Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to BBVA Francés's 3Q 2018 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 both companies' presentation. After the company's 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 risks to differ materially from those expressed in the forward-looking statements. Additional information concerning these factors is contained in BBVA Francés' annual report on Form 20-F for the fiscal year 2017, filed with the U.S. Securities and Exchange Commission. Today with us, we have Mr. Ernesto Gallardo, CFO, and Mrs. Cecilia Acuña, Head of Investor Relations. Ms. Acuña, you may begin your conference.
Thank you. Good afternoon, everyone. As usual, I will start with a brief summary on the most important topics of the third quarter of 2018. Then we'll be open to questions. Now, I'd like to make a brief review on the macroeconomic environment. The agreement reached with the International Monetary Fund in June did not restore confidence as expected and triggered a new round of capital outflows and a strong depreciation of the peso during the first quarter, which only further down after a renewed commitment to perform greater fiscal adjustments. In this context, a new agreement with the IMF was reached, going from $50 billion- $56.7 billion. The inflation targeted plan was abandoned and replaced by the new monetary exchange system that seeks to keep the monetary base process in nominal terms until June 2019.
Together with this, the central bank continued to increase the cash reserve requirements up to 2,300 basis points in the fourth quarter of 2018. Due to the economic slowdown, the demand for credit has plunged but deposits maintain a good performance, although slowing the pace of growth. Now I'd like to make a brief review on the bank's performance. First of all, I'd like to remind you that since January 1st, 2018, figures are reported in accordance with IFRS. Having said this, in the third quarter of 2018, BBVA Francés reached a net income of ARS 3 billion, 41.6% and 117.7% higher than the net income registered in the previous quarter and in the third quarter of 2017. In the last case, we state it for comparative purposes.
During the third quarter of 2018, the ROE reached 4% and the ROA 34.8%, compared to 3.5% and 26.4% published in the previous quarter, respectively. Net operating income reached ARS 10 billion, increasing 27.2% compared to the previous quarter and by 71.4% compared to the third quarter 2017. As a clarification, a reclassification was performed during this quarter due to the change in the criteria regarding the deferral of credit card emission fees, which were previously recorded as net interest income and are now recorded as net fee income and other operating income. Operating expenses reached ARS 6.2 billion, an increase of 18.7% compared to the previous quarter due to higher personnel expenses. The efficiency ratio in the quarter was 46.7%, showing an improvement around 281 basis points compared to the previous quarter and 822 basis points compared to the third quarter 2017.
In connection to the activity level, at the end of September, the private sector loan portfolio totaled ARS 178.6 billion, increasing 10.2% during the quarter and 61.5% in the last 12 months. As a clarification, as of the third quarter, [Bosstan Financial Services] is no longer recorded on a consolidated basis. Loan consolidated market share was 8.38%, showing an increase of 33 basis points in the last 12 months. Credit growth was affected during the quarter by the devaluation of the peso and higher interest rates, resulting in a strong increase of loans in U.S. dollars, mainly due to registration of the new value of the currency and a mild growth in pesos. With regard to loans to individuals, credit card and personal loans recorded a positive performance, offsetting the slowdown in the demand for mortgages loans. Commercial loan growth was mainly due to the depreciation of the peso.
At the end of September, the asset quality ratio was 0.99%, with a coverage ratio of 220.5%. The cost of risk reached 1.21%, 22 basis points above last quarter due to some deterioration, mainly on the retail portfolio. The drought that affected the country during the first months of the year did not have a significant impact on the affected portfolio. Total deposits reached ARS 247.2 billion at the end of September, increasing 28.2% compared to the previous quarter and 90.5% compared with the third quarter of 2017. Foreign currency deposits remained stable during the quarter, but this balance reflects the depreciation of the peso. Local currency deposits increased 18.7%, mainly due to increases in saving accounts and current accounts with interest. BBVA Francés continues to show an adequate level of solvency.
At the end of September, the total capital ratio was 14.1%, 52 basis points lower than the ratio of June, mainly due to the higher risk-weighted assets, those denominated in foreign currency as a consequence of the devaluation of the peso. The RWA ratio Tier 1 was 12.9% at the same date. Thank you very much. We are now ready to answer your questions.
Thank you. The floor is now open for questions. If you have a question, please press star one on your touchtone phone at this or any time. If at any point your question is answered, you may remove yourself from the queue by pressing star 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. Our first question comes from Alonso Garcia with Credit Suisse. Please go ahead.
Good morning, everyone. Thanks for taking my question. First of all, I would like to talk about margins. We observed margins flattish versus the previous quarter, despite much higher central bank rates versus the second quarter, basically given the higher cash levels and deposit costs. What should we expect from current levels? Do you think we can expect higher margins for the fourth quarter as loan yields catch up with the higher deposit costs on the back of repricing and also even higher central bank rates in the fourth quarter? Also, if you have any preliminary expectations for next year. Thank you.
