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BBVA Banco Frances S.A (NYSE:BBAR)
Q2 2020 Earnings Call
Aug 26, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 2020 Results Conference Call. [Operator Instructions]

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 US 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 US Securities and Exchange Commission.

Today with us, we have Mr. Ernesto Gallardo, CFO; Ms. Ines Lanusse, IRO; and Mr. Javier Kelly, Investor Relations Manager.

Mr. Kelly, you may begin your conference.

Javier Kelly -- Investor Relations Manager

Hello, everyone, and welcome to the BBVA Argentina earnings conference call for a discussion of our second 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 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.bbva.com.ar.

Speaking today will be Ines 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 Bank 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 June 30, 2020.

Now, let me turn the call over to Ines.

Ines Lanusse -- Investor Relations Officer

Thank you, Javier, and thank you all of you for joining us on our second 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 the branch network. In particular, branches have applied the necessary protection measures in line with the highest security standards to minimize risks in interaction. The bank has shown great adaptive capacity on the one hand by the ongoing cooperation of the all COVID-19 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 has 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% and the penetration of mobile clients reached 57.4% from 56.1% in the prior quarter. In these unprecedented times, the bank has once again demonstrated its resilience maintaining a solid sound liquidity [Phonetic] -- 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 in the fourth quarter of last year, the bank has been able to reduce its expenses in a sustained manner for two quarters in a row.

Now, I will comment on the bank's second quarter 2020 financial results. All figures mentioned herein after are measured in current currency at the end of the reporting period, including the corresponding financial figures for previous periods provided for comparative purpose, unless otherwise noted.

BBVA Argentina's second quarter 2020 net income, including inflation adjustment effects, totaled ARS2.6 billion, 21.9% lower than the ARS3.3 billion posted a quarter ago and 70.1% lower than the ARS8.6 billion 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-19 pandemic and the sharp decline in interest rates, tariffs from changes in the country's monetary policy set by the Central Bank, among other regulations also conducted by the Central Bank. The year-over-year decrease is partially explained by the ARS1.1 billion dividend we received as a consequence of our participation in Prisma during the second quarter 2019.

In the quarter, net interest income totaled ARS15.9 billion, 13.9% lower than the results posted in the first quarter of 2020 and 17.1% lower than the results posted during the second quarter of 2019. These variations were mainly explained by the decrease in the average yield of the Central Bank LELIQ, which is partially offset by the decrease in peso cost of funds, following the trend of decreasing market interest rates and an increase in sight deposits. 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 contract 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 7.2% or ARS673 million compared to the first quarter of 2020 and 52.7% or ARS6.6 billion compared to the first quarter of 2019. This is explained by the decrease in the monetary policy rate promoted by the Central Bank. This contraction was offset by increasing the position in LELIQ derived from the new regulations that enables a higher position in LELIQ, in line with what was granted in time deposits at minimum rate. Interest has come from loans and other financings totaled ARS14.2 billion, decreasing 10.7% 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 second quarter of 2020, interest from time deposits represented 79.1% of the bank's total interest expenses, decreasing 24.8% in the quarter and 56% in the year.

Net fee income amounted to ARS3.1 billion, 57.3% higher quarter-over-quarter as a result of a commercial award receiving during the quarter, plus the saving granted by the lower expenses related to credit card benefits 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 ARS1 billion vis-a-vis ARS1.3 billion 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 second quarter of 2020, FX gains, including foreign currency forward transactions, totaled ARS1.5 billion, decreasing 3.2% quarter-over-quarter. This is a consequence of the lower activity due to the regulatory 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 second quarter in a row, we experienced a sequential contraction in the personnel and administrative expenses lines. During the second quarter of 2020, personnel and administrative expenses totaled ARS7.8 billion, decreasing 7.8% quarter-over-quarter and 6% year-over-year. Personnel benefits contracted 15.2% in the quarter, reaching ARS4 billion, generating savings over ARS700 million. This is a consequence of the efficiency plans we put in place during the fourth quarter 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% posted in the second quarter of last year. This is a consequence of a steeper contraction in the income, which is not offset by the savings generated in expenses. In the second quarter of 2020, other operation expenses contracted 26.7%. This decrease is explained by the decline in other allowances due to the unseen checking account -- unused checking account overdraft.

In terms of activity, the bank financing to the private sector totaled ARS250.4 billion, increasing 5.4% quarter-over-quarter in real terms and decreasing 5% year-over-year, also in real terms. BBVA Argentina consolidated market share of the private sector loans as of June 2020 increased for second quarter in a row reaching 8.54%.

Private loans denominated in pesos grew 11.1% quarter-over-quarter in real terms and 30.2% 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, pledged loans, personal loans and credit cards, these have decreased 0.2% sequentially and grew 0.9% year-over-year. In the quarter, the steepest decline can be seen in the pledged and consumer loans both declining -- decreasing 15.2% and 5.5% respectively. This decline was partially offset by the increase in credit card consumption boosted by zero rate credit lines and Ahora 12 program.

