-quarter and 14% year-over-year. Net income from financial instrument at fair value decreased sequentially, totaling ARS 1.4 billion vis-a-vis ARS 2.1 billion in the prior quarter. If we exclude the ARS 716 million dividend we received from our participation in PRISMA, the bank would have reported a gain of ARS 33 million, increasing 2.4% in the quarter. In the third quarter of 2019, FX gain, including foreign currency forward transactions, totaled ARS 3.8 billion, increasing 83.8% quarter-over-quarter.
This increase was mainly attributed to the Argentine peso depreciation and the long positive position BBVA Argentina had during the quarter. Moving on to the expenses. We experienced a sequential increase in the personal administrative expenses line. During the third quarter of 2019, personal administrative expenses totaled ARS 7.1 billion, increasing 25.5% quarter-over-quarter and 64.1% year-over-year. Personnel benefits increased 12.6% in the quarter, while administrative expenses increased 42.7% in the same period. The increase in personnel benefits was mainly explained by mandatory salary increases agreed with the unions to adjust to the inflationary environment. The increase in administrative expenses was mainly driven by the increment in armored transportation costs due to higher amount of cash in transit. As of September 2019, the accumulated efficiency ratio remains low, reaching 35.7% and improving for the 47.2% posted in the third quarter of 2018.
BBVA Argentina's effective tax rate was 15%, lower than the 27% accumulated as of the second quarter of 2019, mainly caused by the incorporation of the tax inflation adjustment in the third quarter of 2019. In terms of activity, the bank financing to the private sector totaled ARS 211.8 billion, increasing 14.7% quarter-over-quarter and 22.5% year-over-year. It is important to mention that BBVA Argentina consolidated market share of the private sector loan as of September of 2019 reached 8.13%. Private loans denominated in ARS grew 28.7% quarter-over-quarter and 36.2% year-over-year. This was not the case for USD-denominated loans, which decreased both measured in ARS and in USD. Regarding the retail portfolio, including mortgages, pledge loans, personal loans, and credit cards, pledge loans grew the most due to the consolidation with the associates.
Excluding pledge loans, credit cards increased the most, growing 11.6% quarter-over-quarter and 42.6% year-over-year. Mortgages loans reflect the impact of rising inflation. Commercial loans, including overdraft, documents, and other loans, increased 6.6% quarter-over-quarter and 11.6% year-over-year. The line with the highest growth was overdraft, increasing 83.4% in the quarter and 7.2% in a yearly basis. In the third quarter of 2019, gross loans to deposit ratio improved from 67.5% in the second quarter to 78.2%. Regarding exposure to the public sector, excluding central bank instruments, this quarter, BBVA Argentina reduced its exposure, measured as a percentage of total assets by 179 basic points. In the quarter, our total exposure to the public sector was ARS 17.9 billion, down from ARS 24 billion in the prior quarter.
As of September 30, 2019, asset quality measured as non-performing loans over the total loans reached 3.31%, with a cover ratio of 105.08%. During the quarter, the provision of Molino Cañuelas increased to 75% from 50% in the previous quarter. It is worth mentioning that Molino Cañuelas' debt is still denominated in U.S. dollars. On the funding side, private sector deposits in the third quarter 2019 totaled ARS 271.5 billion, down 3.8% sequentially and 10.8% higher than in the third quarter 2018. Private non-financial sector deposits in local currency were ARS 152.8 billion, increasing 3.2% quarter-over-quarter and 17.8% year-over-year. This is mainly explained by an increase in checking account deposits, which was offset by the fall in time deposits. Private non-financial sector deposits in foreign currency decreased, both measured in ARS and in U.S. dollars.
As of September 2019, BBVA's transactional accounts, including checking and saving accounts, represent 65.5% of total deposits. BBVA Argentina consolidated market share over the private sector deposits as of September 2019 reached 7.14%. In terms of capitalization, BBVA Argentina accounted an excess capital of ARS 26.6 billion, which represented a total regulatory capital ratio of 17.1% and a Tier 1 ratio of 16.4%. The bank aim is to make the best use of this capital. The bank liquidity ratio in ARS and in US dollars remain healthy at 57.8% and 66.7% of the total deposits as of September 30, respectively.
