Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to BBVA Argentina's 3Q 'nineteen 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 company's remarks are completed, there will be a question and answer section. 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 BBVA Argentina's Annual Report on Form 20F for the fiscal year 2018 filed with the U.
S. Securities and Exchange Commission. Today with us, we have Mr. Ernesto Gallardo, CFO Ms. Ines L'Annuse, IRO and Mr.
Javier Kelly, Investor Relations Manager. Ms. L'Annuse, you may begin your conference.
Good morning, everyone, and thank you for joining us today for a discussion of our Q3 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 under 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 1, 2019, BBVA Argentina has started to consolidate its balance sheet line by line with the activities of PCA Finance, Rombo Compania Financieras and Volvarez Financial Services. Prior to this change, the activity of these joint ventures were 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 3 joint ventures. Based on the above, the bank results should be considered on a consolidated basis. Now I will comment on the bank's Q3 2019 financial results. BBVA Argentina's Q3 2019 net income totaled ARS 11,100,000,000, 63.9 percent higher than the ARS 6,800,000,000 posted in the Q2 of 2019 and ARS 264.8 percent higher than the ARS 3,000,000,000 posted a year ago, mainly based on the increase in net interest income and foreign exchange results. The accumulated net income for the 9 months ended as of September 30, 2019, was ARS 23,900,000,000, 253.3 percent 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 placement effect is not taken into account, ROE and ROA would have been 58.8% and 7.4% Without taking into consideration the consolidation with PCA, Rombol and Volkswagen, operating income would have been ARS 10,100,000,000, 14.8 percent higher than the previous quarter and net income would have been ARS 10,700,000,000, 58.3 percent higher than Q2 2019. It is worth mentioning that as of August 28, 2019, the national government extended the maturity for short term notes, Lettres, Lecap, Lecerre and Lelinc. As of the Q3 of 2019, BBVA Argentina reports a portfolio of national securities subject to restructuring for an amount of ARS 10,000,000,000, which are priced at fair value through other comprehensive income, over which a ARS 4,900,000,000 loss has been recognized as a consequence of changes in the contractual flow. In the quarter, net interest income totaled ARS 15,600,000,000, 19.8 percent higher than the results posted in the Q2 of 2019 and 129.2 percent higher than the results posted 1 year ago.
This performance can be traced to a 17 point percent 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 ARS 14,800,000,000, growing 13.9 percent quarter over quarter and 26.8 percent quarter over quarter and 63.6 percent year over year. In Q3 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 mix volume and higher interest rates. Compared to Q3 2018, income from government securities increased 362.8%.
In Q3 2019, interest on time deposits represented 77% of the bank's total interest expenses, increasing 11.5% in the quarter and 134.4 percent in the year. On Q3 of 2019, net interest margin, including foreign exchange difference, was 25.6 percent higher than the 23.1% in the Q2 of 2019 and 15.6% as of the Q3 of 2018, supported by a greater contribution of the security portfolio and an improvement in the client rate spreads. In the Q3 of 2019, net fee income was ARS 1,500,000,000, 19.5 percent 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 Q2 2019 the incentive we received from the credit card issues and we included in the Q3 2019, which is comparable with what happened in the Q3 2019, we would have shown an increase of 33.2 percent quarter over quarter and 14% year over year. Net income from financial instruments at fair value decreased sequentially, totaling ARS 1,400,000,000 visavis to ARS 2,100,000,000 in the prior quarter. If we exclude the ARS 716,000,000 dividend we received from our participation in Prisma, the bank would have reported a gain of ARS33 million, increasing 2.4% in the quarter.
In the Q3 of 2019, FX gain, including foreign currency forward transactions, totaled ARS 3,800,000,000 increasing 83.8 percent quarter over quarter. This increase was mainly attributed to the Argentine peso depreciation and the long stop positive position BBVA Argentina had during the quarter. Moving on to the expenses. We experienced a sequential increase in the personnel and administrative expenses line. During the Q3 of 2019, personnel and administrative expenses totaled ARS 7,100,000,000, increasing 25.5 percent quarter over quarter and 64.1% year over year.
Personal 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 ARMOUR 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 Q3 of 2019. BBVA Argentina's effective tax rate was 15%, lower than the 27% accumulated as of the Q2 of 2019, mainly caused by the incorporation of the tax inflation adjustment in the Q3 of 2019.
In terms of activity, the bank financing to the private sector totaled ARS 211.8 billion, increasing ARS 14.7 percent quarter over quarter and ARS 22.5 percent 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 pesos grew 28.7% quarter over quarter and 36.2% in the year. This was not the case for dollar denominated loans. We decreased both measured in pesos and in dollars.
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 0.2% in a yearly basis.
In the Q3 of 2019, gross loans to deposit ratio improved from 67.5% in the 2nd 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 basis points. In the quarter, our total exposure to the public sector was MXN 17,900,000,000 down from MXN 24,000,000,000 in the prior quarter. As of September 30, 2019, asset quality measured as nonperforming loans over the total loans reached 3.31 percent with a covered ratio of 105.08%. During the quarter, the provision of Molino Calvela increased to 75% from 50% in the previous quarter.
It is worth mentioning that Molino's cannula debt is still denominated in dollars. On the funding side, private sector deposits in the Q3 2019 totaled ARS 271 500,000,000 down from 3 down 3.8% sequentially and 10.8% higher than in the Q3 2019. Private non financial sector deposits in local currency were ARS152.8 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 pesos and in dollars.
As of September 2019, EBA's transactional accounts, including checking and saving accounts, represent 65.5 percent 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 pesos and in dollars remained healthy at 57.8% and 66.7 percent sorry, 66.7 percent of the total deposits as of September 30, respectively.