Commercial loans, including overdrafts, discounted instruments, leasing, Comex [Phonetic] and other loans grew 11.6% 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 pass-through interest corporate loans, which grew 63.2% or ARS18.5 billion in the quarter, followed by discounted instruments that grew 9% in the quarter. As of June 30, the bank has disbursed more than ARS20.5 billion in loans to more than 9,000 SMEs 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 disbursed ARS1.8 billion of FoGAr granted loans and ARS7 million in loans for self-employed individuals at zero interest rates. In the second quarter 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 non-performing portfolio over total portfolio reached 1.56%, the lowest in the last 12 months. The ratio was positively affected by the temporary flexibility that Central Bank implemented as a consequence of the COVID-19 pandemic, in which extends grace period in 60 days. But the greatest impact was that during the second quarter of the year, the bank proceed to perform Molinos Canuelas debt write-off, which at the moment of the write-off amounted to ARS2.7 billion.

Coverage ratio reached 268.38% [Phonetic]. This is explained by the decrease in the non-performing loans, mainly as a consequence of Molinos Canuelas write-off. Allowances in the second quarter of 2020 reflect expected losses driven by the adoption of IFRS 9 standard as of January 1st, 2020, excluding subsidies, BCA [Indecipherable], which we'll start to implement in IFRS 9 as of 2021 pursuant to the Central Bank regulation. Additional application of the IFRS 9 impairment model is temporary, excluding for non-financial public sector debt instruments.

Regarding exposure to the public sector, excluding Central Bank instruments, this quarter BBVA Argentina decreased its exposure measured as a percentage of total assets reaching 3.3%. In the quarter, our total exposure to the public sector, excluding Central Bank notes, was ARS17.8 billion, down from ARS19.3 billion in the prior quarter. This exposure is also denominated -- well denominated in pesos or in US 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 LELIQ in exchange of BONCER maturity in 2023 and 2024.

On the funding side, private sector deposits in the second quarter of 2020 totaled ARS367 billion, up 7.6% sequentially and down 8.5% when compared with the third quarter of 2019 in real terms. Private sector deposits in local currency were ARS254 billion, increasing 14.6% quarter-over-quarter and 20.1% year-over-year. This is mainly explained by the strong growth in time 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 second quarter of 2019, US dollar deposit withdrawal continued but at slower pace than we 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% -- 64.5% a year ago, evidencing the ability of the bank to improve the funding. BBVA Argentina consolidated market share of the private sector deposit as of June 2020 reached 6.5%. In terms of capitalization, BBVA Argentina accounted an excess capital of ARS53.2 billion, which represented a total regulatory capital ratio of 21.9% and a Tier 1 ratio of 21.2%. The bank aim [Phonetic] is to make the best use of this excess capital. The bank liquidity ratio in pesos and in dollars remained healthy at 56.5% and 80.3% 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.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Gabriel Nobrega with Citigroup. Please go ahead.

Gabriel Nobrega -- Citigroup -- Analyst

Hi, everyone. Good morning. And thank you for the opportunity to ask questions. So, during the quarter, we saw that you finally roll out Molca and we saw your 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 level this quarter? And I'll make a second question afterwards. Thank you.

Ines Lanusse -- Investor Relations Officer

Hello, Gabriel. Thanks for your question. Yes, as you mentioned, we had basically NPL improved in this quarter basically by two factors. We write-off Molca and also the waiver we have from 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 toward the end of the year around 3.53% more or less, that is excluding all the Central Bank's waivers we have. Regarding coverage, yes -- sorry, going back to NPL, just to make it clear, the effect is mainly then because we had a sharper reduction of the non-performing loan, and the loan book [Phonetic] denominated a little more.

Going toward 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 toward the end of the year around 170%. The effects you had in this quarter is mainly because the denominator in our coverage ratio, which includes the NPLs, decreased more than the effect we had 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 remained stable and you had a sharp decrease in the commercial lines. So, we are seeing comfortable -- the actual level of provisioning we are having, which is full IFRS 9.

Gabriel Nobrega -- Citigroup -- Analyst

All right. Perfect. Thank you. And as for the second question, actually looking at your net financial margin, and also including the net loss from the writedown of the assets, which fell a lot during the quarter, even though we had lower interest rates and also the benefit from the lower non-remunerated reserve rate requirements due to the bank disbursing loans at a 24% interest rate. 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 repricing all of your assets to the lower interest rate environment? Thank you.

Ines Lanusse -- Investor Relations Officer

I think -- 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 toward the end of the year, you should keep seeing it stable toward 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 25% on the LELIQ was ARS2 billion. That was previously in the other comprehensive income and now we had to recognize that lower price in the P&L.