I think we can expect a similar level of margins for the fourth quarter. It will depend, of course, on the evolution of interest rates of the central bank. We are expecting to maintain more or less the level that we have in the end of the year, because we never change, in that sense, in the level of interest rates, of retail interest rates. For the next year, we are expecting to have or to see a decrease in interest rates during the year. This is something that will depend on many uncertainty things that we have in front of us. The idea that we have is that we will maintain, at the beginning of the year at least, the same kind of margins that we have in terms of client spreads.
When you say that you're expecting margins for the fourth quarter, are you considering the all-in margin, also considering results from valuation of securities that goes outside the NII, or you are only talking about NII, just to be sure?
I'm talking about the net interest income coming from everything that is included in the net interest income. I am talking also about the hold to collect and sell portfolio that we have in that part of the balance sheet. Considering the central bank assets.
Okay.
There is a relationship. You're talking about margins, we're talking about up to 10 liabilities. In that sense, there is a kind of decrease, a small decrease in interest rates. It will affect both liabilities and assets.
Okay, got it. Regarding, just as last question, regarding asset quality, I wanted to check what segment is generating more pressure currently, and if you believe that cost of risk for this quarter should be seen at the peak, or when do you anticipate a stabilization in provisions? Thank you.
In terms of cost of risk, I think that we can expect maybe a little bit higher for the last quarter of the year. Around the levels that we have, we will continue being one of the most conservative, let's say, or having one of the best cost of risk in the sector. I think that due to the environment that we have, we can foresee a little bit higher number, nothing worrying, really.
It's only 10% above this cost of risk that we presented.
Okay. Which sector is causing more pressure right now? Is it the retail segment, or are you seeing issues on the commercial side as well?
In the retail. It's what we're seeing. The other thing is that you never know if you are going to have something specifically in the company, but I think that is more in the retail portfolio.
Understood. Thank you very much.
Our next question comes from Gabriel Nóbrega with Citi. Please go ahead.
Hi, Ernesto and Cecilia. Thank you for the opportunity to ask questions. I actually have a follow-up on this question on asset quality. We are actually seeing that trend sales are increasing, and I think it's very understandable, due to the deteriorating macroeconomic situation. During the quarter, we saw that you increased your provisions, and you reached a really high cost of risk, while still maintaining a very solid coverage ratio of around 220%. My question is, what maybe are you seeing in terms of asset quality risks that are worrying you? Why do you think you need to continue making such high provisions if you are already very well covered? I'll make a second question afterwards. Thank you.
Well, during the quarter, we increased, as you said, the provisions, mainly because the retail segments and some companies that have problems, that was the reason of the increase. For the following quarter, we will see what will happen. Gabriel?
All right. Yeah. Okay. What I just want to understand, maybe, if I try to rephrase this question, is that, do you think that it is reasonable for your bank to continue on having a coverage ratio above 200%?
Above. It could be a little lower than that level.
We are not expecting to see in the last quarter of the year, even considering the circumstances or the environment that we have, we are not foreseeing a strong decrease on the coverage ratio. We could have or we could see a smaller number in coverage ratio, but it should be close to that number. Below that, at around 200 level. Yeah, it should be.
The thing is that we are not implemented IFRS now, we have the good level of provision, if we need to implement it right now.
All right. Perfectly understood. I have another question regarding your loan growth. We see that it continues to be above inflation at around 60% year-over-year. However, this continues to be mainly pushed by the dollar-denominated loans and the peso depreciation. Despite this, we still saw that you were able to gain share. What I would like to understand from you is if you want to continue on growing and gaining share, or are you beginning to invest all of these lack of demand and credits into government securities?
No, we will intend to continue with gaining market share. It's difficult in this environment, the idea of the bank is to close the gap with our competitors in terms of share. We will continue to do that.
Let's say that we are doing our business in a business as usual, let's say, model, being always conservative and prudent in our decisions. We didn't close any, let's say, kind of activity, and we are, let's say, we go with the economy, and we go with the activity that there is in the market. In that sense, if we can gain market share, we will do it. The investments in other assets like LELIQ or others, central bank assets, it's due to the new requirements of liquidity or for minimum cash reserve. The cash reserve requirements that we have coming from the central bank is what is behind of increase of this portfolio, but not because we try to close the loans portfolio or something like that, and then to buy or to purchase central bank assets.
The other question, just coming back to the question about the coverage ratio. The idea, again, we cannot say that we are not going to suffer about the coverage ratio due to the behavior of the portfolio. We cannot foresee, let's say, a bad behavior from maybe a corporate or a company. In that case, we could see some deterioration of the numbers. We think that still we will maintain very well numbers of coverage ratio and cost of risk.
All right. That's very clear. Thank you.
This concludes the question and answer section. At this time, I would like to turn the floor back to Ms. Acuña for any closing remarks.
Okay. Thanks again for joining us, and if you have any further questions, please contact us in our offices. Thank you.
Thank you. This concludes today's presentation. You may disconnect your line at this time, and have a nice day.