Overall, despite the complex economic scenario in which the bank has been operating, the Q3 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
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 2 weeks since the administration won. I know it's still a. M.
Long shot until December, but maybe could you tell us what you were seeing? In practical terms? What are you expecting in terms of this new administration? And if you are already seeing any impacts directly to the banking sector? And I'll make a second question afterwards.
Thank you.
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 outflow in the system in line with the system, not more than that. And going forward, what we are projecting regarding loan growth for the quarter, probably some decrease we're seeing for the Q4 of 2019, but deposits growing in the Q4 of 2019.
All right. And 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. But we have no official information to confirm that, that is going to happen.
All right, perfect. And that's for my second question. It's actually on the impacts from the debt reprofiling. We saw another one of your peers passing this impact through it, some P and 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 and L and your bottom line.
So here, could you maybe just elaborate how you unbooked these results and how we should maybe look at these results and the impact from the DEV TEM repo filing going forward, please?
Yes. Okay. As you mentioned, we the result from those securities basically is the administration of the excess liquidity that Van has, which is done by the Asset and Liability Committee. So that's why the effect you see it under other compressive income. From the total amount that was reported by basically you have ARS 731,000,000 in LECAP.
You have ARS 245,000,000 in Lettis. That was the only amount that if you wouldn't have had a re profile, you would have been able to recognize that interest in the quarter. And you have ARS 9,000,000 of Lelink. Since these securities are administered are deals by the assets and liability committee, these securities are hold to maturity. So what you're reflecting in the balance sheet in other comparisons is that decrease in the price.
But 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 and L.
All right. So on the P and L, it should come on the NII front, right?
Exactly. On NII, once you the security matures and we're able to collect the interest rate of those securities. Obviously, there's no default on those securities, no?
Perfect. Thank you, Inez.
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 President and or by the elected President, Ertug Hernandez and or by his advisors regarding the Leliqs. I mean, there is some uncertainty surrounding these instruments.
So 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 in the Leliqs and what would be the sort of impact on profitability from switching out of Leliqs? And my second question would be on asset quality. I would like to hear you, if you can share what would be the what would have been the pro form a 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. So regarding Lalique, again, it's all 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 implementation where you can't use Leliq as minimum cash requirements, that also makes our position in Leliq somehow reduce. And you're going to try to defend your margin by reducing the cost of funds.
So basically, that's a strategy. It's early to say what the government is going to do with Elite. 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. So basically, it's basically we get the money from our clients and we put them in the leak.
So it's a decision on the government what they want to do with that. Regarding NPLs, the consolidation on the NPL ratio, the joint venture effect is only represents 4% to 5% of that NPL amount. Probably it's more important to give you the NPL excluding Molino Canuelas. Molino Canuelas was, as we mentioned in the remarks, it's a U. S.
Dollar debt. So you had an effect of that in the increase in NPLs, plus you provisioned the debt from 50% to 75%. So basically, that's what happened and why NPLs increased that much. But if you would take out the Efecto Molina Canolas, NPL would have been 2.2 percent. And your third question was more regarding the macro scenario, Parece?
No, it was just on the outlook on 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 Canuelas up to 100% by the end of the year. That's a possibility. And nothing rather than the normal operating. 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 with HSBC. Please go ahead.
Hello, Ines. 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 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?
2nd, in terms of Molinos, can you so can you confirm that you classified it as nonperforming in this quarter, but not before? Or was it in the 2nd quarter that you started classifying it? And finally, what other big NPLs do you think you might be seeing and in what sectors? And where do you think the NPLs could pick? Thank you.
Hi, Carlos. Nice to hear from you. Regarding inflation adjustment, we are providing the accumulated inflation of the balance sheet as of the 9 months. Inflation adjustment should be applied as of January of next year. So you probably are going to see the disclosure quarter by quarter once we start presenting the quarter results of 2020, where you will have to disclose the comparable for 2019.
Regarding your next question was more regarding NPLs. We had it as NPL already as of the Q3 of last year. We went gradually provisioning more. But the main effect you have on NPLs on NPLs on NPLs on NPLs, it has to do with that is dollar denominated debt. So that makes increasing NPS go higher.
Going forward, again, the main effect you have in NPS was Molino Canuelas and you had some effect of a company from the white line that had a peso had a dollar loan and that was specified. It's around MXN 500,000,000. So it had been refinanced and moved into pesos. And then there's no other particular case that should be worried about. You had also some NPLs increasing because there are companies that debt in other financial institutions.
So based on Central Bank's regulations, despite the company has no debt with us, We are obliged to provision also. So that also makes our provisions increase. And there was a third question, Carlos?
Yes. Where do 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. But given the case that we are calculating or providing the IFRS 9 provisioning for the holding company, we 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 of to IFRS 9. And on the other hand, we think that as it's going to be the first implementation here in Argentina, then the first impact will be in capital and not in 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 100 or 200 basis points in your Tier 1 capital or 3 or 4?
No, no, no, no, no. We are not talking about nothing relevant really.
Okay. And it will be applied in January 2020? Excuse me? It will be applied in January of 20 20. Is that what you expect?
Yes. That will be the first moment. But again, due to the uncertainties that we have right now in front of us with the new government, we are not we don't know if finally the Central Bank will apply this because we are waiting for some layouts that they have to provide to different all the banks in order to be able to calculate and properly the provisioning by IFRS 9. So we are expecting to have IFRS 9 in place in January this year or next year.
Okay, very clear. Thank you so much.
Thank you, operator, and thank you all for joining us today. We appreciate your interest in our company. We look forward to meeting you 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.
And thank you. This does concludes today's presentation. You may disconnect your line at this time and have a nice day.