Going forward, you should see also an effect in that line because of the 60% remaining that, as we mentioned [Technical Issues] swap in July 2020. So you're going to see also a negative effect in the third quarter. But the net interest income, you should see it stable going forward toward the end of the year.

Gabriel Nobrega -- Citigroup -- Analyst

Perfect. Thank you so much.

Ines Lanusse -- Investor Relations Officer

You're welcome.

Operator

The next question is from Alonso Garcia with Credit Suisse. Please go ahead. Mr. Garcia, your line is...

Alonso Garcia -- Credit Suisse -- Analyst

Good morning, everyone. Thank you for taking my question. My question is actually a follow-up. First -- [Technical Issues] hello, can you hear me now?

Ines Lanusse -- Investor Relations Officer

Now, yes. You should have shutdown. Now I can hear you.

Alonso Garcia -- Credit Suisse -- Analyst

Hello?

Ines Lanusse -- Investor Relations Officer

Hello? Yes.

Alonso Garcia -- Credit Suisse -- Analyst

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 third quarter, fourth quarter or maybe even in the first quarter 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.

Ines Lanusse -- Investor Relations Officer

Okay. Hello, Alonso. How are you doing? We expect -- a lot has to be depending on Central Bank's regulation, or if the [Phonetic] waiver continues or doesn't continue. Being that said, we expect the peak more toward the fourth quarter this year. And then, again, it depends on how much -- depending on the ratio how much the loan book finally grows. We are expecting our loan book to grow above inflation. We are projecting an inflation toward the end of the year around 47%. So, those two variables will finally define the level of NPLs you could see toward the end of year or the coming 2021, but we feel comfortable again with the level of provisioning we are having.

Alonso Garcia -- Credit Suisse -- Analyst

Right. Thank you. So you would expect 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 quarter despite the deterioration that we are going to see most likely in the second half of the year. Is that correct?

Ines Lanusse -- Investor Relations Officer

Coverage ratio should go down toward the end of year, NPL should increase. But you can see a higher level of provision also toward the fourth quarter of 2020.

Alonso Garcia -- Credit Suisse -- Analyst

Right. 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? Do you think there could be upside next year if you resume growth in your retail loan portfolio?

Ines Lanusse -- Investor Relations Officer

Alonso, you may imagine to predict 2021, in Argentina, it's quite difficult. A lot will have to do what happens with the economy, where the inflation level finishes at the end of 2020. Yes, definitely we see a pick up at the end of -- we see an improvement in the economy, you should see the retail portfolio picking up and that definitely should help our markets -- our margins. Regarding the budget, we are basically working on it, so it's still difficult to predict 2021.

Alonso Garcia -- Credit Suisse -- Analyst

Understood. Thank you very much.

Operator

[Operator Instructions] The next question is from Carlos Gomez with HSBC New York. Please go ahead.

Carlos Gomez-Lopez -- HSBC -- Analyst

Hi, Ines. 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 it because there is more obligation to lend at this 24% growth, 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.

Ines Lanusse -- Investor Relations Officer

Okay. Hi, Carlos. Nice to talk to you. Regarding loan growth, the projection we're giving that is to grow a little bit above inflation, it basically has to 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 are not lending in dollars because the sponsors 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 are offering around 24% and zero interest rates.

The retail portfolio, despite it starting to pick up the credit cards, and there you can see also the zero percent interest rate. We have a little bit to do, how fast it will recover, what would -- finally happen with inflation. So basically that's what we are seeing on the loan book, but it's not genuine demand per se. Basically we come from a very low base in 2020, plus the mandatory loans that you are providing and everything in pesos.

Your second question was regarding tax rate. Yes, as you can see, we ended the quarter with a tax rate around 34%, higher than the regulatory 30%. Basically that has to do with the difference in the fiscal base that you need to take to consider the [Indecipherable] from the base you see on the P&L. 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.

Carlos Gomez-Lopez -- HSBC -- Analyst

And that is for this year. And also for next year? I mean, that is the rate that we should expect...

Ines Lanusse -- Investor Relations Officer

At least for this year. At least for this year. At least for this year because the main effect is that you are [Indecipherable] the inflation. And I think, as I mentioned, since you have to -- the fiscal base to calculate tax is different from the accounts rate [Phonetic]. Those are the distortions that we see by the inflation effect.

Carlos Gomez-Lopez -- HSBC -- Analyst

Thank you so much.

Operator

This concludes the question-and-answer session. At this time, I would like to turn the floor back to Mrs. Lanusse for any closing remarks.

Ines Lanusse -- Investor Relations Officer

Thank you, operator, and thank you all for joining us. We appreciate your interest in the company. We look forward to meeting you more over the coming months and providing financial and business updates 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.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Javier Kelly -- Investor Relations Manager

Ines Lanusse -- Investor Relations Officer

Gabriel Nobrega -- Citigroup -- Analyst

Alonso Garcia -- Credit Suisse -- Analyst

Carlos Gomez-Lopez -- HSBC -- Analyst

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