Overall, despite the complex economic scenario in which the bank has been operating, the third quarter has been very positive, both for the great results obtained and for the balance sheet quality, which remains strong in terms of liquidity and capital, and records one of the most stable NPLs ratio in the financial system. This concludes our prepared remarks. We will now take your questions. Operator, please open the line for questions.
Thank you. The floor is now open for questions. If you have a question, please press star then one on your touch tone phone at this or any time. If at any point your question is answered, you may remove yourself from the queue by pressing the star then two. Questions will be taken in the order they are received. We do ask that when you pose your question, that you pick up your handset to provide optimum sound quality. Please hold while we poll for questions. The first question will come from Gabriel Nobrega with Citibank. Please go ahead.
Hi, everyone. Good afternoon, and thank you for taking my questions. It's already been two weeks since the administration won. I know it's still a long shot until December, but maybe could you tell us what you are seeing, and in practical terms, what are you expecting in terms of this new administration? If you are already seeing any impacts directly to the banking sector, and I'll make a second question afterwards. Thank you.
Hi, Gabriel. Thank you for your question and joining the call. As you said at the beginning, it's early to say. The administration yet has not disclosed that much information on how he's going to address the country going forward. Regarding the bank, we have seen some extra deposits outflowing the system, in line with the system, not more than that. Going forward, what we are projecting regarding loan growth, for the quarter, probably some decrease we're seeing for the fourth quarter of 2019. Deposit growing in the fourth quarter of 2019.
All right. Just a follow-up here. Sorry. We have heard that maybe SME-directed lending could come back. Have you heard anything about this as well?
Nothing official. Obviously, if you base in the past that you had some of SME credit orientation, that happened in 12 years of administration. It's something that could happen, we have no official information to confirm that that is going to happen.
All right. Perfect. As for my second question, it's actually on the impact from the debt reprofiling. We saw another one of your peers passing this impact through it, some P&L, specifically on the NII front. However, when we looked at your results, I understood you actually passed this through the other comprehensive income, which ended up affecting your equity and not your P&L and your bottom line. Here, could you maybe just elaborate how you booked these results and how we should maybe look at these results and the impact from the debt reprofiling going forward, please?
Okay. As you mentioned, the result from those securities basically is the administration of excess liquidity the bank has, which is done by the Asset and Liability Committee. That's why the effect you see it under other comprehensive income. From the total amount that was reprofiled, basically you have ARS 731 million in LECAP. You have ARS 245 million in LETES. That was the only amount that if you wouldn't have had a reprofile, you would have been able to recognize that interest in the quarter, and you have ARS 9 million of LELIQ. Since these securities are administered, are dealt by the Asset and Liability Committee, these securities are held to maturity. What you're reflecting in the balance sheet, in other comprehensive income, is the decrease in the price.
Since you hold the security till maturity, once you are able to get the interest, you're going to see that effect on the P&L.
All right. On the P&L, it should come on the NII front, right?
Exactly. On NII, once the security matures and we're able to collect the interest rate of those securities. Obviously, if there's no default on those securities.
Perfect. Thank you, Inés.
Again, if you would like to ask a question, please press star then one. The next question comes from Alonso Garcia with Credit Suisse. Please go ahead.
Good morning, everyone, thank you for taking my question. My first question is regarding the exposure to central bank instruments. Given some comments made by the elected president, Alberto Fernández, and/or by his advisors, regarding the LELIQs, there is some uncertainty surrounding this instrument. I don't know if you have any sort of strategy here to reduce your exposure to these sort of instruments. If that is the case, with which instruments you would replace the LELIQs and what would be the impact on profitability from switching out of LELIQs. My second question would be on asset quality. I would like to hear if you can share what would have been the pro forma NPL ratio without considering the consolidation of the auto loan portfolios, and what is the outlook ahead considering the current outlook for GDP inflation and interest rates. Thank you.
Okay. Regarding LELIQ, again, it's only comments that you're seeing in the press, and it's difficult to say what's going to happen with that. Our position in LELIQ has decreased in the quarter, as you can see in our press release. Also, after the last regulation, where you can't use LELIQs as minimum cash requirements, that also makes our position in LELIQ somehow reduced, and you're going to try to defend your margins by reducing the cost of funds. Basically, that's a strategy. It's early to say what the government is going to do with LELIQ. There's a lot of rumors, but nothing really official on what's going to happen with that. The truth is, LELIQ is the instrument the banks use to put the money we get from clients that are in time deposits.
Basically, we get the money from our clients, and we put them in LELIQ. Regarding NPLs, the consolidation on the NPL ratio, the joint venture effect only represents 4%-5% of that NPL amount. Probably, it's more important to give you the NPL, excluding Molino Cañuelas. Molino Cañuelas was, as we mentioned in the remarks, it's a U.S. dollar debt. You had an effect of that in the increase in NPLs. Plus, you provisioned the debt from 50% to 75%. Basically, that's what happened and why NPLs increased that much. If you would take out the effect of Molino Cañuelas, NPL would have been 2.2%. Your third question was more regarding the macro scenario, correct?
No, it was just on the outlook for asset quality, considering the current macro outlook, GDP inflation, and interest rates. What do you expect for NPLs and provisions going forward based on that?
Probably, you will take provision of Molino Cañuelas up to 100% by the end of the year. That's a possibility. Nothing rather than the normal operation. That's the main case that makes our NPL growth, and particularly because it's a U.S. dollar-denominated loan.
Understood. Thank you very much.
The next question comes from Carlos Gomez-Lopez with HSBC. Please go ahead.
Hello, Inés. Good morning. First of all, thank you for giving that information about inflation adjustment and how it affects your earnings and your equity. That's quite useful. In that regard, you have given us the result for the year. Could you possibly give us the results in inflation-adjusted terms for each quarter so that we start to build our series and to be prepared for the implementation next year? Second, in terms of Molino Cañuelas, can you confirm that you classified it as non-performing in this quarter but not before? Was it in the second quarter that you started classifying? Finally, what other big NPLs do you think you might be seeing, and in what sectors, and where do you think the NPLs could peak? Thank you.
Hi, Carlos. Nice to hear from you. Regarding inflation adjustment, we are providing the accumulated inflation of the balances as of the nine months. Inflation adjustment should be applied as of January of next year. You probably are going to see the disclose quarter by quarter once we start presenting the quarter results of 2020, where you will have to disclose the comparable for 2019. Your next question was more regarding NPLs. We had it as NPL already as of the third quarter of last year. We went gradually provisioning more, the main effect you have on NPLs of Molino Cañuelas, it has to do with that is a dollar-denominated debt. That makes increasing NPLs go higher.
Going forward, again, the main effect you have in NPLs was Molino Cañuelas, and you had some effect of a company from the white goods line that had a dollar loan, and now it was specified. It's around ARS 500 million. It had this refinance and moved into pesos. There's no other particular case that should be worried about. You had also some NPLs increasing because there are companies that have debt in other financial institutions. Based on Central Bank regulations, despite the company has no debt with us, we are obliged to provision those debts also. That also makes our provisions increase. There was a third question, Carlos?
Yeah. Whether you think the NPLs will peak.
We don't have right now a number with us. Sorry. It's something that we are now elaborating a little bit more careful because all the ratings for Argentina due to this country ceiling and then the rating that was changed by the different rating agencies is something that we are now elaborating. Given the case that we are calculating or providing the IFRS 9 provisioning for the holding company, right now, we know that we are not going to have any problem in that sense because we have enough provisions right now assuming the change to IFRS 9. On the other hand, we think that as it is going to be the first implementation here in Argentina, then the first impact will be in capital and not in end results.
Could you give an idea about the order of magnitude of IFRS 9?
Excuse me?
Could you give us an idea about how much we are talking about? Is this one or 200 basis points in your Tier 1 capital or three or four?
No. We are not talking about nothing relevant, really.
Okay. It will be applied in January 2020?
Excuse me?
It will be applied in January of 2020? Is that what you expect?
Yes. That will be the first moment. Again, due to the uncertainties that we have right now in front of us with the new government, we don't know if finally the Central Bank will apply this because we are waiting for some layouts that they have to provide all the banks in order to be able to calculate and properly the provisioning by IFRS 9. We are expecting to have IFRS 9 in place in January next year.
Okay. Very clear. Thank you so much.
Once again, if you would like to ask a question, please press star then one. This concludes our question and answer section. At this time, I would like to turn the floor back over to Ms. Lanusse for any closing remarks.
Thank you, operator, and thank you all for joining us today. We appreciate your interest in our company. We look forward to meeting 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 be happy to follow up. Thank you, and enjoy the rest of your day.
Anne, thank you. This thus concludes today's presentation. You may disconnect your line at this time and have a nice day.